A performance audit of the Arizona Housing Finance Review Board

              STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
OF THE
ARIZONA HOUSING FINANCE
REVIEW BOARD
OCTOBER 1983
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 83- 20
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
October 25, 1983
Members of the Arizona L e g i s l a t u r e
The Honorable Bruce Babbitt, Governor
Mr. Cary Marmis, Chairman
Arizona Housing Finance Review Board
Transmitted herewith is a report of the Auditor General, A Performance
Audit of t h e Arizona Housing Finance Review Board. This report is i n
response t o a January 18, 1982, r e s o l u t i o n of the J o i n t L e g i s l a t i v e
Oversight Committee. The performance a u d i t was conducted a s a part of t h e
Sunset Review s e t f o r t h i n A. R. S. § § 41- 2351 through 41- 2379.
The blue pages present a summary of the r e p o r t ; a response from t h e
Arizona Housing Finance Review Board is found on the yellow pages
preceding the appendix.
My s t a f f and I w i l l be pleased t o d i s c u s s or c l a r i f y items i n the report.
Respectfully submitted,
V
Douglas R. Norton
Audit or General
Enclosure
Staff : William Thomson
Peter N. Francis
Karen C. Holloway
1 1 1 WEST MONROE SUITE 600 PHOENIX. ARIZONA 85003 ( 602) 255- 4385
OFFICE OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF THE
ARIZONA HOUSING FINANCE REVIEW BOARD
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 83- 20
TABLE OF CONTENTS
SUMMARY
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDINGS
FINDING I
The Housing Finance Review Board has not provided
e f f e c t i v e review of mortgage revenue bond proposals.
CONCLUSION
RECOMMENDATIONS
FINDING I1
Board minutes do not conform t o Open Meeting Law
requirements .
CONCLUSION
RECOMMENDATIONS
OTHER PERTINENT INFORMATION
Problems inherent i n the federal mortgage revenue
bond program.
APPENDIX
Consultant's Report and Resume
- Page
i
1
7
LIST OF TABLES
- PAGE
TABLE 1 - Arizona Single Family Mortgage Revenue
Bond I s s u e s
TABLE 2 - Success of 1982 Bond Issues
TABLE 3 - Average Cost and Subsidy per MRB Loan
by Income Group
SUMMARY
The Office of the Auditor General has conducted a performance audit of
the Arizona Housing Finance Review Board i n response t o a January 18,
1982, resolution of the Joint Legislative Oversight Committee. This
performance audit was conducted a s a part of the Sunset Review s e t f o r t h
i n A. R. S. § § 41- 2351 through 41- 2379.
The Housing Finance Review Board ( HFRB) was created i n 1979 by A. R. S.
$ 9- 1174 - e t - seq t o a s s i s t i n making home mortgages more affordable f o r low
and moderate income families and t o stimulate a c t i v i t y i n the housing
construction industry. The Board has t h r e e s t a t u t o r y functions. The
Board must review mortgage revenue bond ( MRB) proposals submitted by
metropolitan I n d u s t r i a l Development Authorities ( IDAs) t o finance the
purchase of single family residences. The Board has sole authority t o
issue MRBs f o r the nonmetropolitan counties when petitioned by two or
more counties. Furthermore, the Board may a l l o c a t e Federal housing
monies t o p o l i t i c a l subdivisions and qualified p a r t i c i p a n t s through the
Office of Economic Planning and Development ( OEPAD).
The Board's f i v e members a r e appointed by the Governor subject t o
confirmation by the Senate and serve three- year terms. Although
representation is not specified by t h e s t a t u t e s , both business and lay
i n t e r e s t s currently are represented. Unlike most other boards, members
do not receive compensation nor are they reimbursed f o r t r a v e l expenses
related t o Board a c t i v i t i e s .
Board Review Has
Been Inadequate ( See Page 11)
Although several f a c t o r s beyond the Board's control, such a s declining
i n t e r e s t r a t e s and unemployment, have adversely impacted recent mortgage
revenue bond issues, the Board's review of proposed issues has also been
inadequate. Arizona MRB issues of 1982 have been largely unsuccessful i n
providing low and moderate income housing, and most of the bonds may have
t o be r e c a l l e d . This lack of success is due i n part t o 1) Federal
amendments i n 1980 t o the MRB program; 2) adverse economic conditions,
e s p e c i a l l y t h e dramatic drop i n mortgage i n t e r e s t r a t e s i n 1982; and 3)
problems experienced marketing the program i n the home building and
f i n a n c i a l communities.. However, t h e Board approved two of t h e 1982
i s s u e s even though f e a s i b i l i t y s t u d i e s overestimated mortgage demand.
A c o n s u l t a n t h i r e d by t h e Auditor General's Office found serious problems
with the f e a s i b i l i t y study done on t h e Board's own nonmetro bond i s s u e .
For example, many assumptions used i n the study were quest ionable,
computational e r r o r s were made, a metropolitan a n a l y t i c format was
inappropriately used and t h e condition of t h e nonmetropolitan housing
finance market was not adequately assessed.
Several changes a r e needed t o make t h e Board's review of MRB proposals
meaningful and e f f e c t i v e . The Board needs 1 ) a u t h o r i t y t o specify
information t o be provided i n demand f e a s i b i l i t y s t u d i e s , 2) s t a f f i n g ,
and 3) more time t o evaluate s t u d i e s submitted f o r review.
Board Minutes Do N o t Meet
Statutory ~ equiremenst ( See Page 25)
The Board is not i n compliance with Open Meeting Law requirements
regarding the keeping of minutes. Board minutes a r e not a v a i l a b l e f o r
one- third of its meetings, and recorded minutes a v a i l a b l e do not meet a l l
requirements. Moreover, p r i o r t o our audit the Board did not maintain
c o n f l i c t of i n t e r e s t d i s c l o s u r e statements i n a separate f i l e as required
by law. Assigning an Attorney General r e p r e s e n t a t i v e t o the Board would
aid i n resolving these problems.
Inherent Problems i n Federal
MRB Program ( See Page 31)
F i n a l l y , we examined other information p e r t i n e n t t o our review of t h e
Housing Finance Review Board. Several problems inherent i n the Federal
mortgage revenue bond program l i m i t its e f f e c t i v e n e s s a s a means of
providing affordable housing f o r low and moderate income f a m i l i e s . Recent
Federal r e s t r i c t i o n s make t h e program l e s s a t t r a c t i v e and d i f f i c u l r t o
market i n comparison t o other mortgage finance programs. A person
generally cannot qualify f o r the program, r e g a r d l e s s of income, i f t h e
i n d i v i d u a l owned a home within the past t h r e e years. The U. S. Treasury's
recent reduction i n t h e maximum p r i c e of homes e l i g i b l e f o r purchase
under t h e program has a l s o adversely impacted t h e nonmetro MRB program.
At the national l e v e l , t h e U. S. General Accounting Office ( GAO) has
issued s t u d i e s i n d i c a t i n g t h a t the MRB program is i n e q u i t a b l e and c o s t l y
i n comparison t o a l t e r n a t i v e s . Although its preliminary findings were
challenged by the Council of S t a t e Housing Agencies, GAO has not
r e t r a c t e d its c r i t i c i s m of t h e program i n subsequent testimony before t h e
Congress. Because t h e program is i n f l e x i b l e , higher income p a r t i c i p a n t s
r e c e i v e a g r e a t e r subsidy under the program than lower income
p a r t i c i p a n t s . Most of t h e b e n e f i t s of t h e program, moreover, a r e
d i s t r i b u t e d t o i n d i v i d u a l s i n upper income brackets. According t o GAO,
MRB i s s u e s of 1982 primarily benefitted bond holders, bond underwriters,
attorneys and other intermediaries, not homebuyers.
iii
INTRODUCTION AND BACKGROUND
The Office of t h e Auditor General has conducted a performance audit of the
Arizona Housing Finance Review Board i n response t o a January 18, 1982,
resolution of the Joint Legislative Oversight Committee. This performance
audit was conducted a s a part of the Sunset Review set f o r t h i n A. R. S.
9941- 2351 through 41- 2379.
The Housing Finance Review Board ( HFRB) was created i n 1979 by A. R. S.
99- 1174 - e t - seq t o a s s i s t i n making home mortgages more affordable f o r low
and moderate income families and t o stimulate a c t i v i t y i n the housing
construction industry. The Board accomplishes its purpose through the
issuance of tax- exempt mortgage revenue bonds ( MRBs).
The Board's f i v e members a r e appointed by the Governor subject t o
confirmation by the Senate and serve three- y ear terms. Although
representation is not a specified by the s t a t u t e s , both business and lay
i n t e r e s t s currently are represented . Unlike most other boards, members do
not receive compensation nor a r e they reimbursed f o r t r a v e l expenses
related t o Board a c t i v i t i e s .
Board Functions
The Board has three s t a t u t o r y functions. The Board must review mortgage
revenue bond proposals submitted by metropolitan I n d u s t r i a l Development
Authorities ( IDAs) t o finance t h e purchase of s i n g l e family residences.
The Board has sole authority t o issue MRBs f o r the nonmetropolitan
counties when petitioned by two or more counties. Furthermore, the Board
may a l l o c a t e Federal housing monies t o p o l i t i c a l subdivisions and
q u a l i f i e d p a r t i c i p a n t s through the Office of Economic Planning and
Development ( OEPAD). In t h i s regard, the Board has been involved i n the
S t a t e ' s Housing and Urban Development ( HUD) Section 8 a c t i v i t y .
I n 1982 OEPAD, as Arizona's designated S t a t e housing agency, had received
c o n t r a c t a u t h o r i t y t o a l l o c a t e U. S. Housing and Urban Development ( HUD)
Section 8 d i s c r e t i o n a r y funds t o subsidize r e n t a l s of multifamily u n i t s .
Approximately 242 u n i t s were assigned t o Arizona. The Federal government
intends t h a t , following c o n s t r u c t i o n of t h e s e new p r o j e c t s , c e r t a i n
a l l o c a t e d r e n t a l u n i t s w i l l be subsidized with these Section 8 funds f o r a
period of 20 years. Although OEPAD s t a f f d i d much of t h e work i n
a l l o c a t i n g t h e s e Federal funds and i n g e t t i n g t h e p r o j e c t s underway, the
Board was involved i n making t h e policy decisions. Because t h e HUD
Section 8 program has been discontinued, the Board w i l l not perform t h i s
function i n t h e f u t u r e .
Mortgage Revenue Bond Authority and Process
The Federal government, under Section 103A of t h e I n t e r n a l Revenue Code,
allows s t a t e or l o c a l governmental e n t i t i e s t o i s s u e tax- exempt bonds a s a
way of a t t r a c t i n g c a p i t a l f o r public purposes. Under Federal law,
tax- exempt bonds may be issued t o subsidize mortgage i n t e r e s t r a t e s
thereby making home- ownership more affordable. Federal law requires t h a t
the mortgage revenue bonds be issued by r e s o l u t i o n of a s t a t e o r p o l i t i c a l
subdivision. Approval by a s t a t e agency of a l o c a l IDA'S bond i s s u e plan
is not required although requiring such approval had been considered by
Congress i n 1979 proposed l e g i s l a t i o n .
The process of issuing bonds begins with a bond underwriter or investment
banker working with an IDA o r t h e HFRB t o s t r u c t u r e a bond issue which
w i l l have t h e lowest possible bond i n t e r e s t r a t e . The issuing
government's primary r o l e is i n issuing the bonds and e s t a b l i s h i n g the
g u i d e l i n e s f o r e l i g i b i l i t y f o r t h e mortgage loans. Bond counsel is
retained t o ensure t h a t t h e bond i s s u e complies with a l l pertinent Federal
and s t a t e laws. Lenders and developers a r e encouraged t o p a r t i c i p a t e i n
t h e program. They put up i n advance a commitment f e e , usually a
percentage of t h e t o t a l value of t h e loans they expect t o make or houses
they expect t o s e l l . Arrangements a r e made with a mortgage i n s u r e r t o
p r o t e c t bondholders. The insurance guarantees against l o s s e s due t o
mortgage d e f a u l t s . Arrangements a r e made with a bank t o act a s t r u s t e e
f o r the bond proceeds. The t r u s t e e invests t h e proceeds u n t i l they are
used t o purchase mortgages. The t r u s t e e also receives principal and
i n t e r e s t payments and redeems the bonds according t o the t r u s t indenture
a s funds accumulate i n the reserve accounts.
Once t h e i s s u e i s f u l l y structured, the bonds a r e rated by an independent
rating agency and sold t o investment bankers. The l a t t e r then s e l l the
bonds t o individual and i n s t i t u t i o n a l investors. The proceeds from the
s a l e of the bonds 1) c r e a t e the loan fund, 2) set up reserves f o r such
things a s bond i n t e r e s t , and 3) cover costs of bond issuance and the
underwriter's discount. The loan fund is drawn down a s p a r t i c i p a t i n g
lenders make loans ( mortgages) which l a t e r are purchased with bond
proceeds. Monthly mortgage payments of principal and i n t e r e s t and
prepayments of mortgages generate the cash flow necessary t o meet the debt
service, such a s the i n t e r e s t on the bonds.
Investors buy tax- exempt bonds, even though t h e i n t e r e s t r a t e is lower
than t h e i n t e r e s t r a t e on taxable bonds of comparable quality and term,
because t h e i n t e r e s t income is exempt from Federal taxation. Issuers of
tax- exempt MRBs pass the i n t e r e s t savings obtained from t h e t a x exemption
on t o home buyers i n the form of below- market i n t e r e s t r a t e mortgages.
Level of Activity
As shown i n Table 1, a t o t a l of $ 324,235,000 of mortgage revenue bonds
have been issued since the Board was created. $ 27.2 million has been
raised under the Board's non- metro issue. Nearly $ 300 million has been
approved by the Board and sold by other IDAs.
TABLE 1
ARIZONA SINGLE FAMILY MORTGAGE REVENUE BOND ISSUES
Is suer Date of Review Size of Issue
Metropolitan
Pima County
Maricopa County
Tucson/ Pima County
Phoenix/ Maricopa County
Nonmetropolitan
Pinal, G i l a , Mohave Counties
J o i n t Is sue
Nonmetro - Bond i s s u e
Total
Source: HFRB Annual Reports
In a d d i t i o n t o t h e above i s s u e s , t h e Board had reviewed two other MRB
i s s u e s i n 1980 f o r t h e City of Tucson and Pima County. They were canceled
before issuance due t o adverse conditions i n t h e bond market.
Staffing and Funding
Although A. R. S. s9- 1174. A. s t a t e s t h a t t h e Department of Economic Security
should f u r n i s h c l e r i c a l and s e c r e t a r i a l s t a f f f o r the Board, t h e Board is
s t a f f e d by OEPAD.* This s t a f f i n g includes both p r o f e s s i o n a l and c l e r i c a l
help.
