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. 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. 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. Personnel expenses for administering the program accounted for  the remaining $3.7 million of HUD’s cost. 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. 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. 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. 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. 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. As of July  2003, the HOCs’ desk reviews had identified 28 nonprofits that made an  estimated total of $704,720 in excess profits. Our analysis suggests that the  program is of questionable benefit to most homebuyers. 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. 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.
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. 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.