[HM Mortgagee Letter 74-14] DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING MANAGEMENT, To: All approved mortgagees. Many mortgagors are experiencing serious problems in making timely mortgage payments due to the nationwide increase in unemployment and the temporary lay-offs occasioned in some industries. This curtailment of income and reduction in working hours has affected many mortgagors with HUD-insured mortgages. In an effort to assist those families who are experiencing temporary hardship, the Department of Housing and Urban Development is again strongly encouraging mortgagees to render whatever assistance is possible to help these mortgagors. Procedures contained in HUD Handbook 4191.1 "Administration of Insured Home Mortgages", Chapter 2, paragraphs 121-128, fully describe relief measures available to mortgagors under these circumstances. These include: 1. Voluntary withholding of foreclosure by the mortgagee.-The mortgagee may wait as long as one year from the date of default before starting action to acquire the property. During this period, the mortgagee can assist the mortgagor by accepting reduced payments or by carrying the account in a default status. All funds remitted by the mortgagor during this period shall be applied in accordance with the terms of the mortgage. Since, by definition, the date of the default is thirty days after the mortgagor's failure to meet a requirement of the mortgage, the account can be carried in default indefinitely if the mortgagor makes payments during the period of default. Thus, partial payments, when applied, will advance the date of the default. 2. Special forbearance relief.-The mortgagee may enter into a formal forbearance agreement with the mortgagor. When this is done, the mortgagee will receive, as part of its insurance settlement, unpaid mortgage interest, including all amounts accrued prior to the execution of the forbearance agreement, computed to the earliest of the applicable dates described in HUD Handbook 4110.2, The Mortgagee's Guide, Home Mortgage Insurance, Fiscal Instructions, Chapter 12, paragraph 12-5a. A formal forbearance agreement cannot extend beyond 18 months without prior HUD approval. 3. Recasting of mortgages in default.-A mortgage in default may be recast to: (1) increase the unpaid principal balance of the mortgage to include all sums due and payable except late charges; and (2) extend the term of the mortgage for not more than ten years. While it is recognized that recasting generally is not used by mortgagees, in this period of national concern HUD hopes mortgagees will be willing to extend this form of relief to a greater degree than has been customary. Recasting of a mortgage could prove of greater benefit to a mortgagor than the granting of special forbearance. On the other hand, use of special forbearance together with the recasting procedure might be more beneficial to some mortgagors. Mortgagees should ascertain that their employees are fully familiar with all available forbearance procedures and that they make appropriate use of these procedures. Local HUD Area and Insuring Offices should be contacted for further information on these matters. Sincerely, H. R. CRAWFORD, Assistant Secretary for Housing Management. Mr. JERRY BUCKLEY, Minority Counsel, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, OFFICE OF THE AREA DIRECTOR, U.S. Senate Subcommittee on Housing, DEAR MR. BUCKLEY: Enclosed is the San Francisco Area Office's response to the questions raised at the Subcommittee hearings in Oakland August 28. We have also included for your information an excerpt from current 518 (b) instructions indicating that homes insured under the Sec. 235 program longer than one year ago are not eligible for assistance. (Note: HUD acquired properties sold with Sec. 235 subsidy are covered by HUD's one year warranty rather than 518 (b)). Sincerely, -Attachment. JAMES H. PRICE, Area Director. Question 1. How many single family homes has the area office insured since 1968 in the San Francisco area? How many multifamily? This total includes 7,878 properties insured under the Sec. 235 programHomeownership for Low and Moderate Income Families. B. MULTIFAMILY Since 1968, this Office has insured 419 projects containing 45,011 units. Question 2. What is the present inventory of acquired properties in (Oakland) area? Question 3. What HUD programs were most of these abandoned homes insured under? i.e. 221 (d) (2), 223(e), 235, 236. Do you have figures on percentages under each program for this area? Answer. As of September 2, 1975, the inventory of acquired properties in the City of Oakland consisted of 171 properties. 96 (56%) were insured under Sec. 203(b); 6 homes (638%) under Sec. 221(d) (2); 10 (6%) under Sec. 235. Question 4. What has been the impact of these special risk programs (i.e. 221(d) (2), 223(e), 235) in this area? Have they contributed primarily to the abandonment problem? Answer. The special risk programs have had no favorable impact on Oakland in general. They are attempts to enable low and moderate income families to attain homeownership which they could not afford in the private mortgage market. Properties designated to be insured pursuant to Sec. 223 (e) at the time of appraisal are located in declining urban areas. This section of the housing act waives economic soundness and economic life requirements with respect to location and mortgage term. The default rate for mortgages insured pursuant to this section is higher than the Sec. 203 (b) program: the overall default rate is about 1.65%; the 223 (e) rate is about 4%. Question 5. What is the average cost of maintenance between acquisition and resale of a property (i.e. holding cost and repairs)? Answer. As of May 1975, holding costs on our acquired properties averaged $3,330 per unit; repairs averaged $3,250. Question 6. What is the average length of time