The Board has no budget. No S t a t e funds a r e a v a i l a b l e t o reimburse Board
members nor t o cover any c o s t s of OEPAD1s s t a f f i n g of the Board. Certain
f e e s of t h e Board ' s l e g a l and f i n a n c i a l c o n s u l t a n t s may be paid out of bond
* OEPAD s t a f f maintain t h a t OEPAD is t h e l o g i c a l agency t o provide
s t a f f i n g support because OEPAD is the designated S t a t e agency f o r
Federal housing programs.
proceeds. In addition, $ 8,600 of the issuance c o s t s f o r the Board's
nonmetro issue ( see page 11) has been earmarked t o cover some of OEPAD's
s t a f f i n g c o s t s related t o t h e issue. A. R. S. $ 9- 1174 was amended i n 1981
t o grant the Board the authority t o charge an i s s u e r a f e e ( up t o $ 3,000
per proposal) t o cover Board expenses related t o the review of an IDA'S
bond proposal. Fees can be assessed, however, only i f bonds are issued.
Thus, experts hired by the Board t o provide independent analysis cannot be
paid with these funds unless the bond proposals are approved.
Scope of Audit
Our audit of the Housing Finance Review Board addressed issues s e t f o r t h
i n the 11 Sunset f a c t o r s i n A. R. S. $ 41- 2354. Additional detailed work was
conducted on the following issues:
- Whether the Board's review of MRB proposals is adequate, and
- Whether the Board has complied with Open Meeting Law and c o n f l i c t
of i n t e r e s t disclosure requirements.
As part of our a u d i t , we examined other information pertinent t o the
Housing Finance Review Board. This includes problems inherent i n the
federal Mortgage Revenue Bond Program which l i m i t its effectiveness and
more c o s t e f f e c t i v e a l t e r n a t i v e s which have been recommended by the U. S .
General Accounting Office. These problems and a l t e r n a t i v e s are discussed
on page 31.
The Auditor General and s t a f f express appreciation t o t h e members of the
Housing Finance Review Board and Office of Economic Planning and
Development s t a f f f o r t h e i r cooperation and assistance during the course
of t h i s audit.
SUNSET FACTORS
In accordance with A. R. S. $ 41- 2354, t h e L e g i s l a t u r e should consider t h e
following 11 f a c t o r s i n determining whether t h e Housing Finance Review
Board should be continued o r terminated .
1. Objective and purpose i n e s t a b l i s h i n g the Board
The Housing Finance Review Board was e s t a b l i s h e d pursuant t o A. R. S.
§ 9- 1174 - e t 3 t o provide affordable home mortgages f o r low and
moderate income f a m i l i e s and t o stimulate economic development and
home c o n s t r u c t i o n a c t i v i t y i n Arizona. The Board accomplishes t h e s e
purposes by reviewing mortgage revenue bond proposals submitted by
metropolitan I n d u s t r i a l Development A u t h o r i t i e s ( IDA'S) and by issuing
mortgage revenue bonds f o r t h e S t a t e ' s nonmetropolitan counties.
Through the Board's bond program, mortgage financing is made a v a i l a b l e
t o e l i g i b l e homebuyers at below- market i n t e r e s t r a t e s .
The Board a l s o a l l o c a t e s Federal housing ( HUD Section 8) funds t o
p o l i t i c a l subdivisions and q u a l i f i e d p a r t i c i p a n t s i n cooperation w i t h
t h e Office of Economic Planning and Development. Because t h e Section
8 program is being phased out, however, t h e Board w i l l no longer
perform t h i s function.
. 2. The e f f e c t i v e n e s s with which t h e Board has m e t its objective and
purpose and the e f f i c i e n c y with which t h e Board has operated
The Board's e f f e c t i v e n e s s i n reviewing bond proposals has been
l i m i t e d . Bond proposals have been approved d e s p i t e t h e f a c t t h a t
f e a s i b i l i t y s t u d i e s overestimated demand. Changes are needed t o make
Board review of bond proposals meaningful and e f f e c t i v e ( see Finding
I, page 11).
According t o t h e Board, it has performed its Federal a l l o c a t i o n
function e f f e c t i v e l y . The Board a l l o c a t e d 242 Sect ion 8 r e n t a l
subsidy u n i t s among 8 p r o j e c t s . Thirty- nine of those u n i t s have
proceeded smoothly toward construction. The Board recently i n i t i a t e d
s p e c i a l monitoring and reporting requirements t o f a c i l i t a t e successful
completions of the remaining u n i t s .
3. The extent t o which t h e Board has operated within the public i n t e r e s t
The Board's function of reviewing proposals and issuing bonds can
serve the public i n t e r e s t by r a i s i n g needed mortgage finance funds.
However, t h e Board has not provided e f f e c t i v e bond proposal review.
The Board did a c t i n the public i n t e r e s t when it sought and obtained
lower f e e payments f o r t h e p a r t i e s receiving f e e s from the bond
issuances.
4. The extent t o which r u l e s and r e g u l a t i o n s ~ romulgated by t h e Board a r e
c o n s i s t e n t with the l e g i s l a t i v e mandate
The Board does not have s p e c i f i c rule- making a u t h o r i t y , and no r u l e s
and r e g u l a t i o n s have been promulgated.
5. The extent t o which the Board has encouraged input from the public
before promulgating i t s r u l e s and r e g u l a t i o n s and the extent t o which
it has informed the public a s t o its a c t i o n s and t h e i r expected impact
on t h e ~ u b l i c
The Board posts public notices of its meetings i n accordance with t h e
Open Meeting Law. Its minutes, however, do not s a t i s f y s t a t u t o r y
requirements. No minutes a r e a v a i l a b l e f o r one- third of t h e Board's
meetings. Tape recordings of other meetings do not meet a l l
requirements ( see Finding 11, page 25).
6. The extent t o which t h e Board has been able t o i n v e s t i g a t e and resolve
complaints t h a t a r e within i t s j u r i s d i c t i o n
Because the Board is not a regulatory agency, t h i s f a c t o r does not
apply
7. The extent t o which t h e Attorney General or any o t h e r a p p l i c a b l e
agency of S t a t e Government has t h e a u t h o r i t y t o prosecute a c t i o n s
under enabling l e g i s l a t i o n
Board s t a t u t e s do not define v i o l a t i o n s n o r prescribe p e n a l t i e s .
Theref ore, no prosecutable act ions a r e s p e c i f i e d i n t h e enabling
l e g i s l a t i o n .
8. The extent t o which t h e Board has addressed d e f i c i e n c i e s i n t h e
enabling s t a t u t e s which prevent it from f u l f i l l i n g its s t a t u t o r y
-- -
mandate
Each year since its establishment, the Board has supported l e g i s l a t i o n
t o enhance its performance. Through its p a r t i c i p a t i o n on the S t a t e
Housing Task Force, t h e Board supported House B i l l 2335 i n 1983 which
would have authorized s t a f f i n g f o r t h e Board, expanded its powers and
made other changes i n its operations. Portions of t h i s B i l l were
enacted by t h e L e g i s l a t u r e and signed by the Governor.
9. The extent t o which changes a r e necessary i n t h e laws of t h e Board t o
adequately comply with t h e f a c t o r s l i s t e d i n t h e Sunset law
The L e g i s l a t u r e should c o n s i d e r g r a n t i n g t h e Board rule- making
a u t h o r i t y t o specify the type of information t o be included i n general
plans and f e a s i b i l i t y s t u d i e s submitted t o t h e Board f o r review ( s e e
page 20).
10. The extent t o which termination of the Board would s i g n i f i c a n t l y harm
the public h e a l t h , s a f e t y o r welfare
Termination of the Board would not s i g n i f i c a n t l y harm the public
health, safety or welfare. However, i f the Board were terminated the
S t a t e would not have an e n t i t y authorized t o issue mortgage revenue
bonds i n multicounty, nonmetropolitan areas of the State where
af fordable housing is needed.
11. The extent t o which t h e level of regulation exercised by the Board is
appropriate and whether l e s s or more s t r i n g e n t l e v e l s of regulation
would be appropriate
This f a c t o r does not apply t o the Housing Finance Review Board.
FINDING I
THE HOUSING FINANCE REVIEW BOARD HAS NOT PROVIDED EFFECTIVE REVIEW OF
MORTGAGE REVENUE BOND PROPOSALS.
The lack of success of recent mortgage revenue bond i s s u e s can be
a t t r i b u t e d i n part t o the l i m i t e d e f f e c t i v e n e s s of t h e Housing Finance
Review Board. Although several f a c t o r s outside Board c o n t r o l adversely
impacted recent MRB i s s u e s , the Board's review of these proposed i s s u e s has
a l s o been inadequate. If the Board is continued, changes a r e needed t o
make t h e Board's review of bond proposals more meaningful and e f f e c t i v e .
Recent Issues Not
Successful
The Arizona MRB i s s u e s of 1982 have l a r g e l y been unsuccessful i n g e t t i n g
low and moderate income f a m i l i e s i n t o homes. As a r e s u l t , most of the
bonds w i l l have t o be r e c a l l e d e a r l y , t h u s disappointing some program
p a r t i c i p a n t s .
The f i r s t t h r e e MRB i s s u e s approved by t h e Board were successful.
According t o the Board, the 1979 Pima County i s s u e of $ 40 m i l l i o n , the 1980
Maricopa County i s s u e of $ 63 million and t h e 1980 Pinal- Gila- Mohave
Counties j o i n t i s s u e of $ 30 m i l l i o n a l l r e s u l t e d i n v i r t u a l l y a l l a v a i l a b l e
funds being committed t o mortgage purchases. These i s s u e s , however,
preceeded t h e MRB program changes r e s u l t i n g from the 1980 Federal
amendments ( see page 31). Thus, t h e Board's 1982 i s s u e s represent not only
its most recent a c t i v i t y but a l s o its only experience under current MRB
program requirements and r e s t r i c t ions.
In 1982 t h e Board reviewed and approved two MRB programs issued by
p o l i t i c a l subdivisions. The I n d u s t r i a l Development A u t h o r i t i e s ( IDAs) of
Pima County and the City of Tucson had a j o i n t i s s u e of approximately $ 51
m i l l i o n and the IDAs of t h e City of Phoenix and Maricopa County j o i n t l y
issued $ 113 million i n mortgage revenue bonds. The Board i t s e l f was the
i s s u e r of MRBs f o r t h e nonmetro counties. This bond i s s u e was sold
November 2, 1982, f o r $ 27.2 m i l l i o n .
To d a t e it appears t h a t t h e s e 1982 i s s u e s have been unsuccessful or
have had only limited success. Less than 2 percent of t h e ~ ima/ Tucson
$ 51 m i l l i o n i s s u e had been committed t o purchase mortgages by t h e end
of t h e commitment period, and l e s s than 5 percent of the
Phoenix/ Maricopa $ 113 m i l l i o n i s s u e has been committed . The Board ' s
own nonmetro i s s u e with a mortgage i n t e r e s t r a t e of 11.05 percent has
performed s l i g h t l y b e t t e r ; yet , with l e s s than t h r e e months remaining
i n t h e o r i g i n a l commitment period, less than 15 percent of t h e bond
revenues have been committed." Table 2 i n d i c a t e s t h e l e v e l s of
a c t i v i t y i n t h e t h r e e 1982 i s s u e s t h e c o s t s which a r e deducted from
bond proceeds and t h e amount of funds committed t o purchase mortgages.
TABLE 2
SUCCESS OF 1982 BOND ISSUES
Bond
Proceed s
Committed
D a t e To Purchase Percentage of Total
I s s u e r Is sued S i z e T o t a l Cost ( l ) Mortgages Issue Used ( I
Phoenix/
Maricopa 9- 82 113,000,000 3,281,500 5,561,600(~) 4.9
Nonmet ro 11- 82 27,000,000 913,000 4 , 0 7 8 , 4 5 0 ( ~ ) - 14.9
$ 191,000,000 $ 5,940,500 $ 10,312,800 5.4
Source: Auditor General a n a l y s i s of d a t a furnished by bond i s s u e t r u s t e e s .
( 1) Total c o s t i n c l u d e s i s s u a n c e c o s t s t o l e g a l counsel, f i n a n c i a l advisors,
e t c . , a s well a s the discount f e e on the s a l e of the bonds. GAO found t h a t
t h e cost of issuance of MRBs were high i n other s t a t e s and t h a t t h e biggest
b e n e f i c i a r i e s of t h e program were t h e intermediaries ( see page 36).
( 2) Up t o 7/ 12/ 83
( 3) Up t o 8/ 26/ 83
* On August 22, 1983, t h e Board extended t h e commitment period f o r the
nonmetro i s s u e t o May 2, 1984.
Although t h e amount of funds committed i n t h e nonmetro program is low, t h e
$ 4 m i l l i o n i n mortgages sold thus f a r have been used t o benefit f a m i l i e s
of low and moderate income. As of May 17, 1983, 58 mortgages had been
committed. The average mortgage was approximately $ 45,000, t h e average
income was $ 21,855 and t h e average purchase p r i c e was $ 47,311.
Because t h e Pima/ Tucson i s s u e and t h e Phoenix/ Maricopa i s s u e were
unsuccessful, most: of the bonds w i l l have t o be r e c a l l e d . If the bonds
a r e r e c a l l e d , bondholders may not r e a l i z e t h e f u l l y i e l d o r r e t u r n on
t h e i r investments.
Board s ' Review
Is Inademat e
Although s e v e r a l f a c t o r s beyond the Board ' s c o n t r o l have adversely
impacted recent MRB i s s u e s , the Board's review of bond proposals has a l s o
been inadequate and i n e f f e c t i v e . Lack of success of recent i s s u e s is due
i n part t o 1 ) Federal amendments i n 1980 t o t h e MRB program, 2) economic
c o n d i t i o n s , and 3) marketing problems. However, t h e Board approved t h e
bond proposals d e s p i t e t h e f a c t t h a t f e a s i b l i t y s t u d i e s overestimated
mortgage demand and contained s e v e r a l t e c h n i c a l flaws.
Outside Factors Limit Success - The 1980 amendments t o t h e Federal
mortgage subsidy bond program; economic conditions, including declining
i n t e r e s t r a t e s and unemployment; and marketing problems a l l adversely
impacted the success of the 1982 MRB i s s u e s i n Arizona. V i r t u a l l y a l l
these f a c t o r s were beyond t h e Board's d i r e c t c o n t r o l .
Federal s t a t u t e s and U. S. Treasury pronouncements have affected t h e
success of t h e 1982 Arizona i s s u e s . Abuses of t h e MRB program i n t h e
1970s i n some s t a t e s led Congress t o pass l e g i s l a t i o n i n 1980 which
attempted t o r e s t r i c t t h i s program t o f i r s t - t i m e homebuyers of low and
moderate income. U. S. Treasury r e g u l a t i o n s which limited a r b i t r a g e * and
lowered l i m i t s on t h e purchase p r i c e s of houses a l s o had an impact on
recent bond programs. For a more d e t a i l e d discussion of these
r e s t r i c t i o n s and other inherent problems i n t h e Federal MRB program, see
page 31.
