THE REPORT BY the U.S. Department of Housing and Urban Development on conditions in Montgomery County's Housing Opportunities Commission should please county residents. The report is an improvement over the one released by the housing department in July 1997, which roundly criticized the commission and placed it on probation for its poor handling of the federal Section 8 rental-subsidy program for low-income tenants. Today, that probationary status has been lifted.

County residents, and especially the 4,100 households subsidized by the Section 8 program, shouldn't go overboard with their praise, however. While the quality of its staff has improved, and there is better compliance with federal regulations and stronger internal controls, three problem areas noted in the 1997 report have not been corrected as of July. That may explain why HUD still rates the commission's handling of the Section 8 program as "marginally satisfactory." It also may shed light on HUD's reasons for continuing the restriction on the commission's spending of administrative fees for at least another 18 months. Until all remaining deficiencies are resolved, the housing authority should consider itself still under the spotlight.

Nonetheless, Richard J. Ferrara, the county commission's executive director, has reason to be in better frame of mind today. As HUD stated on Aug. 31, "The [1997] findings were so flagrant that HUD could have declared the Housing Opportunities Commission in breach of its obligations under the Section 8 . . . and removed the program from control of your agency." As a result of efforts to turn around the bad situation that they inherited, Mr. Ferrara and his staff now are praised by HUD for the "great strides" they have taken in the reformation of Montgomery Section 8 operations. That's the good news. The Housing Opportunities Commission's black eye isn't gone completely. But it's on the way.