Mr. Chairman, Senator Kerry and Members of the Subcommittee:
My name is John Koelemij and I am a home builder from Tallahassee, Florida and past President of the 190,000 member firms of the National Association of Home Builders (NAHB). On behalf of NAHB, I thank you Mr. Chairman, as well as other key members of the Subcommittee and of the full Banking Committee, for your leadership and perseverance in continuing to strive in order to achieve both a responsible as well as equitable solution to the task before you with respect to the expiring project-based Section 8 rental assistance contracts. also want to publicly thank and acknowledge our appreciation for the Subcommittee's professional staff, both Republican and Democratic, for their dedication, accessibility and their in depth knowledge of housing programs. They serve you well.
Further, I thank you for the opportunity to appear here today to comment on the "Multifamily Assisted Housing Reform and Affordability Act of 1997," S.513. As the Chairman and Members of this Subcommittee know all too well, project-based section 8 rental assistance contracts, have begun to expire. Their numbers are estimated to be 1.3 million units. Of this universe, approximately 900,000 are in structures with mortgages insured by the Federal Housing Administration (FHA). An additional 50,000 units, in about 1,700 projects, are financed by a direct loan from the Rural Housing Service at the Department of Agriculture. Other units are in projects financed by bonds through various state housing finance agencies.
While some of these rental assistance contracts are co-terminus with the terms of the mortgage, most are not. Consequently, if the Section 8 rental assistance contracts are not renewed, these projects are at serious risk of default and foreclosure. The practical effect of Congress taking no action exposes a wide variety of stakeholders to very serious consequences. These stakeholders include: the FHA insurance fund, the Departments of Agriculture, HUD, and Treasury; state bonding agencies; private lenders; a vast number of communities and neighborhoods; owners and most importantly, the residents the program is intended to serve.
Most owners of this valuable housing stock are dedicated to providing good housing that is decent, safe, sanitary and affordable. Residents depend on this rental housing for shelter and security. In many neighborhoods, this housing serves as an anchor for the community. These are very sound reasons, indeed, Mr. Chairman for taking actions that will preserve this housing in the affordable housing stock, minimize the risk of loss and likelihood of increased liabilities for responsible owners, minimize the displacement and uncertainty for current residents, and protect the physical asset that this housing provides.
NAHB believes that Section 8 portfolio re-engineering should contain certain elements essential to providing a responsible and equitable solution. First, the formula should be clear, workable and flexible, as a "on one size fits all" system simply will not work. S.513 contains this essential element. The bill provides for new, lower rents for projects based on rents for comparable unassisted properties in the area, or, if no such measure is available, 90 percent of the HUD fair market rent (FMR). Existing mortgages would be restructured to provide a reduced new, or modified, first mortgage with lower debt service, which along with operating costs, can be covered by the lower rents. Funds to pay the difference between the old mortgage and the new mortgage would come from the FHA insurance fund. In order to avoid certain adverse tax consequences arising from the reduction of the first mortgage, funds provided by FHA to reduce the first mortgage would be repaid by the owner through a second mortgage. The lower rents would result in lower rental subsidies from HUD.
Second, if the debt is to be restructured, the restructuring entity should be a public body. Section 8 project-based rental assistance involves the use of public funds. Only public bodies have the accountability necessary for balancing social policy with the fiscal policy in a responsible manner, while being accountable to taxpayers. S. 513 embraces this element by maintaining an active role by public entities for any reform of the Section 8 portfolio; namely the state and local housing finance agencies (HFAs). NAHB strongly supports this approach.
We recognize that not all public housing finance agencies possess the ability to restructure the debt on properties that exceed market value, nor to determine the actual market value. HFAs should, nonetheless, remain in control of the process, while contracting out certain functions to FHA approved mortgage lenders and other entities that are qualified to deliver a responsible and workable approach. Re-engineering, or financial restructuring, on over-market properties should focus not only on reducing the cost to the government, but it should also focus on protecting the physical asset along with responsible owners and managers and the hundreds of thousands of elderly, disabled, and other low-income families. S.513 achieves this goal.
Third, the rental assistance should remain as project-based. Empowering residents by providing alternative housing choices is a commendable concept and can be a useful tool. However, in this instance, we are in most cases misleading the public, if not ourselves, for there often exists no alternative housing. Instead, the goal should be one of adequate protection for the joint needs of current residents, the fiscal viability of responsibly owned and well-managed housing projects, the overall cost to taxpayers, and the continuation of needed affordable housing that serves as an important resource for the community. S. 513 embraces this element.
Continuation of project-based assistance provides the highest level of protection for current residents. For the elderly and the disabled, tenant-based assistance does not offer choice, but rather uncertainty. This is particularly true in tight housing markets in major urban areas as well as in rural areas. "Vouchering out" project-based rental assistance does, however, pose an increased risk to the continued financial viability of an affordable housing resource. "Vouchering-out" also places residents at greater risk that the government's commitment to providing rental assistance can be reduced in overall numbers with greater ease.
Further, NAHB is deeply concerned with the Administration's proposal, which provides project-based assistance for the elderly and the disabled, but not for housing occupied by families with children. NAHB believes that it is important to preserve affordable housing for the elderly and the disabled, as well as housing occupied by low- and moderate-income families.