Economic f a c t o r s i n operation i n 1982 a l s o had a negative e f f e c t on t h e
success of the MRB i s s u e s . Although t h e 1982 i s s u e s had been judged t o be
a t t r a c t i v e i s s u e s because of low bond i n t e r e s t r a t e s achieved, a
subsequent f a l l i n competitive mortgage i n t e r e s t r a t e s following each
issuance precluded s u f f i c i e n t demand f o r mortgages. In f a c t , the Board
argues t h a t the d e c l i n e i n i n t e r e s t r a t e s accounts almost exclusively f o r
t h e lack of success of t h e 1982 i s s u e s . According t o t h e Board, the
v o l a t i l i t y of i n t e r e s t r a t e s reached unprecedented l e v e l s i n 1982.
U n c e r t a i n t i e s about employment and t h e economy i n 1982 and 1983 probably
have a l s o dampened mortgage demand.
Bond r a t e s generally a r e set a t a point i n time and do not change f o r the
l i f e of the bond i s s u e , whereas competitive market mortgage i n t e r e s t r a t e s
vary and cannot be predicted. The objective of pricing a bond i s s u e is t o
obtain the lowest marketable i n t e r e s t r a t e possible f o r the i s s u e r . This
p r i c e then e s t a b l i s h e s the mortgage r a t e . The success of t h e program,
such a s , making housing finance more affordable, depends on what happens
* According t o Black's Law Dictionary, a r b i t r a g e is defined a s :
" Transactions of bankers and mercantile houses by which
stocks o r b i l l s a r e bought i n one market and sold i n
another f o r the sake of t h e p r o f i t a r i s i n g from a
d i f f e r e n c e i n p r i c e i n t h e two markets."
t o other mortgage i n t e r e s t r a t e s following issuance of the bonds. I f t h e
spread between the MRB mortgate r a t e and competitive r a t e s , f o r example
FHA, is a t l e a s t 2 percent, buyers are supposed* t o be a t t r a c t e d t o the
program. If i n t e r e s t r a t e s r i s e the program becomes even more
a t t r a c t i v e . However, i f i n t e r e s t r a t e s f a l l a s they did following a l l
three 1982 issues, the issue becomes l e s s a t t r a c t i v e .
A t l e a s t one bond issue, the nonmetro issue, has also experienced
marketing problems which affected its success. L i t t l e advance marketing
was done with developers, many of whom did not commit t o the nonmetro bond
program because they did not understand the program's r e s t r i c t i o n s and
because commitment fees were too high.** In addition, l i t t l e marketing
was done with lenders who were also reluctant t o p a r t i c i p a t e because of
program r e s t r i c t i o n s and because servicing fees were too low. In
addition, once the bonds were sold, l i t t l e e f f o r t was made t o advertise
the program t o r e a l e s t a t e agents, developers and p o t e n t i a l homebuyers
u n t i l seven and one- half months i n t o the program. Few developers were
ready t o s e l l houses u n t i l three or four months i n t o t h e program.
Board Approved Proposals Despite Problems - The Board approved one 1982
MRB proposal despite t h e f a c t t h a t it was aware the f e a s i b i l i t y study
overestimated mortgage demand. A review by our consultant of the
f e a s i b i l i t y study f o r a second bond issue has a l s o pointed out serious
f a c t u a l and methodological problems which resulted i n an overstatement of
mortgage demand f o r t h i s issue as well.
The Housing Finance Review Board has s t a t u t o r y authority t o disapprove a
bond issue i f c e r t a i n c r i t e r i a are not m e t . A. R. S. $ 9- 1174.~. s p e l l s out
the Board's d u t i e s , which includes:
* See page 31. Federal r e s t r i c t i o n s , excessive processing time, e t c . ,
a l l have an impact on the program. Some lenders stated t h a t a 2
percent spread f o r the nonmetro issue may not overcome the problems
caused by program c o n s t r a i n t s and i n e f f e c t i v e marketing of the MRB
program. ** Developers were required t o pay a 3 percent commitment fee up front .
" C. The housing finance review board s h a l l meet t o
review general plans. . . . I n reviewing such plans
t h e housing finance review board s h a l l consider:
1. Whether t h e amount of the mortgage money
proposed t o be made a v a i l a b l e is reasonably r e l a t e d t o
the demand t h e r e f o r . "
In accordance with A. R. S. $ 9- 1174, Subsection E, t h e Board a l s o may allow
the bonds t o be issued by n o t t a k i n g any a c t i o n within 30 days a f t e r
r e c e i p t of t h e general plan.
The Board has u t i l i z e d a demand f e a s i b i l i t y study f o r each proposed i s s u e
as t h e document which purports t o show the l e v e l of demand f o r mortgages
from the proposed bond issue. The demand f e a s i b i l i t y study is not a l e g a l
requirement under e i t h e r Federal or S t a t e r e g u l a t i o n s but is usually
required t o obtain a bond r a t i n g . Standard and Poor's, a corporation
which r a t e s bonds, s t a t e d t h a t although they have no w r i t t e n c r i t e r i a of
what a f e a s i b i l i t y study should include, it looks f o r general i n d i c a t o r s
of housing a c t i v i t y .
Problems with Pima/ Tucso* n Issue - OEPAD's economic research s t a f f reviewed
the f e a s i b i l i t y study f o r the Pima/ Tucson bond proposal, pointing out
s e v e r a l s e r i o u s problems. In a memorandum t o t h e Board dated May 27,
1982, regarding the proposed Pima/ Tucson i s s u e , OEPAD' s chief of economic
research s t a t e d :
" 1. In i t s review of economic conditions, the report
makes no mention of current economic d i f f i c u l t i e s
facing Pima County. In p a r t i c u l a r , t h e copper
industry is i n i t s most severe downturn of the
post- World War I1 period. . . .
" 2. Although a complete check of a l l data used i n the
report has not been made, at l e a s t one serious
e r r o r has been found. Table 9 lists 137,249
households i n Tucson i n 1980. There were only
125,266 households. . . .
" 3. The most serious problems with t h e report .
an attempt is made t o estimate t h e incomes of
r e n t e r s i n Tucson and Pima County. No d e t a i l s on
methodology a r e given and the sources l i s t e d do
not contain t h e income d a t a shown per se. . . ."
OEPAD as the Board's s t a f f , concluded t h a t although the f e a s i b i l i t y study
i d e n t i f i e d over 70,000 e l i g i b l e households, the demand was greatly
overstated :
" Since the e l i g i b l e households w i l l be r e s t r i c t e d t o
those not having owned a home within three years, the
approximately 1,000 housing u n i t s t o be financed with
the bond issue could s u b s t a n t i a l l y exhaust the
available market."
Although both individual Board members and the Board's s t a f f challenged
the v a l i d i t y of the demand study, the Board did not act on t h i s
information. In its letters t o the IDAs of Pima County and the City of
Tucson, the Board s t a t e d :
" While the Board has approved the Pima County/ City of
Tucson issue a t the $ 50,875,000 level requested, we
believe t h i s may be high f o r the following reasons:
". . . Although the issue has been f u l l y subscribed t o
by participating builders, the market f e a s i b i l i t y study
prepared by ( a p r i v a t e firm) presents inconclusive
evidence a s t o the magnitude of housing demand given
r e s t r i c t i v e federal qualifying regulations ( especially
t h e new homeowner requirement); and
I, . In the event builder a l l o c a t i o n s a r e not f u l l y
u t i l i z e d , it is a l s o inconclusive a s t o whether the
existing housing market could e f f e c t i v e l y absorb t h i s
program funding given the same r e s t r i c t i v e federal
regulations."
In discussing why t h i s issue was approved, Board members told us the Board
is reluctant t o disapprove an issue because 1) even i f the MRBs only
r e s u l t i n few mortgage purchases, it s t i l l helps some homebu~ ers, and 2)
the only people whose money is a t r i s k a r e sophisticated developers who
understand the risk.* However, i f the Board intends t o approve a l l
proposals despite reservations about t h e i r possible success, then the
purpose and value of its IDA proposal review function is open t o question
and may be unnecessary.
* Developers and lenders bear much of the cost of an unsuccessful MRB
i s s u e . I f bonds are recalled, developers and lenders f o r f e i t some or
a l l of t h e i r 3 percent commitment fee depending upon the amount of
unsold mortgages.
Nonmetro Study Overstated Demand - The Board's f e a s i b i l i t y study of i t s
own nonmetro bond proposal a l s o contained s e r i o u s t e c h n i c a l problems. We
contracted with an independent f i n a n c i a l consultant t o review t h e nonmetro
f e a s i b i l i t y study.* He s t a t e d t h a t t h e f e a s i b i l i t y study contained
serious problems i n methodology and its conclusions o v e r s t a t e demand f o r
mortgages under t h i s program. Some of h i s concerns were a s follows:
Many of t h e assumptions e i t h e r could have been challenged or
should have been more c a r e f u l l y checked.
Technical e r r o r s were found of a computational nature.
The report u t i l i z e d t h e format f o r a metropolitan study instead
of one f o r a nonhomogeneous region of 12 " mini- states."
Neither t h e people preparing t h e study nor t h e Board i t s e l f
interviewed enough people t o obtain adequate information about
t h e housing finance market i n t h e nonmetro area. In a d d i t i o n ,
when Board s t a f f interviewed homebuilders i n October 1982, t h e
r e s u l t s of the survey were e i t h e r not relayed t o the Board or
were disregarded by it.
Four other t e c h n i c a l problems with the f e a s i b i l i t y study a r e d e t a i l e d
below.
High Vacancy Rates and A l t e r n a t i v e Housing Costs - Our consultant
s t a t e d t h a t t h e f e a s i b i l i t y study did not adequately address r e n t a l
housing :
" The a v a i l a b i l i t y of r e n t a l accommodations and t h e i r
q u a l i t y and p r i c e l e v e l s must be considered i n a major
way i n any evaluation of t h i s type."
The consultant noted t h a t the study used a " more- than- average" vacancy
r a t e i n s i n g l e family housing, namely 14.9 percent versus an average
* See Appendix f o r c o n s u l t a n t ' s report and resume.
18
r a t e of 5 percent. The study reported an average monthly rent of
$ 162.50 f o r occupied dwellings i n t h e nonmetro area. When one
compares the average rent t o t h e average monthly mortgage payment
under t h i s program, t h e mortgage payment is a t l e a s t two and one- half
t i m e s the average r e n t . Multiplying the 168,614 s i n g l e family u n i t s
by t h e vacancy r a t e of 14.9 percent produces over 25,000 vacant
s i n g l e family dwellings i n t h e nonmetro area. Our consultant went on
t o say:
" This is a s t a r t l i n g s t a t i s t i c when compared t o r e n t a l
p r i c e s , on the average, and average house purchase
p r i c e s and payments as noted above. In summary, t h i s
p o i n t s out t h a t i f housing a l t e r n a t i v e s a r e roughly
equal, why not rent f o r a smaller monthly outflow
versus a higher purchasing p r i c e payment which would
weld a f f i l i a t i o n t o an area where employment
p o s s i b i l i t i e s might not be a s t o c r e a t e i n t e r e s t i n
buying by a l l family u n i t s q u a l i f i e d ? "
Employment and Unemployment S t a t i s t i c s - The consultant stated t h a t
the nature of employment growth is important t o an assessment of
mortgage demand i n the area. He noted t h a t information on
unemployment, t h e v a r i a t i o n i n unemployment r a t e s among counties and
the psychological e f f e c t of unemployment r a t e s on homebuy e r decisions
a r e necessary and a p p r o p r i a t e c o n s i d e r a t i o n s i n assessing mortgage
demand. This was not done, however, i n t h e f e a s i b i l i t y study.
New Residents Not P o t e n t i a l MRB Homebuyers - The consultant c r i t i c i z e d
the assumption made by the demand study t h a t a l l i n d i v i d u a l s
in- migrating t o Arizona would be p o t e n t i a l homebuyers under t h e
program. Most of the in- migration i n t o the nonmetro area is not
employment- related i n the nonmetro counties. These people a r e r e t i r e d
and would not q u a l i f y f o r the program because they probably have owned
a home i n t h e l a s t t h r e e years.
Income S t a t i s t i c s too Old - The consultant a l s o noted t h a t some d a t a
used i n t h e study was outdated. Information on income l e v e l s was
developed from 1979 income s t a t i s t i c s . He concluded:
". . . here is a c r i t i c a l s e r i e s on income over 22
months old a t the t i m e of issuance of t h e bonds, t h i s
preceding span containing t h e most severe recession
nationwide since the l a t e 1920' s. In summary, the
p a s t , present and a n t i c i p a t e d f u t u r e income of
prospective home buyers is a major element i n t h e
a p p r a i s a l of housing demand and considering t h e past
deep recession t h i s s e r i e s of numbers should have been
updated i n some way. "
Changes Are Needed t o
Provide f o r Effective Review
I f t h e Housing Finance Review Board is continued, changes a r e needed t o
make t h e Board ' s review of bond proposals more meaningful and e f f e c t i v e .
The Board needs: 1 ) a u t h o r i t y t o specify t h e d e t a i l and format of
information included i n f e a s i b i l i t y s t u d i e s , 2) s t a f f i n g , and 3) more time
t o evaluate s t u d i e s submitted f o r review.
Guidelines f o r Studies - Currently the Board does not specify the format
and type of information t o be provided i n f e a s i b i l i t y s t u d i e s submitted
f o r review. The Board needs r u l e making a u t h o r i t y t o specify such
requirements f o r IDAs.
To review bond proposals e f f e c t i v e l y , t h e Board needs t o specify
information t o be included i n f e a s i b i l i t y s t u d i e s . As noted e a r l i e r , the
Board r e l i e s primarily on f e a s i b i l i t y s t u d i e s t o a s s e s s the need f o r
housing and t h e demand f o r proposed mortgage financing . Without
s u f f i c i e n t information presented i n proper format, however, t h e Board
cannot provide an adequate assessment.
The Board needs rule- making a u t h o r i t y t o specify the d e t a i l and format of
information t o be included i n f e a s i b i l i t y s t u d i e s submitted by IDAs.
Board s t a t u t e s o u t l i n e broad c r i t e r i a governing general plans submitted t o
t h e Board, but do not allow the Board t o require a d d i t i o n a l d e t a i l nor t o
specify what must be included i n f e a s i b i l i t y studies." In an informal
opinion, Legislative Council s t a f f stated t h a t t h e Board needs specific
rule- making authority t o require additional d e t a i l i n general plans or t o
specify the c r i t e r i a which should be addressed i n f e a s i b i l i t y studies
submitted f o r review.' According t o Legislative Council, however, the
Board does not need any additional s t a t u t o r y authority t o specify
information and e s t a b l i s h guidelines governing f e a s i b i l i t y studies of its
own issues.
