February 15, 2002
Janice W. Blake-Green
U.S. Department of Housing and
Office of the Chief Financial Officer
451 7th Street, S.W., Room 2214
Washington, DC 20410
Subject: Challenge to the inclusion of the following positions on the Assistant Secretary
For Housing-Federal Housing Commissioner A-76/FAIR Act Inventory:
D606 Asset Appraisal and Valuation
D708 Application Receipt/Processing
D709 Mortgage Underwriting
D000 Administrative Support
Dear Ms. Blake-Green:
As the President of the Council of HUD Locals, 222, of the American Federation of Government Employees, AFL-CIO which represents employees working at the U.S. Department of Housing and Urban Development, as well as in my capacity as an "interested party" as established under the provisions of section 3(b) of the Federal Activities and Inventory Reform Act (FAIR Act) of 1998, Public Law 105-270, and as the head of a labor organization as described in section 7103(a)(4) of title 5, United States Code, I submit the following challenge to select items contained in the Department’s Commercial Activities Inventory of April 7, 2001. Notice of the Inventory was published in the Federal Register on January 3, 2002.
Specifically, I am challenging the decision to include the items listed below on the Department’s inventory list as commercial activities:
Assistant Secretary for Housing-Federal Housing Commissioner A-76/FAIR Act Inventory:
D606 Asset Appraisal and Valuation
D708 Application Receipt/Processing
D709 Mortgage Underwriting
D000 Administrative Support
These items specifically appear above the organization code HMLA and/or HMLAS, preceded by a number and letter representing the Region and office in which each organization is physically located. We are challenging their inclusion on the list wherever the organization may be physically located.
The Office of Federal Procurement Policy (OFPP) Policy Letter 92-1, "Inherently Governmental Functions" of September 23, 1992 defines inherently governmental functions as follows:
"As a matter of policy, an "inherently governmental function" is a function that is so intimately related to the public interest as to mandate performance by Government employees. These functions include those activities that require either the exercise of discretion in applying government authority or the making of value judgments in making decisions for the Government."
It is my contention that in accordance with the above definition, all of the work categorized under each of these commercial activity codes should be rightfully defined as inherently governmental and reclassified as inherently governmental. Specifically:
The challenged function codes work in the organizational unit commonly referred to as the Office of Housing Production Branch (Production). Production is involved in both the direct financing and the insurance of mortgages used to finance multifamily construction, rehabilitation and/or refinancing. The Office of Housing has three processes for review and approval of financing and mortgage insurance. The first is known as MAP, Mortgage Accelerated Processing; the second is TAP, Traditional Application Processing. Both MAP and TAP are used for FHA mortgage insurance. The third process is very similar to TAP and is used where HUD is directly financing the production of housing for the elderly and persons with disabilities (Section 202 and 811 Housing).
These function codes are engaged in an inherently governmental function, involving among other things, the interpretation and execution of the laws of the United States so as to:
Additionally, releasing to a contractor the information necessary to accomplish the function will result in contractor access to confidential business information.
With regard to FHA mortgage insurance, the mortgagees (banks), mortgagors (owners), developers, construction companies, architects, accountants, appraisers, and environmental, structural, civil, and mechanical engineers that work on these requests for FHA mortgage insurance are generally profit motivated, and they seek a government guarantee that their business venture will not fail, or at least, that they will not suffer from that failure. Should the business venture fail, the mortgagee will seek to have the outstanding mortgage covered by the FHA mortgage insurance. Because FHA mortgage insurance is offered for NON-RECOURSE loans, the mortgagor will be able to walk away from the business failure without financial impact on his other business ventures or partnerships, or on his personal wealth.
The public’s interest is secured only by the real estate (not by any other assets of the mortgagor or mortgagee). Under these circumstances, the mortgage underwriting, asset appraisal and valuation, and architectural and engineering reviews are of truly critical value. These are commonly referred to as the technical reviews.
In fiscal year 2001, the Office of Multifamily Housing provided $4.34 billion in mortgage insurance to 470 multifamily housing developments, 67 assisted living facilities, 135 nursing homes and 5 mobile home parks. This is an average of $6.4 million per development insured. Failure on even a small number of developments results in significant loss.
TAP relies upon HUD employees to directly appraise, underwrite and review architectural and engineering plans. In the 1990s, HUD engaged in small procurement contracting known as “delegated processing” to provide these services. HUD employees who were specialists in underwriting, valuation, construction analyses, etc., reviewed the contractors’ work. Contractors worked directly for and were paid by HUD. Although each individual contract was small, the total cost was far in excess of the cost of doing the work in house. Additionally, contracting out and then reviewing contractor’s work often made the mortgage insurance application process slow.
In response, the agency developed Mortgage Accelerated Processing. MAP is the FHA insurance application processing method of choice for the department. The agency uses MAP in greater and greater proportions. Rather than using HUD employees or contractors working for HUD, the mortgagee seeking mortgage insurance provides the technical reviews. HUD staff then review the technical reviews submitted by the mortgagee and it’s contractors.
