[Senate Hearing 107-482]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-482
 
 THE MULTIFAMILY ASSISTED HOUSING REFORM AND AFFORDABILITY ACT OF 1997
=======================================================================


                                HEARING

                               before the

               SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

    EXPLORING THE SUCCESS OF THE ``MULTIFAMILY ASSISTED HOUSING AND 
     AFFORDABILITY ACT OF 1997'' AND THE SO-CALLED MARK-TO-MARKET 
                              LEGISLATION

                               __________

                             JUNE 19, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs






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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
JOHN F. KERRY, Massachusetts         RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
JACK REED, Rhode Island              WAYNE ALLARD, Colorado
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
EVAN BAYH, Indiana                   CHUCK HAGEL, Nebraska
JOHN EDWARDS, North Carolina         RICK SANTORUM, Pennsylvania
ZELL MILLER, Georgia                 JIM BUNNING, Kentucky
                                     MIKE CRAPO, Idaho
                                     DON NICKLES, Oklahoma

           Steven B. Harris, Staff Director and Chief Counsel
             Wayne A. Abernathy, Republican Staff Director
                  Jonathan Miller, Professional Staff
         Melody H. Fennel, Republican Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                       George E. Whittle, Editor

                                 ______

               Subcommittee on Housing and Transportation

                   JACK REED, Rhode Island, Chairman

JOHN F. KERRY, Massachusetts         WAYNE ALLARD, Colorado
JOHN EDWARDS, North Carolina         RICK SANTORUM, Pennsylvania
CHRISTOPHER J. DODD, Connecticut     RICHARD C. SHELBY, Alabama

                     Kara M. Stein, Staff Director
       Tewana Wilkerson, Republican Deputy Legislative Assistant

                                  (ii)










                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 19, 2001

                                                                   Page

Opening statement of Chairman Reed...............................     1
    Prepared statement...........................................    49

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     2
    Senator Corzine..............................................     4
        Prepared statement.......................................    49
    Senator Sarbanes.............................................     6
        Prepared statement.......................................    49
    Senator Dodd.................................................    14
        Prepared statement.......................................    50

                               WITNESSES

John C. Weicher, Assistant Secretary for Housing--FHA 
  Commissioner, U.S. Department of Housing and Urban Development.     4
    Prepared statement...........................................    50
    Response to written questions of:............................
        Senator Allard...........................................    95
        Senator Sarbanes.........................................    96
Ira G. Peppercorn, Director, Office of MultiFamily Housing 
  Assistance Restructuring, U.S. Department of Housing and Urban 
  Development....................................................     7
    Prepared statement...........................................    52
Peter Guerrero, Director, Physical Infrastructure Issues, U.S. 
  General Accounting Office, Accompanied by: Richard Hale........    14
    Prepared statement...........................................    58
    Response to written questions of:............................
        Senator Sarbanes.........................................    97
        Senator Allard...........................................   102
Charles Wehrwein, Vice President, Mercy Housing, Inc.............    29
    Prepared statement...........................................    75
Barbara J. Thompson, Director of Policy and Government Affairs, 
  National Council of State Housing Agencies.....................    31
    Prepared statement...........................................    78
John Benz, President, Property Advisory Group, Inc...............    33
    Prepared statement...........................................    82
Cathy Vann, President, Ontra, Inc................................    35
    Prepared statement...........................................    84
Geraldine Thomas, Vice President, National Alliance of HUD 
  Tenants........................................................    38
    Prepared statement...........................................    87

              Additional Material Supplied for the Record

Miscellaneous letters submitted for the record by Senator Jack 
  Reed...........................................................   103

                                 (iii)












 THE MULTIFAMILY ASSISTED HOUSING REFORM AND AFFORDABILITY ACT OF 1997

                              ----------                              


                         TUESDAY, JUNE 19, 2001

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
                Subcommittee on Housing and Transportation,
                                                    Washington, DC.

    The Subcommittee met at 9:30 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Jack Reed (Chairman of 
the Subcommittee) presiding.

             OPENING STATEMENT OF SENATOR JACK REED

    Senator Reed. Good morning. Let me welcome everyone to this 
morning's hearing and call it to order.
    Today's hearing is about affordable housing and how to keep 
it affordable. In particular, we will explore the success of 
the MultiFamily Assisted Housing Reform and Affordability Act--
the so-called Mark-to-Market legislation. This law is scheduled 
to expire on September 30, 2001, and we will be attempting to 
determine how well it has worked and whether it needs to be 
reauthorized.
    We will have two panels of witnesses. The first panel will 
consist of our three Government witnesses; John Weicher, 
Assistant Secretary for Housing and Urban Development; Ira 
Peppercorn, Director of the HUD Office of MultiFamily Housing 
Assistance Restructuring; and Peter Guerrero, Director of 
Physical Infrastructure at the General Accounting Office.
    Our second panel, will consist of the stakeholders involved 
in the restructuring process. I will introduce these 
individuals later.
    We will be asking all of the witnesses to tell us what 
progress has been made in restructuring the rents and debts of 
the FHA-insured Section 8 portfolio, the savings such 
restructurings have generated for the Federal Government, the 
physical condition of the housing stock, the effectiveness of 
the Office of MultiFamily Housing Assistance Restructuring, or 
OMHAR.
    We look forward to examining all of these issues in detail 
today.
    As we well know, Congress passed the Mark-to-Market 
legislation in 1997 in order to update and restructure Section 
8 project-based developments insured by the FHA. About 8,500 
such projects with over 800,000 units of affordable housing 
were built in the late 1970's and the early 1980's.
    The Federal Government guaranteed that these projects would 
be built by insuring the mortgages and using Section 8 
contracts to guarantee that the rents would be high enough to 
pay off the mortgages. In most markets, these rents were above 
market value. Typically, the mortgages for these multifamily 
dwellings had terms of 40 years and the Section 8 contracts had 
terms of 20 years.
    By the late 1990's, the 20 year Section 8 contracts started 
to 
expire and the Congress had begun to renew all Section 8 con-
tracts at market rents for a period of only 1 year. In markets 
in 
which the fair market rent was higher than the contract rent, a 

simple renewal of the contract was sufficient to continue 
supporting the property.
    However, in many cases, contract rents remained far above 
local rents. In these cases, Congress' decision to renew 
Section 8 contracts at lower market rents was likely to result 
in rents too low to support the remaining mortgage payments on 
such properties. As a result, it looked likely that these FHA-
insured properties would default, costing Federal taxpayers 
tens of billions of dollars.
    The Mark-to-Market legislation was passed as an attempt to 
address this problem. There were two objectives. First and 
foremost, the legislation was meant to preserve affordable 
housing by putting it on a stronger footing, both financially 
and physically. And second, the law was designed to reduce the 
cost to the Federal Government of rental assistance payments.
    We also created the Office of MultiFamily Housing 
Assistance Restructuring--OMHAR--to accomplish both of these 
objectives, with the help of Participating Administrative 
Entities.
    We look forward today to the testimony of our witnesses on 
the relative progress the Mark-to-Market Program has had and 
how we should reauthorize and extend this program in full or in 
part.
    Let me recognize my colleagues before I formally introduce 
the witnesses.
    Senator Allard do, you have any comments?

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Yes, Mr. Chairman, brief comments, if I 
might.
    First, I want to congratulate you on holding your first 
hearing as the new Chairman of this Subcommittee.
    Senator Reed. Thank you.
    Senator Allard. And I look forward to continuing our 
productive working relationship. I believe that oversight is an 
important responsibility of legislators. Maybe it is the most 
important thing. It is probably the thing that you get the 
least credit for because 
everybody is looking for how much legislation you can pass and 
bills that you can get passed.
    I think that it is important that as a Committee, we follow 
up and see how the legislation is being implemented once we do 
pass it. And I believe that good, effective oversight is a 
bipartisan issue and I look forward to working with you as we 
continue the diligent oversight conducted by this Subcommittee.
    The Housing and Transportation Subcommittee held an 
oversight hearing of HUD's Office of MultiFamily Housing 
Assistance Restructuring, or OMHAR, 2 years ago. At that time, 
OMHAR was just beginning to contract with Participating 
Administrative Entities. (PAE's). We did not have the advantage 
of a broader perspective on the program.
    This hearing is an excellent opportunity to revisit the 
issue and to evaluate OMHAR's progress thus far.
    Congress created the Mark-to-Market Program in 1997, to 
reduce Section 8 costs, while preserving the affordability and 
availability of low-income rental housing. The purpose of the 
program is to reduce the property rents to market level, while 
simultaneously reducing property debt levels and owner costs to 
a number of tools authorized by that legislation.
    These mortgage restructurings are carried out by 
participating administrative entities. As part of the same 
legislation, Congress established OMHAR to administer the Mark-
to-Market Program and oversee the Participating Administrative 
Entities. The legis-
lation authorized the Mark-to-Market Program for 4 years. 
Therefore, the Mark-to-Market Program authority and OMHAR's 
administrative authority expires on September 30, 2001.
    Even though the program and administrative authority will 
expire, Section 8 properties with above-market rates will still 
be required to have their rents reduced to market levels. 
Without the proper tools to also restructure the debt, many 
owners may lack sufficient funds for property maintenance or 
mortgage payments.
    Because many Section 8 properties are also FHA-insured, 
this would result in a significant number of claims against 
FHA, in addition to many tenant displacements.
    Clearly, no one finds this a desirable scenario. By taking 
up the issue of mark-to-market reauthorization now, we can 
avoid it.
    I believe that today's hearing is an excellent step in that 
direction and will provide Members with an opportunity to 
examine the successes and shortcomings of mark-to-market and 
OMHAR as we begin to formulate reauthorization legislation. I 
am pleased that we have a broad representation of viewpoints at 
today's hearing. GAO has been reviewing OMHAR for sometime now, 
and I am sure that they will have valuable insight to share 
with us.
    We will also have a chance to hear the views of the mark-
to-market participants, including the perspective of OMHAR, 
tenants, public PAE's, private PAE's, nonprofits and owners.
    I look forward to hearing from all of you.
    Finally, I would like to extend a special welcome to 
Charles Wehrwein of Mercy Housing, which is headquartered in 
Denver. Mercy Housing has been very beneficial, I believe, to 
the Denver community and I am pleased to have them represented 
here today on a later panel. I would like to welcome him 
personally.
    Again, I want to thank my colleagues for holding this 
hearing and I look forward to working with you on this 
important matter and also, I personally would like to welcome 
the witnesses that we have on the panel.
    Thank you, Mr. Chairman.
    Senator Reed. Thank you very much, Senator. Thank you for 
your kind words.
    I have a difficult act to follow. You have conducted this 
Subcommittee with great courtesy and bipartisanship and 
attention to substance, and I hope that I can maintain those 
standards.
    Senator Allard. I am looking forward to working with you, 
Mr. Chairman.
    Senator Reed. Thank you, Senator.
    Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Mr. Chairman, I too congratulate you on 
your first hearing. And I also would express my gratitude to 
Senator 
Allard for his strong leadership in the short time that I have 
been here, and I appreciate working with both of you.
    This is an important issue. I have a statement for the 
record that I would ask that you include. I welcome the 
panelists and look forward to finding out more about this 
program and its effectiveness.
    I agree with this oversight comment that Senator Allard was 
making as one of our more important responsibilities.
    Thank you very much.
    Senator Reed. Without objection, the statement will be made 
a part of the record.
    Now let me introduce the panel.
    Mr. John Weicher is the newly-confirmed Assistant Secretary 
for Housing and also serves as the FHA Commissioner.
    Prior to his appointment, Mr. Weicher was a Senior Fellow 
and Director of Urban Studies at the Hudson Institute. He has 
also served as HUD Assistant Secretary for Policy Development 
and Research, from 1989 to 1993. He was also Associate Director 
of Economic Policy at the Office of Management and Budget, from 
1987 to 1989, and earlier served as HUD Deputy Assistant 
Secretary for Economic Affairs, from 1975 to 1977.
    Ira G. Peppercorn is Director of the HUD Office of 
MultiFamily Housing Assistance Restructuring--OMHAR. Before his 
confir-
mation as Director of OMHAR, Mr. Peppercorn was the General 
Deputy Assistant Secretary for Housing, and Federal Housing 
Commissioner at the Department of Housing and Urban 
Development. Before that, he served as the Executive Director 
of the In-
diana Housing Finance Authority. In that capacity, he was the 
Senior Advisor to Governors Evan Bayh, our colleague on the 
Committee, and Frank O'Bannion, on affordable housing.
    Peter Guerrero is GAO's Director of Physical 
Infrastructure. In this capacity, Mr. Guerrero is responsible 
for managing GAO's work on housing, transportation, 
environmental infrastructure, and telecommunications issues. 
Mr. Guerrero's distinguished Federal career spans some 29 
years. In addition to GAO, Mr. Guerrero has worked at both the 
Department of Labor and the Environmental Protection Agency.
    I would also like to introduce Rick Hale to the Committee. 
He will be sitting in on the panel today. Mr. Hale was the 
principal investigator for the GAO study on the mark-to-market 
reauthorization, which Mr. Guerrero will speak to today.
    Secretary Weicher.

                  STATEMENT OF JOHN C. WEICHER

        ASSISTANT SECRETARY FOR HOUSING-FHA COMMISSIONER

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Weicher. Thank you, Mr. Chairman. And thank you for 
inviting me to testify this morning on the impending expiration 
of the Office of MultiFamily Housing Assistance Restructuring. 
I am here today to discuss the Administration's position 
concerning the future of OMHAR and its legislative authority.
    Before I begin, let me express my appreciation to this 
Committee for voting to confirm me as Assistant Secretary for 
Housing and FHA Commissioner. It is an honor to appear before 
you today.
    I am reminded that the first question at my confirmation 
hearing from Senator Sarbanes concerned the Mark-to-Market 
Program. Chairman Reed, you also raised the issue during the 
hearing with me, so it is fitting that my first hearing before 
this Subcommittee should be on the same subject.
    Mr. Chairman, the challenges of HUD's multifamily assisted 
inventory is the most complex issue that HUD has ever had to 
face. I first became involved in this subject 15 years ago as a 
member of the Hills-Reuss task force. Congress has enacted 
major legislation on three separate occasions beginning in 
1987. During the mid-1990's, Congress wrestled for 3 years with 
the mark-to-market concept before finally passing the 1997 Act. 
The process for dealing with these properties has taken longer 
than originally anticipated, we need to revisit this issue yet 
again.
    Since becoming Commissioner, I have discussed OMHAR with 
Secretary Martinez and there are ongoing discussions within the 
Administration. Secretary Martinez stated in April the 
Administration intends to seek an extension of the 
restructuring authority and reiterated this position in his 
testimony before the Senate Appropriations Subcommittee last 
week.
    As this morning's hearing demonstrates, there appears to be 
general support for an extension of the restructuring authority 
beyond this September, and the Administration will be 
submitting detailed legislative recommendations on how to 
proceed with that extension.
    The future of the OMHAR office itself has generated a 
greater level of discussion than the extension of its 
authority.
    Until this year, nearly all of OMHAR's actions were rent 
restructurings, without any changes in the mortgage amount. The 
first full mortgage restructuring did not occur until the 
second quarter of last year.
    Since then, however, there has been significant progress. 
There are only 30 full mortgage restructurings in the year 
2000. So far, in 2001, there have been 77 in 5 months, and I 
understand that an additional 75 are scheduled for closing in 
the next 60 days. This is encouraging. But clearly more work 
needs to be done, and we want to ensure that this important 
work is allowed to continue.
    Secretary Martinez discussed the future of OMHAR itself in 
his Appropriations Subcommittee testimony. He stated that the 
Department expects to request a 3 year extension for OMHAR with 
two changes. It would not be headed by a Presidential 
appointee, and it would fall under the authority of the Office 
of Housing.
    Placing OMHAR within Housing would simplify issues of 
jurisdiction and coordination. At present, Housing is 
responsible for making project subsidy payments and managing 
insurance contracts, while at the same time OMHAR is 
responsible for restructuring the subsidies and contracts for 
the future. The same projects are under the jurisdiction of two 
separate, equal offices, each reporting to the Secretary. With 
OMHAR under the authority of the Commissioner, this anomalous 
situation would no longer exist. It would also be easier to 
coordinate OMHAR with the 18 MultiFamily Hubs in the Office of 
Housing that are located around the country. We also believe 
OMHAR will be able to complete its work faster with a simpler 
administrative structure.
    I want to stress that we certainly recognize the critical 
nature of OMHAR's work and we have every expectation that it 
will continue to be fully dedicated to that work and only that 
work. Having come halfway through the mark-to-market process, 
we intend to see it through to completion.
    Since OMHAR would be reporting to the Commissioner, we do 
not expect to recommend reauthorization of the position of 
OMHAR Director as one requiring appointment by the President 
and confirmation by the Senate. This would avoid a circumstance 
where one Presidential appointee reports to another 
Presidential appointee of equivalent rank.
    We understand that almost two-thirds of the remaining 
properties subject to debt restructuring have contracts that 
expire in the next 2 fiscal years. With an average processing 
time of about 13 months after contract expiration, we believe 
that a 3 year ex-
tension is appropriate. By 2004, we should all be able to judge 

whether any further extension is needed, or whether the small 
remaining workload can be handled within FHA.
    Mr. Chairman, OMHAR was created to strike a balance between 
the preservation of affordable rental housing and the rising 
costs of renewing expiring Section 8 contracts. That is 
important work. For Secretary Martinez and for me, continuing 
this work is one of our highest priorities.
    We look forward to working with Congress and working with 
this Committee in the coming weeks on this important issue.
    Thank you.
    Senator Reed. Thank you very much, Mr. Secretary.
    We have been joined by Chairman Sarbanes. And at this time, 
I would recognize him for an opening statement.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Well, thank you very much, Mr. Chairman. 
I apologize. There was a traffic back-up that prevented me from 
getting here at the outset.
    I wanted to congratulate you on the occasion of taking on 
the gavel of the Housing and Transportation Subcommittee. Given 
your ongoing active interest in these issues, we very much look 
forward to your leadership of the Subcommittee.
    We can use that transportation dimension to address the 
problems that we encountered here this morning.
    [Laughter.]
    I also know that you and Senator Allard have worked 
together in a very cooperative fashion and we look forward to 
that relationship continuing.
    Actually, the Subcommittee has not been officially 
reorganized, nor has the Committee itself been reorganized. 
That is still pending. Senator Gramm and I talked and we are 
proceeding, at least with the hearing schedule. I think we will 
have to get ourselves into place before we can actually 
transact the business agenda. But we are trying to move ahead 
and prepare.
    This is a very important hearing, to review the bipartisan 
legislation passed in 1997 to deal with the expiration of 
Section 8 contracts on FHA-insured buildings. The purpose of 
that legislation was to reduce Section 8 rents that were above 
market, to restructure the mortgages where necessary, and 
provide for much needed renovation.
    The results we were aiming for and which we seem to have 
been achieving to date was the upgrading and preservation of 
valuable affordable housing at rates that were more affordable 
for the Federal Government as well.
    The legislation establishing this Mark-to-Market Program, 
as well as the Office of MultiFamily Housing Assistance 
Restructuring, which was created to implement the program, 
unfortunately expire at the end of this fiscal year; namely, 
September 30. Yet, it is obvious that we need the program to 
continue. It is making advances, but the job has by no means 
been completed.
    And obviously, we have the responsibility to decide how we 
want to proceed with regards to the legislation. I look forward 
to working with my colleagues here and with the Administration 
to come to a fair determination on how to keep this effort on 
track.
    Let me again thank Senator Reed for holding this hearing. 
He has put together two very good panels of witnesses, which, I 
think will give an opportunity for all stakeholders to 
participate. I feel very keenly that the Committee should 
proceed in a comprehensive, workman-like manner, in an effort 
to hear from all interested parties. And that is what has been 
set out for today's agenda. I think, in the end, this kind of 
thorough review and comprehensive airing of the issues will 
result in better legislation and this hearing is obviously 
consistent with that approach.
    So, Mr. Chairman, congratulations on assuming the gavel. I 
look forward to working with you and Senator Allard and my 
other colleagues as we address this.
    This is one of a list of reauthorizations that I set out 
last week, that the Committee has to address over the next few 
months. We have various expiring authorizations in different 
areas of our jurisdiction and this is one of them.
    This program is up and going. We would like it to be going 
much faster. Presumably, Mr. Peppercorn will address that. But 
this is one of the must items on the Committee's agenda.
    Thank you very much for scheduling this very good hearing.
    Senator Reed. Thank you, Mr. Chairman.
    And now, I would like to call on Mr. Peppercorn.

                 STATEMENT OF IRA G. PEPPERCORN

                DIRECTOR, OFFICE OF MULTIFAMILY

                HOUSING ASSISTANCE RESTRUCTURING

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Peppercorn. Thank you, Mr. Chairman, Ranking Member 
Allard, Senators Sarbanes and Corzine. Thank you very much for 
the opportunity to be here today with you to give you a status 
report on the Mark-to-Market Program.
    At this time, I would like to thank Secretary Martinez. He 
is a good man. He is going to do a great job. His staff, 
Commissioner Weicher, who has a long history and a good history 
in housing, for their leadership and for asking honest 
questions about the Mark-to-Market Program. If the program is 
continued--and I hope that it is--I believe that their 
thoughtful analysis will only serve to strengthen it.
    I would like to give a small caveat this morning and say 
that, as you see on television sometimes, the remarks here are 
my own, or on the editorial pages. They are my own. They are 
not necessarily the views of the Administration.
    But there has been a lot of dialogue and a lot of good 
communication between my office and the new team over at HUD.
    I would also like to recognize a man that is not here at 
this moment. I had the honor of serving under Senator Bayh when 
he was Governor of Indiana for both of his terms. His 
leadership and his vision and his spirit of bipartisanship have 
assisted me over the years and has been very inspiring to me 
and to the others who elected him to serve.
    What I would like to do now is give you a brief, but 
comprehensive, look at what has been accomplished by OMHAR 
through the Mark-to-Market Program, what remains to be done, 
and what will be needed in order to allow the Mark-to-Market 
Program to continue achieving the goals that the Congress 
envisioned in the MAHRA legislation.
    Congress created the Office of MultiFamily Housing 
Assistance Restructuring--OMHAR. It is quite a name, I know. 
But it has a very important purpose.
    It was created as a semi-independent entity within HUD to 
address financial crisis in the Section 8 program. Former 
Senator Mack noted at the time that an effort to ``reform the 
Nation's assisted and insured multifamily housing portfolio'' 
was needed in order to handle what was termed the most 
difficult problem in housing at the time. And in fact, this 
morning, you heard Commissioner Weicher say much the same 
thing--the most complex issue that HUD has ever faced.
    OMHAR has accomplished much and worked very hard to meet 
the challenge of its mission. In fact, some of the challenges 
are competing challenges. But unless changes are made to the 
sunset provision in the legislation, OMHAR and its 
restructuring authority will go out of existence on September 
30 of this year. However, the statutory requirement and the 
need to reduce the rents on the expiring above-market 
properties will continue either imperilling the financial 
health of properties around the country or creating a situation 
where rents are not in fact reduced to market.
    There are a number of goals for the Mark-to-Market Program. 
Social goals, particularly in terms of preserving affordable 
housing, financial and economic goals in terms of reducing the 
long-term, project-based assistance, and minimizing the risks 
of large FHA losses. And then there are managerial and 
administrative goals--promoting, operating, and cost 
efficiencies, addressing problems that have occurred over the 
years by terminating relationships with owners or managers who 
have not met their obligations, establishing a network of local 
public and private entities to administer the Mark-to-Market 
Program, involving tenants in one of the most substantive ways 
that we have ever seen, and providing a consistent, prudent, 
and documented process for all participating properties.
    The environment today, both the economic and the political 
environment, differs markedly from when this legislation was 
first passed. Fewer properties have entered the program than we 
had 
expected.
    Nonetheless, the Mark-to-Market Program offers a win-win 
opportunity for government, for taxpayers, for tenants, and for 
communities. And as more deals are closed, we save more money 
by reducing excess payments on Section 8 subsidy contracts, 
ensuring that the properties involved are on a sound financial 
footing, preserving needed units of affordable housing, and 
thereby meeting the goals of the Mark-to-Market Program.
    Before you, you see a chart.
    [Pause.]
    You almost saw a chart.
    [Laughter.]
    Almost 900 properties, comprising over 63,000 units, have 
gone through the Mark-to-Market process, resulting in a net 
savings of almost $900 million, a present value of over half a 
billion dollars. A big job remains--about half the properties 
assigned to OMHAR are still in the process, representing an 
additional net savings of $1\1/2\ billion over 20 years, or a 
present value of over $800 million.
    We will talk about the costs later, but the operational 
costs, not including the PAE's, are about $40 million. So what 
we are seeing is a very significant savings compared to what we 
are spending.
    Chart 3 shows that in addition to the large number of 
contracts that expire through the remainder of the fiscal year, 
there are 3,400 more Section 8 contracts expiring in the next 3 
years, about a third of which are estimated to be above market.
    You will hear some folks say that we got off to a slow 
start. I will probably agree with that. But what you hear today 
is that the Mark-to-Market Program is operating efficiently and 
effectively. Part of our management approach, and you will read 
this in the various reports on OMHAR, has been to integrate 
constructive feedback from all of the stakeholders, enabling us 
to incorporate significant improvements in the process.
    We have not been the type of organization that set up 
everything in place day one and then said, ``We got it right. 
We got it perfect.''
    We did not, but we spent a lot of time listening to the 
various stakeholders, making the needed changes, listening to 
the owners, making the needed changes, and adjusting as we went 
along. We are operating with an experienced and highly 
motivated staff and with public and private contractors.
    Let me give you a better idea of what we have done.
    We currently have almost 1,800 properties with about 
140,000 units. We are facilitating to preserve them. The 
underwriting 
requirements of the Mark-to-Market Program ensure that these 
affordable housing properties will be operated in a manner to 
en-
sure their ongoing viability. At a time when affordable housing 

is in short supply in many parts of the Nation, Mark-to-Market 
Program provides critically needed continuity to many 
communities 
and residents.
    One of the Nation's largest apartment owners, Denver-based, 
AIMCO, has 110 projects in the program, considers the Mark-
to-Market Program important to AIMCO and its residents in its 
affordable housing portfolio. And here, though it is not in my 
testimony, let me take a side note and say, this was one of the 
innovations we created. Originally, when AIMCO came in, they 
might have had to deal with PAE's in 25 or 30 different States 
and four regional offices.
    We created a large owner program so that they could 
facilitate access to the properties, and they would only have 
to deal with one regional office and two PAE's. They were able 
to bring in properties that not only were expiring before 
September 30, but, importantly, after. That is one of the 
innovations.
    What they have said about us is that the program will 
enable them to continue to provide safe and decent affordable 
housing to qualifying tenants for many years to come while 
protecting HUD from claims under its mortgage insurance 
programs. The program is an important element in addressing the 
affordable housing requirements in the country. Their statement 
has been submitted to the Subcommittee.
    Completed transactions so far have resulted in a savings of 
just under $900 million, with $2.4 billion to go. And present 
value, it is $500 million and $1.3 billion. This is not a final 
tally of the Mark-to-Market Program, since additional 
properties expected to enter the Mark-to-Market Program between 
now and the sunset date will generate future savings.
    I have one property here. The property is called Monview 
Heights. It consists of 326 units in West Mifflin Pittsburgh. 
It is a working class neighborhood roughly 5 miles from 
Pittsburgh. There is going to be a net savings to the 
Government after a restructuring of almost $12 million.
    Now, I know that the way the Federal budget works, you 
cannot just take it from one pot and put it into another. But 
when we have been paying so much money in excess of the market 
at a time when there is such a drain on money for affordable 
housing, if we can save that type of money, preserve the 
housing, keep people in their place, to the Federal Government 
as a whole, that is more money that can be used for other 
purposes and, hopefully, for affordable housing. Let me share 
some of the processes that we adopted to make sure this 
happened.
    We made sure that there were national standards for 
consistency, but we enabled local solutions to local 
communities and local governments. We utilize a small staff of 
Government employees to leverage public and private 
contractors. There are less than 100 OMHAR employees 
nationally. We rely on business- and market-oriented principles 
to set rents. We encourage tenants to participate. And we 
maintain communications and we share information with all of 
the stakeholders.
    The result of the process is savings to the Government, and 
to the taxpayer, that are generated even as the affordable 
housing remains available, and even as the physical condition 
is improved.
    The fundamental complexity, though, the reason why you 
might have heard we got off to a slow start, has to do with the 
nature of the work that must be accomplished to restructure a 
property.
    It is not an easy task.
    The original thinking of we just set rents to market leads 
to a whole host of questions--What is the market? How do you 
assess it? How do you appraise it? How do you know?
    We just cannot go out there and say, it should be a 
percentage of Fair Market Rent (FMR), because most people will 
tell you that the fair market rents are often neither fair, nor 
market.
    There is no national database. This really shocked me. 
There was no national database where you can go in and submark-
to-submarket, find what the rents are in that particular 
community. So, property by property, we have had to go in and 
assess them all individually. These are all one-off, difficult 
work-outs. They are not anything that can be done en masse.
    The real estate work-outs occur in the context of a very 
complex legislative and regulatory environment, and it also 
includes negotiations with property owners, PAE's, tenants, 
lenders, and others in the community.
    Additionally, some properties, despite having rents above 
market, have physical, financial or managerial problems, even 
before the rents are reduced.
    The legislative requirements of OMHAR are explicit 
regarding transaction costs and cash flow to owners. For 
instance, there is a mandatory 75-25 split the moment a deal is 
restructured.
    These terms created some difficult hurdles for us. In some 
cases, property conditions or ownership problems have been such 
that we have not been able to close a restructuring transaction 
or continue assistance on a project-based basis. At that time, 
we have to figure out how to best protect the tenants and 
sometimes we have to voucher the property.
    How has OMHAR responded to these challenges?
    We have listened to our stakeholders. We have implemented 
changes when prudent and reasonable. We have developed a 
program as flexible as possible within the context of 
legislation. And as a result, starting last summer and moving 
into the fall, we met with all kinds of stakeholders, resulting 
in revisions and initiatives to address their concerns.
    First, we introduced additional performance-based 
incentives for participating owners. Every year after the Mark-
to-Market Program, if the property meets its physical, 
managerial, and financial standards, the property owners will 
receive a market level of return on the capital they were 
required to invest.
    Now you might say, why didn't we offer this earlier?
    Remember the context in which we were working, where people 
were thinking that owners were just simply getting too much.
    To have added to that at the time, and this was the direct 
feedback that we got, was we would make the deal too rich. And 
so what we did is we listened and we listened to the owners' 
communities and we listened to the tenant groups and we 
listened to the nonprofits. I personally sat down with the 
Inspector General and I said, this is the problem that we are 
facing. The deals will not work from a financial point of view 
unless we do this. And she put out her concerns, which had to 
do with how they were going to be monitored afterwards, and in 
the end, agreed with us.
    That was not something that we could have done earlier.
    Second, we introduced incentives for purchasers, 
recognizing that the additional costs they will incur over 
costs typically incurred by owners. This is true for both for-
profit and not-for-profit owners.
    Third, we made use of the statutory authority to forgive 
second mortgage debt when appropriate. And Chuck Wehrwein, who 
will be speaking later, works for Mercy Housing, was someone on 
our stakeholder panel who was working for a nonprofit, who can 
tell you about the benefit of the reduction of that debt.
    Finally, we introduced reforms to improve the level of 
communication between owners, OMHAR, PAE's, and purchasers. We 
gave owners and purchasers the right to receive various 
important information throughout the restructuring process, and 
we formalized the notification and appeal process.
    Some other things which I will go through quickly.
    We created an agreement with Ginnie Mae. We created a large 
owner initiative. We have responded to concerns and comments 
from our partners. All of these initiatives have demonstrated 
our commitment.
    So where are we today?
    We have closed 126 full restructurings. We have about 75 in 
the pipeline in the next 60 days. Five hundred what we call 
Lites, which was a program innovation where people could take 
the rent reduction without the debt restructuring. We have 116 
in owner negotiations, 331 in due diligence and underwriting, 
another 300 expected to come in. The thing is moving.
    As the Commissioner said, there is absolutely more work to 
be done. The program is in place. Yes, it took time for the 
program to build its infrastructure. I want to make a side 
comment here.
    One of the things that we did at the very beginning was we 
looked and we listened to what had failed in the past. And one 
of the lessons was coinsurance.
    What people said to me was, do not start rushing in to do 
deals right away. Build the infrastructure first. I said this 
before this body 2 years ago.
    We took a lot of heat for that approach, but in the end, we 
have the right structure. We have a structure that stood up to 
public scrutiny, not once, not twice, but three times. And we 
have a program that is working and working in a way that not 
only financially and not only from a preservation point of 
view, but also ethically, I feel completely comfortable 
standing before this body and saying, we did the right thing.
    Staffing--we have less than a 100 staff on board. Only 38 
are permanent, 49 are temporary. And this is one of the core 
problems. Two-thirds of our staff is comprised of production 
staff who oversee the PAE's, who review the deals, who conduct 
the closings. Three-quarters of those field staff that are 
completing the restructurings are term employees, which means 
that their jobs with OMHAR expire in 102 days.
    The staff has incredible backgrounds. As envisioned under 
the legislation, we have people from the RTC, from the FDIC, 
from lenders, from nonprofits, from HUD, and from other Federal 
Government agencies. It is an incredibly broad staff. I am 
absolutely impressed by their dedication and their 
professionalism, especially knowing that some of them are 
worried about what is going to happen to them personally on the 
September 30 sunset date.
    The PAE's--our partners, are the third parties who actually 
do the nitty-gritty work. And what we have seen is that there 
has been a consolidation. We had 42 public PAE's and nine 
privates. We are now working with 25 publics and nine privates. 
Why?
    One of the things that we learned again is that this job 
was very tough, difficult real estate work. This was not just 
tax credit allocation. Nor was it bond issuance. It meant very 
difficult real estate knowledge. And what we saw was that there 
was slower than expected deal flow, which means that the 
volumes were insufficient. The restructuring process was much 
more rigorous than they expected. Their staff had other 
priorities. And there were many roles in terms of being a 
Section 8 contract administrator and lender. That led to some 
conflicts.
    The consolidation has actually worked very effectively. But 
with 900 deals under the belt, and more to come, we have a 
stable capacity. It is important to emphasize that public 
entities can and will continue to play a vital role, even 
though in certain cases being a PAE has not been the best role.
    HFA's, in their traditional role, and I am a former HFA 
director, as affordable housing lender, tax credit allocator, 
or allocator of housing grants, they are very well positioned 
to work with us to provide funds to restructure properties. In 
addition to their working relationships, public entities can 
often be very helpful in 
terms of knowledge about the properties and the owners in their 