Staffing f o r the Board - To provide e f f e c t i v e review, the Board a l s o needs
s t a f f . The Audit or General's consultant stated :
". . . it is suggested t h a t a Financial Analyst be
retained by the Housing Review Board to e i t h e r
impartially evaluate d r a f t documents or generate
i n t e r n a l l y such foundation a s would g i v e t h e Board more
appropriate d i r e c t i o n a l material f o r analysis."
The Board acknowledges its need f o r s t a f f . Senate B i l l 1238 supported by
the Board i n 1982 would have granted the Board authority t o h i r e f i n a n c i a l
consultants and t o conduct studies necessary t o carry out its functions.
This provision of the B i l l , however, was not enacted.
* A. R. S. $ 9- 1174, Subsection B s t a t e s :
The general plan s h a l l b r i e f l y describe:
The amount of the proposed bonds.
The maximum term of the bonds.
The maximum i n t e r e s t r a t e on the bonds.
The need f o r the bond issue.
The terms and conditions f o r originating or
purchasing mortgage loans or making loans t o
lenders.
The area i n which the single family dwelling
units t o be financed may be located.
The proposed fees, charges and expenditures t o
be paid f o r originators, s e r v i c e r s , t r u s t e e s ,
custodians, mortgage administrators and others.
A l l insurance requirements with respect t o
mortgage loans, mortgaged property, mortgagors,
o r i g i n a t o r s , s e r v i c e r s and t r u s t e e s .
The anticipated date of issuance of the bonds."
OEPAD estimates t h a t t h e Board needs approximately $ 15,000 annually t o
h i r e independent experts t o evaluate MRB plans and proposals. This
estimate assumes t h a t t h e Board reviews t h r e e proposals per year a t a cost
of $ 5,000 per review and does not include OEPAD1s s t a f f i n g c o s t s . If
experts a r e a l s o needed t o develop guidelines governing f e a s i b i l i t y
s t u d i e s , a d d i t i o n a l cost s would be incurred.
The Board would need an appropriation from t h e L e g i s l a t u r e f o r s t a f f
because it does not have a source of funds which is not contingent on the
s a l e of bonds. Currently, the Board does not have a n o p e r a t i n g budget,
however, it can charge IDAs f o r review of bond proposals. A. R. S. § 9- 1174,
Subsection G s t a t e s :
" The housing finance review board may charge any
corporation submitting a general plan f o r review a f e e
not t o exceed t h r e e thousand d o l l a r s and payable solely
from bond proceeds t o reimburse t h e board f o r its
expenses i n reviewing the general plan."
Fees can be assessed, h'owever, only i f bonds a r e issued. Thus, experts
hired by t h e Board t o provide independent a n a l y s i s cannot be paid with
these funds unless the bond proposals a r e approved.
The Board has not used IDA funds t o evaluate demand f e a s i b i l i t y s t u d i e s .
The Board has c o l l e c t e d $ 6,000 from IDAs. As of September 8, 1983, $ 4,000
of these funds have been paid out f o r review of bond i s s u e fees. As a
r e s u l t of these reviews, the Board has reduced some of the bond f e e s ,
thereby lowering the cost of issuance. OEPAD s t a f f estimate t h a t
approximately $ 80,000 i n c o s t s were saved on the 1982 ~ h o e n i x / ~ a r i c o ~ a
County i s s u e and approximately $ 255,000 on t h e 1982 ~ ucson/ Pima County
i s s u e .
Demand Study too Late - The demand f e a s i b i l i t y study is received too l a t e
i n the review process t o be u s e f u l . By the time the study has been sent
t o t h e Board, t h e i s s u e has been f u l l y s t r u c t u r e d , and reviewed and
approved by t h e l o c a l IDAs. Bond counsel, underwriters and f i n a n c i a l
consultants, whose pay is contingent on approval of the issues, have a l l
completed t h e i r work. Tentative commitments from developers and lenders
may also have been obtained. Board members stated t h a t , because the
f e a s i b i l i t y study is submitted so l a t e i n the process, they do not have
enough time t o review the study and do not have authority t o make changes
i n the proposed issue. Board members stated t h a t t h e Board also needs
more t i m e t o consider changes t o the general plan which is submitted t o
the Board e a r l i e r i n the review process.
CONCLUSION
The Housing Finance Review Board has not provided adequate review of
mortgage revenue bond proposals. The Board has approved bond proposals
even though f e a s i b i l i t y studies submitted t o the Board overestimated
mortgage demand and contained other flaws. Changes are needed t o provide
f o r e f f e c t i v e bond proposal review.
RECOMMENDAT IONS
1. The Legislature should consider: a) funding the Board's a c t i v i t i e s
so t h a t the Board can h i r e its own independent housing finance expert
t o evaluate the demand f o r mortgages and b) granting the Board
rule- making authority f o r its MRB review a c t i v i t i e s .
2. The Board should: a) reevaluate its r o l e i n reviewing IDA bond
proposals and b) set up guidelines t o be followed i n the development
of the general plan and f e a s i b i l i t y s t u d i e s f o r t h e Board's bond
issues.
FINDING I1
BOARD MINUTES DO NOT CONFORM TO OPEN MEETING LAW REQUIREMENTS.
The Housing Finance Review Board is not i n compliance with the Open
Meeting Law, thus exposing the Board ' s decisions t o l e g a l challenge.
Board minutes a r e not complete, nor are they generally available t o the
public. Moreover, prior t o our audit the Board did not maintain c o n f l i c t
of i n t e r e s t disclosure statements i n a separate f i l e a s required by law.
Open Meeting Law
The Board has not maintained minutes of a l l of its meetings a s required by
the Open Meeting Law. Further, available tape recordings of some meetings
do not meet a l l statutory requirements. Although the Board was advised by
private counsel t o keep w r i t t e n minutes, it has not done so.*
A. R. S. $ 38- 431.01, Subsection B requires the Housing Finance Review Board
t o maintain written minutes or a recording of its meetings:
" A l l public bodies, except f o r subcommittees and
advisory committees, s h a l l provide f o r the taking of
written minutes or a recording of a l l t h e i r meetings,
including executive session. . . ."
The s t a t u t e f u r t h e r s t a t e s t h a t minutes must contain c e r t a i n information:
". . . such minutes or recording s h a l l include but not
be limited to:
1. The date, time and place of the meeting.
2. The members of the public body recorded as e i t h e r
present or absent.
3. A general description of the matters considered.
* The Board does not have an assigned Attorney General representative,
although it has, on occasion, requested advice on other matters, such
a s the use of IDA fees.
4. An accurate description of a l l l e g a l actions
proposed, discussed or taken, and t h e names of
members who propose each motion. The minutes s h a l l
also include the names of the persons, as given,
making statements or presenting material t o the
public body and a reference t o t h e l e g a l action
about which they made statements or presented
material . "
No Minutes - The Board has not maintained w r i t t e n minutes or a recording
of one- third of its meetings. The Board met 32 times from its inception
i n 1979 through May 18, 1983." There are n e i t h e r w r i t t e n minutes nor
tapes available f o r 11 of these meetings. The recording of its meeting of
September 9, 1982, moreover, is useless because it is inaudible.
According t o the written agenda t h i s meeting should have been an important
one because the Board planned t o discuss f a c t o r s c r i t i c a l t o its proposed
nonmetro bond issue.
Taped Minutes A r e Incomplete - Tape recordings which are available do not
s a t i s f y a l l s t a t u t o r y requirements. A review of 14 hours of Board tapes
disclosed t h a t the tapes do not include a l l required information. The
date, t i m e and place of the meeting is not always s t a t e d . Generally,
neither Board members who make motions o r d i s c u s s i s s u e s nor interested
p a r t i e s who address the Board a r e i d e n t i f i e d .
Tape recordings of Board meetings, furthermore, are not r e a d i l y a v a i l a b l e
t o the public. A. R. S. 538- 431.01, Subsection D s t a t e s that minutes of
regular sessions s h a l l be available f o r public inspection three working
days a f t e r the meeting. However, we found t h a t the public may be
discouraged from inspecting such tapes because a tape recorder may not be
available. The Board does not own its own equipment and must rely on a
borrowed recorder. OEPAD s t a f f suggested that a recorder be requested one
day i n advance of inspecting the tapes.
* There is no evidence t h a t any of these meetings were canceled.
Counsel Advised Board t o Keep Written Minutes - Although the Board's l e g a l
counsel f o r the nonmetro mortgage revenue bond i s s u e advised t h e Board t o
keep w r i t t e n minutes of its d e l i b e r a t i o n s , it has not taken h i s advice.
Counsel, i n a w r i t t e n memorandum dated September 13, 1982, informed Board
members of t h e s t a t u t o r y requirements of t h e Open Meeting Law. Counsel
added the following advice on t h e keeping of minutes:
" In view of t h e harsh p e n a l t i e s f o r v i o l a t i o n s of the
Open Meeting Law, the precise l e g a l requirements of
housing bond issuances and the d i f f i c u l t y i n dealing
with tape recorded " minutes", it is our recommendation
t h a t the Board keep c e r t a i n w r i t t e n records of i t s
proceedings. . . . The Clerk of the Board should
prepare w r i t t e n minutes of each meeting. . . . The
minutes of each meeting should be f i l e d with the n o t i c e
records, chronologically, i n a convenient fashion ( such
a s a loose leaf notebook or binder) and a v a i l a b l e f o r
inspection by the general public. If the Board
continues t o tape its sessions, the tapes should a l s o
be a v a i l a b l e t o t h e g e n e r a l p u b l i c f o r inspection."
However, the Board has not acted on t h i s advice. Lacking full- time s t a f f
support, the Board sought t o minimize t h e work load f o r OEPAD s t a f f .
Noncompliance with Open Meeting Law minute- keeping requirements leaves t h e
Board vulnerable t o l e g a l challenge. A. R. S. 938- 431.05 provides t h a t
l e g a l actions taken i n v i o l a t i o n of the law a r e n u l l and void and must be
r a t i f i e d i n a subsequent public meeting. In a d d i t i o n , t h e Board can be
sued and c i v i l p e n a l t i e s assessed i n accordance with A. R. S. $ 38- 431.07,
Subsection A.
Conflict of I n t e r e s t Law
Prior t o our audit the Board was not i n compliance with the conflict of
i n t e r e s t law because it did not maintain a special f i l e of conflict of
i n t e r e s t disclosures. In addition, the Board's use of tape recordings t o
disclose con£ l i c t s of i n t e r e s t may not s a t i s f y l e g a l requirements. To
assist i n resolving these problems, an Attorney General representative
should be assigned t o the Board.
A. R. S. 538- 509 requires the following disclosure of s u b s t a n t i a l i n t e r e s t :
" Every p o l i t i c a l subdivision and public agency subject
t o t h i s a r t i c l e s h a l l maintain f o r public inspection i n
a special f i l e a l l documents necessary t o memorialize
a l l disclosures of s u b s t a n t i a l i n t e r e s t made known
pursuant t o t h i s a r t i c l e . "
According t o the Attorney General' s Off ice, Arizona con£ l i c t of i n t e r e s t
s t a t u t e s are broadly written and s u b s t a n t i a l c i v i l and criminal penalties
are provided for noncompliance.
Prior Conflict Not i n Separate File - Although a t l e a s t one Board member
has declared a c o n f l i c t , it was not i n writing and not maintained i n a
separate f i l e . The Board chairman declared a c o n f l i c t i n the tapes of the
May 18, 1983, meeting.
When we brought t h i s matter t o the Board's a t t e n t i o n on July 25, 1983, a
written disclosure of the c o n f l i c t mentioned above was received by OEPAD
and is now maintained i n Board records.
Tapes May Not Satisfy Requirements of the Law - klthough a t least one
conflict has been declared i n the tapes, and a tape recording may serve as
" minutes," t h e s t a t u t e s a r e not c l e a r whether a tape recording of the
e n t i r e board meeting could s u b s t i t u t e f o r a written disclosure. The
Legislative Council stated i n a memorandum dated July 23, 1983:
" It is l e s s c l e a r whether placing a tape recording i n
such a special f i l e is a violation of t h e c o n f l i c t of
i n t e r e s t laws. A. R. S. $ 38- 503, subsection A, paragraph
3 requires disclosure statements t o be made by means of
a signed paper or contained within a copy of the
agency's o f f i c i a l minutes which f u l l y describes the
c o n f l i c t . For purposes of Arizona's " open meeting law"
( A. R. S. t i t l e 41, chapter 3, a r t i c l e 3.1) a tape
recording may be s u b s t i t u t e d f o r minutes of meetings.
Such a recording would be an " o f f i c i a l record" of the
agency. Arguably, f o r purposes of t h e c o n f l i c t of
i n t e r e s t laws, a recording could similarly be
substituted f o r written minutes. The c o n f l i c t of
i n t e r e s t s t a t u t e s a r e s i l e n t i n t h i s regard. You may
wish t o recommend l e g i s l a t i o n t o c l a r i f y t h i s
ambiguity. "
There appears t o be a p r a c t i c a l problem i n allowing the tapes t o serve a s
both the " minutes" and t h e d i s c l o s u r e of c o n f l i c t of i n t e r e s t . Since many
of the Board's meetings run f o r two t o three hours, the disclosure would
be d i f f i c u l t t o find on the tapes.
Assigning an Attorney General representative t o the Board would aid i n
resolving the Board's l e g a l problems. The Housing Finance Review Board
does not have the benefit of on- going legal advice a s do most other State
agencies and boards. Therefore, the Board may not be f u l l y aware of a l l
its s t a t u t o r y requirements.
CONCLUSION
The Housing Finance Review Board is not i n compliance with the Open
Meeting Law i n that 1) n e i t h e r w r i t t e n nor taped " minutes" are available
f o r many of its meetings, 2) the taped " minutes" are incomplete because
persons making motions o r t e s t i f y i n g before the Board a r e not adequately
i d e n t i f i e d , and 3) the taped " minutes" are not r e a d i l y a c c e s s i b l e t o the
public. In addition, the Board did not maintain a separate f i l e of
c o n f l i c t of i n t e r e s t statements prior t o our audit. Assignment of an
Attorney General representative t o the Board would help i n resolving these
problems.
RECOMMENDATIONS
1. The Board should e i t h e r keep 1) complete written minutes of a l l of
its meetings i n accordance with A. R. S. $ 38- 431.01 or 2) taped
minutes i n a manner t h a t meets a l l legal requirements.
2. The Board should request t h a t a n Attorney General representative be
assigned t o review with the Board the procedures it should follow
regarding c o n f l i c t of i n t e r e s t , Open Meeting Law and other l e g a l
requirements.
