[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




   HUD LOSING $1 MILLION PER DAY--PROMISED ``REFORMS'' SLOW IN COMING

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 23, 1999

                               __________

                           Serial No. 106-34

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
59-984                     WASHINGTON : 2001


                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 23, 1999...................................     1
Statement of:
    Apgar, William, Assistant Secretary for Housing, Federal 
      Housing Commissioner, U.S. Department of Housing and Urban 
      Development................................................   107
    Cincotta, Gale, executive director, National Training and 
      Information Center, Chicago; Grace Jackson, volunteer, 
      Roseland Neighborhood Housing Services, Chicago; Carl 
      Edwards, president, Organization for a New Eastside, 
      Indianapolis; Brian Davis, director, Northeast Ohio 
      Coalition for the Homeless; and Stanley Czerwinski, 
      Associate Director, Resources, Community, and Economic 
      Development Division, U.S. General Accounting Office.......   152
    Cooper, Nancy H., District Inspector General, Southeast/
      Caribbean District, U.S. Department of Housing and Urban 
      Development................................................    17
Letters, statements, etc., submitted for the record by:
    Apgar, William, Assistant Secretary for Housing, Federal 
      Housing Commissioner, U.S. Department of Housing and Urban 
      Development:
        Information concerning factual errors....................   134
        Letter dated September 9, 1999...........................   132
        Prepared statement of....................................   110
    Biggert, Hon. Judy, a Representative in Congress from the 
      State of Illinois, prepared statement of...................    11
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, letter dated March 9, 1999.....................     2
    Chenoweth, Hon. Helen, a Representative in Congress from the 
      State of Idaho:
        Additional questions for the record......................   147
        Prepared statement of....................................    13
    Cincotta, Gale, executive director, National Training and 
      Information Center, Chicago, prepared statement of.........   155
    Cooper, Nancy H., District Inspector General, Southeast/
      Caribbean District, U.S. Department of Housing and Urban 
      Development, prepared statement of.........................    19
    Czerwinski, Stanley, Associate Director, Resources, 
      Community, and Economic Development Division, U.S. General 
      Accounting Office, prepared statement of...................   181
    Davis, Brian, director, Northeast Ohio Coalition for the 
      Homeless, prepared statement of............................   171
    Edwards, Carl, president, Organization for a New Eastside, 
      Indianapolis, prepared statement of........................   161
    Gilman, Hon. Benjamin A., a Representative in Congress from 
      the State of New York, HUD Single Family Property 
      Disposition Program report.................................    33
    Jackson, Grace, volunteer, Roseland Neighborhood Housing 
      Services, Chicago, prepared statement of...................   166
    Sanders, Hon. Bernard, a Representative in Congress from the 
      State of Vermont, prepared statement of....................    14
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, chart concerning mutual mortgage 
      insurance fund.............................................   105

 
   HUD LOSING $1 MILLION PER DAY--PROMISED ``REFORMS'' SLOW IN COMING

                              ----------                              


                        TUESDAY, MARCH 23, 1999

                          House of Representatives,
                            Committee on Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 12:15 p.m., in 
room 2154, Rayburn House Office Building, Hon. Dan Burton 
(chairman of the committee) presiding.
    Present: Representatives Burton, Gilman, Morella, Mica, 
Terry, Biggert, Ose, Chenoweth, Waxman, Kanjorski, Mink, 
Norton, Cummings, Kucinich, Tierney, Allen, and Schakowsky.
    Staff present: Kevin Binger, staff director; Daniel R. 
Moll, deputy staff director; Barbara Comstock, chief counsel; 
David A. Kass, deputy counsel and parliamentarian; Jane Cobb, 
professional staff member; Mark Corallo, director of 
communications; John Williams, deputy communications director; 
Carla J. Martin, chief clerk; Lisa Smith-Arafune, deputy chief 
clerk; Corinne Zaccagnini, systems administrator; Jacqueline 
Moran, legislative aide; Maria Tamburri, staff assistant; Phil 
Schiliro, minority staff director; Phil Barnett, minority chief 
counsel; Cherri Branson and Michael Yeager, minority counsels; 
Ellen Rayner, minority chief clerk; Jean Gosa, minority staff 
assistant; and Barbara Wentworth, minority research assistant.
    Mr. Burton. The committee will come to order.
    A quorum being present, we will proceed.
    Several weeks ago, this committee held a hearing about 
Federal programs that are wasting billions of taxpayer dollars 
every year. These programs are on GAO's high risk list, because 
mismanagement and internal weaknesses make them very vulnerable 
to waste, fraud and abuse. Today's hearing is the second in a 
series of full committee hearings that will examine these high 
risk areas.
    During the February 10th hearing, I promised to try to work 
with our appropriators to hold agencies accountable for 
addressing the high risk areas. Since then, I co-signed a 
letter with Chairman Bill Young of the Appropriations Committee 
to every major agency. It puts them on alert that we want to 
see serious efforts to resolve these problems, starting with 
specific, measurable performance goals and their annual Results 
Act plans.
    Without objection, I would like to enter this letter into 
the record at this time. This is the letter we sent to all the 
agencies from Chairman Young and myself. Without objection, so 
ordered.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.001
    
    [GRAPHIC] [TIFF OMITTED] T9984.002
    
    Mr. Burton. I plan to share what we learn here today with 
the Appropriations Committee, and I'm going to work with them 
to do whatever is necessary to get the agencies to turn these 
problems around. What Chairman Young and I wanted to stress to 
all of the agencies about the Results Act is that there has 
been an attitude of, well, maybe we'll comply and maybe we 
won't.
    A number of the agencies that are supposed to comply with 
the Results Act have done almost nothing. Some have done 
minimal things. And some have tried a little bit harder. But 
the fact is, the Results Act is the law and it needs to be 
complied with.
    One of the things I said to Chairman Young that I think is 
very important is that the Results Act did not appear to have 
any teeth in it. The way to make sure there were teeth in it 
was to have the Appropriations Committee, as well as myself, 
let them know that there were penalties to be imposed if each 
agency did not comply with the Results Act, which means very 
simply that there will be a very hard look taken at their 
budgets and their expenditures. If they don't comply with the 
Results Act, then we find ways that they should have complied. 
There may be some substantial cuts. We think that's something 
they ought to understand.
    Our hearing today will focus on the Department of Housing 
and Urban Development. It would have been helpful if we had 
HUD's performance plan by now. Every other major agency has 
submitted a performance plan at this point. But HUD has not. If 
we had it, we would have been able to see how specifically HUD 
plans to address some of the problems that we will look at 
today.
    I sincerely hope we're going to see that plan soon. In the 
meantime, I expect FHA Commissioner Apgar to tell the committee 
his specific goals and measures for resolving the high risk 
problems as I requested in the invitation letter to him. I've 
talked to Secretary Cuomo a number of times. He's a very nice 
fellow and I think he has the best interests of the Department 
of HUD at heart, and I think he wants to do the right thing. 
But evidently, he needs more help from his assistants to make 
sure they have a plan and they get on with it.
    Today the high risk program we will examine is HUD's 
Federal Housing Administration [FHA]. FHA is the home mortgage 
insurer for many people who wouldn't ordinarily qualify for a 
home loan in the private marketplace. For example, first time 
home buyers and people with not so perfect credit histories. 
Every year, thousands of these mortgages go into default, and 
the FHA is responsible for reselling these homes.
    This is where the problems start. HUD is sitting on a huge 
backlog of repossessed properties, and the list is growing 
every year. A lot of these properties sit in HUD's inventory 
for months, some even for years. Some abandoned properties have 
been in HUD's inventory for more than 8 years.
    HUD's contractors are so poorly managed that the properties 
have become run-down and vandalized. The value of the 
properties is plummeting and hurting the whole neighborhood. 
The management of this process is such a fiasco that HUD is 
losing over $1 million every single day.
    This is not a new problem. It's been going on for years. 
They've been on GAO's high risk list since 1994.
    Just as significant as the cost to the taxpayer is the cost 
to individuals and neighborhoods. Management failures and 
staffing shortages have resulted in lax oversight of the 
contractors responsible for maintaining these properties. One 
HUD office in Florida was so shortstaffed that they did not 
visit their contractor handling these properties in 3 years. In 
another case, the contractor performed the work, inspected the 
work and approved the payment to himself with no oversight.
    As you can see from the pictures on these easels that we 
have over here to the left, some taken as recently as this 
month, the lack of proper attention to these properties exposes 
them to vandalism, maintenance problems and safety hazards. How 
would you like to live in that one on the left?
    The longer they sit in these conditions, the more the value 
deteriorates and the more money HUD loses and the more the 
neighborhood suffers, and the more everybody that lives in the 
neighborhood complains.
    One of HUD's primary missions is expanding home ownership. 
But evidence and testimony you will hear today indicates this 
program is not achieving this mission. Home ownership is 
clearly a problem when the rate of FHA foreclosures is rising.
    Look at the recent trends. In fiscal year 1996, there were 
just under 61,000 foreclosures. In fiscal year 1997, the number 
was 71,000 foreclosures. For fiscal year 1998, it was 76,000 
foreclosures. Why is the number of FHA insured families 
defaulting on their loans increasing in an economy that's 
growing like ours is? How long can neighbors living next to 
blighted HUD properties expect to wait for HUD reforms while 
their property values continue to go into the tank?
    HUD's mission is not to drive down communities, its mission 
is to make communities better. Communities do not deserve this 
from their Government, and the tax dollars that support it.
    Three of our witnesses testified before Congress 1 year ago 
almost to the day. At that time, they talked about the 
condition of many of the HUD homes in their neighborhoods, and 
what these poor conditions do to them and to the surrounding 
community and the property values. One witness even had the 
personal experience of foreclosure on his FHA mortgage.
    I've asked these witnesses to return today to give us a 
status report. I want to ask them if the situation over the 
past year has improved at all.
    In fairness to HUD, this agency has been troubled for many 
years. I'm sure this administration inherited more than its 
share of problems when it took the helm 6\1/2\ years ago. HUD 
will testify today that FHA's property disposition program is 
in transition. We'll hear about the enormous undertaking to 
contract out all the responsibilities for reselling these 
homes.
    How long do HUD officials expect the transition to these 
new contracts to take? And what will HUD's oversight of the new 
contracts look like?
    Poor contractor oversight has been a serious problem for 
this program in the past. If the FHA couldn't manage these 
contractors in the past, and now they're going to give them 
even more responsibility. Is it going to work any better?
    I'd also like to know when HUD expects the trends I 
mentioned earlier to take a positive turn. Even though the 
population that FHA serves is considered more risky than that 
of the private sector mortgage industry, it seems to go against 
all reason to see foreclosure rates going up and up during this 
good economy. It's not what is happening in the private 
mortgage industry.
    Our witnesses today will help us understand the present 
state of affairs with this program. I hope we'll get some 
answers from HUD on what their reforms are and when we can 
expect them to be realized.
    As part of my opening statement, I want to show a segment 
of the NBC Nightly News called Fleecing of America that aired 
several weeks ago about HUD's FHA properties. But first, I want 
to say something to HUD. My understanding is that in the days 
prior to NBC's original piece, HUD led an all-out offensive 
against NBC not to show it. It has also come to my attention 
that HUD has gone on an offensive against the General 
Accounting Office.
    I know there was heavy lobbying going on leading up to the 
release of the high risk list. I also have a copy of a letter 
dated March 12, 1999 that HUD Deputy Secretary Saul Ramirez 
sent to Comptroller General David Walker that personally 
attacks him because HUD is on GAO's high risk list.
    Also, the battles HUD has engaged in with its Inspector 
General are no secret, and we had a manifestation of that when 
the IG spoke here just a couple of weeks ago.
    I know that HUD has taken its share of knocks over the 
years, but not without reason. The management problems at HUD 
exist now. They are affecting communities and families today. 
HUD officials need to understand that shooting the messenger is 
not going to solve their problems. More than ever, HUD needs to 
focus its resources on solving problems and not fighting the 
messenger, such as the IG or the GAO. So let's move forward, 
recognize the problems where they exist, try to find solutions 
and give the American public the accountability that they 
deserve.
    Now I'd like to have this piece shown from ``Fleecing of 
America.''
    [Video shown.]
    Mr. Burton. Let me just say before I turn to my colleague 
from California, Mr. Waxman, that evidently one house, not all 
of them, but one house in that piece was characterized as one 
of the homes that was controlled by HUD, and evidently there 
was some question about that. So NBC made a mistake, but that 
was only one of them. All the rest of the homes shown in that 
piece were actually HUD controlled properties.
    With that, Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    While we have an obligation to scrutinize HUD, we also have 
an obligation to bring balance and fairness to our scrutiny. 
Unfortunately, that's not always the case, as is clear, I 
think, by the video you just showed us. Paul Harvey used to 
say, and now here's the rest of the case.
    What bothers me about this broadcast we just saw is that 
the filthy, run-down house NBC featured as exhibit A against 
HUD isn't even a HUD property. HUD had no responsibility for 
maintaining that house, and they shouldn't be blamed for its 
condition.
    The chairman just acknowledged the fact that NBC doesn't 
dispute this. They even ran a retraction on March 19th, making 
it clear that this dilapidated property is not in HUD's 
inventory. You say, well, that was only one of the houses in 
that video. That was the house that this story was all about. 
And it wasn't even a HUD building.
    I'm also bothered by the story's emphasis on a 1998 GAO 
report that ignores a more comprehensive evaluation by Arthur 
Andersen Consulting that reaches a markedly different 
conclusion. I'm bothered by the misleading and inaccurate 
allegation that HUD is losing $1 million a day. I noticed that 
the chairman is even using that statistic as fact.
    But as we'll see by the end of this hearing, HUD isn't 
losing $365 million a year on the FHA program. Instead, the FHA 
program is actually responsible for a net gain of $1.5 billion 
in 1998, and is projecting a net gain of over $2 billion in 
1999. There's no evidence of any demonstrable waste, fraud or 
abuse in the program.
    Indignation must never be a substitute for fact. I'm sure 
if NBC were a bit more careful, it could have found an actual 
HUD property in abysmal condition. They do exist. But I suspect 
they are exceptions.
    While it's probably inevitable that some problems will 
arise in a small number of HUD's 40,000 properties, our goal 
must be to continue to have every property in the best 
condition possible.
    The chairman said HUD was trying to intimidate NBC before 
they ran this broadcast. I don't know anything about that. 
Maybe HUD was trying to tell NBC that they were featuring a 
house that wasn't even under HUD's control.
    Mr. Chairman, ensuring that all Americans have access to 
safe housing is one of our Nation's highest priorities. So I 
welcome this opportunity today to evaluate HUD's performance. 
The scandals and mismanagement that has plagued HUD in the 
1980's has recently given way to a new approach and a strong 
commitment to improve Government service.
    GAO, which has been critical of HUD in the past, has 
recognized these reforms, and recently noted that ``HUD 
continues to make credible progress in overhauling its 
operations to correct its management deficiencies.'' While 
further improvements are still needed, I want to commend 
Secretary Cuomo for the significant accomplishments he and the 
Department have already achieved.
    I think he's a nice guy, too, as the chairman pointed out. 
But that has nothing to do with anything. If he's doing the job 
he's supposed to do, he should be commended. If he's doing 
things he shouldn't be doing, he should be corrected. But 
simply to use a hearing to beat up on HUD, without substantial 
evidence to back it up, is not a responsible oversight.
    We have to scrutinize HUD. We also have an obligation to 
bring balance and fairness to our scrutiny. The FHA program is 
a lifeline for home ownership to thousands of families across 
our country. Over 75 percent of first-time homeowners have FHA 
approved mortgages. FHA insures more mortgages for African-
Americans and Hispanics than any other insurer. And 93 percent 
of FHA mortgages have no problems, and do not result in 
default.
    Now, that's a significant figure, because 93 percent of the 
loans are fine, but 7 percent do end up in default. That's 
higher than other lenders who have a lower rate of default. But 
the loans of FHA are to people who wouldn't be able to 
otherwise get these loans to buy a home. That's why the Federal 
Government established the FHA program.
    I look forward to today's testimony and our testimony that 
we're going to receive. But I was taken by surprise when the 
chairman talked about, why are we having more homes foreclosed 
when our economy is doing so well.
    Well, in 1993, there were 918,700 bankruptcy cases in the 
United States. In 1997, we had 1,317,000 bankruptcies in the 
United States. Our economy is doing very well for most people, 
we're all grateful for that fact. But we are seeing many of our 
people not holding up well under these circumstances, and we 
see more and more people going into bankruptcy as a result. Not 
all of the bankruptcy cases involve HUD, but they are an 
illustration of the fact that some people cannot sustain 
themselves, some people do go into default on their loans. And 
some of those loans are HUD loans, some are not. And when they 
are HUD loans, the properties are to be maintained properly, 
and we want to make sure HUD is doing their job.
    I thank you, Mr. Chairman, for this opportunity to make 
this opening statement, and I yield back the balance of my 
time.
    Mr. Burton. Mr. Gilman.
    Mr. Gilman. Thank you, Mr. Chairman.
    I want to commend Chairman Burton for moving forward with 
today's hearing. I think it's important for this committee to 
examine any waste, fraud or abuse, wherever it may be. It's 
important that we in the Congress, and more specifically, those 
of us on the Government Reform Committee, hold our Federal 
agencies accountable for the funds we provide to them.
    As the chairman mentioned, HUD has been on GAO's high risk 
list of Federal programs that are vulnerable to waste, fraud 
and abuse since 1994, which has cost our budget millions of 
dollars a day. I find that more appalling when we consider that 
today, I'll be meeting later on with housing authority 
directors from my own congressional district who undoubtedly 
will be asking for increased funding for Section 8 funding in 
the appropriation process.
    While I have and will continue to insist on adequate 
availability of Federal housing vouchers and subsidies to those 
who are in need for such housing, I want to make certain HUD is 
not wasting these funds that we in the Congress have 
appropriated.
    So again, Mr. Chairman, I want to thank you for bringing 
this issue to the attention of the Congress. I'd be pleased to 
yield to the gentleman.
    Mr. Burton. Let me just say that although the piece that we 
just saw did have a piece of property that was not technically 
under the control of HUD, I have been in HUD projects myself, 
personally. I have walked through some of them. The stench was 
terrible. And it wasn't that long ago that I was going through 
those.
    As a matter of fact, I want to cite one multi-housing 
project in Indianapolis that was built, this was several years 
ago, called Rivers Point. There were two high rise buildings. 
They were so poorly managed by HUD and so poorly watched that 
they were completely destroyed. The elevators didn't work, this 
was within 4 or 5 years after their construction.
    People had defecated in the bathtubs, there were rats, it 
was just an absolute disaster.
    They sold those for about a nickel on the dollar, or 10 
cents on the dollar to a private contractor. He went in and 
cleaned them up, fixed them up, and now they are high rise 
apartments, some are even luxury apartments.
    That's just tragic, the billions of dollars that are 
wasted, the millions of dollars that were wasted on that one 
project.
    Now people can say, well, this isn't the case, this one 
piece of property is not really, it's the exception rather than 
the rule. I want to tell you, I've been through these houses. I 
was in the real estate business. That was my business, I was a 
realtor before I came to Congress. My brother still is a 
realtor.
    We have been through these houses, a lot of them, in 
Indianapolis, one of the cities that was mentioned. And I want 
to tell you, there's a lot of improvement that can be made and 
HUD needs to do it.
    I thank the gentleman for yielding.
    Do any other Members wish to be heard? The gentlelady from 
Hawaii.
    Mrs. Mink. Thank you, Mr. Chairman.
    I yield to the ranking minority member.
    Mr. Waxman. Thank you for yielding. I'm sort of taken aback 
by the chairman's statement of his own personal experience. I 
don't doubt that he experienced what he claimed. But public 
housing is different than houses that were under discussion 
where there's a loan to a purchaser for a single family 
dwelling. A lot of these multi-family residences are public 
housing, sometimes run by the local people with some Federal 
dollars, sometimes they are run by private owners who have 
received help from tenants that have Section 8 vouchers.
    So I think we ought to be indignant whenever we see any 
abuse or fraud. But because we see some abuse or fraud doesn't 
mean that everything is abused and fraud is the norm rather 
than the exception.
    I point out the high number of bankruptcies, I just want to 
say that I pulled off the Web this statistic, more Americans 
filed for bankruptcy in 1998 than ever before. That's pretty 
startling, when we recognize we've had such a good economy for 
most people. But for a lot of people, it wasn't a very good 
economy and they weren't able to hold onto their homes, weren't 
able to pay their bills, had to go into bankruptcy as a 
consequence.
    I thank you for yielding, and I just raise this doubt in my 
own mind whether we're not comparing apples and oranges, and 
whether HUD had the responsibility for the public housing the 
chairman walked into or whether they didn't. Let's hear from 
the witnesses and maybe we'll be able to sort through these 
different claims as we go through a scrutiny, which is 
appropriate for our committee, and I commend the chairman for 
calling an oversight hearing, so that we can look into the HUD 
activities.
    Mr. Burton. Our first panel will be Ms. Nancy Cooper. 
Excuse me, did you wish to speak? The gentlelady is recognized 
for 5 minutes.
    Mrs. Biggert. Mr. Chairman, I would like to enter a 
statement into the record.
    [The prepared statement of Hon. Judy Biggert follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.003
    
    Mr. Burton. Would you yield to me for just one moment?
    Let me just say in response to my colleague, before we have 
our first panel, real estate was my business. Single family 
dwellings were part of my business. I know of what I am 
speaking. I know who was financing them and who was controlling 
the properties that I went into. There's no question about it.
    So I just want to make sure the gentleman from California 
understands that I know these were properties managed by HUD 
that were FHA financed that weren't properly taken care of. 
There's just no question about it.
    Mr. Waxman. When was that, Mr. Chairman?
    Mr. Burton. I went out with my brother in Indianapolis 
probably 6 months ago. My brother is still a realtor, and vice 
president of a company in Indianapolis.
    [The prepared statements of Hon. Helen Chenoweth and Hon. 
Bernard Sanders follow:]

[GRAPHIC] [TIFF OMITTED] T9984.004

[GRAPHIC] [TIFF OMITTED] T9984.005

[GRAPHIC] [TIFF OMITTED] T9984.006

[GRAPHIC] [TIFF OMITTED] T9984.007

    Mr. Burton. We will now bring forward Ms. Nancy Cooper.
    [Witness sworn.]
    Mr. Burton. Ms. Cooper is the District Inspector General 
for Audit in HUD's Office of Inspector General. Her office is 
responsible for ongoing work in the field regarding FHA's 
single family program. She will testify regarding the current 
status of the single family property disposition program.
    She is up here today from Atlanta and we welcome her and 
thank her for her responsiveness under the heavy time 
constraints the committee has put her team under.
    Ms. Cooper.

