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Report to the Chairman, Subcommittee on Housing and Transportation, 
Committee on Banking, Housing and Urban Affairs, U.S. Senate:

January 2004:

SINGLE-FAMILY HOUSING:

Cost, Benefit, and Compliance Issues Raise Questions about HUD's 
Discount Sales Program:

GAO-04-208:

GAO Highlights:

Highlights of GAO-04-208, a report to the Chairman, Subcommittee on 
Housing and Transportation, Committee on Banking, Housing and Urban 
Affairs, U.S. Senate 

Why GAO Did This Study:

In 2001, the Department of Housing and Urban Development’s (HUD) 
Inspector General reported on serious problems in HUD’s Discount Sales 
Program, under which nonprofit organizations purchase HUD-owned 
properties at a discount, rehabilitate them, and resell them to low- 
and moderate-income homebuyers. The objectives of the program are to 
expand affordable housing opportunities, help revitalize 
neighborhoods, and reduce HUD’s property inventory in a timely, 
efficient, and cost-effective manner. Although the Inspector General 
recommended that the agency suspend the program and evaluate its 
viability, HUD did neither. GAO was asked to assess (1) the costs of 
the program to HUD, (2) the benefits of the program to homebuyers, and 
(3) HUD’s efforts to monitor participating nonprofits and enforce 
program requirements. 

What GAO Found:

GAO found that the Discount Sales Program poses significant costs to 
HUD, is of questionable benefit to homebuyers, and has serious 
monitoring and compliance problems. GAO estimates that the program 
cost HUD between $18.8 and $23.9 million in calendar year 2002. 
Between $15.1 and $20.2 million was a reduction in net revenue 
resulting from HUD’s selling approximately 1,200 properties through 
the program instead of through its regular sales process. Personnel 
expenses for administering the program accounted for the remaining 
$3.7 million. GAO’s analysis of 238 properties sold under the program 
in 2002 suggests that most of the homebuyers did not benefit 
financially. Assuming that nonprofits and homebuyers would incur the 
same rehabilitation costs, GAO estimates that 76 percent of the 
homebuyers would have spent less purchasing the properties through 
HUD’s regular process and paying for the rehabilitation work 
themselves. And while the program can help homebuyers access a range 
of homeownership services, these services are also available from 
other sources. GAO did not evaluate the extent to which the program 
generated other benefits, such as neighborhood revitalization.

While uncovering numerous program violations, HUD’s monitoring efforts 
have faced challenges. For example, HUD monitors nonprofits through 
desk reviews of the annual reports it requires nonprofits to submit 
each February. However, as of July 2003, HUD’s four homeownership 
centers, which administer the program, had not received reports for 
more than half of the properties the agency estimates were purchased 
and resold under the program in 2002. Even with this problem, the desk 
reviews found that 28 of the 44 nonprofits that submitted reports 
violated resale limits, earning an estimated total of $704,720 in 
excess profits (see figure). HUD requires that nonprofits use their 
excess profits to pay down the mortgages of the homebuyers they 
overcharged, but the agency’s ability to enforce this requirement is 
extremely limited. As of July 2003, nonprofits had made only $62,000 
in payments on mortgages.

What GAO Recommends:

GAO recommends that HUD (1) evaluate options to improve the program’s 
benefit to homebuyers, the agency’s monitoring of nonprofits, and 
enforcement of excess profits requirements; (2) assess the extent to 
which the program is meeting its objectives; and (3) terminate the 
program if its current cost plus the resources needed to improve it 
exceed the program’s benefits. HUD agreed with GAO’s recommendations 
to evaluate the program but said that the report overstated the 
program’s costs and understated its benefits.

www.gao.gov/cgi-bin/getrpt?GAO-04-208.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact David G. Wood at 
(202) 512-8678 or woodd@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

In 2002, the Discount Sales Program Cost HUD at Least $18.8 Million: 

The Discount Sales Program Is Not Likely to Benefit Most Homebuyers 
Financially but Can Help Them Access Homeownership Services and 
Assistance: 

Limited Monitoring Efforts Have Uncovered Numerous Violations, but 
Effective Enforcement Has Been Difficult: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Statistical Models Used to Estimate Program Costs and 
Benefits: 

Appendix III: Comments From the Department of Housing and Urban 
Development: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Tables: 

Table 1: HUD's Calendar Year 2002 Single-Family Property Sales: 

Table 2: Estimated Reduction in Net Revenue Due to the Discount Sales 
Program in Calendar Year 2002, by Discount Level: 

Table 3: Estimated Reduction in Net Revenue Due to the Discount Sales 
Program in Calendar Year 2002, by Homeownership Center: 

Table 4: HUD's Estimate of Personnel Costs for the Discount Sales 
Program in Calendar Year 2002, by Homeownership Center: 

Table 5: Estimated Number of Homebuyers Who Did and Did Not Benefit 
Financially by Purchasing Homes through HUD's Discount Sales Program: 

Table 6: Percentage of Estimated Excess Profits Used to Pay Down 
Homebuyer Mortgages, as of July 2003: 

Table 7: Variable Names, Descriptions, and Mean Values: 

Table 8: Coefficients from Estimated Models: 

Figure: 

Figure 1: Resale Price Violations Disclosed by Desk Reviews of 
Nonprofits' Annual Reports on Calendar Year 2002 Program Activity: 

Abbreviations: 

FHA: Federal Housing Administration:

GAO: General Accounting Office:

HOC: homeownership center:

HUD: Department of Housing and Urban Development:

SAMS: Single-Family Acquired Asset Management System:

Letter 
January 30, 2004:

The Honorable Wayne Allard: 
Chairman: 
Subcommittee on Housing and Transportation 
Committee on Banking, Housing and Urban Affairs: 
United States Senate:

Dear Mr. Chairman:

Each year, the Department of Housing and Urban Development (HUD) 
acquires tens of thousands of single-family properties through 
foreclosures when homeowners default on mortgages insured by the 
Federal Housing Administration (FHA). HUD sells these properties in as-
is condition through its regular sales process and a number of smaller, 
specialized programs, including the Discount Sales Program. Under the 
Discount Sales Program, HUD sells properties at 10, 15, or 30 percent 
discounts to nonprofit organizations[Footnote 1] and government 
entities[Footnote 2] (nonprofits) that then rehabilitate (rehab) the 
homes as necessary and resell them to low-and moderate-income 
homebuyers. However, a November 2001 report by HUD's Inspector General 
concluded that low-and moderate-income homebuyers did not benefit 
significantly from the program; that many participating nonprofits were 
actually profit-motivated entities; and that HUD lacked effective 
approval, monitoring, and enforcement procedures.[Footnote 3] In light 
of these problems, the Inspector General recommended, among other 
things, that the agency suspend the program and evaluate the program's 
viability. Although HUD acted on many of the report's recommendations, 
it neither suspended nor evaluated the program.

As agreed with your office, this report assesses (1) the cost of the 
program to HUD, (2) the benefits of the program to homebuyers, and (3) 
HUD's efforts to monitor participating nonprofits and enforce program 
requirements. To address these objectives, we reviewed the program 
activities of HUD's Office of Housing and four homeownership centers 
(HOC) in Atlanta, Georgia; Denver, Colorado, Philadelphia, 
Pennsylvania; and Santa Ana, California. As agreed with your office, 
our work focused on the properties HUD sold through the program in 
calendar year 2002 and the monitoring and enforcement activities the 
HOCs performed in connection with those properties. To estimate the 
program's cost to HUD and its benefits to homebuyers, we performed a 
statistical analysis using data from HUD's Single-Family Acquired Asset 
Management System (SAMS)[Footnote 4] and the U.S. Census Bureau. We did 
not evaluate the extent to which the program generated other benefits, 
such as neighborhood revitalization. Appendixes II and III provide 
detailed information on our objectives, scope, and methodology.

Results in Brief:

We estimate that the Discount Sales Program cost HUD between $18.8 and 
$23.9 million in calendar year 2002. Most of this cost, between $15.1 
and $20.2 million, was a reduction in net revenue resulting from HUD's 
selling approximately 1,200 properties through the program rather than 
through its regular sales process, in which properties' prices are not 
discounted. The reduction in net revenue varied according to the 
discount level, with properties sold at a 30 percent discount 
accounting for the largest share of the total reductions. Personnel 
expenses for administering the program accounted for the remainder of 
HUD's cost. HUD estimates that its headquarters and HOCs allotted about 
45 staff years[Footnote 5] to the program in calendar year 2002, 
primarily to oversee participating nonprofit organizations. According 
to HUD, these staff years equated to approximately $3.7 million in 
personnel costs. HUD officials said that in the absence of the Discount 
Sales Program, these staff years would be allocated to other 
activities.

Our analysis of 238 homes sold under the Discount Sales Program in 
calendar 2002 indicates it is likely that most of the homebuyers did 
not benefit financially from the program.[Footnote 6] Specifically, 
assuming that nonprofits and homebuyers would incur the same costs to 
rehab a property, we estimate that 76 percent of the homebuyers would 
have spent less if they had purchased the properties through HUD's 
regular sales process and paid for the rehab work themselves. The 
estimated proportion of homebuyers who did not benefit varied by 
discount level, ranging from more than 90 percent at the 15 percent 
discount level to one-half at the 30 percent discount level. In part, 
homebuyers did not benefit because some nonprofits overcharged for some 
properties and some program rules authorize nonprofits to pass on 
costs--such as financing as closing costs--that homebuyers would likely 
not incur under HUD's regular sales process. We also found that while 
the program can provide access to a range of services and assistance 
that may benefit homebuyers, such as homeownership counseling, home 
maintenance courses, and down payment assistance, these services are 
also available from other sources. HUD has stated that the program 
generates benefits and supports policy goals, such as neighborhood 
revitalization and stability, that extend beyond benefits to individual 
homebuyers, but the agency has not studied the extent to which the 
program is serving these ends.

HUD's monitoring efforts have uncovered numerous program violations, 
but implementing the monitoring process and effectively enforcing 
program rules have been difficult. For example, one of the HOCs' 
primary monitoring tools is the desk review of the annual reports 
participating nonprofits are required to submit each February. However, 
as of July 2003 the centers had not received annual reports from 
nonprofits responsible for more than half of the 626 discounted 
properties that HUD estimates were purchased, rehabbed, and resold 
under the program during calendar year 2002. Further, as a condition of 
program participation, nonprofits must allow HUD staff to perform on-
site reviews of their operations. However, the HOCs' use of these on-
site reviews has been uneven. The Atlanta and Denver centers reviewed 
about half of their approved nonprofits in calendar year 2002, but the 
Philadelphia and Santa Ana centers reviewed few and none, respectively, 
citing limited staff resources and the difficulty of traveling to 
nonprofits' offices. But even with these limitations, the HOCs' desk 
and on-site reviews identified numerous violations of program 
requirements. For example, the centers' desk reviews found that 
nonprofits often did not comply with HUD limits on the resale price of 
discounted properties and earned excess profits from the program. 
Specifically, the reviews showed that 28 of the 44 nonprofits that 
submitted annual reports sold one or more properties at prices 
exceeding those allowed under the program, resulting in 124 homebuyers 
being overcharged an estimated total of $704,720. However, the centers 
have had limited success enforcing the requirement that nonprofits 
making excess profits pay down the mortgages of homebuyers they 
overcharged. As of July 2003, nonprofits had used less than 10 percent 
of the estimated excess profits they made to pay down homebuyers' 
mortgages.

This report recommends that the Secretary of HUD (1) evaluate options 
to improve the program's benefit to homebuyers, the agency's monitoring 
of nonprofits, and enforcement of excess profits requirements; (2) 
assess the extent to which the program is meeting its objectives; and 
(3) terminate the program if its current cost plus the resources needed 
to improve it exceed the program's benefits. In comments on a draft of 
the report, HUD agreed with our recommendations to further assess the 
program but added that our analysis appeared to overstate the program's 
cost and understate its benefits.

Background:

Established in 1993, HUD's Discount Sales Program seeks to expand 
affordable housing opportunities, help revitalize neighborhoods, and 
reduce the agency's inventory of single-family properties in a timely, 
efficient, and cost-effective manner.[Footnote 7] Under the program, 
approved nonprofit organizations receive a discount when purchasing 
HUD-owned single-family properties and are required to rehabilitate and 
resell them to low-or moderate-income homebuyers. As of August 2003, 
423 nonprofits were approved to participate in the program, down from 
more than 2,000 nonprofits 3 years earlier. HUD attributed the 
reduction to changes in the program, such as stricter approval 
standards and increased reporting requirements, and to the agency's 
efforts to remove nonprofits that violate program rules.