3. The Legislature may wish t o c l a r i f y whether or not tape recordings
may s u b s t i t u t e f o r w r i t t e n c o n f l i c t of i n t e r e s t disclosures.
OTHER PERTINENT INFORMATION
PROBLEMS INHERENT I N THE FEDERAL MORTGAGE REVENUE BOND PROGRAM.
Several problems inherent i n the Mortgage Revenue Bond Program l i m i t i t s
effectiveness as a means of providing affordable housing f o r low and
moderate income families. Recent Federal r e s t r i c t ions make the program
l e s s a t t r a c t i v e and more d i f f i c u l t t o market i n comparison t o other
mortgage programs. At the national l e v e l , moreover, the program is being
questioned because it is inequitable and c o s t l y . The U. S. General
Accounting Off i c e suggests t h a t a l t e r n a t i v e approaches may offer a more
cost- effective method of providing low and moderate income housing.
Federal R e s t r i c t i o n s
The 1980 Mortgage Subsidy Bond Act and recent Federal regulations imposed
r e s t r i c t i o n s on the Mortgage Revenue Bond Program which have reduced its
a t t r a c t i v e n e s s t o homebuyers, developers and lenders. For example, s t r i c t
l i m i t s placed on program e l i g i b i l i t y and home purchase prices have
adversely impacted the program. Other requirements and r e s t r i c t i o n s
imposed on developers and lenders have made the program d i f f i c u l t t o
market and l e s s competitive with other mortgage finance programs.
E l i g i b i l i t y - S t r i c t Federal provisions l i m i t who may qualify f o r the
Mortgage Revenue Bond Program. A person generally cannot qualify f o r the
program i f he has owned a residence within the past three years. Thus,
individuals who move t o Arizona t o r e t i r e or t o take a new job would not
be e l i g i b l e f o r an MRB loan, despite t h e i r income l e v e l s , i f they have
owned homes elsewhere within the past three years. Yet, much of Arizona's
population growth and housing need comes from the in- migrat ion of r e t i r e e s
and new employees.
Proving e l i g i b i l i t y f o r t h e MRB program, furthermore, can be more
d i f f i c u l t than proving e l i g i b i l i t y f o r other mortgage loan programs. The
applicant f o r an MRB loan must f u r n i s h a copy of h i s Federal tax r e t u r n
for the past t h r e e years. Other loan programs only require two years' tax
r e t u r n s . According t o l e n d e r s , low- income a p p l i c a n t s frequently do not
have copies of a l l necessary t a x returns. The I n t e r n a l Revenue Service
takes about s i x weeks t o send copies of returns which is o f t e n too long t o
wait on a real e s t a t e t r a n s a c t i o n .
Purchase Price Limits - I n December 1982, t h e U. S. Treasury Department
announced a reduction i n t h e maximum purchase p r i c e of MRB homes which
a l s o impacted the nonmetro program adversely. Although t h e Board took
a c t i o n t o attempt t o r a i s e t h e p r i c e l i m i t s , p r i c e l i m i t s could not be
r a i s e d i n some counties.
Purchase p r i c e l i m i t s a r e developed through a sampling procedure which
estimates t h e average p r i c e of homes i n a given area. Actual price l i m i t s
a r e s e t a t 110 percent of t h e average prices. In December 1982, the
Treasury Department decreased its estimates of t h e average p r i c e s of homes
i n Arizona. For nonmetro Arizona, new house p r i c e l i m i t s f e l l from
approximately $ 84,000 t o $ 54,000 as a r e s u l t of the Treasury's
announcement .
To address t h i s problem, the Board met with members of Arizona's
Congressional delegation and hired a consultant t o review the average
p r i c e of homes i n t h e nonmetro counties. The r e s u l t s of t h e study were
h e l p f u l i n r a i s i n g the purchase p r i c e l i m i t s i n most of the counties,
although t h e l i m i t s were s t i l l s u b s t a n t i a l l y below 1982 l i m i t s a t t h e
inception of t h e program.
A few counties, however, were not helped by t h e Board's study. One of
these was P i n a l County, which was t o receive 29 percent of the bond
funds. The data base f o r Pinal County supported the U. S. Treasury new
home p r i c e l i m i t of $ 54,000. At l e a s t one developer has suffered
f i n a n c i a l l y from the changes i n t h e p r i c e l i m i t s . When the l i m i t had been
i n t h e $ 80,000s, the developer paid h i s commitment f e e s and planned t o
s e l l new houses i n t h e mid $ 60,000~. Since t h e change i n l i m i t s , he has
had t o lower h i s price.
Program Not A t t r a c t i v e - Other requirements and r e s t r i c t i o n s make the MRB
program l e s s a t t r a c t i v e t o developers and lenders compared t o other
mortgage loan programs. To p a r t i c i p a t e i n t h e program, lenders and
developers must pay up f r o n t a r e l a t i v e l y high commitment f e e of 3
percent. Commitment f e e s a r e high p a r t l y because a r b i t rage, t y p i c a l l y
used t o cover t h e expenses of the program, is limited. The program is
a l s o u n a t t r a c t i v e because f e e s paid f o r servicing mortgages a r e r e l a t i v e l y
low, mortgages a r e funded only twice monthly and i n t e r e s t r a t e s a r e
determined by the bond r a t e . In a period of r i s i n g i n t e r e s t r a t e s , the
i s s u e r would not be able t o r a i s e t h e mortgage r a t e . Because the program
is l e s s a t t r a c t i v e t o developers and lenders, it has been d i f f i c u l t t o
market as noted i n Finding I, page 15.
Program Under Question Nationally
At the national l e v e l , the Mortgage Revenue Bond Program is being
questioned. U. S. General Accounting Off i c e s t u d i e s have found t h e
program's r i g i d loan s t r u c t u r e and requirements a r e not responsive t o
d i f f e r e n c e s i n income levels." Thus, higher income program p a r t i c i p a n t s
receive a g r e a t e r subsidy than lower income p a r t i c i p a n t s . The program is
a l s o very c o s t l y i n comparison t o a l t e r n a t i v e s .
* We reviewed GAO's preliminary report t o Congress dated April 18, 1983;
a r e b u t t a l t o t h a t report by the Council of S t a t e Housing Agencies
dated May 12, 1983; and the subsequent GAO testimony before Congress
on June 15, 1983. In a d d i t i o n , we discussed the Council's r e b u t t a l
with GAO o f f i c i a l s . After reviewing the Council's r e b u t t a l , GAO
r e t a i n s its p o s i t i o n t h a t t h e r e a r e inherent flaws i n the Federal MRB
program.
Lack F l e x i b i l i t y - The MRB program's rigid loan s t r u c t u r e and requirements
are not responsive t o differences i n family circumstances, income l e v e l s
and changes i n income over t i m e . Long- term mortgages a r e granted based on
a person's income a t a point i n time and the mortgage i n t e r e s t r a t e s are
determined by bond r a t e s . Recipients of the subsidy are selected on a
first- come, f i r s t - s e r v e basis, not upon f i n a n c i a l needs. The following
hypothetical cases i l l u s t r a t e the lack of f l e x i b i l i t y of PIRBs.
Case I
Family A with no children has an income of $ 27,589, the maximum t o
qualify f o r a low- interest mortgage." Family B with 4 children and an
income of $ 27,600 is not e l i g i b l e f o r the program. It must go t o an
a l t e r n a t i v e loan program such a s FHA and probably pay a t l e a s t one and
one- half percent more i n i n t e r e s t even though Family B ' s f i n a n c i a l
need may be g r e a t e r than Family A ' s .
Case I1
Family C consists of a recent professional graduate with spouse still
i n school. They qualify f o r a subsidized loan with an income of
$ 25,000. In the following year, the young professional receives a
$ 3,000 r a i s e and his spouse has an entry- level position which pays 0
$ 17,000. Thus i n one year's time, the family income has nearly
doubled-- to $ 45,000-- yet t h i s family w i l l continue t o benefit from the
subsidized i n t e r e s t r a t e f o r the l i f e of the mortgage.
* The s t a t e s , not the Federal government, set income l e v e l s f o r the MRB
program. Arizona's upper income l i m i t is determined ( by A. R. S.
59- 1151) by multiplying the Arizona median income by 115%, which under
the MRB program is $ 27,589. Arizona does not have a sliding scale f o r
s i z e of family, although some s t a t e s do.
Case I11
Family D c o n s i s t s of a family which has never owned a home before but
t h e family has a s s e t s i n a savings account i n the amount of $ 20,000.
Because the family's t o t a l income does not exceed $ 27,589, it is
e l i g i b l e f o r a subsidized mortgage loan.
Program Is Inequitable - Because a l l homebuyers receive the same
f ixed- rate mortgage under t h e MRB program, higher income p a r t i c i p a n t s
receive a g r e a t e r subsidy than lower income p a r t i c i p a n t s . Table 3 from
the U. S. General Accounting Off i c e ( GAO) testimony before Congress
i l l u s t r a t e s t h e inequity i n t h e s i z e of t h e subsidy. The average monthly
subsidy or benefit increases a s one's income and s i z e of loan increases.
For example, a person qualifying f o r a $ 29,000 mortgage w i l l receive a
subsidy of $ 33 a month whereas someone who may qualify f o r a $ 53,000
mortgage w i l l be subsized at almost twice t h i s l e v e l .
TABLE 3
AVERAGE COST AND SUBSIDY PER
MRB LOAN BY INCOME GROUP
D i s t r i b u t i o n D i s t r i b u t i o n Average Average Average
Income Group of Funds Lent of Loans Made Mortgage Cost Per Monthly
($ 000) ( Percent ) ( Percent ) Amount Loan MRB Subsidy
Over 50
Total
Source: Results of a U. S. General Accounting Office survey of MRB loan a c t i v i t y
( 20,000 loans) i n 40 j u r i s d i c t i o n s i n t h e 6 months between 12/ 81 and 7/ 82.
The cost t o t h e U. S. Treasury a l s o increases with t h e s i z e of the loan.
To the extent t h a t people with higher incomes a r e buying more expensive
homes and obtaining l a r g e r loans, it w i l l cost t h e Federal Treasury more
t o subsidize those loans.
Mort gage Revenue Bond Program Costly - Compared t o a l t e r n a t i v e s such as
t h e proposed tax c r e d i t , the MRB program is very c o s t l y f o r Federal
taxpayers. Most of t h e b e n e f i t s of the MRB program are d i s t r i b u t e d t o
people i n the upper income brackets. The GAO has constructed a p r o f i l e of
t h e b e n e f i c i a r i e s of mortgage revenue bonds.* The GAO report t o
Congress** s t a t e d :
" Based upon 1982 s t a t i s t i c s , we believe t h a t t h e
l a r g e s t share . . . of t h e c o s t s of mortgage revenue
bonds went t o benefit high- income bond purchasers, bond
underwriters, lawyers and o t h e r i n t e r m e d i a r i e s r a t h e r
than t o homebuyers. In c o n t r a s t , providing t h e same
households with the same a s s i s t a n c e they received i n
1982, but using a more e f f i c i e n t subsidy such as a tax
c r e d i t , could have reduced the proportion of subsidy
l o s t t o deTivery expenses t o l e s s than 6 percent
leaving 94 pert ent t d benefit homebuy ers. " ( emphasis
added)
The GAO report concluded t h a t a l a r g e share of b e n e f i t s from the MRB
program accrues t o bondholders i n upper income brackets. To the extent
t h a t other Federal taxpayers, including those of low and moderate income,
a r e paying the expenses of running the government, bondholders a r e
b e n e f i t t i n g a t t h e i r expense. Another l a r g e group of b e n e f i c i a r i e s a r e
t h e bond underwriters, lawyers and f i n a n c i a l consultant s.
* The b e n e f i c i a r i e s include a l l those who benefit f i n a n c i a l l y from the
MRB program. B e n e f i t s i n c l u d e income and tax b e n e f i t s a s well a s the
mortgage i n t e r e s t subsidy.
** The U. S. House Ways and Means Committee requested GAO t o perform a
c o s t benefit a n a l y s i s of the MRB program and a l t e r n a t i v e programs
which could be used t o subsidize the mortgage payment f o r low- and
moderate- income f a m i l i e s . I n a p r i o r study, GAO had measured the
b e n e f i t s of the MRB program on t h e home building industry.
A l t e r n a t i v e Programs May
Be More Cost Effective
According t o the GAO, a l t e r n a t i v e s t o t h e mortgage bond program may o f f e r
a more cost e f f e c t i v e method of providing affordable housing t o low and
moderate income families. At t h e Federal l e v e l a t a x c r e d i t program is
being considered as an a l t e r n a t i v e t o MRBs. S t a t e and l o c a l e n t i t i e s a r e
a l s o considering other ways of financing housing programs and a t t r a c t i n g
mortgage c a p i t a l .
/
Tax Credits - SB 1598, introduced i n t h e United S t a t e s Senate i n July
1983, would provide a new option t o s t a t e and l o c a l e n t i t i e s which now
i s s u e mortgage revenue bonds. The issuing a u t h o r i t y could decide not t o
i s s u e some or a l l of the mortgage revenue bonds authorized by the I n t e r n a l
Revenue Code. I n s t e a d , t h e s t a t e s could e l e c t t o i s s u e mortgage c r e d i t
c e r t i f i c a t e s d i r e c t l y t o homebuyers. The c e r t i f i c a t e s would enable
homebuy e r s t o " buy down" conventional mortgage i n t e r e s t r a t e s by claiming
a tax c r e d i t equal t o a s p e c i f i e d percentage of t h e i n t e r e s t paid on a
home mortgage. The t a x c r e d i t option would not l i m i t a n a u t h o r i t y ' s
a b i l i t y t o i s s u e taxable bonds t o r a i s e mortgage c a p i t a l . Mortgage c r e d i t
c e r t i f i c a t e s could be u t i l i z e d i n conjunction w i t h t a x a b l e mortgage bonds
f o r t h i s purpose, and proceeds could then be l e n t t o homebuyers a s
c u r r e n t l y done under t h e MRB program. This approach, however, would be
l e s s c o s t l y t o t h e Federal Treasury.
Advantages of Tax Credit Over MRBs - The proposed Federal t a x c r e d i t
program has several advantages over MRBs. The t a x c r e d i t is more f l e x i b l e
than t h e Mortgage Revenue Bond Program. Many i n e q u i t i e s of t h e MRB
program ( and the r e l a t e d Federal tax deductions) can be addressed through
the mortgage tax c r e d i t . In a d d i t i o n , t h e t a x c r e d i t method of buying
down t h e e f f e c t i v e i n t e r e s t r a t e i s l e s s c o s t l y than the MRB method.