   STATEMENT OF NANCY H. COOPER, DISTRICT INSPECTOR GENERAL, 
 SOUTHEAST/CARIBBEAN DISTRICT, U.S. DEPARTMENT OF HOUSING AND 
                       URBAN DEVELOPMENT

    Ms. Cooper. Good afternoon. Mr. Chairman and members of the 
committee, my name is Nancy Cooper. I'm District Inspector 
General for the Southeast/Caribbean District in the Department 
of Housing and Urban Development. With me are members of my 
district team, Mike Gill and Jerry Kirkland. I thank you for 
inviting us.
    I'm speaking today about our ongoing audit of HUD's single 
family property management and disposition program, known as 
the real estate owned, or REO operation.
    When we began our work late last year, HUD was well into 
its HUD 2020 reform and had reduced its single family staff by 
over 50 percent. Plans to pipeline or privatize management and 
marketing of properties had not materialized.
    Our objective was to see what impact this was having on 
HUD's performance. We were concerned that poor property 
conditions and management inefficiencies reported by GAO in 
March 1998 might still exist and if there existed an increased 
risk of fraud.
    Our results show that conditions overall have not improved 
since GAO's report. Our findings mirror those of KPMG in its 
audit report issued just this month on FHA's financial 
statements. Simply put, HUD has not fulfilled its core mission. 
Here's why.
    HUD's ability to turn over its acquired properties 
declined. Inventory increased 70 percent over the last 2\1/2\ 
years to over 42,000 properties, and homes held in inventory 
over 6 months increased 76 percent.
    Sales to homeowners went down, while sales to investors 
rose. HUD's ability to maximize returns to the mortgage 
insurance fund also declined. Average loss per property 
increased from $28,000 in fiscal year 1996 to over $31,000 in 
fiscal year 1998.
    The care of HUD properties is essential to protect the 
neighborhoods around them. Yet our own property inspection 
confirms what contract inspectors have been reporting to HUD, 
that the rate of non-compliance by the companies hired to 
manage our properties is unacceptable. At the committee's 
request, we brought a few pictures of our current inventory.
    This is a property in Rockford, IL, acquired in May 1998. 
It lists for $17,001, or $900 less than it was appraised. HUD's 
cost to date is $28,600, including $2,300 paid to maintain it. 
The inspector who took this picture last December also reported 
the kitchen and bathroom were filthy. Records show the asset 
manager visited regularly.
    Next is a photo of the front of a property in Miami, 
acquired in November 1997. We took this picture a week ago. The 
back of the property is overgrown and littered with debris 
inside and out. In January, HUD inspectors reported significant 
vandalism. The asset manager did not visit regularly.
    HUD's cost is $79,690, a loss already over $45,000 based on 
list price.
    Next is the condition of a property in Los Angeles in 
September 1998. Our inspection showed debris outside and 
neglect by the asset manager. Here's the same property in mid-
March 1999. The property continues to be neglected, with the 
lawn obviously not mowed for some time.
    These final photos are of another property in Los Angeles 
taken in September 1998. The roof is leaking and the asset 
manager was under contract to fix it. We took a picture of the 
ceiling again just a week ago. The roof wasn't repaired, and 
the ceiling has fallen in. Now it will be much more expensive 
or more likely the list price will have to be lowered.
    It would be unfair to criticize HUD's field staff for these 
conditions. Last October, we observed the Santa Ana staff 
barely keeping its head above water. The staff of 18 was 
expected to manage a portfolio of 16,000 properties.
    Around the country, workloads were shifted among offices 
when suddenly, no REO staff remained. Problems were so severe 
in Chicago, Birmingham, Jacksonville and Coral Gables that 
emergency contracts were let to handle many of the duties. 
These circumstances nearly paralyzed the monitoring efforts.
    Next month, HUD faces still more new challenges. Current 
operations will be replaced by 16 management and marketing 
contracts nationwide. These companies will handle nearly every 
aspect of HUD's multi-billion dollar real estate portfolio at a 
5-year estimated cost of $900 million.
    I'd like to make one last point, important to the 
Department's future plans. Our preliminary data indicates HUD 
has not been effective or swift in dealing with non-performing 
contractors. We've seen no monetary sanctions, few contracts 
terminated, and no contingency plans when contractors fail. It 
is essential that HUD have a strong contract enforcement 
strategy if it expects to be successful in these future 
endeavors.
    That concludes my opening remarks. Thank you.
    [The prepared statement of Ms. Cooper follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.008
    
    [GRAPHIC] [TIFF OMITTED] T9984.009
    
    [GRAPHIC] [TIFF OMITTED] T9984.010
    
    [GRAPHIC] [TIFF OMITTED] T9984.011
    
    [GRAPHIC] [TIFF OMITTED] T9984.012
    
    [GRAPHIC] [TIFF OMITTED] T9984.013
    
    [GRAPHIC] [TIFF OMITTED] T9984.014
    
    [GRAPHIC] [TIFF OMITTED] T9984.015
    
    [GRAPHIC] [TIFF OMITTED] T9984.016
    
    Mr. Burton. Thank you, Ms. Cooper.
    Right now, what kinds of penalties are imposed on these 
contractors if they don't comply with their contractual 
obligation?
    Ms. Cooper. We see none.
    Mr. Burton. Are there any regulations over at HUD that 
would impose any kind of financial penalties on them if they 
don't do their job properly? Do you know?
    Ms. Cooper. I do not know. I do know there are provisions 
within the contract that allows HUD to go against them to 
terminate the contract, for example. We've not seen them doing 
much of that, either.
    What normally happens is that HUD will send a warning 
letter to an asset manager saying, we've inspected your 
property, three of your properties, you're not keeping them up. 
Please tell us what you'll do to correct these problems. 
Generally, the asset manager will write back, show evidence of 
having corrected those conditions in those properties, and that 
will be the last of it.
    Mr. Burton. The employees of HUD that oversee the 
contractors, do they go out and spot check to make sure the 
contractors are doing their job?
    Ms. Cooper. They do, yes. They're doing less and less of 
it, but they do.
    Mr. Burton. If they're doing less and less of it, how do 
they know if the contractor is performing properly?
    Ms. Cooper. They have contracts right now for inspectors to 
oversee the asset managers.
    Mr. Burton. So they have separate contractors for 
inspectors, private inspectors to go out and spot check 
properties to see that they're being taken care of properly by 
the contractors?
    Ms. Cooper. That's correct. This is what HUD used to do. 
HUD no longer has the staff to do it, so they've hired 
companies to do it.
    Mr. Burton. They're contracting.
    Ms. Cooper. Right.
    Mr. Burton. In some of the statements I've seen, you had a 
contractor that not only did the inspection but also did the 
billing, the oversight and the collection, and was never even 
reviewed by anybody, independent contractor or staff member at 
HUD. Is this an unusual situation?
    Ms. Cooper. I believe it is unusual. I believe this was a 
situation involving one of the emergency contracts. I can check 
if you'll allow me.
    Mr. Burton. I wish you would check and let me know.
    Ms. Cooper. One of the individual asset management 
companies was allowed to do this, but this was an unusual 
situation, and we're not sure why in this case.
    Mr. Burton. The new contractual agreements, the new 
contracts that are going to be let by HUD, I guess there are 
going to be six contractors nationwide, is that correct?
    Ms. Cooper. I'm not sure of the number. There are 16 
contracts, but something less.
    Mr. Burton. My staff says there are going to be six 
contracts. The policing is going to be done, I guess, by 
independent contractors as well who are going to go out and 
double check and make sure the contractors are doing their job, 
is that correct?
    Ms. Cooper. That's our understanding, yes.
    Mr. Burton. Do the new contractual agreements impose any 
kind of financial penalties on the contractors if they do not 
do the job properly?
    Ms. Cooper. I can't answer that. As you know, we're in the 
middle of our audit. That's one of the areas we intend to look 
at, is how well those contracts are written. Right now, we've 
not done that field work and I can't talk about it.
    Mr. Burton. What I wish you'd do for me, and we'll leave 
the record open, if you could send to me and my staff 
information about those contractual agreements and what they 
contain, it would be helpful. It seems to me there not only 
should be a severability clause in there, if they're not doing 
their job, they lose the contract, No. 1, but No. 2, if they're 
not doing the job and it's pretty prevalent among the work that 
they're performing, there ought to be substantial financial 
penalties imposed against them for not doing the job.
    In other words, financial penalties for not doing the job, 
No. 1, because they're taking the taxpayers' money and they're 
not doing the job, and they know they're not doing the job, so 
there ought to be financial penalties, No. 1. Then No. 2, if 
that doesn't get the job done, the cancellation of the contract 
in addition to the financial penalties that are imposed against 
them.
    Ms. Cooper. I couldn't agree with you more. We'll check for 
that information.
    Mr. Burton. See if their contractual agreements do have 
those stipulations in them.
    Ms. Cooper. Certainly.
    Mr. Burton. I yield back the balance of my time to Mr. 
Waxman.
    Mr. Waxman. Ms. Cooper, you just said you're in the middle 
of your audit?
    Ms. Cooper. Yes, sir.
    Mr. Waxman. Why are you testifying now if you haven't 
completed your audit?
    Ms. Cooper. The committee asked me to.
    Mr. Waxman. It just strikes me it would be more sensible to 
talk to us about an audit that's completed rather than one 
that's incomplete.
    I want to ask you a couple of questions. Last year in 
December, the Washington Times reported that the Inspector 
General warned that HUD was losing $1 million every day by 
failing to dispose of the vacant properties in its inventory. 
Chairman Burton evidently agrees with that statement, because 
he was so alarmed that he named this hearing ``HUD Losing $1 
Million Per Day, Promised Reforms Slow in Coming.'' That's a 
title for a fact-finding hearing. Sounds like a conclusion was 
reached before we ever heard from any witnesses.
    I'm sure you're familiar with that figure. My understanding 
is that HUD spends $1 million a day in managing its inventory 
of single family homes. Do you believe it's appropriate for HUD 
to spend money to manage its inventory?
    Ms. Cooper. Sure.
    Mr. Waxman. And I've read how this $1 million a day figure 
has been attributed to the Office of Inspector General. How did 
you arrive at that estimate?
    Ms. Cooper. I'll explain it to you. That estimate is based 
on the cost per day for HUD to manage its portfolio. The cost 
per day is $29 a day. That number is based on an inventory at 
the time that that statement was written of 41,000 properties.
    The point that we were attempting to make with the 
statement is that when HUD fails to turn over the properties, 
if they have 41,000 properties in their inventory, it costs $1 
million a day.
    Mr. Waxman. My understanding was that figure was not just 
for the 41,000 properties that came through foreclosure, but it 
represents holding costs for more properties than that. Am I 
incorrect?
    Ms. Cooper. I'm not sure of your question. My understanding 
is that $29 is the cost to HUD.
    Mr. Waxman. For each of the 41,000 foreclosed properties?
    Ms. Cooper. To manage any piece of property.
    Mr. Waxman. Any piece of property?
    Ms. Cooper. Any piece of property.
    Mr. Waxman. So it's not a net loss for these properties, 
it's the cost of maintaining the properties until they are 
sold. And when the properties are sold, HUD recoups these 
costs, doesn't it?
    Ms. Cooper. Not always, no, sir.
    Mr. Waxman. Well, not always, but sometimes?
    Ms. Cooper. Sure, sometimes it does, yes.
    Mr. Waxman. It's like saying Coca-Cola loses $1 million a 
day because they spend $1 million a day for sugar. But you 
forget about the fact that they turn around and sell Coca-Cola 
and make a profit on the sale of their product. We all know 
that we have costs of doing business. If Coca-Cola spends $1 
million a day on sugar, it doesn't mean it loses it. We know 
they make a lot of money.
    I have here the yearly financial results of a mutual 
mortgage insurance fund. That's the pool of money funded by 
premiums paid by borrowers used to finance the operation and 
cost of the FHA single family insurance program. We can see 
from the chart that, it's right over there, to your right, we 
can see from that chart that all expenses, including the cost 
of maintaining property, totaled $2.87 billion in 1998.
    But we also see that their total receipts including sales 
of acquired properties, fees and premiums, totaled almost $4.43 
billion. That's a net profit. In 1998, this fund actually 
netted $1.55 billion. I'm sure there are management challenges, 
but it seems to me we should really be thanking HUD, not only 
for keeping the opportunity available for middle class people 
in under-served communities to buy homes, but for writing us a 
check last year for $1.55 billion. And the net receipts 
estimate for fiscal year 1999 are even higher, $2.138 billion.
    Do you disagree with my statement, when you look at it in 
that context?
    Ms. Cooper. Sir, I don't have any information about that 
chart that you're looking at, and I didn't do any computation, 
and my staff didn't do any computation on the fund.
    We are looking solely at the cost or profit of the property 
disposition portion of the HUD portfolio.
    Mr. Waxman. Well, you're only looking at one part of the 
equation. You're only looking at the cost, but you're not 
looking at the rest of the picture. And it's not very helpful 
for us for you to come up with a figure that's then used to 
criticize HUD for losing us $1 million a day, when in fact, 
that figure is an inaccurate figure if you look at the total 
amount of money that HUD not only spends but generates from 
their properties.
    Ms. Cooper. It's an important figure when HUD no longer is 
able to turn properties over according to their goal. Their 
goal is to get properties out of inventory in 6 months.
    When that number declines, then it starts costing the 
taxpayer, it starts costing the fund unnecessarily. That's 
merely the point we were trying to make.
    Mr. Waxman. Can you give us the breakdown of the 41,000 
foreclosed homes, how many stayed off the market 6 months, how 
many were sold earlier? Wouldn't that be a more meaningful 
figure if we're being critical of HUD for not selling its 
property faster? Not how much it spends during the period of 
time it has to maintain that property and pay for costs.
    Ms. Cooper. Yes, sir, I would agree it would. And in my 
full testimony, we talk about the inventory of properties over 
6 months old increasing 76 percent from 7,100 properties to 
12,500 properties. That 12,500 properties is in inventory 
longer than they should be. That's costing. That's the point we 
were trying to make.
    An efficient operation turns properties over within 6 
months. An inefficient one doesn't.
    Mr. Waxman. I want to concede to you, as you've conceded to 
us on that million dollar figure, that that is an issue that is 
of concern. We want to look at that carefully. But obviously in 
the short time I have, maybe I'll have more opportunity, but 
others will want to ask questions, we can explore some of these 
inflammatory statements that seem to be coming out of an audit 
that isn't even complete, and for which a hearing has already 
been titled--this is the notice that went to all the press and 
the Members--HUD Losing $1 Million Per Day, Promised Reforms 
Slow in Coming.
    Mr. Burton. The gentleman's time has expired.
    Mr. Waxman. Some fact-finding, some disinterested fact-
finding oversight.
    Mr. Burton. Mr. Gilman.
    Mr. Gilman. Thank you, Mr. Chairman.
    Just a couple of questions. How many HUD field staff will 
be in charge of contractor oversight, and how did HUD arrive at 
the number you have?
    Ms. Cooper. The number we've seen is 70. And I'm not 
certain how HUD arrived at that number.
    Mr. Gilman. Is 70 going to be enough to do the kind of work 
you need to do?
    Ms. Cooper. I can't answer that question. Once we take a 
look at HUD's new monitoring procedures, we may be in a 
position to try to predict whether or not that number of staff 
can do what needs to be done.
    We hope to try to do some of that assessment between now 
and the end of our field work.
    Mr. Gilman. Have you increased the number this year, or is 
that decreased? What's the situation with regard to the 
oversight?
    Ms. Cooper. With regard to the number of staff?
    Mr. Gilman. Yes.
    Ms. Cooper. Let me see, I'll answer and if this isn't the 
answer to your question, you can ask me again. There are 
currently about 300 REO staff. The predictions are that with--
--
    Mr. Gilman. 300 what kind of staff?
    Ms. Cooper. Pardon me; 300 HUD staff working on the real 
estate owned operations.
    Mr. Gilman. OK.
    Ms. Cooper. Under these 16 new management marketing 
contracts, they will pare down that 300 staff to around 70. 
Those 70 staff will merely be contract monitors. They will 
monitor those 16 nationwide contracts to ensure they're 
complying with the terms.
    Mr. Gilman. How did you arrive at the reduction from 300 to 
70?
    Ms. Cooper. Sir, I didn't arrive at it, you'll have to ask 
HUD.
    Mr. Gilman. From your oversight perspective, do you think 
this is a practical reduction? Is this going to affect the 
ability of the agency to do the oversight?
    Ms. Cooper. I wish I could tell you. And maybe I can tell 
you when we're finished.
    It depends on what exactly HUD has in mind for these 70 
people to do. HUD may be sure of that. We're not real sure of 
it yet. We haven't read their documentation.
    Keep in mind also that HUD has plans, we understand, to let 
other contracts, besides just these 16 management and marketing 
contracts. We understand they still intend to have hired 
contractors to oversee those contractors. They'll have other 
contracts besides those 16, to help supplement the staff.
    Mr. Gilman. Has anyone made an analysis if these numbers 
are sufficient to do the kind of work that should be done?
    Ms. Cooper. HUD made the statement that they have made that 
analysis.
    Mr. Gilman. Have you examined that?
    Ms. Cooper. We have not yet.
    Mr. Gilman. Are you planning to do that?
    Ms. Cooper. We're going to look at it from the perspective 
of the real estate owned operation, yes, sir.
    Mr. Gilman. When will you know that?
    Ms. Cooper. We're hoping to know that by July. We're hoping 
to complete our audit and issue the report by July.
    Mr. Gilman. Would you notify this committee of your final 
audit, as to whether or not these people can provide the kind 
of oversight that's needed?
    Ms. Cooper. Yes, sir, we'll do that.
    Mr. Gilman. Mr. Chairman, I'd like to request that a copy 
of that report when received be made part of this hearing.
    Mr. Burton. Without objection.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.017
    
