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

                                                          S. Hrg. 107- 1014

                        AFFORDABLE HOUSING PRESERVATION

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

                                    HEARING

                                   before the

                   SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

                                     of the

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

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                       ON

       PRESERVING THE EXISTING PRIVATELY-OWNED AFFORDABLE HOUSING STOCK
       CURRENTLY SUPPORTED WITH PUBLIC FUNDS UNDER A VARIETY OF FEDERAL
              HOUSING INSURANCE, SUBSIDY, AND ASSISTANCE PROGRAMS

                                   __________

                                OCTOBER 9, 2002

                                   __________

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

    90-543              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
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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

                    Linda L. Lord, Republican Staff Director

                        Jennifer Fogel-Bublick, Counsel

                   Jonathan Miller, Professional Staff Member

               Sherry E. Little, Republican Legislative Assistant

                     Mark A. Calabria, Republican Economist

       Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                           George E. Whittle, Editor

                                     ______

                   Subcommittee on Housing and Transportation

                       JACK REED, Rhode Island, Chairman

                     WAYNE ALLARD, Colorado, Ranking Member

    THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
    DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
    JON S. CORZINE, New Jersey           RICHARD C. SHELBY, Alabama
    CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
    CHARLES E. SCHUMER, New York         CHUCK HAGEL, Nebraska
    DANIEL K. AKAKA, Hawaii

                         Kara M. Stein, Staff Director

                  Tewana Wilkerson, Republican Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                           WEDNESDAY, OCTOBER 9, 2002

                                                                       Page

    Opening statement of Senator Reed................................     1

    Opening statements, comments, or prepared statements of:
        Senator Corzine..............................................     6
        Senator Carper...............................................     7
        Senator Akaka................................................     7
        Senator Sarbanes.............................................    13

                                   WITNESSES

    John C. Weicher, Assistant Secretary for Housing and Federal
      Housing Commissioner, U.S. Department of Housing and Urban
      Development; accompanied by: Robert S. Kenison, Associate
      General Counsel, Assisted Housing and Community Development....     2
        Prepared statement...........................................    34
        Response to written questions of Senator Sarbanes & Senator
          Reed.......................................................    83
    James R. Grow, Staff Attorney, National Housing Law Project,
      Oakland, California............................................    21
        Prepared statement...........................................    37
    Katherine G. Hadley, Commissioner, Minnesota Housing Finance Agenc
      y; on
      behalf of the National Council of State Housing Agencies, Washin
      gton, DC.......................................................    24
        Prepared statement...........................................    45
    Thomas W. Slemmer, President, National Church Residences,
      Columbus, Ohio; on behalf of the American Association of Homes
      and Services for the Aging.....................................    25
        Prepared statement...........................................    50
    Louise Sanchez, President, National Alliance of HUD Tenants, New
      York, New York.................................................    27
        Prepared statement...........................................    75

                  Additional Material Supplied for the Record

    Letter from Sheila Crowley, Ph.D., President, National Low Income
      Housing Coalition to Senator Jack Reed, dated October 15, 2002.    99
    Statement of Michael Bodaken on behalf of Stewards of Affordable
      Housing for the Future, dated October 16, 2002.................   101

                                     (iii)

                        AFFORDABLE HOUSING PRESERVATION

                                  ----------

                           WEDNESDAY, OCTOBER 9, 2002

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

        The Subcommittee met at 2:32 p.m., in room SD-538 of the
    Dirksen Senate Office Building, Senator Jack Reed (Chairman of
    the Subcommittee) presiding.

                 OPENING STATEMENT OF SENATOR JACK REED

        Senator Reed. Let me call the hearing to order. Good
    afternoon. I would like to welcome everyone to today's
    oversight hearing on affordable housing preservation.
        We are holding this HUD oversight hearing because there is
    growing evidence that HUD is neglecting one of its most
    important responsibilities--its responsibility to preserve and
    to maintain our Nation's existing affordable housing stock.
        Some of our past hearings have highlighted the incredible
    need for affordable housing in this country. One out of every
    seven American families spends more than half of their total
    income on housing or lives in a severely inadequate unit.
    Meanwhile, approximately 200,000 affordable housing units have
    been lost to the market during the past 5 years, and another
    544,000 Section 8-assisted units are at-risk of loss during the
    next 5 years.
        As we struggle to create more housing in this country, more
    affordable housing, we certainly cannot afford to lose any more
    of our existing affordable housing stock. It is much cheaper to
    preserve an existing unit of affordable housing than it is to
    build a brand-new one. In Rhode Island, a new housing unit can
    cost between $150,000 to $165,000 to build, while preserving an
    existing unit only costs between $50,000 to $60,000. So why are
    we here today?
        We are here today because in many cases HUD is just letting
    affordable housing stock slip away. In my own State of Rhode
    Island, affordable housing groups and tenants have been
    struggling for over a year to keep 430 units of housing long-
    term affordable. I am concerned that HUD has been a hindrance
    instead of a help. So
    instead of enforcing rules requiring that tenants be given 1-
    year notice by the owner that the building is leaving the HUD
    Section 8 program, HUD allowed the owner to opt-out and even
    rewarded the owner with enhanced vouchers for all of the
    existing tenants. Despite a lawsuit brought by the tenants that
    resulted in an agreement that the owner would not prepay his
    mortgage for a certain period of time, HUD recently sold the
    mortgages on three of the buildings to a bank in Texas without
    FHA insurance. This one action by HUD, whether intentional or
    otherwise, has effectively erased the recent State court
    settlement that would have kept these units affordable over the
    long-term.
        In some cases, HUD has gone beyond mere neglect of its duty
    to preserve housing to outright hostility. HUD recently
    announced its intention to allow all owners of Section 8
    project-based buildings who have refinanced to opt-out of their
    housing assistance payments, the HAP contracts, the very
    contracts that provide Section 8 subsidies to properties. Not
    surprisingly, over the past decade many owners have refinanced
    their original mortgages to take advantage of better interest
    rates. They have done so with HUD's approval and with the
    belief by all parties that the HAP contract remained in force.
        HUD is now saying that, upon refinancing, the HAP contract
    terminates and that HUD intends to contact every owner who has
    refinanced to give them the opportunity to opt-out of their
    contracts and affordability restrictions.
        I am very concerned with this decision by the
    Administration that could lead to a loss of 100,000 affordable
    housing units and look forward to discussing this issue with
    the Secretary today.
        Today, we will hear from two panels of witnesses. The first
    panel will consist of Dr. John Weicher, Assistant Secretary for
    Housing and Federal Housing Commissioner, Department of Housing
    and Urban Development. The second panel will consist of: Mr.
    James Grow, Staff Attorney, the National Housing Law Project;
    Ms. Kit Hadley, Commissioner of Minnesota Housing Finance
    Agency; Mr. Tom Slemmer, President & CEO, National Church
    Residences; and Ms. Louise Sanchez, President, National
    Alliance of HUD Tenants.
        Each of our witnesses has been asked to testify about
    affordable housing preservation issues, HUD policies that
    affect the preservation of affordable housing, and any
    proposals that should be considered as part of Federal
    legislation to encourage the preservation of affordable
    housing.
        Before we begin, I would also like to thank each of you for
    your written testimony, which has been shared with all the
    Members of the Housing and Transportation Subcommittee, and I
    would ask that you stick to our 5-minute time limit for oral
    testimony so we may have more time for questions and
    discussions. I look forward, obviously, to this hearing.
        When Senator Allard arrives or my colleagues, I will
    interrupt and allow them an opportunity to make an opening
    statement if they choose. Now let me recognize our first panel,
    Secretary John Weicher. Secretary Weicher is the Assistant
    Secretary for Housing and Federal Housing Commissioner at HUD.
    Prior to his appointment, he was the Director of Urban Policy
    Studies at the Hudson Institute.
        Secretary Weicher, welcome.

                      STATEMENT OF JOHN C. WEICHER

                  ASSISTANT SECRETARY FOR HOUSING AND

                      FEDERAL HOUSING COMMISSIONER

            U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                    ACCOMPANIED BY ROBERT S. KENISON

                       ASSOCIATE GENERAL COUNSEL

               ASSISTED HOUSING AND COMMUNITY DEVELOPMENT

        Mr. Weicher. Thank you, Chairman Reed, and thank you for
    inviting me to testify this afternoon.
        I would like to start by describing several initiatives of
    the Department to increase the available inventory of
    affordable housing before turning to the subject of
    preservation.
        As you know, the FHA's basic multifamily housing insurance
    program is Section 221(d)(4). In the fiscal year that just
    ended, that program enjoyed a very substantial increase in
    activity. FHA made commitments for 198 new construction or
    substantially rehabilitated projects, with over 38,000 units
    and totaling $2.8 billion worth of mortgage loans. That total
    dollar figure is easily the highest for the program in the last
    10 years. It is almost double our activity in fiscal year 2001
    when FHA made commitments for 139 projects, with 21,000 units
    totaling $1.5 billion. That amounts to a 42 percent increase in
    the number of projects, a 79 percent increase in the number of
    units, and an 85 percent increase in the dollar value of
    commitments.
        One major reason for this dramatic increase is that, in
    fiscal year 2002, HUD was able to operate Section 221(d)(4) on
    a self-sustaining basis. By raising the mortgage insurance
    premium to 80 basis points, we were able to end the program's
    dependence on credit subsidy. The industry doesn't need to be
    concerned anymore about program delays and stoppages because of
    credit subsidy issues, and three times in the last 8 years, FHA
    had to discontinue its credit subsidy program operations
    because we ran out.
        I know that many people in the industry were concerned that
    raising the premium would cripple the program. Clearly, that
    did not happen.
        Having put Section 221(d)(4) on a self-sustaining basis,
    the FHA is now in a position to reduce the insurance premium to
    57 basis points, which will make the financing of new or
    rehabilitated apartments more affordable. The reduction is a
    result of a comprehensive review of the credit subsidy
    calculations for all FHA multifamily programs, the first such
    analysis in a decade.
        You may recall from my confirmation hearing that I made a
    commitment to conduct this study. FHA completed it in time for
    the new credit subsidy calculations and the new premiums to be
    included in the President's Budget for fiscal year 2003 and to
    go into effect at the beginning of this fiscal year. We have
    lowered the premium on several self-sustaining programs, and we
    have lowered the credit subsidy rate on almost all of those
    that still require
    credit subsidy.
        There are other reasons for the sharp rise in commitments.
    Shortly after he came to HUD, Secretary Martinez announced his
    support for a 25 percent increase in the statutory per unit
    limits for the FHA's multifamily mortgage insurance programs.
    This was the first increase since 1992. It helps make FHA more
    feasible in high-cost areas where the programs have not been
    used in several years. Philadelphia, for instance, has seen its
    first FHA-insured project in more than 5 years. Applications
    have been submitted for projects in Washington, in Baltimore,
    in St. Louis, and in suburban Minneapolis, projects that would
    not have been submitted without the increase in the limits.
        I also want to touch briefly upon some of this
    Administration's budget proposals that will increase access to
    or add to the current inventory of affordable housing.
        The Administration's Budget for this fiscal year includes
    an additional $200 million in funding for 34,000 vouchers, in
    addition to the 1.74 million vouchers currently being utilized
    by low-income families. The Senate Appropriations Committee
    only provided funding for 17,000 new vouchers, and the
    Administration strongly urges Congress to fully fund our
    request.
        Although the national vacancy rate is close to an all-time
    high at 8.5 percent in the second quarter of this year, there
    are still areas of the country with a low vacancy rate. To
    address this problem, the Administration also supports the
    development of affordable housing through the Low-Income
    Housing Tax Credit, which supports about 100,000 new or
    rehabilitated rental units each year. Two years ago, Congress
    enacted a 40 percent increase in the volume limits for the Tax
    Credit, and caps for tax-exempt housing bond financing were
    also raised last year. States can direct these resources to the
    local markets where supply is constrained or rents are highest.
        In addition, the Administration has asked for increased
    funding this year for the HOME block grant of $1.8 billion. At
    that level, HOME will produce 23,000 new affordable units and a
    similar number of rehabs. The provision of these units will be
    made through decisions by local governments concerning their
    own affordable housing needs. Families with extremely low
    incomes will occupy over half of them. By law, voucher holders
    have access to all units developed with HOME and/or tax credit
    support.
        I would also like to report progress on one of the first
    initiatives I undertook after becoming FHA Commissioner to look
    at the pipeline in Sections 202 and 811. A report prepared for
    GAO had indicated that there were over 100 projects from 1992
    to 1997 that had not reached initial closing. I directed our
    Office of Multifamily Housing to determine the status of these
    projects. We learned that the pipeline data was badly out of
    date. Of the 100 projects listed as being in the pipeline, 25
    had cancelled--some of them years ago--and 18 had already
    closed. I then directed our staff to close as many of the
    remaining projects as possible, and I am pleased to report that
    we closed 30 of them.
        At the end of fiscal year 2002, that pipeline is down to 26
    projects, 1.3 percent of the 2,058 projects funded during the
    6-year period. This fiscal year, I expect we will close or
    cancel those 26 unless they are in litigation. We have also
    been working on the other end of the pipeline. Last year, we
    brought 75 percent of 202 and 811 projects to closing within 2
    years of funding. In the past, it has only been 60 percent, I
    understand.
        Turning quickly to the subject of preservation, the
    Department is committed to preserving the existing stock of
    affordable rental housing. Working with Congress, HUD has been
    successful in a number of efforts to preserve the affordable
    housing.
        The Department has implemented Mark-to-Market and Mark-Up-
    to-Market to provide opportunities for owners to make capital
    improvements and the necessary repairs to ensure the units are
    decent, safe, and sanitary for the residents and to ensure the
    units remain affordable.
        Since the inception of the Mark-to-Market Program, OMHAR
    has successfully closed debt restructurings on 571 projects,
    including over 46,000 units, all of which are now subject to
    30-year Use Agreements. These properties were provided with
    over $62 million in escrows for repairs, and an infusion of
    approximately $40 million in immediate Reserve for Replacement
    deposits to increase long-term physical stability. In addition,
    OMHAR has processed contract renewals and reduced rents on over
    120,000 units, resulting in annual savings of over $105
    million.
        The Mark-Up-to-Market Program, created in 1999, has been
    similarly successful. In its first 4 years, over 600 contracts
    have been renewed and 58,000 affordable housing units were
    preserved under this program. The Department has also renewed
    over 1,000 Section 8 contracts in the Section 202 program, with
    more than 80,000 affordable elderly and disabled units being
    preserved.
        For all of the Section 8 project-based programs combined,
    during the last 4 fiscal years, a total of 10,695 Section 8
    contracts were renewed and over 778,000 affordable housing
    units have been
    preserved.
        In my testimony, I address a number of specific policy
    matters concerning preservation. I would like to conclude by
    discussing one of them in particular. This concerns the
    contractual provisions governing the term of HAP contracts on
    State HFA Section 8 projects when the projects refinance and
    the recent legal opinion issued by the Department's Office of
    General Counsel.
        The Section 8 contracts in question were executed prior to
    1980. They provide that the term of the contract terminates,
    and I quote, ``on the date of the last payment of principal due
    on the permanent financing.'' It is my understanding that up
    until the recent OGC opinion, HFA's have interpreted the HAP
    contract language to mean that new financing is included as
    ``permanent financing'' and that the contract does not
    terminate when an owner refinances the original mortgage.
        We recognize the concerns of project owners, State
    agencies, and Members of Congress about the potential
    consequences for the affordable housing stock. We share those
    concerns, and we have been discussing the situation and
    possible options with the Council of State Housing Finance
    Agencies.
        Currently, in an effort to assure the availability of
    continued rental assistance for project residents, we proposed
    to the State agencies two alternatives for the affected project
    owners: First, the owner may elect to extend the maximum term
    of the HAP contract from the date of the prepayment so that it
    terminates at the originally scheduled maturity date on the
    permanent financing; or second, the owner may elect to renew
    the project-based Section 8 contract in accordance with the
    Multifamily Assisted Housing Reform and Affordability Act.
        However, an affected owner could choose neither option and
    exercise the right to opt-out of the Section 8 contract. In
    this case, the owner must provide HUD and the tenants with the
    proper 1-year notice of HAP contract termination.
        We will be continuing to discuss this important matter with
    the State HFA's and with others who are concerned.
        This concludes my statement, Mr. Chairman. Thank you for
    the opportunity to appear before you, and I will be happy to
    answer your questions.
        Senator Reed. Thank you, Mr. Secretary.
        Let me recognize my colleagues in order of their arrival.
    Senator Corzine, do you have an opening statement before we
    start a round of questioning?

                  STATEMENT OF SENATOR JON S. CORZINE

        Senator Corzine. Yes. Thank you, Mr. Chairman.
        I, like you and others, believe that the preservation of
    affordable housing is one of the most pressing issues before
    this Committee. Often we talk about the need to build more
    affordable housing and neglect to highlight the amount of
    affordable housing that we have lost to abandonment,
    demolition, or the private market.
        This is an extremely serious issue around the Nation, and I
    have to say it is a critical issue in the State of New Jersey.
    According to the Housing and Community Development Network of
    New Jersey, much of New Jersey's affordable housing is aging
    and at a risk of deteriorating to the point where it is no
    longer livable. The State has already lost much housing to the
    abandonment and demolition procedures. In a State that has the
    third highest housing costs in the Nation, further loss of
    affordable housing will only exacerbate an already dire
    affordable housing shortage.
        Mr. Chairman, as you noted, HUD has actively taken actions
    to reduce the preservation of affordable housing. I wish I
    could say that HUD was actively assisting our State to preserve
    this housing. Last February, HUD foreclosed on a Section 8
    project-based residence in Newark, New Jersey, the Brick Towers
    Apartments. Actually, this is quite a controversial spot in my
    community. Fearing demolition of their homes, residents of the
    Tower worked to secure private financing for a proposal to
    rehabilitate the property at no cost to the Federal Government.
    Despite their efforts to save their home, which contains 320
    units of affordable housing, and their efforts to save the
    Federal Government the $12 million HUD plans to spend to
    demolish the property, HUD refused to even meet with the Brick
    Towers residents to discuss their concerns about the demolition
    or to consider the rehabilitation proposal.
        I wrote to the Secretary numerous times requesting such a
    meeting, and to my knowledge, HUD has never met with the
    residents. And I find, as you can imagine, it extremely
    troubling. At the very least, HUD has a responsibility to
    listen to the concerns of those who are living there and are
    going to be disrupted.
        Mr. Chairman, I also am concerned about HUD's
    reinterpretation of Section 8 Housing Assistance Payment
    contracts to allow owners of Section 8 properties who have
    refinanced their mortgages to opt-out on those Section 8
    programs. Over the last decade, as you are aware, almost
    200,000 affordable housing units have been lost to mortgage
    prepayments and opt-outs. HUD's new interpretation, in my view,
    will only serve to increase the loss of affordable units.
        I hope that HUD is in the business of expanding access to
    affordable housing, not eliminating it. I look forward to
    hearing the testimony of our panelists and, in particular,
    Commissioner Weicher's response to these concerns.
        Senator Reed. Senator Carper, do you have a statement?

                  COMMENTS OF SENATOR THOMAS R. CARPER

        Senator Carper. I do, just a brief one, if I could.
        Mr. Chairman, thanks so much for holding this hearing and
    for a whole series of them focusing on affordable housing in
    this Congress. Some of those earlier hearings have shown that
    affordable housing continues to be a problem in our part of the
    country, and I think throughout the country.
        My hope is that in the next Congress we will be able to
    develop a comprehensive approach to solve the affordable
    housing crisis or begin to solve the affordable housing crisis.
    Under your leadership, Mr. Chairman, I am confident that we
    will.
        In the meantime, it seems that the least we can do is to
    preserve the affordable housing units we already have, and I am
    concerned about some recent regulatory actions that seem to
    work against preservations, in particular, HUD's recent legal
    opinion that would give certain Section 8 project owners the
    ability to opt-out of the Section 8 program if they have
    refinanced their mortgages.
        Again, Mr. Chairman, we thank you for scheduling this
    hearing, and I want to say special thanks to our witnesses for
    being here.
        I am supposed to preside at 3 o'clock, so I won't be able
    to stay for as long as I would like, but I wanted to be here
    for the budget.
        Thank you.
        Senator Reed. Thank you very much, Senator Carper.
        Senator Akaka, do you have an opening statement?

                  COMMENTS OF SENATOR DANIEL K. AKAKA

        Senator Akaka. Thank you, Mr. Chairman, and I appreciate
    your conducting this hearing today.
        There is a severe nationwide shortage of affordable rental
    housing. Affordable housing units declined by 9.5 percent
    between 1985 and 1999. Hard working Americans are being forced
    to spend more than they can afford to find adequate housing.
        The 2002 Report of the Millennium Housing Commission cited
    that one in four American households reported spending more
    than 30 percent of their income on housing in 1999. In my home
    State of Hawaii, affordable housing can be particularly
    difficult to find. According to the National Low Income Housing
    Coalition's annual Out of Reach Report, the average U.S.
    employee must make nearly $14.66 an hour to be able to afford a
    modest two-bedroom rental and be able to pay for food and for
    other basic needs. The Report indicated that in Hawaii a worker
    must earn $16.74 per hour. The median wage in Hawaii is $12.72
    per hour.
        The current limited existing stock of affordable rental
    units is likely to decline further as housing prices in
    particular regions continue to increase significantly.
        HUD must take an active role in preserving existing
    affordable housing units. And HUD appears to be accelerating
    this decline in rental units. Like several of my colleagues on
    this Committee, I am extremely concerned with HUD's housing
    preservation policies. In particular, I am concerned that HUD's
    interpretation of Section 8 Housing Assistance Payment
    contracts allows owners of Section 8 properties to opt-out of
    the Section 8 program if they have refinanced their mortgages.
    This action is likely to drastically reduce the number of
    affordable units available. According to HUD, 180,000 units
    could be impacted by the implementation of this policy. In
    addition, this action could damage the creditworthiness of
    State Housing Finance Agencies' bond programs.
        Mr. Chairman, I thank you for conducting this important
    hearing today, and I look forward to a complete examination of
    HUD's activities as they pertain to housing preservation. I
    want to thank the witnesses for appearing today. Thank you, Mr.
    Chairman.
        Senator Reed. Thank you, Senator Akaka.
        Mr. Secretary, let's go right to the HAP contract issue
    because, as you know, it has elicited a great deal of concern.
    I find it terribly troubling.
        First, how many units are affected by this
    reinterpretation?
        Mr. Weicher. We are counting it by projects, Mr. Chairman.
    We have 600 projects that we know of, and it may be up to 1,400
    projects. We are still counting that. We estimate, if it is
    1,400 projects, it will be a little over 100,000 units. So it
    is not as high as Senator Akaka was suggesting. I am not aware
    of a number from HUD in that range at all. I understand it to
    be possibly a little over 100,000 units. Among other things, we
    are trying to make sure we have a count on the possibly
    affected properties.
        Senator Reed. When you get that final determination, could
    you share it with the Committee?
        Mr. Weicher. We will be glad to.
        Senator Reed. I would make the obvious point: 100,000 units
    in a very tight market for affordable housing is a significant
    impact.
        I just want to understand what went on here. For 20 years,
    the contracts have been interpreted as not being changed by
    refinancing. And then suddenly, HUD looks over 20 years of
    practice in which each time one of these refinancings took
    place, HUD had to approve the refinancing, and declares that
    for 20 years they have been grossly misinterpreting the
    contract. Is that what happened here?
        Mr. Weicher. No, Mr. Chairman. But let me say that I am not
    a lawyer, as you know, and this concerns a legal opinion. I
    have asked our Associate General Counsel for Assisted Housing
    and Community Development to come with me today, Mr. Robert S.
    Kenison, and with your permission, I would like to ask him to
    respond to the legal issues here.
        Senator Reed. Surely.
        Mr. Kenison. Good afternoon, Mr. Chairman.
        Senator Reed. Good afternoon.
        Mr. Kenison. I think your framing of the issue is pretty
    close to the facts as they have occurred. The only quibble I
    would take is that I do not think this is a HUD
    reinterpretation. Just let me say what I mean by that.
        We were asked last spring by an attorney representing some
    owner, I believe in New Jersey, what the meaning of that
    contract was. This is in the Section 8 contract, which is
    limited to the State Housing Agency Program. The other Section
    8 contracts for new construction and substantial rehabilitation
    that were prominent in the 1980's and that make up the great
    majority of Section 8 project-based assistance do not have this
    provision in it. But we were asked to say what we thought this
    particular provision meant. Again, as Assistant Secretary
    Weicher said, this is a provision that was in what we call
    ``the old reg contracts,'' those that were executed roughly
    from 1975 to 1980. And the provision called for the termination
    of the HAP contract on the shorter of two dates: A number of
    years certain that was written in, or on the last payment due
    under the permanent financing.
        If the permanent financing permits a prepayment, that
    doesn't mean it is due on the last scheduled date of the
    original permanent financing. It means it is due when the
    permanent financing is completed, and that is when the HAP
    contract would terminate.
        Everything you have said about what has happened in HUD
    participation and refinancing is accurate. I think no one
    looked at that contract before, and when we saw the case this
    time--and I believe a good resolution was made in New Jersey.
    But, nevertheless, that is the way we took it to read.
        Since that time, the National Council of State Housing
    Finance Agencies has been very helpful in working with us,
    calling attention to much of what has happened in the past in
    refinancing the field, and clearly, I think what we have to say
    is that it has been understood or at least assumed that the
    contract did not terminate, notwithstanding this recent look we
    have taken.
        Our look this time was reinforced by the fact that in 1980,
    when we developed and issued a new form of contract, that
    particular contract said that the HAP contract would expire
    upon the shorter of the number of years written into it or the
    date of the originally scheduled permanent financing maturity.
    It was a clear change from what we had before, and that is why
    we think this is problematic contract language.
        We share your feeling about it 100 percent, but it is
    awkward, uncomfortably stark language.
        Senator Reed. Well, it is awkward language that has been
    followed for 20 years, and a certain--and I am an attorney, and
    we can argue about this endlessly. But it would seem to me 20
    years of practice in interpreting any contract, particularly in
    literally hundreds of refinancings, in which the developers
    were represented by sophisticated counsel in most cases--not
    all--and this issue was never raised in 20 years?
        Mr. Kenison. The exact meaning of that contract never was
    raised expressly. I think people assumed that the answer was it
    was okay.
        Senator Reed. I think if enough people assume the answer is
    okay, that might be the answer.
        Mr. Kenison. For that reason, we would say that everything
    that has happened in the past is in the nature of what is
    called an implied contract.
        Senator Reed. That is true. And I think the implied
    contract can be enforced, just as these implied contracts. You
    have eliminated or given the developers the option of
    disregarding the contract. Are you prepared to go in and recoup
    the payments that were made under these contracts?
        Mr. Kenison. No. Certainly we would argue that that implied
    contract lives up to today and everything that was paid, they
    get the benefit of the deal.
        Senator Reed. Then why would suddenly this implied contract
    in which the regulations apply be nullified on one side and not
    the other?
        Mr. Kenison. Now that this issue has been focused on and we
    think the meaning of the contract is so clear, we think it
    would be helpful to prospectively make that clear by amendatory
    contracts.
        Senator Reed. But you are giving the choice to the
    developers. If they choose the best option for themselves, that
    is fine. But you prejudice tenants who are living in these
    units.
        Let me also just say that I think clearly this could be
    easily interpreted the other way, and you have chosen an
    interpretation which I think defies 20 years of practice. But a
    specific question: Who was the individual and what entity did
    he represent who sought this reinterpretation?
        Mr. Kenison. I don't know. The attorney was Mr. Levy on
    behalf of a project in New Jersey. I can find that out.
        Senator Reed. Could you give us that information?
        Mr. Kenison. Certainly.
        Senator Reed. So one lawyer, one project, by inquiring to
    your office caused you to change the practice that was in place
    for 20 years that has been essentially abided by and
    unquestioned by
    legions of lawyers over that 20 years?
        Mr. Kenison. Well, I think there may have been other
    inquiries. I don't know. But this was the first time the
    question was so explicitly put.
        Senator Reed. I find it mind-boggling.
        Mr. Kenison. Yes, I----
        Senator Reed. You know, part of being a lawyer is coming up
    with solutions that are fair and sensible and consistent with
    practice, and I do not think you did.
        Senator Corzine.
        Senator Corzine. Mr. Weicher, does HUD plan to conduct an
    analysis of availability of affordable housing with respect to
    325 Brick Towers Apartments, if you are familiar with that, and
    its impact if we demolish it in Newark, which is, as I stated
    in my opening statement, a very serious concern for the
    community?
        And on a more general basis, are there any standards that
    HUD uses when determining whether or not to allow such housing
    to be demolished or preserved?
        Mr. Weicher. Senator Corzine, as I am sure you know, we
    have sold the project to the Newark Housing Authority, and we
    have sold it with rental affordability deed restrictions. And
    if the project is demolished and new housing is constructed,
    then there are those affordability restrictions. The residents
    would receive vouchers to enable them to find other housing not
    just within Newark, but also within New Jersey, and for that
    matter Northern New Jersey, and beyond.
        If I might say in response to your earlier opening
    statement, early in the process HUD did meet with the residents
    and discussed with them the plans to sell the project to the
    Newark Housing Authority, and at one point the residents were
    invited to put together a proposal for the project, and they
    did not. My understanding is that they did not express interest
    in doing that. We therefore signed a contract, an agreement,
    gave an option to the Newark Housing Authority, and it is on
    that basis that the recent sale occurred.
        The last request that we received to meet with the tenants,
    we were advised that because of the litigation of that
    building, General Counsel for that matter at the Department of
    Justice advised us not to meet with the tenants, and therefore
    we did not. We did request that the Newark Housing Authority
    meet with the residents about the sale.
        Senator Corzine. Did you follow up whether they did?
        Mr. Weicher. Yes.
        Senator Corzine. And did the Newark Housing Authority meet
    with them?
        Mr. Weicher. Yes. I am sorry. Let me just correct that,
    Senator Corzine. A meeting is planned.
        Senator Corzine. It is my impression that there has been no
    meetings, at least from the September time frame onward.
        I think while it is important for the local residents in
    this particular situation, I think it is indicative of the real
    problem that we have here, because for the citizens that live
    here in this housing project, there is virtually no available
    use of vouchers. Vouchers are going unused because of lack of
    availability in Newark, and so we are now creating a situation
    where people have to, as you described, move somewhere in the
    State of New Jersey or potentially outside of the State of New
    Jersey, while they may have jobs with limited transportation
    opportunities in and around the area.
        I think it is descriptive of a problem that is
    extraordinarily difficult for a lot of the people that live in
    affordable housing, particularly in States which have such a
    dramatic shortage of affordable housing, and I am concerned
    that all of us, not just HUD, but all of us together are not
    being sensitive enough to the availability of housing and
    taking those steps that move in the direction of at least
    maintaining what we currently have in place on a common-sense
    basis. And demolition in this particular instance, particularly
    when there was another developer willing to come in, we have
    not been able to have the kind of dialogue on a consistent
    basis.
        I have sent two letters to Secretary Martinez with regard
    to this issue, and I continue to be very concerned about the
    lack of real engagement with regard to resolving the number of
    affordable housing units in Newark broadly, which I think is
    representative of the Nation.
        Mr. Weicher. Senator Corzine, I might just comment that
    there is statutory right of first refusal for State and local
    entities when we acquire a project and are prepared to sell it.
    Newark Housing Authority had that statutory right and exercised
    it. During all of the vicissitudes of discussion within Newark,
    that right remained available to them.
        I might also say that we are committed to preserving the
    available stock as much as we can. As I said in my statement,
    in the last 4 years in a variety of programs, we have preserved
    close to 800,000 units, about 778,000 units over that period of
    time, and that is a very substantial share of the inventory,
    the total inventory, not just the inventory that came up for
    renewal.
        Senator Corzine. I just reiterate that that may be on some
    macro level. In a lot of the most desperate need areas of our
    urban communities, where affordable housing is in its most
    minimal supply, that does not appear to be the case, certainly
    not in Newark, certainly not in Camden, where I could go back
    and recite other elements of similar kinds of actions, and I
    think that their response with regard to vouchers really is
    indicative of what I am concerned about, which is an
    indifference in making sure we have adequate numbers of
    affordable housing.
        Senator Reed. Thank you, Senator Corzine.
        Senator Akaka, and then we will recognize Chairman
    Sarbanes.
        Senator Akaka. Thank you very much, Mr. Chairman.
        Secretary Weicher, Section 613 of the Mark-to-Market
    Extension Act required HUD to establish procedures to ensure
    that rents offered to owners as an incentive for participation
    in the Section 8 program, these incentives are to be comparable
    to the enhanced voucher rents, supported by the public housing
    authorities and Federal subsidies, when their owners opt-out.
    What is HUD doing to comply with this requirement?
        Mr. Weicher. The requirement to provide enhanced vouchers
    to residents who may be affected by the decision to prepay a
    project and not to keep it as affordable housing? We are
    providing these enhanced vouchers to the residents in those
    projects, and the enhanced voucher means that they can stay in
    the project at the rent that the landlord is charging. This
    requires the local approval of the PHA for that rent, but they
    can stay in the project at that rent, or they can use the
    voucher at the fair market rent for the local area, and they
    can use that voucher anywhere else in the local area. So, we
    are providing enhanced vouchers which I think was one of the
    most useful ideas to break the tremendous impasse that existed
    in Congress and in Administrations about preservation for over
    a decade, and we are doing it.
        If you are aware of instances where residents are saying
    they were not provided with enhanced vouchers, then we would
    very much want to know about those instances.
        Senator Akaka. Several of our witnesses in their testimony
    have suggested that HUD create an office of preservation to
    better coordinate its preservation efforts. What type of
    coordination of
    efforts currently exists within HUD and how can these efforts
    be improved?
        Mr. Weicher. We have, of course, the Office of Multifamily
    Housing Assistance Restructuring, which is responsible for both
    the Mark-to-Market Program and the Mark-Up-to-Market Program,
    and that includes all of the Section 8 properties, which are
    the vast bulk of what is at issue here. With respect to the
    other properties that would be involved would be Section 236
    projects. There are not very many of those, and those are
    handled through the regular program office. I do not have any
    sense that we need a different structure than we have.
        Last year Congress, in reauthorizing OMHAR, placed OMHAR
    within the Office of Housing, with the Director of OMHAR
    reporting to me, rather than being independent of the
    Department essentially and reporting to the Secretary, and that
    has improved our ability to coordinate our activities. There is
    a close working relationship between the Office of Multifamily
    Housing, basic FHA and Sections 202 and 811 programs, and the
    Office of Multifamily Housing Assistance Restructuring. I meet
    with the Director of that office weekly, and sometimes more
    than weekly, and he is meeting with the Office of Multifamily
    Housing, the staff is meeting with the Office of Multifamily
    Housing regularly, and it seems to be everyone's sense that
    this is working better than the previous arrangement had
    worked.
        Senator Akaka. Mr. Secretary, how will HUD utilize its
    authority for Interest Reduction Payments on certain terminated
    and recaptured Section 236 properties with IRP contracts, which
    are used for the rehabilitation of multifamily projects?
        Mr. Weicher. The Emergency Supplemental Act, this summer,
    rescinded $300 million that had been estimated in the budget,
    for Interest Reduction Payments. That took all the money that
    we had for that program. Looking forward, we have in the budget
    for 2003 a $100 million estimate. That is an estimate. What
    actually happens depends on a number of factors. We cannot
    really know how many projects we will choose to prepay in the
    course of the year. Some of the projects, we will be able to
    decouple the IRP in the sense they will continue to receive the
    Interest Reduction Payments in return for agreeing to
    affordability restrictions when they refinance, and some
    projects will Mark-Up-to-Market and not, therefore, opt-out,
    and the Interest Reduction Payment will not come into play.
        There is also a complication in that the contracts prepay,
    that the money becomes available over the course of the fiscal
    year, and we cannot know the timing of that, and we have to
    make the commitment to begin the program, make the funds
    available before the end of the fiscal year. So if we assume we
    get $100 million this year, and again it is not rescinded, then
    it will be a question of the timing at which the money will
    become available. If the recision had not occurred, we were
    working on a feasible program with the money that we had
    available, and we still could, but we have no money at all.
        Senator Akaka. Thank you, Mr. Secretary.
        Senator Reed. Thank you, Senator Akaka.
        Senator Sarbanes.