jurisdiction.
    Chart 6 shows that we have arrived at a balance--in 
quality, in oversight, and in timeliness, that is working. To 
date, OMHAR has cost $32.4 million in staff and other costs, 
due primarily to the financial advisors, achieving savings of 
$866 million. That is a pretty impressive ratio.
    What do we need to finish the job?
    September 30, 2001, the sunset date called for in the MAHRA 
legislation, is fast approaching. Planning must occur now to 
determine the Government's approach to reducing rents on 
expiring Section 8 contracts after that date. Without the 
legislative authority to reduce a property's mortgage payment 
when it is reduced, HUD will have to watch Section 8 properties 
struggle with excessive debt burdens. Owners may cut back on 
maintenance to make ends meet or default. And if we do not do 
something quickly, people are going to be looking for other 
positions. Over half of OMHAR's staff expire with the sunset.
    The Mark-to-Market Program and its stakeholders will need 
an assurance of continuity in order to maintain the momentum, 
in order to continue to bring the benefits of affordable 
housing units.
    Mr. Chairman, we have a compelling story. We are not only 
preserving affordable housing, but also doing it at a ratio 
where cost savings are 20-1 of what our costs are.
    We are happy to work with the new Commissioner and the new 
Secretary toward a cooperative solution so that this terrific 
program can continue.
    Thank you.
    Senator Reed. Thank you very much, Mr. Peppercorn.
    We have been joined by Senator Dodd of Connecticut. Senator 
would you like to make a comment?

            COMMENTS OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Mr. Chairman, I would ask unanimous consent 
that my comments be included in the record at this point. But 
let's move along with the witnesses.
    Senator Reed. Thank you.
    Without objection, Senator Dodd's comments will be included 
in the record.
    Mr. Guerrero, could you strive for 5 minutes?

                  STATEMENT OF PETER GUERRERO

            DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES

                 U.S. GENERAL ACCOUNTING OFFICE

                  ACCOMPANIED BY RICHARD HALE

    Mr. Guerrero. Yes, Mr. Chairman.
    Senator Reed. Thank you.
    Mr. Guerrero. We are pleased to be here today to discuss 
our report on the Mark-to-Market Program.
    As you know, this program is aimed at preserving 
affordability of low-income rental housing, while reducing the 
cost of rental assistance subsidies. More specifically, the 
program provides a framework to restructure Section 8 
properties by lowering rents when those contracts expire and by 
also reducing mortgage debt if such action is necessary for the 
properties to continue to have a positive cash flow. Without 
such restructuring, rents for many of the approximately 8,500 
properties in HUD's portfolio would substantially exceed market 
levels, resulting in far higher Federal subsidies under the 
Section 8 program.
    As provided for in the Act, OMHAR has contracted with 
public and nonpublic entities--these are referred to as PAE's--
to carry out the mark-to-market restructurings on behalf of the 
Federal Government. There are two kinds of restructurings. The 
first is 
referred to as a full mortgage restructuring and involves 
reset-
ting a property's rents to market levels and reducing its 
mortgage 
debt by the amount needed to insure the property achieves a 
positive cash flow. The second type is referred to as a rent 
restructuring and it involves reducing the property's rent 
levels, but not reducing its mortgage debt. This type of 
restructuring generally occurs when the property is physically 
and financially sound, so that it can continue operation at 
market-level rents with the existing mortgage.
    Legislation does expire at the end of this fiscal year. 
After that, HUD will still be required to renew Section 8 
contract rents at market levels, but the tools established by 
the Act for restructuring the mortgage notes will no longer be 
available. OMHAR's authority would also terminate at the end of 
this fiscal year without further action.
    Our statement today focuses on three issues. First, the 
status of this program. Second, factors that have affected the 
pace of the program. And third, advantages and disadvantages to 
continuing the program and OMHAR.
    In summary, we found, first, as of May 2001, approximately 
1,500 properties were in OMHAR's Mark-to-Market Program. Figure 
1 in my written statement shows that about 60 percent of these 
properties will receive full mortgage restructurings and the 
other 40 percent will receive rent restructurings.
    Figure 3 in my written statement shows that OMHAR has 
completed about 12 percent of the properties requiring a full 
mortgage restructuring and about 84 percent of the properties 
requiring rent reductions.
    Figure 4 in my statement shows that OMHAR estimates the 
Federal Government will realize about $500 million in savings 
over a 20 year period from the restructurings that it has 
completed so far.
    However, for some properties that have not successfully 
completed the restructuring process, the requirement to reduce 
rents to market has decreased the properties' cash flows, 
increasing the likelihood that these properties will develop 
physical and financial problems later on down the road. And we 
believe that these properties need to be very closely monitored 
by HUD.
    Second, Mr. Chairman, we found that various factors have 
affected the pace of the program. It took almost 2 years to get 
it up and running, during which time, as you heard, OMHAR had 
established the infrastructure to begin assigning the large 
volume of properties to the PAE's for restructuring.
    Other factors may have slowed the process as well. The 
initial process that OMHAR used for reviewing and approving 
restructuring deals and detailed requirements contained in the 
program's operating procedures guide, and the unwillingness of 
some owners to participate in the program, were all factors.
    However, OMHAR has taken actions to address these matters 
and program stakeholders that we talked to, believe that the 
pace of the program has improved.
    While the program has proceeded more slowly than OMHAR 
originally estimated, many stakeholders believe that OMHAR's 
progress in implementing the program has been reasonable, given 
the program's complexity and the number of tasks that needed to 
be accomplished.
    Third, Mr. Chairman, we found that extending the program 
past its scheduled termination date would be more advantageous 
to the Federal Government than ending the program.
    As shown in Figure 5 in our prepared statement, there is 
over 1,300 Section 8 contracts with above-market rents that 
will expire over the next several years. If rents on these 
properties are marked down to market levels, as they would be 
required to do, even if the authority expired, without 
providing for mortgage restructuring, the reduced rents may not 
be sufficient to provide revenues to cover operating expenses, 
mortgage payments, and much needed repairs. This would force 
the owners to reduce expenditures for maintenance, adding to 
the possibility of deteriorating properties and possibly 
defaults on these properties.
    Such outcomes--deteriorating properties and claims against 
the FHA insurance fund--are outcomes that are generally viewed 
as undesirable and would have an undesirable impact on the 
affordability of American housing.
    Extension of the program, on the other hand, would permit 
Section 8 property owners with above-market rents and unexpired 
contracts to benefit from the restructuring tools that are 
currently available and prevent the adverse effects on 
affordable housing that could occur if the program is not 
continued.
    For this reason, all of the program stakeholders who 
participated in our panel, our expert panel that we sponsored 
as part of our work, support the continuation of the program 
beyond the end of this fiscal year when it would otherwise 
terminate.
    Finally, Mr. Chairman, we agree with the view expressed by 
most program stakeholders that the administration of the Mark-
to-Market Program should continue to reside in an office 
dedicated to the program's implementation and that office needs 
the resources and expertise to administer the program and 
oversee these complex transactions.
    Some stakeholders felt that integrating this program into 
HUD's Office of MultiFamily Housing could improve efficiency, 
transferring program responsibilities from OMHAR to HUD without 
dedicated staff to administer the program could disrupt 
momentum.
    There was also concern that if OMHAR staff transferred to 
HUD were not assigned specifically to this mark-to-market 
function, they could be reassigned by HUD to perform other HUD 
functions. And this is given to the fact that we have 
consistently been told that the HUD field offices and staff are 
stretched very thin. So this is a well-founded concern.
    In conclusion, Mr. Chairman, if the legislative authority 
for the Mark-to-Market Program is allowed to expire on 
September 30 of this year, HUD estimates it will have to reduce 
the rents to market levels for some 1,300 properties without 
having the tools necessary to mitigate the potential adverse 
effects of such reductions. Doing so could both affect the 
quality and availability of affordable housing. While 
transferring authority for the Mark-to-Market Program to HUD's 
Office of Housing could potentially help facilitate the 
coordination of some mark-to-market related functions, care 
must be taken to retain program staff resources and expertise.
    Thank you.
    Senator Reed. Thank you very much, Mr. Guerrero.
    Let me begin the round of questioning by addressing a 
question to Secretary Weicher. Mr. Weicher, what specific 
changes would you be urging at this point with respect to 
extension of the Mark-to-Market legislation?
    Mr. Weicher. What changes in the authority? Mr. Chairman, 
that discussion is still going on within the Administration and 
at this point, we do not have a specific set of recommendations 
to give you. I wish that we did and I can assure you that we 
will be giving you recommendations as quickly as we possibly 
can.
    Senator Reed. Thank you. So, we can anticipate informally 
being contacted with your proposals, both Senator Allard and I?
    Mr. Weicher. Yes, you can. And formally, on behalf of the 
Administration as well.
    Senator Reed. Thank you, Mr. Secretary.
    Mr. Guerrero, I will ask you the same question from your 
perspective, and Mr. Hale's perspective. What changes would you 
suggest as we go forward to the mark-to-market?
    Mr. Guerrero. We provide in our report that is soon to be 
issued a number of specific changes that key stakeholders 
thought would be helpful to continue to move this program 
along. We took no 
position on those matters. We simply enumerated them. Some of 
them include providing for additional funds to help with the 
rehabilitation of these properties necessary to keep these 
deals moving. Others deal with the administrative process in 
terms of getting correct rent comparability studies that OMHAR 
feels that they can rely on in the beginning of the process--
studies that are accurate and complete.
    First I would say that the most important factor, though, 
that we recommend here is, prompt action. Because of the 
deadline, OMHAR will lose contract staff that have unique 
expertise in this program if there continues to be uncertainty 
with regard to the future of this program. Also, that 
uncertainty will have an adverse effect on owners of these 
properties creating some uncertainty as to what exactly to do. 
Is it better to wait? Is it better to come in now and proceed 
with these deals? So moving quickly is the most important thing 
that we could recommend.
    Second, the other thing that we would recommend is 
certainly renewing the authority for restructuring the 
mortgages. We think that that is critical to preventing future 
defaults and deterioration of these properties.
    Third, we would recommend that wherever this function 
resides, whether OMHAR continues, whether it goes to HUD's 
Housing Assistant Secretary, it is important to have dedicated 
staff and resources to continue the momentum of the program.
    Senator Reed. Thank you, Mr. Guerrero. You point out, as 
you alluded to in your report, that, in your words, it would be 
workable to place OMHAR under HUD's Office of Housing, so long 
as such action does not disrupt program momentum.
    One of the aspects of OMHAR is that, as you point out, many 
of the staff are contract staff that are, as I understand, 
reimbursed on not a typical civil service scale. Is that 
correct?
    Mr. Guerrero. That is correct.
    Senator Reed. So in any transfer of functions directly 
under HUD, your presumption would be that you would have to 
main-
tain that scale of compensation and the same type of 
contractual arrangements?
    Mr. Guerrero. That is correct.
    Senator Reed. And there is, I presume, a danger by 
integrating it into HUD, or at least an issue whether or not 
that same type of reimbursement and contract schedule would be 
maintained.
    Secretary Weicher, is that one of the considerations?
    Mr. Weicher. Well, we certainly are aware of the issue, Mr. 
Chairman. We know that it is a problem. We know that financial 
regulatory staff in Washington are typically paid better than 
staff who perform other functions in various Cabinet agencies. 
So, we certainly intend to address that question seriously. And 
while I cannot offer you a specific recommendation from the 
Administration on this point, I can restate our commitment to 
making this program continue to work, not lose the momentum 
that has been built up, and see this thing through to 
completion as expeditiously as possible.
    I might also say that the Secretary has general authority 
to pay above the GS scale in certain situations at his 
discretion and that becomes a possibility in addition to the 
differential that is established for financial regulatory 
personnel.
    Senator Reed. Thank you.
    Let me now call upon Senator Allard, the Ranking Member.
    Senator Allard. One thing that I think would be helpful to 
us on the Committee here is to follow up on the recommendation 
from the panel of experts that you had there.
    They recommended two main options for program 
administration. They recommended OMHAR or HUD's Office of 
Housing. Could you explain to us what you view as the pros and 
cons to each one of these options?
    Mr. Hale. Certainly, Senator Allard. Actually, some of 
those have been discussed.
    I think the main perspective of people who favor 
transferring the program into HUD's Office of Housing were well 
articulated by Mr. Weicher, that they felt like it could 
facilitate coordination between the office responsible for the 
program and other activities conducted by the Office of Housing 
that deal with multifamily properties covered in this program.
    But the preponderance of people that were on our expert 
panel, many of whom are here today, supported a continuation of 
OMHAR or an OMHAR-like office that would still have resources 
and expertise dedicated to the administration of the program. 
And as Mr. Weicher said, and also Mr. Peppercorn, I think given 
the complexity of this program and the difficulty of carrying 
out the restructuring actions under it, it is important to have 
staff that are dedicated to the program and understand it and 
have the capabilities to complete these actions.
    Senator Allard. Mr. Peppercorn, how long do you think we 
need to reauthorize the Mark-to-Market Program?
    Mr. Peppercorn. Three years seems to be a reasonable 
number. When you project out the deal expirations, most of them 
will have come in by that time.
    Senator Allard. Are you of the view that this is something 
that we will have to have in place permanently that will always 
have a restructuring need out there?
    Mr. Peppercorn. I think Congress did a pretty wise thing by 
saying that a particular office has a sunset date. I think it 
is a better idea to extend for 3 years, as opposed to 
permanently, and then come back at the end of 3 years again and 
say, do we need this now or are we done?
    Did I answer your question, sir?
    Senator Allard. I think you did, yes. Not directly, but 
certainly indirectly.
    [Laughter.]
    Now, your estimates also indicate the number of 
restructurings will steadily decline with time.
    Mr. Peppercorn. Yes.
    Senator Allard. What do you think should be OMHAR's need as 
far as budget and staff members?
    Mr. Peppercorn. It is going to be about the same for a 
while because it has taken a little over a full year to 
complete. So that means that even if they are coming in at 
about the same level, or even with a slight decrease in the 
next year, it is still going to take 1 or 2 years for that work 
to taper off.
    I would say, for the most part, the number is pretty close. 
We are actually authorized for 101. We have tried to be 
efficient. We are only in the 80's at this point in time.
    Let me also point out that if in fact the work goes down, 
there are ways in which the skills and talents of the people in 
this office can be used. You have people who really understand 
real estate, that understand how to set markets that could 
potentially do other work-outs.
    So if for some reason the workload drops off, I think the 
Secretary and the Commissioner have a terrific team that could 
potentially be deployed for some of the other needs in the 
organization.
    Senator Allard. I would like to turn now to the General 
Accounting Office. I do not know which one of you would need to 
answer this question. But I would like to have your view on the 
length of time for reauthorization. And then your view on 
administering the office and the number of employees.
    Mr. Guerrero. I think the consensus seems to be around 3 
years and we would support that. We think that is a reasonable 
number. There is also merit to having that a firm 3 years 
because it encourages the parties to come to the table, knowing 
that there is an end to this process and that entering into the 
process sooner than later is to their mutual advantage.
    The resources--we do not really have any particular view as 
to what that would entail, but we could get back to you on the 
record with some estimate of what resources would be required 
for that extension.
    Senator Allard. Mr. Chairman, I know that I am running 
short of time, but I have just one more brief question here, if 
I may, for Mr. Peppercorn.
    Senator Reed. Yes, go right ahead.
    Senator Allard. Thank you. Would you explain to me in a 
little more depth about these properties where we had rent 
adjustments. There seems to be a general feeling that they 
should have had total debt restructuring, and just what is 
going on in those properties.
    Mr. Peppercorn. Absolutely. It is probably the most 
difficult problem that we face. When MAHRA was created, what 
happened was, in addition to requiring that rents are reduced, 
there were also other restrictions that were put on the 
property. For instance, the moment you had a dollar written off 
into a second mortgage, the proceeds of the cash flow had to be 
split, 75 percent going back to the Federal Government, 25 
percent going to the owner.
    Second, any rehab needs, the owner had to come up with 20 
percent in cash of those costs.
    Third, and we have adjusted this somewhat, they were asking 
to be extended out for 30 years. We were asking them to extend 
out for 30 years. They were only getting back a Section 8 
contract of 1 to 5 years.
    What that created was a dynamic where many owners simply 
did not want to participate. They did not want to lock into 
their cash flow being so constrained. They did not want to lock 
into 30 years. And so, what they did was they tried, in 
essence, to say, we will take the Lites. We will get our rents 
reduced. Leave me alone.
    What has happened, though, is in certain cases, the 
property cannot be sustained, in our belief, sufficiently to 
keep that going.
    What are the options at that point?
    We cannot go in and force the owner to accept a debt 
restructuring. We cannot legally go in and take the property 
away. So when an owner says no, I do not want a full debt 
restructuring, for whatever reason, it creates the most 
difficult problem we are facing, which is, we now have a legal 
obligation to reduce the rent. We know that the property really 
needs a debt restructuring. The owner will not agree. And then 
the question is, what do you do?
    The system that has been created, and we have worked with 
both Housing and the GAO on, is a system called a Watchlist. 
There is no one I know that is completely comfortable with the 
way that is working. We all know it is a challenge. We are 
absolutely open to ideas on how to make it better, how to fix 
the problem, because you are putting your finger on exactly the 
most important and most difficult problem we are facing.
    Senator Allard. Yes, and I am struggling with that myself, 
and I was hoping you would have some suggestions.
    Thank you, Mr. Chairman.
    Mr. Peppercorn. Thank you.
    Senator Reed. Thank you, Senator Allard.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Peppercorn, first of all, let me say that the Members 
of the Committee share your generous evaluation of Senator Bayh 
and we were pleased to hear it. We will commission the staff to 
make sure that he hears of your very kind remarks here this 
morning.
    [Laughter.]
    Mr. Peppercorn. Thank you.
    Senator Sarbanes. Mr. Weicher, we are pleased to have you 
back, now confirmed as the Assistant Secretary. I thought we 
had an interesting nomination hearing. In fact, I thought it 
was very useful and very helpful, and perhaps, although you 
were on the hot seat for a while, perhaps a good example of how 
a nomination hearing can be very helpful in terms of clearing a 
nominee and developing some policy.
    Is it the Administration's intention to actually submit to 
us a piece of legislation? Are you just going to give us ideas 
of what you think should be done, or is it your intention to 
actually send us a draft bill?
    Mr. Weicher. It is our intention to send you a draft bill. 
It may not be a long draft bill, but it is our intention to 
send you one.
    Senator Sarbanes. All right. Now I was looking at your 
statement, where you say, ``There appears to be general support 
for an extension of the restructuring authority beyond the 
current scheduled expiration date.''
    Do you see where I am?
    Mr. Weicher. Yes, Senator.
    Senator Sarbanes. Then you go on to say, ``The 
Administration will be submitting legislative recommendations 
on how best to proceed with that extension.'' I reread that 
sentence three or four times. I was kind of looking for the 
word after submitting, like soon, promptly----
    [Laughter.]
    In the near future, post-haste.
    [Laughter.]
    I did not find it. What is your response to that?
    Mr. Weicher. Senator, I think you are a careful reader.
    [Laughter.]
    Let me say that we will be submitting legislative 
recommendations as quickly as possible.
    [Laughter.]
    And let me say also that the Subcommittee has made clear 
that it would like those recommendations as quickly as 
possible.
    Senator Sarbanes. Let me underscore that with this 
observation. I will put a question to the GAO people.
    It is my understanding, at least from general reports, that 
the staff that has been assembled at OMHAR, although they have 
had some slowdown in getting going, but now they are going, and 
that there is generally respect for the quality and the 
competence of that staff. Is that correct?
    Mr. Guerrero. I think that is a correct assessment.
    Senator Sarbanes. Now, Mr. Peppercorn, what is going to 
happen to that staff if we run up toward the end of the fiscal 
year and there is not a reauthorization, and come September 30, 
you are confronted with sort of a drop-dead problem?
    Mr. Peppercorn. They are worried. I mean, we talk 
regularly. They are comforted by what Commissioner Weicher and 
the Secretary have said in terms of their intent and what 
everybody believes will happen.
    But as somebody said to me in one of our regional offices 
last week, well, we know what you think, Ira. We know what they 
think. We know the direction it is going to go in. But I have a 
mortgage to pay and kids to feed. So the closer and closer you 
get to September 30 without a formal renewal, the more 
difficult it is for the very talented people on the staff to 
hang in there.
    Senator Sarbanes. I think generally here, we share a 
respect for that staff. I think the intention is to 
reauthorize. And so, I think you can communicate that to them 
as well.
    Now, I come back to Mr. Weicher. We are on a fairly tight 
timeframe here and I want to underscore that. We are in this 
week and next week. There is then a break for July 4. We are 
then back for a July period. And I think we should be aiming to 
try to move this bill through the Senate during that period 
because, at the end of that period, there is an August break. 
We are not here at all in the month of August, and we come back 
after Labor Day. If we do not move the bill out of the Senate 
during the July period, we will be a little behind time.
    Of course, the House would have to move a bill as well. You 
would have to reconcile whatever differences and get something 
into law by September 30. So, we really do need something from 
the Administration quite quickly.
    Now that may argue for you simplifying or streamlining what 
you submit. Obviously, the more far-reaching it is, the more it 
needs to be worked over.
    I think my colleagues would agree that is the scheduling 
framework within which we are now operating. We do not want to 
lose these people. It seems that finally, we have a good crew 
put together and they are doing a good job and we want that 
process to continue along.

    I feel strongly about this because there is a lot of 
affordable housing out there. We do not want to lose it. Some 
of this restructuring, we are in the process also of 
refurbishing this housing and maintaining, sustaining the 
inventory and keeping it. And we have a very serious affordable 
housing problem.

    Now, we discussed production at your hearing and that is a 
separate issue. But at least this existing housing, affordable 
housing, I think we have to place a great premium on sustaining 
it in the inventory.

    Senator Allard. Would you yield?

    Senator Sarbanes. Yes.

    Senator Allard. How are we doing on filling up your 
positions, your appointments, nominations and what not? Do we 
have your area where you need suggestions to set public policy 
in this area? Do we have those positions pretty well filled, or 
are we still struggling to get those filled?

    Mr. Weicher. I believe you have two confirmation hearings 
on Thursday of this week with Mr. Rosenfeld and Ms. Antonelli. 
And I believe there are three others who are in the process of 
nomination, or being named by the President.

    Senator Sarbanes. Yes, but the remaining three, they are 
not before us.

    Mr. Weicher. No.

    Senator Sarbanes. The ones that are before us, we will have 
a hearing on.

    Senator Allard. And if there is some way that we can put 
those that haven't been put forward by the Administration, that 
we can put them on a faster track or somehow, I think we would 
all probably appreciate that so that we can move forward and 
get your recommendations, get as much help on board for you, 
because this is pending legislation that is going to come up 
here quickly.

    Senator Reed. Again, I think that Senator Sarbanes' point 
is very well taken because of the schedule. We certainly would 
benefit from the recommendations of the Administration. But at 
some point, just because of the time schedule, we will have to 
move.

    Mr. Weicher. I think those are all very reasonable 
statements, and I think that is a very reasonable schedule, 
Senator Sarbanes, that you have set forth. It certainly seems 
to me to make sense.

    If this is legislation that you are trying to deal with on 
September 29-30 and with detailed changes, then I think we may 
all not be very happy with the outcome after the dust settles.

    I think we know the schedule. We are working to get you our 
recommendations as quickly as we can, and we realize the more 
complicated the recommendations are, the more complicated the 
legislative consideration process will be.

