B-199105.OM, SEP 18, 1980

B-199105.OM: Sep 18, 1980

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IS CONSISTENT WITH AUTHORIZED USES OF THAT METHOD OF FINANCING. IS NOT IN VIOLATION OF STATUTE OR CONGRESSIONAL INTENT. 1. BACKGROUND THE TANDEM PLAN IS ONE OF TWO BASIC TOOLS USED BY THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) TO SUPPORT THE MORTGAGE MARKET. GNMA IS A CORPORATION WITHIN THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) WHICH PROVIDES A SECONDARY MARKET FOR CERTAIN MORTGAGES WHICH ORDINARILY WOULD NOT BE WELL RECEIVED IN THE PRIVATE SECONDARY MARKET. IT WAS CARVED OUT OF THE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) BY THE HOUSING AND URBAN DEVELOPMENT ACT OF 1968. GNMA WAS GIVEN RESPONSIBILITY FOR SO- CALLED "SPECIAL ASSISTANCE FUNCTIONS" (12 U.S.C. ONE OF WHICH IS MAKING HOUSING AVAILABLE FOR PEOPLE UNABLE TO OBTAIN ADEQUATE HOUSING UNDER ESTABLISHED HOME FINANCING PROGRAMS.

B-199105.OM, SEP 18, 1980

SUBJECT: USE OF TANDEM FINANCING FOR PARTIALLY ASSISTED SECTION 8 PROJECTS. B-199105-O.M. (CODE NO. 382280)

DIRECTOR, CED

TO ASSIST HIM WITH A NEW STUDY ENTITLED "REVIEW OF LIFE CYCLE COSTS OF SECTION 8 PARTIALLY ASSISTED PROJECTS," TEAM LEADER BILL GAINER HAS ASKED US SEVERAL QUESTIONS CONCERNING THE PROPRIETY OF USING TANDEM FINANCING FOR PARTIALLY ASSISTED SECTION 8 RENTAL ASSISTANCE PROJECTS. WE CONCLUDE THAT SUCH USE, WHILE NOT CONTEMPLATED AS PART OF THE ORIGINAL PURPOSE OF TANDEM FINANCING, IS CONSISTENT WITH AUTHORIZED USES OF THAT METHOD OF FINANCING, HAS BEEN ACKNOWLEDGED BY CONGRESS, AND IS NOT IN VIOLATION OF STATUTE OR CONGRESSIONAL INTENT.

1. BACKGROUND

THE TANDEM PLAN IS ONE OF TWO BASIC TOOLS USED BY THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) TO SUPPORT THE MORTGAGE MARKET. GNMA IS A CORPORATION WITHIN THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) WHICH PROVIDES A SECONDARY MARKET FOR CERTAIN MORTGAGES WHICH ORDINARILY WOULD NOT BE WELL RECEIVED IN THE PRIVATE SECONDARY MARKET. IT WAS CARVED OUT OF THE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) BY THE HOUSING AND URBAN DEVELOPMENT ACT OF 1968, P.L. 90-448, SEC. 801, 82 STAT. 536, 12 U.S.C. SEC. 1716B (1976), WHICH SPUN OFF THE REST OF FNMA AS A PRIVATE CORPORATION. AMONG OTHER THINGS, GNMA WAS GIVEN RESPONSIBILITY FOR SO- CALLED "SPECIAL ASSISTANCE FUNCTIONS" (12 U.S.C. SEC. 1720, 1721), ONE OF WHICH IS MAKING HOUSING AVAILABLE FOR PEOPLE UNABLE TO OBTAIN ADEQUATE HOUSING UNDER ESTABLISHED HOME FINANCING PROGRAMS, AND ANOTHER OF WHICH IS TO FINANCE HOME MORTGAGES GENERALLY AS A MEANS OF PREVENTING A DECLINE IN HOME BUILDING WHICH WOULD ADVERSELY AFFECT THE NATIONAL ECONOMY. U.S.C. SEC. 1716.