a property is held by HUD? Answer. HUD holds properties an average of 6.8 months. Question 7. What programs has HUD initiated to decrease its inventory of properties? Do you feel that these programs are effective in dealing with this problem? Answer. The number of HUD acquired properties in the Oakland area has declined steadily from 359 in October 1973 to 171 in September 1975. This has been accomplished by increased use of private area managers to oversee and expedite the repair and/or sale of properties in their localities, some modest use of as-is sales, local broker incentive programs, coordination with the City of Oakland, streamlining of office procedures and increased advertising. Question 8. The "as-is sales" program, where HUD urges the sale of all acquired properties on a high bid basis without repairs and without further mortgage insurance, may offer immediate relief to HUD's bulging inventories. However, this program raises the question of whether as-is sales merely recycle the abandonment process by allowing deteriorated housing to be occupied without repair. What precaution has HUD taken to prevent this from happening? (I.e. is there cooperation with city officials as to the impact of these sales? Is there counseling of new owners so that they may be able to get financing for these kinds of properties?) Answer. Although local considerations are the overriding factors in individual neighborhoods, generally, this office feels that as-is sales are compatible with (or will not have an adverse effect on) stable neighborhoods, upward transitional neighborhoods, or already blighted neighborhoods. Conversely, caution is used in utilizing as-is sales in downward transitional neighborhoods where the threshold for tipping into blighted condition may be exceeded. Of the 171 properties in Oakland now owned by HUD, only 17 are scheduled to be sold on an as-is basis. The Oakland Building Department is notified of all as-is sales prior to the sale and provides HUD with a list of code deficiencies which are passed on to the purchaser. The City then contacts the new owner concerning repairs needed prior to authorizing connection of utilities. The City of Oakland also maintains a counseling agency to help new and potential homeowners, particularly those who have acquired Sec. 235 homes. There is a prerequisite that those purchasing with Sec. 235 assistance complete a counseling course. Counseling is not mandatory for purchasers of as-is properties. Question 9. What measures has HUD used to deter the foreclosure rate of HUD insured properties? Answer. Our single-family mortgage servicing section is in constant telephone contact with mortgages and mortgagees trying to work out reinstatement programs for delinquent owners. In addition they are making mortgagee reviews where forbearance relief for delinquent mortgagors is stressed. In the last two months seven mortgagee reviews have been made. Mortgagees are also encouraged to work with HUD Certified Counseling Agencies. Copies of default notices on Oakland properties are sent to the City of Oakland Housing Advisory and Appeals Board and the Oakland Counseling Agency for inspection of the property and direct contact with the owners to offer counseling assistance in an attempt to arrange workouts with the lender whenever possible. Question 10. Does HUD have any comprehensive program that addresses the revitalization of abandoned neighborhoods? Do you feel that a comprehensive rather than a spot approach is needed? What would you recommend that a comprehensive approach include? Answer. This office believes that the revitalization of abandoned neighborhoods must come about through the cooperation of Federal, State and local authorities as well as lending institutions and the community. Many block grant cities have elected to undertake rehab programs. In the specific case of Oakland, we have invited the City to begin a "greenlining" program which would be a joint agreement on neighborhood rehabilitation project areas and then develop standards and programs for systematic code inspections, dwelling rehabilitation, open space, street and drainage improvements, landscaping, including tree planting and neighborhood utilities and services. [HUD Washington, D.C., 4070.1 Rev. p 3-2] b. Dwelling. The dwelling may consist of a one or two family unit and shall have been more than one year old on the date the conditional commitment was issued. c. Application. In the case of a Section 235 mortgage, the application for assistance must have been submitted within one year after insurance of the mortgage as evidenced by the date of insurance endorsement. In the case of mortgages in older, declining urban areas insured under Section 203 (b) or 221(d) (2) on or after August 1, 1968, and prior to January 1, 1973, the application for assistance must be submitted not later than August 22, 1975, one year after the date of enactment of the Housing and Community Development Act of 1974. d. Extent of Defect. The defect must be a structural or other major defect which so seriously affects the use and livability of the property as to create a serious danger to the life or safety of the inhabitants. To meet this test, the defect must not be speculative or of limited likelihood of becoming an actual danger. A defect which has become a serious danger to the life or safety of the inhabitants, but which was not so at the time of the original appraisal inspection, is not eligible. For those claims involving reimbursement for repairs previously made, the defect must have been such that a judgment can be made that it constituted a serious danger to life or safety at the time of the original appraisal inspection. e. Determination of Existing Defect. The defect must be determined by HUD-FHA to have existed on the date the conditional commitment covering the property was issued and must be one that a proper appraisal inspection of the property could reasonably have been expected to reveal. 