Commonwealth of Pennsylvania et al. v. James T. Lynn, Secretary of Housing and Urban Development,et al., Appellants, 501 F.2d 848 (D.C. Cir. 1974)

This is an appeal from a grant of summary judgment requiring the Secretary of Housing and Urban Development (HUD) to resume accepting, processing, and, where appropriate, approving applications for federal subsidy under three 1363 (D.D.C., 1973). The District 1363 (D.C.C., 1973). The District Court's order to this effect has never been operative by reason of a Supreme Court stay order. See 414 U.S. 809, 94 S. Ct. 26, 38 L. Ed. 2d 44 (1973). For the reasons stated hereinafter, we reverse the judgment of the District Court.

* The three programs involved in this suit¹  are as follows:

1. Section 101 is a rent supplement program under which the federal government agrees to make monthly rental payments on behalf of qualified tenants in housing erected under other government programs, such as 236 and 221(d) (3) projects. See 12 U.S.C. 1701s(b), 1715l(d) (3). The government's contract with the developer, which may run for up to forty years, provides for HUD supervision of rent charges and tenant eligibility. Tenants, who must have incomes and assets below the applicable area maxima for public housing eligibility and be drawn from one of six specially targeted groups, pay rent equal to 25% Of their income, and HUD pays the rest.

2. Section 235 is aimed at 'assisting lower income families in acquiring homeownership' by subsidizing construction of single-family units for their purchase. The builder/sponsor enters into an agreement whereby the government insures the mortgage, and then subsidizes its repayment to the extent that principal, interest, taxes, and insurance exceed 20% Of the qualified vendee's income, with a subsidy ceiling so that the effective interest rate is not reduced below one per cent.

3. Section 236 follows a similar pattern for the purpose of 'reducing rentals for lower income families' in housing owned by non-profit or 'limited dividend' sponsors. HUD and the sponsors enter into an agreement for government regulation of rents and tenant eligibility, in return for which the government insures the mortgage and undertakes to pay the mortgage interest in excess of one per cent. Tenants pay rent calculated on the basis of operating expenses and mortgage interest at one per cent, or twenty-five per cent of their income, whichever is greater.

Housing is constructed under Sections 235 and 236 at the initiative of a sponsor who makes a specific proposal to HUD, generally first at an informal, prefeasibility conference with local HUD representatives. If the HUD representative indicates that approval of a Section 236 project would be likely under applicable guidelines,²  the sponsor will submit a formal application for a feasibility letter. If approved, HUD issues a feasibility letter and reservation of contract authority conditioned on completion of final building plants within a specified time.³  When the plans are submitted, it issues either a conditional or firm commitment, depending upon whether further changes are deemed necessary. With a firm commitment in hand, the sponsor arranges for the closing of a construction loan at which HUD will endorse the mortgage note. Construction then begins, often more than two years after the initial application was submitted.

For Section 235 proposals, if approved, HUD makes a reservation of contract authority, conditioned on completion of construction and a proposed sale to an eligible purchaser within a set time. The sponsoring builder then builds the houses and locates a buyer who enters into an assistance payment contract with HUD which is incorporated into the mortgage insurance contract between HUD and the mortgagee.⁴ 

Unlike Sections 235 and 236, the Section 101 rent supplement program is not an independent housing construction program but an incentive that is piggybacked onto projects under other programs. Thus, HUD may enter into an agreement prior to construction of Section 236 housing to reserve funds for making rent supplement payments to the developer, who in turn dedicates a specific number of units to the Section 101 program.

Early in 1973, the Secretary, after consultation with the President, ordered the suspension of these and the other principal federal housing subsidy programs,⁵  and at the same time announced that HUD would conduct a thorough study and evaluation of the suspended programs in order to determine whether they should be continued, terminated, or modified.⁶  On March 8, 1973, in his State of the Union Message on Community Development,⁷  the President informed Congress that the study would be completed by the following September.⁸  Thereafter, on May 21, with the programs still suspended, appellees⁹  filed this suit challenging the Secretary's authority to suspend the programs.¹⁰ 

The District Court allowed the action to proceed as a class suit, and rejected appellant's arguments that doctrines of standing, sovereign immunity, and political question barred relief.¹¹  It held that the relevant statutes do not invest the Secretary with any discretion to suspend processing and approval of qualified applications for housing subsidy, and that the executive power vested in the President by Article II of the Constitution does not authorize refusal to execute these laws. Because we hold a different view with respect to the first of these issues, we do not reach the second.

II

The narrow question we decide is whether the Secretary has, under the housing subsidy statutes and relevant declarations of congressional policy, discretion to withhold exercise of contract authority, given him by Congress for a specific purpose, in order to determine whether that purpose would be achieved or frustrated by its continued exercise under existing circumstances. The issue is no broader because it is undisputed that, when the Secretary suspended the programs, he did so for 'program-related' reasons, and not for reasons of policy-- such as fiscal policy-- extrinsic to the operation of the programs.¹²  As stated in the Brookings Institution's annual budget analysis:¹³ 

Since expenditures under these programs only occur after occupancy of completed housing units, the Secretary's announcement had essentially no budgetary impact during fiscal 1973 and will reduce expenditures in fiscal 1974 only slightly. Hence, it is clear that the administration's decision to halt new commitments under assisted housing programs is not primarily a response to current budgetary stringency. Rather it reflects real concern about the equity and efficiency of these programs.

