[Senate Hearing 107-836]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-836


                         HOUSING AND COMMUNITY
                           DEVELOPMENT NEEDS

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

                                HEARING

                               before the

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

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

THE EXAMINATION OF HOUSING AND COMMUNITY DEVELOPMENT NEEDS, FOCUSING ON 
THE FISCAL YEAR 2003 HOUSING AND URBAN DEVELOPMENT BUDGET, PROVIDING A 
   MORTGAGE CUT RATE FOR NATIONAL GUARDSMEN AND RESERVISTS CALLED TO 
 ACTIVE DUTY, RELIEF ON FHA MORTGAGES FOR THE VICTIMS FAMILIES OF THE 
 SEPTEMBER 11, 2001 ATTACKS, AND FOR NEW YORK CITYS' ECONOMIC RECOVERY

                               __________

                   NOVEMBER 29 AND DECEMBER 13, 2001

                               __________

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

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                            WASHINGTON : 2002
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

                   Mark Calabria, Republic Economist

             Sherry Little, Republic Legislative Assistant

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
                            C O N T E N T S

                              ----------                              

                      THURSDAY, NOVEMBER 29, 2001

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1
    Prepared statement...........................................    32

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     3
    Senator Reed.................................................     4
        Prepared statement.......................................    32
    Senator Miller...............................................     5
    Senator Stabenow.............................................     5
    Senator Corzine..............................................     6
        Prepared statement.......................................    33
    Senator Carper...............................................    21
        Prepared statement.......................................    34

                               WITNESSES

Patty Murray, A U.S. Senator from the State of Washington........     1
Barbara Sard, Director of Housing Policy, Center on Budget and 
  Policy
  Priorities.....................................................     7
    Prepared statement...........................................    35
Raymond A. Skinner, Secretary of Housing and Community 
  Development,
  the State of Maryland, Testifying on Behalf of The National 
    Council
  of State Housing Agencies......................................     9
    Prepared statement...........................................    55
    Response to written questions of Senator Sarbanes............    86
Edgar O. Olsen, PhD, Professor of Economics, University of 
  Virginia.......................................................    12
    Prepared statement...........................................    59
David W. Curtis, Executive Vice President and Chief Executive 
  Officer,
  Leon N. Weiner & Associates, Inc., Testifying on Behalf of The 
    National
  Association of Home Builders, Inc..............................    14
    Prepared statement...........................................    65
    Response to written questions of Senator Sarbanes............    87
Kurt Creager, President, National Association of Housing and
  Redevelopment Officials, and Chief Executive Officer, Vancouver 
    Housing
  Authority, Vancouver, Washington...............................    16
    Prepared statement...........................................    71
F. Barton Harvey, Chairman and CEO, The Enterprise Foundation....    19
    Prepared statement...........................................    79
    Response to written question of Senator Sarbanes.............    88

              Additional Material Supplied for the Record

Statement submitted by U.S. Conference of Mayors, National 
  Association
  of Counties, National Association for County Community Economic
  Development, National Association of Local Housing Finance 
    Agencies,
  National Community Development Association, dated November 29, 
    2001.........................................................    90
Additional testimony submitted by Kurt Creager, dated
  December 10, 2001..............................................    94
                              ----------                              

                      THURSDAY, DECEMBER 13, 2001

                                                                   Page

Opening statement of Chairman Sarbanes...........................   109
    Prepared statement...........................................   149

Opening statements, comments, or prepared statements of:
    Senator Gramm................................................   111
    Senator Reed.................................................   113
    Senator Allard...............................................   114
    Senator Bayh.................................................   115
    Senator Crapo................................................   117
    Senator Miller...............................................   118
    Senator Bunning..............................................   118
    Senator Stabenow.............................................   118
        Prepared statement.......................................   153
    Senator Corzine..............................................   119
    Senator Schumer..............................................   145

                                WITNESS

Mel Martinez, Secretary, U.S. Department of Housing and Urban
  Development....................................................   121
    Prepared statement...........................................   153

 
                         HOUSING AND COMMUNITY 
                           DEVELOPMENT NEEDS

                              ----------                              


                      THURSDAY, NOVEMBER 29, 2001

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

    The Committee met at 10:05 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call this hearing to order.
    There is a vote scheduled at 10:30 a.m. and we will do as 
much business as we can before we have to leave to go and vote. 
I am going to defer my opening statement because Senator Murray 
is here to introduce one of the people who will be on the 
panel, and I know she has some other pressing engagements. 
Senator Murray, why don't you go ahead. We will be very happy 
to hear from you.
    Senator Murray. Well, thank you very much, Mr. Chairman and 
Members of the Committee.
    Chairman Sarbanes. I might add, a former, very 
distinguished Member of this Committee.

                   STATEMENT OF PATTY MURRAY

          A U.S. SENATOR FROM THE STATE OF WASHINGTON

    Senator Murray. Well, thank you, Mr. Chairman, and Members 
of the Committee. I really do appreciate the opportunity to 
take just a minute this morning to introduce a very good and 
long-time friend of mine, Kurt Creager.
    Kurt is the Chief Executive Officer of the Vancouver 
Housing Authority in my home State of Washington. That is the 
housing authority that serves all of Clark County, Washington, 
which is one of the fastest-growing communities in the entire 
country.
    Kurt has always been an effective and articulate spokesman 
for affordable housing and community development in Washington 
State, and I am pleased that he is now President of the 
National Association of Housing and Redevelopment Officials, 
which allows him to bring his passion for these issues to the 
national level.
    Mr. Chairman, I know that you have shared many of my 
concerns about the first HUD budget proposed by the Bush 
Administration and I applaud your decision to hold this hearing 
today on the fiscal year 2003 HUD budget.
    Programs like the Community Development Block Grant Program 
and the Public Housing Capital and Operating Funds are really 
critical to serving low-income people and communities from 
coast to coast. We need to make sure that the Administration 
understands their importance.
    In my home State of Washington, we are experiencing 
tremendous layoffs and increased unemployment, and we know that 
at a time when the economy is slowing down, we should not be 
reducing our investments in affordable housing and communities.
    Mr. Chairman, I thank you for holding this hearing. On 
behalf of the people of Washington State, I want to thank Mr. 
Creager for his leadership and his testimony and for coming all 
the way across the country today.
    Thank you very much, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Senator Murray. We 
appreciate you being here and introducing Mr. Creager.
    I want to thank all of the witnesses for joining us today 
to help explore and examine the housing and community 
development needs of the American people and the communities in 
which they live. Earlier this week, the President signed the 
HUD appropriations bill into law for the fiscal year in which 
we now find ourselves. Despite the narrow limits within which 
the Appropriations Committee was required to work, I do think 
they substantially improved the Administration's budget 
request, and I am very pleased that that is the case.
    I very much hope that the Administration will take into 
account the extent to which poor and even moderate-income 
working families are facing an affordable housing crisis as 
they prepare the HUD budget for fiscal 2003.
    By HUD's own data, 5 million very low-income American 
families pay over half their income in rent. A study by the 
National Housing Conference that looked at a broader sample 
found that nearly 14 million families, including working 
families earning more than the median income, face critical 
housing needs.
    In fact, while the number of worst-case needs among poor 
families actually seemed to stabilize a bit, the number of 
working families carrying the severe burden has risen quite 
sharply.
    A recent low-income housing coalition study shows that two 
full-time, minimum wage earners in a family is not sufficient 
in 33 States to rent a modest apartment which would require 
paying 30 percent of a family's income, a level widely assumed 
to be a measure of affordability.
    In other words, you have two full-time workers at the 
minimum wage, and in two-thirds of our States, that is not 
sufficient income to rent a modest apartment at 30 percent of 
the family's income.
    In the past decade, the number of units available to 
extremely low-income renters has dropped by about 15 percent, a 
loss of almost a million units. And nationally, apartment 
vacancy rates have declined by 1.7 percentage points, making it 
more difficult for all renters to find an affordable place to 
live.
    We should take a moment to think of what it means to pay so 
much of one's income for housing alone. It means insecurity and 
uncertainty. It may well mean rootlessness. These families live 
one unexpected medical bill, one car repair, one bout of 
unemployment away from homelessness. And many end up moving 
from one apartment to another, move in with relatives or 
friends just to keep a roof over their house. And obviously, 
the impact on the children of these families is extremely 
marked.
    I think it is important as we move ahead that both the 
Congress and the Administration should seek to expand aid to 
low-income families. Programs that help create a ladder of 
housing opportunity, such as FHA multifamily programs, need to 
be increased. For many the final rung on the ladder is 
homeownership assistance programs, and with some Federal 
assistance, many American families can take this final step 
toward the American Dream.
    I want to commend the Bush Administration last year for 
proposing additional downpayment assistance for homeownership. 
But I regret that the proposal came only at the expense of 
other programs, which I think were also sorely needed. It was 
an additional commitment of resources.
    Actually, the Appropriations Committee tried to straighten 
that out a little bit. I hope we do not face a similar 
situation in the budget that we will be receiving in the new 
year.
    The panel of witnesses we have here today come with broad 
experience and expertise to discuss America's housing needs and 
how we should go about meeting them. I am very much looking 
forward to hearing from them.
    Before we do that, I will turn to my colleagues for any 
statements they may have.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman for holding this 
hearing today on housing and community development needs for 
the fiscal year 2003 HUD budget. HUD's budget has been 
increasing in recent years and that trend I expect will 
continue in 2002.
    To merely focus on dollars seems to me to miss the point. 
The central question should be--what are the objectives of HUD? 
And are adequate resources provided to achieve those desired 
results?
    I want to make a point to emphasize The Government 
Performance Results Act, which is legislation that we passed 
some time back in this Congress which directed agencies to 
begin to measure their performance through measurable results.
    Many county commissioners, city council people, use this 
type of management tool in order to have accountability. Even 
businesses will have this accountability on how those dollars 
are spent and what the results are.
    I would hope that this Committee, working with the 
Subcommittee on Housing, would focus on trying to develop some 
measurable results from HUD so that, as policymakers, we can be 
more responsible on how these programs are administered.
    The success of HUD will be determined by how many people it 
helps to achieve self-sufficiency, not by how much money it 
spends. It is the responsibility of the Congress to hold 
Federal agencies accountable for specific results and to budget 
according to the success or failure in achieving those results.
    For the last several years, HUD's budget has been increased 
significantly. But what is most striking is the amount of 
unobligated money in the HUD pipeline which has already been 
appropriated by the Congress. At the end of last year, there 
was at least $12 billion of unobligated and unspent HUD money.
    It should also be noted that over the last several years, 
we have significantly increased Federal resources for 
affordable housing. Both the low-income housing tax credit and 
private activity bond authority were increased at the end of 
2000.
    In addition, this year Congress increased the FHA 
multifamily loan limits. It is also important to note the 
private sector's primary role in providing affordable housing. 
Mortgage bankers, homebuilders, and realtors are all working 
harder to create more affordable housing. It is very 
encouraging that the Fannie Mae and Freddie Mac conforming loan 
limits will rise in January from $275,000 to $300,000. This 
will help get many more families into affordable housing and 
affordable home mortgages.
    Before I close, I want to raise a concern with the Chairman 
if I might. HUD has not had an inspector general for nearly 6 
months. The President has nominated Ken Donohue, and my 
understanding is that his paperwork has been received by the 
Committee. And I hope that we can hold a hearing and confirm 
Mr. Donohue before the session ends, Mr. Chairman.
    Thank you.
    Chairman Sarbanes. His paperwork is complete. I discussed 
his situation yesterday with the Secretary. So it is not off 
the radar screen.
    Senator Allard. Are you planning a hearing shortly?
    Chairman Sarbanes. Well, I want to have a further 
discussion with the Secretary.
    Senator Allard. Okay.
    Chairman Sarbanes. Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Mr. Chairman, thank you very much for 
scheduling this hearing. I have the great opportunity to serve 
as the Chairman for the Housing and Transportation 
Subcommittee, along with Senator Allard as the Ranking Member.
    The Chairman's comments today are precisely on point. There 
is an affordable housing crisis across the country, measured 
not simply in statistics, but in the lives of American 
families.
    We are all in this room, I suspect, lucky enough to be able 
to think back to where we grew up, one address or two addresses 
of a house we knew, a house with stability. For so many 
American families, that is not the case, particularly in city 
center areas.
    In addition, the crisis in affordable housing forces 
families to make very difficult choices to live in an 
inadequate and, indeed, dangerous, house, or to have no place 
at all to live. And one of the real dangers that we find, 
particularly in the northeast, but across the country, is the 
pervasive nature of lead-based paint in houses that poison 
children. It is the number-one preventable pediatric disease in 
this country.
    And yes, it is not just about money. But, frankly, the 
scope and the nature of this housing crisis requires more 
resources. It requires them to be spent well and wisely. But 
anyone who would suggest simply by reorganizing HUD we are 
going to deal with this problem, I think is missing the point. 
We have to put real resources to address a real crisis. And I 
thank the Chairman for scheduling this hearing. I would also 
like to make my full statement a part of the record.
    Chairman Sarbanes. It certainly will be included in the 
record.
    Senator Miller.

                 COMMENT OF SENATOR ZELL MILLER

    Senator Miller. I have no statement at this time, Mr. 
Chairman.
    Chairman Sarbanes. Thank you.
    Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman, for holding this 
important hearing. And I think one of the opportunities that we 
have now with the extended session is to focus on our oversight 
responsibilities. And I think this is incredibly important and 
we appreciate everyone being here today.
    I am hopeful that we can focus in a way that brings some 
consensus among all the stakeholders about where we need to go 
in terms of the next year's budget.
    I certainly share the concerns, though, of the Chairman and 
of Senator Reed in terms of the challenges that real families 
are facing and with the downturn, and in fact, the official 
designation now of a recession, we certainly are seeing 
families that are being squeezed greatly by the economy, by 
layoffs.
    And I think all of us want to have a home for our children, 
to have safe housing that is free of lead paint and is a house 
that is not your car or some tent that is out in a park, which 
we have seen too many people finding themselves in this 
situation.
    I did want to stress, Mr. Chairman, that I am very 
concerned about the cuts that were made in Community 
Development Block Grants. I hope we are going to see a reverse 
in that and a commitment to move forward for those kinds of 
resources that are important for communities and for individual 
homeowners.
    And I am very concerned, and I know my good friend, Senator 
Jon Corzine, has mentioned this as well, his concern. But the 
fact that the budget eliminates the Public Housing Drug 
Elimination Program earmark is of real concern to me.
    This is a broad, bipartisan program. And when you couple 
that with the fact that we have seen a retreat in funding for 
Operation Same Home in the Office of the Inspector General of 
HUD, I am very concerned in terms of what this means as it 
relates to safe and drug-free public housing and communities.
    I would assume that the Administration's position is not 
that we are seeing a lessening of the problem of illegal drugs 
in public housing, but that we need to be very focused on safe 
homes and effective programs that eliminate access to drugs for 
our children in public housing and for all of our residents. 
So, I am very concerned and interested in knowing what the 
strategy is in terms of enforcing against illegal use of drugs 
and trafficking of drugs in our housing complexes.
    With that, I would just again welcome those who are with us 
today and thank you, Mr. Chairman, for a very important 
hearing, and know that we have a lot of work to do. Families 
are counting on us and hoping that we will put together 
effective programs that obviously use the dollars wisely, but 
certainly make sure that resources are available for families 
to be able to have what is a fundamental American Dream, which 
is a home for their family.
    Thank you.
    Chairman Sarbanes. Thank you very much, Senator Stabenow.
    Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman. I appreciate, as 
the other Members do, your holding this hearing. This is one of 
the most important topics I think we face in the Congress. 
Making sure that we do those things that help provide American 
families with decent, safe, affordable housing is a 
responsibility that I take very seriously and I know my 
colleagues on the Committee do. And we share your commitment to 
that, Mr. Chairman.
    I have a formal statement I will put in the record. But I 
want to underscore the things that Senator Stabenow just spoke 
about, the drug elimination program, which, starting with 
testimony by then-designate Martinez, the idea that this 
program was going to be supported was commented on both 
verbally and in writing and then dropped, I think just flies in 
the face of the facts of what we see when you go into public 
housing projects across this country.
    Decent, safe, affordable housing is something that is our 
responsibility and I am absolutely frustrated beyond belief 
with the elimination of this program. The Community Development 
Block Grants that Senator Stabenow spoke about strike at the 
very heart of our elderly, disabled, low-income communities.
    We have a lot of work to do here, and I appreciate the 
witnesses' participation. I have a formal statement, but this 
is one that I do not think we can give enough attention to.
    Chairman Sarbanes. Thank you very much, Senator Corzine.
    Ms. Sard, I think we will begin with you, and then we will 
move across the table.
    Barbara Sard is currently the Director of Housing Policy at 
the Center on Budget and Policy Priorities here in Washington. 
Prior to working at the center, Barbara Sard, a graduate of 
Harvard Law School, was the Senior Managing Attorney of the 
housing unit at the Greater Boston Legal Services, where she 
served for some----
    Ms. Sard. A long time.
    [Laughter.]
    Chairman Sarbanes. A long time. I accept that 
characterization.
    We are very pleased you are here. We know the terrific work 
you have done in working on renewal of tenant-based Section 8 
contracts, changes in the project-based voucher program, the 
development of policies and rules to implement the merger of 
the tenant-based certificates and voucher programs.
    You have really made a number of very significant 
contributions which we are aware of and grateful for, and we 
would be happy to hear from you.

                   STATEMENT OF BARBARA SARD

                   DIRECTOR OF HOUSING POLICY

             CENTER ON BUDGET AND POLICY PRIORITIES

    Ms. Sard. Thank you very much, Senator, and I appreciate 
the opportunity to testify today before the Committee.
    I am going to touch on three issues in my testimony: 
reviewing some of the recent data on housing needs, 
highlighting some of the recent research that substantiates 
what I think we know in our gut, which is that housing makes a 
difference in the lives of families and children, and finally, 
making a few recommendations related to voucher program funding 
for next year.
    On the data side, recent data show that despite the 
increased level of work effort in the population, poor and 
near-poor families continue to have serious housing problems. 
As the Senator said, in 1999, there were 4.9 million households 
with incomes under half of the median who either paid more than 
half of their income for housing or lived in severely 
substandard housing.
    Even among those households with such low incomes, most who 
are not elderly or disabled are relying on earnings primarily 
for their livelihood. Four out of five rely primarily on 
earnings. So this is not a problem just of the so-called 
dependent poor or welfare poor. This is a problem of low-income 
working families.
    If you have the testimony there is a graph which we did not 
have the funds to blow up. I apologize. That takes the data 
from the 1999 housing survey and shows that more than three-
quarters of the families problems are solely that they are 
paying more than half of their income for housing.
    They live in decent housing. They live in uncrowded 
housing. For those families in particular, vouchers can solve 
their housing problem. They can potentially use vouchers right 
where they are and solve their affordable housing problem.
    But for many families, vouchers have been more difficult to 
use recently because of the declining vacancy rate, as the 
Senator mentioned. And in all regions, there is a reduced 
supply of units affordable even to families with vouchers, at 
rents that are appropriate for the program.
    And that is particularly true of larger units, the units 
needed for families with three or more bedrooms. And so, that 
is really an important thing to think about in terms of the 
production side, that for vouchers to work for these larger 
families, we need more units.
    I also want to highlight location of housing as a very 
important issue. The steepest decline in available rental units 
at the right rents for the voucher program was in the suburbs. 
But as we know, the suburbs are where most of the job growth is 
occurring.
    If families are going to have a chance of working, or a 
better chance of working, it is very important that we target 
production of rental housing substantially to those suburban 
areas or other areas of high job growth and link that newly 
produced housing with vouchers.
    As you probably also know, renter households at the lowest 
incomes, those called extremely low income, below 30 percent of 
area median, have by far the highest incidence of housing 
problems.
    And another important feature of the voucher program is 
that it is the only one of the current Federal housing programs 
that is primarily targeted on these extremely low-income 
families. Every year 75 percent of vouchers have to go to these 
households. If we want to get scarce resources to the people 
that need them the most, it is important to have new vouchers.
    On the production side, our current tools, the Low-Income 
Housing Tax Credit and the HOME program, have been shown to 
work without additional subsidies only for households with 
income above about 45 percent of the area median.
    My testimony includes data from two recent HUD studies that 
show the extent of extreme rent burdens for families in tax 
credit and HOME developments if they do not also have rental 
assistance through the voucher program.
    Given our priority on welfare reform and its timeliness 
with the reauthorization coming up next year, it is important 
to look at the data on what families leaving welfare earn.
    The recent studies have shown that the typical family 
nationally who goes to work from welfare still has to pay 57 
percent of its income for housing. If you look at the chart, we 
took the data on earnings from the 14 jurisdictions where HHS 
has financed what are called welfare leaver studies. You can 
see that these families would have to pay from 52 to 129 
percent of their income simply for modest housing.
    There is a growing body of research that indicates that 
having housing subsidies makes welfare reform efforts more 
effective. In Minnesota, the evaluation of the MFIP 
demonstration showed that almost all of the increases in 
employment and earnings that were shown to be so significant in 
that demonstration were attributable to the families who had 
housing assistance of some kind. Families without affordable 
housing basically did not benefit from the welfare reform 
effort.
    The studies that have been done looking at children have 
shown that having affordable housing, particularly having 
vouchers that families use to move to better-off areas, makes a 
great difference in children's lives, most notably in 
education. The education results have been stunning. Given our 
current priority on education reform, I would suggest that if 
we ignore housing, it is like trying to reform education with 
one hand tied behind our back.
    Finally, on the budget. As you know, the number of new 
vouchers funded this year was 70 percent below the number that 
had been funded in 2001. Indeed, the number of new vouchers 
funded in 2002 was the lowest under a Republican President 
since the first budget of the Reagan Administration. There is a 
chart that we updated from HUD's data that shows that only in 
the fiscal 1982 budget were there fewer new vouchers funded 
when there was a Republican President in office than this past 
year.
    One thing to be very carefully on the look-out for in the 
HUD budget this next year is the fact that about $1.8 billion 
in additional budget authority is going to be required just to 
stay even. And that is because of the multiyear Section 8 
contracts that are expiring, as well as a few other 
technicalities that I explain in the testimony.
    So-called increase of $1.8 billion is no increase at all. 
It is only holding the ground, which obviously is a problem and 
a squeeze for other parts of the HUD budget. But for all the 
reasons I have talked about, it remains very important to 
continue to increase the Federal investment in vouchers and 
expand the number of families helped. And I would suggest, in 
particular, that we look at the need for new vouchers targeted 
on families moving from welfare to work in this coming year of 
TANF reauthorization.
    It is also important in order to make vouchers more usable 
in communities of high job growth, that housing authorities be 
able to pay an adequate amount of money with the vouchers. And 
one proposal that is in our testimony that we hope this 
Committee will seriously consider is increasing the amount that 
housing authorities can pay to 120 percent of the fair market 
rent. If this Committee proposes legislation that would change 
the statute in that way, that also has a fiscal effect that 
would have to be considered in the budget.
    There are a number of other proposals as well in the 
testimony that can improve the effectiveness of the voucher 
program which have a small financial impact, but that are yet 
important to pay attention to.
    Thank you.
    Chairman Sarbanes. Thank you. The vote has started. And I 
think, Mr. Skinner, probably rather than starting with you 
since we are already into the vote, we would better recess and 
go and vote and then we will return and resume the hearing.
    You all appreciate that this is the way it works.
    [Laughter.]
    Mr. Skinner. We understand.
    [Laughter.]
    Chairman Sarbanes. The hearing will stand in recess, 
subject to the call of the Chair.
    [Recess.]
    Chairman Sarbanes. The hearing will resume.
    We will now turn to Ray Skinner, who has a quarter-century 
of experience in housing, economic development, community 
revitalization, real estate development, and urban planning.
    Since 1988, he has been the Secretary of the Maryland 
Department of Housing and Community Development.
    Mr. Skinner. Since 1998.
    Chairman Sarbanes. 1998, yes. What did I say?
    Mr. Skinner. You said 1988.
    Chairman Sarbanes. No, I am sorry. 1998.
    Mr. Skinner. I have not been there that long.
    Chairman Sarbanes. Well, you have done a good job, so we 
are pleased with your presence there.
    We are very pleased to have Ray here and we would be happy 
to hear from him.

                STATEMENT OF RAYMOND A. SKINNER

         SECRETARY OF HOUSING AND COMMUNITY DEVELOPMENT

                     THE STATE OF MARYLAND

                    TESTIFYING ON BEHALF OF

         THE NATIONAL COUNCIL OF STATE HOUSING AGENCIES

    Mr. Skinner. Good morning, Senator Sarbanes. It is always a 
pleasure to see you. Actually, before beginning my testimony, I 
would just really like to thank you on behalf of my department, 
and really, on behalf of all the citizens of Maryland, for your 
unwavering support for housing and community development 
programs. We really do appreciate that.
    Chairman Sarbanes. Thank you.
    Mr. Skinner. Mr. Chairman, Members of the Committee, my 
name is Raymond Skinner and I am Secretary of the Maryland 
Department of Housing and Community Development. It is a 
pleasure to be here today. I really appreciate the opportunity 
to testify on behalf of the National Council of State Housing 
Agencies. NCSHA, as you know, represents the housing agencies 
of the 50 States, the District of Columbia, Puerto Rico, and 
the U.S. Virgin Islands.
    I want to thank you, Mr. Chairman, and many of the Members 
of this Committee who cosponsored and helped enact legislation 
last year to increase the caps on housing bonds and housing tax 
credits. However, unfortunately, even with those increases, 
many people qualified to receive bond and credit help still 
will not get it, in some cases because of three obsolete and I 
guess somewhat obscure Federal requirements that prevent it.
    I will not go into what they are in the interest of time, 
but they are outlined in my testimony. However, we believe that 
Senate Bill S. 677 fixes these problems. Forty-seven Senators 
have already cosponsored it and more than half the House has 
cosponsored an identical bill, H.R. 951. The National Governors 
Association and 20 other major State and local government, 
public finance, and housing groups have also endorsed this 
legislation.
    We want to thank the Members of the Committee who have 
cosponsored S. 677, and certainly urge all Senators, especially 
my Senator from the Great State of Maryland, to cosponsor it 
and to press for its inclusion in a tax bill very soon.
    Last year, Congress did more than just restore the 
purchasing power of the bond and credit caps that the bond and 
credit caps had lost since they were established in 1988. What 
you did was also index those caps for future inflation so that 
they would never again be robbed of their purchasing power due 
to inflation.
    Regrettably, Congress has made no similar provision for 
Federal housing spending programs. Today's HUD budget is a 
third of what it would have been had it kept pace with 
inflation since 1976. Had HUD budgets been adjusted for 
inflation over the last 27 years, $1 trillion more would have 
been invested in affordable housing. The HUD budget has 
remained flat in nominal terms. It has barely grown from $29.2 
billion in 1976 to $30 billion in 2002, and has lost two-thirds 
of its purchasing power due to inflation.
    The HOME program dramatically illustrates the tool 
inflation has taken on Federal housing funding. Congress 
authorized HOME at $2 billion in 1992, but appropriated only 
$1.5 billion that year. Since then, it has funded HOME at 
levels steadily outpaced by inflation. If Congress had funded 
HOME at its authorized level of $2 billion and adjusted that 
amount annually for inflation, HOME today would be funded at 
over $3 billion. That is more than 1\1/2\ times the $1.85 
billion that you just appropriated.
    As the Federal housing resources shrink, the number of 
families with critical housing needs remains startlingly high, 
as we have already heard. One out of eight American families 
has a critical housing need. That is 14 million families, 
including homeowners and renters, ranging from the very poor to 
those actually in what would be considered the middle class. 
Families hardest hit, of course, are those with the least 
incomes. Of those 14 million families, 84 percent earn 50 
percent of their area's median income or less. A stunning two-
thirds have incomes of 30 percent or less.
    In my State of Maryland, we also have acute unmet housing 
needs, particularly among the very low-income and extremely 
low-income families. We estimate that about 70 percent of all 
extremely low-income renters in Maryland pay more than 30 
percent of their income in rent, and half pay more than 50 
percent of their income.
    And even with the housing cap increase, requests for 
credits exceed our supply. In fact, we just completed a housing 
tax credit round where we had $4 of requests for every dollar 
of tax credits available. We also exhaust our private activity 
bond cap annually and it too is vastly oversubscribed. Pressure 
on the bond cap will continue to build as the 10 year rule 
increasingly prevents us from recycling mortgage revenue bond 
mortgage payments into new mortgages.
    Our HUD monies are also woefully insufficient. For example, 
this year, we received requests for more than two times our 
homeless assistance funding. We could immediately use another 
$13 million in HOME funds, and these are for projects that are 
already on the drawing boards and really could be funded within 
the next 6 months or so. And also, we received requests for two 
times our available CDBG housing funds. Most people do not 
normally think of CDBG as a housing program. But States do use 
CDBG funds for housing. Nationally, the average is about 20 
percent of the CDBG funds. In Maryland, we use about 35 percent 
of our CDBG funds for housing, for housing rehabilitation and 
for site acquisition.
    Some would say more tenant-based vouchers are the answer. 
Clearly, vouchers are an important tool and we certainly need 
more of them. But in Maryland, and in many other States, and in 
fact, the first witness has already mentioned this, vouchers 
are of no use in a number of areas where there is simply no 
affordable housing to rent. In Howard County, Maryland, for 
example, the housing department reports the vacancy rate is 
actually less than 1 percent--0.57 percent, to be precise. And 
there are other counties in Maryland where the vacancy rate is 
less than 2 percent. More vouchers will not address the problem 
of the lack of supply. Simply put, we need to produce more 
units.
    Unquestionably, Congress must find a way to devote 
substantially more Federal resources to affordable housing. But 
whatever Congress provides undoubtedly will not be enough to 
meet the total demand. So it is essential that we make the most 
of every Federal housing dollar.
    This requires eliminating unnecessary and outmoded Federal 
rules and regulations that slow the delivery of funds, increase 
the costs, and frustrates results. The changes we propose to 
the bond and credit cap programs in S. 677 are just a few of 
the examples of the changes that are needed to maximize dollars 
spent. We also have a number of ideas for streamlining HOME and 
other HUD programs to make them work more effectively and 
efficiently, both separately and, even more importantly, to 
work together, and we look forward to sharing them with you, 
some of which are, again, in the longer testimony.
    Finally, existing resources are insufficient to meet the 
Nation's affordable housing needs, particularly those of 
extremely low-income renters. That is one of NCSHA's highest 
legislative priorities, and a priority of the National 
Governors Association, is the creation of a new, State-
administered, rental production program targeted to very low-
income families. We want to work with you to 
design a program that builds on the success of programs like 
the housing bonds, the housing credit, and HOME, that utilize 
existing, proven State delivery systems, is integrated with 
existing State housing allocation plans and funding systems, 
and provides States the flexibility we need to tailor 
innovative solutions to our unique housing needs. And clearly, 
they are unique from State to State.
    In conclusion, we have a long way to go to close the ever-
widening gap between housing need and housing resources. There 
is no simple single answer. But, clearly, three steps would 
make a significant difference. First, housing program funding 
at least sufficient to keep pace with inflation. Second, the 
deregulation and devolution of existing programs. And third, 
new, flexible, State-administered resources to fill the gaps, 
particularly in our ability to house our most needy families.
    I want to thank you for the opportunity to testify today. 
NCSHA and our member State housing agencies are very grateful 
for your enthusiastic and sustained support of affordable 
housing and we stand with you and ready to assist you in any 
way we can.
    Chairman Sarbanes. Thank you very much, Ray.
    I would say to all of our witnesses, your full statements 
will be included in the record. I have had a chance to look 
through them and I very much appreciate the obvious effort and 
work that went into giving the Committee a very full 
presentation. And it will give us and the staff an opportunity 
to work through them very carefully and digest the material you 
have provided to us.
    The fact that we have to truncate the oral presentations is 
not--I want it understood that we appreciate the written 
presentations and we certainly will devote attention to them. 
But by the nature of how we have to function, we have to try to 
hold down the oral statements to a reasonable time.
    Next, we will hear from Professor Olsen, Professor of 
Economics at the University of Virginia. He has been a Post-
Doctoral Fellow in applied urban economics at Indiana 
University and has served as a consultant to HUD in a number of 
administrations.
    Professor Olsen, we are pleased to have you here.

                STATEMENT OF EDGAR O. OLSEN, PhD

         PROFESSOR OF ECONOMICS, UNIVERSITY OF VIRGINIA

    Mr. Olsen. Thank you, Mr. Chairman. I welcome this 
opportunity to talk with you and the Members of your Committee 
about the HUD budget. I speak from the perspective of a 
taxpayer who wants to help low-income families, a taxpayer who 
has spent the last 30 years studying the effects of low-income 
housing programs. My testimony will focus on the HUD budget for 
these programs.
    Given the current economic slowdown and the added expense 
of fighting international terrorism, it is clear that little 
additional money will be available for low-income housing 
programs over the next few years. The question is: How can we 
continue to serve the families who currently receive housing 
assistance and serve the poorest families who have not been 
offered assistance without spending more money? The answer is 
that we must use the money available more wisely.
    Research on the effects of housing programs provides clear 
guidance on this matter. It shows that tenant-based housing 
vouchers provide equally desirable housing at a much lower 
total cost than any type of project-based assistance.
    My written testimony contains references to these studies 
and a brief description of them. These results imply that we 
can serve current recipients equally well--that is, provide 
them with equally good housing at the same rent and serve many 
additional households without any increase in the budget by 
shifting resources from project-based to tenant-based 
assistance.
    The magnitude of the gain from this shift would be 
substantial. The smallest estimates of the excess cost of 
project-based assistance imply that a total shift from project-
based to tenant-based assistance would enable HUD to serve at 
least 600,000 additional households with no additional budget. 
These findings have important implications for how the HUD 
budget should be spent.
    First, the money currently spent on operating and 
modernization subsidies for public housing projects should be 
used to provide the tenant-based vouchers to public housing 
tenants, as proposed by the Clinton Administration and by 
Senator Dole during his Presidential campaign. If housing 
authorities are unable to compete with private owners for their 
tenants, they should not be in the business of providing 
housing.
    Second, contracts with the owners of private subsidized 
projects should not be renewed. Instead, we should give their 
tenants portable vouchers and force the owners to compete for 
their business. There is no reason to believe that the mark-to-
market initiative will improve the cost-effectiveness of the 
programs involved.
    Third, the construction of additional public or private 
projects should not be subsidized. No additional money should 
be allocated to HOPE VI and there should be no new HUD 
production program.
    These reforms will give taxpayers who want to help low-
income families more for their money by greatly increasing the 
number of families served without spending more money or 
reducing support for current recipients.
    Two main objections have been raised to exclusive reliance 
on tenant-based assistance. Specifically, it has been argued 
that 
tenant-based assistance will not work in markets with the 
lowest vacancy rates, and construction programs have an 
advantage compared with tenant-based assistance that offsets 
their cost-ineffectiveness, namely, they promote neighborhood 
revitalization to a much greater extent. My written testimony 
explains the conceptual problems with these arguments and, more 
importantly, shows that they are inconsistent with the 
available evidence.
    We do not need production programs to increase the supply 
of units meeting minimum housing standards. The Experimental 
Housing Allowance Program demonstrated beyond any doubt that 
the supply of units meeting minimum housing standards can be 
increased rapidly by upgrading the existing stock of housing 
even in the tightest housing markets. This happened without any 
rehabilitation grants to suppliers. It happened entirely in 
response to tenant-based assistance that required families to 
live in units meeting the program standards in order to receive 
a subsidy.
    In the Housing Assistance Supply Experiment, tenant-based 
assistance alone produced a much greater percentage increase in 
the supply of adequate housing in these localities in 5 years 
than all the Federal Government's production programs for low-
income families have produced in the last 65 years.
    The available evidence also shows that housing vouchers 
enable us to move eligible families into adequate housing 
faster than any construction program under any market 
conditions.
    The consequence of using the costly construction and 
substantial rehabilitation programs has been that more than a 
million of the poorest families who could have been provided 
with adequate housing at an affordable rent with the money 
actually appropriated for housing assistance have continued to 
live in deplorable housing or no housing at all.
    I urge the Committee to take the bold steps necessary to 
serve these families, and I appreciate the willingness of the 
Members of this Committee to listen to the views of a taxpayer 
whose only 
interest in the matters under consideration is to see that our 
tax revenues are used effectively and efficiently to help low-
income families.
    Chairman Sarbanes. Thank you very much, sir.
    David Curtis is the Executive Vice President and Chief 
Financial Officer of Leon N. Weiner & Associates, a 
multifaceted real estate development firm which has long been 
recognized as an industry leader and innovator, particularly in 
providing affordable housing to individuals and families of 
moderate means.
    Mr. Curtis is here today representing the National 
Association of Home Builders.
    We are very pleased to have you here. We would be happy to 
hear from you, sir.

                  STATEMENT OF DAVID W. CURTIS

      EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

               LEON N. WEINER & ASSOCIATES, INC.

                    TESTIFYING ON BEHALF OF

        THE NATIONAL ASSOCIATION OF HOME BUILDERS, INC.

    Mr. Curtis. Thank you, Mr. Chairman. As you indicated, I am 
here representing the 205,000 members of the National 
Association of Home Builders. And like the other speakers, we 
want to thank you and the Committee for holding this very 
important hearing. It is an honor for me to be here.
    We think the hearing is timely for many reasons. As we have 
already heard from you and from other speakers, affordable 
housing needs have reached a critical stage and impact a broad 
spectrum of households across the country.
    In NAHB's opinion, the HUD budget should reflect the 
importance of addressing these needs. We think that by doing 
so, we can benefit families and communities, while allowing 
housing to play its traditional role in leading toward an 
economic recovery.
    I want to focus my remarks predominantly on production and 
preservation because at NAHB, we believe that adequate supply 
of housing is central to addressing our Nation's housing needs.
    Some of the most important Federal tools for housing have 
been the FHA multifamily programs. However, in recent years, 
these programs have been subjected to a start and stop cycle 
that has frustrated participation and production.
    NAHB has repeatedly expressed concern about HUD's decision 
to raise the mortgage insurance premiums on these programs from 
50 to 80 basis points for the simple reason that those 
increases translate into increased rents and decreased 
affordability. We believe that the model utilized by HUD and 
OMB is outdated and unnecessarily pessimistic.
    Congress has directed HUD to work with the industry to 
review the technical assumptions in the model and FHA 
Commissioner Weicher agreed to complete a study by October 1, 
so that a revised formula could be in effect for the 2003 
budget.
    NAHB believes that completing that study, in cooperation 
with industry representatives, and implementing any changes for 
the 2003 budget cycle, is fundamentally important.
    We applaud Congress for raising, as has already been 
mentioned, the FHA multifamily mortgage loan limits by 25 
percent in the 2002 appropriations bill. Those limits had 
remained static since 1992 and had made the program unworkable 
in many areas.
    Unfortunately, the bill did not include indexing for 
inflation, nor did it allow the HUD Secretary to make 
allowances in some cities for exceeding the 110 percent high-
cost factor. We hope to work with Congress to include these 
modifications in the next year.
    NAHB is very supportive of both the HOME and CDBG programs. 
HOME funds have become a critical source for gap financing for 
the production of affordable housing, according to locally 
identified needs, and I think that is important.
    We support a funding level of at least $2 billion for the 
HOME program, as well as a significant one-time special 
allocation as an economic stimulus.
    We also support an increase of CDBG funding to a level of 
at least $4.8 billion. We are pleased that HUD changed its 
position and allows CDBG funds for the construction of single-
family new homes, and we would urge Congress to make the same 
accommodation for multifamily production.
    With regard to Section 8, we would urge Congress to provide 
funds so that all Section 8 contracts can be renewed, including 
those under the mark-to-market program, and in this way, we can 
preserve the affordable housing stock that is in place now. As 
other speakers have suggested, we would also recommend that 
funding be provided for 79,000 new incremental vouchers.
    As has already been mentioned, we are facing a critical 
housing shortage and large numbers of working families have 
urgent needs, but are not eligible for assistance under the 
current Federal housing programs. NAHB believes that the 
production of housing for those working families should be a 
top priority for next year.
    We have developed a program that is designed to increase 
and maintain the affordable housing stock over the long term. 
The program would foster mixed-income housing and is designed 
to use Government resources efficiently with small amounts of 
subsidy relative to the amount of housing produced.
    No new program bureaucracy would be needed because we 
propose that it be administered in the same fashion as the HOME 
and the tax credit programs, and we believe funding should be 
made available for this new production program.
    Finally, the Office of Policy Development and Research 
provides information that is very useful to the housing 
industry and we would suggest that HUD should collect data to 
assist in the development of new housing finance sources.
    Specifically, more consistent, comprehensive and detailed 
data on multifamily loan performance is needed to more 
efficiently attract funds from the capital markets. Sufficient 
funding should be made available to support this data-
collection effort by PD&R.
    We at NAHB look forward to continuing to work with 
Congress, HUD, and our industry partners in achieving our 
mutual goal of a decent and safe home for every American.
    Thank you very much.
    Chairman Sarbanes. Thank you very much, sir.
    Kurt Creager is Chief Executive Officer of the housing 
authority in Vancouver, Washington. He is also the President of 
the National Association of Housing and Redevelopment 
Officials, an organization, of course, which we know very well 
and whom he is representing here today.
    And we would be very happy to hear from you, sir.