    [GRAPHIC] [TIFF OMITTED] T9984.018
    
    [GRAPHIC] [TIFF OMITTED] T9984.019
    
    [GRAPHIC] [TIFF OMITTED] T9984.020
    
    [GRAPHIC] [TIFF OMITTED] T9984.021
    
    [GRAPHIC] [TIFF OMITTED] T9984.022
    
    [GRAPHIC] [TIFF OMITTED] T9984.023
    
    [GRAPHIC] [TIFF OMITTED] T9984.024
    
    [GRAPHIC] [TIFF OMITTED] T9984.025
    
    [GRAPHIC] [TIFF OMITTED] T9984.026
    
    [GRAPHIC] [TIFF OMITTED] T9984.027
    
    [GRAPHIC] [TIFF OMITTED] T9984.028
    
    [GRAPHIC] [TIFF OMITTED] T9984.029
    
    [GRAPHIC] [TIFF OMITTED] T9984.030
    
    [GRAPHIC] [TIFF OMITTED] T9984.031
    
    [GRAPHIC] [TIFF OMITTED] T9984.032
    
    [GRAPHIC] [TIFF OMITTED] T9984.033
    
    [GRAPHIC] [TIFF OMITTED] T9984.034
    
    [GRAPHIC] [TIFF OMITTED] T9984.035
    
    [GRAPHIC] [TIFF OMITTED] T9984.036
    
    [GRAPHIC] [TIFF OMITTED] T9984.037
    
    [GRAPHIC] [TIFF OMITTED] T9984.038
    
    [GRAPHIC] [TIFF OMITTED] T9984.039
    
    [GRAPHIC] [TIFF OMITTED] T9984.040
    
    [GRAPHIC] [TIFF OMITTED] T9984.041
    
    [GRAPHIC] [TIFF OMITTED] T9984.042
    
    [GRAPHIC] [TIFF OMITTED] T9984.043
    
    [GRAPHIC] [TIFF OMITTED] T9984.044
    
    [GRAPHIC] [TIFF OMITTED] T9984.045
    
    [GRAPHIC] [TIFF OMITTED] T9984.046
    
    [GRAPHIC] [TIFF OMITTED] T9984.047
    
    [GRAPHIC] [TIFF OMITTED] T9984.048
    
    [GRAPHIC] [TIFF OMITTED] T9984.049
    
    [GRAPHIC] [TIFF OMITTED] T9984.050
    
    [GRAPHIC] [TIFF OMITTED] T9984.051
    
    [GRAPHIC] [TIFF OMITTED] T9984.052
    
    [GRAPHIC] [TIFF OMITTED] T9984.053
    
    [GRAPHIC] [TIFF OMITTED] T9984.054
    
    [GRAPHIC] [TIFF OMITTED] T9984.055
    
    [GRAPHIC] [TIFF OMITTED] T9984.056
    
    [GRAPHIC] [TIFF OMITTED] T9984.057
    
    [GRAPHIC] [TIFF OMITTED] T9984.058
    
    [GRAPHIC] [TIFF OMITTED] T9984.059
    
    [GRAPHIC] [TIFF OMITTED] T9984.060
    
    [GRAPHIC] [TIFF OMITTED] T9984.061
    
    [GRAPHIC] [TIFF OMITTED] T9984.062
    
    [GRAPHIC] [TIFF OMITTED] T9984.063
    
    [GRAPHIC] [TIFF OMITTED] T9984.064
    
    [GRAPHIC] [TIFF OMITTED] T9984.065
    
    [GRAPHIC] [TIFF OMITTED] T9984.066
    
    [GRAPHIC] [TIFF OMITTED] T9984.067
    
    [GRAPHIC] [TIFF OMITTED] T9984.068
    
    [GRAPHIC] [TIFF OMITTED] T9984.069
    
    [GRAPHIC] [TIFF OMITTED] T9984.070
    
    [GRAPHIC] [TIFF OMITTED] T9984.071
    
    [GRAPHIC] [TIFF OMITTED] T9984.072
    
    [GRAPHIC] [TIFF OMITTED] T9984.073
    
    [GRAPHIC] [TIFF OMITTED] T9984.074
    
    [GRAPHIC] [TIFF OMITTED] T9984.075
    
    [GRAPHIC] [TIFF OMITTED] T9984.076
    
    Mr. Gilman. Thank you, Mr. Chairman.
    Do you have requirements or guidelines for how much time 
HUD employees should spend actually looking at HUD-held 
properties, and how many site visits they should conduct? Do 
you understand my question?
    Ms. Cooper. I do understand your question, but it's not an 
easy answer, so I'm trying to decide how to answer it.
    HUD staff right now are contract monitors. They're not 
going to be property inspectors any more. The guidelines for 
the time that we've been looking at the REO operations----
    Mr. Gilman. You keep saying REO. What is REO?
    Ms. Cooper. Real estate owned. The property disposition 
program.
    Mr. Gilman. What does REO stand for?
    Ms. Cooper. Real estate owned. It's my southern accent. I'm 
saying real estate owned [REO]. I'm sorry, I was told not to 
use acronyms here.
    I'll try to say property disposition program. Now I've lost 
track of what it was you asked me.
    Mr. Gilman. Let me repeat what I'm asking. Do you have any 
requirements or guidelines for how much time HUD employees 
should spend in actually looking at HUD-held properties and how 
many site visits they should conduct? I think that's a basic 
question to see whether or not they are able to do the job.
    Ms. Cooper. For the last 1\1/2\ years, the contract 
monitors, the contractors who have been doing the property 
inspection, have had a requirement to do an initial inspection 
of every property that comes in under their responsibility. 
After that, they are required to do 10 percent of their 
portfolio every month.
    I'm assuming that was probably the same criteria that HUD 
used when HUD did property inspection and had the staff to do 
it. They imposed that same requirement on the contractors.
    Mr. Gilman. Have you reviewed this to see if that's an 
adequate performance by HUD employees?
    Ms. Cooper. Actually, the problems that we are going to be 
addressing are not with the number of inspections, necessarily. 
It would be more with the action that's taken once that 
inspection is done. They can inspect all day long, all week 
long, all year long. But if nothing is done with the results of 
the inspection, then it doesn't do much good, which is why I 
was hoping to get across the point that there needs to be some 
enforcement, if a contractor is operating properly.
    Mr. Gilman. I think we would agree on enforcement, but we 
also want to know, are there sufficient number of inspections 
before you get to enforcement? Do you feel there are a 
sufficient number of inspections by these number of employees 
who will be doing the inspection to make a proper determination 
as to whether or not HUD is performing properly?
    Ms. Cooper. No. The answer is no.
    Mr. Burton. Thank you, Mr. Gilman.
    The gentlelady from Hawaii.
    Mrs. Mink. Thank you, Mr. Chairman.
    I want to continue in the discussion that was started by 
our ranking minority member. I'm very much confused with the 
title of the hearing today, HUD losing $1 million per day.
    I think that from your testimony and the chairman's opening 
remarks, one of the important responsibilities that HUD has or 
indeed any homeowner has is to maintain the property, to 
preserve the value of the asset. That has to be a major 
requirement.
    So on the sad occasion of a foreclosure, where the Federal 
Government resumes ownership of the property because of failure 
of the previous owner to make payments, then it is a very 
important responsibility that the Federal Government assume the 
cost of maintenance and repair and general upkeep. Would you 
not concur that that's a major obligation that HUD assumes when 
it takes over a foreclosure?
    Ms. Cooper. I agree.
    Mrs. Mink. If that is a responsibility of the new owner, in 
this case HUD, then it would seem to me that the expenditures 
to maintain the value of the property is a legitimate 
expenditure, wouldn't you say that?
    Ms. Cooper. I would agree.
    Mrs. Mink. Then really, in line with the videos that we 
saw, perhaps the Department can be accused for not spending 
enough rather than spending too little. Because indeed, what we 
saw, and I have no idea what the rest of the properties are, 
but if they're typical, then what needs to happen is that HUD 
should have authority to hire more employees, and have greater 
sums of money accessible to it for maintenance and upkeep.
    Isn't that a fairly logical conclusion?
    Ms. Cooper. That could certainly be a valid point.
    Mrs. Mink. Well, then, let me go to the point of the very 
large, substantial increase in properties in the HUD inventory, 
from 24,000 in October 1996 to almost double, 42,000, as you 
testified, the last of February of this year. Given their own 
goal of 6 months disposition, and their efforts to dispose 
resulted in 12,000 plus properties remaining in their inventory 
in excess of 6 months, I believe that's what you said?
    Ms. Cooper. Yes, ma'am.
    Mrs. Mink. Then if we're going to criticize that HUD has 
not energized itself to dispose of properties within a short 
period of time, its own target of 6 months, then isn't it more 
appropriate to say that the $29 you assess as being ``wasted'' 
because they fail to dispose of the property to be legitimately 
charged to the 12,000 properties and not the 42,000? In which 
case then, it could be said that HUD unwisely spent $300,000 
per day because of its failure to dispose of properties in a 
timely fashion?
    Ms. Cooper. At the time the IG made that statement, HUD had 
also promised that it would pipeline all the properties that 
were in its, that came into its portfolio. In effect, HUD was 
already behind in removing all properties from the inventory, 
as it has promised it would do.
    Mrs. Mink. But you see, the whole discussion is absolutely 
faulty. Because on the one hand you admit that it is a 
legitimate expense on the part of the Government to maintain 
the value of these assets, and therefore, moneys have to be 
expended. Second, you talk about the disposal of the properties 
on the market, and making sure that the Government gets value 
for the properties that it has now obtained ownership for.
    If it is true that only 12,000 properties remained after 6 
months, and if we're going to talk about excess expenditures, 
it seems to me it's absurd to talk about $1 million a day. We 
ought to talk about 12,000 properties costing the Government 
$29 a day, when those properties could have been sold.
    One final comment I want to say, that in my jurisdiction, 
which is having a terrible time in its economy, thousands of 
properties are being foreclosed, not necessarily to HUD, but to 
the banks and so forth. These properties were acquired at a 
time when the values of the properties were extremely high. 
Their failure to pay up their mortgages resulted in a 
foreclosure.
    So there is a huge windfall for the institutions as well as 
the Federal Government for assets they are now acquiring that 
are extremely valuable. Those are asset values. But the other 
side of that coin is that our economy is so bad out there, 
there are very few people who can afford to buy these 
properties. So they are held extraordinarily long.
    I was just talking to someone in my office a moment ago who 
had to leave for a new job opportunity. His house has remained 
unsold on the market for 18 months. Now, that private owner, I 
am sure, has been doing everything he can do, standing on the 
sidewalks trying to dispose of his property and not being able 
to do so.
    So in some cases, I'm sure that HUD has found the community 
and State circumstances such that it is impossible to move 
these properties. So I think it's unfair to load upon HUD all 
of these situations without critical evidence to point 
specifically to the areas and properties and concerns that 
might generate legitimate oversight responsibilities on their 
part.
    Otherwise, I think this is an enormous waste of time. I 
yield back the balance of my time.
    Mr. Waxman. Will you yield to me?
    Mrs. Mink. I yield to my ranking member.
    Mr. Waxman. It just strikes me, your point was so well 
taken, that we're talking about 12,000, which is out of 41,000, 
less than a third of the properties under foreclosure. That's 
because they haven't met a self-imposed 6 month deadline.
    But isn't it accurate that at least 2 of those 6 months are 
by statute time when HUD can't dispose of the properties, 
because they have to give the owner a chance to come back and 
cure it or have some public interest group come in? Isn't that 
accurate, Ms. Cooper? Isn't that the policy they have at HUD?
    Ms. Cooper. I need to consult with my staff, please.
    Mr. Waxman. I understand that's their current policy, but 
they're talking about changing that policy.
    Ms. Cooper. My staff is telling me that when HUD 
forecloses, or when the lender forecloses, that the owner of 
that property does not have an opportunity to buy back.
    Mr. Waxman. As I understood it, they have a policy where 
they give them time, they hold off for a couple of months. So 
they have this built-in restraint that they've built in. But 
also, these are hard to sell properties in inner city 
neighborhoods. I would think anybody would have a hard time 
selling some of those properties.
    That's not to justify it, it's just to give some balance to 
the fact that we're talking about less than a third of their 
inventory and the difficulty in selling it.
    I thank the gentlelady for yielding.
    Mr. Burton. The gentlelady's time has expired.
    Mrs. Morella.
    Mrs. Morella. Thanks, Mr. Chairman. I think this is a very 
interesting hearing.
    I note that one of the witnesses coming up, I think in the 
third panel, is going to state that HUD has become less and not 
more responsive to HUD related neighborhood issues. I just 
wonder if you would walk me through the process. I am a 
homeowner. Next door to me is a neglected HUD property. What do 
I do? Do I report it? How do I go through this process in order 
to get some resolution?
    Ms. Cooper. You'd have to be able to identify the asset 
manager who is overseeing that property. All of these 
properties are doled out to local real estate companies to 
maintain them and to secure them and to preserve them and to 
ready them for market. Then to market those products as well.
    You would have to know who that real estate company was.
    Mrs. Morella. Could I find that out easily?
    Ms. Cooper. You should be able to find out if there is a 
HUD sign posted.
    Mrs. Morella. And if there isn't?
    Ms. Cooper. You call HUD, I suppose.
    Mrs. Morella. So I can find this out, I call HUD and get 
that information. Then do I call that entity, that real estate 
firm?
    Ms. Cooper. I'm assuming you're asking, if there was a 
problem at the house, or if you wanted to inquire about buying 
it?
    Mrs. Morella. No, I just want to eradicate the problem.
    Ms. Cooper. You would find out who that asset manager was, 
and you would complain to them, or you would complain to HUD. 
If you complained to HUD, it would be HUD staff responsibility 
to contact that asset manager to tell them they've had a 
complaint and to have them go out and correct whatever the 
problem is.
    They're getting paid good money to maintain those 
properties.
    Mrs. Morella. That's what I was also going to ask, is how 
long does it take, too, for this process?
    Ms. Cooper. That's why we look at the average. There are 
extremes, there are some properties that get out of inventory 
in 30 days. There are some properties that do stay in inventory 
for a year or a year and a half.
    So the measure of how efficient things are operating is the 
average. The average is 6 months. It takes 6 months to get them 
out of inventory.
    Mrs. Morella. Have you heard of problems, of the fact that 
HUD is not responsive to neighborhood issues, or is becoming 
less responsive to neighborhood issues?
    Ms. Cooper. We didn't look at that.
    Mrs. Morella. It might be something to look at, too, as one 
of the criteria that you evaluate. And how they are rectified 
or resolved.
    Let me ask you a very parochial question. Do you have any 
kind of a listing of properties that HUD owns that have not yet 
been sold in my area, or in any congressional district? Do you 
have an inventory of that?
    Ms. Cooper. HUD maintains a computer system that lists all 
properties in its inventory. I can't imagine that couldn't sort 
that by neighborhood. I would say yes.
    Mrs. Morella. By congressional district?
    Ms. Cooper. Right. In fact, I know they do, because we did 
it to select our samples.
    Mrs. Morella. What information would it give me?
    Ms. Cooper. I haven't personally looked at the list. I can 
ask.
    Mrs. Morella. I would be interested whether it tells me how 
long it's been on the market, whether there are inspections 
made.
    Ms. Cooper. Apparently there are several reports that can 
be generated through this system. It will not tell you 
information about inspections. HUD doesn't record that.
    But it will tell you when the property came into inventory, 
how much it currently lists, how much HUD has, how much it has 
cost HUD in payments to the asset manager or perhaps payoff of 
the lender's claim. It will tell you information like that.
    Mrs. Morella. The reason I ask that is, I feel as a good 
legislator this would be an important thing for me to find out 
more about if I want to make sure that HUD is making money, 
that the neighborhoods are looking good, that we have things in 
order so there is personal oversight. Wouldn't you agree that 
is a good idea for a Member of Congress? It helps you out as 
Inspector General.
    Ms. Cooper. I would agree.
    Mrs. Morella. Thank you, Mr. Chairman. I yield back.
    Mr. Burton. The gentlelady yields back the balance of her 
time. Is there further discussion?
    Mr. Kucinich.
    Mr. Kucinich. Thank you, Mr. Chairman. I want to thank you 
for calling this hearing.
    My questions and remarks will be more germane to the next 
panel, so I'm going to yield my time to Mr. Waxman.
    Mr. Waxman. I thank you very much for yielding.
    It just strikes me as perplexing why we're holding this 
hearing today. You're in the middle of an audit, you haven't 
completed it. HUD has proposed some changes, isn't that 
correct?
    Ms. Cooper. Yes.
    Mr. Waxman. That's supposed to go into effect on March 
29th.
    I just don't know how constructive this is. The chairman 
says we want to show how they're not doing their job, losing $1 
million a day of taxpayers' money so he can go to the 
Appropriations Committee and cut their budget. Do you think 
that would be helpful, if we had smaller appropriations for 
HUD?
    Ms. Cooper. That's a decision for all of you, not me.
    Mr. Waxman. Well, it seems to me some of the problems you 
were indicating were that there is not enough personnel to 
supervise some of these buildings.
    Ms. Cooper. At the moment, there are not. That's correct.
    Mr. Waxman. Well, your office in September 1997 made 
several recommendations concerning real estate management 
contracts. I want to go through some of them so we can see 
whether HUD has taken measures to implement those 
recommendations.
    The IG recommended that HUD establish specialized positions 
for personnel responsible for contract oversight and monitoring 
to make them full time jobs with performance standards and 
training requirements. Has this been done?
    Ms. Cooper. That I don't know. That will be a part of what 
we have left to do, to see what positions HUD has for contract 
oversight.
    Mr. Waxman. Well, the IG previously testified that it has 
been done. So they haven't let you know in the office that your 
boss told us that it has been done.
    Ms. Cooper. Perhaps I should have asked my staff.
    Mr. Waxman. Well, the IG also recommended, your agency, 
that HUD integrate data systems and payment systems so that 
contract performance and contract payments will relate and be 
systemically monitored. Has this been done?
    Ms. Cooper. One moment.
    Mr. Waxman. Well, let me just tell you, the IG has already 
told us it has been done.
    Ms. Cooper. My staff is telling me that they don't 
recognize those recommendations, it wasn't part of the scope of 
the work we're doing. If it's something we should----
    Mr. Waxman. Let's see if they recognize this one. The IG 
recommended that HUD establish a threshold dollar amount for 
review of contract proposals by the Chief Financial Officer 
prior to contract awards.
    Ms. Cooper. You're reading from----
    Mr. Waxman. This is September 1997.
    Ms. Cooper [continuing]. Our audit of contracting, is that 
correct?
    Mr. Waxman. That's right.
    Ms. Cooper. OK. This is work we have yet to do. This is 
what I was trying to explain. We have not yet looked at what 
HUD has proposed to do. We've been looking at what HUD's been 
doing over the last year and a half.
    Mr. Waxman. Well, shouldn't you look to see whether they're 
improving?
    Ms. Cooper. Yes, sir. That's exactly where we're headed 
next. We're looking at how those contracts read and how those 
contracts will be monitored to see whether or not there are 
strategies in the Department to properly oversee those 
contracts.
    So if you ask me that question again in 3 months, I should 
be able to answer it.
    Mr. Waxman. Let me point out that these are 
recommendations, your staff doesn't even remember it, but these 
are recommendations made in September 1997 by the Office of 
Inspector General. And as I understand it, these 
recommendations have been followed by HUD, including the next 
recommendation that HUD take steps to integrate and update its 
information technology systems. And there are others I want to 
go through.
    But you and your staff don't even seem to be familiar with 
your own recommendations. Second, you haven't completed your 
audit to see whether the recommendations have been followed, if 
you could remember what they were. And third, you're here to be 
critical of HUD for not doing things in the past and you don't 
know whether they've changed.
    So I just don't know how helpful this hearing is for us as 
policymakers to evaluate whether things are getting better.
    For example, I'll just tell you, GAO was very critical of 
HUD's management problems in its high risk series major 
management challenges and program risks. But GAO also gave 
credit where credit was due, concluding that ``HUD continues to 
make credible progress in overhauling its operations to correct 
its management deficiencies.''
    Do you agree with that HUD statement? If you do, how could 
you when you don't even know what they're doing, whether they 
made changes or not? Do you agree with GAO?
    Ms. Cooper. The report you're referring to was an audit, 
nationwide audit overall of HUD's----
    Mr. Waxman. Which report is that?
    Ms. Cooper. The report with the recommendations you're 
referring to.
    Mr. Waxman. But I'm asking about GAO's statement, which I 
just quoted. GAO did a written, what they call high risk 
series, they looked at HUD. They said, HUD continues to make 
credible progress in overhauling its operations to correct its 
management deficiencies. Do you agree with GAO?
    Ms. Cooper. We have looked at the property disposition 
activities since January 1997 to today. My answer in that 
perspective would be no, they have not.
    Mr. Waxman. Let me point out for the record and for your 
information, I read to you recommendations that were made by 
the IG office in September 1997. The IG testified in a 
subcommittee of this committee in a hearing in June 1998. So in 
June 1998, the IG testified that some of these reforms had in 
fact been accomplished, because she had made the 
recommendations and they were being followed.
    You don't seem to know about that.
    Ms. Cooper. With respect to the property disposition 
activity?
    Mr. Waxman. With respect to the way they're contracted.
    Ms. Cooper. The contracting issue has been outside of the 
scope of this audit. The contracting issue is HUD's ability to, 
as an organization, nationwide, to implement contract 
activities. It didn't simply apply to the property disposition 
activities, it applied to everything. It applied to automation 
of the Department, it applied to contracts for closing agents, 
it applied to numerous things.
    Mr. Waxman. Did it apply to contracting people to manage 
the properties?
    Ms. Cooper. It would, yes.
    Mr. Burton. The gentleman's time has expired.
    Mr. Waxman. Isn't that what we're talking about here?
    Mr. Burton. The gentleman's time has expired.
    Mr. Waxman. You might want to let her finish.
    Mr. Burton. Did you have something you want to add?
    Ms. Cooper. I simply wanted to say once again, this is an 
area that we intend to look at, but we have not yet looked at 
it. It is a part of the scope of our audit. So we will address 
that contracting oversight ability by the time we finish the 
work and issue our audit report.
    Mr. Burton. Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Ms. Cooper, I don't have the institutional memory that a 
lot of our members have, since I haven't been here until this 
year. But just so I can have the information, right now, HUD is 
in the transition, is that correct?
    Ms. Cooper. That's correct.
    Mrs. Biggert. Was this at the recommendation of the GAO, or 
was this something that they just decided to cut down on the 
numbers, and go to fewer offices, or to have the four major 
offices, rather than smaller offices across the country?
    Ms. Cooper. I believe it actually started with 
recommendations from the NPR. HUD hired consultants to help 
them design a system that would work more like private industry 
works. The conclusion of the study was that they would go to 
these four centralized home ownership centers to process their 
property disposition and all other aspects of FHA.
    Mrs. Biggert. So in the middle of this, then, you're doing 
an audit. Were they to be finished with that transition prior 
to this time, or is this just the time that it takes?
    Ms. Cooper. They were to have been finished with this. One 
of the reasons that we're doing, that we've undertaken the 
review we have is that GAO reported problems. We didn't want to 
wait. And after GAO reported those problems, we didn't see the 
transition coming, we didn't see HUD making much progress 
toward what it was ultimately going for, which was the private 
contracts.
    We were afraid we would get caught, as the IG, when 
Congress called and said, HUD hasn't accomplished what it 
intended to accomplish, where have you been. We wanted to be in 
a position when you asked to be able to tell you the state of 
HUD's activities.
    Mrs. Biggert. Was there any definite date, then, for when 
this was to be accomplished, or not?
    Ms. Cooper. There was. Let me see if my staff remembers the 
date.
    Originally, it was August or September 1998.
    Mrs. Biggert. So do you expect that you'll complete your 
audit by July of this year?
    Ms. Cooper. Yes.
    Mrs. Biggert. Do you expect that they will be then having 
finished the transition and be privatized, so to speak, or 
having the private contractors take over?
    Ms. Cooper. They will. Those contracts have already been 
signed. As of March 29th, all properties will be turned over to 
those new contractors. So they are now transitioning, as we 
speak.
    Mrs. Biggert. So you would expect that your audit will also 
include the results from March 29th to July and how that's 
operating? Or will you end just as of March 29th?
    Ms. Cooper. What we'll try to do, it's going to be a little 
difficult for us to assess new contracts that have started up 
over that short a period of time. So what we will do is study 
the monitoring procedures by HUD, and we will review very 
carefully those contract terms.
    We will try to make some recommendations to HUD where we 
see risks. If for example, the contracts don't have any 
provision for monetary penalties or HUD does not have 
contingency plans, we will make recommendations such as those. 
If HUD's monitoring has holes in it from our reading and our 
perspective, based on our historical knowledge, we'll make 
recommendations about that.
    We will probably wait for about 6 months to a year to look 
at, and we'll go back and look at those contracts.
    Mrs. Biggert. So will your specific recommendations include 
reducing the holding times, or the costs, as well as specifics 
for the contract, such as penalties?
    Ms. Cooper. I expect our recommendations will address that. 
One of the things we think would be important for HUD to do is 
to be able to measure the cost of the new contracts and compare 
it, compare that with alterative ways of handling the property 
disposition.
    Mrs. Biggert. Thank you very much. Thank you, Mr. Chairman.
    Mr. Burton. The gentleman from Massachusetts.
    Mr. Tierney. Thank you, Mr. Chairman.
    Ms. Cooper, is it your practice, or do you generally 
testify prior to completion of an audit, or before you've 
issued your recommendations?
    Ms. Cooper. Not mine. No, sir.
    Mr. Tierney. So you're telling me it wasn't your initiative 
to come here and testify prematurely today?
    Ms. Cooper. Part of the mission of the Inspector General is 
to keep Congress fully informed. When Congress asks for 
information, far be it from me to deny them that information.
    Normally, we like to finish an audit before we make the 
results of the audit public. It's not so much to Members of 
Congress, but it is to the press. We don't do that.
    The reason we don't do that is because as an organization, 
we're held to well recognized standards which means that when 
we come forward with an audit report, by gosh, everything in 
it, all the T's have been crossed and the I's have been dotted. 
So we like to go through that full process before we issue an 
audit report.
    We also like to give the auditee, in this case, HUD, an 
opportunity to respond to the results of our work, in all 
fairness. So we get those comments, we allow those comments to 
be in our report, and then the report gets issued.
    So generally we do.
    Mr. Tierney. So you didn't initiate this visit here today, 
I take it?
    Ms. Cooper. No, sir, I did not.
    Mr. Tierney. I think your visit is premature, for all the 
reasons you've stated. I can't for the life of me imagine, 
other than for the press or some other motive what we're doing 
here today.
    I'll give Mr. Waxman the balance of my time.
    Mr. Waxman. Thank you for yielding.
    I appreciate that it's the policy of your office to give 
Members of Congress information, so that we'll have it 
available to us. I wrote to Ms. Gaffney, who's the Inspector 
General, and asked her to respond to a report that was prepared 
by Mr. Donald Bucklin, who used to be the staff for Senator 
Thompson on campaign finance investigation. He was very 
critical of the Inspector General, he said things like that 
tensions exist between Ms. Gaffney and other HUD officials, and 
she has not provided credible evidence supporting many of her 
challenges to HUD actions.
    In fact, he went on and said many of Ms. Gaffney's 
statements ``[reveal] petty, nitpicking arguments based upon 
misrepresentations, distortion of events, remarks taken out of 
context and arguments that defy logic and reason.''
    Now, that's pretty troubling, when someone makes that 
statement who was hired by HUD to do an independent evaluation 
of the IG. But I didn't get a response from Ms. Gaffney. I'm 
not critical of you. But if it's your policy to give Members of 
Congress information, which I thought would have been helpful 
for me to have prior to this hearing, I just want to put on the 
record, I never got a response from her prior to this hearing. 
I was informed a few minutes ago that she's been out of the 
country, that she'll try and get me an answer by March 26th. 
But that's after this hearing.
    Ms. Cooper. May I respond?
    Mr. Waxman. Sure.
    Ms. Cooper. It's not the office policy to give information 
to Congress, it's the law.
    Mr. Waxman. Well, tell Ms. Gaffney she may be breaking the 
law if she doesn't get this information to me, although I doubt 
she'll be prosecuted.
    Ms. Cooper. That's why we're here.
    Mr. Waxman. She's your boss, isn't she?
    Ms. Cooper. Yes, she is.
    Mr. Waxman. I hope she'll give me the answers to my 
questions, because those charges are pretty damning.
    Now, I want to examine this HUD issue in comparison to the 
private sector. You would think that based on the criticisms 
that HUD was performing leagues below private firms that 
dispose of foreclosed property. But I don't know that that's 
the case at all.
    Are you familiar with an industry benchmarking and best 
practices report by Andersen Consulting in March 1997?
    Ms. Cooper. I'm not. No, we are not.
    Mr. Waxman. Well, one critical success factor considered by 
the Andersen firm was HUD's ability to maximize return on 
sales. I don't know if you're aware that sales revenue for 
private industry averaged 96 to 105 percent or more of value. 
HUD's single family property disposition performance was 
comparable at 98 percent.
    Another critical success factor recognized by Andersen 
Consulting was minimizing the cost of sale. Chairman Burton 
apparently believes that HUD is losing $1 million a day. But 
Andersen thinks HUD is doing as well as the private sector.
    Are you aware that the industry standard for cost of sale 
was 12 to 18 percent of market value and that HUD's costs 
averaged 17 percent?
    Ms. Cooper. I was aware that HUD's costs--no, that HUD's 
loss per property based on its acquisition costs, had increased 
from $28,202 in fiscal year 1996 to $31,728 in fiscal year 
1998. I was aware of that. I'm not sure I was aware of the 
statistics that you----
    Mr. Waxman. You weren't aware of the Andersen Consulting 
report?
    Ms. Cooper. No.
    Mr. Waxman. What is your job at the Inspector General's 
office?
    Ms. Cooper. Pardon me?
    Mr. Waxman. What do you do at the IG office?
    Ms. Cooper. I'm the District Inspector General for the 
Southeast/Caribbean District. I am the audit manager in charge 
of the eight southeastern States and Puerto Rico. Overseeing 
internal and external audits of the Department.
    Mr. Waxman. In that region?
    Ms. Cooper. Or nationwide, which is what this is. But yes, 
sir, in that region, too, the external audits in that region.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Burton. Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    I share the chairman's background in real estate, and I 
have some personal direct experience in acquiring HUD 
properties that have been foreclosed upon. I want to make sure 
that my memory is accurate in terms of what I recall from the 
transactions I've done.
    The point of your visit here is to brief us on your 
progress, if you will, an interim report. And you've referenced 
the KPMG report of March 12, 1999, and suggested that your 
preliminary results mirror those conclusions.
    I think the point I'd like to make, and I want to hear 
feedback from you very briefly, is in terms of property, REO 
property that HUD ends up owning, in terms of the REO stuff 
that HUD has, typically HUD takes possession after a number of 
months. In California, for instance, I think it's 3 months, 92 
days or something, in terms of filing the notice of default and 
getting to a foreclosure and taking possession.
    Oftentimes in that period of time, the person in whom title 
is vested will vacate the property. You end up with a property 
that has disconnected utilities, no maintenance, no occupant, 
no insurance. In some areas you'll get people who move into the 
property, then you have a squatters problem, et cetera.
    I appreciate how you have pointed out here the cost of that 
delay that is incumbent to HUD when that delay takes place. You 
have talked about an average disposition time of around 6 
months, suggesting there are some that go 12 months. But that 
ignores that first 45 days before you ever even have 
possession, if I understand correctly.
    Ms. Cooper. That's correct.
    Mr. Ose. In California, with the temperature variations we 
get, and the condensation we get, if we have an unoccupied 
property without heating or air conditioning, we'll get 
significant deterioration, as you showed in these pictures. For 
instance, in drywall, paint, what have you, flooring. We'll 
have people come in and steal the equipment, microwaves, 
utility, garbage disposal and the like.
    Is it your point that we are failing in disposing of these 
properties in a timely manner?
    Ms. Cooper. HUD's statistics support that we are failing in 
disposing of them in a timely manner, yes.
    Mr. Ose. Is it your purpose in coming here today to suggest 
that your interim audit confirms that?
    Ms. Cooper. That's correct.
    Mr. Ose. As does the KPMG audit of last week?
    Ms. Cooper. Yes.
    Mr. Ose. I want to shift to this chart over here. Mr. 
Chairman, has that been entered into the official record?
    Mr. Burton. I think Mr. Waxman asked that it be entered 
into the record. I presume it was.
    We'll put it in the record, without objection.
    [The chart follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.077
    