                  COMMENTS OF SENATOR PAUL S. SARBANES

        Senator Sarbanes. Thank you very much, Mr. Chairman. I am
    sorry I was not able to be here at the outset, but this is a
    busy time of the legislative session.
        First of all, I want to thank Chairman Reed for holding
    this very important hearing. Obviously, preserving affordable
    housing already in stock is a very critical issue. The National
    Low Income Housing Coalition released its annual Out of Reach
    Report just a few weeks ago. There is not a city or county in
    the country where a full-time minimum wage earner can afford to
    put his or her family in a two-bedroom apartment. In fact, on
    average, a worker needs almost $15 an hour to pay for modest
    housing, almost three times the minimum wage.
        These figures make it very important that we preserve what
    affordable housing we have. It seems to me that HUD should be
    very much involved in that endeavor. Regrettably, and I know we
    will hear about this from the other witnesses to follow, HUD
    seems to be undercutting efforts to preserve affordable
    housing, either through indifference and inaction, or sometimes
    just a hostility to innovative ideas, a hostility that seems to
    me to be more driven by ideology than by common sense.
        Having said that, I want to ask some questions of the
    Secretary.
        I may touch on subjects that have been covered to some
    extent. On August 29, quite some time ago, Senator Reed and I
    wrote to the Secretary about the reinterpretation of Section 8
    housing assistance payments contracts in a way that would allow
    owners of Section 8 properties to opt-out of the Section 8
    program. It was our understanding, as we raised then, that the
    reinterpretation applied not only to projects that refinance in
    the future, but also to any projects that had refinanced in the
    past. So that is the first question I want to ask.
        First of all, presumably this letter was referred on to
    you, Mr. Secretary?
        Mr. Weicher. I am sure it was, Senator. We are the logical
    people to be responding to it. I am surprised if you have not
    received a response, and I will certainly look into that.
        Senator Sarbanes. Fine. That is the first question I want
    to ask. This is October 9. We sent this letter on August 29 on
    a matter we think is of some importance and we have gotten no
    reply.
        Mr. Weicher. I will look into that. I can tell you that the
    Department tracks Congressional correspondence very carefully,
    as do I. And to my knowledge, we have no overdue letters from
    any Member of Congress, and we have certainly had no overdue
    letters since well before the date of your letter, and we track
    this every week. The deadlines are weekly and we track this
    every week. I will look into that and give you a specific time.
        Senator Sarbanes. Well, let us go to the substance.
        Mr. Weicher. Excuse me, Chairman Sarbanes. With me is our
    Associate General Counsel for Assisted Housing and Community
    Development, who is knowledgeable about this whole issue, and
    essentially it is an issue of a legal opinion, and Mr. Kenison
    might have something to say about that letter I believe.
        Mr. Kenison. Mr. Chairman, I just wanted to say that that
    letter, because of the source and the importance of it, was
    directed to be prepared for the Secretary's signature. My
    office prepared a letter. It is in clearance and should be out
    very quickly.
        Senator Sarbanes. Where is the letter? Do you have it with
    you?
        Mr. Kenison. No.
        Senator Sarbanes. Mr. Secretary, let me just ask you about
    the policy? What is going on? I am told, even by your own
    estimates, 180,000 units, affordable housing units, could be
    lost under this new policy.
        Mr. Weicher. Mr. Chairman, Senator Akaka made reference to
    that number also, and the count that we have is that something
    over 600 projects, perhaps as many as 1,400 projects, may be
    affected. If it is 1,400 projects, it would be a little over
    100,000 units that would be affected. I do not want to minimize
    that, but if you have other numbers from HUD, I certainly would
    want to see them, because we have been working very seriously
    on this issue. We recognize it as a problem. It was called to
    our attention unexpectedly, as Mr. Kenison said, early, by
    either a developer or an agency in New Jersey--he can respond
    to this--and we realized immediately that we had a problem
    here, and we have been working to try to identify a solution.
    We have met with the Council of State Housing Finance Agencies.
    We know their concern. We know the concerns of the Members of
    Congress. We share those concerns. We are trying to work out a
    solution that is legally appropriate.
        Senator Sarbanes. Well, what kind of solution are you
    trying to work out?
        Mr. Weicher. What we have done is we have offered options
    to owners to renew the contracts on these projects that have
    already been--the contracts were terminated and refinanced. We
    have been working to make sure that option is available.
        Senator Sarbanes. Have you opened up all the past
    contracts?
        Mr. Weicher. It is not all of them.
        Senator Sarbanes. For refinancing?
        Mr. Weicher. It is not all of them. It is the contracts
    which were State Housing Finance Agency projects and the
    contracts were executed prior to 1980. That is why it is
    between 600 and 1,400 projects and we have a total universe of
    Section 8 projects of about 15,000.
        Senator Sarbanes. Didn't HUD assent to these refinancings?
        Mr. Weicher. May I, at this point, refer to Mr. Kenison as
    the legal expert on this?
        Senator Sarbanes. Well, except there are important policy
    implications, but let me just hear him, yes.
        Mr. Kenison. I think that is a fair way to ask the
    question, Mr. Chairman, and, yes, HUD did assent to them.
        Senator Sarbanes. Did you not continue to pay funds to
    Section 8 property owners who did the refinancing?
        Mr. Kenison. Correct.
        Senator Sarbanes. Now, you are coming back and saying that
    they are out of their obligations to keep the housing
    affordable?
        Mr. Kenison. What we are saying is no one had ever looked
    at the contract provision before. The contract provision is
    painted in very bold language that throws into question what we
    have done. There is no question, however, but what has happened
    in the past, the practice has been total assent to the
    refinancing. That is why the package now, described by
    Assistant Secretary Weicher, tries to get them all up to speed
    in accordance with the contract language and practice.
        Senator Sarbanes. My understanding is that the State
    Housing Finance Agencies, which finance many of the properties,
    and the building owners, had all interpreted the language to
    mean that new financing is included in permanent financing, and
    the contract does not terminate when they refinance the
    original mortgage.
        Mr. Kenison. That is what my understanding----
        Senator Sarbanes. They refinance the original mortgage in
    order to get a lower interest rate, right?
        Mr. Kenison. Yes, sir.
        Senator Sarbanes. And that is to the advantage of the
    owner, is it not?
        Mr. Kenison. Sure.
        Senator Sarbanes. But now you are telling us that because
    that has been done, and that was permitted, that they are now
    out from under their affordable housing obligation?
        Mr. Kenison. We are saying that they have the option of
    formalizing what has been happening in practice for the last 15
    years by executing an amendatory contract.
        Senator Sarbanes. Suppose they refuse to do that? Then they
    are out from under the restrictions?
        Mr. Kenison. We think that is a problem.
        Senator Sarbanes. How do you reach a conclusion like that
    in light of the fact that this has been a standard practice and
    has been accepted by everybody?
        Mr. Kenison. There is a vast tension between that accepted
    broad practice and the words that are in the contract. That is
    why the National Council and State Housing Agencies have
    proposed legislative language, and we have looked at that, and
    given them a technical drafting service.
        Senator Sarbanes. Everyone is desperate to prevent the loss
    of this housing, but the whole problem originates from a HUD
    interpretation.
        Mr. Kenison. Yes, sir.
        Senator Sarbanes. Secretary, you are against Section 8
    project-based, are you not?
        Mr. Weicher. Mr. Chairman, we are managing the Section 8
    inventory in accordance with the statute. We are committed to
    preserving the units that were subsidized in the period between
    1974 and 1983, and for that matter the earlier units under
    Sections 236 and 221(d)(3)BMIR. This is not an issue of
    ideology. We know what the law is. We are following the law. We
    have devoted a lot of effort to preserving the stock.
        I mentioned in my opening remarks that over the last 4
    years we have preserved close to 800,000 units in Section 8
    through Mark-to-Market, Mark-Up-to-Market, and the 202 projects
    that had Section 8 contracts, and we are continuing to work on
    that. We work very closely with OMHAR. My Office of Multifamily
    Housing works very close to OMHAR. This is a legal
    interpretation, which as Mr. Kenison said, the issue arose as a
    surprise to all of us in the Department. We have all been
    proceeding on the basis that these earlier HAP contracts
    continued, as Mr. Kenison said, for 15 years. I do not know the
    period of time, but this came as a surprise. The General
    Counsel's Office spent some time on the issue before reaching
    that conclusion.
        Senator Sarbanes. We need an answer to our letter. I want
    to see the opinion, but this is an outrage. You could lose, by
    any estimate, over 100,000 units of affordable housing, and you
    are sitting there telling me that it is a legal interpretation
    of a practice that has been prevailing and to which everyone
    has assented and has participated.
        Mr. Weicher. Mr. Chairman, I do not want to minimize at all
    the extent of the problem.
        Senator Sarbanes. No, I hope not.
        Mr. Weicher. I would say that we do not have any
    expectation that over 100,000 units would, in fact, opt-out.
    There are a number of States, including some large ones, in
    which State provisions discourage prepayment and opting-out,
    discourage opting-out, and we do not have any reason to believe
    that all of the owners who are affected would choose to opt-
    out.
        Having said that, because I think it is important to give
    you the best information we can, again, I do not want to
    minimize the extent of the problem. We are very concerned, and
    we recognize that this is completely unexpected by all of us.
        Senator Sarbanes. I am interested because I was involved
    with some of my colleagues in trying to preserve affordable
    housing. HUD would not allow the transfer of Section 8
    subsidies to replacement housing as part of a broader
    revitalization plan to build mixed-income housing in Pittsburgh
    and Indianapolis; correct?
        Mr. Weicher. The statute does not permit what the developer
    wanted to do in Pittsburgh and Indianapolis, which essentially
    was to transfer Section 8 project-based subsidy to newly
    constructed projects. The Administration does not favor that,
    and opposed doing so. We worked out an agreement with each
    city, separate agreements with each city, similar, but there
    are some legal differences between the project status. We
    worked out an agreement with each city, under which the city
    would be able to take title to each of the projects affected,
    and the city would receive substantial funding from us for
    demolition and redevelopment of housing on the sites on which
    those projects were located, which was consistent with our
    legal authority.
        Senator Sarbanes. Did you oppose a legislative proposal to
    alter your legal authority in order to permit this to happen?
        Mr. Weicher. The Administration did not--there was an
    amendment proposed to the Appropriations bill last year. We
    were opposed to that. We met with Members of this Committee,
    and we agreed that we would not oppose that amendment. It did
    not make it into the Appropriations bill, which frankly, I did
    not realize until after the Appropriations bill was signed and
    published. We subsequently learned that there was opposition
    with the House, as well as when the issue was reopened by the
    cities. There was opposition within the House to the original
    amendment, and continuing opposition to the legislative change,
    and there was opposition by the Administration to a legislative
    change. And on that basis we worked out an agreement with the
    cities and with the developer, and to our knowledge, those
    agreements are what we are operating on, and we intend to abide
    by them, and we think that those agreements solve the problems
    that the cities are concerned with and that the developer is
    concerned with within our current legal authority. We intend to
    go forward and continue, as we have been, to work with the
    cities to bring those projects to the conclusion that we have
    agreed on.
        Senator Sarbanes. Mr. Chairman, you have been very generous
    with the time, and I appreciate that very much. We obviously
    are just beginning to scratch the surface here, and I think
    this is an extremely important issue, and I must say I do not
    have any sense of any, not even asking for a mission, but any
    sort of a commitment on preserving affordable housing, which is
    unfortunate since I think we look to HUD to provide some
    momentum for, and some leadership for, and some imagination. I
    am sure this is a matter we will continue to pursue.
        Thank you.
        Senator Reed. Thank you, Chairman Sarbanes.
        I have a few additional questions.
        First, again, this issue of the HAP contracts is so
    intriguing. After 20 years of consistent interpretations by
    both sides, apparently one or two lawyers approaches HUD,
    claims, in a rather novel argument, that 20 years of experience
    and interpretation is absolutely wrong. HUD, on their own
    volition, changes the regulations and the policy. Was any
    thought given to resisting a possible lawsuit? Who made the
    policy decision not to test this policy of 20 years in court?
    That is not a legal judgment. That is a policy judgment. Mr.
    Secretary, did you make that judgment?
        Mr. Weicher. No. The Office of General Counsel concluded
    that the contract had not been interpreted correctly. That is
    the judgment of the Office of General Counsel. As you know, the
    General Counsel, like me, is a policy official of the
    Department. This Committee confirmed him at the same time that
    you confirmed me. And this is the opinion of the Department
    that we do not have that
    authority.
        Senator Reed. So after 20 years of practice, no lawsuit was
    initiated; is that correct, Mr. Kenison?
        Mr. Kenison. Yes, Mr. Chairman.
        Mr. Weicher. That is correct.
        Senator Reed. No lawsuit was initiated. And suddenly you
    just throw 20 years of practice out. You do not even say, well,
    you know this is a close call. We have been doing this for 20
    years. We would probably have a good argument in court. Mr.
    Kenison, do you think you would have a good argument in court?
        Mr. Kenison. I think we would have a great argument for the
    money that has already been paid out, and the tenants who have
    been assisted to date. What would happen in the future I think
    is the problem.
        Senator Sarbanes. But your ruling went back, did it not?
        Mr. Kenison. The ruling goes back to the fact that it
    affects the past, as well as the present. But insofar as any
    given owner has received assistance and gotten the benefit of
    the bargain, we would not challenge that.
        From the----
        Senator Reed. But it is just--excuse me, sir. Go ahead.
        Mr. Kenison. I was just going to say that from the
    standpoint of litigation, we considered that to a degree, that
    litigation would probably come against HUD by owners.
        Senator Reed. Well, there was no litigation by HUD by any
    owners, is that correct?
        Mr. Kenison. Absolutely correct.
        Senator Reed. So how many issues are pending before HUD now
    that are being litigated because owners have disputed
    contracts?
        Mr. Kenison. I do not know. Not a lot.
        Senator Reed. Not a lot?
        Mr. Weicher. I can----
        Senator Reed. But this was not important enough to test the
    seriousness of the claim by the developer community by saying,
    if you feel that is your interpretation, you have a right to go
    to court? This was seen so automatic and so unimportant that we
    just say, oh, sure.
        Mr. Kenison. It was seen as extremely important, but it was
    seen almost as automatic. That language is so straightforward.
        Senator Reed. Twenty years of experience absolutely
    undercuts your argument, I am sorry. I appreciate the fact that
    you are advocating, and you study this issue more than I do,
    but I will stop.
        Mr. Kenison. Mr. Chairman, I really do not mean to
    advocate. We just read that contract, and it reads very sparely
    that it terminates on the earlier of two dates; a number of
    years certain or the date on the last payment of the permanent
    financing.
        Maybe one reason no one looked at that before, and I would
    not say it was interpreted, I would say it was always assumed
    that the contract survived, is that the vast majority of these
    project-based contracts, not with the State Housing Finance
    Agency do not have that provision in it. So if you go to
    refinancing or assignment of the contract, of course, it
    carries forward.
        Senator Reed. Again, one could make a very good legal
    argument that, by implication, if it is unclear, then the other
    thousands of existing HUD contracts would be controlling, at
    least by implication. We can get into a long legal argument,
    and I respect the fact that this is a legal issue, but it is
    just you did not even fight about it. And we always hear these,
    you know, we have to run Government like a business. I cannot
    conceive of any business who is questioned on an issue with
    this ambiguity, after 20 years of consistent interpretation, it
    may be because no one raised the issue, but consistently, and
    it is an important issue, whether they can get in on a
    contract. Every time these contracts, these refinancings came
    up, HUD looked at these contracts, at least perfunctorily.
        Mr. Kenison. Well, and the State----
        Senator Reed. Yet this is just, well, we just fold up our
    cart.
        It goes to the remedy, too. The remedy is basically
    whatever is the best deal for the developer. It is not
    preserving affordable housing. It is not even trying to
    preserve affordable housing.
        Let me move to two other issues because I think the
    Secretary and you----
        Mr. Weicher. Mr. Chairman, could I just, speaking of the
    benefits to the owner, presumably the refinancing was done in
    order that the owner gained a benefit out of the refinancing,
    right? I mean, in financial terms.
        Mr. Kenison. Sure.
        Mr. Weicher. In addition now, he has also gained this huge
    benefit on top of that by HUD's interpretation, so he can now
    walk out of his contract. So, you have to approve the
    refinancing, do you not?
        Mr. Kenison. I am not sure if in the State finance program
    we approve them. I do not think we do. This is the program in
    which the State Housing Agencies were given the discretion.
        Senator Sarbanes. All right. They approve it. You have to
    continue to make the Section 8 payments.
        Mr. Kenison. Sure.
        Mr. Weicher. Yes, Mr. Chairman.
        Senator Sarbanes. So, you approve it, he gets better
    financial terms, and now he walks away from his affordable
    housing obligation. Boy, that is a deal.
        Senator Reed. Mr. Secretary, two other issues if I could.
        First, notice requirements for opting-out of Section 8.
    There are several examples in my State of Rhode Island, in
    Texas, and in Los Angeles, where individuals suggest that HUD
    has not enforced requirements for appropriate notice before
    opting-out of the Section 8 program.
        In Los Angeles, the owner is alleged not to have abided by
    State notice requirements. That is something that HUD
    recognizes, but HUD says they will not get involved, but the
    question really is, what assurances can you give us that you
    are going to enforce the notice requirements?
        Mr. Weicher. Mr. Chairman, to my knowledge we are enforcing
    the notice requirement, and we certainly intend to enforce the
    notice requirement across the board. I would very much like to
    see any of the examples that you mention, any alleged examples,
    we will look into all of them. This is not our policy to stamp
    on that notice anywhere along the line.
        Senator Reed. We will make those references, but in the
    State of Rhode Island, we had a situation where we asked HUD to
    look into the issue of notice, and they refused to get
    involved. Tenants, I believe, went to court, got a State
    ruling, and then HUD, as I mentioned in my opening statement,
    decided to sell the mortgages to a bank in Plano, Texas,
    claiming now that they are no longer the responsibility of HUD.
    We will get the information to you.
        Mr. Weicher. Is this the three projects that you mentioned
    in your opening remarks?
        Senator Reed. In my opening remarks.
        Mr. Weicher. The owner did prepay on those, and there was
    no subsidy and no use restrictions on those at this stage. I
    understand the current question is, is the court settlement,
    and we were not party to that court settlement anywhere along
    the line.
        Senator Reed. We will provide specific details, but as I
    understand it, the issue was not the prepayment as much as the
    notice to prepay.
        Mr. Weicher. Please give us that information in as much
    detail as you can.
        Senator Reed. With respect to another issue, in Ms.
    Sanchez's testimony, she talks about enhanced vouchers and
    HUD's lack of enforcement ensuring that owners who opt-out
    accept enhanced vouchers. Do you have any knowledge where
    owners are refusing to accept enhanced vouchers after opting-
    out?
        Mr. Weicher. When we met with Ms. Sanchez and other leaders
    of the National Association of HUD Tenants, one or two people
    in the room mentioned problems with owners not accepting
    enhanced vouchers in their projects in their communities.
        The information I was able to obtain at that meeting was
    that these were situations where the Public Housing Authority
    was not permitting the enhanced voucher to go to the maximum
    permitted, to the rent that was being charged on the project,
    but were setting a lower maximum for the enhanced voucher,
    which I understand is legally permissible.
        Those are the only instances that I have been aware of, and
    if there are other instances, I imagine you are going to be
    sending me a lot of paper, but that is fine.
        Senator Reed. Thank you very much.
        Senator Sarbanes.
        Senator Sarbanes. Mr. Chairman, I know we have a panel
    waiting, and I think we should hear from them. I just, again,
    want to thank you for holding this hearing, and I want to
    underscore the fact that I think it is very apparent that there
    is an area here crying out for a very careful Congressional
    oversight, and I am very pleased that you have here launched
    that effort, not concluded it, but launched it, and thank you
    very much.
        Senator Reed. Thank you, sir.
        Thank you, Mr. Secretary. Thank you, Mr. Kenison.
        Senator Reed. Let me call the next panel forward, please.
        I will call the second panel to order and introduce our
    witnesses.
        Mr. James Grow is a Staff Attorney at the National Housing
    Law Project, Oakland, California. Jim is the Project's
    principal staff for HUD-assisted preservation work and has
    spent his legal career working on affordable housing issues.
    Thank you, Mr. Grow.
        Ms. Kit Hadley has been a Commissioner of the Minnesota
    Housing Finance Agency since July 1994. Prior to her
    appointment as Commissioner, she served as the Deputy
    Commissioner and Director of Government Affairs.
        Mr. Tom Slemmer is President and CEO of the National Church
    Residences in Columbus, Ohio. Founded in 1961, National Church
    Residences is one of the country's leading nonprofit
    organizations specializing in the development, construction,
    and management of over 1,400 units of affordable housing
    designed to serve the elderly, low-income families, and persons
    with disability through Federal and State grants, loans, and
    tax credit programs.
        Ms. Louise Sanchez is currently the NAHT Board President
    and has been an NAHT Board Member since 1997. She also serves
    as a Co-Chair of the Mitchell-Lama Residence Coalition, which
    represents over 101,000 families in Mitchell-Lama subsidized
    developments in New York State.
        We look forward to your testimony. Let me remind you,
    again, that your full statements are in the record, and I would
    ask you to abide by our 5-minute limit.
        Mr. Grow.

                       STATEMENT OF JAMES R. GROW

                             STAFF ATTORNEY

                      NATIONAL HOUSING LAW PROJECT

                          OAKLAND, CALIFORNIA

        Mr. Grow. Thank you, Mr. Chairman. Thank you for providing
    the National Housing Law Project with this opportunity to
    testify on the preservation issue.
        Our organization provides legal and technical support to
    hundreds of tenant leaders, organizers, nonprofit
    organizations, and legal advocates throughout the country who
    are working every day to preserve affordable housing. We all do
    this work because of a shared commitment to the basic principle
    that everybody needs a place to call home, and that housing
    that is decent and affordable or can be made so and provides
    stability against arbitrary eviction merits our special
    attention because once it is lost, it is virtually impossible
    to replace.
        Our mutual experience demands that Federal policies and
    practices must promptly be reformed. My written testimony
    covers the recent history of Federal preservation policy,
    current problems, specific examples in greater detail, but in
    my remarks, I would like to focus on four major points.
        First, since 1994, with only a couple of notable
    exceptions, Federal preservation policy has been in a full-
    scale retreat, but often a retreat that is wrought in total
    silence. Much of the harm has been made through budgetary
    decisions and related changes in law adopted through the
    appropriations process, with little public input from the
    normal legislative authorizing process.
        Two prime examples of this backward procedure include:
    First, Congresses' abandonment of the Federal Preservation
    Program, in favor of authorizing unrestricted prepayments for
    properties with HUD-subsidized mortgages; and, second, with
    Congresses' adoption of so-called flexible authority, beginning
    in 1995 and made permanent a year later, giving HUD incredibly
    broad and standardless discretion over its decisions concerning
    properties with HUD-held mortgages or that are HUD-owned.
        Thousands of units, formerly protected by Federal laws that
    were carefully crafted through the normal legislative
    authorizing process, have been lost without those laws ever
    having been revised or repealed.
        My second point is that Congress and the public need to
    know much more about HUD's activities under its existing
    statutory and regulatory authority. Congress may not fully
    realize how HUD is interpreting, applying, or even ignoring
    statutes that it has passed. At various times over the past 30
    years, and certainly for much of the past decade, HUD has been
    on a mission, not to preserve affordable housing, but actually
    the opposite, to get rid of it.
        In pursuing this mission, HUD thrives on Congressional
    ignorance. When the harmful or illogical consequences of
    thoughtless agency decisions reach the light of day, the
    Congress has often
    responded on a bipartisan basis: For example, by enacting the
    Mark-to-Market Program in 1997 and by adopting the ``Mark Up''
    and enhanced voucher protections that preserve more housing and
    protect residents a couple of years later in 1999.
        Vigilant and persistent oversight, coupled with accurate
    data on critical issues from HUD itself, is essential to
    responsive preservation policymaking and administration.
        My third point. Preservation policy should not be built
    around the concept of owner choice that underlies current
    policy on most prepayments and Section 8 opt-outs, nor should
    it rely on unbridled HUD discretion that governs HUD's
    activities concerning HUD-owned properties and those with HUD-
    held mortgages.
        Congress should establish or reinstitute public policy
    criteria concerning the circumstances under which developments
    should be preserved or not, as was true under the 1990
    preservation program and the 1994 property disposition policy.
        Congress should also provide appropriate procedures and the
    funding to make preservation happen, possibly with
    participation by State and local governments. Granting HUD
    discretion is extremely hazardous, even where HUD is directed
    to make specific findings, as in the case of those prepayments
    that still require HUD approval. This is especially dangerous
    when HUD is given discretion with no statutory criteria
    whatsoever, as in the case of the Flexible Authority statute,
    where HUD takes this as a license to ignore all prior
    unrepealed statutes and regulations such as those governing
    multifamily foreclosure and disposition activities and mortgage
    sales.
        Congress may not be fully aware of what it did in 1995
    because it was buried in an emergency supplemental
    appropriations bill and made permanent a year later, arguably
    allowing HUD to override all other existing statutes and rules.
        I would like to echo your remarks earlier, Mr. Chairman,
    concerning HUD's recent mortgage sale of multifamily HUD-held
    notes which included those on several Rhode Island properties.
    This note sale may have stripped away all Federal regulatory
    protections such as budget-based rent restrictions and perhaps
    even prepayment restrictions. Certainly, it has made it a lot
    more difficult for residents to prevail on their legal
    challenge to the prepayment and opt-out under Rhode Island law.
        That HUD would do this without identifying or analyzing the
    impacts of its actions on the preservation of affordable
    housing demonstrates a serious administrative failure, whether
    it is committed by HUD staff or by due diligence contractors.
        My last point is that preservation policy cannot be driven
    solely by a desire to save Federal budget authority. Congress
    must reform its budget accounting rules or create exceptions
    that permit longer term subsidy commitments that do not
    increase actual annual outlay spending. This will enable the
    creation of appropriate preservation and rehabilitation
    policies--set a level playing field, if you will, to measure
    the costs of preservation with those of other options. But even
    so, cost-effectiveness is but one part of an overall process
    that must also evaluate both the feasibility and the social
    benefits of preservation.
        We are paying high prices to protect tenants when owners
    prepay or opt-out under the enhanced voucher program, but the
    irony is we are not getting any housing preserved in the
    bargain.
        The Federal Government should also commit additional
    resources to support the financial contributions of State and
    local governments through matching grant programs and to
    complement other Federal preservation tools, such as Mark-Up-
    to-Market in Section 8 and the targeted use of Federal
    Multifamily Mortgage
    Insurance to ensure preservation for nonprofit transfers.
        Finally, one of the most important additional tools to
    advance preservation would be to adopt Federal income tax
    relief on the noncash gain for those owners that transfer
    properties at commensurately lower sales prices to tenant-
    endorsed nonprofit preservation purchasers, as recently
    recommended in concept by the Millennial Housing Commission.
        Thank you, Mr. Chairman.
        Senator Reed. Thank you, Mr. Grow.
        Ms. Hadley.

                    STATEMENT OF KATHERINE G. HADLEY

             COMMISSIONER, MINNESOTA HOUSING FINANCE AGENCY

                            ON BEHALF OF THE

               NATIONAL COUNCIL OF STATE HOUSING AGENCIES

                             WASHINGTON, DC

        Ms. Hadley. Chairman Reed, thank you for this opportunity
    to testify on behalf of the National Council of State Housing
    Agencies. Preservation of the existing supply of Federally-
    assisted housing is one of the most important goals of the
    Minnesota Housing Finance Agency. There are many critical
    preservation issues that need the attention of Congress and HUD
    in partnership with the States.
        However, I would like to spend the rest of my 5 minutes on
    the preservation problem that did not exist until a few months
    ago. The problem is the opinion of the Office of General
    Counsel on HAP contracts that has been well-described by you.
        We point out, as you have, that HUD has concluded that the
    HAP contracts terminated upon a refinancing, despite the fact
    that HUD itself approved the assignment of the HAP contract to
    the new financing in hundreds of transactions in State after
    State, year after year, despite the fact that HUD itself
    continued to pay Section 8 subsidies on hundreds of refinanced
    developments in State after State, year after year, and despite
    the fact that letters from HUD confirm HUD's understanding that
    the HAP contract remains in force after a refinancing.
        To remedy this newly discovered problem, HUD proposes to
    allow owners of refinanced projects, both past and future,
    three choices, one of which is opting-out of the Section 8
    program. As if we did not already face a huge challenge to
    preserving extremely affordable rental housing, with the stroke
    of a pen, HUD has put at-risk the homes of 100,000 seniors and
    families with children, added hundreds of owners to the numbers
    already considering opting-out of the Section 8 program and
    raised questions about the financial security of bonds issued
    to finance Section 8 developments.
        This HUD opinion is a fiasco. It raises three questions
    about HUD's stewardship of precious affordable housing
    resources. The first question is what is HUD's policy on
    preservation? States are investing hundreds of millions of
    dollars and thousands of person hours in very complicated
    transactions to preserve, not just State-financed housing, but
    housing financed by the Federal Government, HUD, and USDA rural
    development.
        In Minnesota alone, the State legislature appropriated $60
    million in State general funds in addition to our other
    resources, and we have locked in 6,000 units of affordable
    housing, 80 percent of which were financed originally by the
    Federal Government, not the State. Many of us at the local
    level, HFA's, cities, tenants, owners, and advocates feel that
    we are going it alone in caring about preserving this critical
    housing.
        Some in Minnesota have questioned why we would put State
    resources into preserving HUD-assisted housing when HUD is not.
    How long is this sustainable without HUD as a genuine partner?
        The second question is what kind of business partner is
    HUD? How should Standard & Poor's or Moody's rate bonds in the
    future that are dependent on a contract with HUD. Should for-
    profit or nonprofit owners participate with HUD in the future
    in programs or transactions that require that they take any
    risk?
        The Minnesota Housing Finance Agency, taking its very
    cautious approach, got prior approval from HUD for every
    refinancing we did. How can HFA's or anyone rely on anything
    HUD says if they can disavow their words and actions decades
    after the fact?
        The third question is what does this demonstrate about
    HUD's administration of housing programs? HUD, in essence, is
    saying that for at least two decades, HUD's staff, under both
    Republican and Democratic Administrations, improperly paid out
    billions of dollars of rent subsidies, that no one asked
    whether it was legal and that HUD just noticed it.
        Depending on what you think of the OGC's opinion, HUD was
    either wrong for 27 years or they are wrong now. Neither
    scenario inspires confidence. While I am not here to debate the
    legal questions involved in that, suffice it to say that NCSHA
    firmly believes that this decision was not compelled by the
    language and that the opinion might have been rendered
    differently if HUD had been guided by a strong policy
    commitment to preserving Federally-
    assisted housing.
        In conclusion, HUD has seriously exacerbated an already
    serious problem. The opinion of the OGC is plain wrong. HUD
    should reconsider the opinion and reverse it. Failing that, we
    are exploring our options, including working with HUD, and with
    you, Mr. Chairman, Senator Sarbanes, and others to devise
    legislation that will fix this problem.
        Thank you very much for your concern for preservation and
    for your close attention to this specific matter.
        Senator Reed. Thank you very much, Ms. Hadley.
        Mr. Slemmer, welcome.

