Chairman Mack, Senator Kerry, and members of the Subcommittee, thank you for this opportunity to testify.
The National Council of State Housing Agencies (NCSHA) is a national, nonprofit organization created in 1970 to assist its members in advancing the interests of lower income and underserved people through the financing, development, and preservation of affordable housing. NCSHA's members are Housing Finance Agencies (HFAs) with statewide authority. NCSHA's member agencies operate in every state and the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
Mr. Chairman, NCSHA commends you and your colleagues, Senators D'Amato, Bond, and Bennett, for taking the lead in Congress to preserve our nation's affordable housing stock and protect its low income residents. We applaud you for introducing the first and most well-constructed legislation (S. 2042) to address permanently the need for restructuring FHA insured mortgages and renewing the thousands of expiring Section 8 project-based contracts which support them.
We thank you for involving the State HFAs in the development of this critical piece of legislation, which you reintroduced this year as S. 513. Thanks to your extraordinary efforts to reach out to the entire affordable housing community, this bill is a consensus product. It reflects the perspectives and has the support of those who live in, own, manage, and finance this assisted housing.
We share your sense of urgency to move this legislation as quickly as possible this year. The time is now for Congress to deal definitively with the Section 8 crisis. Contracts assisting 646,000 units expire this year. Contracts assisting another 1.8 million units will expire next year. The number of units with contracts expiring will continue to grow over the next five years, reaching 2.7 million in 2002. Failure to renew these contracts will force residents to face sharp rent increases, displacement, and eviction. Property revenues will be reduced sharply, resulting in high rates of default and FHA claims.
Mr. Chairman, you clearly understand the sweeping implications of the Section 8 contract renewal crisis. We as a nation cannot afford to continue to renew all expiring contracts at current rents, but we also cannot afford to turn our back on the federal government's enormous investment in this irreplaceable housing stock and its residents. Your bill would achieve federal budgetary savings. You recognize, however, that this is not just a budget exercise. Unlike alternative approaches, your legislation also would put the housing on sound financial footing, preserve it as affordable for the long term, protect its residents from harsh rent increases and displacement, and contribute to neighborhood stabilization and revitalization. Your strategy would accomplish all of this while respecting the rights of states, owners, lenders, and investors. Your approach is the right approach.
Mr. Chairman, your legislation recognizes that HUD lacks the staff, resources and capacity necessary to effectively handle the restructuring of Section 8 contracts. The General Accounting Office (GAO) has cited HUD as a "high risk" agency since 1994 because of department-wide deficiencies making programs vulnerable to waste, fraud, abuse, and mismanagement. GAO reported that long-standing problems such as weak internal controls, inadequate information and financial management systems, and an ineffective organizational structure continue to affect HUD's performance. Furthermore, in light of severe budget constraints, Secretary Cuomo has announced his intention to downsize the HUD staff from 10,400 to 7,500 employees bythe year 2002.
Even HUD admits it does not have the resources to handle Section 8 restructuring on its own. In its multifamily housing bill (H.R. 1433), HUD responds to its lack of capacity by proposing to contract with both private and public sector agencies. Unfortunately, HUD's legislation fails to draw adequately upon the expertise and public purpose mission of HFAs by giving them priority for handling property restructuring. Instead, HUD's proposal would rely heavily on the private sector. The use of private entities is inappropriate and poses a dangerous risk to the preservation of the housing stock as affordable and the protection of low income residents. Unlike HFAs, private firms are motivated purely by profit, not public service. We are deeply concerned about HUD's proposal, and seriously question HUD's commitment to partnering with HFAs to any significant extent. We urge you to reject HUD's approach decisively.
Mr. Chairman, we urge you to continue to insist on the priority your bill establishes for qualified HFAs to handle Section 8 restructuring. HFAs are ready, willing, and uniquely able to take on this challenge.
Mr. Chairman, this Congress is dedicated to devolving responsibility for decision making as much as possible from the federal government to states and localities. We agree that returning authority for public policy implementation to state and local governments in many cases will yield better performance and results than the federal government has produced. HFAs are highly qualified to assume HUD's responsibilities and create superior outcomes in the restructuring process, and will be there in years to come to work in partnership with property owners, managers, and residents.