                   STATEMENT OF KURT CREAGER

         PRESIDENT, NATIONAL ASSOCIATION OF HOUSING AND

                  REDEVELOPMENT OFFICIALS AND

                    CHIEF EXECUTIVE OFFICER,

                  VANCOUVER HOUSING AUTHORITY

                     VANCOUVER, WASHINGTON

    Mr. Creager. Thank you, Mr. Chairman and Members of the 
Committee, and I want to thank Senator Murray for her gracious 
and warm introduction of me at the beginning of this hearing. 
We have had a long and cooperative working relationship dating 
back to her days as a State Senator.
    For those of you who are not familiar with NAHRO, NAHRO 
members represent 95 percent of the public housing stock in the 
United States and are responsible for its management on a day-
to-day basis. Our members also administer 93 percent of the 
Nation's Section 8 portfolio. And we have many members that are 
also CDBG, HOME, and housing finance agency administrators.
    With me today is Larry Lloyd, who is Vice President of 
housing, and also Executive Director of the Anne Arundel, 
Maryland Housing Authority. Saul Ramirez, Executive Director-
Designee for NAHRO, who will begin in January. And Rick Nelson, 
who some of you know as Montgomery County HOC Board Member. He 
is outgoing Executive Director of NAHRO and retiring at the end 
of this calendar year. I know you have appreciated his good 
work over these many years.
    In Vancouver--America's Vancouver--the Vancouver Housing 
Authority is a diversified local housing provider. Half of our 
stock is not regulated by HUD. It is financed through bonds and 
tax credits. We are the managing general partner of many tax 
credit partnerships. We operate and own emergency shelters, and 
we also provide homeownership assistance to people throughout 
the region. As Senator Murray mentioned, we have been the 
fastest-growing urban county in the Pacific Northwest over the 
last decade.
    I will focus on three areas--housing and community 
development as economic stimulus, the need for reliable and 
predictable capital funding for the public housing capital 
fund, and the loss of the Public Housing Drug Elimination Grant 
Program.
    First, as mentioned by the other speakers, housing is, and 
has proven to be, an effective economic stimulus. It provides 
family wage jobs, direct expenditures trickle very quickly 
through the economy, and in a resource-based economy such as 
the Pacific Northwest, it is quite important. Washington 
currently leads all 50 States in unemployment. And that is 
seasonally adjusted for October, before the 30,000 cuts that 
Boeing has announced are counted.
    Housing and community development programs are as important 
today as they were in 1983, when the Congress provided 
supplemental funding under the jobs bill program. To give you 
one example, we are permit-ready as a local developer for a 
mixed-income, mixed-use project called Anthem Park. It is a 
$14.5 million project that will be built for us by Westwood 
Swinerton of San Francisco, the general contractor. Less than 2 
percent of this budget is Federal dollars. So you will be 
leveraging with merely a couple of hundred thousand dollars, 
$14.3 million worth of private investment and tax credit 
equity.
    Second, I would like to speak about the public housing 
capital fund because we are deeply troubled about the perceived 
unre-
liability of appropriations for the capital fund.
    In the Quality Housing and Work Responsibility Act of 1998 
(QHWRA) you gave us a great new tool. You gave us a predictable 
source of capital finance which we could then bond against for 
the provision of capital improvements that are needed in the 
first year.
    In the Pacific northwest, we have good housing stock. But 
we also have earthquakes. Senator Murray would like to remind 
you that we had a disaster actually before September 11, in the 
Nisqually earthquake and it took several housing units in the 
Seattle area out of service.
    And when I look at my 5 year plan for capital investment, 
in Vancouver, it includes seismic retrofitting to senior high-
rises. That is most effectively done at one time, rather than 
phased out over several years. And one way to do that is to 
bond against the future receipt of capital grant funds, as 
Chicago has done.
    I must say, though, when the President's budget came out 
with a 25 percent cut, that threw the investment markets into 
disarray. Standard & Poor's and Moody's needed to understand 
that this was a reliable source of financing in which to bond 
against.
    For small housing authorities which could not likely absorb 
the cost of financing individual securities using capital 
grant, housing authorities across the country, from Maryland to 
Washington, are looking at joint pooled projects, either 
through joint powers agreements or in the case of Maryland, 
through working with the State housing finance agency. That 
way, we can access lower-cost money at the bottom of the 
interest rate cycle, we hope, and to put that capital 
investment to work right away. Reliable capital expenditures 
are important to us, as is the predictability of 
appropriations.
    The third issue has to do with the PHDEP, or the Public 
Housing Drug Elimination Grant Program. The loss of this 
program is, I think, profound because it signals a larger 
issue. We have heard the Department talk about its need to 
return to its core mission, which means, apparently, that 
support services are not part of the Department's core mission.
    We know that most of this money was either used for youth 
activities, which is a prevention activity, or for law 
enforcement, which is a direct enhancement to the service of 
public housing neighborhoods.
    Both of those are a great loss, and especially after 
September 11. Local governments are in no position to provide 
even a modicum level of support to public housing 
neighborhoods, which is deeply troubling because they have a 
disproportionate share of children and frail, vulnerable adults 
living in them.
    It is not adequate to provide a baseline of public service 
to those neighborhoods. They need additional support and 
services. And this program is one way to pay for that. Seattle 
and King County alone are experiencing a $1.5 million cut. They 
serve 35 cities and those cities will not replace those 
services with law enforcement.
    I think it is appropriate to call into question the 
Department's belief that they are returning to their core 
mission. We learned in the last 20 years that we need more than 
sticks and bricks to make public housing neighborhoods 
effective, vital, and safe places to live. And if we accept 
that reasoning, then we must also accept that family self-
sufficiency and services for the homeless throughout McKinney 
would be vulnerable, which we cannot accept.
    In closing, I would like to say that we have found a great 
deal of common ground with the new Administration. We are 
working cooperatively on issues such as restructuring the so-
called PHAS system, the Public Housing Assessment System. NAHRO 
and Standard & Poor's are developing a replacement for PHAS, 
which we are working cooperatively with the Department on. So I 
want you to know that while we have differences on budget 
matters, we continue to work cooperatively together in the 
future.
    In summary, please do consider these programs as they are 
essential to the health of cities across the country.
    Thank you.
    Chairman Sarbanes. Thank you very much, sir.
    Our final panelist is Bart Harvey, who is Chairman of the 
Board of Trustees and Chief Executive Officer of the Enterprise 
Foundation. Enterprise is a national, nonprofit organization 
that mobilizes private capital to support community-based 
organizations in a wide range of neighborhood revitalization 
initiatives.
    And many of us, I think, are personally acquainted with the 
fine work which Enterprise does. They are really one of the 
leading nonprofit organizations in the field.
    We are very pleased to have Bart Harvey here. We would be 
happy to hear from you.

                 STATEMENT OF F. BARTON HARVEY

          CHAIRMAN AND CEO, THE ENTERPRISE FOUNDATION

    Mr. Harvey. Thank you very much, Chairman Sarbanes. And I 
would like to thank the whole Committee for having this hearing 
today.
    As you heard, Enterprise Foundation is a national nonprofit 

organization. It was started by Jim Rouse in 1982, and it is 
the original public/private partnership. We partner with over 
2,000 nonprofits, mostly grassroots around the country. We have 
raised and committed over $3.5 billion of private funding, 
which has 
leveraged another $8 billion of private and public funding to 
help produce over 120,000 affordable homes.
    Mr. Chairman, we also thank you, Senators Kerry, Reed, and 
Leahy, for their efforts to include housing in the Senate's 
economic stimulus plan. And certainly, it deserves to be there. 
It generates jobs and other economic development and it helps 
those who have been most affected by this crisis at the same 
time.

    You all have heard about the need for affordable housing. 
My only comment on it is that it will get worse if this 
recession deepens. And it will affect people even more, those 
that can least afford it.
    I also would like to thank Congress for intervening in the 
last fiscal year 2002 appropriation to try and increase what 
the Administration had proposed. And I certainly expect that 
that may need to be the case again for year 2003.

    Finally, Senator Reed, you and others mentioned the need 
for lead-safe housing and the scourge of lead poisoning. And 
Enterprise and others have got housing and health practitioners 
and the Centers for Disease Control and created the National 
Center for Lead-Safe Housing. And there is a prototype out 
there that works very closely with HUD. And HUD's funding is 
very much needed in this area as well.

    I have been honored to be one of the commissioners on the 
Millennial Housing Commission. And the commission has had 
hearings all across the country, from Washington, DC to Chicago 
and rural areas, all the way to California. And we get the same 
story back from those hearings. Over and over again, city, 
rural areas, that, first of all, housing has to be seen in the 
context of community, work, and transportation.

    Therefore, what HUD needs to do most is to have flexible 
funding. It needs to be devolved to the States and localities 
where they can make that decision, the best decision. It needs 
to be able to be leveraged with private resources. And people 
do not want to figure out the regulations for a lot of new 
programs. Rather, they would like to see some common sense 
changes in current regulations.
    While everything that everyone has said on this panel is 
important, and I think vouchers are important, public housing 
is important, new private mechanisms are certainly important, 
it is not an either/or situation we are looking at. It is a 
both/and.

    Vouchers make sense in some cases. Production makes a lot 
of sense in others. I would like to just focus in on three 
specific programs that are terribly important to the work that 
we are doing in our public/private partnership.
    First of all, the HOME program. We have a shortage of 2.8 
million rental apartments affordable to extremely low-income 
people. Three quarters of a million apartments affordable to 
such renters were lost between 1997 and 1999 alone. And there 
is the threat to more units being lost.
    A simple, effective way that Congress can help fill this 
gap and increase production would be to increase the annual 
HOME appropriation. If you remember what I said about the 
Milliennial Housing Commision's hearings, it is flexible. It is 
locally administered. It is a leveraged program, and it is 
highly targeted to those that most need it. There is a decade's 
worth of evidence that certainly argues for it. It is financed 
more than 617,000 affordable homes and currently produces more 
than 70,000 homes a year. Of HOME-assisted renters, nearly 90 
percent were very low income. Every home dollar generates 
almost $4 in additional private and other 
investment.
    HOME is especially important for the community-based groups 
that Enterprise works with. And we would certainly encourage 
HUD to request and Congress to provide $2.9 billion in HOME 
funding for fiscal year 2003, and that is merely an inflation 
adjustment to the program from when it started in 1990.
    Second, we also think that HUD and Congress should make a 
priority in 2003 to expand the capacity of the community-based 
groups that deliver housing. And here, we are talking about 
pennies in the overall budget. But capacity building is an 
important outreach by HUD to match private funds and to help 
these organizations retain staff, upgrade computer systems, 
develop business plans, and form new partnerships. Enterprise 
and other entities help distribute these funds to increase the 
capacity of grassroots groups, of nonprofit groups.
    The Urban Institute found that the community group 
strength, production, and local support systems have grown 
significantly, thanks in part to capacity-building investments. 
The Urban Institute went on in its report to say, grassroots 
groups, ``In many cities, are now the most productive 
developers of affordable housing, outstripping private 
developers and public housing agencies.'' And again, the cost 
is relatively small. There is a program called Section Four, 
which says that every Federal dollar needs three private 
dollars to be leveraged before it can go out, so that these 
groups are not unduly dependent upon Federal money. Again, a 
way of priming the pump and a public-private partnership across 
the country.
    Finally, we think you need more programs that gets private 
capital to work, particularly for affordable housing. Everyone 
knows the low-income housing tax credit and it is a terrificly 
successful program. But HUD also encourages a similar type of 
program called the Community Development Financial Institutions 
Fund. And this fund stimulates the creation and nurtures the 
growth of community-based financial institutions working to 
revitalize distressed and underserved communities.
    In 1999, entities that receive this funding finance nearly 
25,000 homes and apartments, virtually all of which were 
affordable to low-income people. Nearly 60 percent of funds 
certified--CDFI's, as they are called--serve smaller urban 
areas and 62 percent serve rural communities. This is creating 
capital in areas that need it, focus it on the immediate issues 
and problems, and leveraging it with private sources. Again, it 
is a very small part of the budget. But, regrettably, it was 
cut by almost a third in the 2002 HUD appropriation. We would 
certainly like to see that funding restored.
    The Administration talked, and President Bush talked about 
a homeownership tax credit, and we wholeheartedly subscribe to 
having a homeownership tax credit and we hope the 
Administration will come forward with it. Looking at the low-
income housing tax credit, it would be a wonderful vehicle for 
private capital to flow in a system that people already 
understand and again leverage other dollars.
    Let me just conclude, if I may, by saying that post-
September 11, now, more than ever, our Nation needs to be 
strong and united. We believe that the sources of that strength 
and unity include family, faith, community, and a place called 
home. Now, more than ever, home matters. Home is the family's 
foundation and an anchor in times of turbulence. Home means 
security and stability. Home helps define and sustain 
communities, forming the fabric of our neighborhoods and the 
relationships that bind us.
    I would just urge Congress that it have the public do the 
public part of a public/private partnership and allow the 
resources so that we can stimulate private investment, public/
private partnerships that will make a difference, and allow 
people to solve problems in localities across this country.
    Thank you very much.
    Chairman Sarbanes. Thank you very much. We have been joined 
by Senator Carper. And before we go to questions, Tom, did you 
have any statement, brief statement.

              COMMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. I will be very brief.
    [Laughter.]
    Uncommonly brief.
    [Laughter.]
    I want to welcome each of our witnesses today. We thank you 
for your testimony. I especially want to welcome Dave Curtis 
from Delaware, someone who we have a lot of respect for in our 
State on these matters.
    I have a statement I would like to ask unanimous consent to 
be included in the record, and thank you, Mr. Chairman.
    How was that? Uncommonly brief.
    [Laughter.]
    Chairman Sarbanes. Mr. Skinner, I know you have some other 
pressing engagements and at some point, you will have to leave. 
When that point comes, I would just invite--if you ever saw 
``The Sound of Music,'' you know, when they disappeared off the 
stage quietly----
    [Laughter.]
    You can do that whenever you feel it is necessary to do so.
    Mr. Skinner. Thank you, sir.
    [Laughter.]
    Chairman Sarbanes. Given the number of Members that are 
here, I think we will have 5 minute rounds. And then if we want 
to continue, we will come back around again. But I want 
everyone who has been here, and some have been here for quite a 
while, to have a chance to ask some questions.
    I want to start with the first building block. Often, we do 
not discuss preserving the stock of existing affordable 
housing. We talk about providing additional housing, and I 
think that is a very important thing and we are focused on 
that. And obviously, there is a tremendous need, as I outlined 
in my statement.
    We talk about new housing, either through vouchers or new 
construction, some combination thereof. But I want to go back 
to what we need to do to preserve the stock of existing 
affordable housing because we are losing a significant amount 
of that stock.
    I understand Enterprise has a partnership with the National 
Housing Trust, called the Preservation Corporation. Bart, could 
you talk briefly about what you do in this area, and what role 
you think preservation should play in HUD's budget proposal and 
in housing policy generally? And if others want to add 
comments, we would be happy to receive them.
    Mr. Harvey. Thank you, Senator.
    The Enterprise Foundation teamed up with the National 
Housing Trust. It is probably one of the best organizations 
that had chronicled every single apartment or rental unit 
across the country that is at risk of being lost as far as its 
affordability goes, either from opt-out or a whole number of 
other issues.
    We came together and provided capital and said, well, why 
don't we help go out and preserve those units because, first of 
all, it is the most cost-effective thing you can do. The cost 
of preservation is far less than the cost of new production in 
most places.
    In a whole number of places that are gentrifying, there has 
been a long fight to get private investment and then the very 
people that have led that fight are, in essence, going to be 
squeezed out of their neighborhoods. So there is a question of 
equity as well.
    And there are some things that are very important. First of 
all, we believe it should be handled through States and 
localities. You will need funds like HOME funds, which are 
flexible funds that can be used to buy out owners. And then 
there is the need for exit tax relief. And the Millennial 
Housing Commission, this is one of the prime issues they will 
be coming back with some recommendations around the exit tax 
relief issue. But even after that, you are going to need 
flexible funds. And you should have decisions made locally as 
to what are the most important areas of preservation. This is a 
very cost-effective, very important issue for the country.
    Chairman Sarbanes. Does anyone want to add anything?
    Yes, Mr. Olsen, go ahead.
    Mr. Olsen. Any housing unit can be made affordable with a 
sufficient subsidy. All of the units in the tenant-based 
Section 8 voucher program, are adequate units made affordable 
with tenant-based vouchers. The real issue here is, what 
programs will get families into adequate housing that is 
affordable at the lowest cost to taxpayers? And the answer to 
that is tenant-based vouchers.
    Guaranteeing subsidies to particular units that are 
independent of the condition of the units, provided only that 
the units just meet minimum standards, is one of the reasons 
for the excessive cost of project-based assistance. So I would 
say, let us let the tenants do the monitoring.
    Chairman Sarbanes. Well, I want Ray Skinner to address 
this. But don't you have a situation in which you have 
established project-based affordable housing. If you do not 
sustain it, the owners of it, given developments that have 
taken place in some instances, will simply take it out of the 
affordable housing market and shift it over into an entirely 
different market?
    Maybe if the project is a pretty good one, it has in effect 
helped to upgrade the neighborhood, and you will lose that 
housing altogether for affordable purposes. What do you think 
about that, Ray?
    Mr. Skinner. Well, we certainly believe that preservation 
is a critical issue. As you have indicated, and others have, 
there has been in fact a net decrease in the number of 
affordable housing units. In Maryland, many of the projects 
that we now finance, both with our tax credit program and our 
mortgage revenue bond, the multifamily mortgage revenue bond 
program, are in fact preservation projects. These are projects 
where new owners come in and acquire and rehab those units and 
put them back into affordable use. And as has just been 
mentioned by Bart, we also use HOME funds to help to bring down 
the rents in those projects. And we are fortunate here in 
Maryland that we have a great State commitment to affordable 
housing and we use State-appropriated dollars also to help keep 
those projects affordable.
    Not only that, but we require long-term affordability 
requirements beyond 30 years. Many of our projects, when we go 
through the acquisition rehab process, are required to be 
affordable for another 40 years, in some cases, as much as 50 
years.
    Mr. Creager. I would also mention, Mr. Chairman, this is a 
particular challenge for rural America. The preservation of 
existing affordable housing, the RDA and USDA financed stock 
that dates back to the 1960's, and is often the only affordable 
stock in the community. They have their challenges because they 
are now 30 years old and need significant reinvestment.
    You took a major step in the right direction by 
reauthorizing and expanding on bonds and tax credits because a 
lot of those debt and equity instruments can be used to 
refinance those properties.
    We are also looking, of course, in 2002 at the first 
generation of long-term housing tax credit projects that were 
placed into service in 1987, which are now at the end of their 
15 year regulatory term.
    You may recall that from 1987 to 1989, most States only 
imposed the minimum 15 year affordability requirement, and 
after that point had extended affordability requirements. Local 
housing providers, nonprofits, housing authorities, and others 
will be working with the owners of those properties to extend 
them 30 to 50 years into the future.
    Mr. Harvey. Could I just comment back on one of the 
statements by Mr. Olsen? I do not think it is only what is the 
cheapest way of doing something because you are dealing with 
human beings here. And there are people who have lived in a 
community that are elderly, that would get displaced, and maybe 
you could send them somewhere else with a voucher.
    But a lot of the segregation we get comes from the places 
that will take vouchers and those that will not, and that there 
is an adequate supply near work places, there is not the 
ability for people to live in certain communities along the 
way.
    It is not just cost. And I am happy to take on the issue of 
cost as well. But it is about community and people and where 
they live and where they want to live, and how do you do that 
effectively, and cost effectively.
    Chairman Sarbanes. One of the things we have been working 
on, particularly with the elderly and the disabled, is to put 
into play a range of services along with housing. I am going to 
yield to Senator Allard as I notice that my time is up.
    And it is difficult for me to see how you accomplish that 
if you completely depart from project-based housing because 
that gives you a sufficient way to bring in those services. And 
you are talking about elderly people--I mean, we could carry 
the analysis out further, and the argument weakens a bit.
    But it seems to me, on the elderly and the disabled, you 
have a real challenge in terms of providing them a housing 
situation which adequately addresses their needs. And it seems 
to me that their challenge is different from, say, a younger 
working family that can take a voucher and go somewhere else, 
assuming they can find the housing, and address their housing 
needs. Yes?
    Ms. Sard. Senator, if I may respond to that. In terms of 
Bart Harvey's comment, it is important to recognize that there 
are about a million tenants in the project-based Section 8 
stock who are elderly and disabled. And I agree with his 
comments about the importance of community and yours about the 
importance of being able to link services to those people.
    I want to note for the Committee that last year, Congress 
enacted a new tool within the voucher program called Project-
Based Vouchers, which is an important tool for expanding, I 
think, what everyone would agree with here. It makes service-
linked or service-intensive housing possible while providing 
the market discipline mechanism because this new project-based 
voucher is one that the tenant can move with if the tenant 
chooses to, while the development has a guaranteed stream of 
subsidy as long as it remains in good condition. We have some 
new tools that housing authorities can now use and more 
vouchers would make it even more possible for them to do more 
of such housing for an aging population.
    Chairman Sarbanes. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    You have all supported in your comments the HOME program. 
It has been noted by myself at least that support. There have 
also been people who are proposing new housing programs.
    I would like to have you comment on just simply going ahead 
and increasing over time the amount of money that we put into 
the HOME program in lieu of creating new programs. And I would 
like to have each member of the panel who would like to comment 
on that thought.
    Mr. Harvey. Let me start, since I am in agreement with you.
    There are a number of other options that have been 
proposed. There is a housing trust fund. Again, the Millennial 
Housing Commission is working on some other offshoots of it. 
Basically, they are variations on a theme. And again, the theme 
is to have a flexible program that is targeted to serve who 
most need that service. And that can work with tax credits and 
other Federal programs.
    And I do not think they are mutually exclusive and I think, 
in essence, through the HOME program, or even alterations in 
the HOME program, you can achieve very close to what these 
other programs are proposing. I do not think there is any 
disagreement and there are some merely variations on a theme 
here.
    Senator Allard. Mr. Creager.
    Mr. Creager. Senator, thank you for the question. We at the 
Vancouver Housing Authority actually implement projects using 
HOME funds.
    I was pleased to be here in the early 1990's when Senators 
Cranston and D'Amato led this Committee and spoke to the 
reauthorization of the HOME program in 1992. I believe that 
HOME is a little too restrictive. If you recall the legislative 
history, the program was put upon a Secretary of HUD that did 
not support it. Therefore, many of the program rules and 
regulations were codified into the Act. So that has really 
limited administrative flexibility of the 
Department to use it.
    Senator Allard. So these were rules and regulations put in 
by the Congress.
    Mr. Creager. That is correct.
    Senator Allard. And not by HUD?
    Mr. Creager. Jack Kemp did not want the program.
    Senator Allard. So if we work to remove some of those rules 
and regulations, then the possibility of that flexibility that 
we granted there makes it less likely, less of an appeal to go 
to new programs.
    Mr. Creager. I would say that if you do not do a production 
program and look to HOME, then improve upon HOME. Do not just 
add money to it. That said, NAHRO does support a $2 billion 
appropriation level, which is the initial authorization for the 
program, and does not have a position beyond that as expressed 
by others.
    Senator Allard. We will just go down the table.
    Mr. Curtis.
    Mr. Curtis. Thank you. I suppose in a very simple sense, 
what we need to produce affordable housing is subsidy in some 
form, so that increasing HOME dollars with the elimination of 
some of the restrictions that have been alluded to may in fact, 
given appropriate flexibility, provide the additional subsidy 
that is needed for a new housing production program.
    At NAHB, we are focused on trying to create mixed-income 
housing because we think that is most advantageous for the 
families that live in the developments, as well as the 
community, developments that look like anywhere in the United 
States, rather than a warehouse of poor people, if you will. In 
order to do that, one of the approaches that we have been 
working on is to combine a moderate subsidy with debt that 
would be issued by the Government, whether it be in the form of 
Ginnie Mae securities.
    What I am saying is I do not think it is as simple as 
simply increasing HOME dollars. We would need to wed some of 
these structures together to create a production program. But 
we think we can do that and agree that it should be done 
through the present delivery mechanisms of the HOME program and 
the tax credits.
    Senator Allard. Mr. Olsen.
    Mr. Olsen. To the best of my knowledge, there is no serious 
independent study of the effects of the HOME program. And I am 
absolutely certain there is no cost-effectiveness study of the 
HOME program relative to tenant-based vouchers.
    I would say two things about that. One, such a study is 
long overdue. Two, I see no reason to believe that HOME is 
going to be any more cost effective than the other production 
programs. HOME is mainly used for production-type programs. 
Until such a cost-
effectiveness study is done, I would favor no additional money 
for the HOME program.
    Chairman Sarbanes. Professor Olsen, let me just interject. 
Is it fair to say that you oppose all programs that could be 
used to produce new affordable housing?
    Mr. Olsen. Yes.
    Chairman Sarbanes. Low-income housing tax credit, HOME, 
CDBG, mortgage revenue bonds--you are against all of those, 
right?
    Mr. Olsen. Absolutely.
    Chairman Sarbanes. Are you against the mortgage interest 
deduction tax credit?
    Mr. Olsen. Yes.
    Chairman Sarbanes. You are against that as well?
    Mr. Olsen. Yes.
    Chairman Sarbanes. Okay.
    Senator Allard. Ms. Sard.
    Ms. Sard. Returning to Senator Allard's question, my view 
is perhaps a little different from others on the panel.
    I think more money into HOME would not accomplish as much 
as a new production program that was targeted on extremely low-
income households. If you look at HOME, more than half of HOME 
funds have been spent on homeownership uses--in fact, largely 
on repairs for existing homeowners and then another share for 
expanding homeownership.
    I am not intending to criticize homeownership. I think it 
is a question of what the Congress wishes to accomplish. More 
money into that stream is likely to be spent in similar ways. 
And less than half of the dollars are now used for rental 
housing production.
    Also, a recent HUD study which is cited in my testimony 
shows that, of the extremely low-income households who live in 
HOME-funded rental units, those without housing assistance are 
paying 69 percent of their income on average for rent.
    So HOME alone cannot produce rental housing that extremely 
low-income people can afford. If you are going to use that kind 
of shallow subsidy stream, it needs to be coupled with some 
kind of operating subsidy or voucher program in order to make 
it usable for the people with the greatest needs.
    Senator Allard. Mr. Chairman, I see that my time is 
expired. I would like to just briefly request of those of you 
who would like to see some regulatory changes in HOME, in order 
to not have to look at new programs that perhaps are less 
restrictive, to suggest some changes to me. I do not know, 
maybe the Committee would be interested in getting that 
information. But certainly, I would be interested in getting 
where those rules and regulations are creating a problem in 
flexibility within HOME.
    And if those are what is driving the new programs, as 
opposed to just expanding dollars in HOME, I would like to know 
what rules and regulations you think that is a problem in.
    Chairman Sarbanes. If it is not covered in the statements 
you have submitted, if you could submit a supplementary 
statement that addresses that issue to the Committee, it would 
be helpful.
    Mr. Creager. I do want to make sure that you know that 
NAHRO does support a new production program and it is of course 
in my written testimony.
    What you will find on review of a regulatory framework, is 
that it is easier to use the money for homeownership. That is 
why the majority of the money is being used for that purpose 
rather than rental housing production.
    So some of the barriers are actually at the expense of 
rental housing production. It is not necessarily a bias of 
local government administration of the program.
    Mr. Harvey. And if I could just interject one final 
comment.
    I have no disagreement. I am talking about the vehicle of 
HOME, and there are a lot of common-sense things that you could 
do to make it more productive. But if Congress wanted to 
target--and we think it ought to--extremely low-income people, 
it would have to set up those sets of regulations within HOME, 
which could be easily done, to say that, look, this portion of 
it goes to X, Y, Z, or have a parallel program that works the 
same way so that people do not have to relearn it; that can be 
used specifically for extremely low rental housing.
    Chairman Sarbanes. Of course, that then runs counter to the 

effort to devolve a lot of this decisionmaking down to the 
local level, which was one of the arguments used for HOME when 
we put it into place. So it is a balance question.
    Mr. Harvey. Again, we strongly believe that there should be 
some Federal targets that are in it. But, then, within that, 
the local jurisdictions can say, great. We can use x amount as 
they are, for homeownership, y for rental, et cetera.
    Chairman Sarbanes. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Let me turn to the issue of the Section 8 reserves. Ms. 
Sard, as you might realize, in the appropriations process, we 
were compelled, or the Committee was compelled, to cut these 
reserves in half. And CBO has estimated that this will decrease 
voucher utilization, meaning that fewer families will be served 
by Section 8 programs. Do you agree with this assessment? And 
can you elaborate why fewer families would be served?
    Ms. Sard. The question of whether fewer families would be 
served depends on how HUD chooses to administer the change that 
was made in the Appropriations Act. The score, the assumption 
of outlay savings, was based on the language in the House bill, 
which was incorporated in the final legislation.
    However, the conference committee report has important 
language in it which directs HUD to ensure that agencies that 
need more than the 30 days of reserves in order to maintain 
voucher assistance to the authorized number of families, should 
get it.
    If HUD indeed follows the direction of the conference 
committee and gives appropriate signals to housing agencies 
that they can rely on that money being there, then I think that 
the CBO anticipation will not prove to be the case. And I hope 
that will happen and I certainly hope that this Committee will 
help ensure that HUD does that.
    Senator Reed. Thank you very much. Mr. Creager, can you 
comment on that?
    Mr. Creager. I would like to elaborate because this a 
bread-and-butter issue for local administration of the program. 
We have appreciated the chance to work with Barbara Sard on 
this issue over the last couple of years. As you know, the 
reserve level is computed based on past practice, the prior-
year experience. And there are two economic conditions that 
could adversely affect local agencies as they administer the 
program, which could cause them to dip into a second month of 
reserves.
    One is if your market deteriorated to the point where your 
vacancy rates increased dramatically, your utilization rate 
could go up, which is great for consumers. If you are at 95 
percent, you could quickly go to 100 percent. More consumers 
would find housing. And yet, your reserves are predicated on 
your past year's experience. So that would be an immediate 
fiscal impact on the local agency, which would be problematic.
    The other example is a flip side of a soft economy. Voucher 
holders of course, are paying an affordable rent and if they 
lose their jobs, and many of our residents have moved from 
welfare to work rather recently, and therefore, are often the 
first to lose their jobs. In this instance their income falls 
rapidly, which means that the portion of Housing Assistance 
Payment (HAP) payment paid to their landlord goes up 
dramatically. And it can go up very quickly.
    So the local housing authority is putting out more HAP 
payment than they have authority to do so and the local housing 
authority must dip into that second month of reserves to cover 
the shortfall.
    What we would like to see is the access to that second 
month codified rather than just buried in report language some 
place. So that those agencies that do need it--those are two 
examples that I have given you, there would be other examples--
would have access to it. That said, you need to know that I 
administer a Moving-To-Work (MTW) agency and we have been 
granted 2 months' reserves. So we are held harmless from this 
new rule. But I know that it will affect my colleagues.
    Senator Reed. Thank you very much.
    Mr. Curtis, in the last few months, the new Administration 
is taking some action, first, with respect to the FHA 
multifamily program that was shut down in April essentially 
because of the lack of credit subsidy. This is one issue.
    And the second issue is increasing insurance premiums in 
FHA programs from 50 to 80 basis points. When Secretary Weicher 
was here, he said that this would be good for the industry 
because it would provide predictability. Have these 
developments been good for the industry? What is your position?
    Mr. Curtis. No, I do not think we can say that it has been 
good for the industry. FHA has a tremendous product. And much 
like--well, any place with a tremendous product, when you have 
a demand for that product, but you have uneven ability to 
provide the product--and in this case, when the window closed, 
there were some 50,000 units' worth of jobs financed to be left 
standing at the door. That is inconsistent and, as I said, that 
discourages participation in the program and it really affects 
the ability particularly to produce new housing.
    There may be refinance sponsors who can afford to wait 6 
months. But when you have your suppliers and contractors ready 
to go, they cannot hold their lumber prices for 6 months 
waiting for the window to open up again. So, the stop-and-start 
nature is a big problem. Fortunately, we think that it can be 
solved and it can be solved without the increase in the premium 
from 50 to 80 basis points.
    As I said earlier, the increase in the premium is based on 
experience from the early 1980's, which is far different from 
what current models we think would show.
    And Commissioner Weicher has been instructed and has 
agreed, which is now overdue, to study that issue and see what 
the appropriate level for a self-sufficient fund without the 
need for a credit subsidy would be. And we have every reason to 
believe that, with appropriate, up-to-date assumptions, that 
would be within the previous 50 basis points, and that we would 
not have to allocate credit subsidy and not have to play this 
red light/green light game.
    So we think it is, again, just fundamentally important that 
that study is followed through and the results of that study 
are implemented before the 2003 budget because the 2002 budget 
is based on the 80 basis points, and if we are right, there is 
going to be a surplus. And we all know that surpluses do not 
necessarily get back into the production of housing.
    Senator Reed. Thank you. Final question to Mr. Creager.
    Secretary Martinez justified his proposed $700 million cut 
in the public housing capital fund by claiming that an ABT & 
Associates report stated that the PHA's can only absorb $2.3 
billion in capital funds per year. And then he argued that 
there was a huge backlog in capital funds as evidence of this 
problem.
    This raises a few questions. In your view, is there a 
serious backlog problem in the capital fund with public housing 
authorities?
    Mr. Creager. There is a backlog, but it was overestimated, 
and I think dramatically overestimated by the Secretary by 
including the fiscal year 2001 appropriations in his estimate, 
which had not been released yet by the Department. We did not 
have access to the money. We could not spend the money.
    Mark Twain said you could use statistics like a lamppost--
either for illumination or for support. And I think he was 
probably using it for support rather than illumination.
    [Laughter.]
    Senator Reed. Well, the ABT report makes the point that 
there is a finite limit of absorption, which sounds like a 
scientific analysis. Funds totalling $2.3 billion annually, do 
you agree with that?
    The more colloquial way to say it, if we gave public 
housing authorities more money to address capital issues, you 
could use more than $2.3?
    Mr. Creager. Absolutely. I think it has been 
mischaracterized; hence, the comment about statistics. The ABT 
report does not say that local housing authorities can absorb 
only $2.3 billion a year. It says that there is an accrual of 
need of $2 billion a year and that the backlog is $20 billion.
    NAHRO is supporting an appropriation of $3.5 billion. And I 
believe very confidently that the capacity issues are being 
addressed. As I said, they were dramatically overestimated in 
the first place for political purposes, I think to make a 
point.
    For many years, up until 3 years ago, most of the Nation's 
housing authorities, the mainstream housing authorities only 
had access to CIAP dollars, which were an on-again/off-again 
resource. You cannot do capital investment planning when your 
source of capitalization is subject to competitive rounds of 
grantsmanship, which it was until 3 years ago. It is now a 
consistent, predictable capital grant. And the larger housing 
authorities, such as Vancouver, are actually receiving less 
money in order to give something to all the other smaller 
housing authorities, which we accept.
    Under QHWRA, you asked that we all do 1 and 5 year plans. 
And those 1 and 5 year plans are now fully dialed in, which 
identify exactly how those monies will be used. And we are now 
moving to the capital markets to create multiyear 
capitalization of those funds. So I am very confident that $3.5 
billion can be fully justified and we would be happy to provide 
supplemental information to that effect for illumination, not 
for support.
    Senator Reed. Thank you. We all need a little support, too, 
occasionally. So, thanks.
    [Laughter.]
    Mr. Chairman.
    Chairman Sarbanes. Well, we had a sharp exchange with the 
Secretary about this. And we are going to have another sharp 
exchange with him. When we did the Public Housing Act in 1998, 
we brought you within a 4 year parameter, as I recall.
    Is that correct? Getting this money and committing it. 
Because before, you had money that was hanging around in the 
pipeline over an extended period of time.
    Now my understanding is that all the housing authorities 
are within the 4 year parameter. So now you come along and you 
say, well, we have this money backed up in the pipeline, so we 
will skip a year and we will not put any money in there. I 
mean, that was the proposal, because we have money already in 
there, so we do not, in a sense, really need it.
    That completely undercuts the effort to assure a steady 
stream against which the public housing authorities could 
collateralize their public housing capital funding in order to 
raise a larger amount than the annual appropriation, in order 
to do these projects. Wasn't that the concept?
    Mr. Creager. It is very counterproductive.
    Chairman Sarbanes. Could you develop that a little bit?
    Mr. Creager. The Vancouver Housing Authority is very active 
in the securities markets and we are considered strong with a 
stable outlook by Standard & Poor's, one of the few housing 
authorities in the country with that designation. We are very 
proud of it.
    And your reliability in the capital markets is key to your 
pricing of your bonds. And if you have unstable credit and 
unstable source of revenue to service that security, then you 
are going to pay a premium in the interest rate pricing.
    I think the Secretary, perhaps unwittingly, undercut QHWRA 
by proposing that reduction. Believe me, the capital markets 
were in serious disarray this summer when it was heard. 
Standard & Poor's and Moody's took stock of it.
    I think their general conclusion is that as long as you 
have never placed more than 25 percent of your annual 
appropriation as security for a specific bond issue, that you 
would be okay, giving you some headroom. That is not a signal 
for the Secretary to come back and propose a 75 percent cut to 
the capital grant, however.
    So we do need this as a reliable tool. Using seismic 
repairs as an example, it is more efficient to have a 
contractor come into a building and do the seismic repairs all 
at once, rather than to spread them out over 3 years.
    So we may choose to hold within that 4 year period of time 
an appropriation to the second year so we have enough money to 
engage the contractor once, instead of engaging and disengaging 
and paying the mobilization cost to the contractor and 
disrupting the tenants over an extended period of time.
    Chairman Sarbanes. Well, this has been an extremely helpful 
panel. We obviously could go on indefinitely. We will be 
looking to you for counsel and advice. We have great respect 
for the expertise that is reflected at the table.
    Chairman Sarbanes. Senator Allard, do you have anything 
further to discuss?
    Senator Allard. No, Mr. Chairman. I would just like to 
thank the panel for their testimony. I found it very helpful.
    Chairman Sarbanes. We very much appreciate it. The hearing 
stands adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional materials supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    Good morning. I want to thank the witnesses for joining us today to 
help us explore and examine the housing and community development needs 
of the American people and the communities in which they live.
    Earlier this week, the President signed the HUD appropriations bill 
into law. This bill, despite the very strict limits within which the 
Committee was forced to work, was considerably better than the 
Administration's original request.
    It is my sincere hope that the Administration will take into 
account the extent to which poor and even moderate-income working 
families are facing an affordable housing crisis in this Nation as they 
prepare their HUD budget for fiscal year 2003. HUD's own data show that 
nearly 5 million very low-income American families pay over half of 
their income in rent, or live in severely substandard housing.
    A study by the National Housing Conference that looks at a broader 
sample, found that nearly 14 million families, including working 
families earning more than the median income, face such critical 
housing needs. In fact, while the number of worst case needs among poor 
families actually stabilized a bit, the number of working families 
carrying this severe burden has risen dramatically.
    A recent Low-Income Housing Coalition study shows that two full-
time minimum wage earners in a family is not sufficient in 33 States to 
rent a modest apartment paying 30 percent of a family's income--the 
level widely assumed to be a measure of affordability. These trends are 
not surprising. In the past decade, the number of units available to 
extremely low-income renters has dropped by 14 percent, a loss of 
almost a million units. Nationally, apartment vacancy rates have 
declined by 1.7 percentage points, making it more difficult for all 
renters to find an affordable place to live.
    It is worth considering what it means to pay so much of one's 
income for housing, alone. It means uncertainty, insecurity, and, most 
likely, it means rootlessness. These families live one unexpected 
medical bill, one car repair, one bout of unemployment away from 
possible homelessness. As a result, many of them are forced to move 
from one apartment to another, or to move in with relatives or friends, 
just to keep a roof over their heads.
    The children in these families will not be able to receive an 
adequate education. Their parents will not be able to take full 
advantage of job training offered to them, or other important services, 
until they have the kind of stability that affordable housing in a safe 
neighborhood can bring. In my view, housing is a first step to bringing 
many poor families and their children to economic self-sufficiency.
    These statistics make it clear that, in developing its fiscal year 
2003 budget for HUD, the Administration should seek to expand its aid 
to low-income families. Programs that help create a ladder of housing 
opportunity, such as the FHA multifamily program, must also be 
increased. Finally, homeownership assistance programs are, for many, 
the final rung on the ladder. With some Federal assistance, many 
American families can take this final step to reach the American Dream. 
The Administration did propose additional downpayment assistance last 
year; however, this would have come at the expense of other programs. 
It was not additional money.
    We have a distinguished panel of witnesses with broad experience 
and expertise here this morning to discuss exactly what the housing 
needs in America are, and how we should go about meeting them.
                               ----------
                PREPARED STATEMENT OF SENATOR JACK REED
    I would like to thank Chairman Sarbanes for scheduling this hearing 
on our Nation's housing and community development needs and the fiscal 
year 2003 HUD budget. I also would like to thank all of the witnesses 
this morning for time and input.
    America is rich in resources, talent, blessings, and promise. The 
hard work and ingenuity of men and women across the country has led us 
to take on and succeed at many monumental challenges. However, one 
challenge we have yet to conquer is decent, safe, and affordable 
housing. While we are the best-housed Nation in the world, 15 million 
low-income households pay too much for their housing, live in severely 
substandard housing, or are homeless. We have much more to do to reach 
our true potential as a Nation. In the absence of good housing, a 
family's ability to do all the other things society expects of it--
parenting, employment, education--is clearly impaired.
    Unfortunately, the recent National Low-Income Housing Coalition 
``Out of Reach'' report shows that the gap between incomes and housing 
costs has grown in every State during the past year. The number of 
States where people need an income equivalent to at least two full-time 
minimum wage jobs to afford modest rental housing has increased from 27 
to 33 in the last year. In my State of Rhode Island, the wage to afford 
the fair market rent for a two-bedroom home is $12.87 an hour. This 
means that a worker earning minimum wage, which in Rhode Island is 
$6.15 an hour, would have to work 84 hours per week in order to afford 
a two-bedroom unit at the State's median fair market rent. No where in 
the country does the minimum wage work of one person come close to 
paying the rent. It would seem self-evident that if one goes to work 
every day and collects a regular paycheck, that should be enough to 
secure a reasonable place to live and take care of one's family.
    As Chairman of the Subcommittee on Housing and Transportation, one 
of my priorities is to focus attention on this affordable housing 
crisis and the many factors that are contributing to it--including 
market failure and Federal disinvestment in housing assistance for low-
income families. We need to consider creative solutions like a National 
Affordable Housing Trust.
    We also need to focus on make our Nation's housing stock safe. No 
child in this country should have to live in a home that is hazardous 
to her health because of environmental hazards like lead-based paint.
    Finally, we need to do more to prevent and end homelessness in this 
country. As most of you are all too aware, we have seen an increase in 
homelessness around the Nation--especially in the number of children 
and working families entering the homelessness system. Lack of 
affordable housing is only one piece in the puzzle. The McKinney-Vento 
Homeless Assistance Act was intended to be an emergency response to the 
``crisis'' of homelessness. Instead, it increasingly appears that it is 
providing a safety net not only for those who are homeless, but also 
for people who are not being served adequately by mainstream housing 
and service programs. I hope to have hearing on this issue within the 
next few months.
    In short, now is not the time to see another period of 
disinvestment by the Federal Government in housing. HUD was forced to 
sacrifice its budget during the Reagan Administration and it should not 
be asked to do so again, especially during a recession. In fact, a 
number of us believe that Federal spending on housing could play an 
important role in restoring the economy to health. By including funding 
in a stimulus package for programs like the Emergency Food and Shelter 
Program, the Public Housing Operating Fund, and HOME, we would help 
some of the Americans most vulnerable to the economic slowdown.
    It is our hope today to focus on these issues and the growing 
importance of a strong fiscal year 2003 budget for HUD. Decent, safe, 
and affordable housing is not only the American Dream and the American 
Promise, it also needs to be the American Commitment.
                               ----------
              PREPARED STATEMENT OF SENATOR JON S. CORZINE
    Thank you Mr. Chairman, for holding this hearing. I also want to 
thank all of the witnesses for appearing here today to discuss the 2003 
HUD budget and for offering their insights as to how we can best seek 
to provide American families with decent, safe, affordable housing.
    Mr. Chairman, I share your commitment to this cause, and believe 
that one of our primary responsibilities on this Committee is to ensure 
that the Department of Housing and Urban Development is held to the 
highest standards as they seek to carry out this important mission. It 
is a responsibility that we must never abdicate or shy away from.
    Maintaining an adequate supply of affordable housing and making it 
available to those who need it is of the utmost importance to our 
Nation. The need for affordable housing has been exacerbated given our 
current economic situation when more and more Americans face 
unemployment and our Nation stands in the midst of a recession which 
may be prolonged as a result of the effects of the September 11 
attacks.
    I have great concerns about cuts that were made in the HUD budget, 
in particular the elimination of the Public Housing Drug Elimination 
Program, a program that had been heralded as reducing crime in and 
around our Nation's public housing 
developments.
    Additionally, I am concerned about the cuts made to programs that 
provide housing aid to the elderly, disabled, and low-income 
communities. I also look at the Community Development Block Grants as 
an important part of addressing the housing shortage. I have great 
concern about the cuts made to that program as well.
    Mr. Chairman, it is my hope that as we look at the HUD budget for 
fiscal year 2003, the needs of American families will be the paramount 
consideration. If it is not, then we, and HUD, will have failed in our 
duties.
    I look forward to the discussion today and to hearing the 
recommendations of our witnesses. Again, Mr. Chairman, I thank you for 
holding this hearing.
                               ----------
             PREPARED STATEMENT OF SENATOR THOMAS R. CARPER
    Thank you Mr. Chairman for holding this important hearing. I would 
like to thank Dave Curtis for appearing before the panel today and 
sharing his expertise with us. Mr. Curtis is well known for his 
knowledge on a wide array of financing and development programs 
including those offered by HUD, Housing Finance Agencies and GSE's. He 
recently led the successful effort to secure a $16,800,000 HOPE VI 
grant to assist in the revitalization of Wilmington's oldest public 
housing community. I am proud to have such an accomplished Delawarean 
appearing before the Committee. I would also like to thank the other 
witnesses for coming today and sharing their views and their expertise 
with the Committee. I look forward to all of the testimony.
    Last week, I toured the various homes built by the Cornerstone West 
project in Wilmington. The Cornerstone West project revitalizes homes 
on Wilmington's West Side for low- and moderate-income first-time 
homebuyers and I was really impressed by what I saw. One of the 
persistent problems we have had in Wilmington, and I am sure we are not 
alone, is boarded up housing, vacant units, a preponderance of rental 
units instead of owner-occupied housing, as well as long waiting lists 
for assisted housing. Cornerstone is one project that is tackling these 
problems. I am sure there are similar projects in other cities, and 
Congress should ensure that it provides successful projects and 
programs with the funds they need to make housing more affordable.
    It is clear that there is a lack of affordable housing in the 
United States. Currently, there are nearly 5 million very low-income 
households with worst case housing needs; about 94 percent of these 
families pay more than half of their income in rent each month. To 
address this shortage we have to find the best use of every dollar at 
our disposal, as well as the most effective use of existing Federal 
programs to stimulate new production and substantial rehabilitation.
    That is why I joined Senator Corzine in sponsoring legislation 
increasing the FHA multifamily loan limits. I was pleased that this 
increase passed as part of the VA/HUD appropriations legislation, 
although I was disappointed that it did not include the indexation that 
Senator Corzine and I had in our bill.
    I look forward to working with my colleagues on other initiatives 
that address the affordable housing crisis in our communities.








































                PREPARED STATEMENT OF RAYMOND A. SKINNER
 Secretary of Housing and Community Development, The State of Maryland
                        Testifying on Behalf of
             The National Council of State Housing Agencies
                           November 29, 2001
    Mr. Chairman, Senator Gramm, and Members of the Committee, I am 
Raymond Skinner, Secretary of the Maryland Department of Housing and 
Community Development. I am testifying today on behalf of the National 
Council of State Housing Agencies (NCSHA), which represents the Housing 
Finance Agencies (HFA's) of the 50 States, the District of Columbia, 
the Commonwealth of Puerto Rico, and the U.S. Virgin Islands.
    First, I want to thank you, Mr. Chairman, and the many other 
Members of this Committee who cosponsored and helped enact legislation 
last year to increase substantially the caps on tax-exempt private 
activity bonds (Bonds) and the Low-Income Housing Tax Credit (Housing 
Credit) and index them for future inflation. With this increased 
authority, tens of thousands of additional low-income families each 
year will buy their first home or rent a decent, affordable apartment.
    Unfortunately, even with these increases, many people qualified to 
receive Bond and Housing Credit help still do not get it. Three 
obsolete Federal requirements prevent it:

 The Ten-Year Rule, which forbids States to recycle billions of 
    dollars in Mortgage Revenue Bond (MRB) loan payments to make new 
    MRB mortgages;
 Artificially low MRB home price limits, based on eight-year-
    old home sales data, despite a 40 percent increase in home prices 
    in the last 8 years; and
 Inflexible Housing Credit income and rent rules, which often 
    make development infeasible in very low-income, frequently rural, 
    areas.

