Indiana Law Review


VOLUME 7 1974 NUMBER 5
INDIANA LAW REVIEW

SECTION 235 HOUSING: ONE EMPIRICAL STUDY WITH
RECOMMENDATIONS FOR THE FUTURE

Anne C. Singer,* Everett E. Landon,** and
Janet E. Graham***

I. Introduction

In a country in which a "person's home is his castle/* and in
which the health of the housing construction industry is a major

indication of economic stability, it is not surprising that Congress

has enacted legislation to aid the poor in obtaining their own
homes.' Surprisingly, aside from a small-scale experiment some
years earlier^ it was not until 1968, after two summers of
urban riots and in the midst of a severe housing slump, that

Congress took major steps in this direction. In that year, at-
tempting to promote for low-income families a developing sense
of dignity as well as hard work, thrift, family solidarity, and a
"stake in the community,"^ Congress promulgated section 235 of

* Member of the New Jersey Bar; Law Clerk to the Honorable Robert
L. Clifford, The Supreme Court of New Jersey; S.B., University of Chicago,
1966; M.S., University of Alabama, 1969; J.D., University of Cincinnati, 1973.

**Member of the Ohio and Michigan Bars; Law Clerk to Robert Hewlett,
Chairman of the Michigan Employment Relations Commission; B.A., DePauw
University, 19b7; J.D., University of Cincinnati, 1973.

*** Law Student, University of Cincinnati; B.M.E., Indiana University,
1969.

This study was conducted under a research grant from the American
Bar Foundation. The analyses, conclusions, and opinions expressed are those
of the authors and not the Foundation, its officers, and directors or others
associated with its work.

'In 1934, Congress passed the National Housing Act, ch. 847, 48 Stat.
1246 (1934), as amended, 12 U.S.C. §§1701, 17151, 1715z 1735b (1970).

^The National Housing Act was amended in 1966 to provide for a limited,
experimental program, authorizing FHA-insured mortgages to nonprofit
organizations for purchase and rehabilitation of substandard houses for resale
to low-income families. 12 U.S.C. § 17151(h) (1970).

^See Berger, Homeownership for Lower Incoyne Families: The 1968
Housing Act's "Cruel Hoax,' 2 Conn. L. Rev. 30 (1969) ; Butler, An Approach
to Low and Moderate Income Home Ownership, 22 Rutgers L. Rev. 67, 68
(1967) ; Note, Government Programs to Encourage Private Investment in
Low-Income Housing, 81 Harv. L. Rev. 1295, 1319 (1968); 20 Case W. Res.
L. Rev. 494,495 (1969).

773



774 INDIANA LAW REVIEW [Vol. 7:773

the National Housing Act/ providing subsidies for middle- and
low-income home purchasers.^ It was the first major step which

^Act of Aug. 1, 1968, Pub. L. No. 90-488, § 235, 82 Stat. 477, codified at
12 U.S.C. § 1715z (1970). The more relevant portions of this section are as
follows

:

§ 1715z. Homeownership or membership in cooperative association
for lower income families—Authorization for periodic

assistance payments to mortgagees

(a) For the purpose of assisting lower income families in ac-
quiring homeownership or in acquiring membership in a cooperative
association operating a housing project, the Secretary is authorized

to make, and to contract to make, periodic assistance payments on
behalf of such homeowners and cooperative members. The assistance
shall be accomplished through payments to mortgagees holding mort-
gages meeting the special requirements specified in this section.

Qualifications and eligibility requirements

for assistance payments

(b) To qualify for assistance payments, the homeowner or the
cooperative member shall be of lower income and satisfy eligibility
requirements prescribed by the Secretary, and

—

(1) the homeowner shall be a mortgagor under a mortgage
which meets the requirements of and is insured under subsec-
tion (i) or (j) (4) of this section ....

Limitation on payments on behalf of mortgagor; occupancy

of property; m,axim,um amount of payment

(c) The assistance payments to a mortgagee by the Secretary
on behalf of a mortgagor shall be made during such time as the mort-
gagor shall continue to occupy the property which secures the mort-
gage .... The payment shall be in an amount not exceeding the
lesser of

—

(1) the balance of the monthly payment for principal, in-
terest, taxes, insurance, and mortgage insurance premium due
under the mortgage remaining unpaid after applying 20 per cen-
tum of the mortgagor's income; or

(2) the difference between the amount of the monthly pay-
ment for principal, interest, and mortgage insurance premium
which the mortgagor is obligated to pay under the mortgage and
the monthly payment for principal and interest which the mort-
gagor would be obligated to pay if the mortgage were to bear
interest at the rate of 1 per centum per annum.

Adoption of procedures for recertifications of m,ortgagor's or
cooperative member's income

(f) Procedures shall be adopted by the Secretary for recertifi-
cations of the mortgagor's (or cooperative member's) income at in-
tervals of two years (or at shorter intervals where the Secretary
deems it desirable) for the purpose of adjusting the amount of such
assistance payments within the limits of the formula described in
subsection (c) of this section.



1974] SECTION 235 HOUSING 775

Congress had taken toward the goal of "a decent home and a suit-
able living environment for every American family/'* a goal first
proclaimed in the Housing Act of 1949/

Authorization of appropriations; aggregate amount of assistance
payment contracts; maximum, income limits of families; annual

report to Congressional Committees with respect to income

levels; liTnitation on payments with respect to existing
dwellings or dwelling units in existing projects

(h) (1) There are authorized to be appropriated such sums as
may be necessary to carry out the provisions of this section, in-
cluding such sums as may be necessary to make the assistance pay-
ments under contracts entered into under this section. The aggre-
gate amount of contracts to make such payments shall not exceed
amounts approved in appropriation Acts, and payments pursuant to
such contracts shall not exceed $75,000,000 per annum prior to July
1, 1969, which maximum dollar amount shall be increased by $100,-
000,000 on July 1, 1969, and by $125,000,000 on July 1, 1970.

(3) .... [Njot more than

—

(A) per centum of the total amount of contracts for
assistance payments authorized by appropriation Acts to be
made prior to July 1, 1969,

(B) 15 per centum of the total additional amount of
contracts for assistance payments authorized by appropria-
tion Acts to be made prior to July 1, 1970, and

(C) 10 per centum of the total additional amount of
contracts for assistance payments authorized by appropria-
tion Acts to be made prior to July 1, 1971,

may be made with respect to existing dwellings, or dwelling units
in existing projects.

Insurance of mortgages executed by mortgagors meeting eligibility

requirements for assistance payments; issuance of commitment;
eligibility requirements for insurance

(i) (1) The Secretary is authorized, upon application by the
mortgagee, to insure a mortgage executed by a mortgagor who meets
the eligibility requirements for assistance payments prescribed by the
Secretary under subsection (b) of this section.

Deductio7is for 7?iinors in determining income limits; exclusion

of earnings of minors

(1) In determining the income of any person for the purposes of
this section, there shall be deducted an amount equal to $300 per each
minor person who is a member of the immediate family of such per-
son and living with such family, and the earnings of any such minor
person shall not be included in the income of such person or his family.

Note that section 235 also covers membership in a cooperative housing asso-
ciation. Id. §§ 1715x(b) (2), (d). But these subsections are not relevant to
this study.



776 INDIANA LAW REVIEW [Vol. 7:773

The goal, however, was not to help every American family, but
only the low-income family. Limits were placed upon the an-

nual income which a family might receive and still be eligible

to benefit from the Act. A purchaser's income could not exceed
135 percent of the public housing limit for initial occupancy in a

given geographical area, with one limited exception for slightly

more affluent families.® To determine eligibility, a deduction of
$300 for each minor child was made from the applicant's gross
income.^ Social security taxes, unusual or temporary income, and

earnings of minors were also deducted before the eligibility figure,
called adjusted gross income, was ascertained. '° Moreover, the
financial status of the purchaser would be reviewed once every two
years to adjust the subsidy.'' Finally, the putative purchaser must
be able to afford a $200 down payment.'^

Although many purchasers in fact misunderstood the role of
the FHA by fancifully attributing to it an involvement, and even

For a good basic discussion of how section 235 works, see Schafer & Field,
Section 235 of the National Housing Act: Homeownership for Low Income
Families?, 46 J. Urban L. 667 (1969). For an excellent, detailed account,
see C. Edson & B. Lane, A Practical Guide to Low- and Moderate-Income
Housing (1972) [hereinafter cited as Edson & Lane].

^Some observers have argued that it is too risky for low-income families
to own their own houses, and that they should not be encouraged to do so.
This assumption appears to be unjustified, as pointed out by Kolodny, Should
Poor Families Own?, in Homeownership for the Poor 190 (C. Abrams ed.
1970). Kolodny demonstrates that modern changes in the mortgage system
make low-income homeownership feasible: (1) mortgages extend for longer
periods, (2) they are self-liquidating, i.e., no deficiency judgment results
on FHA mortgages when the house is sold, and (3) downpayments are low.
Id. at 197. Whether homeownership is risky, concludes Kolodny, depends only
on whether the payment is within the family's means.

H2 U.S.C. §1441 (1970). This statement is reiterated in the Housing
and Urban Development Act of 1968, 12 U.S.C. § 1701t (1970).

^Act of July 15, 1949, ch. 338, § 2, 63 Stat. 413, as amended, 42 U.S.C.

§1441 (1970).

^Twenty percent of authorized funds can be used to aid families whose
incomes exceed the 135 percent limitation. 12 U.S.C. §1715z(h)(2) (1970).

9/d. §1715z-l(m).

'°HUD, Homeownership for Lower-Income Families, No. 444.1, at 12,
cited in Krooth & Sprogens, The Interest Assistance Programs—A Successful
Approach to Housing Problems, 39 Geo. Wash. L. Rev. 789, 802 n.80 (1971)
[hereinafter cited as Krooth & Sprogens, Housing Problems'].

'

'12 U.S.C. §1715z(f) (1970).

'^/d. 1715z(i) (3) (C) (i). For the purchaser whose income exceeds the

135 percent level, the downpayment must be three percent of the acquisition
cost. Id. §1715z(l)(3)(C)(il).



1974] SECTION 235 HOUSING 111

a guarantee of housing quality, which in reality never existed, the

method by which purchasers obtain their federal assistance is

relatively easy to understand. The mortgagor-purchaser is re-
quired to pay to the mortgagee a figure equivalent to twenty per-

cent of the mortgagor's monthly income. ^^ HUD, through the FHA,
pays the balance between that sum and the actual mortgage pay-
ment. In no instance, however, may the government pay more than
the difference between the actual monthly payment under the
mortgage and what the monthly payment would be if the mortgage
were at a one percent interest rate.'^ Thus, if the interest rate

were one percent, there would be no subsidy. HUD has estimated
that the average monthly subsidy resulting from this formula is
$50.'^

Aside from paying the subsidy, the only role that the FHA
plays in the purchase transaction is to insure to the mortgagee

repayment of the full amount of the loan in the event the buyer
defaults.'^ The FHA appraisers inspect the property sold under

13

The payment shall be in an amount not exceeding the lesser of

—

(1) the balance of the monthly payment for principal, interest,
taxes, insurance, and mortgage insurance premium due under the
mortgage remaining unpaid after applying 20 per centum of the
mortgagor's income; or

(2) the difference between the amount of the monthly payment
for principal, interest, and mortgage insurance premium which the
mortgagor is obligated to pay under the mortgage and the monthly
payment for principal and interest which the mortgagor would be
obligated to pay if the mortgage were to bear interest at the rate of
1 per centum per annum.

Id. §1715z(c).

'*Id. §1715z(c) (2).

^ ^Hearings on Housing and Urban Development Legislation and Urban
Insurance Before the Subcomm. on Housing of House Comm. on Banking and
Currency, 90th Cong., 2d Sess. 172 (1968).

'''See 12 U.S.C. §1715z(j) (1970). For a case holding that the only
purpose of the FHA inspection is to protect the FHA itself and that the FHA
owes the purchasers no duty to inspect the premises for proper construction
because it is not in privity with them, see United States v. Neustadt, 366 U.S.

696, 709 (1961). In Neustadt, the Court reasoned that the Federal Tort Claims
Act, 28 U.S.C. § 2860(h) (1970), did not sanction any suit arising out of a
claim of misrepresentation by the Government. This holding itself has im-
portant implications for section 235 purchasers. In Johnson v. FHA, 128
Colo. 144, 261 P.2d 161 (1953), the Supreme Court of Colorado stated that
the only contract entered into by the FHA was with the bank in insuring its
loan and that the purchasers could not be considered third party beneficiaries



778 INDIANA LAW REVIEW [Vol. 7:773

the program but do so for the limited purpose of insuring that the
value of the property exceeds the government's obligation. In fact,

the FHA has no direct contact with the purchaser in the typical
section 235 transaction. As suggested later, this isolationist ap-
proach may well be at the root of section 235 difficulties.'^

New, existing, and rehabilitated housing can be purchased
under the section 235 program. When Congress established the
program in 1968, intending that new housing would receive an
even greater percent of the funds in later years, it limited the

funds which could be expended for existing housing to twenty-five

percent of the section 235 budget.'® In 1969, the statute was
amended to permit greater support for the existing housing com-

of this contract. See also United States v. Chelsea Towers, Inc., 295 F. Supp.

1242, 1247-48 (D.N.J. 1967).

In Davis v. Romney, 490 F.2d 1360 (3d Cir. 1974), the court denied
monetary damages to plaintiffs who had bought homes under sections 235
and 221(d), which did not meet Philadelphia Housing Code standards. Sec-
tion 221(d)(2), incorporated by reference into section 235, requires that
the FHA-guaranteed mortgage be secured by property which meets the stan-
dards of state laws and local ordinances. Although plaintiffs' properties
did not comply with this requirement, the Davis court held that the statutory

standard was not intended to protect the homeowner, but rather to assure
the United States adequate collateral. However, because the FHA had not
made even minimal efforts to discover whether the houses met the standards
imposed by local ordinances, narrowly drawn injunctive relief would be avail-
able. See also Jackson v. Romney, 355 F. Supp. 737 (D.D.C. 1973).