HUD acquires properties through foreclosures of homes with FHA-insured 
mortgages. FHA provides federally backed mortgage insurance primarily 
to low-income and first-time homebuyers who might otherwise have 
difficulty obtaining a mortgage.[Footnote 8] In calendar year 2002, HUD 
acquired more than 67,000 properties through foreclosures and sold 
approximately 65,000 properties from its inventory. At the end of 
calendar year 2002, HUD had an inventory of 32,018 single-family 
properties.

HUD sells the properties in its inventory in as-is condition through a 
number of different programs. Table 1 shows the primary programs HUD 
uses to sell properties and the number of properties sold under each 
during calendar year 2002. Most HUD-owned properties are eligible for 
price reductions under the Discount Sales Program. The program 
accounted for approximately 2 percent of HUD's overall property sales 
in calendar year 2002.

Table 1: HUD's Calendar Year 2002 Single-Family Property Sales:

Program: Regular sales; Number of properties: 60,634.

Program: Officer Next Door[A]; Number of properties: 1,168.

Program: Teacher Next Door[A]; Number of properties: 925.

Program: Discount Sales; Number of properties: 1,226.

Program: Asset Control Area[B]; Number of properties: 795.

Program: Dollar Homes[C]; Number of properties: 275.

Total; Number of properties: 65,023.

[A] The Officer Next Door and Teacher Next Door programs offer HUD-
owned properties at 50 percent discounts to law enforcement officers 
and teachers willing to live in economically distressed neighborhoods.

[B] Under the Asset Control Area program, participating nonprofits 
agree to purchase all of the HUD-owned properties located within 
specific geographic areas. The nonprofits receive discounts of up to 50 
percent off HUD's list price.

[C] The Dollar Homes program allows local governments to purchase 
eligible HUD-owned properties for one dollar. The properties made 
available through the program are those HUD is unable to sell within 6 
months.

[End of table]

HUD offers discounts of 10, 15, and 30 percent to nonprofit 
organizations. The size of the discount depends on several factors: 
whether a property in as-is condition is eligible for FHA insurance, 
whether it is located in a revitalization area,[Footnote 9] and whether 
it is sold individually or in a package of five or more homes. HUD 
inspects and appraises all foreclosed properties to determine whether 
they are again eligible for FHA mortgage insurance. FHA will insure 
mortgages only on properties that meet HUD's minimum property standards 
and local building codes or that need less than $5,000 in repairs in 
order to meet these standards. Properties needing more than $5,000 in 
repairs are considered uninsurable. For purposes of the Discount Sales 
Program, HUD then differentiates properties by location. All insurable 
properties receive a 10 or 15 percent discount whether or not they are 
located in a revitalization zone. The 15 percent discount is only 
applied if the property is part of a group of five or more properties 
purchased in a single transaction. Uninsurable properties lying outside 
revitalization areas also receive these discounts, but those located 
within revitalization areas are eligible for the steepest discount--30 
percent.

Under the Discount Sales Program, HUD has two methods of selling 
properties to nonprofits: competitive bidding and noncompetitive sales. 
Both methods allow discounts for nonprofits. Under the competitive 
process, HUD establishes a list price for the properties but will 
accept bids that are lower. HUD posts the properties, with their list 
prices, on the Internet in its general listings and accepts bids from 
prospective owner-occupants and nonprofits, but not investors, for a 
priority period of 10 to 30 days, depending on the geographic area. HUD 
awards the property to the owner-occupant or nonprofit with the highest 
bid. If the highest bidder is a nonprofit, HUD grants a 10 or 15 
percent discount off the bid price when it closes on the home. For 
properties that fail to sell during this priority period, HUD then 
accepts bids from the general public, including investors.

The noncompetitive sales method applies only to uninsurable properties. 
HUD lists these properties separately from its general listings and 
makes them available to nonprofits through a HUD contractor's Web site. 
Nonprofits have a priority period of 5 days to express interest in the 
properties at HUD's list price. If more than one nonprofit expresses 
interest in a property, HUD selects the buyer by lottery. As with 
competitive sales, the discount is applied at closing. Properties that 
are not sold noncompetitively are placed in HUD's general listings and 
made available for sale on a competitive basis.

Nonprofits that purchase properties under the Discount Sales Program 
are responsible for rehabilitating them as needed to meet HUD's minimum 
property standards and local building codes. Nonprofits are required to 
limit their resale price to no more than 110 percent of their "net 
development cost," or the sum of their allowable costs for acquiring, 
rehabilitating, and reselling the properties. Nonprofits must also sell 
the homes to buyers whose incomes do not exceed 115 percent of their 
area's median income, adjusted for family size.

HUD's four HOCs administer the Discount Sales Program and oversee the 
participating nonprofits. The HOCs process nonprofits' applications to 
participate in the program and monitor nonprofits for compliance once 
they begin purchasing, rehabilitating, and reselling homes. To help 
monitor the program, HUD requires nonprofits to submit annual reports 
to the appropriate HOC by February 1 of each year. The reports must 
provide information on properties the nonprofits have bought, 
rehabilitated, and resold, including repair costs, prices to 
homebuyers, and homebuyers' incomes. HOC staff also conduct on-site 
visits to nonprofits and properties to review files and inspect 
repairs, among other things. When a nonprofit fails to follow the 
program's requirements, HOCs may remove the nonprofit from the program.

In recent years, HUD has changed some of its program requirements to 
increase its oversight of nonprofits. For example, in 2000 HUD issued 
guidance establishing uniform standards for nonprofits applying to 
participate in the program. The guidance outlines specific information 
nonprofits must submit in applying for the program, mandates that 
nonprofits recertify with HUD every 2 years, and requires that 
nonprofits answer detailed questions about their ability to carry out 
affordable housing programs.

To address concerns raised in the HUD Inspector General's 2001 report 
on the program, HUD issued additional guidance in December 2001 
designed to strengthen the program's reporting and accountability 
requirements. Until this guidance was issued, nonprofits needed to meet 
HUD's annual reporting and net development cost requirements only for 
properties purchased at a 30 percent discount. The guidance expanded 
annual reporting and resale price requirements to all properties, 
regardless of discount level, and clarified HUD's net development cost 
calculation by providing a detailed list of allowable and unallowable 
costs.

Also in response to the Inspector General's report, HUD issued guidance 
in January 2002 designed to tighten eligibility requirements for 
nonprofits. Among other things, the guidance described circumstances 
that could create a conflict of interest between nonprofits and their 
business partners. In addition, it required that nonprofits be 
incorporated as 501(c)(3) organizations for at least 2 years and have a 
minimum of 2 consecutive years of affordable housing experience within 
the last 5 years. Finally, to accommodate HUD's on-site reviews, the 
guidance required nonprofits to maintain property records in a 
specified format.

HUD did not implement all of the Inspector General's recommendations. 
Specifically, the Inspector General's report recommended that HUD 
suspend the program and evaluate it to determine whether the program 
was viable or should be discontinued. HUD Office of Housing officials 
told us they developed a proposal for a contractor study of the program 
but that the proposal was never funded. HUD officials said they did not 
suspend the program because they felt the improvements made following 
the Inspector General's review would prevent further problems.

In 2002, the Discount Sales Program Cost HUD at Least $18.8 Million:

We estimate that the Discount Sales Program cost HUD between $18.8 and 
$23.9 million in calendar year 2002. Most of this cost, between $15.1 
and $20.2 million, was a reduction in net revenue resulting from HUD's 
selling properties through the program rather than through its regular 
sales process.[Footnote 10] Personnel expenses for administering the 
program accounted for the remaining $3.7 million of HUD's cost.

The Discount Sales Program Reduced HUD's Net Revenue:

The net revenue HUD receives from each property it sells is less than 
the property's selling price because HUD incurs certain holding and 
selling costs. Some of these costs are common to both discounted and 
regular HUD property sales, while others are not. For example, on a 
regular sale, HUD pays the homebuyer's closing and financing costs and 
the sales commission of the successful selling broker, within certain 
guidelines. HUD does not pay either of these costs for properties sold 
through the Discount Sales Program. HUD does not require a selling 
broker for the properties nonprofits purchase through the program; 
consequently, there is generally no selling broker's commission for 
these transactions. HUD incurs other types of costs for all properties 
whether or not they are part of the program. These costs include (1) 
the fees and reimbursable expenses it pays to management and marketing 
contractors responsible for inspecting, appraising, securing, 
maintaining, and selling HUD-owned properties; (2) sales incentives in 
the form of cash allowances that HUD periodically offers to homebuyers-
-including nonprofits--that close relatively quickly on executed sales 
contracts; (3) the listing broker's fee; and (4) the property taxes for 
the period when HUD owned the home.

To determine the impact of the Discount Sales Program on HUD's net 
revenues (i.e., the selling price minus holding and selling costs) we 
compared the estimated net revenues HUD received for the discounted 
properties with the estimated net revenues HUD would have received if 
it had sold the properties through its regular sales process.[Footnote 
11] Using data from HUD's SAMS and the U.S. Census Bureau, we made this 
determination for:

1,194[Footnote 12] properties that HUD sold through the program in 
calendar year 2002. We used a statistical model that included data for 
these properties and approximately 4,000[Footnote 13] properties HUD 
sold through its regular process during the same year.[Footnote 14] We 
found that by selling the 1,194 properties through the Discount Sales 
Program instead of its regular sales process, HUD reduced the net 
revenue it received in calendar year 2002. Specifically, we estimate 
that the total reduction in HUD's net revenue was between $15.1 and 
$20.2 million,[Footnote 15] an average of between $12,672 and $16,945 
per property. (See app. II for a detailed discussion of our statistical 
analysis.) Without the program, and with all other things remaining 
equal, cash flows into HUD's insurance fund would have increased by 
that amount.

As shown in table 2, the overall and average reductions in net revenue 
varied according to the discount level. The properties sold with 10 
percent discounts accounted for about two-thirds of the homes that HUD 
sold through the program in calendar year 2002, but for less than half 
the total estimated reduction in net revenue. In contrast, the 
properties sold with 30 percent discounts represented less than one-
third of the total properties sold but more than 40 percent of the 
overall reduction in net revenue. Finally, the properties with 15 
percent discounts accounted for about 9 percent of the total properties 
and between 7 and 10 percent of the overall reduction in HUD's net 
revenue.

According to HUD officials, the agency's database somewhat overstates 
the number of properties sold with a 10 percent discount (the most 
common type) and somewhat understates the number sold with a 15 percent 
discount (the least common type). The officials said this overstatement 
occurs because HUD does not always update its database to reflect the 
fact that a property, indicated in the database as being sold with a 10 
percent discount, may actually have been sold at a 15 percent discount 
if it was part of a group of five or more properties bought in a single 
transaction. As a result, our analysis may overestimate the reduction 
in net revenue for properties discounted by 10 percent and 
underestimate it for those discounted by 15 percent.

Table 2: Estimated Reduction in Net Revenue Due to the Discount Sales 
Program in Calendar Year 2002, by Discount Level:

Discount level: 10 percent; 
Number of properties sold: 744; 
Total estimated reduction in net revenues (dollars in millions): 
$6.6 - $9.3; 
Average estimated reduction in net revenues per property: $8,844 - 
$12,453.

Discount level: 15 percent; 
Number of properties sold: 102; 
Total estimated reduction in net revenues (dollars in millions): 1.0 - 
1.9; 
Average estimated reduction in net revenues per property: 10,223 - 
18,997.

Discount level: 30 percent; 
Number of properties sold: 348; 
Total estimated reduction in net revenues (dollars in millions): 7.5 - 
9.0; 
Average estimated reduction in net revenues per property: 21,572 - 
25,947.

Total; 
Number of properties sold: 1,194; 
Total estimated reduction in net revenues (dollars in millions): 
$15.1 - $20.2; 
Average estimated reduction in net revenues per property: $12,672 - 
$16,945. 

Sources: HUD and the U.S. Census Bureau.

Note: Our confidence level for the estimates is 90 percent.

[End of table]

As shown in table 3, the overall and average reductions in net revenues 
also varied by HOC. A major reason for this variance was differences 
among the centers in the proportion of their properties sold with 30 
percent discounts. Because 30 percent discount properties cost HUD more 
in net revenue than properties at the other discount levels, the HOC 
with the highest proportion of 30 percent properties--Santa Ana--had 
the greatest reduction in net revenue. The HOC with the lowest 
proportion--Denver--had the smallest reduction in net revenue.

Table 3: Estimated Reduction in Net Revenue Due to the Discount Sales 
Program in Calendar Year 2002, by Homeownership Center:

Homeownership center: Atlanta; 
Number of properties sold: 296; 
Total estimated reduction in net revenues: (dollars in millions): 
$2.8 - $3.8; 
Average estimated reduction in net revenues per property: $9,317- 
$12,744.

Homeownership center: Denver; 
Number of properties sold: 183; 
Total estimated reduction in net revenues: (dollars in millions): 
1.2 - 2.3; 
Average estimated reduction in net revenues per property: 6,551 - 
12,689.