    Senators John Breaux and Orrin Hatch have introduced S. 677, the 
Housing Bond and Credit Modernization and Fairness Act of 2001, to fix 
these problems. Forty-seven Senators already have cosponsored that 
bill. More than half of all House Members have cosponsored an identical 
House bill, H.R. 951.
    The National Governors Association and nearly 20 other major State 
and local government, public finance, and housing groups have endorsed 
this legislation, including the National Association of Home Builders, 
the National Association of Realtors, the Mortgage Bankers Association 
of America, The Bond Market Association, the U.S. Conference of Mayors, 
the National Association of Counties, and the National Association of 
Housing and Redevelopment Officials. Twenty-four governors believe so 
strongly in the importance of this legislation, they have personally 
written the President, the Congressional leadership, or their own 
Congressional delegations to urge its immediate enactment.
    Thank you, Senator Allard and the many other Members of the 
Committee who have cosponsored S. 677. We urge all Senators to 
cosponsor S. 677 soon and to press your leadership and Finance 
Committee colleagues to include it in a tax bill at the earliest 
possible opportunity.
Federal Housing Investment Is Woefully Insufficient
    Congress did much more than increase the Bond and Housing Credit 
caps last year. You also recognized the need to adjust those caps 
annually for inflation, so they would never again be robbed of their 
purchasing power as they were over the past 14 years.
    Regrettably, Congress has made no similar provision for Federal 
housing spending programs. Today's HUD budget is a third of what it 
would have been had it kept pace with inflation since 1976. Had the HUD 
budget been increased even just to keep up with inflation over the past 
27 years, the Federal Government would have invested $1 trillion more 
in affordable housing and millions more needy families would have 
received housing help.
    The HUD budget has remained relatively flat in nominal terms over 
the last 27 years, barely growing from $29.2 billion in 1976 to $30 
billion in 2002, and losing nearly two-thirds of its purchasing power. 
During the same period, total Federal discretionary budget authority 
has grown from $194 billion to $635 billion, a three-fold increase, 
narrowly outstripping inflation.
    Although created little more than a decade ago, the HOME program 
dramatically illustrates the toll inflation has taken on Federal 
housing funding. Congress authorized HOME at $2 billion in 1992, 
because it believed that amount was necessary for HOME to accomplish 
its housing production goals. However, Congress appropriated only $1.5 
billion for HOME in 1992 and has funded HOME since below its authorized 
level, at amounts steadily outpaced by inflation.
    If Congress had funded HOME at its authorized level of $2 billion 
and adjusted that amount annually for inflation, HOME today would 
provide nearly $3 billion to States and localities, more than 1\1/2\ 
times the $1.85 billion Congress just appropriated. Even if HOME's 
original $1.5 billion appropriation had been increased annually just to 
account for inflation, HOME funding by now would have reached $2 
billion.
    The Federal housing funding shortage is exacerbated by the 
increased diversion of resources to maintenance of effort activities. 
More than half of the fiscal year 2002 HUD appropriation will be 
devoted to renewing rental assistance contracts and preserving existing 
assisted housing. By comparison, virtually none of HUD's budget in 1976 
funded such activities.
    Though these investments are crucial to the continued provision of 
tenant rental assistance and the preservation of our precious and 
scarce affordable housing stock, Congress must recognize that these 
activities crowd out funding for new affordable housing production and 
assistance as long as total HUD funding remains relatively stagnant.
Critical Housing Needs Persist
    While new Federal housing investment shrinks and is increasingly 
devoted to preservation activities, the number of low- and moderate-
income families with critical housing needs remains startlingly high. 
One out of every eight American families has a critical housing need, 
according to Harvard University's Joint Center for Housing Studies' 
2001 report, The State of the Nation's Housing. That is 14 million 
families, including homeowners and renters, ranging from the very poor 
to the solidly middle class.
    Indisputably, families hardest hit are those with the least income. 
Of the more than 14 million families with critical housing needs, 84 
percent earn 50 percent of their area's median income (AMI) or less. A 
stunning two-thirds have incomes of 30 percent of AMI or less.
    Meanwhile, we are not even maintaining our affordable housing 
stock, let alone increasing it. HUD's 2001 Report on Worst Case Housing 
Needs in 1999 reports that the number of rental units affordable to 
extremely low-income households (with incomes of 30 percent of AMI or 
less) dropped by 750,000, and the total number of units affordable to 
very low-income households (with incomes of 50 percent of AMI or less) 
fell by 1.14 million between 1997 and 1999. HUD found that in every 
region of the country, rental housing affordable to extremely low-
income renters was in shorter supply than housing affordable to other 
income groups.
    The Joint Center's report also reveals that, ``the total number of 
unsubsidized units affordable to extremely low-income households is 
just 1.2 million. With 4.5 million unsubsidized renters earning less 
than 30 percent of the area median income, the shortfall in affordable 
housing for the very poorest now stands at 3.3 million units. These 
numbers, in fact, understate the shortage because higher income 
households occupy 65 percent of the units affordable to extremely low-
income households.''
    In 2001, HUD reported that 4.9 million poor households suffered 
``worst case housing needs'' in 1999, defined as paying more than 50 
percent of their income in rent and/or living in severely substandard 
housing. HUD also documented that only one of every three extremely 
low- and very low-income households eligible for Federal housing 
assistance actually receive it, leaving 9.7 million poor households in 
desperate need of housing help.
    In the face of growing housing needs among extremely low-income 
families, State housing agencies report increased difficulty housing 
them. Though the GAO reported in 1997 that Housing Credit properties 
with additional subsidies were reaching families with average incomes 
of 25 percent of AMI, State agencies simply do not have the sufficient 
subsidies to begin to meet the need. With the victory of the Credit Cap 
Increase has come the realization that States will be more limited in 
our ability to invest credits in housing serving extremely low-income 
families without significant increases in subsidy dollars that can be 
combined with the credit.
    My State of Maryland has acute unmet housing needs, particularly 
among very low- and extremely low-income families. We estimate that 
about 70 percent of all extremely low-income renters in Maryland pay 
more than 30 percent of their income in rent, and about half pay more 
than 50 percent of their income in rent. The National Low-Income 
Housing Coalition estimates 39 percent of Maryland renters pay more 
than 30 percent of their income in rent.
    Even with the Housing Credit cap increase, requests for credits 
exceed our supply by a 4-to-1 ratio. Maryland also exhausts its private 
activity bond cap annually, and it too is vastly oversubscribed. 
Pressure on the bond cap will continue to build as the Ten-Year Rule 
increasingly prevents us from recycling MRB mortgage payments into new 
mortgages, forcing us to use new cap authority to finance new MRB 
loans. We estimate the Ten-Year Rule will cost Maryland over $400 
million in MRB mortgage money over just the next 5 years.
    Our HUD monies are also woefully insufficient. For example, this 
year, we received requests for more than two times our homeless 
assistance funding. Demand for our HOME funds also exceeded their 
supply. We estimate we could commit an additional $12 to $13 million in 
HOME funds in just the next 6 months. This includes $9 million for 
multifamily projects that are ready to go forward and are currently 
waiting for funding and $3 to $4 million for rehabilitating single-
family homes and financing group homes for the disabled, persons with 
mental illness, and persons with AIDS.
    While not a housing program per se, the Community Development Block 
Grant (CDBG) program has provided flexible funding for housing-related 
activities for low-income people for more than 25 years. States spend 
approximately 20 percent of their CDBG funds on housing. In Maryland, 
we have used about 30 percent of our CDBG funds for housing activities. 
Total CDBG requests exceed available funds by more than 2-to-1. This 
year, Congress cut the formula allocation for the CDBG program by $60 
million, or 1.3 percent. From October 2000 to October 2001, the 
country's inflation rate was 2.1 percent. While these percentages seem 
small, in real terms, the formula program would have needed an increase 
of about $90 million for the fiscal year 2002 budget to keep things 
where they are. For fiscal year 2003, the formula portion of the CDBG 
program would need to increase by about $250 million to offset this 
year's cut and inflation.
    Some will propose more tenant-based vouchers as the answer to our 
affordable housing needs. Vouchers are an important tool, and we 
certainly need more of them. In Maryland and many other States, 
however, vouchers are of no use in a number of areas where there is 
simply no affordable housing to rent. In Howard County, for example, 
the county housing department reports the rental vacancy rate is .57 
percent--there are only 57 vacant rental units for every 10,000 rental 
units in the county. Preliminary 2000 census figures show that a number 
of counties in Maryland have vacancy rates below 2 percent. More 
vouchers will not address the lack of available units. Simply put, we 
need to produce more units.
Make Federal Housing Resources Work Smarter, Go Farther
    Unquestionably, Congress must find a way to devote substantially 
more Federal resources to affordable housing if we are to even begin to 
meet our country's housing needs. But, we must also recognize that 
whatever increased investment our collective best efforts might produce 
will not be enough to solve the dire housing problems we confront. So, 
it is essential that we make the most of every housing dollar the 
Federal Government provides.
    This requires eliminating unnecessary and outmoded Federal rules 
and regulations that slow the delivery of funds, increase costs, and 
frustrate results. The changes we propose to the Bond and Housing 
Credit programs in S. 677 are just a few examples of the kinds of 
changes in Federal housing programs that are sorely needed to maximize 
dollars spent and to reach as many eligible families as possible. NCSHA 
has proposed to the Millennial Housing Commission many more 
recommendations for streamlining HOME and other HUD programs to make 
them work more effectively and efficiently both separately and 
together. We are hopeful that the Commission will include these 
recommendations in its report to the Congress next spring, and you will 
swiftly enact them.
    One sure way to deliver Federal housing resources more efficiently 
and target them more effectively is to devolve greater responsibility 
for their administration to the States. During the last three decades, 
State housing agencies have assumed a primary role in financing 
affordable housing. Our success in blending business-like efficiency 
with accomplishing our public mission has earned us the respect of the 
Congress, our States, and the community at large.
    Congress, in turn, has entrusted States with the administration of 
the bond and housing credit programs, the only Federal programs 
dedicated to financing lower income first-time homebuyer mortgages and 
low-income apartment construction. Congress has also empowered the 
States to administer the HOME program, FHA-HFA multifamily risk-
sharing, and Section 8 restructuring and contract administration and to 
borrow funds directly from the Federal Home Loan Banks. Employing these 
and other programs and resources, State agencies administer the full 
range of 
affordable housing programs, including homeownership, rental, homeless, 
and all kinds of special needs housing.
    State agencies have strong management, broad experience in 
underwriting and 
finance, and expert staffs, which number as many as 300 in the larger 
agencies. We have issued nearly $140 billion in bonds to finance 
homeownership and apartment construction without a single default and 
with foreclosure and delinquency rates far lower than industry 
averages.
    State housing agencies have achieved significant results, but we do 
not work alone. We have built strong partnerships with local 
governments, nonprofits, the private sector, resident and community 
groups, and service providers to address the unique and diverse housing 
challenges we confront. The results are dramatic. We have financed more 
than 2 million first-time, lower-income homebuyer mortgages and more 
than 1.8 million apartments, including more than 1.2 million through 
the housing credit.
    State housing agencies have also been strong and successful 
partners with HUD, when HUD rules have permitted us to use our talent 
and expertise to do the job. Most recently, 35 HFA's have assumed HUD's 
responsibility for the administration of 750,000 Section 8 project-
based units.
    States have accomplished these results because Congress has 
empowered us to employ Federal resources flexibly and leverage them to 
meet a variety of affordable housing challenges. As you well know, 
housing needs and conditions vary dramatically among and within States. 
One-size, Washington-driven housing solutions simply do not fit all. 
That is why programs like the Housing Credit and Bonds are so 
successful. They let States and our partners respond effectively, 
efficiently, and imaginatively to our most pressing housing needs.
Establish and Fund a New Production Program
    Clearly, existing resources are insufficient to meet the Nation's 
affordable housing needs, particularly those of extremely low-income 
renters. That is why one of NCSHA's highest legislative priorities and 
a priority of the National Governors Association is the creation of a 
new, State-administered rental production program, targeted in 
significant part to extremely low-income families. We want to work with 
you to design a program that builds on the success of programs like 
bonds, the housing credit, and HOME, utilizes the existing, proven 
State delivery system, and is integrated with existing State housing 
allocation plans and funding systems.
    We know that builders are willing to build affordable rental 
housing if funds are available. The demand for the rental housing 
programs we operate bears this out. For example, we received about 
$12.5 million in State funds this year to provide rental housing. 
Developers requested $47 million in State funds, almost four times the 
amount available. As mentioned, even with the increase in the housing 
credit cap, demand exceeds supply by almost 4-to-1. We received $7.9 
million in credits this year and had requests for $31 million in 
credits.
    States are in the best position to combine new, flexible funding 
with bonds, housing credits, and other resources and to target limited 
funds to our most critical needs. We know our housing needs and markets 
and have proven delivery systems in place that can provide one-stop 
shopping to the development community. State administration will also 
assure that the impact of whatever limited funding Congress makes 
available is not diluted by the distribution of funds to hundreds of 
local communities, as under the HOME program.
    A new program will only work, however, if States are given the 
flexibility we need to tailor innovative solutions to our unique and 
varied housing problems. HUD regulation must be limited to that which 
is necessary to assure nondiscrimination and accountability for the use 
of funds to achieve the goals Congress sets. Irrational and 
unnecessarily burdensome rules, regulations, and reporting requirements 
frustrate States and our partners, smother creativity, increase costs, 
and delay results.
    We propose that the new funds be allocated by State housing 
agencies, subject to a State allocation plan, modeled on the housing 
credit qualified allocation plan. The plan, developed with extensive 
pubic input, would identify the State's priority rental housing needs 
and strategies for using the funds to address them.
    States should be empowered to use funds for a wide range of 
activities, including tenant and project-based assistance, new 
construction, rehabilitation, preservation, and operating assistance 
and to deliver funds through an array of capable partners, including 
the public and private sectors, and nonprofit and for profit entities. 
Funds should not be encumbered with program set-asides.
    Finally, it is essential that any new program's income, rent, and 
other rules be compatible with those of other Federal housing programs, 
for its combination with them will almost always be necessary to reach 
extremely low-income families.
    In conclusion, we have a long way to go to close the ever-widening 
gap between housing need and housing resources, and there is no single, 
simple answer. But, clearly, three steps would make a significant 
difference: housing program funding at least sufficient to keep pace 
with inflation; the deregulation and devolution of existing programs; 
and new, flexible State-administered resources to help fill the gaps, 
particularly in our ability to house our most needy families.
    Thank you for the opportunity to testify today. NCSHA and our 
member State housing agencies are very grateful for your enthusiastic 
and sustained support of affordable housing. We stand ready to assist 
you in any way we can.
                               ----------
               PREPARED STATEMENT OF EDGAR O. OLSEN, PhD
             Professor of Economics, University of Virginia
                           November 29, 2001
    Mr. Chairman and Members of the Committee on Banking, Housing, and 
Urban Affairs: I welcome this opportunity to talk with you about the 
fiscal year 2003 HUD Budget. I speak from the perspective of a taxpayer 
who wants to help low-income families. I have no other financial 
interests in the matters under consideration at this hearing.
    My views are influenced not only by this perspective but also by my 
knowledge of the systematic evidence about the effects of low-income 
housing programs. I have been involved in housing policy analysis since 
the late 1960's. Since then, I have done many empirical studies of the 
effects of low-income housing programs, and I have read carefully a 
very large number of other studies. During the Nixon Administration, I 
was an analyst on the Housing Policy Review Task Force that led to the 
Section 8 Certificate Program. As a visiting scholar at HUD during the 
Carter Administration, I worked on an evaluation of this program and 
reviewed the final reports from the Experimental Housing Allowance 
Program. More recently, I have written a lengthy survey of what is 
known about the effects of low-income hous-
ing programs for a National Bureau of Economic Research volume on 
means-
tested transfer programs, and I did a substantial amount of work as a 
consultant to the GAO on their study comparing the cost-effectiveness 
of tenant-based 
vouchers and major construction programs such as the Low-Income Housing 
Tax Credit and HOPE VI. My testimony will focus on the HUD budget for 
low-income housing programs.
    Given the current economic slowdown and the added expense of 
fighting international terrorism, it is clear that we will not be able 
to spend more money on housing assistance over the next few years. The 
question is: How can we continue to serve current recipients equally 
well and serve some of the poorest families who have not yet been 
offered assistance without spending more money? The answer is that we 
must use the money available more wisely.
    Research on the effects of housing programs provides clear guidance 
on this matter. It shows that we can serve current recipients equally 
well (that is, provide them with equally good housing for the same 
rent) and serve many additional families without any increase in the 
budget by shifting resources from project-based to tenant-based 
assistance.
    Five major studies have estimated both the cost per unit and the 
mean market rent of apartments provided by housing certificates and 
vouchers and the largest older production programs, namely Public 
Housing, Section 236, and Section 8 new construction.\1\ These studies 
are based on data from a wide variety of housing markets and for 
projects built in many different years. Three were multimillion dollar 
studies conducted for HUD by respected research firms during the Nixon, 
Ford, Carter, and Reagan Administrations. They are unanimous in finding 
that housing certificates and vouchers provide equally desirable 
housing at a much lower total cost than any of these production 
programs, even though all of these studies are 
biased in favor of the production programs to some extent by the 
omission of certain indirect costs.
---------------------------------------------------------------------------
    \1\ The studies are Mayo and others (1980), Olsen and Barton 
(1983), Schnare and others (1982), U.S. Department of Housing and Urban 
Development (1974), and Wallace and others (1981). Olsen (2000) 
provides a description and critical appraisal of the data and methods 
used in these studies as well as a summary of their results.
---------------------------------------------------------------------------
    The studies with the most detailed information about the 
characteristics of the housing provided by the programs found the 
largest excess costs for the production programs. One study estimated 
the excessive cost of public housing compared to housing vouchers for 
providing equally desirable housing to be 64 percent and 91 percent in 
the two cities studied and the excessive cost of Section 236 to be 35 
percent and 75 percent in these two cities (Mayo and others, 1980). 
Another study estimated the excessive cost of Section 8 new 
construction compared to tenant-based Section 8 certificates to be 37 
percent even when all of the indirect costs of the Section 8 new 
construction program are ignored (Wallace and others, 1981). These 
indirect subsidies include GNMA Tandem Plan interest subsidies for FHA-
insured projects and the forgone tax revenue due to the tax-exempt 
status of interest on the bonds used to finance SHFA projects. Based on 
previous studies, the authors argue that these indirect costs would add 
20 to 30 percent to the total cost of the Section 8 new construction 
Program.
    The recently completed GAO study produced similar results for the 
major active construction programs--LIHTC, HOPE VI, Section 202, 
Section 515, and Section 811. Using the conceptually preferable life 
cycle approach, the excess total cost estimates range from at least 12 
percent for Section 811 to at least 27 percent for HOPE VI.\2\ (The GAO 
calculations exclude HOPE VI construction costs that are not related to 
housing.) These estimates are lower bounds on the excessive cost 
because some costs of the production programs were omitted due to the 
difficulty of collecting the relevant data. For example, all public 
housing projects receive substantial local property tax abatements. The 
GAO analysis ignores this cost to local taxpayers. An earlier study 
(reported in Olsen, 2000, p. 16) estimated that these abatements 
account for 22 percent of the cost of this program to taxpayers.
---------------------------------------------------------------------------
    \2\ The GAO study also reports first-year excess costs of the 
production programs. The first-year cost of a production program is the 
sum of the annualized development subsidies and the tenant rent and 
other Government subsidies during the first year of operation. The 
estimates of excess cost of production programs based on this method 
are much higher than estimates based on the life-cycle approach. 
Although these estimates may be closer to the truth due to the omission 
of some of the costs of production programs and deviations between the 
assumptions of the life-cycle analysis and reality, this methodology is 
defective for the reasons explained in Olsen (2000, pp. 18-21).
---------------------------------------------------------------------------
    The GAO study also contains evidence concerning whether production 
programs are more cost-effective than tenant-based vouchers in the 
tightest housing markets. In addition to the national estimates, the 
GAO collected data for seven metropolitan areas. The data for the GAO 
study refer to projects built in 1999. In that year, the rental vacancy 
rates in the seven metropolitan areas ranged from 3.1 percent in Boston 
to 7.2 percent in Baltimore and Dallas, with a median of 5.6 percent. 
The overall rental vacancy rate in U.S. metropolitan areas was 7.8 
percent. So all of the specific markets studied were tighter than 
average. Only five of the largest 75 metropolitan areas had vacancy 
rates lower than Boston's. In each market, tenant-based vouchers were 
more cost-effective than each production program studied.
    The GAO study will not be the last word on the cost-effectiveness 
of the programs studied. Improvements in its implementation of the 
life-cycle methodology are possible and desirable. However, it provides 
the only independent cost-effectiveness analysis of these programs.
    The magnitude of the gain from shifting from project-based to 
tenant-based assistance would be substantial. Even the smallest 
estimates of the excess costs of project-based assistance imply that 
shifting 10 families from project-based to tenant-based assistance 
would enable us to serve two additional families. Since HUD provides 
project-based assistance to more than three million families, a total 
shift from project-based to tenant-based assistance would enable us to 
serve at least 600,000 additional families with no additional budget. 
The most reliable estimates in the literature imply much larger 
increases in the number of families served. For example, the Abt study 
of the Section 8 New Construction Program implies that tenant-based 
vouchers could have provided all of the families who participated in 
this Program with equally good housing for the same rent and served at 
least 65 percent more families with similar characteristics equally 
well without any additional budget. Since this program served over 
900,000 families at its peak, this amounts to an additional 585,000 
families. These findings have important implications for how the HUD 
budget should be spent.
    First, the money currently spent on operating and modernization 
subsidies for public housing projects should be used to provide tenant-
based vouchers to public housing tenants, as proposed by the Clinton 
Administration and by Senator Dole during his Presidential campaign. To 
enable housing authorities to provide decent housing despite this loss 
in revenue, they should be allowed to rent their apartments to any 
household eligible for housing assistance for whatever rent this market 
will bear. Families with tenant-based vouchers would occupy many of 
these apartments. Other families eligible for housing assistance would 
occupy the rest. Housing authorities could raise additional money by 
taking advantage of the current regulation that allows them to sell 
projects. At present, they have little incentive to do it. Without 
guaranteed Federal operating and modernization subsidies, many 
authorities may well decide to sell their worst projects. These are the 
projects that will be abandoned to the greatest extent by their tenants 
with vouchers, and they are the most expensive to operate. They should 
be sold in their current condition to the highest bidder in order to 
maximize the revenue available to modernize other projects. If housing 
authorities are unable to compete with private owners for their 
tenants, they should not be in the business of providing housing.
    Second, contracts with the owners of private subsidized projects 
should not be renewed. Instead we should give their tenants portable 
vouchers and force the owners to compete for their business. Tenants 
who choose to move should be given a modest grant for moving expenses. 
This is far less expensive than continuing with these costly forms of 
project-based assistance.\3\ It is important to realize that for-profit 
sponsors will not agree to extend the use agreement unless this 
provides at least as much profit as operating in the unsubsidized 
market. Since these subsidies are provided to selected private 
suppliers, the market mechanism does not insure that profits under the 
new use agreement will be driven down to market levels. If this is to 
be achieved at all, administrative mechanisms must be used. Proponents 
of all previous programs of this sort argued vigorously that their 
program would insure that excessive costs were not paid for apartments. 
Cost-effectiveness studies of these programs indicate that they failed 
badly to control costs. There is no reason to believe that the mark-to-
market initiative will produce better results. It will merely hide the 
excess cost to a greater extent. We should leave the job of getting 
value for the money spent to the people who have the greatest incentive 
to do it, namely the tenants.
---------------------------------------------------------------------------
    \3\ See Weicher (1997) for a detailed analysis of vouchering out 
project-based assistance.
---------------------------------------------------------------------------
    Third, the construction of additional public or private projects 
should not be subsidized. For example, no additional money should be 
allocated to HOPE VI. This program is an improvement over traditional 
public housing in that it avoids concentrating the poorest families at 
high densities in projects. However, the GAO study reveals that it is 
highly cost-ineffective compared with tenant-based vouchers that also 
avoid these concentrations. For the same reason, there should be no new 
HUD production program.
    Most people who develop and operate subsidized housing projects 
will oppose these reforms. However, they will give taxpayers who want 
to help low-income families more for their money by greatly increasing 
the number of families served with a given budget without reducing 
support for current recipients.
    Two main objections have been raised to exclusive reliance on 
tenant-based assistance. Specifically, it has been argued that tenant-
based assistance will not work in markets with the lowest vacancy rates 
and construction programs have an advantage compared with tenant-based 
assistance that offsets their cost-ineffectiveness, namely they promote 
neighborhood revitalization to a much greater extent.
    Taken literally, the first argument is clearly incorrect in that 
Section 8 certificates and vouchers have been used continuously in all 
housing markets for more than two decades. A more precise version of 
this argument is that tenant-based assistance will not work in the some 
markets because these markets do not have enough vacant apartments that 
meet minimum housing standards and are affordable to voucher 
recipients. The defects of this argument are easy to understand, and it 
is inconsistent with the empirical evidence.
    All vouchers authorized in a locality can be used even if the 
number of vacant apartments that meet minimum housing standards and are 
affordable to voucher recipients is less than the number of vouchers 
authorized. Some recipients offered vouchers might already occupy 
apartments meeting the program's standards. In this case, the family 
can participate without moving. In the absence of assistance, these 
recipients typically devote a high fraction of their income to housing 
and skimp on other necessities. The housing voucher reduces their rent 
burden. Other families who are offered vouchers will live in housing 
that does not meet Section 8 standards. However, these apartments can 
be repaired to meet the standards. Similarly, vacant apartments that do 
not initially meet the program's standards can be upgraded to meet 
them. In short, we do not need new construction to increase the supply 
of apartments meeting minimum housing standards.
    The evidence shows that these are not theoretical curiosities. The 
tenant-based Section 8 certificate and voucher programs have 
substantially increased the supply of affordable housing meeting 
minimum housing standards. The most recent detailed analysis is based 
on data from a national random sample of 33 public housing authorities 
in 1993 (Kennedy and Finkel, 1994). Thirty percent of all recipients 
outside of New York City continued to live in the apartments that they 
occupied prior to participating in the program (Kennedy and Finkel, p. 
15).\4\ Forty-one percent of these apartments already met the program's 
standards and 59 percent were repaired to meet the standards (Kennedy 
and Finkel, p. 83). About 70 percent of all recipients outside of New 
York City moved to a new unit. About 48 percent of these apartments 
were repaired to meet the program's standards (Kennedy and Finkel, p. 
84). The rest moved to vacant apartments that already met the 
standards. Therefore, the apartments occupied by about half of the 
families that received certificates and vouchers outside NYC during 
this period were repaired to meet the program's standards. The 
previously mentioned sources contain similar results for NYC. In this 
city, only 31 percent of the apartments occupied by recipients had to 
be repaired to meet the program's standards.
---------------------------------------------------------------------------
    \4\ The authors analyzed New York City separately from the other 
housing authorities.
---------------------------------------------------------------------------
    The Housing Assistance Supply Experiment of the Experimental 
Housing Allowance Program (EHAP) provides even more powerful evidence 
on the ability of tenant-based vouchers to increase the supply of 
apartments meeting minimum housing standards even in tight housing 
markets. The Supply Experiment involved operating an entitlement 
housing allowance program for 10 years in St. Joseph County, Indiana 
(which contains South Bend) and Brown County, Wisconsin (which contains 
Green Bay). These were smaller than average metropolitan areas with 
populations of about 235,000 and 175,000 people, respectively. The 
general structure of the housing allowance program in the Supply 
Experiment was the same as the Section 8 Voucher Program that EIM 
operated from 1983 until its merger with the new Housing Choice Voucher 
Program, except that homeowners were eligible to participate in the 
Supply Experiment. About 20 percent of the families in the two counties 
were eligible to receive assistance (Lowry, 1983, pp. 92-93). By the 
end of the third year when participation rates leveled off, about 41 
percent of eligible renters and 27 percent of eligible homeowners were 
receiving housing assistance (Lowry, pp. 24-25). Data for analysis was 
collected during the first 5 years of the experiment in each site. 
During that period, about 11,000 dwellings were repaired or improved to 
meet program standards entirely in response to tenant-based assistance 
and about 5,000 families improved their housing by moving into 
apartments already meeting these standards (Lowry, p. 24). This 
represented more than a 9 percent increase in the supply of apartments 
meeting minimum housing standards. So, tenant-based assistance alone 
produced a much greater percentage increase in the supply of adequate 
housing in these localities in 5 years than all of the Federal 
Government's production programs for low-income families have produced 
in the past 65 years. The annual cost per household was less than 
$3,000 in current prices.
    The Supply Experiment sites were chosen to differ greatly in their 
vacancy rates and the size of their minority populations in order to 
determine whether the outcomes of an entitlement housing allowance 
program depend importantly on these factors. At the outset of the 
Supply Experiment, the vacancy rates in Brown and St. Joseph County 
were 5.1 percent and 10.6 percent (Lowry, p. 53). So the average 
vacancy rate in the two sites was almost exactly the average vacancy 
rate in 2000 for U.S. metropolitan areas (7.7 percent). In 2000, only 
26 percent of the 75 largest metropolitan areas had vacancy rates less 
than the vacancy rate in Brown County at the outset of the experiment 
and 20 percent had vacancy rates greater than the vacancy rate in St. 
Joseph County. The participation rate differed little between the two 
sites. Indeed, it was higher in the locality with the lower vacancy 
rate (Lowry, p. 122).
    We do not need production programs to increase the supply of 
apartments meeting minimum housing standards. The Experimental Housing 
Allowance Program demonstrated beyond any doubt that the supply of 
apartments meeting minimum housing standards can be increased rapidly 
by upgrading the existing stock of housing even in tight markets. This 
happened without any rehabilitation grants to suppliers. It happened 
entirely in response to tenant-based assistance that required families 
to live in apartments meeting the program's standards in order to 
receive the subsidy.
    Those who express concern about the ability of tenant-based 
assistance to work well in the tightest housing markets usually mention 
the low success rates in some localities. In discussing this matter, it 
is important to distinguish between an authority's so-called success 
rate and its ability to use Section 8 vouchers. An authority's success 
rate is the percentage of the families authorized to search for a unit 
who occupy a unit meeting the program's standards within the housing 
authority's time limit. An authority's success rate depends on many 
factors including the local vacancy rate. The most careful study of 
success rates (Kennedy and Finkel, 1994) indicates that among 
localities that are the same with respect to other factors those with 
the lowest vacancy rates have the lowest success rates.
    An authority's success rate bears no necessary relationship to the 
fraction of the authority's vouchers in use at any point in time. No 
matter what an authority's success rate, the authority can fully use 
the vouchers allocated to it by authorizing more families to search for 
apartments than the number of vouchers available. For example, if an 
authority has a success rate of 50 percent, authorizing twice as many 
families to search as the number of vouchers available will result in 
full utilization of the vouchers on average. If each housing authority 
adjusted its issuance of vouchers to its success rate in this manner, 
some authorities would exceed their budget and others would fall short 
in a given year. However, the national average success rate would be 
very close to 100 percent.
    For many years, public housing authorities have over-issued 
vouchers and thereby achieved high usage rates despite low success 
rates. In recent years, they have had a reserve fund for this purpose, 
and current regulations call for penalties on authorities with usage 
rates below 95 percent. The national average usage rate is high (about 
92 percent).
    Almost all tenant-based certificates and vouchers are in use at 
each point in time. Even more would be in use if housing authorities 
were more aggressive in over-issuing vouchers. Local housing 
authorities rarely, if ever, return certificates and vouchers to HUD. 
Although it is true that some families who are offered vouchers do not 
find housing that suits them and meets the program's standards within 
their housing authority's time limits, other eligible families in the 
same locality use these vouchers. This indicates clearly that the 
problem is not that there are no vacant apartments that meet program 
standards and are affordable to voucher recipients or apartments whose 
landlords are willing to upgrade them to meet program standards. In the 
tightest housing markets, these apartments are extremely difficult to 
locate. Unsubsidized families also have trouble locating apartments in 
tight housing markets.
    The real issue is not whether tenant-based vouchers can be used in 
all market conditions but whether it would be better to use new 
construction or substantial rehabilitation programs in tight markets. 
In this regard, the key question is: Will construction programs get 
eligible families into satisfactory housing faster than tenant-based 
vouchers in some market conditions?
    Based on existing evidence, there can be little doubt that tenant-
based vouchers get families into satisfactory housing much faster than 
any construction program even in the tightest housing markets. Two 
major studies of success rates under the tenant-based Section 8 program 
have been completed over the past 15 years (Leger and Kennedy, 1990; 
Kennedy and Finkel, 1994). These studies collected data on more than 50 
local housing authorities selected at random. The lowest success rate 
observed was 33 percent for New York City in the mid-1980's.\5\ If a 
housing authority with this success rate issued only the vouchers 
available at each point in time and allowed recipients up to 3 months 
to find a unit meeting the program's standards, about 80 percent of new 
vouchers would be in use within a year. If they followed the current 
practice of authorizing more families to search for apartments than the 
number of vouchers available, almost all of the vouchers would be in 
use within 3 months.
---------------------------------------------------------------------------
    \5\ The success rate in New York City in the mid-1980's was much 
lower than the second lowest (47 percent in Boston in the mid-1980's) 
and much lower than in New York City in 1993 (65 percent). An earlier 
study based on data from the late-1970's found lower success rates. 
However, at that time housing authorities were still figuring out how 
to administer this new program. So these success rates are of no 
relevance for predicting the effects of expanding the program today.
---------------------------------------------------------------------------
    How long does it take from the time that money is allocated for 
construction programs to the time that the first units are available 
for occupancy? Based on data on a national random sample of 800 
projects built between 1975 and 1979, Schnare, Pedone, Moss, and Heintz 
(1982) found the mean time from application for project approval to 
completion of the project ranged from 23 months for Section 236 to 53 
months for conventional public housing. Mean times ranged from 26 to 31 
months for the variants of the Section 8 New Construction and 
Substantial Rehabilita-
tion Program. Occupancy of the completed apartments required additional 
time. 
Although the authors did not report results separately for different 
markets, it seems reasonable to believe that these times were greater 
in the tightest housing markets because the demand for unsubsidized 
construction would be greatest in these locations.
    So if Congress were to simultaneously authorize an equal number of 
tenant-based vouchers and apartments under any construction program, it 
is clear that all of the vouchers would be in use long before the first 
newly built unit was occupied, no matter what the condition of the 
local housing market at the time that the money is appropriated.
    The second major objection to the exclusive reliance on tenant-
based assistance is that new construction promotes neighborhood 
revitalization to a much greater extent than tenant-based assistance. 
The evidence from the Experimental Housing Allowance Program is that 
even an entitlement housing voucher program will have modest effects on 
neighborhoods and the small literature on the Section 8 Voucher Program 
confirms these findings for a similar nonentitlement program (Lowry, 
1993, pp. 205-217; Galster, Tatian, Smith, 1999B). These programs 
result in the upgrading of many existing dwellings, but this is 
concentrated on their interiors. It is plausible to believe that a new 
subsidized project built at low-density in a neighborhood with the 
worst housing and poorest families would make that neighborhood a more 
attractive place to live for some years after its construction. The 
issue is not, however, whether some construction projects lead to 
neighborhood upgrading. The issues are the magnitude of neighborhood 
upgrading across all projects under a program over the life of these 
projects, who benefits from this upgrading, and the extent to which 
upgrading of one neighborhood leads to the deterioration of other 
neighborhoods.
    The primary beneficiaries of neighborhood upgrading will be the 
owners of nearby properties. Since the majority of the poorest families 
are renters, it is plausible to believe that most of the housing 
surrounding housing projects located in the poorest neighborhoods is 
rental. Therefore, if a newly built subsidized project makes the 
neighborhood a more attractive place to live, the owners of this rental 
housing will charge higher rents and the value of their property will 
be greater. Since the occupants of this rental housing could have lived 
in a nicer neighborhood prior to the project by paying a higher rent, 
they are hurt by its construction. The poor in the project's 
neighborhood will benefit from the neighborhood upgrading only to the 
extent that they own the property surrounding the project.
    With the passage of time, the initial residents will leave the 
neighborhood in response to the project and others who value a better 
neighborhood more highly will replace them. In short, housing programs 
involving new construction will shift the location of the worst 
neighborhoods to some extent. The aforementioned possibilities have not 
even been recognized in discussions of housing policy, let alone 
studied.
    What has been studied is the extent to which projects under various 
housing programs affect neighborhood property values. The existing 
studies find small positive effects on average for some programs and 
small negative effects for others (Lee, Culhane, and Wachter, 1999; 
Galster, Smith, Tatian, and Santiago, 1999A; Galster, Tatian, and 
Smith, 1999B). No study finds substantial positive effects on average 
for any program.
    The consequence of using the costly construction and substantial 
rehabilitation programs has been that several million of the poorest 
families who could have been provided with adequate housing at an 
affordable rent with the money appropriated for housing assistance have 
continued to live in deplorable housing or paid a substantial fraction 
of their income to live in adequate housing. We should learn from our 
past mistakes and not heed the call for a new HUD production program. 
Indeed, we should go further and disengage from project-based 
assistance to existing apartments as soon as current contractual 
commitments permit.
    I appreciate the willingness of Members of the Committee to listen 
to the views of a taxpayer whose only interest in the matters under 
consideration is to see that tax revenues are used effectively and 
efficiently to help low-income families.
References
          Galster, George; Smith, Robin E.; Tatian, Peter A.; and 
        Santiago, Anna M. with Mary Cunningham and Charlene Y. Wilson. 
        Assessing Property Value Impacts of Dispersed Housing Subsidy 
        Programs: Final Report. Washington, DC: The Urban Institute, 
        May 1999A.
          Galster, George C.; Tatian, Peter; and Smith, Robin. ``The 
        Impact of Neighbors Who Use Section 8 Certificates on Property 
        Value.'' Housing Policy Debate 10 (1999B): 879-917.
          Kennedy, Stephen D. and Finkel, Meryl. Section 8 Rental 
        Voucher and Rental Certificate Utilization Study. Cambridge, 
        MA: Abt Associates Inc., 1994.
          Leger, Mireille L. and Kennedy, Stephen D. Final 
        Comprehensive Report of the Freestanding Housing Voucher 
        Demonstration. Volume 1 & 2. Cambridge, MA: Abt Associates 
        Inc., May 1990.
          Lee, Chang-Moo; Culhane, Dennis P.; and Wachter, Susan M. 
        ``The Differential Impacts of Federally Assisted Housing 
        Programs on Nearby Property Values: A Philadelphia Case 
        Study.'' Housing Policy Debate 10 (1999): 75-93.
          Lowry, Ira S. (ed.) Experimenting With Housing Allowances: 
        The Final Report of the Housing Assistance Supply Experiment. 
        Cambridge, MA: Oelgeschlager, Gunn & Hain, 1983.
          Mayo, Stephen K.; Mansfield, Shirley; Warner, David; and 
        Zwetchkenbaum, Richard. Housing Allowances and Other Rental 
        Assistance Programs--A Comparison Based on the Housing 
        Allowance Demand Experiment, Part 2: Costs and Efficiency. 
        Cambridge, MA: Abt Associates Inc, June 1980.
          Olsen, Edgar O. ``The Cost-Effectiveness of Alternative 
        Methods of Delivering Housing Subsidies.'' Thomas Jefferson 
        Center for Political Economy, Working Paper 351, December 2000. 
        http://www.virginia.edu/-econ/TJpapersx.htm
          Olsen, Edgar O. ``Housing Programs for Low-Income 
        Households.'' National Bureau of Economic Research, Working 
        Paper 8208, April 2001. http://papers.nber.org/papers/W8208
          Olsen, Edgar O., and Barton, David M. ``The Benefits and 
        Costs of Public Housing in New York City.'' Journal of Public 
        Economics 20 (April 1983): 299-332.
          Schnare, Ann; Pedone, Carla; Moss, William; and Heintz, 
        Kathleen. The Costs of HUD Multifamily Housing Programs: A 
        Comparison of the Development, Financing and Life Cycle Costs 
        of Section 8, Public Housing, and Other Major HUD Programs. 
        Volume 1 & 2. Cambridge, MA: Urban Systems Research and 
        Engineering, Inc., May 1982.
          U.S. Department of Housing and Urban Development. Housing in 
        the Seventies. Washington, DC: Government Printing Office, 
        1974.
          U.S. General Accounting Office, Federal Housing Programs: 
        What They Cost and What They Provide. GAO-01-901R, July 18, 
        2001. http://www.gao.gov/new.items/d01901r.pdf
          Wallace, James E.; Bloom, Susan Philipson; Holshouser, 
        William L.; Mansfield, Shirley; and Weinberg, Daniel H. 
        Participation and Benefits in the Urban Section 8 Program: New 
        Construction and Existing Housing. Volume 1 & 2. Cambridge, MA: 
        Abt Associates Inc., January 1981.
          Weicher, John. Privatizing Subsidized Housing. Washington, 
        DC: American Enterprise Institute for Public Policy Research, 
        1997.
                               ----------
                 PREPARED STATEMENT OF DAVID W. CURTIS
          Executive Vice President and Chief Financial Officer
                   Leon N. Weiner & Associates, Inc.
                        Testifying on Behalf of
            The National Association of Home Builders, Inc.
                           November 29, 2001
Introduction
    On behalf of the 205,000 members of the National Association of 
Home Builders, I want to thank you for inviting us to speak on the 
fiscal year 2003 Department of Housing and Urban Development (HUD) 
budget. My name is David Curtis, and I am a builder from Wilmington, 
Delaware. I currently serve as Executive Vice President of Leon N. 
Weiner & Associates, Inc., which is a Wilmington-based home building, 
development and property management firm. The Weiner organization and 
its affiliates are recognized as industry leaders, particularly in the 
area of providing affordable housing to individuals and families of 
moderate means. The company has developed and constructed more than 
4,500 homes, 9,000 apartments, and several hotels, office and retail 
facilities.
    Two recent reports, one by the Center for Housing Policy, 
``Paycheck to Paycheck: Working Families and the Cost of Housing in 
America,'' and the Joint Center for Housing Studies of Harvard 
University's, The State of the Nation's Housing Annual Report 2001, 
have extensively documented the growing problem of housing 
affordability for low- and moderate-income households. The Joint 
Center's report states that, at the end of the last decade, over 14 
million owner and renter households spent more than half their incomes 
on housing. Two million households lived in homes with serious 
structural deficiencies, and many of those households were also 
severely cost-burdened. The Center for Housing Policy estimates that 
3.7 million households who fall within the category of the ``working 
poor'' have critical housing needs.
    NAHB strongly supports the mission of HUD and its efforts to meet 
the Nation's housing and community development needs through single-
family, multifamily, and urban and rural development initiatives. Most 
of these efforts include a public-private partnership that involves 
private, for-profit home builders and that is facilitated through 
coordination with many other partners including community organizations 
and State and local governments. In addition to developing and 
overseeing most of the key Federal programs in these areas, HUD also 
conducts important research and analysis on housing needs and solutions 
to housing problems.
    NAHB views HUD's role in housing as critical to achieving the 
Nation's goal of safe and decent housing for every American. Success in 
these efforts requires adequate funding and effective and efficient 
operation of the Department. We recognize there are significant 
challenges in meeting funding requests throughout the Federal budget, 
but we urge Congress to provide sufficient funds to give HUD the staff 
and resources necessary to make meaningful progress in addressing the 
Nation's housing and community development needs. Our detailed 
recommendations follow.
    In addition, the HUD budget is a factor in the degree of economic 
stimulus received by the housing sector and the economy. Our statement 
also includes observations and recommendations on economic stimulus 
measures.
The Federal Housing Administration (FHA) Multifamily Programs
    The FHA is the only Federal program that supports the production 
and rehabilitation of affordable rental housing units for a range of 
incomes, not just the very low end of the market.
    However, while the FHA programs continue to serve a vital function 
within the housing finance system, the legislative, regulatory, and 
policy framework under which these programs operate are often 
unnecessarily restrictive and burdensome. On the multifamily side, the 
programs have been subjected to a series of start-stop cycles that have 
resulted in significant losses of time and money to developers and 
longer waits for affordable housing by residents.
    Of particular concern to NAHB is HUD's decision to raise the 
mortgage insurance premium from 50 to 80 basis points for a number of 
the FHA multifamily mortgage programs, in particular the 221(d)(4) 
program. According to the model used by HUD and the Office of 
Management and Budget (OMB) to determine credit subsidy requirements, 
the higher mortgage insurance premium allows the FHA Section 221(d)(4) 
multifamily mortgage insurance program to operate without a credit 
subsidy appropriation. The Administration's budget for fiscal year 2002 
continues the higher premium level.
    NAHB has expressed its opposition to the mortgage insurance premium 
increase as burdensome and unnecessary. NAHB; believes the premium 
increase in the Section 221(d)(4) program will lead to higher rents and 
reduced production of affordable rental housing. NAHB believes that the 
assumptions in the model used by HUD and OMB to determine the credit 
subsidy requirements for the Section 221(d)(4) program are excessively 
pessimistic. For example, the model places too much weight on the 
performance of loans from the early 1980's, which were insured under 
much weaker underwriting standards than employed today and were 
impacted by the unprecedented retroactive provisions of the 1986 Tax 
Act. If the model were revised to address these and other problems, the 
Section 221(d)(4) program would not require credit subsidy 
appropriations or an increase in insurance premium.
    Congress recognized this problem by directing HUD, in the fiscal 
year 2002 HUD/VA appropriations bill conference report, to work with 
the industry to review the technical assumptions provided by HUD to OMB 
for inclusion in the risk model. FHA Commissioner John Weicher and his 
staff held several meetings with NAHB where HUD requested and NAHB 
offered recommendations for alterations to the model. Commissioner 
Weicher agreed to complete a study of the credit subsidy model by 
October 1, 2001, so that a revised formula could be in effect for the 
fiscal year 2003 budget, but has failed to do so. NAHB believes that 
completing the study of the model and implementing any changes in time 
for the fiscal year 2003 budget cycle is of utmost importance. We also 
believe that HUD needs to follow through in working with the industry 
in finalizing any changes.
    Also related to the FHA multifamily programs, we appreciate the 
support of HUD and applaud the action taken by Congress in the HUD 
fiscal year 2002 appropriations bill, which raises the FHA multifamily 
mortgage loan limits by 25 percent. The limits, which remained at the 
level last set in 1992, made the program unworkable in many major urban 
areas. The increase in the mortgage loan limits will now help provide 
affordable housing in many areas where the programs could not be used 
previously.
    We were disappointed, however, that the increase was not indexed to 
account for inflation each year. Without indexing, the loan limits will 
rapidly become outdated, leaving us in the same position as before. We 
urge you to include an inflation index to the mortgage loan limits in 
the fiscal year 2003 budget, and we recommend using the U.S. Bureau of 
the Census Annual Construction Cost Index. This index is used to derive 
the annual value of general construction costs put into place and is a 
measure of the impact of inflation on construction costs. It is the 
best readily available index published on an annual basis.
    Additionally, there are a few cities where costs, particularly for 
land, have risen so dramatically over the past several years that the 
25 percent increase will not be sufficient to enable developers to use 
the FHA programs. While the Secretary has discretion to adjust the 
limits by a high cost factor, we believe that a legislative change is 
needed to recognize that there are some very high cost cities that 
should be permitted to exceed the current 110 percent high cost factor. 
We encourage you to consider making such a legislative change.
HUD Budget Recommendations
    NAHB believes that it is essential to maintain a strong Federal 
commitment to housing assistance programs for low- and moderate-income 
families and provide incentives for greater involvement by State and 
local governments to develop affordable housing solutions. As such, we 
support adequate funding levels for the housing programs that will help 
achieve these goals.
HOME Investments Partnerships Program
    NAHB is very supportive of the HOME program. It is an important and 
flexible block grant that State and local governments use to address 
their locally identified affordable housing needs. HOME funds have 
become an important source of gap financing for developers using tax-
exempt bonds, low-income housing tax credits and other affordable 
housing financing. HOME funds are also an important source of 
assistance for first-time homebuyers. We support a funding level of at 
least $2 billion, without funds earmarked for specific purposes. We 
believe the participating jurisdictions already have the flexibility to 
use HOME funds to meet their specific housing needs, which can vary 
considerably.
Community Development Block Grants (CDBG)
    NAHB was disappointed that the funding for the CDBG program was 
reduced from $4.4 billion in fiscal year 2001 to $4.34 billion in 
fiscal year 2002. NAHB supports a funding level of $4.8 billion. This 
program, which provides flexible funding so that communities can meet 
housing and economic development needs as they see fit, is a 
cornerstone in the effort to revitalize our Nation's cities and rural 
areas. We were pleased that HUD recently changed its position on 
prohibiting the use of CDBG funds for the new construction of single-
family housing. We urge Congress to consider allowing the use of CDBG 
funds for the new construction of multifamily housing as well.
Section 8
    While NAHB understands the reason Secretary Martinez requested 
fewer vouchers for fiscal year 2002, it is nonetheless a dramatic 
reduction from the fiscal year 2001 level of 79,000 vouchers. We 
understand that, in some localities, vouchers were not being utilized 
efficiently; however, HUD is taking steps to address this issue, which 
should help improve utilization rates. At the same time, Congress needs 
to be aware that demand for Section 8 vouchers has not declined. In 
fact, in many localities, residents face waits of 5 or more years 
before they can receive a voucher. We urge Congress to provide funds 
for all Section 8 contract renewals and, additionally, provide funding 
for 79,000 new incremental vouchers in fiscal year 2003. The Section 8 
voucher program is critical to addressing the housing needs of 
extremely low- and very low-income residents, especially during 
economically difficult times when more families are facing unemployment 
and rising housing costs.
Partnership for Advancing Technology in Housing (PATH)
    NAHB is supportive of the $8.75 million that was included in the 
fiscal year 2002 budget. This program is vital to the accelerated 
development of new housing technologies, designs, and practices that 
can significantly improve the quality of housing and save energy 
without raising the cost of construction. We urge you to continue 
funding of this innovative program.
The Rural Housing and Economic Development Program
    While much progress has been made in improving housing in rural 
America, there remains a considerable unmet need, particularly among 
very low- and low-income rural households. NAHB supports the Senate's 
restoration of the Rural Housing and Economic Development Program 
because it provides funding for important technical assistance, such as 
homeownership counseling, to those who live in rural communities. Our 
members report that credit problems and lack of knowledge about the 
home buying process are serious issues in rural communities and that 
programs to address these issues are valuable and needed services. We 
support maintaining a funding level of at least $25 million.
HomeAid
    Finally, under the Economic Development initiative, we support 
funding for the HomeAid America program, whose mission is to build or 
renovate shelters for temporarily homeless men, women, and children 
across America by establishing chapters in affiliation with home 
building associations throughout the country. We are very appreciative 
of the $490,000 earmark for fiscal year 2002, and we look forward to 
working with the Committee next year on continued funding.
Housing Preservation--Restructuring the Portfolio of HUD-Assisted
Multifamily Properties
    HUD, through the Office of Multifamily Housing Assistance 
Restructuring (OMHAR), is carrying out a program, created by Congress 
in 1996, to restructured the portfolio of HUD-assisted multifamily 
properties. The goal of the program, often referred to as ``Mark-to-
Market,'' is to keep properties with expiring Federal rental assistance 
contracts in the affordable housing stock while, at the same time, 
reducing the amount of Federal budget dollars required to provide 
rental assistance to residents of those properties. This is 
accomplished by either a restructuring of the mortgage and a rent 
reduction or by just a rent reduction.
    NAHB strongly supports the goals of the Mark-to-Market program and 
looks forward to the completion of work by Congress to pass 
reauthorization legislation for the program, which sunsets this year. 
And, as mentioned earlier, we urge Congress to continue to provide the 
funding needed by HUD to renew the rental assistance contracts on the 
Mark-to Market properties. This initiative is the only Federal program 
available to preserve this major component of our stock of affordable 
rental housing, representing more than 1.3 million housing units. While 
the program got off to a slow start, it appears to be picking up 
momentum and clearly has the potential for making significant progress 
toward the goals it is charged to pursue.
    As the program moves forward, some improvements and clarifications 
should be made in administrative processes and procedures. In 
particular, NAHB is very interested in working with HUD and other 
interested parties to develop more accurate and equitable processes for 
determining rents and to improve the operation and productivity of the 
Mark-to-Market program.
New Rental Housing Production Program
    Despite the Nation's general prosperity, there continues to be a 
critical shortage of affordable rental housing. As mentioned 
previously, two recent reports, one by the Center for Housing Policy, 
``Paycheck to Paycheck: Working Families and the Cost of Housing in 
America,'' and the second, the Joint Center for Housing Studies of 
Harvard University's The State of the Nation's Housing Annual Report 
2001, have extensively documented the growing problem of meeting the 
housing needs of 3.7 million households who are the ``working poor.'' 
The Center is focusing on this group because there are signs of 
persistent and worsening housing affordability for them in all parts of 
the country, including cities, suburbs, and rural areas, despite the 
recent economic prosperity.
    Workers in municipal jobs, such as teachers and police officers, 
and in the services sectors, such as janitors, licensed practical 
nurses, and salespeople, fall into this group of people and are a large 
and growing component of many local economies. The growth in such jobs, 
however, is not matched by the growth in the supply of affordable 
housing, creating an increasingly difficult situation for both renters 
and homeowners.
    NAHB believes there is a need for a new multifamily rental housing 
production program that would meet the affordable housing needs of 
households with incomes between 60 and 100 percent of AMI, America's 
``working poor,'' as described in the reports. These households are not 
eligible for housing assistance through most current Federal housing 
programs.
    NAHB has developed a program that is designed to increase and 
maintain the affordable housing stock over the long term. The program 
would not require large Federal budget outlays. Instead, affordability 
would be generated through lower interest rates available by securities 
backed by the full faith and credit of the Federal Government. Federal 
subsidies would be required in some instances and would 
be provided through modest interest-rate buydowns. A portion of the 
units (up to 
25 percent) would serve households below 60 percent of AMI, although a 
modified rental assistance voucher program would be needed to assist 
these households.
    The program is designed to use Government resources as efficiently 
as possible, with the amount of subsidy required per development small 
relative to the amount of housing produced. A wide range of households 
will be served by producing mixed-income housing. The program ensures 
long-term affordability (40 years+) and provides incentives to owners 
through the deferral of profits, contingent on property performance 
(both financially and physically) until long-term affordability is 
satisfied. It builds in adequate reserves from cashflow for on-going 
maintenance and future capital improvements. Finally, the NAHB proposal 
avoids the establishment of new program bureaucracy, because it could 
be administered in the same fashion as the HOME, CDBG, and tax credit 
programs.
    NAHB believes that the establishment of a new rental housing 
production program should be a top housing priority for the 
Administration and Congress in the coming year. Several bills have 
already been introduced in Congress, and the Millennial Housing 
Commission is expected to offer a recommendation on a new rental 
production program as well. NAHB is committed to continuing its work 
with its housing partners, HUD, and Congress toward this goal.
Economic Stimulus
    HUD's focus should also reflect the current economic situation, and 
the realization that housing can and should play a major role in 
leading an economic recovery. To that end, NAHB has proposed an 
economic stimulus package designed to produce jobs, income and new 
revenue to Federal, State and local governments. Among the initiatives 
included in this package are a temporary first-time home buyer tax 
credit, a temporary increase in the low-income housing tax credit 
(LIETC), and a temporary removal of the tax-exempt bond ceiling.
    The NAHB proposal for a 10 percent first-time home buyer tax credit 
is similar to the one proposed by President Bush in 1992. The estimated 
economic impact of this credit would total $27 billion in labor and 
business income in the community where the homes are built, and $15.6 
billion to workers outside the area producing goods and services for 
the new homes. This translates into an additional 1.2 million jobs 
created. The local governments in the area would see an added $4.3 
billion and all other governments would receive an additional $18.7 
billion. The Federal Government's revenues would increase by $15.8 
billion alone.
    The temporary increase in the dollar amount of LIHTC's awarded to 
States would be similar in magnitude to the permanent per capita 
increase enacted in the recent past. This would stimulate the 
production of $28,000 additional low-income units, $780 million in 
income, and support over 21,000 full-time jobs.
    Tax-exempt bonds are used by themselves and in combination with the 
LIHTC and other programs to produce affordable rental housing. To 
achieve a strong short-term economic stimulus, we recommend temporarily 
removing the limits on the amount of private activity tax-exempt bonds 
a State may issue. We estimate the impact on multifamily production 
would be an additional 15,000 units, generating $470,000 million in 
income and 13,300 full-time jobs. In addition to this, expansion of 
other private activities financed by these bonds would provide further 
stimulus.
    NAHB's economic stimulus package also targets two HUD programs, 
recommending increases in the FHA multifamily mortgage limits and HOME 
grant spending. The 25 percent FHA loan limit increase in the fiscal 
year 2002 appropriations bill was a step in the right direction and 
should provide an annual economic stimulus on the order of 4,000 units 
of new construction and $150 million in wages, enough to support over 
4,000 full-time jobs. As mentioned previously, however, that bill 
failed to provide further increases for high-cost metropolitan areas, 
such as Boston, New York, and San Francisco. Not only are additional 
increases necessary to make the program work effectively in those 
areas, we estimate that the total economic impact in terms of income, 
jobs, and Government revenue generated would be roughly one-fourth 
greater than the stimulus provided by the 25 percent loan limit 
increase alone.
    We have already expressed our support for the HOME program as a 
proven mechanism for producing affordable housing. In addition to an 
annual funding level of at least $2 billion, we recommend a one-time 
increase in the dollar amount of HOME grants awarded to States as a 
desirable way to provide a short-term boost to the U.S. economy 
stimulus. An increase of $500 million would produce approximately 6,400 
new multifamily units, which would generate about $175 million in wages 
and support 4,800 full-time jobs.
Single Family FHA
    A 1996 change in a HUD regulation may create problems for 10 year 
warranty programs and for the home builders using those programs. The 
result of the regulation will be to increase the risks to warranty 
providers, which will in turn result in increased costs for warranty 
coverage.
    On July 9, 1996, HUD published a Final Rule that dealt with a broad 
range of issues relating to FHA-insured single-family loans. HUD viewed 
these changes as ``technical improvements'' and, therefore, did not 
publish the proposed changes for public comment prior to publication in 
final form.
    The problem relating to 10 year insurance-backed warranty programs 
arises from a change in the Code of Federal Regulations, section 
203.204(g) wherein the word ``or'' in the following sentence is changed 
to ``and.'' Before this change, this section read as follows:

          ``. . . A Plan must contain prearbitration conciliation 
        provisions at no cost to the homeowner, or provision for 
        judicial resolution of disputes, but arbitration, which must be 
        available to a homeowner during the entire term of the coverage 
        contract, must be an assured recourse for a dissatisfied 
        homeowner.''

    This change did not come to light until recently, when HUD told a 
large home building company that their warranty program, based on an 
in-house risk retention group, would have to contain the ``and'' 
language.
    Warranty programs are reviewed and approved by HUD on a 24-month 
cycle. At the time of the last renewal in 1999, one major warranty 
provider was permitted by HUD to retain the ``or'' language in its 
warranty. Another major warranty firm has addressed HUD's requirements 
by adding an addendum to their warranty documents that permits the 
judicial alternative on warranties for homes purchased using FHA-
insured loans while retaining an arbitration-only warranty for 
conventionally financed homes.
    NAHB is concerned that, by requiring warrantors to offer the 
judicial alternative, HUD is opening the door for homeowner lawsuits, 
which greatly increases the risk exposure to warranty providers thereby 
adding to consumer home buying costs, since any additional risk borne 
by warranty providers would be passed along to home buyers in the form 
of increased premiums. For example, one warranty provider has indicated 
its average warranty premium would increase approximately 29 percent on 
warranties that offer the home buyer a judicial option and premiums 
would increase by a significantly larger margin for high-risk states 
such as Texas and Colorado.
    In addition, a Uniform Limited Warranty, which was proposed to HUD 
by NAHB's Home Buyer Warranty Task Force in May 2000, calls for binding 
arbitration. Therefore, the current rule also negatively impacts the 
proposed Uniform Limited Warranty.
    NAHB believes that the Federal Arbitration Act and recent case law 
support the use of binding arbitration as a legal and desirable method 
of resolving disputes in warranty matters and that HUD's requirement 
that a judicial option must be offered to homeowners, while legal, is 
not necessary or desirable.
    NAHB agrees with home builders and warranty firms that arbitration 
is a fair and legal means of resolving warranty disputes, and that HUD 
should not mandate that 10 year insurance-backed warranties contain a 
provision offering home buyers the right to seek either a judicial 
remedy or arbitration.
Surveys and Housing Information
    The budget of the Office of Policy Development and Research (PD&R) 
supports several current surveys of housing activity and conditions. 
HUD sponsors current construction activity surveys of homes built for 
sale, apartments for rent, and manufactured housing produced. These 
vital housing indicators are important to the 
industry and to the rest of the economy as indicators of the health of 
the housing sector.
    PD&R also supports the American Housing Survey, a survey of the 
condition of the housing stock and household characteristics. The 
survey has been conducted since 1973 and provides the housing community 
with consistent information about the American housing stock, 
condition, affordability, and change. We urge you to continue funding 
both of these information sources.
    In addition, there are a number of areas where a lack of data is 
hampering efforts to develop new sources of financing for housing. For 
example, more consistent and comprehensive data on multifamily 
properties and related mortgages are needed before additional steps can 
be taken to develop new ways to attract funds for affordable 
multifamily housing from the capital markets. Sufficient funding should 
be available to support such data collection efforts by PD&R.
Conclusion
    Mr. Chairman, NAHB appreciates the opportunity to share our 
priorities and concerns with you as the fiscal year 2003 HUD budget is 
developed. We look forward to continuing to work with Congress, HUD, 
and our industry partners in achieving the goal of a decent and safe 
home for every American.

                   PREPARED STATEMENT OF KURT CREAGER
 President, National Association of Housing and Redevelopment Officials
        and Chief Executive Officer, Vancouver Housing Authority
                         Vancouver, Washington
                           November 29, 2001

    Good morning, Mr. Chairman and Members of the Banking Committee. My 
name is Kurt Creager and I am here in my capacity as President of the 
National Association of Housing and Redevelopment Officials (NAHRO). 
NAHRO is the Nation's oldest and largest membership organization in the 
United States devoted to affordable housing and community development. 
NAHRO represents more than 5,600 individuals, including approximately 
2,500 housing agencies. NAHRO members own or manage more than 1.3 
million units of public housing, representing 97 percent of all public 
housing in the United States. In addition, our members administer more 
than 1.3 million, or 93 percent, of Section 8 vouchers. Funds used by 
NAHRO's Community Development/Redevelopment members serve communities 
with populations of more than 148 million.
    I am also the CEO of the Vancouver Housing Authority (VHA) in 
Vancouver, Washington. The VHA is a countywide housing provider, 
immediately across the Columbia River from Portland, Oregon. Standard 
and Poor's has classified the VHA as a ``Strong'' local housing 
authority with a ``Stable'' outlook. We are a HUD high-performer and 
were part of the first wave of Moving-to-Work (MTW) agencies selected 
by HUD for the MTW deregulation demonstration. We are responsible for 
about 4,500 dwelling units, about half of which are Federally financed 
and half of which are privately financed with tax exempt bonds, tax 
credits, and/or State and local resources. Our portfolio also is made 
up of 575 public housing units and 1,850 vouchers.
    Thank you for the opportunity to testify before you on the recently 
approved fiscal year 2002 budget for the Department of Housing and 
Urban Development (HUD) and provide comments on the pending fiscal year 
2003 budget. Before I begin my remarks, it is important to understand 
that while NAHRO may have disagreements with the budget proposed by 
this Administration, we are continuing to work with its members to find 
areas of common ground.
    Unfortunately, the President's proposed fiscal year 2002 budget 
misrepresented the facts on how key housing programs, such as the 
Capital Fund and the drug elimination program, are administered. This 
misrepresentation, which I will reference in my comments, established a 
framework of discussion during the appropriation process that distorted 
the significant amount of work that is being done in communities 
throughout the country to serve the needs of our Nation's poorest 
citizens. As a result of some of this distortion, we witnessed cuts to 
many key programs that generate jobs and address local needs. In our 
view, the fiscal year 2002 budget falls short of meeting local needs 
and illustrates the need for additional resources in the fiscal year 
2003 budget.

Stimulus Debate Misses Opportunity
    Clearly, the attacks that occurred on September 11 have forced 
Congress to reevaluate its priorities. However, while Congress attempts 
to determine how to respond to terrorism, it must understand that a 
strong financial commitment to local housing and community development 
needs is a means to strengthen homeland security and a means to 
stimulate the economy. The exclusion of housing and community 
development programs from the stimulus debate that has consumed 
Washington over the last 2 months is a missed opportunity to highlight 
the benefits that HUD-funded programs provide to local economies. These 
programs infuse local economies with resources that create jobs, build 
housing units, and improve infrastructure projects. For example, a new 
production program attached to a stimulus bill will immediately create 
jobs in the construction and building supply industries, while 
providing housing for low- and extremely low-income households.
    Our country needs a new production program that provides funds 
directly to local communities to build housing units for low- and 
moderate-income households. Organizations such as NAHRO have been 
advocating for a new affordable housing production program for close to 
2 years. The need for increasing the supply of affordable housing is 
well documented and does not need to be repeated here. A production 
program will provide an infusion of dollars that can help spur local 
economies, address pressing affordable housing needs and sending a 
clear message that the Federal Government has not allowed the war on 
terrorism to deflect resources from pressing homeland needs.
    Even if a production program was not enacted, funding of HUD 
programs creates jobs. Investment in Federal programs generates a 
multiplying effect in local communities. For example, Washington State 
University's Real Estate Research Center determined that residential 
real estate is the second largest contributor to the State's economy, 
after international trade. The Boeing Company is fifth and Microsoft is 
sixth, in comparison. Washington State is heavily dependent on trade. 
It leads the Nation in unemployment with a seasonally adjusted 
unemployment rate of 6.6. percent in October. This rate was computed 
before any of Boeing's 30,000 layoffs took effect.
    An investment in housing is a good investment in local and State 
economies. This is as true today as it was in 1983 when the Congress 
appropriated supplemental CDBG funds to entitlement cities, urban 
counties and States. NAHRO analysis, by department, of the major 
programs funded (CDBG, HOME, Capital Fund, Operating Fund, HOPE VI, 
etc.) indicates that approximately 680,000 jobs are either created or 
sustained, through these programs, in local communities throughout the 
country. A cut to these programs means that jobs will be lost, while an 
increase means that jobs will be gained. It is also important to note 
that the population served by NAHRO members is among the poorest in our 
society. The downturn in the economy has resulted in a loss of the 
marginal jobs low-income workers tend to hold. As their incomes 
decrease, the demands for public housing, Section 8, and other 
Federally supported services increase.

Fiscal Year 2002 Budget and Its Implications for Fiscal Year 2003
    The fiscal year 2002 budget sends a very dangerous message to local 
communities struggling to meet the basic needs of their constituents. 
For example, Congress appropriated $68 million less this year (fiscal 
year 2002) for the CDBG formula than in fiscal year 2001. The fiscal 
year 2002 VA/HUD bill contains $4.34 billion for the CDBG formula, 
compared to $4.409 in fiscal year 2001. All of this has occurred 
despite these programs' proven track record in creating new jobs. 
According to the Department, local programs funded by CDBG created more 
than 116,000 jobs in fiscal year 2001. Over the course of its 25 year 
history, the CBDG program generated, on average, approximately 87,000 
jobs per year, according to NAHRO's report, More Than Bricks and 
Mortar: The Economic Impact of the Community Development Block Grant 
Program. In addition to decreased funding, formula allocations to 
entitlement communities will decrease due to the higher number of 
entitlement communities receiving formula allocations. Population data 
from the 2000 Census led to the establishment of more than 20 new 
entitlement communities over the past 2 years. Therefore, more 
communities will share a decreased pot of formula funding in fiscal 
year 2002. CDBG also benefits communities in a variety of ways. For 
example, in fiscal year 2001, 170,000 homes were repaired as a result 
of CDBG funds. CDBG also funds daycare centers for working families, 
nonprofits offering services to low-income families, and infrastructure 
improvements. The program provides localities with the needed 
flexibility to address community needs in a timely fashion.
    Additionally, the HOME program is another stimulator of local 
economies. In the fiscal year 2002 budget, the HOME program was 
essentially level funded at $1.846 billion. However, it did include a 
$50 million set-aside for a Down Payment Assistance Initiative, subject 
to subsequent authorizing legislation that must be passed by June 2002. 
This is the first year that HOME has had a set-aside taken from the 
formula to create a new program. Most distressing about this set-aside 
is that it already is an eligible activity under HOME. Many communities 
are already providing down payment assistance using HOME dollars. This 
new program simply duplicates existing activities and does not give 
communities the flexibility to best meet their local needs. NAHRO 
strongly opposes this set-aside. In fiscal year 2003, the HOME formula 
should be funded at $2 billion with no set-asides.
    It is important to note that the HOME program has never been fully 
funded at the authorized level of $2 billion. This is unfortunate given 
the program's success since its inception. Since it is beginning, the 
HOME program has produced, on average, 50,000 units a year and has 
created approximately 400,000 units of affordable housing for low- and 
moderate-income households. In fiscal year 2001, HOME produced 
approximately 70,000 units of affordable housing.

Public Housing Capital Fund
    We appreciate Congress's efforts to restore the deep cut proposed 
by the Administration to the Capital Fund in fiscal year 2002. Despite 
Congressional efforts, the Capital Fund still experienced a 5.5 percent 
reduction from the fiscal year 2001 level of $3 billion. We hope that 
the focus for fiscal year 2003 will be to increase funding to $3.5 
billion; expand flexibility in the use of these funds; enhance support 
for agencies that seek to develop and use new financing tools; and 
provide greater emphasis on public-private partnerships to close the 
gap between Federal funds and program needs.
    The Administration's proposal created an unfortunate distortion of 
the facts, which made it appear that nearly $6 billion was unexpended 
and $3 billion unobligated through fiscal year 2000. In fact, though, 
fiscal year 2000 funds should not have been included since the 
obligation and expenditure time limits have not yet occurred. We 
estimate the amount to be $2.6 billion unspent and $1 billion 
unobligated through fiscal year 1999 funding. We recognize that there 
are a few large agencies that do have problems with obligation and 
expenditures and a few that have legitimate delays.
    We also continue to be concerned about the mismatch between the 
Administration's push toward more marketable, mixed-income communities, 
including those with incomes below 30 percent of area median, and the 
downturn in funding for capital improvements. The funds appropriated, 
which are subject to set-asides, will not help housing agencies reach 
the goals for public housing set by Congress and the Administration.
    Building on the success of the HOPE VI program, the Quality Housing 
and Work Responsibility Act of 1998 (QHWRA) provides housing agencies 
with the flexibility to leverage their capital funds to attract more 
private investment to address backlogged modernization needs that have 
resulted from this provision. Chicago and Washington, DC have already 
sold securities backed by the future revenue anticipated from the 
Capital Grant. NAHRO agrees that housing agencies must be partners with 
the private sector. For that reason, NAHRO has formed a partnership 
with the Bank of America, the Enterprise Foundation, and the Local 
Initiatives Support Corporation. This partnership, the NAHRO Access 
Alliance, will provide local housing agencies with opportunities to 
access the capital markets. Reductions in the Capital Fund undercuts 
the innovative activities we want to achieve. Any reduction in Public 
Housing Capital Fund sends an alarming signal to private markets 
interested in participating in mixed-finance agreements with local 
housing agencies. We must be seen as reliable partners by the capital 
markets to attract significant new private capital. Our reliability 
will be called into question should the Public Housing Capital Fund be 
reduced.
    We ask that in fiscal year 2003, Congress provide at least $3.5 
billion for the Capital Fund to ensure that resources are available to 
address capital needs. This will underscore Congressional commitment to 
foster public/private partnerships that will meet the growing need for 
quality housing affordable to extremely low-income and low-income 
households.

Public Housing Drug Elimination Program (PHDEP)
    The decision to eliminate the Public Housing Drug Elimination 
Program (PHDEP) is very disconcerting at a time when security concerns 
have increased dramatically as a result of the September 11 terrorist 
attacks. The Drug Elimination Grant Program is an effective tool in 
reducing crime and drug activity in public housing throughout the 
country. In fact, there is a great deal of support for prevention 
programs that have proven to alter the behavior of at-risk populations 
and effectively address security concerns within local communities. The 
Journal of the American Medical Association concluded that intensive 
parent-child involvement is critically important to enabling teens to 
avoid substance abuse and other at-risk behaviors. A significant 
percentage of PHDEP funds go to activities designed to facilitate such 
involvement and alter the environmental influences, risks, and 
expectations that may lead youth to drug abuse or violent crime.
    Sixty-five percent of the funds are spent on prevention and law 
enforcement activities. Prevention is less costly than eradicating an 
entrenched criminal element. Eradicating drug-related and violent crime 
from a community is costly--more costly than the level of law 
enforcement already provided by a jurisdiction. PHDEP provided funds 
for housing agencies to pay for the additional services they needed to 
eradicate these problems. Establishing new behavior and expectation 
after eradication requires services targeted to at-risk youth and 
adults--PHDEP grantees spent 35 percent of their funds on these 
efforts.
    Rolling PHDEP funds into the fiscal year 2002 Operating Fund budget 
may provide a few extra dollars to all local housing agencies (LHA's), 
but will not provide funds at the level needed to sustain youth 
prevention programming and other activities that create and maintain 
safe communities. LHA's faced with the decision to pay utility bills to 
keep residents warm or pay for drug and crime prevention efforts, will 
obviously deal with their most immediate and vital needs. PHDEP funds 
also have leveraged other Federal and local funds to expand services 
for their communities. Furthermore, the events of September 11 have 
placed additional demands on local police departments to increase 
security in areas designated as high-priority areas. Many of these 
local police departments will be unable to compensate for the lost drug 
grant funds that were directed to protect public housing residents.
    During the hearings on the fiscal year 2002 budget, Secretary Mel 
Martinez said it was virtually impossible to measure PHDEP's program 
successes. However, HUD requires agencies to submit data explaining 
their accomplishments and has published studies, guidebooks, and GIS 
mapping software to measure the success of the program.
    In fiscal year 2002, the Operating Fund has been boosted by about 
$250 million from the merger of PHDEP funds. These funds could result 
in housing agencies receiving at least 100 percent of their operating 
subsidy request. But the increase comes at the expense of the PHDEP 
program. There is no net gain in funding; in fact, funding for safety 
and security is now lower than ever--the lower amount of $250 million 
must be divided among all 3,400 housing authorities. Programming and 
activities formerly supported by PHDEP funds may be discontinued in 
order for housing agencies to meet operating expense needs. NAHRO has 
already received calls from many agencies preparing their Agency Plans 
for fiscal year 2002 who are struggling with these decisions.
    NAHRO supports funding the Operating Fund at least at the level of 
$3.5 billion for fiscal year 2003, but not at the expense of 
eliminating the drug elimination program. This funding level is 
critical as HUD receives information from the Harvard Cost Study Group 
that is attempting to determine the appropriate formula for the 
Operating Fund. There are a number of issues in the current approach 
that concerns NAHRO. These include the methodology, the public process, 
and the progress of the study. However, our principal concern is that 
the researchers are not studying the real costs of operating public 
housing. They are using a proxy-based study that uses the Federal 
Housing Administration (FHA) data. The researchers will simply 
approximate the cost of public housing by using the FHA cost data and 
apply an adjustment factor to compensate for public housing's unique 
operating environment.
    NAHRO is very concerned with this adjustment factor. It is unclear 
how the study team will craft a numeric adjustment factor from 
qualitative data that it plans to collect by questionnaire. Combined 
with the use of nonpublic housing cost data, our concern grows since 
the cost study will do little to accurately demonstrate the cost of 
operating public housing, and will be of little use in finalizing the 
Operating Fund formula. Throughout their work, the study team has 
maintained that it would be too expensive and take too long to collect 
data from public housing agencies. We disagree and believe the tools 
can be developed to help housing agencies calculate their actual costs 
from the information they now maintain, but do not submit to the 
Department. They have not been asked to submit this data. To reject 
this method is simply losing an opportunity to improve efficiency and 
effectiveness in public housing and understand its true operating 
costs.

Revitalization of Severely Distressed Public Housing (HOPE VI)
    NAHRO strongly supports reauthorization for the HOPE VI program 
with funding at $625 million for fiscal year 2003. We support 
programmatic changes that would include more small agencies as 
grantees, and adapt application and grant management procedures to 
small agencies. Appropriations for the program should be increased to 
assure that grants would be awarded to previously submitted and 
approvable applicants. The program should continue to award grants to 
additional, new applicants. The definition of ``severely distressed 
public housing'' should be amended to enable local housing agencies to 
serve all public housing populations in addition to families; to give 
equal emphasis to physical and social or community distress; 
and to reduce the emphasis on, or requirement for, demolition of public 
housing 
units as a criteria for approving an application or redevelopment plan. 
Programmatic and process changes must be made to improve the 
application, selection, and award process and to simplify 
implementation of the program, especially for small agencies.
    NAHRO supports the provision in the fiscal year 2002 appropriations 
conference report that requires HUD to provide Congress with a report 
covering the program's best practices, lessons learned, impact on 
surrounding communities, and the extent to which the program has 
leveraged private investments and revitalized economic development in 
the target communities. We believe this would be a useful analysis that 
can guide the program in the future.

Section 8
    The fiscal year 2002 appropriations bill raises two critical budget 
issues that need to be addressed in the Section 8 program. NAHRO is 
encouraged by the fact that the fiscal year 2002 appropriations bill 
includes sufficient resources to ensure that all expiring Section 8 
contracts will be renewed. We are also encouraged that report language 
was included that directs the Department to provide the necessary 
resources for agencies that will require more than 1 month of reserves 
to serve their authorized number of families. The Department agrees 
that housing agencies in need of the additional resources will receive 
them.
    Housing agencies need assurances that Congress will continue to 
renew all Section 8 contracts in succeeding years and ensure that 
sufficient reserves are available when program costs become excessive. 
The Section 8 program is a market-driven program with costs that can 
vary from year to year. Successful implementation of the Section 8 
program is complicated by the many factors that affect utilization of 
the vouchers. Any one of these issues, or a combination of issues, can 
impact a recipient's ability to use their voucher.

Local Market
    Both the cost and availability of units are the two principal 
factors that have the biggest impact on the Section 8 program. Between 
1997 and 1999, the number of units with rents affordable to households 
with incomes below 50 percent of area median income (AMI) dropped by 
1.1 million units, a loss of 7 percent in the affordable housing stock. 
HUD's A Report On Worst Case Housing Needs in 1999 found that 4.9 
million households endure worst-case housing needs, including 10.9 
million people. Among this group are 3.6 million children, 1.4 million 
elderly, and some 1.3 million disabled adults. Over three-fourths of 
renters with worst-case housing needs, had a severe rent burden of 50 
percent or more as their only housing problem. In addition, waiting 
lists for housing assistance are longer than ever before.
    The national call for a new production program geared toward 
providing new units for those below 50 percent of median income 
indicates that there is a significant need for housing units for our 
Nation's poor. Available housing resources for those earning less than 
50 percent of median income are dwindling throughout the country. When 
private market rental units are available, families are spending more 
than 50 percent of their income for rents due to the cost of the unit.

Landlord Participation
    Landlord participation determines the number of units that are 
available for voucher holders. When the economy is good, landlords 
often choose not to participate in the program. They can charge higher 
rents to unassisted households without worry about paper work or 
compliance with program regulations.

Housing Agency Management
    Much has been said about the ability of housing agencies to 
administer the Section 8 program. According to HUD, 92 percent of 
current vouchers are being used in communities. To put this in 
perspective, if our school systems were graduating students with a 
grade point average equal to the utilization rate of Section 8, 
education reform would be unnecessary. Clearly, we must find a way to 
more successfully use the remaining 8 percent of vouchers. Where 
management failures are the problem, HUD should exercise its authority 
to address them. The few management failures that exist do not warrant 
a wholesale change in the Administration of the program. Housing 
agencies are in the best position to administer this program. They have 
a track record of working with landlords, know their local markets, and 
spend a great deal of time counseling voucher holders in helping secure 
housing. There are many factors, outside an agency's control, that 
affect its ability to assist families in finding housing.
    Local zoning policies determine the type and location of housing in 
communities. These policies, controlled by the local government, 
dictate where certain types of housing can be built and whether they 
are multifamily or single-family dwelling units. This impacts where 
families may look for units, the cost of those units, and the 
availability of units. Family decisions also affect where vouchers are 
used. Proximity to family, work, church, etc. also factor into the 
search for housing and is not a reflection of mismanagement.
Congressional and HUD Actions Needed To Improve the Program

Fair Market Rents
    Fair market rents (FMR's) are estimates of rent plus the cost of 
utilities. They are market-wide estimates of the rent subsidy that 
should be provided to families to allow them to rent standard quality 
housing throughout the geographic area's competitive market. Despite 
the rental assistance program's overall success, NAHRO believes there 
is a need to increase the FMR to the 50th percentile for all 
communities to help alleviate the increasing concern of underutilized 
vouchers. NAHRO completed a survey in 2000 that demonstrated that 
increasing the FMR would help families find housing. HUD recognized the 
increasingly difficult task of finding sufficient numbers of units at a 
lower percentile and authorized increases in a limited number of 
jurisdictions. While the increase will cost the Federal Government more 
money, the reality is that it will guarantee that more voucher holders 
will be successful in their search for housing.
    One criticism of the Section 8 program is that the vouchers are 
underutilized 
in some markets. Increasing the FMR provides recipients of this 
assistance with 
greater housing choices in order to utilize the vouchers they have been 
given. HUD took the appropriate first step when it raised the FMR to 
the 50th percentile in fiscal year 2001 for a limited number of 
communities. There must be increases in resources to extend this 
increased FMR to all communities.

Forty Percent Cap
    In 1998, statutory changes limited the family's contribution on any 
newly executed Section 8 contract (regardless of whether the family is 
new to the Section 8 program or just moving to a different Section 8 
unit) to 40 percent of the family's adjusted income. There are no 
exceptions to this limit. NAHRO believes participants in the program 
should have the flexibility to pay more than 40 percent of their income 
for the initial rent to secure an apartment. Many NAHRO members have 
raised concerns that participants must turn down units because they are 
prevented from paying more than 40 percent of their income to secure 
the apartment. We agree with the concern that families should not pay 
an excessive amount of their income on rent, however, if a family is 
willing to exceed the 40 percent cap, they should have the option to do 
so if that is necessary to secure an apartment of their choice. If they 
are paying 42 to 45 percent of their income for a Section 8 unit, it is 
still less than they are paying in the open market. One solution is to 
allow housing agencies to base the 40 percent cap on gross income 
versus adjusted income.

Flexible Use of Housing Assistance Payment (HAP)
    The HAP is the portion of assistance that is paid to the landlord. 
The tenant is responsible for the balance of the rent amount. Because 
some voucher holders are unable to find units, many housing agencies 
believe they should have greater flexibility in using the HAP for 
purposes that will assist participants in securing housing. This could 
include assisting with security deposits, credit problems, moving 
expenses, etc. If housing authorities have greater flexibility in using 
the HAP, it allows more ability to provide housing opportunities for 
low-income families.
    Any unused Section 8 funds should be placed back in the program. 
Congress needs to exercise more care in deciding whether there should 
be further reductions in reserve accounts. NAHRO contends Congress 
needs to enact language codifying a reserve account for the program. 
Without a codified reserve, housing agencies will not know for certain 
whether there will be a buffer for rising market costs.

Rescissions
    The second critical issue pertains to rescission. Dropping 
utilization rates are used to justify rescissions to the program. The 
fiscal year 2002 appropriations bill rescinds $1.2 billion from 
unobligated balances remaining from funds appropriated to the HUD's 
Annual Contributions for Assisted Housing or any other HUD account for 
fiscal year 2001 and prior years. HUD must meet the rescission by 
September 30, 2002. The final bill includes language proposed by the 
House to prohibit the rescission of funds governed by statutory 
reallocation provisions, which is welcomed. However, there is a 
propensity to rescind Section 8 dollars at an alarming rate.
    In the last several years, rescissions have been included in the 
VA, HUD appropriations bill in the neighborhood of $1 billion per year. 
At the same time, 4.9 million families with worst-case housing needs, a 
third of whom are on waiting lists and two-thirds who are not, spend 
more than half of their income on housing costs. Many families 
fortunate enough to reach the top of waiting lists still end up 
returning their vouchers after being unsuccessful in finding an 
affordable unit or a landlord willing to rent to a voucher holder. 
Utilization rates are of such a concern that HUD came up with a success 
rate payment standard a year ago, in recognition that few voucher 
holders could secure housing at the 40th percentile, even when LHA's 
were using their maximum allowable payment standard.
    The tools needed to ensure that the voucher program ebbs and flows 
with the market simply do not exist in the program. However, housing 
agencies are held responsible for a family's inability to find a unit. 
To add insult to injury, rather than recycling excess reserve funds 
throughout the year, HUD will begin to permanently reduce an LHA's 
annual budget authority if it does not achieve a 95 percent leasing 
rate. The aforementioned statutory measures are critical for housing 
agencies to achieve some measure of ability to help poor people find 
decent housing.