    Senator Sarbanes. Well, I think, to sharpen it up, I think 
it would be very helpful to have your recommendations by the 
end of this month, or certainly into the first week in July, 
which is when we are away, so that it is available to us when 
we come back in, and we can incorporate it into our thinking as 
we move towards a fairly prompt mark-up in July.
    We not only have the problem of moving it through the 
Committee, but then finding time on the Senate calendar in 
order to take it up, although, hopefully, this would be a 
noncontroversial piece of legislation. It would be easier to 
do, to move it on the floor, without a great commitment of 
time. These things have a way 
of getting backed up. It would not be so serious if we were not 

running the risk of losing this team that has been assembled 
and 
put together, which most everyone thinks is currently doing a 
creditable job.
    Mr. Weicher. We certainly do not want to terminate the 
activities of OMHAR and we do not want them to be terminated by 
inadvertence, either.
    I think, Senator, you have given us a very reasonable 
timetable and we will do our best to meet it.
    Senator Reed. Thank you, Mr. Chairman.
    Senator Dodd.
    Senator Dodd. Thank you, Mr. Chairman. And that is the line 
of questioning I had as well for Mr. Weicher.
    First of all, let me thank all of you for being here and 
testifying.
    Just to explore this a bit, the timeframe, and Senator 
Sarbanes and the Chairman have identified it, well, even in 
July, we are looking at a series of appropriations bills which 
can just consume the entire time on the floor of the Senate.
    One Senator on this kind of a matter could basically kill 
this, is the way I see it, with the timelines being what they 
are. It is not going to take any Herculean effort here to stop 
the reauthorization of this program.
    And so, it becomes, I think, not only important in terms of 
submission, but I would like to just explore with you, to what 
extent you think this is worthwhile reauthorizing.
    It seems to me that this is not de novo, and I understand 
the need for having people in place obviously to help 
administer. But we are not talking about the creation of an 
office here. We are now talking about an established record, at 
least I see an established record, and the GAO seems to confirm 
that.
    I realize you do not have a plan yet. I would like to 
explore with you whether or not you think it has been 
worthwhile.
    Obviously, if the Administration in its language is not 
particularly pleased with this kind of an operation, that you 
have some kind of problems with it, I think it is very helpful 
for us to know that today.
    I can wait for your submission in July, but at that point, 
I need to get from you whether or not you think this office and 
this particular effort has been in the best interest of 
everyone involved. Or do you think it ought to go to FHA?
    I know there is a turf battle going on here a bit, but 
aside from doing that, is this in your view--you are an 
experienced person. This is not something we are just bringing 
up to you today for 
the first time. You are very familiar with it. What do you 
think of 
it? We can get into the details of it, but has this been 
worthwhile 
or not?
    Mr. Weicher. Well, Senator, to expand a little bit on what 
I said in my prepared statement and my opening remarks, the 
Secretary has said on behalf of the Administration that we want 
to extend the basic authority of OMHAR.
    Senator Dodd. Yes.
    Mr. Weicher. We are about halfway through a process that 
you put in motion in 1997. We think that process should 
continue. We do not believe, and I have not heard anyone say 
this morning, that at this point, we should adopt a new 
approach to deal with the last half of the properties that are 
going through the system.
    The questions are likely to concern the administrative 
structure of the office and its relationship with the rest of 
HUD and it may involve some suggestions for changes in the 
specific authorities. I notice some suggestions in some of the 
testimony from the second panel. But, as I also said, this is 
as tough an issue as any of us are ever likely to face in HUD, 
and that is saying something. There are some competitors for 
that title.
    But this is something that you all have been wrestling with 
for years. We have a strategy that you adopted after a great 
deal of hard work in 1997, and it is our view to carry that 
strategy forward to conclusion.
    I hope that is responsive.
    Senator Dodd. It is responsive, and I appreciate that very 
much.
    Are you satisfied as well with Mr. Peppercorn's numbers in 
terms of the cost savings that have been realized up to this 
point? Or is there some debate about that?
    Mr. Weicher. There is no debate on them. I have not sat 
down myself and gone through the numbers. Having said that, let 
me 
go back and say that there is, as far as I know at this point, 
no de-
bate on them. I think we all have slightly different numbers. 
Those numbers change every time there is a new resolution or 
restructuring.
    Senator Dodd. Yes.
    Mr. Weicher. And I think if you sat down and looked at the 
testimony of everyone, you will see some differences.
    Senator Dodd. Is there any authority which exists within 
the Department, for instance, if we were unable, for whatever 
reason, to adopt legislation? Is there some way the Secretary 
would be allowed or could allow the office to continue in 
operation for a period of 60 or 90 days, whatever, if Congress 
for some reason were unable of adopting, both Houses, a bill 
that the President was able to sign?
    Mr. Weicher. I do not know, Senator, very simply. I hope 
that if that were to happen, if we were in that situation, we 
would be able to do that on some basis, but I am not a lawyer 
and I am not an expert on legislation.
    Senator Dodd. I might say if you would take a look at that 
and let us know. That might be helpful in terms of just the 
clock up here in terms of how we are functioning.
    That would also get to the point that Senator Sarbanes has 
raised. And again, I would just raise it here.
    Have you had a chance to make any assessment of the quality 
of the people in this office, Mr. Weicher?
    Mr. Weicher. No, Senator, I have not. I have known Mr. 
Peppercorn since he was at FHA back in 1997 and 1998. Beyond 
that, as you know, I have been in office for 18 days and I have 
not----
    Senator Dodd. That is a long time.
    [Laughter.]
    Mr. Weicher. It seems longer every day.
    [Laughter.]
    Yet met with the people at OMHAR.
    Senator Dodd. Very good. You might just take a look because 
I think that point of obviously putting together this synergy 
of talented people, I do not need to tell you how that works. 
Obviously, you have seen it in so many different capacities in 
your life. But if you lose that, it falls apart, trying to 
replace it again, can get right back to the very worthwhile 
critique of why this program took so long to get going. And 
going back to the director of this program and then putting the 
staff together. So, I think the notion that we could end up 
losing some talented and bright people--the offers are out 
there when you are that talented, to be able to move people 
very quickly if you are in a situation where you are 
vulnerable.
    I think that is worth mentioning.
    Finally, Mr. Peppercorn, one of the concerns we have heard 
voiced is that a number of the properties with above-market 
rents are not being referred by FHA to OMHAR. What is going on 
there? What is the problem there?
    Mr. Peppercorn. That is something that we have talked to 
the Office of Housing about. The properties need to go from the 
owners to the HUD field offices and then over to us. I do not 
know what the reasons are. And what we do is we look at the 
model and we predict which properties we think will come in and 
which properties have not come in and see where there is a gap.
    And we have communicated the data to the Office of Housing 
and I believe that it is appropriate for them to really take a 
hard look at the very question you are asking.
    Senator Dodd. Well, Mr. Chairman, I notice that we do not 
have anyone from FHA on our panel. You have a very complete 
panel here coming up. But I wonder if we might do a letter to 
FHA.
    Senator Reed. Actually, Mr. Weicher is the Commissioner.
    Senator Dodd. Well, I know. But do you have any reason why 
that is going on?
    Mr. Weicher. Senator, I do not know why that is happening 
at this point. In the process of preparing for this hearing, I 
became aware of this as a problem as seen by OMHAR and I have 
asked our Office of MultiFamily Housing to ascertain what the 
problem may be and see if we can identify for specific projects 
what else we should be doing.
    It is not our intention, it is not Secretary Martinez's 
intention, not my intention, to delay this process because of 
confusion and 
bureaucratic difficulties between agencies. We do think, as I 
said 
in my statement, that if OMHAR is within Housing, we have 
better control over the relationships between the MultiFamily 
Hubs and OMHAR and between the rest of the Office of Housing. 
So that we do not have complicated conversations about what is 
really going on.
    Senator Dodd. Fine. Yes?
    Mr. Guerrero. To put some perspective on this, we observed 
that only 32 percent of the expired contracts in the last 
fiscal year were referred to OMHAR. A look needs to be taken, 
as HUD indicated, at the reasons for why that is.
    One possible explanation we heard is simply the changing 
economics in certain markets. We have had a very robust economy 
in certain markets. That could account for why some of these 
properties when their contracts expire do not get forwarded.
    Some of our panelists thought perhaps that would suggest a 
need for a third party to look at the rent comparability 
studies that begin this process, to ensure that they are 
accurate and reflect the true market conditions, so that when 
you begin the process, you are actually starting with good 
data.
    Senator Dodd. Yes.
    Mr. Guerrero. And that would eliminate data as a potential 
source of the fact that some properties that should be coming 
into the system are not coming into the system.
    Senator Dodd. That is a good suggestion.
    Finally, Mr. Chairman the statute requires the tenants--for 
you, Mr. Peppercorn--that significant stakeholders be involved 
in the restructuring process. I guess the question that I would 
ask you is: Are the PAE's meeting this requirement?
    Mr. Peppercorn. I think for the most part the answer is 
yes. I know from an OMHAR policy point of view, the answer is 
absolutely yes.
    There have been cases that have been brought to my 
attention where the PAE was not paying good enough attention to 
tenant issues. Some of the things we have heard in particular 
were that tenant meetings were scheduled during the day on 
family properties. That means that people cannot go. Every 
single time we have heard an issue like that, we have stepped 
in. Some of this was a learning curve on the part of the PAE's.
    Moreover, about 2 weeks ago, we brought in PAE's and tenant 
groups and OMHAR staff and housing staff from around the 
country to have a training session, to have people share their 
experiences honestly.
    And my sense of things is, it is not perfect but it is 
pretty good.
    Senator Dodd. Did GAO look at that at all?
    Mr. Hale. Yes, Senator Dodd. Actually, when we had our 
expert panel back in February, that was an issue that came up. 
We had representatives from tenant groups there, as well as 
OMHAR. And they expressed some concerns about just the things 
that Mr. Peppercorn was talking about, about meetings not being 
held appropriately, tenants not getting notification.
    And actually, since then, we have followed up a couple of 
times and to OMHAR's credit, they have had a couple of 
additional conversations where they did bring in 
representatives, most recently a couple of weeks ago, from the 
tenant groups and from a number of PAE's to talk about these 
issues. So that is positive.
    Having said that, it is still going to be an ongoing 
situation that OMHAR obviously will need to stay on top of to 
make sure that the tenants do get a chance to participate.
    Senator Dodd. Thank you very much.
    Thank you, Mr. Chairman very much.
    Senator Reed. Thank you, Senator Dodd.
    Thank you to the panel.
    There may be additional questions which we would solicit in 
writing. And I would urge you to promptly respond so that we 
can move this process forward.
    Thank you very much.
    I would now like to call up the next panel, please.
    Before introducing the second panel, I would like to yield 
to Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Unfortunately, I am going to have to leave for a 
conflicting engagement. I do want to thank the people on this 
panel. I have had a chance to look through their statements and 
obviously, a great deal of work has gone into them. And there 
is really a great deal there that I think is beneficial to the 
Committee, and I am most appreciative for that contribution. I 
apologize that I am not going to be able to stay to hear the 
testimony. I do want to make two observations, Mr. Chairman.
    First of all, I want to observe that the National Leased 
Housing Association is quick on the beat. I see that they have 
John Bentz, who is one of the directors of the association, to 
give their testimony today. And it just so happens that Mr. 
Bentz is from Providence, Rhode Island.
    [Laughter.]
    Senator Reed. Coincidence.
    [Laughter.]
    Senator Sarbanes. And I also want to observe that the Mercy 
Housing people are here with Mr. Wehrwein, and that their 
headquarters is in Denver, Colorado.
    Senator Allard had to leave us for a brief period, but I am 
glad to see a panel that is staying abreast of the times, Mr. 
Chairman.
    [Laughter.]
    Thank you all very much.
    Senator Reed. Thank you, Mr. Chairman.
    Let me first introduce the panel formally and then we will 
begin with Mr. Wehrwein.
    John Bentz is from my own home State of Rhode Island. John 
is here on behalf of the National Leased Housing Association, 
of which he is a Director. He is also Cofounder and President 
of Property Advisory Group, which manages approximately 2,100 
housing units in five States and is based in Providence, Rhode 
Island.
    Mr. Bentz is Past President of the Rhode Island chapter of 
the Institute of Real Estate Management and is currently 
serving as the Chair person of the Legislative and Emissions 
Committee. He is both a certified Property Manager with the 
Institute of Real Estate Management and a registered Apartment 
Manager with the National Homebuilders Association.
    Thank you, John, for joining us today.
    Ms. Geraldine Thomas is the current Vice President of the 
National Alliance of HUD Tenants and has been a resident of 
HUD-assisted multifamily housing since 1988. She is Chair of 
the 
association's mark-to-market task force, which consists of 
local 
affiliated groups for providing outreach and training service 
to tenants in mark-to-market properties in 25 States. Ms. 
Thomas has been a board member of the National Association of 
HUD Tenants since 1997, and served as the association's Vice 
President since 1998. She was honored in June 2001, by the 
National Association of HUD Tenants Conference with the 
organization's Outstanding Organizer of the Year Award.

    She is an active member of her community and we thank her 
for being here. Her community is in the Philadelphia area. Is 
that 
correct?

    Ms. Thomas. Yes.

    Senator Reed. Thank you.

    Barbara J. Thompson is Director of Policy and Government 
Affairs for the National Council of State Housing Agencies. She 
is representing the publicly Participating Administrative 
Entities. She oversees the work of the legislative and program 
staff on regulatory issues related to affordable housing, 
including banking, tax, budget, appropriations. Ms. Thompson is 
responsible for keeping member finance agencies informed of 
Congressional activities. She has served in the New Jersey 
Governor's Washington office as a senior housing lobbyist under 
two administrations, former Governors Tom Keane and Brendan 
Byrne.

    Cathy Vann is representing the private PAE's. She is the 
President of Ontra, a participating administrative entity for 
OMHAR. During her 15 years' tenure at the Ontra companies, Ms. 
Vann has been involved in the due-diligence, asset management 
and disposition of more than $8.5 billion in distressed 
mortgage and real estate assets in 45 States and Puerto Rico.

    Ontra, as a private PAE in the Mark-to-Market Program, has 
been awarded 118 full debt restructures, 120 rent restructures, 
and 22 comparability reviews since their July 1999 contract 
inception.

    And we thank her for joining us.

    Finally, Mr. Charles Wehrwein is the Vice President of 
Mercy Housing, one of the largest nonprofit developers, owners 
and managers of service-enriched affordable housing in the 
United States. His responsibilities include leading Mercy's 
acquisition initiative, which is focusing on acquiring and 
preserving portfolios of existing affordable housing complexes 
across the country.

    Mr. Wehrwein also oversees the Mercy loan fund and the 
Mercy housing development division. And prior to joining Mercy, 
Mr. Wehrwein served in various capacities, including Chief 
Operating Officer with the National Equity Fund, the largest 
nonprofit syndicator of low-income housing tax credits.

    And he has had previous experience in the Federal 
Government at HUD, and we thank him for joining us today.

    Mr. Wehrwein, would you begin, please?

    Senator Allard. Mr. Chairman, I would just like to 
personally welcome Mr. Wehrwein to the Committee and we look 
forward to his testimony.

    Senator Reed. Thank you, Senator.

         STATEMENT OF CHARLES WEHRWEIN, VICE PRESIDENT

                      MERCY HOUSING, INC.

    Mr. Wehrwein. Thank you, Mr. Chairman, and Senator Allard, 
for your kind words.
    I wanted to say that my comments also reflect the input of 
several other significant community development organizations, 
including the National Housing Trust, LISC, the Housing 
Partnership Network, and NEFPI.
    Mr. Chairman, Mercy Housing and others in the community 
development field regard the preservation of affordable rental 
housing as essential to the stability and revitalization of 
communities and the residents who so desperately need this 
housing, both now and in the future.
    Before commenting on the specific issues and policies 
around the mark-to-market subject, I would like to share with 
the Subcommittee a specific example of mark-to-market in 
action, if I may.
    Mercy Housing owns a 106 unit Section 8 assisted property 
in Denver, Colorado. This property serves the transitional 
housing needs of distressed families. Our Section 8 contract 
expired and we were eligible for mark-to-market, and we have 
entered that process and expect to close on our transaction 
within the next month or so.
    An example of a typical resident at Decatur Place, which is 
the name of this property, is Caroline Garcia. She and her four 
children escaped an abusive relationship with nothing more than 
the clothes on their backs. She had no education when she 
arrived at Decatur Place. Her first month there, she was only 
able to contribute $4 per month toward the rent at the 
apartment. She immediately went to work part-time at the 
cafeteria where her children attended school. She took life 
skills training provided by Mercy on-site, including parenting, 
financing and computer training, and she began her education 
process. In just 2\1/2\ years, she has completed her education 
and is now working full-time as a medical tran-
scriber. Her children are healthy and strong, and doing better 
in school than they ever have, and she is now contributing $386 
a month toward rent. Were it not for the Mark-to-Market 
Program, this property could not have been sustained at this 
level.
    As to the progress of restructurings, clearly, they began 
far too slowly. But I think now have picked up dramatically. In 
our view, it is solely because of the new owner and nonprofit 
incentive guidelines that were adopted by OMHAR in the fall of 
2000. They were created through a cooperative approach that 
brought together stakeholders from across the spectrum. It has 
been a great example of how Government should work.
    These new guidelines, among other things, have encouraged 
the nonprofits to pursue purchases of mark-to-market properties 
and owners to submit to the mark-to-market process.
    Prior to these guidelines, it was simply uneconomic to take 
on these properties. We applaud OMHAR's recognition of the risk 
of additional affordable housing losses in their response to 
this problem. Without these incentives, we believe that full 
restructurings would not have commenced at the pace that they 
currently have.

    Extending the authorities present under MAHRA will allow 
sufficient time for the backlogs of these complicated 
transactions to be completed. It will send a clear and strong 
message to the entire housing community that Congress is 
committed to sticking with a consistent program once it works.
    We strongly support the extension of authorities beyond 
their scheduled expiration at the end of fiscal year 2001, and 
we recommend that Subtitle A, of MAHRA be extended. 
Furthermore, we strongly encourage the Subcommittee to 
recognize and affirm the importance of the new incentives and 
guidelines implemented by OMHAR, as they are critical to the 
recent success of the Mark-to-Market Program. Finally, we 
specifically call for the Subcommittee's attention to the need 
for continued funding of ITAG and OTAG grants at levels equal 
to or exceeding last year's $10 million.
    I would like to turn my comments now toward the experience 
of working with OMHAR and its team members.
    OMHAR was clearly slow getting out of the gate, as you have 
heard, both in organizing its operations and in contracting 
with the PAE's. Creating an organization from scratch is 
difficult and time consuming under the best of circumstances 
and it seems in hindsight that a period of 3 years to both 
create the organization and complete all the restructurings was 
optimistic at best.
    Experience with OMHAR's national office staff and 
consultants suggests that they are extremely competent from a 
technical standpoint and they reach out and seek information 
and guidance from many stakeholders.
    The assessment of OMHAR's field staff is somewhat more 
variable, the largest problem being the communication of their 
national policies and the assurance that those are being 
carried out.
    Experience with public PAE's has been very positive. My 
personal experience with the Housing Finance Authorities in 
Colorado and Missouri have been outstanding. Overall, the staff 
at the public PAE's seems competent and professional and the 
public PAE's seem to have a better understanding on how to 
appropriately strike a balance between cost savings and quality 
affordable housing.
    From a programmatic standpoint, we would like to see a more 
direct linkage between the HFA and other State and local 
housing resources and preservation, and would strongly support 
new funding allocated to the States to accomplish this goal. 
The Federal matching grants provisions of the legislation 
proposed in H.R. 425 and proposed in the past by Senators 
Sarbanes, Kerry and Santorum would be an excellent vehicle to 
accomplish the linking of State and Federal resources and we 
would strongly support that.
    Experience with the private PAE's has also been fairly 
good, although, again, the communications issue seems to be a 
bit of a problem. Their nature as profit-motivated entities 
sometimes pushes them to focus more on the cost elements than 
the quality elements of housing in their locales.
    In conclusion, whatever the reasons for the delays in 
getting OMHAR off the ground, it is now working. It is a 
singular business-like unit in the Federal Government that is 
competent and improving and it would be a waste of the 
taxpayers' resources invested to date, to let it expire, or 
otherwise reconfigure it, just as it is beginning to reach its 
potential.
    The work that it was created to do is not yet done. It is a 
small, lithe organization with specific technical skills that 
allow it to be responsive to stakeholders and objectives judged 
by Congress. Therefore, I urge you to extend the OMHAR 
organization in its current configuration by extending Subtitle 
D of MAHRA.
    Thank you, Mr. Chairman. That concludes my testimony.
    Senator Reed. Thank you very much, Mr. Wehrwein, not only 
for the substance of your testimony, but also for your length.
    If I could urge everyone to stay as close to 5 minutes as 
possible, it would be appreciated. We want to have time for 
questions.
    Your written statement will be included in the record if 
you want to summarize also.
    Ms. Thompson, please.

                STATEMENT OF BARBARA J. THOMPSON

           DIRECTOR OF POLICY AND GOVERNMENT AFFAIRS

           NATIONAL COUNCIL OF STATE HOUSING AGENCIES

    Ms. Thompson. Thank you, Mr. Chairman.
    Mr. Chairman, I am Barbara Thompson, Director of Policy and 
Government Affairs for the National Council of State Housing 
Agencies.
    The NCSHA represents the Nation's State Housing Finance 
Agencies. Rick Godfrey of your own State of Rhode Island, Mr. 
Chairman, serves on NCSHA's board and is a member of its 
Executive Committee.
    Thank you for this opportunity to testify about the Section 
8 restructuring program and the experience of HFA's serving in 
it. First, though, Mr. Chairman, I would like to thank you and 
Senator Allard and the many Members of this Subcommittee who 
cosponsored and helped enact legislation in the last Congress 
to increase the caps on housing bonds and the Low Income 
Housing Tax Credit.
    Unfortunately, even with these increases, many qualified 
for bonds and credit help simply will not get it. Three 
obsolete program provisions prevent it.
    Senate bill 677 fixes these problems. We would appreciate 
your cosponsorship and that of your Subcommittee colleagues, 
and ask you to encourage your leadership to please include it 
in a tax bill this year.
    NCSHA and the Nation's State HFA's worked very closely with 
the Congress to create the restructuring program. With the 
support of Congress and the industry, we assured that qualified 
HFA's had a priority right, Senator, to serve as restructuring 
agents. We knew that HFA's would carry out restructurings in a 
manner that protects the interests of the Federal Government 
and at the same time, the properties, the residents, and the 
surrounding communities. Regrettably, OMHAR has failed to 
utilize the expertise of HFA's. Instead, OMHAR has treated 
HFA's as robots, prescribing their every move, stifling their 
judgment and their creativity.
    Accordingly, though we urge the Subcommittee to reauthorize 
the restructuring program, we encourage you to turn its 
responsibility, responsibility for its administration, over to 
HUD. We also recommend that you direct HUD to streamline its 
many, many rules and regulations and devolve greater 
decisionmaking to the State HFA's, as Congress always intended.
    State HFA's have been strong and successful partners with 
the Federal Government when it has permitted them to do their 
job with their own expertise and experience.
    Congress intended States to have decisionmaking authority 
and flexibility when it gave them the priority to serve as 
PAE's. Chairman Bond at the time said:

          Devolving responsibility and decisionmaking to the State and 
        local level is one of the primary goals of this Mark-to-Market 
        legislation.

    Senator Mack, author of the legislation, said:

          I expect HUD to approve many HFA's as PAE's and provide them 
        as much flexibility as possible within appropriate parameters 
        to administer the (permanent) program.

    However, OMHAR either never understood that or chose to 
ignore Congress' will. Instead, it chose to do the 
restructuring work. From the start, OMHAR has dictated down to 
the finest detail every step HFA's must take in restructuring 
properties. It has denied HFA's the ability to apply the very 
expertise, judgment, knowledge of their local markets, concern 
for their properties and communities and tenants, that caused 
Congress to choose them to do this work in the first place.
    Despite Congress' many admonitions about streamlining the 
program and utilizing HFA's, OMHAR changed little until the 
Senate Appropriations Committee last fall told them that its 
functions would be transferred to HUD. Since then, OMHAR has 
made some progress, but too little, in our opinion, and very 
late. Though it finally reduced the requirements of its 
operating procedures guide, the changes it contains still do 
not go nearly far enough toward streamlining and simplifying 
the program.
    OMHAR continues to value process over product, rules over 
results. Its guidance to PAE's remains overly prescriptive, 
confusing, needlessly complex, ever-changing, and 
inconsistently interpreted and applied by its own staff. Its 
operating guide, Senator, has 22 separate appendices and 
requires the use of 86 separate forms to process a single 
transaction. OMHAR issued 79 ``policy'' emails to PAE's in just 
the last 14 months. Its financial model, which PAE's must use 
to calculate the necessary financial outcome in a 
restructuring, is over 40 pages long and unnecessarily complex. 
It leaves little room for State judgments.
    OMHAR runs a command and control operation. It delegates 
little authority to its regional offices. Frequently, the 
regional office will tell an HFA one thing, while the 
headquarter office tells them another. Communication between 
OMHAR and HUD is very poor. PAE's are bounced back and forth 
between OMHAR and HUD for decisions and information.
    Many HFA's find OMHAR more interested in saving money than 
in preserving properties. OMHAR frequently questions HFA market 
rent and rehabilitation needs assessments, despite its lack of 
familiarity with the properties and the communities within 
which they are located.
    Policymakers, Senator, will for some time debate the number 
of Section 8 properties lost and the Federal subsidy savings 
forfeited due to OMHAR's insistence on doing it its way. But 
there is another cost--the loss to the restructuring program of 
State HFA expertise, judgment, experience and commitment to 
public purpose.
    Of the original 42 State HFA's approved as PAE's, only 22 
remain in the program today. Some HFA's never signed contracts, 

believing they could add little value given OMHAR's 
prescriptive 
approach. Others have declined to renew, severely frustrated 
with OMHAR's unreasonable and irrational rules. Still others 
have been forced out by OMHAR often without explanation. Some 
remain, but are inactive because OMHAR doesn't give them 
assets. It gives them instead to the privates without the 
knowledge of the HFA or their agreement as the law requires.
    Your own agency, Mr. Chairman, one of the strongest in the 
country, last April received written notice from OMHAR that it 
would not renew its contract. That notice gave no explanation 
for the termination.
    Mr. Chairman, Congress wrote the right plan when it gave 
priority to public PAE's to carry out Section 8 restructurings. 
The problem is OMHAR never implemented that plan.
    You have an opportunity to insist on the system that you 
established nearly 4 years ago, a system under which the 
responsibility for restructuring Section 8 properties is 
delegated to willing and capable State and local agencies with 
reasonable Federal oversight and accountability to the Federal 
Government, the States, communities, and residents.
    Thank you very much, Mr. Chairman, for this opportunity to 
testify and CSHA and the State HFA's are committed to working 
with you to set the Section 8 restructuring program on the 
course Congress intended.
    Senator Reed. Thank you, Ms. Thompson.
    John Bentz. John, good to see you here.

                    STATEMENT OF JOHN BENTZ

            PRESIDENT, PROPERTY ADVISORY GROUP, INC.

      DIRECTOR OF THE NATIONAL LEASED HOUSING ASSOCIATION

    We thank you for the opportunity to appear before you 
today.
    Mr. Bentz. Same here. It is a pleasure, Senator. I 
appreciate Senator Sarbanes' comments relative to the 
timeliness of my visit to this Committee. And I appreciate your 
hearing me today.
    My name is John Bentz. I am President of Property Advisory 
Group in Providence, Rhode Island. I am a Director of the 
National Leased Housing Association, on whose behalf I testify 
today.
    As a matter of background, for the past 30 years, NLHA has 
represented the interests of owners, lenders, housing agencies, 
and others involved with Section 8 programs, both project-based 
Section 8 and tenant-based vouchers.
    My company alone owns 18 Section 8 properties throughout 
the country and we currently have several properties undergoing 
process in the Mark-to-Market or Section 8 renewal program, as 
they are called.
    Today, we will focus our comments on the future of OMHAR 
and the Mark-to-Market Program. Both issues are of great 
concern to NLHA members.
    The expiration of OMHAR authorization on September 30 
raises the question of whether the entity is to continue. It is 
generally recognized that OMHAR got off to a slow and rocky 
start and did not hit its stride until about a year ago. The 
program was new, OMHAR was not fully staffed, and owners were 
naturally wary of a program that could have significant 
negative consequences to the projects and to their investors.
    However, at this time, OMHAR appears to be functioning on a 
higher level. Nearly 140 mortgages have undergone full debt 
restructuring with 25 to 30 restructurings expected to close 
each month through September.
    Under the direction of Mr. Peppercorn, OMHAR itself has 
made significant reforms to make restructuring more attractive 
to owners. These reforms include the possibility of enhanced 
assessments and project management fees, and allowing interest 
on the owners' required deposits to reserves as an eligible 
project expense. In other words, OMHAR has shown that it does 
listen and responds to concerns raised by the stakeholders.
    At this point, the termination of the Mark-to-Market 
Program does not appear to be practical. Because of the high 
cost of Section 8 subsidies, a replacement mechanism would be 
needed to develop with no promise of anything better. The 
question does arise, however, as to whether or not OMHAR should 
be continued in its present form or whether the Mark-to-Market 
Program should be melded into HUD's regular multifamily 
programs.
    My opinion is it should be kept separate.
    NLHA feels that OMHAR must retain its functional 
independence in order to retain its current capacity to process 
debt restructuring. OMHAR has attracted some very talented and 
experienced staff members. We believe that their retention is 
essential to the continuation of the Mark-to-Market Program to 
avoid causing fatal interruptions. I think this has been 
discussed at great length in the previous discussions.
    We would caution against dismantling OMHAR and simply 
folding the Mark-to-Market activities into HUD's regular 
multifamily marketing program responsibilities.
    Implicit in our belief that OMHAR should be retained is our 
view that mortgage restructuring mechanisms as adopted in 1998 
should continue as long as Section 8 rents are to be based on 
comparable market rents.
    I believe Mr. Peppercorn mentioned FMR's--are they fair and 
are they marketable? Sometimes it is debatable.
    There are 400 properties that are anticipated to be 
eligible for debt restructuring in fiscal year 2002 alone. 
Without the legislative authority to restructure the debt on 
these properties, the FHA insurance fund will be forced to 
absorb a high level of mortgage defaults when properties 
undergo a rent reduction with unsatisfactory burdens being 
placed on owners and residents.
    Although OMHAR has been responsive to a number of 
suggestions from the housing community, there are other changes 
that could be made to improve the program. Most would require 
changes to the statute.
    In recognition of our time limitations, I will not explain 
them in any detail, but simply say that amendments should be 
made to address: One, owners contributions to rehabilitation 
costs; two, the inadequacies of market rents in some inner-city 
neighborhoods and rural areas, which are a very important item; 
and three, needed flexibility in certain HUD mortgage programs 
to improve the Mark-to-Market Program.
    Our written testimony provides more details on these issues 
and NLHA's members are developing more significant legislative 
recommendations this week which we will provide to the 
Subcommittee staff.
    I thank you for this opportunity to testify this morning.
    Senator Reed. Thank you very much, Mr. Bentz.
    Now, I will call on Ms. Vann.

                    STATEMENT OF CATHY VANN

                     PRESIDENT, ONTRA, INC.

    Ms. Vann. Thank you, Mr. Chairman.
    I am presenting this testimony today as the President of 
and on behalf of Ontra, Inc., as a private PAE for OMHAR. To 
place my testimony in perspective, during Ontra's 16 year 
tenure, we have had significant experience dealing with 
distressed Government assets. The $8.5 billion in assets that 
we have managed through that 16 years have been with the likes 
of Texas Housing Agency, FSLIC, FADA, FDIC, RTC, and numerous 
Texas banks and S&L's, including Southwest Plan Institutions.
    In the early 1990's, Ontra received ``above average'' 
ratings from all four Wall Street Investor Rating Agencies to 
facilitate its participation as a Special Servicer and equity 
partner in over $2.5 billion in distressed mortgage and real 
estate asset acquisitions with AIG, Citicorp, CS First Boston, 
and Goldman Sachs. About $1 billion of these assets were in a 
partnership with the Federal Government through the RTC S and N 
Series program.
    Ontra commenced its contract with OMHAR in July 1999 as one 
of the first two private PAE's. They were assigned 120 Rent 
Restructurings, referred to as Lites, 118 Debt Restructurings, 
referred to as Fulls, and 22 Comparability Reviews, for a total 
asset count of 260.
    In the interest of time, the detailed results are provided 
for the written record. But to summarize, Ontra has completed 
112 of the Lites, 83 of the Fulls, and 21 of the 22 Comp 
Reviews, for a total of 216 assets that have been either 
resolved, closed or completed. The statistics of my report are 
based on these numbers.
    In order to provide the services for this contract, Ontra 
management has historically dedicated 23 individuals to the 
delivery of the required services and currently has 16 staff 
members fully engaged in the process.
    Much of the remainder of my testimony, the nonstatistical 
portion, represents the results of my canvassing effort in 
February of the eight other private PAE's in response to a 
request from the GAO to participate in a panel regarding the 
disposition of OMHAR in the Mark-to-Market Program.
    Regarding the progress in rent and debt restructurings, as 
everyone has said, it had a slow start. But from the private 
PAE's perspective, there were two essential drivers to this.
    For the first 12 to 18 months, owners appeared disengaged 
and largely convinced that if they stalled, the Mark-to-Market 
would go away and in all fairness, there was little incentive 
for the owners to participate willingly in the program, given 
the financial structure at that time. The owner's incentive 
package which was in-
troduced in September 2000, has gone a long way to cure this 
problem. Since January 2001, there has been gaining momentum in 
the owner community to contemplate, comprehend, and finally, 
engage the program.
    Of Ontra's 195 completed Lites and Fulls transactions, and 
that includes resolved assets, there were only four opt-outs on 
Fulls and five opt-outs on Lites. Opt-outs are where the owner 
has chosen to just completely leave the affordable housing 
program.
    The program is very complex. That is the second driver, the 
complexity of the program. And I want to stress here that, with 
all the criticisms of OMHAR, we have a completely different 
perspective. We think the program is complex. We think OMHAR's 
response to it has been appropriate.
    The following comments I would like to keep in that 
perspective. There has been significant ramp-up and learning 
curve maturation involved. The following items will speak to 
this complexity issue.
    The heart of the Restructure Transaction has a 45-page 
model which includes not only all of the MAHRA business rules 
written in, but 14 different analytic schedules. There is eight 
standard real estate mortgage analysis schedules, such as 
operating budget analysis, long-term capital reserves, debt 
sizing, amortization, claim sizing, net savings. It includes an 
additional six schedules to analyze Tenant versus Project-based 
subsidies, IRP recaptures, Out-year HAP contract recaptures, 
affordability restrictions, exception rents, and an analysis of 
the anticipated repayability of the partial payment of claim, 
all in one integrated proforma.
    This is a very valuable tool. It is complex, but it is 
valuable. And I do not know how we could accomplish what we 
have accomplished without this sort of tool. Going further on 
more complexity.
    There is a minimum 26 individuals involved, and sometimes 
as high as 41 we have counted in a single transaction that have 
to 
be notified, coordinated, copied and satisfied, including four 
to five 
individuals at OMHAR, two to three at HUD, and numerous 
others such as local housing authorities, owners, property 
managers, tenants, OTAG's, PCA Consultants, and Appraisers, old 
lenders, new lenders, four different sets of attorneys and 
title company personnel.
    Once again, that is not an issue that is driven by OMHAR. 
That is the nature of the beast. That is what it takes to 
complete a transaction with all the parties, as what we believe 
the Government has intended us to do.
    There are four different closing scenarios. There are 
different rules and regulations for each of them, the most 
common of which is a 223(a)(7), in which there are 55 distinct 
documents, 8 signatories, and 14 distribution parties.
    However, in the last 24 months, all of these bases have 
been effectively covered. The long awaited momentum is 
currently being achieved. And note that the average time 
between acceptance and close for a standard Full Debt 
Restructuring, at least for this PAE, has gone from 15 months 
for assets assigned prior to January 2001 to 7 months for 
assets assigned after January 2001, representing a 114 percent 
improvement.
    Regarding the savings to date generated for the Federal 
Government, based on Ontra's portfolio, there has been an NPV 
savings on 119 completed and closed Lites and Fulls 
transactions of approximately $106.3 million of which $63.8 
million represented 79 Lites, and that included 19 Fulls that 
went to Lites. And there is $42.5 million which represents 40 
closed or completed Fulls.
    The estimated PAE costs to date, at least from our 
perspective, is about 3 percent of the NPV savings.
    Regarding the physical condition of the housing stock, we 
looked at this from two perspectives. The status of the stock 
as it came into the program or as it was assigned to us as a 
PAE, and then the long-term preservation dollars.
    As far as the deferred maintenance which was the status of 
the housing as it entered the program, the program calls for 
escrowing funds to cure immediate repairs within 12 months 
after closing.
    The repair escrow rehab numbers for Ontra's 31 closings, 
and we have 21 imminently pending closings which will close in 
the next 30 to 60 days. Of these 52 assets, we have escrowed 
almost $5.3 million on 4,683 units, 52 projects, which amounts 
to about a little over $100,000 per project and about $1,100 
per unit. But these numbers are somewhat skewed because five 
inner-city properties represent about 3 million or 60 percent 
of this total.
    When you look at it overall, deferred maintenance in our 
portfolio has not been a significant issue.
    However, the housing is aged. So from a long-term 
perspective, the same set of 52 assets closed and pending. The 
program has allowed us for set-asides of approximately $57.5 
million, averaging just over $12,000 a unit to cover the 20 
year long-term capital needs. This represents an average of 
about $614 per unit per year set aside for replacements.
    One of the more compelling statistics is that the average 
reserve deposit prerestructure went from approximately $309 to 
$439 postrestructure, which represents a 42 percent increase in 
annual reserve deposits to the replacement reserve accounts. 
These numbers seem to point to the fact that although it 
appears that not 
all of the housing is in terrible shape, but that the program 
is 
providing a unique opportunity to reconfigure the economics and 

provide for the stabilization, if not the rejuvenation of aged 
housing stock and thereby ensure quality affordable housing 
into 
the future.
    Regarding the operations of the Office of MultiFamily 
Housing Restructuring Assistance, in summary, on this issue, I 
hope that my entire testimony speaks to the fact that the 
program is very complex by nature. It has achieved definite, 
significant momentum. And it is providing solid savings while 
at the same time capitalizing on a unique opportunity to set 
the economics straight for the Nation's FHA insured Section 8 
housing stock, and to ensure continuance, at least in this 
sector, of quality affordable housing.
    OMHAR has been integral to this process and despite the 
criticism to the program and OMHAR's implementation of such it 
is my company's opinion that OMHAR has done an admirable job 
of juggling the priorities of the numerous stakeholders and the 

parties to the transactions, while at the same time developing 
well proportioned tools to manage the delivery of a very 
complex program. There are three additional items I wanted to 
address very quickly on a going forward basis.
    Senator Reed. Could you summarize very quickly, Ms. Vann?
    Ms. Vann. Okay. These are okay because they have been said 
before.
    Senator Reed. Thank you very much.
    Ms. Vann. Thank you.
    Senator Reed. Ms. Thomas.

