Debentures Not Serving Purposes HUD Intended--Legislative Changes Could Help Increase Effectiveness and Minimize Interest Costs

RCED-85-38: Published: Mar 13, 1985. Publicly Released: Mar 13, 1985.

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GAO evaluated the provisions of the National Housing Act of 1934, which authorized the Department of Housing and Urban Development (HUD) to accept long-term, low-interest debentures instead of cash as payment for mortgage insurance premiums. GAO focused its review on: (1) the impact of redemption of debentures before they reach maturity as payment for mortgage insurance premiums; and (2) helping HUD improve program management and Congress decide whether amendments to the act, with respect to the debentures, are warranted.

GAO found that the provisions of the act which allow the redemption of debentures before maturity could create a need for increased appropriations, a need for Treasury borrowing, or the loss of any HUD opportunity to earn interest on mortgage insurance premiums paid in cash rather than in debentures. GAO found that: (1) about 95 percent of all debentures redeemed during the 5 years ending September 30, 1982, were used to pay mortgage insurance premiums; (2) debentures were used to pay almost 15 percent of the premiums collected during the same period; and (3) debentures with a 20-year maturity date are redeemed on the average in about 7 years. Because HUD may not have reserves available in its insurance funds at the time debentures are redeemed, early redemptions can lead to borrowing from the Treasury, and Treasury borrowing rates have been historically higher than rates carried by debentures being redeemed. Consequently, when HUD has to borrow money at interest rates higher than the rates on the debentures being redeemed, higher interest costs are incurred. In 1982, HUD proposed that its authorization bill include a provision to eliminate the statutory requirement allowing debentures to be redeemed at face value in exchange for mortgage insurance premium payments; however, the legislation was not enacted. Finally, most mortgage lending institutions which GAO contacted stated that the mortgage insurance premium redemption feature provides no particular incentive for investing in programs which pay in debentures.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has had nearly 2 years to act on this recommendation and has not. Congressional action at this time would probably require a fresh analysis from GAO, something GAO can consider in conjunction with the GAO annual work planning process.

    Matter: Congress should amend the National Housing Act to provide the Secretary, HUD, with the authority to redeem debentures prior to maturity at less than face value in order to adjust for variations between debenture interest rates and Treasury borrowing rates.

  2. Status: Closed - Not Implemented

    Comments: Congress has had nearly 2 years to act on this recommendation and has not. Congressional action at this time would probably require a fresh analysis from GAO, something GAO can consider in conjunction with the GAO annual work planning process.

    Matter: Congress should amend the National Housing Act to provide the Secretary, HUD, with the authority to reject debentures as payment of mortgage insurance premiums if debenture owners choose not to accept less than face value, or if the Secretary otherwise deems it appropriate.

 

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