Homeownership center: Philadelphia; 
Number of properties sold: 359; 
Total estimated reduction in net revenues: (dollars in millions): 3.5 - 
4.7; 
Average estimated reduction in net revenues per property: 9,712 - 
13,061.

Homeownership center: Santa Ana; 
Number of properties sold: 356; 
Total estimated reduction in net revenues: (dollars in millions): 7.7 - 
9.4; 
Average estimated reduction in net revenues per property: 21,592 - 
26,542.

Total; 
Number of properties sold: 1,194; 
Total estimated reduction in net revenues: (dollars in millions): 
$15.1 - $20.2; 
Average estimated reduction in net revenues per property: $12,672 - 
$16,945. 

Sources: HUD and the U.S. Census Bureau.

Note: The estimates may not add up to totals due to rounding. Our 
confidence level for the estimates is 90 percent.

[End of table]

HUD officials told us they were aware that the program reduced the 
agency's net revenue from property sales. However, HUD has not 
evaluated whether the program is reducing HUD's property inventory in a 
timely, efficient, and cost-effective manner, as intended.

HUD Incurred Administrative Costs Operating the Discount Sales Program:

To determine the impact of the Discount Sales Program on HUD's 
administrative costs in calendar year 2002, we compared the 
administrative costs HUD incurred under the program to what HUD would 
have incurred had the discounted properties been sold through HUD's 
regular process. According to HUD, in administering the Discount Sales 
Program, HOC staff perform tasks that are not part of HUD's regular 
home-selling process. For example, for the Discount Sales Program, 
center staff approve and recertify participating nonprofit 
organizations and monitor the nonprofits' compliance with program 
requirements--tasks they do not perform for the regular sales process. 
As a result, HUD's administrative cost per property is lower for its 
regular sales process than it is for the Discount Sales Program. HUD 
officials told us that for this reason and the small volume of 
properties sold through the Discount Sales Program, selling the 
discounted properties through HUD's regular process would have had no 
measurable effect on the administrative costs for the regular sales 
process.

The bulk of HUD's administrative costs for the Discount Sales Program 
are the salaries and benefits of staff who work on the program. 
According to HUD officials, most of these staff split their time among 
several programs, but HUD's time and attendance system does not record 
the time they spend on each one. Therefore, we relied on estimates from 
HUD to determine how many staff years were spent on the program in 
calendar year 2002 and the associated costs. Although HUD incurred 
other types of costs to administer the program, such as mailing costs 
and travel expenses for visiting nonprofit offices, these were minor 
compared with the personnel costs and were not included in HUD's 
estimate.

HUD estimates that its personnel costs for the Discount Sales Program 
were approximately $3.7 million in calendar year 2002.[Footnote 16] 
(See table 4.) HUD's estimate was based on information provided by its 
HOCs and Office of Housing, which showed that their staffs devoted a 
total of 45 staff years to the program. The number of staff years and 
the associated cost varied across offices, however. Among the HOCs, the 
Atlanta center had the most staff years and highest personnel costs and 
the Denver center the fewest staff years and lowest personnel costs. 
HUD's Office of Housing devoted the equivalent of about one staff year 
to the program. HUD headquarters and HOC officials told us that in the 
absence of the Discount Sales Program, these staff years would have 
been dedicated to administering other HUD programs, so that HUD would 
have incurred the personnel costs with or without the program.

Table 4: HUD's Estimate of Personnel Costs for the Discount Sales 
Program in Calendar Year 2002, by Homeownership Center:

Staff years; 
Atlanta center: 17.0; 
Denver center: 5.2; 
Philadelphia center: 11.8; 
Santa Ana center: 10.4; 
HUD: headquarters: 0.8; 
Total: 45.1.

Personnel costs; 
Atlanta center: $1,386,740; 
Denver center: $423,930; 
Philadelphia center: $957,919; 
Santa Ana center: $844,599; 
HUD: headquarters: $75,263; 
Total: $3,688,451.

Source: HUD.

[End of table]

The Discount Sales Program Is Not Likely to Benefit Most Homebuyers 
Financially but Can Help Them Access Homeownership Services and 
Assistance:

Our analysis of 238 properties sold under the Discount Sales Program in 
calendar year 2002 indicates it is likely that most homebuyers did not 
benefit financially from the program. Specifically, assuming that 
nonprofits and homebuyers had the same rehab costs, we estimate that 76 
percent of the homebuyers would have spent less if they had purchased 
the properties through HUD's regular sales process and paid for the 
rehab work themselves. In part, the lack of financial benefit to 
homebuyers is attributable to the program's rules, which authorize 
nonprofits to pass on costs that homebuyers would likely not incur 
using the regular sales process. Despite the program's limited 
financial benefits, it may help homebuyers access a range of services 
and assistance--such as homeownership counseling, down payment 
assistance, and home maintenance courses--that are beneficial but also 
available from other sources. The program may also help improve 
neighborhood conditions by rehabbing and putting back on the market 
homes that might otherwise remain vacant or in disrepair.

The Financial Benefit of the Program to Most Homebuyers is Doubtful:

To determine the extent to which homebuyers benefited financially from 
purchasing a rehabilitated home through the Discount Sales Program, we 
performed a statistical analysis comparing what the homebuyers actually 
paid for these homes with our estimate of what they would have spent 
had they purchased the homes under HUD's regular process and paid for 
the rehab work themselves. Our analysis assumed that in the absence of 
the Discount Sales Program, a homebuyer would be able to (1) purchase 
the same home and rehabilitate it to the same extent as the nonprofit 
and (2) incur the same rehab costs as the nonprofit.[Footnote 17] We 
also assumed that the homebuyer would inhabit the home during the 
rehabilitation and therefore would not incur housing expenses for two 
residences during that period.[Footnote 18] We performed this analysis 
on 238 properties that nonprofits purchased and resold between February 
1 and December 31, 2002.[Footnote 19] These properties were the only 
ones for which HUD could provide the rehab costs and selling prices to 
homebuyers at the time of our review. (See app. II for a detailed 
discussion of our statistical analysis.):

Assuming equal rehab costs for nonprofits and homebuyers, we estimate 
that 182 of the 238 homebuyers, or 76 percent, did not benefit 
financially by purchasing a rehabbed property from a nonprofit that 
bought the property through the Discount Sales Program. That is, the 
buyers would have spent less had they purchased the property through 
HUD's regular sales process and paid for the rehab work themselves. 
Under the assumptions of our analysis, we estimate that these 
purchasers spent an average of $9,200 more buying the house through the 
program than they would have spent otherwise. Our analysis indicated 
that the other 24 percent of the homebuyers benefited financially from 
the program, because purchasing the homes through HUD's regular sales 
process and rehabbing them would have been more expensive. We estimate 
that these homebuyers saved $9,200, on average, by purchasing through 
the Discount Sales Program. Because nonprofits may, in some 
circumstances, be able to rehab a home more cheaply than an individual 
homebuyer, we also performed the analysis assuming that a homebuyer 
would pay 25 percent more than a nonprofit for the same rehab work. 
Even under that assumption, we estimate that 59 percent of the 
homebuyers would not have benefited financially from the program. More 
specifically, we estimate these purchasers spent an average of $8,000 
more buying the house through the program than they would have spent 
otherwise. We estimate that the remaining 41 percent of homebuyers 
saved $10,100, on average, by purchasing a home through the program.

Our estimates of the extent to which homebuyers did or did not benefit 
varied according to the discount level of the property purchased. 
Assuming equal rehab costs for nonprofits and homebuyers, we estimate 
that 79 percent of the homebuyers purchasing houses that had been 
discounted 10 percent saw no financial benefit. For the properties with 
15 percent discounts, we estimate that more than 90 percent did not 
benefit. However, for the properties with 30 percent discounts, we 
estimate that one-half of the homebuyers saw some financial benefit. 
(See table 5.):

One reason homebuyers did not benefit financially, according to our 
analysis, was that nonprofits sometimes resold the properties for more 
than the program allowed.[Footnote 20] This finding was especially 
strong for purchases in the 15 and 30 percent discount categories. Had 
the nonprofits not overcharged the homebuyers in these cases, we 
estimate that more than one-third of the homebuyers who bought 
properties with a 15 percent discount and more than three-quarters of 
those who bought properties with a 30 percent discount would have 
benefited financially.

Table 5: Estimated Number of Homebuyers Who Did and Did Not Benefit 
Financially by Purchasing Homes through HUD's Discount Sales Program:

Discount level: 10 percent; 
Number of properties: 143; 
Number of homebuyers who benefited financially: 30; 
Number of homebuyers who did not benefit financially: 113.

Discount level: 15 percent; 
Number of properties: 51; 
Number of homebuyers who benefited financially: 4; 
Number of homebuyers who did not benefit financially: 47.

Discount level: 30 percent; 
Number of properties: 44; 
Number of homebuyers who benefited financially: 22; 
Number of homebuyers who did not benefit financially: 22.

Discount level: Total; 
Number of properties: 238; 
Number of homebuyers who benefited financially: 56; 
Number of homebuyers who did not benefit financially: 182. 

Sources: HUD and the U.S. Census Bureau.

[End of table]

Our analysis did not take into account certain factors that are 
difficult to quantify but may make the program either more or less 
beneficial from a homebuyer's perspective. For example, some homebuyers 
may be willing to incur significant costs to avoid the time, 
difficulty, and inconvenience involved in selecting materials, 
obtaining and evaluating contractor bids, residing in a property 
undergoing rehab work, and possibly obtaining a separate loan to 
finance the rehab work.[Footnote 21] Conversely, some homebuyers may 
not view these tasks as major obstacles and may see significant 
benefits to controlling the rehab process themselves, such as the 
ability to select the materials used and the ability to oversee the 
rehab work as it progresses.

The Discount Sales Program's Rules Reduce the Likelihood That Buyers 
Will Benefit Financially:

Some of the Discount Sales Program's rules make it unlikely that 
purchasing a property from a nonprofit that purchased the property from 
HUD at a 10 or 15 percent discount will benefit homebuyers more than 
purchasing the same property from HUD through the regular sales 
process. For example, HUD allows nonprofits to resell discounted 
properties for up to 110 percent of the "net development cost," or the 
cost of buying the property plus allowable rehab, holding, and selling 
costs. The 10 percent markup helps nonprofits to cover the overhead 
expenses they incur by participating in the program. However, taking a 
10 percent markup on a property purchased at a 10 or 15 percent 
discount effectively cancels out all or most of the discount. As a 
result, the price of the home to the eventual homebuyer reflects 
little, if any, of HUD's discount to the nonprofit.

Furthermore, program rules authorize nonprofits to include in their 
calculations of net development cost certain "allowable" financing and 
closing costs they incur in buying discounted HUD properties. As a 
result, a homebuyer who purchases a property from a nonprofit pays not 
only his or her own financing and closing costs but--through the sales 
price--the nonprofit's as well. In contrast, when a homebuyer purchases 
a property using HUD's regular sales process, HUD pays allowable 
financing and closing costs on the buyer's behalf. Also, a nonprofit's 
net development cost may include the principal and interest payments 
for the mortgage on the property while the property is being renovated 
for up to 6 months. Raising the nonprofit's net development cost 
effectively raises the price for the eventual homebuyer, who could have 
avoided some of these expenses by purchasing the house directly from 
HUD and, if possible, inhabiting it during the renovation.

The Discount Sales Program May Help Homebuyers Access Certain Services 
and Assistance and Improve Neighborhood Conditions:

According to HUD and nonprofit officials, many of the families who 
purchase properties through the program are first-time homebuyers. 
Accordingly, HUD strongly encourages nonprofits to provide 
homeownership counseling services and requires participants to submit 
"affordable housing plans" detailing, among other things, the services 
and assistance that low-and moderate-income homebuyers using the 
program can expect to receive. During our visits to HUD's homeownership 
centers, we reviewed the affordable housing plans for a judgmental 
sample of 17 nonprofits. The plans showed that the nonprofits offered a 
wide range of services and assistance to homebuyers, either directly or 
through referrals to other agencies. The services included mortgage 
credit counseling, "hotlines" homebuyers could call with questions, and 
courses on budgeting and home maintenance. Some nonprofits also offered 
assistance with down payments and closing costs. HOC staff told us that 
these services and assistance were typical of those provided by most 
participating nonprofits.

Both HUD and nonprofit officials told us they believed that providing 
such services to new homebuyers facilitated homeownership among low-
income families that might otherwise have a hard time purchasing a 
home. These officials also said that the services helped minimize the 
likelihood of default by preparing families for the responsibilities of 
homeownership. However, we found that similar services were widely 
available outside the Discount Sales Program. For example, HUD itself 
provides financial support to hundreds of housing counseling agencies 
across the country. Any prospective homebuyer can access these services 
at no cost.