The United States District Court for the District of Columbia has held
that the FHA has a duty to inspect homes sold under section 235 by virtue
of 12 U.S.C. § 1735(b) (1970) (referred to in the literature both as section

518 and section 104 of the Housing Act of 1970). Bailey v. Romney, 359 F.
Supp. 596 (D.D.C. 1973). The court distinguished Neustadt on the grounds
that the Neustadt claim arose under the Federal Tort Claims Act. The court
said that section 104 (section 518) "recognized the abuses in the § 235 Pro-

gram and provided a [specific] remedy." Id. at 600.

See Note, Abuses in the Low Income Homeownership Programs—The
Need for a Consumer Protection Response by the FHA, 45 Temple L.Q. 461,
467 (1972), for a discussion of a provision in the FHA manual which states
that the FHA inspection is primarily for the purpose of eliminating "con-
ditions threatening the continued economic soundness of the mortgage trans-
action," and secondarily "to protect the health and safety of the occupants."
But see Note, Liability of the Institutional Lender for Structural Defects in
New Housing, 35 U. Chi. L. Rev. 739 (1968), for a statement and analysis of
the theory that the lender who makes the inspection, supposedly for his own
purposes, should be liable to the buyer in the case that the inspection fails
to disclose faulty construction of the new housing.

^^See note 99 infra & accompanying text.

i«Act of Aug. 1, 1968, Pub. L. No. 90-448, § 235(h) (3), 82 Stat. 479,
codified at 12 U.S.C! § 1715z(h) (3) (1970).



1974] SECTION 235 HOUSING 779

ponent for 1970 and 1971.^^ While there was no statutory mini-
mum price on houses purchased under the program, statutory
maximums ranged from $18,000 to $24,000, depending on family
size, family income, location of the house, and the year of pur-
chase.^° In this study, which the authors will refer to as the
Cincinnati Study, homes ranged in price from $7,000 to $24,000.

Within two years after the inauguration of this *'new era in
housing," however, the program was vigorously attacked by the
media,^' Congress,^' and HUD itself." Congressional hearings held
by the House Committee on Banking and Currency, chaired by Rep-
resentative Wright Patman,^'^ redounded with charges of wide-
spread corruption in the pricing of the homes for which subsidies
were issued, in the acquisition of huge profits by housing specula-
tors, in the disillusionment and distress of purchasers, and in the

unnecessary dissipation of federal funds. According to these re-

ports, the concept that only two years earlier was intended to give
millions of citizens a "stake in the community" apparently had giv-
en them only financial insecurity and overpriced homes. The hear-
ings disclosed numerous examples of houses that had been bought at

costs of $2000 to $4000, "cosmetized,'"' and then re-sold through

section 235 at prices ranging from $12,000 to $16,000.

Normal checks on such chicanery were not present. Lending
institutions whose inspectors normally would have discovered this

fraud were unconcerned, since the FHA was insuring the loan at
100 percent. Furthermore, the FHA was responsible, at least in-

^^Act of Dec. 24, 1969, Pub. L. No. 91-152, § 109, 83 Stat. 381, codified at
12 U.S.C. § 1715z(h) (3) (1970).

2°12 U.S.C. §1715z(b)(2) (1970).

'''See, e.g., "Sixty Minutes," CBS Television, Jan. 5, 1971; Wall Street
Journal, Sept. 12, 1972, at 40, col. 1.

^^See, e.g.. Staff of House Comm. on Banking and Currency, 91st
Cong., 2d Sess., Investigation and Hearing of Abuses in Federal Low-
and Moderate-Income Housing Programs (Comm. Print 1970) [hereinafter
cited as 1970 Hearings]. The Report paints a generally dim picture of the
program as viewed in its early stages by this Committee.

2^HUD, Office of Audit, Audit Review of Section 235 Single Family
Housing, No. 05-2-2001-4900 (1971) [hereinafter cited as Audit Review].
This study reports that many appraisals were defective, that supervision and
review over the appraisers was insufficient, and that the attitudes of FHA
personnel were improper. Id. at 4-6.

=^^1970 Hearings, supra note 22.

"/cf. at 3, 29.



780 INDIANA LAW REVIEV/ [Vol. 7:773

directly, for inspections and appraisals which did not fairly repre-
sent the condition of the property or its true value.^^

Although unconscionable, the abuses of overpricing might not

by themselves have been intolerable to the poor in light of the
substantial FHA sudsidy. However, in addition to purchasing an
overpriced house, the poor found that they often had acquired a

home which required costly repairs. Although an underlying
rationale for the section 235 program was that homeownership
would have advantageous auxiliary benefits by instilling pride of
homeownership, the homes described in the hearings were not likely
to provide inspiration for anyone. All too often, buyers walked

away from their purchases. Fallen ceilings, faulty furnaces, wiring
that violated municipal housing codes, plumbing that had to be re-
paired, and porches that had to be replaced comprise examples of
defects found by the Committee investigators.^^ Many of these
defects were so serious that they caused the newly purchased home
to be deemed unfit for habitation under municipal housing codes.

These abuses spurred Congress in December, 1970, to authorize

expenditures "to correct or to compensate the owner for structural
or other defects which seriously affect the use and livability [of
homes] ,"^® if the defect existed at the time of the issuance of the

insurance commitment and had not been discovered because of
sloppy inspection techniques. This new provision, section 104 of
the Housing Act of 1970,^' might have aided many families who
were so despondent over the condition of their homes that they
moved out or accepted foreclosure as the only solution. Unfortun-
ately, the provision required that such homeowners file a claim
for repairs within one year of their purchase date,^° a require-

ment which often went unsatisfied because of faulty and delayed
notification processes.^ ^ Thus, even the remedy which carried so
much hope seemed to be too little, too late.

^^Id. at 1. Some FHA officials have been indicted and convicted for
taking bribes in connection with their work administering the section 235
program. N.Y. Times, Dec. 13, 1973, § 1, at 53, col. 1.

^^1970 Hearings, supra note 22.

2^12 U.S.C. § 1735b (b) (1970).

^^Act of Dec. 31, 1970, Pub. L. No. 91-609, § 104, 84 Stat. 1771, codified at
12 U.S.C. § 1735b (1970). This section is also referred to in the literature as
section 518.

3012 U.S.C. § 1735b (b) (1970).

^^See note 70 i7ifra for results of this study on this point. In addition,
section 104 is too limited in scope and may even be inadequate to protect the
homeowner who was victimized by deliberate concealment, since the section



1974] SECTION 235 HOUSING 781

Thus, in late 1971, section 235 stood badly scarred, berated

by those who had always expected the project to fail, and mourned
by those who had hoped that it would succeed. But many questions
remained in need of substantive answers if the program was to
be objectively evaluated. Prior studies of the program had in-
vestigated or reported only dramatic failures and tales of corrup-
tion and graft.^^ Were these accounts typical or were they a
"parade of horrors" brought forth by those who sought the suspen-
sion of the program?

Attempting to find answers to some of these questions, these
authors, supported by generous funding from the American Bar
Foundation, conducted empirical research into the actualities of

section 235 housing in the Cincinnati area. The purpose was not
simply to determine whether the interest subsidy method utilized
by section 235 as a specific statutory provision was viable but
rather to determine whether the entire approach of the Housing

Act of 1968, which relied upon the poor to make and live with their
own housing choices, was legitimate. The rest of this Article is
a report of that study.

Despite the President's suspension of funding^^ for the section

235 program in early 1973, and his recent proposal to substitute
direct subsidies to the poor for the section 235 interest subsidy,^"^

will only remedy defects which "proper inspection could reasonably be ex-
pected to disclose." 12 U.S.C. § 1735b(b) (1970). This problem is raised in

Audit Review, supra note 23, at 48.

One final serious bar to section 104's effectiveness arose from the regu-
lations promulgated by the Secretary of HUD, pursuant to 12 U.S.C. § 1735(c)
(1970). These regulations provided that the Secretary would evaluate re-
imbursement claims for defects in light of "the extent to which the defects
presented a clear and present danger to the occupants," among other con-
siderations. However, the District Court for the District of Columbia has
recently held that this standard is unduly restrictive and contrary to the
legislative intent mirrored in section 104. It enjoined the application of this
standard. Bailey v. Romney, 359 F. Supp. 596 (D.D.C. 1973).

^^See generally 1970 Hearings, supra note 22.

^^ Remarks Prepared for Delivery by George Romney, Secretary of HUD
at the Twenty-Ninth Annual Convention Exposition of the National Asso-
ciation of Home Builders Astroworld, Houston, Texas, Jan. 8, 1973.

2^N.Y. Times, Sept. 23, 1973, § 4, at 4, col. 3. Under the direct subsidy
approach, the federal government would provide cash to qualified recipients

and allow them to choose their own homes on the private market. It is beyond
the scope of this Article to compare the advantages of the interest subsidy
with those of the direct subsidy. Critiques of direct subsidies can be found
in Gans, A Poorman's Home is His Poorhouse, N.Y. Times Magazine, Mar.



782 INDIANA LAW REVIEW [Vol. 7:773

the Cincinnati Study has continuing significance. Perhaps it even

has heightened importance at this time of reexamination of the

housing problem, for there is certain to be continuing debate over

the best and most economical means to assist the poor in attaining
adequate shelter. Many members of Congress still favor the in-
terest subsidy method, and within a few days of the announcement
of the administration's proposed direct subsidy, critics of the new
program became vocal."

Regardless of the final outcome of the direct subsidy versus

interest subsidy battle, a minor battle is presently being waged in
the courts over the legality of the suspension of funds for the

section 235 program. Two suits on this question have been filed.
In Pennsylvania v. Lynn,^^ defendant Lynn, Secretary of HUD,
was enjoined from refusing to accept applications for subsidies
and was ordered to process these new applications as well as exist-
ing ones. In so holding, the court found without merit his con-

tentions of lack of standing, political question, and sovereign im-

munity. The court concluded that it was not within the Secretary's
discretion to suspend the funds since "the Congressional mandate
requires that [the programs] be operated on a continuing basis."^^

The detailed account of legislative history recited by the court
strongly supported this conclusion. The court further stated that
it was not "within the discretion of the Executive to refuse to
execute laws passed by Congress but with which the Executive
presently disagrees."^® After this decision was rendered, the order
to process applications for section 235 funds was stayed pending
appeal in the United States Court of Appeals for the District of

Columbia.^' A second case to force release of suspended funds.
City of Camden v, Lynn,^^ is still at an early stage of litigation, no
decision having been rendered at the time of this writing. Clearly

31, 1974, at 20; N.Y. Times, Apr. 2, 1974, § 1, at 15, col. 1. For the results
of an experimental direct subsidy project, see HUD, First Annual Report
OF THE Experimental Housing Allowance Program (1973).

2^N.Y. Times, Sept. 23, 1973, § 4, at 4, col. 3.

2*362 F. Supp. 1363 (D.D.C. 1973), motion to stay denied, No. 1835 (D.C.

Cir., Aug. 21, 1973), stayed, No. 230 (Mr. Chief Justice Burger, Aug. 29,
1973). But cf. Housing Authority v. HUD, 340 F. Supp. 654 (N.D. Cal. 1972).

2^362 F. Supp. at 1369.

38/c?. at 1372.

^'No. 1835 (D.C. Cir., Aug. 17, 1973), stayed. No. 230 (Mr. Chief Justice
Burger, Aug. 29, 1973).

4°No. 961 (D.N.J., filed June 29, 1973).



1974] SECTION 235 HOUSING 783

section 235 has not yet been put to death ; the battle has yet to be

waged.

II. Methodology

Several preliminary points of methodology must be noted,
for it is on these points that the Cincinnati Study differs signifi-

cantly from those which preceded or paralleled it. First, this study,

unlike others thus far published,"*' maintained "control" groups

against which to measure findings relating to section 235 pur-

chasers. It was not enough to show, as the critics maintained, that
section 235 purchasers were being subjected to substandard hous-

ing. If persons who bought similar housing but were not being
subsidized by the Housing Act were suffering from the same ills
and deceits, then the weakness lay not in the provisions of the Act,

but in the type of market which was being studied. If, for example,
a critic of section 235 pointed to statistics that X percent of all
such houses were foreclosed within one year but could not show
that the percentage of foreclosures for comparable non-235 houses

was less, the only conclusion possible would be that section 235
was not being used by speculators and realtors to bleed the poor
any more or any less than they would have been bled without
it. And if the rate for non-235 housing were equal to or higher
than that for section 235 housing, then perhaps section 235 could

even be said to be a blessing for its clients, even if X percent were
"too high" on an absolute scale.

Two control groups of forty interviewees each, chosen to cor-
respond with the new and existing section 235 groups, were sur-
veyed. These control groups were chosen by selecting, from land
record plat books, houses purchased as close in time and locale
to section 235 purchases as possible. The times of purchase were
within the time span of the section 235 program being studied,
from 1969 to 1972.

A second major difference between the Cincinnati Study and
others is that its authors were fortunate enough to obtain inter-
views with a substantial number of persons whose mortgages had
been foreclosed after the purchase of section 235 houses. Although
difficult to locate because such foreclosed owners often do not
leave forwarding addresses, the interviews with these prior
owners provide some fresh insight into the success or failure of

"^'Note, The 235 Housing Program in Action: An Empirical Study of its
Administration and Effect on the Homeowner-Participant in the Columbia,
South Carolina Area, 25 S.C.L. Rev. 93 (1973) [hereinafter cited as Columbia
Study]. See generally 1970 Hearings, supra note 22.



784 INDIANA LAW REVIEW [Vol. 7:773

section 235. Sixty-seven persons in Hamilton County, Ohio, had
left section 235 houses. Sixty had left from old houses ; seven from
new. A rate of 5.6 percent vacated homes, included a foreclosure
rate of about five percent, since one or tv^o of the sixty-seven were
voluntary sales."^^ Thirty-one of the sixty-seven persons were
located and interviewed, a "finding rate" of nearly fifty percent.

The methodology employed in this study was as follows. First,
records of the FHA in Hamilton County were examined and re-
vealed a total of 1,214 homes which had been purchased under
section 235 between April, 1960, the start of the program in Cin-
cinnati, and May, 1972. Of these, 636 were new houses and 578
were existing houses. Although the Act provided for the same
subsidy in the case of rehabilitated houses,"^^ such houses were not
part of the Cincinnati program. From each of the two groups,
new and existing, forty names were randomly drawn. When a
potential interviewee could not be contacted or was contacted and
refused the interview, a replacement name was drawn randomly,
in order to maintain the sample size at forty.