    Mr. Ose. Thank you, sir.
    I have a question on the fees and premiums, the $2.4 
billion, I sat on the board of an insurance company. It's my 
recollection from our operations that we tried to cover 
operating costs off fees and premiums and generated our profit 
on the basis of our portfolio growth. If I look at those 
numbers over there, these premiums of $2.4 billion are less 
than total expenditures or $2.87 billion, generating about a 
$450 million deficit, which is close to the million dollars a 
day costs that we're otherwise concerned about.
    I would appreciate having some further explanation as to 
what falls into that category that's described as total 
expenditures over there. I don't understand what's within the 
$2.87 billion. As a practitioner, and someone who has purchased 
HUD property, a year after HUD has taken possession under the 
REO, can you tell me or quantify for me roughly on a time line 
the loss in value that HUD suffers as you go from 6 to 9 to 12 
months? Is it 10 to 20 to 30 percent?
    Ms. Cooper. I wouldn't have information to give it to you 
like that. I certainly can't tell you. What will go up, the 
lender's claim will be the same. What will go up is the cost to 
maintain the property by the asset manager, the repairs that 
are needed based on vandalism, weather, those kinds of things.
    The longer it sits without utilities, the more it 
deteriorates.
    Mr. Ose. My point in bringing these things up is that the 
money we spend on that kind of activity, of correcting those 
deficiencies, we cannot spend to take care of new housing 
demand.
    Mr. Chairman, I yield my time to you.
    Mr. Burton. I think I'll let the gentleman keep his time, 
if he likes. I'll bring up my comments and questions at the 
next panel.
    Mr. Waxman. Would the gentleman yield so I can ask a 
factual question?
    Mr. Ose. I would yield to my distinguished colleague.
    Mr. Waxman. Thank you. I misunderstood, I thought you made 
a statement to her and she didn't dispute it. You said the 
average time for disposition is 6 to 8 months. Is that your 
testimony? Because I understood your testimony was that you 
were focusing on and criticizing that property which turned out 
to be a third, less than a third of the 41,000 that took more 
than 6 months.
    But is it on average 6 months? Or are you critical or 
singling out for us those that took longer than 6 months?
    Ms. Cooper. We're actually trying to show the trends in the 
whole portfolio. We're doing several things. We have taken 
statistics from HUD's own data base to try to compare to what 
HUD's property disposition mission is. We're looking at whether 
or not----
    Mr. Waxman. Just specifically the 6 month figure. Is it 
inaccurate to say you're talking about an average, that it 
takes an average of 6 months or longer to sell property? Or did 
you single out that part of their portfolio that took longer 
than 6 months for which you were critical of the amount of 
money HUD had to spend?
    Ms. Cooper. We didn't single out. HUD's goal is 6 months. 
We looked to see whether properties were being turned over to 
the market within 6 months. We saw that in fact HUD was not 
maintaining that 6 months.
    Mr. Ose. May I reclaim, please?
    Mr. Waxman. Yes.
    Mr. Ose. I think the gentleman's point is well made about 
the houses that we hold in portfolio past 6 months. That is the 
area I'm concerned with, because that is the area we suffer the 
greatest declination in value. So I would like to reinforce 
your point, whether that 6 months is an average or not, my 
concern is focused on those houses that exceed that 6 months.
    Mr. Waxman. I share your concern.
    Mr. Ose. It's a legitimate area for concern.
    Mr. Burton. I thank Ms. Cooper very much. Unless we have 
further members wanting to speak, we'll have the next panel 
come up.
    Mr. Apgar.
    [Witness sworn.]
    Mr. Burton. Mr. Apgar is the Assistant Secretary for 
Housing and also the Federal Housing Commissioner at the 
Department of Housing and Urban Development. He's in charge of 
the Federal Housing Authority. Mr. Apgar, you are recognized 
for 5 minutes.

 STATEMENT OF WILLIAM APGAR, ASSISTANT SECRETARY FOR HOUSING, 
 FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND 
                       URBAN DEVELOPMENT

    Mr. Apgar. Good afternoon. On behalf of HUD Secretary 
Andrew Cuomo, I want to thank you for this opportunity to 
testify on behalf of the FHA.
    FHA is a real success story. By insuring low down payment 
loans for people with less than perfect credit, FHA has helped 
more than 27 million American families to become homeowners. 
Last year, FHA assisted over a million families.
    Perhaps more importantly, FHA does this at no cost to the 
taxpayers as the charts illustrate. Last year, we contributed 
$1.5 billion to the national deficit reduction effort.
    Building on this record of achievement, Secretary Cuomo has 
created new and effective ways for FHA to conduct business. 
Today's hearing focuses on just one area of that reform, our 
FHA property disposition efforts.
    As a mortgage insurer, FHA does take ownership of some 
properties. Last year, FHA took 70,000 properties, or 
approximately 1 percent of the more than 7 million loans 
outstanding. We are constantly looking for new ways of doing 
business. Over the last 2 years, we have developed, tested and 
now are implementing a new property disposition method, 
predicated on the belief that private sector real estate 
professionals can more efficiently manage and sell REO 
properties than HUD staff.
    Before I go farther, to describe this new approach, I'd 
like to make a brief comment on the testimony provided by the 
HUD Office of Inspector General.
    As the NBC situation pointed out, it's really important to 
get the facts straight in this review. And I will submit a 
detailed accounting of the factual errors contained in the 
testimony you just heard from the IG.
    I'd like to briefly comment, though, on one prominent 
example of IG misstatement. This is the million dollar issue. 
The statement is provocative as you've heard here. In many ways 
it's misleading. What the Inspector General fails to recognize 
is that a vast majority of the costs discussed here today are 
not incremental costs associated with delay, but rather the 
basic costs of a sales operation.
    Contrary to the statement by the IG, there has been no 
slowdown in recent years in the time it takes to sell FHA 
property. Moreover, as we noted from the Andersen Consulting 
study, FHA's average property holding and sales costs are 
squarely in line with industry standards.
    Finally, it's noteworthy to reiterate that FHA does not 
cost taxpayers 1 penny, since the overall operation actually 
generates more than $1\1/2\ billion of net revenues.
    Unfortunately, many HUD critics continue to focus on the 
past, rather than work with us to forge the new initiatives 
that are coming on line at HUD. By any objective standard, the 
new management and marketing approach is praiseworthy. First, 
we know this new contracting approach works. During more than 2 
years of pilot testing at three sites, private contractors have 
proved able to sell properties faster and at a higher rate of 
return than HUD's own efforts.
    Next, we are well on the way to deploying this successful 
model nationwide. Last fall, we received more than 170 
proposals in response to a national RFP. This was one of the 
most competitive HUD procurements in history.
    And finally, the contract is incentive based, with the 
entire fee set as a percentage of the net return to FHA. And at 
the suggestion of HUD's Inspector General, the contract 
minimizes pass-through expenses to HUD, creating a strong 
incentive for the contractor to sell HUD properties fast.
    Our confidence in this report was bolstered by the recent 
assessment of the Office of the Comptroller General at the 
General Accounting Office. They concluded that the new approach 
would likely yield substantial benefits of cost savings and 
quality improvements. Over the last 8 months, we have worked 
with the management consulting company of Booz, Allen and 
Hamilton to develop a comprehensive set of management and 
financial systems controls. In combination with the new 
incentive based contract, this monitoring system will ensure 
the national program works as well as the pilots.
    Finally, I'd like to take a brief moment to comment on the 
testimony you'll hear from Gale Cincotta. While I disagree with 
many of Ms. Cincotta's solutions, I agree with her focus on 
foreclosure avoidance. That's why I urge Gale Cincotta and 
others to take a careful look at the steps that FHA has taken 
over the past year to reduce foreclosures.
    These strategies include our initiatives to foster greater 
use of FHA home buyer retention tools, to enhance FHA lender 
monitoring enforcement, and to create new appraisal monitoring 
systems that will provide consumers with the information they 
need to help them make good home buying decisions, and will 
enable FHA to better identify and sanction those lenders and 
appraisers who would abuse the system.
    Before concluding my remarks, I'd like to thank Congressman 
Kucinich for alerting the Department to his concerns about the 
impact of the HUD Reform Act on grant application review 
process. The HUD Reform Act is designed ``to preclude giving an 
unfair advantage to applicants who would receive information 
not available to other applicants.''
    However, as the Congressman has pointed out, applications 
sometimes are rejected for narrow technical errors, such as 
checking the wrong box on the form, which may seem to defy 
common sense. Mr. Kucinich has proposed an amendment to the 
Federal grants process, which would clarify the ability of 
applicants to correct these kinds of ministerial omissions or 
errors.
    The Department will also take administrative action to 
provide clear guidance to applicants and HUD staff regarding 
notification of technical errors and applications for HUD 
grants. We believe these actions will address the concerns 
raised by Congressman Kucinich and others, and we are pledged 
to continue to work with the committee on this issue.
    So in conclusion, Mr. Chairman, I'd like to thank you for 
this opportunity to testify. I believe an honest and objective 
assessment of these and other HUD reform initiatives will 
demonstrate that under the leadership of Secretary Andrew 
Cuomo, HUD is moving in the right direction. And I'd be happy 
to take any questions you may have.
    [The prepared statement of Mr. Apgar follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.078
    
    [GRAPHIC] [TIFF OMITTED] T9984.079
    
    [GRAPHIC] [TIFF OMITTED] T9984.080
    
    [GRAPHIC] [TIFF OMITTED] T9984.081
    
    [GRAPHIC] [TIFF OMITTED] T9984.082
    
    [GRAPHIC] [TIFF OMITTED] T9984.083
    
    [GRAPHIC] [TIFF OMITTED] T9984.084
    
    [GRAPHIC] [TIFF OMITTED] T9984.085
    
    [GRAPHIC] [TIFF OMITTED] T9984.086
    
    [GRAPHIC] [TIFF OMITTED] T9984.087
    
    [GRAPHIC] [TIFF OMITTED] T9984.088
    
    [GRAPHIC] [TIFF OMITTED] T9984.089
    
    Mr. Burton. When a person buys a house on FHA, they buy the 
FHA mortgage insurance?
    Mr. Apgar. That's correct.
    Mr. Burton. And the premiums that they pay go into the 
mortgage insurance fund?
    Mr. Apgar. That's correct.
    Mr. Burton. If they default on their mortgage, the money 
comes out of that fund to pay for any loss that the mortgage 
fund incurs, it comes out of that fund?
    Mr. Apgar. That's correct.
    Mr. Burton. And when the property is then sold, the money 
that's received from the sale of that property then goes back 
into the fund?
    Mr. Apgar. That's correct.
    Mr. Burton. According to the previous panel, based upon the 
acquisition costs, they increased from $28,000 in fiscal year 
1996 to $31,728 in fiscal year 1998. They say as a result, the 
loss to the mortgage insurance fund increased from about $1.5 
billion in fiscal year 1996 to slightly over $2 billion in 
fiscal year 1998.
    That money is not a direct loss to the taxpayer, but it is 
a direct loss to the fund. Now, when the fund loses money, that 
means that the people who are paying into the fund, the people 
who are buying that mortgage insurance, do not benefit from a 
profit in the fund, they lose because there's a loss in the 
fund.
    So the premiums that could go down to the millions of 
people who have FHA loans do not go down because of the loss in 
the fund, is that not correct?
    Mr. Apgar. First of all, the data you just cited are some 
of the factual errors that are contained in this report. We 
have no idea where they got the 7 percent increase in cost per 
sale. Our own estimates suggest that it hasn't increased, just 
as our own estimates suggest that there's no increase in the 
length of holding time.
    But you are correct to the extent to which we incur costs 
in selling homes, that results in a loss in money to the fund.
    Mr. Burton. If a property, let's say a person moves out, 
and they have a mortgage of $50,000 on a property, and the 
property is worth $70,000, you've got a $20,000 profit there 
that's going to go back into the fund. But if the house sits 
there and deteriorates, as we've seen these other houses 
deteriorate, for 6 or 7 months, and then it's only sold for 
$55,000, instead of the $70,000 it would have gotten, that's a 
loss of $15,000 that could have gone into that fund, because it 
had to be held for that extra period of time, isn't that 
correct?
    Mr. Apgar. Typically, sir, if a property is worth more than 
the value of the outstanding mortgage insurance----
    Mr. Burton. No, you're missing the point. My point is----
    Mr. Apgar. That property will never come to us, sir. If the 
market value of the property is more than the outstanding 
mortgage balance, the lender would repossess the home and sell 
it through their own mechanisms.
    Mr. Burton. Let's just say it's $45,000 and the property is 
worth $50,000. The lender is going to lose money. And it sits 
there. There's a $5,000 loss. If it sits there for 6 months and 
it deteriorates, it goes down to $25,000.
    So now you have, instead of a $5,000 loss, a $20,000 loss, 
and that is absorbed by the fund, right?
    Mr. Apgar. While the properties aren't being sold, the fund 
incurs costs, correct.
    Mr. Burton. So the fund loses money. Now, who pays into 
that fund?
    Mr. Apgar. Who pays into the fund?
    Mr. Burton. Yes.
    Mr. Apgar. The receipts come from the mortgage insurance 
premiums.
    Mr. Burton. Which is paid by?
    Mr. Apgar. By the home buyers in the FHA system.
    Mr. Burton. That's right. So if the people who are in the 
fund, who are buying a home, I want to buy an FHA home, and I 
have to pay a certain percentage into the mortgage fund for 
mortgage insurance in case I default on a loan.
    If the fund continues to go down by $1 billion or $1\1/2\ 
billion or $1 million a day or whatever we're talking about, 
then what that means is the costs are going to be passed on to 
the consumer in the form of an increase in the premiums, or at 
the very least, not a decrease in the premiums that they could 
realize if the fund was making money.
    Mr. Apgar. Well, if that were the case, that would be true. 
But of course, the fund is strong, it's the most financially 
secure position we've been in over a decade. As a result of 
that, in the last several years, we've cut premiums in several 
significant ways. We've had a special first time buyer program 
cut, which for counseled buyers, we give them a discount off 
their property insurance as well as an inner city discount.
    So in fact, we have been able to cut insurance premiums, 
because the scenario you described just isn't true.
    Mr. Burton. If the IG is correct, and you're saying that it 
isn't correct, but if the IG is correct and it's losing $1 
million a day, or $365 million a year, then that money is 
coming out of the fund, if they're correct. You're disputing 
that. But if they're correct, that money is coming out of the 
fund.
    And if there has been a reduction in premiums, as you've 
said, to the consumer when they get a loan, it could be greater 
if that figure is correct, the $365 million a year. I know 
that's a hypothetical figure to you and you don't agree with 
it. The fact is if money's coming in, I was an insurance man, 
too, as well as a real estate man.
    There is what's called the law of profit and loss in the 
law of large numbers. If you're losing money, what the 
insurance carrier does is they either increase the premium or 
they eliminate the risk by reducing that class of business so 
they don't have to insure it any more. But in any event, 
they're going to operate at a profit.
    Now, you don't have to operate at a profit, but you have to 
at least maintain some funds in that insurance fund. So the 
bottom line is, if you're losing money each year, because of 
excess properties being on the market, because maintenance of 
those properties is high, then that money comes out of the 
fund, and that money cannot be passed back onto the persons 
buying the insurance in the form of lower rates.
    That is correct, isn't it?
    Mr. Apgar. Right. If all the scenarios you say are true, 
then your final conclusion is true.
    Mr. Burton. So the big difference we have, then, is whether 
or not you're correct or whether or not the IG is correct. If 
you're correct, there's no problem. If the IG is correct, we're 
losing $1 million a day out of the fund.
    Granted, according to Mr. Waxman, this is not taxpayers' 
money. But it is the money of millions of people who have loans 
through the FHA mortgage loan program. So it might not be 
taxpayers' money, but it's the money of millions of people who 
have homes through the FHA plan that could realize a lower 
premium, therefore more money in their pockets, if there wasn't 
a problem. That's the premise that we're talking about.
    Mr. Waxman.
    Mr. Waxman. Before I begin my questions, I want to yield to 
Mr. Kucinich.
    Mr. Kucinich. Thank you very much, Mr. Waxman, Mr. 
Chairman.
    I want to thank the Chair for holding this hearing, because 
one of the outcomes that we've seen, as demonstrated by the 
testimony of Mr. Apgar, is that HUD did recognize problems and 
demonstrated a willingness to take action and reevaluate their 
policies. I want to tell the Chair how much I appreciate your 
support, and I appreciate Mr. Waxman's support.
    All I'm saying is that the response that Mr. Apgar gave is 
in response to a recognition by HUD that there are problems. 
And they demonstrated a willingness to take action. That came 
about, I might add, because of the support of the Chair and 
also Mr. Waxman. So these hearings can be productive in some 
way. Thank you.
    I yield back to Mr. Waxman.
    Mr. Waxman. I thank you for pointing that out, because it 
does show that there is a responsiveness at HUD to a genuine 
criticism that all of us have. I thank you for being 
responsive.
    Let me go to the points that are before us today, that the 
chairman seemed to try to argue that when money is paid out of 
this fund that it raises premiums for others. So it's not 
taxpayers' money, but other people are going to pay more for 
their premiums.
    Are your premiums based exclusively on the loss, meaning 
money that was spent to maintain the property?
    Mr. Apgar. No, they're based on the overall financial 
health of the fund. Which as I said is the strongest it's been 
in over a decade.
    In the 1980's, of course, the fund was very much 
mismanaged. We had a serious situation where the fund was net 
underwater. Since that time, we've rebuilt the capital base of 
the fund through prudent management to its highest level in 
over a decade.
    We just had the new audit by our Price Waterhouse. This 
audit again makes this point.
    Mr. Waxman. So it's not like if you have insurance and you 
pay off a loss--that's what insurance is all about--it doesn't 
mean your insurance companies have to immediately turn around 
and ask everybody to pay more for that loss.
    Mr. Apgar. We expect to take certain loss. That's part of 
our whole risk management strategy.
    Mr. Waxman. That's why you have the insurance.
    Mr. Apgar. That's right. We lend to people who, quite 
frankly, could not get a loan other ways. They are riskier 
borrowers. We anticipate a certain amount of losses as part of 
the calculation that goes into making those mortgages.
    And as was mentioned earlier, 93 out of every 100 of our 
borrowers go on to be homeowners, successful homeowners for 
life. When there are issues, and the property is foreclosed 
upon, that's what we're talking about today, the small number 
of cases, not the large number of successful cases.
    Mr. Waxman. I want to question you about how HUD is 
performing with these foreclosed properties compared to the 
private sector, because I think that's really the issue that's 
before us. But I want to just take a moment to point out to 
everybody what FHA means to people. FHA insured 585,000 people, 
or one-fourth of all first-time home buyers' in 1997. FHA is 
the primary insurer in urban areas and insures more mortgages 
of African-Americans and Latinos than any other insurer.
    In fact, the 1996 Federal Reserve report concluded FHA 
bears approximately 66 percent of the aggregate credit risk for 
minority and low income borrowers and their neighborhoods, 
while private mortgage insurers bear only 6 to 8 percent. Of 
FHA insured home purchase loans, 15.4 percent were to Latinos, 
compared to 6.8 percent for home loans insured by private 
insurers in 1996.
    Of FHA insured loans, 13.2 percent went to African-
Americans, compared to 5.3 percent of home loans in the private 
insurance market. Of FHA insured home purchase loans, 31 
percent were to low income borrowers, compared to 14 percent 
for home loans insured by private insurers in 1996. In fact, 
almost 85 percent of FHA's loans to low income borrowers in 
1995 would not have qualified within private insurance market 
guidelines to loan to value ratios. Which means these poor 
people wouldn't have been able to buy homes.
    Even serving all these needs, FHA performs generally on par 
with private mortgage insurers, isn't that right?
    Mr. Apgar. Yes. We did the Andersen benchmarking study 
because we wanted to know how we compared, where our areas of 
weakness might be as we began this new process of changing our 
property disposition activity.
    Mr. Waxman. Let me just ask you, regarding the Andersen 
benchmark study, are there a lot of different studies out about 
how well you and the private sector would be doing in this area 
of dealing with foreclosures and homes?
    Mr. Apgar. We wanted one that focused on our details. So 
this is the one we have. There are other studies that compare 
FHA activities. For example, in terms of our sales price 
information, there's a national study that says that our sales 
price relative to an estimate of market value is on a par with 
other private entities.
    Mr. Waxman. Can you imagine anybody in your field not 
having heard of the Andersen study?
    Mr. Apgar. It was pretty widely discussed, it was a very 
important study for us, and it was a key to our restructuring 
our FHA operations.
    Mr. Waxman. I was shocked that the representative of the 
Inspector General seemed to never have heard of this, even 
though she was here commenting on this very area.
    Mr. Apgar. In our testimony before another committee last 
year, of course, we provided information on the Andersen study. 
This is no secret on our part. We've been using this 
information to try to refute these claims that FHA is a poor 
performer.
    Mr. Waxman. My time is up, and I'm hopeful I'll get more 
time, because Mr. Kucinich said he'd come back and yield me 
more time. I want to go into precisely how the private sector 
matches up to HUD in this very area for which HUD is being 
criticized.
    Thank you, Mr. Chairman.
    Mr. Burton. Mr. Kanjorski is next.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, I come a little bit armed, because I not only 
have the opportunity to sit on this committee, but I have spent 
the last 14 years of my career on the Banking Committee. We're 
well aware of the history of HUD and the housing problems that 
have existed in the United States.
    I think the records show that in the second term of the 
Reagan administration and in the first and only term of the 
Bush administration, there was always great consternation in 
the Banking Committee about FHA. We thought there was some 
hidden vault down there in the Department building where all 
these records and all these properties were located, and no one 
really had a handle on it.
    Over the last 6 years, the Department has undertaken a 
massive approach to handling inventory, studying these problems 
and getting a handle on these problems. Consistent with any 
criticism of HUD or any other Federal agency, for that matter, 
there is always room for criticism and always room for 
tightening. It's evident that there are things here that we 
would like to have operate in a more effective manner.
    To the Commissioner, I'd like to say that every report I'm 
getting back is that you have taken on a Herculean task and 
have significantly changed the processes and procedures. I'm 
wondering whether you could tell the committee for the record 
some of the things you've done on Internet with the 
advertisement of properties to make them readily available to 
average people, and also to the brokers, and private sales 
community.
    Mr. Apgar. Yes. Mrs. Morella asked the question about 
whether you can find out about HUD-held properties. Of course, 
all our properties are listed on the Internet. In fact, many of 
our home buyers come to us via that new technology. Certainly a 
lot of our broker partners use the Internet to learn about HUD 
properties for sale.
    As part of the new management and marketing contract, we're 
going to move more aggressively into the multiple listing 
services around the country. This should both widen our market 
and hopefully further shorten our sales time. But we've been 
aggressive users of new technology, both in terms of the 
operations of the program and also our outreach to consumers.
    Mr. Kanjorski. Have you found that as a result of the use 
of the Internet and these new methodologies, the process of 
turnover of properties has increased and has decreased in cost 
of holding and handling?
    Mr. Apgar. Right. Unlike the IG, we see no degradation in 
our time of holding properties. It has remained constant at 
about 180 days. The reality here is, most of our properties 
sell quite quickly. It's difficult to sell properties that are 
a problem. And the example discussed earlier where a private 
homeowner couldn't sell their home in 18 months, we see that 
all the time.
    In Syracuse, for example, the estimate is it takes anywhere 
from 16 months to 20 months to sell a privately owned home. So 
in those instances, some of our homes quite frankly don't sell 
as quickly. We aggressively cut the price, we work with 
community based non-profits to sell the homes. So we do have 
efforts. But that's where our issues are.
    Mr. Kanjorski. If I could characterize your testimony, as I 
understand it, the premise of the hearing today was, HUD is 
wasting $1 million a day. But in reality, so that the taxpayers 
understand, the program that you administer and as administered 
by this administration under HUD is not only not costing $1 
million a day, but something significantly less than that, and 
overall, FHA is returning to the Treasury $1.5 billion.
    So, this is one department or one branch of HUD and the 
Federal Government that's making a profit for the U.S. 
Government, is that correct?
    Mr. Apgar. Yes, we are a profit center with respect to 
deficit reduction efforts and overall health of the general 
funds.
    Mr. Burton. Would the gentleman yield?
    Mr. Kanjorski. Yes.
    Mr. Burton. You're returning $1.5 billion to the general 
fund?
    Mr. Apgar. Actually, we have net returns of $1.5 billion. 
The funds actually stay in the FHA accounts.
    Mr. Burton. They stay in the mortgage----
    Mr. Apgar. The mortgage insurance company, that's correct.
    Mr. Burton. But it's not going back into the general 
Treasury.
    Mr. Apgar. But for purposes of calculating the deficit and 
expenditure estimates, they are listed that way, yes, sir.
    Mr. Burton. Because of the unified budget?
    Mr. Apgar. That's correct, because of the unified budget.
    Mr. Burton. But it's not going back into the general fund, 
in actuality.
    Mr. Kanjorski. Reclaiming my time, so that the chairman 
understands, if he's not involved in accounting, it's a reserve 
fund that is showing a surplus of $1.5 billion. Any time we 
were to finalize the accounts and dissolve the U.S. Government, 
in fact, the Treasury would receive the surplus funds which 
amount to $1.5 billion a year.
    Mr. Apgar. Right.
    Mr. Kanjorski. So to attempt to mislead and say it's not 
going back to the Government would be a mistake. It's accounted 
for in the overall deficit as a plus. It is in fact a plus and 
the funds exist there presently to be re-used and to support 
the fund. Nevertheless, it operates at a profit to the U.S. 
Government, is that correct?
    Mr. Apgar. That's my understanding, sir.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Burton. Thank you. The gentleman's time has expired. 
The gentlelady from Washington.
    Ms. Norton. Mr. Chairman, I regret I was not able to be 
here for most of this hearing. I do want to say that the 
subject matter of this witness is of enormous interest to me. 
The District had a $5,000 home buyer credit that has had an 
enormously positive effect on home buying in the city.
    While our concern was particularly with middle income 
taxpayers who have bought in great numbers, what has been 
wonderful to see is the coming alive of home owning in the 
poorer sections of the District of Columbia, in wards 7 and 8. 
None of that could have occurred without HUD's help with these 
particular home buyers.
    I'd like to yield the balance of my time to the ranking 
member, who has been here.
    Mr. Waxman. Thank you very much for yielding.
    We, through technology, have seen pictures today of really 
dilapidated houses in what appear to be very bad shape. I could 
imagine, when we hear from people who live near these houses, 
they must be horrified at what it's doing to their 
neighborhoods.
    I want to know what HUD's responsibility is. First of all, 
was HUD responsible for the deterioration of the house 
immediately, or do they sometimes pick up these houses when the 
borrower has walked away from it?
    Mr. Apgar. As was suggested earlier, the foreclosure 
process in many States can be lengthy, ranging from a couple of 
months up to 18 months or more. In many instances, by the time 
we get control of the properties, they are in very serious 
disrepair.
    That's why we requested and got authority from Congress 
just this last October to extend our reach in those difficult 
situations. So where there is a property languishing on the 
market during a foreclosure process, we can take control of 
that property through taking the note prior to foreclosure.
    This was the approach that we had proposed using in our 
April testimony. We awaited confirmation of Congress through 
the 1999 Appropriation Act that we had the legal authority to 
do that. So that will give us an additional capacity to attack 
that portion of the problem that we don't have control over 
now, which is what happens to the property after the homebuyer 
moves out and before HUD gets legal possession of the property 
through a foreclosure action.
    Mr. Waxman. So you have a buyer. The buyer is an 
irresponsible person who doesn't pay his or her debts and 
abuses the property, maybe just in the most horrible way. There 
are properties like that, aren't there?
    Mr. Apgar. Yes, occasionally there are borrowers like that. 
Even if the borrower is a responsible party, an unoccupied home 
in many of the neighborhoods that are in serious decline will 
depreciate quite rapidly.
    Mr. Waxman. So you get a property that's deteriorated in 
value, it's peeling, it falls apart, it smells, if a 
Congressman walked in with his brother, he would notice it, 
that it smelled. It could happen. It could also happen to 
private foreclosures, couldn't it?
    Mr. Apgar. Oh, for sure.
    Mr. Waxman. Now the question is, what do you do? Now you've 
foreclosed, you're trying to figure out how to get these 
properties foreclosed faster. Now you foreclose on them and the 
question is, what do you do to get rid of these properties? 
Resell them. Tell us about your activities there.
    Mr. Apgar. We have a number of initiatives. In the 
District, for example, the Officer Next Door program is quite 
popular, where we give HUD homes at a discount to police 
officers to encourage them to live within the District. In 
fact, the 2,000th beneficiary of this program was a District 
police officer.
    We also work with community based non-profits. Under the 
new legislation that was passed in 1999, we have a program 
which will target hard to sell areas, working in cooperation 
with neighborhood groups and cities, again to put a focus on 
our efforts to secure, maintain and dispose of those properties 
in the difficult to sell areas.
    Mr. Waxman. Is it true that HUD takes a longer time, holds 
onto those properties longer than the private sector before 
they turn around and sell them?
    Mr. Apgar. According to the Andersen benchmarking study, 
the industry ranges between 120 and 180 days. HUD is now at 182 
days, right within that bound. Under our new management and 
marketing contracts, we think the incentives that we've given 
the new contractors will bring our average down to 150 days or 
less.
    Mr. Waxman. Is it a fair statement that you have an average 
of 6 months before you dispose of these properties?
    Mr. Apgar. That's our overall average right now.
    Mr. Waxman. So it is 6 months on average?
    Mr. Apgar. The range is between 4 months and 6 months. 
We're at the high end of the range now.
    Mr. Waxman. You're at the high end of the range? Part of 
the reason for that is that you have a policy to promote owner 
occupants and other public policy interests?
    Mr. Apgar. That's correct. Early on, we have a period in 
which from 30 days to 45 days in which community based non-
profits have right of first refusal to purchase our properties, 
as do governments.
    Mr. Waxman. Is that by statute or by policy?
    Mr. Apgar. That's been our policy. Our new approach is 
going to continue to have that policy in effect, but streamline 
it so we're able to move quickly to make sure that if folks 
want to buy it through those special options, they can. But 
then we move it more quickly to the general market if they 
choose not to.
    Mr. Waxman. Could it be that the Inspector General for HUD 
doesn't know about this policy?
    Mr. Apgar. I don't know. It's in all our documents, it's in 
all our contracts. A key element of the new approach is to work 
out the handling of those setaside periods, to make sure it 
operates effectively.
    Mr. Burton. The gentleman's time has expired. Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Apgar, on your testimony there is a comment in here 
about the industry norm for sales revenue between 96 and 105 
percent of appraised value. And FHA sells properties at an 
average of 95 percent of market value. Is appraised value the 
same as market value in this lexicon?
    Mr. Apgar. No, the appraised value should be a best faith 
estimate of market value.
    Mr. Ose. How do you reconcile the 96 and 105 percent of 
appraised value with 95 percent of market value? It's apples 
and oranges.
    Mr. Apgar. It's the same thing. The estimate that is the 
105 percent figure, many private sector companies do cosmetic 
repairs to boost the sales price a bit. So they're able to sell 
higher than the initial appraised value.
    We sell our properties generally as-is. So that's why we're 
on the low end of that spectrum.
    Mr. Ose. Mr. Chairman, I need to jump shift here for a 
minute. I'm under the impression that the Chief Financial 
Officer for HUD resigned 2 weeks ago, is that correct?
    Mr. Apgar. Mr. Keevey did leave HUD, maybe a week ago, 2 
weeks probably.
    Mr. Ose. What is the status of having a replacement named?
    Mr. Apgar. They have an active search underway for a new 
Chief Financial Officer. I don't know the details of that, but 
I know they're looking.
    Mr. Ose. Any idea on the timeframe for completion of the 
search?
    Mr. Apgar. My expectation is, given the importance of the 
job that's going to be moved forward quickly.
    Mr. Ose. I have a related concern. Deputy Assistant 
Secretary Smith fills a slot----
    Mr. Apgar. He's actually the Acting Assistant Secretary for 
Administration. Joseph Smith, that's correct.
    Mr. Ose. He has served in that capacity for more than a 
year without an appointment, consistent with current Federal 
statute?
    Mr. Apgar. Joseph Smith is a career HUD employee. He's been 
with the Department for close to 25 years. He's in the process 
of being nominated, a very unusual move, to nominate a long-
time career staff person to such a critical political position. 
But Joe Smith has more than earned the respect of the 
leadership at HUD, and he's in the process of being nominated.
    Mr. Ose. I'm not questioning his degree of respect, I'm 
questioning whether or not he has served a year in a spot that 
is otherwise subject to the Federal Vacancies Act, that says 
you cannot serve in a temporary capacity for more than a year.
    Mr. Apgar. You're going to have ask others about these 
matters in more detail. I know Mr. Smith's general role in the 
Department, I work with him every day. But in terms of the 
details of his appointment status, you'll have to get other 
information. I'd be happy to provide that for the record or get 
someone who could provide that for the record for you.
    Mr. Ose. Mr. Chairman, I'd appreciate an opportunity to 
enter that question into the record for further response. I 
yield my time to the chairman.
    Mr. Burton. Thank you. Without objection, it will be so 
ordered.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.090
    