While it may be doubted whether mere 'concern about the equity and efficiency' of a program duly established by Congress could, without more, support an executive decision to suspend its operation, it is clear that this is not the usual case of claimed authority 'to defer approval for reasons totally collateral and remote' to the purpose of the authorizing legislation. State Highway Commission of Missouri v. Volpe, 479 F.2d 1099, 1114 (8th Cir. 1973). See Campaign Clean Water, Inc. v. Train, 489 F.2d 492, 494 (4th Cir. 1973); Guadamuz v. Ash, 368 F. Supp. 1233, 1241 (D.D.C. 1973); Commonwealth of Pennsylvania v. Weinberger, 367 F. Supp. 1378, 1381 (D.D.C. 1973); National Council of Community Mental Health Centers, Inc. v. Weinberger, 361 F. Supp. 897, 901-902 (D.D.C. 1973); State of Oklahoma v. Weinberger, 360 F. Supp. 724, 728 (W.D.Okl.1973); Local 2677, AFGE v. Phillips, 358 F. Supp. 60, 78 (D.D.C. 1973); cf. Commonwealth of Massachusetts v. Weinberger, Civ.Action No. 1308-73, slip op. at 7 (D.D.C. July 26, 1973). Accordingly, our inquiry is limited to two subjects: (1) whether the Congress gave the Secretary discretion to halt the programs for programrelated reasons, and (2) if so, whether that discretion was abused.

III

Whether Congress gave the Secretary the discretion here claimed is preeminently a question of intent. Minor v. Mechanics' Bank, 26 U.S. (1 Pet.) 46, 64, 7 L. Ed. 47 (1828); see Sinclair Refining Co. v. Atkinson, 370 U.S. 195, 82 S. Ct. 1328, 8 L. Ed. 2d 440 (1962). We begin this aspect of our inquiry, therefore, with the text of the organic statutes. Since all follow the same pattern, only one need be described in any detail.

The operative authorization and authorization of appropriations subsections of 12 U.S.C. 1715z (Section 235) provide:

(a) For the purpose of assisting lower income families in acquiring 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 . . .. (h) (i) There are authorized to be appropriated such sums may be necessary to carry out the provisions of this section, including such sums as may be necessary to make the assistance payments under contracts entered into under this section . . .. (i) (i) 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. Commitments for the insurance of such mortgages may be issued by the Secretary prior to the date of their execution or disbursement thereon, upon such terms and conditions as the Secretary may prescribe. (k) The Secretary shall from time to time allocate and transfer to the Secretary of Agriculture, for use (in accordance with the terms and conditions of this section) in rural areas and small towns, a reasonable portion of the total authority to contract to make assistance payments as approved in appropriation Acts under subsection (h) (i) of this section.

Other subsections govern such matters as eligibility requirements for assistance, limitations on the amount of assistance, and authority to insure mortgages executed by non-profit organizations and public agencies. Subsections (f) and (g) provide that the Secretary shall adopt procedures and prescribe regulations, respectively, for periodic recertification of recipients' income, a factor in the assistance formula, and to assure that sales prices do not exceed appraised value.

The provisions of 12 U.S.C. 1715z-1 (Section 236) and 12 U.S.C. 1701s (Section 101) deviate from those above only insofar as the differences in the form of assistance provided and the definition of eligible recipients require. Thus, each authorizes the Secretary to enter into payment contracts, provides that the Secretary shall issue pertinent regulations, and authorizes the appropriation of sums necessary to conduct the program and meet contractual obligations. Like Section 235, dollar limitations on the Secretary's contract authority are specified for the 236 and 101 programs.¹⁴ 

The Secretary makes three arguments that he has the discretion here claimed. First, he points to the nonmandatory language of the statutes, particularly in the subsections granting him contract authority. Second, he notes that the statutes' stated purpose is to aid particular groups, from which he infers both the obligation to administer the programs for their benefit, and a correlative discretion to suspend their operation on determining, as here, that there is a substantial likelihood that the programs are principally benefitting others and perhaps actually harming the intended group of beneficiaries.¹⁵  In support of this inference it is urged that it would be unreasonable to impute to Congress an intent that new and experimental programs involving large, long-term financial commitments be blindly pursued no matter how circumstances may have changed. Third, the Secretary suggests that the national housing policy, 42 U.S.C. 1441, which applies to all federal agencies with housing functions, is better served by the action he has taken, or at least that he is entitled so to conclude.