                     STATEMENT OF THOMAS W. SLEMMER

                 PRESIDENT, NATIONAL CHURCH RESIDENCES

                             COLUMBUS, OHIO

                            ON BEHALF OF THE

                   AMERICAN ASSOCIATION OF HOMES AND

                         SERVICES FOR THE AGING

        Mr. Slemmer. Thank you, Mr. Chairman and Members of the
    Subcommittee. I am Tom Slemmer, President of National Church
    Residences. I am also Chairing the Preservation Task Force of
    the American Association of Homes and Services for the Aging.
    Just to refresh your memory, we have 5,600 members, not-for-
    profit members, who are operating about 300,000 units of
    affordable housing under some form of Federal subsidy or
    sponsorship, about 70 percent faith-based. I am also one of the
    founding members of the Stewards for Affordable Housing for the
    Future. Just to give you the not-for-profit perspective on
    this, we represent about eight large not-for-profits around the
    country, about 65,000 units of housing that wants to send the
    message that not-for-profits have the capacity and the
    willingness to participate in this issue of preserving
    affordable housing.
        I want to focus my comments a little bit on the not-for-
    profit senior housing perspective. Our testimony speaks to many
    aspects of preservation, but one of the things that we want to
    say is that we are really alarmed about what is happening to
    the loss of affordable senior housing.
        We fear that we are going to lose every single unit that is
    in a good market area--I mean that--especially if you look at
    the 236 portfolio. The market forces are moving so fast that it
    is just almost impossible, without some kind of leadership, to
    really turn around the properties that are located in prime
    areas. We are seeing it on the West Coast and the East Coast,
    but other areas, also.
        I thought I would just mention quickly that vouchers do not
    work for seniors, and we need to really think about that. The
    project-based Section 8 is really important for senior housing
    because it is not just addressing the affordable housing
    situation. It is really serving a more complex array of issues,
    and it is really a great success story of this Congress--the
    development and the operation of affordable senior housing.
        Vouchers may work, but they certainly encourage scatter
    sites. Senior housing really concentrates on density, and with
    that density we are able to provide more services, we are able
    to get more community involvement, we are able to foster more
    supportive housing systems, reduce isolation on and on. Senior
    affordable housing is a bargain for this country, and people
    are starting to recognize it is part of this long-term care
    strategy that we are going to have to develop here as the baby-
    boomers, like myself, become seniors here in the next 10 years.
        Mission-driven not-for-profits have a will and a desire to
    participate in this affordable housing preservation, and we are
    really alarmed. You have already recognized the need. We find
    in our membership there are eight people on the waiting list
    for every Section 202 housing facility in this country.
    Somebody from New York just told us today they have 10 units
    available this year, 1,500 on the waiting list. Lots of need
    that is well-documented.
        We want to focus our recommendations on three issues. We
    think we need leadership from HUD, we need incentives for
    sellers to participate in a preservation process, and we need a
    few tools to make this happen. I say that in that order because
    it really is about leadership. HUD has many of the tools
    available right now to help us preserve this kind of housing.
        Owners must have an incentive to get them to participate in
    what is clearly a longer process of putting together the
    financing package for a preservation plan. There are some tools
    out there that we need to talk to you about as it relates to
    how to help us with this.
        Vouchers, for example, are a problem. The enhanced voucher
    program, we think you should rename that and call it a
    transition voucher, because what it is doing, in many cases, is
    helping owners transition their property to a market-rate
    product. We think you should come up with a preservation
    voucher, a voucher that allows a preservation entity, a not-
    for-profit preservation entity, to participate in this voucher
    pool when they are actually trying to preserve this housing.
        In just a few moments, I want to tell you about a project
    in Kansas that we preserved, and I have copies of this I will
    share with you later, but a beautiful 50-unit property,
    Manhattan, Kansas, a town of 50,000, and it is a success story
    that I think if we could figure out the components that made
    that successful, we might be able to find a solution in the
    future.
        We had an owner opting-out. He announced his opt-out. The
    community and the residents were involved. They were concerned
    about this. We received the national HUD office's and the local
    HUD office's participation in a preservation plan. We were able
    to get the State Housing Finance Agency to score us high on a
    preservation tax credit allocation. The Federal Home Loan Bank
    Board became involved, and we put together a package that
    preserved this project, in perpetuity, for affordable senior
    housing--great
    location, great group of anxious seniors.
        And it really required the leadership to pull all of this
    off, and that is the kind of leadership we think it is going to
    take to solve this problem with preservation. We have to have a
    focal point nationally that says, this is a problem. We have to
    figure out how to expedite the tools that we have available to
    get us to be able to move faster, to keep up with market
    forces, and we have to coordinate with State Housing Finance
    Agencies to make sure that they are on board with preservation
    tax credits, and we have to get the private grants involved to
    provide incentives.
        We see properties like this that do not have that kind of
    support come on the marketplace for sale and are gone in a
    matter of a few months. We are working on one right now in
    Cleveland, where the owner decided to opt-out. It is a Section
    236 elderly property. The opt-out, we really could not slow it
    down because of enhanced vouchers, there was no community to
    preserve that housing, and we were not able to slow it down
    because, with enhanced vouchers, the owners are able oftentimes
    to get extra cashflow into their property, and they can change
    their property from an affordable product to a market-rate
    product without any loss of revenue. We were almost
    facilitating that change.
        We are working on a lot of preservation projects. Virtually
    every one requires HUD leadership. In many cases, we are
    getting outstanding leadership at the HUD local level. I would
    just encourage you to think about--leadership is really
    important here. We have a lot of tools available, a lot of
    people around this country that are interested in preservation.
    We have to figure out a way, like the Millennium Housing
    Commission suggestion, with some kind of preservation tax
    credit that gives relief to the owners for hanging in there in
    the preservation process, and we have to work on a few more
    tools to put in the hands of qualified preservation entities so
    we can participate in the preservation.
        But there are not-for-profits with the will and the
    capacity out there to really make a difference in this problem.
        Senator Reed. Thank you very much, Mr. Slemmer.
        Ms. Sanchez.

                      STATEMENT OF LOUISE SANCHEZ

              PRESIDENT, NATIONAL ALLIANCE OF HUD TENANTS

                           NEW YORK, NEW YORK

        Ms. Sanchez. Thank you, Senator Reed, for your leadership
    in calling this hearing and for the invitation to testify
    before you.
        Founded in 1991, the National Alliance of HUD Tenants is
    the Nation's only membership organization representing the 2.1
    million families who live in privately-owned, HUD-assisted
    housing.
        This past weekend, NAHT released a report in several cities
    showing that the United States has lost more than 250,000 units
    of affordable housing since 1996 when Congress restored owners'
    ability to prepay their 40-year HUD-subsidized mortgages
    without major restrictions. Of this amount, close to 200,000
    units of HUD-subsidized housing were lost due to owner
    decisions to prepay or to opt-out of expiring project-based
    Section 8 contracts as of August 2001. The remaining units
    consist of public housing units lost through the HOPE VI
    demolitions. We are submitted a copy of this report,* by the
    way, with my testimony today.
    ---------------------------------------------------------------------------
        *Held in Committee files.
    ---------------------------------------------------------------------------
        Many observers thought that the problem of the loss of
    housing was solved when the Congress and HUD adopted the Mark-
    Up-to-Market Program in 1999. However, our report shows that,
    despite this program, the average loss of housing nationally
    has remained roughly the same as before its adoption. About
    41,000 units continue to be lost each year. We clearly need to
    do more to preserve the Nation's affordable housing stock.
        Some areas have been particularly hard hit. By August 2001,
    California and Texas alone had lost over 65,000 units of
    privately-
    owned affordable housing, nearly a third of the national total.
    Some 14 States have seen an increase in the rate of either the
    opt-outs or prepayments by more than 300 percent since early
    1999.
        Most startling of all, however, is the new data we are
    releasing today regarding New York City, which is where I come
    from. We have already lost more than 8,000 units in New York
    City alone, and owners of another 5,767 units in the 11
    Mitchell-Lama developments have filed notices of intent to
    prepay. In addition, four co-ops housing more than 25,000
    families, including the 15,000-unit Co-op City development, are
    planning to privatize and prepay their mortgage in the next
    year. All told, we have lost or expect to lose some 40,000
    units of affordable housing in New York City by the end of next
    year.
        In the wake of the trauma inflicted on New York City in the
    past year, the imminent loss of 40,000 affordable housing units
    is a crisis which we can neither bear nor ignore.
        Homeland security begins with a home. Action by the
    Congress is urgently needed to give us the tools to preserve
    these affordable units. It is now clear that voluntary
    incentives are insufficient to save affordable housing. NAHT
    believes that Congress should establish a national regulatory
    framework, like the Title VI Preservation Program, repealed by
    Congress in 1996, to limit owners' ability to opt-out and
    prepay.
        Ironically, in buildings where HUD is executing 5- to 20-
    year Mark-Up-to-Market contracts, the cost of additional
    Section 8 subsidies is approaching the cost of the Title VI
    Preservation Program, but with none of the benefits in terms of
    mandatory repairs, permanent affordability, and transfers to
    nonprofit purchases. Worse, the 5-year extensions in most Mark-
    Up-to-Market buildings leave residents and HUD at continued
    risk.
        Deregulation is a strategy that has failed in the energy,
    telecommunications, banking, and airline industries in the
    United States and in countries around the globe. Now the
    evidence is in: Deregulation is a failure in the subsidized
    housing industry as well. Congress should act now to restore
    regulations to save our homes.
        Besides the Congress, HUD needs to do more to save
    affordable housing. Instead, HUD's policies have added to the
    loss of housing rather than its preservation. For example,
    HUD's policy of dumping properties it owns or controls on the
    open market with vouchers for tenants and toothless use
    restrictions has resulted in the loss of 26,000 apartments by
    March 2000, a significant portion of the 86,402 project-based
    Section 8 opt-out units lost between 1996 and 2001.
        The NAHT has challenged a variety of discretionary HUD
    policies which have added to the needless loss of housing. Our
    written testimony goes more into this in detail. In the
    interest of time, we will limit our remarks here to suggesting
    the three key questions for which we would like some answers
    today with the Subcommittee's help.
        Will HUD adopt a comprehensive policy to maximize
    preservation of at-risk housing in areas where HUD has
    discretion to do so?
        Will HUD enforce--enforce--the law and sanction owners
    where owners fail to accept enhanced vouchers as required by
    Congress or comply with Federal or State notice requirements as
    required by HUD's own Section 8 policy?
        And will the Commissioner and his staff meet with
    representatives of NAHT, the National Housing Law Project, and
    key Subcommittee staff to discuss and resolve the specific
    cases we have raised in our testimony today?
        Since NAHT was founded in 1991, we have sought to establish
    a partnership with HUD whereby the tenants, the people with the
    strongest stake in the successful operation of HUD housing,
    serve as the unpaid volunteer's ``eyes and ears'' of HUD in
    overseeing owners and managers of our buildings. Congress has
    supported this vision by providing up to $10 million annually
    through Section 514 of the MAHRAA to promote tenant and
    community petition in Section 8.
        I will conclude with this. Most devastating to tenants has
    been HUD's continued failure to restart the VISTA Volunteers
    Project in HUD housing. Funded by a HUD interagency agreement
    with the Corporation for National and Community Service since
    1995, this successful project has helped to empower tens of
    thousands of residents in HUD multifamily housing to
    participate in saving and improving their homes. The program
    costs HUD very little money and leveraged an equal amount of
    resources from CNCS to place an average of 50 VISTA's each year
    with 30 local groups. CNCS has pledged its support for a 3-year
    extension of the program if HUD is willing. This program has
    been frozen since November 2001, when HUD failed to honor its
    contract with CNCS, even though in March, Secretary Martinez
    and Commissioner Weicher told Congress that the VISTA project
    would be restarted immediately and that the $600,000 owed to
    CNCS by HUD was being processed. He said he was going to do it
    as soon as he left here and went to his office. I can only
    assume he never found his way to the office because the bill
    was never paid.
        The other part of the problem is that much to HUD's
    embarrassment, in the ongoing Section 514 fiasco, it could have
    been avoided had the new leadership team communicated with
    NAHT. In the 25 years NAHT and its leaders have been dealing
    with HUD, this is by far the least responsible and accessible
    leadership at the Agency we have ever seen. Far from being
    treated as partners, this Administration treats tenants and the
    people who work with us as if we were the enemy. We ask the
    Subcommittee's help in helping us reestablish the kind of
    dialogue and partnership through regular meetings with the
    Secretary and the Commissioner, which we have enjoyed with
    several previous Administrations.
        We ask Congress to adopt legislation to save our homes. We
    urge that the Subcommittee support S. 1365, the preservation
    matching grant. We urge Congress to restore regulatory measures
    to prevent displacement and preserve affordable housing, like
    the former Title VI Preservation Program. And, finally, if I
    can turn the page, it is not too early for Congressional
    leaders to develop a long-term legislative strategy to save our
    homes.
        I refer you to the written report, and, again, let me thank
    you for allowing us to testify.
        Senator Reed. Thank you, Ms. Sanchez.
        Thank you all for your testimony. I have questions for all
    the panelists, but let me begin with Ms. Hadley.
        You listened to the exchange about the HAP program, and
    just for some further context, over the course of 20 years in
    Minnesota your lawyers, who looked at these refinancings, and
    the developers who came in, did they ever raise the question of
    the applicability of the Section 8 provisions?
        Ms. Hadley. Mr. Chairman, the issue of what happens upon a
    refinancing was, in fact, addressed by HUD's staff, both
    program staff and attorneys working for HUD. It came up in a
    variety of different ways, and we have submitted letters to HUD
    and other documents that demonstrate that. So, we think, in
    fact, HUD's staff was doing their job for the last 20 years.
    They were considering the question of what happens upon a
    refinancing with the HAP contract, and it was decided correctly
    all these years.
        Senator Reed. And, in fact, your perspective also is that
    the beneficiaries, the owners of these projects understood that
    too, and there is documentation suggesting--not just practice
    but documentation suggestion that?
        Ms. Hadley. My understanding is that the owners fully
    expected that these HAP contracts would continue.
        Senator Reed. Well, we would be interested in some of those
    documents. Staff, I am sure, will contact you. But thank you so
    much. I still remain amazed at this startling reinterpretation.
        Mr. Grow, your testimony talked about the hostility toward
    preservation, and I think, Mr. Slemmer, essentially the same
    thing. Why don't you comment on HUD's policy with respect to
    foreclosure and to the extent that leads you to believe that
    there is this real hostility? And your comments, too, Mr.
    Slemmer, about the 202 program would be helpful.
        Mr. Grow.
        Mr. Grow. Well, I feel like I saw this movie a long time
    ago. Congress wrestled with this issue in the early 1980's,
    held a lot of hearings, issued reports, enacted legislation in
    1988 requiring HUD to preserve multifamily properties that were
    being sold at foreclosure or were HUD-owned.
        A few years later, when the Congress--or HUD did not
    request adequate budget authority to run the program, HUD
    came--the Clinton Administration came to Congress in 1994 and
    said, we need some relief from this, we cannot manage all these
    properties that are in trouble, so let's devise some more
    ``flexible'' authority. That is a bad term because that was
    used subsequently to justify deregulation. But Congress worked
    very hard with the Administration in 1993 and 1994 to come up
    with the Multifamily Property Disposition Reform Act.
        Well, before the ink was even dry on that statute, which
    establishes public policy criteria governing HUD's foreclosure
    and property disposition activities, as well as its mortgage
    sale activities, HUD was back in here in 1995, requesting that
    Congress give it blanket authority to do whatever it wants. And
    Congress did that.
        So, I cannot imagine that an agency that was committed to
    preserving affordable housing would not be able to work within
    the statutory framework that Congress had already crafted.
        There have been repeated instances--it was interesting
    listening to the explanation of Brick Towers and the exchange
    between the Commissioner and Senator Corzine. Brick Towers was
    sold not for preservation but to the Newark Housing Authority
    for demolition, despite the city council's having passed an
    ordinance prohibiting demolition.
        So to hear them say that, well, the State or the local
    government has the right of first refusal is really
    disingenuous because that right of first refusal was exercised,
    and they did not get their act together, and that contract of
    sale expired numerous times. HUD could have easily said the
    deal is off, we have to sit down and work something else out.
    And they never did that.
        Senator Reed. Thank you, Mr. Grow.
        Mr. Slemmer, you have done, as you indicated in your
    testimony, a great deal of work with elderly housing, Section
    202 programs, and your perspective, too, about these
    foreclosure issues. I think it was a point Mr. Grow established
    that this is not a recent problem. This goes into the Clinton
    Administration, too. But whether or not there is a more
    difficult situation today or this is just a continuation of the
    insensitivity that has been for years.
        Mr. Slemmer. That is a good question. We have documented in
    our testimony three foreclosures of Section 202 elderly
    properties that really are alarming to us. ``Hostility'' is not
    a good word for it, I would suggest. These properties got
    caught up in property disposition, and it is just a lack of
    awareness that they should stop and do something about it.
        The concern we have had primarily is not that you won't
    find elderly housing every once in a while get into problems
    and then end up in property disposition. But the lack of
    interest in bringing in someone else, another not-for-profit to
    be able to step in and operate that housing.
        In Detroit, for example, we had two large not-for-profit
    organizations that were willing to step up, and in Upstate New
    York, the one we document is in Alfred, New York, we had our
    organization willing to step in, and just the inability to
    effect the process once the gears got rolling.
        I would say as it relates to preservation, ``hostility'' is
    not a good word. In our experience, it is more of a lack of
    awareness of what the loss of this housing does to the
    community. And when you can convince the HUD office of that, we
    find oftentimes there is more leadership at the local level
    than you could get at the national level in terms of people
    saying, yes, let's figure out what we can do to save the homes
    of these people.
        Senator Reed. Is this a lack of resources at the local
    level or a lack of a policy directive from Washington saying
    get interested in this? And I think you have very clearly
    stated it is not, you know, do not do this at all, but it is
    just not making it a priority?
        Mr. Slemmer. Typically a HUD transaction, if you have tax-
    exempt bonds or you have tax credits involved, it is a year to
    a year and a half process. And than getting everyone, HUD and
    the other agencies, to understand that preservation requires
    speed is very difficult.
        We find, for example, that oftentimes the tax credit cycle
    will not coincide at all with the property that is offered for
    sale. Therefore, convincing the owner to hang in there while
    you go through this process is very, very difficult. But I
    think leadership is the key.
    Focusing all the resources we have on this effort would make a
    difference.
        Senator Reed. Thank you.
        Ms. Sanchez, your testimony also suggests--and the question
    I raised with Secretary Weicher--about the failure to give
    proper notice. Is that a problem you see increasing?
        Ms. Sanchez. Yes, it is. And, in particular, I think there
    were five States that I may have cited--California--I need to
    put my glasses on. California, Minnesota, Missouri, New York,
    and Pennsylvania in a sense immediately come to mind.
        But the whole question of notice becomes paramount because
    if tenants do not get proper notice, in the sense of, first of
    all, the time period, there is so much work that has to be done
    in terms of still trying to preserve their housing, that they
    will not have time to do, and that is because of the absolute
    refusal of HUD to do any homework on opt-out applications or
    prepayment applications. They routinely approve them. They do
    not check into things that they should be checking into--land-
    use options.
        They approved a buy-out in Manhattan 4 years ago for a
    development on 23rd Street. That buy-out has not taken place
    yet because the tenants went in and litigated on the land use.
    There was a covenant with the Board of Estimates that said that
    no matter who owns the property, the apartments have to remain
    affordable for another 75 years.
        Why HUD doesn't do this, why the burden falls on tenants to
    go check this out--they need the time to check it, they need
    the resources, the money which goes into the OTAG funds and the
    ITAG funds which are all blocked up again right now. It is a
    losing game if they, in truth, are out to preserve affordable
    housing.
        I fail to understand why they do not do a little bit of
    homework but shove it all on the backs of tenants to do all the
    research for themselves.
        Senator Reed. Thank you very much, Ms. Sanchez.
        I want to thank all of the panel for your excellent
    testimony, your comments, and your insights, and it seems
    apparent today that leadership is necessary by the Congress,
    the President, and the Administration at HUD to once again
    focus attention on preserving affordable housing. And without
    that leadership, without that attention, we will see a
    continuing erosion of affordable housing. It doesn't help when
    some inexplicable decisions are rendered by the Counsel's
    Office which accelerates that erosion.
        We are all committed here, and I think that is a commitment
    shared not only by this panelist but also by Secretary Weicher,
    by Secretary Martinez, and by the President to ensure that
    people have a chance to live in decent housing. But the
    rhetoric has to be matched with action and leadership and
    commitment. I hope we can do that.
        I would ask if there are additional questions, or material,
    or responses, if we ask you questions, please to submit them by
    October 16. In fact, let me get this right. You might receive
    questions from my colleagues prior to October 16. Please within
    10 days respond. And if you have anything you would like to
    send in, that is okay.
        Thank you very much. The hearing is adjourned.
        [Whereupon, at 4:25 p.m., the hearing was adjourned.]
        [Prepared statements, response to written questions, and
    additional material supplied for the record follow:]

                     PREPARED STATEMENT OF JOHN C. WEICHER
        Assistant Secretary for Housing and Federal Housing Commissioner
                U.S. Department of Housing and Urban Development
                                October 9, 2002

        Chairman Reed, Ranking Member Allard, and distinguished Members of
    the Subcommittee, thank you for inviting me to testify on the subject
    of affordable housing preservation.
        You have asked me to discuss specifically several matters that
    concern the preservation of the existing stock of affordable housing. I
    am happy to do that, but before doing so, I would like to describe
    several of the Department's initiatives to increase the available
    inventory of affordable housing.
        In the fiscal year just completed, the Federal Housing
    Administration's basic multifamily housing insurance program, Section
    221(d)(4), experienced a very substantial increase in activity.
    Overall, FHA made commitments for 198 new construction or substantially
    rehabilitated projects, with over 38,000 units and totaling $2.8
    billion worth of mortgage loans. That total dollar figure is easily the
    biggest number for the program in the last 10 years, and could well be
    a record. It is almost double our activity in fiscal year 2001. Last
    year, FHA made commitments for 139 projects, with over 21,000 units,
    totaling $1.5 billion. That amounts to a 42 percent increase in the
    number of projects, a 79 percent increase in apartment units, and an 85
    percent increase in the dollar value of commitments.
        One major reason for this dramatic increase is that, in fiscal year
    2002, HUD was able to operate Section 221(d)(4) on a self-sustaining
    basis. By raising the mortgage insurance premium to 80 basis points, we
    were able to end the program's dependence on credit subsidy and
    terminate the need for appropriations. There is no longer any need for
    the industry to be concerned about program delays and stoppages
    because of credit subsidy issues. During the last 8 years--from 1994
    through 2001--FHA's credit subsidy programs had to discontinue
    operations three times.
        I know that many people in the industry were concerned that raising
    the premium would cripple the program. Clearly, that did not happen.
        Having put Section 221(d)(4) on a self-sustaining basis, FHA is now
    in a position to reduce the insurance premium to 57 basis points, which
    will make the financing of new or rehabilitated apartments more
    affordable. The reduction is a result of a comprehensive review of the
    credit subsidy calculations for all FHA's multifamily programs, the
    first such analysis in a decade. You may recall from my confirmation
    hearing that I made a commitment to conduct this study. FHA began work
    on the study in June of last year, and we completed it in time for the
    new credit subsidy calculations and premiums to be included in the
    President's Budget for fiscal year 2003 and to go into effect at the
    beginning of this fiscal year. We have lowered the premium on several
    self-sustaining programs, and lowered the credit subsidy rate on almost
    all of those that still require credit subsidy. The proposed notice for
    the premium reduction was published in the Federal Register for comment
    in August with comments due by September 30. We expect the final notice
    to be published within a matter of days and FHA will permit Section
    221(d)(4) commitments that have not closed to be reprocessed at the 57
    basis point premium.
        There are other reasons for the sharp rise in commitments. Shortly
    after he came to HUD, Secretary Martinez announced his support for a 25
    percent increase in the statutory per unit limits for the FHA's
    multifamily mortgage insurance programs. This was the first increase
    since 1992. The increase helps to make the FHA programs more feasible
    in high-cost areas where the programs had not been used for several
    years. Philadelphia, for instance, has seen its first FHA-insured
    multifamily projects in more than 5 years. Mortgage insurance
    applications have been submitted to finance developments in Washington,
    DC, Baltimore, St. Louis, and suburban Minneapolis that would not have
    been submitted without the increase in the limits.
        The Multifamily Accelerated Processing (MAP) Program is another
    contributing factor. Having now completed 2 full years of this program,
    we have done more to standardize the process, and we have demonstrated
    to the development industry that FHA's field staff can and will provide
    an expedited review of the mortgage insurance application packages.
        I also want to briefly touch upon some of this Administration's
    fiscal year 2003 budget proposals that will increase access to or add
    to the current inventory of
    affordable housing.
        The Administration's Budget for this fiscal year includes an
    additional $200 million in funding for 34,000 rental housing vouchers,
    in addition to the 1.74 million vouchers currently being utilized by
    low-income families. The Senate Appropriations Committee only provided
    funding for 17,000 new vouchers. The Administration strongly urges
    Congress to fully fund our request, either by the full Senate or in
    conference.
        Although the national vacancy rate is close to an all-time high--
    8.5 percent in the second quarter this year--there are still areas of
    the country with a low-vacancy rate. To address this problem, the
    Administration also supports the development of affordable housing
    through programs such as the Low-Income Housing Tax Credit, which
    supports about 100,000 new or rehabilitated rental units each year. Two
    years ago, Congress enacted a 40 percent increase in the volume limits
    for the LIHTC, and caps for tax-exempt housing bond financing were also
    raised last year. States can direct these resources to the local
    markets where supply is constrained or rents are highest.
        In addition, the Administration has asked for increased funding
    this fiscal year for the HOME block grant program. At the proposed $1.8
    billion funding level, HOME will produce 23,000 new affordable units
    and a similar number of rehabilitated units. Provision of these units
    will be made through decisions by local governments concerning their
    own affordable housing needs. Families with extremely low incomes will
    occupy over one-half of these units. By law, Section 8 Voucher holders
    have access to all units developed with HOME and/or LIHTC support.
        HUD's Section 202 elderly housing, Section 811 Disabled Housing and
    Housing Opportunities for Persons with AIDS programs also produce
    thousands of new units a year for special populations.
        I would also like to report progress on one of the first
    initiatives I undertook after becoming FHA Commissioner, and that was
    to take a look at the large number of projects in the development
    pipeline in the Section 202 and Section 811 programs. A report prepared
    for GAO had indicated that there were over 100 Section 202 projects
    from the years 1992 to 1997 that had not reached initial closing. I
    directed our Office of Multifamily Housing to determine the status of
    these projects. We learned that the pipeline data was badly out of
    date. Of the 100 projects listed as being in the pipeline, 25 had
    cancelled--some years ago--and 18 had already closed. I then directed
    our staff to bring as many of these old project commitments as possible
    to closing, and I am pleased to report that we closed 30 of them.
        At the end of fiscal year 2002, the combined total of Section 202
    and Section 811 projects funded between 1992 and 1997 that had not
    reached initial closing is now down to 26. That number represents only
    1.3 percent of 2,058 projects funded during that 6-year period. This
    fiscal year, I expect those 26 will be closed or cancelled, unless they
    are in litigation.
        We will continue to try and make improvements to ensure the timely
    development of affordable housing under these programs and are working
    with our field staff to help accomplish this. We recently completed two
    training sessions for our field staff, the first such training in 11
    years. In addition, we changed the awards process so that it does not
    reward sponsors that previously have been unable to demonstrate that
    they can develop affordable housing in a timely manner.
        I would now like to address some of the issues this Subcommittee
    has raised concerning the preservation of the existing stock of
    affordable housing.

    Preservation of the Existing Section 8 and Section 202
    Affordable Housing Stock
        The Department is committed to preserving the existing stock of
    affordable rental housing. Over the last few years, the Congress
    through legislation has provided for financial tools to provide
    incentives and assist project owners to preserve the affordable housing
    stock. Working with Congress, the Department has been successful in a
    number of areas in its efforts to preserve the affordable housing stock
    as well provide incentives to the owners.
        The Department implemented Mark-to-Market and Mark-Up-to-Market to
    provide opportunities for owners to make capital improvements and the
    necessary repairs to ensure the units are decent, safe, and sanitary
    for the residents and to ensure the units remain affordable.
        Since the inception of the Mark-to-Market Program, HUD's Office of
    Multifamily Housing Assistance Restructuring (OMHAR) has successfully
    closed debt restructurings on 571 properties. These properties include
    over 46,000 units and are now subject to 30-year Use Agreements. They
    were provided with over $62 million in escrows to repair properties,
    and an infusion of approximately $40 million in immediate Reserve for
    Replacement deposits, increasing the long-term physical stability of
    the properties. In addition, OHMAR has processed Section 8 contract
    renewals and reduced rents on over 120,000 units, resulting in annual
    Section 8 savings of over $105 million.
        The Mark-Up-to-Market Program, created in fiscal year 1999, has
    been similarly successful. In its first 4 years, through fiscal year
    2002, 632 Section 8 contracts have been renewed and 58,000 affordable
    housing units were preserved under this program. To be eligible for the
    Mark-Up-to-Market, a property must: (1) Not have a low- and moderate-
    income use restriction that cannot be eliminated by the unilateral
    action of the owner; (2) be decent, safe, and sanitary; (3) not be
    owned by a nonprofit entity; (4) not be a Section 8 Moderate
    Rehabilitation Project; and (5) have rents exceeding 100 percent of
    fair market rents.
        Additionally, the Department uses its statutory authority to enter
    into multiple-year Section 8 contracts for those owners choosing the
    Mark-Up-to-Market rent increase option. Owners must enter into a
    contract at a minimum of 5 years, but not to exceed 20 years. Payments
    under the contracts are subject to the availability of appropriations.
    To limit the possible cost to the Government for implementing the MU2M
    option, the Department capped the rent increase at the comparable
    market rent or 150 percent of fair market rents, whichever is lower.
        The Department also recognizes the important contribution that has
    been made by nonprofit owners in the development and the preservation
    of affordable housing. This is particularly true for those nonprofit
    sponsors who have developed Section 202 affordable housing for the
    elderly and persons with disabilities. Many of the older Section 202
    projects have Section 8 rental assistance. The owners of these projects
    are eligible to apply for an increase in their rents to cover the cost
    of capital repairs. The program requirements and process for obtaining
    the rental increase is described in Chapter 15 of the Section 8
    Contract Renewal Guide. From fiscal year 1999 through fiscal year 2002,
    1,092 Section 8 contracts in the Section 202 program have been renewed,
    with more than 80,000 affordable elderly and disabled housing units
    preserved.
        For all Section 8 project-based programs combined, during the last
    4 fiscal years, a total of 10,695 Section 8 contracts were renewed and
    over 778,000 affordable housing units have been preserved.
    HUD's Interpretation of Section 8 Contractual Provisions for
    State Finance Agency-Financed Multifamily Projects
        The Department's Office of General Counsel recently issued a legal
    opinion regarding the contractual provisions governing the term of a
    Section 8 Housing Assistance Payment Contract (HAP) between a State
    Housing Finance Agency and an owner for a State Housing Finance Agency-
    financed project executed prior to 1980. It is HUD's position that this
    is neither a new policy nor a reinterpretation. The Section 8 contracts
    in question provide that the term of the contract terminates ``on the
    date of the last payment of principal due on the permanent financing.''
    It is my understanding that up until the recent OGC opinion, Housing
    Finance Agencies have interpreted the HAP contract language to mean
    that new financing is included as ``permanent financing,'' and that the
    contract does not terminate when an owner refinances the original
    mortgage.
        The Department has identified approximately 1,400 Section 8 HAP
    contracts at most that potentially could be impacted by this recent OGC
    opinion. This maximum number could be further reduced by the dozen or
    so States that have strong prepayment restrictions. In an effort to
    lessen the impact of this opinion on the existing assisted tenancies,
    minimize the loss of affordable housing units, and to assure the
    availability of continued rental assistance for project residents, HUD
    has proposed to the State Housing Finance Agencies two alternatives for
    the affected project owners: (1) The owner may elect to extend the
    maximum term of the HAP contract from the date of the prepayment to
    terminate at the originally scheduled maturity date of the permanent
    financing. (2) The owner may elect to renew the project-based Section 8
    contract in accordance with the Multifamily Assisted Housing Reform and

    Affordability Act (MAHRAA).
        However, an affected owner could choose neither option and exercise
    the right to opt-out of the Section 8 contract. In this case, the owner
    must provide HUD and the tenants with the proper 1-year notice of HAP
    contract termination.
        We recognize the concerns of project owners, State agencies, and
    Members of Congress about the potential consequences for the affordable
    housing stock, and we have been discussing the situation and possible
    options with the Council of State Housing Finance Agencies, among
    others.
    Status of Regulations that Will Allow Nonprofit Organizations to Create
    For-Profit Limited Partnerships for the Section 202 Program
        The original law that allowed for-profit participation in the
    Section 202 program was included in the American Homeownership and
    Economic Opportunity Act of 2000. Included in the same Act, was a
    provision related to the refinancing of existing Section 202 projects.
    On August 23, 2002, the Department issued Notice H2002-16 to implement
    this provision. Since then, my office has focused its efforts on the
    rulemaking associated with the provision regarding for-profit
    participation in the Section 202 program. We are working diligently on
    the required regulation and expect to submit it to OMB for review in
    the near future. We know that the nonprofit organizations are eager to
    use the capital advance to leverage additional funds to develop more
    additional affordable housing or services for the elderly. HUD funded
    eight Section 202 projects in fiscal year 2001, where the sponsors
    indicated that they anticipated developing a mixed-finance project.