Finally, because of an interest in ascertaining whether buyers
who had purchased homes which eventually required repairs under
section 104 had special characteristics,^^ another category was
added. Forty interviewees were randomly selected from a pool
of the 108 buyers who had received section 104 repairs in Hamilton
County. Thus, at the outset there were the following six categories
of interviewees:

Total numher Percent Number of
from which of interviewees

Section 235 purchasers sam,ple drawn total

1. Purchasers of new homes 629 51.8 40
2. Purchasers of existing homes . . 410 33.8 40
3. Purchasers whose homes required

§ 104 repairs 108 8.9 40

4. Purchasers foreclosed

2. New homes 7 0.6
b. Existing homes 60 4.9 31

Control purchasers

5. Purchasers of new homes 40

"•^Compare this rate to the rate in Philadelphia, for example, where the

rate of foreclosure was just under eight percent. See Stegman, Low-Income
Ownership: Exploitation and Opportunity, 50 J. Urban L. 370, 376 (1973).
Apparently Cincinnati's section 235 program has fewer problems than those
in Philadelphia.

4^2 U.S.C.§1715z (h)(3) (1970).

^*See note 29 supra & accompanying text.



1974] SECTION 235 HOUSING 785

6. Purchasers of existing homes ... 40

Total interviewees 231

The sample, then, upon which this report is based numbers

231 which includes thirty-one persons in the "foreclosed'* category,

and forty persons each in the other five categories. Although fairly

small, this sample is statistically sound. Indeed, some of the more

general findings which are reported here have appeared in other

reports.'^^ In any event, given the resources and time at the authors'

disposal, an attempt was made to interview as many people as
possible. Of the total number of section 235 purchasers in Hamil-

ton County, more than thirteen percent were interviewed and ap-
proximately twenty percent of the entire number were either con-
tacted or sought to be contacted. The actual interview consisted

of approximately one hundred questions and lasted from twenty-

five to forty-five minutes each. They were conducted during the
summer of 1972.

III. Who Is Section 235 Helping?

A, Is It Reaching Those for Whom It Was Primarily Intended?

As already suggested, one of the primary purposes of section
235, and indeed of the entire Housing Act of 1968, was to give low-
income families a "stake in the community.'*"*^ In light of the tenor

of the times in which the Act was passed, manifested in part by
mounting tensions in the ghetto areas, it is also likely that blacks

^^For replication of some, but not all, of the data, see Columbia Study,
supra note 41. See also U.S. Comm'n on Civil Rights, Homeownership for
Lower-Income Families (1971). Similar surveys of section 235 purchasers
nationwide have been done by HUD itself. One survey done of buyers in the
third quarter of fiscal 1969 revealed that the typical section 235 purchaser

had a family of five members, made an annual income of $5,685, and bought
a house for $15,000. R. Taggart, Low-Income Housing: A Critique of
Federal Aid 78 (1970). Another study done in the first quarter of 1971
showed an average family whose head of household was twenty-nine years old,
earned an annual income of $6,150, and bought a house for $17,808. It re-
vealed an average family size of four in new housing and six in older housing.
Of these buyers seventy-eight percent were married couples, with twenty-
one percent described at "other types.'* Edson & Lane, supra note 4, at
5:9. The data in the Cincinnati Study is generally comparable in all areas to
the earlier studies, except that annual salaries of section 235 purchasers in
Cincinnati were found to be slightly higher than the above reports indicated
for their subjects.

^^Hearings on H.R. 15624, H.R. 15625 and Related Bills Before the Suh-
comm. on Housing of the House Comm. on Banking and Currency, 90th Cong.,
2d Sess., pt. 1, at 77 (1968).



786 INDIANA LAW REVIEW [Vol. 7:773

were intended to be primary beneficiaries. To determine whether
the program was reaching the people it sought to reach, the authors
investigated the income and occupation of both the experimental
and control groups, as well as the homeowning history, both im-
mediate and distant past, of the purchasers involved. The racial
makeup of the sample will be considered in the next subsection.

The findings on income levels were striking. There was a
marked difference, on the average approximately ?5,000 annually,
between the incomes of the experimental 235 groups and the in-
comes of their respective controls. Between the two sets of compar-
able control and experimental groups, the difference was especially
noteworthy. While the average weekly income of the section 235
purchaser of existing housing was $152, that of the control pur-
chaser of existing housing was $242, a difference of $4,600 per year.
The statistics indicate a difference of over $3,700 per year between
control and section 235 purchasers of new homes. Those purchasers
whose experience went sour, either through foreclosure or sig-
nificant repairs, were substantially poorer than those in any of
the other groups. This is made clear by examining in Table I the
average weekly per capita incomes of these groups, which ranged
from $17 per person per week in section 104 houses to $78 per
person per week in new control purchases.

One significant factor which may account for much of the
difference in income between existing section 235 purchasers

and existing control purchasers is that the controls tended to be
families in which both spouses were employed, while the section
235 families were not. While only three families in the existing
section 235 sample reported that both spouses worked, sixty-three

percent of the existing controls had income from two work-
ing spouses. In addition, a much larger percentage of section 235
houses were purchased by single women whose earnings tended
to be lower than those of their male counterparts. In new section
235 housing, ten percent of the families had two working spouses,
while both spouses were employed in twenty-eight percent of the
new controls.'*''

Table I: Income

Weekly
Section 235 purchasers income ($)
New 162
Existing 152

§ 104's 125

"•^The income of minors is not included in the section 235 subsidy formula

and so this study has not examined this possible source of additional income.

Annual Per capita
income ($) income/week ($)

8,424 40

7,904 25

6,500 17



1974] SECTION 235 HOUSING 787

Foreclosed 136 7,072 19

Control purchasers

New 234 12,168 78
Existing 242 12,584 60

While needy families in the Cincinnati area are being helped

by section 235, it is immediately clear from Table I that the Cin-

cinnati sample has a much higher average income than a com-
parable sample obtained in other areas of the country/® These

high average incomes may indicate that the program is not reach-
ing as many hard-core poor as Congress had intended.

Nevertheless, other data indicates unequivocally that the pro-

gram is giving a "stake in the community" to those v^ho did not
have such a stake prior to their involvement in the program. For

example, Table II shoves that virtually none of the section 235

purchasers in any group had lived in his own home prior to his
section 235 purchase, while a substantial number of control pur-
chasers and owned previous homes. Further data in this table
reaffirms what the income analysis indicated, namely, that even
though average incomes of people helped by section 235 may not
be as low as Congress might have wished, low-income recipients

are indeed benefiting from it. Between eight to twenty-five per-
cent of the section 235 purchasers, depending upon the group,
had been living in public housing prior to their purchase. Only
a negligible number of control purchasers had done so.

Table II: Prior Homeotvning Experience

Percent Percent having

owning at least one set Immediately prior home (%)
Section 235 prior of homeowning Public Private Rent Own
purchasers houses parents housing apartment home home
New 10 95 8 70 18 5
Existing 20 50 25 50 23

§ 104's 10 58 15 45 35 5

Foreclosed 16 83 16 55 26 3

"^^A second empirical study was funded by the American Bar Foundation
in the summer of 1972. See Columbia Study, supra note 41. Although it
is not clear whether the Columbia Study's sample of 400 new house buyers
and 100 existing house buyers was representative of the actual Columbia,
South Carolina, section 235 population, that study showed that seventy-
three percent of those respondents had incomes from $3,000 to $7,000, while
only sixteen percent earned over $7,000 per year. Id. at 106. This is in
marked contrast to the Cincinnati income levels even though Columbia,
South Carolina, is a Southern city and would be expected to have a some-
what lower average income. See also U.S. Comm'n on Civil Rights, Home-
ownership FOR Lower Income Families 29 (1971), which included new and
existing housing and reported a 1969 average income of $5,579 in four cities
—Denver, St. Louis, Little Rock, and Philadelphia.



788 INDIANA LAW REVIEW [Vol. 7:773

Control

purchasers

New .15 95 2
.30 80 5

63

57

15 15

Existing . . .

.

25 13

The figures on parents' homeowning experiences further dif-
ferentiate section 235 purchasers from control purchasers, at least
in the category of existing housing. Although Table II indicates

that a majority of all purchasers interviewed had at least one set
of parents who owned a house at one time in their lives, the figures
for the control purchasers are generally higher than those for the

section 235 purchasers. If the purchasers of new section 235 hous-
ing, who are white, young married couples, and almost indistin-
guishable from their control counterparts, are removed from the
survey, the impact is more apparent: section 235 is reaching al-
most double the number of persons whose parents did not own
a house at any time in their lives. This must affirm the view that
the program is bringing a new dimension to the lives of these
purchasers.

B. General Description of the Section 235 Sample

The data which is reported in Table III following this sum-
mary supports the following conclusions about the sex, race, age,
and educational levels of each of the four kinds of section 235
purchasers

:

1. Purchasers of existing 235 housing,—Although statistic-
ally a majority of these purchasers are married couples, a startingly
high percentage are single women. The purchasers in this sample
tend to be black, older than the average homeowner, with a weaker
educational background.

2. Purchasers of housing which required repairs under sec-
tion 104^.—This group is similar to that described above except that
it tends to be even more nonwhite and somewhat younger.

3. Purchasers of housing which ivas foreclosed.—This group,
again, is highly female, predominantly black, with a marginal ed-

ucational background, and middle aged.

^. Purchasers of neiv housing und.er section 235.—These pur-
chasers stand out in striking contrast to the other three groups.

They are white, young married couples with a substantially higher
degree of education.

Table III: The Purchasers

Educational level Average
Section 235 Percent Percent Average (average highest family
purchasers female nonwhite age grade completed) size

New 5 5 21-30 12 4



1974] SECTION 235 HOUSING 789

Existing 48 65 41-50 10 6

§104's 45 73 31-40 10 7

Foreclosed 39 52 31-40 10 7

Control

purchasers

New 2 21-30 some college 3
Existing 5 53 31-40 12 4

In comparing the section 235 purchaser to the control pur-

chaser, the following generalizations seem warranted : control pur-

chasers both in existing and new housing, but particularly in the
latter category, are better educated, younger, almost all married

couples, in smaller family units, and more likely to be white than

their section 235 counterparts. In dealing with each of the char-

acteristics separately, the authors conclude the following

:

1. Sex.—Section 235 has allowed a substantial number of
women to purchase homes, possibly many with large families.

2, Race,—Section 235 has substantially helped blacks move
into existing housing, but when new housing is concerned, whites
have taken advantage of the program to the virtual exclusion of

blacks.

The FHA has been criticized for its role in creating racially
isolated inner cities or, on the other hand, for moving racially
isolated groups from the inner city to a similar "suburban ghetto."^'
The section 235 program appears to be continuing the disturbing
pattern, although there was less segregation in new section 235
housing than in new control housing. In fact, in the new develop-
ments which housed predominantly section 235 buyers, the sight

of black and white children playing together was fairly common.
Nevertheless, the data points to a significant level of isolation of

the races.

Pinpointing the reasons for this isolation is difficult. No
overt discrimination was apparent. Most likely, it resulted simply
from the higher income requirement which was a prerequisite to
buying the more expensive new houses, a requirement which most
blacks probably could not meet. Other reasons may include a lack
of awareness in the black community that new housing is avail-
able, as well as a reluctance of blacks to leave familiar neighbor-

hoods and venture into areas where they may feel unwelcome.
But whatever the cause, the result is clear and lamentable.

'^'^U.S. Comm'n on Civil Rights, Homeownership for Lower Income
Families (1971).



790 INDIANA LAW REVIEW [Vol. 7:773

These findings on racial patterns in subsidized homes are
analagous to those made in June, 1971, by the United States Com-
mission on Civil Rights,^° except that the Cincinnati Study found

no new subdivisions that are predominantly black as reported
there."'

3. Age,—New home purchasers, both in the control and the
section 235 groups, fell into the twenty-one to thirty age bracket/^

Combined with the data from the racial composition column of
Table III, this data shows that most purchasers of new homes in
Cincinnati were young, white married couples, whether assisted
by the FHA program or not.

It may be doubted by some that Congress intended section
235 subsidies to benefit the young couple which is not entrenched
in poverty but is moving up the economic ladder and would one
day own a house even without any government aid. Although these
couples were likely not its primary target, congressional intent
generally was that stable families in the $3,000-$8,000 income level
be assisted." If such families happen to be college students or
other young couples with temporarily low incomes, they should be
equally eligible. In fact, for those who believe that one of the
strengths of section 235 is the economic integration it promotes,

such a mixed clientele within the program is a great advantage.

^. Educational Level.—Not surprisingly, the average educa-
tional level of the control group was higher than any of the section
235 groups except purchasers of new homes, who, as already
shown, were like the average new control buyer, namely, white
and young. The tenth grade was the median educational level of
the head of household^^ for section 235 purchasers of existing

housing, as it was for the section 104 and foreclosure groups.

^^New black subdivisions were also found in Columbia, South Carolina.
Columbia Study, supra note 41, at 111. The majority of purchasers in that
study were black. Id. at 107.

^^In the Columbia, South Carolina, study the average age was also
*'yo^i^g>" i-^-y 30. Id. at 107. Since three-fourths of the respondents in that

study were in new housing, this data corresponds well with this study's new
housing data.

^^R. Taggert, Low-Income Housing: A Critique of Federal Aid 14
(1970).

^'^In this study, "head of household" was defined as the primary bread-
winner of a family. Although this person was usually male, some females
were "household heads."



1974] SECTION 235 HOUSING 791

These statistics, however, represent only an average. The variation
was wide with twenty-five percent of the existing group graduat-
ing from high school with twenty percent having received no more
than a sixth grade education. In the existing control group, how-
ever, the average achievement was a high school diploma. A high
school diploma was even more likely to be found among the new
control purchasers; although one such buyer had only completed

the eighth grade, thirty-five had completed "some college.*' The
median level of this group was ''some college," with twenty-eight
percent reporting that they were college graduates. Thus, the

purchasers of existing housing appear to be comparatively handi-

capped by limited educational achievement, whereas those in new
section 235 housing, while somewhat behind their respective con-
trols, are substantially better off in terms of education than

their counterparts in existing housing.