         STATEMENT OF GERALDINE THOMAS, VICE PRESIDENT

                NATIONAL ALLIANCE OF HUD TENANTS

    Ms. Thomas. Thank you, Senator Reed.
    On behalf of the National Alliance of HUD Tenants, I am 
pleased to submit these comments on the Mark-to-Market Program. 
The National Alliance of HUD Tenants, or NAHT, is the Nation's 
first membership organization representing the 2.1 million 
families who live in privately-owned, HUD-assisted housing. Our 
membership today includes tenant groups and area-wide 
coalitions in 30 States.
    I want to thank you and the Subcommittee for the honor of 
speaking before you today.
    Since 1999, NAHT has convened a monthly Mark-to-Market Task 
Force, which I chair, consisting of the tenant coalitions among 
NAHT's membership working in the mark-to-market buildings.
    The comments we submit today reflect the consensus views of 
these NAHT affiliated groups, based on their experience with 
the Mark-to-Market Program on the ground in more than 20 
States.
    In the interest of time, I refer the Subcommittee to our 
written statement which explains why many owners have avoided 
the Mark-to-Market Program or opt for 1 year Section 8 contract 
renewals and rent reductions, known as OMHAR Lites. I will say 
though, that the main reason for the low level of owner 
participation in the mark-to-market was the decision by 
Congress to make owner participation entirely voluntary.
    With a boom economy, owners in many parts of the country 
have few reasons to go into mark-to-market and restrict their 
chance to make more money for 30 years.
    As long as Congress is unwilling to require owners to renew 
their expiring Section 8 contracts or to regulate rents for 
assisted housing, owners will continue to opt-out of HUD 
programs and demand ever high levels of Section 8 subsidies, 
renewals from HUD with few repairs as the price for staying in 
the program. Few owners will choose to go into mark-to-market. 
The results will be continued loss of affordable housing and 
missed opportunities for savings in the Section 8 program.
    Based on the decisions of NAHT Mark-to-Market Task Force 
and input from NAHT affiliates from across the Nation, we offer 
the following recommendations to extend and improve the Mark-
to-Market Program this year.
    Number one--Extend Mark-to-Market restructuring authority. 
NAHT joins the emerging consensus that the authority to 
restructure mortgages to save costs, as outlined in MAHRA, 
should be extended indefinitely.
    Number two--Continue OMHAR as a separate office, reporting 
to the Secretary. After a slow start, OMHAR is now functioning 
smoothly and produces results at a steady pace for HUD. To 
throw sand in the machinery at this time would cause major 
staff upheaval and confusion that would be both unnecessary and 
unwise.
    Congress should leave the successful Mark-to-Market Program 
in the separate office where it is located now, reporting to 
the Secretary of HUD for at least the next few years.
    Number three--Redefine OMHAR's governmental mission and 
transform PAE's into subcontractors for HUD. The experience 
with PAE's over the past few years shows that turning over HUD 
functions to State and private agencies is a bad idea. Because 
of costing more from the tenants' point of view, contracting 
out is undesirable because it adds to the complexity and 
confusion for tenants who now have to deal with several 
agencies rather than one. It is hard to educate the private 
PAE's in particular about the value and the role of tenant 
participation in decisions which affect our lives.
    So NAHT recommends that Congress define the essential 
Government functions of the Mark-to-Market Program--preparation 
and approval of the final MRRAS Plan and review of public and 
tenant comments and keep them inside of OMHAR.
    OMHAR should be allowed to subcontract out specific 
functions to PAE's or others, such as preparing a capital needs 
assessment or appraisal in cases where OMHAR staff cannot do 
them. But basic Government decisions regarding the MRRAS plan 
should not be privatized.
    Number four--NAHT offers several recommendations to improve 
tenant participation.
    A--Improve access to information. Tenants need help from 
Congress to get assets to project operation budgets and other 
documents to help HUD expose scams, identify savings, and 
promote sales to nonprofits.
    B--Extend the $10 million set-aside for technical 
assistance funding. Section 514 of the MAHRA expires on 
September 30. It is essential that Congress extend this program 
to continue funding for the well-designed but under-funded 
tenant assistance program which OMHAR has put in place.
    C--Extend time for review of the MRRAS Plan. We recommend 
that the required time for tenant review of the draft MRRAS 
Plan be extended from the current 10 to 30 days.
    D--Require written response to tenant comments. We 
recommend that OMHAR and or the PAE reviewing tenant comments 
respond in writing to these comments as it is required in 
Federal 
Environmental Reviews.
    E--Require notice to tenants and a required meeting 
throughout the mark-to-market process. Most important, tenant 
notice and at least one mandatory meeting should be required of 
all OMHAR Lites projects. Also, notice to tenants and a 
guaranteed meeting should be required if a property is being 
disqualified or kicked out of the program, or if an owner 
changes its decision and changes to OMHAR Lites, mark-to-
market, or opts-out of the program for any changes in property 
status. Tenants should also be notified if the PAE handling 
their property changes in mid-stream.
    F--Enforce Notice and Duty to Accept requirements when 
owners opt-out and fix problems with Enhanced Vouchers. HUD has 
stated publicly and in writing that it does not intend to 
enforce an owner's duty to accept Enhanced Vouchers in the 
event owners opt-out, even though Congress clearly required 
this last year.
    Nor has HUD always required owners to follow the 1 year 
notice to tenants when they decide to opt-out.
    Congress should clearly mandate HUD to enforce the law and 
use this opportunity to fix remaining problems with Enhanced 
Vouchers, which we describe in our statement.
    Number five--Support the Preservation Matching Grant bill 
to promote sales to nonprofit groups and preservation of mark-
to-market buildings. Today, OMHAR does not have access to 
capital grant source to help nonprofit groups buy and preserve 
buildings in the Mark-to-Market Program. For properties needing 
repairs, a capital grant source would also be useful to help 
owners fix up substandard buildings as part of the MRRAS Plan.
    The Preservation Matching Grant bill which passed the House 

2 years ago, has been refiled in the House as H.R. 425, and 
will soon be refiled in the Senate by Senator Jeffords and 
others. We urge the Subcommittee to hold an early hearing to 
give this bill renewed momentum.
    Number six--Adopt a Regulatory Program to Preserve 
Affordable Housing. In extending the Mark-to-Market, NAHT 
believes that the Congress should establish a national 
regulatory program to limit owners' ability to opt-out, prepay, 
and obtain windfall profits through high market rents at the 
expense of residents in affordable housing. It would be far 
preferable and less costly to preserve at-risk units by 
regulating owner choice to opt-out of HUD programs.
    Adoption of national regulations would send owners flocking 
to the Mark-to-Market Program and results in major savings to 
HUD. It would also mean more repairs for substandard buildings 
and a big increase in owners willing to sell to nonprofit 
groups.
    Number seven--Reaffirm and strengthen HUD and OMHAR's 
mandate to preserve mark-to-market buildings with project-based 
Section 8 assistance. While the current program appears to have 
resulted in only a few voucher conversions, it is premature to 
conclude that the risk of mass voucherization of HUD housing 
under mark-to-market has been avoided, as intended by Congress 
when MAHRA was passed. Congress should use this opportunity to 
clarify its intent to preserve the maximum amount of mark-to-
market eligible stock with project-based Section 8.
    Mr. Chairman, thank you for the opportunity to provide 
testimony to the Subcommittee today. NAHT stands ready to work 
with the Subcommittee and OMHAR to make the Mark-to-Market 
Program work better for tenants and the communities.
    Thank you.
    Senator Reed. Thank you very much, Ms. Thomas.
    Let me begin the questioning by addressing the same 
question to each of the panelists beginning with Mr. Wehrwein.
    Putting aside for just one moment the placement of OMHAR in 
HUD, either independent or part of the Housing Office, what is 
the single most important change we could introduce into a 
reauthorization bill?
    Mr. Wehrwein. Senator, I think the most important change 
that has already occurred has been the incentive guidelines 
that have made it much more economically feasible to undertake 
these transactions. They are currently not even in regulatory 
form. And some more significant support of those guidelines by 
the Subcommittee and the Senate would be much appreciated.
    Senator Reed. Thank you, Mr. Wehrwein.
    Ms. Thompson.
    Ms. Thompson. Yes, Mr. Chairman. The most important thing 
you could do in reauthorizing this program is to instruct HUD 
or OMHAR, whichever winds up running it, to devolve greater 
decisionmaking to the State and local governments, as Congress 
first intended, and cut the paperwork.
    Senator Reed. Thank you.
    John, you have indicated the three issues. One, owner's 
contribution to the rehabilitation fund; two, the inadequacy of 
certain market rent in urban areas as a problem; and then, 
finally, just increased flexibility. Would you want to 
elaborate on any one of those, or add an additional comment?
    Mr. Bentz. Yes, Senator. The rents that are in the inner-
city areas, and when they do a comparable market study, in a 
lot of cases, do not really come up to what you really need to 
support and sustain an inner-city development because of the 
money it takes to run a development of this type and you are 
doing a comparable market study that shows that the rents that 
you are getting are excessive and the rents that you are 
getting are not really excessive because of the items that you 
have to address in each one of these facilities.
    I think we have gone through a couple of mark-to-market 
studies and we are going through a couple of restructurings. 
The rents that have showed in the comparable market studies do 
not really come to what we really need to run one of these 
developments.
    Senator Reed. Thank you.
    Ms. Vann, what would you propose on behalf of your 
organization or your perspective in terms of other than the 
replacement of OMHAR?
    Ms. Vann. I would like to make a comment based on the PAE 
consensus, private PAE consensus on that canvassing that I did. 
And I think from our perspective, we really feel that the 
program is working. So, we would prefer not to see many more 
changes. Now that we have it set in place and we are on a roll, 
we would like to just continue.
    Senator Reed. Thank you.
    Ms. Vann. I am sorry. I cut off so quickly before, I did 
not get to thank the Committee. I really do appreciate the 
opportunity to present testimony today.
    Senator Reed. Well, we thank you for coming and for your 
excellent testimony.
    Ms. Thomas, your perspective, please? What would you feel 
would be essential to be included in new legislation?
    Ms. Thomas. Yes, just to make sure that tenants are 
notified up front and that they are part of the process from 
the very beginning. I think that is crucial.
    Senator Reed. How would you evaluate tenant participation 
so far based upon your experience and the comments from your 
colleagues?

    Ms. Thomas. In some areas, it is good, and in others, it is 
not so good. We know that in the beginning, everything was a 
slow start. But there has been changes made. But we must 
continue to strive to make it even better.

    Senator Reed. Thank you.

    Let me raise an issue here that was joined directly and 
indirectly in the testimony. That is, there is a debate about 
the public versus private PAE's. Many State housing finance 
agencies have extensive experience--my housing agency in Rhode 
Island, mortgage finance housing agency, is an excellent one. 
Yet, for one reason or another, as has been indicated, State 
PAE's have not done as much work as the private PAE's.

    Several questions. Why are the private PAE's doing more? A 
related question in my mind is, I presume that they are subject 

to the same paperwork requirements, the same models, the same 
everything.

    I think Ms. Thompson wants to respond. And Ms. Vann, you 
might want to respond, too.

    Ms. Thompson. Certainly. I just want to put the numbers in 
some perspective, if I could, first, Mr. Chairman because I 
think there is some misconception that somehow the public 
agencies have done many fewer restructurings than the private 
agencies. That is not true as a percentage of the assets they 
have been given. They simply have not been given as many assets 
as the private sector. And I addressed that in my testimony 
because the law required when they are an improved PAE, a 
public PAE, that OMHAR mutually agree with them on the assets 
that they will receive.

    Instead, OMHAR, from the very beginning of this program, 
has given assets to the private sector without even notifying 
in many cases the public sector. And in some cases, it has 
assigned an asset and within 2 weeks will call up the agency 
and say: You know what? We are moving fast and we want to give 
this to a private sector entity. We are just going to take it 
away from you, for no reason related to capacity.

    Let me give you the percentages because I think it is very 
instructive. This comes off of OMHAR's own web site as of 
yesterday. The public PAE's have completed 29 of the 226 full 
restructurings they have been given. That is 13 percent. The 
private PAE's have completed 101 of the 653 Fulls they have 
been given, 15 percent, just 2 percent more.

    Of the Lites, 220 of 258 Lites that the public have been 
given, they have finished 85 percent of them. Of the 284 of the 
355 Lites that the private sector received, they have completed 
only 80 percent. So the public agencies are actually doing 
better on the Lites, just 2 percent less on the Fulls 
restructurings. They simply do not have the assets.

    You have to remember, too, Mr. Chairman, that a number have 
dropped out of the program. Some did not even sign their 
original contracts because they felt that they just could add 
no value to such a prescriptive program--Virginia, 
Pennsylvania, Michigan, ironically, Governor Engler's agency 
headed by Jim Logue, who was the Multifamily Assistant 
Secretary at HUD, under Secretary Kemp, actually was a 
consultant to the Subcommittee when you wrote this legislation. 
His agency has withdrawn because they think the program is so 
overly prescriptive, that they are simply agents. They are not 
being called upon to use their expertise and they would rather 
use it elsewhere.
    Senator Reed. Thank you.
    Ms. Vann, I want to give you a chance to respond if you 
would like to.
    Ms. Vann. I guess it is hard to speak to what has happened 
between OMHAR and the public PAE's because I have been on the 
outside looking in.
    I know from a private PAE perspective, OMHAR possibly 
making up for the slow start in the beginning and its lining up 
the infrastructure. It seems like maybe--and this is just kind 
of a perspective, that the private PAE's or private sector is 
more driven toward speed and rolling assets and moving them 
through. And I think that strikes to the heart of the 
disagreement about the prescrip-
tiveness of the program.
    Entities who have done a lot of affordable housing have 
their way of doing it. And here comes MAHRA, which we believe 
is a very specific law and you had to have a very specific 
program to make sure that the statute was implemented correctly 
and according to what Congress intended.
    So it has been a benefit to us. And that is the only ying 
and yang that I see between the two.
    Senator Reed. Thank you, Ms. Vann.
    Ms. Thompson, before I yield to Senator Allard, if you 
could just respond.
    Ms. Thompson. If I could just respond to that comment.
    First of all, the numbers do not suggest that they are 
doing more as a percentage, as I said before. But it is very 
important that we focus on the point about driven toward speed. 
This is not a program that should be driven by speed, 
especially under pressure from OMHAR because they have so much 
catching up to do.
    This is a program where the States have to look at, should 
look at, everyone should look at the preservation needs of 
these properties. And what we are hearing from the States, and 
I am not going to speak to the private experience because I am 
not familiar with it, is that OMHAR is not allowing them to do 
what is necessary to keep these properties in low-income use 
for the long term. You are going to have this problem right 
back before you in a few years if we do not look at that aspect 
of the program.
    Senator Reed. Thank you very much.
    Let me turn to the Ranking Member, Senator Allard.
    Senator Allard. Thank you, Mr. Chairman. And I hope that I 
am not duplicating a question that you asked before. We juggle 
several balls in the air at the same time and sometimes it 
requires us just to step out of the room for a moment or two.
    Regarding those properties that we were mentioning in the 
last panel, what we call the Watchlist properties, these are 
properties with physical and financial troubles that are being 
monitored by the Office of Housing, what do you think should 
happen with these properties and what should be the role of 
HUD's Office of Housing?
    I thought I would call on you, Mr. Wehrwein, and Ms. 
Thompson and Mr. Bentz to respond to that question.
    Mr. Wehrwein. Thank you, Senator.
    I share some of the concerns voiced in the previous panel 
about the adequacy of the Watchlist process. In my estimation, 
it doesn't portend well for the future of those assets. And I 
would argue that the HUD Office of Housing Resources is 
probably insufficient to oversee and manage all of those 
properties and to assure that, in fact, they are being 
monitored closely. I just do not think they have the resources.
    I would suggest that if the Subcommittee were interested in 
considering any changes to the legislation in terms of 
reauthorizing and amending, that one consideration might be 
that there be consideration given to pushing more of those 
assets into a required restructuring because, as Ms. Thompson 
said earlier, I think that in a different category of assets, 
we are going to see these same assets come before us with some 
problems in 4 or 5 years.
    Senator Allard. Ms. Thompson.
    Ms. Thompson. I would simply add, I agree with Mr. 
Wehrwein. I would simply add that it is too bad at this point 
in a relatively new program in terms of how long it has been 
really fully operating, that we even have a Watchlist. This is 
the very thing that we were trying to get away from. All of 
these properties were on a Watchlist technically to begin with, 
but we are beyond that at this point. But I agree. I think that 
restructuring should be done to those properties because their 
long-term health, both physically and financially, 
managerially, is not assured.
    Senator Allard. Mr. Bentz.
    Mr. Bentz. Yes, Senator. Thank you. The Watchlist, I think, 
is a misnomer because the original intent, as two people 
previously testified, was to get the properties out of HUD, and 
if you are on a Watchlist, you go back to HUD, to the HUD 
office, which is something I believe that they were trying to 
eliminate to begin with.
    The restructuring process is somewhat cumbersome and the 
Watchlist is something that I think they should reevaluate. It 
is a definite problem.
    Senator Allard. I would like to address this to, Mr. Bentz, 
and Ms. Vann, and Ms. Thomas. Last September, HUD released a 
package of initiatives for property owners participating in the 
Mark-to-Market Program. How helpful have these initiatives been 
in bringing reluctant owners to the table from your 
perspective?
    We will start with you, Mr. Bentz.
    Mr. Bentz. I think they have been extremely helpful. We 
have done a number of deals over the last 2 or 3 years and we 
have benefited from some of the changes. I think Senator Reed 
asked me a question a little while ago which it kind of went 
right over my head with regard to the owner's participation in 
the 20 percent that is supposed to come up with the 
restructuring of a particular development.
    That has been one of the drawbacks in the entire program, I 
think, is the 20 percent that the investors basically have to 
come up with. And in a lot of cases, they just do not want to 
come up with the dollars, so they either opt-out or they go 
through another form of restructuring which is not beneficial 
to the development.
    Senator Reed. Ms. Vann.
    Ms. Vann. I think it has had a significant impact, made a 
big difference in our portfolio.
    Senator Reed. Ms. Thomas.
    Ms. Thomas. I think that, actually, it was a problem in 
areas because you had owners opting-out and definitely tenants 
not being aware of anything. So it was not that great for us.
    Senator Allard. Do you think that offering such incentives 
could have an unintended effect with some owners and make them 
hold back from participating in the program and hope that 
better incentives might come along later?
    Ms. Thomas. Yes.
    Senator Allard. I would like to have you three answer that.
    Mr. Bentz. Yes. I would say, yes. One of the other 
drawbacks, especially in the complete restructuring program, is 
the 30 year obligation. If you are going to go through a 
restructuring from an owner's standpoint, depending on the area 
you are in, 30 years is a long time.
    Senator Allard. A long time.
    Mr. Bentz. I do not think I am going to be here for another 

