HUD's failure to administer properly its expanded assignment program to avoid foreclosure of single-family HUD-insured mortgages.

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1 HUD'S SINGLE-FAMILY MORTGAGE INSURANCE PROGRAMS There are three issues concerning HUD's single-family mortgage insurance programs which must be addressed on an expedited basis by the new HUD administration. (1) HUD's failure to implement adequately its program to accept assignments of single-family HUD-insured mortgages to avoid foreclosure; (2) HUD's failure to adopt adequate policies relating to the acquisition and disposition of single-family homes on which HUD-insured mortgages have been foreclosed; and (3) HUD's failure to provide adequate procedural safeguards to homeowners seeking compensation for structural and other serious defects in their homes (purchased with HUD-insured mortgages) under the Section 518(a), (b) and (d) programs. I. ISSUE; THE MORTGAGE ASSIGNMENT PROGRAM HUD's failure to administer properly its expanded assignment program to avoid foreclosure of single-family HUD-insured mortgages. THE PROBLEM: In settlement of a nationwide class-action, Ferrell v. Hills, Civ. No. 73 C 334 (filed 2/13/73) reported sub nom."" Brown v. Lynn, 385 F. Supp. 986 (1974) and 392 F. Supp7T59 (N.D ), challenging HUD's failure to prevent precipitate foreclosures by HUD-approved mortgagees, HUD promulgated regulations expanding its program, authorized under 12 U.S.C. Section 1715u, to accept assignments of mortgages in default. See HUD Notice 76-43, HM Mortgagee Letter 76-9, May 17, 1976, and 41 Fed. Reg: 49730, et seq. (No. 10, 1976). Under the assignment program, where defaulting mortgagors meet certain criteria, HUD must accept assignments of their mortgages, grant partial or complete forbearance for up to 36 months, and permit repayment over the remaining term of the loan, in accordance with certain formulae related to income. The regulations set out notice, hearing, and written decision requirements. HUD, however, has not adequately supervised implementation of these regulations, and the assignment in-lieu-of-foreclosure program is not working as it should. There have been failures by HUD field offices as well as HUD Central in the administration of the assignment program. The field offices have: a) refused to grant forbearance periods and have

2 -2- ignored monthly payment formulae for forbearance and reinstatement periods; b) applied unauthorized criteria as a basis for denying assignments; c) eliminated required procedural safeguards such as proper notices of decisions and face-to-face conferences; d) created inordinate delays in processing because of inadequate and/or under-motivated staff; and e) failed, along with mortgagees, to advise mortgagors of available relief and to provide meaningful assistance to those not sophisticated enough to take advantage of the assignment program., Recent statistics concerning the implementation of the program illustrate some of the problems. Although the nationwide mean acceptance rate for assignments, as of December 31, 1976, was 16%, six HUD offices had accepted no assignments while rejecting 192 requests; thirteen offices had acceptance rates under 5%, and thirty-six offices had rates of between 5 and 10%. In addition, in nine offices over 397o of the requests were still in process, while one major office showed a backlog of 68.7% of requests still in process. Furthermore, the low number of requests filed with HUD (12,330) out of the number of potentially eligible defaulted homeowners.(110,000 estimated by HUD in June 1976) may indicate widespread failure of HUD and mortgagees to give proper notice to mortgagors of the assignment program. These figures emphasize as well the need for comprehensive default counseling to reach those not sophisticated enough to take advantage of the assignment programs. In addition to the failures of the field offices, HUD Central has failed to implement the program adequately. It has: a) established a 10% quota on the taking of assignments; b) failed to investigate offices with acceptance rates of less than 10%; c) failed to modify regulations which are in conflict with the requirements of the Ferrell v. Hills settlement agreement; and d) failed to require reprocessing of requests for assignment relief where field office violations have been found

3 -3- PROPOSED SOLUTION: 1) rescind any and all Central Office directives which establish quotas for acceptance rates; 2) investigate all offices where assignment acceptance rates are under the national mean or where charges of other violations have been made; 3) establish higher standards for underperforming offices; 4) stay all foreclosures and acquisitions in offices where violations have been documented, and reprocess all requests de novo in accordance with-proper standards and procedures; 5) provide adequately trained staff in all field offices; 6) fully fund permanent default counseling agencies in areas with high default rates; 7) audit mortgagee conduct and impose sanctions for noncompliance; 8) modify regulations in conflict with the Ferrell settlement; and 9) modify existing statistical forms so that meaningful data on the operation of the assignment program can be accumulated. II. ISSUE: ACQUISITION AND SALE OF HOMES HUD's policies regarding the acquisition and disposition of single-family homes on which HUD-insured mortgages have been foreclosed. THE PROBLEM: The former HUD administration promulgated regulations regarding the acquisition and disposition of foreclosed singlefamily HUD-insured homes which are a matter of serious concern. 24 C.F.R , as amended, 41 Fed. Reg , Sept. 29, In acquiring, holding and selling such properties, HUD has: a) required that the property be vacant prior to HUD's