    HUD's Enforcement of Regulations When Owners Opt-Out of
    Section 8 Contracts
        We have been pleased to work with the Members of this Subcommittee
    to ensure that owners with developments that have project-based Section
    8 assistance provide proper notice when opting-out of the Section 8
    program. It was never the intent of the Department to reward owners who
    do not comply with the required Federal notice requirements. The
    forthcoming revisions to the Section 8 Contract Renewal Guide will
    clarify this point, and will be available within the next few months.
    We have worked with our Offices of General Counsel and Public and
    Indian Housing to develop a consistent policy that does not reward
    owners yet protects the tenants at the projects where the owner chooses
    to opt-out.
        Any owner who fails to provide proper 1-year opt-out notification
    must permit the tenants to remain in their units without increasing
    their portion of the rent for whatever period of time is necessary to
    meet all of the notification requirements. Eligible families residing
    in the property will be issued vouchers when the contract expires. The
    family may use the voucher to remain in their current unit or elect to
    use the voucher to move to another property. Should the family elect to
    remain in their current unit, the voucher housing assistance payments
    contract does not commence until the full 1-year notice requirement has
    been met. The effect of this action is that the owner will not receive
    any voucher assistance payments until proper notice has been provided
    to the tenants.
        In instances where project owners need additional time to meet the
    1-year notice requirement, they are encouraged to enter into a short-
    term contract renewal with a term long enough to ensure that the
    tenants receive a full 1-year notice of contract expiration. Otherwise,
    the owner will only receive the tenant portion of the rent the families
    were paying under the expired contract until the full 1-year notice
    period has been met.

    Status of the Utilization of Interest Reduction Payments Funds to
    Rehabilitate Existing Affordable Housing
        The Department will continue to consider the implementation of
    Section 236(s) depending on the availability of future year Section 236
    recaptures. Questions regarding the availability of funds derived from
    old contract authority converted to budget authority were not resolved
    until the spring of 2002.
        As Members know, the Emergency Supplemental Appropriations Act
    included a $300 million rescission of recaptured IRP funds from
    mortgages insured by Section 236 that have been prepaid. At this time,
    it does not appear that there are adequate funds beyond the rescission
    to implement a program.
        Estimates of future prepayments which provide the recaptured funds
    available for rehabilitation are uncertain. Two initiatives by the
    Department that help to preserve the affordable stock have reduced the
    amount of future IRP funds available for recapture. HUD allows Section
    236 owners to decouple the IRP from the mortgage at prepayment in
    return for extended affordability restrictions. Those IRP funds are not
    available for recapture.
        In addition, Section 236 owners with Section 8 subsidies may apply
    to have their Section 8 rents Marked-Up-to-Market. Approximately $40
    million in IRP funds have been used to capitalize project reserves for
    replacement for projects that have been Marked-to-Market by OMHAR.
        This concludes my statement, Mr. Chairman. Thank you for the
    opportunity to appear before this Subcommittee.

                                   ----------
                      PREPARED STATEMENT OF JAMES R. GROW
       Staff Attorney, National Housing Law Project, Oakland, California
                                October 9, 2002

        Mr. Chairman and Members of the Subcommittee. Thank you for this
    invitation to testify today on the important issue of preserving the
    existing privately-owned affordable housing stock currently supported
    with public funds under a variety of Federal housing insurance,
    subsidy, and assistance programs.
        The National Housing Law Project is a charitable nonprofit
    organization providing legal and technical support for housing
    advocates, tenant leaders, and public officials nationwide on the
    housing issues confronting Americans with incomes at or near the
    poverty level. Our support role has included legal research, advice,
    and co-counsel regarding litigation matters, legislative, and
    administrative advocacy with Congress and State and local governments,
    publication of our Housing Law Bulletin and housing law manuals, and
    training and technical assistance. The views presented here reflect the
    work of the Project over more than 30 years since its creation in 1968.
    Working with local housing advocates, dealing with the day-to-day
    problems and opportunities presented by implementation of Federal
    housing laws and programs, has developed the views we express today.
        This privately-owned, Federally-supported, affordable housing stock
    totals more than 1.5 million units in more than 10,000 properties
    located throughout the urban, suburban, and rural areas of our Nation,
    providing affordable housing to more than 3 million seniors, people
    with disabilities, and families with low and very-low incomes. These
    units, regulated by HUD and the USDA's Rural Housing Services under a
    variety of mortgage loan and rental assistance programs, represent more
    than one-third of our country's deeply subsidized affordable housing
    inventory intended to meet the critical and growing needs of lower-
    income Americans for decent affordable housing. The vast majority of
    residents who call these units home have very-low annual incomes, many
    below $10,000.
        One of the major design weaknesses of these programs is that the
    affordability restrictions accompanying the Federal financing or the
    subsidy itself are time-
    limited and expire at some point. Without further Federal budget
    authority and a commitment or requirement that the owner continue to
    provide affordable housing, the stock faces a risk of conversion to
    market-rate use.
        Our statement first focuses on the recent legal and policy
    background of the
    preservation issue, before moving to several specific areas of concern
    that require Congressional oversight or legislation.

    Recent Historical Background

        Over the last decade, Federal budget priorities have driven
    substantial changes in Federal preservation policy. Prior to 1994,
    virtually all units were protected through a variety of Federally-
    funded statutory policies and programs, such as the preservation
    program for units facing prepayment risks and the property disposition
    program for troubled developments. In 1994, Congress relaxed the
    preservation requirements governing HUD's multifamily foreclosure and
    disposition practices. ``Multifamily Housing Property Disposition
    Reform Act of 1994,'' Pub. L. No. 103-233, 108 Stat. 342 (1994),
    primarily codified at 12 U.S.C.A. Sec. 1701z-11 (West 2001). In 1995, a
    new Congress went even further in an emergency supplemental
    appropriations law, arguably granting HUD broad and standardless
    discretion over these issues. Pub. L. No. 104-19, 109 Stat. 194, 233
    (1995). Simultaneously, HUD promoted its ``Reinvention Blueprint,'' a
    radical proposal to substitute vouchers for all project-based
    assistance, including public housing. While not endorsing HUD's
    proposal, in 1996, Congress reduced funding for the Title VI
    preservation program for properties with HUD-subsidized mortgages,
    permitting owners to prepay their mortgages and terminate prior Federal
    affordability and occupancy restrictions. Congress continued to reduce
    funding further, while not repealing the program, finally starving the
    preservation program of any Federal funding in fiscal year 1998. In
    1996, Congress also reenacted through the appropriations process the
    so-called ``flexible authority'' governing HUD's administration of
    troubled properties, making it permanent until changed. Pub. L. No.
    104-204, Sec. 204, 110 Stat. 2873, 2894 (September 26, 1996) (for
    fiscal year 1997 and thereafter), codified at 12 U.S.C.A. Sec. 1715z-
    11a(a) (West 2001).
        About the same time, Congress faced the question of how to address
    the problem of expiring Section 8 contracts, some of which were
    requiring large ``above-market'' Federal subsidies to support them.
    Rejecting HUD's voucher plan, in late 1997 Congress passed the
    ``Multifamily Affordable Housing Reform and Affordability Act''
    (MAHRAA), which provided owners of such properties with the choice to
    terminate their participation by ``opting-out,'' or to remain in the
    Section 8 program, generally with new rent levels set at ``market''
    rates. Pub. L. No. 105-65, Title V, 111 Stat. 1343, 1384 (October 27,
    1997), codified at 42 U.S.C.A. Sec. 1437f (Historical and Statutory
    Notes, ``Multifamily Housing Assistance''). Owners for whom new lower
    ``market rents'' would be too low to support debt service and operating
    expenses could pursue a restructuring plan to reduce their debt service
    obligations, while usually maintaining their project-based Section 8
    contracts, addressing the property's rehabilitation needs, and
    committing to a long-term Use Agreement. HUD and other program
    administrators were also provided with authority to disqualify certain
    owners from further participation, due to serious prior program
    violations.
        Until mid-1999, HUD did nothing to implement its authority to
    provide higher Section 8 rent levels at contract expiration to those
    owners of properties with ``below-market'' rents. Many owners left the
    program during this period. In 1999, HUD finally adopted an ``emergency
    initiative'' (HUD Notice H 99-15, June 1999) to offer such basic
    incentives to owners to preserve affordable housing. Recognizing the
    importance of expanding preservation initiatives, Congress soon after
    enacted similar ``Mark-Up-to-Market'' policies into law later that
    year. Pub. L. No. 106 -74, Sec. 531, 113 Stat. 1110 (1999) (extensively
    revising Section 524 of MAHRAA concerning rent levels HUD can and must
    offer to various types of properties with expiring Section 8
    contracts). While many owners have apparently pursued the ``mark up''
    option, still many others have opted-out of the program.
        To its credit, HUD made certain adjustments to the Mark-to-Market
    restructuring program to provide improved financial incentives for
    participating owners and purchasers in September 2000.
        However, as part of MAHRAA, Congress also established specific
    authority for Interest Reduction Payments on Section 236 properties
    with IRP contracts terminated through prepayment or foreclosure be
    recaptured and used for rehabilitation for other eligible HUD
    multifamily projects. Pub. L. No. 105-65, Sec. 531, 111 Stat. 1409
    (1997). Despite its inclusion in the Administration's fiscal year 2001
    and 2002 budgets, HUD has never implemented this grant/loan program,
    while the available fund grew to $300 million. In July 2002, Congress
    rescinded these funds in the Supplemental Appropriation to pay for
    antiterrorism activities. Pub. L. No. 107-206, 116 Stat. 820, 892
    (August 2, 2002). Both the fiscal year 2003 Budget and the Senate
    Appropriations bill project another $100 million being made available
    in the coming year to preserve and improve properties still at-risk of
    conversion to market rate.
        Congress has also recently expressed concern about the mounting
    losses of affordable housing, specifically concerning HUD's disposition
    activities. In March 2000, Senator Bond, then Chair of the HUD-VA-IA
    Appropriations Subcommittee, issued a statement that was extremely
    critical of HUD's lax preservation efforts for its troubled projects
    inventory, and later spearheaded efforts to win passage of provisions
    explicitly requiring HUD to renew Section 8 contracts at a foreclosure
    or disposition sale for projects primarily occupied by the elderly and
    disabled, unless renewals are determined ``infeasible.'' Pub. L. No.
    106 -377, Sec. 233 (October 27, 2000) (for fiscal year 2001); Pub. L.
    No. 107-73, Sec. 212 (November 26, 2001) (for fiscal year 2002).
    Senator Bond has recently introduced a bill which would extend this
    requirement to all Section 8 properties. S. 2967, 107th Congress 2d
    Sess., Sec. 203.
        Finally, Congress has emphasized the importance of preservation in
    enacting the ``Mark-to-Market Extension Act'' last January, extending
    authority for the restructuring program for another 5 years. Pub. L.
    No. 107-116, 115 Stat. 2220 (January 10, 2002). One provision requires
    HUD to develop procedures to ensure that the rents being offered owners
    to stay in the Section 8 program are comparable to the ``enhanced
    voucher'' rents supported by PHA's and Federal subsidies when they
    ``opt-out,'' Sec. 613. We have heard of no initiative by the Department
    to address Congress' directive.

    Summary of the Current Situation

        HUD has demonstrated little capability or initiative to address
    preservation issues. The Agency has resisted preservation strategies
    for decades, responding only to statutory mandates that leave it little
    choice. Left alone, HUD will continue to pursue practices that permit
    maximum conversion of units to vouchers, reducing its role to only
    providing annual funding, while shifting all administrative
    responsibilities to local PHA's.
        Federal policy must change. Congress should first request HUD to
    provide specific information about its activities. Congress should then
    determine the additional policies and funding resources necessary to
    establish clearer duties and workable procedures for implementing
    preservation policies. Broad agency discretion and occasional isolated
    policies or expressions of concern from Congress are an utter failure.
        More funding will be needed to preserve more housing, to purchase
    properties and ensure their proper rehabilitation. While State and
    local governments have recently begun to allocate some of their own
    resources or other funds within their control (e.g., bond financing and
    tax credits) to meet preservation needs, as well as taking other
    preservation initiatives such as improved notices and rights of first
    refusal, they cannot solve this problem on their own. Congress should
    pursue adoption of legislation (e.g., H.R. 425, S. 1365) to provide
    ``matching grants'' to State and local governments that make
    preservation investments.
        Reevaluating the principle of owner choice underlying the current
    prepayment and opt-out policies should also be reconsidered. Some
    restrictions that express conscious public policies about which
    properties should be preserved through additional financial incentives
    or transfers to tenant-endorsed preservation purchasers will be
    essential.
        The central irony of current Federal preservation policy is that,
    without preserving housing, the Federal Government is still paying the
    cost of preserving much of the housing by supporting new ``market
    rents'' through the enhanced voucher program. This is true for both
    units lost through mortgage prepayment and Section 8 opt-outs, at least
    as long as the tenants choose to remain in place.
        Congress' grant of broad discretion to HUD for handling troubled
    properties and mortgages has not been used creatively to preserve those
    properties where sufficient tenant and community support has been
    demonstrated.

    Specific Preservation Issues

        The following review highlights several areas where Congress should
    exercise greater oversight of HUD's activities in light of previously
    expressed statutory preservation policies or expectations, and develop
    responsive statutory policies. These areas include:

     Troubled Projects Policy
     Prepayment of Properties Requiring HUD Approval
     Revision of Flexible Subsidy Agreements
     Implementation of the Section 531 Rehab Grant Program
     Providing Enhanced Vouchers to Owners Who Violate Notice
        Requirements
     Miscellaneous Preservation Issues

    Troubled Properties
    Background

        When privately-owned HUD-insured or -assisted properties become
    severely deteriorated or financially mismanaged, HUD must take
    corrective action as the responsible regulatory agency, and often as
    the actual noteholder following default and assignment. In enacting the
    ``Multifamily Housing Property Disposition Reform Act of 1994'' (Pub.
    L. No. 103-233, codified at 12 U.S.C. Sec. 1701z-11), Congress granted
    HUD's request for greater flexibility in substantially revising HUD's
    statutory obligations with respect to properties being sold at
    foreclosure or from the Agency's inventory of HUD-owned properties,
    reducing the Agency's preservation duties but still requiring some
    minimum standards and procedures. Starting in 1995, in large part to
    save budget authority, Congress provided even greater ``flexible
    authority'' (12 U.S.C. Sec. 1715z-11a(a) ) for HUD's foreclosure and
    disposition activities, later adding authority to HUD to provide ``up-
    front'' repair grants from the Insurance Fund to purchasers of HUD-
    owned properties. In 1996, HUD revised its disposition regulations (24
    C.F.R. Part 290) to implement the 1994 statute. In 2000, Congress first
    explicitly required renewal of Section 8 contracts at a foreclosure or
    disposition sale for projects primarily occupied by the elderly and
    disabled, unless ``infeasible'' (Pub. L. No. 106 -377, Sec. 233
    (October 27, 2000) ), and renewed that mandate for fiscal year 2002.
    Pub. L. No. 107-73, Sec. 212 (November 26, 2001). Also in 2000, the
    Congress extended indefinitely HUD's authority to make up-front grants
    for rehabilitation (Pub. L. No. 106 -377, Sec. 204), and later amended
    the ``flexible authority'' statute to require transfer of HUD-owned
    properties to State or local government where the project is unoccupied
    or there are more than 25 percent severely defective units. Pub. L. No.
    106 -554, App. G, Sec. 141, 114 Stat. 2763, 2763A--614-617 (December
    21, 2000).

    Issues Raised By HUD's Policy and Practices

        HUD has essentially pursued policies of dumping the troubled
    properties on the private market, much as was done in the 1970's. Since
    1995, HUD's customary approach has been to dispose of as many
    properties as possible and cease any Federal responsibility after the
    point of foreclosure:

     By terminating any Section 8 contracts at or before
        foreclosure (despite form contract language that the contract
        survives foreclosure), either during their term or at expiration,
        and refusing to permit assumption of project-based contracts by
        foreclosure sale purchasers, even willing public agencies or
        nonprofit bidders.

     Possibly by adjusting bidding practices to ``low-ball'' bids
        below outstanding debt and thus avoid taking title to properties at
        foreclosure and reselling them through the property disposition
        program (with its more appropriate process, rules, and grant
        resources).

     By selling properties at the foreclosure sale without repair
        or purchaser qualification requirements, restrictions, or subsidies
        adequate to preserve and improve properties as long-term affordable
        housing for Section 8-eligible families.

     By selling properties at the HUD-owned disposition sale
        without repair or purchaser qualification requirements,
        restrictions, or subsidies adequate to preserve and improve
        properties as long-term affordable housing for Section 8-eligible
        families, or by permitting demolition without regard to regulatory
        criteria.

        HUD has never published any rules describing how it proposes to use
    its ``flexible authority'' to override its responsibilities under the
    1994 statute and 1996 regulations. Similarly, we have seen no published
    guidelines to implement the 2000-2001 requirement to preserve project-
    based Section 8 contracts at elderly and disabled properties.
        Since 1995, HUD apparently has not produced any comprehensive data
    or reports for the properties are disqualified from the program, or
    sold through foreclosure or property disposition. Such annual reports
    on June 1 of each year detailing many related issues are required by
    the 1994 Act, 12 U.S.C. Sec. 1701z-11(l). Yet no one knows how HUD has
    exercised its existing authority to preserve properties, or the results
    of its decisions for affected properties, for surrounding communities,
    and for the
    residents.

    Examples

        Even in instances where tenant or community organizations or public
    agencies have demonstrated substantial support for preserving and
    improving these properties, HUD has refused to explore alternatives
    that would preserve and improve viable properties as housing affordable
    for the extremely low-income families served by Section 8. The
    following are specific cases that have come to our attention, but more
    detailed oversight would likely produce additional information.

    Rotella Park Manor (Thornton, CO)

        This 100 percent Section 8 property in substandard condition was
    scheduled for foreclosure sale. The Colorado Housing Finance Authority
    should acquire the property and preserve the project-based Section 8
    contract while financing the purchase and rehabilitation, either as
    lender or as purchaser. Despite this request, backed by significant
    technical information and community support, and despite its ``flexible
    authority,'' HUD refused to permit the transfer of the Section 8
    contract. The State agency purchased property, but the subsidy has been
    converted to vouchers, jeop-
    ardizing the viability of a substantial State investment if the market
    softens, and removing the property from guaranteed use for very-low
    income families. Most of the units will not pass the necessary housing
    quality inspection until completion of rehabilitation.

    Brick Towers (Newark, NJ)

        Tenants have been fighting to save this 324-unit property for
    years. The residents have established a nonprofit corporation and
    entered into a joint venture with a reputable developer who has lined
    up private financing for a $10 million rehabilitation, using Tax
    Credits and perhaps preserving the Section 8 contract, which has not
    yet been terminated (as of early September). Despite solid community
    support for preserving the property (City Council has passed
    resolutions and in June 2002 enacted an 18-month moratorium on
    demolition; Federal legislators and local public officials have written
    in support), HUD plans to give the buildings and $12 million to the
    Newark Housing Authority, which plans to demolish them, and redevelop a
    lesser number of units on the site for mixed-income use. The residents'
    plan would preserve 324 affordable housing units, avoid the involuntary
    displacement of hundreds of African-American families and save
    taxpayers $12 million. HUD gave the NHA repeated extensions to close
    the transfer (scheduled for around September 13), while refusing to
    discuss the merits of the residents' proposal.

    East Liberty Properties (Pittsburgh, PA)

        In Pittsburgh, a community effort to redevelop three troubled
    projects (the former ``Federal American'' properties in East Liberty)
    proposes to demolish the existing buildings (three high-rises and
    adjacent low-rises, all of which are obsolete and physically
    deteriorated), and construct a number of less dense, mixed-income
    residential developments, on the existing sites and on other nearby
    sites. Two of these properties were recently processed through the
    ``Mark-to-Market'' Program, while another remains in default on its
    first mortgage, and awaits foreclosure and disposition. This effort
    enjoys broad support among the local community, city officials, and a
    coalition of resident organizations in the properties. However, that
    support--and to some extent the viability of the development plan
    itself--is threatened by HUD's refusal to allow a transfer of the
    existing project-based Section 8 contracts to newly developed
    replacement housing, even where that housing is constructed prior to
    the demolition of the existing structures.

    Satsuma Gardens (Pasadena, TX)

        HUD sold this 232-unit property at foreclosure on August 28 to a
    for-profit developer on the courthouse steps with virtually meaningless
    affordability restrictions on only 79 units. Tenants were entitled to
    60 or more days notice. No one knew about it because HUD had provided a
    notice dated June 27, 2000, stating that HUD intends to foreclose
    ``within the next few months,'' but then delayed the sale for more than
    2 years. The notice failed to comply with HUD's own regulations, by not
    indicating the deadlines for offers or any comments, and failed to
    state that the full disposition recommendation and analysis and other
    supporting information would be available for inspection and copying at
    the HUD field office (per 24 C.F.R. Sec. 290.11(d) ). The notice also
    stated that the complex (not just 79 units) must be maintained as
    affordable housing for low-income persons for 20 years, while the
    actual 2002 sale imposed no restrictions on the remaining 153 units. At
    least three nonprofits were interested in possible acquisition.

    Village of Eastgate (Garland, TX)

        This 878-unit property is 98 percent occupied and in good shape.
    HUD sold the property to the City of Garland for $1 in 1996, requiring
    that it be kept as affordable housing for only 7 years. The City plans
    to demolish it with the hope of major hotel development.

    Ellison Apartments (Red Bluff, CA)

        For many years, by its blatant failure to exercise oversight, HUD
    contributed to this property's troubled status (default on mortgage,
    serious and pervasive HQS problems, drug activities). Rather than
    working with the community, HUD tried to auction it off at foreclosure
    without preserving affordability and ensuring needed repairs. This
    project represented 12 percent of all the affordable housing in Tehama
    County, one of the poorest counties in California. This project was
    also a critical source of housing for individuals protected by the Fair
    Housing Act. After months of concerted advocacy by tenant leaders,
    community groups, and city and Federal executives and legislators,
    along with threatened litigation, HUD finally agreed in 2000 to bid its
    full debt to acquire the property at the foreclosure sale, and transfer
    it to the city with an up-front grant for resale to a community-based
    nonprofit for rehabilitation.

    HUD Approval of Prepayments on Properties Requiring HUD Approval

        Prepayment of a Federally-subsidized mortgage terminates the
    regulatory agreement and the accompanying Federal use restrictions on
    rent levels and occupancy. While many HUD-subsidized developments are
    eligible for unrestricted prepayment under statutes passed since 1996,
    many other properties cannot be prepaid without HUD approval. These
    include properties originally owned or still owned by nonprofits, many
    properties with Flexible Subsidy restrictions, and properties with Rent
    Supplement or Section 236 RAP contracts. HUD's approval decisions are
    governed by Section 250 of the National Housing Act, passed in 1983,
    which requires HUD to undertake a specified process and make certain
    findings, including that ``the project is no longer meeting a need for
    rental housing for lower-income families.'' HUD has published no
    regulations or other administrative guidelines to implement this
    statute. Yet, in an unknown number of cases, HUD has approved
    prepayment for these properties without making the required findings.
    Despite the fact that Congress amended Section 250 in 1988 to remove
    its authority to do so, HUD has specifically allowed the availability
    of ``other Federal assistance'' such as tax credits and enhanced
    vouchers to influence its approval decisions under Section 250. These
    prepayments often result in restructuring rents at affected properties
    at higher levels at or near market at considerable public expense.
    While some existing tenants may receive vouchers, many will experience
    significant rent increases even with the voucher. In any case, these
    prepayments remove units from availability to very low-income families
    in need of affordable housing that cannot afford the higher rents.

    Examples

        At least three such prepayments under Section 250 have occurred in
    the past few years (two in Texas and one in California). HUD has never
    published or otherwise explained its policy and how it complies with
    Section 250, nor accounted for its specific approval decisions.

    Bryte Gardens (West Sacramento, CA)

        HUD approved a prepayment and transfer plan for this Section 236
    property that was originally owned by a nonprofit and sold to a for-
    profit owner in 1982. Using tax credits and bond financing, a new
    purchaser obtained HUD approval for a new rent structure based on the
    tax credits, which approximate market rent levels in the area,
    memoralized in a HUD ``Use Agreement.'' HUD made no findings required
    by Section 250 regarding the current and the future need for the
    property under its current Section 236 subsidized status, instead
    creating its own illegal standard of accepting a Use Agreement. Nor did
    HUD make any effort to ensure that the owner had complied with
    applicable State law concerning prepayments. About one-third of the
    tenants have experienced rent increases, and some in excess of $200
    monthly. A Federal court's refusal to enjoin the transaction and
    dismissal of the case as moot is now on appeal to the Ninth Circuit.

    Revision of Flexible Subsidy Agreements

        Many of HUD-subsidized properties (reportedly more than 60,000
    units) received assistance under the Flexible Subsidy program in the
    late 1970's and 1980's to address physical needs or other financial
    difficulties. In exchange for this assistance, many owners signed form
    Flexible Subsidy Assistance Contracts that prohibit prepayment of the
    insured or subsidized first mortgage note without HUD approval, and
    require the owner to execute an amendment to the note. Presumably, such
    prepayments should be governed by the standards and procedures of
    Section 250, supra. The Assistance Contract also required the owner to
    maintain the low- and moderate-income character of the project for the
    full remaining mortgage term, including compliance with all of the
    provisions of the applicable program (usually Section 236 or Section
    221(d)(3) BMIR) and the regulations, the heart of which was budget-
    based, HUD-regulated rents. Usually, HUD also required owners to
    execute a Flexible Subsidy Use Agreement imposing identical or similar
    obligations.
        Over the past few years, HUD has renegotiated Use Agreements on
    some of these properties, sometimes involving prepayment of the
    mortgage, again with no published standards and apparently little
    public scrutiny. The Agency's compliance with Section 250 for any
    related prepayments remains unclear. An appropriate policy might allow
    HUD to approve prepayments and renegotiation of the Use Agreements in
    exceptional circumstances for clearly defined preservation transactions
    where trade-offs are justified due to increased affordability terms
    (including restricted tenant-endorsed nonprofit ownership), no harm to
    current and future tenants, and full utilization of and duty to accept
    project-based Section 8, etc. Because no policy has been published as a
    rule, Congress should request HUD to explain its policy and its
    specific decisions, and why the policy has not been published. In
    addition, Congress should investigate whether HUD has approved any new
    rent restrictions on properties formerly restricted by budget-based
    rents, other than those specifically contemplated under the Section 8
    ``Mark-Up-to-Market'' Program, as well as the Agency's asserted
    authority and reasons for doing so.

    HUD's Failure to Implement the Section 531 Rehab Grant Program

        About 5 years ago, in Section 531 of MAHRAA (Pub. L. 105-65), the
    Congress
    directed that authority for Interest Reduction Payments on Section 236
    properties with IRP contracts terminated through prepayment or
    foreclosure be recaptured and used for rehabilitation for eligible
    multifamily projects. In late 1999, HUD had developed a Draft Notice to
    make this IRP Pool Fund available, but it was never issued. Despite its
    inclusion in the fiscal year 2001 and 2002 budgets, HUD never
    implemented this grant/loan program, and Congress recently rescinded
    $300 million for antiterrorism activities. Both the fiscal year 2003
    Budget and the Senate Appropriations bill project another $100 million
    being made available in the coming year. Congress should require that
    HUD take the necessary steps to immediately make these funds available,
    to provide important new incentives, coupled with new use restrictions,
    to preserve and improve properties still at-risk of conversion to
    market rate.

    Providing Enhanced Vouchers to Owners Who Violate Notice Requirements
    Background

        Federal law (42 U.S.C. Sec. 1437f(c)(8) ) requires a 1-year written
    notice with specific content prior to contract expiration or
    termination. In the Section 8 Renewal Policy Guide (January 2001),
    following a 1999 Federal court decision, HUD clarified that owners
    seeking to opt-out must clearly state that intention. The statute also
    specifies that the owner must not evict the tenants and cannot increase
    tenant rents until 1-year after proper notice is provided, and
    authorizes HUD to offer noncomplying owners a renewal contract on HUD-
    set terms and conditions until proper notice is served and the
    applicable period has run. However, HUD has often provided enhanced
    vouchers at scheduled contract expiration to properties where owners
    have not provided legal termination notices, effectively providing
    financial rewards to owners for violating the law, while permitting
    simultaneous compliance with the statutory rent limits. Where valid
    notice has not been provided, the contract expiration date has passed
    and the owner has not executed a renewal contract, HUD has declined to
    provide renewal contracts to the current owner or to a preservation
    purchaser.
        Last fall, the Chairman and several other Senators wrote to
    Secretary Martinez requesting that HUD provide enhanced vouchers only
    where the contract has been validly terminated with proper notice, but
    received no definitive written commitment to cease this practice.

    Other Preservation Issues
    Congress Should Require HUD to Pursue an Overall Policy Favoring
            Preservation
    and Create an Office of Preservation to Coordinate HUD Efforts

        If Congress establishes or encourages HUD to more actively pursue a
    Federal preservation policy, it should consider establishing a
    responsible official within HUD to coordinate the Agency's efforts to
    ensure that the various programs and officials work toward that
    objective.

    Mortgage Sales

        Since the mid-1980's, HUD has sought to raise revenue while
    divesting itself of oversight responsibilities by selling HUD-held
    multifamily mortgages to private lenders or to the project owners
    themselves. Because such note and mortgage sales can strip away Federal
    regulatory protections such as rent and occupancy restrictions, courts
    enjoined such policies and Congress enacted statutory restrictions on
    such policies for subsidized properties in 1988. It is unclear whether
    HUD is taking the position that its recent ``flexible authority'' (12
    U.S.C. Sec. 1715z-11a) relieves it of any obligation to comply with the
    1988 statute and implementing regulations governing mortgage sales. Yet
    it appears that HUD is selling HUD-held mortgages on ``unsubsidized''
    properties with no regard to the impact of such sales on the
    continuation of existing protections for tenants and the affordability
    of the housing in the regulatory agreement. Many such ``unsubsidized''
    properties were not ``deregulated'' and apparently still have budget-
    based rent restrictions. HUD should not be selling these mortgages in a
    fashion that fails to protect tenants or housing affordability.

    No Efforts to Transfer Disqualified Properties to Nonprofits

        In Section 516(e) of MAHRAA, for properties disqualified from
    approval from a restructuring plan because of prior program violations
    by the owner, the Congress
    directed HUD to ``establish procedures to facilitate the voluntary sale
    or transfer of a property'' as part of a restructuring plan, with a
    preference ``for tenant organizations and tenant-endorsed community-
    based nonprofit and public agency purchasers meeting'' reasonable HUD-
    established qualifications, thus preserving the Section 8 contract and
    providing for necessary rehabilitation of the property. HUD's
    regulations provide only that any such owner facing disqualification
    provide a notice to nonprofit organizations if they are intending to
    sell the property. Not one of HUD's other powers as insurer or holder
    of the mortgage or as contract administrator on the existing Section 8
    contract are brought to bear upon the proposed disqualification or the
    owner's intent to hold the property. Congress intended that HUD do more
    to ``facilitate'' transfers of these properties than sit on the
    sidelines and watch owners do whatever they choose, unencumbered by
    other HUD leverage such as foreclosure, taking possession, pursuing
    other contract remedies, or seeking civil money penalties.

    Providing Federally-Insured Financing for Preservation Purchasers

        Nonprofits seeking to purchase properties with expiring below-
    market Section 8 contracts at-risk of conversion can often take
    advantage of the Federal ``Mark Up'' in Section 8 contract rents as a
    vital preservation tool, increasing project income. However, because
    the Federal subsidy commitment is limited to 1-year at a time,
    obtaining financing to purchase and rehabilitate the property is often
    extremely difficult, forcing resort to public agencies or to
    underwriting properties at lower rent levels (that is, tax credit
    rents). More grants or deferred loans from public agencies are
    therefore required to complete the financing package. HUD should
    consciously provide Federal mortgage insurance for the security that
    most lenders require, and allow preservation purchasers to take full
    advantage of the higher Section 8 subsidies to save scarce State and
    local resource and thus preserve more properties.

    Implementation of a Rent Consistency Policy so that Project-Based
            Renewal
    Offers Are Comparable to Enhanced Voucher Rents

        On numerous occasions, it has been reported that ``market rent''
    levels determined by the required Rent Comparability studies for the
    renewal of expiring Section 8 contracts were less than those same
    ``market rents'' available under the enhanced voucher program to owners
    who opt-out. These two rent levels substantially affect an owner's
    decision to remain in the program or opt-out, but are determined by
    different agencies and personnel. Consequently, owners who can get more
    rent under the voucher program had no incentive to remain in the
    project-based program. In Section 613 of the ``Mark-to-Market Extension
    Act'' last January, Congress required HUD to develop procedures to
    ensure that the rents being offered owners to stay in the Section 8
    program are comparable to the ``enhanced voucher'' rents supported by
    PHA's and Federal subsidies when they ``opt-out.'' Congress should
    require HUD to report on the steps it has taken to address Congress'
    directive, and a timetable for completion of its policymaking process
    to end this inexplicable dichotomy.

    Congress Should Direct HUD to Restart the ITAG and VISTA Components of
    Technical Assistance Program

        In Section 514 of MAHRAA, Congress recognized that tenant
    participation in the renewal and restructuring process for properties
    with expiring contracts was an essential feature of the program, and
    authorized HUD to provide up to $10 million annually to support
    outreach and tenant participation in the future of their homes.
    Congress reiterated the importance of technical assistance in the Mark-
    to-Market Extension Act. For more than a year, in the wake of unfounded
    allegations concerning HUD's compliance with the Anti-Deficiency Act,
    HUD has failed to take the necessary steps to reactivate two important
    components of the program: The VISTA program providing outreach and
    support to tenants in eligible properties, and the Intermediary
    Technical Assistance Grant Program, providing primarily grants for
    predevelopment and resident capacity building. HUD has also
    unnecessarily expended almost all of the fiscal year 2002 technical
    assistance program funding to re-record prior commitments to address
    what the HUD Inspector General found were nonexistent ADA violations.
        Congress should ensure that HUD takes immediate steps to restart
    these important program components, and develops a workable plan to
    commit fiscal year 2003 appropriations as soon as they are available
    for all program components, including the Outreach and Technical
    Assistance Grantees who contracts expire toward the end of 2003.
        Thank you, Mr. Chairman and Members of the Subcommittee, for
    requesting our views on the preservation issue.