30 years. Maybe my kids will, but I do not think I will be. The 

30 years is one of the biggest drawbacks I think in a lot of 
the 
programs, to get owners and investors to stay in the program.
    Senator Allard. You are suggesting that maybe we look at 
these not so much from a housing aspect, but just almost from a 
commercial property aspect, where you think in shorter terms, 
generally.
    Mr. Bentz. Yes.
    Senator Allard. Ms. Vann.
    Ms. Vann. We have not sensed that any of the owners are 
still holding out for a better deal. We are starting to sense 
that the owners are saying things like, we just want to get 
this done. We just want to get through it.
    And one of the real positive aspects of the program that I 
have seen is that owners are very pleased with the amount of 
rehab and rejuvenation of these properties. It is solving a lot 
of their problems in that area, also. I do not see any changes 
in the future that could make much of a difference in what we 
are doing.
    Senator Allard. Ms. Thomas, do you want to add anything?
    Ms. Thomas. Just basically that I am not sure what the 
owners are holding out for, whether they are holding out for 
more money or not. I do know that we did have problems and 
still have problems, and that tenants are suffering for it.
    Senator Allard. Okay. Now the last question, if it is okay, 
Mr. Chairman.
    Senator Reed. Please.
    Senator Allard. Do you think there is anything more program 
administrators could do to remove barriers to owner 
participation?
    We will start with you again, Mr. Bentz.
    Mr. Bentz. I do not think so. I think, overall, the program 
that is in place has been, as I said before, somewhat 
reasonable. I think it is probably the best that we are going 
to get at this particular time without specific legislation to 
address some of the other areas which I mentioned previously.
    Senator Allard. Okay. Ms. Vann.
    Ms. Vann. I think the cost of small loans, it is cost-
prohibitive. If there was a way that you could see fit to maybe 
aggregate and pool loans when they are, say, under $150,000, 
under $200,000, because what we find, to get lenders to do 
those smaller loans, the fees are just incredible. And rightly 
so because the lenders have to do FHA servicing. To justify the 
effort, they have to charge a lot of fees.
    We are left in a limbo area there on the small loans where 
there are very little options available to the owners. They can 
come up with cash, but then, that kind of presents a problem 
for them. So if there could be a way to provide a vehicle for 
under $200,000, a ready vehicle, then that would be a great 
improvement.
    Senator Allard. Ms. Thomas.
    Ms. Thomas. I just think more money should be available so 
that the folks can go through the process. And hopefully, 
owners will get on board.
    Senator Allard. Mr. Chairman, thank you.
    Senator Reed. Thank you very much, Senator Allard.
    Just a final opportunity. You listened to the previous 
panel. If you have comments with respect to what they said, Mr. 
Wehrwein, a reaction or comment, on any point that you think 
should be addressed based on the previous panel.
    Mr. Wehrwein. Thank you, Mr. Chairman. It sounds to me like 
there is an awful lot of agreement around the extension of the 
authorities and the only disagreement is where it lands.
    I would just assert that we would attempt to do what would 
throw the least, I think someone said, sand in the machinery, 
and try to keep this thing moving along and attempt to react to 
some of the problems that Ms. Thompson and others have talked 
about and attempt to fix a machine that is already working.
    Senator Reed. Ms. Thompson.
    Ms. Thompson. Yes, I would like to address something that 
Mr. Peppercorn said in his statement.
    He talked about the consolidation of the public agencies 
under this program. There has been no consolidation. The 
program provides for no consolidation. What there has been is 
elimination. They have driven public agencies out of this 
program. Forty-two agencies, Mr. Chairman, Senator Allard, 42 
State housing agencies, including both of yours, applied and 
went through a rigorous review at HUD and were approved to 
participate.
    Every agency that applied was approved, many more than 
anyone ever thought would step up to the plate. Now, today, we 
have 22 participating. And not yours in Rhode Island. And your 
Colorado agency, Senator Allard, is really struggling. In fact, 
I spoke with them about a deal the other day and I finally 
said, look, I do not know what to tell you, except call John 
Carson because he will help you, and I am very serious. And you 
will be hearing from them, John, if you haven't. The agencies 
are very frustrated. They do not have other priorities, as Mr. 
Peppercorn said. If they did, why would 42 of them have 
applied? Why would 42 of them have staffed up and gotten ready 
to run this program if they had other priorities?
    He also mentioned that the State HFA's, that this is very 
difficult real estate work. It is not just allocating credits 
or allocating bonds, as though the State HFA's simply handed 
those out of a drive-through window.
    They do rigorous analysis under those programs. They are 
required to by law. The housing credit is probably the most 
successful Federal housing program ever, as we saw with the GAO 
report a few years ago and the fact that you folks increased it 
in the Congress by 50 percent, 40 percent in the case of bonds, 
you thought they were working so well.
    Why were they working so well? Because the State and local 
governments make the decisions based on the unique conditions 
in their States and communities, not Washington.
    So to say that the very agencies that can run those 
programs and run them well and use the same disciplines that 
they would use under the OMHAR program, are somehow not capable 
of running this program.
    And to somehow say that it is not OMHAR that is complex, it 
is the program that is complex. OMHAR has created the program. 
Those 68 forms that are required for each deal are not required 
by the statute you wrote, not in any way, shape or form.
    If you think back to the demonstration that you first 
authorized as a pilot for this program, it worked very well. 
But they loaded all kinds of requirements on top of that, 
requirements that are not necessary. They are not driven by the 
statute. And we urge you to review that as you look toward the 
reauthorization.
    Thank you.
    Senator Reed. Thank you.
    Mr. Bentz.
    Mr. Bentz. Thank you, Senator. It appears, I think, with 
past testimony between Mr. Weicher and Mr. Peppercorn, that 
there is a little bit of friction between the two agencies.
    I think it is to the benefit of all of us, and especially 
for those two gentlemen and their two agencies, to get together 
to form some kind of an alliance that is going to allow the 
program to continue.
    And if it has to do with the PAE's and get them more 
involved, I think that that is something that has to happen.
    Overall, I think the program has run fairly well over the 
last 6 months to a year. Everybody has stated that it has taken 
3 years to get underway and I think that is--I do not know 
whether it is justifiable or not justifiable. But it was a very 
cumbersome task that they had to undertake and I think with the 
new administration coming in, I think they are going to have to 
work together to make the program work.
    Senator Reed. Thank you.
    Ms. Vann.
    Ms. Vann. I think the comments that I heard today about 
moving OMHAR into HUD to achieve better efficiencies and 
consistency of the program is a plus, as long as the personnel 
can be maintained, so we do not have new learning curves, loss 
of momentum, et cetera.
    Senator Reed. Thank you.
    Unless Senator Allard has additional questions, you have 
the last word, Ms. Thomas.
    Ms. Thomas. Thank you. I would just like to see OMHAR stay 
where it is, and to operate in the way it has been. It is 
working now. Let's just push forward.
    I want to thank the Committee once again for the 
opportunity to speak before you.
    Senator Reed. Thank you.
    Thank you all for your testimony. There may be written 
questions and we would request that you respond promptly.
    Thank you very much. We are adjourned.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF SENATOR JACK REED
    Today's hearing is about affordable housing and how to keep it 
affordable. In particular, we will explore the success of the 
``MultiFamily Assisted Housing Reform and Affordability Act''--the so-
called Mark-to-Market legislation. This law is scheduled to expire on 
September 30 and we will be attempting to determine how well it has 
worked and whether it needs to be reauthorized.
    Congress passed the Mark-to-Market legislation in 1997 in order to 
update and restructure Section 8 project-based developments insured by 
Federal Housing Authority. About 8,500 such projects with over 800,000 
units of affordable housing were built in the late 1970's and the early 
1980's.
    The Federal Government guaranteed that these projects would be 
built by insuring the mortgages and using Section 8 contracts to 
guarantee that the rents would be high enough to pay off the mortgages. 
In most markets, these rents were above market levels. Typically the 
mortgages for these multifamily dwellings had terms of 40 years and the 
Section 8 contracts had terms of 20 years.
    By the late 1990's, the 20 year Section 8 contracts started to 
expire and Congress had begun to renew all Section 8 contracts at 
market rents for a period of only 
1 year. In markets in which the fair market rent was higher than the 
contract rent, a simple renewal of the contract was sufficient to 
continue supporting the property.
    However, in many cases, contract rents remained far above local 
rents. In these cases, Congress' decision to renew Section 8 contracts 
at lower market rents was likely to result in rents too low to support 
the remaining mortgage payments on such properties. As a result, it 
looked likely that these FHA-insured properties would default, costing 
Federal taxpayers tens of billions of dollars.
    The Mark-to-Market legislation was passed in an attempt to address 
this problem. It had two objectives: first and foremost, the 
legislation was meant to preserve 
affordable housing by putting it on a stronger footing, both 
financially and physic-
ally. Second, the law was designed to reduce the cost to the Federal 
Government 
of rental assistance payments.
    The Office of MultiFamily Housing Assistance Restructuring (OMHAR) 
was created to accomplish both of these objectives, with the help of 
Participating Administrative Entities (PAE's).
    Our panel of witnesses, both Government witnesses and stakeholders 
involved in the restructuring process, will tell us what progress has 
been made in restructuring the rents and debts of the FHA-insured 
Section 8 portfolio; the savings such restructurings have generated for 
the Federal Government; the physical condition of the housing stock 
that is being preserved; and the effectiveness of the Office of 
MultiFamily Housing Restructuring Assistance or OMHAR.
    We look forward to their testimony.
                               ----------
              PREPARED STATEMENT OF SENATOR JON S. CORZINE
    Thank you, Mr. Chairman, for holding this hearing and I also want 
to thank all of the witnesses for appearing here today to help discuss 
the status of the Mark-to-Market Program and to help us determine what 
we need to do to continue to 
preserve the FHA insurance fund while also maintaining safe, quality 
housing for 
low-to-moderate income Americans across this country.
    Although I am new to the Committee, I believe the issue of 
affordable housing is of the utmost importance to our Nation. This is 
especially true in the current economic climate when so many working 
families are struggling to find access to decent, safe, affordable 
housing and when economic indicators suggest that we may be facing a 
downturn. I am looking forward to learning more about the Mark-to-
Market Program and to having a productive discussion as to how we may 
best move this program forward.
    Again, Mr. Chairman, I thank you for holding this hearing and I 
look forward to hearing from our witnesses today.
                               ----------
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    Mr. Chairman, I want to congratulate you on the occasion of your 
taking the gavel of the Housing and Transportation Subcommittee. Given 
your ongoing active interest in these issues, I look forward to your 
leadership of the Subcommittee.
    While the Subcommittee has not yet been officially reorganized, 
Senator Gramm graciously encouraged us to proceed with this and other 
hearings as we try to get the work of the Committee done.
    Today's hearing is an important review of the status of bipartisan 
legislation passed in 1997 to deal with the problem of expiring Section 
8 contracts on FHA insured buildings. The purpose of that legislation 
was to reduce Section 8 rents that were above market, restructure the 
mortgages where necessary, and provide for needed renovation. The 
result we were aiming for, and seem to be achieving to date, was the 
upgrading and preservation of valuable affordable housing at rates the 
Federal Government could afford.
    The legislation establishing this ``Mark-to-Market'' Program, as 
well as the Office of MultiFamily Housing Assistance Restructuring 
(OMHAR), which was created to implement the program, expires at the end 
of this fiscal year. Yet, the need for the program will continue for a 
number of years to come.
    It is our responsibility to decide how we want to proceed with 
regards to the legislation. It is my intention to work with my 
colleagues in the Congress and in the Administration to come to a fair 
determination on how to keep this effort on track.
    Again, I want to thank Senator Reed for holding this hearing. He 
has put together two very good panels of witnesses that provide an 
opportunity for all the stakeholders to participate. I feel very 
strongly that the Committee should proceed in a methodical, workmanlike 
manner in an effort to hear from all interested parties. In the end, 
this kind of thorough review and comprehensive airing of the issues 
should result in better legislation. This hearing is consistent with 
this approach.
    Mr. Chairman, I look forward to reading the testimony.
                               ----------
           PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD
    The Mark-to-Market Program got off to a slow start after Congress 
passed the ``MultiFamily Assisted Housing Reform and Affordability 
Act'' in 1997. But in the couple of years that the program has been 
operating, it has helped put hundreds of housing projects on a more 
sound financial footing.
    It is my understanding that the program has already saved taxpayers 
$450 million by helping housing projects restructure their debts and 
reduce their costs so that the Government could in turn reduce the cost 
of Section 8 vouchers without causing hardship to low-income tenants. 
Nearly 600 projects have already undergone some type of restructuring 
under the Mark-to-Market Program and the program appears to be 
achieving its goals.
    When the program started there were about 8,500 projects that were 
eligible for restructuring. Those projects had more than 800,000 
housing units--that is 800,000 places that people call home. And the 
Mark-to-Market Program can help focus resources where they should be 
focused on maintaining those units, rather than simply servicing debt. 
The program has worked well for some, but it could be working well for 
many others.
    In my opinion, OMHAR and the Mark-to-Market Program have gotten off 
to a good start and it is my hope that the witnesses will provide some 
insights to explain how we can ensure that the full benefits of the 
program can be realized.
                               ----------
                 PREPARED STATEMENT OF JOHN C. WEICHER
            Assistant Secretary for Housing-FHA Commissioner
            U.S. Department of Housing and Urban Development
                             June 19, 2001
    Chairman Reed, Ranking Member Allard, distinguished Members of the 
Subcommittee, thank you for inviting me to testify on the impending 
expiration of the Office of MultiFamily Housing Assistance 
Restructuring. As you know, the restructuring authority and the 
authorization for OMHAR expires on September 30, as part of ``The 
MultiFamily Assisted Housing Reform and Affordability Act.'' I am here 
this morning to discuss the Administration's position concerning the 
future of OMHAR and its legislative authorities.
    Before I begin, let me express my appreciation to this Committee 
for its support of my confirmation as Assistant Secretary for Housing-
FHA Commissioner. It is an honor to appear before you today.
    I am reminded that the first question from Senator Sarbanes at my 
confirmation hearing concerned the ``Mark-to-Market'' Program. Chairman 
Reed also raised the issue of mark-to-market during the hearing. So it 
is fitting that my first hearing before this Subcommittee should be on 
the same subject.
    Mr. Chairman, the challenges of HUD's multifamily assisted 
inventory involve some of the most complex issues that the Department 
has had to address. I first became involved in this subject 15 years 
ago as a member of the Hills-Reuss task force. Congress passed 
legislation in 1987 and again in 1990, but the problems remained 
unresolved. During the mid-1990's, Congress wrestled for 3 years with 
the mark-to-market concept before finally passing ``The MultiFamily 
Assisted Housing Reform and Affordability Act'' in 1997. The process 
for dealing with these properties has taken longer than originally 
anticipated, for a variety of reasons, so we now need to revisit this 
issue yet again.
    Since assuming the position of Commissioner, I have discussed with 
Secretary Martinez the future of these authorities and the implications 
for public policy, particularly with regard to the residents of these 
properties. Discussions within the Administration are still ongoing, 
and will necessarily involve the Office of Management and Budget, among 
others, before a final recommendation is made. However, HUD's fiscal 
year 2002 budget proposal submitted to Congress in April acknowledged 
the Administration's intention to seek an extension of the debt 
restructuring authority. In his testimony before the Senate 
Appropriations Subcommittee last week, Secretary Martinez stated that 
there continues to be a need for this program, and that HUD would be 
seeking an extension of the restructuring tools.
    There appears to be general support for an extension of the 
restructuring authority beyond the current scheduled expiration date. 
The Administration will be submitting legislative recommendations on 
how best to proceed with that extension.
    OMHAR estimates that over 2,500 Section 8 properties have contracts 
that expire after this fiscal year; approximately 1,300 are estimated 
by OMHAR to be above market. There is a continuing statutory 
requirement to mark down rents to market levels. Without the mortgage 
restructuring tools, it seems likely that many of these properties 
would default on the mortgages. This would expose FHA to significant 
claims and place the housing of thousands of families in jeopardy.
    The future of the OMHAR office itself has generated a greater level 
of discussion than the extension of the restructuring authorities. The 
first few years of OMHAR were less productive than had been hoped for a 
variety of reasons. In large 
part, the first 2 years were spent establishing program infrastructure 
and assigning 
the properties to the Participating Administrative Entities (PAE's) for 
restructuring 
actions.
    OMHAR did not complete any restructurings until the fourth quarter 
of 1999, some 2 years after it was created. These first completions 
were rent restructurings, without any changes in the mortgage amount. 
The first full mortgage restructuring did not occur until the second 
quarter of 2000.
    Since then, however, there has been significant progress. OMHAR 
completed 423 rent restructurings by the end of 2000 and has completed 
another 63 through May of this year. More importantly, the pace of full 
mortgage restructurings has picked up sharply this year. There were 30 
full mortgage restructurings in 2000, and another 77 so far in 2001. 
Further, I understand that an additional 75 full restructur-
ings are scheduled for closing in the next 60 days. Since full mortgage 
restruc-
turings are more complicated, this is encouraging. But clearly more 
needs to be done, and we want to ensure that this important work is 
allowed to continue.
    In his Appropriations Subcommittee testimony last week, Secretary 
Martinez also discussed the future organizational structure of OMHAR. 
He stated that the Department expects to request a 3 year extension for 
OMHAR with two changes: (1) that the office would no longer be headed 
by a Presidential appointee, (2) and that OMHAR would fall under the 
authority of the Office of Housing.
    Accordingly, we may recommend to Congress the continuation of a 
separate OMHAR office dedicated to this work, but under the authority 
of the FHA Commissioner, rather than maintaining its current position 
as an independent office. This move would simplify issues of 
jurisdiction and coordination. At present, the Office of Housing is 
responsible for subsidy payments and the management of insurance 
contracts, while at the same time OMHAR is responsible for 
restructuring them 
for the future. The same projects are under the jurisdiction of two 
separate, equal 
offices, each reporting to the Secretary simultaneously. With OMHAR 
under the 
authority of the Commissioner, this anomalous situation would no longer 
exist. In 
addition, this proposed structure would facilitate coordination between 
OMHAR 
and the 18 Multifamily Hubs, which are located throughout the country 
and have 
detailed information and knowledge on any particular property in the 
field. We 
believe the completion of OMHAR's work would be expedited by a simpler 
administrative structure.
    At the same time, we certainly recognize the critical nature of the 
work under OMHAR, and would have every expectation that the office 
would be fully dedicated to that work and only that work. Having come 
halfway through the mark-to-market process, we intend to see it through 
to completion.
    In addition, since OMHAR would be an entity reporting to the 
Commissioner, we do not expect to recommend reauthorization of the 
position of OMHAR Director as one requiring appointment by the 
President and confirmation by the Senate. This would avoid a 
circumstance where one Presidential appointee reports to another 
Presidential appointee of equivalent rank.
    We understand that the bulk--almost two-thirds--of the 1,300 
anticipated properties subject to debt restructuring have contracts 
that expire in the next 2 fiscal years. With an average processing time 
of approximately 13 months following contract expiration, we believe an 
extension of 3 years beyond fiscal year 2001 is appropriate. By 2004, 
we should all be able to judge whether any further extension is needed, 
or whether the small remaining workload can be handled within FHA.
    Mr. Chairman, OMHAR and the authority it exercises were enacted to 
strike a balance between the preservation of affordable rental housing 
and the rising costs of renewing expiring Section 8 contracts. If 
Congress had not intervened, project-based Section 8 renewal needs 
would have reached $7 billion annually by 2007. Recently, encouraging 
progress had been made in preserving the viability of many of these 
properties. But much work remains to be done. For Secretary Martinez, 
and for me, the continuation of this work is one of our highest 
priorities. We look forward to working with Congress and this Committee 
in the coming weeks on this important issue.
    Thank you.
                               ----------
                PREPARED STATEMENT OF IRA G. PEPPERCORN
    Director, Office of MultiFamily Housing Assistance Restructuring
            U.S. Department of Housing and Urban Development
                             June 19, 2001
    Mr. Chairman, Ranking Member Allard, and distinguished Members of 
the Subcommittee, thank you for the opportunity for me to be here today 
in order to give you a status report on the Mark-to-Market Program. I 
would like to give you a brief but comprehensive look at what has been 
accomplished by OMHAR through the Mark-to-Market Program, what remains 
to be done, and what will be needed in order to allow the Mark-to-
Market Program to continue achieving the goals that Congress envisioned 
in the MAHRA legislation.
    At this time I would like to thank Secretary Martinez' Office and 
John Weicher, Assistant Secretary for Housing--FHA Commissioner, for 
their leadership and for asking the honest questions about the Mark-to-
Market Program's continuation. 
If continued, I believe their thoughtful analysis will only serve to 
strengthen the 
program.
    I would also like to recognize the leadership of a man serving on 
this Committee, Senator Evan Bayh, under whom I had the honor of 
serving for 8 years.
Let Me Start With A Brief Background On OMHAR
    Congress created the Office of MultiFamily Housing Assistance 
Restructuring (OMHAR) as a semi-independent entity within HUD to 
address a financial crisis in the Section 8 program for affordable 
housing assistance. Former Senator Connie Mack noted at the time that 
an effort to ``reform the Nation's assisted and insured multifamily 
housing portfolio'' was needed in order to handle what was termed the 
most difficult problem in housing at the time. OMHAR has accomplished 
much and worked hard to meet the challenge of its mission. Unless 
changes are made to the sunset provision in the MAHRA legislation, 
OMHAR and its restructuring authority will go out of existence on 
September 30, 2001. However, the statutory requirement and the need to 
reduce the rents on expiring above-market, Section 8 contracts will 
continue. The many goals of the Mark-to-Market Program can be grouped 
into three categories:
Social
 Preserving affordable housing by maintaining the long-term 
    physical and financial integrity of the privately-owned, publicly-
    subsidized rental housing insured or held by FHA.
Financial/Economic
 Reducing long-term project-based Section 8 rental assistance 
    costs.
 Reducing the risks of large FHA insurance costs.
Management/Administrative
 Promoting operating and cost efficiencies in Section 8 
    assisted properties.
 Addressing problem properties by terminating relationships 
    with owners who have not met their obligations and responsibilities 
    to HUD and/or to their tenants.
 Establishing a nationwide network of local public and private 
    entities to administer the Mark-to-Market Program.
 Engaging and organizing tenant and local community 
    participation in the restructuring process to preserve affordable 
    housing.
 Providing a consistent, prudent, and documented process for 
    all participating properties.

    The Mark-to-Market Program offers a ``win-win'' opportunity for the 
Government, taxpayers, tenants, and communities, as more deals are 
closed, we are saving more money by reducing excess payments on Section 
8 subsidy contracts, while ensuring that the properties involved are on 
a sound financial footing, and preserving needed units of affordable 
housing in good condition, thereby meeting the goals of the Mark-to-
Market Program.
    Almost 900 properties--comprising over 63,000 units--have gone 
through the mark-to-market process, resulting in net savings of $895 
million. A big job remains--about half of the proerties assigned to 
OMHAR still remain to be completed.

          In addition to the large number of contracts expiring through 
        the remainder of this fiscal year, there are 3,715 more Section 
        8 contracts expiring in the next 3 fiscal years, almost half of 
        which could be above market.
          The Mark-to-Market Program is operating efficiently. Part of 
        our management approach has been to integrate constructive 
        feedback from all stakeholders--this has enabled us to 
        incorporate significant improvements in the process. We are 
        operating with an experienced and highly motivated staff and 
        experienced public and private sector contractors (our 
        Participating Administrative Entities or PAE's), we are running 
        with momentum.
Let Me Give You A Better Idea of the Scope of the Program
    The Mark-to-Market Program is currently facilitating the 
preservation of over 140,000 units of affordable housing in 1,739 
properties. The underwriting requirements of the Mark-to-Market Program 
ensure that these affordable housing properties will be operated in a 
manner to ensure their ongoing economic viability and good physical 
condition. At a time when affordable housing is in short supply in many 
parts of the Nation, the Mark-to-Market Program provides critically 
needed continuity to many communities and residents.
    A PAE's partner highlighted in his letter of support to the 
Subcommittee that ``discussions regarding OMHAR and the mortgage 
restructuring process frequently forget the manner in which it impacts 
the resident--the quality of housing provided to the residents under 
mark-to-market (M2M) has dramatically improved.''
    In addition, one of the Nation's largest apartment owners, Denver 
based Apartment Investment and Management Company (AIMCO), who has 110 
projects in the program, considers the Mark-to-Market Program 
``important to AIMCO and 
residents in [its] affordable housing portfolio. The program will 
enable [them] to 
continue to provide safe and decent affordable housing to qualifying 
tenants for 
many years to come while protecting HUD from claims under its mortgage 
insurance programs. The program is an important element in addressing 
the affordable housing requirements in the country.'' Their statement 
has been submitted to the Subcommittee.
    Completed transactions so far have resulted in net savings of $895 
million. Once all deals in the current pipeline are completed, we 
estimate that the savings represent $2.4 billion, while at the same 
time ensuring that these 140,000 units of 
affordable housing remain part of the affordable housing stock. This is 
not the final tally of mark-to-market savings, since additional 
properties expected to enter the Mark-to-Market Program between now and 
the sunset date will generate additional savings. In addition, there 
are future savings to be captured from the Section 8 contracts expiring 
over the next 3 to 5 years.
    In furtherance of our goals, we have adopted processes that:

 Require the application of national standards for consistency, 
    while enabling solutions tailored to local conditions and community 
    requirements.
 Utilize a small staff of Government employees to leverage both 
    public and private 
    contractors.
 Rely on market-oriented principles to set rents.
 Encourage meaningful participation by tenants in the affected 
    housing units.
 Maintain communications and share information and concerns 
    with all stakeholders, including owners, lenders, HUD offices, 
    tenants, and Government agents, on an ongoing basis.
OMHAR Tackles Many Challenges In Pursuit of Its Mission
    As I mentioned earlier, the result of the process is savings to the 
Government, and to the taxpayer, that are generated even as the 
affordable housing remains available, and as the physical condition of 
the housing is improved, when needed.
    First of all, the fundamental complexity of the Mark-to-Market 
Program is due to the nature of the work that must be accomplished in 
order to restructure a property. These real estate workouts occur in 
the context of a complex legislative and regulatory environment, and 
involve negotiations between property owners, PAE's, tenants, lenders, 
and other community stakeholders.
    Some properties, despite having these above market rents, are 
physically, financially, or managerially stressed even before the rents 
are reduced. The legislative requirements of the Mark-to-Market Program 
are explicit regarding transaction costs and cash flow to owners after 
restructuring and these terms have created difficult hurdles to a 
successful restructuring for some owners.
    In some cases, property conditions or ownership problems have been 
such that 
we have not been able to close restructuring transactions or continue 
project-based 
assistance; tenant protections and providing vouchers has been a key 
goal in 
such cases.
    In a letter of support submitted to this Subcommittee, a public PAE 
partner of ours captured perfectly the challenge we balance every day: 
``while these [social, 
financial, and administrative] are admirable goals, they continuously 
compete with one another and speak volumes about the complexity of the 
process.''
How Has OMHAR Responded To These Challenges?
    We have listened to our stakeholders, we have implemented changes 
where prudent, and we have striven to create as flexible a program as 
possible within the context of the legislation. As a result, beginning 
in the fall of last year, we implemented revisions and initiatives to 
address the concerns of our stakeholders.
    First, we introduced additional performance-based incentives for 
participating owners. Each year after mark-to-market, if a property 
meets program standards for financial, physical and managerial 
soundness, the property owners will receive a market level of return on 
the capital they were required to invest in order to pursue mark-to-
market, plus a greater share of property cash flow for that year. We 
believe this reform is vital for the long-term health of the properties 
and aligns the interests of HUD and the owner community. We also 
believe it appropriately rewards owners for achieving HUD's public 
policy objectives. Purchasers are also eligible for these same 
performance-based incentives.
    Second, we introduced incentives for purchasers, recognizing the 
additional costs they will incur, over and above costs typically 
incurred by stay-in owners. This feature was necessary in order to 
ensure that, whenever an owner chooses to sell a mark-to-market 
property, there will be a capable and desirable purchaser willing to 
take over the property and take it through mark-to-market.
    We have made use of our statutory authority under MAHRA Sec. 517a5, 
to forgive second mortgage debt, when appropriate. PAE's may consider 
second mortgage debt forgiveness for independent, tenant endorsed, 
community-based nonprofit and public agency purchasers who accept a 
longer use agreement, agree not to sell the property for a 10 year 
period, and agree to reinvest a portion of cash flow in the property. 
This reform is consistent with our statutory responsibility to 
facilitate transfers when owners desire to sell.
    Finally, we introduced reforms to improve the level of 
communication between OMHAR, PAE's, owners, and purchasers. 
Specifically, we gave the owners and purchasers the right to receive 
various important information throughout the re-
structuring process, and we formalized the notification and appeal 
processes to give 
owners and purchasers additional assurances that their point of view 
would be solicited, heard, and considered.
    We have reached an agreement with Ginnie Mae to facilitate the 
securitization of small mortgage loans created for mark-to-market 
properties, thereby increasing the availability and decreasing the cost 
of these small mortgage loans.
    We have created a ``large owner initiative'' under which owners of 
large portfolios were given the opportunity to centralize processing of 
all of their properties with one or two PAE's. This initiative is now 
directly responsible for a significant share of new transactions coming 
in to OMHAR.
    We have responded to concerns and comments received from our PAE 
partners and greatly streamlined standard program guidance, giving 
PAE's additional flexibility, and placing a premium on their 
professional judgment of what is best for each property.
    All of these initiatives demonstrate our commitment to a workable 
program that circumvents hurdles and responds to valid stakeholder 
issues--all the while continuing to achieve the mission and ensuring 
public accountability.
    We have all come a long way, especially in this past year. But 
there is still a high level of ongoing activity in the Mark-to-Market 
Program, and much work remains to be done.

 Closed 126 full restructurings through May 2001--10 more have 
    already closed this month to date.
 Another 27 closings are scheduled for this month.
 47 more closings are being scheduled at this time.
 116 transactions are approved and are now in owner 
    negotiations.
 169 deals are currently in approval stages.
 331 properties are in due diligence and underwriting.
 Expect approximately 300 new assets will enter the program by 
    sunset.
 Roughly another 1,700 of the 3,500 properties with expiring 
    Section 8 contracts through fiscal year 2004 are expected to be 
    above market.

    As you can see, there is more work to do, which will bring more 
savings and will preserve more affordable housing. We have the 
infrastructure in place, with a 
momentum that can be sustained in order to complete the task that 
Congress 
envisioned.
    OMHAR and its partners are positioned to complete that work. The 
program is in place. Yes, it took time for the Mark-to-Market Program 
to build its infrastructure, to work with its partners to ramp up 
production to our satisfaction, and to the satisfaction of others. But 
we are now there. The processes work, and we are meeting the goals of 
the program. Let me detail the resources in place to complete our 
mission.
Staffing
    We currently have 87 staff on board, of which 38 are permanent and 
49 are temporary. Chart 6: Two-thirds of our staff is comprised of 
production staff--meaning overseeing PAE's, reviewing and underwriting 
deals, and conducting closing and post closing activities: Chart 7: 
Specifically, three quarters of our field staff that are completing 
restructurings are term employees--which means that their jobs with 
OMHAR expire in 102 days.
    The staff has exceptional and very diverse backgrounds. As 
envisioned under the legislation's creation, many have RTC, FDIC 
workout, and DUS underwriting experience. These staff are trained and 
experienced and have established effective oversight and direction for 
the Mark-to-Market Program. I, personally, continue to be impressed by 
the professionalism of the OMHAR staff and their commitment to boosting 
production numbers and meeting the goals of the program in the face of 
the looming September 30 sunset date.
    Chart 8: Our partners, the PAE's, are the 3rd parties through which 
the nitty gritty work of restructuring gets done. At our peak, we had 
contractual relationships with 51 PAE's (42 publics and 9 privates); 
and we are now working with 34 PAE's (25 publics and 9 privates). Why 
did this consolidation happen? There are many reasons we can identify:

 A lack of deal inflow meant that volumes were insufficient for 
    either the PAE's or OMHAR to justify continued participation.
 The restructuring process was much more rigorous and time-
    consuming than 
    anticipated.
 The mark-to-market restructuring is a ``real estate workout'' 
    and the ability to 
    negotiate in controversial situations wasn't an expertise that some 
    PAE's had or wanted to develop.
 The various roles of being the Section 8 contract 
    administrator, lending to the local affordable community, 
    developing more housing with some of the owners, and doing mark-to-
    market restructuring, presented conflicts of interest in some 
    cases.

    With approximately 900 deals under our belt, we have developed a 
stable capacity amongst our PAE's. And let me assure you, we have 
stellar performers--both public and private.
    Given the magnitude of the training, management and oversight 
efforts required by OMHAR, I think it is important to share with you 
that the capacity between the public and private PAE's is quite 
different. The average private PAE manages 66 deals, while the average 
public PAE manages 7 deals. While OMHAR continues to be committed to 
the statutory preference for public PAE's, and we are very pleased with 
the quality of many of the public PAE's performance, when a PAE with 
very few deals does not perform in a timely manner or does not deliver 
quality work products, it is very labor intensive with little product 
to show for the effort. When numerous PAE's with few deals do not 
perform in a timely manner or do not deliver quality work products, it 
ties up limited staff resources and impedes production. All nonrenewals 
to date have occurred in public PAE's, who had capacity, competing 
priority, and/or performance issues.
    It is important to emphasize that public entities continue to play 
a vital role in the mark-to-market process, even though in certain 
cases it has not proved appropriate or efficient for them to serve as 
PAE's. Finance agencies, in their traditional roles as affordable 
housing lender, tax credit allocator, or allocator of State affordable 
housing grants and low-interest loan funds, are well positioned to 
provide new funds to restructured properties. Congress intended this in 
designating HFA's as part of the restructuring process--to date, 
however, the public PAE's have brought additional funding to less than 
a dozen deals. Finance agencies can make the difference between 
preserving housing for the long term or losing it from the affordable 
housing stock, by facilitating the use of additional sources of funds 
that can be instrumental to a successful restructuring. Because States 
have not typically brought outside sources to OMHAR deals, OMHAR issued 
clarifications that it does not seek to recoup external funds brought 
into mark-to-market properties and wants them invested entirely into 
properties in their States.
    In addition, due to their historical working relationships, public 
entities often have a wealth of information about the properties and 
owners in their jurisdictions, and about the appropriate level of rents 
and operating expenses. With this background, with their sensitivity to 
the challenges facing these properties, and with their established 
working relationships with community stakeholders--such as tenant 
associations--public entities are a valuable resource and can play a 
role in the mark-to-market process. OMHAR staff is currently working 
with HFA's on strategies for utilizing public entities in roles beyond 
the PAE's role, in recognition of the value that we think they can add.
    We have arrived at a balance in partners, in quality, in oversight, 
and in timeliness that is working. And we are performing efficiently. 
To date OMHAR has cost $66.2 million in PAE's staff costs and FHA 
claims to achieve those savings of $895 million over 20 years. Looking 
at the present value of those savings--$517 million--still shows a 
7.8:1 savings to cost ratio. In other words, for every dollar of cost, 
we save almost $8.
    OMHAR has not yet reached its peak for completions of full debt 
restructurings. We have seen improved results with a significant 
increase in full restructurings since February. We have assets moving 
through every stage of the pipeline; we and the PAE's have learned 
much; we have become more creative in addressing the challenges, and we 
have improved our timeliness with each passing month. We have developed 
an expertise not easily or readily able to be replicated. We want to 
finish the job we signed on to do.
    This is echoed by another public PAE partner in a letter of support 
recently submitted to the Subcommittee: . . . ``It would be a travesty 
for the program to not 
continue. OMHAR has learned lessons, adapted the program, and built 
working 
relationships with PAE's that will allow them to successfully 
accomplish the goals 
of MAHRA.''
What Do We Need To Complete the Job?
    September 30, 2001, the sunset date called for in the MAHRA 
legislation, is fast approaching. Planning must occur now to determine 
the Government's approach to reducing rents on expiring Section 8 
contracts after the sunset date. Without the legislative authority to 
reduce a property's mortgage payments when its rents are reduced, HUD 
will have to watch Section 8 properties struggle with excessive debt 
burdens. Owners may cut back on maintenance to make ends meet, or 
default on their FHA insured loans. The residents of these properties 
are negatively impacted by failing properties. The resulting costs to 
HUD exceed the costs of restructuring the mortgage debt under mark-to-
market.
    Furthermore, with over half of OMHAR's staff on term appointments 
that expire with sunset, the legislative authority to continue their 
terms beyond sunset and keep this dedicated group of staff together is 
key to the continued success of the program.
    The Mark-to-Market Program and its stakeholders need an assurance 
of continuity in order to maintain momentum, and to continue to bring 
its benefits to the affordable housing units with Section 8 contracts 
that are only now approaching 
expiration. The ability to reduce a property's mortgage payments is 
crucial for the mark-to-market mission of preserving affordable housing 
at market rents. And we believe it benefits the financial savings goals 
to address these workouts proactively and with the consistent 
methodology and process that we have developed.
    Mr. Chairman, I believe we have a compelling story to tell. 
Affordable housing is being preserved for those in need, at a cost 
savings to the taxpayer. There is nevertheless much work still to be 
done. I believe with more time we will have a resounding success story 
to tell.
    Thank you, Mr. Chairman, I would be pleased to answer any 
questions.


