A. Permissive versus mandatory terms.

The Secretary's argument from the non-mandatory language of the statutes is not conclusive standing alone. The statutes are indeed replete with evidence of Congress's intention to give the Secretary broad discretion in the programs' administration. Thus, he may prescribe regulations governing eligibility,¹⁶  and building standards,¹⁷  and, under Section 101, any subject he deems in need of regulation to carry out the program.¹⁸  The general pattern of all three statutes is to grant the Secretary discretion over many areas in appropriately permissive language, and to revert to mandatory terms only where Congress is setting minimum conditions on the exercise of his discretion.¹⁹  But discerning Congress's intent to bestow or withhold discretion to suspend the programs in their entirety is not a simple matter of tallying the 'shalls' and 'mays' and finding that the 'mays' have it.²⁰  Logic, and precedent, e.g., Minor v. Mechanics' Bank, supra, require more, and earlier Secretaries have been so advised. See 22 Op.Atty.Gen. 295, 296 (1899); compare id. with 21 Op.Atty.Gen. 391, 392 and 21 Op.Atty.Gen 414 (1896).

Here the permissive language of the authorizing sections is more naturally in keeping than would be mandatory language with the tenor of a program to be administered by the Secretary's entering into contracts not specifically identifiable at the time of enactment.²¹  Little support can be derived, therefore, from the juxtaposition of mandatory and non-mandatory language in these statutes. Cf. Hecht Co. v. Bowles, 321 U.S. 321, 64 S. Ct. 587, 88 L. Ed. 754 (1944). At the same time, however, there is no warrant on the face of the authorizing subsections for decrying an intent that the Secretary's authority be used under all circumstances, as appellees would have us hold.

B. Statutory declarations of policy and purpose.

The Secretary draws more affirmative support from other aspects of the statutory texts and from the statutory context within which they were enacted. The most basic statement of congressional housing policy derives from the Housing Act of 1949, which dedicates the nation to 'the realization as soon as feasible of the goal of a decent home and a suitable living environment for every American family.' Section 2, as amended, 42 U.S.C. 1441. In addition to setting the national goal, that Act specifies certain policies to be followed in its attainment,²²  and imposes the following obligations on the executive agencies:

The Department of Housing and Urban Development, and any other departments or agencies of the Federal Government having powers, functions, or duties with respect to housing, shall exercise their powers, functions, and duties under this or any other law, consistently with the national housing policy declared by this Act and in such manner as will facilitate progress in attaining the national housing objective hereby established, and in such manner as will encourage and assist (1) the production of housing of sound standards of design, construction, livability, and size for adequate family life; (2) the reduction of the costs of housing without sacrifice of such sound standards; (3) the use of new designs (etc.) and the increase of efficiency in residential construction and maintenance; (4) the development of well-planned, integrated, residential neighborhoods and the development and redevelopment of communities; and (5) stabilization of the housing industry at a high annual volume of residential construction.

This statute is not precatory; HUD is obliged to follow these policies. Action taken without consideration of them, or in conflict with them, will not stand, Shannon v. United States Department of Housing & Urban Dev., 436 F.2d 809 (3d Cir. 1970); Garrett v. City of Hamtramck, 335 F. Supp. 16, 26 (E.D. Mich. 1971); see Talbot v. Romney, 334 F. Supp. 1074, 1079 (S.D.N.Y. 1971), although there is, of course, broad discretion in the agency 'to choose between alternative methods of achieving the national housing objectives.' Shannon, supra, 436 F.2d at 819.²³ 

In addition to these general policies that must guide the Secretary in the discharge of all his housing functions, the programs involved in this suit each bear a statement of congressional purpose that is equally binding on the Secretary in administering the particular program. Thus, Section 235 was enacted 'for the purpose of assisting lower income families in acquiring homeownership'; Section 236, 'for the purpose of reducing rentals for lower income families'; and Section 101, for the benefit of 'qualified tenant' groups as therein defined. These expressions of intent unquestionably obligate the Secretary to administer the programs in a manner reasonably well-calculated to assist their intended beneficiaries,²⁴  and the exercise of such discretion as he has must be directed to that end. The real question here is whether the Secretary has the discretion, or indeed the obligation, to suspend the programs' operation when he has adequate reason to believe that they are not serving Congress's purpose of aiding specific groups in specific ways, or are frustrating the national housing policies applicable to all housing programs. We think he has this limited discretion.

When the Secretary has evidence sufficient to convince him that particular housing programs have come into conflict with the overall housing policy or the program goals set by Congress, and that administrative correctives within his power to take have not or will not resolve the conflict, his dilemma is acute.²⁵  Appellees suggest that the only course then open to him is the familiar one of continuing to administer the programs as well as can be done, and to report the difficulty to Congress.

However usual it may be for the Executive to follow that course under other conditions, it would be unreasonable to conclude, absent a clear indication, that it is a requirement of the laws relevant to these particular circumstances. If the programs are indeed disserving congressional policy, their continued operation at normal levels for the nine-month period deemed necessary for their evaluation would implicate the Secretary in a massive frustration of that policy. Commitments made under these programs may obligation the federal government, irrevocably, to make very substantial outlays for as many as forty years. In the normal course of a nine-month period, commitments could be expected to involve hundreds of thousands of housing units²⁶  and billions of dollars.²⁷  A court is properly reluctant to conclude that Congress forbade the Secretary to withhold commitments of so vast a magnitude when he has good reason to believe that exercising his authority would be contrary to the purposes for which Congress authorized him to act.