Conclusion
    The HUD budget must be increased in direct proportion to the need 
that exists in local communities. I appreciate and respect the fact 
that tough decisions needed to be made for the fiscal year 2002 budget. 
I also appreciate the circumstances surrounding September 11 and how it 
has affected the priorities in Washington. However, as we approach the 
fiscal year 2003 budget, we must be mindful of the fact that we are 
making great advances in the health of cities and improved housing 
quality. Yet, we have far to go in the area of affordability, which is 
why we need a commitment to these programs. The need for affordable 
housing grows every day. It is our hope that the fiscal year 2003 
budget will be an improvement on the fiscal year 2002 and provide some 
response to the needs of our communities.
    Yet as the Nation is now three-quarters into a recession, it is 
important that the most vulnerable citizens--the homeless, disabled, 
and seniors--are not forced to bear the burden of the need to pay for 
homeland security or nation-building abroad. Instead, this is a time to 
redouble our efforts to help people move from welfare to work and to 
ensure that our cities, our counties and our States are part of a 
concerted effort to stimulate the national economy. We have a huge 
investment in affordable housing and safe, viable communities across 
the country. We need not sacrifice their future in the fiscal year 2003 
budget debate. It is our hope that the fiscal year 2003 budget will be 
an improvement on the fiscal year 2002 and provide some response to the 
needs of our communities.
    Thank you, Mr. Chairman, for the opportunity to address the 
Committee today. I would be happy to respond to questions that you deem 
appropriate.

                             Attachment One
    The following is a summary of programs that were highlighted in a 
NAHRO brochure on PHDEP extolling the benefits of the Drug Elimination 
Grant Program. The brochure was published in April.

Drug Elimination Committees
New York City Housing Authority, New York City, New York
    To combat the twin problems of drug-abuse and drug-related crime, 
which affect the lives of its tenants, the New York City Housing 
Authority established Drug-Elimination Committees in 85 Federally 
sponsored developments. Funded by HUD's Drug Elimination Program, Drug 
Elimination Committees are grass-roots coalitions of tenants, housing 
authority staff, law enforcement officials, and community leaders who 
joined together to identify specific drug-elimination needs of each 
community where they operate. Drug Elimination Committees are the 
central local unit with responsibility for implementation of drug-
prevention strategies.

The Sky's The Limit School Incentive Program
Housing Authority of the City of Reno, Reno, Nevada
    The School Incentive Program was created to help students strive 
for excellence and provide alternatives to gang and drug involvement. 
It is part of the housing authority's Public Housing Drug Elimination 
Program (PHDEP). The program is tailored to each student. Students set 
their own goals for each grading period. Goals are set in academics, 
social citizenship, and school attendance. When a child successfully 
attains his or her goal, a reward is presented in a ceremony at the 
monthly resident council meeting. Thirty-seven percent of the youth 
living in Reno public housing complexes participate.

Comprehensive Drug Elimination Program
Richmond Housing Authority, Richmond, California
    The Richmond Housing Authority, the Richmond Police Department, a 
resident management corporation, and two community-based agencies have 
developed an innovative drug elimination program. The program 
implements a nationally acknowledged innovative and effective school-
based drug intervention model within a public housing community. The 
model comprises an intensive and interrelated set of services for youth 
and their parents, which include recreational and socialization 
services, family and individual counseling, parent support and 
advocacy, and education and environmental support for the public 
housing community. The program funds a Family Drug Counselor, a Family 
Services Counselor, and Recreation Counselors.
    The RHA's major role has been to function as a facilitator to bring 
together the various agencies to develop a comprehensive drug 
elimination program. PHDEP provides $250,000. Additional local 
resources from the City and the Police Department valued over $500,000 
have been committed to support the goals of the program.

Preserve Our Neighborhoods
Housing Authority of the City of Auburn, Auburn, Alabama
    The Auburn Housing Authority developed ``Preserve Our 
Neighborhoods'' in response to the illegal drug activities that had 
been taking place in the city's public housing communities in recent 
years. The program is based on the principles of enforcement and legal 
actions against those involved in the illegal drug trade and was 
created through cooperative efforts between the housing authority, the 
City of Auburn, the Auburn Police Department, and the Auburn Housing 
Authority Tenant Council. Two activities that have proven extremely 
successful are the Police Foot Patrols and ``No Trespassing'' letters. 
There has been a 42 percent decrease in drug-related activity since the 
program began 24 months ago. The City of Auburn pays for approximately 
one-third of this program.

Nueva Maravilla Drug Elimination Program
Housing Authority of the City of Los Angeles, Los Angeles, California
    Residents living in Nueva Maravilla Housing Development located in 
East Los Angeles were exposed routinely to drug dealing, gang violence, 
and related criminal activity. The Housing Authority of the City of Los 
Angeles put into effect a comprehensive Drug Elimination Program funded 
by HUD to address these problems. The major components of this program 
are the employment of narcotics and gang investigators, a multiagency 
Anti-Drug Task Force, prevention and intervention programs, a family 
development program, and physical site security. Surveys performed at 
the inception of the program and a year later indicate that it has 
reduced the number of crimes, eased residents' fears, and improved the 
overall quality of life in the community. Funding was provided by PHDEP 
and was matched with funds from the housing authority.

Economic Self-Sufficiency
Housing Authority of the City of Meriden, Meriden, Connecticut
    The Drug Elimination Program combats drugs and crime and provides 
Meriden Housing Authority's (MHA) residents with the tools necessary to 
promote personal betterment and achieve self-sufficiency. While 
continuing to battle crime, MHA's program has focused on Welfare-to-
Work activities for adults. The housing authority's efforts revolve 
around facilitating community collaboration in the program to the 
greatest extent possible. A variety of funding sources were sought out 
and combined with community volunteers to increase and improve the 
scope of resident services. The program seeks to increase resident 
employability through computer-based training and job-placement 
assistance. Community agencies continue to support and strengthen MHA's 
efforts to achieve its goals.

Combating Fear and Hopelessness
Meriden Housing Authority, Meriden, Connecticut
    The Meriden Housing Authority's Drug Elimination Program also was 
created to answer a need of public housing residents to feel safe in 
their own homes. Drug dealing, gang activity, and shootings had 
produced a sense of fear and hopelessness among people living in 
Meriden's public housing developments. Foot patrols, educational and 
recreational programs, parent tutoring programs, and a resource center 
have addressed the feeling of despair that had plagued the community. 
In place of these feelings are those of hope and increased opportunity. 
Over 25 arrests have taken place and public housing residents have 
stated that they perceive a reduction in crime.

Neighborhood Assistance Office
Springfield Metropolitan Housing Authority, Springfield, Ohio
    The drug problem at the Springfield Metropolitan Housing Authority 
had gotten out of control. The housing authority used capital 
improvement funding to hire off-duty Springfield city police officers 
to assist in the eradication of crime from the area. Later, PHDEP 
grants gave the SMHA the opportunity to open the Neigh-
borhood Assistance Office to provide additional support to the 
residents in the 
Springfield Metropolitan Housing Authority's successful battle to 
remedy the drug problem.

Accelerating Public Housing Drug Eradication
Paducah Housing Authority, Paducah, Kentucky
    To control the influx of crack into the community, the Paducah 
Police Department and the Paducah Housing Authority accelerated its 
Public Housing Drug Eradication Program by focusing on taking marketing 
space away from drug dealers and their customers. In the spirit of 
community-oriented policing, this new approach goes beyond the criminal 
and involves direct contact with the public housing 
community. The creation of the Thomas Jefferson Police Substation 
within the 
public housing community has resulted in an increase in drug arrests 
and a de-
crease in drug-related activity. Funding came from PHDEP and the 
Paducah Police Department.

Community Policing Reduces Drug-Related Activity
Housing Authority of the County of Salt Lake, Salt Lake City, Utah
    The Housing Authority of the County of Salt Lake (HACSL) sponsors 
its Community Policing Program under the drug elimination program for 
nine public housing neighborhoods. Salt Lake County Sheriff 's 
Department works closely with public housing and resident services 
staff to employ community police deputies. The deputies provide 
surveillance, conduct investigations, attend tenant meetings, meet 
monthly with staff from the program and HACSL housing managers, provide 
police reports about criminal activity, and keep program staff posted 
about new problems. The Community Policing Program has resulted in a 
reduction in drug activity, gang problems, vandalism, and graffiti. 
These programs demonstrate that PHDEP is making a difference in many 
communities
                               ----------
                 PREPARED STATEMENT OF F. BARTON HARVEY
              Chairman and CEO, The Enterprise Foundation
                           November 29, 2001
Introduction and Overview
    Thank you, Chairman Sarbanes, for this opportunity to share with 
you The Enterprise Foundation's views on the Administration's fiscal 
year 2003 budget request for the Department of Housing and Urban 
Development (HUD).
    The Enterprise Foundation is a national nonprofit organization 
founded in 1982 by Jim and Patty Rouse that mobilizes private capital 
to support community-based organizations and a wide range of their 
neighborhood revitalization initiatives. We have raised and invested 
more than $3.5 billion to produce more than 120,000 affordable homes. 
Our community partners have used these resources to leverage an 
additional $7.5 billion in investment in their neighborhoods. 
Enterprise's network of local partners includes 1,900 community and 
faith-based groups, public housing authorities, and Native American 
Tribes in more than 700 locations.
    Mr. Chairman, we commend you for calling this hearing. It is 
typical of your longstanding leadership that you would focus the 
Committee's attention on a vital issue others often overlook: the 
important role the Federal Government, primarily through HUD, must play 
in helping meet our Nation's housing needs. We hope today's hearing 
initiates a bipartisan effort to forge consensus on steps Congress and 
the Administration can take to assure housing needs do not worsen 
during this time of great uncertainty in the country and the world.
    We also deeply appreciate your and Senator Reed, Senator Kerry, and 
Senator Leahy's efforts to include housing assistance in the Senate's 
economic stimulus legislation. Housing help--especially the $3 billion 
for the HOME program you have proposed--absolutely should be part of 
any economic stimulus plan. Housing generates jobs and other economic 
activity and provides assistance to people who need it most during an 
economic downturn.
    Mr. Chairman, this country faces an affordable housing crisis. Even 
before September 11, housing needs were far outstripping the capacity 
of States and localities to meet them. The most current data show 
nearly 14 million families with critical housing needs, another two 
million who will experience homelessness this year and a loss over the 
past decade of more than one million apartments affordable to 
``extremely low-income'' renters (those earning 30 percent or less of 
area median income). These figures reflect conditions before the 
terrorist attacks, during a time when the economy was growing. Now that 
those terrible events have pushed the economy into what could be a 
prolonged recession, housing needs likely will worsen further.
    We commend Congress for increasing funding for many HUD programs in 
the fiscal year 2002 HUD appropriation above the levels the 
Administration proposed in its budget request. Your colleague from 
Maryland, Senator Mikulski, along with Senator Bond, was instrumental 
in that effort. Regrettably, HUD's budget for the current fiscal year 
still results in slightly less net new housing assistance than in 
fiscal year 2001. With the economy worsening, States, cities, and 
communities likely will fall further behind in their efforts to meet 
their most vulnerable citizens' housing needs.
    Congress and the Administration cannot allow this to continue in 
the fiscal year 2003 appropriations process. We urge HUD to request 
more adequate funding and Congress to assure that the Federal 
Government does its part to help meet our Nation's housing needs next 
year. We would make the following three broad recommendations to the 
Administration in developing its fiscal year 2003 HUD budget 
priorities:

 Increase housing production, especially for extremely low-
    income households;
 Expand the capacity of community-based groups to deliver 
    housing help; and
 Encourage and empower the private sector to do more to help 
    meet housing needs.
Increase Housing Production, Especially for
Extremely Low-Income Households
    Without a substantial increase in Federal investment in housing 
production, this Nation will never solve its affordable housing crisis. 
The Federal Government 
has largely withdrawn from housing production over the past 20 years. 
HUD's 
budget in real terms is less than half of what it was in 1980 and only 
about one-quarter of the Department's shrunken funding today goes to 
new production and 
rehabilitation.
    Is it any surprise that the Nation now faces a growing deficit of 
affordable homes for its poorest citizens? The 1999 American Housing 
Survey reveals an absolute shortage of 2.8 million rental apartments 
affordable to extremely low-income people.\1\ And the problem is 
worsening rapidly. The number of apartments affordable to extremely 
low-income renters dropped by 750,000 nationwide between 1997 and 1999 
alone, according to HUD.\2\
---------------------------------------------------------------------------
    \1\ Dolbeare in The 2001 Advocates' Guide to Housing and Community 
Development Policy, National Low-Income Housing Coalition, 2001, p. 11.
    \2\ Nelson, ``What do we know about shortages of affordable rental 
housing,'' Testimony before the House Committee on Financial Services 
Subcommittee on Housing and Community Opportunity, May 3, 2001, p.2.
---------------------------------------------------------------------------
    A simple and effective way Congress could increase affordable 
housing production would be to increase the annual HOME appropriation. 
A decade's worth of evidence certainly argues for it. HOME has financed 
more than 617,000 affordable homes and currently produces more than 
70,000 homes a year. Of HOME-assisted renters, nearly 90 percent are 
very low-income and 56 percent are extremely low-income. More than half 
of all HOME-assisted homebuyers earn 60 percent or less of area median 
income. Every HOME dollar generates an additional $3.93 in public and 
private investment in housing.\3\
---------------------------------------------------------------------------
    \3\ ``HOME Program Data as of 10/31/01,'' HUD Web site.
---------------------------------------------------------------------------
    HOME is an especially important tool for community-based groups, 
which have received almost half of all HOME funds, according to The 
Urban Institute.\4\ HOME dollars often provide critical resources to 
housing developments financed with the Low-Income Housing Tax Credit 
(Housing Credit), which is vital to neighborhood organizations, because 
they typically do the most difficult developments requiring the deepest 
subsidy to serve the neediest families. HOME also provides crucial 
technical assistance and operating support to community-based groups to 
help them become stronger organizations.
---------------------------------------------------------------------------
    \4\ The Urban Institute, Expanding the Nation's Supply of 
Affordable Housing: An Evaluation of the HOME Investment Partnership 
Program, U.S. Department of Housing and Urban Development, Washington, 
DC, 1999, p. 31.
---------------------------------------------------------------------------
    HOME works because it is flexible and allows States, cities and 
communities to solve whatever housing needs they--not the Federal 
Government--determine are most important: homeownership or rental; new 
construction, rehabilitation, or preservation; elderly, disabled, 
homeless, or working family.
    HOME received roughly $1.8 billion in formula funding for fiscal 
year 2002, the same as fiscal year 2001, plus an additional $50 million 
for a new downpayment assistance program. We encourage HUD to request 
and Congress to provide $2.9 billion in HOME funding for fiscal year 
2003. This amount would roughly equal an inflation adjustment to HOME's 
initial 1993 authorization level of $2 billion.
    In addition to a HOME increase, we, like many affordable housing 
advocates and growing numbers of Members of Congress, support a new 
production program targeted to extremely low-income people. A 
substantial HOME increase would help significantly address affordable 
housing needs of families with incomes between 30 percent and 80 
percent of area median income. It also would partially alleviate, but 
not solve, the far more severe housing crisis facing those earning less 
than 30 percent of area median income. To achieve that objective 
completely, a new program is needed.
    Extremely low-income people face by far the most acute affordable 
housing needs. In 1999, for every 100 extremely low-income renters 
there were available only 39 affordable apartments nationwide.\5\ And, 
as noted earlier, that inadequate supply of housing is shrinking fast.
---------------------------------------------------------------------------
    \5\ Nelson, ibid., p.3.
---------------------------------------------------------------------------
    Fortunately, HOME has shown us what a successful program should 
look like. It should be flexible, allowing for virtually any type of 
housing development, with an emphasis on rental production, including 
rehabilitation. It should be administered by States and cities, 
pursuant to public input. It should leverage additional public and 
private investment. It should provide a strong role for community-based 
groups. Beyond those broad, largely noncontroversial principles, we 
offer the following more detailed suggestions for structuring a new 
production program.
    Any new program should serve low-income people exclusively, with 
the large majority of resources dedicated to extremely low-income 
people. We recommend that any new program target 75 percent of its 
funds to extremely low-income households. Of that amount, 30 percent of 
funds should be targeted to households earning the equivalent of the 
minimum wage or less. The remaining 25 percent of funds should be 
targeted to households earning up to 80 percent of area median income, 
provided that they live in low-income communities. This targeting would 
assure that the vast majority of resources benefit those that most need 
housing help, while allowing (and facilitating) some level of mixed-
income development in high-poverty neighborhoods that would benefit 
from it.
    Also, any new program should work in combination with existing, 
effective resources, especially the Housing Credit. The only way to 
serve extremely poor people with a capital subsidy is to combine 
resources from several programs. It is particularly important that any 
new program work with the Housing Credit, which can cover up to 70 
percent of construction costs. The Housing Credit generally penalizes 
developments that receive Federal grants, with exceptions for HOME and 
the Community Development Block Grant. One way to assure that a new 
program would work with Housing Credits could be to allow, but not 
require, jurisdictions that receive the new resources to run them, or 
some portion of them, through their HOME program accounts. This could 
be accomplished without altering either the HOME statute or the deeper 
targeting and any longer affordability requirement of a new program.\6\
---------------------------------------------------------------------------
    \6\ We understand that many jurisdictions impose much longer 
affordability requirements on HOME-assisted housing than required by 
law. We recommend that any new program contain an affordability 
requirement that lasts for the duration of the property's useful life.
---------------------------------------------------------------------------
    Finally, any new program should set a minimum rent contribution 
affordable to extremely low-income people to allow developers, lenders, 
and investors to underwrite developments that serve them. Simply 
pegging tenant rents to a percentage of their income, which varies by 
family, prevents sound financial underwriting. We recommend that any 
new program set a minimum tenant contribution to rent for the extremely 
low-income apartments of either the greater of 30 percent of the 
tenant's income or a standard amount affordable to a tenant whose 
income is 15 percent of the area median income (State median income for 
apartments in nonmetropolitan areas).
    Another important production program for low-income people is the 
HOPE VI public housing revitalization program. HOPE VI also stands out 
as one of the most effective Federal initiatives ever to facilitate 
mixed-income affordable housing and stable neighborhoods. HOPE VI 
represented a bold admission by Congress that past public housing 
policy regarding high-rise concentration of the very poor had failed 
and a radically new approach was needed. The program--and the 
localities, developers, and residents that have worked together to 
implement it--have delivered. HOPE VI has helped transform dozens of 
the most distressed neighborhoods in America by building community 
services and resident support systems along with new homes. HOPE VI 
received $574 million for fiscal year 2002, the same amount as fiscal 
year 2001. We encourage HUD to request and Congress to provide this 
level of funding in fiscal year 2003.
    Authorization for HOPE VI expires next year. The work of public 
housing revitalization is far from over, however. Many high-rise and 
mid-rise public housing developments, while not ``severely 
distressed,'' are physically obsolete or are fast approaching that 
point. Many are still home to high concentrations of extremely poor 
people. We look forward to working with the Committee and HUD to create 
a new, successor program to HOPE VI to address these housing needs and 
turn more dysfunctional, detrimental environments into healthy 
communities. The new program should incorporate the core principles 
that have characterized HOPE VI's success: mixed-income housing; ``new 
urbanist'' planning and design elements; provision for infrastructure, 
community facilities, and supportive services; and financial 
leveraging.

Expand the Capacity of Community-Based Groups to
Deliver Housing Help
    One of the best ways to assure that Federal housing funds assist 
the neediest households and most distressed communities is to build the 
organizational strength of community and faith-based groups dedicated 
to helping them. Congress can do that through an existing, proven 
initiative called ``Section 4 Capacity Building for Community 
Development and Affordable Housing.''
    ``Capacity building'' is abstract jargon, but it means the very 
life of an organization. Capacity building funds help community-based 
groups hire and retain staff, upgrade computer systems, develop 
business plans, and form new partnerships. There are no ground 
breakings or ribbon cuttings for capacity building, but without it, 
neighborhood groups could not achieve the bricks and mortar 
transformation of their communities. This kind of support is especially 
vital for smaller organizations with less experience in community 
development. And it is a wise investment for the Federal Government, 
because it ensures that organizations that use Federal resources can do 
so efficiently and effectively.
    Congress enacted Section 4 in 1993 to allow HUD to participate in a 
private sector-led collaborative called the National Community 
Development Initiative (NCDI). The NCDI had been formed 2 years earlier 
by a group of national foundations, financial institutions, Enterprise 
and the Local Initiatives Support Corporation (LISC), another leading 
national community development organization.\7\ The purpose of the NCDI 
was to strengthen community groups, attract additional resources to 
expand their work and build continuing local support for community-
based revitalization. Under the initiative, the funders channel 
resources through Enterprise and LISC to community-based groups in 23 
cities.\8\ (In 1997, Congress began appropriating capacity building 
funds through HUD to other intermediaries, such as Habitat for Humanity 
International and YouthBuild, for use outside NCDI cities, including 
rural and tribal areas.)
---------------------------------------------------------------------------
    \7\ The participants in the NCDI are The Annie E. Casey Foundation, 
Bank of America, Deutsche Bank, The Robert Wood Johnson Foundation, 
W.K. Kellogg Foundation, John S. and James L. Knight Foundation, John 
D. and Catherine T. MacArthur Foundation, The McKnight Foundation, 
Metropolitan Life Insurance Company, J.P. Morgan Chase & Co., Pew 
Charitable Trusts, The Prudential Insurance Company of America, The 
Rockefeller Foundation and Surdna Foundation.
    \8\ The cities are Atlanta, Baltimore, Boston, Chicago, Cleveland, 
Columbus, Dallas, Denver, Detroit, Indianapolis, Kansas City (MO), Los 
Angeles, Miami, Newark, New York, Philadelphia, Phoenix, Portland (OR), 
San Antonio, San Francisco Bay Area, Seattle, St. Paul, and Washington 
(DC).
---------------------------------------------------------------------------
    The NCDI's overwhelming, documented success shows that capacity 
building is a high yielding investment in which limited Federal 
resources leverage substantial private capital for a significant 
community development impact. According to an independent analysis by 
The Urban Institute, community group strength, production and local 
support systems have grown significantly thanks to NCDI investment. As 
a result of the NCDI, The Urban Institute concluded that community-
based groups ``in many cities are now the most productive developers of 
affordable housing, outstripping private developers and public housing 
agencies.'' \9\
---------------------------------------------------------------------------
    \9\ Walker and Weinheirner, Community Development in the 1990's, 
The Urban Institute, Washington, DC, 1998, p. 1.
---------------------------------------------------------------------------
    After a decade, we have learned a few lessons about why Federal 
support for nonprofit capacity building is so essential and why it 
represents a wise investment of very limited Federal dollars:
    First, Federal participation is limited but indispensable. Overall 
private funding in the NCDI increased dramatically in subsequent 
funding rounds after HUD joined in 1993. In addition, most HUD funds 
committed through the NCDI have been in the form of grants, on which 
neighborhood groups especially depend to build their organizational 
strength. (Private NCDI funds more often are deployed as loans.) 
Furthermore, according to The Urban Institute ``The single best 
predictor of the number of capable [community-based groups] in a city 
is the amount of Federal funding channeled by that city government to 
neighborhood revitalization.'' \10\
---------------------------------------------------------------------------
    \10\ Ibid., p. 9.
---------------------------------------------------------------------------
    Second, Federal participation leverages substantial additional 
private investment. Recipients of Federal capacity building funds are 
required to match every dollar they receive with three additional 
dollars of private or public funds. In practice, they leverage even 
more than that. Private funds account for 85 percent of the roughly 
$250 million committed through the NCDI through this year, a leverage 
ratio of more than 4-to-1. That $250 million has leveraged more than $2 
billion in total community revitalization investment from more than 250 
State and local partners.
    Finally, Federal participation does not limit local innovation. 
Almost as important as the scope of HUD's participation in the NCDI has 
been the nature of it. As The Urban Institute noted, ``EIM's 
participation in NCDI was a significant move for the Federal Government 
because HUD pledged to act as an equal to the other funders--not 
imposing its own criteria for selecting cities or [community groups], 
but instead tailoring its regulatory requirements where possible.'' 
\11\
---------------------------------------------------------------------------
    \11\ Ibid., fn., p. x.
---------------------------------------------------------------------------
    Congress appropriated $25 million in capacity building funds to 
Enterprise and LISC to split equally in fiscal year 2002. (Additional 
capacity building funds were appropriated to Habitat for Humanity 
International and YouthBuild.) Enterprise and LISC receive far more 
requests for capacity building assistance than they can meet each year. 
We urge HUD to request and Congress to provide $30 million in nonprofit 
capacity building funds to Enterprise and LISC for fiscal year 2003.

Encourage and Empower the Private Sector to Do More to
Help Meet Housing Needs
    While we believe the Federal Government must do much more to help 
meet the Nation's housing needs, the private sector has a significant 
role to play as well. Programs like the Housing Credit have shown that 
limited, targeted Federal incentives can generate large private 
investment in affordable housing that contributes substantially to 
community revitalization. We recommend that the Administration and 
Congress continue to encourage similar public-private partnerships.
    One such example is the Community Development Financial 
Institutions (CDFI) Fund. While administered by the Treasury 
Department, the Fund's budget is funded in the VA, HUD, and Independent 
Agencies appropriation. The Fund stimulates the creation and nurtures 
the growth of community-based financial institutions working to 
revitalize distressed and underserved communities. The Fund has made 
more than $430 million in awards to support a wide range of financial 
institutions, including community development banks, credit unions, 
loan funds, venture capital funds, and microenterprise loan funds. The 
Fund provides direct assistance to such institutions, as well as 
incentives for larger banks to invest in them.
    Recipients of funding must match every dollar of Federal assistance 
with at least a dollar from other sources. In practice they leverage 
Federal funding much further. According to a recent Treasury Department 
survey, 106 recipients of CDFI Core Component funding that received a 
total of $114 million from 1996-1998 made $3.5 billion in community 
development loans and equity investments during that period. In other 
words, these institutions leveraged every dollar of Federal assistance 
with an additional $31.\12\
---------------------------------------------------------------------------
    \12\ CDFI Fund, CDFI Fund Quarterly, Spring 2001, Volume 4 Number 
2.
---------------------------------------------------------------------------
    While some CDFI's are engaged in nonhousing activities, such as 
small business and community facilities development, many focus heavily 
on housing. In 1999, entities that received CDFI Fund Core Component 
awards financed nearly 25,000 homes and apartments, virtually all of 
which were affordable to low-income people. Nearly 60 percent of fund-
certified CDFI's serve smaller urban areas and 62 percent serve rural 
communities.\13\
---------------------------------------------------------------------------
    \13\ Ibid.
---------------------------------------------------------------------------
    Regrettably, the fiscal year 2002 HUD appropriation cut the CDFI 
Fund by almost one-third, from $118 million in fiscal year 2001 to $80 
million. We deeply appreciate Congress' efforts to increase funding 
above the Administration's request--which would have cut the fund by 
more than 40 percent--especially the Senate, which provided $100 
million for the fund in its version of the appropriations bill. We 
cannot understand why the Administration would propose such a sharp cut 
to a program with a proven track record that leverages an extraordinary 
amount of additional investment to meet pressing national needs. We 
urge the Administration to request restored funding for the CDFI Fund 
to the fiscal year 2001 level of $118 million and for Congress to 
provide that amount in fiscal year 2003.
    Another excellent proposal for increasing private investment in 
affordable housing is the homeownership tax credit the Administration 
included in its fiscal year 2002 budget request. While HUD would have 
no direct role in the credit, the Administration last year included a 
description of it in its HUD budget request. And while the Banking 
Committee would not have jurisdiction over the credit, we believe it is 
important that the Committee, and its many Members dedicated to 
affordable housing, understands and supports this promising proposal.
    Most Federal low-income housing assistance is for rental housing 
help. Far fewer resources are available to help produce homeownership 
housing for low-income families. Homeownership rates for minorities, 
families earning less than their area's median income and central city 
residents are well below the rate for the Nation as a whole. The main 
reason for the lack of affordable homeownership development in many 
distressed neighborhoods is that it costs more to build or 
substantially rehabilitate homes than homes can sell for in such areas. 
Thus, a resource is needed to bridge the difference between the 
construction cost and market value of homes in low-income communities. 
A homeownership production tax credit would fill a glaring gap in the 
housing finance system, increase affordable homeownership opportunity 
for low-income people, encourage mixed-income development and community 
revitalization and help combat sprawl.
    The Administration's proposal wisely incorporates many aspects of 
the housing credit that have made it such an effective rental housing 
production program. We support the Administration's core proposal: 50 
percent present value tax credit claimed over 5 years; allocated by the 
States under a competitive process based on annually determined housing 
needs; in an amount equal to $1.75 per capita, with a small State 
minimum, both of which would be indexed to inflation; targeted to 
families earning 80 percent or less of area median income; available in 
census tracts with median incomes of 80 percent or less of area median 
income; awarded to developers to fill the gap between construction 
costs and market value; limited to 50 percent of development costs; 
buyer subject to recapture of a portion of any resale gain if the home 
is sold to a nonqualified buyer within 3 years of original purchase.
    In addition, we recommend the following modifications to the 
Administration's proposal: the credit also should be available in rural 
areas, as defined by Section 520 of the 1949 Housing Act, and on Indian 
reservations; States should be able to serve buyers earning up to 100 
percent of area median income in ``Qualified Census Tracts'' as defined 
under the housing credit statute (census tracts where more than half 
the families have 60 percent or less of area median income or where 
development costs are disproportionately high); and nonprofit 
developers should receive a minimum of 10 percent of each State's 
annual allocation of credits. We urge the Administration to include the 
proposal in the fiscal year 2003 budget request and for Congress to 
enact it next year.

Federal Housing Policies and Priorities Beyond Fiscal Year 2003
    While our testimony deals with HUD's budget request for fiscal year 
2003, we want to conclude with a few words about the future of Federal 
housing support beyond next year. As a member of the Millennial Housing 
Commission, I have spent much time recently discussing with leaders 
from throughout the housing industry numerous ideas for improving the 
affordable housing finance and delivery sys-
tem. Three ideas in particular have resonated with me. I hope they are 
helpful to 
HUD and the Committee in thinking about the ``big picture'' aspects of 
Federal 
housing policy, which while part of the annual HUD appropriations 
process, also transcend it.
    First, housing programs and policies are too often isolated from 
broader goals of enhancing economic opportunity for families and 
strengthening communities. Viewing housing through such a narrow lens 
has led to myopic policies that disregard the interconnections between 
housing and other human and community needs. Housing is the foundation 
of most families' savings and many neighborhoods' stability. In making 
housing policy, Congress and HUD should consider how housing assistance 
fits into a larger family and community context.
    Second, and very much related to the first point, housing programs 
must be more flexible. States and localities must be given greater 
authority to combine housing resources with one another and with other 
programs that serve the same constituencies and communities, such as 
welfare, workforce development, child care, and transportation 
programs. We encourage Congress and HUD to explore ways to enable more 
efficient combination of Federal resources, especially when and where 
they target very low-income people and/or extremely distressed 
neighborhoods as part of comprehensive community revitalization 
strategies.
    Third, we implore Congress and HUD to develop policies and devote 
resources to preserving the existing affordable housing stock. The 
Federal Government has made a huge investment in the current inventory. 
Most of it provides decent, affordable housing for low-income people. 
But we are losing more and more of this precious resource every year to 
deterioration and conversion to market rate use. More than 1 million 
low-cost rental apartments were lost during the 1990's. Up to 4 million 
more affordable apartments (including 1 million Federally assisted 
apartments) are at risk over the next decade.\14\ Congress and HUD must 
address preservation before it is too late. We would look forward to 
working with both in that effort.
---------------------------------------------------------------------------
    \14\ John D. and Catherine T. MacArthur Foundation, Capacity and 
Capital for Housing Preservation, June 2001, p.3.
---------------------------------------------------------------------------
Conclusion
    Mr. Chairman, now more than ever, our Nation must be strong and 
united. We believe that sources of that strength and unity include 
family, faith, community--and a place called home. Now more than ever, 
home matters. Home is a family's foundation and an anchor in times of 
turbulence. Home means security and stability. Home helps define and 
sustain communities, forming the fabric of our neighborhoods and the 
relationships that bind us.
    Now more than ever, a decent, safe, and affordable home is out of 
reach for too many working Americans. More than 15 million low-income 
families pay too much in rent, live in rundown housing or are homeless. 
The supply of affordable apartments is rapidly shrinking nationwide. 
The slowing economy, along with the recent and substantial loss of jobs 
in the United States, will put the prospect of an affordable home out 
of reach for even more low-income Americans. This will strain the 
fabric of many communities.
    The Federal Government, working with States and localities, the 
private sector and community-based organizations, has a responsibility 
to help meet the Nation's most dire housing needs. We sincerely hope 
that the Administration's fiscal year 2003 HUD budget request will 
provide the tools necessary to meet this responsibility. Thank you for 
this opportunity to testify.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM RAYMOND 
                           A. SKINNER

Q.1. You point out in your written testimony, the low-income 
housing tax credit is an extremely popular program that has 
proven to be highly effective in attracting private investment 
to the construction of affordable housing. Last year, we 
increased the amount of tax credits each State could use. 
However, to be effective, particularly in serving those most in 
need, the tax credit must be supplemented by other funds. 
Discuss for the Committee the importance of HOME and CDBG in 
the context of the tax credit.

A.1. In the past two calendar years, the Maryland Department of 
Housing and Community Development (DHCD) has funded a total of 
74 rental housing projects. Forty-three of these projects 
received Federal Low-Income Housing Tax Credits, and 23 
utilized tax-exempt bond financing. Fully 25 percent of all 
projects funded by DHCD relied on some HOME funding, either 
from the State's allocation or from funds provided by local 
HOME entitlement jurisdictions. The percentage of projects with 
HOME funding was higher for tax credit projects, with over 45 
percent of the tax credit projects receiving HOME funds. 
Without this important resource, DHCD would have been unable to 
assist 19 tax credit properties, which would have resulted in 
the loss of 1,619 affordable rental units.
    HOME funds are vitally important for reaching the lowest 
income families. Maryland's experience shows that housing 
receiving subsidies only from IRS resources--tax credits and 
bonds--have difficulty in providing rents affordable to 
families earning less than 60 percent of median income, much 
less in making rents affordable to extremely low- and very low-
income families. Most recently financed projects depend on soft 
debt either from HOME or our State-funded programs to achieve 
rents affordable to households earning 40 to 50 percent of 
median income.
    CDBG funds are far less likely to be tied with tax credit 
projects. There are a number of reasons for this. First, the 
CDBG program discourages the use of its funds for most new 
construction of housing, and rehabilitation loans are primarily 
focused toward owner-occupied dwellings. Second, unlike HOME, 
CDBG grants are awarded to units of local government, which are 
generally not housing developers. Finally, the schedules, 
activity, and allocation requirements are so different between 
the CDBG program and the tax credit program that we have found 
a local government would have to receive funds several years in 
advance of when the funds would actually be needed by a 
developer.

Q.2. In addition, what importance does the Community 
Reinvestment Act (CRA) plan in your efforts to build affordable 
housing?

A.2. The impact of the CRA on total investment in affordable 
housing is difficult to track. This is because while private 
lenders are important partners in the provision of affordable 
housing, it is impossible to trace that motivation specifically 
back to the CRA. However, a large number of commercial lenders 
have participated in the projects we have funded, either as 
direct lenders or indirectly through syndication of the tax 
credits.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM DAVID W. 
                             CURTIS

Q.1. What is the impact of the premium increase in FHA 
multifamily programs and the cost of development and on 
potential tenants of the affordable housing being constructed 
under these FHA programs?

A.1. The premium increase will result in higher development 
costs, because the higher premiums are paid during the 
construction period as well as over the life of the loan. This 
means a jump in the up-front development costs, as well as 
higher debt service. In some cases, builders will not go 
forward with projects because higher rents cannot be charged in 
their markets and/or they cannot absorb these costs.
    As far as the impact on tenants, industry experts estimate 
that raising the mortgage insurance premium from 50 basis 
points to 80 basis points could raise rents by 3 to 4 percent. 
In an example from the Richmond, Virginia, area provided by a 
large 221(d)(4) lender, the impact of a 4 percent increase 
would be as follows:


    The impact of a 4 percent increase would be significant, 
ranging from $326 to over $500 annually. To maintain spending 
30 percent of income on rent, incomes for these residents would 
need to increase by almost $1,100 annually for the smallest 
one-bedroom unit to nearly $1,700 for the three-bedroom unit.
    It should also be noted that currently interest rates are 
fairly low. Should interest rates fluctuate upward, the impact 
on affordability would be even more onerous.

Q.2. How important is project-based assistance in developing 
and financing housing that serves very low-income people?

A.2. Two recent reports, one by the Center for Housing Policy, 
``Paycheck to Paycheck: Working Families and the Cost of 
Housing in America,'' and the Joint Center for Housing Studies 
of Harvard University's, The State of the Nation's Housing 
Annual Report 2001 have extensively documented the growing 
problem of housing affordability for low- and moderate-income 
households. The Joint Center's report states that, at the end 
of the last decade, over 14 million owner and renter households 
spent more than half their incomes on housing.
    The Joint Center report also discusses the imbalance 
between the supply of affordable units and the growing demand 
for such housing. According to the report, the multifamily 
sector was hard hit by losses in both small (under 4 units) and 
larger (5 or more units) apartments in the 1990's. Overall, new 
construction in the multifamily sector added over 1.6 million 
units in the 1990's, but 1.25 million were removed from the 
market during that time. The report states that ``. . . net 
losses of the smallest multifamily buildings and only minimal 
additions of larger multifamily buildings are worrisome because 
of their critical importance in meeting low- and moderate-
income housing demand.''
    The ``State of the Nation's Housing'' report also points 
out that the limited production of units affordable to 
moderate-income households is troubling and likely to cause the 
critical housing needs problem to spread further to moderate-
income families.
    It is well documented that many areas of the country have 
poor tenant-based housing voucher utilization rates, in large 
part due to the lack of affordable units in the market where 
vouchers can be used. We believe that project-based rental 
assistance is of critical importance in increasing the stock of 
housing affordable to low- and moderate-income households. In 
addition, project-based assistance is a critical ingredient in 
the success of efforts to preserve affordable housing through 
such programs as Mark-to-Market.
    Project-based rental assistance aids efforts to expand the 
stock by making a significant difference when underwriting a 
new multifamily development or securing funds for a major 
rehabilitation. The guarantee of Federal funding for a portion 
of the rental income reduces the risk to the lender providing 
the loan. Tenant-based vouchers, because they move with the 
tenant, do not provide this impetus to financing and 
production.
    Also of importance to note is that many affordable housing 
developments with project-based assistance provide social and 
community services to residents with special needs, such as 
senior citizens and people with disabilities. The Federal 
Government provides funding for many of these services, in 
partnership with owners and service providers, which are 
provided on-site because residents may not be able to access 
them elsewhere. Households in need of such services and who 
have tenant-based assistance cannot be assured that they will 
be able to access these important services. Also, even if such 
services were available in other properties, residents with 
special needs may not have the mobility to relocate and use a 
tenant-based voucher.

  RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES FROM F. 
                         BARTON HARVEY

Q.1. Professor Olsen's testimony says that the primary 
beneficiaries of neighborhood revitalization are owners of 
surrounding properties and that production programs will simply 
``shift the location of the worst neighborhoods.'' As CEO and 
Chairman of one of the premier organizations working to better 
communities around the country, do you see evidence to support 
Mr. Olsen's statement, or does your experience lead you to a 
different conclusion about the effects of producing new housing 
in neighborhoods undergoing revitalization?

A.1. Thank you for the opportunity to address this important 
question. Housing production programs have been proven to 
contribute to community revitalization.\1\ Even Professor Olsen 
in his written testimony acknowledges: ``It is plausible to 
believe that a new subsidized project built at low density in a 
neighborhood with the worst housing and the poorest families 
would make that neigh-
borhood a more attractive place to live for some years after 
its 
construction.''
---------------------------------------------------------------------------
    \1\ See, for example, Hevesi, Dennis, ``Programs That Promote 
Homeownership Help Neighborhoods as Well, a Study Finds,'' New York 
Times, Monday, July 30, 2001, A17 and Higgins, Lindsey R., ``Measuring 
the Economic Impact of Community-Based Homeownership Programs on 
Neighborhood Revitalization,'' The Local Initiatives Support 
Corporation's Center for Homeownership and George Mason University, 
April 2001.
---------------------------------------------------------------------------
    Neighborhoods with the worst housing and the poorest 
families are where Enterprise and our community-based partners 
work and where we believe the Federal Government must focus 
much more resources. Sometimes, housing rehabilitation and new 
construction in such areas boosts the values of surrounding 
properties. More often than not, that is a good thing for the 
entire community and all its residents. Increased property 
values are a tangible sign that a neighborhood is coming back, 
which attracts additional residential and new economic 
development investment in the area.
    But let us not be mistaken about who benefits most from 
affordable housing production in distressed neighborhoods: 
human beings. Low-income families and individuals who 
previously were forced to live in run down, unsafe housing, for 
which they may well have been charged a disproportionate share 
of their income for rent, often in dysfunctional, dangerous 
neighborhoods, are the primary beneficiaries of a decent, 
affordable place to live.
    Gentrification is a concern in some communities that 
otherwise have benefited from revitalization efforts. But there 
are ways to mitigate its negative effects, all of which are 
referenced in our written testimony, including: increased 
investment in affordable production programs, which guarantee 
long-term affordability to low-income people; initiatives to 
preserve the existing affordable housing stock; and strong 
community-based organizations looking out for low-income 
residents' interests.

                         STATEMENT SUBMITTED BY
                       U.S. CONFERENCE OF MAYORS
                    NATIONAL ASSOCIATION OF COUNTIES
               NATIONAL ASSOCIATION FOR COUNTY COMMUNITY
                          ECONOMIC DEVELOPMENT
         NATIONAL ASSOCIATION OF LOCAL HOUSING FINANCE AGENCIES
               NATIONAL COMMUNITY DEVELOPMENT ASSOCIATION
                           November 29, 2001
    The U.S. Conference of Mayors, National Association of Counties, 
National Association for County Community Economic Development, 
National Association of Local Housing Finance Agencies, and National 
Community Development Association, represent a mixture of elected 
officials and local government agencies which administer HUD's housing 
and community development programs, principally the Community 
Development Block Grant Program and the HOME Investment Partnerships 
Program. We appreciate the opportunity to provide our written views and 
recommendations on HUD's housing and community development needs in 
fiscal year 2003. Our comments will focus primarily on the Community 
Development Block Grant Program and the HOME Investment Partnerships 
Program.

