Housing Preservation:

Policies and Administrative Problems Increase Costs and Hinder Program Operations

RCED-97-169: Published: Jul 18, 1997. Publicly Released: Jul 18, 1997.

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Pursuant to a legislative requirement, GAO reviewed the Department of Housing and Urban Development's (HUD) preservation program, focusing on the: (1) funding provided for preservation properties as compared with the properties' values; (2) levels of rehabilitation grants provided to properties compared with their physical needs; and (3) administrative and other problems that have arisen under the program.

GAO noted that: (1) for the 40 properties that GAO reviewed, HUD approved $239 million for preservation grants or loans, which average about $6 million per property; (2) the approved funding ranged from one-fourth of a property's value to more than 3 times its value; (3) for 22 of the 40 properties, the approved funding exceeded the property's value by an average of 62 percent; (4) as part of the preservation funding for the 27 sales transactions GAO reviewed, HUD approved a total of $111.9 million for rehabilitation funding that owners or purchasers had requested; (5) this amount was 568 percent higher than the $16.7 million that HUD contractors had identified as needed to cover repairs that would return the properties to good condition; (6) the approval of a higher funding level is largely attributable to HUD's broad criteria for funding rehabilitation costs presented in a 1994 preservation policy notice; (7) the policy on eligible rehabilitation costs is aimed at facilitating sales to nonprofit purchasers and maximizing the remaining life and quality of preservation properties; (8) while HUD is likely to reduce rehabilitation funding for some of these properties in order to comply with fiscal year 1997 funding caps that Congress established, the overall rehabilitation funding for the 27 properties will still be substantial; (9) HUD's administration of the preservation program is hampered by a number of factors that collectively limit the Department's ability to ensure that the program is being managed effectively and efficiently, that federal funds are being spent wisely, and that preservation operations are consistent with program requirements; (10) these factors include the program's complexity, frequent changes in program requirements, the tight time frames under which approval and funding decisions are often made, program guidance that is fragmented and sometimes ambiguous or incomplete, and HUD's limited oversight of its field office operations; (11) for example, GAO found these factors contributed to two cases in which HUD erroneously funded and in a third case planned to provide preservation funding that exceeded legislatively mandated funding caps by a total of $1.5 million; (12) after GAO notified HUD of these situations, it took action to recover the excess funds; and (13) GAO also found two cases in which HUD used its waiver authority to provide preservation funds to properties whose operations were already governed by use agreements requiring the owners to maintain them as affordable housing for extended periods even if they prepaid their mortgages.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In committee reports on HUD's fiscal year 1998 appropriation request, both the House and Senate Appropriations Committees specifically cited the report's findings as a basis for their decision to terminate funding for HUD's Low-Income Housing Preservation Program.

    Recommendation: To strengthen HUD's administration of the preservation program, the Secretary of Housing and Urban Development should undertake a systematic reassessment of the policies and internal controls governing the preservation program to ensure that they provide adequate assurance that the program's funds are being spent prudently and in accordance with legislative requirements. This assessment should focus, in particular, on policies and controls governing the types of improvements eligible for rehabilitation funding and HUD's reviews of requests for such funding, HUD's assessment of the effects of increases in rehabilitation funding on owner's equity, HUD's determination of funds needed for initial deposits to replacement reserves, HUD's oversight of field office activities, and HUD's monitoring of the owners' compliance with affordability restrictions placed on their properties.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: In committee reports on HUD's fiscal year 1998 appropriation request, both the House and Senate Appropriations Committees specifically cited the report's findings as a basis for their decision to terminate funding for HUD's Low-Income Housing Preservation Program.

    Recommendation: The Secretary of Housing and Urban Development should no longer fund preservation properties that are already bound by use agreements preserving the properties' affordability for extended periods or use preservation funds to resolve enforcement actions against the owners of multifamily properties and reconsider HUD's policy allowing owners to retain replacement reserve account balances when transferring properties to new owners.

    Agency Affected: Department of Housing and Urban Development

 

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