5. Family Size.—As is evident from Table III, existing sec-
tion 235 housing has helped much larger families than has new
section 235 housing or either set of control housing. The largest
family in new section 235 housing had eight members, while in
existing section 235 housing the average family had six members
with twenty-three percent having nine or more members. Only
fifteen percent of the new section 235 housing and five percent of
the new control housing sheltered families with as many as six
members. Thus, older housing appears to attract and best fill the
needs of larger families who cannot be comfortablj^ accommodated
in the smaller new housing.^^ Use of older housing also permits
subsidized buyers greater freedom of choice of location. For both
of these reasons, it is important that it not be phased out of the

program.^*

6, Occupational Status.—The data shown in Table IV is con-
sistent with other information that purchasers of new housing
under section 235 are similar in many respects to purchasers of
new control housing and differ significantly from all other pur-
chasers of section 235 housing. If these purchasers are omitted,

it is clear that section 235 has aided to an important extent those

^^Evidence strongly suggests that housing for the large, poor family is

"one of the most desperate urban needs in the Country." P. Martin, The
Ill-Housed 1002 (1971).

^'^Betty Frieden relies on this factor in recommending that greater use

of existing housing be allowed. B. Frieden, Improving Federal Housing Sub-

sidies 17 (Working Paper #1 for The Joint Center for Urban Studies of
M.I.T. and Harvard University, 1971) [hereinafter cited as B. Frieden].



792 INDIANA LAW REVIEW [Vol. 7:773

lower occupational groups which might not otherwise have been

able to obtain houses.

To ascertain the occupational status of the samples, the authors
utilized a socio-economic status score based on a table employed

by the United States Census Bureau/^ This table ranks profes-
sions with a score from one to ninety-nine, based upon earnings
and educational requirements. Physicians rank highest with a
score of ninety-nine while domestic day workers have a score of
seven, and construction workers are scored at sixteen. The authors
assigned persons on welfare a status score of zero although it

was not included in the Census Table.

Because a substantial number of families in the section 235
groups were on welfare—a constant twenty-five percent except in
the new housing group in which there were no families on welfare
—the authors calculated both the overall average status number
and the average, excluding persons on welfare. Clearly the sec-
tion 235 program has, to some extent, broken class barriers and
permitted those of a lower socio-economic status to live close to

those with more prestigious occupations.^^ A definite class dis-
tinction remains, however, between section 235 purchasers of new
and existing housing.

Table IV: Occupational Status

Average
Section 235 purchasers score

New 59
Existing 28

§ 104's 33

Foreclosed 28

^^U.S. Census Bureau, United States Census of Population: 1960:
Subject Reports: Socio-economic Status, Appendix I at 264-67 (1967).

^^See Krooth & Sprogens, Housing Problems, sup7'a note 10, at 815, for
the recommendation that even greater economic integration should be en-
couraged through affirmative action by the FHA. The authors suggest that
up to twenty-six percent of appropriations for housing subsidies should be
set aside for families in any income range and that their housing purchases
in what are presently section 235 "communities" should be subsidized up
to two percent of their interest rate. Such subsidy would encourage wealthier
families to move into lower income areas and so would avoid creation of
stigmatized and isolated lower-income developments. It would also be likely
to forward racial integration. Id. at 816.

HUD also has suggested that a greater economic mixture should be pro-
moted by prohibiting exclusive sales in new developments to section 235
buyers and perhaps by limiting their number to fifty percent in any given
development. Audit Review, supra note 23, at 35.

Average score Percent
xcluding welfare on welfare

59

38 25

44 25

41 -_ 25



1974] SECTION 235 HOUSING 793

Control purchasers

New 72 72
Existing 55 55

7. Stability,—Although "stability" and "maturity" may not
be measurable, the authors had hypothesized that the factors of

transiency, length of time in present job, and prior evictions for

nonpayment of rent or other misconduct on rental premises might

be relevant to this inquiry. Instead the Cincinnati Study dis-

covered the following:

(a) Section 235 purchasers are not noticeably more transient

than control purchasers, when measured by duration of their hous-
ing residence immediately prior to the purchase of their present

house.^*^

(b) Job tenure data reveals no trends within the various

groups and this factor appears to be irrelevant in predicting success

or failure among homebuyers.*°

^'Data collected is shown here:

Length of Time in Prior Residence

Percent living Percent living

there more than there less than
Section 285 purchasers six years three years

New 5 78
Existing 38 25

§ 104's 23 50

Foreclosed 13 68

Control purchasers

New 78
Existing 20 58

This data is predictable if one realizes that younger familes, those primarily

in new housing, are the most likely to be improving themselves financially
and so are the most likely to be mobile. In contrast, the least mobile, so-
called "most stable" group was in existing housing. These are primarily the
older families who would be less likely to be moving up the income ladder
and more likely to have ties in one neighborhood. Also, because they are
generally poorer, they are less likely to have the money to move often.

^°This data is charted below:

Job Tenure
Percent on job Percent on job

Section 235 purchasers five years or more two years or less

New 25 35
Existing 38 8

§ 104's 43 15

Foreclosed 22 12

Control purchasers

New 35 23
Existing 50 18



794 INDIANA LAW REVIEW [Vol. 7:773

(c) Neither the section 235 purchasers nor the control pur-

chasers had been overtly unstable enough in their prior residential

experiences to require eviction for late payments or other such

misconduct.*^

IV. Assessing the Allegations of Abuse

Having delineated the basic characteristics of the groups of

section 235 purchasers, and having discovered that, except for

buyers of new houses, the buyers tended to be those most intended
to be benefitted by the legislation, one must turn to the heart of

this inquiry, namely, the true extent of abuse under the section

235 program. The Cincinnati Study set out to answer this problem

by focusing on three questions. (1) Were the houses purchased
in Cincinnati under the program as inadequate as the reports

given during the 1970 congressional hearings would indicate?

(2) Even if they were inadequate, was this inadequacy the cause
of higher foreclosure and repair rates among section 235 pur-
chasers? (3) Finally, despite the hypothesized greater rate of

failure among section 235 purchasers, did the social benefits ob-
tained by the preponderance of buyers outweigh this higher rate

of failure in the program?

A, The Kinds of Homes Purchased

1, Existing vs. New Homes

As already indicated," section 235 provides for the purchase
of existing, rehabilitated, or new housing. In Cincinnati, however,
there are no formal rehabilitation projects for single-family dwell-

•^^ Interviewees were asked if they had ever been requested to leave a
previous residence. The great majority had not. Percentages of negative
replies were: existing section 235, sixty-five percent; existing controls,

seventy percent; new section 235, ninety-three percent; new controls, seventy-
five percent; section 104's, sixty-eight percent; and foreclosures, seventy-one
percent. Of those asked to move, most were not asked for fault-related
reasons. Urban renewal or apartment rehabilitation had caused the eviction
of thirteen percent of the existing section 235 and section 104 groups and
ten percent of the foreclosed group, while only five percent of existing con-

trols and only one person in new housing were forced to move for this
reason. A few persons were "evicted" from houses which they had been
renting and told that the landlord would sell them that house with the help
of section 235 money. Certain other families were evicted from public housing
because their income exceeded the income limits permissible in such housing.

Eviction for nonpayment of rent was reported by only three persons in this
study. Additionally, most interviewees had had no problems with their land-
lords other than the landlord's failure to make repairs.

^"^See note 43 supra & accompanying text.



1974] SECTION 235 HOUSING 795

ings, and therefore only existing and new housing projects were
considered.

New housing generally presents administrative advantages
to the FHA. It allows the FHA to work with developers with whom
the insuring office is familiar through previous transactions.

Generally, a number of nearly identical homes, varying only in
floor plan, are built in a single area where inspections can be
carried out on a continuing basis with minimal wasted travel time.

For the buyer, in addition to the FHA "safeguards," there are
county or city building inspections which tend to insure that the

new building complies with the applicable codes. The most im-
portant advantage to the buyer, however, is the guarantee which
the seller must give by the terms of the FHA financing. Under
such a guarantee, most buyers of new homes would have only to
call their sellers or secure a needed repair during the one-year

warranty period. Additionally, all new equipment in the house is
guaranteed, so that the buyer is protected by manufacturer war-
ranties on such costly items as water heaters and furnaces. There
are, however, pitfalls in this system of separate warranties by in-
dividual manufacturers. If the builder himself cannot be held re-

sponsible, it may be difficult for the buyer to find out who is.
There is also the disturbing possibility that the responsible party
has gone out of business, as occurred with one buyer in the con-
trol sample in whose home air conditioning had been installed
without air vents. She had no recourse, and the system was
useless.

All of the safeguards which help to insure that new houses
will be reasonably free of problems are absent in existing housing.

This deficiency could be partially remedied by requiring a prior
inspection by a professional inspector or a city code inspection.
This precaution is rarely taken voluntarily by buyers, whether

or not the purchase is by means of section 235 assistance.

2. Size of Homes

Not surprisingly, the survey indicated that existing homes
in the price range available under the section 235 program and
equivalent homes within the control group were larger and more
spacious than any of the new housing. Again, not surprisingly in
light of the finding that larger families could be found in the

existing section 235 group, these houses generally had more bed-
rooms. Somewhat smaller houses were found in the existing
control group. In new section 235 housing, the homes were more



796 INDIANA LAW REVIEW [Vol. 7:773

uniform and even smaller." But these figures do not reflect

the great disparity in overall size between new and existing
homes. Many of the older homes were truly spacious but no new
homes could properly be described in this way.

3. Price of House and Size of Payments

The median price for all section 235 homes in the Cincinnati
Study was between $15,000 and $15,999. In the new housing
category it was $20,675 and in existing housing it was $14,950. As
indicated by Table V both sets of controls were within $1,000 of
these figures, demonstrating that they were well chosen, suitable
controls. The new control housing was of identical construction
to the section 235 housing. The small difference in average price
was a result of optional extras chosen by the control families who
were not limited by statutory maximum costs.

The overwhelming majority of section 235 purchasers in all
groups reported that they paid the statutory minimum of $200 as
a down payment.^"^ When the controls are compared to this statistic,
one of the outstanding benefits of section 235 becomes immediately

apparent. Among the existing control purchasers twenty-eight
percent reported a downpayment in excess of $1,000, and another
sixty percent reported dovv^n payments of more than $500 ; in new
control housing, more than sixty percent reported downpayments
of more than $1000. Clearly the federal program enables people
who cannot accumulate large savings the means by which to buy
a home of their own.

Table V: Price and Size of Payments

Average Average monthly
Average monthly payment before buying

Section 235 purchasers price payment^^ present house

New 20,675 111 107
Existing 14,950 91 80

•^^ Fifteen percent of the existing section 235 housing contained two
bedrooms, thirty-three percent had three, thirty-three percent had four, and
fifteen percent had five or more. Forty percent of the existing control hous-
ing had two bedrooms, thirty-eight percent had three, twenty percent had
four, and none had more than four bedrooms. In the new section 235 housing
category, eighty-eight percent of the homes had three bedrooms and twelve
percent had four.

^^In existing housing, twenty-five percent reported paying more than
$200. In section 104 housing, eighteen percent reported a larger down pay-
ment, and in foreclosures, nineteen percent reported paying more. In new
section 235 housing, however, there were only three deviations from the uni-
form $200 down payment.

*^The Columbia, South Carolina, study found an average monthly pay-
ment of $86. Since three-fourths of the sample were new homeowners, this



1974] SECTION 235 HOUSING 797

§104's 15,385 98 82

Foreclosed 14,793 82 79

Control purchasers

New 21,425 176 119
Existing 15,873 137 83

A comparison of the amount which section 235 purchasers
paid in rent for their previous residences with the amount of their
current mortgage payments shows that the subsidy enables home-
ownership at only a slightly elevated cost. Interviewees were asked
whether their present monthly payments imposed too great a
burden on them. Twenty-two percent of existing section 235 pur-
chasers said that they did, and twenty-eight percent of existing
control purchasers agreed. Only five percent of the new section
235 purchasers felt pressured by the payments, however, while a
similar eight percent of the new control purchasers felt such pres-
sure. Of the section 104 buyers, eighteen percent said that the pay-
ments were too high, and thirty-nine percent of the foreclosed
group agreed that their payments had been too high.

However, only fifteen percent of the existing section 235
owners had ever missed a monthly payment, as had eight percent of
the existing controls. Remarkably, no new section 235 owner
reported missing any payments, compared to five percent of the
new control owners who reported that they had. Among the sec-
tion 104 owners twenty-three percent had missed pajonents and
sixty-four percent of the foreclosed group said that they had
done so.

Reasons for the missed payments were not necessarily eco-
nomic inability to pay but a feeling of helplessness, especially in
the section 104 group, when purchasers found their houses falling
apart. Often, they stated that they sought to bring pressure for

repairs on the mortgage company by withholding money owed.
Some in the foreclosed group reported making full payments on
their houses until they deliberately decided to move out, again,
because of the uninhabitable condition of the house. Reasons for

missed payments in other groups were purely economic, such as
layoff or illness.

.4. Physical Problems with the Homes Purchased

Purchasers were asked to describe all of the problems that
they had had with the homes they purchased. The types of prob-
lems which were found to be most significant in this study should

figure is lower than that reported here, but this would be expected in a
Southern city where the cost of living generally should be less. Columbia
Study, supra note 41, at 118.



798 INDIANA LAW REVIEW [Vol. 7:773

provide some guideline for the FHA, for homeownership counsel-
lors, and ultimately for home buyers in determining in what
aspects of a section 235 transaction particular caution should be

exercised. Any single problem that would require the ordinary
homeowner^^ to hire a repair person was recorded as a problem for
the purposes of this study. Since the interviewers were not profes-
sional home consultants, no attempt was made to further classify
the problems.