According to HUD, the Discount Sales Program also generates benefits 
and serves policy objectives, such as neighborhood revitalization and 
stability, that extend beyond the individual households that purchase 
properties. Some HUD and nonprofit officials told us they believe that 
the Discount Sales Program may help to improve neighborhood conditions 
by supporting the rehabilitation and sale of properties that would 
otherwise be vacant and in disrepair, reducing surrounding property 
values, and becoming magnets for vandalism and trespassing. For 
example, one nonprofit official told us that by purchasing and 
rehabbing multiple properties over a period of several years, the 
organization had not only improved the housing stock of one community 
but also helped create an environment that encouraged economic 
development and social service opportunities nearby. HUD officials also 
told us that many prospective owner-occupants are not willing to 
purchase homes requiring significant rehab work because of the 
difficulty and risks of undertaking a rehab project. They said that 
even if owner-occupants were to purchase these properties, they might 
do less rehab work than a nonprofit would or not rehab them at all. 
Finally, HUD believes that by promoting homeownership and property 
rehabilitation, the program has stabilizing effects on neighborhoods 
and contributes to property values--factors that reduce the risk of 
foreclosure and losses to FHA's insurance fund. Although expansion of 
homeownership opportunities and neighborhood revitalization are 
objectives and potential benefits of the program, HUD has not studied 
the extent to which the program is serving these ends.

Limited Monitoring Efforts Have Uncovered Numerous Violations, but 
Effective Enforcement Has Been Difficult:

The HOCs use two monitoring tools to assess nonprofits' compliance with 
program requirements: desk reviews of annual reports and on-site 
evaluations. However, the HOCs had trouble conducting desk reviews 
because many program participants turned their reports in late or not 
at all, and many reports were incomplete. In addition, the HOCs' use of 
on-site reviews was uneven, with two centers conducting them routinely 
and the other two doing few or none. Even with these problems, the 
HOCs' monitoring efforts uncovered numerous violations of program 
rules, such as making excess profits by reselling discounted properties 
for more than the program allowed. The HOCs have removed many 
nonprofits for noncompliance but lack an effective mechanism for 
enforcing requirements concerning excess profits.

Effectiveness of Desk Reviews is Hampered by Missing or Incomplete 
Information:

Nonprofits participating in the Discount Sales Program are required to 
submit annual reports to the HOCs each February 1 that provide 
information on the properties purchased under the program the previous 
calendar year.[Footnote 22] The required information includes the 
status of the property (i.e., whether it has been rehabbed and resold), 
the rehab costs, and the selling price to the homebuyer. Nonprofits 
must also provide documentation, such as settlement statements, giving 
detailed financial information on the purchase and resale of the 
properties.

Desk reviews of these reports are HUD's primary method of determining 
whether nonprofits comply with key program requirements, such as those 
restricting the resale prices of rehabilitated homes and the 
purchasers' income levels. However, the effectiveness of desk reviews 
as a monitoring tool has been limited because many nonprofits have not 
submitted annual reports on time, and others have provided incomplete 
information. Specifically, as of July 2003--more than 5 months after 
the annual reports were due--HUD lacked reports from nonprofits 
accounting for more than half of the 626 properties it estimates were 
bought, rehabbed, and resold in calendar year 2002. The HOCs had 
reports for properties resold to homebuyers from only 44 of the 166 
nonprofits that purchased discounted properties in calendar year 2002. 
Other nonprofits submitted reports that lacked all of the data the HOCs 
needed to assess the participants' compliance with program 
requirements. For example, as of April 2003, more than half of the 
annual reports received at the Denver HOC did not contain the 
information necessary to determine the nonprofits' net development 
costs for the properties. As a result, staff could not determine 
whether the nonprofits had sold their properties at prices that were 
within program limits. Similarly, more than one-third of the reports 
received by the Atlanta HOC as of July 2003 did not contain the 
required certification of the homebuyers' income levels. Without this 
information, the HOC had no assurance that the properties were sold to 
homebuyers with low and moderate incomes, as required.

According to HOC officials, efforts to collect missing data and resolve 
other reporting issues can take months. For example, staff at the 
Atlanta HOC told us that they spent large amounts of time calling and 
writing nonprofits to gather the information missing from the annual 
reports. Although three of the HOCs--Atlanta, Denver, and Santa Ana---
had originally planned to complete their desk reviews by the end of 
April 2003, these reviews were still under way in mid-July 2003. At 
that time, the remaining HOC--Philadelphia--had completed reviews of 
just 16 percent of its properties.

The reporting problems occurred despite the HOCs' efforts to remind 
nonprofits of the reporting requirements and to provide training on the 
program rules. For example, all four HOCs sent reminder letters to 
nonprofits several weeks before the annual reports were due. In 
addition, HOC officials told us they provided either one-on-one or 
group training to nonprofits on submitting annual reports and meeting 
other program requirements. HOC officials speculated that a major 
reason for the reporting problems was that many nonprofits lacked 
adequate administrative capacity. However, they also said that carrying 
out in-depth assessments of administrative capacity as part of the 
initial approval process would require a costly on-site evaluation of 
every applicant.

In October 2003, HOC officials told us that as a result of their 
follow-up efforts, they had made significant progress in obtaining 
annual reports from nonprofits that had not reported earlier in the 
year. However, during the long time it takes the HOCs to obtain and 
review annual reports, nonprofits may continue to purchase more homes 
and violate program rules. In addition, according to HOC officials, 
many nonprofits that had failed to report had either withdrawn or been 
removed from the program, leaving little incentive to report. 
Consequently, it is unlikely that HUD will ever know whether these 
nonprofits followed program requirements in rehabbing and reselling 
discounted properties.

The Number of On-Site Reviews Varied Across Homeownership Centers:

HUD's guidelines not only require that nonprofits allow on-site reviews 
of their operations as a condition of program participation but also 
outline the types of records participants must maintain and make 
available for HUD's on-site review. On-site reviews generally allow for 
a more in-depth assessment of a nonprofit's program activities than 
desk reviews. For example, on-site reviews may include examining 
invoices and cancelled checks to determine the validity of claimed 
rehab costs. They may also involve inspection of rehabbed homes and 
interviews with homeowners.

We found that only two of the four HOCs--Atlanta and Denver--routinely 
used on-site reviews as a monitoring tool in calendar year 2002. 
Atlanta HOC officials told us that they tried to review each of their 
medium-and high-risk nonprofits at least once every 2 years.[Footnote 
23] Consistent with this policy, the center performed 22 on-site 
reviews in calendar year 2002, covering about half of the nonprofits 
that had purchased discounted homes that year. The Atlanta HOC had 
trained staff stationed throughout the center's geographic jurisdiction 
to perform the on-site reviews and also employed two specialists with 
backgrounds in home construction. The Denver HOC performed on-site 
reviews of 10 of the 23 nonprofits it sold properties to in calendar 
year 2002. Officials there said that they targeted nonprofits using 
desk reviews, homebuyers' complaints, and applications to the program. 
The reviews were performed by staff working out of the HOC, with 
assistance from other HUD staff stationed near the nonprofits.

In contrast to the Atlanta and Denver centers, the other two HOCs--
Philadelphia and Santa Ana--used on-site reviews rarely or not at all. 
The Philadelphia HOC, which sold properties to 48 nonprofits in 
calendar year 2002, conducted just two on-site reviews during that 
year, citing a shortage of staff as the primary reason. Center 
officials told us that they plan to use a contractor to conduct on-site 
reviews of nonprofits with known performance problems and that the 
contractor will be required to have construction specialists assist in 
these reviews. The Santa Ana HOC, which sold properties to 52 
nonprofits in calendar year 2002, did not perform any on-site reviews. 
Santa Ana HOC officials told us that the center's large geographic 
jurisdiction made it impractical for them to travel to nonprofits' 
offices. To compensate for the lack of on-site reviews, the Santa Ana 
center uses an in-depth version of the desk review, requiring 
nonprofits to submit large amounts of supporting documentation, 
including invoices, with their annual reports. A Santa Ana official 
said that this is the same documentation that HOC staff examine during 
on-site reviews but acknowledged that desk reviews do not include 
property inspections.

Despite Monitoring Limitations, HOCs Uncovered Numerous Program 
Violations:

The HOCs identified violations of program requirements during both desk 
and on-site reviews. Primary among these were violations of the ceiling 
for resale prices: 110 percent of the net development cost.[Footnote 
24] The desk reviews the HOCs had conducted as of July 2003 showed that 
nonprofits often did not comply with the resale restriction. This 
problem occurred despite the fact that in December 2001 HUD had issued 
guidance to nonprofits clarifying net development costs and providing 
detailed instructions for calculating them.

As shown in figure 1, 28 of the 44 nonprofits that had submitted annual 
reports as of July 2003 overcharged homebuyers for one or more 
properties. These violations occurred on about 124 (47 percent) of the 
265 properties covered by the annual reports and resulted in homebuyers 
being overcharged an estimated total of $704,720.[Footnote 25] The 
amount of the estimated overcharges varied significantly from property 
to property, ranging from under $10 to more than $40,000. For example, 
one nonprofit closed on a discounted home in New York for $117,600 in 
October 2002 and spent about $41,000 to rehab the property. The 
nonprofit subsequently resold the property for $234,000, or $43,333 
more than the program allowed. Assuming the homebuyer had secured a 30-
year loan at 6 percent interest (the prevailing rate at the time the 
homebuyer made the purchase), the overcharge increased the homebuyer's 
annual mortgage payments by more than $3,100.

Figure 1: Resale Price Violations Disclosed by Desk Reviews of 
Nonprofits' Annual Reports on Calendar Year 2002 Program Activity:

[See PDF for image] 

[End of figure] 

The HOCs' desk reviews also identified three cases in which nonprofits 
violated program requirements by reselling discounted properties to 
homebuyers whose incomes exceeded 115 percent of the area median 
income. For example, the Denver HOC found that one of its nonprofits 
sold a Texas home to a buyer whose income was 141 percent of the area 
median income, adjusted for family size.

The HOCs' on-site reviews also revealed instances of serious 
noncompliance, underscoring the importance of these reviews as a 
monitoring tool. Among these violations were a lack of auditable 
records, unallowable rehabilitation costs, and conflicts of interest 
between nonprofits and their rehabilitation contractors. For example, 
one review disclosed that the nonprofit had made bulk purchases of the 
materials it needed to rehabilitate discounted properties but, contrary 
to program requirements, did not maintain records showing the costs of 
these purchases or the materials that were used for each home. As a 
result, the reviewers could not verify the net development cost for any 
of these properties. In another on-site review, the Atlanta staff found 
that the nonprofit was not in control of the day-to-day operations of 
its discount property purchases. Instead, the nonprofit allowed its 
affiliated contractors and realtors to control the buying, rehabbing, 
and selling of the properties acquired through the Discount Sales 
Program and to share in the profits from the sale.

HOCs Have Removed Violators from the Program but Lack Effective Means 
to Enforce Requirements on Excess Profits:

To hold nonprofits accountable for program violations, the HOCs may use 
two main enforcement tools: (1) removing participants from the program 
and (2) requiring them to use excess profits to pay down overcharged 
homebuyers' mortgages. The HOCs have often exercised their authority to 
remove nonprofits but lack an effective mechanism for enforcing 
requirements concerning excess profits. As a result, some nonprofits 
that did not comply with program requirements have retained excess 
profits, and homebuyers who were overcharged have not received 
financial restitution.

HOCs Frequently Removed Nonprofits from the Program, but the Process 
Has Limitations:

HUD issued regulations in June 2002 authorizing the agency to remove a 
nonprofit from its roster of approved organizations for any cause HUD 
judged to be detrimental to the agency or to any of its 
programs.[Footnote 26] These causes include failure to comply with HUD 
guidance and instructions and failure to respond within a reasonable 
time to HUD inquiries, including requests for documentation. In recent 
years, the HOCs frequently used removal to hold nonprofits in the 
Discount Sales Program responsible for a variety of compliance 
problems. In calendar year 2002, for example, the Santa Ana HOC removed 
31 nonprofits from the program, mostly for failure to submit annual 
reports, conflicts of interest, selling homes for more than program 
limits or to families that were not low-or moderate-income, and lack of 
administrative or financial capacity. In calendar year 2003, all four 
HOCs removed nonprofits that had failed to file annual reports or 
committed other program violations. For example, as of October 2003, 
the Atlanta HOC had removed 18 nonprofits from the program--more than 
one-third of the nonprofits that had purchased discounted properties in 
calendar year 2002. The other three HOCs removed a total of 63 
nonprofits that had purchased properties that year.