                 PREPARED STATEMENT OF CHARLES WEHRWEIN
                             Vice President
                          Mercy Housing, Inc.
                             June 19, 2001
    Good morning, Mr. Chairman. My name is Charles Wehrwein. I am a 
Vice President of Mercy Housing, Inc. and have had direct experience 
with OMHAR and the M2M Program both at Mercy, and in a previous 
position with one of the largest nonprofit preservation portfolio 
acquisitions to date. I appreciate the opportunity to offer my comments 
today on three issues: the progress being made in restructuring rents 
and debt of the FHA insured Section 8 portfolio, the experience with 
the operations of OMHAR and its team--including PAE's--and the savings 
generated by restructurings and the overall impact on preservation of 
affordable housing. These comments generally reflect the input of other 
significant organizations in the community development field including 
the National Housing Trust, LISC, the Housing Partnership Network, and 
NEFPI.
Introduction: Mercy Housing
    Mercy Housing is a nonprofit affordable housing developer, owner, 
and manager headquartered in Denver, CO, with real estate interests in 
many other regions throughout the Nation. In our 20 year history, we 
have developed nearly 11,000 units of affordable housing serving more 
than 27,000 low-, and very low-income Americans on any given day. Mercy 
Housing regards the preservation of affordable rental housing as 
essential to the stability and revitalization of communities and the 
residents who so desperately need this housing, both now and in the 
future. Mercy and others who work in the community development field 
remain deeply concerned about the future of preservation in general, 
and the Mark-to-Market Program specifically. To that end, Mercy is 
launching a targeted preservation initiative that will focus 
significant human and financial resources on this critical problem.
Case Study: Mercy Housing's Decatur Place, Denver, CO
    Before commenting on the specific issues and policies around the 
M2M subject, it is helpful to add some real context to the discussion. 
In that regard, I would like to share with the Subcommittee a specific 
example of M2M in action.
    Mercy owns a 106 unit Section 8 assisted property in Denver, CO. 
This property serves the transitional housing needs of distressed 
families--that is where a spouse with children has been in an abusive 
relationship and has had to leave home with virtually nothing. This 
property's Section 8 contract expired and it was subject to M2M. The 
M2M restructuring at Decatur is nearly complete and is expected to 
close within the next month or so.
    An example of a typical resident is Caroline Garcia. She and her 
four children escaped an abusive relationship with nothing more than 
the clothes on their backs. She had little education and no job when 
she arrived at Decatur Place. When told she would have to reside in a 
two-bedroom apartment until a three-bedroom became available, she said 
it would be much better than the single room apartment they just left. 
Her first month, she was able to contribute only $4 per month for rent. 
She immediately went to work part-time at the cafeteria where her 
children attended school. She also took life skills training provided 
by Mercy at the site, including parenting, financing and computer 
training. In just 2\1/2\ years, she has completed her education and is 
now working full-time as a medical transcriber. Her children are 
healthy and strong, and doing better in school. And she is now 
contributing $386 per month for rent.
    This is a great example of the contribution that assisted housing 
makes in our community. Were it not for the M2M Program and the 
commitment of staff of OMHAR--both the national office and the San 
Francisco field office--the Colorado Housing Finance Agency (CHFA), the 
City of Denver and the committed staff and resources of Mercy Housing, 
this property could not have been sustained.
Progress of Restructuring of the FHA Insured Section 8 Portfolio
    The progress of restructurings, which began far to slowly, has now 
picked up dramatically. In our view, it is solely because of the new 
owner and nonprofit incentive guidelines that were adopted by OMHAR in 
fall of 2000. They were created through a cooperative approach that 
brought together stakeholders from across the spectrum that is a great 
example of how Government should work. These new guidelines, among 
other things, recognize and allow for a more fair economic treatment of 
nonprofit purchasers relating to the ongoing costs of ownership and 
provide for some additional debt relief to encourage nonprofits to 
pursue purchases of M2M properties. The nonprofit buyer, in turn, 
commits to an extended period of affordable use. They also provide for 
improved processing and returns of equity to existing owners that 
recognize the economics associated with extending affordable use.
    Prior to these new guidelines, it was simply uneconomic to take on 
these properties. While the economics are still marginal under the 
incentives, they make it probable that long-term nonprofit owners can 
own and operate these properties over time and actually cover some of 
the costs of ownership. They also recognize the 
extended affordability commitment by existing owners and have 
dramatically 
increased the number of restructurings that have occurred with this 
group. We 
applaud OMHAR's recognition of the inequity in treatment of nonprofit 
owners and the resultant risk of additional affordable housing losses, 
and their response to this problem. Without these new incentives, the 
number of restructurings, especially full restructurings, would not 
have increased materially and the program would have been a failure.
    Extending the authorities present under MAHRA will allow sufficient 
time for the backlog of these complicated transactions to be completed. 
It will send a clear and strong message to the entire housing community 
that Congress is committed to sticking with a consistent approach once 
it works. This will help to eliminate the potential for stalling by 
those who would attempt to wait for another program change before 
acting. It will also allow more nonprofit purchasers to line up the 
additional resources necessary to help preserve these assets for the 
future.
    We strongly support the extension of authorities beyond their 
scheduled expiration at the end of fiscal year 2001. We recommend that 
Subtitle A, of MAHRA be extended for at least 5 years. Furthermore, we 
strongly encourage the Subcommittee to recognize and affirm the 
importance of the new incentives and guidelines implemented by OMHAR, 
as they are critical to the recent success of the M2M Program. Finally, 
we specifically call the Subcommittee's attention to the need for 
continued funding of Intermediary Technical Assistance Grants (ITAG) 
and Outreach and Training Grants (OTAG) at a level equal to the 
previous years' $10 million per year or higher. We further recommend 
that the Department expedite the availability of these funds to their 
intermediaries charged with disbursement.
Experience Working with OMHAR and Its Team
    OMHAR was clearly slow getting out of the gate, both in organizing 
its operations and in naming and contracting with Participating 
Administrative Entities (PAE's). The reasons for this are many 
depending on one's point of view. Creating an organization from scratch 
is difficult and time consuming under the best of circumstances. Add to 
the mix creating this organization in a politically charged atmosphere 
where salaries and contracting procedures are more limited than in the 
private sector, and it seems in hindsight that a period of 3 years to 
both create OMHAR and complete all necessary transactions was 
optimistic at best.
    Experience with OMHAR's national office staff and consultants 
suggests that they are extremely competent from a technical standpoint, 
are willing to work with all stakeholders, and they have worked very 
hard to get this program underway once the organization was up and 
running. The consolidated expertise in the national office is 
especially effective at dealing with the myriad complications that many 
of these deals bring.
    The assessment of OMHAR's field staff from the perspective of many 
nonprofit stakeholders is more variable. The largest problem overall 
seems to be the effectiveness of communication of national office 
policies and positions and the assurance that these policies and 
procedures are being followed consistently. This problem 
is exacerbated by the fact that OMHAR has been unable to fill open 
positions due 
to their impending sunset. More time to accomplish this important task 
and more 
certainty about the future of OMHAR would alleviate many of the 
problems in 
this area.
    Experience with public PAE's has been mostly positive, and my 
personal experiences with Housing Finance Authorities in Colorado and 
Missouri have been outstanding. These PAE's have a very good sense of 
their markets and the standards housing should meet in those markets. 
Overall, the staff at the public PAE's seems competent and 
professional. Public PAE's have a better understanding on how to 
appropriately strike a balance between cost savings and quality 
affordable housing.
    As with the rest of the M2M implementation, it is taking some time 
for all of these entities to get up to speed with what is effectively a 
new program. Like the comment above, time and certainty will improve 
this experience more still.
    From a programmatic standpoint, we would like to see a more direct 
linkage between HFA and other State and local housing resources and 
preservation, and would strongly support new funding allocated to the 
States to accomplish this goal. This leveraging of, and link to, more 
locally driven housing resources would strengthen the link between the 
public PAE and the HUD-assisted/insured assets in their communities. 
The Federal matching grants provisions of the legislation 
proposed in H.R. 425 and proposed in the past by Senators Sarbanes, 
Kerry, 
and Santorum (Section 401 of S. 2733 introduced last year) would be an 
excellent 
vehicle to accomplish the linking of State and Federal resources and we 
strongly 
support it.
    Experience with the private PAE's has been generally good. As with 
my comments earlier on OMHAR field offices, communications of national 
policies and priorities could be improved upon. Their nature as profit-
motivated contractors sometimes leads to less ownership of a deal when 
compared to public PAE's and possibly a focus on cost considerations 
versus the quality and context of the property at the local level.
    In conclusion, whatever the reasons for the delays in getting OMHAR 
off the ground, it is now working. It is a singular businesslike unit 
in the Federal Government that is competent and improving and it would 
be a waste of the taxpayer's resources invested to date, to let it 
expire, or otherwise reconfigure it, just as it is beginning to reach 
its potential. This would be analogous to building a factory, creating 
new tooling, training new employees, and then closing it down just as 
production got underway. The work it was created to do is not yet done.
    Based upon my experience as a Deputy Assistant Secretary for 
MultiFamily Housing at HUD/FHA, it is my strong feeling that 
transferring the OMHAR staff into the HUD mainstream will at best, 
create serious delays of 6 months or more as it is assimilated into the 
system, and more probably, cripple the program. As it stands today, 
OMHAR is a model for future Government program operations. It is a 
small, lithe organization with specific technical skills that allow it 
to be responsive to stakeholders and objectively judged by Congress. If 
it is assimilated more directly into HUD, and especially if its wage 
scale and special contracting flexibility are taken away, many key 
staff will either leave for the private sector, or be drawn into other 
responsibilities at the Department. Therefore, I urge you to extend the 
OMHAR organization in its current configuration by extending Subtitle D 
of MAHRA for 5 years or more. I would also encourage Congress and the 
Administration to consider other ways that this technical capacity 
could be used to deal with more problem assets or asset categories 
throughout the assisted/insured HUD portfolio. For example, these same 
skill sets would be useful to HUD in dealing with ``work outs''--for 
example where insurance claims have been paid or where the Secretary 
has taken ownership of a property through foreclosure.
Preservation and the Cost of the M2M Program
    As to the question of the cost effectiveness of the program we 
cannot provide the Subcommittee with the specific costs of the program 
versus projections that are 
5 years old or more. What we can comment on, however, is the cost 
effectiveness of preserving this limited and essential affordable 
housing. Anecdotally, the cost of purchasing, rehabilitating and 
preserving existing rental housing is often in the range of $20,000-
$40,000, which compares very favorably to the cost to build new and/or 
the permanent loss of potentially hundreds of thousands of units from 
the affordable housing inventory.
    The conclusion here is clear. Even if the marginal cost of 
restructuring mortgages and reunderwriting projects results in a modest 
increase in costs--which we do not assume here--failure to act would 
result in both higher replacement costs and/or the loss of 
irreplaceable housing resources that the Government has already 
invested billions of dollars in. Preserving the existing assets and the 
project-based contracts associated with them is good public policy and 
good fiscal policy and we believe that OMHAR and the M2M Program are 
effective tools in accomplishing these public policy goals and should 
be extended.
    Finally, mission driven organizations like Mercy Housing, the 
National Housing Trust, the Housing Partnership Network, NEFPI, and 
LISC and its Community Development Corporation partners are ready to 
help serve the public purpose of preserving the valuable investment 
that our Nation has made in affordable housing. To that end, these 
organizations need capital support to be able to preserve and maintain 
this housing over the long term. We strongly support legislation that 
would accomplish this like that proposed in Section 402 of S. 2733 
introduced by Senators Sarbanes, Kerry, and Santorum last year, with 
funding limited to those direct and intermediary nonprofit 
organizations that have a demonstrated track record and commitment 
toward the development and long-term ownership of affordable housing.
    This concludes my testimony. I appreciate the opportunity to be 
with you today and share our experiences. I would be happy to respond 
to any questions you have and to work with your staff to follow-up on 
or amplify any issues brought to light.
               PREPARED STATEMENT OF BARBARA J. THOMPSON
               Director of Policy and Government Affairs
               National Council of State Housing Agencies
                             June 19, 2001

    Mr. Chairman and Senator Allard, I am Barbara Thompson, Director of 
Policy and Government Affairs for the National Council of State Housing 
Agencies (NCSHA). I will become NCSHA's Executive Director on July 1.
    NCSHA represents the Nation's State Housing Finance Agencies 
(HFA's). Richard Godfrey of your own State, Mr. Chairman, is NCSHA's 
Secretary.
    Thank you for this opportunity to testify about the future of the 
Section 8 restructuring program and the experience of State HFA's 
serving in it. Before I turn to that, however, I want to thank the 
Chairman, Senator Allard, and the many other Subcommittee Members who 
cosponsored and helped enact legislation in the last Congress to 
increase substantially and index for inflation the caps on tax-exempt 
private activity bonds (Bonds) and the Low Income Housing Tax Credit 
(Housing Credit). Now, tens of thousands of additional lower-income 
families each year will buy their first home or rent a decent, 
affordable apartment.
    Unfortunately, many people qualified to receive housing help under 
these programs still will not get it. Three obsolete provisions prevent 
it: the Ten-Year Rule, which forbids States to recycle billions of 
dollars in MRB mortgage payments to make new mortgages; MRB purchase 
price limits, derived from 8 year old home sales price data, despite 
dramatic increases in home prices in the last 8 years; and Housing 
Credit income eligibility rules, which make development infeasible in 
many very low-income, frequently rural, areas.
    Senators Breaux and Hatch introduced S. 677, the Housing Bond and 
Credit Modernization and Fairness Act of 2001, to fix these problems. 
Thank you, Senator 
Allard, for your early cosponsorship. We urge all Subcommittee Members 
to cosponsor S. 677 soon and to press your leadership and Finance 
Committee colleagues to include it in a tax bill this year.
    NCSHA and our member State HFA's worked very closely with the 
Congress to help create the Section 8 restructuring program, to 
preserve Section 8 properties while reducing subsidy costs to the 
Federal Government. With the support of Congress and the industry, we 
fought successfully to ensure that the restructuring program provided 
qualified State and local public agencies a priority right to serve as 
restructuring agents, to ensure that restructurings were carried out in 
a manner that protects the interests of the Federal Government, the 
properties, the residents, and the surrounding communities. 
Regrettably, the Office of MultiFamily Housing Assistance Restructuring 
(OMHAR) has failed to utilize the talents of State HFA's, as Congress 
intended. Instead, OMHAR has treated HFA's as automatons, prescribing 
their every move and stifling their creativity.
    Accordingly, we urge the Subcommittee to reauthorize the 
restructuring program, but place responsibility for it in HUD's Office 
of Housing, as both the Senate Appropriations Committee and the 
Administration have proposed. We further recommend that you direct HUD 
to delegate responsibility for restructurings on a priority basis to 
qualified and willing State and local HFA's, with reasonable HUD 
oversight, as Congress always intended.

State HFA's and the Federal Government Are Strong Housing Partners

    During the last three decades, State HFA's have assumed a primary 
role in financing affordable housing. Their success in blending 
business-like efficiency with accomplishing their public mission has 
earned HFA's the respect of the Congress, their States, and the 
community at large.
    Congress, in turn, has entrusted States with administering the Bond 
and Housing Credit programs, the only Federal programs dedicated to 
financing lower-income, first-time homebuyer mortgages and low-income 
apartment construction.
    With Bonds and the Housing Credit, State HFA's have financed more 
than two million first-time, lower-income homebuyer mortgages and over 
two million apartments, including 1.2 million with the Housing Credit. 
They have issued nearly $140 billion in Bonds without a default and 
with foreclosure and delinquency rates far lower than industry 
averages.
    State HFA's have accomplished these outstanding results because 
Congress has permitted them to employ Federal resources flexibly to 
respond effectively and imaginatively to their unique and diverse 
housing needs. Congress has enlisted HFA's to apply their expertise, 
experience, and knowledge of their communities to solve housing 
problems particular to their own States. That is why the Bond and 
Credit programs are so successful, and that is why Congress increased 
authority under those programs by nearly 50 percent last year, the 
largest single increase in Federal housing assistance ever.
    State HFA's have also been strong and successful partners with HUD, 
when HUD has permitted them to use their talent and expertise to do the 
job. Most recently, 33 State HFA's have successfully assumed HUD's 
responsibility for the administration of 750,000 Section 8 project-
based units. More than 30 State HFA's participate in the FHA-HFA risk-
sharing program, under which HUD allows them to use their own proven 
multifamily underwriting standards, just as they do in the Bond and 
Credit programs.

Empower the States to Do the Job Congress Intended Them to Do

    Congress intended States to have this same decisionmaking authority 
and flexibility to respond to their housing needs and conditions when 
it gave them priority to serve as Participating Administrative Entities 
(PAE's) in the Section 8 restructuring program. HUD Appropriations 
Subcommittee Chairman Bond, Floor Manager of the Fiscal Year 1998 HUD 
Appropriations Bill, which contained the restructuring legislation, 
made that clear on the Senate floor when he said, ``Indeed, devolving 
responsibility and decision-making to the State and local level is one 
of the primary goals of this Mark-to-Market legislation. Not 
surprisingly, that is also the reason for the priority in selecting 
State and local housing finance agencies to be PAE's.''
    Senator Mack, then Chairman of the Housing Subcommittee, who wrote 
the restructuring legislation, further elaborated on how Congress 
expected OMHAR to work with HFA's in a July 1998 Senate floor colloquy 
with Senator Bond on the Fiscal Year 1999 HUD Appropriations Bill. The 
Senator said, ``HFA's have proven that they have the capacity and 
willingness to serve as the Federal Government's partners in affordable 
housing . . . I expect HUD to approve many HFA's as PAE's and provide 
them as much flexibility as possible within appropriate parameters to 
administer the (permanent) program.''
    However, OMHAR either never understood or chose to ignore the 
Congress' will that HFA's, not OMHAR, do the restructuring work. From 
the start, OMHAR has dictated down to the finest detail every step 
HFA's must take in restructuring properties. It has denied HFA's the 
ability to apply the very expertise, judgment, knowledge of their local 
housing markets, and concern for properties, communities, and tenants 
that caused Congress to choose them to do this work in the first place.
    In August 1999, NCSHA's Executive Director John McEvoy and 
Massachusetts Housing Finance Agency Executive Director Steven Pierce, 
in testimony before this Subcommittee, told the story of OMHAR's heavy-
handed micromanagement and bureaucratic interference. With your 
permission, Mr. Chairman, I would like to submit their statements for 
this hearing record for the benefit of those Senators who were not then 
Members of this Subcommittee.
    At the time of that hearing, nearly 2 years after the program's 
enactment, two-thirds of State HFA's approved by HUD to participate as 
PAE's were still trapped in seemingly endless negotiations with OMHAR 
on their contracts, OMHAR had 
released its encyclopedic Operating Procedures Guide (OPG), and not a 
single full 
restructuring had been completed.
    At that hearing, nearly 2 years ago now, NCSHA strongly urged OMHAR 
to abandon its prescriptive approach and release the expertise, 
mission-oriented judgment, and experience of the State HFA PAE's to 
carry out the work Congress intended them to perform. In response to 
NCSHA's and his own State's testimony, then Ranking Minority Member 
Kerry said, ``We ought to be able to reduce the bureaucracy, which is 
everybody's enemy, and see if we cannot streamline this thing in a way 
that makes more sense.''
    That same fall, in its HUD appropriations report (Senate Rpt. 106-
161), the Senate Appropriations Committee said:

          The Committee is further concerned that the Department's 
        staffing justification for OMHAR does not reflect its roles and 
        responsibilities as en-
        visioned by the ``Mark-to-Market'' legislation. OMHAR and HUD 
        have not 
        provided the Committee any convincing evidence that 101 staff 
        is needed 
        to run a program that was envisioned to be implemented 
        primarily by publicly accountable third parties, namely State 
        and local housing finance agencies. While the Committee 
        appreciates OMHAR's efforts to ensure public accountability, 
        the Committee is concerned that the procedures and processes in 
        place may be overly prescriptive and potentially result in 
        delaying the completion of transactions. The intent of mark-to-
        market was to provide as much flexibility as possible within 
        reasonable parameters to allow the third parties to perform 
        their duties in an efficient and effective manner. The role of 
        OMHAR was to ensure that proper procedures were in place, 
        qualified and publicly accountable entities were selected to 
        act on behalf of the Federal Government, and to perform post-
        audit oversight duties after a reasonable period of time and 
        number of deals were completed. It is not evident that HUD and 
        OMHAR have structured the program to meet the intent of the 
        law.

    Despite Congress' admonitions, little changed until more than a 
year later, after the Senate Appropriations Committee recommended in 
its fiscal year 2001 HUD appropriations report (Senate Rpt. 106-410) 
that OMHAR's functions be transferred to HUD's Office of MultiFamily 
Housing beginning in fiscal year 2001. The Committee said, ``the 
program has been fraught with delays due to unnecessary and prolonged 
negotiations tactics by OMHAR, an overly prescriptive operating guide, 
and the inability to fully utilize State housing finance agencies that 
were intended by Congress to administer most of the restructuring 
activities.'' The Committee encouraged OMHAR ``to streamline the 
restructuring process and provide the flexibility necessary for the 
State housing finance agencies to administer the program as intended by 
the Congress.''
    Since then, OMHAR has made some progress, though too little, very 
late. It has completed the restructuring of more than 100 properties, 
due in significant part to its new owner incentives, which have brought 
previously reluctant owners to the 
negotiating table and helped PAE's expedite transactions.
    OMHAR also finally reduced the requirements of its OPG, 3 years 
into the program. It was not until January 2001 that OMHAR issued its 
completed, revised guide. The changes it contains still do not go 
nearly far enough toward streamlining and simplifying the program.
Bureaucracy Still Rules
    Despite its progress, OMHAR continues to value process over 
product, rules over results. Its guidance to PAE's remains overly 
prescriptive, confusing, needlessly complex, ever changing, and 
inconsistently interpreted and applied by its own staff. The OPG has 22 
separate appendices and requires the use of 86 forms to process a 
single transaction. OMHAR has issued 79 ``policy'' emails to PAE's in 
the past 14 months, each containing an average of two to three policy 
changes.
    OMHAR continues constantly to change its requirements and 
processes, rarely do these changes contribute to meaningful 
streamlining or program simplification. Often changes are not clearly 
communicated to the PAE's. Sometimes they are not communicated at all. 
For example, OMHAR criticized one State HFA for using an ``old'' form. 
When the HFA pointed out that it retrieved the form from OMHAR's 
website and its date was more current than that of the form OMHAR said 
it should have used, OMHAR told the State to ignore the form on its 
website, since it had been posted for such a short time, and use the 
old form instead.
    OMHAR's ``Financial Model,'' which it requires PAE's to use to 
calculate the ``necessary'' financial outcome in a restructuring, is 
over 40 pages long, unnecessarily complex and unwieldy, and leaves 
little room for State underwriting judgments. The model has gone 
through five revisions, each one resulting in a more complex model than 
the previous one. Regardless of how far along a transaction might be 
under one financial model, OMHAR requires that it be submitted for its 
review under the latest model.
    OMHAR runs a command and control operation, delegating little 
authority to its regional offices. Both OMHAR headquarters and its 
regional offices review restructuring proposals simultaneously. 
Frequently, the regional office will tell a State HFA to proceed one 
way, only to be reversed later in the process by headquarters. In 
addition, communication and coordination between OMHAR and HUD is poor. 
Many times PAE's are bounced back and forth between OMHAR and HUD for 
information and decisions.
    HFA's also report that OMHAR's constant second-guessing has 
resulted in multiple project underwritings, delaying results and 
undermining their ability to negotiate effectively with owners. Many 
HFA's find that OMHAR is more interested in saving money than in 
preserving properties for the long-term. OMHAR frequently questions HFA 
market rent and rehabilitation needs assessments, despite its lack of 
familiarity with the properties and local market conditions. For 
example, OMHAR initially rejected one State HFA's recommendation that 
an elevator be installed in a multistory elderly housing property with 
a prolonged high vacancy rate on its upper floors. When OMHAR finally 
relented and an elevator was installed, the vacancy rate dropped 
significantly. While the HFA achieved the right outcome for the 
property, it involved unnecessary hassle and costly delay.
    OMHAR imposes very strict timeframes on PAE's, yet it imposes no 
similar discipline on itself. State HFA's report prolonged delays by 
OMHAR in responding to their requests. OMHAR frequently loses 
paperwork, requiring HFA's to resubmit the same information time and 
time again. OMHAR refuses to relieve PAE's from deadlines which its 
actions, or more frequently, inaction, cause them to miss.
    OMHAR's Internet Tracking System and Resource Desk are seriously 
flawed and deficient. Costly to establish, they have failed to 
significantly facilitate the restructuring process. OMHAR scrapped the 
tracking system for a 2 month period last summer because it was fraught 
with software glitches. The Resource Desk at last count contained over 
1,500 questions, with answers that are often ambiguous and inconsistent 
with responses to other similar questions.
    OMHAR's conflict of interest certification requirements are 
overreaching. They require PAE's to execute a separate certification 
for each assigned asset on behalf of all ``restricted persons.'' 
``Restricted persons'' is so broadly defined it includes PAE staff, 
board members, and third-party contractors and their employees. For one 
State, this amounts to over 60 individual certifications to accept a 
single asset from OMHAR. The same State engaged an environmental 
contractor to complete an environmental review who determined that to 
meet OMHAR's requirements, the employees of the laboratory performing 
tests on asbestos and lead-paint samples had to sign certifications!
The Cost of OMHAR's Intransigence
    For some time, policymakers will debate the number of Section 8 
properties lost and Federal subsidy savings forfeited due to OMHAR's 
insistence on doing it its way. But there is another cost: the loss to 
the restructuring program of State HFA's expertise, judgment, 
experience, and commitment to public purpose.
    In August 1999, NCSHA told this Subcommittee that OMHAR had driven 
at least two qualified HFA's out of the program and was on a course to 
drive out others. That statement proved prophetic. Of the original 42 
State HFA's approved as PAE's, only 22 remain in the program today. A 
number of those are actively considering withdrawing.
    Some State HFA's decided not to sign contracts with OMHAR, 
believing they could add little value to the program given OMHAR's 
prescriptive approach. A number participated the first year, but 
declined to renew their contracts, severely frustrated with OMHAR's 
unreasonable and irrational rules and failure to assign them assets. 
Still others have been forced out of the program by OMHAR, often 
without any explanation. Some remain in the program, but are inactive 
because OMHAR gives their assets to private PAE's, often without their 
knowledge or agreement, as the restructuring law requires.
    Your own agency, Mr. Chairman, the Rhode Island Housing and 
Mortgage Finance Corporation (RIHMFC), last April received written 
notice from OMHAR that it would not renew its contract. In that 
communication, OMHAR gave no reason for terminating the relationship. 
OMHAR never granted RIHMFC Executive Director Richard Godfrey's request 
the previous July for a meeting with its director to discuss Rhode 
Island's concerns with the restructuring process.
    The New Hampshire Housing Finance Agency (NHHFA) recently 
terminated its contract with OMHAR after OMHAR informed the agency by 
telephone in late January of its unilateral decision to withdraw 
NHHFA's first full restructuring asset--assigned earlier that month--
and reassign it to a private PAE. In response to NHHFA's letter 
objecting to the transfer, the OMHAR director wrote, ``The decision was 
solely based on the fact that as of the end of January 2001, due to the 
limited number of available New Hampshire assets, NHHFA had not yet had 
the opportunity to undertake a full mortgage restructuring. 
Consequently, and recognizing admittedly, the complexity of the M2M 
Program and the learning curve of all PAE's, it did not seem in the 
best interest of NHHFA or OMHAR for NHHFA to go forward with this, 
perhaps the only available, full mortgage restructuring. Unfortunately, 
this was presented to you as a final decision, rather than a point of 
discussion.'' I would like your permission, Mr. Chairman, to submit 
this correspondence, and that of the RIHMFC with OMHAR, for the record.
Implement the Plan Congress Wrote
    Mr. Chairman, Congress wrote the right plan when it gave priority 
to public PAE's to carry out Section 8 property restructurings subject 
to OMHAR's oversight. The problem is OMHAR never implemented that plan.
    With OMHAR's scheduled sunset, you have an opportunity to insist on 
the system that you established nearly 4 years ago, a system under 
which the responsibility for restructuring Section 8 properties is 
delegated on a priority basis to capable and willing State and local 
public agencies with reasonable Federal oversight and accountability to 
the Federal Government, their States, communities, and residents.
    We believe the Administration is committed to implementing that 
system. We urge that the restructuring program be reauthorized, but 
responsibility for its implementation be transferred to HUD, as the 
Administration proposes. If OMHAR is retained, it should lose its 
independent status. Its director should report to the FHA Commissioner. 
We further recommend that Congress direct HUD to review and streamline 
OMHAR's rules and procedures and devolve greater decisionmaking 
authority under it to qualified public HFA's.
    Some will say HUD does not have the capacity to take on this 
responsibility. We disagree. We are not suggesting that HUD perform 
Section 8 restructurings. We are asking that HUD oversee State and 
local HFA's and others who qualify to do the restructuring work.
    Some will say leave OMHAR alone. It is not perfect, but it is a lot 
better than it was. We must not settle for that. Too much restructuring 
work remains to be done. Too much is at stake.
    Thank you, Mr. Chairman, for this opportunity to testify. NCSHA and 
the State HFA's are committed to working with you to set the Section 8 
restructuring on the course Congress intended.
                               ----------
                    PREPARED STATEMENT OF JOHN BENTZ
                President, Property Advisory Group, Inc.
          Director of the National Leased Housing Association
                             June 19, 2001
    Mr. Chairman and Members of the Committee: My name is John Bentz, 
President of Property Advisory Group, Inc. of Providence, Rhode Island 
and a Director of the National Leased Housing Association, on whose 
behalf I testify today. I am accompanied by Denise Muha, Executive 
Director of NLHA and Charles L. Edson, Association Counsel. We thank 
you for the opportunity to appear before you today.
    As a matter of background, for the past 30 years, NLHA has 
represented the interests of private sector participants in the Section 
8 program including owners, managers and lenders, as well as housing 
authorities and other public officials who administer various HUD 
programs including the Section 8 Voucher Program. We will focus our 
comments on this hearing's important issue concerning the future of the 
Office of MultiFamily Housing Assistance Restructuring (OMHAR) and the 
Mark-to-Market Program, both of great concern to our members.
The Future of OMHAR
    As you are aware, OMHAR's authorization expires on September 30 
placing squarely before Congress the issue of whether that entity is to 
continue. It is generally recognized that OMHAR got off to a slow and 
rocky start and did not really hit its stride until about a year ago. 
The program was new, OMHAR was not fully staffed, and owners were 
naturally wary of a program that could have significant negative 
consequences to the project and their investors. Indeed, OMHAR did not 
complete its 100th restructuring until a few months ago--over 3 years 
from the Agency's creation in 1997.
    We have reached a point where OMHAR appears to be functioning at a 
higher level. Nearly 140 mortgages have undergone full debt 
restructuring with 25 to 30 mortgage restructurings expected to close 
each month through September. Further, OMHAR has approved and 
implemented hundreds of OMHAR Lites--a lowering of Section 8 rents to 
market without debt restructuring.
    Recognizing the need to attract more owners, OMHAR itself has made 
significant reforms to make restructuring more attractive to owners. 
These reforms include the possibility of enhanced asset and project 
management fees and allowing interest on the owner's required deposit 
to reserves as an eligible project expense. In other words, OMHAR has 
shown that it does listen and that it can implement significant changes 
while implementing its program and we anticipate that issues brought to 
OMHAR's attention will continue to be addressed.
    At this point, the termination of the Mark-to-Market Program does 
not appear practical. Because of the continuing high costs of Section 8 
subsidies, a replacement mechanism would need to be developed with no 
promise of anything better. The question does arise, however, as to 
whether or not OMHAR should be continued in its present form, or 
whether the Mark-to-Market Program should be melded into HUD's regular 
multifamily program activities.
    For a number of reasons, NLHA feels that the Mark-to-Market Program 
must continue to be separately administered. Whether it is administered 
by an entity called OMHAR or named something else is not the most 
important question. We would not object if OMHAR were to be continued 
in its present form. We also understand, however, the argument that the 
OMHAR Director should report to the FHA Commissioner, and not directly 
to the Secretary and Congress, and would understand if a decision were 
made to bring OMHAR into the Office of the Assistant Secretary of 
Housing.
    If this is done, however, we caution you as follows: First, we 
think it would be a mistake to simply fold the mark-to-market 
activities into the Department's regular multifamily monitoring 
activities. Such a move would unduly burden staff already stretched by 
retirement and attrition. The mark-to-market process is highly complex 
and benefits greatly from having well trained and specialized staff 
focused exclusively on its mission. Second, OMHAR has attracted some 
very talented and experienced staff members. We believe that their 
retention is essential to the continuation of the Mark-to-Market 
Program without causing fatal interruption. We understand that moving 
mark-to-market into the Office of Housing raises some pay rate and 
other personnel issues. We hope that these can be resolved in order to 
maintain and build upon the momentum that has been generated, short of 
dismantling the current OMHAR staff.
Mortgage Restructuring
    Implicit in our previous discussion is our view that the mortgage 
restructuring mechanism adopted in the fiscal year 1998 VA/HUD and 
Independent Agencies Appropriation Act should continue as long as 
Section 8 rents are to be based on comparable market data. There are 
400 properties that are anticipated to be eligible for debt 
restructuring in fiscal year 2002 alone. Without the legislative 
authority to restructure the debt on these properties, the FHA 
insurance fund will be forced to absorb a high level of mortgage 
defaults when properties undergo a rent reduction with unsatisfactory 
burdens being placed on owners and residents.
Changes to Restructuring
    Although OMHAR has been responsive to a number of suggestions from 
the housing community, there are other changes that could be made to 
make the program attractive to owners--many of these would require 
changes to the statute. NLHA is holding its annual meeting this week 
and we will use this opportunity to develop specific legislative 
recommendations that we will submit to you within the next few weeks. 
They will likely include the following:

 There is now a statutory requirement that owners share in 
    necessary rehabilitation costs. This creates an unacceptable burden 
    for owners in many instances. We are dealing with older properties 
    by definition, which often need significant re-
    habilitation. Owners are generally limited partnerships, with 
    general partners who are typically unable to respond to cash calls 
    for any number of reasons. We suggest that the statute be changed 
    to permit the rehabilitation to go forward without the requirement 
    of owner contribution.
 While there is an exception rent standard that would permit 
    the restructuring of mortgages where the comparative market rents 
    are too low to support project 
    operations, the standard is too rigid for productive use in many 
    instances. The Mark-to-Market Program generally, by setting rents 
    in accordance with market comparable properties, results in lower 
    rents for properties located in rural areas and in depressed inner-
    city urban areas. These are often the properties that need 
    assistance the most.