4 -4- accepting title; b) required that the property remain vacant while it is held in HUD's inventory (the average time in inventory as of 9/30/76 was 22 months); c) made few or no repairs while holding the property; e) precluded former mortgagors and renters from renting the property at fair market rentals during the period it is in HUD's inventory; and f) refused to permit former mortgagors to purchase the property on an equitable basis. The policies are irrational from an economic point of view and contravene HUD's statutory duty to preserve existing housing and neighborhoods. Enforcement of the policies costs HUD--and the taxpayers--substantial sums of money--more than would be spent if the policies were reversed. The average net loss on resale nationwide is $9,341; in one metropolitan area, Chicago, the average net loss increases to $14,025. In addition, the policies create slums and blighted neighborhoods, and the loss of habitable homes; they encourage speculators to buy and resell properties with few or no repairs. The policies are the subject of a nationwide class-action lawsuit" filed in Chicago in 1975, Metropolitan Area Housing Alliance [MAHA] v. HUD, 75 C 3032 (N.D. 111.).The former HUD administration resisted all attempts to change the policies. However, on February 2, 1977, Acting Deputy Assistant Secretary for Housing, Joseph Burstein, sent a telegram to all regional administrators and area insuring office directors, indicating that HUD was reconsidering its policy regarding repurchase by former mortgagors presently occupying HUD-owned property. Although the language of the telegram was ambiguous, Mr. Burstein explained to counsel in MAHA v. HUD, that HUD did intend to suspend the operation Section for ninety days. That suspension has not been put into effect, and new regulations have not yet been issued. PROPOSED SOLUTION: We request that HUD issue new regulations which will a) clearly eliminate the requirements that the property be vacant prior to acquisition and that it remain vacant while in HUD's inventory;

5 -5- b) establish and require a comprehensive repair and rental program for all acquired properties; c) prohibit all "as-is" sales; d) require that all sales be made to qualified low- and moderate-income purchasers under the FHA mortgage insurance programs; e) allow former mortgagors and tenants to rent the property at fair markent rentals while it is in HUD's inventory; and f) allow former mortgagors to repurchase their property on an equitable basis. III. ISSUE: DEFECT COMPENSATION PROGRAM HUD's failure to provide adequate procedural safeguards to FHA homeowners seeking compensation for structural and other serious defects in their homes under the Section 518 (a), (b) and (d) programs. THE PROBLEM: Sections 518 (a), (b) and (d) of the National Housing Act, 12 U.S.C. 1735(b), empower HUD to compensate certain homeowners of dwellings purchased with FHA-insured mortgages for structural and other serious defects in their homes. Section 518(a) applies, with certain qualifications relating to the date of the claim, to owners of newly constructed dwellings purchased with FHA-insured mortgages; and Sections 518(b) and (d) apply, with certain qualifications relating to the date of construction and mortgage insurance and the date of the claim, to purchasers of existing homes having FHA mortgage insurance. In administering these programs, HUD has failed to provide sufficient procedural safeguards to persons making claims: 1) under Section 518(a), homeowners are prevented from filing for compensation until they have exhausted the "construction complaint" procedure, a lengthy process whereby HUD attempts to enforce the homeowner's statutory warranty against the builder. Many claims are seriously delayed, not uncommonly for two to three years; and many homeowners, frustrated by this process, simply give up trying, never realizing that HUD is mandated to provide compensation to them; 2) when claims are made under the Section 518(a) program,

6 -6- homeowners are excluded from participating in HUD's determination of their eligibility under the program, and are not permitted to rebut any adverse findings in any meaningful way. These procedures have prevented homeowners from obtaining compensation. The Section 518(a) program has been in existence since 1964, and only some items of 691 claims have been found valid as of January 1, 1976, even though there have been thousands of legitimate complaints about serious unrepaired defects in newly constructed FHA-insured homes; and 3) in addition to being denied an opportunity to rebut adverse findings, claimants under the Section 518(b) and (d) programs have an additional problem: their eligibility depends on a finding that HUD inspectors erred when initially appraising their property. This requirement of a finding of HUD's fault creates an inherent agency bias, which, without due process safeguards, almost invariably results in decisions adverse to homeowners. Recent statistics bear this out. For Section 518(b), out of 85,839 claims and reconsiderations determined as of September 30, 1976, only some items of 13,548 claims were found valid. In Philadelphia, only. 87«of the items submitted for compensation were found valid. PROPOSED SOLUTION; Claims procedures for Sections 518(a), (b) and (d) should immediately be changed to: a) allow claimants whose claims have been preliminarily denied to appear before an independent and objective HUD decision-maker, with counsel, to present evidence and argument in support of their claims, followed by a written decision setting forth the facts relied upon by the decision-maker in reaching his determination; b) provide that the person(s) who conducted the original appraisal and inspection, or who supervised a person conducting such an appraisal and inspection, may not participate in any way in the processing or determination of a claim, and that no person who conducts an inspection pursuant to a claim may participate in decision-making with respect to such claim; c) require that all claims which have been denied without appropriate safeguards be reprocessed, allowing all claimants basic due process protections as outlined above;

7 -7- d) allow claimants to examine and copy (without making a Freedom of Information Act Request) all documents HUD relied on in making a preliminary decision; e) provide time deadlines to give force to the existing --and disregarded--requirement that claims be processed promptly; f) eliminate the "construction complaint" procedure under Section 518(a), (Ch. 1, HUD Handbook Rev.), which requires homeowners to first attempt to enforce their statutory warranty against the builder before filing Section 518(a) claims; and g) establish a program to advise applicants about Sections 518(a), (b) and (d), including providing each applicant with a written explanation of the program terms and how best to support a claim, and designating one person in each field office who will have sole responsibility for administration of the program.