    Mr. Burton. First of all, 40 percent of the foreclosures or 
repossessions, where they leave the house, exceeds 6 months, 40 
percent is what the IG said. Is that correct?
    Mr. Apgar. Forty percent? I'm sorry?
    Mr. Burton. The vacancies, 40 percent exceed 6 months, is 
that correct?
    Mr. Apgar. No, I believe it's closer to 19, 20 percent.
    Mr. Burton. Well, we need to once again check the IG.
    Mr. Apgar. Yes, and even their calculation was 7,000 over.
    Mr. Burton. We'll check that. We did some calculating, and 
if the $1.5 billion per year is accurate--and the IG says $1.5 
billion to $2 billion is accurate--if that money was returned 
in reduced premiums to the 7 million homeowners who pay 
mortgage insurance, it would amount to a $215 a year reduction 
in their insurance premiums. If you cut that in half, it would 
still be over $100.
    So if those moneys were returned because the $1.5 billion 
to $2 billion wasn't wasted as the IG says, you would have a 
reduction in insurance premiums for those people of about $215 
a year. Whether it's a tax reduction or a reduction in the 
insurance premiums, it's still quite a bit of money.
    Now, the Inspector General told us that contractors are not 
being overseen or watched correctly, is that correct?
    Mr. Apgar. No, I don't believe that's a correct statement. 
They identified some instances where they found that to be 
true, but that's not the general practice.
    Mr. Burton. They said that one contractor was not visited 
by a HUD employee in over 3 years. Are you familiar with that 
case?
    Mr. Apgar. No. As we suggested, we only got their testimony 
yesterday. In a typical IG audit, we'd have a chance to read 
the testimony and review it.
    Mr. Burton. Would you correct that for me and let me know?
    Mr. Apgar. I certainly will.
    Mr. Burton. And we've been told that another contractor was 
auditing his own work and approving his own payments. Are you 
familiar with that?
    Mr. Apgar. That would be very unusual, and I'm not familiar 
with that particular case, other than having read it yesterday 
in the IG's testimony.
    Mr. Burton. But you will check that for me as well?
    Mr. Apgar. I sure will.
    Mr. Burton. And do you dispute that supervision of 
contractors was poor and the condition of HUD properties was 
deteriorating because the contractors were not being supervised 
properly?
    Mr. Apgar. I do not believe it's a fair statement that 
contractors weren't being supervised correctly. Again, there's 
no evidence that we're suffering any delay in sales of our 
homes. Our data suggests the opposite.
    Mr. Burton. If you would, after you review the report, give 
us a comment in writing, I'd really appreciate it.
    Mr. Apgar. And we wish to submit for the record a list of 
what we've identified already as being factual errors, clearly 
misstatements of fact that just spring right out at you when 
you read that testimony.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.091
    