The major advantage of t h e t a x c r e d i t is f l e x i b i l i t y . It would work
whether mortgage i n t e r e s t r a t e s a r e s t a t i c or moving up or down. Tax
c r e d i t s would a l s o give the l o c a l a u t h o r i t y g r e a t e r f l e x i b i l i t y i n
designating t o whom b e n e f i t s w i l l go and what public purposes s h a l l be
served, such a s whether t o d i r e c t b e n e f i t s t o low and moderate income
f a m i l i e s , t o t h e e l d e r l y or t o urban r e v i t a l i z a t i o n . If c a p i t a l shortage
is a major problem f o r the a r e a , t h e t a x c r e d i t program could be used i n
conjunct ion with a taxable bond program; t h e taxable bonds would a t t r a c t
c a p i t a l , and t h e t a x c r e d i t s could be used t o d i s t r i b u t e the b e n e f i t s .
I n e q u i t i e s of the PIEB program, which a r e discussed on page 35, could be
addressed by the s t a t e through use of proposed Federal t a x c r e d i t
c e r t i f i c a t e s . Under the proposal, t h e s t a t e could determine who would
receive t h e tax c r e d i t s or subsidy and how l a r g e a subsidy each person
should receive. For example, f a m i l i e s with g r e a t e r f i n a n c i a l need could
be given t a x c r e d i t s of 15 percent of t h e i r mortgage i n t e r e s t payments and
f a m i l i e s with higher income and l e s s need could be given c r e d i t s of only
10 percent. O r the s t a t e could give a f l a t percentage buy down or tax
c r e d i t t o a l l f i r s t - t i m e homebuyers regardless of f i n a n c i a l need or t h e
s i z e of t h e mortgage.
According t o GAO, t h e proposed Federal t a x c r e d i t would be a l e s s c o s t l y
way of buying down t h e i n t e r e s t r a t e than issuing tax- exempt mortgage
revenue bonds. Because t h e cost of a t a x c r e d i t program is only a
f r a c t i o n of the cost associated with a Mortgage Revenue Bond Program, it
would a l l o w a n increased l e v e l of a s s i s t a n c e t o homebuyers, while reducing
the cost t o t h e Federal Government from 20 t o 40 percent.
S t a t e A l t e r n a t i v e s t o
-- MRBs Are Considered
S t a t e and l o c a l e n t i t i e s a r e a l s o exploring a l t e r n a t i v e ways of financing
housing programs or a t t r a c t i n g c a p i t a l . However, most of these
a l t e r n a t i v e s a r e not aimed a t t h e low and moderate income market f o r homes.
Approximately 20 s t a t e s a r e beginning t o use t h e i r s t a t e pension funds t o
invest i n housing. Connecticut, f o r example, i n v e s t s a portion of its
pension funds i n mortgages a t market r a t e s , thus i t s program is not aimed
a t low- or moderat e- income housing. Maryland i n v e s t s its s t a t e insurance
fund i n housing loans. Taxable bonds a r e being used t o promote
a v a i l a b i l i t y of c a p i t a l f o r mortgages i n Alaska. Taxable bonds by
themselves, however, w i l l probably not reduce t h e e f f e c t i v e market
i n t e r e s t r a t e .
In 1983, two of these a l t e r n a t i v e s were recommended by t h e S t a t e Housing
Task Force.* Authority t o i s s u e taxable bonds was sought i n SB 1238 but
was not included i n t h e f i n a l l e g i s l a t i o n enacted. The Task Force a l s o
had recommended tapping t h e S t a t e ' s pension fund f o r housing c a p i t a l .
* The S t a t e Housing Task Force was e s t a b l i s h e d by t h e Governor i n July
1982 t o analyze the need f o r a S t a t e housing and finance e n t i t y and
t o explore ways t o reduce housing c o s t s i n Arizona. A report of its
findings and recommendations was published i n January 1983.
THE ARIZONA HOUSING FINANCE REVIEW BOARD
RESPONSE TO THE PERFORMANCE AUDIT BY THE
OFFICE OF THE AUDITOR GENERAL
The Arizona Housing Finance Review Board ( HFRB) appreciates the Auditor
General's performance audit of the Board. The report has recommended a num-ber
of changes to improve the Board's efficiency. Most of these changes
would not have been necessary if the Board had a staff and a small operating
budget.
Legislative action is required to implernent most of the recommendations
contained in the report, however the Board is taking the necessary steps to
implement those recommendations it can. Some have already been implemented,
especially those regarding Open Meeting Law requirements.
The Board thanks the Auditor General's staff for being available to
answer questions during the course of the audit and meetings with the Board
and for displaying a professional apprcach concerning their investigation.
During meetings with the Auditor's staff, the Board expressed its views to
clarify portions of the draft report. The revised draft report still needs
clarification regarding Finding I ana the chapter on the mortgage revenue
bond program.
Before commenting on Finding I, a clarification is necessary regarding
the comments on the HUD Section 8 program found on page 2 of the report.
While the Section 8 program has not been discontinued, the new construction
and substantial rehabilitation programs have not received appropriations
from Congress. Since these were the programs with which the Board worked,
the HFRB is no longer involved in Section 8.
Page 2
RESPONSE TO FINDING I THAT THE ROUSING FINANCE REVIEW BOARD HAS NOT PROVIDED
EFFECTIVE REVIEW OF MORTGAGE REVENUE BOND PROPOSALS
The report states that the 1982 mortgage revenue bond issues were un-successful
ana that the bonds will have to be recalled early which will
disappoint some program participants. It is important to understand that
this does zot necessarily mean that the Board's review of these issues was
inadequate, nor that people could not buy homes because of the outcome of
these issues.
As stated in the report, outside factors - - especially because of the
fall in interest rates - - limited the success of the bond issues. Even though
the 1982 mortgage revenue bond issues were less attractive to home buyers than
anticipated, these buyers were able to buy homes through other competitive
programs, such as FHA, whose rates were either lower or a little higher than
the mortgage revenue bond rates.
The report also states that once the nonmetro bond issue was sold, little
effort was made to advertise the program. In its review, the Auditor failed to
state the reason for the advertising delay. The U. S. Treasury Department reduced 4
the purchase price limits after the bond issue was sold, forcing the Board to
take action and hire a consultant to prepare a study refuting the Treasury De-partment
limits.
The Auditor's report notes that few developers were ready to sell homes
unti 1 three to four months into the program. It should be realized, howzver,
that small builders participate in the nonmetropolitan bond issue. These
builders do not have a standing inventory to draw from, unlike the large
builders in the Phoenix and Tucson areas.
Page 3
The Auditor concentrated on the bond issues of 1992 to prove that the
Board did not pi- ovide effective review of the mortgage revenue bond proposals.
According to the Auditor, this is the year outside factors limited the success
of the bond programs. But, little mention is given to the three successful issues
of 1979 and 1980. The report states the successful issues preceded the federal
amendments to the 1980 Mortgage Subsidy Bond Act. It should be pointed out that
these issues had the same type of purchase price and income limit restrictions
as the 1982 issues.
Table 2 on page 12 in the report profiles the 1982 bond issues. The same
information is not provided in the report for the 1979 and 1980 successful issues.
Consequently, it is provided in Table 1 below. This table shows that all three
of these issues virtually sold out.
TABLE 1
Success of 1979 - 1980 Bond Issues
Bond Proceeds % Total
Date committed to Issue
Issuer Issued Size Total Cost Purchase Mortgages Used
Pima County
b Maricopa County 7/ 80 63,160,000 1,691,000 55,400,000 87.7%
Pinal, Gila,
Mohave Counties 11/ 80 30,000,000 1,099,250 28,600,756 95.3%
The board can not agree more with the Auditor's comment on page 21 that
the Board needs staff to provide effective review. Currently, the Office of
Economic Planning and Development provides staff support, but it receives no
f inanci a1 reimbursement . W. hatis more, the Board can assess fees for its review
only if the bonds are issued. If bonds are not issued, the Board receives no com-pensation
for its review. Therefore, it cannot pay for an independent analysis
Page 4
of a proposal. The Board believes a small operating budget is crucial in order
to provide effective review of all bond proposals - - whether or not they are
issued .
RESPONSE TO PROBLEMS IN THE MORTGAGE REVENUE BOND PROGRAM
In addition, the Board questions the appropriateness of examining the
federal mortgage revenue bond program in a performance audit of the Housing
Finance Review Board. The Auditor's report includes only the negative side of
the program. The Board believes that the other side of the issue must also be
presented.
It is important to note that the report states federal restrictions, such
as eligibility criteria and purchase price limits, create problems for the
success of the program. On page 31, the Auditor be1 ieves that many people
moving to Arizona would not qualify for the mortgage revenue bond program be-cause
they have owned a home within the last three years. However, the Auditor
fails to consider that many people moving to the state have rented previously
and would be priced out of the home ownership market entirely without the
mortgage revenue bond program.
Furthermore, although the report infers every bond issue was adversely
affected by the purchase price reductions announced by the U. S. Treasury De-partment,
in Arizona the reductions affected only the 1982 monmetropolitan
bond issue. The impact on bond programs in other states is hard to assess without
a survey.
To support its position that the mortgage revenue bond program is not effective, a
the report relies on a study by the U. S. General Accounting Office
mentioning a rebuttal to that report prepared by the Council of State Housing Agencies
( CSHA). However, in its response to the GAO report CSHA provided convi~ cing arguments
that the mortgage revenue bond program is in fact successful in helping low and mod-erate
households buy homes.
Page 5
Listed below are excerpts from the CHSA report entitled, Council of State
Housing Agencies Response to the General Accounting Office Study " The Costs
and Benefits of Mortgage Revenue Bonds" Prel iminary Report" ( May, 1983).
These points provide a summary of the other side to the mortgage revenue
bond program issue that was not presented in the Auditor's report:
1) GAO chose to limit its investigation to bonds issued from
December 1981 through July 1982, a period of record high
interest rates. This unrepresentative period distorts the
analysis for budget purposes and provides a misleading picture
of program beneficiaries.
2) The FHA homebuyer has a median income of $ 10,000 above the
State Sgency buyer and the comparison shows that MRB's have a
far greater share of borrowers in the lower income levels.
3) As GAO overstates the cost of revenue bond financing, so does
it understate the benefit to home purchasers. It does so by
understating the conventional mortgage rates and overstating
the tax exempt mortgage rates that existed in 1982.
4) The GAO report focuses on monetary costs and benefits of tax
exempt financing. In doing so, it neglects other benefits and
advantages which cannot be so easily quantified:
Local and state agencies can tailor programs to local
needs.
Mortgage bond programs provide a source of mortgage funds
to rural and urban areas which are tradionally capital
short. They also have been particularly helpful as a
tool of urban revitalization and neighborhood improvement.
. Special program such as home improvement loans are ignored
by GAO.
There is no mention of the importance of these State and
local programs in the face of reduced Federal support for
housing and for housing program administration.
. GAG ignores the role Congress and the Administration de-signated
for MRB's in 1982 as a countercyclical support
for the housing industry.
5) What is true for medians is equally true across the board. Fully
50 percent of revenue b~ nd program homebuyers in 1982 had incomes
of less than $ 25,000 compared with only 23 percent of FHA buyers.
Only 15 percent of MRB buyers had incomes over $ 35,000, compared
to 41 percent of FHA buyers.
Page 6
6 ) GAO states the " typical mortgage revenue bond homebuyer in 1982"
had an incotre " between $ 20,00C and $ 40,000." In fact, the typical
buyer had income of less than $ 25,000 and, as GAO own data in-dicates,
72 percent were below $ 30,000.
7 ) GAO also contends that the purchase price ceiling " encourages"
participation of " upper income people." GAO in its own sample
fo~ nd the average purchase price to be $ 48,800 - hardly luxury
housing.
The hypothetical cases presented on page 34 again only illustrate the
negative aspects of the mortgage revenue bond program. No cases were pre-sented
showing how the program allowed a person who is otherwise priced out
of the housing market afford a home. The Board asserts that Case I1 is not
relevant, since it is based on future incomes of qualifying people. The young
professional in Case I1 could just as easily have lost his job yet kept his
home because of the below market mortgage provided by the mortgage rever~ ue
bond program.
In response to the Auditor's comment cn page 36 that the mortgage revenue
bond program primari ly benefits weal thy people, the Board draws your attention
to a letter from Martin F. Ryan to Senator Dennis DeConcini. Ryan, who wa:
chairman of the State Housing Task Force, clearly presents the other view-point.
Mr. Ryan categorically refutes the claims that the wealthy and middle-men
are the primary beneficiaries of the program. His letter is attached as
an addendum.
Again, the discussion on the proposed tax credit introduced in the U. S.
Senate by Senator Dole only presents one side. The report implies the tax cred-it
is available now, which it is not, and that it is superior to the mortgage
revenue bond pr+ ogram. Recent pubi ications have questioned the tax credit pro-posal
vis- a- vis mortgage revenue bonds. For example, the National Ass~ ciat ion
of Home Builders believes the tax credit proposal would provide less benefit
than mortgage revenue bonds because the proposal makes inaccurate assumptions
about mortgage revenue bond subsidy levels.
Page 7
In conclusion, the Board believes that while the program and the HFRB
can benefit from certain changes, both are currently operating i n the public
interest. Although the Auditor General's report is essentially fair and
accurate, the Board believes that the points made in its response to
the report are vital to understanding the task of the HFRB. The Board
submits that by clarifying these issues, the Auditor General's report
can better serve its legislative directive.
LAW OFFICE
MARTIN F. RYAN, LTD.
6425 E. GRANT ROAD
P. O. BOX 30755
TUCSON, ARIZONA 8575 1
( 602) 296- 54 1 8
September 16, 1983
The Honorable Dennis DeConcini
United S t a t e s Senate
4104 Dirksen Senate O f f i c e B u i l d i n g
Washington, D. C. 20510
Dear Dennis:
On Wednesday n i g h t , September 1 4 t h , I r e t u r n e d home a f t e r a
h a r d d a y o f f i g h t i n g with c l i e n t s a b o u t t h e s i z e of my f e e s and I
p i c k e d up t h a t e v e n i n g ' s e d i t i o n of t h e Tucson C i t i z e n and f e l t
compelled t o sit down and g e t o f f a l e t t e r t o you a b o u t an a r t i c l e
t h a t a p p e a r e d on t h e f r o n t p a g e . The a r t i c l e c o n c e r n e d an
A d m i n i s t r a t i o n program of t a x c r e d i t s f o r f i r s t t i m e homeowners.
I know t h a t you have proposed reforming t h e e n t i r e t a x s t r u c t u r e
and s u b s t i t u t i n g a f l a t rate t a x . My correspondence is not a b o u t
e i t h e r s u b j e c t .