HOME Investment Partnerships Program
    The HOME Investment Partnerships Program (HOME) has been a catalyst 
in spurring new affordable housing development since 1992. Since its 
inception, the program has expanded the supply of decent, safe, 
affordable housing for low- and moderate-income families, strengthened 
public-private partnerships in developing affordable housing, and 
provided funding to communities to assist in meeting their housing 
challenges. The flexibility of the program allows local participating 
jurisdictions to use the program funds in combination with other 
Federal, State, and local funds, and to work with their nonprofit 
partners, to develop affordable housing, both ownership and rental, 
based on locally defined needs.
    According to cumulative HUD data as of October 31, 2001, since HOME 
was created in 1990, it has helped to develop or rehabilitate over 
617,513 affordable homes for low- and very low-income families. 
Targeting is very deep in the HOME program. The majority of HOME funds 
have been committed to housing that will be occupied by very low-income 
people and a substantial amount will assist families with incomes no 
greater than 30 percent of median (extremely low-income). As of the end 
of October 2001, more than 81 percent of home-assisted rental housing 
was benefitting families at or below 50 percent of area median income, 
while 41 percent was helping families with incomes at or below 30 
percent of area median income. In addition, approximately 29 percent of 
the home buyer units assisted with HOME was targeted to families at or 
below 50 percent of area median income.
    HOME funds help low- and very low-income families realize the dream 
of homeownership by providing for construction and rehabilitation of 
housing as well as providing the down payment and/or closing cost 
assistance. Since 1992, HOME funds have been committed to 352,200 
homeowner units (this includes assistance to 229,612 first time home 
buyer units and rehabilitation assistance to 122,578 occupied homeowner 
units).
    HOME is cost effective and provides the gap financing necessary to 
attract private loans and investments to projects. For each HOME 
dollar, $3.93 of private and other funds is currently being leveraged. 
This clearly illustrates the judicious use of HOME funds by local 
governments.
    HOME is a sound program, with an excellent track record in 
developing affordable housing for households at various income levels. 
However, HOME is limited by the amount of funding that is appropriated 
each year. Funding for the program has increased very little since it 
first began in 1992. The amount allocated under the program in 1992 was 
$1.460 billion. The amount appropriated for 2002 was $1.85 billion. Of 
this amount, $87 million was provided to set-asides within the program. 
In addition, the increasing number of new participating jurisdictions 
and consortia will decrease the formula allocation further. Moreover, 
the formula allocation for the program was not increased from fiscal 
year 2001 to fiscal year 2002. This concerns us greatly. In order to 
expand efforts to meet the enormous need for affordable housing in this 
country, adequate resources must be appropriated for programs such as 
HOME. We propose a funding level of $2.25 billion for the basic HOME 
program in fiscal year 2003, along with an additional appropriation of 
$2 billion for a rental production program within HOME, which is 
further described below. We also propose that the set-asides within the 
program be scaled back, or eliminated altogether.
    We were pleased to see that the initial $200 million set-aside 
requested by the President within HOME for a down payment assistance 
program was reduced to $50 million. We are opposed to this set-aside 
and ask that it be eliminated altogether in fiscal year 2003. HOME 
funds may already be used for down payment and/or closing cost 
assistance. In fact, since 1992, $1.06 billion of HOME funds have been 
used to help families buy their first home. There is no need to create 
a separate program for this purpose for it would result in a 
proliferation of set-asides that further dilute the program.
    Besides an increase in the formula allocation of the program, we 
also strongly recommend that technical assistance funding under HOME be 
continued, and increased. We are pleased that HUD continues to receive 
technical assistance funding annually; however, the funding amount is 
diminishing. We have heard from sources at HUD that the amount 
available for HOME technical assistance funding at the national level 
will be severely cut this year, or possibly eliminated altogether. Our 
associations have applied for this funding through HUD's SuperNOFA 
process in past years to directly provide technical assistance to our 
members. We use this funding to provide training workshops, develop 
publications, and provide on-site technical assistance, all targeted to 
helping grantees better administer their HOME funds. We ask that you 
continue to make HOME technical assistance funds available at the 
national level for our associations and others to help their grantees 
better implement the HOME program.

Housing Production
    According to HUD's most recent edition of its Report on Worst Case 
Housing Needs, over five million renter households have severe housing 
needs. These households contain renters with incomes below 50 percent 
of area median income who pay more than half their income for rent or 
live in severely substandard housing. Progress in assisting these 
households is diminished by the substantial shortages of affordable 
housing. Between 1997 and 1999, the number of units with rents 
affordable to households with incomes below 50 percent of area median 
income dropped by 1.1 million, a loss of 7 percent. The report's 
findings on the accelerated reduction in the number of affordable 
rental units show that the private market is not producing enough 
affordable rental housing to meet existing demand. One answer to this 
crisis is to produce more affordable housing using effective Federal 
housing programs such as HOME.
    In the past couple of years, there have been a number of bills 
introduced in Congress to increase housing production, primarily 
targeted to households at or below 30 percent of area median income. 
These proposals have mainly focused on creating a National Housing 
Trust Fund, a new and separate program from existing HUD programs. In 
an effort to avoid a situation where such a program would compete with 
HOME, our associations propose that a housing production element be 
incorporated within HOME. The infrastructure is already in place within 
HOME to implement such a program.
    Our proposal would provide grants for new construction, substantial 
rehabilitation, and preservation of multifamily housing. Mixed-income 
projects would be encouraged. All of the resources made available under 
our proposal must benefit households at or below 80 percent of median 
income, with at least 50 percent befitting those at or below 30 percent 
of median income. Funds would be apportioned 60 percent to local 
participating jurisdictions and 40 percent to States using a formula 
that measures inadequate housing supply. We would be pleased to work 
further with the Committee in crafting a production program.
    In addition to this proposal, there are several other 
modifications/refinements to the HOME program that we offer for the 
Committee's consideration:

 We recommend that a loan guarantee program be added to HOME, 
    modeled after the very successful Section 108 program under CDBG. 
    Such a program would enable participating jurisdictions to 
    ``borrow'' against future entitlement grants in order to undertake 
    large-scale projects. The House passed this proposal in 1994, but 
    the Senate never acted;
 We recommend that the statute be changed to allow 
    participating jurisdictions to provide matching funds on a program 
    year, rather than the current Federal fiscal year basis, to 
    simplify program administration;
 We recommend permitting the substitution of a substantially 
    equivalent State or local environmental review requirement for the 
    environmental review requirements under NEPA;
 We recommend providing an exemption from the environmental 
    review requirements for rehabilitation of one to four units and all 
    owner-occupied rental and homeownership projects;
 We recommend deleting the current law requirement that the 
    Secretary establish per-unit subsidy limits. The statute already 
    requires participating jurisdictions to certify that they have not 
    provided more funds than are necessary to assure a project's 
    financial feasibility.

Community Development Block Grant Program
    Now in its 27th year, the Community Development Block Grant program 
is the Federal Government's most successful domestic program. CDBG 
helps communities tackle some of their most serious community 
development challenges. The CDBG program's success stems from its 
utility, that is, providing cities and counties with an annual, 
predictable level of funding, which can be used with maximum 
flexibility to address unique neighborhood revitalization needs.
    Based on the fiscal year 2001 CDBG data reported by grantees, CDBG 
provided funding to 172,445 housing units. Of this number, CDBG 
provided funding for the new construction of 3,878 units, assisted 
11,812 first time homebuyers, and rehabilitated 156,755 housing units. 
In addition to providing funding to housing units, the program created 
or retained 116,777 jobs. This is just in fiscal year 2001 alone. In 
fiscal year 2001, entitlement communities spent their CDBG funds in the 
following manner: housing (30.98 percent), public works and 
infrastructure (25.56 percent), planning, monitoring and program 
administration (15.48 percent), public services (13.25 percent), 
economic development (8.32 percent), and preventing or eliminating 
slums and blight (6.21 percent).
    Even though the program has performed well, the annual 
appropriations for CDBG have remained static over the last decade, 
increasing only slightly in some years. Most recently, the program 
received a cut in fiscal year 2002, reducing its annual appropriation 
from $5.057 billion in fiscal year 2001 to $5.0 billion in fiscal year 
2002. We were very surprised and disheartened to see a cut to the 
program, particularly a program that has such a stellar track record in 
benefitting our communities across the country, and particularly given 
the fact that very few other HUD programs received a cut. More 
importantly, the formula allocation to grantees has begun to erode 
because of the increased set-asides allotted by Congress under the 
program. In fiscal year 2002, the formula allocation was cut by 
approximately $59 million because of decreased appropriations and 
continued funding of a large number of set-asides under the program. If 
the set-asides continue to flourish, the formula allocation to grantees 
will continue to diminish over time, providing fewer and fewer funds to 
grantees for their community development needs, which are also 
increasing. In addition, the number of new entitlement communities has 
increased which has further decreased the formula allocation to 
existing communities. We implore Congress to increase funding for CDBG 
in fiscal year 2003, especially given the set back in funding to the 
program this year. Given the fact that the program has increased very 
little in its 27 years, we are seeking at least $5.0 billion in formula 
funding in fiscal year 2003. This would represent a $659 million 
increase in formula funding from fiscal year 2002. In addition to the 
increase in the program's formula allocation, we are also seeking 
funding for technical assistance under the program. For reasons unknown 
to us, Congress discontinued funding for CDBG technical assistance a 
few years ago. Since that time there has been no funding for technical 
assistance for the program. Like in the HOME program, technical 
assistance is crucial to ensuring better implementation of the program.
    In addition to increased funding for the program, there are several 
refinements to the CDBG program that we offer for the Committee's 
consideration:

 We recommend that the threshold for application of the Davis-
    Bacon requirements for CDBG conform to that of the HOME program, 
    that is 12 units or more;
 We recommend making CDBG expenditures for fair housing a 
    directly eligible activity, rather than its being subject to the 20 
    percent administrative cap. This will take some of the pressure off 
    the administrative cap;
 We further recommend eliminating the current law requirement 
    that housing service activities under CDBG be subject to the 20 
    percent administrative cap. This is a technical correction. The law 
    prior to the 1992 amendments did not place these activities under 
    the cap;
 We recommend permitting the substitution of substantially 
    equivalent State or local environment review requirement for the 
    environmental review requirements under NEPA.

IDIS
    Both HOME and CDBG grantees utilize HUD's Integrated Disbursement 
Information System (IDIS) to report their accomplishments as well as 
drawn down funds. Our associations, as well as grantees, continue to 
work with HUD to iron out the last remaining ``kinks'' in the system. 
Overall, the system provides valuable information to grantees, HUD, and 
Congress on how HOME and CDBG funds are being used nationwide. It is 
imperative that Congress appropriate sufficient funding to ensure that 
IDIS continues in operation until HUD has finalized its Departmental 
Grants Management System (DGMS). No direct funding was appropriated for 
IDIS in fiscal year 2002. The program will now have to try to seek 
funding through HUD's working capital fund, with no assurances that 
funding will be provided. We ask that Congress provide adequate funding 
for the system in fiscal year 2003 and direct HUD to provide adequate 
funding for the system this year from its resources. HUD is currently 
working on developing its DGMS system, which is years away from 
becoming operational. Until that system is fully operational to the 
satisfaction of our grantees, Congress must continue to fund IDIS to 
ensure that grantees can properly administer their CDBG and HOME 
projects.

Other Important Programs
    There are two other programs that play a key role in expanding the 
supply of affordable housing Low-Income Housing Tax Credits and tax-
exempt Private Activity Bonds. Tax credits provide equity investments 
for affordable rental housing, while tax-exempt bonds provide debt 
financing for affordable rental housing and first mortgage assistance 
for income-qualified, first-time homebuyers (Mortgage Revenue Bonds). 
We worked very hard over the past 4 years to convince Congress of the 
need to increase the Statewide volume caps that apply to these two 
programs. We were very pleased that Congress increased both volume caps 
in a two-step process as part of the fiscal year 2001 omnibus 
appropriations bill. Under the legislation, the tax credit cap 
increased on January 1, 2001 from the previous $1.25 per capita, per 
State to $1.50 per capita, per State. On January 1, 2002 it will 
increase to $1.75 per capita, per State. Similarly, the volume cap for 
Private Activity Bonds increased on January 1, 2001 from the previous 
greater of $50 per capita or $150 million per State to the greater of 
$62.50 per capita or $187.50 per State. On January 1, 2002 it will 
increase to the greater of $75 per capita or $225 million per State. 
Both caps are indexed for inflation going forward. In most States 
housing gets the lion's share of the bond volume cap.
    However, the bond cap increase will be undermined by an obscure 
provision added to the tax code in 1988 applicable to Mortgage Revenue 
Bonds. It requires that mortgage prepayments made 10 years after the 
date that the bonds were issued be used to redeem the bonds, rather 
than recycling them into new mortgages. Recycling is permitted within 
the first 10 years. We believe it should be permitted after the first 
10 years, and therefore support H.R. 951. This legislation, introduced 
by Reps. Houghton and Neal, would repeal the 10 year rule. H.R. 951 
also provides an optional method for calculating the maximum allowable 
purchase price of a home that a first-time homebuyer can purchase with 
Mortgage Revenue Bond assistance.
    The final issue upon which we wish to comment is the need to renew 
expiring rent subsidy contracts under the McKinney Act's homeless 
housing programs. In order to assure continuity of services and rental 
assistance in these projects we recommend that the Supportive Housing 
Program renewals and Shelter Plus Care renewals be transferred to the 
regular Section 8 rental program. This would allow more funding to be 
available under HUD's homeless assistance programs for the development 
of new projects to assist the homeless.
    We would also like for the Committee to give serious consideration 
to combining HUD's homeless assistance programs into a single, flexible 
formula-allocated block grant program. While we recognize that there is 
continued resistance from other groups on this idea, we also recognize 
that the current system is not perfect. Grantees have to spend months 
planning and applying for the funds, and then waiting for many more 
months to hear as to whether or not they were awarded funding through 
HUD's SuperNOFA competition. We do recognize the importance of the 
partnerships that have been formed and supported through the current 
system and agree that the planning process should continue within our 
block grant proposal. We also recognize that a lot more funding is 
needed to assist communities in meeting the needs of the homeless. To 
that end, we request that Congress increase the appropriations level of 
HUD's homeless assistance programs, including funding the Supportive 
Housing Program and Shelter Plus Care renewals.
    We again thank you for the opportunity to provide written comments 
on the need for funding for these very important programs. We look 
forward in working with you and your staff in the year ahead.































                         HOUSING AND COMMUNITY 
                           DEVELOPMENT NEEDS

                              ----------                              


                      THURSDAY, DECEMBER 13, 2001

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

    The Committee met at 10:05 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call this hearing to order. Good 
morning. I am pleased to welcome everyone to the Committee's 
second hearing on housing and community development needs. I 
want to welcome Secretary Martinez and extend the Committee's 
appreciation to him for appearing today. We have been looking 
forward to this session. Mr. Secretary, we are pleased to have 
you here.
    Two weeks ago, the Committee heard from a number of experts 
about the growing affordable housing problem in the country. 
Today, we are anxious to hear the Housing Secretary's 
perspective.
    As my colleagues know, the Administration is in the midst 
of putting together its budget proposal for fiscal year 2003. 
Because that process has not yet been completed, and 
recognizing the constraints that the Executive Branch operate 
within, we have indicated to the Secretary that we understand 
that he cannot talk about budget levels for specific programs--
not to us. He can talk to OMB, and we are hopeful that he is 
doing that, of course.
    However, we have asked him to discuss what he sees as the 
Nation's needs in the area of housing and community 
development, particularly as the country finds itself in the 
first recession in about a decade now.
    Let me talk about some good news. After stagnating and even 
falling in the 1980's, the homeownership rate rose to historic 
levels in the 1990's, particularly in the latter part of the 
decade. Improvements in minority homeownership drove much of 
this improvement. In fact, 40 percent of all new homeowners 
from 1994 to 1999 were minorities, even though minorities make 
up only 24 percent of the population. African-American and 
Hispanic homeownership rates grew twice as fast as the white 
homeownership rate.
    Nevertheless, there continues to be a significant gap in 
homeownership rates between white and minority Americans. 
Closing that gap, we know is a priority for the Secretary. He 
testified to it right at the beginning in his confirmation 
hearing, and I am sure other Members of this Committee want to 
be helpful in that effort.
    In this regard, let me just say that I am concerned about 
the Department's so-called clarification on the issue of yield-
spread premiums, put out a month ago by the Secretary.
    I do not want to divert over into that issue this morning, 
but I just want to note it because it is our intention to hold 
hearings on that subject early in the new year.
    We are concerned because Assistant Secretary Weicher said 
that HUD was compelled to issue the new policy statement 
because of the decision in the Culpepper case. But in that 
case, the court actually found that brokers collected thousands 
of dollars in unnecessary out-of-pocket fees from FHA 
borrowers, in addition to steering them to higher interest rate 
loans in exchange for yield-spread premiums paid by the lender.
    I understand that there is some rulemaking now going on in 
the Department with respect to this matter, and we obviously 
are very interested in that. Now as I mentioned we will come 
back to that subject, I anticipate, early in the new year.
    I mentioned the general progress on homeownership. But 
there is obviously a growing problem in terms of affordable 
rental housing. In fact, HUD's own data show that nearly five 
million very low-income American families pay over half of 
their income in rent. A study by the National Housing 
Conference that looked at somewhat broader criteria than used 
by the Department, found that nearly 14 million families, 
including working families, face this same critical problem. 
Actually, the situation, worst-case needs among poor families, 
seemed to stabilize a bit, but the number of working families 
carrying severe housing cost burdens has risen rather 
dramatically.
    There are 33 States in the country in which two full-time 
minimum-wage earners in a family were not sufficient to rent a 
modest apartment, paying 30 percent of a family's income. And 
we will put a chart up that shows this development.
    We find that in the past decade, the number of units 
available to extremely low-income renters has dropped by almost 
a million units, a loss of 14 percent. Obviously, this is a 
matter of some concern and it is something we will go into with 
the Secretary in the course of the question and answer period.
    The Committee is anxious, Mr. Secretary, to work with the 
Department in a cooperative way to get at this problem. We know 
of your own commitment to addressing affordable housing issues, 
both in your testimony here and in your speeches around the 
country, and we want to join together in a partnership effort 
to really get at this problem. We appreciate your being here.
    I yield to Senator Gramm.
    Senator Gramm. Mr. Chairman, could you give us a quick 
summary of what these colors mean over here? Housing wage.
    Chairman Sarbanes. Yes. What that shows is what--if you 
accept the standard that you pay 30 percent of your income for 
housing, then this shows what a two-bedroom apartment would 
cost.
    Senator Gramm. Okay. Got it. At 30 percent of your income.
    Chairman Sarbanes. At 30 percent. It would show what income 
you would have to have to be able to afford that. Now the dark 
areas are worse than the white areas.
    Senator Allard. That is the hourly wage?
    Chairman Sarbanes. That is the hourly wage.
    Senator Gramm. It must be a monthly wage.
    Chairman Sarbanes. The dark area is the hourly housing wage 
at more than twice the Federal or State minimum wage.
    For instance, in Texas, you would have to have a wage of 
$12.56 an hour.
    Senator Gramm. Okay. Got it.
    Chairman Sarbanes. In order to be able to--so it shows the 
gap between minimum wage, and that wage is needed to be able to 
afford housing.
    Senator Gramm. To meet that goal.
    Chairman Sarbanes. Which is the standard criteria. It is 
the one HUD itself uses, as I understand it, in measuring 
needs.
    So it shows you the gap between what people earn, 
conceivably what they earn, and what they have to earn in order 
to be able to afford housing.
    Senator Allard. And so, is that all rentals or is that just 
housing rentals?
    Chairman Sarbanes. That is the fair market rent for a two-
bedroom unit at 30 percent of income.
    Senator Allard. Two-bedroom unit, whether it is a house or 
whatever.
    Chairman Sarbanes. Yes. Actually, it is a helpful 
illumination of the problem of this gap between income and the 
cost of affordable housing. I think it is a fairly illustrative 
way of demonstrating that.
    Senator Gramm.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Well, Mr. Chairman, thank you for holding 
this hearing and Mr. Secretary, thank you for testifying.
    I would have to say that next year, I will enter my 18th 
year as a Member of the Banking Committee, and I have been very 
actively involved in many issues in this Committee, but HUD is 
an area that I do not feel that I have ever gotten my hands 
around, nor do I believe this Committee has ever done that.
    Chairman Sarbanes. And he may do it this coming year.
    [Laughter.]
    Senator Gramm. This is my last year.
    [Laughter.]
    Let me first say that when I came to Congress, as an 
intellectual debate I had with myself was whether or not it was 
rational that the American society has decided to provide such 
heavy levels of subsidy to homeownership.
    From an economic production point of view, in allocating 
resources to maximize gross domestic product, at least in the 
short run, you can make a very strong case that we grossly 
over-invest in homeownership.
    I believe the problem with that argument, however, is that 
homeownership has a profound impact in a democracy. It gives 
people a stake. I do not want to turn this into a partisan 
issue, but I think my colleagues might be interested in this.
    In 1990, I was running for reelection. I had a lot of money 
and I did not have a very well-financed or strong opponent. And 
so, I did something very few politicians do. I did a poll of 
3,000 samples. I did not ask a lot of questions about what 
people thought, but I asked a very large number of questions 
about people.
    I found 258 people who said that they were on welfare. I 
looked at a lot of factors, but a thing that struck me, and I 
have never forgotten, as no politician would ever forget such a 
number--if you were going to pick one variable in all that data 
to determine whether someone had a favorable impression of me, 
the guy paying for the poll, homeownership was the strongest 
predictor.
    Interestingly enough, the second strongest predictor was 
someone working in the private sector of the economy. At the 
same income and education, whether they worked for the 
Government or the private sector made a profound difference. So 
I have been a strong believer that homeownership is vitally 
important.
    [Laughter.]
    I think that our achievement in the 1990's in expanding 
homeownership in that golden economic age that we were in, in 
expanding homeownership among minorities, will pay big 
dividends in America's future. I do believe it changes family 
histories when people get an opportunity to own their own home. 
So it is something that I am very much committed to.
    And the points I would like to make are the following. I am 
interested in what the budget's going to be. But I am far more 
interested in your effort to look at all these programs that we 
have added over the years and to try to determine, do we have a 
rational set of programs? Should we try to consolidate some of 
these programs? To what extent are programs efficient in 
actually getting the help to the people we are trying to help? 
To what extent is public housing a way station on the road 
toward homeownership? To what extent is it a dead end? Those 
are the things that I am interested in. And these are very 
difficult problems.
    So I just want to say to you, when you were here being 
confirmed, the point that I made and I wanted to reiterate now, 
is that you are in the process of learning your new job. But 
one of the things I want to urge you is to commit the time, 
energy, and resources to really understanding all these 
programs.
    We add new programs. We never get rid of old programs. 
Often, they overlap or they are contradictory. I believe that 
this Committee would be receptive to proposals where you could 
show that we could improve the bottom-line effectiveness in 
improving housing and improving homeownership that would 
represent some substantial changes in housing programs.
    So I hope as we get into the spring, as you reach the point 
where you have learned how to do this job and you have gotten 
your staff in place, I hope you will make recommendations to us 
as to how we could help improve the effectiveness of this 
program.
    We are spending a lot of money. We want to spend it wisely. 
And any input you would have, I can at least commit that we 
would work to give it serious consideration.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. I would just note that despite this 
political correlation that has just been established, I still 
remain a very firm proponent of expanding homeownership. Either 
that demonstrates my undying commitment to homeownership or it 
demonstrates some political softening of some sort or the 
other.
    [Laughter.]
    Senator Gramm. No, I think it represents the triumph and 
love of America with self-interest.
    [Laughter.]
    And I commend you.
    [Laughter.]
    Chairman Sarbanes. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman, for 
holding this hearing. And thank you, Mr. Secretary, for joining 
us today.
    I believe that that chart indicates that in many regions of 
the country, rural and urban, there is a housing crisis, an 
affordable housing crisis. My home State of Rhode Island is no 
exception to that. We fall in that band of places where you 
have to work exceptionally hard just to meet the minimum 
requirements for affordable housing. And as Senator Gramm 
pointed out, not just homeownership, I believe, but also decent 
housing has a profound effect on many things.
    We are today finishing up an education bill. One of the 
things we found, that children who move from house to house, 
rental unit to rental unit, do not seem to do as well as 
children who are in stable, decent homes. And so, your task of 
affordable housing impacts fundamentally on so many other 
different aspects of American life, and that is why it is so 
important.
    We have found, interestingly enough, in Rhode Island, even 
with the significant subsidy to homeownership, that our 
homeownership rate has fallen, actually. The rest of the 
country is rising--it is falling. One reason is the fact that 
there is a growing gap between affordability for homes and the 
price of homes.
    The luxury market is fine. You can buy a $600,000, $700,000 
house in Rhode Island. What is difficult to buy, in fact, these 
listings have fallen 50 percent, is the modest, first-time 
homebuyer's special, if you will. And that is a crisis.
    A lot of our problems go, particularly in the multifamily 
area, to production. We have not provided the incentives and 
support for production we need. We have a growing population, 
growing concern, growing need, but not the supply.
    And I would hope that in the budget that we face next year, 
and particularly in my capacity as Chairman of the 
Subcommittee, we will work very closely to see if that 
production bottleneck can be breached and we can produce more 
homes, more rental units in the United States.
    Finally, there is one area that is sometimes overlooked, 
and that is, we still have a profound homelessness problem in 
this country. We have families that are literally sleeping on 
the floors of our social welfare agencies in Providence, Rhode 
Island because there is not affordable rental housing for them, 
even on a temporary basis.
    So, the challenges are great and our commitment will be 
measured not just by this hearing, but by what is in this 
budget coming up. And I urge you to work so that it is a good 
budget for housing.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Senator Reed.
    I will recognize Senator Allard now.
    I would comment that Senator Reed, as the Chairman of the 
Subcommittee on Housing and Senator Allard is the Ranking 
Member, have been working quite hard on a number of housing 
issues and we are most appreciative to them for the work that 
is being done in the Subcommittee.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Well, thank you, Mr. Chairman. I want to 
commend you for holding this important hearing and follow up on 
your comments. It is a pleasure to work with both you and 
Senator Reed on these housing issues.
    I also want to join you in welcoming Secretary Martinez to 
today's hearing on housing and community development needs for 
America. I would like to follow up a little bit on what Senator 
Gramm had mentioned.
    When I was Chairman, just a little over a year ago now, we 
did have a number of hearings on what could be done to 
consolidate some programs. And one of the areas that we looked 
at is whether the program was authorized by Congress or not.
    I would suggest that maybe you have your staff go back and 
review some of that testimony that we had collected if you are 
really concerned about following up with Senator Gramm's 
comments, and Senator Reed's comments on production.
    Also, I do think that we need to solicit the support of 
local governments with a national effort because there is some 
prejudice at the local level against affordable housing 
projects. For example, there are some manufactured homes in the 
State of Colorado which I represent that are very nice homes. 
In fact, I am not sure they are better than standard 
construction homes.
    We passed some recent legislation in here that actually 
helped improve that even more. And there is a prejudice 
sometimes among neighbors and City Council people and county 
commissioners not wanting to have that kind of construction.
    But what has developed in Colorado--actually, there is 
community living with swimming pools, game rooms, recreation 
rooms, and everything else. And there is plenty of opportunity 
in that area if we seek it out.
    I would also say that after your first year, it is hard to 
imagine that almost a year has gone by now since you have been 
in office. It is clear that you and the Administration are 
working hard to focus on HUD on its core mission of increasing 
affordable housing. And I want to congratulate you on that.
    In my office, we are receiving regular reports that the 
morale of the Department has risen and that there is a real 
sense that you value the professionals at the Department and 
that you are determined to move HUD aggressively away from its 
troubled past. And it is clear that you and your team are 
acting quickly to streamline management, reduce duplicative 
programs, and create a more efficient agency.
    The tone which agency heads set is very important. You have 

indicated a strong desire to work with Congress, the General 
Accounting Office, and HUD partners to improve the quality of 
services. I would urge you to continue to emphasize the 
Government Performance and Results Act. Through this tool, we 
judge programs here in the Congress by the results and not 
their budgets.
    I also want to thank you, Chairman Sarbanes, for having the 
Committee act on the HUD Inspector General nominee. It is 
critical to have an IG in place. Mr. Secretary, you deserve a 
full team.
    I am pleased to see the Administration's strong emphasis on 
the expansion of homeownership, particularly among minorities. 
HUD plays a critical role in expansion of the American Dream.
    This commitment is reflected in the President's American 
Dream Downpayment Fund and programs to make FHA more 
competitive in the home mortgage arena. It is also encouraging 
to see a focus on simplifying the home-buying process. I hope 
we can begin to see a reduction in some of the paperwork 
involved in a home purchase.
    Let me conclude by noting that earlier this year, the U.S. 
Senate committed to work with Habitat for Humanity to build a 
home in each State. Last weekend, we dedicated one in my 
hometown of Loveland, Colorado.
    I want to commend the President and the Secretary for their 
commitment to this and similar sweat equity programs. This is 
an example of where HUD can work with nonprofits and faith-
based partners to create more affordable housing in our Nation.
    And thank you for being here, Mr. Secretary. I look forward 
to your testimony.
    Chairman Sarbanes. Thank you very much, Senator Allard.
    I might note, Mr. Secretary, that we passed that 
manufactured housing bill here in the Committee.
    Senator Allard. Yes.
    Chairman Sarbanes. That was when Senator Gramm was the 
Chairman.
    It is administered and implemented by HUD. But part of our 
thinking in doing that was that by, in effect, raising the 
standards, we give people more assurance and confidence about 
the quality of the manufactured housing that would address the 
issue that Senator Allard was raising.
    So that is down in your bailiwick now.
    Secretary Martinez. Yes, Senator.
    Chairman Sarbanes. Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you very much, Mr. Chairman. And thank 
you for holding this hearing today.
    As Senator Gramm mentioned, it really involves more than 
economics and just housing per se. It really involves here the 
American Dream and what percentage of the American people have 
the opportunity to achieve the American Dream, as Senator Gramm 
said, or having a stake in the economic vitality of the 
country.
    Mr. Chairman, as you mentioned, for too many Americans, 
this is still beyond their means. Nearly five million very low-
income people, defined as those 50 percent at the median income 
level and below, live with worst-case housing needs. Ninety-
four percent of these families, I think as you mentioned, Mr. 
Chairman pay more than half of their income each month in rent.
    So for these Americans, affordability is a very real issue. 
And I think about 11 percent, Mr. Chairman, live in every 
substandard housing conditions. With all of the progress that 
has been made, we still have important work to do.
    As we focus on these important housing needs, I would like 
to raise an issue that directly impacts the housing and 
community development of my State of Indiana, Mr. Secretary. I 
believe it also affects this important issue in Senator 
Santorum's State, and Senator Allard's State.
    Over the previous months, we have been seeking a 
legislative remedy to a number of technical limitations that 
the community builders, in conjunction with the cities of 
Indianapolis, Pittsburgh, and Denver, have encountered under 
the Multifamily Assisted Housing Reform and Affordability Act.
    Our amendment would allow the community builders in the 
cities of Indianapolis, Pittsburgh, and Denver to replace old 
and dilapidated public housing buildings with new townhouse-
styled housing for low income families. We proposed an 
amendment that, according to the CBO, would have almost no 
cost. Our proposals are based on plans that are supported by 
the tenants and the mayors of all three communities.
    Mr. Secretary, without this legislative fix, the project at 
Indianapolis will not be able to go forward. The property would 
remain in HUD's hands and end up costing the American taxpayers 
more money. This is just the kind of wasteful, senseless 
outcome that has really led too many Americans to not have 
confidence in government's competence to manage our affairs.
    And I regret to report, Mr. Secretary, that so far, HUD has 
not been very cooperative. As a matter of fact, has obstructed 
our ability to get this amendment passed and continues to 
obstruct our ability to get this amendment passed. In fact, I 
have been informed that your staff has not been very responsive 
at all and has really been unwilling to engage in any 
meaningful discussions about this amendment whatsoever.
    I cannot stress enough the importance of this proposal to 
low-income families in Indianapolis and the economic 
development of our capital city. If this legislative remedy 
does not go forward, HUD will have caused the City of 
Indianapolis and other communities to undergo a substantial 
setback in the area of affordable housing.
    So it is my hope that this initial reaction by the 
Department and the staff will not cause you to not address this 
issue in a positive manner. I hope that we can have a dialogue 
here later today about a prompt resolution of this matter 
because it is important.
    Until then, Mr. Secretary, I must say that my confidence in 
the Department has been undermined to such a degree, that every 
appointment and every item in the budget deserves added 
scrutiny, because if HUD can be so in error and unresponsive on 
this important matter, quite frankly, the possibility of error 
and unresponsiveness on other important matters is heightened 
in my mind.
    I regret the need to point this out to you today, but we 
have tried continually and just have not gotten any 
satisfactory response yet. So I hope we will have an 
opportunity to address this and again, I thank you for coming, 
and I look forward to working with you on this issue.
    Secretary Martinez. Thank you, Senator.
    Chairman Sarbanes. Thank you very much, Senator Bayh.
    Mr. Secretary, I might say, I have discussed this 
Indianapolis situation with Senator Bayh and it seems to me the 
merits are very strong in favor of what Senator Bayh has said. 
And we hope that the Department can take a more careful look at 
that situation.
    Secretary Martinez. What I would like to do, Senator, if I 
may, is just comment momentarily on this, is to give you our 
reasoning and then, of course, this lies within the prerogative 
of the Congress as to what you wish to do with the proposed 
amendment. But I want you to understand at least where we are 
coming from.
    It is not our desire to be obstructive and it is not our 
desire not to cooperate with what seems to me an obvious good 
reason. But there are some policy implications that you should 
be aware of, and then you can make a judgment as to----
    Chairman Sarbanes. Well, we may pursue that during the 
question and answer period.
    Senator Bayh. I would be happy to. It does lie within the 
prerogative of Congress, Mr. Secretary. But my understanding is 
that the House conferees have been carrying HUD's water on this 
issue.
    Secretary Martinez. Well, do we want to go ahead and get 
into it now, or should I wait?
    Senator Bayh. No, wait.
    Chairman Sarbanes. Why don't we wait. I hear a rumbling 
here about waiting.
    [Laughter.]
    Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. Mr. 
Secretary we appreciate you coming to visit with us today about 
the critical issues we are going to cover.
    And I appreciate the fact that you will not be able to 
discuss the fiscal year 2003 budget in any detail. But I 
believe that we can discuss a number of the critical issues 
relating to the core mission of HUD, which has already been 
indicated to be helping families get affordable and good 
housing.
    In reviewing your testimony that you have prepared, I was 
pleased to note the strong support that HUD is giving to the 
kinds of programs that do make a big difference for those who 
would like to get into first-time homeownership and to improve 
their homeownership situation, as well as focusing on those who 
may not be in a position to seek homeownership, but will need 
to have rental opportunities that are important to them.
    I was pleased in particular to see that you were a strong 
advocate for the Habitat for Humanity program and I think most 
of us here have participated in that in one way or another. But 
it is good to see HUD focusing on programs that recognize that 
the right kind of policies that we need to pursue in this 
country to truly make a difference.
    I believe the more we recognize what happens in the 
marketplace and how we can incentivize and provide the 
opportunities for people to obtain first-time homeownership or 
to improve their homeownership circumstances, or to get better 
advantages in the rental markets, then we will make a very big 
difference. I also was very pleased to see that you have a 
strong focus on reform of RESPA--the Real Estate Settlement 
Procedures Act.
    I believe that that is one of the things that can make a 
very big difference in this country. As we have seen the 
regulatory burdens and the bureaucracy around the mortgage 
process and just the process that a person has to go through to 
purchase a home increase to the point where it has become an 
economic obstruction to the ability to purchase a home. I will 
not go into any other details, except to say that I wish that I 
had talked to Senator Gramm before this hearing today.
    I was criticized in my home State about a week ago by a 
newspaper editorial, amazingly, in my opinion, for supporting a 
tax credit for first-time homebuyers. I wrote back what I 
thought was a fabulous response, but I missed one really good 
reason that I did not know about that Senator Gramm has 
identified here. And that is the political aspect of 
homeownership. So I am going to investigate that a little bit 
further.
    However I believe that we have to do everything we can in 
this country to focus on the right kind of policies to increase 
the opportunities for all Americans for homeownership in 
particular. And I appreciate the work that the Department is 
undergoing to identify the right policies that we need to focus 
on and give us guidance here in Congress as we develop the 
national policy.
    Thank you.
    Chairman Sarbanes. Thank you very much, Senator Crapo.
    Senator Miller.

                 COMMENT OF SENATOR ZELL MILLER

    Senator Miller. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary.
    I have no statement at this time.
    Chairman Sarbanes. Thank you.
    Senator Bunning.

                COMMENTS OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman, for holding this 
very important hearing. And I would like to thank the Secretary 
for taking time out of his busy schedule to testify before us 
today.
    We have already heard from many different interest groups, 
housing experts and State and local authorities, on what they 
think should be in HUD's budget. Now we are going to get a 
chance to hear from you. Since everyone here is much more 
interested in your statement than mine, I will stop now.
    [Laughter.]
    Secretary Martinez. Thank you.
    Chairman Sarbanes. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I would submit 
my full statement for the record.
    But I do want to welcome the Secretary and stress, as my 
colleagues have, that we are all aware that there is no 
question that we face a critical housing shortage in this 
country and that we all have a responsibility to work together 
to address this on behalf of our families.
    In Michigan, a person must make $12.35 an hour in order to 
be able to afford a two-bedroom unit at fair market rent using 
the 30 percent of his or her housing expenses, as has been 
indicated on the chart. This is 2\1/2\ times the minimum wage.
    It is not just in Michigan, but across the country, that we 
have families that are working hard every day and struggling to 
be able to provide housing and a roof over their heads for 
their children.
    Further, in the midst of the recession, with mixed signals 
about when we will see an economic recovery, there is going to 
be an even greater demand for HUD services in the coming year. 
So we have a real challenge in front of us. And I must say, Mr. 
Secretary, that when you came before the Committee last April, 
I expressed my disappointment in the White House-proposed HUD 
budget at that time. And as the Chairman and others had pointed 
out, there were serious accounting questions such as how yet 
unexpended but already obligated funds were treated. And 
equally alarming, the White House budget consolidated funds in 
a way that are forcing those underfunded programs to compete 
against each other.
    I am also very concerned about the fact that the Public 
Housing Drug Elimination Program earmark was eliminated and I 
am hopeful that in this coming budget, that you will explain to 
us how you intend to move forward through the HUD budget in 
promoting a comprehensive drug prevention strategy because, 
certainly, the challenges have not gone away and the safety 
issues for our families have not gone away just because we have 
not been designating specific dollars for drug treatment and 
drug enforcement programs.
    I would also indicate that as we are talking about HUD 
programs and the importance of homeownership, that I would urge 
you to continue to be supportive and to speak out on issues of 
predatory lending, when we do have our low-income or moderate-
income homeowners that find themselves with equity in their 
home and then they become victims to predatory lending, to 
attempt to strip that equity out of their home.
    We are defeating the whole goal of homeownership and the 
ability to save through equity in a home. And I am very 
appreciative of the Chairman's leadership on the issues of 
predatory lending and see that there is a direct correlation.
    And finally, Mr. Chairman, I would just, on a personal note 
from Michigan, want to indicate that the holiday tree in front 
of the U.S. Capitol is from the great State of Michigan this 
year. It is called the Tree of Hope.
    And I mention it because we have made a commitment that the 
lumber from this 73-foot tall tree that is 44 feet wide will be 
going back to lumber for Habitat for Humanity homes in 
Michigan. It is a very strong commitment on the part of all of 
us in Michigan that that excellent program is part of our 
housing strategy.
    Chairman Sarbanes. Thank you very much, Senator Stabenow.
    Senator Corzine.

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you very much, Mr. Chairman, and I 
appreciate your holding this hearing as well.
    I certainly welcome the Secretary. I want to identify with 
the remarks from the Senator from Texas. I do not know whether 
I am correlated with homeownership in the vote that we have 
gotten, but it is a fundamental foundation to the success of 
our Nation. That is why this issue is so important.
    Frankly, I am very concerned about the growing depth and 
lack of affordable housing. I will not cite the statistics that 
a number of my colleagues have on worst-case needs and the 
growing percentage of people there.
    I will cite in my own home State, we beat Michigan. It is 
$17.87 an hour to afford fair market rent for a two-bedroom 
dwelling. It is the third-highest in the country. And we have a 
very real and growing homeless problem because of lack of 
affordable housing. It is over three times the minimum wage and 
is a serious burden for people who live in our community.
    I also identify seriously with accountability and making 
sure we have efficient programs. But the commitment that we 
have made not only in this Administration, but over the last 25 
or 30 years, is less than I think is reflective of the needs of 
our country or the value of homeownership and quality living.
    When we have only gone from a budget of $29.2 billion in 
1976, which we heard in testimony 2 weeks ago, to a budget of 
$30 billion, when you put that in the context of cuts in the 
public housing capital fund that were in last year's program, 
the zeroing-out of the Public Housing Drug Elimination Program, 
which you and I have talked about before, I have very serious 
concerns and many issues raised by the people in my community 
about this.
    I have serious concerns whether the commitment to this is 
more than words. I believe we need to both have accountable 
programs that work, but we also need to make sure that we 
invest properly to make sure it happens.
    I also want to align myself with comments made by Senator 
Stabenow on predatory lending. To the best of my knowledge, of 
understanding what yield-spread premiums are about, it is going 
to exacerbate some of those problems, some of the new rulings, 
to the extent that I understand how the secondary mortgage 
market works. And I am concerned whether it is moving in the 
right direction on those concerns.
    I look forward to your testimony. I know your desire to 
have a strong and affordable housing base is sincere and I 
really do want to work with you to make that commitment 
something that works for working families and families across 
this country.
    Chairman Sarbanes. Thanks very much, Jon.
    I might note to the Members of the Committee, that the 
Federal Reserve Board yesterday, in a unanimous decision, 
approved amendments to the implementing regulations of HOEPA, 
which will enhance consumer protections for mortgage borrowers. 
So it is a very significant and important step in this effort 
to deal with the predatory lending issue.
    Mr. Secretary, we are pleased you are here. We look forward 
now to hearing from you. This actually gives all the Members of 
the Committee an opportunity to kind of leave their concerns 
with you as we prepare to complete the first session of this 
Congress.
    So please go ahead.