                                   ----------
                   PREPARED STATEMENT OF KATHERINE G. HADLEY
                 Commissioner, Minnesota Housing Finance Agency
                                on behalf of the
           National Council of State Housing Agencies, Washington, DC
                                October 9, 2002

        Chairman Reed, Senator Allard, and Members of the Subcommittee, I
    am Kit Hadley, Commissioner of the Minnesota Housing Finance Agency.
    Thank you for this opportunity to testify on behalf of the National
    Council of State Housing Agencies (NCSHA).
        The NCSHA 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. I am a Member of NCSHA's Board of Directors.
        State HFA's allocate the Low-Income Housing Tax Credit (Housing
    Credit) and issue tax-exempt private activity bonds (Housing Bonds) to
    finance apartments for low-income renters and mortgages for lower-
    income first-time homebuyers in nearly every State. They administer the
    HOME Investment Partnerships (HOME) program in 40 States to provide
    both rental and homeownership assistance for low-income families. Many
    State HFA's administer other Federal housing programs, including
    Section 8 and homeless assistance.
        State HFA's have helped more than 2.2 million lower-income families
    buy their first home with a Mortgage Revenue Bond (MRB) mortgage. State
    HFA's have financed more than 2 million rental apartments for low- and
    moderate-income families, including more than 1.4 million apartments
    for low-income families with the Housing Credit. They have provided
    another 220,000 low-income families homeownership and rental housing
    help through HOME.
        HFA's also administer many programs to help preserve affordable
    rental housing. They finance property acquisition and rehabilitation
    and provide owners incentives to maintain their housing as affordable
    or transfer it to entities that will. Many States have added
    preservation to their criteria for determining which developments
    receive Housing Credits. Some have set aside a portion of their Housing
    Credits for preservation.
        State HFA efforts to produce and preserve rental housing received a
    boost from Congress' recent passage of a near 50 percent increase in
    the Housing Credit and Bond volume caps. However, these increases were
    not enough even to restore the purchasing power these programs had lost
    to inflation since Congress imposed the caps in 1986. Demand for
    Housing Credits and Bonds still outstrips their supply in virtually
    every State.
        The availability of scarce Bond financing is severely threatened by
    the MRB 10-Year Rule. The rule requires HFA's to use MRB mortgage
    payments to retire the MRB, rather than make new mortgages to lower-
    income families, once the MRB has been outstanding for more than 10
    years.
        This obsolete rule puts increased pressure on the already
    inadequate Bond cap by forcing States to use new Bond authority to
    finance MRB mortgages, rather than recycling old authority into new
    mortgages. In 3 more years, the rule will have wiped out the equivalent
    of the Bond cap increase and will have crowded out multifamily housing
    lending as greater amounts of new authority are committed to single-
    family use.
        The Housing Bond and Credit Modernization and Fairness Act, S. 677,
    repeals the MRB 10-Year Rule and makes other important changes in the
    MRB and Housing Credit programs to assure their usefulness in all parts
    of the country, particularly in very-low income, predominantly rural,
    areas. Seventy-six Senators have cosponsored S. 677.
        I encourage you, Mr. Chairman, and Senator Sarbanes, to join them
    in cosponsoring this important bill. I ask all Members of the
    Subcommittee to communicate to the Senate Leadership and Finance
    Committee Chairman Baucus (D-MT) and Ranking Member Grassley (R-IA) the
    urgent need to include S. 677 in a viable tax bill this year.
        Thank you, Mr. Chairman, for your strong and consistent leadership
    on affordable housing matters. NCSHA commends you for holding this
    hearing on affordable housing preservation.
        The need to preserve affordable rental housing goes hand-in-hand
    with the need to produce more of it, about which NCSHA testified before
    this Subcommittee 2 weeks ago. The same urgent needs that demand the
    production of more affordable rental housing make it imperative that we
    protect the existing affordable rental housing stock.
        In its much anticipated, recently released report on Federal
    housing policy, the Millennial Housing Commission concluded, ``it is
    critical that the Nation adopt a preservation philosophy to guide its
    housing policy going forward.'' We wholeheartedly agree and stand ready
    to help.

    The Housing Need is too Great to Allow the Loss of Stock

        There is an ever-growing consensus, supported by academic research,
    newspaper reports, and the personal experience of millions of low-
    income families, that our Nation confronts a deepening affordable
    housing crisis. According to the 1999 Annual Housing Survey, one in
    seven American families has a severe housing problem, meaning they
    spend more than half their income on housing or live in substandard
    housing. That is 15.5 million families, both homeowners and renters.
        This housing crisis extends from the very poor to the solidly
    working class. Indisputably, those hardest hit are those with the least
    income. Of the 15.5 million
    families with severe housing problems, 80 percent are very-low income,
    earning 50 percent of their area's median income (AMI) or less. Nearly
    60 percent have extremely low incomes, earning 30 percent of AMI or
    less.
        With so many families in urgent need of affordable housing, we
    cannot afford to lose a single unit of affordable housing. Yet, we are
    losing staggering numbers of units. According to HUD's 2001 report on
    worst-case housing needs, in 1999, the Nation had nearly 1 million
    fewer apartments with rents affordable to extremely low-income families
    than in 1991. Between 1997 and 1999, the number of apartments
    affordable to extremely low-income families declined by 750,000, or 13
    percent. During the past 4 years, nearly 150,000 Federally-assisted
    units have been lost to mortgage prepayments or owner opt-outs. The
    threat of further losses looms as subsidy contracts on hundreds of
    thousands of units expire each year.

    Substantial New Federal Resources are Needed

        A substantial part of the problem is that we are not allocating
    enough resources to replace housing we lose, repair deteriorating
    units, and subsidize tenants to help them pay otherwise unaffordable
    rents. More Federal resources must be devoted to producing and
    preserving affordable rental housing, especially for those with the
    least income. Changes in the voucher program, such as those Senator
    Sarbanes' bill, S. 2721, proposes, are also needed.
        Instead of increasing housing resources, however, the Federal
    Government has reduced them. Today's HUD budget is a third of what it
    would have been had it kept pace with inflation since 1976. The HUD
    budget has remained flat in nominal terms over the last 27 years. It
    has barely grown from $29.2 billion in 1976 to $30 billion in 2002,
    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 threefold increase.
        This year, Congress rescinded $300 million that could have been
    used to rehabilitate affordable apartments in need of repair and
    another $400 million that otherwise could have helped families pay
    unaffordable rents.
        Increased funding for existing HUD programs is essential. However,
    funneling more resources into these programs alone will not eliminate
    the affordable housing shortage. New Federal subsidy sources are needed
    to leverage and extend the reach of existing programs.
        To respond to the growing need for affordable rental housing and to
    prevent its further loss, NCSHA advocated in testimony before this
    Subcommittee 2 weeks ago the creation of a new source of flexible
    Federal funds administered by State HFA's to produce and preserve
    rental housing targeted to extremely low-income families. We urge you
    to move quickly to enact this program. In the meantime, we ask you to
    direct HUD to take several immediate steps to preserve affordable units
    that might otherwise be lost.

    HUD's Section 8 HAP Ruling is Wrong and Will Increase Opt-Outs

        One of the most urgent preservation issues confronting HFA's arises
    from HUD's recent ruling that certain Section 8 Housing Assistance
    Payments (HAP) contracts terminate upon the refinancing of the
    mortgages they support. This ruling, which HUD is on the verge of
    implementing both prospectively and retroactively, will enable hundreds
    of owners to opt-out of Section 8 contracts believed to guarantee the
    affordability of the housing they support for another 10 or 20 years.
        We urge you to stop HUD from implementing this ruling. If HUD
    refuses, we ask you to pass legislation protecting the contracts in
    question for their full terms.
        The contracts in question were written between 1975 and 1980, a
    period of significant Section 8 activity. HUD estimates that the
    contracts support more than 1,000 properties with as many as 150,000
    apartments. NCSHA's survey shows that more than 1,300 contracts are
    involved. At least 278 of these contracts covering 25,000 apartments
    support mortgages that have been refinanced.
        HUD's ruling came after the New Jersey Housing and Mortgage Finance
    Agency (NJHMFA) and an owner of a property financed by NJHMFA agreed in
    principle to refinance the NJHMFA mortgage and assign the associated
    HAP to the new mortgage, as had been done in hundreds of refinancings
    over the last 20 years. HUD reviewed the refinancing plan, as it always
    has done.
        In reviewing the New Jersey property's refinancing plan, a HUD
    lawyer interpreted a clause of the Section 8 HAP contract to mean the
    contract terminates on the date of prepayment of the original mortgage.
    The clause states the contract term shall not exceed ``(1) ___ years
    (typically 30 or 40) or (2) . . . a period terminating on the date of
    the last payment of principal due on the permanent financing.''
        The HUD lawyer opined that a refinancing requiring the pay-off of
    the mortgage's outstanding principal balance activated the second
    provision of this clause, thus terminating the contract. State HFA's,
    owners, lenders, and even HUD field offices had long understood this
    provision to mean the date the last payment of principal was due under
    the terms of the original mortgage, not the date of prepayment of that
    mortgage caused by a refinancing.
        NCSHA, several HFA counsel, and a number of other lawyers with
    substantial Section 8 expertise disagreed with HUD's opinion and urged
    HUD's Office of Housing and General Counsel to reverse it. We argued
    that the only function of the words ``date'' and ``due'' in the
    disputed language is to make clear that the reference is to the full
    term of the original financing. Otherwise, the provision would simply
    read, ``a period terminating on the last payment of principal on the
    permanent financing.'' The addition of the concept of the ``date'' on
    which principal is ``due'' makes clear the language refers to the
    duration of original mortgage.
        For contemporaneous evidence that this is the meaning of the
    clause, one need only look at the regulations that applied to State
    agency financings at the time they entered into the contracts. The
    relevant section (Section 883.206(a) ) of the regulations applicable to
    State agency projects at the time provides:

              Since the Contract under which the housing assistance
            payments are made concerns a project financed by a loan or a
            loan guarantee from a State agency, the total Contract term may
            be equal to the term of the HFA financing, not to exceed 40
            years for any dwelling unit. [Emphasis supplied.]

        HUD itself wrote the contract with the disputed language and
    published it in the Federal Register with the regulation just cited.
    One has to place an extraordinary burden of proof on anyone who would
    interpret the HUD-written contract to disagree with HUD's own
    regulation.
        In addition, the Annual Contributions Contract (ACC) between HUD
    and the HFA includes nearly identical language stating, the total
    contract term shall not exceed the shorter of ``(1) ___ years
    (typically 30 or 40) or (2) . . . a period terminating on the date of
    the originally scheduled maturity date on the permanent financing.''
    This language proves the intent that the contract term coincide with
    the term of the financing.
        NCSHA further supported our interpretation of the contract clause
    by providing HUD memoranda between HUD local offices and headquarters
    concerning the refinancing of a Virginia property showing that HUD had
    considered whether any provisions in the HAP or related documents
    triggered a reduction in the term of the HAP. HUD found none.
        A HUD field office memorandum requesting headquarters' review and
    advice asked if the Section 8 owner could refinance the mortgage and
    assign its HAP contract without adversely affecting the provisions of
    that contract. The HUD field office memorandum also stated that the HFA
    involved in the refinancing did not want to undertake any action that
    could trigger a reduction of the term of the HAP. HUD headquarters
    responded as follows:

              We have previously stated that the statute and the
            regulations do not require a reduction in the term of the HAP
            Contract where State agency participation in the ownership or
            financing of a project is terminated by reason of a transfer of
            ownership or refinancing. Where HUD approval of an assignment
            of the HAP Contract as security for financing is requested . .
            . HUD approval cannot be conditioned on either reduction of the
            term of the HAP Contract or of the maximum housing assistance
            commitment. This requirement does not provide an opportunity to
            amend the HAP Contract or to impose new conditions. [Emphasis
            in original.]

        One might question why HUD's guidance did not refer specifically to
    the HAP language currently at issue in concluding that the refinancing
    transaction did not shorten the contract's term. The answer is simply
    that no one in HUD's Office of General Counsel or any other office in
    HUD--and no one outside the Department--interpreted the HAP language as
    causing a termination. HUD was not unaware of the language. The
    correspondence makes clear that the HUD lawyers reviewed all of the
    documents and applicable program requirements.
        Moreover, at this time, HUD was closely analyzing refinancing
    proposals to determine if it could cut back on outstanding Section 8
    commitments. It is significant that, in this period of intense HUD
    scrutiny for the purpose of reducing contractual obligations, HUD did
    not put forward the interpretation of the HAP language it is now
    advancing.
        The NCSHA also supplied HUD correspondence between HUD's
    Minneapolis field office and my agency revealing HUD had determined in
    1984 that a refinancing allowed it to reduce the term of the contract.
    Significantly, though, HUD did not conclude at the time that it could
    terminate the contract. (In 1987, HUD reversed itself, determining that
    it was no longer necessary to reduce the term of the contract and
    ratifying that the contract endures through the refinancing.)
        HUD's Office of Housing and its Office of General Counsel have had
    many occasions to consider the effect of refinancings on HAP contracts,
    both prior to the cited correspondence and subsequent to it. Yet,
    neither office has ever suggested the HAP terminates upon a refinancing
    until now. The hundreds of HUD personnel involved in reviewing these
    transactions over many years were not derelict in their duty. They, and
    thousands of outside parties involved--lawyers, investors, and HFA's--
    were reading the contracts and supporting documents correctly.
        Despite the evidence invalidating the HUD lawyer's opinion, HUD's
    General Counsel on June 23 issued an opinion confirming it. The General
    Counsel found HUD's decision to rewrite in 1980 the disputed contract
    language sufficient evidence that HUD believed that the original
    contract language terminated the contract in a refinancing and
    corrected it so contracts could be continued to their full terms. The
    1980 version of the HAP contract states that the total contract term
    shall not exceed the shorter of ``(1) ___ years (typically 30 or 40) or
    (2) . . . a period terminating on the date of the originally scheduled
    maturity date on the permanent
    financing.''
        Yet, HUD provides no evidence that it rewrote the contract
    provision to change its meaning. It is much more plausible that HUD
    rewrote the language to clarify and confirm the interpretation that has
    guided its actions and those of its stakeholders since. There is not
    one opinion, memo, notice, handbook, letter, or any other form of
    internal or external correspondence or guidance to suggest HUD changed
    the contract because it believed the original language caused the
    contract to terminate upon refinancing.
        HUD's Assistant Secretary for Housing John Weicher has accepted the
    General Counsel's opinion and is preparing to implement the ruling
    soon. HUD intends to give owners who have refinanced mortgages
    supported by the affected HAP contracts or refinance such mortgages in
    the future the option of: (1) Amending their contracts to extend them
    through the original full term; (2) entering into a new contract under
    current renewal terms, such as Mark-Up-to-Market; or (3) opting-out of
    the Section 8 program, after a 12-month tenant notice period.
        Concerned about the risk HUD's ruling poses to thousands of
    affordable apartments and their residents and HUD's failure to consult
    Congress before moving forward, we alerted Congress to HUD's plans and
    asked it to intervene. Other groups, including the National Housing
    Trust, the National Low Income Housing Coalition, the National Alliance
    of HUD Tenants, and the Stewards of Affordable Housing for the Future
    have supported our efforts.
        Representatives of the Moody's Investors Service and Standard and
    Poor's rating agencies also have weighed in with concerns that HUD's
    ruling could disrupt the market for Section 8 bonds and undermine
    ratings on State housing bond programs. Even if HFA's are successful,
    as they were in the New Jersey case, in persuading owners to stay in
    the program, owners who choose 1-year renewals place HFA bonds issued
    with the backing of long-term Section 8 contracts at-risk. HFAs' bond
    ratings could suffer and their costs of doing business could increase--
    costs that ultimately will be borne by the low-income families HFA's
    exist to serve.
        Mr. Chairman, you, Senator Sarbanes, and several other Members have
    asked HUD to reconsider its ruling. Yet, in a recent meeting, HUD told
    NCSHA it would not reverse it. Alternatively, we have suggested to HUD
    that it join NCSHA in
    devising legislation clarifying that these contracts are to extend for
    their full term. We have supplied HUD suggested language, which we
    understand HUD is currently reviewing.
        Failing enactment of such legislation, HFA's may be forced to
    litigate this matter and ask the courts to reverse HUD's ruling or
    prohibit HUD from implementing it. While no HFA's want to take this
    action and, to the best of my knowledge, have not yet, it may be their
    only way to resolve this issue. I urge you to help convince HUD to
    avoid this legal battle by reversing its opinion or working with you to
    devise legislation that clarifies that these contracts are to extend
    for their full term.
        What makes HUD's expenditure of time and effort on this HAP ruling
    especially galling is the presence of major preservation problems HUD
    should be addressing. Instead of using its energies implementing a
    ruling giving owners the ability to opt-out of the Section 8 program,
    HUD should spend more time in other areas where they can advance
    affordable housing preservation.

    Additional Preservation Challenges HUD Should Address

        In 1997, Congress enacted the Multifamily Assisted Housing Reform
    and Affordability Act to establish the Section 8 restructuring program,
    establish a new system for renewing expiring Section 8 contracts, and
    authorize a new preservation grants program using recaptured Interest
    Reduction Payment (IRP) subsidies from Section 236 projects. Recaptured
    IRP subsidies were to be used to provide critically needed repair and
    modernization funding for Federally-assisted low-income housing
    projects that otherwise lack sufficient reserves and capital to finance
    needed repairs. These units are home to tens of thousands of elderly or
    low-income Americans.
        HUD never implemented this program. After HUD piled up $300 million
    that could have preserved thousands of apartments critically needed to
    meet low-income families' affordable housing needs, Congress rescinded
    the money HUD had not used over the 5 years it had been authorized. We
    urge you to ensure that HUD implements this valuable and needed
    program. We further recommend that you allow non-FHA-insured properties
    access to this program. Currently, only FHA-insured properties are
    eligible, despite the critical needs of assisted properties without FHA
    insurance.
        We are also concerned that HUD has not placed a high enough
    priority on preservation in its implementation of the Section 8
    restructuring program. State HFA's acting as participating
    administrative entities under the program report that HUD's
    underwriting guidelines sometimes do not allow for adequate resources
    to ensure the property's viability into the future. Additionally, HUD's
    policy of placing properties on its ``watch list'' exposes them to
    financial risk with little HUD oversight, as the General Accounting
    Office recently found.
        We are encouraged that oversight of the Office of Multifamily
    Housing Assistance Restructuring (OMHAR) now resides in the Office of
    the Assistant Secretary for Housing and hope that HUD will urge OMHAR
    to place a high priority on preservation. We support OMHAR's policy of
    allowing additional subsidies to support added rehabilitation to
    improve the chances a property will stay affordable longer than without
    such subsidies, but are concerned that OMHAR has not officially
    promulgated this policy.
        Finally, State HFA's are concerned that rent adjustments available
    to uninsured Section 8 properties do not allow rents to rise with
    project expenses and may trigger defaults. We recommend Congress permit
    HUD to increase rents to a budget-based rent when necessary for the
    property to meet reasonable expenses and allow rents to rise to
    comparable market rents when an annual rent adjustment factor will not
    increase rents to market.
        Standard and Poor's has downgraded several ratings on local Section
    8 bond issues and is undertaking a comprehensive review of all Section
    8 deals prompted by inadequate rent increases resulting from Congress'
    rent adjustment freeze on uninsured Section 8 properties. The current
    policy threatens many projects' financial condition and will lead to an
    increasing number of bond rating downgrades and mortgage defaults.
        Mr. Chairman, Senator Allard, and Subcommittee Members, thank you
    for this opportunity to testify on the urgent need to preserve our
    Nation's affordable housing stock. The NCSHA and our member State HFA's
    are ready to help you in any way that we can.

                                   ----------
                    PREPARED STATEMENT OF THOMAS W. SLEMMER
             President, National Church Residences, Columbus, Ohio
                                on behalf of the
            American Association of Homes and Services for the Aging
                                October 9, 2002

        Chairman Reed and Members of the Housing and Transportation
    Subcommittee, I am Tom Slemmer, President of National Church Residences
    (NCR). NCR is one of the Nation's largest not-for-profit sponsors and
    managers of affordable housing for seniors, including over 14,000
    Federally-assisted housing units located in 25 States. I am pleased to
    represent the views of NCR and the American Association of Homes and
    Services for the Aging (AAHSA), where I serve on the Board of Directors
    and Chair the Housing Steering Committee.
        AAHSA represents more than 5,600 mission-driven, not-for-profit
    members providing affordable senior housing, assisted living, nursing
    homes, continuing care retirement communities, and community services.
    Every day, our members serve more than one million older persons across
    the country. AAHSA is committed to advancing the vision of healthy,
    affordable, ethical long-term care for America. Senior housing is a
    critical part of the long-term care continuum. Our members, mostly
    faith-based organizations, own and manage more than 300,000 units of
    Federally-assisted housing, including the largest number of sponsors of
    Section 202 Supportive Housing for the Elderly.
        First of all, we would like to thank you, Chairman Reed and Members
    of the Subcommittee for holding this very timely and important hearing
    on preservation, the third in a series of hearings to bring national
    attention to the plight of affordable housing in this country. We
    commend the Subcommittee for convening the recent hearings on housing
    production needs. As witness after witness testified, there is a
    critical shortage of affordable housing in local communities throughout
    our country. As documented by the National Low Income Housing
    Coalition's (NLIHC) recent study on income needs for housing,
    affordable housing is ``Out of Reach'' for most working families.
        For many low-income retired older persons, this situation is
    compounded by their struggle to meet housing and other basic needs on a
    fixed income--primarily Social Security. More than 7.4 million elderly
    households pay more than they can afford for their housing, including
    1.4 million elderly classified by a HUD 1999 study as having ``worst
    case'' housing needs (paying more than 50 percent of income on shelter
    or living in substandard housing). Unfortunately, most of these older
    persons
    receive no housing assistance and are confronted with multiyear waiting
    lists for
    existing Federally-assisted housing. Examples of this include:

        The B'nai B'rith International Center for Senior Services, the
    largest U.S. national Jewish sponsor of Federally-subsidized elderly
    housing (37 facilities with over 4,000 units), indicated that it is
    about to open a brand new 42-unit addition to its 242-unit facility in
    Boston. However, if and older person is not already on the waiting
    list, they will not likely get admitted soon to the expanded facility.
    With a waiting list of over 90 applicants (representing a 2-3 year
    wait), the new facility will clearly be filled with those applicants
    already on the waiting list. Similarly, a 5-year-old facility in North
    Hollywood, California, has over 300 on its waiting list with an
    undetermined wait for occupancy; and in Queens, New York, a 20-year-old
    facility has a waiting list of approximately 1,500 applicants for an
    anticipated turnover of only 10 units per year. There clearly is a
    great need for subsidized elderly housing, and this need will only
    increase as the elderly live longer and remain healthy for a longer
    period of time.

        The Volunteers of America reported that they are seeing their new
    HUD 202 elderly facilities lease up almost as quickly as they are
    opened. Throughout their coast-to-coast portfolio, the average waiting
    list now comes to 16 months and it is getting longer. Many of the
    properties have closed their list at 3 years worth of future residents.
    This program is filling a need that is growing rapidly regardless of
    where you look in the Nation.

        The Retirement Housing Foundation (RHF) reports that many of their
    waiting lists, especially in Southern California, are closed because
    they have grown to over 1,000 names. Angelus Plaza, one of the Nation's
    largest affordable housing communities recently opened their waiting
    list and within 2 months, they received over 2,800 new applications for
    this downtown Los Angeles facility of 1,030 units. Currently, Angelus
    has only 100 vacancies per year. Pilgrim Tower East in Pasadena has 158
    units but they have had to close their waiting list. Wilshire House has
    72 units in Santa Monica and their waiting list is closed. MacArthur
    Park Tower in Los Angeles has 183 units but the waiting list had to be
    closed for now. Culver City Rotary Plaza has 100 units but the waiting
    list is closed. When the lists get this long, some older persons are
    forced into other alternatives which may include homelessness. In the
    Los Angeles area, housing costs have skyrocketed and the population of
    homeless women, children, and seniors has grown significantly.

        In addition to concerns for the development of affordable housing
    to address current and projected needs (particularly important for the
    projected doubling of the elderly population by 2030), there is a
    simultaneous concern with the loss of current affordable housing. NCR
    and AAHSA believes that one of the most critical housing issues
    confronting affordable housing in this country is to stop the
    hemorrhage and to replace the loss affordable housing. As the Committee
    knows from your June 27 hearings on the Seniors Commission,
    preservation was designated as the top priority of the Senior's
    Commission and one of the major recommendations of the Millennial
    Housing Commission. As we seek domestic security for our country, we
    must also ensure a fundamental need of ``housing security'' for the
    elderly and for other special populations.
        Out of concerns for the preservation of affordable elderly housing,
    AAHSA established this year, a Task Force on Preservation which I am
    pleased to Chair. We are pleased to participate in these hearings and
    look forward to working with the Committee to preserve the supply of
    affordable housing in this country.
        In my testimony, I will share some of NCR's and AAHSA member's
    experiences with recent efforts to preserve affordable housing for
    older Americans. My testimony will focus on a series of local examples
    (short stories) that NCR and other AAHSA members have experienced which
    illustrate the struggle in our efforts to fulfill our mission to
    provide both suitable and affordable housing for older persons in the
    context of existing resource priorities, public policies, market
    forces, and Government regulations.
        My testimony will focus on five major preservation issues:

        I. Loss of the existing supply of affordable housing as current
    owners ``opt-out'' of Federally-assisted housing and convert these
    properties to market rate housing.
        II. Limited funds and other barriers confronting not-for-profit
    organizations in their efforts to acquire potential properties to
    preserve affordable housing.
        III. Concerns with foreclosure and refinancing of Section 202
    elderly housing projects.
        IV. Use of enhanced vouchers and other counter-productive policies;
    our housing members report that vouchers are ``ouchers'' for many older
    persons, for example, they simply do not work very well for older
    Americans.
        V. Modernization, rehabilitation needs of ``aging'' buildings.

    Recent Losses and Need to Preserve Affordable Elderly Housing

        One of the most critical needs confronting affordable housing in
    this country is the need to preserve the current supply. According to
    the 2001 State of the Nation's Housing by the Joint Center for Housing
    Studies of Harvard University, more than a million units of affordable
    housing have been lost for low-income persons over the past 10 years
    (900,000 between 1993-1995 and 300,000 units between 1997-1999). In
    fact, there have been more affordable housing units lost over the past
    few years than have been produced, including rural housing through the
    Section 515 program, as testified at your recent hearings by the
    Housing Assistance Council (HAC). Additionally, the National Housing
    Trust (NHT) estimates that if current trends and policies continue,
    between 500,000 and 600,000 Federally-assisted housing units are at-
    risk of prepayment and potential loss to market rate. For various
    reasons, owners are prepaying their Federal mortgage, opting-out of
    Federally-assisted housing, and converting affordable housing to market
    rate.
        Earlier this year, NHT conducted a study of housing loss. They
    noted that in recent years, nearly 200,000 units, in over 1,000
    properties that served lower-income households, had been lost to the
    affordable, regulated housing inventory. In a separate study for the
    Seniors Housing Commission, NHT documented that owners of more than 250
    properties that primarily serve the elderly (where more than 50 percent
    of the households were 62 or over) have prepaid in recent years their
    HUD FHA-insured mortgage or opted-out of their Section 8 contracts; and
    therefore, losing over 20,000 apartments from previously regulated
    affordable rents. Unless there is a change in policies and market
    conditions, we expect that this trend will continue since many
    properties that primarily serve older persons have high-interest rates
    with current rents below market rate.
        Because of the timing, relevancy, and depth of this NHT study,
    ``Preserving and Improving Subsidized Rental Housing Stock Serving
    Older Persons: Research and Recommendations for the Commission on
    Affordable Housing and Health Care
    Facility Needs for the 21st Century,'' we would like to request that
    the study be
    included as part of our testimony.

    Efforts by Not-for-Profit Organizations to Acquire and Preserve

        NCR and other AAHSA members have a mission and long-term commitment
    to provide suitable and affordable housing for low- and moderate-older
    persons, including extremely low-income persons. To achieve our
    mission, many AAHSA members have worked in partnership with other
    public and private organizations, including the Federal Government.
    With growing concerns over recent and potential loss of affordable
    housing units, NCR and other AAHSA members have sought to acquire some
    of these properties that are ``at-risk'' of converting to market rate
    housing--out of reach for most low-income older persons. We firmly
    believe that it is significantly less costly to preserve these housing
    units rather than to replace them. In fact, NCR experiences indicate
    that it costs over twice as much to replace these housing units than it
    does to preserve them.
        As a CEO of a major nonprofit /faith-based organization, as an
    AAHSA Board member, as a founding member of SAHF* (Stewards of
    Affordable Housing for the Future--a recently established coalition of
    national nonprofit organizations dedicated to the preservation of
    affordable housing), and as a taxpayer, I have very serious concerns
    with the loss of the investment of public dollars in affordable
    housing. I am particularly concerned when I experience firsthand the
    consequences of the conversion to market rate of many of these
    desperately needed affordable housing properties, primarily to increase
    the profit by their for-profit owners. I do not have a problem with
    for-profit owners seeking to maximize their investment in rental
    housing; however, I do have very serious concerns with public policies
    that thwart efforts by not-for-profit organizations seeking to preserve
    the public investment in these affordable housing properties for low-
    income older persons.
    ---------------------------------------------------------------------------
        *SAHF is comprised of eight major national nonprofit organizations
    that own and operate over 65,000 affordable apartments serving low-
    income elderly and families in 46 States and DC. Members are committed
    to the mission of providing and preserving affordable housing for the
    long-term, keeping well-maintained, and enhancing resident services for
    the people who call it home. Members of SAHF are: The National Housing
    Trust; Mercy Housing, Inc.; National Church Residencies; the NHP
    Foundation; NHT-Enterprise Preservation Corporation; Preservation of
    Affordable Housing, Inc.; Retirement Housing Foundation; and Volunteers
    of America.
    ---------------------------------------------------------------------------
        Yet, under current policies, NCR and other nonprofit organizations
    are being forced to ``compete'' with for-profits for the preservation
    of these affordable housing facilities that were developed with public
    dollars to assist low-income persons. Owners of Federally-assisted
    housing have the legal right to ``opt-out'' of Federal use restrictions
    after a specified period of time, usually in 20 years when their
    Section 8 contract expires, and an option to maximize their investment
    by converting the property to market-rate housing.
        Some owners may seek to opt-out because they are tired of the
    bureaucratic and capricious rules and regulations of Federal programs.
    I can certainly relate and empathize with their frustration. However,
    what concerns many AAHSA members and me is that we are willing to
    endure the regulations and other bureaucratic complexities because we
    need the resources and partnership with the Federal Government in order
    to fulfill our long-term commitment of providing affordable housing for
    low-income older persons. Unfortunately, in too many situations not-
    for-profit organizations do not have the resources or means to compete
    with for-profit owners who are seeking to convert the property to
    market rate--even at the expense of critical affordable housing needs
    of low-income older persons. The typical older person residing in our
    facilities is an older woman living alone on a fixed income (primarily
    Social Security less than $10,000).
        In some situations, we have been successful in acquiring and
    preserving properties. We are however, concerned that HUD is not often
    willing to provide adequate distribution or cashflow to nonprofit
    organizations. As a consequence, too often we have not been able to
    compete successfully due to a lack of adequate resources to acquire,
    disincentives of the existing owner to sell, including exit taxes,
    timing, local market conditions, bureaucratic red-tape, and other
    factors which have thwarted preservation efforts. As with most real
    estate, is it often a case of location, for example, the likely success
    of the converted property to compete in the local market. Older Section
    236 affordable housing properties located in good market areas--in
    neighborhoods or communities with tight housing markets or areas
    undergoing revitalization, are at great risk of being lost. NHT
    developed documents that depict state-by-state comparisons of housing
    properties that have opted-out and those that are at-risk of opting-
    out. I would like to request that these charts be included as part of
    my testimony.
        To illustrate real situations of some of the positive preservation
    efforts, as well as some of these unsuccessful efforts, I would like to
    cite just a few examples (short
    stories) of NCR and other AAHSA members' experiences with acquisitions
    and preservation of affordable elderly housing. NCR has documented some
    of these experiences in a short video which we would be pleased to
    provide for the Committee Members and staff to give a better
    understanding of the quality of some of these properties and our
    efforts to preserve them. It is very gratifying when we and/or other
    nonprofit organizations are able to preserve these affordable elderly
    housing properties. It is clearly a win-win situation for older
    persons, the local community, and the taxpayer. Here are a few examples
    of when the system works.