Despite its importance as an enforcement tool, HOC officials told us 
that removing nonprofits from the program had significant limitations. 
First, the process can take months to complete, allowing nonprofits to 
continue purchasing properties and possibly to commit additional 
violations. HOC staff must carefully document their justification for 
the action and must follow due process procedures that can be lengthy, 
particularly if a nonprofit appeals the removal decision. HOC officials 
said that once they decide to remove a nonprofit, they often restrict 
the number of properties it may purchase in an effort to reduce the 
potential for further noncompliance during the due process period. 
Second, once a nonprofit is removed, it has little incentive to report 
to HUD on the discounted properties it resold or to surrender any of 
the excess profits it may have earned. As a result, the centers may 
never learn whether these properties were resold at reasonable prices 
to low-or moderate-income homebuyers, and the homebuyers who were 
overcharged for their properties do not receive any financial 
restitution.

HOCs Had Limited Success Recovering Excess Profits:

In December 2001, HUD issued instructions requiring nonprofits to sign 
an addendum to every sales contract that limited the resale price of 
discounted homes to 110 percent of the net development cost. The 
instructions also mandated that nonprofits use the excess profits they 
earn by exceeding the 110 percent limit to pay down the mortgages of 
the homebuyers they overcharged.

The four HOCs have attempted to implement this requirement by 
requesting mortgage "pay downs" from nonprofits that are making excess 
profits. However, Philadelphia HOC officials and attorneys from HUD's 
Office of General Counsel also told us that the agency's authority to 
enforce the requirement was not specified in regulation and was 
therefore in question. Furthermore, the attorneys said that as a 
practical matter the requirement would be difficult to enforce, as HUD 
would have to refer nonprofits that refused to comply to the Department 
of Justice for legal action. The officials said they doubted whether 
Justice would accept these cases because the amounts of money involved 
are generally relatively small--often less than $10,000--and it would 
be cost-prohibitive for Justice's attorneys to pursue them. HUD 
officials added that obtaining enough documentation to build a 
convincing legal case was difficult, because many nonprofits do not 
keep proper financial records that adequately document the amount of 
excess profits earned.

As a result of these problems, the HOCs had limited success getting 
nonprofits to use excess profits to pay down homebuyers' mortgages. 
According to HOC officials, the nonprofits that have paid down 
mortgages did so voluntarily because they wanted to stay in the 
program. As of July 2003, the HOCs' desk reviews had identified 28 
nonprofits that made an estimated total of $704,720 in excess profits. 
At that time, seven of the nonprofits had made combined mortgage pay 
downs of $62,002, or only about 9 percent of the total estimated excess 
profits. (See table 6.):

Table 6: Percentage of Estimated Excess Profits Used to Pay Down 
Homebuyer Mortgages, as of July 2003:

Homeownership: center: Atlanta; 
Number of properties resold for more than program limits: 27; 
Estimated excess profits: $123,059; 
Amount of estimated excess profits used to pay down mortgages: $0; 
Percentage of estimated excess profits used to pay down mortgages: 0%.

Homeownership: center: Denver; 
Number of properties resold for more than program limits: 45; 
Estimated excess profits: $253,926; 
Amount of estimated excess profits used to pay down mortgages: $33,330; 
Percentage of estimated excess profits used to pay down mortgages: 13%.

Homeownership: center: Philadelphia; 
Number of properties resold for more than program limits: 18; 
Estimated excess profits: $186,942; 
Amount of estimated excess profits used to pay down mortgages: $0; 
Percentage of estimated excess profits used to pay down mortgages: 0%.

Homeownership: center: Santa Ana; 
Number of properties resold for more than program limits: 34; 
Estimated excess profits: $140,793; 
Amount of estimated excess profits used to pay down mortgages: $28,672; 
Percentage of estimated excess profits used to pay down mortgages: 20%.

Total; 
Number of properties resold for more than program limits: 124; 
Estimated excess profits: $704,720; 
Amount of estimated excess profits used to pay down mortgages: $62,002; 
Percentage of estimated excess profits used to pay down mortgages: 9%. 

Source: HUD.

Note: The estimated excess profits are for discounted properties that 
HUD sold between February 1 and December 31, 2002, which nonprofits 
resold that same year.

[End of table]

HOC officials told us that although some of the remaining 21 nonprofits 
had withdrawn or were removed from the Discount Sales Program, others 
were still being evaluated by HOC staff and were continuing to purchase 
discounted properties. Moreover, these nonprofits retained all of the 
excess profits they had made. For example, one nonprofit still under 
review as of October 2003 made an estimated $28,700 in excess profits 
on five discounted properties that it resold in 2002. The nonprofit did 
not pay down any mortgages, purchased 27 additional properties in 2003, 
and is still in the program. HUD's inability to enforce its 
requirements on excess profits in a vigorous and timely manner not only 
deprives homebuyers that have been overcharged but also puts the 
financial interests of other prospective homebuyers at risk.

Conclusions:

HUD's Discount Sales Program is intended, among other things, to help 
make homes affordable for low-and moderate-income homebuyers. However, 
deficiencies in the program's design and implementation have undermined 
its ability to serve this end. Our analysis suggests that the program 
is of questionable benefit to most homebuyers. In addition, the HOCs' 
monitoring and enforcement efforts do not adequately ensure that 
nonprofits are complying with requirements designed to protect 
homebuyers' financial interests. And despite the program's significant 
cost, HUD has not determined whether the program is meeting its 
objectives of expanding affordable housing opportunities, helping to 
revitalize neighborhoods, and reducing HUD's property inventory in a 
timely, efficient, and cost-effective manner.

Measures to address the cost, benefit, and compliance issues raised in 
this report are likely to be expensive or have adverse effects. For 
example, to reduce the cost of the program, HUD could reduce the size 
of its discounts, dedicate fewer staff resources to the program, or 
both. However, these actions would likely reduce the program's 
financial benefit to homebuyers and weaken HUD's ability to oversee 
participating nonprofits. Conversely, to increase financial benefits to 
homebuyers, HUD could increase the size of its discounts, but doing so 
would effectively raise the cost of the program.

Taken together, the program's problems and the lack of clear solutions 
raise serious questions about whether HUD should continue to operate 
it. We recognize that contemplating the termination of the program 
involves trade-offs. In the absence of the program, it is possible that 
some individuals and families would have difficulty purchasing suitable 
homes and that neighborhood conditions would suffer if HUD-owned 
properties were not rehabilitated or sold as quickly. However, unless 
significant changes are made to the program, it will likely continue to 
experience the problems raised in this report and by HUD's Inspector 
General.

Recommendations for Executive Action:

GAO recommends that the Secretary of HUD take the following two 
actions:

* Evaluate options to improve the program's benefit to homebuyers, the 
agency's monitoring of nonprofits, and enforcement of excess profits 
requirements.

* Assess the extent to which the program is meeting its objectives.

If the Secretary determines that the current cost of the program plus 
the resources needed to improve it exceed the program's benefits, GAO 
recommends that the program be terminated.

Agency Comments and Our Evaluation:

We provided HUD with a draft of this report for review and comment. In 
a letter from the Assistant Secretary for Housing (see app. I), HUD 
agreed with our recommendations to further assess the program and said 
it would proceed accordingly. Also, HUD disagreed with some aspects of 
our methodology and said that our analysis overstated the program's 
costs and understated its benefits. Lastly, HUD said that the report 
should acknowledge the significance of the multiple public policy 
objectives the program serves. However, HUD did not respond to our 
third recommendation concerning the possible termination of the program 
if, after further evaluation, HUD determines that the program's current 
costs plus the resources needed to improve it exceed its benefits.

More specifically, HUD stated that any conclusions about program costs 
should be based on actual program performance rather than on 
"hypothetical extrapolations." We designed our analysis to estimate the 
effect of the Discount Sales Program while holding constant the effect 
of other factors, such as neighborhood and property characteristics, 
that might also influence the ratio of the net revenue HUD receives 
from selling a property to the property's appraised value. To implement 
this approach, we developed a statistical model using data from actual 
HUD property sales and compared (1) the net revenue our model estimated 
HUD would have received for each discounted property had the property 
been sold through the regular process with (2) the net revenue our 
model estimated HUD would have received by selling the property through 
the Discount Sales Program. Each estimated value contained an error 
term that captured the effects of omitted variables unavailable for the 
modeling process. As appendix II of our draft report explained, 
comparing two estimated values removed the influence of the omitted 
variables from our comparison, leaving the effect of the program on 
HUD's net revenue. HUD said that its own preliminary comparison of net 
revenues from program and nonprogram property sales had shown that the 
loss in net revenue from the program was substantially less than our 
estimate indicated, and that our report significantly overstated the 
program's cost. Because HUD did not provide us details of its analysis, 
we cannot determine why HUD's results differed from ours. We continue 
to believe that isolating the effect of the program from other 
influences, rather than making comparisons that do not control for 
these factors, is the most appropriate way to estimate the impact of 
the Discount Sales Program on HUD's net revenue.

HUD also said that our conclusion that most homebuyers did not benefit 
financially from the program rested on the assumption that individual 
homebuyers would have access to rehab financing on terms as favorable 
as nonprofits and would have the skills to oversee the construction. 
HUD disagreed with this assumption and said it believes that nonprofits 
have both the ability to obtain financing that is unavailable to 
average homebuyers and the capacity to oversee the rehab work at a cost 
that "may be less than that" charged by profit-motivated firms. As a 
result, HUD said that our report significantly understated the 
program's benefit to homebuyers. Our draft report recognized the 
possibility that individual homebuyers might not be able to rehab a 
home as cheaply as a nonprofit. For this reason, we estimated the 
program's financial benefits under two scenarios. The first assumed 
equal rehab costs for nonprofits and homebuyers; the second assumed 
that homebuyers would pay 25 percent more than a nonprofit for the same 
rehab work. Under both scenarios, our estimates indicated that most 
homebuyers did not benefit financially from the program. Our draft 
report also recognized that obtaining financing for rehab work and 
overseeing this work are obstacles for some homebuyers, and that these 
and other factors that are difficult to quantify may make the program 
either more or less beneficial from a homebuyer's perspective. However, 
it is important to note that homebuyers financing properties purchased 
through the Discount Sales Program in effect pay financing costs for 
the rehab work because the cost of this work is included in the 
nonprofit's selling price (i.e., the homebuyer's purchase price) and 
therefore is reflected in the homebuyer's mortgage costs. Furthermore, 
because more than half of the properties we reviewed received less than 
$15,000 in rehab work--including some that received none at all--it is 
unlikely that the oversight costs for these projects would be very 
substantial.

Finally, HUD said that the Discount Sales Program serves several public 
policy purposes and was neither conceived as nor intended to be only a 
source of revenue for FHA. HUD stated that the program contributes in a 
"direct and positive manner" to the promotion of homeownership and the 
revitalization of neighborhoods and that our report should acknowledge 
the significance of these objectives. Our draft report did not indicate 
that the program was intended to be solely a source of revenue. In 
addition, our draft report recognized that the goals of the program 
include the expansion of affordable housing opportunities and 
neighborhood revitalization and included statements from HUD and 
nonprofit officials about how the program may help to improve 
neighborhood conditions. Furthermore, HUD's comments do not recognize 
the potential of the agency's regular sales process to help achieve the 
same goals. Nevertheless, we added language to the final report to 
reflect HUD's views about the program's potential benefits. As our 
report notes, HUD has not provided any analysis to support its 
assertion that the program is contributing to the stated policy 
objectives. Accordingly, we believe that HUD needs to undertake such an 
analysis before making decisions about the program's future.


We are sending copies of this report to the appropriate congressional 
committees, and it will be available at no charge on GAO's Web site at 
[Hyperlink, http://www.gao.gov] If you or your staff have any 
questions about this report, please call me at (202) 512-8678. Key 
contributors to this report are listed in appendix IV.

Sincerely yours,

David G. Wood: 
Director, Financial Markets and Community Investment:

Signed by David G. Wood: 

[End of section]

Appendixes: 

Appendix I: Objectives, Scope, and Methodology:

Our objectives were to assess (1) the cost of the Discount Sales 
Program to HUD, (2) the benefits of the program to homebuyers, and (3) 
HUD's efforts to monitor participating nonprofits and enforce program 
requirements. Our work focused on the approximately 1,200 properties 
HUD sold through the program in calendar year 2002 and the monitoring 
and enforcement activities the four HOCs performed in connection with 
those properties.