I n s t e a d , I am w r i t i n g t o you a s a long- time f r i e n d a b o u t a
s u b j e c t i n which I have a v e r y deep i n t e r e s t and I hope some s m a l l
knowledge. That s u b j e c t is tax- exempt f i n a n c i n g i n g e n e r a l and
s i n g l e and m u l t i - f a m i l y f i n a n c i n g of homes i n p a r t i c u l a r . I am
e n c l o s i n g a copy of the a r t i c l e . I do n o t know how a c c u r a t e t h e
q u o t a t i o n is, b u t i n t h a t a r t i c l e d i s c u s s i n g t h e use of tax- exempt
bonds f o r s i n g l e f a m i l y housing, t h e General Accounting O f f i c e is
quoted a s s a y i n g :
" Extension" ( beyond t h e December 3 1 s t
e x p i r a t i o n ) " is a s s u r e d even though t h e
General Accounting O f f i c e s a y s i n a d i s p u t e d
r e p o r t t h a t up t o 87% of t h e rnoney from t h e
bonds aoes t o l a w v e r s . w e a l t h v i n v e s t o r s and
o t h e r & middle men, l e ' a v i n g o n l y 13% t o a i d
homebuyers."
That i n f o r m a t i o n is c o m p l e t e l y e r r o n e o u s , f a l s e , and
m i s l e a d i n g , e i t h e r t h a t o r I and many o t h e r s have been
u n d e r c h a r g i n g . I am a n g e r e d a t t h e d e p t h s r e a c h e d by some
governmental o f f i c i a l s to s u p p o r t t h e i r p o s i t i o n . That q u o t a t i o n
is n o t h i n g more t h a n p r e p o s t e r o u s propaganda.
I h a v e been i n v o l v e d i n t h e t a x - e x e m p t f i e l d s i n c e 1 9 6 9 ,
r e p r e s e n t many I n d u s t r i a l Cevelopaent A u t h o r i t i e s i n t h e S t a t e of
A r i z o n a , have s e r v e d a s Chairman of t h e G o v e r n o r ' s S t a t e Housing
The Honorable Dennis DeConcini
September 16, 1983
Page TWO
Task F o r c e , and can t e l l you t h a t t h e q u o t a t i o n , i f a c c u r a t e , is
so d a n g e r o u s l y f a l s e a s to c a l l i n t o s e r i o u s q u e s t i o n t h e
m o t i v a t i o n s , i n t e g r i t y and p a r e n t a g e of t h e a u t h o r s .
L e t me t e l l you from e x p e r i e n c e w i t h b o t h s i n g l e f a m i l y
h o u s i n g bonds and o t h e r tax- exempt f i n a n c i n g s , t h a t i n t h e S t a t e
o f Arizona t y p i c a l costs f o r a l l so c a l l e d " middlemen" ( T r u s t e e ,
Lawyers, P r i n t e r , U n d e r w r i t e r , and o t h e r s ) a r e less t h a n t h e f e e
c h a r g e d by a r e a l t o r i n a t y p i c a l r e a l e s t a t e t r a n s a c t i o n . I n
f a c t , t h e p e r c e n t a g e a t t r i b u t a b l e to i s s u a n c e c o s t s f o r s i n g l e
f a m i l y housing f i n a n c i n g w i t h tax- exempt bonds is o f t e n lower t h a n
o t h e r f i n a n c i n g s because o f t h e economies o f s c a l e . None of t h e
bond p r o c e e d s go t o " wealthy i n v e s t o r s , " a l t h o u g h t h e bondholder
b e n e f i t s from n o t having t h e i n t e r e s t t a x e d , t h e homeowner
b e n e f i t s by having lower i n t e r e s t r a t e s , t h e c o n t r a c t o r b e n e f i t s
by b u i l d i n g t h e h o u s e s , t h e employee b e n e f i t s by having a d d i t i o n a l
j o b s , s t a t e and l o c a l governments b e n e f i t from i n c r e a s e s i n s a l e s ,
real p r o p e r t y and income t a x e s .
I wouldn' t want to m i s l e a d you. T h e r e h a v e b e e n p r o b l e m s i n
Arizona w i t h tax- exempt f i n a n c i n g of s i n g l e f a m i l y h o u s i n g .
However, t h e problems have n o t a r i s e n because of t h e c h a r g e s o f
" middle men" or b e n e f i t s p r o v i d e d to " w e a l t h y i n v e s t o r s " .
v o l a t i l e i n t e r e s t r a t e s and C o n g r e s s i o n a l r e s t r i c t i o n s have been
major c a u s e s o f t h e d i f f i c u l t i e s t h a t have b e e n e x p e r i e n c e d .
Demand h a s been dampened as a r e s u l t o f r e s t r i c t i o n s l i m i t i n g
s i n g l e f a m i l y programs t o f i r s t t i m e homeowners, r e s a l e
r e s t r i c t i o n s , programs g e a r e d to l o w and middle income w i t h o u t
a d e q u a t e f e d e r a l d e f i n i t i o n s , and a r b i t r a r i l y low a r b i t r a g e
c e i l i n g s . I n s u f f i c i e n t i n c e n t i v e s e x i s t to emphasize m a r k e t i n g i n
t h e s m a l l e r communities w h e r e , p r o p o r t i o n a l l y , t h e need is j u s t a s
g r e a t .
However, even w i t h a l l t h e p r o g r a m ' s p r o b l e m s , t h e use o f
tax- exempt f i n a n c i n g i n t h e S t a t e o f Arizona f o r s i n g l e f a m i l y and
o t h e r p u r p o s e s is i m p o r t a n t to t h e S t a t e ' s g r o w t h . A r i z o n a is a
c a p i t a l poor s t a t e . I n d u s t r i a l development and bond f i n a n c i n g
o f t e n p r o v i d e t h e o n l y a f f o r d a b l e means o f g e t t i n g a p r o j e c t done
and g e t t i n g it d o n e w i t h t h e a d d i t i o n a l p l u s o f u s i n g E a s t e r n
c a p i t a l . Congress should l e g i t i m a t e l y concern i t s e l f w i t h t h e
s o c i a l p u r p o s e s forming t h e s u p p o r t i n g framework f o r t h e use o f
I n d u s t r i a l Developinent Bonds. Congress should n o t p a r t i c i p a t e i n
a n n u a l h u n t i n g e x p e d i t i o n s where t h e f o e s o f I n d u s t r i a l
Development Bonds, n o u r i s h e d by t h e T r e a s u r y , s e e k t o change t h e
r u l e s and b r i n g down and bury i n s t a g e s t h i s i m p o r t a n t f i n a n c i n g
v e h i c l e .
P l e a s e view w i t h some s k e p t i c i s m , t h e T r e a s u r y argument a b o u t
l o s t d o l l a r s . A s an example, New J e r s e y ' s economic development
o f f i c i a l s r e c e n t l y concluded t h a t t h e r e is a seven- to- one cost
The Honorable Dennis DeConcini
September 1 6 , 1983
Page Three
b e n e f i t r a t i o f a v o r i n g t h e use o f I n d u s t r i a l Development Bonds.
I n o t h e r w o r d s , f o r e v e r y one d o l l a r t h e T r e a s u r y l o s t , s e v e n
a d d i t i o n a l t a x d o l l a r s were c o l l e c t e d i n i n c r e a s e d sales, income
and r e a l p r o p e r t y t a x e s . Other s t u d i e s have s u p p o r t e d s i m i l a r
c o n c l u s i o n s , and y e t t h i s s i d e of t h e argument is seldom
p u b l i c l y p r e s e n t e d .
R h e t o r i c n o t w i t h s t a n d i n g , t h e complained- about a b u s e s and
m i s u s e s o f t a x - e x e m p t f i n a n c i n g have s i m p l y n o t o c c u r r e d i n
A r i z o n a . S a f e g u a r d s do e x i s t . Before bonds can i s s u e , b o t h a n
I n d u s t r i a l Development A u t h o r i t y and its g o v e r n i n g body m u s t
approve an i s s u e . The mechanism is s l i g h t l y d i f f e r e n t f o r s i n g l e
f a m i l y housing bonds b u t t h e y must u l t i m a t e l y be approved by a
S t a t e a g e n c y , t h e S t a t e Housing F i n a n c e Review Board. The
g a u n t l e t is becoming more d i f f i c u l t to r u n a s i s s u e r s a r e no
l o n g e r a c t i n g a s r u b b e r stamps and are demanding s t r i c t e r proof of
b o t h t h e merit o f t h e p r o p o s a l and its p u b l i c p u r p o s e .
S i g n i f i c a n t l y , no I n d u s t r i a l Development Bond i n t h e S t a t e o f
Arizona h a s e v e r gone i n t o d e f a u l t . By s t a t u t e , we c a n n o t f i n a n c e
massage p a r l o r s . By p h i l o s o p h y , d i s a d v a n t a g e d a r e a development is
f a v o r e d .
Again, t h i s l e t t e r is n e i t h e r i n s u p p o r t o f nor i n o p p o s i t i o n
t o t h e A d m i n i s t r a t i o n ' s proposed t a x - c r e d i t s . I do b e l i e v e t h a t
t h e s i n g l e f a m i l y h o u s i n g program h a s found wide a c c e p t a n c e
t h r o u g h o u t t h e c o u n t r y , h a s s e r v e d a l e g i t i m a t e purpose and s h o u l d
be c o n t i n u e d . There is a need f o r l e g i s l a t i v e e f f o r t s to h e l p
make housing a f f o r d a b l e . My concern is w i t h e f f o r t s on t h e p a r t
o f some to c r i p p l e t h e use o f tax- exempt i n d u s t r i a l development
f i n a n c i n g i n t h e name of reform. I would hope t h a t you and your
s t a f f would s u p p o r t t h e e x t e n s i o n of use of tax- exempt f i n a n c i n g
f o r s i n g l e f a m i l y h o u s i n g and w i l l p r o c e e d c a u t i o u s l y b e f o r e
s u p p o r t i n g any o t h e r changes i n e x i s t i n g tax- exempt f i n a n c i n g law.
There a r e many more q u a l i f i e d t h a n I to c o u n s e l you.
However, I do have s t r o n g f e e l i n g s . My p l e a is n o t t h a t you a d o p t
my p o s i t i o n , b u t t h a t you c o n s u l t w i t h t h o s e who a r e knowledgable
i n t h e f i e l d b e f o r e t a k i n g a p o s i t i o n .
Thanks f o r l i s t e n i n g .
S i n c e r e l y ,
Martin F. an/
MFR: j m s
E n c l o s u r e
A dministratioq , offers- tax credit
on firstmtirne home buye
By The Auoelaled Prsn
WASHINGTON - The Reagan
administration, womed about the
rising cost of a mortgage- bond sub
sidy, is supporting a proposed tax
credit for up to half the interest
charged first- time homebuyers.
It's not that the administration is
eager to launch a new tax break at
a time of record federal deficits.
Rather, the administration is de-termined
to reduce the ta. x losses
caused by the mortgage bonds - a
cost that would total another $ 15
billion if authority to issue the
bonds were extended another three
years.
The tax- exempt bond program is
so popular with state, city and
county officials that Congress is
certain to renew it when it expires
on Dec. 31. Threequarters of the
members of Congress have signed
an extension.
Extension is assured even though
the General Accounting Office says
in a disputed report that up to 87-
percent of the money f. r_ o. m__ th. g
bonds goes to lawyers, wea!- khyic
vestors and o- t_ h-- e-- r-- - m-- iddlemenL - leas!=
ing only 13 percent to aid hme-biqFE.
At a hearing before the Senate
Finance Committee yesterday,
John E. Chapoton, an assistant sec-retary
of the treasury, repeated the
administration's adamant opposi-tion
to renewal of the bands pro-gram.
But if the program is ex-tended,
he added, it should be
coupled with the proposed tax
credit.
The tax- credit bill, sponsored
cbefly by Sens. Robert J. Dole, R-Kan.,
and Russell B. Long, D- La.,
chrrnan and senior Democrat, re-spectively,
on the comrniuee, a s
sumes the bonds program will be
extended. But it encourages local
governments to give up some of the
authority they have to issue the
bnds and, instead, to issue cemfi-cates
qualitylng homebuyers for
the federal tax cretAt. Sates gen-erally
are limited to about $ 200 mil-lion
worth of these bonds a year.
The credit would be set by the
local government at between 10
percent and 50 percent of mortgage
interest paid.
The credit would be subtracted
That saviug would
come from
elimination of the
middlemen involved
in the bond trunsnc-tions,
from any federal tax deduction
claimed for mortgage interest. For
instance, assume a person paid $ 3,-
000 interest in a year and qualified
for a 30 percent tax credit. That
would result in a $ 900 credit -
which reduces taxes, dollar for dol-lar
- and a $ 2,100 deduction, whch
cuts income sxbjec: to taxes.
Chapoton noted a 550,000 % year
mortgage subsidized with taxex-empt
bonds could be obtained today
for about 11 percent and a $ 476
monthly payment. The total after-tax
cost during the first year for a
Derson In the 20 oercent tax bracket
kho itemizes d& ucti~&~ ould k
$ 4,616.
That same mortgage, without the
bond subsidy, would command a 13
percent interest rate and a monthly
payment of $ 572. The first- year
after- tax cost, assurmng a 14.3 per-cent
mortgage credit, would be $ 4,-
544.
Although the annual costs to the
homebuyer are fairly close, it
would cost the treasury $ 1,614 the
first year to subsidize the mortgage
but only $ 746 to do it with the tax
credit, Chapoton said.
That saving would come from
elimination of the middlemen in-volved
in the bond transactions.
Under the mortgage- bond pro-gram,
state and local governments
issue tax- exempt bonds to subsidize
mortgages, chiefly for lower- in-come
people buying their first
home. Because the bonds are ex-empt
from federal income taxes,
they are sold at an interest rate
that is usually two or three percent-age
points below market rates.
States, cities and counties have
found the bonds so attractive -
since the entire cost is borne by the
federal government - that exten-sion
of the bonds program for three
years would cost the federa! trea-sury
$ 15 billion in lost taxes, be
cause the government would be
giving up revenues as far as 30
years into the future. The govern-ment
estimates continued issuance
of the bonds would cost $ 2.8 billion
over the next five years; inclusion
of the taxcr& t plan would cut that
loss to $ 2.2 billion.
GLENN A. WILT, JR., Ph. D.
Financial and Economic Consultant
BOX 1010
Tempe, Arizona 8528 1
Telephones: 602- 965- 6355
602- 965- 31 3 1
602- 248- 0000
August 10, 1983
Off ice of. the Auditor General
State of Arizona
Attention: Ms. Karen C. Holloway
111 West Monroe - Suite 600
Phoenix, Ariozna 85003
Dear Ms. Holloway:
The purpose of this letter report is to provide detail on my examination
of the analytic document entitled Report of the Arizona ~ ousing Finance
Review Board - Mortgage Revenue Bond Market Study for the Counties of
Apache, Cochise, Coconino, Gila, Graham, Greenlee, Mohave, Navajo f
C Pinal, Santa Cruz, Yavapai and Yuma. The major part of this analysis
explores items in this Review Board Report with direction toward a more
sound evaluation format; at the end a summary contains recommendations
and conclusions on this appraisal.