    [GRAPHIC] [TIFF OMITTED] T9984.092
    
    [GRAPHIC] [TIFF OMITTED] T9984.093
    
    Mr. Burton. One other thing. I believe Mr. Kanjorski, I 
believe he was still here, said that you were returning $1.5 
billion or thereabouts to the Treasury. The fact of the matter 
is, that money does not go back to the Treasury. Under the 
unified budget, as far as paper is concerned, just like the 
Social Security Trust Fund, Highway Trust Fund and so forth, 
that's included as an asset. But the fact is, you don't put any 
money out of the insurance fund back into the Treasury, do you?
    Mr. Apgar. I asked our budget people to explain this to me. 
They said the practical effect was that this was contributing 
to the overall balanced budget, and it was effectively the same 
as putting money in the Treasury. Technically, the money stays 
in the FHA fund, as was noted by Mr. Kanjorski.
    Mr. Burton. The reason I bring that up is because if in 
fact the IG is correct, that there's a $1.5 billion to $2 
billion shortfall in the fund because of these issues, and I 
know you disagree with that, but if that's the case, rather 
than saying that that money is in effect going back to the 
Treasury, when it isn't, because it really isn't, it's staying 
in the fund, wouldn't it be better to reduce the insurance 
rates to these 7 million policy holders who are mortgage 
holders, who have mortgages with the FHA, and save them $215 a 
year?
    Mr. Apgar. Now that the fund is as strong as it's ever 
been, I think it's fair to look at the rate structure and 
decide whether or not we can prudently have a reduction.
    Mr. Burton. Mr. Cuomo I've talked to a number of times. He 
seems to want to be cooperative. I've been very impressed with 
him. All I would say is I wish you would suggest that to him 
when you talk to him about these other issues.
    Mr. Apgar. Fair enough.
    Mr. Burton. Thank you. Mr. Kucinich.
    Mr. Kucinich. Thank you, Mr. Chairman.
    I yield my 5 minutes to Mr. Waxman.
    Mr. Waxman. Thank you very much, Mr. Kucinich, for yielding 
to me.
    The Arthur Andersen Consulting firm is not a fly by night 
operation, it's a very highly regarded organization, isn't that 
accurate?
    Mr. Apgar. Yes, they do very good work for us and many 
other Government agencies.
    Mr. Waxman. In fact, the new head of the General Accounting 
Office was a partner at Arthur Andersen. That was, I think, one 
of the reasons that many people thought he would do a good job. 
He had the credentials for assuming the GAO position.
    Mr. Apgar. That's true. They have good knowledge of 
Government practice, it makes an ideal person to move into 
Government service.
    Mr. Waxman. I'm concerned, and Mr. Ose expressed a concern, 
if properties stay too long before they're sold, that that's 
costing us money. It's costing HUD money, whatever this fund 
is.
    Mr. Apgar. Yes.
    Mr. Waxman. Yet the Arthur Andersen Consulting firm said 
that the industry average standard, in terms of return on the 
appraised value, is 96 percent to 105 percent of the appraisal 
when they do sell property, whatever period of time it takes.
    Mr. Apgar. Yes.
    Mr. Waxman. And the performance, according to this study, 
is that HUD has achieved a 98 percent return on the appraised 
values. Sounds to me like that would indicate you're doing a 
reasonable job making sure we get the money back from these 
properties no matter how long it might take you to foreclose it 
and then turn around and sell it.
    Mr. Apgar. I think that's fair. The Government Performance 
Act, of course, focuses on results. That's why we look to these 
benchmarking studies. We think that measured in terms of 
results, our work stands up in terms of best practices, a 
comparison with industry benchmark standards.
    Mr. Waxman. That's the information we're getting from 
Andersen Consulting. I want to get more information about this 
issue to be sure it's true. I know that everybody would have a 
concern, especially people in the neighborhood, if there's a 
house that's not being cared for, and not being foreclosed on, 
not being turned around and sold, so that it can be maintained. 
So we don't want properties sitting out there for any length of 
time.
    Mr. Apgar. Fair statement. Nor do we.
    Mr. Waxman. In order to deal with these properties, 
however, you contract with people to maintain them, in the 
interim before you sell them, isn't that right?
    Mr. Apgar. That's correct.
    Mr. Waxman. Now, what I want to know is, are you taking all 
the appropriate actions to be sure that the contractors are 
doing their job? Do we have non-performing contractors? I 
understand you have contractors who are hired so to speak on an 
incentive based contract. Do you have any penalties against 
them if they're not doing their job?
    Mr. Apgar. Well, of course the biggest penalty is that 
under the management and marketing contract, people only get 
paid for results. They get paid a fee relative to the sale 
price of the home. So there's a powerful incentive for them to 
perform, maintain the properties, and sell them for the best 
price.
    Mr. Waxman. I want to be sure that we're getting these 
people who have this responsibility under contract with HUD, to 
be sure they're doing their job.
    Mr. Apgar. So do we.
    Mr. Waxman. We ought to explore that even further. But I 
don't think the case has been made credibly, charges have been 
leveled, but I don't think the case has been made in any 
credible way, that you have failed miserably to get the money 
back for these properties when people default, or that you have 
large numbers of properties that are substandard and eyesore 
and often constitute hazards.
    The statement by the representative from the Inspector 
General was that they found 12,000 properties, I think she said 
that took too long to sell. Was that the testimony?
    Mr. Apgar. I believe that's correct, that was the number 
they used.
    Mr. Waxman. Is that an accurate statement?
    Mr. Apgar. We were checking that number, because it led her 
to make an inaccurate conclusion, which the time on the market 
of our properties has grown over the last 2 years. Our 
statistics suggest that's not true. So we're trying to figure 
out ourselves how she could make that statement, given her own 
data to suggest that the conclusion she came to was correct.
    Mr. Waxman. If it were true, what do 12,000 properties 
represent of your total portfolio?
    Mr. Apgar. We have 40,000 properties in inventory. So it's 
about 30 percent. We sold about 65,000 properties last year, 
that was the number of properties we sold.
    Mr. Waxman. I appreciate the testimony you've given. I have 
somewhat defended HUD, because I think you've been unfairly 
criticized. But I do want to point out to you that I want to be 
sure you're doing the job that the American people expect of 
you.
    I thought it was ironic that you were criticized for not 
taking the money that you make and not giving it back to the 
taxpayers. But you would think from the title of the hearing 
today, ``HUD Losing $1 Million Per Day,'' it sounds like the 
Government is losing $1 million a day. They're funds that 
shouldn't be lost, whether they're Government funds or the 
premium payers.
    Mr. Chairman, let me ask unanimous consent for all Members' 
statements to be entered into the record. We didn't get to that 
earlier.
    Mr. Ose [presiding]. Without objection.
    Mr. Waxman. And I thank you for your forbearance.
    Mr. Ose. Our distinguished colleague from Illinois.
    Ms. Schakowsky. Thank you, Mr. Chairman.
    As a new Member of Congress, I come here with having been 
involved with community organizations in my district for many, 
many years. In particular, I want to ask you a process 
question. I want to be sure that you will make a commitment to 
me now, because Chicago has been particularly hard hit by FHA 
foreclosures, because we have many abandoned HUD buildings in 
Chicago, that you will meet with me when I ask, but also with 
me and representatives of organizations who have lots of 
experience and lots of data, to try and reconcile some of those 
differences on a regular basis, if I ask for those meetings.
    Mr. Apgar. We'd be happy to do that.
    Ms. Schakowsky. We're about to hear some testimony from 
these community organizations, who true to form are always sort 
of at the tail end of hearings. I know that there is the issue 
of inspections of FHA properties. I recently purchased a home, 
and the notion of purchasing a home without having an 
inspection first is absolutely unthinkable. Just unthinkable to 
me, and to my lender as well.
    So I'd like you to comment on that. Let me get my other 
question in, too, and you can answer. The other issue is going 
to be on a particular piece of legislation, H.R. 595, which, if 
we really are seeking to decrease the number of foreclosures, 
it seems to me that we ought to be looking at ways to provide 
emergency assistance to people who, for no fault of their own, 
are finding it hard to meet payments.
    It seems like it may also be economically a wise thing to 
do, in the long run, to keep people who have an investment in 
those homes in those homes over a hump. So if you could comment 
on both those things, on the inspections and on the 
legislation, I would appreciate it.
    Mr. Apgar. Fair enough. You're exactly right, a home 
inspection is a very important element in the home buying 
process. The overwhelming large share of buyers get a home 
inspection.
    FHA prominently encourages, through its housing counseling 
system, people getting inspections. The issue where we differ 
with various proposed legislation is whether we should make 
that step mandatory. We're worried about whether or not a 
mandatory inspection at this time, given the fact that the home 
inspection industry is largely unregulated by the Federal and 
State governments, would in fact provide less benefit than 
meets the eye.
    What we are doing though, is that we're expanding our 
efforts to try to encourage folks to get a home inspection and 
to take note of the fact that that's a very important part of 
the home buying process.
    Relative to the legislation that you referenced, we agree, 
foreclosure avoidance is the most effective way of addressing 
this set of issues. We wouldn't be here today if we weren't 
moving ahead in our foreclosure efforts. My concern is that the 
particular form of legislation will make the same mistake that 
got us into part of this problem in the beginning. We had this 
activity in the past called the assignment program. That 
program has led to a mass of foreclosures and building up of 
debt that led to many of the problems with the FHA earlier in 
the decade.
    We have foreclosure tools that were legislated and guided 
through legislation enacted in 1996. Those foreclosure 
avoidance tools are hitting their stride. We're doing more 
foreclosure avoidance work now than we ever did under the 
previous regime, and we think we're making significant progress 
in that arena. I think it's something like 1,500 foreclosures a 
month are being avoided, and over 1,200 of those are homeowners 
who are getting exactly the kind of benefit you're suggesting, 
of being able to have forgiveness on their loans or some extra 
benefit to keep them in their home and avoid the costly 
foreclosure process.
    Mr. Ose. Would the gentlelady yield for a moment?
    With respect to Ms. Schakowsky's question about home 
inspection, are there not States in the United States that 
actually already require that? For instance, in California. Do 
we have any evidence as to the differential default rate that 
might follow on accordingly? I'd be happy to take it in 
writing.
    Mr. Apgar. We could look at the State law as to whether 
they require inspections. Again, most States are silent on that 
matter. As a matter of fact, most States do almost no 
regulation of the home inspection industry. Our concern is 
whether you should mandate this, not whether it's a highly 
desirable activity.
    Again, the Banking Committee took this matter up last time. 
This proposal appeared in the Lazio Home Ownership bill, and it 
was removed, because again, the conclusion, at least of that 
committee at that time, was this was not an effective way to 
address the problem.
    Mr. Ose. The Chair would provide the distinguished 
gentlelady from Illinois a couple more minutes, having taken 
your time. I yield back.
    Ms. Schakowsky. I just have one comment, thank you, Mr. 
Chairman. It seems to me that the data does not bear out that 
there have been effective foreclosure avoidance measures. If we 
look at the foreclosure rate increase in 1997, for example, 15 
percent, and in 1998, an additional 7 percent increase in FHA 
foreclosures. So it seems to me we certainly have some distance 
to go.
    Mr. Apgar. Fair enough.
    Mr. Ose. The Chair recognizes the distinguished Member from 
Florida, Mr. Mica.
    Mr. Mica. Thank you, Mr. Chairman.
    I have a couple of questions. First of all, we're in a very 
good economy, I believe, last I checked. Dispute as to who gets 
credit for it. I think that as part of those that help come and 
balance the budget, make people work instead of being on the 
public dole.
    But in any event, I think most of us agree we're in a 
pretty good economy, right, sir?
    Mr. Apgar. Overall, the economy is doing very well, yes.
    Mr. Mica. In 1996, there were just under 61,000 
foreclosures of your properties. In 1997, that grew by 10,000 
to 71,000. In 1998, it was up another 5,000. It's gone up 
15,000 in 2 years.
    To what do you attribute the dramatic rise in foreclosures 
in 2 years of basic prosperity?
    Mr. Apgar. As was suggested earlier, the foreclosures that 
are occurring today are often among properties that, despite 
the good economy, their current value isn't what the prices 
were when they were originally purchased. The largest increase 
in our foreclosures is coming out of California, which even 
though the California economy is beginning to improve, it 
hasn't improved enough to move houses out of this foreclosure 
problem.
    In addition, most of those foreclosures are coming out a 
particular HUD program, the adjustable rate mortgage program. 
There we have made significant changes to improve the overall 
quality of our underwriting of the adjustable rate mortgage 
program.
    Mr. Mica. Even with adjustable rate mortgages, the payments 
actually would have been going down in this economy, because 
the interest rates have been dropping. They've dropped to 
historic lows in that pattern, so people's payments, I know it 
takes a while for it to kick in.
    Mr. Apgar. Yes. The point I was making there is, there was 
a significant increase in foreclosures in California, mostly 
linked to this ARMS program. We've made adjustments to improve 
the overall underwriting in that program. Again, the California 
economy was slow to recover.
    I'd just like to say one thing about the overall economy, 
because of course, in other budget discussions we've talked 
about this. This is really a two-tiered economy, in which many 
are doing very well, but the inner cities and our core areas 
are not all benefiting. We have the highest worst case needs 
housing situation in the Nation's history. We have significant 
under-utilized resources in terms of high unemployment in our 
inner cities.
    So while the economy is working for most, in the 
neighborhoods that we serve, the economic recovery is not 
nearly as strong as your question suggests.
    Mr. Mica. If you're having a fairly dramatic increase in 
the number of people who are being foreclosed upon, and you 
said you had pinpointed it to some of these California 
properties, is there anything, have you done anything, any kind 
of review or profile of the individuals who are defaulting?
    Mr. Apgar. We have statistics on the characteristics of our 
defaults, the characteristics of default rates by program type, 
by characteristics of the borrower and the like, yes.
    Mr. Mica. Is anything done to implement changes in lending 
practices? Have you instituted things to try to mitigate the 
number of folks who get into that situation?
    Mr. Apgar. Actually, in respect to the ARMS program, we did 
significantly change the underwriting of that program in 
February of last year. We're already seeing a substantial 
reduction in our ARMS business. We think that's good, we think 
some lenders may have been abusing that program. That's why we 
took that action.
    Mr. Mica. Is that your loss mitigation program?
    Mr. Apgar. No, in terms of the loss mitigation program----
    Mr. Mica. Could you explain what loss mitigation is?
    Mr. Apgar. Essentially, loss mitigation is a term that says 
that trying to avoid the losses to a mortgage lender, it's a 
little cold and impersonal term. What we're really talking 
about is how we keep homeowners in their homes. That's the key. 
In many instances, it costs more money to everybody, certainly 
the homeowner and often the FDA, to foreclose.
    We had a series of legislation guided policies that we put 
in the books in 1996. In 1997, we did 5,000 cases of loss 
mitigation under that guidance. We did 10,000 last year. We're 
projecting we're doing 20,000 this year. Again, the vast 
majority of those cases are places where we're able to 
intercede with the property owner and the mortgage lender, 
restructure the mortgage, extend the term, write down the note 
rate, do any one of those things to make it so that that 
homeowner can stay put.
    Even though that costs the fund money, it saves us money by 
avoiding these costly foreclosure efforts.
    Mr. Mica. You said in California that there was a change in 
property values or you attributed some of the problems to the 
changes in property values. Is that also something that you've 
allowed for under any of these problems for adjustment, so 
that, again, the goal I think is to keep people in their 
property, avoid the cost of foreclosure, which is tremendous.
    Mr. Apgar. For sure.
    Mr. Mica. Plus the dislocation of the individuals.
    Mr. Apgar. There are many mortgages that are underwater in 
this sense, meaning that the value of the home is less than the 
outstanding mortgage balance. In those situations precisely is 
when you want to keep the homeowner there, because they can 
continue to use that home and benefit from it. As the economy 
and the prices improve in that area, they work their way out of 
this deficit situation.
    Mr. Mica. I can't understand exactly how you get into a 
situation when the property is worth a little bit less, the 
payments are less and the people are being foreclosed upon.
    Mr. Apgar. Because they can't meet the payments. And they 
can't sell the home.
    Mr. Mica. Then the problem is they can't sell the home, and 
recover any of the equity, or, well, there's no equity. But 
actually a net loss.
    Mr. Apgar. That's what I'm saying. It's underwater. The 
outstanding mortgage balance is higher than what they can sell 
the home for.
    Mr. Mica. And do you have any way to again, specifically, 
to deal with that problem?
    Mr. Apgar. Yes, we can write the mortgage balance down. 
That's called a partial payment of claim, in which we pay off 
the lender for a share of the mortgage balance.
    Mr. Mica. Do you take a hit?
    Mr. Apgar. We take a hit on the fund to do that. We can 
restructure the mortgage by extending the term, changing the 
interest rate, or if there is mortgage debt owed, I mean, 
payments owed, we can forbear, i.e., we can forgive those 
payments and let the owner pick up fresh with where they are.
    Mr. Mica. Do you have any recourse if the property is sold 
later at an additional profit?
    Mr. Apgar. No. It's a transaction that benefits the home 
buyer, so we don't have any recovery mechanisms against the 
lender.
    Mr. Mica. Thank you.
    Mr. Apgar. We do? I'm sorry. We do place a second lien for 
that amount to secure our interests there. But it's not with 
the original lender, not related to the original lender, but an 
obligation of the homeowner to pay.
    Mr. Ose. The Chair will entertain a second round of 
questions if the Members wish.
    Mr. Kucinich. Again, Mr. Chairman, as I indicated earlier 
to Mr. Burton, HUD is demonstrating willingness to try to work 
to solve problems when they're given a definitive challenge. 
And I'm hopeful that the other areas that have been identified 
here, you'll also be given the opportunity to rise to the 
occasion, as you did on the homeless program.
    Mr. Apgar. Thank you. Our new management and marketing 
contract approach goes on line next week. We perceive that it 
will in fact improve on the record substantially.
    Again, we have evidence from the pilots that we ran that we 
can substantially reduce our time of holding the inventory and 
raise our yield. So we're very optimistic that this new 
approach will yield great benefits.
    Mr. Ose. The gentlelady is recognized.
    Ms. Schakowsky. Thank you. I have just one more quick 
question, Mr. Chairman.
    That is, I have been told that Secretary Cuomo has said to 
housing advocates that there are no inspectors, housing 
inspectors, in the United States. What could he possibly have 
meant by that?
    Mr. Apgar. I'm not sure, since he's so knowledgeable about 
the housing industry, that must be a misstatement. Because we 
meet with various groups, including various associations that 
represent home inspectors, all the time. So we understand that 
there are home inspectors working in our properties and 
elsewhere.
    Ms. Schakowsky. So your assumption is that was a 
misstatement?
    Mr. Apgar. Yes. It certainly is not factually correct. It 
would be hard to imagine that he would make that error.
    Mr. Mica [presiding]. Mr. Apgar, just a quick question. 
Maybe you can refresh me, and you may have already given this 
information to the committee.
    You have 76,000 foreclosures. What percentage of 
foreclosures is that out of your total?
    Mr. Apgar. We have close to 7 million loans outstanding. So 
that's approximately 1 percent of all the loans that are 
outstanding in the FHA insured portfolio.
    Mr. Mica. How does that compare to conventional lenders?
    Mr. Apgar. In terms of our outstanding foreclosures?
    Mr. Mica. Yes.
    Mr. Apgar. We anticipate that our foreclosures are going to 
be a higher share. That's how the program was designed. We take 
risks on borrowers that the private sector wouldn't touch. If 
they are the kind of safe, less risky borrower, then they would 
in fact go to the private sector, they wouldn't foreclose as 
often and they're well served by the private sector.
    Mr. Mica. One of the problems that has arisen in the past 
is that you've had some serious difficulties with contractors. 
I'm interested in how HUD will ensure that contractors who 
performed poorly in the past, have poor performance records, 
will not be working as subcontractors under the M&M contracts.
    Mr. Apgar. First of all, the competitive bidding process 
that we had for the national contract had over 170 bidders. 
People that had poor records with us in the past, that was 
taken into account. And the largest share of the work will be 
done by these firms themselves. They already have opened 56 
offices around the country, hired over 600 people. So the 
direct contractor will do much of the work. Subcontractor 
relationships will exist in some of the outlying areas. We will 
monitor those closely.
    With respect to contractor monitoring, again, this contract 
is a new vehicle that was created out of the pilots. The 
contracting mechanism of the pilot was carefully reviewed by 
the Inspector General. They gave us a list of recommended 
changes to the contract, and we embedded many of them in the 
new structure.
    For example, the issue of pass-through costs, which is a 
very difficult monitoring area, where we had to decide whether 
costs coming through from the contractor was a legitimate cost. 
Under the new contracting mechanism, these costs are paid for 
out of the contractor's pocket. They only get paid, not for 
incurring costs of maintaining the properties, but only get 
paid to the extent to which they are able to sell the 
properties and return funds to the FHA.
    We think this will encourage them to sell the homes quickly 
and to maintain them to preserve the market value.
    Mr. Mica. Do you have contractors that are monitoring 
contractors?
    Mr. Apgar. Under the new setup, we will monitor through a 
variety of ways. Of all the records that the contractor 
retains, 10 percent will be reviewed, 10 percent of all the 
properties they have under inventory will be inspected. Those 
functions will be handled by a contractor.
    Again, these are not highly judgmental functions. We're 
asking people to go out and, relative to a standard checklist, 
identify whether the property meets certain standards or 
whether the files are in place.
    It's our job as HUD to review those monitoring reports and 
then take the action. So all the action steps will be taken by 
our HUD staff.
    Mr. Mica. And your HUD staff and your professional staff is 
monitoring monitors, so to speak, they're conducting the top 
level of oversight?
    Mr. Apgar. We do quality assurance on all levels of our 
contracting. There was a question made earlier about whether or 
not our HUD staff is adequate for the task, and where our 
staffing numbers came from. Again, this was the place where the 
IG's testimony was misleading. We estimate we will have in 
effect 143 people, full time equivalents, doing our monitoring 
work.
    The estimate of how many we needed was the result of a 
careful workload assessment done by Booz, Allen and Hamilton. 
If anything, their early report suggests that we have too many 
people doing this job now. But because we want to be cautious, 
we've kept the fuller level of oversight.
    Recognize that the numbers that we have in the field today 
are doing a lot of functions which will be shifted to 
contractors under the new system.
    Mr. Mica. Your system to monitor the work of the 
contractors is important. And you've discussed how that would 
be in place. What's the progress for having those monitors in 
place as far as contracts? Are all of those positions filled, 
or those slots filled?
    Mr. Apgar. Yes, they are. That work will be done out of the 
home ownership centers.
    Mr. Mica. All the monitors and contractors?
    Mr. Apgar. They'll be supported by field staff which are 
located in field offices around the country, and again, those 
people are working today for us, but they'll be working in a 
new role starting Monday.
    Mr. Mica. It's my understanding that you testified to Mr. 
Burton or told him that in your previous testimony here that 
you weren't lax in overseeing contractors and contractor 
problems were very limited. However, you just told me that poor 
performing contractors were being precluded from new bids.
    Mr. Apgar. That's correct. There are some. We've taken 
sanctions against them in the past and will continue to take 
actions against them in the future.
    Mr. Mica. What percentage are we looking at of those that 
fall into that poor performing category?
    Mr. Apgar. I think last year we took action against 8 or 10 
contracts, terminated their contracts. A larger number of them, 
we put them on notice for poor performance. I think last year 
we may have had as many as 150 contractors. The essence of the 
new approach is to have fewer folks to monitor. Again, we have 
a higher quality, I believe, of contracting agent now, because 
we're able to be more selective.
    Mr. Mica. I have no additional questions at this time. Do 
any of the other Members?
    We want to thank you for your testimony and for working 
with our committee today. We have no further questions and 
excuse you at this time.
    [Additional questions for the record follow:]

    [GRAPHIC] [TIFF OMITTED] T9984.094
    
    [GRAPHIC] [TIFF OMITTED] T9984.095
    
    [GRAPHIC] [TIFF OMITTED] T9984.096
    
    [GRAPHIC] [TIFF OMITTED] T9984.097
    
    Mr. Mica. I'd like to call now the third and final panel. 
If I may, I'd like to introduce witnesses as they come froward.
    On our third panel, we have Ms. Gale Cincotta, co-founder 
and executive director of the National Training and Information 
Center, also known as NTIC, in Chicago. The NTIC is a national 
resource center on urban issues. Over the past 20 years, Ms. 
Cincotta has received numerous achievement awards for 
outstanding work on such issues as human rights, poverty and 
community revitalization.
    Accompanying her on the panel is Grace Jackson, who is from 
the Chicago area. She is a board member and past president of 
the Roseland Home Ownership Center of Roseland Neighborhood 
Housing Services. Throughout the 1970's and 1980's, Ms. Jackson 
was a neighborhood leader for the Greater Roseland 
organization, and played an important role in the fight against 
insurance redlining and FHA lending abuses. We welcome you to 
the panel and look forward to your testimony.
    We also are pleased to have Mr. Carl Edwards, a fellow 
Hoosier of the chairman's, with us today. Mr. Edwards was born 
in Indianapolis, where he's lived for the past 26 years. He 
volunteers his time as president of the Fletcher-Lipincott 
Neighborhood organization. He's also a member of the Brookside 
Park advisory committee and serves on the board of the Near 
Eastside community organization. I'd like to thank you, Mr. 
Edwards, for coming, and our other panelists for being with us 
today. We look forward to your testimony.
    These particular witnesses testified 1 year ago on April 
1st, 1998, before the Banking Subcommittee on Housing chaired 
by Mr. Lazio. It's my understanding that you came before this 
panel a year ago. In essence, this group testified that FHA 
property disposition problems were contributing to, rather than 
alleviating, urban blight and deterioration. They have been 
asked to provide our committee with an update today on the 
status of issues that they raised at that time, almost 1 year 
ago.
    We also have Mr. Stanley Czerwinski from the General 
Accounting Office who is going to join us for the panel in 
testimony. He is the Associate Director of the Division on 
Resources, Community and Economic Development at the General 
Accounting Office. I'd like to welcome him and thank him for 
his participation.
    It's part of the responsibility of this committee of 
Congress to swear in our witnesses, which I'll do in a moment. 
I understand we have one additional witness, who has been 
involved in homeless area programs. We have Mr. Brian Davis, 
director of the Northeast Ohio Coalition for the Homeless. He's 
going to testify about problems that he's experienced in 
dealing with that problem.
    I think that completes this third and final panel. I'd like 
to welcome each of you. This is an investigative committee of 
Congress, and it is our custom and practice and also 
requirement that we swear in our witnesses.
    [Witnesses sworn.]
    Mr. Mica. Welcome to our panel today. I'm pleased to 
recognize Ms. Gale Cincotta, co-founder and executive director 
of the National Training and Information Center from Chicago 
for your testimony and opening statement.
    Also I might tell all of the panelists, if you have a 
lengthy statement that is written or prepared, and you'd like 
it submitted as part of the record, we will do so at request by 
unanimous consent of the committee.
    Ms. Cincotta, you are recognized now, and you will see the 
little light go on here for 5 minutes. You'll get a little 
warning there in red.
    Thank you.

   STATEMENTS OF GALE CINCOTTA, EXECUTIVE DIRECTOR, NATIONAL 
   TRAINING AND INFORMATION CENTER, CHICAGO; GRACE JACKSON, 
  VOLUNTEER, ROSELAND NEIGHBORHOOD HOUSING SERVICES, CHICAGO; 
   CARL EDWARDS, PRESIDENT, ORGANIZATION FOR A NEW EASTSIDE, 
 INDIANAPOLIS; BRIAN DAVIS, DIRECTOR, NORTHEAST OHIO COALITION 
 FOR THE HOMELESS; AND STANLEY CZERWINSKI, ASSOCIATE DIRECTOR, 
 RESOURCES, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Ms. Cincotta. I have testimony I've submitted, and I'm also 
submitting other material for the record.
    Mr. Mica. Without objection, your full testimony will be 
made part of the record.
    Ms. Cincotta. While Mr. Apgar is still in the room, he 
should remember September 9th, I had Ira Peppercorn from his 
office and Charles Gardner from the regional office in our 
office at NTIC in Chicago, where they said, and he has said in 
his office, there are no inspectors in the United States. We 
have to then therefore maybe get appraisers to do the 
inspections.
    They came with a thick thing like this of paper saying, 
now, this is what the appraisers would have to do. I know that 
after they left their office, and there were NHS people, 
myself, our staff, et cetera, that they took it to some 
lenders. The lenders called me the next day and told me, and 
even showed me exactly what they had left in our office.
    So he is lying to you under oath that they have not tried 
to get appraisers to do inspections. And he is either lying to 
me or lying to you when he says there are enough inspectors in 
the country.
    What bothered me today was how much time they spent trying 
to trash a story that was on television, on one building out of 
the thousands of vacant buildings----
    Mr. Kucinich. Excuse me, Mr. Chairman.
    Mr. Mica. Yes?
    Mr. Kucinich. I'm a little bit concerned about a statement 
the witness made. I know her, I respect her, I worked with her 
years ago when she was working with Monsignor Boroni. But when 
somebody makes a charge in front of a committee like that, I'm 
kind of uneasy about hearing those charges made.
    Mr. Mica. Well, the witness is free to express herself.
    Ms. Cincotta. I'm under oath and he's here. Bill, didn't 
you tell us that, or are you going to sit there and lie?
    Mr. Mica. Ma'am, we don't want to get into an exchange, but 
you're welcome to testify and comment as best you can in your 
own words. And we do appreciate that.
    Ms. Cincotta. But it's hard to sit that long, having been 
involved with this, and again, to go after something that was 
on television on one building out of 76,000. And on that 
building, again, the loan was insured by FHA, the tax bill was 
billed to them. The home was foreclosed on, and now it's part 
of an FHA program. Nobody's been in that building since 
September.
    But they take any criticism and try and find something to 
get you, rather than, that is a problem. This is a list, and I 
want to submit this, of over 800 foreclosed buildings, FHA 
buildings in Chicago that we got recently. They found out we 
had this when another city, I think it was Carl's city, asked 
for the same thing. They didn't give it to them, and they have 
shut it down for us getting it in Chicago. There are over 800 
homes in Chicago that they have on this thing, addresses, et 
cetera.
    So what I'm trying to say, the frustration of your own 
Government, that you expect to do good for you and do better, 
lies through their teeth, hides the facts, and instead of 
working to solve the problem, wants to pretend there is no 
problem, wants to ignore this. And what we've been facing for 
years upon years, of fighting once to get FHA in, we didn't get 
FHA originally in any of the cities, because it was started as 
a new construction program.
    Then ever since then, fighting to clean it up so it would 
function well. It led us to try and get the Community 
Reinvestment Act passed, that our older neighborhoods, they 
need mortgages, they need the Government to protect them, they 
need the Community Reinvestment Act. They don't need hundreds 
upon hundreds of people being put out, promised the American 
dream and being put out of their home over and over and over 
again.
    Seventy-six thousand foreclosures, if you look up on it, 
it's the history of my life, it starts around 1972 when NPA was 
formed. There were 63,000 foreclosures in 1973. One of the 
things that worked, and when the numbers went down was when 
Senator Proxmire was head of the Banking Committee. There was 
something that was put in called 518 (b) and (d), that any 
home, older existing home, sold on an FHA mortgage, if within 
the first year anything went wrong with the systems or roofs or 
porches, there could be reimbursement.
    That worked excellent, because you needed something like 
that. They needed the inspections before that. But you can see 
I'm looking at this, at that time in history, that worked.
    It's not a new home with a warranty. There have to be 
different things, a new home has a warranty, I guess with the 
new construction, 10 years. An older, existing home should have 
a full inspection and a warranty. I know you don't like to 
spend money, but I think you spend money in the long run after 
the fact.
    The other thing, there's something pending called H.R. 595, 
Mortgage Assistance Program, where if people have a chance, 
within 1 year and get some assistance, the majority of them 
will be able to keep their homes.
    If you want to house American citizens in existing 
construction and older buildings, you have to figure out a way 
to protect them. You can't do like Mr. Apgar and Mr. Cuomo, 
shuck and jive, lie through their teeth, change the story, do 
this, do that. Why don't they bite the bullet and do what's 
right? It won't cost that much, in the long run, it will be 
cheaper.
    But they're really happy when they tweak you and try and 
make you look bad. But I think we're talking about families 
that we see every day in our neighborhoods that shouldn't be 
offended by their own Government. They trust their Government.
    I did bring a list, I thought we were going to be able to 
put it up, of all the foreclosures in Chicago, so that maybe by 
seeing the addresses, address by address by address, it could 
give some urgency to what's happening. And if you get those 
folks back here to testify, why don't they come up with 
solutions rather than trying to hide the problem over and over 
and over again?
    If you don't do anything, they smirk at you behind your 
back, at me, et cetera. Nothing happens good for the citizens.
    [The prepared statement of Ms. Cincotta follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.098
    