To determine the cost of the Discount Sales Program to HUD, we examined 
the program's impact on HUD's net revenue from property sales and the 
cost of administering the program. To determine the effect of the 
program on HUD's net revenue, we performed a statistical analysis of 
data from HUD's Single-Family Acquired Asset Management (SAMS) and the 
U.S. Census Bureau. This analysis allowed us to estimate how much less 
net revenue HUD received by selling properties through the program 
instead of its regular sales process, while controlling for other 
factors. Appendix II provides detailed information on our statistical 
model. Because HUD does not keep records that would identify the costs 
to administer the program, we asked HUD to estimate them. HUD developed 
its estimate by querying HOC and Office of Housing officials about the 
number of staff years they allotted to the program in calendar year 
2002. HUD used this information and salary and benefit data to derive 
an approximate personnel cost for the program. HUD's estimate of 
administrative costs did not include comparatively minor expenses, such 
as travel and mailing costs. We did not assess the reliability of HUD's 
estimate.

To determine the benefits of the program to homebuyers, we examined the 
program's potential financial benefits and the types of homeownership 
services and assistance provided by participating nonprofit 
organizations. To determine the extent to which homebuyers benefited 
financially from the program, we performed a statistical analysis using 
data from HUD's SAMS, the Bureau of the Census, and the four HOCs. Our 
analysis was limited to 238 discounted properties that HUD sold between 
February 1 and December 31, 2002,[Footnote 27] that nonprofits resold 
to homebuyers that same year. These were the only properties for which 
the HOCs had the rehab and resale data necessary for our analysis. This 
analysis allowed us to compare what homebuyers actually paid for the 
discounted homes to our estimate of what they would have spent had they 
purchased the homes under HUD's regular sales process and paid for the 
rehab work themselves. Our analysis assumed that in the absence of the 
Discount Sales Program, a homebuyer would be able to purchase the same 
home and rehabilitate it to the same extent as the nonprofit. We also 
assumed that a homebuyer would inhabit the home during the 
rehabilitation and, therefore, would not incur housing expenses for two 
residences during that period. We performed the analysis twice using 
different assumptions about rehab costs each time. The first time we 
assumed that a homebuyer would incur the same rehab costs as a 
nonprofit; the second time we assumed that homebuyers would incur 25 
percent higher rehab costs than a nonprofit. Appendix II provides 
detailed information on our statistical model. In assessing the 
program's financial benefits, we also reviewed HUD's rules and 
instructions for both the Discount Sales Program and the agency's 
regular sales process and interviewed officials from HUD's Office of 
Housing. To determine the types of services and assistance provided by 
participating nonprofits, we visited 6 nonprofits that were actively 
involved in the program and interviewed officials from these 
organizations. During our visits to the four HOCs, we reviewed the 
affordable housing plans for a judgmental sample of 17 nonprofits and 
interviewed the nonprofit coordinator at each HOC. We did not evaluate 
the impact of the Discount Sales Program on neighborhood conditions. 
However, we discussed this issue with HUD and nonprofit officials and 
visited six properties that nonprofits had either rehabbed or were in 
the process of rehabbing.

To assess HUD's efforts to monitor participating nonprofits, we 
reviewed HUD's program guidance and instructions, SAMS data on the 
number of discounted properties each nonprofit purchased in calendar 
year 2002, nonprofits' annual reports on these properties, and the 
results of the HOCs' desk and on-site reviews. We analyzed SAMS data, 
nonprofits' annual reports, and desk reviews to determine the extent to 
which (1) nonprofits submitted required monitoring information through 
their annual reports and (2) the HOCs' monitoring efforts identified 
noncompliance with requirements governing the resale price of 
discounted properties and the income level of the homebuyers. From the 
desk review information, which was current as of July 2003, we also 
determined the estimated excess profits earned by the nonprofit 
organizations that submitted annual reports. For each HOC, we used SAMS 
data and on-site review logs to determine how many of the nonprofits 
that purchased discounted properties were subject to an on-site visit. 
We also examined the results of these reviews and discussed them with 
cognizant HOC officials to determine how they were conducted and the 
types of problems they uncovered. Finally, we interviewed HUD Office of 
Housing and HOC officials about factors that hampered their ability to 
monitor nonprofits.

To assess HUD's efforts to enforce program requirements, we reviewed 
the agency's regulations and guidance to determine the major 
enforcement actions available to the HOCs. We interviewed officials 
from HUD's Office of Housing, Office of General Counsel, and the four 
HOCs about their ability to take these actions. At each HOC, we 
collected information on how frequently and in what situations they 
used these enforcement tools. We also collected information on the 
amount of excess profits nonprofit organizations used to pay down 
homebuyers' mortgages as of July 2003. Finally, we obtained data from 
each HOC showing the calendar year 2003 discounted home purchases of 
nonprofits that sold properties for more than program limits the 
previous year.

We tested the data we obtained from HUD's SAMS and the HOCs' desk 
reviews for reasonableness and completeness and found them to be 
reliable for the purpose of our analyses. In addition, we reviewed 
existing information about data quality and controls supporting SAMS 
and discussed the data we analyzed with agency officials to ensure that 
we interpreted them correctly.

We conducted this review from December 2002 through November 2003. We 
performed our work in accordance with generally accepted government 
auditing standards.

[End of section]

Appendix II: Statistical Models Used to Estimate Program Costs and 
Benefits:

Two objectives of the study were to determine (1) the cost of the 
Discount Sales Program to HUD and (2) the benefits of the program to 
homebuyers. For the cost objective, the scope of the study included 
properties that HUD sold to nonprofit organizations in calendar year 
2002. For the benefits objective, the scope included the properties 
that HUD sold to nonprofits between February 1 and December 31, 2002, 
that nonprofits rehabilitated and resold to homebuyers during the same 
year. The empirical analysis used to address these objectives was based 
upon two procedures. The first procedure was the estimation of a model 
for which the dependent variable is the fraction of the appraised value 
that HUD recovers for each property after taking the agency's selling 
costs into account. Controlling for a number of factors discussed 
below, the difference between the estimated net revenue HUD would have 
received by selling the properties at a discount versus an estimate of 
what HUD have would received if the property had been sold under HUD's 
regular sales process represented the cost of the Discount Sales 
Program to HUD. The second procedure was an estimate of the financial 
benefits a homeowner received from purchasing a rehabilitated 
Discounted Sales Program property from a nonprofit organization rather 
than purchasing the property through HUD's regular sales process and 
paying for the rehab work personally.

This appendix is organized in the following manner. First, there is a 
brief discussion of the data. Second, there is an explanation of the 
specification of the two econometric models that differ only in their 
dependent variables, as mentioned above. Next, there is a discussion of 
the estimation results of the two models. Finally, these results are 
used to calculate estimates of the costs and benefits of the Discount 
Sales Program.

Data:

For our analysis, we obtained from HUD's Single-Family Acquired Asset 
Management System (SAMS) computerized files for the 65,039 properties 
sold by the agency during calendar year 2002. Each record provided 
financial information, such as selling price, appraised value, and 
various transactions costs. Each record also contained information on 
the structural characteristics of the property, such as the number of 
bedrooms and bathrooms. To describe the impact of neighborhood 
characteristics, we obtained data at the census tract level on the 
percent of the population living within an urbanized area, median 
household income in 1999, and median real estate taxes. The source of 
these data was the Census 2000 Summary File 3 prepared by the U.S. 
Census Bureau.

A review of the data identified a number of outliers and missing 
values. These observations were replaced using the means from the 
overall data set minus these observations. In addition, 3,776 
observations were lost during the merger of the Census data because of 
the inability to identify the census tract in which they were located. 
As a result, these observations were not included in our analysis. In 
order to make the properties more comparable, we also restricted the 
set of properties to only those properties in census tracts in which at 
least one discount sale was made. Finally, we excluded some 
observations with extreme values for the dependent variable in our 
first model, which resulted in 5,189 observations being used in the 
regression analysis.

Specification of the Models:

We developed two econometric models possessing the same set of 
explanatory variables. We used the first model to estimate the cost of 
the Discount Sales Program to HUD. In this model, the dependent 
variable is HUD's net revenue from the sale of a property divided by 
the property's appraised value. Net revenue equals HUD's selling price 
minus property taxes paid by HUD, management and marketing contractor 
costs, financing and closing costs (including discounts) paid by HUD, 
the listing broker fee, and the cost of any HUD sales incentives. We 
used the second model to estimate the benefits of the program to 
homebuyers. In this model, the dependent variable is simply HUD's 
selling price for a property divided by its appraised value. The 
explanatory variables used in both models are of four types: dummy 
variables identifying the homeownership center (HOC) that administered 
the sale; dummy variables describing a combination of HOC and discount 
level, for those properties sold through the Discount Sales Program; 
characteristics of the property; and characteristics of the 
neighborhood. We chose the final specification of the models to obtain 
a good fit while avoiding problems with multicollinearity.

We chose the property and neighborhood characteristics based on a 
review of the specifications employed in hedonic housing 
models.[Footnote 28] Such models treat the housing market as an 
integrated series of submarkets for various housing characteristics 
such as house size and neighborhood quality. A set of housing and 
neighborhood characteristics can serve to describe a product like 
housing because individual housing units can be differentiated from one 
another in many ways.

Selling price is the amount paid to HUD by either the nonprofit or the 
private individual purchasing the property. Property taxes are the 
annual property tax multiplied by the number of days the property was 
owned by HUD divided by 365. Management and marketing contractor costs 
encompass all fees and reimbursable costs HUD pays to these 
contractors. Financing and closing costs paid by HUD include any 
discount granted to a nonprofit organization. The selling fee is the 
commission that HUD paid to the selling broker. This fee is generally 
zero for properties sold to nonprofits. All HUD properties are placed 
with a listing broker, so this generates a listing broker fee. 
Incentives are cash back allowances that HUD periodically pays to 
homebuyers who close on an executed sales contract relatively quickly-
-for example, within 30 to 60 days. Appraised value is the amount at 
which the property was appraised before the sale.

The explanatory variables belong to one of four groups of variables: 
those identifying the HOC that administered the sale; those describing 
a combination of HOC and discount level, for those properties sold 
through the Discount Sales Program; those describing characteristics of 
the house; and those describing characteristics of the neighborhood. 
This specification allows the net revenue as a fraction of the 
appraised value for properties sold through the regular program to vary 
by HOC, and it allows the effect of the Discount Sales Program on HUD's 
net revenue to vary by HOC and by discount level. We defined a set of 
HOC dummy variables that take on a value of 1 for all sales (discounted 
and not discounted) administered by that HOC, with Atlanta as the 
omitted category, and 0 otherwise. We then defined a set of dummy 
variables that represented combinations of HOC and discount program 
level. For example, there is a dummy variable that takes on a value of 
1 for all sales with a 10 percent discount made by the Atlanta HOC and 
0 otherwise, etc. In this way, the coefficient on that variable 
represents the difference in the fraction of the appraised value 
obtained on property sales with a 10 percent discount and made by the 
Atlanta HOC, compared with the fraction obtained by the Atlanta HOC on 
sales made through the regular program. Similarly, the coefficient on 
the dummy variable that takes on a value of 1 for all sales with a 
discount level of 30 percent made by the Santa Ana HOC represents the 
difference in the fraction of the appraised value obtained on property 
sales made at a 30 percent discount and made by the Santa Ana HOC, 
compared with the fraction obtained by the Santa Ana HOC on sales made 
through the regular program.[Footnote 29]

There are three variables that provide characteristics for each 
property. These variables measure the property's number of bedrooms, 
bathrooms, and stories. Although the likely association between those 
variables and HUD's net revenue from a property sale relative to the 
property's appraised value is not clear-cut, we anticipated that there 
may be a positive association for the number of bedrooms and bathrooms. 
HUD's costs associated with property management and sale include a 
fixed cost component not related to property value as well as a 
component that varies with selling price. Accordingly, if properties 
with more bedrooms and bathrooms tend to be valued more, increasing 
both their selling prices and appraised values, then HUD's net revenue 
relative to the appraised value will be higher for higher-valued 
properties because HUD's fixed costs will be lower relative to the 
appraised value. Because the relationship between number of stories and 
market value is less clear, we had no clear expectation for the sign of 
the coefficient for that variable. Because any effect of these 
variables on market value is likely to similarly affect both selling 
price and appraised value, for the equation with selling price divided 
by appraised value as the dependent variable we had no clear 
expectation of the signs of the coefficients of these variables. 
However, we included them to keep our equations consistent and because 
these variables may exhibit statistically significant effects if HUD is 
able to obtain more accurate appraisals for certain types of 
properties.