HFAs are permanent, quasi-public institutions chartered by state governments expressly for the public purpose of creating and preserving decent, safe, and affordable housing in a fiscally responsible manner. Most State HFAs have over 25 years of experience in financing affordable housing throughout our states. Each HFA has a stake in the Section 8 portfolio in its state, because of its commitment to providing affordable housing opportunities in this time of scarce resources and expanding need, and because the future of these properties inevitably will affect neighboring properties.
HFAs will work to reduce the costs of the Section 8 program, while remaining true to our mission of providing decent, safe, and affordable housing. HFAs understand the importance of that scarce resource and will strive to restructure the financing in ways that accomplish both the public purpose of providing good quality housing and the objective of reducing Section 8 costs.
HFAs operate as self-sustaining, efficient businesses, reinvesting our revenues in affordable housing programs. For that reason, we seek reasonable compensation for assuming responsibility for the restructuring process. Make no mistake, however, about our motivation for handling this process. The HFAs have no expectation that restructuring will be a profitmaking venture. In fact, the uncertainties involved in unraveling the complex financial structures supporting these properties pose a real risk that HFAs may not be able even to cover our costs in this process.
Unlike private sector entities, HFAs are publicly accountable. HFAs were established by state legislatures or governors. HFAs are subject to oversight and audit by state governments. HFA boards of directors are appointed by governors or other elected officials, and often include elected state officials among our members.
In contrast with private firms, HFAs are permanent institutions devoted exclusively to the financing and long term administration of affordable housing programs. We are deeply dedicated to working with the residents of properties we finance and the surrounding communities. HFAs are familiar with the interests of these communities, and have experience in providing forums for resident concerns and coordinating services and funding sources to benefit residents. The long-standing commitment of HFAs to our public purpose and high performance has helped us earn the trust of our citizens.
HFAs possess the financial expertise and experience necessary to analyze and best respond to the legitimate financial needs of Section 8 properties. Most HFAs have almost three decades of experience in housing finance, development, underwriting, rehabilitation, asset management, compliance monitoring, auditing, and related legal work. HFAs have a proven track record in outstanding loan servicing and management of our subsidized housing stock. Careful monitoring of HFA properties through financial accountability and prudent resource allocation has contributed to the viability and longevity of these properties. HFA-financed properties have exceptionally low incidences of default and foreclosure. The private sector investment community acknowledges the sound underwriting and monitoring experience of HFAs through consistently high bond ratings.
HFA underwriting expertise includes significant experience with complicated financial workouts similar to those that will occur in with restructuring. Most HFAs possess the full range of technical resources necessary to analyze, restructure, and reposition affordable housing developments. HFAs also know the housing markets, demographics, and particular needs of our states and communities, making us most qualified to assess the short and long term implications of restructuring and repositioning Section 8 properties.
For example, the Florida Housing Finance Agency recently assisted two multifamily properties whose bonds were in default by structuring a refunding of existing bonds through the issuance of $15.6 million in nonrated tax exempt bonds. The sale of these bonds enabled the developer to redeem the existing defaulted bonds. In addition, the refunding eliminated the Resolution Trust Corporation's (RTC) exposure to the existing bonds. Since 1991, the Maryland Department of Housing and Community Development (MDHCD) has supplied over $12 million in bonds, over $3.5 million in development funds, and write-down assistance to help stabilize five properties at risk of defaulting on their mortgages. The Department also provided resident services and worked closely with local governments to help bolster these properties. Maryland's assistance helped reduce the FHA insurance claims for properties with Section 236, Section 8, and 221(d) (4) federal assistance.
HFAs are experienced in working in partnership with the federal government and monitoring owner and manager compliance with federal housing programs, including HOME and the Low Income Housing Tax Credit (Housing Credit), and in Section 8 contract administration. Many HFAs have administered Section 8 contracts throughout their 20 year terms, assuring sound physical and financial condition of the properties, and managing subsidy payments on HUD's behalf.