Appellees suggest that the HUD Act of 1968, whence Sections 235 and 236 derive, provides the clear indication we deem necessary to their case. In that Act Congress reaffirmed the national housing goal a 'a decent home and a suitable living environment for every American family,' and stated its belief that the goal could be achieved within a decade 'by the construction or rehabilitation of twenty-six million housing units, six million of these for low and moderate income families.' 42 U.S.C. 1441a. In addition to enacting substantive programs in aid of this goal, it directed the President to develop and transmit a ten-year plan for achieving the goal, 42 U.S.C. 1441b, and to report annually on progress toward the objective he had set for the particular year. 42 U.S.C. 1441c. In his annual reports, the President is directed to compare the results of the previous year with the objective set for that year and, in the event of a shortfall, state the reasons therefor, steps being taken to prevent its recurrence, and any necessary revision of the remaining annual objectives; and, in light of experience, to 'make recommendations with respect to any additional legislative or administrative action which is necessary or desirable to achieve the objectives of the plan.'²⁸ 

The Executive's reporting function under the 1968 Act reflects, as appellees suggest, the Congress's determination to oversee closely the nation's progress in attaining its housing goal, and attests to the importance assigned to that goal.²⁹  Requiring annual progress reports and inviting legislative proposals bespeaks a willingness to take corrective action that experience indicates to be 'necessary or desirable to achieve the objectives of the plan.' At the same time, however, delegation of the planning function gives the Executive a considerably broader mandate than otherwise to evaluate the programs independently and, to the end of achieving the goal expressed in the 1968 Act in terms of a specific number of housing units, to determine the mix of authorities to be used, within the authorization ceilings set by Congress. While the Congress and the President alike no doubt expected that the authority would be used or carried forward, as with unused authority in prior years,³⁰  the policy and planning provisions of the 1968 Act are surely not a basis for inferring that Congress intended that it be used notwithstanding later events or information that cause the Executive to believe its use might undermine the integrity of the statutory national housing policy.³¹  On the contrary, that Act indicates a greater than average degree of reliance on, and discretion in, the branch charged with developing the ten-year plan and carrying it out as best it can.

2. The congressional response.

The legislative history of the 1965 and 1968 Acts is, not surprisingly, unenlightening on the precise question before us. When Congress establishes a new program, however novel or untested, it does not normally express itself on the question of what the executive officer charged with its administration should do if and when he has reason to believe that it is frustrating the policies he is obliged to serve. In such unanticipated circumstances, it becomes the duty of a court to construe the relevant statutes in a manner that most fully effectuates the policies to which Congress was committed.³²  We are not, however, entirely without congressional guidance, beyond the inferences to be drawn from the statutes themselves, in the unusual circumstances of this case.³³  And the congressional response to the decision of January 8 does not suggest that we err in our reading of the statutes to confer a limited discretion to suspend the programs.³⁴ 

On January 29, 1973, the President submitted his 1974 budget proposals to Congress, and urged enactment of new legislation emphasizing an alternative approach to achieving the national housing goal. No funds were requested for the suspended programs. In March the Housing Subcommittee of the House Committee on Banking and Currency held a hearing on the suspension at which Secretary Lynn and Under Secretary Hyde explained the basis for the action.³⁵  During the course of that hearing a few members questioned the degree to which mismanagement accounted for the situation giving rise to the suspension but, significantly, not a single member drew in question its legality, even inferentially.³⁶ 

The Housing Subcommittee did not recommend special legislation to order resumption of the programs, but two items relevant to the programs were soon to come before the Congress: extension of the insuring authority of the Federal Housing Administration, including its authority for Sections 235 and 236, which was due to expire at the end of the fiscal year; and the HUD appropriation for 1974.

a. The House

The House approved a one-year extension of insuring authority by House Joint Resolution 512 on May 21.³⁷  The report of the Committee on Banking and Currency, Temporary Extension of Certain Housing and Urban Development Laws and Authorities, H.Rep.No.93-206, 93d Cong., 1st Sess. 2 (1973), explained Section 1 of the resolution:

This section includes extension of authority for the sections 235 (homeownership) and 236 (rental) housing programs which have been temporarily suspended by the President. Approximately $400 million in contract authority is available for use by the Administration, pending its review and evaluation of Federal housing subsidy programs. . . . Extension of these programs for one year will enable the President to reactivate these programs during Fiscal Year 1974 . . ..