Finally, there are four variables for neighborhood characteristics: the 
percent of the population in the census tract living within an 
urbanized area, median household income in 1999, median real estate 
taxes, and whether the property is located in a revitalization area. As 
for the property characteristics, we anticipated that to the extent 
that these neighborhood characteristics are associated with higher 
(lower) property values, they would be positively (negatively) 
associated with HUD's net revenue from a property sale relative to that 
property's appraised value because for higher-(lower-) valued 
properties HUD's fixed costs will be lower (higher) relative to 
appraised values. Accordingly, we anticipated positive coefficients in 
the equation for which the dependent variable is HUD's net revenue 
relative to appraised value for the percentage of the population living 
within an urbanized area, median income, and median real estate because 
all of these variables are likely to be positively associated with 
property value. In contrast, we anticipated a negative coefficient for 
location in a revitalization area because that variable may indicate 
lower property values that would raise the ratio of HUD's fixed costs 
to a property's appraised value and because HUD may also incur 
additional costs to maintain properties in those areas. Again, similar 
to the property characteristics, we had no clear expectations for the 
signs of the neighborhood characteristics in the equation in which the 
dependent variable is HUD's selling price relative to the appraised 
value because any effect of these variables on property value is likely 
to similarly affect selling price and appraised value. But, for the 
reasons cited above, we included them in the equation.

Table 7 presents the variable names and descriptions, along with mean 
values of the explanatory variables. In a previous version of the model 
that we estimated using a data set representing all usable observations 
of HUD property sales, rather than the data set containing only sales 
made in census tracts in which discount sales were made, we included as 
variables the year in which the structure was built and the average age 
of homes in the census tract. These variables were significant at that 
time, but they became insignificant in the final model when we limited 
our data set, so we dropped them from the analysis. Although the rate 
of change in house prices is another variable that may have some 
predictive value, we did not include it in our models because 
information on the rate of house price change was not available at the 
census tract level. Also, according to HUD officials, the average time 
between the appraisal and the sale of a property is about 3 months, so 
in most cases we did not anticipate that there would be much price 
appreciation or depreciation resulting from market conditions.

Table 7: Variable Names, Descriptions, and Mean Values:

Variable name: HOC dummy variables: 

Santa Ana HOC; Variable description: 1 if property was sold with or 
without a discount by the Santa Ana HOC, else 0; Mean value: 0.4039.

Denver HOC; Variable description: 1 if property was sold with or 
without a discount by the Denver HOC, else 0; Mean value: 0.1243.

Philadelphia HOC; Variable description: 1 if property was sold with or 
without a discount by the Philadelphia HOC, else 0; Mean value: 0.2249.

Variable name: Discount Sales Program category dummy variables: 

Santa Ana, 10; Variable description: 1 if property sold at 10 percent 
discount level by the Santa Ana HOC, else 0; Mean value: 0.0412.

Santa Ana, 15; Variable description: 1 if property sold at 15 percent 
discount level by the Santa Ana HOC, else 0; Mean value: 0.0019.

Santa Ana, 30; Variable description: 1 if property sold at 30 percent 
discount level by the Santa Ana HOC, else 0; Mean value: 0.0250.

Denver, 10; Variable description: 1 if property sold at 10 percent 
discount level by the Denver HOC, else 0; Mean value: 0.0191.

Denver, 15; Variable description: 1 if property sold at 15 percent 
discount level by the Denver HOC, else 0; Mean value: 0.0120.

Denver, 30; Variable description: 1 if property sold at 30 percent 
discount level by the Denver HOC, else 0; Mean value: 0.0041.

Philadelphia, 10; Variable description: 1 if property sold at 10 
percent discount level by the Philadelphia HOC, else 0; Mean value: 
0.0397.

Philadelphia, 15; Variable description: 1 if property sold at 15 
percent discount level by the Philadelphia HOC, else 0; Mean value: 
0.0058.

Philadelphia, 30; Variable description: 1 if property sold at 30 
percent discount level by the Philadelphia HOC, else 0; Mean value: 
0.0224.

Atlanta, 10; Variable description: 1 if property sold at 10 percent 
discount level by the Atlanta HOC, else 0; Mean value: 0.0399.

Atlanta, 30; Variable description: 1 if property sold at 30 percent 
discount level by the Atlanta HOC, else 0; Mean value: 0.0150.

Variable name: Property characteristics: 

Bedrooms; Variable description: The number of bedrooms in the 
structure; Mean value: 3.1134.

Bathrooms; Variable description: The number of bathrooms in the 
structure; Mean value: 1.8071.

Stories; Variable description: The number of stories in the structure; 
Mean value: 1.3472.

Variable name: Neighborhood characteristics: 

Urban area; Variable description: Percent of population in the census 
tract living within an urbanized area; Mean value: 92.9976.

Median income; Variable description: Median household income in census 
tract (1999); Mean value: 38.6993.

Median real estate taxes; Variable description: Median real estate 
taxes in census tract; Mean value: 1.2862.

Revitalization area; Variable description: 1 if property is located in 
a HUD-designated revitalization area, else 0.; Mean value: 0.2631. 

Source: GAO.

[End of table]

Estimation Results:

We estimated the two models using ordinary least squares due to its 
ease of calculation and interpretation. Table 8 presents the estimated 
coefficients, their standard errors, and the summary statistics.

In general, both models were consistent with our expectations. In the 
model for net revenue relative to appraised value, the coefficients on 
the Discount Sales Program category showed the expected pattern. That 
is, for each HOC, coefficients became more negative at higher discount 
levels.

In both models the coefficients for the characteristics for the 
property possessed the same sign. In general, a higher fraction of the 
appraised value was obtained from larger homes, as measured by more 
bedrooms and bathrooms, as well as homes with fewer floors. The 
fraction of the appraised value obtained by HUD tended to be higher for 
properties located in more urban areas and where median real estate 
taxes were higher. In the model for selling price relative to appraised 
value, the coefficient for median household income was negative and 
statistically significant at less than the 0.01 percent level. However, 
in the model for net revenue relative to appraised value, the 
coefficient on this variable was statistically insignificant.

Table 8: Coefficients from Estimated Models:

Note: Standard errors are in parentheses.

Explanatory variable name: 

Intercept: 

Net revenue relative to appraised value: 0.7975; 
Selling price relative to appraised value: 0.9085.
Net revenue relative to appraised value: (0.0139); 
Selling price relative to appraised value: (0.0136).

HOC dummy variables: 

Santa Ana HOC: 
Net revenue relative to appraised value: 0.0461; 
Selling price relative to appraised value: 0.0231.
Net revenue relative to appraised value: (0.0056); 
Selling price relative to appraised value: (0.0054).

Denver HOC: 
Net revenue relative to appraised value: -0.0444; 
Selling price relative to appraised value: - 0.0520.
Net revenue relative to appraised value: Philadelphia HOC: (0.0079); 
Selling price relative to appraised value: Philadelphia HOC: (0.0077).

Philadelphia HOC: 
Net revenue relative to appraised value: -0.0026; 
Selling price relative to appraised value: 0.0174.
Net revenue relative to appraised value: (0.0074); 
Selling price relative to appraised value: (0.0072).

Discount Sales Program category dummy variables: 

Santa Ana, 10: 
Net revenue relative to appraised value: -0.1448; 
Selling price relative to appraised value: - 0.0874.
Net revenue relative to appraised value: (0.0100); 
Selling price relative to appraised value: (0.0098).

Santa Ana, 15: 
Net revenue relative to appraised value: -0.1959; 
Selling price relative to appraised value: - 0.1064.
Net revenue relative to appraised value: (0.0437); 
Selling price relative to appraised value: (0.0427).

Santa Ana, 30: 
Net revenue relative to appraised value: -0.2726; 
Selling price relative to appraised value: - 0.0506.
Net revenue relative to appraised value: (0.0131); 
Selling price relative to appraised value: (0.0128).

Denver, 10: 
Net revenue relative to appraised value: -0.0622; 
Selling price relative to appraised value: - 0.0088.
Net revenue relative to appraised value: (0.0152); 
Selling price relative to appraised value: (0.0149).

Denver, 15: 
Net revenue relative to appraised value: -0.1147; 
Selling price relative to appraised value: - 0.0385.
Net revenue relative to appraised value: (0.0186); 
Selling price relative to appraised value: (0.0182).

Denver, 30: 
Net revenue relative to appraised value: -0.1744; 
Selling price relative to appraised value: 0.0525.
Net revenue relative to appraised value: (0.0309); 
Selling price relative to appraised value: (0.0303).

Philadelphia, 10: 
Net revenue relative to appraised value: -0.1053; 
Selling price relative to appraised value: - 0.0785.
Net revenue relative to appraised value: (0.0109); 
Selling price relative to appraised value: (0.0106).

Philadelphia, 15: 
Net revenue relative to appraised value: -0.1267; 
Selling price relative to appraised value: - 0.0903.
Net revenue relative to appraised value: (0.0258); 
Selling price relative to appraised value: (0.0252).

Philadelphia, 30: 
Net revenue relative to appraised value: -0.2718; 
Selling price relative to appraised value: - 0.0611.
Net revenue relative to appraised value: (0.0140); 
Selling price relative to appraised value: (0.0137).

Atlanta, 10: 
Net revenue relative to appraised value: -0.0851; 
Selling price relative to appraised value: - 0.0536.
Net revenue relative to appraised value: (0.0106); 
Selling price relative to appraised value: (0.0103).

Atlanta, 30: 
Net revenue relative to appraised value: -0.2595; 
Selling price relative to appraised value: - 0.0173.
Net revenue relative to appraised value: (0.167); 
Selling price relative to appraised value: (0.164).

Property characteristics: 

Bedrooms: 
Net revenue relative to appraised value: 0.0052; 
Selling price relative to appraised value: 0.0063.
Net revenue relative to appraised value: (0.0022); 
Selling price relative to appraised value: (0.0022).

Bathrooms: 
Net revenue relative to appraised value: 0.0155; 
Selling price relative to appraised value: 0.0083.
Net revenue relative to appraised value: (0.0034); 
Selling price relative to appraised value: (0.0033).

Stories: 
Net revenue relative to appraised value: -0.0280; 
Selling price relative to appraised value: -0.0081.
Net revenue relative to appraised value: (0.0054); 
Selling price relative to appraised value: (0.0053).

Neighborhood characteristics: 

Urban area: 
Net revenue relative to appraised value: 0.0007; 
Selling price relative to appraised value: 0.0007.
Net revenue relative to appraised value: (0.00009); 
Selling price relative to appraised value: (0.0001).

Median income: 
Net revenue relative to appraised value: 0.0003; 
Selling price relative to appraised value: - 0.0006.
Net revenue relative to appraised value: (0.0002); 
Selling price relative to appraised value: (0.0002).

Median real estate taxes: 
Net revenue relative to appraised value: 0.0177; 
Selling price relative to appraised value: 0.0254.
Net revenue relative to appraised value: (0.0032); 
Selling price relative to appraised value: (0.0031).

Revitalization area: 
Net revenue relative to appraised value: -0.0244; 
Selling price relative to appraised value: - .0091.
Net revenue relative to appraised value: (0.0054); 
Selling price relative to appraised value: (0.0053).

Summary statistics: 

R^2: 
Net revenue relative to appraised value: 0.28; 
Selling price relative to appraised value: 0.09.

Number of Observations: 
Net revenue relative to appraised value: 5,189; 
Selling price relative to appraised value: 5,189. 

Source: GAO.

[End of table]

Program Costs:

We used the estimated coefficients for the Discount Sales Program 
variables from the model for net revenue relative to appraised value to 
estimate the cost of the program to HUD. We made this estimate by 
comparing the (1) net revenue that our model predicted HUD would have 
received for each discounted property had it been sold through the 
regular sales process with (2) net revenue our model predicted HUD 
would have received by selling it through the Discount Sales Program. 
Even though we knew the actual amount HUD received by selling the 
property through the Discount Sales Program, we compared two estimated 
values in order to be consistent. Each estimated value contained an 
error term that captured the effects of omitted variables unavailable 
for the modeling process. By comparing two estimated values, we removed 
the influence of the omitted variables from our comparison, leaving the 
effect of the Discounted Sales Program.

This analysis was conducted using 1,194 discounted properties that were 
sold during calendar year 2002. The values of the Discount Sales 
Program dummy variables reflect the estimate of the difference in the 
fraction of appraised value obtained by HUD for each combination of 
discount level and HOC. That is, for a given property's program 
characteristics--discount level and HOC--these estimates represent the 
difference in value HUD obtains compared to the case in which that 
property had been sold through the regular program. Because we included 
HOC dummies to capture otherwise unmeasured factors that might vary by 
region, the program characteristic dummy variables describe incremental 
revenue differences associated with each discount level as compared to 
the level of nondiscount sales in each HOC. For example, if a property 
was sold by the Philadelphia HOC at a 15 percent discount, the 
estimated difference in the net revenue value would be about -13 
percent of appraised value. The relevant coefficient in table 8 is -
0.1267. Similarly, if a property was sold by the Santa Ana HOC at a 15 
percent discount, the estimated difference in the net revenue value 
would be about 20 percent of appraised value. The relevant coefficient 
in table 8 is -0.1959.