The patterns of problems found in existing section 235 and
existing control houses, summarized in Table VI, were similar.^^
In both, plumbing was the most frequently encountered problem.
It affected fifty-three percent of the existing section 235 houses

and fifty-five percent of existing control houses. Interior problems
such as cracked or crumbling walls, ceilings, stairs, and floors
ranked second in the problem list. There was a significant number
of other problems, such as rotten windows, fallen porches, heating

systems, roofs, electrical systems, and yards. Yard problems in-
cluded dead trees that required removal, sidewalks and driveways
which were cracked and deteriorated, retaining walls needing re-
pairs, and yard areas which needed to be cleared of junk. Vermin
infestation was also a problem for some of the owners of existing
homes.*^

Table VI: Defects in Existing Flomes

Section

235

Type of defect existing
Interior

Plumbing 53%
Walls, ceilings, etc. ... 53%
Heating 45%
Electrical 35%

Exterior

Windows, porches, etc. . 48%
Yards 28%
Vermin 20%
Roof 40%

^^For the purposes of this study, an "ordinary homeowner" can be
defined as one who has no special skills or training in any construction
trade such as plumbing, roofing, or electrical work.

'^''For data on repairs needed on section 235 homes in Columbia, South
Carolina, see Columbia Study, supra note 41, at 123.

•^^The most severe case of vermin infestation encountered was in one
house near the Ohio River where not only were crawling insects visible
but the owner stated that she saw snakes in her basement and did not know
whether they were poisonous.

Section Existing

518's Foreclosures controls

85% 71% 55%
62% 67% 23%
60% 61% 30%
74% 74% 30%

58% 70% 23%
42% 32% 18%
35% 61% 25%
68% 68% 30%



1974] SECTION 235 HOUSING 799

In new section 235 housing and new controls, the most fre-
quently mentioned problems concerned the yard. Sixty-seven per-

cent of new section 235 housing and fifty-three percent of new
controls had problems with their yards. In contrast to the existing

housing, these problems generally were relatively minor, such as

getting grass and shrubs to grow, but more serious problems with
topography were also included. Many houses were placed in such a
way that back yards were virtually nonexistent, since the lot sloped
off steeply into a ravine. Roof problems were mentioned by a few

interviewees. Vermin infestation was not a problem in the new
housing.

Ceiling-wall type problems were frequently mentioned by new
homeowners. Generally these problems were inconsequential when
compared to the serious problems found in existing housing, but

a few serious problems were found. For example, one buyer found,

when winter came, that his house had absolutely no insulation.
Plumbing and heating problems were also not uncommon. Most
notable were a group of houses erected by one builder, who had in-
stalled furnaces too small to adequately heat the homes in winter.
Although the buyers were sure a larger furnace had been in the

model home which they had seen, the model was no longer standing,
and they were unable to prove their allegations.

While most of the problems mentioned were fixed by the
builder following scheduled six- and twelve-month inspections made
under the warranty, numerous interviewees felt frustrated and
angry that their complaints had been handled so slowly. They were
also angry about problems which recurred which the builder seemed
unwilling or unable to fix permanently. Most notable among these
complaints were those of dying shrubs which were replaced, by
new ones which also later died. The problem seemed to stem from
substandard rocky topsoil which had been laid originally.

Table VII: Defects in New Houses

Section 235 New control
Type of defect houses houses

Exterior

Yards 67% 53%
Roofs 18% 10%

Interior

Plumbing: 20% 28%
Heating 20% 23%
Electrical 5% 13%

The section 104 group by definition experienced problems
with their homes, but foreclosures were found to have had problems



800 INDIANA LAW REVIEW [Vol. 7:773

similar in type and quality to the section 104's.*^ To find out how
well section 104 had done its job, inquiry was made of these pur-
chasers to determine whether the requested repairs were done,
and, if so, how satisfactorily. In the group of forty surveyed, the
FHA corrected an average of 3.4 problems per house, at a cost,
according to FHA records, of $1,800 per house. However, despite
this large outlay, section 104 was not without its problems. Many
of the repairs which apparently should have been made were not
in fact corrected. Only sixty-eight percent of the plumbing prob-
lems in the section 104 group received corrective governmental

assistance. Likewise, only seventy-two percent of the electrical

problems, seventy-four percent of roof problems, seventy percent

of exterior problems, fifty-six percent of ceiling-wall type prob-

lems, seventy-one percent of heating problems, forty-three percent

of vermin problems, and twenty-four percent of yard problems

were, according to the respondents, corrected by means of section
104 aid.^°

Since members of the foreclosed group were, by definition, no
longer in their houses, systematic observations of them were not
possible. However, visits to a few of these homes revealed that
many were merely shacks. Others had been razed and still others
were in areas where the entire neighborhood had been virtually
abandoned. There is no doubt that many of the homes lost by fore-
closure were among the worst in the Cincinnati area. It must be
added, however, to complete the picture, that other foreclosed

houses appeared neat and maintained from the outside and that
these owners had been far better off in them than they were when
interviewed in new surroundings, which most often were rat-
infested public housing.

A minority of houses in any category were completely free
from problems requiring major or minor repairs during the home-
owning experience of the interviewee. The total average number

*^'This data can be found in Table VI.

7°12 U.S.C. §1735b(b) (1970). One other problem which frustrated the
purpose of section 104 was the failure of the FHA to notify home buyers of
their rights under the section. Only twenty-eight percent of existing pur-
chasers could remember receiving notice that FHA repairs were available.
Of the group which received section 104 repairs, thirty-three percent reported
that they did not receive a notice that the FHA would make repairs, but had
managed to obtain such repairs because they had initiated persistent com-
plaints to the FHA.

A copy of the letter sent to homeowners notifying them of their rights
to have section 104 repairs performed can be found in Edson & Lane, supra
note 4, at 5:126.



1974] SECTION 235 HOUSING 801

of problems per house gives a more accurate indication of the con-

dition of the house and the frustrations of homeownership. As
summarized in Table VIII, those in the foreclosed group had the

most difficulty, with an average of seven problems per house, v^hile

the new control houses experienced the fewest problems with
approximately three each.

Table VIII: Number of Problems Per Hottse

Average number Percent of homes
Section 235 purchasers of problems with no problem

New 3.5 15
Existing 4.6 18

§ 104's 6.3 (by definition)

Foreclosed 7.0 6

Control purchasers

New 3.2 25
Existing 3.8 30

While the section 235 purchasers had more problems in every

case than their control counterparts, this data demonstrates the

misleading character of one of the major criticisms of the program
voiced during the 1970 congressional hearings, namely, that pur-

chasers were bilked by buying inferior houses from unscrupulous

realtors. Many of the houses sold to section 235 purchasers were,
indeed, in need of repair. But these problems were not at all the
exclusive province of section 235 homes. In each category of repair,

both groups experienced significant hardship. The greatest dif-
ference between the two groups was in the ^'ceiling-walF' category
which is likely to be most easily cosmetized. The fault appears to
lie not in the program, but in the kinds of homes which are avail-
able to any purchaser in this price range. If the Cincinnati
Study shows nothing more than this, it is significant, for it focuses
the spotlight on the real source of the problem, namely, insuf-

ficient funds to purchase adequate housing and lack of sufficient
policing of FHA inspections to screen out the bad houses. The data
which shows that control groups had numbers of problems similar
to the section 235 groups also disproves the thesis of some that
people who buy section 235 houses will not take care of them and
hence are the real "villains".^'

5. Reactions of Purchasers

While it is possible to label specific defects as "problems,"
the critical question is whether the purchasers saw these problems

^^970 Hearings, supra note 22, at 4; Comment, Exploiting the Home-
buying Poor: A Case Study of Abuse of the National Housing Act, 17 St.
Louis U.L.J. 525, 530, 540 (1973).



802 INDIANA LAW REVIEW [Vol. 7:773

as significant. In five of the six groups interviewed a majority

of purchasers expressed satisfaction with the homes they had
purchased, while only in the foreclosed group were a majority
dissatisfied. Specifically, seventy-three percent of existing section

235 owners were satisfied, and eighty percent of existing control
owners also were satisfied. In both new section 235 and new con-
trol housing, eighty-five percent were satisfied. But in houses
requiring section 104 repairs the number dropped to fifty-three
percent, and of the foreclosed owners, a mere twenty-six percent
expressed satisfaction with the homes they had lost.

The most prevalent cause of dissatisfaction was the high
number of repairs required. Dissatisfaction with "neighborhood"
was mentioned in only five instances in all of the groups com-
bined. Another factor which frequently influenced negative re-
sponses to this question was costly utility bills, especially in the
larger, more poorly insulated older houses.^^

Answers to the question "If you had it to do over again,
would you buy the same house?" revealed significant dissatis-
faction in all groups. Predictably, the majority of section 104

buyers, sixty-five percent, and foreclosures, sixty-one percent,
answered in the negative. In thirty-six percent of existing section
235 housing and forty-three percent of existing control housing,
the buyers would not buy the same house again. In new section
235 housing, twenty-three percent replied that they would not do

so, while in new controls thirty-six percent replied in the negative.
It is noteworthy that the control groups in both instances showed
greater dissatisfaction than did the section 235 purchasers. Hence,

the seemingly high percentages are no indication of weakness in

the section 235 program.

''^Utility bills can indeed add substantial unexpected amounts to the
price of home upkeep. Purchasers should be warned about this and an addi-
tional subsidy should be given when they are especially burdensome. This
suggestion is made notwithstanding the fact that the amount of subsidy was
originally set after considering utility expenses. The portion of income
which a buyer must contribute toward house payments was set at twenty
percent instead of twenty-five percent for the reason that utility bills can

be expensive. Hearings on H.R. 15624, H.E. 15625 and Related Bills Before
the Subcomm. of the House Comm. on Banking and Currency, 90th Cong., 2d
Sess., pt. 1, at 77 (1968).

Utility bills have also been credited with causing discrimination against

those living in colder parts of the nation, in that the subsidy formula is

not adjusted to account for the fact that persons living in warmer climates
pay much less in total housing costs, since their utility bills are much lower.
See B. Frieden, supra note 56, at 9.



1974] SECTION 235 HOUSING 803

Home buyers reacted to the need for repairs in diverse ways.
In existing section 235 housing, while only seven persons responded

that their houses were free from problems throughout their home-

owning experience, twenty-nine had spent nothing on repairs.

Those who made repairs spent an average of $418 during the period
of ownership. Additionally, six of the purchasers of existing sec-

tion 235 houses reported that they had spent some money on home
improvements, averaging $1,790 per house. In existing control

housing, twelve purchasers reported their houses free of prob-

lems, w^hile twenty-four spent no money on repairs. The average
repair cost in this group was $500. Fourteen families in existing
control housing, however, contrasted with six in the existing sec-

tion 235 housing, had made home improvements which averaged
$1,130.

In the section 104 group, although no house was without
problems, eighteen interviewees reported spending nothing of their

own on repairs, while the average spent was $198. Finally, in the
foreclosed group, only two reported having no problems, but ten
spent nothing on repairs, and the average amount spent was
$248. Clearly, a number of persons in each group of existing
housing made substantial efforts toward the maintenance of their
houses, just as many did or could make no effort at all.

The new houses were all under warranty from the builder
throughout most of the interviewees' ownership, and these pur-
chasers had, for the most part, not yet had to face this type of
maintenance cost. Thus, in eighty-eight percent of new section
235 housing and ninety percent of new control housing, purchasers
had so far spent nothing on repairs. Substantial amounts had been
invested, however, in home improvements in each of the new
housing groups. Forty-five percent of those in new section 235
houses had made improvements at an average cost of $275. In
new control housing, fifty-three percent had made substantial im-
provements averaging $520.

B. The Sales Transaction

Among the charges leveled at section 235 during the 1970
hearings were high pricing and unethical conduct allegedly engaged
in by many of the persons involved in the sale transaction. Im-
plicit in these charges was the suggestion that the purchaser of
a section 235 house was especially vulnerable to harmful influences
or was ignorant of important aspects of home buying, including the
law regarding the sale and the need for professional assistance
such as that of an attorney and house inspector. The Cincinnati
Study sought to ascertain the extent of the naivete among the



804 INDIANA LAW REVIEW [Vol. 7:773

purchasers. The findings, detailed below, lend little, if any, support
to the view that section 235 purchasers are particularly ignorant of

the law. Home buyers in all six groups lacked such knowledge and
failed to avail themselves of various types of protection such as

might be afforded by an attorney's or house inspector's services.

1. Reasons for Desiring to Buy a House

An important consideration in determining whether section
235 purchasers were less adequate home buyers must be their
reasons for the purchase. As Table IX indicates, a substantial
number of these purchasers had been or were about to be forced
to move. Whatever this may say about their economic or residential
stability, ^^ such an impetus to buying a house must work to the
disadvantage of any purchaser who knows that within days, or
weeks at most, a new home must be found.

Table IX: Most Usual Reasons for Purchasing a House

Percent forced Percent desiring Percent

Section 235 purchasers to move a house needing space
New 3 48 23
Existing 33 20 18

§ 104's 28 28 20

Foreclosed 19 39 16

Control purchasers

Existing- 25 40 10

New 5 48 18

In any event, there is no clear distinction between 235 pur-
chasers, as a group, and control purchasers on the forced-to-
move criterion. However, it may be that section 235 purchasers
who were forced to move just prior to their purchases, experi-
enced a greater degree of desperation than control purchasers.

The very fact that they qualified for section 235 assistance means
that they probably had no money to utilize while they took time
to search for decent accommodations. In fact, several inter-

viewees specifically mentioned that they were caught in this sit-
uation and so were easily pressured by real estate agents into
buying the first house which they saw. Some of the worst houses
were bought under these circumstances.

It is also noteworthy that a substantial number of persons
moved from prior residences simply because they preferred living
in a house of their own.^"^ Such data lends support to the thesis

^^See note 61 supra & accompanying text.

'"'Other researchers have collected similar convincing data on this point.
For a discussion of such studies, see Sengstock & Sengstock, Homeownership

:



1974] SECTION 235 HOUSING 805

underlying the section 235 program that homeownership is a wide-
spread desire among lower-income persons as well as the rich.

2. The Search for Housing

Buying a house is no easy task. There are many factors in
selecting a house, whether new or old, and many reasons for finally
settling upon the one purchased. A second inquiry, then, was to
determine whether there was a difference between section 235 pur-
chasers and control purchasers in the extent of exploration or the

final reason for selecting the residence purchased. It was hypoth-
esized that the more deliberate the buyer was in selecting a house,
the better house he would obtain.