Two members of the Committee expressed their separate view 'that enactment of this bill should in no way imply an acquiescence' in the housing subsidy moratorium. Id. at 15. But the 'acquiescent' tenor of the passage quoted first, and endorsed by the other thirty-eight Committee members, takes on added significance in light of the Committee's other recommendations. For example, the President had purported to terminate the open space land program on January 5, and in his Budget proposed to terminate other community development programs as of June 30, and to replace them with a special revenue sharing act (the 'Better Communities Act'). The Committee, however, citing transitional problems that local governments would experience by a funding hiatus between June 30 and eventual enactment of a new program, recommended appropriation of new monies for four of the programs, including the open space land program. Its intention that this money be spent to alleviate the problems it described could not have been clearer, nor more in contrast with its handling of the Section 235 and 236 programs. Again, with respect to Section 701 of the Housing Act of 1954, the comprehensive planning grant program that the Administration proposed to replace, the Committee reported (at 4):

The Committee will give careful consideration to the substantive legislation to be submitted by the Administration. However, until the Congress completes action on such a proposal, it is the Committee's intent that funds appropriated pursuant to this authorization ($110 million) be utilized under the existing comprehensive planning program, with reasonable levels of support made available to existing program recipients.

The point here is not that the House committee with responsibility for oversight of the suspended housing programs failed to inveigh against the suspension, much less insist upon their resumption. Rather, the point is that, with its intimate knowledge of the Acts creating the programs, it did not view the suspension as being beyond the Executive's power under the statutes. The Committee did not necessarily 'acquiesce' in the sense of accepting the suspension as necessary or desirable, but it certainly appears to have accepted its legality.

In June, before the Senate had yet acted on House Joint Resolution 512, the House Committee on Appropriations reported out, and the House passed, the 1974 appropriations for HUD.³⁸  The bill contained no new contract authority for the suspended housing programs. The report on the bill related that the President had suspended five housing programs and 'terminated' one housing, seven community development, and two community planning and management programs. The Committee 'commended' HUD for undertaking the housing evaluation announced on January 8, but questioned the necessity of the suspension, as follows (at 5):

If the results of the evaluation conclude that subsidized housing programs are inherently unworkable, the Committee will consider alternate proposals of providing low and moderate income housing. However, a total suspension without the results of the evaluation is a harsh approach, and it would seem that a more moderate, humanitarian and logical alternative should have been pursued.

The Committee said that it had 'been alerted to substantial hardships incurred due to the suspensions,' referring to the plight of some sponsors, and therefore urged the Secretary and the President 'to end the suspension of housing programs at an early date.'

The Committee took a distinctly different view of the 'termination' of the community development and planning programs, and the distinction did not turn on the difference between termination and suspension. Expressing 'great concern' over termination of the community development programs, it said, 'Until modified or repealed by the Congress, the Committee directs that these programs be continued.' H.Rep.No.93-296 at 6. The budget had requested only 'a token amount of $137,500,000 for these programs,' but the Committee provided $820,000,000 for them, 119 Cong.Rec. H5191 (June 20, 1973, daily ed.), and directed that it be used. With respect to the community planning and management programs, for which there were unexpended no-year funds of $15.6 million-- as there were available funds for the suspended housing programs-- the Committee provided no new money, but said (at 6):

The Committee directs that the program of new community assistance grants be continued instead of being terminated as proposed in the budget estimate.

No similar direction relating to the housing programs appears, either as a statement of current congressional sentiment or as an interpretation of the requirements of existing law.³⁹ 

b. The Senate.

The Senate was clear in expressing its disagreement with the Executive over the wisdom of the housing suspension, but did not question its legality. The Senate Committee on Banking, Housing and Urban Affairs reported out House Joint Resolution 512 with amendments, accepted by the Senate, to increase the Secretary's contract authority under Section 236,⁴⁰  and to require the Secretary 'to utilize the (new) contract authority or other funds appropriated during the fiscal year' for a number of suspended programs including Sections 235, 236 and 101.⁴¹  The HUD appropriations bill, H.R. 8825, was also amended in committee to require obligation of new contract authority only.⁴²  As to the prior unused authority involved in this suit the Committee merely urged HUD, 'if the study presently being conducted by (HUD) . . . indicates that it would be feasible to restore the rent supplement program,' to do so as soon as possible and 'not necessarily wait for completion of the aforesaid study.' The same course was urged respecting Sections 235 and 236.⁴³  Obviously, this approach suggests not that the suspension was unlawful, but rather that the Committee proposed to make further non-expenditure prospectively unauthorized.⁴⁴ 

The absence of suggestion in Congress's response to the housing subsidy moratorium that the Executive lacked authority to suspend the programs for program-based reasons is not without significance. Of greater weight, however, are the detailed responses of the various committees with responsibility for housing programs and their funding, each of which regarded the suspension as at most unwise and some of which did so at the time that they rejected outright executive initiatives to suspend, terminate, or phase out other programs.