    In this regard, the statute provides that, in most cases, exception 
rent levels are to be limited to 120 percent of HUD approved Fair 
Market Rents (FMR's). While on first glance that might appear fair, in 
fact it results in significant rent reductions for some properties 
which--because of age, security costs, utility costs, and so forth--
require higher rents if they are to be operated successfully. We do not 
believe that the Government intends to withdraw its support for helping 
low-income tenants in depressed rural areas, or in impacted urban 
neighborhoods, but this is what the current program in many cases, 
requires.

 Similarly, in the case of these exception rent projects, OMHAR 
    and owners must agree on appropriate expense levels on which to 
    build exception rents. In some instances, this has proven 
    impossible, where OMHAR simply disagrees with historical operating 
    costs of properties, and owners are of the belief that the OMHAR-
    required expense reductions would inevitably lead to the failure of 
    the properties. A better mechanism needs to be found to resolve 
    these issues.
 Properties with insured mortgages and HUD held mortgages are, 
    in some instances, treated differently. Properties with insured 
    mortgages, where some first mortgage debt is to remain, can have 
    those mortgages restructured using Section 223(a)(7). This 
    treatment is not now available for HUD held mortgages, where 
    Section 223(f) refinancing is required. The Section 223(f) process 
    contains many more restrictions, and takes months longer to 
    process, resulting in unnecessary costs and delays. On the other 
    hand, Section 223(a)(7) mortgages have a term limit which ends 12 
    years after the current mortgage term, which should be made 
    consistent with the Section 223(f) program, that generally provides 
    a maximum 35 year term. Such a change would eliminate the third 
    mortgages that are often required as part of the restructuring. 
    Third mortgages raise additional tax concerns for owners.
 When the Mark-to-Market Program was developed, it was 
    anticipated that full debt restructurings would be processed more 
    quickly than has occurred. We believe, this is because no one 
    appreciated many of the complicated scenarios that arise when 
    dealing with owner issues. Those issues include obtaining limited 
    partner consents, extending partnership terms to coincide with 
    restructured mortgage terms, financing issues, and expense 
    determinations. During processing, when existing Section 8 
    contracts or contract extensions expire, the owner too often finds 
    that its rents are being reduced to market without the benefit of 
    the restructuring, which is still in processing or negotiation. 
    Thus, the village is destroyed while being saved. Significant 
    additional flexibility is needed on this point.

    Overall, we must remember that we are dealing not with a short-term 
problem, but with a long-term issue. The statute requires that 
properties going through full debt restructuring commit themselves to 
at least 30 years of Section 8 usage, as long as Section 8 subsidies 
are available, and that rents shall increase on the basis of an annual 
Operating Cost Adjustment Factor (OCAF). The program as now constituted 
does not provide for a way to increase rents or attract other funds to 
accommodate unanticipated emergency situations. For example, this 
year's utility rise in many parts of the country would take a long time 
to be reflected in OCAF adjustments, if they ever are. Similarly, 
project specific rehabilitation needs, or increased security needs, 
which may not be evidenced in market comparable properties, are not 
being addressed. In other instances, we will find, through hindsight, 
that project underwriting was not all that it could have been. Some 
mechanism must be developed to permit flexibility in appropriate 
circumstances to avoid project failure at a later date.
    Thank you very much for the opportunity to share our views. We look 
forward to working with the Subcommittee as these issues are addressed. 
Please contact NLHA's Executive Director, Denise B. Muha, with any 
questions regarding the Association's testimony.
                               ----------
                    PREPARED STATEMENT OF CATHY VANN
                         President, Ontra, Inc.
                             June 19, 2001
Background/Testimony Perspective
    I am presenting this testimony today as the President of and on 
behalf of Ontra, Inc., as a Private PAE for OMHAR. By way of placing 
this testimony in perspective for the Subcommittee please note that 
throughout its entire 16\1/2\ year tenure Ontra has been involved in 
the due diligence, asset management and disposition of over $8.5 
billion in distressed mortgage and real estate assets in 45 States and 
Puerto Rico. The clients for whom Ontra has provided professional 
distressed asset servicing have included but are not limited to the 
Texas Housing Agency, FSLIC, FADA, FDIC, RTC and numerous Texas banks 
and S&L's. In addition Ontra has received ``Above Average'' ratings 
from all four Wall Street Investor Rating Agencies to facilitate its 
participation as the Special Servicer and equity partner in over $2.5 
billion in distressed mortgage and real estate asset acquisitions with 
AIG, Citicorp, CS First Boston, and Goldman Sachs. Approximately $1 
billion of these acquisitions involved a partnership with AIG and the 
Federal Government through the RTC S and N Series disposition program.
    Ontra commenced its contract with OMHAR in July of 1999. Since 
contract inception Ontra has been assigned 120 Rent Restructurings 
(Lites), 118 Debt Restruc-
turings (Fulls) and 22 Comparability Reviews. In the interest of time 
the following results are provided for the written record and I will 
address them in summary in the discussion regarding Government savings 
below.

                      For Rent Restructurings/Lites
------------------------------------------------------------------------
                         Result                           No. of Assets
------------------------------------------------------------------------
Assigned...............................................             120
Completed..............................................             112
Remained a Lite........................................              55
Converted to Full......................................              41
Owner Opt Out..........................................               5
Ineligible (Below Market)..............................               8
Withdrawn..............................................               3
------------------------------------------------------------------------


                   For Full Debt Restructurings/Fulls
------------------------------------------------------------------------
                         Result                           No. of Assets
------------------------------------------------------------------------
Assigned...............................................             118
Converted to Lite......................................              19
Closed.................................................              31
Completed..............................................               9
Owner Opt Out..........................................               4
Failed Fulls...........................................               5
Ineligible (Below Market)..............................               3
------------------------------------------------------------------------


    In order to provide the services for this contract, Ontra 
management historically dedicated 23 individuals to the delivery of the 
required services and currently has 16 staff members fully engaged in 
the process.
    The remainder of my testimony represents the results of a 
canvassing effort in February of this year whereby I surveyed all of 
the 8 other Private PAE's in response to a request from the GAO to 
participate in a panel discussion regarding the disposition of the M2M 
Program and OMHAR's operations.
Progress in FHA Insured/Section 8 Portfolio Rent and Debt 
        Restructurings
    The Program definitely experienced a slow start from the Private 
PAE's perspective. There were two essential drivers of this situation 
as follows:

 For the first 12-18 months of the program the owners appeared 
    disengaged and largely convinced that if they stalled, M2M would go 
    away and in all fairness there was little incentive for an owner to 
    participate willingly given the financial structure at that time. 
    The owner's incentive package was introduced in September of 2000 
    and since January of 2001 there appears to be gaining momentum in 
    the owner community to contemplate, comprehend and engage the 
    program.

    The program is very complex and has required significant ramp up 
and learning curve maturation in an ever changing environment. Please 
note the following items, which speak to the complexity issue.

 The heart of the Restructure Transaction is represented by a 
    45-page model that includes all of the basic MAHRA business rules. 
    In addition to eight schedules providing standard real estate/
    mortgage analysis such as Operating Budget Analysis, Long-Term 
    Capital Reserve Analysis, Debt Sizing, Amortization, Claim Sizing 
    and Net Savings it includes an additional six schedules to fully 
    analyze Tenant versus Project-based subsidies, IRP recaptures, 
    Outyear HAP contract recaptures, affordability restrictions, 
    exception rents and an analysis of the anticipated repayability of 
    the partial payment of claim all in one integrated proforma.
 The number of parties/stakeholders to a single transaction is 
    significant and includes at a minimum 26 individuals for each 
    single transaction including at least four to five individuals at 
    OMHAR, two to three at HUD and numerous others including Owners, 
    Property Managers, Tenants, OTAG's, PCA Consultants and Appraisers, 
    and at least four different sets of Attorneys and Title Company 
    personnel.
 There are four different and distinct closing scenarios the 
    most common of which is a 223(a)(7). A single transaction of this 
    type involves 55 distinct documents with 8 signatories and 14 
    distribution parties.

    However over the last 24 months, all of these bases have been 
effectively covered and the long awaited momentum is currently being 
achieved. By way of demonstrating this please note that the average 
time between acceptance and close date for a standard Full Debt 
Restructuring for this PAE has changed from 15 months for assets 
assigned prior to January 2001 to 7 months for assets assigned after 
January 2001 representing a 114 percent improvement in program 
implementation with time as the measure.
Savings to Date Generated By This Program for the Federal Government
    Based on Ontra's portfolio the savings to date are provided for the 
written record below but in the interest of time is summarized as 
follows. A total of 119 transactions have resulted in approximately 
$106.3 million of which $63.8 million represents 79 completed Lites and 
$42.5 million represents the 40 closed and completed Fulls.

----------------------------------------------------------------------------------------------------------------
           Transaction Type                    No. Completed/Closed                  20 Year NPV Savings
----------------------------------------------------------------------------------------------------------------
Debt Restructures Closed.............   31                                   $ 32,473,466
Debt Restructures Completed..........    9                                   $  9,976,894
Rent Restructures Completed (Includes   79                                   $ 63,800,205
 Fulls to Lites and Closed Lites).
      Totals.........................  119                                   $106,250,545
----------------------------------------------------------------------------------------------------------------

The Physical Condition of the Housing Stock Being Preserved
    One of the key benefits of this program is that it ensures that the 
assets are now being upgraded systematically. In order to put this into 
perspective, Please Note:
Deferred Maintenance/Prerestructure Status
    The program calls for the escrowing of funds to cure the 
``immediate repairs'' within 12 months after closing. These repairs are 
what the industry traditionally 
considers deferred maintenance. The Rehab Escrow Repair numbers for 
Ontra's 31 
closings and 21 eminently pending (next 30-45 days) are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                          Deferred Maintenance
                     Total Rehab Escrow                      No. Projects   No. Units  -------------------------
                                                                                        Per Project    Per Unit
----------------------------------------------------------------------------------------------------------------
$5,294,790                                                            52        4,683     $101,823       $1,131
----------------------------------------------------------------------------------------------------------------


    We have found however that there is some skewing in these numbers 
with five inner-city projects representing just over $3 million (60 
percent) of the deferred maintenance. Therefore, it appears that the 
deferred maintenance is not a major issue at least in this PAE's 
portfolio.
Long-Term Preservation of the Quality of the Housing Stock
    For this same set of 52 assets--closed and pending--the program has 
allowed for set-asides of approximately $57.5 million ($57,488,155) 
averaging just over $12,000 ($12,276) per unit to cover the 20 year 
long-term capital needs of these projects. This represents an average 
of $614 per unit per year being set aside for replacements.
    One of the more compelling statistics from this PAE's closed and 
pending portfolio is that the average reserve deposit/unit/year was 
$309 prerestructure and $439 post-restructure representing a 42 percent 
increase in annual reserve deposits to the 
replacement reserve accounts. These numbers seem to point to the fact 
that this 
program is providing a unique opportunity to reconfigure the economics 
and provide for the stabilization if not the rejuvenation of aged 
housing stock and thereby ensure quality affordable housing into the 
future.
The Operations of the Office of MultiFamily
Housing Restructuring Assistance
    In summary, this entire testimony speaks to the fact that the 
program is very complex by nature, that there is definite, significant 
momentum at the current time, that the program is providing solid 
savings while at the same time capitalizing on a unique opportunity to 
``set the economics straight'' for the Nation's FHA insured Section 8 
housing stock and to ensure continuance, at least in this sector, of 
quality affordable housing.
    OMHAR has been integral in this process and despite the criticisms 
of the program and OMHAR's implementation of such it is my company's 
opinion that OMHAR has done an admirable job of juggling the priorities 
of the numerous stakeholders and parties to the transactions while at 
the same time developing well proportioned tools to manage the delivery 
of a very complex program.
Other Issues of Interest/Concern/Potential Improvements
    Based on the February 2001 survey of the private PAE's the 
following opinions are offered for additional consideration by the 
Subcommittee.
Advantages/Disadvantages of a Transfer of the
Current OMHAR Functions to HUD
          1. It was a consensus of the Private PAE's that a transfer of 
        responsibilities to HUD would be a duplication of effort and 
        would entail an enormous loss of momentum, as new personnel 
        attempt to get familiar with the overall program as well as 
        with the status of individual assets.
          2. Having the time and ability to apply a robust focus on 
        program results is considered critical by all private PAE's. It 
        was felt that OMHAR with its singular focus is well suited to 
        bring the program to final fruition. It was hoped that at least 
        some consistency in personnel can be maintained.
Program Prescriptiveness
    We are aware that OMHAR has received significant criticism 
regarding the OPG, the Model and other policy and procedure vehicles 
that they have provided to the PAE's. From our (Ontra's) perspective 
given the complexity of the statute, the ex-
tensive program requirements and the complex nature of the issues 
involved, the 
tools provided by OMHAR were an absolute necessity. It occurs to us 
that if the 
Federal Government wants to ensure consistent and fair treatment of all 
the stakeholders, reliable underwriting to ensure that all owners are 
treated fairly and 
consistently, and that the result achieved is a fully accountable 
application of the 
statute, then the tools provided by OMHAR, in our opinion, have been 
well proportioned to the task.
Private PAE Compensation
    This topic was of major concern among the private PAE's. Although 
the program was competitively bid, the PAE's did not have the same 
insight into the intricacies of the program that they now have. The 
program has not only turned out to be much more involved than 
originally estimated but also as issues arose during the development of 
the program over the last 24 months the scope of work expanded quite 
substantially. OMHAR is currently in the process of considering our 
concerns and we hope to see a solution soon. We have but one request 
that whatever incentive compensation changes ensue that they be applied 
for all assets currently undergoing active restructure or at least make 
the changes effective as of January of 2001 for any assets not yet 
closed.
    I would like to close by respectfully thanking the Committee for 
the opportunity to present these views. Thank you.
                               ----------
                 PREPARED STATEMENT OF GERALDINE THOMAS
                             Vice President
                    National Alliance of HUD Tenants
                             June 19, 2001
    On behalf of the National Alliance of HUD Tenants, we are pleased 
to submit these comments on the implementation of the MultiFamily 
Assisted Housing Reform and Affordability Act of 1997 (MAHRA). While 
MAHRA actually encompasses a broader range of Section 8 contract 
renewal options and programs, we understand that the Subcommittee today 
is gathering testimony on the implementation of the Mark (Down) to 
Market Program (M2M) by the Office of MultiFamily Housing Restructuring 
Assistance (OMHAR) created under the statute. Accordingly, our comments 
here are limited to our experience with the Mark Down to Market Program 
in MAHRA.
    Founded in 1991, the National Alliance of HUD Tenants (NAHT) is the 
Nation's first and only membership organization representing the 2.1 
million families who live in privately-owned, HUD-assisted housing, 
including the tens of thousands of families who may be affected by the 
Mark-to-Market Program. Our membership today includes voting member 
tenant groups and 45 area-wide tenant coalitions or organizing projects 
in 30 States and the District of Columbia. We are governed by an all-
tenant Board of Directors elected by member organizations from all 10 
of HUD's administrative regions at our annual June Conference. I have 
served as a NAHT Board Vice President since 1998, and currently Chair 
NAHT's Mark-to-Market Task Force. I also serve as the President of the 
Philadelphia Regional Alliance of HUD Tenants (PRAHT), which organizes 
tenants in the Philadelphia area, and thus have direct experience in 
organizing tenants in the M2M Program.
    One of the most important features of MAHRA, sought by NAHT in our 
testimony before the Subcommittee in 1997, was the Congressional 
mandate for HUD to encourage tenant participation in the M2M Program 
and the provision of funds to help accomplish this goal. In response, 
HUD created the Outreach and Training Grant (OTAG) program to help 
tenants get involved in the program. Since 1999, NAHT has convened a 
monthly Mark-to-Market Task Force consisting of the area-wide tenant 
coalitions or organizing projects among NAHT's membership working in 
M2M buildings, including those which have received OTAG Grants from 
HUD.
    The comments we submit today reflect the consensus views of these 
NAHT affiliated groups, based on their extensive experience with the 
implementation of the M2M Program ``on the ground'' in more than 20 
States, including those such as Ohio, Pennsylvania, Illinois, Florida 
and New York with a large number of M2M-eligible buildings.
Summary Comments on M2M Implementation
    There appears to be an emerging consensus that although the M2M 
Program was slow in getting off the ground, owner participation and 
OMHAR performance have finally reached a reasonable stride within the 
past year. Nonetheless, some observations are in order based on the 
experience of NAHT affiliates in the field which should be taken into 
account in future action by Congress.
    Many owners have avoided M2M. First, many owners with high project-
based Section 8 contract rents have avoided going into full M2M 
restructuring than was hoped by Congress or HUD when the program was 
crafted in 1997. In high market areas such as Boston, Manhattan or the 
West Coast, owners with Section 8 contract rents well above 120 percent 
of the FMR, which were originally thought to be prime candidates for 
M2M, have found they could achieve higher rent yields by switching over 
to HUD's Mark UP to Market initiative--actually increasing HUD's 
Section 8 outlays--or opting-out of the Section 8 program entirely. 
Tenants, HUD and elected officials have universally supported Marking 
Up these contracts as a preferred alternative to opt-outs, which both 
lose precious affordable housing units and initially cost HUD more 
through mandatory Enhanced Vouchers at full market rent levels.
    In many more markets, owners thought to be eligible for M2M 
restructuring have opted instead for HUD's OMHAR Lites alternative--a 
much higher proportion than anticipated by OMHAR at the start of the 
program. These owners are willing to absorb a marginal cut in Section 8 
subsidies to estimated ``market'' levels typically in exchange for a 1 
year contract extension, in effect keeping their options open in the 
event future market conditions make opt-outs or Mark UP to Market a 
viable alternative. The fact that many owners have easily made the 
OMHAR Lite market adjustment suggests that many project-based Section 8 
contracts may well have been inflated beyond actual costs by years of 
generous Annual Adjustment Factor (AAF) increases before MAHRA. These 
OMHAR Lite renewals leave both the tenants and the housing stock at 
continued risk of future opt-out decisions by owners.
    So it appears that fewer owners than anticipated have chosen the 
full M2M 
restructuring path. Generally, buildings going into M2M are located in 
relatively 
depressed market areas with few prospects for an economic upturn in the 
fore-
seeable future. For these buildings, however, concentrated in ``Rust 
Belt'' States where real estate markets have generally lagged behind, 
M2M restructuring can be a viable option.
    But on the whole, the economic ``boom'' of the past several years 
has meant high and rising rental market conditions for many owners, and 
a corresponding reduction in the number of owners for whom M2M is an 
attractive option. It has also meant that owners in ``healthier'' 
market areas are collectively in a stronger position to demand--and 
get--ever higher Section 8 contract renewals, with few ``strings'' 
attached such as repair requirements or long-term affordability 
agreements, from HUD and local agencies alike as the alternative to 
opting-out.
    Similarly, while MAHRA contemplated transfers of M2M eligible 
buildings to nonprofit groups and provided for ``disqualified'' 
properties to be sold to nonprofits, in practice this has occurred very 
rarely. The specter of owner opt-outs has dampened efforts to transfer 
properties in any market area which can sustain rents; many owners 
facing disqualification can simply walk away from M2M and opt-out, 
defusing enforcement efforts. OMHAR has responded with a detailed and 
thoughtful series of policy initiatives to promote transfers to 
nonprofit buyers, within the limits provided by the statute; to date, 
however, there have been few takers. NAHT and its affiliates, as well 
as OMHAR Director Ira Peppercorn, have identified the lack of a capital 
grant funding source for Preservation, which helped encourage such 
transfers under the now-defunct Title VI Preservation Program, as one 
of the reasons for the paucity of nonprofit purchase offers under M2M.
    Fundamental to the lack of owner participation in M2M, however, was 
the decision by Congress to make owner participation in M2M entirely 
voluntary. Unlike the Title VI Preservation Program, which required 
owners to participate in a regulatory framework which preserved 
affordable housing while guaranteeing owners full market value, MAHRA 
allowed owners to decide whether to participate in M2M or ``opt-out'' 
of Section 8 completely. As amended in 1999, owners can now also 
participate in Mark UP to Market, but participation is still voluntary.
    As long as Congress is unwilling to require owner participation in 
Section 8 renewals and/or regulate rents for assisted housing, owners 
will continue to opt-out of the program and/or negotiate ever higher 
levels of Section 8 renewals from HUD, with few repairs, as the price 
of staying in the program. And fewer owners will choose to restructure 
under M2M. The result will be continued erosion of the affordable 
housing stock and missed opportunities for savings in the Section 8 
program.
    ``Devolution'' of decisions to PAE's has slowed program 
implementation and added to complexity and costs. Another reason for 
the late start of the M2M Program appears to be administrative. The 
Congressional choice to ``devolve'' administration to State or private 
``Participating Administrative Entities'' (PAE's) added a hugely 
complicated layer to the program. It took a long time for OMHAR to 
negotiate complicated administrative and fee agreements with an ever-
shifting cast of PAE's 
to implement the program. Data from HUD's recent extension of the 
``devolution'' 
concept to Section 8 Contract Administration suggests that 
``contracting out'' HUD 
functions to State or private entities adds additional costs, as well 
as delays, to 
delegated programs.
    Interestingly, as OMHAR has attempted to implement the PAE's 
mandate, OMHAR has been compelled to transform its approach once the 
M2M Program hit the ground. For example, it turned out that many of the 
public agency PAE's which Congress assumed would carry out the program 
in fact were not that interested. As a result, OMHAR has found itself 
dealing with fewer public agency PAE's in the past 2 years and has 
ended up delegating to a small number of ``private'' PAE's handling a 
large number of States each. Because of complaints from the field by 
tenants and others about the performance of many private PAE's, OMHAR 
has also increased its oversight over these agencies. So although 
Congress intended M2M to be administered by State and private entities, 
``real world'' conditions have required a ``recentralization'' of the 
program back to HUD, with a small number of PAE's operating across 
State lines.
    Another trend has been OMHAR's creation of its ``Large Owner 
Initiative,'' whereby OMHAR Headquarters handles a large number of 
transactions for large national owners such as AIMCO, in recognition of 
the fact that ownership of HUD housing is increasingly concentrated 
among a small number of national and regional firms. Perhaps half of 
the HUD Section 8 stock is owned by fewer than 20 ownership entities; 
these owners found it inconvenient and costly to deal with a myriad set 
of local agencies and themselves have preferred to deal with one 
central administrator: HUD.
    NAHT believes that these evolutionary trends in administration of 
M2M point both to legislative adjustments in M2M, as well as provide 
lessons applicable to other initiatives, such as Contract 
Administration of Section 8 by State Housing Finance Agencies.
    Jury still out on final results of restructuring. Because of 
program delays, few M2M Restructuring Plans have reached the 
``closing'' stage. As a result, NAHT and its affiliates have few cases 
to report where organized tenant groups have participated and been 
heard in the final MRRAS Plan which accompanies restructuring. 
Accordingly, we offer no evaluation or comments on how effective M2M 
has been from the point of view of substantive repairs and management 
improvements sought by residents.
    One area worth noting, however, where Congressional and tenant 
concerns may have been satisfied to date is in the apparently minimal 
extent of ``voucherization'' of family developments in the M2M 
restructuring process. Reflecting a compromise between Congress and the 
Clinton Administration, MAHRA allowed PAE's to ``voucherize'' family 
developments in high vacancy rate areas as part of a final 
restructuring plan, provided several determinations were made by the 
PAE. (The 
Clinton Administration attempted to negotiate a broader mandate for 
voucher-
ization; the Senate, backed by NAHT and other constituency groups, 
advocated for maximal renewal of project-based subsidies.)
    To date, NAHT is aware of only one instance of ``voucherization'' 
in the country under the full restructuring program, although 13 OMHAR 
Lite properties have been ``voucherized.'' However, OMHAR's summary 
reports of the M2M pipeline do not indicate which, if any, properties 
have been converted to vouchers, or how many voucher conversions are 
under consideration by PAE's. Hopefully, most PAE's have concluded that 
project-based renewals are either mandated or warranted in the 
buildings they have reviewed up to the draft MRRAS Plan stage. While 
Congressional design of MAHRA appears to have avoided large-scale 
voucherization, it would be advisable for Congress to use this 
opportunity to reaffirm and strengthen HUD and OMHAR's mandate to 
maximally preserve M2M buildings with project-based Section 8 
assistance wherever possible.
    Progress has been made toward tenant participation, but more can be 
done. MAHRA mandated HUD to provide for tenant participation in the 
program. NAHT and its affiliates were active advocates throughout the 
M2M rulemaking process to ensure that this goal was reflected in M2M 
Program regulations.
    OMHAR deserves much credit for establishing a formal tenant 
participation process in the final M2M regulations including two 
required meetings with residents in M2M properties; for mandating that 
tenants and their associations be granted third-party beneficiary 
status in the Use Agreements accompanying MRRAS Plans in 
restructured properties; for publishing an Operating Procedures Guide 
which guar-
antees residents' right to participate in the program; and, despite 
some delays, for 
designing and funding a workable system of technical assistance 
programs (OTAG's, ITAG's, and VISTA Volunteers). OMHAR's administration 
of the $10 million annual set-aside for technical assistance provided 
in Section 514 of MAHRA has resulted in an OTAG-funded support 
structure for tenant participation in about 30 States, including most 
of those with large M2M portfolios. OMHAR has been effective in 
selecting appropriate local partners to carry out tenant technical 
assistance work in the field--itself no small achievement. As the M2M 
Program reaches its full stride, this technical assistance 
infrastructure is well-positioned to serve the tenants affected by M2M 
in most of the country.
    OMHAR has also been responsive to complaints from NAHT affiliates 
and OTAG grantees in the field that PAE's--particularly the private 
PAE's--were failing to meet OMHAR's requirements for tenant 
participation. In July 2000, NAHT's M2M Task Force collected complaints 
from OTAG's across the country regarding private PAE's failure to 
follow tenant participation requirements, such as notice to residents 
for required tenant meetings. The problem grew in magnitude as a small 
number of private PAE's took increasing numbers of States in their 
service areas. Following a teleconference call with OMHAR Director Ira 
Peppercorn in April 2001, which detailed these problems, OMHAR has been 
able to secure a marked improvement in the performance of several of 
the private PAE's. OMHAR has also responded to NAHT's suggestion for a 
face-to-face conference among OTAG's and PAE's to work out tenant 
participation protocols in greater detail.
    Still, more can be done. The 10 day comment period on MRRAS Plans 
provided by OMHAR is not enough; at least 30 days is needed for tenants 
and their advisers to comment meaningfully. Requirements to provide 
notice and mandatory meetings with tenants should be extended to OMHAR 
Lite buildings and to decisions to ``disqualify'' an owner or otherwise 
to change the status of a property. OMHAR policies still deny access to 
tenants to basic information about the project's operating budget, 
essential information to help tenants comment meaningfully on the 
property's management plan. And there remain major gaps in HUD 
enforcement of the Con-
gressional mandate to provide One Year Notice to Tenants when owners 
decide to opt-out of Section 8--originally required in MAHRA--and to 
enforce the owners' Duty to Accept Enhanced Vouchers when owners opt-
out. Recommendations to improve these and other aspects of tenant 
participation are provided below.
Recommendations for Legislative Improvements to the M2M Program
    Based on discussion of NAHT's M2M Task Force and input from NAHT 
affiliates and OTAG providers across the Nation, we recommend the 
following action by Congress to extend and improve the M2M Program this 
year.
    (1) Extend M2M restructuring authority. NAHT joins the emerging 
consensus that the authority to restructure mortgages to save costs, as 
outlined in MAHRA, should be extended indefinitely.
    (2) Continue OMHAR as a separate office, reporting to the 
Secretary. After a slow start, OMHAR is now functioning smoothly and 
generating results at a steady pace for the Department, given the 
limitations of the program designed by Congress and the reluctance of 
owners to voluntarily participate in a ``boom'' real estate market. To 
throw sand in the machinery at this time, or spark inevitable personnel 
upheavals and administrative confusion that would ensue by a radical 
restructuring of the program would be both unnecessary and unwise. 
OMHAR is not broke; we do not need to ``fix'' it.
    NAHT's M2M Task Force wrestled with the question of whether OMHAR 
should be folded back into the Office of Housing. Generally, NAHT has 
favored rebuilding, not dismantling, HUD's Office of MultiFamily 
Housing over the years. We have generally been opposed to the 
``devolution'' of HUD functions to the States, and to the deregulation 
and voucherization of HUD housing stock which some have linked to the 
devolution strategy. Likewise, we are generally opposed to 
``contracting out'' HUD functions such as contract renewal decisions 
for Section 8--a process strikingly similar, and perhaps modeled on, 
the delegation of M2M decisionmaking to PAE's.
    Just last week, NAHT testified before the Commercial Activities 
Panel created by Congress and opposed the $196 million cost of Section 
8 Contract Administration (C/A) to State Housing Finance Agencies. 
Instead, we pointed out that for a little over half of this amount, HUD 
could hire 1,000 new MultiFamily Housing Staff--double current staffing 
levels--for $115 million, more than enough to do the same work in-
house.
    At the same time, we must recognize that the Office of Housing has 
been seriously understaffed for many years. The forced retirements, 
layoffs and ``reinvention'' of the past few years have decimated the 
HUD Headquarters MultiFamily Staff and Field Offices alike. Many of the 
Department's most experienced personnel, and most of its 
``institutional memory'' in the MultiFamily Housing field, are gone 
from the Agency. To compound this problem, most of the remaining HUD 
bureaucracy is eligible for retirement in the next 2 years.
    So while rebuilding HUD's Office of MultiFamily Housing (OMFH) is a 
desirable goal, we must recognize it cannot happen overnight. 
Accordingly, we recommend that Congress begin the long-term project of 
rebuilding HUD by phasing out the 
C/A system and folding these functions back into the OMFH; repealing 
the $196 
million line outlay expense for Contract Administration; adding $115 
million to 
HUD's Salaries and Expense Account; and targeting these funds to hire 
and train 
new 1,000 MultiFamily Staff over the next few years. (Actually, up to 
1,750 new 
staff will have to be hired and trained, including replacements for 
existing staff who 
may retire.)
    In the meantime, and until this happens, it would be irresponsible 
to turn over administration of the M2M Program now to OMFH until it is 
restaffed and trained to handle the job. We fully support moving in 
this direction, and beginning this process now. But given the magnitude 
of the personnel challenge and pending upheavals facing OMFH, Congress 
should leave the successful M2M Program in the separate office where it 
is located now, reporting to the Secretary, for at least the next few 
years.
    (3) Redefine OMHAR's governmental mission and transform PAE's into 
subcontractors for HUD. The lessons of the PAE's experiment in M2M 
underscore NAHT's conclusion that devolution of HUD functions to State 
and private entities is a bad idea. Besides being inherently more 
costly, from the tenants' point of view contracting out is also 
undesirable because it adds to the administrative complexity and 
confusion of having to deal with several agencies rather than one. 
Moreover, NAHT's experience with the private PAE's in particular 
suggests it is difficult to educate the private sector on the value and 
role of tenant and ``customer'' participation in decisions which affect 
them.
    As noted above, the implementation of M2M has been evolving in a 
direction of greater administrative oversight by OMHAR of a shrinking 
number of PAE's, who have been acting more and more as subcontractors 
to OMHAR rather than independent entities acting in OMHAR's stead. NAHT 
believes that Congress should recognize and further promote this 
evolution in legislation this year. Specifically, we recommend that 
Congress define the minimum governmental functions of the M2M Program--
preparation and approval of the final MRRAS Plan and review of public 
and tenant comments at different stages of the process--and relegate 
them to OMHAR.
    Congress should also specify that PAE's--especially private PAE's--
should not be delegated these fundamentally governmental functions. 
OMHAR may choose, and should be allowed, to subcontract out specific 
functions ancillary to preparing the Plan--such as preparation of a 
Capital Needs Assessment, appraisal, underwriting or environmental 
testing--to outside contractors, in cases where in-house staff cannot 
perform them. These outside contractors may be private PAE's or others. 
But the essential governmental function--decisions regarding the MRRAS 
Plan and subsidy commitments which go with it--should not be 
``privatized.''
    (4) Encourage tenant participation. NAHT offers several 
recommendations to further improve tenant participation in the M2M 
process.
    (a) Improve access to information. Congress should mandate that HUD 
release the Operating Statement of Profit and Loss (formerly Form 
92410) to tenant groups which request it, as part of their review of 
operating expenses and preparation of a Management Plan under the M2M 
process (or other processes under MAHRA). As residents of the 
properties, tenants have the greatest stake in knowing how their rent 
money--and subsidy dollars--are being spent. Residents also know a 
great deal about what is going on in their building, and can help act 
as HUD's ``Eyes and Ears'' to ensure that funds are spent properly. 
Similarly, Congress should mandate release of the balances in Reserve 
for Replacement Accounts for M2M properties. With access to these 
documents, residents can help identify scams, waste, and double-
dipping, can help OMHAR and PAE's more accurately assess repair and 
operating needs, and can help identify potential nonprofit transfer 
opportunities. Congress should likewise mandate that HUD release the 
prospective operating budget of M2M properties prepared under the MRRAS 
plan. Although OMHAR has promised the release of this document, few 
PAE's have in fact done so, even when requested by local tenant groups.
    OMHAR has acknowledged that there is no legal barrier to releasing 
these data under the Freedom of Information Act, despite earlier claims 
to this effect. Instead, OMHAR has declined to restore HUD's earlier 
policy releasing this document due to a fear of owner opposition. But 
honest owners should not fear release of this information to residents, 
if they have nothing to hide. Congressional intervention is needed to 
ensure release of this document to residents.
    Similarly, Congress should mandate the release of HUD's Previous 
Participation Form 2530--redacted to remove Social Security or EIN 
numbers--to resident groups upon request, so that tenants learn what 
other properties are owned or managed by the principals who control 
their building. With this information, tenants can research or contact 
tenants in other buildings to explore common issues or problems.
    (b) Extend the $10 million set-aside for technical assistance 
funding. Section 514 of MAHRA, which authorizes HUD to provide up to 
$10 million annually from the $14 billion Section 8 Certificate Fund 
for technical assistance to tenants in expiring Section 8 buildings 
(NOT just those eligible for M2M) ``sunsets'' on September 30, 2001. As 
mentioned above, OMHAR has done a good job in designing programs to 
make good use of these funds. However, existing programs remain 
underfunded. Extending this authority will provide sufficient funds to 
continue existing commitments and meet reasonable demand for funds in 
the future.
    At the same time, Congress should fix an unusual, unintended glitch 
in the wording of Section 514 which has been interpreted by HUD's 
Office of General Counsel to prohibit its ``rollover'' of unexpended 
annual balances into the next fiscal year, as is the case with most HUD 
programs. As a result, OMHAR discovered that funds authorized by 
Congress in prior fiscal years which had not been ``obligated'' during 
that fiscal year were ``lost'' at the end of that year, and were thus 
not available to meet program commitments. Of the $40 million 
authorized by Congress from fiscal year 1997 through fiscal year 2001, 
only about $12 million has been actually obligated financially to HUD 
grant programs to date--another $8 million is in the pipeline. The 
rest--some $20 million--has reverted to the Certificate Fund and may no 
longer be available. In extending Section 514, we recommend that this 
glitch be fixed to allow the rollover of unobligated funds to 
successive fiscal years.
    We also recommend that Congress clarify that Section 514 funds can 
be used to assist tenants in Section 202 and 515 buildings, and 
buildings receiving Enhanced Vouchers--for example, Section 8 opt-out 
and/or mortgage prepayment buildings--and other voucher conversions 
from project-based Section--for example, HUD Property Disposition/
foreclosure buildings--from the Certificate Fund as well. NAHT 
affiliates have reported requests from tenants in these buildings for 
assistance, 
but are unable to use OTAG or ITAG funds to assist them under current 
eligibility 
definitions.
    (c) Extend time for review of the MRRAS Plan. We recommend that the 
required time for review be extended from the current 10 to 30 days for 
tenant review and comments, on the draft MRRAS Plan.
    (d) Require written response to tenant comments. We recommend that 
OMHAR and/or the PAE reviewing tenant comments respond, in writing, to 
these comments, stating reasons for concurrence or nonconcurrence, as 
is required in Federal Environmental Reviews.
    (e) Require notice to tenants and a required meeting throughout the 
M2M process. Most important, tenant notice and at least one mandatory 
meeting should be required of all OMHAR Lite projects. The unexpectedly 
high volume of OMHAR Lites dramatically underscores the need for a 
guaranteed tenant role in this process. In particular, tenants have a 
stake in ensuring that reductions in project income in a Lite building 
do not adversely affect project operations, repairs or reserves.
    Similarly, notice to tenants and a guaranteed meeting should be 
required at the end of the M2M process if a property is being 
disqualified or kicked out of the program, or if an owner changes its 
decision and changes to OMHAR Lites, Mark Up to Market, or opts-out of 
the program--any change in property status. Tenants should also be 
notified if the PAE handling their property changes in mid-stream.
    (f) Enforce Notice and Duty to Accept requirements when owners opt-
out and fix problems with Enhanced Vouchers. When owners opt-out, HUD 
should affirmatively enforce its own standards. While this should be 
obvious, unfortunately HUD has stated publicly and in writing that it 
does not intend to enforce an owner's duty to accept Enhanced Vouchers 
in the event of an opt-out, even though HUD's Section 8 Guide clearly 
states that owners are so obligated. Likewise, HUD has not always 
required owners to adhere to the One Year Notice of Opt-Out to tenants. 
Congress should clearly mandate HUD to enforce its own standards.
    Congress should use the opportunity when it extends M2M to further 
amend those sections of MAHRA that provide Enhanced Vouchers in the 
event of opt-outs. Briefly, problems requiring a legislative fix this 
year, where HUD does not believe it has a mandate, include eliminating 
PHA rescreening of tenants when they switch to Enhanced Vouchers, and 
allowing ``empty nester'' Section 236 tenants to keep an overhoused 
apartment, provided they pay ``market'' or FMR rent.
    (5) Support the Preservation Matching Grant bill to provide a 
capital grant source to promote nonprofit transfers and preservation of 
M2M buildings. As indicated above, OMHAR's restructuring ``toolbox'' 
does not today include a Capital Grant source to help potential 
nonprofit purchasers assemble the resources to buy and preserve 
buildings undergoing the M2M process. For properties needing repairs, a 
Capital Grant source would be a useful tool to help an owner fix a 
substandard building as part of a MRRAS Plan.
    At a recent forum convened by the Government Accounting Office, 
OMHAR Director Ira Peppercorn concurred with NAHT and other 
participants that passage of a Capital Grant program by Congress would 
be a welcome additional tool to help OMHAR in its preservation mission. 
Fortunately, prospects have improved for passage of the Preservation 
Matching Grant bill which passed the House in the last session but did 
not get out of this Subcommittee in the Senate. With strong bi-
partisan support in both Houses, we are hopeful that the Preservation 
Matching 
Grant will pass in this session. The bill has been refiled in the House 
as H.R. 425, and is soon to be refiled in the Senate by Senator 
Jeffords and others. We strongly urge the Subcommittee to hold an early 
hearing to give this bill renewed momentum when it is refiled.
    (6) Adopt Regulatory Program to Preserve Affordable Housing. In 
extending the M2M Program, NAHT believes that Congress should establish 
a national regulatory framework to limit owners' ability to opt-out, 
prepay, and obtain windfall profits through high market rents at the 
expense of residents and the Nation's investment in affordable housing. 
It would be far preferable and less costly to preserve at-risk units by 
regulating owner ``choice'' to opt-out of HUD programs.
    Congress has the authority to extend regulation or to require 
owners to seek and accept Congressional offers of additional Section 8 
subsidies in order to achieve the overriding public purposes of 
preventing tenant displacement and preserving housing at the least cost 
to the Government. For example, restoring the regulatory framework of 
the Title VI Preservation Program and extending its concepts to ex-
piring Section 8 contracts would preserve more units and would be 
cheaper in the 
long run than replacing lost units with new construction. NAHT would 
prefer this 
approach.
    Creation of a regulatory framework would result in a dramatic 
upsurge of owners seeking full M2M restructuring at lower Section 8 
rent levels, fewer OMHAR Lites and ``opt-outs,'' and greatly increased 
cost savings in the Federal Section 8 Cer-
tificate Fund as a result. It would also greatly increase OMHAR's 
leverage in 
negotiating higher repair and operating standards and longer-term 
affordability 
in exchange for the financial benefits of restructuring than is the 
case in an un-
regulated environment where owners can walk away from the process at 
any time. 
It would also result in a dramatic increase in owners willing to sell 
to nonprofit 
organizations.
    In the meantime, at the Federal level, both Congress and the 
Administration have now acknowledged the need to provide funds as 
incentives to persuade owners voluntarily to remain in HUD's subsidy 
programs. As the experience under MAHRA shows, these solutions will be 
more expensive in the absence of a Federal regulatory framework, and 
many units will still be lost. However, voluntary financial incentives 
remain less expensive than the cost of doing nothing, which would leave 
society a huge unpaid bill for new replacement housing and fuel the 
hidden costs of homelessness and despair. So Congress should extend the 
M2M Program, supplemented by Preservation Matching Grants, even in the 
absence of a regulatory framework to preserve housing at the least cost 
to the Government.
    (7) Reaffirm and strengthen HUD and OMHAR's mandate to preserve M2M 
buildings with project-based Section 8 assistance. As indicated above, 
while the current program design appears to have resulted in a minimal 
number of voucher conversions, the relatively small number of completed 
``closings''--129 out of 904 properties accepted for M2M assignment as 
of June 11, 2001--suggests that caution on this point may be warranted 
before concluding that massive voucherization has been avoided. 
Congress should use this opportunity to clarify its intent to preserve 
the maximum amount of the M2M-eligible stock with project-based Section 
8 assistance.
    Mr. Chairman, thank you for the opportunity to provide testimony to 
the Subcommittee today. NAHT stands ready to work with the Subcommittee 
and with OMHAR to make the M2M Program work better for tenants and our 
communities.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD 
                      FROM JOHN C. WEICHER