Table X indicates that this may be so. Although there were
more significant differences between purchasers of new homes,
whether section 235 or control, on the one hand, and purchasers of
existing homes, whether section 235 or control, on the other,

the data demonstrates that here, in contrast to other areas, there

seemed to be significant differences between the existing section
235 purchasers and the existing control purchasers. Fifty percent
more of existing section 235 buyers looked at the final house only
once before purchase than did their control counterparts. More
startling is the figure on bargaining. Fifty percent of the existing

control purchasers bargained significantly over price, while a

very small percentage of all three groups of the nonnew section
235 housing did so.^^ Also, the control purchasers tended to look

at more houses than did the section 235 purchasers of similar
houses.

Table X: Home Investigation

Section 235

purchasers

New
Existing .

§ 104's . .

,

Foreclosed

Percent

who saw
only

house

they

bought

10

28

35

35

Average
number of
homes seen

5

5 or less

5 or less

5 or less

Percent Number of tivfies
who did house seen before
not see contract signed

whole once twice tnore

house (%) (%) (%)
13 30 18 52

32 33 35

13 40 18 42

6

Percent

who
bargained

over price

N.A.

13

20

38 16 46

A Goal for All Americans, 46 J. Urban L. 313, 318 (1969). The authors also
made their own study. Id. at 320.

^^New housing prices were found to be inflexible shortly after the study
was begun, and thus the bargaining question was soon dropped.



806 INDIANA LAW REVIEW [Vol. 7:773

Control

purchasers

New 5 more than 10 13 23 18 59 N.A/^
Existing . . 13 more than 5 5 23 35 42 50

The contrast which these figures reveal between section 235

purchasers and their control counterparts can best be explained

by two factors. (1) The desperation factor, as discussed above,"
which probably causes many low-income persons to be unable to
make a carefully calculated decision. Any house will relieve the
pressure of the momentary homelessness, so a quick and im-
pulsive decision is made to buy. (2) The syndrome of the poverty-
stricken, alluded to by sociologists,^® which consists of feelings of

helplessness, insecurity, and alienation, may also have some impact
here. The authors sensed such feelings on the part of many inter-
viewees signified by their resigned acceptance of their plight when
faced with hopelessly expensive utility bills, repair bills, and the

imminent loss of their homes. Indeed, the bureaucracy which

surrounds a home purchase is complex, consisting of a real estate
agent, a lending bank, and the FHA. When trouble arises, city
building inspectors, social workers, and housing specialists may
become involved. Thus, the poor may have difficulty communi-
cating their problems to the proper agency and are constantly awed
by the complexity of both the initial sale and the later repair

channels. In the purchase transaction, however, the poverty

syndrome may have led many poor buyers to feel that they could
not insist on seeing more than one house, or at most, a few houses.
To ask for such a service would be "ungrateful" or "more than they
deserved." Unfortunately, as the figures show, those purchasers

who looked at fewer houses, for whatever reasons, were more
likely to experience greater problems, signified by foreclosures

and section 104 repairs.

Although not included in Table X, the data showed no sig-
nificant difference among the groups based upon the time spent in
weighing the decision to buy. In all groups, one-fourth to one-

third of the purchasers decided to buy their homes the same day
they first saw them, and a majority of all groups except the fore-
closures made the decision to buy within one week of seeing the
houses. In conjunction with the finding that existing 235 purchasers

tended to look at fewer houses than other home buyers, these
figures indicate that one cause of later dissatisfaction may have

'''^It appeared that prices on new homes were not open to negotiation.

^^See note 73 supra & accompanying text.

^^See, e.g., HEW, Low Income Life Styles 2 (1971).



1974] SECTION 235 HOUSING 807

been the buyers' carelessness in selecting houses. Even if hurried
decisions were unavoidable for those who were forced to leave prior
homes and there may have been only a limited selection of housing
available within the buyers' price range, a basic education in com-

parison shopping could have greatly benefited purchasers with

no homeowning experience.

A surprising number of persons indicated that they had not
even had the temerity to look at the entire house they bought before

they signed the sales contract. One buyer related that she was not
shown the second floor of the house because children were asleep
when she came to look at it. She later discovered major problems
with a leaky roof. Another buyer had lived in her house for several

months when she accidentally noticed a stairway leading to an
undiscovered third floor. Both stories illustrate the carelessness

with which section 235 homes are often shown.

Interviewees were also asked why they chose the house which
they finally bought. Space for children was the most frequent
response from existing section 235 purchasers, but not nearly so
important for existing control or new housing purchasers. Neigh-
borhood was the second most frequently mentioned consideration
for existing section 235 purchasers, while it was the most im-
portant reason among existing control purchasers. Neighborhood,
however, was not important to new home owners. Price and floor
plan, more than other factors, seemed to influence new home buy-
ers, both section 235 and control purchasers. Generally, the economic
situation of the purchasers influenced what they looked for in a
home. Groups having greater economic freedom, as did the existing
control, new section 235 and new control purchasers, were more
concerned with amenities and prices, whereas those purchasers
in more difficult economic situations were most concerned with
space and neighborhood.

Table XI: Prime Reasons for Selecting the House Boughf^

Only one Space for Floor
Section 235 purchasers they saw Neighborhood children Price plan Other
New 2%
Existing 13%
§104's 18%
Foreclosed 3%

Control purchasers

New 3%
Existing 3%

^'In the Columbia, South Carolina, study "quality or early availability

date" was the most frequent response to a comparable question. "Neighbor-
hood" and "location" were next. See Columbia Study, supra note 41, at 130.

5% 20% 25% 22% 27%
18% 40% 5% 8% 30%
20% 23% 8% 15% 35%
23% 10% 19% 5% 43%

8% 18% 30% 33% 14%
33% 10% 25% 23% 10%



808 INDIANA LAW REVIEW [Vol. 7:773

Other data, summarized in Table XII, demonstrates that all
of the purchasers in the Cincinnati Study were unsophisticated

about the use of professional home inspection services, although
as suggested below, this may be due to a misconception of the
FHA's role in the transaction. ®°

Table XII: Professional Assistance

Percent who used their Percent who hired
Section 235 purchasers own professional inspectors their own attorneys
New N.A. 5
Existing 13 8

§ 104's 8 2

Foreclosed 6 '2
Control purchasers

New N.A. 8
Existing 10 10

Few in any of the groups used the services of an attorney in
their purchases/' Attorneys could have provided guidance by re-
quiring greater care in the prepurchase inspections and might, by
their presence alone, have elicited greater cooperation from the sel-
lers. Need for attorney services can be dramatically demonstrated
by the fact that a significant number of buyers relied on the prom-
ises of sellers or real estate agent to make repairs, without demand-
ing that these promises be placed in the contracts of sale.^^ At least
some standard form sales contracts used by new housing sellers pro-
vide additional evidence that an attorney's services are vital. These

contracts provided virtually no protection for buyers, who usually
bought unconstructed houses on the promise that their houses

®°jSee note 86 infra & accompanying text.

®' James Condit, who was director of Cincinnati's Lawyers for Housing
before it went out of business for lack of funds, has deplored the fact that
so few Cincinnatians purchasing section 235 homes had private attorneys.
Condit, Cincinnati Director's Report, 4 Urban Law. 326, 329 (1972) [here-
inafter cited as J. Condit]. He cites as reasons for this situation that (1)
many poor families view even a slight additional expense for a lawyer as
too much, and (2) a misunderstanding by low-income purchasers that some-
one else, such as lending institutions and the FHA, is looking out after
their interests by searching titles and inspecting the houses. They are thus
led into a false sense of security. Condit believes that abuses in the section

235 program would "never have developed to the proportions they did if low-
income families had been represented with the benefits of even minimal
scrutiny by an attorney." Id. at 329. He recommends that HUD allow at-
torney fees to be included in closing costs.

°^When questioned about their satisfaction with the services of real
estate agents, the most significant recurrent complaint concerned the un-
fulfilled promises of sellers and agents to make repairs.



1974] SECTION 235 HOUSING 809

would conform to the models which they saw. Yet there was no
description of the model in the contract, and often buyers believed
they were buying a fully equipped home as earlier viewed by them,
when many of the features were options which could be obtained
only at additional cost. One section 235 purchaser believed he was
buying a finished family room with his house and did not discover
that he had barren basement walls until he moved in. Still another
group of buyers found out too late that the furnaces they had
bought were too small to properly heat their houses. Although they
were sure that the model which they had seen had contained a
larger furnace, the models had since been torn down, and their
sales contract provided them with no proof of their allegations.

Even if one were to think that any reasonable purchaser
would understand that finished family rooms cost extra money,
it is not nearly so evident that anyone would stop to question

whether a back door was optional at extra cost. Yet this was the
situation in several of the developments in the Cincinnati Study.

Many families in new housing angrily denounced the fact that this
was not pointed out to them at the time they purchased the house.
They felt that it was not only inconvenient but dangerous not to
have a back door. Presumably the back door option was not pointed
out to section 235 purchasers since this "extra" would have raised

the cost above the statutory limit, and so it remained in fact an

option closed to them. Nevertheless, they should have understood

what they were buying.

Additionally, the standard form contract which the authors
observed being used by new housing developers provides that the
seller may substitute comparable materials if he is unable to pro-
cure those seen in the model. This vague phrase seems open to

abuse, although one seller assured the authors that such substitu-

tions are in fact submitted to the buyer for approval. But what if
such approval is not sought or obtained? The buyer has no written
protection. Surely an attorney would warn a client of the dangers
of signing such a vague and unsatisfactory document.

Finally this study examined the understanding of section 235
purchasers of the legal aspects of the transaction. While virtually

no section 235 purchaser understood that mortgage payments
might be increased by any one of three occurrences," a large
percentage were aware that income changes would affect payments.

In light of the purchasers' lack of awareness on many issues,
the authors were surprised to find that high percentages of buyers

°^These are an increase in property taxes, an increase in insurance costs,
or a change in family size. See 12 U.S.C. § 1715z(c) (1) (1970).



810 INDIANA LAW REVIEW [Vol. 7;773

in all six groups knew that they could deduct the interest paid on
their mortgages on their federal income tax returns. Sixty percent
of those in existing section 235 housing knew that they could, com-
pared with eight-eight percent of those in existing control housing.

In new section 235 housing, seventy-five percent of the purchasers
knew that they could deduct interest, as did eight-five percent
of new control purchasers. In section 104 housing and foreclosures,
a lesser number, but still substantial, forty-five percent and thirty-
nine percent respectively, knew that they could deduct the interest.
The Internal Revenue Service has ruled that recipients of section
235 subsidies need not report the subsidy as income but that they

can nevertheless deduct the full interest payment from their taxes.®'^

Most important in the section 235 buyer's understanding of
the transaction is an awareness of the FHA's role." This is
crucially important, for unless it is properly understood, the buyer

will place undue reliance on the FHA inspection. While the FHA
has never guaranteed anything to the home buyer, more than fifty
percent of each section 235 group relied on the FHA inspection
to find serious defects in the house.°* Although the FHA will dis-
close to the buyer defects found by appraisers which must be cor-
rected before the transaction will be approved, the FHA inspection
is not primarily intended to protect the buyer, but rather to assure

that the value of the house is equal to the amount of the mortgage
insured by the FHA.

V. Conclusion

Despite the adverse publicity which the section 235 pro-

gram has received, the Cincinnati Study found much to rec-
ommend its continuation. The high degree of satisfaction of the
homeowners themselves supports this assessment.®^ Owners of
both new and existing section 235 homes expressed satisfaction

^'^The service has taken this position in a letter ruling made public.
2 P-H 1974 Fed. Taxes tl 13,040(10).

^^This problem is also noted in Audit Review, supra note 23, at 55.

®*Seventy-seven percent in existing section 235 housing relied on the

FHA; in existing controls, sixty-eight percent were purchased under conven-
tional FHA-insured mortgages and sixty-four percent of these relied on the
FHA inspection. In new section 235 housing, sixty-three percent relied on
the FHA, as did seventy-three percent of the twenty-two new controls pur-
chased under conventional FHA mortgages. Among section 104 purchasers,
seventy-three percent relied on the FHA, while among foreclosed purchasers,
sixty-eight percent relied. Additionally, nearly fifty percent of each group
thought that the FHA guaranteed the quality of the house to some extent.

^^See p. 777 supra.



1974] SECTION 235 HOUSING 811

nearly equal to that of similarly situated control homeowners.
Additionally, most appeared to be living in better circumstances
than they were before their home purchases. While most had pre-
viously rented apartments or occupied public housing, they were at
the time of this study situated in their own homes which more ade-
quately fulfilled their needs at little increased cost. Generally, these

families had more room, a yard, greater privacy, and a better
neighborhood. For many large families the section 235 program
provided the only opportunity for comfortable living. Furthermore,

these authors found that, contrary to the impression created by
the storm of adverse publicity, both new and existing section 235
homes tended to be only slightly more problem-plagued than those
in the control groups. Finally, in contrast to rent subsidy or public

housing provisions, the section 235 program allowed families com-
plete freedom in choosing housing locations, limited only by their
incomes. Although new section 235 housing tended to be clustered
in suburbs chosen by developers, the older housing was scattered
throughout Hamilton County.

Although congressional intent was originally to phase out
subsidies for existing housing, these authors conclude that existing

housing is a valuable and an important part of the program. Since
only the more moderate income participants within the group
qualifying for section 235 aid can afford the new housing, elim-
ination of the existing housing subsidies would screen out many
whom the program was meant to serve and those in greatest need
of its benefits.^® More compelling is the fact that in cities where
the cost of living is greater than in Cincinnati, elimination of

existing housing would effectively terminate the entire program.
In some northeastern cities new housing cannot be built for prices
within the statutory limits because of high land values and con-
struction costs. Finally, if only new housing were subsidized, the
purchasers would probably tend to be young, white married couples.
The large, often black ghetto family, for whom the income floor
for federally subsidized housing was lowered by amendments prior
to section 235's original enactment,®' would remain trapped in
rental housing.

^^Arguing that the emphasis on new construction is to a great extent
in open conflict with the benefits of low-income homeownership, V. Bach
agrees with this conclusion. V. Bach, Subsidizing Homeownership Through
the 235 Program: The Wrong Instrument for the Right Purpose 5 (Work-
ing Paper #2 of the Joint Center for Urban Studies of M.I.T. and Harvard
University, 1971) [hereinafter cited as V. Bach].