              STATEMENT OF MEL MARTINEZ, SECRETARY

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Secretary Martinez. Well, first of all, Chairman Sarbanes, 
and Ranking Member Gramm, and distinguished Members of the 
Committee, it is a pleasure to be here with you today. I 
appreciate the invitation and I am delighted to talk with you 
about the ways in which the Department of Housing and Urban 
Development is trying to address the needs of the housing 
community in our country.
    I also want to begin by thanking you, Mr. Chairman, and the 
Members of this Committee, for the advice, assistance, and your 
expertise as I have settled into this new community for me and 
new job. I also appreciate the positive working relationship 
that we have had. I also want at this time to thank you and the 
Members of the Committee, Mr. Chairman, for the timely action 
on all of the nominees. We still have a few pending, as we 
discussed. It has made a very important part of the process 
come to fruition.
    I am very pleased with the people that have joined me at 
HUD. I think we have surrounded ourselves with people with 
public- and private-sector experience, with a great diversity 
of background and experience. And with your continued 
assistance, we hope to have our entire management team in place 
in the very near future.
    Chairman Sarbanes. The ones that are pending just got here. 
But we will see what we can do in the next few days.
    Secretary Martinez. One has been here. Two others just got 
here, correct. None have been delayed, by the way. It is all 
been happening pretty quickly. So we are just anxious to get it 
done, hopefully, before the break would be wonderful.
    I should tell you that our job at HUD is made easier by the 
support of a President who is committed to HUD's mission of 
serving those in need, as well as revitalizing our urban 
centers.
    President Bush is an active advocate for our work at HUD. 
He speaks passionately about the dreams a family can achieve 
through homeownership. He has joined me on two occasions to 
stress that point by building homes with Habitat for Humanity 
and wants to triple the funding for HUD for the programs that 
support the good work of Habitat and other like organizations. 
President Bush has directed this Department to serve those in 
need, and I strongly believe that we have a real opportunity to 
help more of them achieve their own American Dream. Despite the 
success of welfare reform, too many families still live below 
the poverty line. As a catalyst in our communities, HUD is 
putting its resources to work empowering citizens to lift 
themselves out of poverty and into prosperity. We have touched 
many lives this year in many different ways.
    The Department reacted quickly and energetically after the 
events of September 11. I immediately required lenders to 
provide relief on FHA-insured mortgages for families of the 
victims and we urged conventional lenders to do the same. They 
responded and we have protected these families from the 
possibility of losing their homes. A short time later, 
Secretary Rumsfeld and I also announced the activation of the 
Soldiers and Sailors Relief Act, which provides assistance to 
National Guardsmen and Reservists who are called to active 
duty. It helps with their leases and it helps to ensure that 
they do not become prey to foreclosures. It also assists in 
keeping the interest rate at no more than 6 percent.
    We all heard the news reports that housing rights of some 
Muslims, Arabs, Indians, and Pakistanis in our country were 
being threatened as a reaction to the violent attacks. I made 
it clear in a letter to more than one million realtors, 
bankers, home-builders, landlords, and other concerned parties 
that our country's laws enforced by HUD do not allow any 
individuals seeking housing to be singled out and discriminated 
against because of their heritage or religious beliefs.
    HUD is also providing an additional $700 million in 
Community Development Block Grant funds to help stimulate New 
York City's economic recovery. We also allowed waivers of 
regulatory provisions for the HOME, Section 8, and public 
housing programs for the City of New York.
    Helping families find affordable and decent housing has 
always been one of HUD's core missions. This means ensuring 
housing opportunities for those who rent, whether out of 
necessity or by choice. It also means creating new 
opportunities for homeownership so that more families can 
achieve what is envied around the world know as the American 
Dream of homeownership.
    Soon after arriving at HUD, I took steps to focus the 
Department's attention on meeting these critical housing needs. 
As the Chairman pointed out, the Census Bureau reported in 
October that the homeownership rate reached an all-time high at 
68.1 percent of all Americans. Historically, minority 
homeownership rates have been lower than the rest of the 
population. Minority homeownership stands at 49.2 percent, and 
while this is a record high and positive news, we must continue 
to do more to close this gap.
    This year, HUD reached out to thousands of low-income 
families who find the road to homeownership blocked by high 
downpay-
ments and as a result proposed the President's American Dream 
Downpayment Fund. We also put forward a new Federal Housing 
Administration hybrid adjustable rate mortgage which promotes 
homeownership by reducing initial home-buying costs. I thank 
the Congress for taking action on these two important 
initiatives.
    If we are to expand the ranks of America's homeowners, we 
must address the challenge of making the home-buying experience 
less complicated, the paperwork demands less time-consuming, 
and the mortgage process itself less expensive.
    To ensure that homeowners have information they need in 
order to make informed choices in the financing of their homes 
and settlement services, I have initiated an overhaul of the 
Real Estate Settlement Procedures Act rules. My intention is to 
improve the process of obtaining a mortgage so that consumers 
get simpler, clearer, and easier disclosure, thereby allowing 
them to effectively shop for the best mortgage to meet their 
needs.
    My goal is to reduce the cost of a mortgage through 
informed shopping and competition. We also have preserved 
yield-spread premium as a valuable tool for opening the doors 
to homeownership. And Mr. Chairman, while I know we have a 
point of disagreement on that issue, and I know we may discuss 
it at more length at another time, I do want you to understand 
that Mr. Weicher's comments about Culpepper are rooted in the 
fact that the Culpepper decision itself found that our rule, 
the 1999 HUD rule, was ambiguous, and we felt it was important 
to clarify that ambiguity. The needs for RESPA reform is even 
more urgent during times of economic uncertainty. Homeownership 
helps create financial stability for families. It also helps 
Senators from Texas. But it also returns and brings economic 
stability to our communities.
    Homeownership is an important goal, but it is obviously not 
an option for everyone. I appreciate the need to expand the 
availability of affordable rental housing and ensure quality 
and options for its residents. The just-enacted 25 percent 
increase in the limits for FHA multifamily insurance will help 
to spur the construction and rehabilitation of affordable 
rental housing. I am also awaiting the recommendations of the 
Millennial Housing Commission as we look for ways to increase 
the supply of affordable housing and I will continue to urge 
our partners in the industry to do more in the area of 
affordable housing.
    On the issue of affordable housing, and I would like to 
just point out that the fair market rent, which is a median 
rent, which is the basis of the chart, Mr. Chairman, is not the 
minimum housing, but it is a much higher standard. Most poor 
people are not seeking median housing. They are seeking minimum 
housing. So I think the standard of the chart and the premise 
of it may be subject to some discussion as to where we may end 
up on that.
    Predatory lending and property flipping are abusive 
practices that continue to plague homebuyers in cities across 
the country. Senator Sarbanes, the Administration is 
particularly concerned about the situation in Baltimore. Since 
April, our Housing Fraud Initiative has resulted in 40 
indictments, six Federal arrests, two State arrests, 27 
successful prosecutions, and 66 debarments. We have provided 
relocation assistance to 46 families. We also worked with you, 
Mr. Chairman, to develop the Credit Watch legislation that was 
included in the fiscal year 2002 budget.
    I am pleased with these accomplishments, but we know that 
there is more work to be done. HUD remains committed to 
addressing the problems in Baltimore, and we feel confident 
that the lessons that we are learning there can be applied 
around the country.
    Exposure to lead-based paint is a serious problem and one 
that citizens, especially low-income citizens, deal with every 
day. Every American child deserves the opportunity to grow up 
in a healthy home, safe from the debilitating and often 
irreversible effects of lead exposure. Because the most common 
source of exposure is lead paint in older housing, HUD has a 
critical role in protecting our children. HUD awarded more than 
$67 million in grants nationwide in October to protect children 
from lead-based paint, with a focus on eliminating lead hazards 
in low-income housing.
    At HUD, we are working to ease the daily struggles of those 
who live in the most difficult circumstances. And those 
certainly include the people in the colonias. Earlier this 
year, I traveled to the colonias--the communities along the 
United States-Mexico border that are steeped in poverty--to see 
the difficult living conditions for myself and to put in place 
a game plan for help. HUD has stepped in to offer assistance 
through grants that will bring water and sewer hook-ups, and a 
Colonias Task Force that I established to ensure that HUD 
programs make an impact in these communities.
    In January, President Bush directed HUD to assist in his 
Faith-Based and Community Initiatives. We have studied the 
barriers that prevent grassroots social service providers from 
reaching out in partnership with the Federal Government to help 
Americans in need. HUD has prepared a report examining what the 
Department can do through regulatory and management 
improvements to level the playing field and encourage greater 
acts of charity in our communities, while preserving necessary 
constitutional safeguards.
    I would urge the Senate to take up the President's faith-
based legislation before the Congress adjourns. This 
legislation is critical to helping HUD expand its partnerships 
with groups working to meet housing needs of low-income 
Americans, the elderly, the disabled, and those living with 
HIV/AIDS.
    HUD has a special duty to the Nation's vulnerable 
population and this includes those who have no place that they 
can call home. Last month, President Bush announced the 
awarding of more than $1 billion to organizations serving 
homeless Americans--the largest homeless assistance in history. 
To streamline and focus the 
response of the many Federal agencies involved in delivering 
homeless services, I have reactivated the Interagency Council 
on the Homeless, which had been inactive for more than 5 years.
    In addition, the Administration remains committed to 
expanding housing opportunities for people with disabilities. 
For example, the voluntary compliance agreement signed recently 
with the District of Columbia Housing Authority will provide 
more than 500 fully accessible public housing units to disabled 
residents. HUD continues to strive to ensure equal housing 
opportunities for all.
    During the confirmation process, Mr. Chairman, I was led to 
understand from many Members of this Committee that HUD was 
plagued by mismanagement at many levels. I understood that 
meeting the needs of the American people meant improving HUD's 
management, and I assure you that I was prepared to take on 
this challenge.
    In the past 11 months, HUD has significantly streamlined 
its management structure to improve the quality and delivery of 
services and restore the agency's credibility in the eyes of 
the Congress and the American people.
    I set a goal that HUD address audit findings made by the 
Inspector General in a timely manner and make corrections that 
actually fix serious management problems. As a telling sign 
that we are committed to doing better, HUD completed the 6 
month period ending September 30, with no overdue management 
decisions on any audit of the Inspector General that has 363 
audit recommendations. This is only the second time that HUD 
has met the goal of no overdue decisions in all the years that 
the OIG has been reporting audit resolution activity to the 
Congress. Our goal is to deliver the best possible services to 
those in need and we have moved aggressively to ensure that HUD 
programs are getting the job done.
    With the support of the National Education Association, the 
American Federation of Teachers and the Fraternal Order of 
Police, I suspended HUD's Officer and Teacher Next Door Program 
in April. This came after criminal charges were brought against 
buyers who purchased their homes fraudulently. We put into 
place aggressive monitoring and tightening controls to prevent 
homebuyer fraud and restarted the programs in August.
    Working with the Congress, we terminated HUD's drug 
elimination program this year. This was a well-intentioned 
program that suffered from a large number of abuses, and 
duplicated the work of other Cabinet Departments. Despite the 
termination of this program, HUD's commitment to ensuring safe 
and drug-free homes for American families has not wavered. In 
fact, to partially offset the elimination of this program, the 
President's fiscal year 2002 budget proposed, and the Congress 
appropriated, an enhancement of the Public Housing Operating 
Subsidies, which local officials may use at their discretion, 
including for activities formerly supported by the drug 
elimination program. I will work with the Office of National 
Drug Control Policy to determine how best to capture and 
account for departmental funds used for drug control 
activities. In addition, I am working with the ONDCP, the 
Department of Justice, and other agencies in exploring ways to 
effectively meet this commitment.
    Until this year, HUD's credit subsidy--which was used to 
cover expected losses on FHA multifamily loans--was fraught 
with uncertainty due to regular appropriations shortfalls. The 
department restructured the program to make it more self-
sufficient and less dependent on taxpayer dollars. Since the 
restructuring became effective on October 1, 2001, HUD has 
issued firm commitments 
totaling $869 million for more than 10,000 housing units, 
nearly double the amount of the previous year.
    I am proud of the strides we have made in identifying the 
programs that are meeting the needs of the people and 
identifying and fixing those that are not. HUD is quickly 
becoming a more efficient, more effective provider of the 
services no agency but ours can deliver. Mr. Chairman, I look 
forward to dealing with some of the questions that have been 
raised.
    In closing, I just want to mention to you that I well 
understand that housing is really a nonpartisan issue, one that 
crosses the lines of party and politics, and I look forward to 
working with the Committee, and continuing to work with the 
Committee, in that spirit that will guide us into the future in 
a way that I believe will help the people of our country.
    Chairman Sarbanes. Thank you very much, Mr. Secretary. We 
appreciate your statement.
    I would note that my understanding is that the fair market 
rent is set at the 40th percentile of rents in a metro area, 
not at the median. But we will develop that point.
    Secretary Martinez. We should probably have some discussion 
on that. I think it would be good for all of us to be sure we 
have numbers that we can agree on.
    Chairman Sarbanes. There is a vote scheduled for 11:00 a.m. 
Since I will be here in any event until the conclusion of the 
hearing, I know there may be colleagues who may not be able to 
return. And so, I am going to yield my time to any such 
colleague so that they have an opportunity now to engage in a 
discussion.
    Senator Gramm.
    Senator Gramm. Mr. Chairman, thank you very much.
    Mel, I want to raise one issue. I know how we can cut the 
cost of buying a house by between a quarter and a third for 
people that are participating in Federal programs aimed at 
lowering the cost of buying a house. And the way to do it is to 
do something about title insurance.
    Now let me make it clear that I am sure that everybody in 
the title insurance business are very fine people. It is not a 
question of any abuse whatsoever. I worked very hard against a 
determined lobbying effort to open up title insurance in our 
Financial Services Modernization Act. But that is not going to 
solve the problem.
    The problem with title insurance is that the entity that 
requires it does not pay for it. So it is costless to the 
lender to require the title insurance. And basically, what 
happens is that I buy a title policy when I buy a house. They 
thoroughly search the deed. And then I sell the house to 
somebody else and in their closing, they have to buy a brand-
new policy which does not build on the policy I have. We have 
had some minor reform when people refinance their note under 
certain circumstances. But even there, often you have to buy a 
new policy.
    Now I am not saying that title insurance does not add 
value. But I am saying that it adds nothing like the value that 
it costs. And what has happened is--I do not know whether it is 
the power of the lobby or whether it is just inertia. But it 
seems to me that if a lot of the Government programs, including 
Freddie Mac and Fannie Mae, change their policy on title 
insurance. I mean, it is not as if this is a country that has 
clouded title any more. The risks involved in not having title 
insurance are minuscule as compared to the cost. And we are 
talking about big dollars on a closing.
    I urge you to get your people to look at somebody who is 
getting Federal assistance, FHA or some similar program, look 
at their closing statements and look at the big chunk of money 
for title insurance. This cries out for something to be done 
about it. I just want to urge you to look at this. We could 
probably do more by fixing that than any increase in 
appropriations for HUD for housing that will be made in the 
next 8 years combined.
    This is a really big item and you are going to run into a 
buzzsaw of political opposition in doing it. But heaven knows, 
it is the right thing. And I want to urge you to please look at 
this thing. This should be fixed. And it is not as if this is 
some trivial issue. The title insurance policy on the kind of 
house that the people who worked hard and bought their first 
home in Texas, and you look at what they have to put down on 
it, it is a big item.
    So I want you to look at it and figure what you could do in 
changing your policy to do something about this requirement of 
title insurance. My guess is the cost, the social cost of its 
elimination--and I am not saying--if people want to buy it, 
great. But you are making them buy it. Your programs are making 
them buy it. And my guess is the social cost of not having it 
would not be one tenth of the cost of purchasing the policies, 
maybe not one hundredth. So anything in that range--I made 
those numbers up. But my guess is they are true.
    [Laughter.]
    Anything in that range ought to be looked at. And I plead 
with HUD to do that.
    Secretary Martinez. Thank you, Senator. I will take that to 
heart. And this is part of this comprehensive RESPA review that 
we are doing.
    The fact is that the whole settlement process of homebuying 
and even refinancing is not transparent enough. There is not 
enough clarity in it. People do not know what they are paying 
for a lot of times. And the bottom line is that the 
mysteriousness of the process does not allow them to also 
compete for services. That gets back to the issue of yields per 
premium, a perfectly legitimate tool to assist the homebuyer 
with the initial cost. But at the same time, badly abused. And 
so, as we go through this process, I think that we will add 
title insurance to the list. I believe it is always on that 
list and I am aware of what you are discussing.
    Senator Gramm. Well, my guess is that most Americans have 
never had a closing that was not unpleasant.
    Secretary Martinez. Or that they understood, by the way.
    Senator Gramm. Well, because they did not understand it 
going in and they felt gouged.
    Secretary Martinez. And typically, because the good faith 
estimate was not particularly accurate at the end of the 
transaction where they had to come up with even more money. So 
this is what this RESPA effort that I am now undertaking is 
going to try to do. It is going to be controversial, I warn you 
now. It is going to require--I am just planning to call them as 
I see them, and that includes your suggestion.
    Senator Gramm. You look at title insurance.
    Secretary Martinez. So we will be there. Thank you.
    Chairman Sarbanes. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. And thank 
you, Mr. Secretary, for your testimony.
    The FHA multifamily program has shut down because of a lack 
of credit subsidies. And the industry estimates that just the 
last year alone, 55,000 apartments were not built because the 
program stopped. In an effort to ensure that the programs are 
able to continue in the future, HUD increased premiums on the 
program.
    There are many in the industry that would argue that if the 
credit subsidy is calculated and allocated properly, there 
would be no need to increase the insurance and the subsidy 
would be adequate for a full year of production. And when 
Secretary Weicher was here, he commendably volunteered to work 
with industry to try to resolve the issue. I wonder, has HUD 
completed its review? And if so, can you share your findings 
with us?
    Secretary Martinez. I am not at this point able to share 
the findings with you. We are closing in on that process, and I 
believe it will be positive news to the industry. But I do not 
think that we are in a position today where I can disclose the 
numbers to you.
    One thing that I will say, by the way, that the elimination 
of the subsidy has had a very positive effect. I think the dire 
warnings that there would be a stop to multifamily housing 
production have not taken place and, in fact, the numbers that 
I have discussed in my testimony suggest that there has been 
almost a doubling of the business that we did a year before. So 
I believe the certainty of the subsidy being there, even at a 
premium increase, is well worth the offset of having a subsidy 
that was there and not there.
    But we will get back to you very soon with some finality to 
that. And as I say, my sense is that the 80 basis points is 
higher than it is going to be in the future.
    Senator Reed. Well, thank you, Mr. Secretary. Again, I 
think this is an important issue because we all, I believe, and 
hope, recognize that there is a production problem in the 
country that is causing higher rental rates in terms of payment 
of rents. This seems to me not completely costless, but a very 
efficient way to perhaps increase production.
    Secretary Martinez. Another way, I might point out, to 
increase production, the Congress just acted in the prior 
budget year on the 25 percent increase of FHA minimums for 
multifamily housing.
    This again is going to have a very positive effect. We are 
already seeing the impacts of that. We are getting loan 
applications from communities that we had not heard from in 
many years--Los Angeles--I cannot think of others, but three or 
four around the country, where very pointedly, they are coming 
in now where none had in the past. So, clearly, this raising of 
the loan limits for FHA multifamily, the credit subsidy issue, 
there are several things that I think we have done already and 
are in the process of doing, I believe will have a very 
positive impact on the affordable housing shortage around the 
country.
    One other thing I will say on that issue, too, Senator, is 
the fact that I believe dislodging HUD's management tangle with 
improved management in our field operations, more direct 
reporting, more autonomy in the local field offices, will make 
HUD a more, develop a friendly agency, which will encourage 
people who have not been in the affordable housing business, to 
perhaps get back in it and gin up production of multifamily 
housing in the affordable area.
    Senator Reed. Thank you, Mr. Secretary. Let me turn to 
another issue--the mark-to-market reauthorization legislation.
    We have tried to move it expeditiously through the 
Congress. One reason is that there was a fear that the staff of 
OMHAR would leave if there was an uncertain resolution to the 
mark-to-market. We are hearing now that because HUD has not 
moved quickly enough, that the staff is leaving and that the 
program integrity is being lost because the very skilled people 
are leaving there or propose to leave there. Can you comment 
upon that situation?
    Secretary Martinez. There is a long lingering sensitivity 
between the Department and OMHAR, that the direction in which 
it is moving is to be part of HUD in a more integrated way.
    I think that we are doing all that we can in what is a 
difficult situation in terms of just people and personalities 
and so forth. But, ultimately, OMHAR, which took a long time to 
ramp up and do the things that we needed it to do, is now 
moving in a positive direction. We want that to continue to 
occur. We hope that the 
people who are there will choose to continue to be employed by 
the restructured OMHAR. The program is vitally important to 
keeping a lot of affordable housing out there. And we will do 
all we can within reason to keep those people and to make that 
transition as smooth as possible.
    Senator Reed. Thank you, Mr. Secretary.
    Turning to another issue, and that is Section 8 vouchers. 
One of the challenges that you face is the increased cost of 
renewing Section 8 vouchers as we go forward. Those costs 
increase both to cover the natural cost of inflation and 
because a number of long-term contracts are expiring and need 
to be renewed. We heard an estimate at our last hearing that 
the cost of renewing Section 8 will be about $1.8 billion next 
year. I wonder if you have a sense of whether or not that 
number is accurate and also, whether or not you will have the 
resources to cover those costs.
    Secretary Martinez. I think the number is too high. I think 
the number is lower than that. It is still a substantial 
figure. The whole issue of Section 8, whether it be project-
based or tenant-based, I think that while it provides a very 
useful vehicle for families to receive rental assistance, the 
fact is that one of the real problems in the Section 8 program, 
as we always see increased vouchers, is the recaptures. About 
$2\1/2\ billion of Section 8 vouchers come back and get 
recaptured every year and then get spent in things other than 
housing.
    I would like to see the Congress in this coming budget year 
to give us the authorization to reallocate Section 8 vouchers 
on a permanent basis because we just have to face the fact that 
Section 8 vouchers work in some communities, and do not work as 
well in others. There is a historical pattern where some 
entitles at the local level are able to use all their Section 8 
vouchers and have a waiting list and there are others where 
they year after year do not get used. We need to be able to 
equalize that in a better way than we have been able to do in 
the past.
    Senator Reed. Well, let me make a final comment and yield 
my time, whatever is remaining, back to the Chairman.
    Secretary Martinez. Yes.
    Senator Reed. In some respects, all roads seem to lead back 
to production, or at least availability of affordable housing, 
because if you do not have enough money to renew the Section 8 
voucher program, then you will lose units. And indeed, if you 
are struggling with renewal of Section 8's versus other housing 
production programs, and with respect to the nonuse of Section 
8, many times--and I am speaking from my experience in Rhode 
Island--it is the fact that the voucher just does not cover the 
prevailing rent, and that people have a voucher. They walk 
around with it for a couple of weeks or months, and they cannot 
find anything that they can spend it on. And as a result, they 
are turned back, which goes again back to production, to having 
affordable housing there that they can use the vouchers.
    So I thank you, Mr. Secretary, not only for your testimony 
today, but for your leadership.
    Secretary Martinez. Thank you.
    Chairman Sarbanes. Senator Allard.
    Mr. Secretary, I might point out, Senator Bayh had to go 
preside in the Senate at 11:00 a.m. And he said he will get in 
touch with you personally and take up the Indianapolis issue.
    Secretary Martinez. I think I would like to get with the 
Senator, and perhaps Senator Santorum and perhaps Senator 
Allard as well, and have our Housing Commissioner and go 
through a thorough explanation of what I think is a honest 
difference of opinion that I think bears no relationship to 
whether, frankly, our nominees are qualified people or not. But 
the bottom line is that I want to resolve it in a way that at 
least allows us to agree to disagree, but at least to 
understand the basis for it.
    It is not a desire to obstruct or not do something that 
appears to be sensible. It is something that would be quite a 
departure from current policy, to policy that has not been in 
effect since 1983, and frankly, I am being told would have a 
significant cost implication by subsidizing the rentals in 
these units for the next 20 years.
    It is something that the Department a long time ago quit 
doing. And so, the bottom line is that there is clearly--I see 
some heads shaking behind you, Mr. Chairman and the fact is 
that there is obviously not a common view of the problem.
    So we should sit down and resolve it and probably, this 
would not be the best place. But I am happy for Mr. Weicher and 
myself to visit with the Senators.
    Chairman Sarbanes. Well, if he were here, it might be the 
best place. But he is not here because he does not control the 
situation. He had to be where he had to be.
    Secretary Martinez. I understand.
    Chairman Sarbanes. Senator Allard.
    Senator Allard. Well, just to follow up on Senator Bayh's 
concerns. We have a similar concern in my State of Colorado.
    My understanding of the way the appropriations process is 
working right now is that the project in Pennsylvania is going 
to get 
accepted by the appropriators and the one in Indianapolis and 
Denver, Colorado, is not.
    And if that is the case, then I think you need to relook at 
that because I think when you do it piecemeal like this, and if 
the appropriators can go ahead and do that, then I think that 
is the problem. Now I may be misinformed on that.
    Secretary Martinez. We clearly would oppose that. We do not 
favor the program in any one of the situations involved. They 
are all the same in terms of the implications to what I believe 
existing policy to be.
    Senator Allard. But the fact is that the appropriator might 
have the final say on that.
    Secretary Martinez. Correct.
    Senator Allard. And that may mean that the Pennsylvania 
project gets treated a little differently than the one in 
Indianapolis. And if that happens, then I think maybe we need 
to sit down and review the whole program and see where we are 
at, because once that begins to happen, then you are going to 
have more projects.
    Secretary Martinez. Basically, the difference is that we 
have a program--the purpose of OMHAR, and this is through 
OMHAR, is to preserve the properties that we now have, not to 
tear them down and build new projects. This is to tear down and 
rebuild. It is putting a Section 8--it is a HOPE VI spin on 
Section 8.
    Senator Allard. Yes.
    Secretary Martinez. There is not a HOPE VI for Section 8. 
HOPE VI is for public housing. So it is attempting to do what 
HOPE VI does in the public housing arena, to do it in the 
Section 8 arena.
    Basically, Senator, the thing that I want to make clear is 
that this is not out of some desire to just obstruct. It is out 
of a very honestly and deeply held opinion that this is not the 
direction that HUD has gone for many years. The restructuring 
through OMHAR is not to do what this is intending to do.
    And in addition to that, it is a major change in policy. 
There would be about a thousand multifamily projects with 
Section 8 contracts eligible that are due to expire in the next 
3 years, and a lot of this could be coming on. So we are 
starting a very significant precedent here if we do this.
    I think with the eyes wide open as to what it implies, I 
think that the Congress can make a choice about what it wishes 
to do with it.
    Senator Allard. I would just conclude my argument by making 
this point.
    It is rental facilities on the same lot, the same location. 
What they determined is that it is easier and less expensive to 
tear down what you have and build new, and that needs to be 
looked at.
    Secretary Martinez. Well, I have gone around and around 
that with Senator Santorum on a few occasions. I think 
basically we are trying to protect the way the program is 
structured currently to be.
    If it is the will of the Congress to change that and we 
want to take a different approach and allow for--I mean, it 
makes perfect sense. Senator Santorum has told me that this is 
going to make a huge difference in this neighborhood. If this 
does not happen, it is just going to be a bad project 
continuing to----
    Chairman Sarbanes. Well, if that is the case, why don't we 
make it work? The same thing in Colorado.
    Secretary Martinez. It ought to happen throughout. I do not 
think it ought to be treated differently in one community as 
another. The policy principles that we are opposed to are true 
in all three projects. It is not any different.
    Senator Allard. Let me move on, Mr. Chairman.
    Secretary Martinez. Yes, sir.
    Senator Allard. As you are aware, I am a strong proponent 
about the results act, which is outcome-based management. I use 
it in my business. When I was a Community Health Officer, we 
used it. We used it in management of our city and it was used 
in the management of the county in the area in which I grew up.
    I believe that it is a good way to have accountability as 
you move into the budget process where you have specific 
measurable goals in which you can measure your outcomes. Will 
HUD's budget reflect the use of outcome-based management 
principles, either totally or partial? And if it is only 
certain agencies, I would be interested to know which agencies 
you would begin to move with.
    Secretary Martinez. Senator, we are trying to do that 
across the board. It lends itself more in some places than in 
others. And I do not know that I can detail for you which 
specifically today.
    But the fact is that other principles in results management 
are well validated in the private sector and I think Government 
should operate with those same principles in mind.
    I look at programs, for instance, and I want to mention one 
in specific--Youth Build. It is a very popular program and it 
gets funded very amply, and in fact, this year it got increases 
beyond what we had asked for. I really question whether Youth 
Build, for the amount we are spending, is having the kinds of 
results that are warranted given the expenditure of the 
dollars. I love kids and I love for young people to get a 
start. If it had not been for people helping young people, I 
would not be here sitting today.
    But the fact of the matter is that we still have to be good 
stewards. It is a program that when you do simple math and you 
look at the per capita of it, I am not sure that it has the 
bang for the buck that we would like to see. So I am not saying 
by that it is not a program that we would continue, but the 
fact of the matter is that we ought to look at it and decide 
how we can make that program more effective to reach out to 
more kids.
    It is only a $65 million program only helping 3,300 kids. 
Well, I was shocked when I saw how few kids we were helping 
through that program. There ought to be a way to make that 
apply to more.
    Senator Allard. I think those kinds of programs get 
identified if we apply the principles in the results act.
    Secretary Martinez. Correct.
    Senator Allard. I think it helps us as policymakers. There 
may be another program that does a better job. And right there 
within your budget, you can measure those results.
    The other thing I wanted to bring up with you is, I have 
been informed that you are working on a project to identify the 
current number of programs in HUD. And I am wondering if you 
have completed your survey or not and what you found out.
    Secretary Martinez. Well, HUD is an agency where it has 
been a repository of all good ideas at one time or another. 
Some 350 programs are at HUD now. We are trying to identify 
each and every single one and each and every single 
authorization for the programs that we have.
    We are not completed in that process. But I assure you, 
what I am trying to do is have a better handle and, if we can, 
combine programs, as we did with drug elimination. I think that 
we are going to end up with in that vein is a much stronger 
effort at drug fighting than we were by the drug elimination 
grants that were going directly to the housing authorities. So 
I believe that shows a willingness to try to correct something 
that was not working appropriately and to reduce the programs 
at HUD.
    It is not about doing less for people. It is about how to 
best do it for people. And so, in that context, we will 
continue to aggressively look at our programs, try to continue 
to focus on our core mission. I think that what happens 
sometimes is that our good intentions leave us in places where 
we end up not serving what we are there to do.
    If we do not provide shelter in the homeless arena, no one 
else can do that. But if we get bogged down and service 
programs that are really more designed for departments like HHS 
to carry out, or job training issues that are really more of 
what Labor does better, or Education, the fact is that then the 
shelter part of our programs suffer. And no one else is there 
to provide the shelter part of our programs. So I am trying to 
get better interaction with other Departments, creating the 
interagency council on the homeless is a good example of that, 
to try to make sure that we are at cross-departmental levels, 
working to ensure and to better see our programs have the 
desired effect.
    Senator Allard. I want to congratulate you on trying to 
stick with the core mission of HUD.
    Mr. Chairman, you have been very generous with your time.
    Thank you.
    Chairman Sarbanes. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman. And again, 
welcome, Mr. Secretary.
    There is no question that I think we all support the 
efforts to be effective with the resources available and to 
certainly ask the tough questions and make sure that we are 
meeting the goals, whether it is addressing homelessness--and 
you have talked in the past about chronic homelessness.
    I believe we also, as we are looking at those who are 
chronically homeless, whether through addiction or mental 
illness, that while we are addressing this population, we need 
to also make sure that we are addressing those who are homeless 
as a result of post-September 11, the economic downturn, and 
that there are many challenges as it relates to the homeless 
and those who are wishing to purchase housing and making sure 
that that is available and that the right kind of quality of 
life is available to those who are in housing in terms of 
safety and so on.
    I would like to go back to the issue of predatory lending 
for a moment. I know that the Chairman talked about the Federal 
Reserve and a very important change that they made as it 
relates to HOEPA yesterday. And I congratulate the Federal 
Reserve for moving forward. I know that Treasury Assistant 
Secretary for Financial Institutions, Sheila Bair, has recently 
been making comments on work that Treasury is undertaking to 
address predatory lending, including setting up a formal task 
force to develop best practices. And I am wondering if you are 
working with Treasury or what your intent is in terms of the 
issues of predatory lending.
    Secretary Martinez. Well, first of all, overall, let me say 
that we are very committed to the issues of predatory lending. 
Our Department has been working with Treasury in the Home 
Ownership and Equity Protection Act that the Chairman referred 
to and the Acts that were taken by Treasury--I am sorry, by the 
Fed--yesterday.
    We continue to work very closely with the Baltimore task 
force on predatory lending and are using that as a bit of an 
example of what can be done in one community with very focused 
effort.
    We have given the resources and the people to stay the 
course in Baltimore and to deal with predatory lending in one 
of the communities where it was most rampant and most difficult 
to stamp out. I think the results that I detailed are in my 
opening statement and speak for the fact that it is working in 
Baltimore. We look forward to replicating that in other 
communities where predatory lending is a particularly difficult 
problem.
    So we are very much committed there and we continue to work 
with Treasury. Some of these issues relate to TELA more than 
they relate to things that we do at HUD. But nonetheless, 
working very closely with them in whatever comes up in that 
arena.
    Senator Stabenow. Well, Mr. Secretary, I would invite you 
to come work with us in Michigan. We have been following the 
Baltimore model. Freddie Mac has been supporting our efforts in 
Detroit through their program, called Don't Borrow Trouble.
    We have a very broad coalition that includes Freddie Mac 
and Fannie Mae and local lenders and fair housing alliance 
members, nonprofits that are very focused on this issue. We 
would very much welcome your involvement and HUD's involvement.
    Let me just ask one other specific thing as it relates to 
policies, because one of the things that has come up over and 
over again as I have held community forums in Michigan and also 
as a constituent of mine, Carol Mackey, testified before this 
Committee back in July, on the issue of good faith estimates. I 
am wondering what your position is as it relates to a good 
faith estimate within 3 days of an application, whether or not 
that is adequate, whether there should be penalty for either 
failing to give the estimate or exceeding the costs of the 
estimate.
    We are hearing over and over again of the good faith 
estimate 3 days before closing, substantially changing at the 
time of closing, and individuals not having the opportunity to 
look in detail at the changes, and finding, in fact, that what 
they thought they were doing in terms of signing on the bottom 
line, is very different from the reality of what happens at the 
time of the closing on the loan. So do you have a position as 
it relates to good faith estimates and consumer information 
being given ahead of time?
    Secretary Martinez. Absolutely, Senator. I think your 
constituent is absolutely correct. It is a bad practice for the 
public to receive a good faith estimate and only have 3 days to 
react.
    My hope is, and what we are doing through this RESPA review 
of the rule process, is to try to give folks an opportunity to 
have a firm estimate at the time of application.
    So prior to giving any money, turning over any money, that 
they would have a firm estimate of what the closing costs, the 
settlement costs, are going to be. That will then allow the 
consumer, with great transparency as to what is being charged 
and why and the costs on each and every subject of the closing 
costs. And the consumer then will have the opportunity to shop 
before they put down any money.
    The problem with the good faith estimate at the tail-end of 
the process is it is only an estimate and it is not a firm 
figure, often subject to change. But it is also at the end of 
the process, when the person is now ready for closing. They 
really have no option to shop for services, to shop the prices 
of the settlement. So I am very committed to RESPA reform, and 
that is at the core of what RESPA reform will be about.
    Senator Stabenow. Thank you.
    Secretary Martinez. Can comment on the issue of the 
homeless?
    Senator Stabenow. Yes.
    Secretary Martinez. I believe that--I set a goal a few 
months ago that we should eliminate or should end chronic 
homelessness in a 10 year timeframe. Chronic homelessness is 
probably a third to 50 percent of our homeless population, and 
they are typically addicted or mentally ill. And they require a 
whole host of support that they are not always now getting.
    There is another very vulnerable segment of that population 
of the homeless, which are the families. And oftentimes, that 
gets overlooked when we talk about that issue.
    You speak about vulnerable communities and post-September 
11. I am well aware of the difficulties that some communities 
face. My home community in central Florida has been terribly 
impacted by the events--the stoppage in travel, people not 
traveling to attractions, and air travel. It has had a very 
devastating impact in that community.
    And in fact, part of what I hope would happen is that, in 
enacting the Faith-Based Initiatives now before the Senate, 
that this will assist us in getting more entities at the local 
level working with us and partnering with us to bring services 
to homeless populations, to break down so many barriers that 
are artificial, that really should not exist, and that will 
level the playing field.
    Right now, we can do business with big people, like Habitat 
for Humanity. They have the resources to go through our very 
complicated process of dealing with, as a faith-based 
organization, of dealing with an agency like HUD. Smaller 
organizations do not have the patience or the resources to hire 
the lawyers and do the things they need to do to be able to do 
business with us.
    We look forward to streamlining that and making that 
process more easy to access so that more organizations can work 
with us and bring those services in partnership with our 
dollars to local communities that need them.
    Senator Stabenow. Let me just say in conclusion, Mr. 
Chairman that I would share your concern about eliminating the 
bureaucracy. I think that is a general challenge that we have 
across the board as we are addressing Government programs.
    And certainly in HUD, I would welcome your simplifying that 
process, whether it be a current faith-based organization that 
is currently working with HUD. We have many groups that, 
regardless of what happens legislatively here, our faith-based 
organizations, faith-based nonprofits, that do wonderful work, 
that I would love to see expanded upon, as well as other 
important, nonprofits. I think if you can see that so that 
smaller organizations can be more directly involved, that would 
be extremely helpful.
    Let me just emphasize again that the chronic homeless are a 
very important part of the homeless population. But as you 
indicated, there is a broader group. And unfortunately, 
oftentimes, when we start creating subsets, they end up being 
pitted against each other for limited resources, rather than 
expanding the resources to meet the true need of what is there. 
So, I would challenge you to look beyond and to expand what is 
available, working in partnership with the community to make 
sure that we are addressing the real needs.
    Thank you.
    Chairman Sarbanes. Before I yield to Senator Corzine, I 
just want to make sure of where you stand. Is it the HUD 
position that it is not your job to provide supportive services 
with respect to the homeless?
    Secretary Martinez. No, that is not what I said. What I am 
saying is that there are a number of programs.
    Chairman Sarbanes. You said that you were going to focus on 
bricks and mortar, as I understand it.
    Secretary Martinez. Well, in a perfect world, Senator, we 
would do just that and then HHS would come in with the kind of 
services that they typically would provide in issues of mental 
health or addiction recovery and things like that. What is 
happening is that over a period of time, the HUD dollars that 
go to homeless organizations, because of the lack of services 
being provided by other organizations like HHS, have gone more 
to services and less to bricks and mortar.
    What I would like to do, and what I am working on doing, is 
without leaving any gap in the provision of services, shift it 
so that HHS can take a stronger role in doing that which they 
should be doing, allowing HUD dollars to then be more geared 
toward the shelter dollars that are needed. So that none of 
this would be done in a way that would leave any programs 
ongoing without the assistance that they would need.
    Chairman Sarbanes. Are you familiar with the Culhane study 
out of the University of Pennsylvania with respect to providing 
support of housing for homeless people and the cost-
effectiveness of doing that?
    Secretary Martinez. No, I am not.
    Chairman Sarbanes. Well, I would certainly bring that to 
your attention.
    I would just make this comment and then I would yield to 
Senator Corzine. Then I may come back. I am getting more and 
more concerned here as I listen to this testimony today that 
there is more and more dogma beginning to gain ascendancy in 
the HUD approach to some of these problems.
    I am very interested in practical, pragmatic solutions to 
these problems. I am not very interested in HUD drawing kind of 
fixed lines and saying, well, we do not do that kind of work. 
That is somebody else's work to do, even though that may mean 
that the problem does not get resolved.
    I have a little of that concern over this Indianapolis and 
Colorado situation as well. Apparently, people have come 
forward with very carefully developed programs that would 
really solve a real problem that exists on the ground, and we 
do not seem to be able to get there. And I am concerned about 
getting there.
    But I will pursue it later. Senator Corzine.
    Senator Corzine. Thank you, Mr. Chairman.
    I want to go back to a basic question because I am not 
convinced that I am hearing the same thing from you that we may 
have heard from the witness panel that we had 2 weeks ago and 
what I certainly feel.
    Do you think there is a crisis in public housing with 
respect to the shortage with respect to the amount of resources 
we as a society dedicate to the general problems that we have? 
Are we doing what we should be doing as a society? I am all for 
management. I believe strongly in making sure that we get bang 
for our dollar.
    Secretary Martinez. I think, Senator, there has been a 
pretty clear consensus over some years that public housing 
probably is not the solution to the housing needs of America. 
We have a number of public housing units that we have had for 
many years, going back to the late 1930's. And through HOPE VI, 
many of these projects which have fallen into disrepair and 
really were problematic are reemerging more as mixed-income 
communities and that type of thing.
    Senator Corzine. But HOPE VI is public housing.
    Secretary Martinez. Sure, it is public housing.
    Senator Corzine. No one is arguing that we need to stay in 
the same pattern of the kind of public housing that was 
created----
    Secretary Martinez. No.
    Chairman Sarbanes. I think if you struck the word public 
housing and used affordable housing, it would go more to the 
point that I think Senator Corzine is getting at. Do you think 
there is a problem with sufficient affordable housing in this 
country?
    Secretary Martinez. I think there is a need for more 
availability of affordable housing. There is affordable housing 
needs in my home community that I dealt with as a local 
official. And Senator Allard did point out the very serious 
problem, is that a lot of times you do get into conflict in 
communities that do not want to have affordable housing.
    But, clearly, there is a problem and clearly, there is a 
need. And clearly, there is a number of things that we must do 
to address the need, including some of the things that I have 
talked about today that we have already begun to do--raising 
the multifamily limits in FHA, the credit subsidy issue, and 
things like that. But, clearly, there is a need.
    Senator Corzine. I think there are a number of individual 
steps. A number of us, including Senator Allard and myself, 
sponsored that here, the multifamily limit. But that was 
reflective of inflation and growth in the cost of housing. It 
was out of step with the real world to not have an increase in 
it.
    But when you go back and, we had a budget of $29.2 billion 
in 1976, and now we have one of $30 billion, even whether we 
are managing well or we are not managing well, we are certainly 
not making a statement that in the world today, that this is 
the same kind of priority that others were thinking it was in 
those particular areas. I think we need to admit we have a very 
serious problem. I know we do in our State.
    Secretary Martinez. Correct.
    Senator Corzine. Whether you are using 40 percent of fair 
market value or 50 percent, $17,500, that is about a $40,000 
income for an individual, maybe a little less than that.
    That is what a lot of people consider the middle class. We 
have an availability, an affordability problem that I think 
needs to be dealt with.
    Secretary Martinez. I agree with you, Senator, and I am 
prepared to work on trying to find ways in which we can attack 
that problem, and I think we are doing some things on that 
already. More needs to be done. I agree.
    May I point something out, though? I am not going to talk 
about the historical perspective here. Senator Sarbanes has 
been at this much, much longer than I have. But when you look 
at this Department and what the budget might have been in years 
past and what it is today, a lot has changed. This is a 
Department that had like 18,000 people, which is now being 
managed by 9,100 people.
    So much has changed in the intervening years. I think your 
point is well taken as to the growth of the budget in this 
Department. But I think also a lot of underlying assumptions 
have to be also consistent in order for that analogy to be 
correct.
    Senator Corzine. As you know, one of my hot buttons is the 
Public Housing Drug Elimination Program.
    Secretary Martinez. Yes, sir.
    Senator Corzine. It was stated that we were going to 
reallocate a lot of these resources to other areas, that the 
purpose was good, that there were things that needed to be 
done. We had a difference of view about how much of it was 
poorly directed. Do you have a number about how much of the 
resources that were allocated--it is roughly $300 million, if I 
am not mistaken.
    Secretary Martinez. Three hundred fifty-eight million 
dollars.
    Senator Corzine. Yes. How much of that has been 
reallocated. And then to go at something that Senator Allard 
asked you--are we going to have standards of measurable results 
to see that those programs or those other initiatives are 
accomplishing what it was that at least I was hearing from the 
public housing officials in New Jersey, was a very meaningful, 
effective program in trying to hold back crime in the public 
housing arenas?
    Secretary Martinez. Let me answer that in two ways.
    First, $150 million of the $358 million was reallocated 
at--I am sorry. Two hundred fifty million dollars out of the 
$350 million was reallocated to the operating fund for public 
housing. So it is a total drop-off of $108 million, not any 
more than that.
    Senator Corzine. That could be available for other elements 
other than drug elimination.
    Secretary Martinez. Right.
    Senator Corzine. This gets at the point.
    Secretary Martinez. No, but here is the thing. If an entity 
feels that they have a good program in drug elimination and 
they were using the program before, they can continue to use it 
now. If there was a place in which they were not particularly 
using the drug elimination program, they now have dollars 
available that they can use for something else. So it gives 
some local flexibility on whether or not they use the dollars--
I mean, they have more availability now for these dollars and 
different usages.
    But, Senator, I expect for you to hold me accountable as to 
whether or not we improve the climate in public housing as time 
goes on in terms of what we do to effectively fight drugs and 
other problems in public housing.
    Second, there is about $800 million yet unencumbered in 
that fund that will be available over the next couple of years 
for public housing authorities to continue to draw on the drug 
elimination program. So while that is being drawn down, we are 
going to put other things in place which we think will be 
helpful in fighting drugs in public housing.
    One thing I will say also is that my experience in this 
Department is that, oftentimes, frequent times, public housing 
agencies have difficulties in management. We are dealing now 
with serious problems at the New Orleans Housing Authority. It 
seems like we deal with these across the country at one time or 
another. San Francisco recently. Puerto Rico.
    The bottom line is that when it comes to things like law 
enforcement, that there may be at the local level a disparity 
in the ability of local housing authorities to be good agents 
as it relates to managing public safety.
    So my thrust is going to be to try to support them by 
having other governmental agencies that deal with issues of 
public safety and drug problems to assist public housing so 
that they can continue to do the things that they do and allow 
these other entities to come in and provide the support. 
Oftentimes, what has happened is that public housing has been 
set apart. The police do not go there. The local law 
enforcement says that is public housing.
    I do not think that is fair. I do not think that is right. 
By having a drug elimination drug program, we are not taking 
the place of effective local law enforcement and other things 
like HIDA funds and other drug funding that comes through our 
drug czar's office.
    Senator Corzine. In the fullness of time, I would love to 
see how we are doing with regard to measurable statistics with 
respect to how crime in public housing is doing.
    Secretary Martinez. We will work with you, Senator, and 
bring to you----
    Senator Corzine. And make sure that we are actually having 
the kind of response we are talking about relative to where we 
were.
    Secretary Martinez. Thank you.
    Senator Corzine. Thank you, Mr. Secretary.
    Senator Reed. Mr. Chairman, would you yield for one moment?
    Chairman Sarbanes. I was going to do my round of 
questioning. But go ahead.
    Senator Reed. For just one moment. Mr. Secretary, since my 
colleagues have made eloquent pleas for specific projects that 
require pragmatic--indeed, inspired--action by the Department, 
I would be remiss. We have a project in Rhode Island, 430 
Section 8 units in Wynsocket and Central Falls that are in a 
similar category of requiring some support by HUD and a 
legislative solution. So I would request that you add that to 
your list as you go back and search your soul and your heart.
    Secretary Martinez. Yes, sir.
    [Laughter.]
    Senator Reed. And we are praying together.
    Secretary Martinez. The right thing to do.
    Senator Reed. The right thing to do. And as the Chairman 
said, the pragmatic thing to do.
    Secretary Martinez. Yes, sir.
    Senator Reed. I am somewhat lighthearted. But it is a very 
serious issue with us and I appreciate your attention to that.
    Chairman Sarbanes. The frustrating thing for us is that we 
are very much aware of how much effort it takes at the local 
level and, presumably, you are as well, as a former local 
official, to put 
together support for addressing blighted housing and, in 
effect, moving through with a project that provides affordable 
housing for low-income people.
    We recognize the amount of effort that has to go into that 
on the part of local elected officials, community activists, 
the tenants, the organizers of the project who have to come up 
with creative solutions, and so forth and so on.
    Now, when that happens and you have a situation in which 
there is general agreement that housing should be done and you 
are not encountering the kind of resistance you ordinarily run 
into, it is extremely frustrating not to be able to move 
forward with that. Now, clearly, the one thing that has emerged 
out of this hearing, it seems to me, is that we need to have 
more hearings.
    [Laughter.]
    Secretary Martinez. I am really delighted to hear that.
    [Laughter.]
    Chairman Sarbanes. I think it is very clear to me, we have 
given you a year down there to get your sea legs and 
everything. But it is very clear to me that we need to really 
have a more intense kind of exchange, and to do some of it 
right out on the public record. To the extent that these 
involve important principles, we need to lay them out and 
examine them very carefully.
    Secretary Martinez. It does not make me happy to be the 
stubborn bureaucracy standing in the way of progress, 
particularly for local communities. That is not what I came 
here to try to do.
    Chairman Sarbanes. Well, if there are statutes or rules 
that frustrate it, then we ought to examine them and see what 
can be done about them.
    Secretary Martinez. I think it is just going to require a 
basic difference in how we have approached the whole issue of 
Section 8 restructuring. And if we want to do that, we should 
go about doing it with open eyes of what we are doing and 
knowing that there will be other projects similar to this that 
are going to come up, and that this is not without a cost 
implication from what I am being told.
    So I do not want to be the fly in the ointment here on 
something that makes a lot of sense to see happen. So I look 
forward to working with the Senators on this. Bureaucracies are 
stubborn things.
    Chairman Sarbanes. Section 8 reserves are critical in 
ensuring that the public housing authorities can serve families 
under Section 8 when costs unexpectedly rise because of 
increased utilities or a jump in the number of large families 
served.
    At the Administration's request, Congress cut these 
reserves in half in the fiscal year 2002 appropriations bill. 
Report language was included by the appropriators directing HUD 
to ensure that utilization does not decrease as a result of 
this cut, and in fact, Congress directed HUD to ensure that 
PHA's have the funds to administer all Section 8 contracts in a 
normal manner, including vouchers that turn over during the 
year.
    Now I understand that HUD has unfortunately sent out 
letters to PHA's directing them to stop reissuing turn-over 
rental certificates. Now this would seem to be in direct 
conflict with the intention of the Congress as spelled out in 
the conference report and will result in a cut in the number of 
families being served. Were you aware, Mr. Secretary, that 
these letters were being sent out?
    Secretary Martinez. No, sir, I was not. In fact, what I 
have been reassured time and again and in preparation for this 
hearing was that the reduction of the reserves from 2 months to 
1 month was not going to have a problem, was not going to 
present a problem, and that 1 month's reserve was really going 
to be sufficient.
    In addition to that, I am told that we also have recaptured 
funds from other funds that can be utilized for this purpose 
and that at no time would there be a situation where a Section 
8 tenant would not have their voucher honored because of this 1 
month's reserve.
    Chairman Sarbanes. Well, am I mistaken in the understanding 
I have that HUD has sent out letters to PHA's directing them to 
stop reissuing turn-over rental certificates?
    Secretary Martinez. I see a lot of faces drawing a blank 
behind me and I certainly was unaware of that. So I do not 
believe that has occurred. But I certainly will look into it, 
Senator, and will try to get back to you today with an answer 
to that because I have been assured and reassured now for close 
to a year that this was without consequence, an accounting 
adjustment.
    Chairman Sarbanes. Well, such letters have been made 
available to us from housing authorities. I am holding one in 
my hand.
    Secretary Martinez. I wish to communicate on that.
    Chairman Sarbanes. I will defer identifying the housing 
authority because I am sure they would be concerned about it. 
But we can engage in a discussion about this.
    Secretary Martinez. Well, we are not the Taliban at HUD. I 
am happy to know who they are and try to solve their problem.
    [Laughter.]
    Chairman Sarbanes. Well, the letter says, amongst other 
things, your housing authority is instructed to stop reissuing 
turn-over rental certificates.
    Secretary Martinez. There is some misunderstanding there. 
But I will certainly look into it and we will get with your 
staff.
    Chairman Sarbanes. I am glad I asked the question and 
perhaps we can clear that matter up. Let me proceed to my next 
subject. OMHAR has restructured about 1,200 deals. This means 
that the properties have been put on a sound financial and 
physical foundation so that they can continue to serve low-
income families. In all, we have preserved about 75,000 units 
of affordable housing, at the same time generating savings to 
the Government.
    In a June 19 hearing before the Senate Subcommittee on 
Housing and Transportation, FHA Chairman Weicher committed to 
retaining OMHAR staff and to providing the resources necessary 
to keep the program moving forward. Now we were interested in 
this because the GAO had surveyed OMHAR and come to the 
conclusion that it had a good, competent staff, that it was up 
and running finally after an initial period of getting its feet 
under it, and that it ought to continue forward.
    Now we are receiving reports that OMHAR has lost some key 
staff, that they have not been allowed to replace them, that 
there was a period in which projects coming into the office 
were not assigned for restructuring. We have asked the GAO now 
to look into this matter. But we hear that the program is 
grinding to a halt.
    Now we supported HUD in the effort to shift the 
administrative location of OMHAR in the Department. But now we 
are getting these reports that it is really impeding or 
undercutting OMHAR's ability to carry out its substantive 
responsibilities.
    Secretary Martinez. Senator, I think that there may be some 
people that are disgruntled about the transfer and the 
situation that is occurring and you may be hearing from them, 
to be quite candid. However, I do not believe that OMHAR is in 
crisis. I do not think that the restructurings are grinding to 
a halt.
    There have been some people who have left, I am told. There 
were some consultants who were there, including highly paid 
consultants, and some have left.
    But we understand the importance of OMHAR and the 
restructuring. We know that 1,200 is about 50 percent of what 
we have to get done in the restructuring of OMHAR. So we are 
very committed to keeping this going forward and intend to do 
all we can to see that the transition is as positive as it can 
be and continues to get the work done in a timely fashion. I do 
not think we need to start over because it did take a long time 
to get geared up.
    Chairman Sarbanes. Yes. We do not want to knock it down. 
Well, we have asked the GAO to come in and look at it.
    Secretary Martinez. And that is fine.
    Chairman Sarbanes. And so, we will have the benefit of 
their inquiry into the matter. But I would be less than fair to 
you if I did not alert you to our concern about this matter and 
about the reports that we are receiving and the importance of 
carrying through with this program. The mark-to-market program 
was a very important initiative on the part of the Congress and 
the Administration. We want it carried through.
    I see there is a vote on. Let me move through here very 
quickly.
    Secretary Martinez. Senator, may I, before I forget, 
because I wanted to do it while Senator Allard was still here. 
But I just wanted to mention that John Carson will be leaving 
these surroundings to join us as our District Coordinator for 
Colorado and that area. We are just so delighted that he is 
joining us. And I just wanted to thank the Senate for letting 
us have such a well-trained, dedicated servant.
    Chairman Sarbanes. We have some very able people up here. 
We are pleased at any time to have the Department draw on their 
talents. You have one of them sitting right behind you who is 
handling your legislative matters, and that is why they have 
been going so smoothly up here.
    [Laughter.]
    Secretary Martinez. That is what she tells me.
    [Laughter.]
    Chairman Sarbanes. I want to address the public housing 
issue, capital funds. I am trying to find out the unexpended 
capital funds that are beyond the legal timeframes. We want 
data on what amount of unexpended funds are not spent within 
the statutory timeframes.
    We asked for that data. What we got was the amount of 
unexpended funds. We did not get the figures on the amount of 
unexpended funds that are beyond the statutory timeframes. So I 
want to repeat the request for that information.
    Secretary Martinez. We will get that to you, Senator.
    Chairman Sarbanes. In other words, we want to know the ones 
that are untimely, that have not been dealt with within the 
required timeframes. We do not think there is much of a problem 
in that regard.
    Secretary Martinez. We have that information and we can get 
it to you.
    Chairman Sarbanes. You do have it?
    Secretary Martinez. I do not think we have it here with us. 
We have that available to us and we will get it to you.
    Chairman Sarbanes. Well, all right.
    Secretary Martinez. That information is available and it 
will be made available to you, Senator.
    Chairman Sarbanes. The GAO said that cutting the $700 
million from the capital fund--and of course, the Congress has 
put most of that back in, as you are aware, in the budget--
without considering the status of each housing agency's 
unexpended capital funds, may have the unintended consequence 
of penalizing housing agencies that have few or no unexpended 
balances because they spent their funds in a timely manner.
    And GAO thinks it is necessary to look at this housing 
authority by housing authority, which I think is important. 
When you responded on the policing thing, I thought to myself, 
well, we need to differentiate between those who are doing the 
job well and those who are not.
    Secretary Martinez. That is right.
    Chairman Sarbanes. And not have a blanket response which 
ends up harming those that are doing a good job.
    We had very interesting testimony from Kurt Creager, the 
Executive Director of the Vancouver, Washington Housing 
Authority, in the hearing we held 2 weeks ago. Actually, I 
commend that testimony to you. I do not know if you have had an 
opportunity to review it or look at it. But if not, I do not 
want to burden your Christmas season, but I do think it would 
be of benefit to take a look at that testimony. I think we had 
some very good witnesses and they obviously gave a great deal 
of time and effort in putting it together.
    Secretary Martinez. I have seen summaries of it, Senator.
    Chairman Sarbanes. Yes. He is retaining capital funds in 
order to accumulate enough to complete certain capital 
projects. This is the whole problem of the backlog and so 
forth.
    Now when we did the statutory revisions with Senator Mack, 
we instituted a timeframe and said, all right, if you are 
outside of that timeframe, your money is going to get 
recaptured. But if you are within that timeframe--it is a 4 
year period to expend--you can accumulate in order to save for 
a project.
    Now Mr. Creager had a project, for instance, to retrofit 
buildings to make them safe in the event of an earthquake. And 
by retaining the capital funds and doing the project all at 
once, they can save significant monies on administrative costs, 
contracting, and so on.
    Secretary Martinez. Yes, sir.
    Chairman Sarbanes. So we think that this accumulation of 
capital funds within the time period is a very important 
management technique, and we invite you to address that issue. 
What is HUD's position on supportive services in senior citizen 
housing?
    Secretary Martinez. Well, I think it is obvious that senior 
housing is one of those areas where supportive services are 
very helpful and 202 housing typically provides services. I 
think it is a rather important part of the provision of service 
to seniors--I mean of housing to seniors.
    So as I look to the future, I think it is one of the areas 
in which we need to probably work on, is to try to find ways 
that as our aging population, more active people, living 
longer, that we really need to address how we provide for 
senior housing in more updated ways than what we have perhaps 
in the past.
    Chairman Sarbanes. Do you see it as a legitimate charge to 
the HUD budget to address the supportive services for senior 
citizen housing?
    Secretary Martinez. I think they go together pretty much 
and I think that--yes. I think what we should do is to find a 
way of cooperating in the way that it is done. But if this has 
some relationship to the homeless situation, Senator, I want to 
assure you that I am not after trying to do less for homeless 
people. What I am trying to do is to make sure that we get the 
kind of help in providing services to the homeless that other 
departments ought to be providing, so that we do not encumber 
our programs with services beyond what our ability is.
    In other words, we have finite funds. I want our funds to 
do the best we can for housing. I do not know if your question 
was merging the two, but I am answering on both.
    Chairman Sarbanes. It is a parallel track.
    Secretary Martinez. It is a parallel track.
    Chairman Sarbanes. Yes.
    Secretary Martinez. So my point on that is that, in the 
elderly situation, I think there is a much closer nexus to the 
need for services merging into the whole project because it has 
to do with accommodations for handicapped issues and medical 
facilities and things like that.
    In terms of the homeless population, what I am trying to 
do, Senator, is to try to bring back a closer partnership that 
I think existed in the past and that has gone away, while at 
the same time, the HUD budget has been burdened with having to 
provide services at the expense of housing. And so, I am trying 
to bring us into better balance by holding other departments' 
feet to the fire.
    Chairman Sarbanes. If we provide the housing without the 
services, it does not seem to work very well.
    Secretary Martinez. And that is not the point. The services 
need to be there. The question is--and I want to invite your 
help--to make sure that we are getting the help so that our 
housing budget does not get eaten up providing services that 
others ought to be providing. You see, when someone is 
homeless, that does not mean that they are not entitled to 
Medicare, for instance. They are not entitled to other 
supportive services for drug addiction that may be available in 
the community through HHS dollars.
    Chairman Sarbanes. Yes.
    Secretary Martinez. All of these things are available in a 
way that should cover everyone. VA veterans sometimes have 
available benefits in other places as well. We have been 
meeting with HHS and have been making good progress in trying 
to find a better way of coordinating their provision of 
services with our housing dollars.
    Chairman Sarbanes. Well, it is an issue that we will have 
to pursue, obviously.
    I am going to go and vote. Have you voted, Chuck?
    Senator Schumer. I have. I just voted.
    Chairman Sarbanes. Well, I will turn the meeting over to 
you.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Sarbanes. And we will conclude, unless there are 
others who have arrived who also wish to question. You can 
adjourn the meeting.
    Senator Schumer. Thank you.
    Chairman Sarbanes. Mr. Secretary, we very much appreciate 
your coming today.
    Secretary Martinez. Thank you.
    Chairman Sarbanes. And we look forward to seeing you again.
    Secretary Martinez. I am sure we will, and I look forward 
to it.
    Thank you.
    Chairman Sarbanes. Thank you very much.
    Secretary Martinez. I appreciate your courtesy, as always.