We emphasize that Congress's failure to enact mandatory spending legislation in response to the Executive's decision to withhold authorized funds is not and cannot be the basis, in any degree, for an inference that it did not intend in the first instance to preclude executive discretion to suspend the programs. Congress may make its adherence to an original intent unmistakable by further legislation, or by overriding a presidential veto, see City of New York v. Train, 160 U.S.App.D.C. 114, 494 F.2d 1033, cert. granted, 416 U.S. 969, 94 S. Ct. 1991, 40 L. Ed. 2d 557 (1974), but it cannot be put to the necessity of acting twice before it is taken to mean what it said in duly enacted legislation. We have examined Congress's response to the executive action here challenged only for the light it might shed on its original intent in establishing these three housing programs.

That response is corroborative of the inference of discretion in the Secretary reasonably to be drawn from the statutes and their contexts; and we hold that, in the circumstances revealed by this record, the Secretary is not without authority to suspend the Section 235, 236 and 101 programs.

IV

When this case was before the District Court, the only administrative decision to be challenged was the Secretary's order of January 8, and it should have been reviewed on the basis of the information then available to the Secretary. During the pendency of this appeal, however, the program evaluation initiated by the Secretary was completed,⁴⁵  and on the basis of that evaluation he determined that operation of one program should be resumed and that operation of the three programs with which this case is concerned should not be. Since the relief sought is immediate resumption of the programs, it would be futile indeed to determine now whether the original suspension decision was an abuse of discretion when made. If the later decision against resumption was not an abuse of discretion, a court of equity would not order resumption of the programs because they had been initially suspended wrongfully, nor, if the later decision was abusive, withhold relief because the original suspension was not. The question has necessarily become the reasonableness of the final decision itself.⁴⁶  This change in circumstances does not require that the case be remanded, however. The housing program study on which the termination was based is before the court. Together with other matters on the public record, it provides support for the Secretary's exercise of discretion of a sort that is not diminished for the lack of adversarial testing.⁴⁷ 

Since the discretion vested in the Secretary is a narrow one, and the potential for mischief in the event of its abuse great, it is natural for a court to extend its inquiry somewhat beyond the 'rational basis' that elsewhere suffices to support an administrative decision under 5 U.S.C. 706. This is not to say that the court is empowered to substitute its judgment for that of the Secretary, for it is not. Rather, 'the ultimate test is reasonableness.' Brawner Building, Inc. v. Shehyn, 143 U.S.App.D.C. 125, 130, 442 F.2d 847, 852 (1971). Our inquiry, therefore, is not merely into whether the Secretary had a rational basis for believing that the programs were disserving Congress's purposes and policies, but whether, having those policies in mind and considering the consequences to be expected from continuing the programs, it was reasonable to discontinue them.

The applicable policy framework may be briefly restated as follows. The national housing objective is the realization as soon as feasible of a decent home and a suitable living environment for every family.⁴⁸  'The policy to be followed in attaining the national housing objective established shall be' one of primary reliance on private enterprise, with governmental assistance 'utilized where feasible to enable private enterprise to serve more of the total need.' HUD is directed to exercise its powers consistently with the national housing policy and so as (1) to produce physically and socially sound housing (2) in an economical manner (3) with increased efficiency of construction and maintenance; (4) to encourage 'the development of well-planned, integrated residential neighborhoods'; and (5) to stabilize the housing industry 'at a high annual volume of residential construction.' 42 U.S.C. 1441.

More particularly, the rent supplement program was enacted for the benefit of those of the '8 million Americans who still live(d) in substandard housing' as of 1965 and the 'estimated 300,000 families who (would) be displaced from their homes over the next four years' who 'are within the income range where they are unable to afford decent housing,' H.Rep.No.365, 89th Cong., 1st Sess. 6 (1965), defined as those whose incomes make them eligible for public housing. 12 U.S.C. 1701z(c) (1). Sections 235 and 236 were enacted to assist 'lower income families,' specifically 'families with incomes in the general range of $3,000 to $7,000,'⁴⁹  and the Secretary was directed to 'accord a preference to those families whose incomes are within the lowest practicable limits.' 12 U.S.C. 1715z(h) (2), 1715z-1(i) (2).⁵⁰  Under each program it was expected and intended that the amount of subsidy per family would decline as annual family income increased. H.Rep.No.1585, 90th Cong., 2d Sess. 8, 22 (Tables) (1968).

There are two questions to be asked with respect to each of the three programs. First, was the program consistent in operation with the national housing policies and the purposes for which Congress enacted it? Second, if it was not, was the inconsistency reasonably attributable to the program's structural features as opposed to the manner of its administration? Each is, of course, a question of fact, but the latter implicates the Secretary's judgment in a way that calls for some deference; it is, in short, a question of discretion. We take the programs up individually with these questions at hand.

As of the end of 1972, just before the program was suspended, 398,000 home mortgages had been insured under Section 235, in the amount of.$7.0 billion. The actual net addition to the housing stock is estimated at 14,000 for every 100,000 subsidized units, primarily because of the finite amount of mortgage money available. The median mortgage amount per unit was $18,500, and the mean only slightly lower, but an inordinate number of units have been poorly built and deteriorate rapidly. The rate of default and abandonment in some neighborhoods has been extremely high, and the rate of failure within ten years for the entire program is projected at 16%.