»'Act of Sept. 23, 1959, Pub. L. No. 86-372 § 503(a), 73 Stat. 680; Act
of July 12, 1957, Pub. L. No. 85-104 § 401(a), 71 Stat. 301. Both amend-



812 INDIANA LAW REVIEW [Vol. 7:773

In addition to the poor physical condition of many huoses,
one criterion of failure which opponents of the program cite is
a high foreclosure rate. The Cincinnati Study revealed a fore-
closure rate among section 235 buyers of approximately five per-
cent, a rate somewhat higher than that of their control counter-
part. However, it is not clear that this elevated foreclosure rate
justifies labeling the program a failure. First, the benefits of
the program seem to outweigh the slightly higher risk assumed
when dealing with low-income buyers. Such risk must be con-
sidered as inherent and "acceptable," even though it is slightly
higher than normal. Second, it is possible that when a payment
is missed, low-income purchasers are treated more harshly by
mortgagees than are middle-income buyers,''^ so the compari-

son of foreclosure rates is not a valid measure of the success
of the program. And third, if the foreclosure rate appears
threatening, corrective measures would not be difficult to estab-
lish.^'

However, the Cincinnati Study found that most of the adverse
publicity directed toward the section 235 program is not without
foundation. Many of the existing homes were dilapidated and
a few were uninhabitable. The FHA should have refused to in-
sure mortgages on them and warned buyers to stay clear of
them. The FHA appraisal was often inadequate to protect the
buyers' or even the government's interest. Houses were insured
that should not have passed the most rudimentary inspection, and
many buyers did not have the necessary skills or experience to
recognize defects in them. Even if they possessed these skills,
many low-income buyers were desperate for housing and eager
to buy the first house shown to them.

In addition to the problems which should have been obvious

at the time of sale, many purchasers were without the necessary
financial resources, or the necessary understanding of the need

for repairs and upkeep. The data collected clearly shows that these
purchasers did not make repairs as they were needed. Although
financial difficulties were not widespread among section 235
purchasers generally, a significant number of foreclosures were
occasioned by inevitable or unforeseeable crises, such as strikes

and illnesses of short duration. However, this type of temporary

ments have since been superceded. See 42 U.S.C. §1402(1) (1970), as

amended, 42 U.S.C. §1402(1) (Supp. I, 1971).

9°5ee note 97 infra.

^'<See Forebearance Agreements p. 815 infra.



1974] SECTION 235 HOUSING 813

problem is not difficult to remedy through corrective legislation.''^
Indeed the lack of provisions to cover these types of emergencies

constitutes a glaring omission in the original act, particularly

considering that the purpose of section 235 is to aid lov^-income

purchasers v^ho are the very persons most subject to financial
collapse during temporary crises.

Despite the problems evident in the section 235 program, it

seems undebatable that not only is homeownership traditionally
a favored form of housing, but that it may be so with good reason.
Offering more space and privacy, a house constitutes a very dif-
ferent type of physical accommodation than does a rented apart-
ment. Indeed for the large family, there may be few, if any, viable
alternatives. It would be a gross misjudgment by Congress to fail
to recognize the benefits which the section 235 program offers.''^
Although reforms are needed, the Cincinnati Study demonstrates

that at least in one geographic area the section 235 program is a
highly beneficial and reasonably successful one.

VI. Recommendations for Remedial Legislation

The section 235 program should not be abandoned since its
benefits appear to be great and its problems controllable. Recom-
mendations for remedial legislation follow. Naturally, not all need

be adopted, but adoption of at least some of them should be forth-
coming to improve the program's success.

1. Existing Housing.—Funding for existing housing should
be continued and should be increased. Existing housing meets the
needs of large families and poorer families, neither of which are
adequately served by other government-sponsored housing pro-
grams or by new section 235 housing. Such existing housing, if
adequately inspected and repaired prior to sale under section 235,
may also slow the decay of inner cities.

2. Price Ceilings.—Limitations on prices of houses that can
be purchased under the program should be substantially raised
to reflect increasing construction costs. Statutory limits should be

flexible to allow for inflation and for varying construction costs
around the country."'^ For example, families should not have to

'^It is beyond the scope of this Article to compare the advantages of
direct subsidies, as recently proposed by the President, note 34 supra, with
the advantages of section 235.

^'^This suggestion has been made by other authors. See, e.g., Krooth &
Sprogens, The Interets Assistance Programs—A Successful Approach to
Housing Problems, 39 Geo. Wash. L. Rev. 789, 813-14 (1971).



814 INDIANA LAW REVIEW [Vol. 7:773

purchase houses without back doors because the slight additional

cost would put them over the legislative cost limit. Such arbitrary
restrictions tend to defeat, rather than promote, the goal of "a

decent home for every American."

3. Counselling.—Home ownership counselling should be pro-
vided by the FHA to educate buyers concerning the buying process
and normal home maintenance expenses.'^ As an adjunct to this
counselling, the FHA should draw up a pamphlet explaining the
basics of the real estate transaction, such as possible real estate tax

increases, home upkeep, and the role which the FHA plays. Finally,
the mortgagor should be informed in writing concerning the re-
pairs which the FHA has required on the purchaser's house prior
to its approval of insurance on that house. Such a requirement
would put the homeowner more completely in control of repair
problems which may arise later and would automatically create a
check on the repairing contractor, since no one but the homeowner
will be in a position to report such problems as they arise.

The counselling program would either be paid for completely
by the federal government or charged to the buyer and prorated
over his mortgage term. If as little as twenty-five cents were
added to each payment over a thirty-year period, discounting in-
terest, one purchaser would be supporting the counselling service

to the extent of ninety dollars.

4. Racial Integration.—The FHA should act affirmatively
to further racial integration in new housing sold under section
235 by means of an advertising campaign. This campaign could

^^Potential counselling services are already provided for. 12 U.S.C.

§ 1701y (1970). This provision creates the National Homeownership Founda-
tion to carry out programs which would encourage public and private organ-

izations to provide increased housing opportunities for low-income families,

including programs of counselling. Id. §§ 1701y(a) (1) (B), (c)(1)(G).

However, little if any counselling has flowed from this provision, at least
in Cincinnati. The only counselling available in Cincinnati, on a very limited
basis, is provided by the Better Housing League of Greater Cincinnati, 2400
Reading Road, Cincinnati, Ohio.

Section 237 of the 1968 Act also provides for the counselling of low-
income families with poor credit histories in order to qualify them for
section 235 purchases. Id. §1715z(2). Unfortunately, this program has not
been funded in most areas of the country, including Hamilton County, Ohio.

Counselling is recommended in virtually every report written on section
235. See, e.g., Note, Abuses in the Low Income Homeownership Programs—
The Need for a Consumer Protection Response by the FHA, 45 Temple
L.Q. 461, 478 (1972); V. Bach, supra note 88, at 15; Audit Review, supra
note 23, at 56.



1974] SECTION 235 HOUSING 815

sponsor advertisements in black publications and could feature
pictures of blacks living in new housing communities.

5. Attorneys,—Attorneys should be required to represent
the buyer in all section 235 purchase transactions. A reasonable
fee could be prorated over the term of the mortgage and would
add only a minimal amount to each mortgage payment. Based
on the customary attorney's fee for home purchase transactions in
some sections of the country, one percent of the purchase price of
the house, purchase of a $20,000 house would incur a $200 legal
fee. If this were paid initially by the FHA and the buyer allowed
to repay it over the term of his thirty-year mortgage, discounting
interest, fifty-five cents would be added to each payment. For a
less expensive house, the amount would be less. This additional cost
is well justified since it will help to assure better inspections and
more equitable sales contracts,'^ as well as better understanding
on the part of the buyer.

6. Forebearance Agreements.—Mortgage contracts should
contain an agreement by the mortgagee to forebear from foreclos-
ing on the mortgaged house and to extend the mortgage term in
the event payments are missed due to a temporary emergency,
which could be statutorily defined and limited. Such a forebearance
agreement would eliminate the possibility that a buyer would lose a
home because of a temporary and unavoidable emergency, such as
a layoff or strike.'^

^*^HUD reports that the problem of the vague sales contract is wide-
spread and suggests that the FHA could provide additional protection for
the buyer by drawing up a sales contract to be used in all section 235 trans-
actions. Audit Review, supra note 23, at 53-57.

'^It has been recommended that forebearance be readily available to the
low-income purchaser in trouble, consistent with the intent that in the ease
of low-income families foreclosure be only a last resort. See J. Condit, supra
note 81, at 330. Condit believes that the low-income family is held to a

higher standard of performance than more affluent families who would not
lose their houses in the event they were beset by a temporary economic emerg-
ency. Usually, when the low-income famly finds itself in trouble, all the
money due is demanded from it each month, along with late charges, and
partial payments will not be accepted. Naturally, beginning in the second
month, such family finds it impossible to catch up, and foreclosure becomes
imminent.

In reality, as Condit reports, FHA regulations allow mortgagees to
forebear up to eighteen months without notifying the FHA. Id. at 331. In
addition, there are several forebearance options as alternatives to foreclosure,

including acceptance of partial payments or allowing the FHA to take over
the mortgage and pay it off while the family is disabled. However, these
alternatives are ignored by most mortgagees. In fact, one study reports that
refusal to forebear is used by mortgagees for the purpose of forcing fore-



816 INDIANA LAW REVIEW [Vol. 7:773

7. Unexpected Repairs—Savings Provisions.—There are sev-
eral possible ways to help the homeowner handle unforeseen and
necessary repairs so that they do not create bills impossible to
meet. An escrow account could be set up into which the buyer
would pay a certain minimal amount each month, perhaps two
dollars, along with his mortgage payment. This money would be
accumulated and, along with the interest it earns, would be payable
to the buyer for necessary home repairs. Such a provision could
probably only accumulate funds sufficient for minor problems,
since a buyer could not reasonably be expected to pay much addi-
tional each month. Some may argue that even two dollars a month
would be excessively burdensome. In the alternative, or in ad-
dition, the seller could be required to place some amount in an
escrow account for repairs needed during the first year of owner-

ship for defects existing at the time of sale. Still another alter-

native to protect the home buyer against excessive expenses emanat-
ing from defects in the house would be to require the mortgagee to
give a limited guarantee on its fitness.'®

8. The FHA's Role.—A basic reappraisal of the FHA's role
in the section 235 program is necessary. That agency must view
itself in part as a social welfare agency and broaden its restricted

role of mortgage insurer.^' In such a role, it would assume more
responsibility for the condition of houses sold through the section

235 program. Consonant with this role, it could also, for example,

run counselling programs as suggested above.
^°°

closure and that this occurs frequently among disadvantaged purchasers.
Comment, Exploiting the Home-buying Poor: A Case Study of Abuse of the
National Housing Act, 17 St. Louis U.L.J. 525, 557-58 (1973).

^^jSee Note, Abuses in the Low Income Homeownership Programs—The
Need for a Consumer Protection Response by the FHA, 45 Temple L.Q. 461,
474 (1972) ; Note, Liability of the Institutional Lender for Structural Defects
in New Housing, 35 U. Chi. L. Rev. 739 (1968).

'^As reported in the 1970 congressional hearings investigating section

235 purchases, the "FHA views itself solely as a mortage insurer whose
interest is in the adequacy of the security for the loan rather decent safe

and sanitary housing for people." 1970 Hearings, supra note 22, at 4-5. This
caveat emptor attitude was characterized as * 'unrealistic." Id. at 5. See also
LeClerq, Entitlement Under Section 235, 25 S.C.L. Rev. 1, 50 (1973).

The recommended change in FHA attitude is deemed essential by the
author in Note, Abuses in the Low Income Homeownership Programs—The
Need for a Consumer Protection Response by the FHA, 45 Temple L.Q. 461,
469-75 (1968). HUD appropriately describes the FHA as not consumer-
oriented. Audit Review, supra note 23, at 6.

'°°See note 95 supra & accompanying text.



1974] SECTION 235 HOUSING 817

9. Fee Appraisers.—To insure that houses are properly ap-
praised, fee appraisers must not be used and the appraisers who
are employed directly by the FHA must be trained and adequately
supervised.^ °' In addition, pressure on appraisers to do an un-
realistic volume of work must be eliminated.^ °^

10. Regressive Subsidy Scale.—The regressive features of
the subsidy scale should be eliminated.

'°^
Poorer persons should

receive greater subsidies than those who are able to afford the
more expensive homes under the program. Presently, the amount
of subsidy can be all but one percent of the interest. Naturally,

the more expensive the home, the more interest is involved, and
therefore the greater the subsidy. Since only the least needy fam-
ilies can qualify to buy the more expensive homes, they receive
more assistance than do poorer purchasers. If this subsidy feature
were reversed, poorer families could buy better houses and be less
plagued by the faulty conditions prevalent in the cheaper homes.

Additionally, the subsidy scale should be adjusted so that

utility costs become an element in the subsidy determination.
Presently, people in northern and southern climates bear unequal
burdens in this regard since colder climates necessitate higher

utility costs.

11. Enforcement Powers of the FHA.—Legislation should be
enacted empowering the FHA to protect home purchasers under
its programs. These powers should include those of investigation,

including subpoena power, litigation in the buyer's behalf, and
criminal and civil sanctions against fraudulent representations
which lead to the conveyance of a section 235 home.

12. Home Inspection Standards.—Not only should the stan-
dards under which the FHA insures homes be more strictly ad-
ministered, but the standards themselves should be raised. The

'°' Presently, many inspectors performing section 235 appraisals are
inadequately trained. See 1970 Hearings, supra note 22, at 6, HUD has
recognized that it has these problems with appraisers who often do in-
adequate inspections and are not subject to proper supervision by superiors.
See generally Audit Review, supra note 23. See also Edson & Lane, supra
note 4, at 5:14. Training and performance of FHA appraisers were at the
heart of the complaint in Davis v. Romney, 355 F. Supp. 29, 35 (E.D. Pa.

1973), affd, 490 F.2d 1360 (3d Cir. 1974).

^°^See Audit Review, supra note 23, at 8, for a thorough discussion of

the appraisal problem.

^°^These features are discussed elsewhere. See R. Taggart, Low-Income
Housing: A Critique of Federal Aid 80 (1970); V. Bach, supra note 88,
at 14; B. Frieden, supra note 56, at 9.