    [GRAPHIC] [TIFF OMITTED] T9984.099
    
    [GRAPHIC] [TIFF OMITTED] T9984.100
    
    [GRAPHIC] [TIFF OMITTED] T9984.101
    
    Mr. Mica. Thank you for your testimony.
    I'd like to recognize Mr. Edwards, who's president of the 
New Eastside, Indianapolis.
    Mr. Edwards. Thank you.
    First of all, I'd like to thank you, Mr. Chairman, and the 
other members of this committee, for holding this hearing 
today, because it gives me the opportunity to let you know my 
perspective on how things are going.
    I've heard a lot of talk today about statistics and 
numbers, and they're very shallow and very cold. This is a face 
that's been affected directly by how FHA and HUD is affecting 
our communities.
    Nine years ago, I was a very young man. I purchased a home. 
It was an FHA insured loan. I dealt with a realtor that 
obviously didn't have my best interests in mind. I was under 
the impression the home that I had purchased had an inspection 
done on it. It was actually termed an appraisal.
    FHA appraisals are fairly thorough. It was done by an 
inspection service. I didn't know any better, like many people 
in this country who buy their first home, didn't know any 
better.
    I bought this house, and it turned up to have several 
mechanical problems, such as heating and cooling and plumbing 
and hot water heater and a leaky roof. I heard a lot of talk 
today about the economy is good and the bankruptcy rates are 
high, and the segment that FHA is serving, which is me, they're 
high risk people.
    Well, I'm one of those people who was 18 years old and had 
his own business and had his life together, but had his life 
destroyed by a faulty program. Had there been a mandatory 
inspection in place, had there been this inspection in place, I 
may not have bought this home, or I would have gone into this 
purchase knowing full well what was ahead of me.
    But that wasn't given to me. I bought a house that I 
thought had a Federal stamp of approval on it, and lo and 
behold, 2 years later, I was homeless. Has anyone been homeless 
in this room? Does anyone know what it feels like to actually 
lose your home? It's not a very pleasant feeling, is it.
    We had the opportunity to bring Charles Gardner from HUD in 
last year. He's the Regional Director for HUD in our area. We 
had a large public meeting with over 100 in attendance. We told 
some stories about properties and nightmares that were in our 
community, one of them being a house that had been vacant for 
several years that had eventually, after several things 
happening to it, caught on fire.
    Mrs. Debbie Thompson of Indianapolis got up and gave a very 
emotional testimony, with tears in her eyes, spoke of how she 
woke up at 4 a.m., to the smell of smoke, not knowing if it was 
her house, wondering if her children were OK, and talking about 
the lasting emotional effects that this has had on her family.
    Charles Gardner and the other officials from HUD listened 
to her testimony. Toward the end of her testimony, she held a 
picture up and showed the audience and Mr. Gardner and the 
others a picture that her 8 year old daughter had drawn of a 
house, a two story house with flames coming out of it, teeth 
and arms. She made the comment that, my daughter drew this for 
me before I came here today and said, Mommy, I want you to show 
these people what this house has done to our lives. 
Consequently, their house was damaged by smoke and water, not 
to mention the emotional effects to their family.
    One of the things we asked Mr. Gardner and the other people 
from HUD that day was, will they process the claim to have this 
house, to have this claim expedited. Mr. Gardner agreed to do 
that. It's 9 months later, and they've not seen 1 penny toward 
this claim.
    You know, people in the community are on the front line day 
in and day out. We have to deal with what is going on in our 
own backyard. I've seen the effects of abandoned houses in my 
community. You see it, it's classic, I don't care what city 
you're in, you see one abandoned house, in my example, one 
abandoned HUD house. Three people that live in that community 
for over 20 years got fed up with dealing with this particular 
house that I spoke of that caught on fire. As I said earlier, 
it sat vacant for almost, I would say almost 3 years before it 
caught on fire, attracted children, attracted vandalism, 
attracted drugs.
    Several homeowners got fed up with dealing with that, got 
fed up with dealing with fighting the system, and moved, as so 
many people do. I've been in my community for almost 26 years, 
I've lived in Indianapolis all of my life. I like where I live, 
but I too am getting tired and fed up. I traveled to Washington 
last year and testified, hoping that my experience would have a 
positive effect on HUD, and here I am again today.
    That really about sums up my testimony. I just have one 
other comment I'd like to make. I'd like to know, is it going 
to take an act of Congress to get this check processed for the 
Thompson family? That would be a good thing to know.
    Thank you.
    [The prepared statement of Mr. Edwards follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.102
    
    [GRAPHIC] [TIFF OMITTED] T9984.103
    
    Mr. Mica. Thank you, Mr. Edwards. That's why we're here, to 
pass acts of Congress, to try to get things done. Sometimes 
it's very frustrating.
    I'd like to recognize now Grace Jackson, who's a volunteer 
with the Roseland Neighborhood Housing Services in Chicago. 
You're recognized, ma'am, and welcome.
    Ms. Jackson. Thank you for having us here. My name is Grace 
Jackson, and I've lived in the Roseland area of Chicago almost 
30 years.
    But there's something that I'd like to say before I do my 
testimony, if it's all right. I heard some gobbledy-gook about 
HUD keeping the houses 60 days and 6 months and 30 days and 45 
days before they're sold. There's a house by me that has been 
vacant and people have been put out of it nine times. It's 
still sitting by me.
    But in the meantime, it has been rehabbed now and will be 
sold. But for 3 years, HUD had it under this real estate 
company who was supposed to take care of it, cut the grass, 
shovel the snow, make sure that the windows and doors were 
boarded up. Nobody, in all this time that I took care of this 
house, for the whole 3 years, I think that's about 36 months, 
came out and did not one mumbling thing. So let nobody tell you 
that they take care of vacant property, unless they started it 
yesterday. Because it has not been done.
    On my block now there are five vacant houses. In a two 
block radius, they do nothing. We, as the block club members, 
get out and make sure it stays boarded, make sure the grass 
stays cut, because who wants all these weeds. So if your 
insurance man happens to come by, and you happen to get a 
letter, and he tells you your insurance has been canceled, we 
can't have that. Most of us who are getting to be senior 
adults, we can't afford it. So we need our insurance that we 
have.
    They don't take care of the property.
    I also heard something, please give me enough time, he lost 
some of his, I'll take his, about this foreclosure. I've heard 
a lot of excuses on that, why this and why that and why some 
people are foreclosed. We do have some people probably that do 
not take care, because they still have that mentality that 
``I'm a renter.'' You might have that.
    I'm not going there. I'm going here. When people buy that 
home, and there's not a mandatory inspection, and they try as 
hard as they can, when you've got a furnace to replace and 
you've got a roof to replace, and you've got electrical to 
replace, you cannot, on what you make, and I've heard this 
said, I didn't like it, but I listened, because it's true, 
African-Americans and Hispanics, some of them make pretty good, 
but some of them don't.
    I got an FHA loan, so I'm not fighting this, it's needed 
for a whole bunch of homeowners, if you ever want to have that 
American dream. But don't tell me that you can have the 
American dream and pay for all the rotten things that are in 
the house, when you're trying to pay a house note, you're 
trying to pay a gas bill, you're trying to pay for the furnace, 
trying to get the windows fixed, trying to pay for the roof. 
That's another reason why we have a lot of foreclosure.
    When I was here last year, I told you all that at one time, 
we had the distinction of being on the list that we had more 
foreclosures than anybody. And I said, well, I'm not bragging, 
I said, take that back, we're back on the road to having the 
distinction of having more foreclosures again. I know this is 
the reason why this is about.
    I'd like to share two stories with you how FHA has failed 
families in Roseland. Mrs. P, she's a working mother of four, 
she bought a home with an FHA insured mortgage in Roseland. A 
few weeks after moving, she was told by a Chicago policeman 
that the building she had just bought was supposed to be 
demolished. The building had previously been foreclosed in June 
1995, and HUD paid the lender $85,000. HUD then sold the house 
3 years later for $26,000, which means the property was vacated 
for 3 years and represented a loss of a good deal of money to 
the Government.
    The realtor then sold the house to Mrs. P. for $122,000. 
Mrs. P. and her four children were living in the home when the 
water actually came pouring through the roof, a leak when it 
rains. Only 30 percent of the electric is working, and all the 
major systems are not working. Mrs. P. and her children are 
ill, and she will likely lose this home. I would have given it 
back to them in the first place.
    Once again, the neighbors will be looking at an open and 
abandoned HUD home.
    Then we had another one. Mr. S. purchased a home with an 
FHA loan from a realtor. The family moved in but the house was 
falling down. He could not afford all the repairs, so he used 
an extension cord to go get him some heat from next door.
    Everybody on the block is dismayed that the Federal 
Government would insure a loan on such a house. Houses such as 
these are a bad investment for the Government and put the 
health and finances of the family and children in danger.
    I understand that March 29th, HUD will begin having a 
private company taking care of that abandoned property. While 
we appreciate this effort on the part of HUD, I have two 
questions for Secretary Andrew Cuomo. How does privatizing the 
management of abandoned property keep the building from 
becoming abandoned in the first place? The best way to address 
the issue of abandoned HUD homes is to prevent FHA foreclosure 
in the first place.
    We need to make inspection mandatory on all homes sold on 
FHA loans and reform the way in which FHA appraisals are done. 
They'll come by and look at your house up and down the street 
and say, oh, this house is fine. I've seen this done. And they 
go around the back and come back around and get in their car 
and tell somebody, and you know what happens, they go right 
ahead. These are unscrupulous, it's not HUD, now, and it's not 
FHA, I didn't say that. This is the unscrupulous realtors and 
mortgage companies. They'll take you around the corner, around 
the house and say, this is fine. Then you move in and you turn 
the heat on in September, your furnace is out.
    I thank you all for having us, and I hope and pray this is 
the last time we have to be fussing with HUD. We're tired of 
the problems, and you all as Congressmen and we as grass roots 
citizens ought to be able somewhere to sit down in a room and 
come up with a solution.
    Thank you.
    [The prepared statement of Ms. Jackson follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.104
    
    [GRAPHIC] [TIFF OMITTED] T9984.105
    
    [GRAPHIC] [TIFF OMITTED] T9984.106
    
    Mr. Burton [presiding]. Thank you, Ms. Jackson, for your 
very informative testimony.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    I would like to thank the House Government Reform Committee 
chairman, Dan Burton, for convening this hearing today that 
includes a panel on the effectiveness of HUD's programs, 
especially as its relates in my case to homeless persons.
    It is a pleasure for me to testify in front of the 
committee that includes Congressman Dennis Kucinich, who has 
been a tireless advocate on behalf of homeless persons, and the 
organizations that provide services to them in my community.
    Today I would like to discuss the status of the local 
continuum of care system for homeless persons in Cleveland, OH, 
and the surrounding Cuyahoga County. In this context, I will 
cite a particular problem we have had with the way the 
Department of Housing and Urban Development has handled a 
program operated by the Salvation Army, and give a number of 
recommendations on how this process can be improved.
    The Salvation Army PASS program is one of the most 
effective programs in Cleveland, and is ranked as the highest 
priority for renewal funding in the 1998 community supportive 
housing grant. But because someone checked the wrong box on 
their application, they were denied funding.
    As you know, the supportive housing grant is intended to 
help homeless people move into some degree of stability. It is 
not an emergency service, it is longer term stability. We have 
recently learned that HUD is reviewing the Cleveland appeal, 
and there should be some resolution of this decision in the 
next few weeks.
    HUD is a valuable caretaker of the appropriations from 
Congress. But we're just asking that they be more sensitive to 
the priorities in our community. The Federal dollars extended 
to PASS and other organizations allowed 200 people over the 
last 2 years to move into some degree of stability. We 
recommend a few changes to the HUD funding process which would 
maintain community oversight of the funding and allow HUD to 
act as an independent adjudicator to keep some of the local 
community from over-politicizing the process, or strain from 
the goal of moving homeless people into stable living 
arrangements.
    In Cuyahoga County, we currently see about 22,000 homeless 
people on the streets every year. That's about 3,000 to 5,000 
every night. In 1998, according to the U.S. Conference of 
Mayors report, we saw a 15 percent increase in requests for 
shelter attributed to the changes in the welfare system and the 
lack of a livable wage job in the city.
    My agency, which does not receive HUD funding, but 
represents the interests of homeless people in the funding 
process, has seen a number of problems with the current 
process. One of our biggest problems is that the funding for 
projects that are seeking a renewal of their HUD grant require 
a greater amount of local community allocation every year, 
which is stifling our ability to fill some of the gaps in 
services. In this last year, we have, if we just renewed all 
the projects that have been funded in the past, it would total 
about $11.1 million, and we have a pro rata share of the 
allocation of about $9.3 million.
    There are minor administrative problems with an application 
that has caused HUD to skip some projects. Many high priority, 
worthy projects in Cleveland have had to wait 1 or 2 years 
because of an error in their application. The local community 
cannot receive technical assistance from HUD on a direct basis. 
If HUD is a partner in the continuum, then this blackout period 
is a hardship to the local community.
    There need to be modest changes in the HUD homeless 
assistance grant, but we do not believe that H.R. 1073, the HUD 
block grant proposal, is the answer. We do recommend that 
renewal funding for programs that support people in permanent 
housing such as shelter plus care be funded for mainstream 
housing programs for low income individuals, and not the 
Stewart B. McKinney funds.
    We also urge you to create a separate NOFA, or urge HUD to 
create a separate NOFA for renewal applications and a separate 
one for new and expanding programs. And we urge some 
modification of Section 103 of the HUD Reform Act to allow 
better communication between HUD and the municipality in order 
to improve the application.
    We have a daunting task ahead of us, to assist those 
families who cannot successfully make the transition from 
welfare to work, and those who are trying to find housing for 
low income individuals in an environment of fewer affordable 
housing opportunities in our cities. HUD must be a partner in 
this undertaking by creating housing opportunities for homeless 
people, and should not be relegated to checking to see if boxes 
were correctly checked on a form.
    Because I probably won't get another chance, I'd like to 
thank the Members of Congress for the AmeriCorps VISTA program, 
which we take advantage of. That has had a tremendous impact on 
our agency and our community.
    Thank you.
    [The prepared statement of Mr. Davis follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.107
    
    [GRAPHIC] [TIFF OMITTED] T9984.108
    
    [GRAPHIC] [TIFF OMITTED] T9984.109
    
    [GRAPHIC] [TIFF OMITTED] T9984.110
    
    [GRAPHIC] [TIFF OMITTED] T9984.111
    
    [GRAPHIC] [TIFF OMITTED] T9984.112
    
    [GRAPHIC] [TIFF OMITTED] T9984.113
    
    [GRAPHIC] [TIFF OMITTED] T9984.114
    
    Mr. Burton. Thank you, Mr. Davis. We appreciate your being 
here with us.
    Mr. Czerwinski. Before you speak, the gentleman who spoke 
earlier from FHA, at the conclusion of our hearing, Mr. Apgar, 
I wonder if we might be able to have you either come back and 
say a few words in response to what they've said, or else meet 
with us back in the lounge. I'd like to have some of these 
questions answered that they raised. Would you do that?
    Mr. Apgar. Yes.
    Mr. Burton. Thank you.
    Mr. Czerwinski.
    Mr. Czerwinski. Thank you, Mr. Chairman.
    It's been a long hearing, so I promise to keep my comments 
very brief.
    Mr. Chairman and members of the committee, we are here 
today to provide information on GAO's work on homelessness. Up 
to 600,000 people may be homeless on any given night. The 
homeless population, once primarily transient males, now 
includes women, families with children, the mentally ill, and 
those dependent on drugs and alcohol.
    As a result, addressing the needs of the homeless has grown 
to a challenge that far exceeds the ability of State, local and 
private organizations. Recently, several Members of Congress, 
including you, Mr. Chairman, and you, Mr. Kucinich, have asked 
GAO to look into how well the Federal Government is helping 
these State, local and private entities address this need.
    At your request, we've initiated a body of work that I'd 
like to briefly summarize today. Last month, we completed a 
study that identified key Federal programs that can potentially 
serve homeless people. Our findings were 50 programs 
administered by 8 Federal agencies can serve the homeless. 
These include programs that are specifically targeted at the 
homeless, and those that are generally available to low income 
populations which include the homeless.
    Over $1.2 billion was spent in 1997 on programs that serve 
the homeless. About $215 billion went to general programs that 
include the homeless in the types of services they provide. The 
types of services they provide include housing, but it's much 
more than housing, it's health care, training, et cetera.
    We concluded that coordination is needed if these 50 
programs are to work effectively to achieve what they're 
supposed to. We also found there's a need for better program 
evaluation, especially common outcome measures among the eight 
Federal agencies.
    Finally, we believe that Federal agencies can make better 
use of the framework the Government Performance and Results Act 
provides for cross-cutting coordination and evaluation.
    Before I conclude my statement, Mr. Chairman, I'd like to 
spend a couple of minutes summarizing reviews we have planned 
or ongoing. First, this summer we plan to issue a report that 
complements the study I've just described of Federal programs. 
This report will provide case studies on some of the more 
successful efforts of States and localities. Specifically, 
we'll focus on how they coordinate their programs with one 
another and the Federal Government, and the use of outcome 
measures to improve their management of programs.
    Also this summer we plan to issue a report on HUD's 
Supportive Housing Program. This program recognizes that in 
addition to housing, many homeless people need services such as 
mental health, substance abuse, and employment assistance. Our 
review of over 1,200 providers will, among other things, show 
the types of housing and other services provided, the types of 
sources of funding--Federal and non-Federal--and the importance 
that the providers at the grass roots level place on Supportive 
Housing Programs from HUD.
    I'd like to close by talking about a study that I know has 
a special interest to you, Mr. Chairman, and Mr. Kucinich. As 
I've just described, there's a myriad of Federal programs that 
are supposed to partner with the State, local and private 
providers.
    Many of the grass roots providers are very dependent on 
Federal funds. At your request, later this year we plan to 
study how well the Federal, State, local and private priorities 
mesh, and how closely the Federal funding matches the 
priorities that are set at the grass roots level.
    This concludes my statement. We'll be pleased to answer any 
questions you may have.
    [The prepared statement of Mr. Czerwinski follows:]

