Established in 1993, HUD’s Discount Sales Program seeks to expand affordable housing opportunities, help revitalize neighborhoods, and reduce the agency’s inventory of single-family properties in a timely, efficient, and cost-effective manner. Under the program, approved nonprofit organizations receive a discount when purchasing HUD-owned single-family properties and are required to rehabilitate and resell them to low- or moderate-income homebuyers. As of August 2003, 423 nonprofits were approved to participate in the program, down from more than 2,000 nonprofits 3 years earlier. HUD attributed the reduction to changes in the program, such as stricter approval standards and increased reporting requirements, and to the agency’s efforts to remove nonprofits that violate program rules. HUD acquires properties through foreclosures of homes with FHA-insured mortgages. FHA provides federally backed mortgage insurance primarily to low-income and first-time homebuyers who might otherwise have difficulty obtaining a mortgage. In calendar year 2002, HUD acquired more than 67,000 properties through foreclosures and sold approximately 65,000 properties from its inventory. At the end of calendar year 2002, HUD had an inventory of 32,018 single-family properties. HUD sells the properties in its inventory in as-is condition through a number of different programs. Table 1 shows the primary programs HUD uses to sell properties and the number of properties sold under each during calendar year 2002. Most HUD-owned properties are eligible for price reductions under the Discount Sales Program. The program accounted for approximately 2 percent of HUD’s overall property sales in calendar year 2002. HUD offers discounts of 10, 15, and 30 percent to nonprofit organizations. The size of the discount depends on several factors: whether a property in as-is condition is eligible for FHA insurance, whether it is located in a revitalization area, and whether it is sold individually or in a package of five or more homes. HUD inspects and appraises all foreclosed properties to determine whether they are again eligible for FHA mortgage insurance. FHA will insure mortgages only on properties that meet HUD’s minimum property standards and local building codes or that need less than $5,000 in repairs in order to meet these standards. Properties needing more than $5,000 in repairs are considered uninsurable. For purposes of the Discount Sales Program, HUD then differentiates properties by location. All insurable properties receive a 10 or 15 percent discount whether or not they are located in a revitalization zone. The 15 percent discount is only applied if the property is part of a group of five or more properties purchased in a single transaction. Uninsurable properties lying outside revitalization areas also receive these discounts, but those located within revitalization areas are eligible for the steepest discount—30 percent. Under the Discount Sales Program, HUD has two methods of selling properties to nonprofits: competitive bidding and noncompetitive sales. Both methods allow discounts for nonprofits. Under the competitive process, HUD establishes a list price for the properties but will accept bids that are lower. HUD posts the properties, with their list prices, on the Internet in its general listings and accepts bids from prospective owner- occupants and nonprofits, but not investors, for a priority period of 10 to 30 days, depending on the geographic area. HUD awards the property to the owner-occupant or nonprofit with the highest bid. If the highest bidder is a nonprofit, HUD grants a 10 or 15 percent discount off the bid price when it closes on the home. For properties that fail to sell during this priority period, HUD then accepts bids from the general public, including investors. The noncompetitive sales method applies only to uninsurable properties. HUD lists these properties separately from its general listings and makes them available to nonprofits through a HUD contractor’s Web site. Nonprofits have a priority period of 5 days to express interest in the properties at HUD’s list price. If more than one nonprofit expresses interest in a property, HUD selects the buyer by lottery. As with competitive sales, the discount is applied at closing. Properties that are not sold noncompetitively are placed in HUD’s general listings and made available for sale on a competitive basis. Nonprofits that purchase properties under the Discount Sales Program are responsible for rehabilitating them as needed to meet HUD’s minimum property standards and local building codes. Nonprofits are required to limit their resale price to no more than 110 percent of their “net development cost,” or the sum of their allowable costs for acquiring, rehabilitating, and reselling the properties. Nonprofits must also sell the homes to buyers whose incomes do not exceed 115 percent of their area’s median income, adjusted for family size. HUD’s four HOCs administer the Discount Sales Program and oversee the participating