The methodology utilized here included review of a wide variety of
background documents both from my own sources and those provided by
your office as supplement to the report as cited above. Some of thes
were as follows:
1. A Feasibility Report compiled by the firm of Ernst and Phinney,
Tucson, Arionza, dated May 14, 1982, for the proposed single- family
Mortgage Revenue Bond program of that period.
2. The Arizona Housing Finance Review ~ oard ~ nnual Report for 1932.
3. The Arizona Housing Finance Review Board Guidelines for issuance
of single- family development mortgages.
4. A review of the Program Synopsis for the Bond Market issue for
the non- metro areas.
Page 2
5. The Prospectus for the Arizona Housing Finance Review Board
Single- Family Mortgage Revenue Bond Series 1982 of November 8, 1982.
6. The agenda for an information session on the purchase price limit
reduction for single- family housing finance using tax- exempt bonds •
of February 24, 1983.
7. A Ledger ~ heet'depictingt he voluntary commitments from Lenders
( and builders through lenders) for the 1982 non- metro issue.
8. Two short letters addressed to Mr. Rich Crystal from representatives
of the Office of Economic Planning and Development, State of Arizona
and Mr. William C. Davis of the securities firm of Rauscher, Pierce,
Refnes, Inc., Phoenix, citing the results of telephone interviews
with builders in certain non- metro areas and mortgage bankers,
commercial bankers and savings and loan executives here in the
Phoenix area. @
9. A reprint of statutes describing the role of the Arizona
Housing Finance Review Board in evaluating its issues and
those from other Industrial Development Authorities that may
overlap in territorial availability.
After review of this body of material, certain subjects were addressed
for purposes of structuring this analysis. These were as follows:
1. The timeliness oT the data base utilized for issuance decision
purposes. 4
2. The appropriateness of the sources of information gathered for
the analysis.
3. The necessity for additional areas of investigation which may
have modified the conclusions reached.
4. The nature and goodness of the assumption format.
5. The need, if any, to consider other major foundational elements
and their potential impact on the issuing conclusions.
These items, coordinated, should express the framework necessary to
determine the worthiness or non- desirability of bond issuance procedures
as predicted by these types of reports.
THE NATURE OF THE FOUNDATIONAL ASSUMPTIONS AND THE DATA BASE
The Report to the Arizona Housing Finance ~ eview Board - Mortgage Revenue
Bond Market Study for the Counties of Apache, Cochise, ~ oconino, Gila,
Graham, Greenlee, Mohave, Navajo, Pinal, Santa Cruz, ~ avapai and Yuma
( October 1982), referenced here as the non- metro study, consists largely
a
Page 3
of information gathered from secondary sources of a published nature, The
beginning segments relate population characteristics inherent in the
twelve counties including age distribution, household size and employment
and income levels, The next references cite the importance of certain
characteristics needing analysis for background detail including retail
sales, bank deposits and mortgage interest rates. An inspection of these
items should permit an assessment of the past interrelationships of the
ability of the population to earn, live comfortably and have these
results, if positive, manifest heartily on the community profile.
The next step was to appraise the nature, value and quantity of the
housing stock in the non- metro study. The thought here was to inspect the
economic characteristics of the population and the housing stock in
each of the 12 counties to determine the level of demand interest in
new housing stock and for the refinancing of existing inventory. This
means, for example, if the population were financially capable and
the housing stock was marginal in value and condition, a " move- up"
phenemona may take place and at levels of interest rates for which
buyers could qualify, housing and thus mortgage demand would be
prevalent.
Finally, in the non- metro report, the projected demand for mortgage
funds was addressed through taking population growth, recognizing the
formation of new households, imputing a lessening demand from this
development because of prevailing unemployment, noting buyer- type
restrictions under this program ( i. e. purchasers cannot have owned
a home within the last three years, etc.) and then considering this
information with the average prices for homes in each territory. his
format, carried to conclusions, is cited and coordinated in ~ xhibit XXIV,
which represents the summary statement to this analysis.
Page 4
There is no question that the non- metro report compilers obtained data
from appropriate sources, including, among others ( a) the Arizona Department
of Economic Security for general data, ( b) Projections Report 1981 - •
Population, Employment, and Income Projections for Arizona and 14 Counties
( c) the Arizona Department of Revenue and ( d) certain University sources.
It is to be noted that in some instances it would have been possible to
contact representatives of these agencies to provide additional timely
statistics ( but perhaps preliminary) which would have added some newer
information on the tail- end of the data citations. Especially relevant
here was the observation that with the changing economic environment
it appears appropriate to consider this point. In fact, this thought is
well referenced on the third page of the non- metro report as follows:
..." t he achievement of any estimates of future events may be
affected by fluctuating economic conditions and is dependent
upon the occurrence of other future events which cannot be
assured. Therefore, the actual demand for mortgage funds
realized by the proposed program may vary from the estimates
included herein, and such variations could be material"...
The general format utilized here is one that could normally be applied
to and centered in a geographic area containing certain homogenous
elements, including employment base, income sources and age and
household distribution. This is - not the case in these 12 counties.
For example, these counties contain a mixture of agriculture, mining
a
and forestry- related employment. Here it is to be especially noted that
these are not known as general growth areas and individuals in occupational
categories within these industries, even if now employed, may not wish to
a
make a long- term commitment to a town or job because of the general
lack of industry dynamics. his is to say that the desire to own a home
in a non- metro political area is subject to different individual influences *
than in a metropolitan area which may contain strong employment potentials.
Exhibit XXV identifies some numeric breakdowns by counties, but there is
Page 5
considerably more work needed here to identify the demand and economic
forces at work in each of these specialized locations.
A REVIEW OF THE REPORT CONCLUSIONS
Exhibit XXIV in the final study is worthy of exploration for the underlying
foundational items supporting the conclusions reached in this analysis
that suggest a demand for mortgage financing in 12 non- metro counties of
Arizona more than double the monies available from the bond issue ($ 59
nillion versus $ 26 million) .
Starting from the top in Exhibit XXIV, the population growth figures
were divided by household size to obtain a gross number of - new households
subject to housing demand. Noting from the Census statistics cited the
percentage of individuals - now in single- family housing, this proporation
of ( rounded) 66 percent was imputed as the new net demand element for
this housing type. The unemployment rate was the subtraction percent
from this net demand, with the underlying assumption that those families
with one or more members in this status would be unable to qualify or
disinterested in purchasing but that the rest would apparently be
available and ready to buy single- family homes. Next, some of the existing
inventory of single- family homes in any market normally sell. At ( rounded)
4 percent, this leaves ( rounded) 6,600 homes needing financing, making
the refinancing of existing homes the largest projected component of
new mortgage demand from this capital.
Next, the mortgage program finance limitations indicate first- time buyers
as the element served by this program at a figure of 25 percent of the
market. Multiplying this we obtain ( rounded) 3,600 households as the
revised market demand. Citing those in income levels that could qualify
( above $ 10,000 yearly and below $ 27,589 annually) as 44 percent of the
Page 6 •
non- metro population, then only about 1,150 households could be interested
in this program. At the average sales price of a home of ( rounded) $ 52,000
a
the conclusion is then reached that about $ 62 million of funds could be
utilized. Lastly, considering that a 5 percent down payment was needed,
$ 59 million would be taken up and this means that the potential exists,
a
as previously stated, for an overscription of more than two times the
allocated potential ($ 59 million versus $ 26.4 million). Important to
this optimistic take- down, there are several in- depth questions which *
should have also been investigated. These would have moderated, either in
a qualitative or quantitative way, the conclusions reached in the non- metro
issue feasibility study. It is possible, however, that the development of
these accessory points may have called attention to the lack of potential
demand as has existed in the bond issue under scrutiny here.
THE POPULATION GROWTH FIGURES AND HOUSEHOLD SIZE CALCULATIONS
Reference was made here to the resource " Projections Report - 1981;
Population, Employment and Income projections for Arizona and 14 Counties-- a
population: 1980- 2035; Employment and Income: 1980- 2007" as prepared by
the ~ rizona Department of Economic Security, Office of Data Administration,
Population Statistics Unit, June 1982, the exact document utilized by
a
the bond study compilers for their population growth statistics. Also,
a discussion was held with Mr. Mobin Quaheri, the senior study analyst
involved in the development of this volume, who is a Unit Director at
the Department of Economic Security, State of Arizona offices. The
assumptions in this study, largely developed in 1981, were that 1982
would be a banner economic year, and it was not. This general observation *
made by a reader in the third quarter of 1982, should have flagged moderation
in survey results, considering that nore than one- half of the year had
passed with little economic optimism.
Page 7
A more major observation developed from an inspection of some statistics
in this volume is that the population projections in the non- metro report
takes consideration of births less deaths plus net migration as a demand
element, There is no question that the birth of a child may create
the need for expanded housing but no income availability normally results
* from this event and quite often an additional outgo from income is
created, thus lessening mortgage qualification abilities. The following
statistics are presented, from the above " Projections Report - 1981"
for inspection and to compare to those in the original non- metro study:
Table 1
Comparative Population Statistics Forecasted for 1983
12 Arizona Counties
Net In- Migration2 T O T A L S ~
County Net ~ i r t h s l Employment Non- employment
~ e i a t e d Related
NET Population- Households
Apache
Cochise
Coconino ' Gila
Graham
Greenlee
Mohave ' Navajo
P inal
Santa Cruz
Yavapai ' Yuma
TOTALS :
' Footnotes: 1. Births less deaths.
2, Both from employment- based and non- employment- based sources ( retirement,
student and military).
3. From original non- metro study- See Exhibit XVIII; Indian Reservation
residents excluded.
Page 8
The important items to derive from this table are as follows:
1. Net births may not constitute an element of housing demand because . of the lack of income generation associated with these events. The
base source of employment- related and perhaps non- employment related
( retired, student and military, if the retired and military personnel a
did not own a home within the past three years, a somewhat unlikely
event) varies markedly between counties, but, in any case, adds to
11,413 persons, as forecasted, or 4,898 households versus the 6,642
from the non- metro study.
2. The county- by- county variation in the generation of types of
projected household increase demands attention. This factor is
addressed in Exhibit XXV by indiviudal county in the non- metro
study, but the distinction is still not made there between
migration and births less deaths. For example, the observation
of the just- preceding table draws attention to the large employment-related
increase in Apache County ( where the smallest average house
price exists - $ 12,900 from Exhibit XVII) and spells some latent
potential for this area ( subject to a later moderating comment on
the continuing nature of the employment base here) while the largest
non- employment related household increase was in Yavapai County, an
area long noted for its retirement base. This may mean that Yavapai,
with this contingent and lower- wage scales versus Maricopa County
and the average housing costs may mean that this area could be a lower-mortgage
qualifying setting, at least under the restrictions of this
non- metro program. In essence, these items of wage levels, housing
prices and retirement segment of the growth of each area, necessitates
individual county- by- county economic evaluation in order to get a
specific and required focus on the demand for housing. In other words,
Page 9
each of these counties should be looked at as a " State" subject to the
analysis of certain individual factors, each important and perhaps
different as they relate to the mortgage and housing demand projected
for each region.
SINGLE- FAMILY HOME OCCUPANCY
The existing families in single- family houses ( 66.2 percent of the total--
from Exhibit XI1 of the non- metro study) are forecasted to be, percentage-
@
wise, also the proportion of - new households which will demand single-family
residences. This assumption leaves several important questions
unanswered including the following:
I,
1. Single- family home occupancy implies dramatic affiliation with
an area, capsulizing a long- standing interest in geographic staying
power, normally supported by longevity of continuing employment.
It is to be noticed that certainly some of the employment in- migration
and some of the existing population ( who may be leery about the
sporatic or temporary nature of their income activities, especially
in the economic setting of the past few years) would find renting
more cost- effective or flexible in view of short- term needs, rather
than purchasing a dwelling unit to which an attachment should be made
for a somewhat lengthy period of time. Reference in this former
case is also made to Mobile Homes, which are given little analytic
attention in this study and are well known as the method of shelter
activity for migrating construction workers. Also, Exhibits XI11
and XVII show respectively that a more- than- average ( namely 14.9
percent, with a 5 percent being denominated as average) vacancy
level in single- family housing in the gross 12 county calculations
and rental prices at an average of $ 148 monthly for median contract
rent and $ 162.50 and $ 167.33 respectively for the average rent per
Page 10
single- family dwelling both for occupied and vacant units. This
" stock" needs consideration as it should affect purchasing decisions
0
for at a ( rounded) $ 50,000 price and a $ 47,500 mortgage at 11 percent
for 30 years, the base principal and interest payment ( without
mortgage rate buy- downs) is ( rounded) $ 452, with property taxes
and insurance premiums on the home yet to be added, making the
purchase decision at the - base payment price at least a 2.5 times
factor of renting ($ 452 divided by $ 167). Of course, it must be
understood that purchase decisions are not made only on the basis
of price and payment charges, but in changing economic times it
appears appropriate to consider the " take- up" of any vacant units
both ( a) county- by- county and ( b) within the county and its major
centers of population, to make sure the available housing units are
located favorably or not within areas of major demand. Reference
here is made to the fact that a dwelling unit vacant ( say) 40 miles
from an employment site sithin a county may not be competitive with
a purchase decision closer to the generation point of income.
2. It is somewhat difficult from the statistics presented in the
non- metro report to get an extra- clear focus on the number and
location within a county of such rentable units existing. However, a
in a gross 12 county sense, the first page of Exhibit XI1 is referenced
and 168,614 single- family units in total in these areas is given
consideration. Multiplying this number by 14.9 percent ( the average a
vacancy rate cited) this results in 25,123 vacant single- family
dwellings. When multi- family accommodations are considered, the
total rises to 37,832 noted on this same exhibit. This is a
startling statistic when compared to rental prices, on the average,
and average house purchase prices and payments as noted above. In
Page 11
summary, this points out that if housing alternatives are roughly
equal, why not rent for a smaller monthly outflow versus a higher
purchasing price payment which would weld affiliation to an area
where employment possibilities might not be as to create interest
in buying by all family units qualified?
THE UNEMPLOYMENT RATE
The cited rate centering at 14 percent in the non- metro study is cause
0
for concern. In all cases, on Exhibit VI, this series, for individual
counties for June 1982 was notably above that of the figures for 1980 and
strikingly so for Apache, Gila, Graham, Greelee, Mohave, Navajo, Pinal
I,
and Yuma. Also worthy of mention is that in no cases was the 1980
unemployment rate below that of the base year of 1970, indicating that
from the two points of 1970 and 1980 and into June 1982 this figure grew
on a percent basis. This statistic combined with other influences, should
have resulted in interviews with bankers, mortgage companies, and
qualified individuals, especially real estate brokers, to determine the
I)
psychological attitudes of potential buyers within these 12 market
territories. These surveys would