Through the administration of federal programs, HFAs have proven our ability to responsibly ration precious and diminishing federal resources while leveraging other resources for meeting our states' housing needs. HFAs have access to both federal and state resources not available to other potential designees. These resources may include funds from the agencyitself, the state government, HOME, CDBG, Housing Credits, foundation grants, and funds borrowed from the Federal Home Loan Banks (FHLBanks), Fannie Mae, Freddie Mac, the AFL-CIO. HFAs also work in partnership with social service providers, state nonprofit networks, and local governments, which could enable us to enhance resources and services available to Section 8 properties and residents throughout the restructuring process.
HFAs bring to restructuring familiarity with the third parties in our states which would carry out contract services such as appraisals, physical needs assessments, and legal services with strict HFA oversight. Unlike HUD, whose contracts with large, national contractors often have produced weak results and allegations of corruption, HFAs have demonstrated our ability to evaluate and oversee the most appropriate use of local contractors with specialized expertise. For example, under the loan sales program with HFAs, HUD has admitted that HFAs' due diligence produced more accurate needs assessment and market studies than HUD's contractors.
HFAs also have long standing business relationships with property owners and managers in our states. HFAs ensure that owners and managers meet agency objectives and program criteria, through careful oversight and efficient allocation of scarce resources. Owners and managers have strong incentives to meet HFA standards, because they want to continue our long term beneficial business partnerships. These established relationships enhance HFAs' ability to work with property owners to develop preservation strategies for troubled properties that are mutually acceptable and advantageous. Conversely, because we know the owners and managers in our states, HFAs can differentiate between the honest and the unscrupulous. HFAs have long standing systems in place for identifying negligent owners and managers, enforcing compliance standards, and imposing sanctions, including removing inadequate owners and managers when necessary. HFAs have no tolerance for corrupt or inept owners or managers who take advantage of housing assistance programs at the expense of low income residents and taxpayers.
Mr. Chairman, as you know, Congress fully recognized HUD's limits and State HFAs' abilities when it enacted the FY 1997 Section 8 Restructuring Demonstration last September in the FY 1997 VA-HUD appropriations bill. Modeled on your bill, Congress designed the Demonstration to rely significantly on HFAs - not privateers - to assume HUD's responsibilities for property restructuring wherever possible. As in S. 513, the Demonstration gave HFAs a priority role to serve as HUD designees. Thirty State HFAs, with three-quarters of the eligible properties, applied and have been approved by HUD to serve as designees.
These HFAs have been eager to get started for many months. Since last fall, NCSHA has made every effort to help HUD define the HFA role under the Demonstration, providing detailed comments to HUD, and convening many meetings and conference calls to allow HUD and HFAs to communicate and exchange ideas. Nevertheless, HUD has been extremely slow to get the program up and running. Regrettably, HUD has focused much of its time and attention on readying its own field staff to carry out the restructurings Congress intended for public agencies and nonprofits.
After four months, HUD finally produced the program guidelines in late January. After three additional months of delays, HUD finally issued specific instructions for HFAs in mid-April. In other words, it took HUD nearly seven months from the enactment of the legislation to provide HFAs with fundamental guidance on how their role would be structured. Throughout this entire period, HUD repeatedly promised to provide this information to HFAs in short order, and failed to produce. On several occasions, after months of delays in producing drafts of key materials for HFA comment, HUD requested written feedback virtually overnight. Until this week, HUD had not provided HFAs with essential financial analysis models and the software necessary to measure how much specific restructuring plans will cost the government, or copies of the draft contracts it will ask HFAs to execute to become designees.
HUD's lack of responsiveness to HFA interest in getting the Demonstration underway has been exacerbated by a lack of consistency in the HUD staff dedicated to implementing the Demonstration. Since September, administration of the program has been handled successively by two program coordinators contracted on a temporary basis, with assistance from outside consultants. The first coordinator served from April through November 1996, dividing his time between Washington and his home in Los Angeles. The second coordinator began in November and will be leaving HUD at the end of this month. HUD has not yet named her replacement. The short tenure of these employees and the temporary nature of their assignments has added to the confusion and uncertainty associated with HUD's management of the Demonstration.