The MAP process is already paper-thin close to resulting in violations of HUD regulations at 24 C.F.R. Section 200.145(b) which state:
Any appraisals, inspections, environmental assessments and technical or financial evaluations conducted by or for the Commissioner are performed to determine the maximum insurable mortgage, and to protect the Commissioner and the FHA insurance funds.
It cannot be argued that technical reviews contracted for by the hopeful beneficiary of the FHA mortgage insurance program is “conducted by or for the Commissioner.” These reviews, bought and paid for by the mortgagee, are for the benefit of the mortgagee. Nonetheless, these technical reviews are used to determine the maximum insurable mortgage, and they are used to protect the FHA insurance fund.
MAP is about as close as you can get to fully bestowing the FHA insurance fund solely in the hands of the private sector without crossing the line of acceptability. The only thing that saves MAP from being in violation of the regulations is the review of the mortgagee technical reviews by qualified HUD/FHA technicians. To contract out the Appraisal and Valuation, Mortgage Underwriting, and Architect/Engineering functions would result in no real FHA review of mortgagee technical reviews. If a non-technical HUD employee is reviewing the HUD contractor’s review of the mortgagee technical reviews, the non-technical HUD employee—who is not an architect, engineer, appraiser or loan sevicer by training and trade—lacks the qualifications to ensure that the Commissioner and the FHA insurance fund are protected.
If, for example, faulty architectural plans are submitted and accepted, the HUD generalist would have no basis upon which to judge whether the plans are acceptable. If their acceptance results in shoddy construction, then the debt insured by FHA will exceed the actual value of the property. At an average cost of $6.4 million per development, the costs to the insurance fund can increase quickly.
It should also be noted that, for many borrowers, FHA mortgage insurance is mortgage insurance of last resort. Therefore, applications to FHA require more, not less, scrutiny. Deals that may be dismissed outright in the conventional private sector will find themselves on FHA’s doorstep. From the private sector’s perspective, it’s worth a try; the worst that can happen is that FHA will also say “no.”
The function of Application Receipt and Processing and Administrative Support should also be considered inherently governmental. Technical reports do not stand alone. The parts must be put together to form the basis for a recommendation. An overview of technical reviews may reveal conflicts between them, or disclose conflicts with government directives or regulations. The function of forming decisions, merging technical data, resolving conflicts or finding them irresolvable is an integral part of protecting FHA insurance funds. If not done properly, the result can be the commitment of mortgage insurance where there should be none, or the failure to insure where it should be done.
There is a lot of money to be made in real estate development on the front end--financing fees, construction costs, architectural drawings, and much more. But FHA insurance lasts for forty years. After almost all of the private sector interests have made their profit and moved to the next deal, the insurance fund remains at risk.
Finally, allowing contractors to do these functions would necessarily result in the release of information that is confidential commercial and financial information, and would potentially harm the competitive abilities of mortgagors whose mortgagees did business with HUD. Data submitted in the underwriting process reveals business sources, estimated costs of doing business and other information that rivals could use to competitive advantage. Corporations do not have rights under the Privacy Act to insist the government not disclose information. But we have specifically recognized a business’s right to have information declared exempt from disclosure under the Freedom of Information Act when it is confidential commercial or financial information. This declaration lasts for ten years (24 C.F.R. Section 15.108). While FOIA would not preclude the agency from releasing this information to a contractor working for the agency, it should be used as an indication of the high level of confidentiality HUD regularly affords this sort of information.
Maintaining these functions as inherently governmental ensures that in using the products of the MAP program, any final agency action complies with the laws and policies of the United States. Maintaining it as inherently governmental ensures that decisions reflect the independent conclusions of agency officials and not those of contractors who may have interests that are not in concert with the public interest, and may be beyond the reach of management controls otherwise applicable to public employees.
Additionally, the work performed under this category involves access to confidential business information. Access by other than an employee of the federal government would compromise legitimate business interests of the agency’s clients. Maintaining this function as inherently governmental ensures that any final agency action complies with the laws and policies of the United States. Maintaining this function as inherently governmental ensures that decisions reflects the independent conclusions of agency official and not those of contractors who may have interests that are not in concert with the public interest, and may be beyond the reach of management controls otherwise applicable to public employees.
The U.S. Department of Housing and Urban Development should uphold this challenge, change its decision and exclude the activities from its list of commercial activities. Thank you for your consideration of the matter. I request that the decision regarding this challenge be sent to me via facsimile at 617/565-8323, with a follow-up mailing to my address at P.O. Box 5961, Boston, MA 02114.
Carolyn Federoff, President
AFGE Council of HUD Locals, 222
cc: Council 222 Executive Board
and Local Presidents
AFGE National Office (Public Policy Department)