The statutory maximum mortgage amount ranged from $18,000 to $24,000 depending on family size and area construction costs.⁵²  Construction costs being lower in the South, these maxima have tended to concentrate Section 235 housing in that region. Almost 49% Of all Section 235 units are located in the southern states, where 25% Of the United States population, and 30% Of the households with incomes in the targeted $3,000 to $7,000 range, live. In contrast, HUD Region II, consisting of New York, New Jersey, Puerto Rico, and the Virgin Islands, is the site of only 3.8% Of the Section 235 units, although it has 13.7% Of the population and 12.4% Of those in the $3,000 to $7,000 income group.

The distribution of Section 235 units by household income shows that 37.3% Have incomes in excess of $7,000, of which 18% Are above $8,000 and 2.1% Above $10,000. Fewer than one-half of one per cent have incomes below $3,000. More significant is the distribution within the $3,000 to $7,000 range. With every increase (in 000s) in income within that group, the percentage of Section 235 units increases. Moreover, with one exception, the annual subsidy per unit is constant or increases with every $1,000 increase in family income. The average family with an income below $3,000 receives an annual subsidy of $720; one between $3,000 and $4,000, $768; and one with an income in excess of $10,000 receives $864.⁵³ 

The reason that the subsidy increases with income derives from the formula by which it is calculated. The homeowner's housing cost is limited to twenty per cent of his income so long as that does not create an effective mortgage rate of interest less than one per cent. Higher income families within the eligible group tend to purchase larger homes, and twenty per cent of their larger incomes not only buys more housing, it also attracts a larger and larger subsidy until they reach the one per cent effective rate plateau. Indeed, although the twenty per cent limitation more often applies to higher income families, for families at every income level it creates an incentive for builders to emphasize larger, more expensive homes, and for families to buy them because they are indifferent to additional cost below the point where they begin to share the burden of marginal price increments.

This curious incentive structure also exacerbates the plight of Section 235 homeowners facing increases in taxes and insurance. Once the subsidy limit has been reached, they must bear these increases alone. Partly as a consequence of this, the projected final default rate of 18.6 per cent may be unrealistically low, in which case the Section 235 mortgage insurance fund is actuarially unsound.

As previously noted, Congress intended Section 235 benefits to accrue 'to those families whose incomes are within the lowest practicable limits,' 12 U.S.C. 1715z(h) (2), and intended the per unit subsidy to decline as family income increased. The actual distribution of Section 235 subsidy by region and especially by income group is not consistent with the former purpose, and of course the tendency of the subsidy amount to increase with family income runs directly counter to congressional intent.

HUD's administration of Section 235 has been subjected to intensive internal and congressional scrutiny and criticism in recent years,⁵⁴  and administrative reforms aimed at improving program results have been attempted.⁵⁵  Some of the points of conflict between the program's actual operation and the general directive to HUD, 42 U.S.C. 1441, would seem to be amenable to administrative correction.⁵⁶  Better appraisal and inspection procedures, for example, could be expected to facilitate the production of sounder housing, and uninflated prices would lead to fewer failures, with their deleterious effect on neighborhoods.

But the operating results that conflict with Congress's intentions specific to Section 235 do not appear to be of a sort amenable to administrative correction. Indeed, a recent congressional study that reiterated the need for administrative improvement recommended legislative reconsideration of the statutory income criterion tied to local public housing income ceilings and of the nationally uniform statutory maximum mortgage amount, in order to correct the unintended regional and income distribution of Section 235 subsidies. Congressional Research Service, An Analysis of the Section 235 and 236 Programs, Subcomm. on Housing and Urban Affairs of the Senate Comm. on Banking, Housing and Urban Affairs, 93d Cong., 1st Sess. 12 (May 24, 1973) (Comm. Print). In view of the limited potential for administrative correction of these deviations from the congressionally intended operation of the program and the apparent degree to which unanticipated and unintended results have been linked to its structural features, we are unable to say that the Secretary acted unreasonably in terminating rather than continuing the program.

The Secretary's study made three crucial findings about the operation of Section 236. First, the program provides a rent subsidy 'mainly to moderate-income households.' Second, the annual subsidy tends to increase with family income. Third, the average Section 236 unit costs 20% More to construct than a comparable unit privately financed. In addition, the ten-year projected default rate of 20% Indicates that the program insurance fund is actuarially unsound.

One hundred and forty-two thousand units had been constructed with Section 236 financing when the program was suspended, and three times as many more had been issued fund reservations or obligations of contract authority unaffected by the suspension. The median mortgage amount was $16,700 per unit. Sixty-two per cent of the completed units had been sponsored by corporations or partnerships organized for profit.⁵⁷ 

Sponsors have a strong interest in serving families with a larger and steadier income. In addition to regarding such families as socially more desirable to the project, they are clearly more desirable tenants from a financial point of view. Since all tenants must pay at least the 'basic rent,' i.e., their share of operating expenses plus amortization at an assumed one per cent, by themselves,⁵⁸  tenants with a larger income are better able to absorb increases in the basic rent, which increases as operating expenses rise. This reduces the rate of turnover, with its attendant costs to management (and thus to other tenants).