We also estimated a range of costs using confidence intervals around 
the estimates for the sales category dummy variables. We did this by 
multiplying each coefficient estimate by 1.645 times its associated 
standard error. We then added and subtracted this amount from the 
coefficient estimate to create a 90 percent confidence interval around 
each estimate. We then recalculated program costs assuming that the 
estimates associated with the lower and upper bounds of the confidence 
interval reflected the difference between the value HUD obtains through 
the Discount Sales Program as compared to the value obtained through 
the regular sales process.

Benefits to Homebuyers:

In the model for selling price relative to appraised value, the benefit 
to the homebuyer of purchasing a property from a nonprofit organization 
was taken to be the estimated price a homeowner would have paid to buy 
the house through HUD's regular sales process, minus the estimated 
financing and closing costs that HUD would have paid in that situation, 
plus the rehabilitation costs, minus the actual sales price paid to the 
nonprofit. This analysis was conducted using 238 observations for 
discounted properties purchased by nonprofits between February 1 and 
December 31, 2002, and resold to homebuyers that same year. These were 
the only properties for which data on the nonprofits' rehabilitation 
costs and the selling price to the final homeowners were available. We 
performed the analysis twice using different scenarios. In the first 
scenario, we assumed that the rehabilitation costs incurred by a 
homebuyer operating outside of the Discount Sales Program would be the 
same as the rehabilitation costs actually incurred by the nonprofit. In 
the second scenario, we assumed that a homebuyer's rehabilitation costs 
would be 25 percent higher than those incurred by the nonprofit. Under 
both scenarios, we assumed that the financing and closing costs HUD 
would pay for under its regular sales process were equal to 3 percent 
of the estimated selling price.

Because these properties were originally bought from HUD by a nonprofit 
organization, we needed to estimate the prices homebuyers would have 
paid to purchase the properties directly from HUD through the regular 
sales process to calculate the difference in price paid by homeowners 
purchasing a property after it had been rehabilitated under the 
Discount Sales Program. In a manner parallel to our estimate of net 
revenue described earlier, we used the values of the estimated Discount 
Sales Program dummy variables from our second model to make this 
calculation.

[End of section]

Appendix III: Comments From the Department of Housing and Urban 
Development:

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 
WASHINGTON, DC 20410-8000:

ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER:

JAN 2004

Mr. Steven K. Westley 
Assistant Director 
Financial Markets and Community Investment 
United States General Accounting Office 
Washington, DC 20548:

Dear Mr. Westley:

Thank you for the opportunity to comment on the draft report entitled 
Single Family Housing: Cost Benefit, and Compliance Issues Raise 
Questions about HUD's Discount Sales Program (GAO-04-208).

The Department appreciates the effort undertaken by your staff to 
perform a thorough analysis of the cost versus benefits of the 
Nonprofit Discount Sales Program (Discount Program) and the fruitful 
discussion between our agencies during the exit conference. We agree 
with the GAO position that the Discount Program would benefit from an 
updated evaluation and an assessment of methods to improve monitoring 
and enforcement. Therefore, the Department accepts the Report's two 
recommendations and will proceed accordingly. However, we wish to 
clarify our position that the Discount Program serves several public 
policy purposes and was neither conceived nor intended to be only a 
source of revenue for the FHA.

One important objective of the program is to expand affordable housing 
opportunities for homeownership in targeted areas. The Report contends 
that minimal savings are accruing to the homebuyer from this program 
especially from sales at shallow discounts. However, this contention is 
predicated on the assumption that the individual homebuyer would have 
access to financing for rehabilitation on terms as favorable as the 
nonprofits and the skills to oversee the construction. We disagree with 
this assumption and think that the nonprofits have the ability to 
obtain financing for rehabilitation that is unavailable to average 
homebuyers and the capacity to oversee the project at a reasonable cost 
(10%) that may well be less than that charged by profit motivated 
developers. Therefore, we feel that the conclusions as to the actual 
benefit accruing to the homebuyer significantly understate the benefit.

Additionally, the promotion of homeownership and the revitalization of 
neighborhoods are important goals of the Department. The Discount 
Program contributes in a direct and positive manner to the achievement 
of both these objectives.

Homeownership and property rehabilitation both have stabilizing effects 
on neighborhoods. It is important to note that outside of this program, 
forty-three percent of FHA sales in revitalization areas are to 
investors; therefore it is possible to conclude that the proportion of 
rental to homeownership would be substantially higher absent the 
Discount Program. 

Finally, while the effects are not directly quantifiable, an increased 
percentage of homeownership in a neighborhood improves the stability of 
the area and directly contributes to property values. These factors 
reduce the risk of default and foreclosure in the subject neighborhood 
and therefore have a positive financial impact on the FHA Insurance 
Fund.

While the Department understands that the intent t of the GAO review 
was to measure the effectiveness of the Nonprofit Discount Program in 
terms of cost and direct benefit to the ultimate purchaser, we request 
that you consider the other goals that the program is intended to 
accomplish and acknowledge their significance in your final report.

As expressed in the exit conference, we continue to have concerns about 
the methodology employed to estimate costs and have additional 
questions on the accuracy of conclusions of the Report. We believe that 
any conclusions regarding costs of the Discount Program should be based 
on actual program performance rather than hypothetical extrapolations. 
For example, we have done some preliminary analysis of actual sales in 
the Discount Program, comparing net recoveries to those on homes not in 
the Discount Program. The cost/loss due to lower net recoveries on 
program properties is only about 60 percent of the (average) GAO 
estimate. Therefore, the Department feels that the report overstates 
the costs and losses significantly. We intend to do a more 
comprehensive review of the cost analyses contained in the report 
shortly and will be pleased to provide you with our results as soon as 
they are available.

In addition, the Department intends to include a comprehensive analysis 
of the actual cost of the Discount Program as a part of the evaluation 
we plan to conduct. We will be pleased to discuss our methodology and 
the results of this analysis with the GAO when it is available.

Again, we appreciate the opportunity to comment on the draft report.

Sincerely,

Signed by: 

John C. Weicher:

Assistant Secretary for Housing 
Federal Housing Commissioner:

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

David G. Wood, (202) 512-8678 Steven K. Westley, (202) 512-8678:

Acknowledgments: 

In addition to those named above, Kimberly Berry, Gwenetta Blackwell, 
Stephen Brown, Emily Chalmers, Rudy Chatlos, Jay Cherlow, David 
Dornisch, John McGrail, John Mingus, Mark Molino, David Pittman, Steve 
Ruszczyk, Stewart Seman, and Mark Stover made key contributions to this 
report.

(250116):

FOOTNOTES

[1] HUD requires these organizations to have 501(c)(3) status. Section 
501(c)(3) of the Internal Revenue Code covers charitable organizations 
that are eligible to receive tax-deductible contributions. Such 
organizations must not be organized or operated for the benefit of 
private interests, and no part of their net earnings may benefit any 
private shareholder or individual.

[2] Government entities include states, counties, cities, or other 
units of government such as public housing authorities. For purposes of 
this report, the term "nonprofit" includes nonprofit organizations and 
government entities.

[3] U.S. Department of Housing and Urban Development, Office of 
Inspector General, Nonprofit Participation in HUD Single-Family 
Programs, 2002-SF-0001 (Washington, D.C.: November 5, 2001). The audit 
covered the discounted properties HUD sold between January 1, 1998, and 
April 30, 2001.

[4] SAMS contains information on the properties acquired and sold by 
HUD.

[5] We use the term "staff year" to mean the amount of time a full-time 
employee would work in the course of 1 year.

[6] These were the only properties for which HUD could provide the 
rehab costs and selling prices to homebuyers as of July 2003. HUD 
estimates that 626 properties were purchased and resold under the 
program in calendar year 2002.

[7] HUD has broad authority to dispose of single-family properties in 
its inventory. See 12 U.S.C. 1710(g).

[8] FHA insures most of its mortgages for single-family homes under its 
Mutual Mortgage Insurance Fund, which is funded by borrowers' insurance 
premiums and covers lenders' claims on foreclosed properties. The 
revenue HUD receives from selling these properties is deposited in the 
fund.

[9] Revitalization areas are HUD-designated locations characterized by 
high levels of foreclosures, very low incomes, and low homeownership 
rates.

[10] We defined net revenue as the price for which HUD sells a property 
minus HUD's holding and selling costs. These costs include discounts to 
nonprofits, other homebuyer sales incentives, payments to management 
and marketing contractors, property taxes, broker's fees and 
commissions, and financing and closing costs. HUD was not able to 
provide us with property-specific data on certain overhead expenses 
that it allocates among the properties in its inventory. As a result, 
we did not include these expenses in our analysis. Because these 
expenses are relatively small, we believe this omission did not have a 
significant effect on our estimates. 

[11] We derived our estimates from a model we developed that predicts 
the net revenue HUD received from each property it sold during calendar 
year 2002 as a function of several variables, including whether HUD 
sold the house through the Discount Sales Program. The model allowed us 
to estimate the effect of the program on HUD's net revenue, while 
holding constant the effects of other factors. We made this estimate by 
comparing (1) the net revenue our model predicted HUD would have 
received for each discounted property had the property been sold 
through the regular sales process with (2) the net revenue our model 
predicted HUD would have received by selling the property through the 
Discount Sales Program. Even though we knew the actual amount HUD 
received by selling the property through the Discount Sales Program, we 
made the comparison between two estimated values in order to be 
consistent. Each estimated value contained an error term that captured 
the effects of omitted variables unavailable for the modeling process. 
By comparing two estimated values, we removed the influence of the 
omitted variables from our comparison, leaving the effect of the 
Discount Sale Program. Appendix II provides additional information 
about our model.

[12] HUD sold a total of 1,226 properties through the Discount Sales 
Program in calendar year 2002. Because we were unable to match 32 of 
the properties to census tract data, we dropped them from our analysis, 
leaving 1,194 properties. 

[13] These were all of the homes HUD sold through its regular process 
that were located in the same census tracts as the properties it sold 
through the Discount Sales Program.

[14] Our analysis assumed that in the absence of the program, HUD would 
have sold the 1,194 properties through its regular sales process. 
Accordingly, our statistical analysis excluded data on properties that 
were not sold through either the Discount Sales Program or HUD's 
regular process.

[15] We are 90 percent confident that HUD's actual loss in net revenue 
was between these two values.

[16] HUD officials stressed that the estimate of personnel costs was 
only a rough approximation of the agency's actual costs.

[17] HUD does not collect the data necessary to test this assumption. 
In addition, the data HUD provided us on nonprofits' rehab costs did 
not always include other, relatively minor, expenses that an individual 
homebuyer could also incur, such as fees for rehab consultants, 
construction permits, and termite inspection services. However, as 
discussed later in this section, our overall finding does not change 
even under the assumption that a homebuyer would pay significantly more 
than a nonprofit to rehab a home.

[18] While this assumption would not hold true in all cases, more than 
half of the properties covered by our analysis received less than 
$15,000 in rehab work and some received none at all, suggesting that 
the rehab work was generally not so extensive as to require vacating 
the home.

[19] We used this time frame because HUD made significant changes to 
the program that became effective on February 1, 2002. For example, HUD 
expanded its annual reporting and resale price requirements to 
properties sold with 10 and 15 percent discounts. 

[20] The issue of nonprofits violating resale price restrictions is 
discussed in more detail in the next section of the report.

[21] Although a homeowner would incur fees and interest costs for such 
a loan, homebuyers financing properties purchased through the Discount 
Sales Program incur similar expenses because the cost of the rehab work 
is included in the nonprofit's selling price and therefore is reflected 
in the homebuyer's mortgage costs.

[22] HUD has required annual reports on properties sold at a 30 percent 
discount since December 1994. Beginning with reports due in February 
2003, HUD expanded the requirement to include all properties sold at a 
discount. 

[23] The Atlanta HOC designates nonprofits that purchase five or more 
properties in a year as medium-or high-risk.

[24] In purchasing a discounted property, a nonprofit must sign an 
addendum to the sales contract stating that it will adhere to this 
rule.

[25] This figure is an estimate because as of July 2003 the HOCs had 
not made final determinations of excess profits for all of the 
properties they had reviewed. As a result, the actual amount of excess 
profits for these properties may be higher or lower than this amount.

[26] Prior to that time, HUD did not have regulatory procedures for 
taking this action and removed nonprofits through a less formal 
process. 

[27] We used this time frame because HUD made significant changes to 
the program that became effective on February 1, 2002.

[28] See, for example, Ann D. Witte, Howard J. Sumka, and Homer 
Erekson, "An Estimation of a Structural Hedonic Price Model of the 
Housing Market: An Application of Rosen's Theory of Implicit Markets," 
Econometrica, Vol. 47 (September 1979): 1151-1173.

[29] There were no discounted sales at the 15 percent level made by the 
Atlanta HOC, and as a result the dummy variable combining 15 percent 
discount with the Atlanta HOC is also omitted. 

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