    Partnerships to Preserve Affordable Elderly Housing

        Colorado Plaza is a 47-unit Section 8 elderly housing community in
    Manhattan, Kansas. With support from the City of Manhattan, NCR
    purchased the property in late 2000, after learning that the building's
    20-year HUD affiliation was about to expire and that the owner was not
    likely to renew the HUD contract. In this case, the former owner wanted
    to maintain Colorado Plaza as affordable senior housing, but he was
    weary of dealing with HUD red tape. Colorado Plaza is a prime example
    of government working hand-in-hand with the not-for-profit sector in
    order to maintain affordable housing. The Manhattan City Commission,
    along with Manhattan's mayoral administration, worked closely with NCR
    to bring about not only the purchase of the property, but also a smooth
    management transition. Procurement of the $1.5 million required to
    purchase the building was aided by the fact that NCR had successfully
    run an identical, 35-unit affordable senior community in Manhattan
    since 1989. Financing consisted of a combination of low-income housing
    tax credits, a Federal Home Loan Bank grant, and the assumption of the
    HUD mortgage. NCR pumped over $200,000 of renovations into the
    property, via previously attained tax credits.
        In late 1999, NCR accepted title to two 52-unit affordable senior
    housing communities in Eastern Ohio. Formerly owned by a for-profit
    organization, Bridgeport Manor and Barnesville Manor operated under the
    Section 8 program. In what marks a milestone in the transfer of
    property from a for-profit entity to a not-for-profit organization, HUD
    approved the transfer of the two facilities to NCR, citing NCR's
    commitment to the preservation of quality, affordable senior housing.
    NCR's acquisition of these two properties was part of HUD's Re-
    Engineering Demonstration project. The project was created to offset
    the number of for-profit entities that are opting-out of the affordable
    housing program. In 1999, many 20-year HUD contracts expired, leaving
    affordable housing owners the option to either withdraw from the
    program or to renegotiate their contracts with HUD. In reevaluating the
    contracts, HUD lowers resident rent structures, thereby causing a
    substantial decrease in owner profit. Of approximately 169 eligible
    properties in Ohio in 1999, only 23 were approved for transfer by HUD.
    The acquisition of Bridgeport Manor and Barnesville Manor is the result
    of a transfer of physical assets, which amounts to a contribution to
    NCR from the former owner.
        According to the National Low Income Housing Coalition, as of 1999,
    an estimated 38,000 affordable housing units had been lost to owner
    ``opt-outs,'' while an additional 60,000 units have been lost due to
    owner prepayment of the mortgage. Prepayment of mortgages allows owners
    to pay off their debt and convert affordable housing to market-rate
    rents. On average, opt-out rents have increased 44 percent; prepayment
    units have increased an average of 57 percent. In the next 5 years, 66
    percent of the existing Section 8 contract (14,000 sites) will expire,
    and in that
    same time, 50 percent of the housing stock in 40 States will expire and
    be eligible
    for renewal.
        In the spring of 2002, NCR purchased four affordable senior
    communities in North Carolina (Charlotte, Clinton, Monroe, and Rocky
    Mount). Totaling 232 units, the facilities, which were spread over 500
    miles throughout North Carolina, were in such a state of disrepair that
    they were virtually unlivable. No maintenance had been done in years.
    Heaters, air conditioners, and plumbing systems worked sporadically.
    Maintenance requests went unanswered for weeks, and were often times
    simply ignored. Low-income, elderly residents were forced to live in
    dangerous, squalid conditions. Rents were even calculated incorrectly,
    with many residents paying far more than the 30 percent maximum. All
    four communities were infested with roaches, vermin, and fire ants. In
    some cases, residents were forced to use their stoves as heaters. The
    $4.2 million acquisition of the four properties was funded through HUD
    and the North Carolina Finance Agency. A portion of the transaction
    included funds for significant renovation and rehabilitation of the
    aging buildings.
        Yet, despite the fact that these are win-win situations, that they
    are politically popular and cost effective (a bargain), there are too
    many failures to acquire and preserve these properties for an
    assortment of reasons. While there are some similar factors, most of
    these preservation efforts are on a project-by-project situation. A few
    examples where these properties ``have gotten away'' and/or are
    currently caught up in negotiations are:

    Long-Term Commitment of Rent Subsidy Needed for Preservation

        One of AAHSA's members, The Retirement Housing Foundation (RHF)
    formed in 1961, affiliated with the Council for Health and Human
    Services Ministries of the United Church of Christ, is a national
    nonprofit organization whose mission is to provide a range of housing
    options and services for the elderly and the low-income families. RHF
    owns and manages over 13,000 apartments in over 130 facilities in 24
    States, Puerto Rico, and the Virgin Islands. In 2001, RHF initiated a
    successful effort to preserve 544 apartments for the elderly in three
    Boston projects (Symphony Plaza East and West, and the Stearns
    Apartments).
        However, preservation efforts that began this year to acquire
    eighteen additional properties (approximately 2,450 units in
    Massachusetts and, Mr. Chairman, 265 units in your State of Rhode
    Island) are being thwarted by a number of technical and administrative
    issues. These properties are intended to be financed with tax exempt
    bonds, 4 percent tax credits, and assumption of existing Section 236
    mortgages, ``co-first'' mortgage loans and 501(c)(3) bonds from
    MassHousing Finance Agency (MHFA). While one of the tax credit
    acquisitions in Massachusetts, and three of the 501(c)(3) bond
    acquisitions can be completed this year without any special allowances
    being made either by HUD or through legislative actions, there are two
    issues that could derail the rest of the acquisitions.
        In order to raise enough money both to pay the seller an acceptable
    price and to fund necessary capital expenditures, each of the projects
    requires a new 20-year Housing Assistance Payments (HAP) contract,
    several of which must be Marked-Up-to-Market. The HAP contracts can be
    subject to annual appropriations in accordance with the current HUD and
    Congressional policy. However, beneath this overarching issue, are two
    separate technical issues: (1) The ELIHPA; and, (2) the original HAP
    contract.

    The ELIHPA Issue

        Of the projects to be financed under the first two structures, four
    are subject to a Plan of Action (POA) and a subsequent Use Agreement
    deriving from participation in the 1994 Emergency Low Income Housing
    Preservation Act (ELIHPA) Program. While HUD policy provides for the
    discretionary granting of Mark-Up-to-Market HAP contracts for ELIHPA
    projects in the context of a sale to a nonprofit, conflicting statutes
    effectively remove that discretion by limiting renewals to 1-year terms
    that resulted from limitation from appropriation language. As a result,
    while it may be technically feasible under existing law to achieve
    market rents, no HAP contract for an ELIHPA project can run longer than
    1-year. From an underwriting standpoint both higher rents and a 20-year
    term are required for a satisfactory price.

    HAP Contract Mark-Up

        The projects to be financed with 501(c)(3) bonds are covered under
    original Housing Assistance Payment (HAP) contracts that are still in
    effect, and as a result are technically ineligible for Mark-Up-to-
    Market. There is a need to remove barriers stopping efforts by
    nonprofit faith-based organizations to preserve affordable elderly
    housing.

    Efforts to Preserve Section 202 Elderly Housing Facilities

        The Section 202 elderly housing program has long been recognized as
    one of the most successful Federally-assisted housing programs, earning
    strong bi-partisan support for its sound management, mission to serve
    low-income older persons, and strong public-private partnership. There
    have been a number of revisions and improvements throughout its 40-year
    history, including significant changes over the past few years enabling
    the program to leverage additional resources to expand supply. The
    attached chart illustrates the four phases of the Section 202 program,
    the number of units, and characteristics under each phase.
        In addition to concerns over stagnant, level-funding that the
    program has received in recent years despite critical need and
    projected demographic increases, there are several preservation issues
    including Section 202 foreclosures, and difficulties with refinancing
    options.

    Sale of Section 202 Elderly Housing Properties

        Last summer, I testified before the House Financial Services
    Committee about our concerns with an unprecedented sale last year of a
    Section 202 elderly housing facility in Detroit. In addition to
    misgivings over the loss of more than 200 affordable elderly housing
    units, we expressed concerns that the sale of the previously not-for-
    profit sponsored property was sold to a for-profit (out-of-state) owner
    and converted to family/student housing. Since that time, at least two
    other Section 202's have been foreclosed and sold to for-profit owners,
    a second project in Detroit and one in New York.

    The Detroit Experience

        To date, two large Section 202 projects in Detroit totaling 532
    units have been foreclosed by HUD and auctioned to for-profit
    developers with the result that both the buildings and their project-
    based Section 8 subsidies are lost forever to low-
    income older persons in the community. The first Section 202 ``lost''
    is Cathedral Towers (formerly Cathedral Terrace) a 19-story, 212-unit,
    Section 202 built in 1971. Approximately 50 percent of the units are
    efficiencies. It was originally sponsored by the Episcopal Cathedral of
    St. Paul's which is located directly across the street and next to
    Hannan House, a four-story facility where a number of senior services
    and activities and providers are located.
        In the 1980's, the Episcopal Diocese gave up its right to appoint
    the majority of the Board of Directors for Cathedral Towers. The
    Cathedral also sponsored Williams Pavilion, a 150-unit Section 202 that
    was built in the mid-1980's and has all one-bedroom units. Cathedral
    Towers has had a long history of management problems and as it got
    older and with the additional burden of having a large number of
    efficiency apartments, vacancies increased. Efforts by the Cathedral
    and senior service providers were rebuffed by a Board that seemed to be
    unaware of the problems they were facing and/or unwilling to take any
    meaningful action. The HUD Area Office has been aware of the problems
    for over a decade. In an effort to fill the vacant efficiency units the
    Administrator and Board requested permission from HUD to rent to Wayne
    State University students. HUD granted this permission on a year-to-
    year basis.
        When the State of Michigan discovered that the building was no
    longer being rented exclusively to older persons, it revoked the tax
    exemption and stopped reimbursing the city of Detroit for the real
    estate taxes. The city then initiated a tax foreclosure and it was at
    this point that HUD stepped in and negotiated a payment to the city to
    prevent foreclosure. HUD then placed the building in enforcement
    (Dallas office) and brought in its own management. However, it did not
    remove the Board and the Board refused attempts by the Cathedral and a
    coalition of nonprofit housing providers to take over control of the
    building and preserve it as senior housing. It was only when the
    foreclosure proceedings were already underway that the Board agreed but
    by then HUD said it was too late.
        The building was sold on August 31, 2000, at foreclosure auction to
    Kohner Properties, a St. Louis based for-profit organization. HUD
    indicated that they had sent a letter to the city offering the property
    for a minimal amount. However, the city has never located the letter
    and, in any case, HUD said that the property would lose all of its
    project-based subsidy in the transfer (in other words, the Section 8
    subsidy would be lost forever). HUD did place a number of deed
    restrictions on the property that, among other things, required the new
    owner to keep the units affordable for 20 years and give priority to
    seniors and the disabled. The amount offered by Kohner was less than $1
    million which is less than a third of the assessed value of the
    property (the result was a bargain price for Kohner and a loss by the
    city of more than two-thirds of the tax revenues in addition to the
    project-based senior housing). The new owner has interpreted that to
    mean that they do not need to market to seniors and they have made only
    modest attempts to do so. Instead they have marketed to single
    individuals with advertising particularly aimed at students.
        The second Section 202 facility sold in Detroit is Four Freedoms, a
    22-story building with 320 units (57 percent are efficiencies) that was
    constructed in the 1960's, originally as a nonprofit Section 236 but
    later converted to Section 202. This facility has just recently gone
    through the foreclosure process but the high bid has not yet been
    accepted because of a legal dispute. This project also has had a long
    history of problems, including vacancies caused by the high number of
    unmarketable efficiency units. The result of this foreclosure will also
    be a permanent loss of project-based subsidies and a loss of tax
    revenue to the city. In these instances, it appears that HUD did not
    intervene to provide timely technical assistance, to provide oversight,
    and to take other actions to preserve the affordable housing that was
    quickly sold to a for-profit buyer at a price far below the assessed
    value. This resulted in not only losing the affordable housing project,
    but also compromising the integrity and long-term reputation of the
    program by opening a ``Pandora's box'' for potential future sales of
    other Section 202 properties. Additionally, in another pending
    situation, a group of nonprofit organizations are working to bring
    adequate resources
    together to purchase another failing Section 202. However, HUD is
    insisting on modernization resources that the group does not have while
    not providing any of its own resources nor agreeing to hold the
    foreclosure in abeyance.

    Lightening Strikes Again: The New York Story

        We assumed that the Michigan situation was unique; however, before
    corrective legislative actions could be taken (provisions were added
    during the Committee mark-up of H.R. 3995 to provide nonprofits with a
    first right of purchase of any Section 202), another Section 202
    elderly housing facility located in southwestern rural New York was
    foreclosed and sold this past spring to a for-profit owner. The
    facility, Oak Apartments built in 1987 with 40 units, is located in
    Alfred, New York, where there is a strong market for housing students
    attending Alfred University at rent that exceeds the affordable rents
    offered to qualified HUD residents. NCR had been contacted by the local
    community in New York to acquire the Section 202 property to preserve
    it for affordable elderly housing. However, despite our interest,
    organizational capacity, and local support, NCR was not able to acquire
    the property at a price that would have allowed it to remain affordable
    to low-income seniors. Although the sale from HUD to the owner included
    a legislative ``use restriction'' initiated during a previous 1983 sale
    to remain ``affordable senior housing,'' it is unclear the specific
    terms of the restriction, what State regulatory body was is charge of
    enforcing the restriction, or how easily the restriction could be
    removed. In fact, just weeks after the sale of the property, the new
    owners were making inquiries on how to convert the property to student
    housing even after promising the community during the public comment
    period the property would remain affordable senior housing.
        It is clearly shortsighted and not cost-effective to use public
    funds that were invested into these affordable housing facilities and
    then, despite need, to sell these facilities at significant discount to
    for-profit owners to convert them to market-rate housing. Nonprofit
    affordable housing advocates simply cannot move fast enough to compete
    with market forces without more effective tools and a proactive HUD
    office. Not-for-profit owners must often receive approval from a
    majority of a volunteer board of directors, that may not be able to
    meet, develop an adequate market study, and vote for a purchase in the
    current timeline for HUD foreclosure sales. In recent years, local
    communities in New York lost more affordable elderly housing units
    through opt-outs and conversions than the State's entire Section 202
    allocation to construct new units.

    Refinancing 202's and Limited Partnerships

        Because of the need for funds to expand the number of units in a
    Section 202
    elderly housing, (funding has been reduced in recent years to an
    average of less than 50 units per project); as well as a need for
    capital improvements. The AAHSA sought legislative changes to enable
    options to leverage Section 202 funds and
    equity to attract other public and private resources. This effort
    evolved from an earlier AAHSA supported proposal to have the Federal
    mortgage forgiven on pre-1990 Section 202 elderly housing facilities,
    as a means to de-couple the Section 8 rent subsidy and to tap the
    equity in the facility. But unfortunately, while a Senate
    requested HUD study indicated this is budget neutral (debt forgiveness
    off set by
    reduced future Section 8 payments), it would require a change in budget
    scoring legislation that was not politically feasible at the time.
        We are pleased that Congress has made a number of reforms to the
    Section 202 program over the past couple years, to provide increased
    flexibility and financial options for attracting public and private
    capital for Section 202 projects. For example, with new legislative
    authority enacted (Pub. L. 106 -569) to enable refinancing and limited
    partnerships between private investors and the traditional not-for-
    profit sponsors of Section 202 projects, it will be easier for Section
    202 elderly housing sponsors to bring private financing into the
    development and/or refinancing of the projects. As the sole general
    partner of a limited partnership, not-for-profit sponsors can partner
    with for-profits to leverage additional funds through low-income
    housing tax credits, private activity bonds, and other resources used
    in combination with Section 202 funds.

    Refining Needs Speedy Processing

        In 1999, MassHousing staff developed a proposal for refinancing
    HUD-held Section 202 mortgages with high-interest rates. This proposal
    won a national award from the National Council of State Housing
    Agencies (NCSHA) in September 2000. At the same time, MassHousing
    approved the refinancing of Peter Sanborn Place, a Section 202
    development in Reading, Massachusetts, that had a 30-day right to
    prepay without HUD's consent. The MassHousing loan will lower the
    interest rate for the project from 9.25 percent to less than 6.0
    percent and recast the amortization schedule for 40 years. This
    refinancing will lower annual debt service costs for the project and
    generate proceeds of at least $1,049,000 above the existing debt to be
    used for physical improvements to the property and to establish an
    escrow to fund resident services. The funds generated by the
    refinancing will enhance the quality of life for the residents and
    enable them to remain in their apartments as they age in place.
        Unfortunately, MassHousing has reported that they have received
    great resistance from HUD at both the local and national level for over
    2 years in approving the refinancing. Widespread support for the
    proposal was received from Congressional leaders in both the House and
    the Senate; but it was not until this past summer (July 2002), after
    direct Congressional intervention, that MassHousing received a
    conditional approval letter from HUD. However, the letter did not
    resolve all policy questions nor permit flexible interpretations of the
    Use Agreement in the notice for HFA/FHA Risk Share refinancings. As a
    result, MassHousing still lacks HUD final approval for this beneficial
    refinancing. Clearly, if not-for-profit organizations are going to be
    able to refinance Section 202 housing facilities, as Congress enabled,
    HUD needs to provide timely leadership, guidance, and processing.

    Vouchers are Ouchers for Older Persons

        While vouchers may be a useful tool for providing safe, decent
    affordable housing for low-income families, vouchers are not as
    effective in providing affordable housing for older persons. Vouchers
    (when available and acceptable by landlords) tend to focus on
    affordability issues through private sector, mixed-income, and
    scattered-sites strategies. The eligible low-income person is empowered
    to locate housing in the community and to use the voucher to reduce
    their portion of the rent by paying 30 percent of their income and
    having the Federal Government pay the landlord the difference.
        Elderly housing is more complex and addresses multiple needs of
    older persons beyond simply affordable housing. One of the primary
    benefits of elderly housing is the fostering of formal and informal
    supportive services. While vouchers tend to emphasize scattered-site
    strategies, senior housing is project-based and works well with higher
    density facilities. Elderly housing provides a base for the delivery of
    support services that become more crucial as older persons age in the
    facility. Non-profit, often faith-based housing also tends to serve as
    a catalyst for increased volunteers and community support.
        One of the primary benefits of age-distinct elderly housing is the
    fostering of informal support systems for older persons, which is
    particularly beneficial in ending isolation for older residents,
    particularly since the typical resident is an older women living alone
    on a low and fixed income. Senior housing tends to be a catalyst for
    community services and often serves as a community focal point for
    assisting older persons in the surrounding area. From a public policy
    perspective, elderly housing with supportive services is very cost
    effective in assisting frail elderly to delay and or avoid costly
    institutions, such as assisted living and nursing homes. In fact,
    supportive elderly housing is a bargain from a comparative cost
    perspective.
        In recent years there has been increased recognition of the
    emerging role that elderly housing with supportive services (and
    service coordinators, etc.) can have with long-term care strategies.
    Yet, many elderly residents have aged-in-place and are becoming more
    frail and at-risk of higher level of care facilities (assisted living
    or nursing homes). For many of these older facilities there is a need
    to rehabilitate or modernize to accommodate supportive services. For
    example, many of the Federally-assisted housing facilities were
    developed as ``independent'' housing; yet have begun to facilitate an
    increased number of community services.
        From a preservation perspective, many of the older housing
    facilities, such as a Section 236 facility, are being refinanced as a
    means to make capital improvement to accommodate supportive service
    needs, including the conversion of some units to affordable assisted
    living. Since some older persons may prefer to live in mixed-age,
    family settings, a range of housing options should be available in
    local communities. In this situation, vouchers could be helpful to make
    housing more affordable. However, project-based rent subsidies work
    best in senior housing for older persons--affordable senior housing is
    an American success story.

    Enhanced Vouchers: A Mixed Blessing or Trojan Horse

        With concerns over the adverse impact that conversion to market-
    rate housing would have on existing residents, for example, being
    forced to pay increased rent or move to more affordable housing,
    Congress provided a number of protections, such as: Advance notices,
    moving assistance, and enhanced vouchers. And with an enhanced voucher,
    an existing resident in a Federally-assisted housing facility involved
    with Mark-to-Market would have the option to continue to remain at the
    facility and to continue to pay their current rent structure (for
    example, 30 percent of their adjusted income). The Federal Government
    would subsidize the qualified low-income resident's rent, but at the
    increased, (``enhanced'') market-rate level.
        At first observation, it would seem that enhanced vouchers provides
    a ``win-win'' solution enabling residents to remain in their homes and
    encouraging owners to continue to provide affordable housing. However,
    while some protection is being provided for existing residents, in some
    regards, enhanced vouchers may actually be a mixed blessing with
    unintended consequence of masking the extent of recent losses of
    affordable housing. Without enhanced vouchers, the adverse impact of
    dramatic increases in rents as units are converted to market rate would
    certainly contribute to a public outcry among existing residents and
    local communities. However, with enhanced vouchers, affordable housing
    units are gradually lost, unit-by-unit, as existing residents move out
    or die but generally, without public awareness.
        In many ways, the enhanced vouchers contribute to a ``silent
    crisis'' with the gradual loss of affordable housing. We believe that
    enhanced vouchers provide only a short-term solution to accommodate
    affordable housing needs of existing residents. In the long run,
    however, they also contribute to the gradual loss of affordable
    housing. To illustrate this point, I would like to discuss two recent
    NCR preservation efforts: One in Pacifica, California, was able to
    acquire the at-risk property where there were no enhanced vouchers; and
    one in Baltimore, Ohio, where enhanced vouchers were used and we were
    not able to acquire and preserve for future affordable housing.

    Pacificia, CA: Resident Outcries Preserves Elderly Housing

        In fall 1998, the owners of 100-unit Ocean View Senior Apartments
    in Pacifica, California, a small town just 12 miles south of the Golden
    Gate Bridge, decided
    to turn the 20-year-old property into a market-rate building. The HUD
    loan had
    been satisfied, and the owners, who had purchased the property only a
    year before, quietly taped 30-day eviction notices to the elderly
    residents doors at 2 a.m. With no affordable housing options within 60
    miles, residents had no housing options, and were effectively rendered
    virtually ``homeless.'' All of the residents were receiving Section 8
    low-income housing assistance and the new rent rates exceeded
    Government standards, so enhanced vouchers were not even an option.
    Many of the residents suffered serious physical setbacks brought on by
    the stress of the situation. Needless to say, the public outcry was
    deafening, especially after the local newspaper, The Pacifica Tribune,
    editorialized against the owners, and in favor of maintaining the
    property as affordable.
        In an unprecedented move, the city of Pacifica seized the property
    by eminent domain in a desperate move to halt the process. NCR joined
    the fight and quickly moved to assemble the $11.1 million needed to
    purchase the building and maintain it as affordable senior housing.
    Financing eventually came from a combination of loans and grants from
    the California Housing Finance Agency; the county of San Mateo; and the
    city of Pacifica. NCR put over $300,000 of renovations into the
    property. The $11.1 million purchase price was over $1 million more
    than the property owners had paid for the building the previous year.
    The Pacifica story is a classic example of the effective collaboration
    of residents, the general public, government, and the not-for-profit
    sector working together to effect positive change. NCR developed a
    video of the Pacifica, and a few other preserved housing facilities
    which we would like to include as part of our testimony.

    Modernization of Older Elderly Housing Facilities

        In addition to preservation needs with the loss of affordable
    housing facilities, AAHSA believes that there is also a critical need
    to preserve the existing stock of Federally-assisted affordable housing
    that serves moderate- and low-income households. As reported by the
    Millennial Housing Commission, there are 4,200 properties with 450,000
    units developed between 1966 -1978 under the Section 236 and Section
    221(d)(d) that are now over 25 years old. Structural and mechanical
    systems of older building start to require significant upgrade and
    replacement by their 20th or 25th years.
        The Section 236 nonprofit elderly developments appear to be most in
    need of modernization funds. During a moratorium on the Section 202
    program, the only Federally-assisted program available for nonprofit
    organizations seeking to develop affordable elderly housing between
    1969 and 1975 was the Section 236 program. As noted, the Section 236
    projects have aged considerably since 1973 and are in dire need of
    capital for modernization. Their lack of access to adequate capital
    puts them at-risk of deteriorating to the extent that they are no
    longer viable properties. Many Section 236's have only partial Section
    8 or other types of rent subsidies which could cause an adverse impact
    on unsubsidized tenants should rents be increased to pay for capital
    improvements. Depending upon the local market conditions, some Section
    236's are at-risk of being converted to market-rate housing and/or are
    being refinanced as a means to generate funds for capital improvements.
        In addition, there are over 5,000 properties with over 250,000
    units that were developed with the pre-1990 Section 202 loan program--
    including 2,800 projects developed under ``cost containment'' policies
    (1980's) that severely limit common space, reduce amenities, use less
    quality materials, and emphasis on efficiencies. In addition to
    structural needs, many of these older facilities need capital
    improvements to accommodate residents' present and future service
    needs. These structural changes include increased common space to
    facilitate supportive services for older residents; converting
    unmarketable efficiencies into one bedroom and/or common space;
    retrofitting to comply with fair housing and ADA requirements; and
    becoming more competitive with newer and/or market-rate facilities.
        A recent AARP study found that 20 percent of the oldest Section 202
    facilities reported that their capital reserves are inadequate to meet
    current repair needs and that 36 percent reported that reserves are
    inadequate to meet projected repair needs. We believe that it is sound
    public policy to protect the public investment in Federally-assisted
    elderly housing facilities. AAHSA fears that ignoring these needs now
    will only increase affordable elderly housing needs in the near future
    as the health of these properties continues to deteriorate . . . ``pay
    now, pay later.''
        AAHSA remains disappointed therefore, that the Administration
    sought and Congress concurred with the rescission in the fiscal year
    2002 Supplemental Appropriations bill of over $300 million from the
    recaptured Section 531, Interest Reduction Payments (IRP). These IRP
    subsidies from Section 236 insured multifamily properties recaptured
    through refinancing are intended for rehabilitation grants or loans to
    qualified owners who demonstrate need and have insufficient project
    income to support rehabilitation. While HUD indicated earlier its
    intent to issue rules to allocate these funds, to date, HUD has not yet
    allocated any of these IRP funds. About a quarter of the eligible
    Section 236 properties have elderly-headed households.

    Modernization: Aging Buildings Also Need Care

        The Retirement Housing Foundation (RHF) is an organization based in
    Long Beach, California, which has been building and acquiring housing
    communities for mostly low-income elderly since 1961. Some of their
    more than 135 properties are over 35 years old. Therefore, the process
    of maintaining these buildings while safely housing frail elderly can
    be costly over the years. Anyone who has undergone home repairs and
    renovation can imagine how expensive it can be to simply paint, replace
    fixtures, carpeting, windows, roofs, heating/AC systems, etc. Multiply
    those costs by 135 buildings and you are talking sizable amounts of
    money.
        Unlike for-profit companies, RHF cannot sell off its aging
    buildings for a profit for conversion into market rates. Besides, that
    is not what our mission is about. RHF prides itself as a faith-based,
    nonprofit organization founded to provide a range of housing options
    and services for the elderly, low-income families, and persons with
    disabilities, according to their needs, in an environment reinforcing
    the quality of life as it relates to their physical, mental, and
    spiritual well-being. A recent poll found that the shortage of
    affordable housing ranks second only to health care costs as a concern
    for citizens.
        RHF's University Center in Indianapolis, Indiana, which was
    completed in 1986, is in desperate need of upgrades and repairs. This
    HUD 202 senior community of 50 units recently underwent some unexpected
    repairs because of an ``act of nature.'' The ground settled beneath,
    leaving cracks in the floors. The problem was exacerbated on the second
    and third floors of the building where lightweight concrete was used to
    provide soundproofing. The cost to fix the flooring exceeded $80,000.
    The parking lot needs to be repaved, cabinets need replacing (estimated
    cost $60,000), heaters are wearing out, and the old frost type
    refrigerators have outlived their
    useful life, not to mention being very energy inefficient. The building
    will need a new roof soon. Considering the needs of the facility and
    the lack of financial resources to make needed repairs is a dilemma for
    RHF and other nonprofit housing providers.
        The Concord in Pasadena, California, a building built around 1966
    has had to have its tired and weary elevators replaced at a cost of
    $230,000. Ralston Tower in Modesto, California, has also had to
    modernize elevators, which was a long drawn out costly ordeal. Pilgrim
    Tower East in Pasadena, California, a 158-unit bustling building of
    seniors was built in 1979, and the two elevators served the residents
    for almost 25 years before they had to be replaced. Replacement is
    generally due to the need for frequent repairs. Fortunately, the
    elevators were safe to use, however their unreliability became a
    nuisance to the elderly residents in the facilities. In addition, when
    the elevators were being repaired, the residents endured long waiting
    periods when trying to enter and leave their apartments. Every 5 to 7
    years, common areas need to be renovated. The average cost is in excess
    of $25,000 per building.
        RHF buildings--such as Harbor Tower in San Pedro, California, which
    was recently painted after 15 years--can look good for quite a while
    but they eventually need a fresh coat of paint. RHF is also in the
    process of investing in automatic doors for all of its buildings at a
    cost of $5,000 to $8,000 for each building to make access easier for
    frail residents and those in wheelchairs. The automatic doors are also
    one way to increase security. Those entering need to have a key fob or
    must enter a code into an entry device located outside the entrance
    doors. Also, in high-crime neighborhoods, an investment in security
    cameras and monitoring equipment has been a necessity at a cost of
    $10,000 or more per facility.
        The true concern of nonprofit building managers is locating
    sufficient financial resources to address capital repairs when
    replacement reserve funds are either inadequate or nonexistent. That is
    why many housing providers have become concerned with the
    Administration and Congress and recent actions to divert funding away
    from HUD to other uses. Many housing providers try to maintain their
    properties for the benefit of the residents, while at the same time
    attempting to reduce operating expenses such as utilities. However, in
    order to purchase energy efficient
    refrigerators, water heaters / boilers, HVAC equipment, and water
    saving devices,
    additional funding is needed.

    Modernization Funding Needs

        B'nai B'rith Parkview Apartments (BBPA) in New York, a Section 236
    project that has 118 Section 8 apartments and 59 market-rate
    apartments, (73 studio apartments) must maintain extremely competitive
    market rents to maintain a high occupancy rate. In turn, the monthly
    replacement reserve amount that coincides with apartment rents made it
    difficult for the facility to maintain an adequate reserve needed to
    complete all the needed capital repairs and replacement needs.
        In spring of 2002, the infrastructure of the building facade failed
    and bricks began falling off the 12-story building. Scaffolding was
    immediately placed around the building to protect the safety of the
    residents. Work to secure the bricks has begun and the cost of the
    initial stabilization of the bricks will cost approximately $90,000, or
    over half of their replacement reserve account. The current budget
    allows for $6,211 per month into the replacement reserve account. With
    this schedule, it would take B'nai B'rith Apartments 14 months to
    recoup the cost of just stabilizing the bricks to retain a minimum
    replacement reserve account.
        Additional facade work is scheduled for next year to remove the
    bricks that could deplete the entire replacement reserve account. Any
    additional capital needs could compromise the financial stability of
    the project if funds are needed from the operating budget for
    additional capital repairs. Access to the $300 million IRP funds could
    have helped in preserving the replacement reserve account for B'nai
    B'rith Parkview Apartments for expected capital needs.

    Recommendations

        The NCR and the AAHSA recommend a number of actions to preserve the
    supply of affordable housing for older persons and other low-income
    persons. These include:

    Establish a HUD Office of Preservation

        Because of the urgency, complexities of funding, and multitude of
    issues to preserve the existing supply of affordable housing, AAHSA
    urges that HUD establish an Office of Preservation. National leadership
    is essential if we are not to lose virtually every affordable senior
    housing facility that is currently located in a good market area. The
    establishment of this Office would serve as a focal point within the
    Federal Government to provide national leadership, including a
    partnership with HUD local offices, national organizations, and others,
    to develop and administer a comprehensive strategy to preserve the
    Nation's supply of affordable housing. HUD already has many tools to
    facilitate preservation including: Data on opt-outs; mortgage insurance
    programs; OHMAR; vouchers; HOME funds, etc. However, NCR and other
    AAHSA members have had mixed experiences with working with HUD both at
    central and various field offices. One of the primary concerns
    expressed by members has been the lack of prompt action by HUD to
    expedite refinancing, acquisitions, and preservation efforts.
        The Preservation Office should have the resources and authority to
    take quick
    actions to assist nonprofits, State and local governments, consumers,
    financial community, and others with resources and technical assistance
    to preserve affordable housing. The Office should establish special
    processing for HUD financing to facilitate the necessary speed of
    preservation transactions. The Office would also serve as a wake-up
    call to the silent crisis that is rapidly eroding the existing supply
    of affordable housing. Presently, the word ``preservation'' does not
    even appear in HUD's strategic planning documents.
        Yet, this valuable housing stock is steadily and quietly being
    lost. Unfortunately, when the Nation comes to fully appreciate the
    gradual lose of this precious housing resource, it will be too late
    unless we do something about it now to ensure that these much needed
    affordable housing properties will be preserved. Once gone, we will
    have to start production programs to replace these units; unfortunately
    at a much higher overall cost to the taxpayers. We would recommend that
    the Subcommittee request that the General Accounting Office (GAO)
    conduct a study on the financial impact of the loss of these affordable
    housing units.
        The scope of the responsibilities of the Preservation Office would
    be broader than the Office of Multifamily Housing Assistance
    Restructuring (OMHAR). The Office would coordinate and oversee
    preservation actions of the Office of Housing and PIH, such as
    assurance of compliance with Congressional mandates, promulgating
    regulations, and/or guidelines. Among suggested actions that the Office
    could take include: Technical assistance to nonprofits and others on
    preservation needs; facilitate with transfer of ownership, for example,
    opt-outs with opt-ins; develop a database of potential at-risk
    properties; assist States and local governments to develop preservation
    programs in their State (such as the establishment of Housing Trust
    Funds or support bi-partisan matching State program provided in H.R.
    425/S. 1365) funds (grants or loans) that could be quickly accessed by
    nonprofits to acquire at-risk affordable elderly housing. In addition,
    the Office could also identify best practices and develop demonstration
    programs and provide incentives for existing owners to transfer
    ownership to a nonprofit committed to sustain affordability.
        The AAHSA recommends that HUD be required to report to Congress
    monthly on the loss of affordable housing stock, including at-risk and
    lost properties listed by Congressional district and to publish the
    reports in the Congressional Record. [We believe that it is important
    for Congress to realize the extent of loss and potential losses,
    particularly in their own local districts.] Our concern is where low-
    income persons will live in the future once these affordable housing
    properties are gone and when we consider that many of these local
    communities will be coming to Congress in the future to seek production
    programs once the voucher holders are gone. It will require
    significantly more tax dollars to rebuild these housing facilities than
    to preserve them now. It certainly doesn't make economic sense to the
    taxpayer and does an incredible disservice to our communities not to
    preserve these properties before they are converted to market rate. We
    would further recommend that HUD should post on its websites,
    information on projects that are vulnerable to market-rate conversion
    so that nonprofits are given ample lead times to acquire, rehabilitate,
    and preserve these facilities.