HUD's consistent delays in producing guidance for designees, its tendency to focus primarily on the role of field offices in restructuring, and the overall lack of cooperation which HFAs have encountered in the Demonstration has led us to question whether these obstacles can be attributed solely to the Department's bureaucratic operations and weak management. We have begun to suspect that HUD is deliberately resisting giving a priority to HFAs in restructuring, as your bill intends and Congress directed under the Demonstration. Recent actions and statements by HUD seem to confirm this suspicion. HUD's multifamily proposal fails to assign priority to HFAs in restructuring. Furthermore, Secretary Cuomo hasquestioned publicly the advantages of working with HFAs, suggesting that HFAs will add only an additional layer of bureaucracy to the restructuring process. I-IUD officials also have alleged that HFAs are interested only in threstructuring fees. HUD!s comments reveal a deeply troublingmisunderstanding ofHFAs' abilities and motivations. HFAs have manyother responsibilities and opportunities that we would like to attend to, but we understand that thepreservation of the Section 8 inventory is critical toour states "and we must do everything possible to fill the void caused by HUD's shortcomings.
HUD's sluggish pace, the consistent "hurry up and wait" pattern of activity, and the disparagement of HFAs has not dampened our enthusiasm or interest in restructuring, however. Despite our disappointment and frustration with HUD's repeated delays, unfulfilled promises, and anti-state bias, HFAs are eager to begin the restructuring process. Three states already have submitted management plans to HUD. This month, HUD approved the plan presented by Ohio, which has the largest portfolio of eligible properties in the nation, with 3,664 units subject to expiring contracts in FY 1997, as well as the plan presented by Massachusetts. We expect HUD to approve the plan submitted by Virginia soon, and anticipate several more HFAs will present plans within the next month.
Mr. Chairman, we ask you to recognize in your legislation the qualifications and commitment of the 30 HFAs participating in the Demonstration by directing HUD to allow these agencies to qualify automatically as restructuring agents. This would avoid duplicative processing of HFAs and additional delays in their restructuring efforts.
In addition to the lessons learned about HUD, the FY 1997 Demonstration has provided early indications that the negative tax consequences resulting from reducing or restructuring the debt on Section 8 properties may discourage property owners from participating in restructuring. Many owners with properties eligible for restructuring this year have been reluctant to step forward, apparently because they do not want to incur the tax penalty. As restructuring agents, HFAs need a full range of financial tools to move restructuring forward. Additional ways of addressing owners' tax concerns may be necessary to ensure maximum participation in this process. We appreciate your effort to respond to the tax problem with a bifurcated mortgage structure. Questions remain, however, about how the Internal Revenue Service (IRS) will treat the second mortgage in this arrangement, and additional solutions may be needed.
Mr. Chairman, HUD staff assert that your bill will not adequately encourage HFAs to act in the federal government's best interest because HFAs have nothing at risk. As I have explained, HFAs have a unique commitment to creating and preserving decent, safe, and sanitary affordable housing in response to the needs of low income residents. HFAs do not ask for special financial incentives for producing these outcomes, for HFAs exist to produce these outcomes.
Moreover, HFAs are taking significant risks by choosing to assist the federal government by participating in restructuring. These risks stem from the uncertainties associated with working with HUD, the real possibility that HUD's compensation will not cover HFA costs, and the danger that HFAs will forego valuable opportunities by investing their staff and resources in the restructuring process. HFAs do not require extra compensation for taking on these risks involved in investing their time, resources, and energy in restructuring. We accept these risks as part of our public purpose mission.
Some people also have suggested that financial incentives are necessary to align HFAs' interests more closely with the financial interests of the government. As quasi-public agencies with public accountability, HFAs share the federal government's interest in maximizing efficiency and savings to the government. HFAs will strive to reduce costs to the federal government, as we always try to minimize expenses and maximize efficiency. Painfully aware of the limited federal resources available for affordable housing and the threat Section 8 costs pose to these already scarce funds, HFAs understand the importance of limiting the federal expense of restructuring solutions.