    [GRAPHIC] [TIFF OMITTED] T9984.115
    
    [GRAPHIC] [TIFF OMITTED] T9984.116
    
    [GRAPHIC] [TIFF OMITTED] T9984.117
    
    [GRAPHIC] [TIFF OMITTED] T9984.118
    
    [GRAPHIC] [TIFF OMITTED] T9984.119
    
    [GRAPHIC] [TIFF OMITTED] T9984.120
    
    Mr. Burton. Thank you, Mr. Czerwinski.
    Mr. Edwards, I missed part of your testimony. You're from 
Indianapolis?
    Mr. Edwards. Yes, correct.
    Mr. Burton. You said that a home that FHA had taken 
possession of sat vacant for a long time, then it caught fire 
and burned down?
    Mr. Edwards. Yes.
    Mr. Burton. How long did it sit vacant?
    Mr. Edwards. It sat vacant, even after the fire, almost 3 
years. It was a real mystery for almost the first year as to 
who owned the house. Several letters were written to the city 
of Indianapolis. I was very uneducated on how to go about 
finding it, there was no marking on the house, there was no 
information on the house. I had no clue who to contact.
    Mr. Burton. Did you ever see anybody from HUD out there, or 
anybody from FHA?
    Mr. Edwards. No. I mean, I didn't watch the house 
continuously, but no, I didn't.
    Mr. Burton. Did you ever see any contractor come by and do 
any work on the house?
    Mr. Edwards. Yes, after we sent several letters to the 
mayor of Indianapolis.
    Mr. Burton. How long was that?
    Mr. Edwards. It took about 9 weeks, after a battery of 
letters went to Mayor Goldsmith.
    Mr. Burton. From all over the neighborhood?
    Mr. Edwards. Yes, and phone calls.
    Mr. Burton. Mayor Goldsmith apparently got hold of FHA?
    Mr. Edwards. The city of Indianapolis claimed the property 
the first time.
    Mr. Burton. So it wasn't FHA? It was the city of 
Indianapolis?
    Mr. Edwards. Correct.
    Mr. Burton. But it was an FHA house?
    Mr. Edwards. Correct.
    Mr. Burton. Where is this located?
    Mr. Edwards. On 16th Street, on the east side of 
Indianapolis.
    Mr. Burton. How far east?
    Mr. Edwards. It's in the 2800 block.
    Mr. Burton. That's not a bad area out there. I know where 
that is.
    Mr. Edwards. It's right behind me.
    Mr. Burton. And it sat there for 9 weeks, you got the city 
of Indianapolis to help you do something, but FHA didn't do 
anything?
    Mr. Edwards. Correct. The neighbors pitched in together and 
mowed the yard after they cleaned the property up, for a whole 
year, because once again, had we not done that, we would have 
had grass that was waist high.
    Mr. Burton. But it did sit vacant, even after the mayor got 
somebody out there?
    Mr. Edwards. Correct.
    Mr. Burton. For how long?
    Mr. Edwards. About a year and a half.
    Mr. Burton. A year and a half?
    Mr. Edwards. Yes.
    Mr. Burton. Did FHA ever come out, that you know?
    Mr. Edwards. They came out. We held a press conference last 
year, and shortly after we held that press conference, they 
paid some attention to the house at that point.
    Mr. Burton. What did they do?
    Mr. Edwards. Boarded it up and secured it.
    Mr. Burton. After a year and a half, they boarded it up?
    Mr. Edwards. Correct. The house had been boarded up prior, 
too, right after it became vacant, it had been boarded up.
    Mr. Burton. By whom?
    Mr. Edwards. I'm not sure exactly whom. All I know is that 
there were boards in place. They had been removed, however. An 
abandoned property tends to draw the worst of our children and 
vandals, however.
    Mr. Burton. But it sat a year and a half before it was re-
boarded up by FHA?
    Mr. Edwards. Yes, longer than that, actually.
    Mr. Burton. Did any other neighbors see FHA or that they 
had people out there?
    Mr. Edwards. To my knowledge, no.
    Mr. Burton. Did the property improve in quality or did it 
deteriorate?
    Mr. Edwards. No, the house caught on fire. Actually, it was 
being used, we had made several complaints to our local police 
department about it being used in the middle of the night for 
people, we're not quite sure what they were doing. We were told 
that it was actually being used for squatters, I guess 
squatters, people that would go in in the middle of the night. 
It was cold, and they would start a fire in the middle of the 
room and do their drugs, because there was paraphernalia 
inside.
    Mr. Burton. After the property burned down, the claim has 
not yet been settled?
    Mr. Edwards. The claim of the damage of the property owners 
to each side of the house, particularly the house to the east 
side of the house, the houses are in very close proximity to 
the abandoned HUD house that caught on fire.
    Mr. Burton. They were damaged by the fire, too?
    Mr. Edwards. Right. There was smoke damage and water damage 
to that property, as well as some exterior siding and water 
damage, that has to this day not been paid.
    Mr. Burton. Has anybody made a claim against FHA or asked 
FHA about that?
    Mr. Edwards. I'm sorry, sir?
    Mr. Burton. Has FHA been contacted?
    Mr. Edwards. Oh, yes, they have.
    Mr. Burton. Have they responded?
    Mr. Edwards. To my knowledge they have responded on many 
occasions. They want, from my understanding, they want the 
homeowners to do the out of pocket expenses up front and 
they'll be reimbursed. That was one understanding of it. 
Another one was they should file on their own homeowners, which 
to me is ludicrous. That's a mark against your homeowners. Why 
should they have to take that? Why should their homeowners be 
responsible for something that HUD should be responsible for?
    Mr. Burton. They would reimburse the insurance company, is 
what they're saying.
    Mr. Edwards. Right.
    Mr. Burton. And how long has it gone unpaid?
    Mr. Edwards. The fire happened November 1997.
    Mr. Burton. In 1997?
    Mr. Edwards. Yes, 1997.
    Mr. Burton. So it's been almost a year and a half.
    Mr. Edwards. Correct. We had Charles Gardner, the regional 
director of HUD, in Indianapolis in July, and got a commitment 
from him that he would personally process the claim. Still to 
this day we have not seen a penny.
    Mr. Burton. Ms. Jackson, we're paying $29 a day to maintain 
these homes, and you and your neighbors have been doing the 
work?
    Ms. Jackson. Right.
    Mr. Burton. Who else has been helping maintain them? Has 
FHA helped?
    Ms. Jackson. Please, sir, no, sir.
    Mr. Burton. Have they been paying you $29 a day?
    Ms. Jackson. Not a penny. We had a meeting at NTIC about 4 
or 5 years ago and talked to the real estate. I said, you don't 
want to do it, you're not sending anybody out. My and my 
girlfriend, she uses the gas mower, I pick up the trash and 
sweep, I'm kind of senior, and I can't do that. She has the 
snowblower, and I do all that.
    We keep it clean. But I did all the nailing. So I told the 
real estate person who was taking care of it. That's when he 
told me he was getting $43 a day. I said, well, you can give me 
$15 a week and I'll still cut the grass and so on. So my 
girlfriend said, no, you give me the $15.
    Mr. Burton. Was the real estate man that you're talking 
about, was he being paid by HUD?
    Ms. Jackson. By HUD. You said $29, he said $43.
    Mr. Burton. And he didn't do anything?
    Ms. Jackson. You weren't there, were you, sir?
    Mr. Burton. No, I wasn't there. And how long was this, 
about 3 years?
    Ms. Jackson. Three years.
    Mr. Burton. You took care of it for nothing and he was 
getting $43 per day?
    Mr. Burton. Per day. Sounds like a heck of a deal for him.
    Ms. Jackson. Isn't that a kick in the foot.
    Mr. Burton. That's a kick someplace else. Did anybody else 
ever come out there besides this fellow?
    Ms. Jackson. No. You know when they finally came, we had a, 
HUD came in the neighborhood, one of the ladies, she came out 
and was looking at property. She came by and saw it, and I 
said, I need to buy this house, because it's nice, I keep it up 
for you. When you're getting ready to sell it, sell it to me. 
She said, well, see the real estate man. So I called him, he 
said, you don't qualify, so I said, OK. That took care of that.
    Mr. Burton. Let me just ask you a couple more questions, 
then I'll yield to my friend Mr. Kucinich. I appreciate you 
inviting some of your constituents up here to talk about their 
problems.
    When Mayor Guiliani of New York came and testified, he 
talked about what he called the broken window theory. He said 
if one window is broken in a neighborhood and nobody fixes it, 
then other windows get broken out and eventually the entire 
neighborhood starts to run down. Did you folks find that to be 
the case?
    Ms. Jackson. Sure. That's the reason, if you don't get up, 
I can say this, it's my problem, I don't have nothing to do 
with it. But, sir, I would be lying. Because it has something 
to do with me. It affects me.
    Mr. Burton. It affects everybody in the neighborhood.
    Ms. Jackson. And if it affects me, it affects her and him 
and what have you. So we all have to go together.
    Mr. Burton. Let me just say, Mr. Waxman, in one of his 
comments, disputed the initial findings of HUD's Inspectors 
General that the contractors are not doing the job. He was 
evidently saying that the contractors were doing the job. 
Everything you guys are telling us backs up what the IG said, 
that they weren't doing their job.
    Ms. Jackson. I was almost to have a fit or something in 
this chair while he was talking. Because I was waiting on him. 
All of you up there so very nice, I was waiting on him. He's 
gone, but I had something for him, I'm sorry.
    Mr. Burton. He's still here, I think.
    Ms. Jackson. Well, bring him on. Bring him on.
    Mr. Burton. Excuse me for laughing, Ms. Jackson. You 
inspire great humor in me.
    Anybody else have a comment? Ms. Cincotta.
    Ms. Cincotta. The difference, like when Grace was talking 
to you about the house next door to her in 20 years has had 9 
FHA mortgages, all the people evicted, when she tried to buy 
it, they said, oh you can't, you own one, we only help 
homeowners. The only reason that building even existed enough 
that finally NHS of Chicago could get it and rehab it is 
because she took care of it.
    If you can imagine, nine FHA homeowners, we have helped 
home ownership. The frustration of the selling pitch that we're 
helping people, well, people, their lives, the community, are 
destroyed. We had a press conference about a year ago to 
dramatize what was happening. This one was one that HUD said 
they knew, at that time they had about an inch or so only. It 
was locked, the rest of the street was taken care of. We go to 
have the press conference.
    An older woman poked me on the shoulder and said, I live 
across the alley, and I've got to tell you what happened last 
night. The back is wide open, as you know. Three guys grabbed a 
12 year old there and raped her.
    You hear this every minute. Now, that was one they said 
they owned. They're paying somebody for it. And not only are 
they losing a great building, but the other things that happen 
in that building, like the rape of this young woman, like other 
things that happen over and over again. They want to pretend 
it's not their problem.
    The sad part is they represent us and we're paying their 
salaries. And they're still messing us over.
    Mr. Burton. We're going to ask the gentleman from HUD to 
respond, Mr. Apgar, in just a minute.
    Mr. Kucinich.
    Mr. Kucinich. Thank you very much, Mr. Chairman, and I 
again want to thank the Chair for calling this hearing. I think 
it would be important for the panelists to know that I served 
four terms in the Cleveland City Council, working at a 
neighborhood level. I'm very familiar with the problems people 
have to deal with on a day to day basis.
    Whether the problems are in connection with HUD or some 
other agency, I know how difficult it can be. I would sit there 
as a member of city council and take anywhere from 50 to 70 
calls a day about concerns that people would have in a 
community. My purpose in this Congress is to try to keep the 
Congress focused on community based things.
    Ms. Cincotta, as I mentioned earlier, years ago when the 
Community Reinvestment Act first came out, I know your effort 
in that. You also remember Monsignor Boroni and the effort that 
was done then to try to improve housing for people. We worked 
together successfully on a project in Cleveland, which I'm 
proud to say stands today as one of the most successful senior 
citizen projects that's been built in our community.
    I'm very sympathetic to the concerns that have been 
expressed here. I think some of the things that have been said, 
I'd like to point out, I think when Mr. Edwards testifies that 
HUD should be proactive and that HUD should listen to what 
people in the community have to say, I think it's very 
valuable. I just mention this to the representatives of HUD who 
are here.
    I think it's very valuable to open up lines of 
communication even better than they have been, not from a 
defensive posture. Because certainly, you're on the defensive, 
but it doesn't need to be that way. There needs to be 
cooperative communication here. I think that's what will make 
the system work better.
    I've seen the same problems that you speak of for many 
years. Ms. Jackson, you probably remember the Model Cities 
program back years ago that ended up being a disaster, despite 
the best intentions of the program.
    So I would like to point out that that testimony I felt was 
very important, as well as the citation of the concerns of Gale 
Cincotta about just what will the privatization function of 
management and maintenance of the single family inventory do or 
mean. Will it mean anything any better? That's something that 
remains to be seen, for sure.
    I know that as you say, it might be hard to imagine anyone 
doing a worse job. But we want to make sure that we don't 
promote structures that basically take it out of public access 
and control. I think we have to be impressed, Mr. Chairman, at 
this testimony, because it's the testimony of people who don't 
just live in the communities, they're the builders of the 
communities, they're the protectors of communities.
    But I also think that we need to shift the debate in the 
sense of this process here, admittedly here, is one which sets 
up kind of a contest between the people and HUD. We need to 
find a way to close that, we really do. HUD obviously has much 
work to do in improving its communication.
    When you look at the size of any bureaucracy, any 
bureaucracy can have failings in that regard, any one of them. 
I've seen it here for the time I've been in Congress, I've seen 
it when I was at City Hall. But it's not adequate when you come 
here with these stories and talk about the difficulties you're 
having. That's not acceptable.
    Now, Mr. Davis, I had the good fortune of working with him 
on some homeless problems. Frankly, we were told for a while 
that we couldn't do anything about it. I'm a Member of Congress 
and I was told that. We worked very hard and kept pressing our 
case. Finally, we got the attention of HUD.
    The other thing that I'd like to point out to you is that I 
remember, as a member of city council, some of the other areas 
that we pursued to get help while we were trying to shake up 
the Federal Government. One was trying to make sure the City 
Hall itself kept an active list of the properties and kept 
inspecting them and issuing reports. I found that could be 
helpful at times.
    But I salute your efforts to try to keep neighborhoods 
clean, to try to keep them livable, to try to make sure that 
Government is responsive. Because if we can't assure that 
Government is responsive, we're not doing the right thing by 
the people in being here.
    So I take your participation here with the utmost gravity 
and seriousness, because this is the reason why I'm in the 
Congress, and I'm sure it's the same for the Chair. That's why 
I appreciated his effort in moving forward to get some answers.
    And going back to HUD, let's find some ways to improve this 
and talk to the people and look at the systemic things that are 
revealed by what they're saying. Because I really believe, one 
final comment, Ms. Cincotta, I really believe that no matter 
how bad things may appear here that we can make them better, 
that we can change them. But it's only with our efforts.
    So I thank you for being here, because your testimony is 
part of our necessary efforts to improve it.
    Mr. Burton. If the gentleman will yield, he's on the 
Democrat side, I'm on the Republican side. Let me just say that 
I think if we talk to Mr. Cuomo about the contracts that are 
going to be let to the contractors who will be overseeing these 
properties, if we could jointly talk to him about imposing not 
only stringent requirements on them, making sure they do their 
job, but also penalties if they don't do their job, in addition 
to losing their contracts, I think that might have a real 
positive impact.
    The communication you're talking about should be not just 
from the bureaucracy and the people that work over there, but 
it should be those contractors and those people that are 
supposed to be out there on the firing line taking care of 
these properties.
    Mr. Kucinich. The chairman makes a good point. I think what 
we've heard here today, Mr. Chairman, in conclusion, is we have 
contractors who are not doing their job. We have plenty of 
testimony on that. And we have the Department attempting to 
defend itself saying, well, some contractors are doing their 
job.
    It's the job of this committee to try to make Government 
work better. That's our charge, that's our challenge as well. I 
look forward to continuing to work with the chairman so that we 
can make Government work better for you.
    Mr. Burton. We'll see if we can draft a joint letter to Mr. 
Cuomo.
    Mr. Kucinich. I'd be glad to work with you, and also it 
would be good to have our ranking member involved, Mr. Waxman.
    Mr. Burton. If I can ever talk to him.
    Mr. Ose.
    Ms. Cincotta. Send him to some of our neighborhoods and 
we'll show him around.
    Ms. Jackson. That's it.
    Ms. Cincotta. And maybe put him in the basement of one of 
these vacant buildings for a week and see how he comes out.
    Mr. Kucinich. Wait, if the gentleman would yield, and the 
gentlelady would yield, just let me state something. I happen 
to believe there's not a finer Member of the U.S. Congress than 
Mr. Waxman. I'm not worthy to hold his briefing books, but I 
will tell you this. It's experience that you have shared that 
all of us are going to take back and talk about what we need to 
do. I think it's always good as we approach these things, and 
the Chair knows I really believe in this, never to personalize 
our observations. Because when we do that, we really fall short 
in the mark of trying to get things done.
    Ms. Jackson. Please? May I say just one thing? I didn't 
mean to say that we wouldn't have gotten along. What we need to 
do is this, and I've had this work before, when we had one of 
the worst things in the world, when we were fighting everybody, 
because everybody was doing the neighborhoods and the 
communities bad. You've got to sit down with a clear head. You 
can't be mad all the time, and we can't always be ready to get 
one up on the other one.
    We've got to sit down and reason together. We don't need to 
always bring Congress in. We can have some of you all, and have 
some of us. We sit down and clear it up and have a good 
solution. Because we have to have a solution about this, this 
is 30 years old. Thank you.
    Mr. Ose. Thank you, Mr. Chairman. As with Mr. Kucinich, I 
too am privileged to serve on this committee. And as compared 
with Mr. Kucinich, I have the privilege on my side of working 
with the distinguished chairman from Indiana, Mr. Burton, whose 
briefing books I daresay I am probably not qualified to carry, 
either. But we do learn day by day and I appreciate the 
opportunity to be here.
    I'm especially interested in any of your experiences with 
respect to the base re-use and the homeless communities' 
involvement in that process. Have any of you been involved in 
that? Military bases that have been closed and subject for re-
use, have any of you been involved in the process of utilizing 
all or a portion of those bases for homeless or neighborhood 
services or things of that nature?
    Mr. Davis. We've been offered a base in northeast Ohio, but 
it was so distant from the community that it would have been 
impossible to transport individuals and get them to services. 
It was too remote.
    Mr. Ose. Absent the geographic distance, what feedback can 
you provide us in terms of the process by which bases scheduled 
for closing are being offered for use by organizations such as 
the four of you represent?
    Mr. Davis. Our only experience is the one official 
extending an invitation to buy a property, but it was so 
remote. We've had no other experience besides that.
    Mr. Ose. Mr. Czerwinski, how about you?
    Mr. Czerwinski. Mr. Ose, we haven't looked at that program.
    Mr. Ose. Ms. Cincotta.
    Ms. Cincotta. What we found, we work with a group, 
Coalition for the Homeless, in Chicago. A lot of the homeless 
are Vietnam vets. There had been a lot of veterans hospitals 
closed in the area, closed off even to be able to take care of 
them before they became homeless. It seems like that one area 
of folks, like Vietnam vets, nobody wanted to pretend we had a 
war in Vietnam. My husband and I had two kids over there.
    They closed hospitals that should be servicing them even 
before they get homeless. They could be servicing them close 
in, right now, and rehabilitate them. It's just, nobody cares.
    Mr. Ose. That's not a housing issue, that's a job training 
or medical services issue.
    Ms. Cincotta. But with the hospital, there's rooms, there's 
beds, there's meeting areas. There are ways to do a lot of 
things. It's just not--nobody cares.
    Mr. Ose. This is one of those unique circumstances where a 
Congressman doesn't have anything to say. Mr. Chairman, I yield 
back.
    Mr. Burton. That is rare.
    Mr. Allen, you are recognized.
    Mr. Allen. Thank you, Mr. Chairman, and I want to thank you 
for holding these hearings. This is a very important topic to 
millions of people across this country, and I am pleased to be 
part of this discussion.
    Most of my questions are probably for Mr. Czerwinski. But 
if others want to join in after he's had a chance to speak, 
that will be fine.
    Just a little bit of background--in Maine, we had 
applications in for the renewal of several homeless programs. 
At the end of the day, after an initial denial, some of those 
programs were renewed. But the Shelter Plus Care program for 
both the State and the city of Portland were not renewed.
    What's interesting is that there were different 
perspectives on this. My understanding is when you look back at 
the entire way this was done, HUD's scoring resulted in five of 
the six New England States receiving less funds in 1999 than 
1998, while the eight western States each received more funds. 
Three of the largest funding decreases occurred in New England.
    It also showed that the 20 poorest States, with 27 percent 
of the population, received only 14 percent of the funds. If 
you look not in terms of poverty but in terms of how heavily 
populated a State is, the Nation's 20 least populated States--
of which Maine is of course one--home to 10 percent of the 
country's population received only 5 percent of the homeless 
funding.
    In Maine, the applications for both the city of Portland 
and the State of Maine were done by the same person who had 
done them year after year. What was interesting is that 
suddenly, instead of being praised, we didn't even qualify for 
funding. So the question arises, is there a problem with 
consistency in scoring? As this program has become more 
competitive, are we evaluating the paper and not the program?
    I understand the pressures on HUD, I understand--as the 
number of applications grows, and the funding doesn't keep 
pace--how applications that have been approved in the past 
might not be considered in the future.
    Here are some issues. First, three questions. Is there a 
way to assure more consistency in scoring year to year? Second, 
is there some way to recognize geographic need in this process, 
so that we don't have a purely competitive system, which can, 
as happened in Maine, suddenly leave a State without any funds 
at all? And third, I understand that a suggestion was made to 
perhaps consider separating renewal applications for homeless 
funding from new applications for homeless funding. Is this 
reasonable?
    Mr. Czerwinski, I'd be interested in your reaction to those 
three questions.
    Mr. Czerwinski. They're very good questions. Unfortunately, 
the answer to the homeless situation is not a simple one.
    What we are trying to do is first of all, just get a handle 
on the Federal programs that are out there, and then look at 
the interaction between the Federal Government and the State 
and locals. The kinds of issues you raise are some of those 
that are coming up quite a bit as anecdotes in our filed work. 
The local governments have their priorities, private 
organizations have theirs, but then there's a mismatch between 
what we're hearing from them and the Federal Government.
    What we're planning to do, at the request of Mr. Kucinich 
and Chairman Burton, is to actually go out and pull a sample of 
applications from the local areas. We will then match the 
priorities they have set with those set by the Federal 
Government. In that way we will try to come up with the answers 
to the very questions you asked. If Mr. Burton and Kucinich are 
willing, we would be quite glad to add you to that request and 
do that work for you.
    Mr. Allen. We would like to be added to that request list 
because Federal homeless funding has been critical for people. 
The State and city just fell off a cliff this year, suddenly 
there was no money where there had been money before.
    I think whether it's a matter of regulations, whether it's 
a matter of legislation, it's an impact that we probably don't 
want to see. We want to maintain some competition, but we don't 
want people to fall off a cliff when they've been running a 
highly recommended program for years.
    Mr. Czerwinski. When you talk about competitive funding, 
you've touched on the paradox of the issue. That is, people 
want to have competitive funding for their projects, but then 
again, they want some consistency. They know they can get 
funding consistently from year to year with the formula grant 
programs.
    But the concern of the homeless advocates is that with 
formula grants, housing and other kinds of services to the 
homeless sometimes may fall right off the table. It's an all or 
none type of situation under two different scenarios. So what 
you're talking about is probably the most critical issue.
    Mr. Allen. Thank you, Mr. Chairman.
    Mr. Burton. Thank you very much.
    Let me thank the panel very much for being here. You've 
been very informative. I wish I could have heard everything you 
had to say, unfortunately I had to go to another meeting 
temporarily. You've not only been informative and helpful, but 
you've been entertaining, Ms. Jackson. You could make it big as 
a standup comedienne. [Laughter.]
    I thank you very much, we're going to take everything that 
you say to heart, and I'd like to have Mr. Apgar come back to 
the table so I and my colleagues can briefly ask him some 
questions.
    Then we'll adjourn and let everybody go get a sandwich or 
something.
    Mr. Apgar, you're still under oath, as you know.
    Mr. Apgar. Yes.
    Mr. Burton. First of all, Ms. Jackson said that she has 
taken care of an FHA house in Chicago for 3 years, and has 
never seen anyone from FHA go near the house. She's been out 
there taking care of the house. I think she said she saw a 
fellow come by that said he was getting $43 a day instead of 
the $29 a day.
    Have you terminated the contracts of any contractors in 
Chicago?
    Mr. Apgar. Yes, we have.
    Mr. Burton. You did?
    Mr. Apgar. Yes.
    Mr. Burton. When did you do that?
    Mr. Apgar. Last year we terminated some. I'd have to get 
the exact time. But we have terminated some contracts, 
including in Chicago.
    Mr. Burton. Do you know if one that you terminated was the 
gentleman that was in the neighborhood where she is?
    Mr. Apgar. I'm not sure of that. If he said to her that he 
was getting paid $43 a day, that has to be a misstatement on 
his part. Contractors under the current system are paid on a 
reimbursable basis. So he wouldn't have anything to reimburse 
against.
    In the new system, contractors are only paid for selling 
the properties, so that's what gives them the incentives to 
maintain and process the mortgages.
    Mr. Burton. Could you do me a big favor and check and see 
if that gentleman is still a contractor for you in her 
neighborhood? I'd like to know.
    Mr. Apgar. OK.
    Mr. Burton. Are you aware of any other problems with 
contractors in Chicago? You said you've fired a couple of them. 
Are there any others you have problems with?
    Mr. Apgar. Reviewing our contractors, I don't know of any 
other problems at this stage. We routinely tell contractors if 
they're not doing their job, if we get a citizen complaint, 
we'll notify the contractor and get them to go out and fix the 
problem.
    Mr. Burton. If you could give me an update on the Chicago 
area and maybe Indianapolis as well, I'd really appreciate it. 
That would give us a chance to take those two as examples and 
spot check them.
    Mr. Edwards said that an FHA house in Indianapolis sat 
vacant for a year and a half and then burned to the ground. He 
said they wrote letters, a lot of letters to the FHA, but the 
only ones who came out to look at the house was the city of 
Indianapolis. Do you know if the contractor in Indianapolis is 
still there and doing his job?
    Mr. Apgar. I don't know about that situation. I know that 
Mr. Edwards talked with our HUD staff about this matter last 
summer. And based on that, our HUD staff took action, including 
the items that Mr. Edwards mentioned, boarding up the property, 
securing it as best they could.
    Mr. Burton. And it burned to the ground?
    Mr. Apgar. I don't believe they said it caught fire, they 
said they had to board it back up. So I believe from his 
testimony, I'm not familiar with the case, the property must be 
still standing.
    Mr. Burton. It burned down, didn't it?
    Mr. Edwards. It did catch on fire, and it was deemed 
unsafe. I was told it was salvaged to some poor guy who 
couldn't fix it up, another nightmare.
    Mr. Burton. So it's just a shell.
    Mr. Edwards. Yes.
    Mr. Apgar. Just a shell, yes.
    Mr. Burton. What about the people next door there, and 
their compensation for the damages to their houses?
    Mr. Apgar. There was a discussion about that. It's my 
understanding we are processing that claim.
    Mr. Burton. Would you check on that and let me know as 
well?
    Mr. Apgar. Sure.
    Mr. Burton. And along with that last question I asked, I'd 
like to know why this claim since 1997 has not been paid. It's 
almost a year and a half later. So if you could give me an 
answer on that, too.
    Ms. Cincotta said that a young girl was raped on a property 
that was vacant in her neighborhood. Have you yourself gone to 
any of these neighborhoods to see for yourself how bad the 
problem is?
    Mr. Apgar. I've been in HUD foreclosed properties, yes.
    Mr. Burton. Well, I'd like to have a report on Ms. 
Cincotta's neighborhood and that house as well, where that girl 
was raped. I think that's important, if you could take a look 
at that.
    Let me ask you one final question, then I'll let you go and 
I'll go vote, because I've got a bunch of votes coming up. 
Suppose I'm a homeowner like Ms. Jackson, and I'm living next 
door to one of the neglected HUD properties. Can you walk me 
through the specific steps that I need to go through to get HUD 
to take action? These people who testified said they've called, 
they've written letters and everything else, and they had 
problems. Just tell me, what's the quickest way to get action 
from HUD when you have that kind of a problem?
    Mr. Apgar. They should call the HUD office in their area 
and get the name of the contractor. That's one approach. We 
have established in many neighborhoods neighborhood watch 
systems, in which cooperation between us and the police 
department, they're able to get immediate attention.
    In most instances, there are HUD signs up. I think the IG 
testified there were well over 90 percent of the properties 
have signs which identify who to call. And in this select group 
of communities where we're working cooperatively with the 
police officers, we have a hotline to the local police 
department where they can call.
    Mr. Burton. I want to thank you very much, Mr. Apgar, for 
being with us. We'll be in touch with you and I appreciate the 
answers to the questions. Give my regards to Mr. Cuomo and tell 
him that we would like to work with you to make sure these 
problems are solved as quickly as possible. Toward that end, 
Mr. Kucinich and I will probably write a couple of notes over 
to you.
    Mr. Apgar. Right. Well, obviously I stayed to hear the 
testimony because I think it is important to work with the 
community groups, as we have in the past. Quite frankly, here 
we have a significant disagreement with methods of addressing 
this problem, with the group from Chicago. They have repeatedly 
asked us to do things, which among other things, we've not been 
able to get congressional authority for.
    But in terms of the diagnosis of the problem, we appreciate 
the fact that quickly disposing of these properties is in 
everybody's interest.
    Mr. Burton. I think one of the biggest problems, and if you 
could convey this back again to Mr. Cuomo, is it's extremely 
important that you have good contractors. If they're not doing 
the job when you spot check, fire them or fine them, whatever 
it takes, to make sure you get competent people on a job. I 
think if you did that, that would go a long way toward solving 
the problem.
    Mr. Apgar. Thank you.
    Mr. Burton. Thank you, sir.
    We stand adjourned.
    [Whereupon, at 4:13 p.m., the committee was adjourned, to 
reconvene at the call of the Chair.]