The fourth element is maintenance of FHA insurance. NAHB believes FHA insurance should remain in place on those projects that have their mortgage debt restructured. Without FHA insurance, many otherwise good and fiscally sound housing projects will be unable to obtain long-term financing at reasonable interest rates. S. 513 embraces this element. The combination of project-based assistance, which is mandatory, combined with the presence of FHA multifamily mortgage insurance on one-year renewals of the rental assistance, increases the likelihood that future renewals will be forthcoming.
The Administration's proposal potentially would subject literally hundreds of thousands of residents to displacement as long-term pressures on balancing the budget prevail over the more limited resistance to renewing tenant-based assistance contracts. As existing residents either move or cease to need assistance, the overall supply can be more easily reduced by failure to re-issue the certificates or vouchers. Further, in certain markets, projects will quickly become destabilized as low-income residents receiving rental assistance move, or exit the program, and no new assistance is provided for additional families. If market rate renters can not be located or attracted to the project, then they will go into default and foreclosure.
Fifth, responsible owners of this housing should be provided adequate protection from the likelihood of unnecessary tax consequences as a result of debt restructuring. If the federal government takes actions to restructure the debt, it has the responsibility to protect those stakeholders who would otherwise be penalized, albeit unintentionally, as the result of these actions. While not containing a tax solution through the Internal Revenue Code, S.513 turns that portion of the original debt that is above the market value into a second mortgage. While this approach is far from perfect, it is preferable to the tax consequences that would occur for many owners without it. The Administration's proposal would increase an owners tax liability beyond that which currently exists without debt restructuring or sale of the property. It creates a preference for sale to certain purchasers, by providing favorable tax treatment to sales to nonprofits, but no tax relief for sales to for profits, thereby reducing the overall value of the properties. Also, the provision calls for owners to relinquish the step up in basis at death. This would result in a major change in what has been an integral part of tax law for decades.
Sixth, restructured rents should be based on market comparables, not HUD's fair market rents (FMRs), which often do no reflect the current market. Further, rents can, and often do, vary widely throughout a metropolitan area leaving the FMR far too low in more costly sections of an area, while excessively high in other neighborhoods.
Seventh, restructuring should not abrogate an owner's right to prepay the existing mortgage. S.513 embraces this element. Owners have the option simply to prepay the current mortgage without participating in the program. The Administration's proposal, on the other hand, does not allow property owners a clean right to prepay their mortgage obligation and seek other uses for their properties. It also would require owners receiving many types of housing assistance to lease a set amount of units to holders of tenant-based assistance, abrogating contract rights of the owners.
With respect to the Section 515 rural direct loan program administered by the Rural Housing Service (RHS) at the Department of Agriculture, NAHB supports the Chairman's decision to renew these Section 8 assistance contracts at current rents. Additionally, we would support any efforts by this Subcommittee to ensure that when these Section 8 contracts do expire, that they are renewed as Section 8 contracts, as opposed to transferring them to the RHS Section 521 rental assistance program until any rural restructuring proposals are fully developed.
When I appeared before this Subcommittee a year ago, I offered our support for last year's version of S. 513. This year, I again offer our support for S.513. It embraces not only the basic principles for responsible housing policy. but also a clear, concise, and workable formula that protects all stakeholders in the program.
We remain concerned, however, over the following three issues:
First, we strongly agree with the authors of S. 513 that the restructuring entities must be public organizations. And, most of the provisions in this legislation direct the restructuring to public entities. Section 103(b)(3)(B), however, provides HUD with a "back door" to contract with non-public entities, including Wall Street investment bankers to conduct the restructuring. NAHB believes that this back door approach, while admittedly a narrow opening, will, nonetheless, allow HUD to involve firms with motivations to take these properties from their current owners and displace their low-and moderate-income residents. NAHB urges that this provision be stricken.
Second, NAHB believes that the bill should contain workable "exception rent" provisions. NAHB is aware of many projects, particular in New York City, as well as many rural areas, where comparable properties do not exist, and where operating costs are high in comparison to HUD's FMRs. A substantial portion of these properties serve seniors who need special services and facilities. It is appropriate to shift to budget-based rents as "exception rents" when the formula cap will not support operating costs without debt service for these properties. However, the technique for establishing a higher exception rent cap (120 percent of the FMR in S.513) and annual limits for use of exception rents (20 percent of expiring units) is not a proper approach for controlling operating costs and simply will result in the removal of hundreds of good projects from the affordable housing stock. A HUD commissioned study by Earnst & Young indicates that market rents would not cover operating expenses in 1,100 of the 8,400 projects in the privately owned FHA-insured HUD-assisted portfolio. Many of these worthwhile projects, particularly elevator structures for seniors in rural areas, would have to be demolished because existing residential market rents will not support operating costs and these buildings cannot be converted to other uses.
NAHB urges that these limitations be removed from S.513. In their place, NAHB supports language to be added to Section 104(g)(2), allowing Participating Administrative Entities (PAEs) to exceed restructuring rent limits and utilize budget-based rent levels for 4 @ exception projects" where the PAE determines that the housing needs of the tenants and the community cannot be addressed adequately through restructuring.
Third, as discussed above, many projects are located in communities where comparable proper-ties do not exist, particularly in rural areas. Comparable properties do exist, however in other communities of similar size and characteristics and can be utilized by expanding the definition of "comparable properties" to allow state certified appraisers, pursuant to the standards of the Uniform Standards of Professional Appraisal Practice, to locate and use actual comparables.
Thank you for considering our comments on this legislation of vital importance to the
industry. I would be happy to respond to any question that Members may have.
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