Most families in the program receive the maximum benefit, which is the whole of the difference between the market rent and the basic rent.⁵⁹  The size of this difference and therefore of the subsidy is a function of per unit land and construction costs. The result of this formula for subsidy is for higher cost projects to serve higher income tenants and for those tenants to receive a correlatively larger subsidy, and for lower cost projects to serve lower income families who receive a smaller subsidy.

The construction costs of Section 236 units are on average twenty per cent higher than for comparable unsubsidized⁶⁰  units, and rents are at least ten per cent higher.⁶¹  The subsidy formula provides an incentive to sponsors to overbuild,⁶²  and even to overstate actual costs, see Survey and Investigations Staff, Report, in 3 1973 Hearings, supra note 25, and HUD's cost control procedures have been unable to deter this practice. According to the congressional staff report just cited, which placed the percentage of units erected by profit-making sponsors at 68%, the only motivation for many sponsors was the tax shelter benefit available during the early years of the project's life. 'Once the tax shelter benefits have been realized by the 236 sponsor, the project becomes a counterproductive investment to the sponsor. At this point in time the sponsor will probably sell his project or return the project to HUD if he is unable to sell the project to another investor.' Id. at 1309.

As of March 31, 1972, Section 236 mortgages totalling $572 million, or 26% Of the total amount then outstanding, were in default. Id. at 1314. By the time of the program's suspension, HUD owned six and held assigned mortgages on sixty projects. None had then been sold, but based on experience under the Section 221(d) (3) below market interest program, HUD expected an average loss of 45% Of acquisition costs, and a turnover period of up to three years during which time operating costs would exceed market rents (i.e., rental receipts including the intended subsidy portion thereof). With a projected ten-year default rate of 20% And a final rate of 30% Or more, the program's mortgage insurance fund is inadequate.

There is hard evidence on the public record that some of the financial problems HUD encountered with Section 236 were attributable to its own failure adequately to supervise the private entrepreneurs on whom the program was designed so heavily to rely.⁶³  While the tendency to overbuild and the fraud associated with inflated cost accountings, for example, may reflect some sponsors' responses to incentives created by the program design, there is no reason to suppose that they were necessarily beyond the reach of administrative prevention, and the Secretary does not claim otherwise. On the other hand, the program's reliance on private enterprise appears to be inherently in tension with the Secretary's mandate to concentrate its subsidies among the lowest income families in the range of those eligible, since sponsors cannot be prevented from renting to eligible tenants concentrated at the high end of that range.⁶⁴  The tendency of higher income families to draw larger subsidies seems equally to be based upon the program design itself, but is nonetheless contrary to the way in which Congress intended Section 236 to work.

The incentive system that concentrates the sponsor's benefits in the early years of the program may also be a virtually insurmountable obstacle to the goal of building sound housing. There is little reason for a sponsor to concern itself with whether the housing it constructs will last for even the life of the insured mortgage, and every incentive to look to the short term with the idea of turning the project over to HUD when the benefits have been exhausted.

While the court cannot determine whether the structure of Section 236 made even these results inexorable, the relationship is sufficiently plausible that we have no basis for saying the Secretary acted unreasonably in terminating the program on the ground that he could not administer it consistently with congressional intent.

The rent supplement program is not a housing construction program at all. Rather, it offers a subsidy to tenants in certain units in projects constructed under other programs, notably the Section 221(d) (3) market rate program, the Section 236 program, and state and local housing construction assistance programs. The continued vitality of the Section 101 program is, therefore, dependent in the first instance upon the continued operation of the underlying construction programs onto which it is piggybacked.

Appellees in this case each proposed to sponsor either Section 235 or Section 236 projects, and Section 101 was implicated with respect to at least some of the latter. No appellee concerned itself with sponsoring projects under any other program to which Section 101 might be conjoined. Appellees did, however, sue on behalf of all others 'similarly situated,' and were certified by the District Court as proper representatives of their class.

While there is some ambiguity in that court's description of the intended class,⁶⁵  we do not see how the class can properly be held to include would-be sponsors of projects under programs other than Section 236 but to which Section 101 might apply, none of whom are parties to this case. Insofar as Section 101 applies to sponsors under other programs, it is impossible to say that common questions of law are present. If the Secretary is refusing to entertain applications under those programs, it is a question of law arising under different statutes as to whether it is within his power or discretion to do so. Insofar as Section 101 applies to Section 236 sponsors, their concern with the former program necessarily terminated with the latter. Accordingly, since we interpret the class determination in this case to reach only those would-be Section 101 sponsors involved with Section 236 applications, there is no longer any justiciable controversy as to them in light of our previous ruling with respect to Section 236. See Mintz v. Mathers Fund, Inc., 463 F.2d 495 (7th Cir. 1972).

Reversed.