    First Right of Refusal for Section 202's

        The AAHSA recommends that statutory provision be made with the
    Section 202 program to ensure that any sale or disposition of a Section
    202 would be to a qualified nonprofit organization. The AAHSA actively
    supported the provisions related to Section 202 foreclosure and sale
    included in H.R. 3995, the Affordable Housing for American Act, as
    amended. We would recommend that HUD be instructed to take prompt
    actions to assist current owners in preventing foreclosure, including
    technical assistance, adjustments to the operating budget and
    operational issues. However, if a transfer of ownership is still
    necessary or desired by the owner to prevent foreclosure or to improve
    operations of the facility, that HUD assist with the transfer of
    ownership to a qualified not-for-profit organization. The AAHSA
    supports use restrictions remaining with the foreclosed or transferred
    project until the expiration of the original term of the loan; although
    we would urge that some flexibility be
    provided to adjust the income limit (up to 80 percent of area median
    income) if
    necessary for the financial soundness of the project.

    Transfer of Federally-Assisted and Rural Housing to Nonprofits

        Similarly, AAHSA recommends that preference for the transfer of
    ownership or control of existing Federally-assisted elderly housing,
    including Section 515 rural housing, be given to qualified nonprofit
    organizations. In addition to technical assistance to assist current
    and potential not-for-profit owners, AAHSA recommends that HUD and
    USDA/RHS be directed to give priority for modernization and
    rehabilitation funding to qualified not-for-profits to prevent
    foreclosure or upon transfer of ownership to another qualified not-for-
    profit. AAHSA supports similar provisions that were added to H.R. 3995
    for this purpose.

    Incentives to Sellers

        While some owners may be willing to sell or to transfer ownership
    to a nonprofit organization, the owner/investors are often discouraged
    because they would be subject to an exit tax at the time of the
    transfer of ownership. AAHSA supports the recommendation of the
    Millennial Housing Commission to provide a Preservation Tax Incentive
    which would grant exit tax relief to owners who sell the facility to a
    qualified preservation entity. While tax issues are beyond the
    jurisdiction of this Committee, the AAHSA would recommend that joint
    efforts be initiated with the
    Finance and other related committees to remove this tax disincentive to
    transfer
    affordable housing properties to a qualified not-for-profit
    organization to preserve
    affordable housing.

    Grants for Nonprofits to Acquire Affordable Housing Facilities

        The AAHSA recommends that grants be provided to assist qualified
    not-for-profit organizations in acquiring affordable housing for low-
    and moderate-income older persons. In addition to provisions that were
    amended to H.R. 3995 to provide operational assistance, AAHSA
    recommends that funds be provided for the acquisitions of at-risk
    properties to preserve affordable elderly housing. AAHSA further
    recommends that additional guidance and authority be given to HUD that
    not-for-profit organization seeking to acquire existing Federally-
    assisted housing, will be assured of long-term (20 years) commitment of
    Section 8 rent subsidies, including Mark-Up-to-Markets vouchers, to
    satisfy underwriters, including ELIHPA and original HAP contracts.
        At the present time, there is a Catch-22 with underwriters wanting
    long-term commitment for rent subsidy; yet counter-productive with
    current budget scoring system discouraging long-term commitments. AAHSA
    recommends that the Committee collaborate with the Budget Committee and
    other appropriate agencies to change existing budget scoring
    requirements to accommodate long-term commitment of rent subsidy funds
    without front-loading budget requirements. AAHSA also recommends that
    fund be earmarked for not-for-profit preservation efforts with the
    establishment of a national housing trust fund, and/or encouraged
    preservation funds for State or local housing trust funds.

    Modernization Grants for Nonprofit Sponsored Elderly Housing

        AAHSA recommends that a specific line-item program be established
    to provide modernization and rehabilitation grants for qualified not-
    for-profit sponsored affordable elderly housing. These funds would
    complement the use of recaptured IRP funds targeted for modernization/
    rehabilitation of nonprofit sponsored Federally-assisted elderly
    housing. These funds could be used for rehabilitation, retrofitting,
    and modernization, including conversion of efficiencies into one-
    bedroom apartments, community space, and/or other uses to improve the
    quality of life of older residents and financial soundness of the
    facility. AAHSA supported similar language that was enacted earlier,
    and supports provisions included in H.R. 3995. AAHSA recommends that
    HUD be instructed to implement promptly this program and that Congress
    provide specific modernization funds for this purpose.

    HUD Guidelines on Section 202 Refinancing and Limited Partnership

        AAHSA recommends that HUD be instructed to expedite compliance with
    Congressional intent to enable owner options with refinancing Section
    202's, including clear guidance that ``once a Section 202'' always
    considered as a Section 202 for purposes of option to participate in
    legislative or administrative actions earmarked for nonprofit sponsors
    of Federally-assisted housing. In addition, AAHSA recommends that
    multifacility owners have the option to combine the refinancing of
    Federally-assisted properties within their portfolio, including
    statewide, regional, or other
    economic groups; and have the option to pool the savings from
    refinancing all or portions of their portfolio, as well as access to
    pooled residual receipts and reserve accounts, for purposes of
    refinancing, enhancing services, expanding supply or other benefits to
    preserve or expand the supply of affordable housing for older persons.
    With this increased flexibility, the multifacility sponsor will ensure
    that the resources pooled among the facilities will be available for
    each of the specific projects within the pool, as needed. AAHSA
    recommends that not-for-profit organizations be entitled to developer
    fees and distribution rates similar to the level provided by State
    housing finance agencies for refinancing Federally-assisted housing
    projects.

    Transition and Preservation Vouchers

        AAHSA recommends that transition vouchers be provided for existing
    residents that choose to remain in their facility that is being
    converted to market rate (similar to enhanced vouchers). However, for
    each affordable housing unit that is converted to market rate we
    recommend that a companion Preservation Voucher be provided for
    nonprofits to develop replacement long-term affordable housing in that
    local community, State, or region. In addition, we would recommend that
    special project-base vouchers be established to accompany the transfer
    of the ownership to qualified nonprofit preservation entities.

    Conclusion

        In closing, I would like to express again our appreciation for the
    leadership that the Committee is taking to preserve affordable housing
    in this country. We have
    serious concerns that critically needed affordable housing is gradually
    being lost, culminating in a ``silent crisis''--below the radar screen
    of the general public and policymakers. We would hope that these
    hearings will serve as a wake-up call to this looming crisis. Some of
    the gradual loss of affordable housing may be due to unintended
    consequences of enhanced vouchers which have tended to numb or
    neutralize outcries from existing residents as their unit is converted
    to market rate. As stated earlier, we believe that enhanced vouchers
    only provide a short-term solution for existing residents and tend to
    mask, hide the need for affordable housing for the scores of low-income
    seniors on multiyear waiting lists and for the future waves of older
    persons, including aging baby-boomers who will be turning 65 in less
    than a decade.
        In addition, some of the gradual decline in affordable housing may
    be due to a lack of consistency with both production and preservation
    strategies between Congressional intent and implementation by the
    Administration. Some of the loss may also be attributed to simply HUD
    and other agencies being understaffed and/or with inexperienced staff
    that have misunderstood Congressional intent. Finally, some of the loss
    of Federally-assisted housing may be attributed to a gradual devolution
    of housing from the Federal Government to State and local governments
    and to the private sector; as well as market forces and other factors.
        Some of the recommended solutions to halt the loss of affordable
    housing are
    beyond the jurisdiction of this Subcommittee. These include: Revisions
    to exit and other tax policies; the need to improve HUD-HHS
    collaboration to ``preserve'' existing elderly housing facilities by
    adapting the facility to accommodate services and health care; and even
    budget scoring constraints, such as long-term commitments for Section 8
    or other rent subsidies; and budget scoring with debt forgiveness of
    the existing Federal Section 202 mortgage. Therefore, we would urge
    that the Subcommittee seek collaborative solutions with other
    committees and agencies to address preservation needs. The Subcommittee
    may want to conduct an Interagency Task Force to examine cross-cutting
    preservation issues.
        We are pleased to contribute to your deliberation on these critical
    issues, and we urge your support for the recommendations outlined in
    our testimony.
        For additional information on this testimony, please contact Larry
    McNickle lmcnickle @aahsa.org.

                                  Appendix G-3
            PRESERVING AND IMPROVING SUBSIDIZED RENTAL HOUSING STOCK
                             SERVING OLDER PERSONS:
               RESEARCH AND RECOMMENDATIONS FOR THE COMMISSION ON
               AFFORDABLE HOUSING AND HEALTH CARE FACILITY NEEDS
                        FOR SENIORS IN THE 21ST CENTURY
                          Michael Bodaken & Kyra Brown
                             NATIONAL HOUSING TRUST
                                 March 1, 2002

    Executive Summary
        We live in an aging Nation. This demographic reality is
    irrefutable. As we proceed through the first decade of the 21th
    Century, our Nation will be increasingly challenged by problems that
    confront our current and future elderly households. Safe, accessible,
    and affordable housing is critical to good health and function at any
    age. But the relationship between housing and health is, perhaps, more
    apparent when one is faced with the frailties associated with old age.
    As we age, more and more health care is provided at our homes. Future
    demographic drivers call for numerous innovations to meet the
    affordable housing and supportive services needs of older persons. Much
    has been written about the production of new units to meet these needs.
    This document, written for the Commission on Affordable Housing and
    Health Facility Needs for Seniors in the 21st Century focuses on
    preserving and improving existing senior affordable housing.*
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        *The National Housing Trust wishes to acknowledge the generous and
    unstinting assistance of the following individuals in the preparation
    of this document for Commission on Affordable Housing and Health
    Facility Needs for Seniors in the 21st Century: Andrew Kochera, AARP
    Public Policy Institute; Don Redfoot, Ph.D., Senior Policy Advisor,
    AARP; Gary Eisenman, Related Capital Companies; and Michael Reardon,
    Nixon, Peabody, LLC.
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        While the goal of preservation may be obvious, it is not always
    clear how this stock should be recapitalized and improved. Affordable
    senior housing, like its occupants, is undergoing an ``aging process.''
    Most of it was developed through private/public partnerships more than
    two decades ago and much of the stock is itself in need of updating and
    repair. Not surprisingly, as the average age of the population in this
    housing has climbed, so have their needs. The dilemma that confronts us
    is how to both preserve what we have and, simultaneously, meet the
    changing needs of those who call it home. The goal of this study is
    threefold:

        (1) To provide specific data on the existing subsidized elderly
    rental housing stock in the United States.

        (2) To summarize that data in a comprehensive, easy-to-read format
    for the Commission on Affordable Housing and Health Facility Needs for
    Seniors in the 21st Century and the general public. This report will
    include information on what properties have already been ``converted''
    to market-rate units where the majority of the units are occupied by
    older persons, the ages and races of the existing occupants, and the
    number of properties serving primarily the elderly that may be capable
    of refinancing in the not too distant future.

        (3) To make recommendations on how to preserve and to improve
    existing subsidized elderly homes. Our analysis includes a discussion
    of new tools approved by HUD to preserve elderly, HUD-insured
    properties. These include: Prepayment of existing Section 202 loans;
    the use of 501(c)(3) bonds, private activity bonds, and low-income
    housing tax credits to revitalize this stock; the possible curtailment
    of debt in Section 202 properties; and policy recommendations to
    facilitate the conversion of existing subsidized housing serving mainly
    the elderly to assisted living facilities.
        We begin with a general summary of the various Federal programs
    that serve the rental housing needs of older persons. In particular, we
    focus on those programs that have HUD Section 8 or other types of
    Federal subsidies. The document proceeds to analyze what we have chosen
    to designate as ``primarily elderly'' properties, that is, properties
    where over 50 percent of the households served are older persons, age
    62 or over. In our study, we found that in recent years, more than 250
    properties that primarily serve the elderly have prepaid their HUD FHA-
    insured mortgage or opted-out of their Section 8 contracts, in the
    process releasing over 20,000 apartments from their previously
    regulated rents. We expect this trend to continue since many properties
    that primarily serve older persons have high interest rates with
    current rents below market. At the same time, we believe a good case
    can be made to current and future owners of this housing that their
    economic interests and preservation of affordable housing can be
    readily aligned.
        Indeed, signs of hope are emerging. New HUD tools are at our
    disposal to renovate subsidized, senior housing. Additionally, State
    and local housing finance agencies, increasingly aware of this housing
    problem, are providing greater resources for its resolution. Some
    subsidized housing owners are already converting their facilities to
    assisted living sites to accommodate the changing needs of their tenant
    profile. In this study, the Trust explains how an owner of primarily
    elderly, subsidized housing can use some of these tools to rehabilitate
    the property without raising the occupants' rents. The Commission
    should encourage these trends and propose other meaningful, cost-
    efficient programs to save this unique housing resource.
        Moreover, our recommendations recognize the devolution of housing
    programs and resources to State and local governments. As the
    Commission will see, a great many States are already devoting
    considerable resources, including low-income housing tax credit set
    asides, for the preservation of the primarily elderly, subsidized
    housing stock. However, much more can be done. The data reveals that
    this problem will grow in the coming decades. The Federal Government
    still has a strong role to play, including encouraging State and local
    governments to ``steer'' their resources toward maintaining this unique
    housing stock. The adoption of the Affordable Housing Preservation Act
    of 2001 would be a significant step in that direction.
        The recommendations that follow flow directly from the Trust's
    initial analysis of the data and our belief that the Federal Government
    cannot abdicate its role to save this housing. No one expects the
    Federal Government to do this by itself. But the Federal Government can
    play a significant role by: (1) Setting aside existing resources for
    preservation; (2) Increasing the flexibility of existing HUD tools for
    preservation; and (3) fully funding programs that match State and local
    efforts to preserve primarily elderly, subsidized housing.

    Recommendations
        Recommendation No. 1: Recommend that an ongoing database be
    established providing project specific information on primarily
    elderly, subsidized properties that (a) have Section 8 contract rents
    at or below market and/or, (b) have loans with significantly high
    current interest rates. These properties arguably have a high risk of
    mortgage prepayment and should be placed on an ``early warning'' list
    to be shared with State Housing Finance Agencies, HUD, the Rural
    Housing Service, and the general public.
        Recommendation No. 2: Recommend that State Housing Finance Agencies
    set aside or prioritize the use of low-income housing tax credits and
    private activity bonds to preserve and improve affordable, subsidized,
    primarily elderly housing.
        Recommendation No. 3: Recommend that Congress strongly encourage
    HUD to facilitate ``Mark-Up-to-Market'' Section 8 contract rents for
    elderly, subsidized properties with current rents below market to
    prevent Section 8 opt-outs by private owners and permit current
    nonprofit owners the resources needed to meet their ongoing operating
    costs. Additionally, it is absolutely critical that nonprofit owners of
    such properties receive distributions from their properties to meet
    other mission-related activities.
        Recommendation No. 4: Recommend that useful information be provided
    to owners of existing HUD-insured, Section 236 properties primarily
    serving older persons. The distribution of information should include a
    simple explanation of how the owner can take advantage of HUD's Section
    236 ``decoupling process'' to rehabilitate the property and keep it
    affordable.
        Recommendation No. 5: Recommend Congress urge HUD to immediately
    establish a program for use of the recaptured Interest Reduction
    Payments that are now in an IRP Pool at HUD. Furthermore, Congress
    should urge HUD to use at least a third of these for the preservation
    and improvement of existing HUD-insured, Section 236 properties
    primarily serving older persons.
        Recommendation No. 6: Recommend Congress urge HUD to permit
    subordination of its Section 202 mortgage to new debt brought in with
    tax credits where the new debt and tax credits actually enhance the
    property's value and livability.
        Recommendation No. 7: Recommend Congress encourage HUD to prepare a

    report to explain to Section 202 owners the comparative costs and
    benefits of
    prepaying its current loan with 501(c)(3) bonds or refinance with new
    debt and low-income housing tax credits.
        Recommendation No. 8: Recommend that Congress revisit the issue of
    waiving all or part of the existing debt on Section 202 properties
    supported by Section 8.
        Recommendation No. 9: Recommend that Congress fund a meaningful
    study of how to best facilitate conversion, where appropriate, of
    existing subsidized housing to assisted living facilities. This study
    should document the costs of such conversion, and in particular,
    conduct a cost/benefit analysis of such conversion. The study should
    determine whether conversion to assisted living prevents premature
    institutionalization, and it should ask practitioners to provide
    detailed training on how to efficiently undertake these conversions.
    Congress should allow industry practitioners and others to provide
    detailed testimony on the recent Senate bill 1886, the ``Assisted
    Living Tax Credit Act,'' introduced by Senator Dodd (D-CT), which
    allows for a business credit for supported elderly housing.
        Recommendation No. 10: The Commission should urge Congress to
    immediately consider, amend, and adopt Senate bill 1365, the Affordable
    Housing Preservation Act of 2001. The Commission should urge Congress
    to amend the Senate bill 1365 to include Section 202 housing as
    eligible for grants provided pursuant to the Act. Further, the
    Commission should recommend that at least $300 million of funds should
    be devoted to the Affordable Housing Preservation Act of 2001 and that
    no less than a third of these funds should be devoted to the
    preservation and improvement of primarily elderly, subsidized housing.

    Narrative
    The Need to Preserve and Improve Affordable Rental Housing for Older
            Persons
        We live in an aging Nation. The demographics are irrefutable:

     Growth in senior households (ages 65 and older) will surge in
        the coming decades. By 2030, the senior population will double to
        nearly 70 million, bringing their share of the total U.S.
        population to 20 percent. The number of those aged 85 and older
        will nearly quadruple, going from 3.5 million to 14 million by
        2030.\1\
    ---------------------------------------------------------------------------
        \1\ Joint Center for Housing Studies of Harvard University, Housing
    for Seniors, 2001.

     Further, almost a third of the growth between now and 2010 of
        one-person households will be for those over age 65.\2\
    ---------------------------------------------------------------------------
        \2\ Joint Center for Housing Studies of Harvard University, The
    State of the Nation's Housing: 2001, p. 10.

     Assisted communities are home to only 3 percent of the
        Nation's senior population.\3\ Nevertheless, as elderly households
        age in place, the need for future affordable assisted living
        increases. The possibility of converting elderly, subsidized
        dwellings to assisted living facilities is just now being explored.
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        \3\ Ibid.

     4.6 million elderly households are renters; almost a third of
        these households--1.5 million--pay more than 50 percent of their
    ---------------------------------------------------------------------------
        incomes for rent and/or are living in substandard housing.

     The median net worth of elderly rental households is less than
        $7,000 compared with the median net worth of $141,000 for elderly
        homeowners.\4\
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        \4\ Ibid.

     Older renters in subsidized housing are two to three times as
        likely to report disabilities than older homeowners.\5\
    ---------------------------------------------------------------------------
        \5\ AARP Public Policy Institute, Adding Assisted Living to
    Subsidized Housing: Serving Frail Persons with Low Incomes, Wilden and
    Redfoot, January 2002.

     Wealth and income disparities will widen, limiting the housing
        choice of poor elderly households: ``[t]he sharp disparity in
        wealth among baby boomers will carry well into their retirement
        years, leaving many lower-income seniors with few housing and
        special care options. Elderly renters will face particularly
        onerous housing cost burdens.'' \6\
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        \6\ Housing for Seniors, 2001.

     The number of older persons residing in subsidized housing
        (over 1.9 million) is greater than the number of persons residing
        in our Nation's nursing homes.\7\
    ---------------------------------------------------------------------------
        \7\ National Center for Health Statistics, 2000 and data derived
    from AARP study, January 2002.

     In recent years, nearly 900,000 unsubsidized, affordable
        housing units have been lost from the affordable housing stock due
        to demolition or rising rents; an additional 150,000 subsidized
        units have been converted to market-rate housing.\8\ Most
        subsidized senior housing facilities have long waiting lists. For
        instance, the AARP study of Section 202 facilities shows there is a
        nationwide average of nine older applicants for every vacant
        Section 202 apartment that becomes available each year. A similar
        waiting list confronts those who are in line for a low-income
        housing tax credit unit.\9\
    ---------------------------------------------------------------------------
        \8\ Compilation of data from National Housing Trust and the Joint
    Center for Housing Studies' The State of the Nation's Housing: 2001.
        \9\ ``Serving the Affordable Housing Needs of Older Low-Income
    Renters: A Survey of Low-
    Income Housing Tax Credit Properties'' (Executive Summary), Andrew
    Kochera, AARP Public Policy Institute, January 2002.
    ---------------------------------------------------------------------------
    Types of Existing Subsidized Rental Housing Primarily Occupied by Older
            Persons
        Over the past 40 years, the Federal Government has, through a
    private/public partnership, produced more than 800,000 apartments
    specifically designed to provide decent, safe, and affordable homes to
    poorer, older persons. This apartment inventory constitutes the most
    significant source of affordable housing for our Nation's elderly
    population. The following describes the programs that produced this
    important housing resource.
    Section 221(d)(3) BMIR and Section 236
        The Housing Act of 1961 authorized the Section 221(d)(3) below-
    market interest rate (BMIR) program. The program insured 40-year
    mortgages made directly to nonprofit and limited dividend sponsors.
    Typically, the interest rate was 3 percent. The Housing and Urban
    Development Act of 1968 added Section 236 to the National Housing Act,
    which combined 40-year mortgage insurance with subsidized interest
    payments to the lender for the production of low-cost housing. The
    interest rate subsidy lowered the effective rate to the owner to 1
    percent. Eventually, many of these projects received additional
    project-based Section 8 assistance to provide additional rental
    assistance payments to owners on behalf of very-low income (50 percent
    median-income or less) tenants.\10\ Nearly 1 million apartments were
    produced under the Section 221(d)(3) BMIR and Section 236 programs.
    Under both programs, the owner had the ``right to prepay'' the mortgage
    after 20 years and end the affordability restrictions.
    ---------------------------------------------------------------------------
        \10\ Generally rental assistance from the Federal Government covers
    the difference between what the tenant is obligated to contribute
    toward rent--typically 30 percent of his/her income--and the rent
    charged by the landlord. Because tenants' incomes are so low, their
    payment often does not pay the operating cost of the property. At least
    13,686 project-based properties, containing 914,847 Section 8-assisted
    apartments, will have their Section 8 contracts expire during the next
    5 years.
    ---------------------------------------------------------------------------
        Some of the Section 236 projects are nonprofit sponsored
    developments specifically designed for older persons. Indeed, a flurry
    of these Section ``236/202'' elderly developments occurred between 1969
    and 1976, in large part due to the moratorium on construction of
    elderly Section 202 properties between 1969 and 1976.
        According to data analyzed by the National Housing Trust for the
    Commission, 657 properties with 91,956 Section 221(d)(3) BMIR and
    Section 236 affordable, subsidized apartments are primarily (50 percent
    or more households in property are 62 or older) elderly properties.
    Many more elderly households--163,958 households according to HUD
    data--reside in 221(d)(3) BMIR and Section 236 apartments in properties
    that are not primarily elderly.\11\
    ---------------------------------------------------------------------------
        \11\ U.S. Department of Housing and Urban Development, Office of
    Policy Development and Research, A Picture of Subsidized Households in
    1998, August 1998.
    ---------------------------------------------------------------------------
    Section 202 Program
        Congress enacted the Section 202 elderly housing program in the
    Housing Act of 1959. The Section 202 program has been successful,
    producing more than 320,000 apartments, of which approximately 170,000
    are also assisted with the Section 8 housing subsidies. Since 1959, the
    Section 202 program has gone through three basic program structural
    changes. The recent Affordable Housing for Seniors and Families Act has
    initiated a fourth basic structural change in the program.

    Initial Program Structure
        When enacted in 1959, the Section 202 program provided direct loans
    from the Federal Government to eligible nonprofit entities. Originally,
    the loans were typically for a 40-year term at a 3 percent interest
    rate, although later HUD determined the interest rate based on the cost
    of Government borrowing. The loans could be used to cover the costs of
    new construction or substantial rehabilitation of rental housing for
    the elderly and the handicapped and the loans could not be repaid
    without the approval of the Government. The requirements for the
    operation of the projects were embodied in a Regulatory Agreement that
    controlled the rent levels to ensure project affordability. However,
    there was no rental assistance provided to the project owners. Tenant
    rents were set at the level necessary to cover the cost of repaying the
    loans and project operations. While much of this stock is in decent
    physical condition, there has not been sufficient income to allow for
    major capital improvements.

    Introduction of Section 8 Rental Assistance
        As the cost of Government borrowing increased, the interest rates
    on Section 202 elderly housing projects rose, making it more difficult
    to maintain affordability in the projects. In 1975, HUD was authorized
    to provide Section 8 assistance to Section 202 elderly housing
    projects. Between 1975 and 1990, HUD provided direct loans to eligible
    nonprofit borrowers under a 40-year note and mortgage. Simultaneously,
    HUD provided properties with 20-year Section 8 project-based rental
    assistance contracts. With the exception of projects that closed
    between approximately 1977 and 1981, the notes and mortgages on these
    projects cannot be prepaid without the approval of HUD. Operations of
    these projects are governed by a Section 202 Regulatory Agreement and
    Section 8 housing assistance payments contract. Today, the Section 8
    contracts are renewed on an annual basis at rents that are the lesser
    of the existing rent multiplied by the applicable operating cost
    adjustment factor (OCAF) published by HUD or at a budget-based rent.

    Capital Advance Program
        In the National Affordable Housing Act of 1990, Congress
    significantly altered the structure of the Section 202 elderly housing
    program. First, Congress provided for two separate and distinct
    programs for older persons and for persons with disabilities. New
    construction under the Section 202 program is now exclusively for older
    persons--defined by HUD as persons 62 years of age and older. Second,
    Congress changed the program from a loan program to a capital advance
    program. Under the capital advance program, HUD basically provides a
    grant to the project that the owner is not required to prepay unless
    the owner does not operate the project in accordance with the program
    requirements for the 40-year term of the capital advance. HUD has
    structured the program so that the obligation of the owner to operate
    the project in accordance with the Section 202 program requirements is
    secured by a zero-interest, 40-year note and mortgage, which is not
    required to be repaid unless the owner is in default. Third, Congress
    decided that the rental assistance received by Section 202 projects
    would no longer be provided through the Section 8 housing assistance
    payments program. Instead, HUD provides a renewable rental assistance
    contract (PRAC) to Section 202 projects. The operation of the PRAC is
    essentially the same as the Section 8 housing assistance program, but
    the appropriations for the rental assistance are provided under the
    Section 202 program and not under the Section 8 program.

    Affordable Housing for Seniors and Families Act
        In December of 2000, Congress again made significant changes to the
    structure of the Section 202 program. First, Congress amended the Act
    to provide for a change in the nature of eligible ownership entities.
    Over the years, one of the constants in the Section 202 elderly housing
    program was the requirement that the project be owned by a nonprofit
    entity. In the new legislation, Congress amended the eligible owner
    definition of ``private nonprofit organization'' to include for-profit
    limited partnerships, in which the sole general partner is an
    organization that qualifies as a private nonprofit organization, or
    corporations that are wholly-owned and controlled by a private
    nonprofit organization. Through this amendment, Congress intends to
    bring to the Section 202 program additional funding sources that have
    previously not been available to these projects, including most
    particularly the possible use of low-income housing tax credits.
    Second, Congress enacted legislation that requires HUD to approve the
    prepayment of Section 202 loans with a prepayment plan under which (i)
    the owner agrees to operate the project under terms at least as
    advantageous to tenants as required under the original Section 202
    program terms or the Section 8 housing assistance payments contract and
    (ii) the prepayment may involve refinancing of the loan if the
    refinancing results in a lower interest rate and reductions of debt
    service. At least 50 percent of any Section 8 savings resulting from
    the refinancing shall be made available to the owner for purposes such
    as increased supportive services, rehabilitation or retrofitting of
    buildings and units, or the construction of additional facilities for
    the project which could include facilities such as additional community
    space or assisted living facilities.
        In addition to providing the owner savings resulting from a
    refinancing, the new law contains other provisions that may be used in
    the prepayment and refinancing plan, including:

     The law requires the Secretary to make available to the owner
        funds in the project's residual receipts account (these accounts
        accrue when the annual income to the owner from tenant payments and
        HUD rental assistance payments are more than are needed to meet
        project debt service and operating expenses) and the reserve for
        replacement accounts. The residual receipts account must be
        maintained at a minimum of $500 per unit and the reserve for
        replacement account must be maintained at a minimum of $1,000 per
        unit.

                      PREPARED STATEMENT OF LOUISE SANCHEZ
        President, National Alliance of HUD Tenants, New York, New York
                                October 9, 2002

        On behalf of the National Alliance of HUD Tenants (NAHT), we are
    pleased to submit these comments regarding preservation of the Nation's
    privately-owned, subsidized housing stock. As you know, NAHT has sought
    such a hearing for several months, as reports emerged of the alarming
    erosion of the Nation's affordable housing due to unregulated owner
    decisions to opt-out of Federal subsidy programs. We want to thank you,
    Senator Reed, for your leadership in calling this hearing, and
    appreciate the opportunity to testify today.
        Founded in 1991, the National Alliance of HUD Tenants (NAHT) is the
    Nation's only membership organization representing the 2.1 million
    families who live in privately-owned, HUD-assisted housing. Our
    membership today includes voting member tenant groups and 45 areawide
    tenant coalitions or organizing projects in 30 States and the District
    of Columbia. We are governed by an all-tenant Board of Directors
    elected by member organizations from all 10 of HUD's administrative
    regions at our annual June Conference. I have served as NAHT Board
    President for the past year, and have been a NAHT Board member since
    1997. I also serve as the Co-Chair of the Mitchell-Lama Residents
    Coalition, which represents over 101,000 families in Mitchell-Lama
    subsidized developments in New York State. I am also President of the
    Michelangelo Tenants Association, a 440-unit HUD-subsidized Mitchell-
    Lama development where I live in the Bronx.
        As the first national tenant union in the United States, NAHT has
    joined the International Union of Tenants (IUT), which named October 7
    as International Tenant Day to coincide with World Habitat Day declared
    by the United Nations, in which the IUT has consultative NGO status. We
    appreciate that the timing of
    today's hearing has helped to honor the growing movement to meet the
    world's
    housing needs.

    The Nation is Losing Affordable Housing at an Alarming Rate
        This past weekend, the NAHT affiliates in several cities released a
    new report documenting the dramatic loss of affordable housing in
    America since 1996, when the United States pledged to do more, not
    less, to meet the Nation's housing needs at the UN Habitat II
    Conference in Istanbul. Instead, our report shows that the United
    States has lost more than 250,000 units of affordable housing since
    1996, following Congress' restoration of owner's ability to ``prepay''
    (for example, pay off after 20 years) their 40-year HUD-subsidized
    mortgages and raise rents to high market levels. Of this amount, a
    total of 199,764 units of privately-owned HUD-subsidized housing was
    lost to owner decisions to prepay or to ``opt-out'' of expiring
    project-based Section 8 contracts as of August 2001. The remaining
    units lost consist of the net loss of Public Housing through HOPE VI
    demolitions. We are submitting a copy of this report* with my testimony
    today, which includes data on prepayments and opt-outs by State.
    ---------------------------------------------------------------------------
        *Held in Committee files.
    ---------------------------------------------------------------------------
        The NAHT was the only national organization to speak out against
    repeal of the regulatory structure of the Title VI Preservation Program
    in 1996, which provided additional HUD subsidies to owners in exchange
    for guaranteed repairs, permanent affordability, and the promotion of
    transfers to nonprofit and tenant ownership. We warned of dire
    consequences for the Nation's affordable housing stock if this
    regulatory program were repealed. Unfortunately, the data show that
    these predictions have come true.

    Mark-Up-to-Market Has Not Been Enough
        When press reports of tenant displacement spurred Congress and HUD
    to act in 1999 to stem the losses, many observers thought that the
    problem was ``solved'' through adoption of the Mark-Up-to-Market
    Program, whereby HUD offers generous increases in Section 8 subsidies
    to owners who voluntarily agree to maintain affordability for 5 to 20
    years. In our report, we compare the number of units lost through
    prepayment and opt-out in the 2\1/2\-year period from 1996 to early
    1999, when Mark-Up-to-Market was adopted, with the equivalent 2\1/2\-
    year period through August 2001, using data compiled by the National
    Housing Trust from several HUD sources.
        These data show that, despite Mark-Up-to-Market, the average annual
    loss of housing nationally has remained roughly the same as before its
    adoption--about 41,000 units continue to be lost each year. While no
    doubt this figure would have been even higher without Mark-Up-to-
    Market, clearly, we need to do more to preserve the Nation's affordable
    housing stock.

    Some States are Particularly Hard Hit
        Looking at the data for each State, it is clear that the loss of
    affordable housing is a truly national problem. But some areas have
    been particularly hard hit. By
    August 2001, California and Texas alone had lost 65,863 units of
    privately-owned affordable housing, nearly a third of the national
    total lost.
        A number of States have actually experienced a dramatic increase in
    the rate of loss, despite the adoption of Mark-Up-to-Market. Overall,
    14 States, including Missouri, Indiana, and South Carolina, have seen
    an increase in the rate of at least one category of units lost by more
    than 300 percent since early 1999. Likewise, a number of smaller and
    more rural States such as Iowa, Nebraska, New Hampshire, and Montana
    where HUD-subsidized housing represents a relatively large portion of
    the State's affordable housing and often the only affordable housing
    available in sparsely populated areas, have experienced a rapid rise in
    units lost. Some other large States, such as Pennsylvania, Ohio, and
    Georgia, have also experienced a significant increase in the rate of
    loss.