You have taken the additional step, which we support, of including a shared savings incentive in S. 513, which would provide HFAs with a share of savings resulting from superior restructurings. This incentive is a useful way to provide additional encouragement to HFAs to find savings and minimize Section 8 subsidy costs beyond the level predicted by HUD's baseline model. We recommend that you allow HFAs to receive a 50 percent share of the savings HFAs achieve in excess of HUD's baseline expectations, to fully compensate HFAs for the additional time, resources, and staff we may invest in order to produce savings above and beyond the federal government's own expectations. HFAs would use this savings for reinvestment in affordable housing. This type of incentive has a successful precedent in the financial adjustment factor (FAF) agreements that Congress required and HUD entered into with several HFAs in the 1980s. This agreement allows HFAs to retain 50 percent of the savings produced through bond restructurings negotiated as part of the FAF agreement. As in your bill, these savings must be reinvested in affordable housing programs.
Mr. Chairman, we strongly support your legislation's continuation of project-based assistance for the Section 8 portfolio, and urge you to reject HUD's proposal to convert subsidies to tenant-based assistance for at least 50 percent of the current project-based portfolio. Under HUD's scheme, each time a resident with a voucher vacates a restructured property, a market rate resident may move in and reduce the stock of housing available to lower income residents. We are deeply concerned about this provision, for it would defeat what HFAs believe is one of the primary performance objectives for restructuring - the preservation of decent, safe, and affordable rental housing for low income citizens. The federal government has invested billions of dollars over the past twenty years in this assisted housing stock. Without continued project-based assistance, this housing will not be preserved as affordable. The government cannot afford to replace this housing, nor will the private sector produce it.
While tenant-based vouchers may provide a useful option in certain circumstances, they should not be used in place of project-based assistance. In markets with the greatest need for affordable housing, residents cannot use housing certificates or vouchers because of low vacancy rates, rents which are higher than the Section 8 Existing Fair Market Rents (FMRs), or the lack of available housing. Furthermore, vouchers are not likely to reduce federal costs significantly or increase resident satisfaction. In short, the cost to the federal government of maintaining project-based assistance for the affordable housing stock will be less than the potential cost of losing this housing to conversion or dilapidation and displacing thousands of low income residents. With the help of State HFAs, restructuring can help reduce the expense of preserving the assisted housing stock to last into the next century.
Mr. Chairman, we commend you for continuing FHA mortgage insurance for Section 8 housing in your bill. This insurance is necessary to guarantee the financial soundness and efficient financing of this housing. We support the use of the FHA insurance fund to write down the insured mortgages to levels sustainable at new, reduced rents, and the use of budgetbased rents for distressed properties which could not operate successfully at market rents even if the FHA insured debt was written down to zero.
As you know, much of the assisted housing stock is uninsured and therefore ineligible for restructuring under S. 513. Of the 3,000 uninsured projects in HUD's portfolio, 2,700 were financed by HFAs. The HFAs believe that your legislation's provision to renew contracts for these properties at existing rent levels adequately addresses the situation. We also would support language directing HUD to renew contracts on uninsured properties at budget-based levels adequate for continued operation of the properties without threatening existing debt or bond requirements, if HFAs were authorized to make these judgments.
Mr. Chairman, your bill allows an HFA to permit up to 20 percent of the units in its jurisdiction to have rent levels not exceeding 120 percent of the local FMR if the housing needs of the residents and community cannot be adequately addressed by the reduced rents required through a mortgage reduction and rental assistance sufficiency plan. We commend you for recognizing that certain properties located in distressed urban communities or isolated rural areas could not be sustained at market rents. We recommend, however, that you authorize HFAs to waive the limits on these exception rents if necessary in extraordinary circumstances to develop a restructuring plan that meets the needs of a property.
Similarly, we urge you to authorize HFAs to waive the $5,000 per unit limit on rehabilitation expenses if we judge it necessary to meet a property's long term capital needs. Although research has shown that the average rehabilitation costs around $5,000 per unit, variations in costs should be permitted where necessary to allow restructuring to address the specific rehabilitation needs of individual properties. Inadequately addressing a property's capital needs now may lead to more expensive structural problems later.
Thank you for this opportunity to present our views.
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