THE TANDEM PLAN IS A MECHANISM THROUGH WHICH GNMA MAKES MORTGAGE MONEY AVAILABLE AT INTEREST RATES MORE FAVORABLE THAN THOSE PRIVATE LENDERS WOULD OFFER. UNDER THE PROGRAM, A BUILDER OR DEVELOPER OBTAINS A LOAN FROM A PRIVATE LENDER WHICH IS GIVEN ASSURANCES THAT IT CAN SELL THE LOAN TO GNMA. IN TURN, GNMA SELLS THE LOAN AT A DISCOUNT TO PRIVATE INSTITUTIONAL INVESTORS THROUGH ITS SECONDARY MORTGAGE MARKET OPERATIONS. THE INTEREST RATE ON THESE LOANS IS ADMINISTRATIVELY SET BELOW CONVENTIONAL RATES. THUS, OTHERWISE QUESTIONABLE PROJECTS BECOME ECONOMICALLY FEASIBLE.

IN ADDITION, THE FACT THAT LENDERS CAN ARRANGE MORTGAGES AND THEN SELL THEM TO GNMA FOR THE FACE AMOUNT OF THE LOAN INDUCES THEM TO PROVIDE FINANCING FOR PROJECTS WHICH WOULD NORMALLY BE DEEMED TOO RISKY. TENANTS ALSO BENEFIT SINCE THE LOWER INTEREST RATES ENABLE PROJECT MANAGERS TO REDUCE RENTS. THE LOSSES INCURRED BY GNMA IN THESE TRANSACTIONS ARE ABSORBED BY THE GOVERNMENT AND ARE COVERED BY APPROPRIATIONS.

THE TANDEM PROGRAM WAS ORIGINALLY ESTABLISHED BY CONGRESS TO PROVIDE SUPPORT FOR THE SO-CALLED SECTION 235 AND SECTION 236 (12 U.S.C. SECS. 1715Z, 1715Z-1) PROGRAMS OF ASSISTANCE FOR LOWER INCOME FAMILIES WITH COSTS OF HOMEOWNERSHIP OR RENTAL, RESPECTIVELY. SEE P.L. 91-152, SEC. 115, 83 STAT. 385, 12 U.S.C. SEC. 1720(J). THOSE PROGRAMS HAD BEEN SERIOUSLY CURTAILED BY THE DELAY OF MANY PROJECTS DUE TO THE INABILITY OF DEVELOPERS TO AFFORD MORTGAGE LOANS AT THE INTEREST RATES PREVAILING AT THE TIME, AND TO THE LIMITED AVAILABILITY OF MORTGAGE CREDIT. IT WAS HOPED THAT THE CREATION OF THE TANDEM SUBSIDY WOULD STIMULATE CONSTRUCTION OF LOW AND MODERATE INCOME APARTMENT BUILDINGS UNDER THOSE PROGRAMS. HOWEVER, THE STATUTE AUTHORIZING TANDEM FINANCING, WHILE IT MAKES CERTAIN MORTGAGES FOR "ABOVE MODERATE INCOME FAMILIES" INSURED UNDER 42 U.S.C. SEC. 1487(A) INELIGIBLE FOR PURCHASE, DOES NOT OTHERWISE EXPRESSLY REQUIRE THAT ITS BENEFITS FLOW EXCLUSIVELY TO LOWER INCOME PEOPLE. 12 U.S.C. SEC. 1720(J). S. REP. NO. 91-392, REPRINTED IN 1969 U.S.C. CONG. AND AD. NEWS 1532.

A NUMBER OF OTHER TANDEM-TYPE PROGRAMS WERE STARTED IN THE EARLY 1970'S, PROVIDING SUPPORT FOR A VARIETY OF SPECIAL PROGRAMS. IN OCTOBER 1974, AT A TIME WHEN THE HOUSING INDUSTRY WAS IN A NEAR DEPRESSION, PASSAGE OF THE EMERGENCY HOME PURCHASE ASSISTANCE ACT (P.L. 93-449, 88 STAT. 1364) GAVE GNMA FUNDS AND AUTHORITY TO ESTABLISH A TANDEM-TYPE PROGRAM TO MAKE COMMITMENTS TO PURCHASE CONVENTIONAL LOANS.

AT PRESENT, HOWEVER, THERE ARE ONLY TWO ACTIVE TANDEM PROGRAMS ADMINISTERED BY GNMA. THIS INQUIRY IS CONCERNED WITH "PROGRAM 25." UNDER THIS PROGRAM, GNMA BUYS MORTGAGES ON PROJECTS OF MORE THAN FOUR UNITS WHERE ONLY PART OF THE PROJECT IS UNDER CONTRACT FOR "SECTION 8" RENT SUBSIDY PAYMENTS. SECTION 8 (OF THE UNITED STATES HOUSING ACT OF 1937, 42 U.S.C. SEC. 1437) WAS CREATED (BY SECTION 201(A) OF THE HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1974, P.L. 93-383, 88 STAT. 662) TO HELP LOWER INCOME FAMILIES OBTAIN DECENT PLACES TO LIVE AND TO PROMOTE ECONOMICALLY MIXED HOUSING. THE SECTION 8 SUBSIDY PAYS THE DIFFERENCE BETWEEN THE MARKET RENT AND 25 PERCENT OF ANY ELIGIBLE TENANT'S INCOME.

UNDER THE "NEWLY CONSTRUCTED AND SUBSTANTIALLY REHABILITATED" SEGMENT OF SECTION 8, HUD IS AUTHORIZED TO MAKE PAYMENTS TO OWNERS WHO AGREE TO CONSTRUCT OR SUBSTANTIALLY REHABILITATE HOUSING IN WHICH SOME OR ALL OF THE UNITS ARE MADE AVAILABLE TO LOWER INCOME FAMILIES. 42 U.S.C. SEC. 1437FB)(2). IT IS THIS SEGMENT THAT IS ELIGIBLE FOR TANDEM FINANCING UNDER PROGRAM 25. BECAUSE SOME OF THE GOALS OF SECTION 8 WERE TO AVOID THE CONCENTRATION OF LOWER INCOME PEOPLE INTO ONE AREA, AND TO ACHIEVE ECONOMIC INTEGRATION, HUD WAS AUTHORIZED BY CONGRESS TO GIVE PREFERENCE TO PROPOSED CONSTRUCTION PROJECTS OF WHICH 20 PERCENT OR LESS OF THE TENANTS WERE TO BE SECTION 8-ASSISTED. 42 U.S.C. SEC. 1437FC)(5). THESE ARE KNOWN AS PARTIALLY ASSISTED PROJECTS. UNASSISTED HIGHER INCOME RESIDENTS IN THESE PARTIALLY-ASSISTED PROJECTS ALSO RECEIVE THE BENEFITS OF TANDEM FINANCING.

II. ANALYSIS

WHEN TANDEM FINANCING WAS FIRST ESTABLISHED IN 1969, IT APPEARED CLEAR THAT ITS BENEFITS WOULD FLOW TO LOW AND MODERATE INCOME FAMILIES. THE DEVICE WAS AIMED SPECIFICALLY AT THE SECTION 236 PROGRAM OF SUBSIDIZED APARTMENT PROJECTS. DURING SENATE CONSIDERATION OF THE CONFERENCE REPORT ON THE BILL, SENATOR TOWER, RANKING MINORITY MEMBER OF THE SENATE SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS, STATED:

"THE STATEMENT OF THE MANAGERS ON THE PART OF THE HOUSE INDICATED IT TO BE CONGRESSIONAL INTENT THAT THESE FUNDS BE USED TO SUPPORT SINGLE FAMILY HOME MORTGAGES; THIS WAS NOT DISCUSSED IN THE CONFERENCE AND IT IS MY BELIEF THAT WE SHOULD UTILIZE THIS SYSTEM BUT SPARINGLY, IF AT ALL, FOR THIS PURPOSE. IN 236 AND 221(D)(3) PROJECTS SPONSORED BY NONPROFIT OR CO- OP MORTGAGORS THERE IS A REQUIREMENT THAT THE SUBSIDY BE PASSED ALONG TO THE LOW AND MODERATE INCOME TENANTS; IN THE SINGLE FAMILY PROGRAMS THERE IS NO REQUIREMENT FOR THIS ASSURANCE. THEREFORE, DURING THESE INITIAL STAGES, AND UNTIL ADEQUATE LAWS CAN BE PROVIDE, WE SHOULD LIMIT THE UTILIZATION OF THE TANDEM PLAN TO MULTI-FAMILY PROJECTS EXCEPT IN CASES WHERE WE ARE ASSURED THAT THE LOW INCOME FAMILY IS RECEIVING THE BENEFIT OF THE FEDERAL FUNDS." 115 CONG. REC. 38626 (1969).

WHEN CONGRESS ENACTED AND HUD BEGAN TO IMPLEMENT THE NEW CONSTRUCTION AND SUBSTANTIAL REHABILITATION SEGMENT OF THE SECTION 8 RENTAL ASSISTANCE PROGRAM, IT WAS HOPED THAT MUCH OF THE FINANCING WOULD ORIGINATE WITH CONVENTIONAL LOANS. HOWEVER, AS MR. GAINER EXPLAINS, CONVENTIONAL FINANCING NEVER CAUGHT ON AND IT WAS NOT UNTIL HUD MADE TANDEM FINANCING AVAILABLE THAT PRIVATE LENDERS STARTED GRANTING FHA PROJECT MORTGAGES.

DURING CONSIDERATION OF SECTION 8, CONGRESS NEVER DIRECTLY ADDRESSED THE AVAILABILITY OF TANDEM FINANCING FOR SECTION 8 IN GENERAL OR FOR PARTIALLY ASSISTED SECTION 8 PROJECTS IN PARTICULAR. BY 1977, THOUGH, CONGRESS HAD OBVIOUSLY BECOME AWARE OF THE USE OF TANDEM FINANCING FOR SECTION 8 ASSISTED PROJECTS. BASED ON A FINDING THAT "PRIVATE FINANCING OF SECTION 8 PROJECTS HAS BEEN EXTREMELY LIMITED" (H.R. REP. NO. 95-42, 95TH CONG. 1ST SESS. 12 (1977)), CONGRESS PASSED SECTION 101(C) OF THE SUPPLEMENTAL HOUSING AUTHORIZATION ACT OF 1977 (P.L. 95-24, 91 STAT. 55), WHICH SOUGHT TO INCREASE USE OF CONVENTIONAL FINANCING BY PERMITTING SECTION 8 CONTRACTS ON UNITS IN PRIVATELY DEVELOPED NEWLY CONSTRUCTED HOUSING TO BE FOR A TERM OF 30 YEARS (INCREASED FROM THE 20 YEARS PREVIOUSLY ALLOWED), IF THE PROJECT WAS CONVENTIONALLY FINANCED. SEE H.R. REP. NO. 95-42, 9-12 (1977).

ASIDE FROM THE LENGTH OF THE SECTION 8 ASSISTANCE CONTRACT TERM, ANOTHER FACTOR CITED BY THE HOUSE COMMITTEE ON BANKING, FINANCE, AND URBAN AFFAIRS AS INHIBITING PRIVATE FINANCING OF SECTION 8 PROJECTS, AND PROBABLY LIMITING THE DESIRED IMPACT OF THE EXTENDED CONTRACT TERM, WAS THE ATTRACTIVENESS TO INVESTORS OF THE BELOW MARKET RATE MORTGAGES AVAILABLE UNDER THE TANDEM FINANCING PLAN. H.R. REP. NO. 95-42, SUPRA 13. THE COMMITTEE ESTIMATED THAT 60 PERCENT OF THE UNITS PROVIDED FOR PRIVATE DEVELOPMENT WOULD CONTINUE TO PURSUE GNMA TANDEM FINANCING (ID.) AND RECOGNIZED THAT "FOR A NUMBER OF PROJECTS THE ADDITIONAL SUBSIDY THROUGH GNMA IS NECESSARY TO INSURE THEIR VIABILITY." ID. 13. THE COMMITTEE SAID THAT "OF COURSE CERTAIN ADMINISTRATIVE CHANGES - FOR EXAMPLE, RESTRICTING THE AVAILABILITY OF GNMA FUNDS, OR INCREASING THE EMPHASIS ON COINSURANCE - COULD COUNTERVAIL" THE CONTINUED RELUCTANCE OF DEVELOPERS TO CONVENTIONALLY FINANCE THEIR SECTION 8 PROJECTS, BUT THE CONGRESS HAS NOT TAKEN ANY ACTION REQUIRING OR RECOMMENDING SUCH MEASURES.

IN FACT, IN 1979, CONGRESS ACTED TO PERMIT GNMA TO PURCHASE MORTGAGES WITH UNIT COSTS PER DWELLING IN EXCESS OF APPLICABLE STATUTORY MAXIMUM MORTGAGE LIMITS IF SUCH MORTGAGES ARE INSURED UNDER SECTION 321(D)(3) OR (4) OF THE NATIONAL HOUSING ACT AND ARE FOR PROJECTS WHERE AT LEAST 20 PERCENT OF THE UNITS ARE ASSISTED UNDER SECTION 8. P.L. 96-153, SEC. 316, 93 STAT. 1101, 1110. MORTGAGES INSURED UNDER SECTION 221(D)(3) ARE INTENDED TO ASSIST PRIVATE INDUSTRY IN PROVIDING HOUSING FOR LOW AND MODERATE INCOME FAMILIES AND THE HOUSE REPORT ACCOMPANYING PUBLIC LAW NO. 96-153 STATED THAT THE EXCEPTION TO THE STATUTORY MORTGAGE LIMITS WAS CREATED IN FUTHERANCE OF THE "INTENT TO ASSURE THAT LOW AND MODERATE INCOME PERSONS ARE THE PRIMARY BENEFICIARIES OF GNMA'S MORTGAGE PURCHASE ACTIVITIES." H.R. REP. NO. 96-154, 96TH CONG., 1ST SESS. 26 (1979).

MOST RECENTLY, DURING THE SENATE BANKING, HOUSING, AND URBAN AFFAIRS COMMITTEE HEARINGS ON THE CONFIRMATION OF RONALD LAURENT AS PRESIDENT OF GNMA, THERE WAS EXPLICIT CONGRESSIONAL RECOGNITION OF THE FLOW OF TANDEM FINANCING BENEFITS TO HIGHER INCOME PEOPLE PEOPLE. CHAIRMAN PROXMIRE, DURING HIS QUESTIONING OF MR. LAURENT, POINTED OUT THAT FUNDING OF PARTIALLY ASSISTED PROJECTS WAS AN OBJECTIVE OF THE "SECTION 8 TANDEM PROGRAM" AND ELICITED A COMMITMENT FROM MR. LAURENT OF GREATER EFFORTS BY GNMA TO MAKE THE PROGRAM A SUCCESS. NOMINATIONS OF JANE MCGREW, GLORIA M. JIMENEZ AND RONALD P. LAURENT:HEARINGS BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 96TH CONG., 1ST SESS. 28 (1979).

WHILE IT IS TRUE THAT THE TANDEM PLAN WAS ORIGINALLY CREATED AS A SUBSIDY WHOSE BENEFITS WERE TO FLOW TO LOW INCOME FAMILIES, IT WAS NEVER BY ITS TERMS LIMITED TO LOW INCOME FAMILIES. MOREOVER, IT IS OBVIOUS FROM THE FOREGOING ANALYSIS THAT A MARKED TRANSFORMATION IN ITS USE HAS OCCURRED. TANDEM FINANCING NOW CONSTITUTES ONE OF THE GOVERNMENT'S MAJOR TOOLS FOR INDUCING PRIVATE FINANCING FOR ITS HOUSING PROGRAMS AND IS AN IMPORTANT STIMULANT FOR HOUSING CONSTRUCTION. THUS, WHEN THE NEW CONSTRUCTION SEGMENT OF THE SECTION 8 PROGRAM WAS LAGGING, TANDEM FINANCING WAS MADE AVAILABLE TO SPUR DEVELOPMENT. DURING CONSIDERATION OF THE SUPPLEMENTAL HOUSING AUTHORIZATION ACT OF 1977, CONGRESS RECOGNIZED THE ROLE TANDEM FINANCING WAS PLAYING UNDER SECTION 8. GIVEN THIS RECOGNITION OF THE EXTENT OF TANDEM FINANCING INVOLVED IN SECTION 8 PROJECTS, THE STATED GOALS OF ECONOMIC INTEGRATION AND INCOME MIX OF THE SECTION 8 PROGRAM, AND THE CONGRESS' OWN STATED PREFERENCE AND DIRECTIVE TO LIMIT SECTION 8 ASSISTED UNITS TO 20 PERCENT OF THE UNITS IN ANY ONE PROJECT, WE THINK THAT THE CONGRESS WAS AWARE THAT SOME OF THE BENEFITS OF TANDEM FINANCING WERE FLOWING TO THE "HIGHER" INCOME UNASSISTED UNITS IN PARTIALLY ASSISTED PROJECTS.

THE EXCEPTION TO GNMA'S STATUTORY MORTGAGE LIMITS IN THE 1979 LEGISLATION FURTHER INDICATED CONGRESSIONAL APPROVAL OF THE USE OF TANDEM FINANCING FOR PARTIALLY ASSISTED SECTION 8 PROJECTS. EVEN THOUGH THE EXCEPTION IS LIMITED TO PROGRAMS INSURED UNDER SECTION 221(D)(3), A SECTION DESIGNED TO PROVIDE HOUSING FOR LOW AND MODERATE INCOME FAMILIES, THAT SECTION DOES INCLUDE MODERATE INCOME FAMILIES AND THE USE OF THE PHRASE "PRIMARY BENEFICIARIES" IN THE ACCOMPANYING HOUSE REPORT INDICATES CONGRESSIONAL RECOGNITION THAT SUCH GNMA MORTGAGE ACTIVITIES NECESSARILY ENTAIL OTHER "SECONDARY" BENEFICIARIES.

WE HOPE THIS INFORMATION IS OF ASSISTANCE TO YOU.

DIGEST

UNDER THE "TANDEM" PLAN, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MAKES MORTGAGE MONEY AVAILABLE AT BELOW-MARKET INTEREST RATES. 12 U.S.C. SEC. 1720(J). "SECTION 8" ASSISTANCE IS A PROGRAM SUBSIDIZING RENTS FOR LOWER INCOME FAMILIES IN BUILDINGS NEWLY CONSTRUCTED OR SUBSTANTIALLY REHABILITATED FOR THE PURPOSE. 42 U.S.C. SEC. 1437F. USE OF TANDEM FINANCING FOR CONSTRUCTION OF SECTION 8 PROJECTS IS NOT IN VIOLATION OF STATUTE AND IS CONSISTENT WITH LEGISLATIVE HISTORY, EVEN THOUGH SOME OF THE BENEFITS FLOW TO MODERATE OR HIGHER INCOME FAMILIES WHO ALSO LIVE IN SECTION 8 BUILDINGS.