            STATEMENT OF SENAOTR CHARLES E. SCHUMER

    Senator Schumer [presiding]. Thank you. And I want to thank 
the Chairman and you, Mr. Secretary, for your courtesy. So many 
things are going on at this close of session, that it is hard 
to get balance here. I appreciate your waiting for the last 
member to ask some questions.
    I would like to thank you for HUD's contribution to the 
Federal response to September 11, and particularly for the CDBG 
funding that will be a necessity in rebuilding lower Manhattan.
    As you probably know, FEMA gives our Government aid when 
they need the help--the overtime for the police and fire, the 
rebuilding of the subways.
    But we have so many other needs--the small businesses, the 
large businesses, the nonprofits, the hospitals. And the CDBG 
grant, which you have supported, and the Administration 
supported, will be very helpful to us. I do want to have, after 
this is over, a little discussion with you about some of the 
specifics. But it is just great for us.
    What I would like to do today, though, is discuss with you 
a real problem we are facing in western New York. It may seem 
that Buffalo is apart from the September 11 crisis. But it is 
not. And the reason is simple.
    Like other places in America, but perhaps more so, their 
economy has been faltering rather dramatically. A number of 
jobs and everything else. Buffalo is way behind most of the 
middle west. So it has always been a problem area for the 
State. Now in the past, the State would help Buffalo, probably 
to a greater percentage at least than it helped any other area, 
by giving State aid.
    September 11 has made State aid extremely difficult. It has 
made it difficult because the State--Governor Pataki estimates 
that the State will lose $9 billion in revenue this coming 
year. It so happens that New York State will lose more revenue 
than the city because of September 11 because the city's 
revenue is basically property tax-based and sales tax-based. 
But the State revenue, which is based on an income tax, is very 
hard hit when Wall Street has--when you lose 100,000 jobs, many 
of them the highest-paying jobs on Wall Street. When the firms 
on Wall Street decide to cut back on their bonuses, which is 
often 25 to 50 percent of the pay, and then the State income 
tax loses its slice. And the percentage of revenues to the 
State government that come from this is enormous.
    As a result, the State has had to cut back on aid to 
Buffalo. The school system is in real trouble. We have worked 
hard to try and get some money out of the education budget for 
the school system. But the city government is in trouble and 
there is talk of bankruptcy. There is talk of a control board 
and all sorts of things.
    What that means is--it is a ripple effect. Since the City 
of Buffalo has to tend to the basic needs of fire, police, and 
education, it cannot do the kinds of economic development 
things that are needed to try and get Buffalo going again to 
dig itself out of this hole. And so, that is why I am coming to 
you for real help.
    Buffalo has applied for a renewal community designation. I 
realize that there are a small number of these in the country. 
But if ever a place needed it, it is Buffalo-Lackawanna, which 
is a city right south of Buffalo, right where the old Bethlehem 
Steel mills--if you go there, you will see the old steel mills, 
empty and shut down. The application is strong. It has the full 
support of the 
Congressional delegation and the Governor of New York. And it 
meets every one of the renewal community criteria--poverty, 
unem-
ployment, below-average income--as required by the application 
process.
    Just let me give you one statistic, Mr. Secretary. Over the 
past decade, the Buffalo-Niagara standard metropolitan 
statistical area lost more jobs and a greater percentage of its 
population than any other urban area in the entire United 
States.
    So, we are trying to do our part. They have lowered taxes. 
They have made some capital investments. And Erie County, the 
county in which Buffalo is, has begun the consolidation of 
services to save taxpayer money. There is a private 
organization, the Buffalo-Niagara Enterprise Organization, they 
have raised $25 million just to promote new business activity 
in Buffalo.
    The bottom line is all of western New York and virtually 
our entire State is focused on saving the economy of 
metropolitan Buffalo. And given September 11, the kinds of 
money that had been planned by the Governor and the State 
legislature to go there for economic development is not likely 
to come. It makes this renewal community designation virtually 
vital.
    If we get it, I am certain that with the talent and the 
energy--it has a great labor force, productive people, people 
who used to be making $20 an hour are now making $6 or $7. They 
do not leave because they love the area.
    But we really need the help. And I think we can turn 
Buffalo with this designation into a national success story. So 
I am just hoping that you, as you review the finalists for the 
renewal community designation, give Buffalo-Lackawanna fair 
consideration.
    Secretary Martinez. Thank you, Senator. I assure you that 
it will receive fair consideration.
    You make a compelling case. I want you to understand that 
this is a competition and various communities, all with 
compelling stories, I might say, compete against one another. 
And it is not a subjective thing that we can just go say, well, 
this happened in New York. Let us pick that one out. So it is a 
process. The process is ongoing, so I cannot at this point 
comment.
    But I appreciate your point of view and you can be assured 
that, as we have responded to September 11 at HUD, and I 
mentioned during my opening remarks some of the other things 
that we have done and I want to just comment on those for you 
because I want you to know how very committed the 
Administration and our Department has been to the New York 
situation.
    We immediately acted with FHA lenders to ensure that there 
would be no foreclosures for any of the victims and things like 
that. We also acted obviously in the CDBG. But we have also 
done whatever it took regulatorily to help with Section 8 and 
public housing for the public housing of New York.
    I have been there now on three occasions, I believe, and I 
will be there again next week, where I am happy to tell you 
that we are coming very close to a point of closure on the 
203(k) problem, which has been pending for some time and the 
number of restructured housing projects that were abused some 
time back.
    So, anyway, with that, I just assure you of every fair 
consideration and certainly New York is in all of our hearts 
and minds and we will do everything we can to be helpful.
    Senator Schumer. Thank you, Mr. Secretary. I have two more 
quick questions and then I will let you go. You have been here 
a long time.
    As you know, I have been interested in the problems of 
predatory lending. I know from your previous testimony, you are 
as well. I have seen it first-hand. It is the number-one reason 
that thousands of people in my State and America who have just 
worked for the American way. They have saved their $25 a month 
until they have enough for a downpayment and then they are just 
robbed by these rip-off artists. So I am just interested in 
knowing what steps HUD has taken or intends to take to deal 
with the pervasiveness of predatory lending in New York and 
around the country and how we can work together to eradicate 
this.
    Secretary Martinez. Senator, we have been taking a very 
aggressive approach to predatory lending. We have been working 
in Baltimore specifically with the issues of predatory lending 
there. We have been working with a task force that the City of 
Baltimore has put together, and the successes there are 
successes that we can replicate around the country.
    I want to assure you that we are very focused on this and 
we are learning a great deal about how to, as we devote 
resources specifically to this problem, what results it can 
have. And we have seen 40 indictments, 27 successful 
prosecutions, 66 debarments.
    This is just in Baltimore. So it is had great results. And 
that is a model that we can hopefully replicate elsewhere. In 
addition to that, RESPA reform.
    Senator Schumer. Right.
    Secretary Martinez. I think when we give consumers more 
information, when they know, and there is more transparency 
what the transaction is about, they will have a better chance 
to avoid the dangers of predatory lending. But we are 
continuing to work on it. Our task force is ongoing, and I look 
forward to working with you on the New York issue.
    Senator Schumer. I think RESPA is important as well. One of 
the things that I have found as I studied predatory lending is 
that, because so much of it occurs from these little lenders--
you do not have the larger institutions being involved in this 
because they are checked and regulated. But we do not have 
enough enforcement.
    I do not know if we need new laws, but we need enforcement 
of some of these little mortgage lenders and mortgage brokers 
because they come in and they just rip people off. I hope that 
is some place that you will look at.
    Secretary Martinez. Absolutely. Yes, sir.
    Senator Schumer. Enforcement of the smaller lenders, who 
seem to do most of the predatory lending.
    Secretary Martinez. I share your concern and I understand 
the problem the same as you do in that sense. I agree.
    Senator Schumer. One final question. This is Federalization 
of New York City's housing units.
    You know we have the problem in New York City. Half, 44 
percent of our renters cannot afford the local fair market rent 
and 12 percent of all working families in New York live in what 
has been determined to be severely or moderately inadequate 
housing.
    Nearly a million people, about 850,000, live in what HUD 
describes as substandard or inadequate housing. These are 
disturbing statistics even in the bumper years that our city 
has had. And of course, now we do not have those.
    One of the few places that has helped us, we have a great 
Federal housing program. Unlike other places, we do not have to 
go around blowing them up, et cetera. We have been more mindful 
of keeping a mix in the housing, having working class as well 
as very poor people. I had to make that fight along with some 
others, including Congressman Lazio over in the House when I 
was there.
    We have had very good management and it has worked pretty 
well. But, again, because of the new concerns, we would like to 
see continued the federalization of these, which helps us 
financially.
    We had a conversation in June, I believe, where we had 
discussed the importance of federalizing an additional 7,000 
State housing units in New York and Massachusetts. You 
mentioned you were going to make that happen, which I 
appreciate. Can you tell me the status of the federalization? 
Have the units been federalized? If not, when should they be? 
That is my last question.
    Secretary Martinez. Okay. And Senator, it is one that I 
would prefer to get back to you with a thoughtful response.
    Senator Schumer. Yes, sir. Great.
    Secretary Martinez. Because at the moment, I have a note 
here. But I would be afraid to try to tell you what the note 
said because I might say it wrong.
    Senator Schumer. Okay.
    Secretary Martinez. So if you will allow me a chance to get 
back to you in a more thoughtful response, I would be happy to 
do that.
    Senator Schumer. Fine. Great. Well, I very much appreciate 
it.
    With your permission, sir, the record will remain open for 
1 week so that people can ask questions in writing. I might 
have some, and my colleagues may. And with that, we thank you 
for your testimony, for your diligence, and for your waiting 
around for the last stragglers to wander in.
    Secretary Martinez. Thank you.
    Senator Schumer. Thanks. The hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    Good morning and welcome to the Committee's second hearing on 
Housing and Community Development Needs in the United States. I want to 
welcome the Secretary and extend to him the Committee's appreciation 
for appearing before us.
    Two weeks ago, we heard from a number of experts about the growing 
affordable housing crisis in America. Today, we want to get the 
Administration's perspective on this problem. As my colleagues know, 
the President is in the midst of putting together its budget proposal 
for fiscal year 2003. Because that process has not yet been completed, 
the Secretary cannot talk about budget levels for specific programs at 
HUD, nor can he talk about new programs that might be proposed. 
However, we have asked him to discuss what he sees as the Nation's 
pressing needs in the area of housing and community development, 
particularly as the country enters its first recession in about a 
decade.
    First, I would like to talk about some good news. After stagnating 
and even falling in the 1980's, the homeownership rate rose to historic 
levels in the 1990's, particularly after 1995. Improvements in minority 
homeownership drove much of this 
improvement. In fact 40 percent of all new homeowners from 1994 to 1999 
were 
minorities, even though minorities make up only 24 percent of the 
population. African-American and Hispanic homeownership rates grew 
twice as fast as the white homeownership rate.
    In spite of this progress, there continues to be a significant gap 
in homeownership between white and minority Americans. Closing this gap 
is a priority of the Secretary, and I want to be as helpful as I can in 
that effort. To that end, I am particularly concerned about the so-
called ``clarification'' on the issue of yield spread 
premiums put out by the Secretary in October. I plan to hold a hearing 
on this topic early next year, and I do not want to divert us to this 
issue this morning. Let me just say, however, that HUD's 
``clarification'' will lead to increased costs to 
low-income, minority, and middle class homebuyers by opening the door 
to mortgage brokers to steer those borrowers into higher interest rate 
loans without their knowledge, and without any reasonable recourse. I 
am particularly disturbed that Assistant Secretary Weicher recently 
said that HUD was compelled to issue the statement because of the 
decision in the Culpepper case. In that case, the Court found that 
brokers collected thousands of dollars in unnecessary out of pocket 
fees from FHA borrowers in addition to steering them to higher interest 
rate loans in exchange for a yield spread premium paid by the lender. 
FHA is designed to be a tool to increase homeownership, not a cover to 
strip owners' equity. As the Court recognized in Culpepper, yield 
spread premiums do have a legitimate role in the marketplace as a way 
of reducing closing costs, if the borrower chooses to pay certain costs 
and fees through a higher interest rate. The Committee will keep a 
close watch on the rulemaking that I understand HUD is undertaking, 
with the goal of ensuring that it really is helpful to homeowners and 
homebuyers.
    While there has been general progress on homeownership, the 
shortage of affordable rental housing is a serious problem that appears 
to be getting worse. HUD's own data show that nearly 5 million very 
low-income American families pay over half of their income in rent, or 
live in severely substandard housing.
    A study by the National Housing Conference that looks at a broader 
sample, found that nearly 14 million families, including working 
families, face this same, critical problem. In fact, while the number 
of worst case needs among poor families actually stabilized a bit, the 
number of working families carrying this severe burden has risen 
dramatically.
    As the chart of the United States shows, there are 33 States in 
which two full-time minimum wage earners in a family is not sufficient 
to rent a modest apartment paying 30 percent of a family's income--the 
general measure of affordability. These trends are not surprising. 
Again, referring to the chart on ``Change In Affordable Rental Units,'' 
we see that in the past decade, the number of units available to 
extremely low-income renters has dropped by almost a million units, a 
loss of 14 percent. Nationally, apartment vacancy rates have declined 
by 1.7 percentage points, making it more difficult for all renters to 
find an affordable place to live. As the third chart indicates, many 
metropolitan areas have significant percentages of families who live 
with the insecurity of knowing that an unexpected medical bill, a car 
repair, or a bout of unemployment can lead to a cycle of eviction and 
homelessness.
    The children in these families will not be able to receive an 
adequate education. Their parents will not be able to take full 
advantage of job training offered to them, or other important services, 
until they have the kind of stability that affordable housing in a safe 
neighborhood can bring. In my view, housing is a first step to bringing 
many poor families and their children to economic self-sufficiency.
    I very much look forward to getting the Secretary's views on these 
issues.






             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
    Thank you, Mr. Chairman. I appreciate that you have called this 
second hearing looking at the housing and community development needs 
that we will need to address in the upcoming HUD budget. And, I am glad 
that the Secretary was able to join us today for this hearing.
    There is no question that we face a critical housing shortage in 
this country and Congress is going to need to work on this problem. In 
Michigan, a person must make $12.35 an hour to afford a 2 bedroom unit 
at Fair Market Rent, using 30 percent of his or her income for housing 
expenses. This is almost two and a half times the minimum wage. And it 
is not just in Michigan; I know this problem is serious nationwide, 
particularly throughout the Midwest, Northeast, and West Coast.
    Furthermore, in the midst of a recession, and with mixed signals 
about when we will see an economic recovery, there is going to be an 
even greater demand for HUD's services. This coming year therefore 
should be a time for a renewed commitment to address our national 
housing problem.
    Mr. Secretary, when you appeared before this Committee in April, I 
expressed my disappointment in the White House's proposed HUD budget. 
As the Chairman and others have pointed out, there were serious 
accounting questions such as how yet unexpended but already obligated 
funds were treated. And, equally alarming, the White House budget 
proposal consolidated funding in ways that forced already underfunded 
programs to compete against each other.
    I know my friend, Senator Jon Corzine, has raised this issue as 
have Senator Sarbanes and others, but I also need to highlight my 
profound disappointment that the Public Housing Drug Elimination 
Program earmark was eliminated. In light of this I think we would all 
greatly benefit, if HUD would clearly articulate to us, as the fiscal 
year 2003 appropriations process moves forward, what its comprehensive 
drug prevention strategy in public housing is going to be.
    Mr. Secretary, I understand that you are in a difficult position. 
The Government through a mix of previous policy decisions as well as 
the current economic climate has dwindling resources available to it. 
This is going to cause the President and you to make some tough 
choices. So, let me be clear and reiterate what I said at our November 
29 hearing on this same topic: I want to work with the Administration 
and my colleagues to ensure that we pass and enact a strong fiscal year 
2003 HUD budget.
    If we fail to do so, it will be terribly shortsighted. The fact 
that we are not investing in capital repairs and other key programs 
will only make matters worse. It is a vicious cycle, costing us 
substantially more in the long run.
    Finally, Mr. Secretary, while you are before us today, let me also 
say that I hope you will work closely with me and other Members of this 
Committee as you proceed on a number of new initiatives. Only by 
working together, across party lines and through open engaged 
discussions between the Administration and Congress, will we be able to 
enhance consumer protections, stop predatory lending, bring clarity to 
Congressional intent on previously passed housing legislation, and 
reform key components of the home buying process.
    Again, thank you, Chairman Sarbanes for calling this hearing and 
for your unrelenting commitment to addressing our Nation's housing 
needs.
                               ----------
                   PREPARED STATEMENT OF MEL MARTINEZ
      Secretary, U.S. Department of Housing and Urban Development
                           December 13, 2001

    Chairman Sarbanes, Ranking Member Gramm, and distinguished Members 
of the Committee, thank you for the invitation to testify before you 
this morning. I appreciate this opportunity to address the many ways in 
which the Department of Housing and Urban Development (HUD) is working 
to meet the Nation's housing and community development needs.
    Mr. Chairman, I would like to begin by thanking you and the Members 
of this Committee for the advice and expertise you provided this year 
as I settled into town and took on this tremendous challenge. The 
Committee has shown me great respect, which I appreciate, and we have 
developed a very positive working relationship.
    Let me also thank you for your cooperation in confirming HUD's 
Presidential nominees. I consider myself fortunate to be surrounded by 
colleagues who bring great expertise to the job from both the public 
and private sectors, and have a rich diversity of background and 
experience. With your continued assistance, we hope to have our entire 
management team in place in the near future.
    Our job is made easier through the support of a President who is 
firmly committed to HUD's mission of public service. President Bush is 
an active advocate for our work at HUD. He speaks passionately about 
the dreams a family can achieve through homeownership. He has joined me 
on two occasions to stress the point by building homes with Habitat for 
Humanity . . . and wants to triple the funding for the HUD program that 
supports the good work of similar organizations.
    President Bush has directed this Department to serve Americans in 
need not simply by raising their quality of life to some minimum 
standard, but by fueling their hopes and dreams to achieve the life 
they always imagined. Despite the success of welfare reform, too many 
families still live below the poverty line. As a catalyst in our 
communities, HUD is putting its resources to work empowering citizens 
to lift themselves out of poverty and into prosperity. We have touched 
many lives this year . . . in many different ways.
    The Department reacted quickly and sympathetically following the 
tragic events in September. I immediately required lenders to provide 
relief on FHA-insured mortgages for families of the victims, and urged 
conventional lenders to do the same. They responded, and we have 
protected these families from losing their homes. A short time later, 
Secretary Rumsfeld and I also announced a mortgage rate cut for 
National Guardsmen and Reservists called to active duty. HUD is 
providing an additional $700 million in Community Development Block 
Grant funds to help stimulate New York City's economic recovery. We 
also allowed waivers of regulatory provisions for the HOME, Section 8, 
and public housing programs.
    Immediately after being sworn in, I took steps to steer HUD's focus 
back to its core mission: helping families find affordable and decent 
housing. This means ensuring housing opportunities for those who rent 
either out of necessity or by choice. And it means creating new 
opportunities for homeownership, so that more families can achieve what 
is envied around the world as the American Dream.
    The Census Bureau reported in October that the homeownership rate 
reached an all-time high of 68.1 percent. Historically, homeownership 
rates for minority groups have been lower than the rest of the 
population. Minority homeownership stands at 49.2 percent and while 
this is a record high and positive news, we must continue to do better 
in closing the gap.
    We have begun to create new opportunities for homeownership, so 
that more families can achieve what is envied around the world as the 
American Dream. This year, HUD reached out to the thousands of low-
income families who find the road to homeownership blocked by high 
downpayments, and proposed the President's American Dream Downpayment 
Fund. We also put forward the new Federal Housing Administration (FHA) 
hybrid adjustable rate mortgage, which promotes homeownership by 
reducing initial homebuying costs. Congress recently provided funds 
subject to authorization for the first of these, and authorized the 
second, for which you have my thanks.
    If we are to further expand the ranks of America's homeowners, we 
must address the challenge of making the homebuying experience less 
complicated, the paperwork demands less time-consuming, and the 
mortgage process itself less expensive.
    To ensure that homebuyers have the information they need in order 
to make an informed purchase, I have undertaken comprehensive reform of 
the Real Estate Settlement Procedures Act (RESPA). In addition to 
preserving yield spread premiums as a valuable tool for opening the 
doors of homeownership, reform will: (1) ensure better protections for 
new homebuyers and those who refinance; (2) offer clarity for the 
mortgage lending industry about their disclosure responsibilities, and; 
(3) provide an additional tool to fight predatory lending.
    The need for RESPA reform is even more urgent during times of 
economic uncertainty. Homeownership helps create financial stability 
for families, and in return brings economic stability to our 
communities.
    Homeownership is an important goal, but is obviously not an option 
for everyone. I appreciate the need to expand the availability of 
affordable rental housing, and ensure quality and options for 
residents. The just-enacted 25 percent increase in the limits for FHA 
multifamily insurance will help to spur the construction and 
rehabilitation of affordable rental housing. I am awaiting the 
recommendations of the Millennial Housing Commission, as we look to 
ways to address affordable housing needs. I will continue to urge the 
industry, and the Government-Sponsored Enterprises in particular, to do 
much more in the area of affordable housing production.
    But let me say that I look forward to the day when we measure 
compassion not by the number of families living in assisted housing, 
but the number of families who have moved into a home of their own.
    Predatory lending and property flipping are abusive practices that 
continue to plague homebuyers in cities across the country. Senator 
Sarbanes, the Administration is particularly concerned about the 
situation in Baltimore. Since April, our Housing Fraud Initiative has 
resulted in 40 indictments, 6 Federal arrests, 2 State arrests, 27 
successful prosecutions, and 66 debarments. We have provided relocation 
assistance to 46 families. We also worked with you, Mr. Chairman, to 
develop the Credit Watch legislation that was included in the fiscal 
year 2002 budget.
    I am pleased with these accomplishments, but we know there is more 
work to be done. HUD remains committed to addressing the problems in 
Baltimore, and we feel confident that the lessons we learn there will 
be beneficial to the rest of the country. HUD looks forward to joining 
with the Treasury Department in its efforts to encourage the 
development of national best practices to address predatory lending.
    Exposure to lead-based paint is a serious concern that many low-
income citizens deal with on a daily basis. Every American child 
deserves the opportunity to grow up in a healthy home, safe from the 
debilitating and often irreversible effects of lead exposure. Because 
the most common source of exposure is lead paint in older housing, HUD 
has a critical role in protecting our children. HUD awarded more than 
$67 million in grants nationwide in October to protect children from 
lead-based paint, with a focus on eliminating lead hazards in low-
income housing.
    At HUD, we are working to ease the daily struggles of those who 
live in the most difficult circumstances. Certainly, this includes the 
residents of the colonias. Earlier this year, I traveled to the 
colonias--the communities along the Mexico border steeped in poverty--
to see the difficult living conditions for myself. HUD has stepped in 
to offer assistance, through grants that will bring water and sewer 
hook-ups, and a Colonias Task Force I established to ensure that HUD 
programs make an impact in the colonias.
    In January, President Bush directed HUD to assist in his Faith-
Based and Community Initiatives. We have studied the barriers that 
prevent grassroots social service providers from reaching out in 
partnership with the Federal Government to Americans in need. HUD has 
prepared a report examining what the Department can do through 
regulatory and management improvements to ``level the playing field'' 
and encourage greater acts of charity in our communities, while 
preserving Constitutional safeguards.
    I urge the Senate to take up the President's Faith-Based 
legislation before 
Congress adjourns. This legislation is critical to helping HUD expand 
its partnerships with groups working to meet the housing needs of low-
income Americans, the 
elderly, disabled citizens, and those living with HIV/AIDS.
    HUD has a special duty to the Nation's vulnerable populations, and 
this includes those who have no place to call home. Last month, we 
announced the awarding of more than $1 billion to organizations serving 
homeless Americans--the largest homeless assistance in history. To 
streamline and focus the response of the many Federal agencies involved 
in delivering homeless services, the Interagency Council on the 
Homeless is being reactivated.
    In addition, the Administration remains committed to expanding 
housing opportunities for people with disabilities. For example, a 
voluntary compliance agreement, signed recently with the District of 
Columbia Housing Authority, will provide more than 500 fully accessible 
public-housing units to disabled residents. HUD continues to strive to 
ensure equal housing opportunities for all.
    Mr. Chairman, Committee Members warned me during the confirmation 
process that HUD was plagued by mismanagement on many levels. I 
understood that meeting the needs of the American people meant 
improving HUD's management, and I assured you that I was prepared to 
take on this challenge. In the past 11 months, HUD has significantly 
streamlined its management structure to improve the quality and 
delivery of services, and restore the agency's credibility in the eyes 
of Congress and the American public.
    I set a goal that HUD address audit findings made by the Inspector 
General in a timely manner and make corrections that actually fix 
serious management problems. As a telling sign that we are committed to 
doing better, HUD completed the 6 month period ending September 30 with 
no overdue management decisions on any of the Inspector General's 363 
audit recommendations. This is only the second time that HUD has met 
the goal of no overdue decisions in all the years that the OIG has been 
reporting audit resolution activity to the Congress. Our goal is to 
deliver the best possible services to those in need, and we have moved 
aggressively to ensure that HUD programs are getting the job done.
    With the support of the National Education Association, the 
American Federation of Teachers, and the Fraternal Order of Police, I 
suspended HUD's Officer Next Door and Teacher Next Door programs in 
April. This came after officials handed down indictments and felony 
convictions against buyers who purchased their homes fraudulently. We 
put into place aggressive monitoring and tightened controls to prevent 
homebuyer fraud, and restarted the programs in August.
    Working with Congress, we terminated HUD's drug elimination program 
this year. This was a well-intentioned program that suffered from a 
large number of abuses, and duplicated the work of other Cabinet 
Departments. Despite the termination of this program, HUD's commitment 
to ensuring safe and drug-free homes for America's families has not 
wavered. In fact, to partially offset the elimination of this program, 
the President's fiscal year 2002 budget proposed, and the Congress 
appropriated, an enhancement for the Public Housing Operating 
Subsidies, which local officials may use at their discretion, including 
for activities formerly supported by the drug elimination program. I 
will work with the Office of National Drug Control Policy (ONDCP) to 
determine how best to capture and account for Departmental funds used 
for drug control activities. In addition, I am working with ONDCP, the 
Department of Justice, and other agencies in exploring ways to 
effectively meet this commitment.
    Until this year, HUD's credit subsidy--which is used to cover 
expected losses on FHA multifamily loans--was fraught with uncertainty 
due to regular appropriations shortfalls. The Department restructured 
the program to make it more self-sufficient and less dependent on 
taxpayer dollars. Since the restructuring became effective on October 
1, 2001, HUD has issued firm commitments totaling $869 million for more 
than 10,000 housing units.
    I am proud of the strides we have made in identifying the programs 
that are meeting the needs of the people . . . and identifying--and 
fixing--those that are not. HUD is quickly becoming a more efficient, 
more effective provider of the services no agency but ours can deliver.
    Mr. Chairman, I will conclude my formal testimony so that I may 
dedicate as much of our remaining time as possible to answering 
questions from the Committee. As I indicated to you in our last 
conversation, HUD's ongoing negotiations with the White House regarding 
the fiscal year 2003 budget preclude me from addressing--in anything 
more than general terms--budget initiatives we may be considering.
    In closing, we all understand that housing is a nonpartisan issue--
one that crosses the lines of politics and party. The families who come 
to us for help are not interested in our political affiliations, and 
our success in serving them depends on cooperation. I am happy to say 
that this is the spirit in which HUD and the Committee have undertaken 
our work this year . . . and the same spirit that will guide us 
tomorrow and into the future. I would like to thank each of you for 
your personal support of my efforts, and I welcome your guidance as we 
continue our work together on behalf of the American people.
    Thank you.
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