818 INDIANA LAW REVIEW [Vol. 7:773

attitude should not be allowed to prevail in FHx\ ranks that "any-
thing most poor purchasers buy is probably better than what they
had."'°^

With these changes, a more successful program is possible.
Section 235 clearly has benefits to bestow. And the costs of pre-
vention outlined above should be less than those which the FHA
has incurred in the past in its administration of the "curative"

section 104 and of foreclosed properties, repossessed when pur-
chasers were forced out of their homes by economic. necessity or
physical uninhabilability.

APPENDIX

Questionnaire For FHA 235 Project

1. Case Number : Survey Number :

2. Date of First Payment
Month :
Year: 1969

1970

1971

1972

3. How long in house (in months) :

4. Price of Home (Loan Amount + ?200 rounded to nearest
thousand) :

5. Type of Home

:

New
Existing

6. Type of Seller

:

Real Estate Speculator

Private Owner
Developer

Other

104-
^In Northwest Residents Ass'n v. HUD, 325 F. Supp. 65 (E.D. Wis.

1971), the district court held that property owners have standing to challenge

the FHA's standards for real estate appraisals and mortgage approval done

under section 235 auspices, and that the federal district court has jurisdiction

to review FHA action in this regard. In this case, plaintiffs, in a class action,
alleged that the FHA's permissive standards violated the stated statutory

purpose of the National Housing Act of "a decent home and suitable living

environment for every American family." See note 6 supra. The recent case

of Davis V. Romney, 490 F.2d 1360 (3d Cir. 1974), reached the same result.

HUD itself recognizes that the "physical environmental standards re-
quired for properties to meet minimum acceptability requirements need to

be reconsidered, upgraded or emphasized." Audit Review, supra note 23, at 4.



1974] SECTION 235 HOUSING 819

7. Category of purchaser:

Male
Female
Husband and Wife
Co-mortgagors

Other

8. Age of purchaser : By impression : . . . . Asked : . . . .
Under 20
21-30

31-40

41-50

51+
9. Race of purchaser:

Caucasian

Afro-American

Other

I. Information on the House Purchased

10. How many bedrooms does this house have?

11. How many bathrooms does it have?

1

2

3

4

4+

1

2

2+
12. How much did you pay for this house?

13. How much was the down payment? .

14. Monthly payments (from FHA) : ....

15. How much do you now pay in monthly payments for your
house?

16. Subsidy :

II. Questions on the Purchase Process

17. How many homes did you look at before you purchased this
home?

18. How long after seeing the house did it take you to make up
your mind to buy the house?

1 day or less
2 days—1 week
8 days—2 weeks



820 INDIANA LAW REVIEW [Vol. 7:773

15 days—1 month
1 month +

19. Did you see the whole house (or the whole model) before you
decided to buy it?

Yes
No

Why not?
20. Was this house inhabited when you came to see it? (existing

house only)

Yes
No
DK

21. How many times did you examine this house (or the model) ?
1

2

3

3+

22. At what times of the day were you shown this house?
Was that before or after dark?

Before dark

After dark

23. Did you ask a professional building inspector to evaluate

this house before you bought it?
Yes
No
DK

24. Did you rely on the FHA inspection to find anything that
was wrong with the house?

Yes
No

Didn't know FHA inspected

25. What factor most influenced you to buy this house?
(1) Good floor plan

(2) Enough space for children
(3) This was the only house we saw
(4) Neighborhood or location

(5) The price was right

(6) Nice yard

(7) Other

26. Why generally did you move?
(1) Wanted a house instead of an apartment

(2) Needed more space for children



1974] SECTION 235 HOUSING 821

(3) Racial makeup of the new neighborhood is better than
that of the old

(4) Other reasons relating to neighborhood

(5) Had to leave old residence
(6) Other

27. Did you pay the price that the seller (real estate agent)
asked or did you attempt to bargain for a lower price? For
more features?

Did not bargain
Bargained price

Bargained features

28. Who was the real estate agent for this house?

29. How did you select the real estate agent with whom you
dealt?

(1) Friend recommended
(2) Newspaper ad
(3) Saw sign on property
(4) Other

30. Were you satisfied with the services of the real estate agent
with whom you dealt?

Yes
No

31. If not, why not?
(1) He promised to make repairs and didn't make them
(2) He rushed us through homes
(3) He didn't answer questions we asked
(4) He didn't mention major problems
(5) Other

(6) Don't know

32. Did the real estate agent make any claims as to repairs
for which FHA would be responsible?

Yes
No

Comments

:

33. Did anyone tell you that your choice of homes was limited

if you bought under the 235 program?
Yes
No

34. If yes, who told you that?
Real estate agent

Seller

Other



822 INDIANA LAW REVIEW [Vol. 7:773

35. How did you first hear about the 235 program?
(1

(2

(3

(4

(5

(6

(7

(8

(9

Social worker
Legal Aid
Real estate agent
Loan company
Friend

Seller

Newspaper
Other

Don't remember

36. Are you satisfied with the home that you bought?
Yes
No

37. If not, why not?
(1) Too many repairs
(2) Too costly to maintain
(3) Burden of home ownership greater than expected
(4) Don't like the neighborhood

(5) Other

III. Willingness to Make Repairs

38. Have you ever employed a repairman?
Yes
No

39. If yoiir house needed minor repairs (such as a leaky faucet,
changing a fuse, or changing a furnace filter), w^ould you
either make the repairs yourself or hire a repairman?
(1) Do it ourselves
(2) Hire a repairman

(3) Do it ourselves or hire a repairman, depending on
the repairs

(4) Can't afford minor repairs

(5) Not willing to make minor repairs
(6) Don't know

40. If your house needed major repairs (such as rewiring, a

new furnace, or a new roof) , would you either make the re-
pairs or hire a repairman?

(1) Do it ourselves
(2) Hire a repairman

(3) Do it ourselves or hire a repairman, depending on the
repairs

(4) Can't afford major repairs

(5) Not willing to make major repairs

(6) Don't know



1974] SECTION 235 HOUSING 823

IV. Knowledge of Mortgage Contract
and Legal Relationships

41. Can your monthly payments go up?
Yes
No
DK

42. If yes, for what reasons can they go up?
(1) Increased income

(2) Increased insurance

(3) Increased taxes

(4) Insurance and taxes

(5) Insurance and income

(6) Taxes and income

(7) Insurance, income, and taxes

(8) Don't know

43. Is the interest you pay on your mortgage loan deductible
from your incomes taxes?

Yes
No
DK

44. Did you know that FHA (Federal Housing Administration)
played a part in your home purchase transaction?

Yes
No

45. Did you think that FHA was making any guarantees to
you about the quality of the house?

Yes
No

46. Did you have an attorney's help when you bought your house ?
Yes
No

V. Problems with the House and Repairs

47. Have you had any trouble with your house?

I. Roof
a. No problem
b. It existed when bought house
c. It developed after I bought house

Who repaired it?
a. F.H.A. repair

b. Other professional repair

c. Self-repaired



824 INDIANA LAW REVIEW [Vol. 7:773

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair
In Hundreds:

II. Plumbing
a. No problem
b. It existed when bought house
c. It developed after I bought house

Who repaired it?
a. F.H.A. repair

b. Other professional repair

c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair

III. Heating

a. No problem
b. It existed when bought house
c. It developed after I bought house

Who repaired it?
a. F.H.A. repair

b. Other professional repair

c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair

IV. Electrical

a. No problems
b. It existed when bought house
c. It developed after I bought house

Who repaired it?
a. F.H.A. repair

b. Other professional repair

c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair

V. Vermin (Pests)
a. No problems
b. It existed when bought house



1974] SECTION 235 HOUSING 825

c. It developed after I bought house
Who repaired it?

a. F.H.A. repair

b. Other Professional repair
c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair

VI. Inside of House
a. No problem
b. It existed when bought house
c. It developed after I bought house

Who repaired it?
a. F.H.A. Repair

b. Other professional repair

c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair

VII. Outside of House
a. No problem
b. It existed v^hen bought house

c. It developed after I bought house

Who repaired it?
a. F.H.A. repair

b. Other profesisonal repair

c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair

VIII. Yardy driveway, etc.

a. No problem
b. It existed when bought house
c. It developed after I bought house

Who repaired it?
a. F.H.A. repair

b. Other Professional repair

c. Self-repaired

d. Seller repaired

e. Other

f. Still needs repair

Approximate cost of repair



826 INDIANA LAW REVIEW [Vol. 7:773

48. Estimate the amount of money you have spent on repairs
in the last year.

(1)

(2) 1-100

(3) 101-300

(4) 301-500

(5) 500+ (Exact amount )

49 What repairs will you do yourself?

50. What repairs will require hiring help?

51. Which of these repairs would you make right now if it
weren't for the lack of money?

52. Have you been cited (since you lived in this house) for a
building code violation?

Yes
No

53. Who requested the city code inspection?
Don't know
Self

Neighbor

Other

54. What were the code violations?
(1) Plumbing

(2) Heating

(3) Electrical

(4) Vermin
(5) Plaster

(6) Sidewalks

(7) Gutters

55. Did you receive notice from your loan company that FHA
would make certain repairs for you?

Yes
No

56. Approximately when were you notified of F.H.A. responsi-

bility?

Month
Year

1971

1972

57. Did you file a claim for F.H.A. repairs?
Yes

"
' No



19743 SECTION 235 HOUSING 827

58. If you filed a claim with F.H.A., has your house been re-
paired ?

Yes
No

59. If yes, were you satisfied with the repairs made?
Not satisfied
Satsified

60. If not satisfied, why not?
Not properly completed
Insufficient

Comments on F.H.A. Repairs and Claims process:

VI. Purchaser's Last Home.

61. Was your last home a house or an apartment?
Apartment
House

62. If an apartment, was it in public housing?
Yes
No

63. If a house, did you own or rent it?
Rented
Owned

64. If you rented, did you experience any problems with your

landlord ?

Yes
No

65. If yes, what were those problems?
a. Non-payment of rent
b. Lack or repairs by landlord
c. Complaints about my children
d. Others

e. Multiple answers.

66. If you rented, were you ever asked to move out?
Yes
No

67. If yes, why?
a. Non-payment of rent
b. Damage to apartment
c. Too many children
d. Apartment rehabilitated
e. Urban renewal
f. Other



828 INDIANA LAW REVIEW [Vol. 7:773

68. How much was your rent or payments in your last home ?

69. Did that amount include utilities?
Yes
No

70. Have you ever owned a home before you purchased this
house ?

Yes
No

71. If you have, why did you leave it?
a. Moved for job
b. Moved because house was taken
c. Couldn't keep up expensive payments
d. Wanted a better house
e. Wanted a better neighborhood
f. Other

72. How long did you live in your last home or apartment?
Under 1 year
1-3-years

4-6 years

6+ years

73. If less than 1 year, how many times did you move in the
two years before you bought your house?

2 times

3 to 5 times

6 or more times

74. Have your parents ever owned their own home?
Yes
No

75. Do you feel that your house payments place too great a
financial burden on you?

Yes
No

76. Have you ever missed any house payments?
Yes
No

77. If yes, for what reasons?

a. Illness

b. Laid off

c. Strike

d. Other



1974] SECTION 235 HOUSING 829

VII. Personal Information

78. Which members of the household are employed full time?

Head of Household Yes
No

Spouse Yes
No

79. Which members of the household are presently employed
part time?

HOH
Spouse

Child

HOH & Spouse
HOH & Child
Spouse & Child
All three

None

80. Present occupation of Head of Household?

81. Present occupation of spouse?

82. How long has the head of household been on his present job?
More than 5 years
More than 2 Years
More than 1 year
Less than 1 year

83. How long was he on his last job?
(Only if on present job less than 1 year)

More than 5 years
More than 2 Years
More than 1 year
Less than 1 year

84. How long has the spouse been on his present job?
More than 5 years
More than 2 years
More than 1 year
Less than 1 year

85. How long was the spouse on his last job?
(Only if on present job less than 1 year)

More than 5 years
More than 2 years
More than 1 year
Less than 1 year



830 INDIANA LAW REVIEW [Vol. 7:773

86. What job did you hold when you bought this house?
Same
Other

Classification

87. How far have you gone in school?
Head of household

88.

89.

(1) 1 6

(2) 7

(3) 8

(4) 9

(5) 10

(6) 11

(7) 12

(8) Technical school

(9) Some college
(0) College graduate

Spouse

(1) 1 6

(2) 7

(S) 8

(4) 9

(5) 10

(6) 11

(7) 12

(8) Technical school

(9) Some college
(0) College graduate

How much is the gross salary/week of the head of household?
25 -50

51 -75

76 -100

101-125

126-150

151-175

176-200

How much is the spouse's gross salary/week?
25 -50

51 -75

76 -100

101-125

126-150

151-175

176-200



1974] SECTION 235 HOUSING 831

90. Do you have any other sources of income?
No
Alimony or

child support

Welfare

Other

91. If yes, how much is it per week?
25 -50

51 -75

76 -100

100 +

92. Has there been any change in your family size since you
bought your house?

No
Additional child,

children

Loss of child

Added spouse
Loss of spouse

Other addition

Other loss

93. How many people now live in this house?

94. Does a husband live in this house?
Yes
No

95. Who are the people living in the house?
Husband
Wife
Children

Other family

Non-relatives

96. If you had it to do over again, would you buy this house?
Yes
No

Comments

:

97. This house appears to the interviewer as follows:

(1) Clean, well maintained.

(2) Exterior dilapidated

(3) Interior dilapidated

(4) Interior in need of paint

(5) Trash in yard

(6) Broken windows



832 INDIANA LAW REVIEW [Vol. 7:773

(7) Yard needs to be mowed
(8) Other conditions:

(9) More than one bad condition

VIII. Questions for Purchasers No Longer J
Living in Their 235 Houses

98. How long did you live in your house bought under the 235
program? In months:

99. Why did you leave?
a. Didn't like owning my own home
b. House was in bad condition
c. Change of job to a different geographical area
d. Financial reasons

e. Unemployment
f. Illness in family

g. High repair costs
h. Other

Describe where you are living now:

a. House
b. Apartment
c. With relatives
d. Public Housing

e. Other

Comments

: