HUD Needs To Better Assess Financial Soundness of Multifamily Residential Projects Before Insuring Them
CED-78-70: Published: Mar 29, 1978. Publicly Released: Mar 29, 1978.
- Full Report:
The Department of Housing and Urban Development (HUD) began insuring multifamily housing projects in 1938 and, in 1954, began implementing subsidized multifamily housing programs to enable low- and moderate-income families to improve their housing conditions.
Recently HUD has incurred many financial losses due to mortgage defaults, foreclosures, and assignments on its multifamily loan insurance programs. Among the problems causing failures were that the underwriters frequently overestimated revenues, underestimated expenses, and did not have supporting documentation. Actual annual revenues for 13 of the 30 projects examined were from 1 percent to 46 percent less than HUD estimates, and actual annual expenses for 27 of the projects exceeded estimates by from 5 percent to 110 percent. HUD's major effort to improve its underwriting process through computerized information on the incomes and expenses of operating multifamily projects was inaccurate, incomplete, and outdated. Contrary to HUD procedures, underwriters at times used property assessment methods and tax rates not applicable to the areas where proposed projects would be located, resulting in unrealistically low estimates of property tax costs. Accurate estimates would help in identifying alternatives to improve financial viability, but once a project is approved, essentially the only options available are to increase rents or provide a moratorium on the interest and principal payments for a short-term period.
Recommendation for Executive Action
Comments: Please call 202/512-6100 for additional information.
Recommendation: The Secretary of HUD should: insist that field offices maintain accurate, complete, and up-to-date information in the computer base used to evaluate proposed projects; insist on underwriters' strict adherence to procedures for preparing real estate tax estimates; require that uniform methodologies be devised and used in projecting the impact of inflationary trends; clarify procedures regarding estimating occupancy levels; examine the possibility of establishing a safety margin which would increase cash flow to cover contingencies during the first few years of project operation; and reemphasize the importance of the underwriting function in objectively and accurately evaluating elements of mortgage risk.