Q.1. What is going to happen to the properties that require 
full mortgage restructuring but only received rent reductions? 
What can HUD do to ensure their physical and financial health? 
Would it be accurate to say that some of those owners are 
receiving Government subsidies but neglecting to keep up their 
properties? And, if so, what actions has HUD taken against 
these owners?

A.1. There are approximately 200 properties that are identified 
as requiring full mortgage restructuring but that only received 
rent reductions. These properties have been placed on a ``watch 
list'' and will be closely monitored by our field offices to 
assure that the owners meet their responsibilities for property 
maintenance and financial soundness.
    Through HUD's Real Estate Assessment Center, these 
properties will be inspected and analyzed for any trend to 
deterioration or financial compliance issues. We fully intend 
to protect tenants in these properties from living in housing 
that is less than fully acceptable and will take appropriate 
servicing measures against any owners who do not maintain their 
properties, including referral to the Departmental Enforcement 
Center.

Q.2. The same Act that established the Mark-to-Market Program 
gave HUD the authority to issue grants for the capital costs of 
rehabilitation to owners of eligible mark-to-market properties. 
The grants are to be funded with money recaptured from 
contracts for interest reduction payments. Though HUD has not 
yet exercised this authority, HUD's 2001 and 2002 budgets 
contain fund balances from these recaptured payments.
    How much money is available from recaptured interest 
reduction payments for rehabilitation grants? How has this 
money been used since the enactment of MAHRA? What are HUD's 
plans for this money? Does HUD plan to exercise its authority 
to issue rehabilitation grants?

A.2. To date, OMHAR had $22,521,724 in available interest 
reduction payments (IRP's) from properties going through its 
debt restructuring process, and has used its authority under 
MAHRA to apply the funds as follows:

 $19,570,724 was used to fund the Reserve-for-
    Replacement accounts of the properties from which the IRP 
    was ``recaptured.''
 $1,954,000 was used to subsidize the debt service on 
    the property.
 The remaining $997,000 was actually recaptured and 
    returned to HUD.

    For the rest of the Department, the fiscal year 2002 budget 
proposes to amend the multifamily rehabilitation program 
authority under Section 236(s) by repealing provisions which 
were designed to offer loans to owners to rehabilitate 
multifamily projects due to the outlay costs of implementing 
this authority.
    HUD currently has the authority to provide grants under 
Section 236(s) to owners for these purposes, although that 
authority has yet to be implemented for several reasons. First, 
the authority deals with highly complex financial issues. 
Second, it had been HUD's intention under the previous 
Administration to implement the grant authority simultaneous 
with the implementation of the loan authority, which was not 
enacted until more recently. As a result, implementation of the 
grant authority has not yet taken place.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES 
                      FROM JOHN C. WEICHER

Q.1. One concern that I have heard voiced is that a number of 
properties with above-market rents are not being referred by 
FHA to OMHAR. Do the panelists agree with that assessment? If 
so, what is the best way of addressing that problem? For 
example, should OMHAR be given the function of doing the 
initial reviews of rents?

A.1. There have been instances of properties with above-market 
rents not being referred to OMHAR. Where this has happened we 
in FHA have worked with the offices to review the reasons why.
    We often found that rents that appeared to be above-market 
were actually at the market when reviewed under our rent 
comparability requirements. Many of the markets have 
substantially strengthened in recent months, so that rents in 
those markets have risen to the level of the project rents.
    There are also properties where the rents in the immediate 
neighborhood are different than the rents for the Zip Code as a 
whole. The model used for initially determining whether a 
property was above market used Zip Code information. And, 
property rents vary by property condition.
    Some types of properties may not have been referred because 
the initial guidance was unclear. For instance, the initial 
guidance on Section 8 renewals for FHA insured, State bond 
financed properties initially seemed to exempt such properties 
(this has been corrected in subsequent guidance).
    There are other reasons why a property may not be referred 
to OMHAR. We recently surveyed the field on a sample of 13 
properties that OMHAR reviewed for rent comparability and had 
contract rents above market. All except one was not sent to 
OMHAR for debt restructuring for legitimate reasons unrelated 
to rent levels; these reasons ranged from owner ineligibility 
to prepayment. The one exception was based on a 
miscommunication where the local office thought they had sent 
it for restructuring; OMHAR had treated as only a request for 
rent comparability. (This property has been subsequently 
returned to OMHAR for restructuring.)
    We are reviewing all of the properties with Section 8 
renewals since October 1, 2000, that OMHAR's model indicates 
should have been submitted to them for rent or debt 
restructuring. Any properties with contract rents still above 
market will be identified for special review and, if necessary, 
steps taken to bring the rents in line at the earliest 
opportunity.
    Looking ahead, I think it is now clear to all of our owners 
that Congress fully intends to continue the requirement to 
bring properties to market rent if they are going to continue 
to receive Section 8 subsidies. At the same time, OMHAR has 
improved its track record for processing its deals and holding 
its PAE's accountable for timely processing. Both factors 
should result in all eligible properties receiving the 
assistance they need through OMHAR.
    OMHAR is already able to provide rent comparability studies 
and analysis where needed. We believe, for the reasons cited 
above, that the process would continue to work and to improve, 
without additional Congressional requirements.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES 
                      FROM PETER GUERRERO

Q.1. Some participants in the program have complained that 
OMHAR's operating procedures guide is far too detailed and 
prescriptive, and the controls it has put in place are too 
onerous and time consuming. Do you agree? Does the guide give 
the PAE's enough flexibility to deal with the specifics of 
individual deals?

A.1. Of the 15 participating administrative entities we 
contacted, including 10 public and 5 nonpublic entities, 7 
believed the extensive requirements contained in the operating 
procedures guide has been a hindrance to completing the 
restructurings in a timely manner. For example, one public 
participating administrative entity told us the guide is 
tedious and time consuming to follow and becomes a source of 
frustration when the entity is trying to solve problems by 
thinking creatively. However, the Participating Administrative 
Entities provided few specific examples of overly prescriptive 
requirements that contributed to delays. As a result of 
concerns with the operating procedures guide, OMHAR streamlined 
its requirements and reissued the guide in January 2001. OMHAR 
believes the revised guide makes clear its reliance on good 
judgment and quality restructuring by the Participating 
Administrative Entity and notes OMHAR's willingness to consider 
alternative approaches that reach the goals of the program. 
OMHAR said the emphasis throughout the revised guide is toward 
flexibility in reaching common sense conclusions and logical 
restructuring outcomes.
    The remaining eight Participating Administrative Entities 
we contacted said the operating procedures guide was necessary 
to ensure consistency in the program and did not impede their 
ability to complete the restructuring transactions in a timely 
manner. Furthermore, most program stakeholders participating on 
our expert panel believed the guide somewhat or greatly 
accelerated the processing of restructuring transactions. While 
we did not conduct a thorough examination of all the 
requirements contained in the operating procedures guide, we 
tend to agree with the majority of Participating Administrative 
Entities who believe the guide was necessary to ensure 
consistency in the program. While the guide contains specific 
requirements that Participating Administrative Entities must 
follow in reaching decisions on various restructuring issues 
affecting a property and how those decisions are to be 
documented, it allows the entities to reach decisions based on 
the property's specific circumstances. Accordingly, we believe 
that it gives Participating Administrative Entities sufficient 
flexibility to deal with the specifies of individual 
restructuring transactions.

Q.2. Do the guidelines ensure consistent results across State 
lines? In your view, is this a desirable goal?

A.2. The operating procedures guide outlines a uniform process 
for all Participating Administrative Entities to follow in 
completing a restructuring transaction, the guide helps to 
ensure consistent results across State lines, which we believe 
is a desirable goal. The law requires OMHAR to assign 
properties for restructuring to the Participating 
Administrative Entities based on the entities' geographic 
jurisdictions. Consequently, Section 8 property owners with 
properties in several States may be dealing with several 
different entities. Without a national mark-to-market protocol 
to ensure consistency, there is increased likelihood that such 
owners would become frustrated trying to negotiate transactions 
with the different Participating Administrative Entities, which 
may be following different restructuring processes.

Q.3. Has the increased involvement of HUD in the operations and 
staffing of OMHAR in the past several months had any impact on 
OMHAR's ability to do its work?

A.3. According to OMHAR, the Office has been unable to obtain 
new staff due to the current hiring freeze by HUD, despite the 
fact that OMHAR is exempt from this policy. OMHAR also noted 
that HUD has not allowed internal promotions due to budget 
constraints. OMHAR stated that they need to fill vacated 
positions and promote staff in order to maintain the progress 
made in restructuring Section 8 properties. OMHAR noted that 
the law gives them the statutory authority to hire and promote 
staff as needed. Section 574(a) of the law states that the 
Director of OMHAR can appoint and determine the compensation of 
employees that is 
necessary to carry out the functions of the Office. According 
to 
HUD, restrictions on hiring and promotions were the result of 
OMHAR's scheduled termination on September 30, 2001. HUD stated 
that hiring and promoting staff did not make sense with OMHAR 
scheduled to terminate. HUD did say that the restrictions would 
be lifted if OMHAR's authority is extended.

Q.4. As you know, the law gave State and local housing finance 
agencies a priority in becoming restructuring agents for HUD, 
or PAE's. While there are more public PAE's, the private PAE's 
are doing more of the work. This is particularly true for the 
more complex full restructurings. Why is this the case? How 
have public and private PAE's performed to date? To what do you 
attribute any differences in performance? For example, did 
OMHAR simply not give public PAE's assets, or did public PAE's 
get assets later than private PAE's? In addition, Barbara 
Thompson testified that, on a percentage basis, public PAE's 
did as well as private PAE's in terms of speed. Is this true?

A.4. Of the 138 full mortgage restructurings completed by June 
15, 2001, nonpublic Participating Administrative Entities 
completed 106 (77 percent) and the public entities completed 
the remaining 32 (23 percent). On average, the nonpublic 
Participating Administrative Entities took less time to 
complete the full mortgage restructurings once they accepted 
the property from OMHAR for restructuring--about 395 days 
compared with an average of 475 days for the public entities. 
The nonpublic Participating Administrative Entities also 
completed more rent restructurings and required less time to 
complete the restructurings than the public 
entities. For example, of the 500 rent restructurings completed 
as 
of June 15, 2001, the nonpublics completed 278 (56 percent) and 

required about 180 days to finish the process compared with the 

public entities that completed 219 (44 percent) and required an 

average of 221 days. According to OMHAR, public entities may be 
less willing to put pressure on the owners to cooperate in a 
timely manner, or may engage in more lengthy negotiations to 
get the best deal for the owner. While both of these actions 
cause delays in completing the transactions, OMHAR said public 
entities may feel compelled to do so since they have 
established long-term relationships with the property owners. 
OMHAR also noted that nonpublic Participating Administrative 
Entities seem to be more interested in earning the incentive 
payments for timely completion of the restructurings than the 
public entities. OMHAR believes this may be largely 
attributable to the fact that the nonpublic entities receive a 
significantly lower base fee than the public entities.
    OMHAR has assigned more properties to the nonpublic 
Participating Administrative Entities for restructuring. For 
example, as of June 15, 2001, OMHAR had assigned 700 properties 
requiring full mortgage restructurings to nonpublic entities 
and 234 properties to public entities. For those properties 
requiring only rent restructuring, OMHAR assigned 345 to 
nonpublics and 243 to publics. 
According to OMHAR, nonpublic Participating Administrative 
Entities are assigned properties in States where there is no 
public Participating Administrative Entity presence, the public 
entity has been capped either by their own election or by OMHAR 
due to performance, or there is a ``large-owner'' memorandum of 
understanding involving multijurisdictional properties--used 
for those owners with a large number of Section 8 properties 
located in various States.

Q.5. In your view, do public PAE's have the staff to handle M2M 
work? Do private PAE's have enough staff?

A.5. While we did not specifically evaluate the Participating 
Administrative Entities' capacity to complete mark-to-market 
restruc-
turings, we found that the nonpublic entities tended to have 
more staff dedicated to work on the program, although they also 
tended to have larger workloads. Additionally, OMHAR told us 
that the skills, expertise and seniority at both a staffing and 
organizational level were significantly lower for a number of 
the public Participating Administrative Entities, and that the 
capacity of some public entities has proven to be significantly 
less than indicated in their original proposals.

Q.6. The witness from the National Association of State Housing 
Agencies, Ms. Thompson, says in her testimony that OMHAR has 
created many impediments to State agencies participating in the 
Mark-to-Market Program. In your view, is this accurate? If so, 
how have the private PAE's been able to complete so many 
projects? Are there impediments unique to the public PAE's, or 
are there different requirements for the public vs. private 
PAE's?

A.6. We are not clear to which impediments Ms. Thompson is 
referring, although we are aware that her organization has not 
been pleased with the compensation that the public 
Participating Ad-
ministrative Entities receive to complete the restructurings, 
the 
program's operating procedures guide, or some of the program's 
conflict of interest provisions. However, public Participating 
Administrative Entities receive higher compensation than the 
non-
publics and the restructuring process, including any conflict 
of interest provisions, outlined in the program's operating 
procedures guide applies to both public and nonpublic entities. 
According to OMHAR, there are no restructuring requirements 
that are unique to the public Participating Administrative 
Entities.

Q.7. The law authorized OMHAR to establish exception rents in 
certain circumstances. The Congress provided this authority to 
provide OMHAR with some flexibility. There were two specific 
circumstances that were considered: First, inner-city 
properties where local market rents were too low to support the 
operation of a project that was generally considered to be an 
anchor in an otherwise blighted community. The Congress clearly 
expected OMHAR to provide rents to continue to maintain such 
properties. Second, the Congress felt that exception rents 
would be needed in rural areas. Has OMHAR been exercising this 
authority? In what cases?

A.7. Section 514g(2) of the law states that exception rents are 
to be allowed if a Participating Administrative Entity 
determines that the housing needs of the tenants and the 
community cannot be adequately addressed through implementation 
of the rent limitation required through a mortgage 
restructuring. The law allows Participating Administrative 
Entities to provide exception rents that do not exceed 120 
percent of Fair Market Rents for up to 20 percent of the 
expiring Section 8 contract units in a fiscal year. The law 
also allows OMHAR to grant waivers for rents that exceed 120 
percent of Fair Market Rents for up to 5 percent of all units 
restructured in any fiscal year. While OMHAR said they did not 
have an identifier to determine whether the exception rent 
properties were located in inner cities or rural areas, they 
could provide the number of properties receiving exception 
rents to date. Accordingly, 36 properties have received 
exception rents as of July 2, 2001.
    OMHAR noted that several reasons exist for properties 
receiving exception rents, including: (1) when market rents 
will not support the property's expenses, such as in cases 
where rents are stable and expenses are increasing as may 
frequently occur in rural areas or in areas marked by generally 
poorer economics, low growth, or even population decline; (2) 
when the housing should be retained since acceptable, 
affordable options are not available which is often the case in 
rural areas where the mark-to-market property may be the only 
rental housing; (3) when older properties that are 
characterized by increasing expenses for repair and maintenance 
and the need to increase deposits to the replacement reserves--
effectively an expense--for the future have higher expenses 
than other properties; and (4) when properties have higher 
expenses than market rate properties because of the additional 
administrative burdens of Section 8--that is, the need for 
additional security and/or maintenance in stressed areas.

Q.8. One clear reason for giving State housing finance agencies 
a priority in the law was that the Congress felt that public 
agencies would be more aggressive about enforcing the mission 
of maintaining affordable housing in strong physical and 
financial condition for the full term of the 30 year 
affordability commitment. From discussion with program 
participants, has there been a difference in the performance of 
the public and private PAE's with regards to adequate 
rehabilitation, adequate reserve for replacement for future 
capital needs, or other ``mission''-related indicators keeping 
the long-term affordability in mind?

A.8. Since we did not include an examination of differences 
between public and nonpublic Participating Administrative 
Entity performance as part of our work, we are not in a 
position to judge whether there have been any meaningful 
differences between public and nonpublic entities' performance 
of mission-related activities, such as their actions to address 
property rehabilitation needs. In analyzing the dollar amounts 
of rehabilitation required for the 
138 completed full mortgage restructurings--as of June 15, 
2001--
we found that, on average, public Participating Administrative 
Entities required more rehab funds than nonpublic entities. For 

example, for the restructurings completed by public entities an 

average of about $106,000 per property in rehabilitation was
required, while the nonpublic entities required an average of 
about $53,000 per property in rehabilitation for the 
restructur-
ings they completed. We also found that for 44 percent of the 
properties restructured by nonpublic entities, no 
rehabilitation was required, compared to 13 percent of the 
properties restructured by public entities.

Q.9. As a follow-up, is there some general and consistent 
standard of rehabilitation and replacement reserves that can be 
incorporated into the statute or the regulations that ensures 
that building will continue in good shape for the 30 years?

A.9. None of the members of our expert panel or other program 
stakeholders that we met with specifically suggested that there 
needs to be a revision of the legislative or regulatory 
standards 
regarding property rehabilitation. Requirements in the Mark-to-
Market legislation and regulations and in OMHAR's operating 
procedures guide make it clear that properties are not only to 
receive necessary rehabilitation when the property goes through 
restructuring, but also that the property be maintained in 
decent, safe, and sanitary condition over the long term. For 
example, Section 401.558 of the regulations state that a 
restructuring plan must require the owner to maintain the 
project in a decent and safe con-
dition and Section 401.560 of the regulations requires that 
each 
Participating Administrative Entity establish management 
standards that, among other things, require the project 
management to protect the physical integrity of the property 
over the long term through preventative maintenance, repair, or 
replacement. OMHAR's operating procedures guide specifies a 
number of steps that Participating Administrative Entities must 
follow in determining how to address property rehabilitation 
needs. Among other things, it states that Participating 
Administrative Entities are to determine the deposits to the 
replacement reserve that are needed to maintain the property in 
acceptable physical condition over the term of the mortgage.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD 
                      FROM PETER GUERRERO

Q.1. In your opinion, how effective is the process for 
monitoring the physical and financial health of the properties 
that needed full restructurings but only received rent 
reductions?

A.1. As we noted in our testimony, while the Mark-to-Market 
Program has resulted in Section 8 savings, the requirement that 
rents be reduced to market has increased the risk of physical 
and financial problems for some properties. This includes 75 
properties that, as of June 15, 2001, OMHAR had processed as 
rent restructurings, but which did not meet OMHAR's 
underwriting criteria and 78 properties that OMHAR had 
processed as full mortgage restruc-
turings, but for which OMHAR reduced the properties' rents to 
market without restructuring the properties' mortgages. We 
found that while HUD's Office of Housing had developed guidance 
for its field offices to follow in monitoring the physical and 
financial condition of such properties, the guidance did not 
specifically cover the 78 properties processed as full mortgage 
restructurings. HUD has recently agreed to revise the guidance 
so that it will include all properties that may be at risk and 
to strengthen other provisions contained in the guidance. 
However, these revisions were not yet finalized as of July 2, 
2001. While this is a positive step, it will be important for 
both HUD and the Congress to ensure that any problems that 
arise at these properties are quickly identified and corrected 
before they affect the property's value and impair the well 
being of property residents.

Q.2. What changes in resources, if any, will be required in 
extending the Mark-to-Market Program?

A.2. While we have not performed any analyses on the resources 
needed to administer the program, it seems likely that the 
workload for restructuring properties would continue to remain 
at current levels for the next 3 years. Therefore, it appears 
that OMHAR's resources would also need to remain at 
approximately their current levels for the same period. As we 
noted in our testimony, OMHAR estimated that over 1,300 Section 
8 properties with above-market rents would expire after fiscal 
year 2002. Of those properties, over 1,150 (88 percent) will 
expire by the end of fiscal year 2004.






























































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