nonprofits. The HOCs process nonprofits’ applications to participate in the program and monitor nonprofits for compliance once they begin purchasing, rehabilitating, and reselling homes. To help monitor the program, HUD requires nonprofits to submit annual reports to the appropriate HOC by February 1 of each year. The reports must provide information on properties the nonprofits have bought, rehabilitated, and resold, including repair costs, prices to homebuyers, and homebuyers’ incomes. HOC staff also conduct on-site visits to nonprofits and properties to review files and inspect repairs, among other things. When a nonprofit fails to follow the program’s requirements, HOCs may remove the nonprofit from the program. In recent years, HUD has changed some of its program requirements to increase its oversight of nonprofits. For example, in 2000 HUD issued guidance establishing uniform standards for nonprofits applying to participate in the program. The guidance outlines specific information nonprofits must submit in applying for the program, mandates that nonprofits recertify with HUD every 2 years, and requires that nonprofits answer detailed questions about their ability to carry out affordable housing programs. To address concerns raised in the HUD Inspector General’s 2001 report on the program, HUD issued additional guidance in December 2001 designed to strengthen the program’s reporting and accountability requirements. Until this guidance was issued, nonprofits needed to meet HUD’s annual reporting and net development cost requirements only for properties purchased at a 30 percent discount. The guidance expanded annual reporting and resale price requirements to all properties, regardless of discount level, and clarified HUD’s net development cost calculation by providing a detailed list of allowable and unallowable costs. Also in response to the Inspector General’s report, HUD issued guidance in January 2002 designed to tighten eligibility requirements for nonprofits. Among other things, the guidance described circumstances that could create a conflict of interest between nonprofits and their business partners. In addition, it required that nonprofits be incorporated as 501(c)(3) organizations for at least 2 years and have a minimum of 2 consecutive years of affordable housing experience within the last 5 years. Finally, to accommodate HUD’s on-site reviews, the guidance required nonprofits to maintain property records in a specified format. HUD did not implement all of the Inspector General’s recommendations. Specifically, the Inspector General’s report recommended that HUD suspend the program and evaluate it to determine whether the program was viable or should be discontinued. HUD Office of Housing officials told us they developed a proposal for a contractor study of the program but that the proposal was never funded. HUD officials said they did not suspend the program because they felt the improvements made following the Inspector General’s review would prevent further problems. We estimate that the Discount Sales Program cost HUD between $18.8 and $23.9 million in calendar year 2002. Most of this cost, between $15.1 and $20.2 million, was a reduction in net revenue resulting from HUD’s selling properties through the program rather than through its regular sales process. Personnel expenses for administering the program accounted for the remaining $3.7 million of HUD’s cost. The net revenue HUD receives from each property it sells is less than the property’s selling price because HUD incurs certain holding and selling costs. Some of these costs are common to both discounted and regular HUD property sales, while others are not. For example, on a regular sale, HUD pays the homebuyer’s closing and financing costs and the sales commission of the successful selling broker, within certain guidelines. HUD does not pay either of these costs for properties sold through the Discount Sales Program. HUD does not require a selling broker for the properties nonprofits purchase through the program; consequently, there is generally no selling broker’s commission for these transactions. HUD incurs other types of costs for all properties whether or not they are part of the program. These costs include (1) the fees and reimbursable expenses it pays to management and marketing contractors responsible for inspecting, appraising, securing, maintaining, and selling HUD-owned properties; (2) sales incentives in the form of cash allowances that HUD periodically offers to homebuyers—including nonprofits—that close relatively quickly on executed sales contracts; (3) the listing broker’s fee; and (4) the property taxes for the period when HUD owned the home. To determine the impact of the Discount Sales Program on HUD’s net revenues (i.e., the selling price minus holding and selling costs) we compared the estimated net revenues HUD received for the discounted properties with the estimated net revenues HUD would have received if it had sold the properties through its regular sales process.