3-3. Defective Conditions Eligible for 518(b) Assistance. The file must be retrieved and reviewed by the field office upon receipt of a claim which appears eligible on its face. Examination of the conditional commitment conditions may determine if the defective STATEMENT OF FREDERICK CRAIG, LOAN GUARANTY OFFICER, VETERANS ADMINISTRATION REGIONAL OFFICE, SAN FRANCISCO Mr. CRAIG. Fred Craig, I am Loan Guaranty Officer, Veterans Administration, San Francisco, and I brought these gentlemen with me and I am delighted to introduce them. On my far right is Bill Beven, who is property management representative from our office who works in Oakland. Next to me is Henry Cohen, who is an attorney from the General Counsel's Office in Washington, D.C. On the far left of the table is George Howard, a loan guaranty attorney in San Francisco. Senator CRANSTON. Thank you very much, Mr. Craig. I have to ask you to summarize in not more than 5 minutes. Mr. CRAIG. I am going to be very brief. Senator CRANSTON We have got to quit at 12:30. Mr. CRAIG. I understand. I just want to say we do not object to the intent of the bill. We believe some fiscal and technical matters need to be clarified and we are primarily concerned with the marketability of the long-term obligations that are mentioned in the bill. As you know our loan guaranty revolving funds are replenished from the sale of our foreclosed homes and this is our primary concern and I think that can be clarified and probably settled. Other than that I wanted to talk about the city of Oakland and northern California. We own 235 properties in northern California and Nevada. Fifty-eight of them are in Oakland and 19 of those we have owned more than 6 months. So we do not have a large inventory here and we do repair the houses before we sell them. Anything else that I might testify to is already in the supplement that was submitted. [The complete statement of Mr. Craig follows:] STATEMENT OF FREDERICK CRAIG, LOAN GUARANTY OFFICER, VA REGIONAL OFFICE, SAN FRANCISCO Mr. Chairman and Honorable Members of the Subcommittee, as the Loan Guaranty Officer of the VA's San Francisco office, I am pleased to have the opportunity to appear before this subcommittee today and present the views of the VA on S.1988. This bill, entitled the "Abandonment, Disaster, Demonstration Relief Act" is designed to prevent deterioration and destruction of neighborhoods and communities and to hold and assemble parcels of land for orderly development and redevelopment. This being based upon a general finding that the cause of the destruction, and deterioration of neighborhods is to a large extent due to abandonment of properties. The VA is well aware of the problems with abandoned properties. Unfortunately, we believe this complex bill, as currently drafted, contains many provi sions which are ambiguous and subject to varying interpretations, leaves many areas unresolved, and will create many problems. For these reasons, the VA opposes S. 1988. Our objections to the bill are not to its intent but rather to potential problems that could result from the vagueness and technical insufficiencies of certain provisions of the bill. These technical problems make it extremely difficult for the VA to take a firm position on the substance of certain of these provisions as we cannot forecast with any degree of certainty the effect that passage of this bill would have upon existing programs. While not intended to be all-inclusive, the following are some of the specific areas we find objectionable: Within the three metropolitan housing markets, to be determined in accordance with Section 5 of the bill, the Neighborhood Protection Corporation, set up to carry out the functions of S.1988, is given authority in subsections (a) and (b) of Section 6 of the bill to take action to declare abandoned residential property forfeited and to seize and take possession of such property. Paragraph 3 of subsection 6(b) of the bill provides such seizure shall be subject to the payment by the corporation of "just compensation" to any person claiming an interest in the seized property. This paragraph further provides that where the person or agency having an interest is a federal agency, payment by the corporation shall be in the form of obligations issued by such corporation. The bill does not specify, however, how payment shall be made to persons or other entities that are not federal agencies. Conceivably, the corporation could make such payment in the form of the same obligations it would issue to federal agencies. Since the bill provides in Section 8(b) (page 20, lines 8 through 14) that such obligations are not guaranteed by the United States and do not constitute a debt obligation of the United States, the marketability of such obligations is at best uncertain. If it is determined that a holder of a mortgage on property deemed to be abandoned is to be paid in long-term debt obligations of the corporation, which may have limited marketability, great reluctance can be foreseen upon the part of the mortgage industry towards making loans on properties in the demonstration areas. If this should occur, potential sellers of residential property would find themselves unable to secure buyers with mortgage financing available to them. As a result, those parties required to relocate might be left with no option other than to abandon their homes. Thus, potentially, the effect of this bill could well lead to greater abandonment rather than less. At the present time the VA Loan Guaranty program is funded by a revolving fund established by section 1824 of Title 38 United States Code. Claims made upon the VA, based on guaranteed loans, are paid from this source. Properties acquired are usually rehabilitated and then sold by the VA. The proceeds of |