    Housing Crisis in New York City
        Most startling of all, however, is the new data we are releasing
    today regarding New York City, where I live. Our report includes a
    chart prepared by the Mitchell-Lama Residents Coalition, which I serve
    as Co-Chair. The Mitchell-Lama program is a resource unique to New
    York, where the State developed more than 101,000 units of mixed-
    income, affordable housing using a variety of subsidy tools, including
    HUD mortgage insurance and subsidies under the Section 236, RAP, and
    Section 8 programs. As in other States, owners of Mitchell-Lama
    buildings are now eligible to ``prepay'' or ``buyout'' their
    Government-subsidized mortgages.
        The results are shocking. We have already lost 3,151 units through
    prepayment, and owners of another 5,767 units in 11 developments have
    filed Notices of Intent to Prepay with HUD and the State. In addition,
    four co-ops housing 25,585 families, including the 15,378 unit Co-op
    City development, are planning to ``privatize,'' prepay their
    mortgages, and convert to high market rates in the next year. All told,
    we have lost or expect to lose 34,503 units of Mitchell-Lama housing in
    New York City by the end of next year.
        Nor are these the only affordable housing units at-risk in our
    city. Another 4,965 units in HUD-subsidized, non-Mitchell-Lama
    buildings have been lost in New York City since 1996. An unknown number
    of these buildings remain at-risk throughout the city.
        In the wake of the traumas inflicted on New York City in the past
    year, the imminent loss of more than 40,000 affordable housing units is
    a crisis which we can neither bear nor ignore. The people of our city
    are still reeling from the after shocks of September 11. Mitchell-Lama
    housing in particular is home to many of the police, firefighters, and
    health service workers who performed heroically after the September 11
    attacks, as well as many low-income and elderly people who simply have
    no options in the high rental market of New York City.
        Homeland security begins with a home. Action by Congress is
    urgently needed to give us the tools to preserve these affordable
    units.

    Congress Should Adopt a New Regulatory Program to
    Save At-Risk Housing
        It is now clear that voluntary incentives, such as the Mark-Up-to-
    Market Program, are insufficient to deter owners who choose to opt-out
    of HUD's contracts in high market areas. NAHT believes that Congress
    should establish a national regulatory framework to limit owners'
    ability to opt-out and prepay. For example, restoring the regulatory
    framework of the Title VI Preservation Program and extending its
    concepts to expiring Section 8 contracts would preserve more units and
    be cheaper in the long run than replacing lost units with new
    construction.
        Ironically, in buildings where HUD is executing 5- to 20-year Mark-
    Up-to-Market contracts, the cost of additional annual Section 8 Budget
    Authority and outlays is approaching, and possibly exceeding, the cost
    of the Title VI Preservation Program, but with none of the benefits.
    Although Congress repealed Title VI due to concerns about costs, at
    least residents and HUD negotiated major repair programs, permanent
    affordability, and transfers to nonprofit purchasers in 30,000 units.
        The equivalent expenditures of Mark-Up-to-Market yield none of
    these offsetting benefits--in fact, short-term extensions of 5 years
    leave the residents and HUD at continued risk that owners will opt-out
    down the road. As long as owners have an unrestricted choice to opt-out
    of HUD programs, they will be able to leverage ever-increasing subsidy
    commitments from HUD--which residents and communities will doubtless
    support--since the alternative of losing affordable housing is
    unacceptable. The restoration of a Title VI regulatory program will, in
    fact, likely save money, since mandatory negotiations will lessen owner
    windfalls and ensure that Congress receives guaranteed benefits on its
    investment. Substituting capital grant funds for ever-increasing
    Section 8 contracts, in this context, will likewise achieve savings
    while preserving housing.
        Deregulation is a strategy that has failed in the energy,
    telecommunications, banking, and airline industries in the United
    States and in countries around the globe. The evidence is in--
    deregulation is a failure in the subsidized housing industry as well.
    Congress should act now to restore regulations to save our homes.

    HUD Policies Have Contributed to the Loss of Housing
        While Congress must provide the funds and regulatory tools to save
    affordable housing, HUD needs to do more to preserve at-risk buildings.
    In fact, the record shows that in a number of ways, HUD policies have
    added to the loss of housing, rather than its preservation.
        Nowhere has HUD's failure been more dramatic than in the Agency's
    policies on Property Disposition and Foreclosure for ``troubled'' HUD
    housing. In March 2000, the Senate VA/HUD Appropriations Subcommittee
    held hearings on the loss of affordable housing stock through HUD's
    policy of dumping properties it owns or controls for sale on the open
    market, with only Section 8 vouchers for tenants, no screening of new
    owners and toothless use restrictions. According to the Subcommittee,
    more than 26,000 units of formerly project-based Section 8 affordable
    housing had been sold off in this fashion--a significant portion of the
    86,402 project-based Section 8 ``opt-out'' units listed in our report
    as lost between 1996 and August 2001.
        To this day, HUD has not collected any data on what happened to the
    former occupants, or to check on building conditions, rents, and incomes
    of current occupants, or the effectiveness of HUD's use restrictions. In
    the absence of any attempt by HUD to monitor or enforce these use
    restrictions or any data to the contrary, it is reasonable to assume
    that many of these units no longer serve as housing for the poor,
    especially in higher market areas. The Subcommittee should require HUD
    to investigate and report annually on these questions, as Congress
    required in its 1994 Property Disposition amendments, but HUD has never
    done.
        NAHT's member organizations and affiliates in Texas, New Jersey,
    California, Pennsylvania, and Colorado have challenged HUD's
    ``dumping'' policies in a number of Property Disposition cases. In
    addition, NAHT has challenged other HUD policies which have added to
    the needless loss of housing, such as the rubber-stamping of mortgage
    prepayments where HUD approval is required, and HUD's failure to
    enforce its own rules where owners violate Federal or State laws
    regarding Notices to Opt-Out or Prepay to tenants or local governments.
    Since 1997, NAHT has also recommended to HUD that it adopt policies
    explicitly maximizing the preservation of affordable housing where HUD
    has discretion to do so. There has been little response by HUD to date.
        The testimony submitted today by the National Housing Law Project
    details several of these policies, and the campaigns waged by NAHT
    member organizations to save affordable housing in these cases. In the
    interests of time, we will highlight today a few cases where immediate
    intervention by the Subcommittee may yet save at-risk buildings
    affected by these HUD policies of neglect:

        Brick Towers (Newark, New Jersey). Last week, HUD reportedly
    ``closed'' on a sale to the Newark Housing Authority of this 324-unit
    high-rise building, where residents have been fighting for years to
    save their homes. In this case, HUD failed to exercise its discretion
    to negotiate with a nonprofit Joint Venture formed by residents with a
    reputable developer to save the building with local subsidies, at no
    cost to HUD. Instead, HUD is providing a $12 million grant to the
    Housing Authority to demolish the building, with no guarantee of
    replacement housing. So HUD is spending $12 million to destroy housing
    which it could save for nothing. HUD should use its remaining leverage
    with the Housing Authority to arrange three-way negotiations with the
    tenant-endorsed Joint Venture to keep the developer's resources and
    HUD's grant in the city, while saving Brick Towers as part of the deal.
        RAP UP II-B (Boston, Massachusetts). In this 51-unit building in
    Boston, HUD is poised to sign off on a mortgage prepayment by a defunct
    ``nonprofit'' whose Board President/Property Manager was caught
    ``equity skimming'' by HUD's Inspector General in 1996, and who is
    selling the building to new owners who plan to keep him on as manager
    and convert the buildings to condominiums when HUD's Section 8
    contracts expire in 2 years. HUD's Enforcement Center is prepared to
    look the other way as long as the $110,000 stolen from the property is
    paid back out of sales proceeds. Instead, HUD could use its discretion
    under Section 250 to reject the mortgage prepayment (HUD has no
    documents establishing that there is a 20-year prepayment option), not
    approve transfer of the Section 8 contract, and not accept payment for
    or sign-off on audit findings unless the owner sells to a legitimate
    nonprofit organization pledged to preserve affordable housing and bar
    former equity-skimmers from management of HUD's Section 8 contracts. If
    the owner fails to comply, HUD should exercise its foreclosure option
    to preserve affordable housing.
        East Liberty Properties (Pittsburgh, Pennsylvania). A broadly
    supported nonprofit purchase and redevelopment plan for three troubled
    housing developments is threatened by HUD's refusal to allow the
    transfer of existing project-based Section 8 contracts to newly
    developed replacement housing, even though HUD clearly has authority to
    do so. HUD should approve this request forthwith.
        Los Angeles Section 8 Opt-Outs. Several owners in Los Angeles have
    recently attempted to opt-out of expiring Section 8 contracts in
    violation of State law in California, which requires a 2-year Notice
    before they can do so. The Los Angeles HUD Office has refused to apply
    HUD's own Section 8 Policy Guide, which stipulates that HUD staff will
    certify compliance with State and local laws before signing off on opt-
    outs or prepayments. The city of Los Angeles has intervened, and
    tenants are now winning Section 8 contract extensions in court, with no
    help from HUD. HUD could still help by requiring owners in the city to
    restart the Notice process to comply with State law, as required by
    HUD's Guide.
        Hedco Properties (Rhode Island). These consist of three properties
    totaling approximately 200 units where, as in California, HUD ignored a
    State law requiring 2-year Notice before prepayment can occur. Tenants
    sued in State court, which upheld the State law and blocked prepayment.
    However, last week tenants learned that HUD had sold the HUD-held
    mortgages on August 28, 2002, to a bank in Plano, Texas, as part of an
    auction of an unknown number of HUD-held mortgages nationally. HUD's
    attorneys are now arguing that the mortgage sale has nullified the
    Regulatory Agreements on these properties, so that the owners are now
    free to prepay, thus mooting the State court decision. Although details
    are scarce, including the legal rationale for HUD's position, this is a
    HUD policy with potentially far-reaching impact on the Nation's housing
    stock. We urge the Subcommittee to explore this issue with HUD,
    determine the extent of the damage, and correct it if possible.

    HUD Appears Unwilling to Enforce the Law
        As the Los Angeles and Rhode Island examples illustrate, the
    problem goes beyond HUD's unwillingness to use its discretion to
    preserve housing; HUD appears unwilling to enforce or uphold the law,
    or to use its enforcement powers to penalize owners who violate its
    regulations.
        Perhaps the clearest example of this is HUD's position on enforcing
    the ``Right to Remain'' language adopted by Congress in the enhanced
    voucher program 2 years ago. Where owners opt-out or prepay, Congress
    has adopted language saying that tenants ``may elect to remain'' in
    their units with enhanced vouchers, which guarantee owners the full
    market rent for their unit, implying that owners have a duty to accept
    the vouchers. HUD's Section 8 Policy Guide, published in January 2001,
    clearly states that owners have the Duty to Accept these vouchers as
    long as tenants wish to remain, and Congress votes the money each year.
    However, the Guide actually states that HUD will not enforce this
    requirement if owners violate it, forcing tenants to find local legal
    counsel to enforce the law.
        As a result, tenants in several States, aided by NAHT affiliates
    and legal aid programs in Minnesota, California, Missouri,
    Philadelphia, and New York have had to file or threaten to file suit to
    enforce this statute. Although so far all tenants have prevailed in all
    these cases, the spectacle of the Federal Government refusing to
    enforce the law, and leaving it up to poor people to do so, does not
    engender confidence in HUD.
        NAHT has also presented numerous other cases to HUD where owners
    have failed to follow Federal or State law Notice requirements, to
    provide enhanced vouchers, or to enforce Right to Organize regulations,
    with spotty results. These examples are too numerous to describe here,
    although we would be happy to document these for the Subcommittee if
    you wish. The problem is deeply institutionalized at HUD, ranging from
    inadequate and/or poorly trained staff at the field office level, to
    hostility from HUD's Office of General Counsel on some issues, to a
    lack of protocols for assessing civil monetary penalties where owners
    violate the law. NAHT has submitted detailed recommendations to HUD on
    revisions to Handbook 4350.3, the Occupancy Handbook for Multifamily
    Housing, to beef up HUD enforcement on these matters. We would
    appreciate the Subcommittee's help in securing these changes, and
    shoring up HUD's willingness and capacity to enforce the law.

    HUD's New Leadership Appears Unable to Provide Resources
    for Tenant Involvement
        Since tenants founded NAHT in 1991, we have sought establish a
    partnership with HUD, whereby tenants--the people with the strongest
    stake in the successful operation of HUD housing--serve as the unpaid,
    volunteer ``Eyes and Ears'' of HUD in overseeing owners and managers of
    our buildings. Over the years, we have built up a complex institutional
    relationship with HUD, including on-going relationships with HUD field
    offices in some 30 States through NAHT's local affiliates; periodic
    ``Eyes and Ears'' meetings at the HUD regional level, between tenants
    in the region and local and Headquarters HUD staff; plenary meetings
    during NAHT's Annual Conferences in Washington, DC, with HUD's top
    leadership; and quarterly meetings with key Headquarters staff and the
    elected NAHT Board.
        Key to this relationship, and the ability of tenants at the local
    building level to participate meaningfully with HUD, has been HUD's
    provision of resources to enable tenants to organize and articulate
    their concerns. In MAHRAA, Congress supported this vision by
    encouraging tenant participation in decisions affecting their homes,
    and the provision of ``up to $10 million'' annually through Section 514
    to promote tenant and community participation in Section 8 programs.
        Since the advent of the new Administration, however, this vision of
    cooperation has been turned into a nightmare of bungling and broken
    promises. Administration ``froze'' all funding to all Section 514
    grantees, including the Corporation for National and Community Service
    and recipients of Outreach and Training Grants (OTAG's) and
    Intermediary Technical Assistance Grants (ITAG's), because of
    bureaucratic bungling by HUD. Only when Congressional hearings secured
    a commitment from the Secretary did the Department resume processing
    invoices to small nonprofits--several months after funds had been
    frozen. HUD delays, unnecessarily intrusive audits, and constantly
    changing financial requirements have meant that OTAG agencies which
    received new contracts in January 2001 have been able to receive
    reimbursements for program outlays for only 10 of the 22 months since
    these grants commenced--forcing chronic program layoffs and closures.
    In effect, small nonprofit agencies who applied for OTAG funds to help
    tenants have been punished by the new Administration's incompetence and
    neglect.
        To make matters worse, it now appears that several 2001 OTAG
    grantees will be punished by HUD's IG for not providing HUD with cost
    allocation plans and timesheet forms which HUD never asked for, had no
    procedure for accepting, and provided absolutely no training on,
    despite NAHT's repeated requests for training and offers to help,
    starting in March 2001.
        Last March, the Secretary promised two Congressional Committees
    that action would be taken to restart the ITAG and VISTA Volunteer
    Program in multifamily housing, and to designate the Acting Deputy
    Assistant Secretary for Multifamily Housing, Fred Tombar, to operate
    the programs. To date, HUD has failed to deliver on these promises.
        For example, to date the ITAG mini-grant remains closed. No
    applications have been approved or accepted for future grants since
    October 2001. The contracts for the administering agencies have not
    been extended. This failure effectively shuts down resources to
    nonprofit groups seeking to acquire at-risk buildings, and deprives
    tenant groups and small nonprofits with resources they need to assist
    tenants in their communities. The Office of Multifamily Housing has
    been given neither the authority, staff resources, funding nor program
    control over Section 514, which remains shut down and unstaffed in the
    Commissioner's office.

    National HUD Multifamily VISTA Project Remains Stalled
        Most devastating to tenants has been HUD's continued failure to
    restart the national VISTA Volunteer project in HUD housing. Funded by
    a HUD Interagency Agreement with the Corporation for National and
    Community Service (CNCS), this highly successful project has served as
    a leading model and prototype for President Bush's call for national
    service. Since 1995, the project has helped to empower tens of
    thousands of residents in HUD multifamily housing to participate in
    saving and improving their homes. The project funded an average of 50
    VISTA Volunteers assigned through State VISTA Offices to locally-based
    nonprofit agencies in 25 States. About 40 percent of the VISTA
    Volunteers have been themselves HUD tenants, who bring new knowledge
    and leadership skills to their communities at the end of their year of
    service. The program cost HUD very little money (an average of $750,000
    annually for 50 VISTA's and support) and leveraged an equal amount of
    resources from CNCS. CNCS Chief Executive Officer, Les Lenkowski, has
    pledged his support for a 3-year extension of the program.
        Despite this record, the project has been frozen since November
    2001, when HUD failed to honor its contract with CNCS. The effect on
    tenants across the Nation has been absolutely devastating. Since HUD
    never processed the balance of $600,000 owed to CNCS under a $3 million
    contract signed in 1998, CNCS had to absorb some $133,000 in VISTA
    Volunteer payroll costs from other sources to prevent a catastrophic
    Christmas time layoff of volunteers. As a result, CNCS was forced to
    ``freeze'' the program, with VISTA's in the field unable to renew and
    agencies unable to hire new recruits. Today, only six VISTA's remain,
    and their terms will end next month.
        In March, Secretary Martinez and Commissioner Weicher reported to
    Congress that the VISTA project would be restarted immediately, and
    that the $600,000 owed to CNCS by HUD was being processed. This turned
    out not to be true. HUD now says that the ``old'' Agreement cannot be
    extended. But there should be no barrier for HUD to execute a new
    Interagency Agreement at $1.4 million per year with CNCS to restart the
    project; in fact, it can be restarted for as little as $700,000. This
    can be done either from remaining Section 514 funds from fiscal year
    2002, or the new $10 million which will be available for Section 514
    from fiscal year 2003, pursuant to Congressional authorization in the
    Mark-to-Market Extender bill passed last fall.
        It is hard to understand why a simple Interagency Agreement with
    another Federal Agency, for a successful program costing HUD very
    little money, has proven so difficult for the Commissioner's office to
    process. We request the Subcommittee's assistance in securing an
    immediate jumpstart to this project, on an urgent basis, while there is
    still time to recruit VISTA Volunteers this fall.

    Top Officials Refuse to Communicate with NAHT
        Much of HUD's embarrassment in the on-going Section 514 fiasco
    could have been avoided had the new leadership team communicated with
    NAHT. For example, in the one meeting which the NAHT Board has had with
    the new Secretary and Commissioner Weicher, in October 2001, we tried
    to explain that there was unlikely to have been any ADA violation at
    OMHAR or at HUD. Our views were rejected, as were repeated attempts to
    communicate subsequent to this meeting. Even when the IG report
    exonerated OMHAR, our extensive knowledge of these programs--which
    could have saved HUD much embarrassment and grief--has neither been
    sought out nor heard by anyone in a position to make decisions at HUD.
        In fact, both the Secretary's and the Commissioner's office has
    refused to answer literally hundreds of phone calls, e-mails, and
    formal written letters signed by NAHT and its associated membership on
    this, or any other, issue since October of last year. (Save for a brief
    meeting with Commissioner Weicher last December arranged by another
    organization.) While NAHT enjoys regular access to and a good
    relationship with HUD career employees such as Acting DAS Fred Tombar
    and his staff and has opened a new dialogue with the Director of OMHAR,
    Hank Williams, it is clear that a number of policy issues are made at a
    higher level in the Department. Besides the Section 514 issues, these
    include the full range of issues discussed today which go to the heart
    of HUD's Preservation of at-risk housing.
        In the 25 years, the NAHT and its leaders have been dealing with
    HUD, this is by far the least responsive and accessible leadership at
    the Agency we have ever seen. If tenants and their representatives
    cannot get a hearing with the key policymakers to raise their concerns
    about policy and enforcement matters which affect their homes, that
    sends a message the new Administration doesn't really care. When the
    Administration is unable to honor contracts and invoices with agencies
    who work with tenants, forcing constant layoffs, and fails to renew a
    VISTA Volunteer project which aids tenants, that, too, sends a message.
    Far from being treated as partners, this Administration treats tenants
    as if we were the enemy.
        We ask the Subcommittee's help in helping us reestablish the kind
    of dialogue and partnership, through regular meetings with the
    Secretary and the Commissioner, which we have enjoyed with several
    previous Administrations.

    Congress Must Adopt New Legislation to Save Our Homes
        Although HUD clearly must do more to preserve affordable housing
    and to re-
    establish communication with residents, the continued erosion of
    affordable housing underscores the need for new legislation to stop the
    continued loss of 40,000 units affordable housing each year. As many
    more as one million expiring Section 8 or prepayment-eligible units
    remain at-risk. In a few years, the Nation will be presented with yet
    another crisis of ``expiring mortgages,'' as the original 40-year
    mortgages and regulatory agreements expire on some 450,000 units still
    regulated by HUD. Congress must act now to address this crisis.
        The following legislative recommendations have been adopted by the
    NAHT Board and membership following extensive discussion and input from
    tenant groups and local tenant coalitions across the country:

        (1) Enact Preservation Grants to Save Housing. Congresses' 1999
    Mark-Up-to-Market initiative has proven inadequate to stop the loss of
    housing. We urge Congress to complement this program with one or more
    strategies to provide capital funds for acquisition and repair of at-
    risk buildings as a further incentive for owners to stay in the
    program. Generally, formulating Federal assistance in the form of
    capital grants with lower on-going Section 8 outlays (to cover lower
    debt costs) wherever possible will preserve housing at the least long-
    term costs to the Government, since the alternative of higher Section 8
    outlays (covering higher debt service) will cost more over time due to
    continuing higher interest payments. In addition, capital grant funds
    should not be ``scored'' as a 100 percent Budget Authority expense,
    since there will be net savings to the Section 8 Certificate Fund in a
    prepayment building which is ``preserved'' with capital grant
    assistance, where enhanced vouchers need not be provided as they would
    be if the building prepaid.

        Now there are three current options for providing capital grant
    funds for at-risk housing:

        (a) Preservation Matching Grant. NAHT urges Congress to enact the
    Preservation Matching Grant to help save units and promote transfers of
    at-risk buildings to nonprofit organizations committed to housing
    preservation. The proposal would provide Federal matching grants on a
    2-to-1 basis to match State and local preservation funding programs.
        In this Congressional session, the Preservation Matching Grant bill
    has been refiled as H.R. 425 by Representative Jerold Nadler and
    sponsored by 88 others in the House, and as S. 1365 by Senators
    Jeffords (I-VT), Grassley (R-IA), Chafee (R-RI), Sarbanes (D-MD),
    Feinstein (D-CA), Kerry (D-MA), Breaux (D-LA), Schumer (D-NY), Murray
    (D-WA), Dayton and Wellstone (D-MN). The Senate bill would allow direct
    HUD grants to nonprofits in States without a matching grant program, as
    recommended by NAHT. We urge the Subcommittee to support S. 1365.

        (b) Housing Trust Fund Grants. Alternatively, the Roukema version
    of a Housing Trust Fund adopted by the House Financial Services
    Committee (H.R. 3995) would provide some limited grant funds to
    localities, which could be used for both preservation and new
    production of housing. Representative Sanders version of the Trust Fund
    proposal, which NAHT supports, adopts the same principle, but at much
    higher funding and matching grant levels. If adequately funded, the
    Trust Fund approach could meet the need for a capital grant source for
    preservation as well.

        (c) Mandate Section 531 Grants. To date, HUD has failed to use its
    authority to spend recaptured Interest Reduction Payments (IRP) as
    capital grants to preserve at-risk housing. As a result, Congress
    rescinded $300 million in IRP funds last year--the same level of
    funding sought by NAHT through the Preservation Matching Grant. It is
    imperative that Congress and HUD not repeat this mistake next year. We
    urge Congress to direct HUD to spend these funds, estimated to be $100
    million in fiscal year 2003.

        (2) Enact Regulatory Measures to Prevent Displacement and Preserve
    Affordable Housing. The record shows that voluntary financial
    incentives are insufficient to fully halt the continued erosion of
    affordable housing. Congress should reestablish a national regulatory
    framework to limit owners' ability to prepay and opt-out, similar to
    the now-defunct Title VI Preservation Program. For example, Congress
    could enact rent restrictions for former HUD-subsidized buildings,
    require owners to accept HUD subsidy offers, and provide tenants and
    tenant-endorsed nonprofits a Right of First Refusal when owners sell.
    NAHT urges Congress to consider these approaches to complement the
    voluntary incentives for owners provided by existing HUD programs. It
    is not too early for Congressional leaders to work with NAHT to develop
    a long-term legislative vehicle to save our homes.

        (3) Strengthen Congresses' Goal of Last-Resort ``Enhanced Vouchers
    for All.''

        (a) Clarify that HUD must enforce owner acceptance of Enhanced
    Preservation Vouchers for multiple year terms. Congress should mandate
    enforcement by HUD of owner compliance.

        (b) Improve Preservation Vouchers. Congress should make several
    technical adjustments to make the goal of ``sticky vouchers for all''
    work better. For example, NAHT proposes more flexible ``occupancy
    standards'' so that Section 236 moderate income tenants are not forced
    out or into smaller units when tenants receive Section 8 Preservation
    Vouchers when owners prepay. Congress should also eliminate the problem
    of unnecessary ``rescreening'' of tenants in good standing by local
    Housing Authorities when voucher conversions occur. NAHT supports
    language proposed by Senator Sarbanes in his Voucher bill to address
    these problems.

        (c) Provide Enhanced Vouchers for tenants when mortgage terms
    expire. In the near future, many buildings with 40-year HUD subsidized
    mortgages will near the end of their mortgage terms. Tenants in these
    buildings need protection from immediate displacement when this occurs.
    Congress should act now to anticipate this problem.

        (4) Mandate that HUD Maximize Preservation of At-Risk and HUD-Owned
    Housing.

        (a) Mandate that HUD preserve at-risk buildings where owners must
    seek HUD approval to prepay or renegotiate HUD or local Use Agreements.
    NAHT urges Congress to mandate HUD to use its discretionary authority
    to enforce use restrictions (such as flexible subsidy, Title II/VI, and
    local use restrictions) and procedural requirements (to review fair
    housing impacts, use of reserves, etc. prior to prepayment) to maximize
    housing preservation.

        (b) Mandate that HUD maximize preservation of buildings sold or
    foreclosed through HUD's Property Disposition or Foreclosure programs.
    For the past 2 years, Congress has mandated that HUD preserve buildings
    it sells where tenants are elderly or handicapped, but not family
    developments, by providing grants and project-based Section 8
    assistance at point of sale. Congress should extend this requirement to
    all buildings sold by HUD.

        (5) Empower Residents and Communities.

        (a) Drop ``preemption'' language in Section 232 of LIHPRHA.
    Congress should amend the now-defunct Low Income Housing Preservation
    and Residential Homeownership Act (LIHPRHA) law to delete Section 232,
    which makes it more difficult to enact tenant protections at the local
    level in the event that Federal ones are ended through prepayment.
    Owners argued for this provision to protect their appraisals under the
    previously mandatory program. In the absence of a Federal regulatory
    framework such as LIHPRHA, the Federal Government should not interfere
    with the right of State and local governments to protect residents in
    accordance with local needs and conditions. (Such efforts have been
    adopted or are under way in Massachusetts, Washington, Oregon,
    California, Denver, and New York.) Similarly, Section 524(f ) of the
    fiscal year 2000 Appropriations bill, which preempts certain local
    restrictions on owner dividends, may also require amendment.

        (b) Expand tenant participation. Congress should clearly affirm
    that HUD, State, and owner decisions (for mark-ups and grants, for
    example) are significant events requiring opportunities for tenant
    notice and comment.

        (c) Allow HUD's technical assistance funds to be used more broadly
    in HUD housing. Congress should clarify that Section 514 Technical
    Assistance Funds (OTAG's, ITAG's, HUD-funded VISTA Volunteers) can
    provide assistance to tenants in enhanced voucher buildings,
    prepayment-eligible buildings without Section 8, and HUD-foreclosed
    properties.
                                 *  *  *  *  *
        We would be happy to provide more information to the Subcommittee
    upon request. Thank you for holding this hearing and allowing NAHT to
    submit its views.
                    RESPONSE TO WRITTEN QUESTIONS OF

             SENATOR PAUL S. SARBANES AND SENATOR JACK REED

                          FROM JOHN C. WEICHER

    Q.1. In 1997, the Congress gave HUD the authority to use
    Interest Reduction Payment (IRP) funds for grants for needed
    repairs in project-based housing, and we made this easier for
    HUD to do in 1999. A policy to distribute these funds was
    actually written and in the final stages of being issued when
    the Martinez Administration took over at HUD. It has been
    almost 2 years since the new Administration took office, and
    yet this policy was never implemented, and the funds never went
    out as intended. Unfortunately, HUD never released these funds
    and Congress finally rescinded $300 million in IRP funds
    earlier this year. Although this $300 million is no longer
    available for use, additional IRP funds should be available in
    the future. Please provide information on how much in IRP funds
    will be available in the next 2 fiscal years and detail your
    plans to implement this grant-making authority so future IRP
    funds can be used to rehabilitate and preserve affordable
    housing.

    A.1. On July 12, 2002, the President submitted to the Congress
    a request that $100 million of IRP funds be rescinded in fiscal
    year 2003. The House Appropriations Committee has reported a
    bill that will enact this rescission, while the Senate
    Committee previously proposed that these funds be used to
    implement the rehabilitation grant program. The Department will
    carry out whichever policy proposal is enacted into law for
    2003 and the ensuing fiscal years.
        Your question makes reference to previous efforts of the
    Department to implement a loan program rather than the original
    grant program to facilitate rehabilitation efforts under
    Section 236(s) of the National Housing Act. The proposal was
    dropped when the Department was informed that budget rules
    would require HUD to seek additional appropriations to pay for
    imputed credit subsidy costs associated with these loans. For
    that reason, the President's budget submission has proposed
    that the legislative authority to offer rehabilitation loans be
    repealed. Again, the Department is prepared to carry out the
    authorities and policies that are enacted into law.

    Q.2.a. We are concerned about the loss of elderly housing.
    Please provide data on how many Section 202 properties are at-
    risk.

    A.2.a. The Department's current Section 202 portfolio consists
    of 7,051 projects. Of the 7,051 projects, the Department has
    determined 143 to be ``troubled'' or at-risk at this time.

    Q.2.b. Please detail HUD's policies for providing assistance to
    these troubled properties.

    A.2.b. HUD's current policies for providing assistance to these
    properties include permitting the transfer of ownership,
    mortgage refinancing and modifications, mortgage workouts, and
    the release of residual receipts.

    Q.2.c. Please provide data on how many Section 202's have been
    foreclosed upon in the past 2 years, to whom they were sold,
    and what use restrictions were placed on those properties at
    sale.

    A.2.c. See Exhibit #1.

    Q.3.a. Congress requires HUD to renew Section 8 contracts at a
    foreclosure or disposition sale for projects that are primarily
    elderly or disabled unless the renewal is infeasible. Please
    provide data on how many of these properties have been
    foreclosed upon or disposed of in the past 2 years.

    A.3.a. Fiscal Year 2001: J.C. Progress, Chattanooga, Tennessee;
    Number of Units: 204; Foreclosure Sale Date: 8/24/01; Sold to:
    City of Chattanooga. Pickwick/Royal Tower, Kansas City,
    Missouri; Number of Units: 233; Foreclosure Sale Date: 9/23/01;
    Sold to: Wilshire Realty and Investment.

    Fiscal Year 2002: SANA Apartments, Hartford, Connecticut;
    Number of Units: 271; Foreclosure Sale Date: 2/1/02; Sold to:
    City of Hartford. Valley Housing, Appleton, Wisconsin; Number
    of Units: 70; Foreclosure Sale Date: 5/2/02; Sold to: Appleton
    Housing Authority.

    Q.3.b. In how many of these cases were the Section 8 contracts
    renewed?

    A.3.b. Since the enactment of the legislation for fiscal year
    2002, HUD renewed the Section 8 contracts for both projects
    identified in response 3(a) above.

    Q.3.c. In how many cases did HUD make the determination that
    renewal was infeasible?

    A.3.c. Based on the dire need for affordable housing for both
    the elderly and the disabled throughout the Nation, HUD has
    made a policy determination for projects that are sold with
    predominately elderly or disabled residing at the project that
    buyers are required to maintain the project as affordable
    elderly and /or disabled housing for a minimum of 20 years.

    Q.3.d. Please detail how these determinations were made and
    also include any written guidelines on how HUD makes these
    determinations.

    A.3.d. HUD has made a decision to renew all of the project-
    based contracts in properties servicing the elderly and
    disabled clientele in accordance with the statute. As indicated
    above, there have been a limited number of foreclosures to date
    and HUD will re-evaluate this determination each fiscal year to
    determine if infeasibility guidelines and criteria are
    necessary and they will issue written guidance.

    Q.4.a. We heard interesting testimony from Mr. Grow that HUD
    has been hostile toward preservation and has not taken
    necessary actions to prevent the loss of affordable housing
    even where community groups are interested in preserving the
    housing. Does HUD have written policies for dealing with a
    project that is at-risk of foreclosure? Please detail these
    policies.

    A.4.a. The Department has written policies for dealing with the
    projects that are at-risk of foreclosure in accordance with the
    regulations set forth in 24 CFR Part 290. The basic operating
    policy for properties in risk of foreclosure, known
    collectively as defaulted HUD-held properties, is in Handbook
    4350.1, Multifamily Asset Management and Project Servicing. HUD
    also issues clarifications and may update or alter handbook
    policy via memorandum to meet changes in the state of the art
    of asset management and servicing.
        In Chapter 10 of this Handbook, HUD states its intent in
    dealing with properties where HUD is the mortgagee as a result
    of a default and a FHA mortgage insurance claim. HUD-held
    mortgages are serviced until the note is sold or the mortgage
    is foreclosed.
        The objectives of servicing HUD-held mortgages are: (A)
    Curing financial defaults and physical deficiencies after
    assignment by working with the mortgagor to maximize monthly
    remittance of payments and, if necessary, by providing mortgage
    relief consistent with the long-term viability of the project
    and the financial interests of the Government. (B) Encouraging
    the mortgagor to infuse funds, when necessary. (C) Ensuring
    that the mortgagor provides adequate management. (D) Preventing
    foreclosure where possible, thus, reducing the potential for
    further operating outlays from the insurance fund and the need
    for additional rent subsidies.
        In Chapter 11 of the Handbook, the Department states its
    objectives for pursuing workouts on the defaulted HUD-held
    property. HUD's basic objective for projects with HUD-held
    mortgages is to develop a workable plan to stabilize the
    property, both financially and physically, and to minimize
    losses to the Department. The tools available to deal with a
    HUD-held property are identical to the Department's arsenal for
    at-risk Section 202's. These include refinancing, mortgage
    modifications, workout arrangements, transfer of ownership,
    release of funds from residual receipts or reserves, and when
    there are project-based Section 8 contracts, HUD can also
    consider debt restructuring through the OMHAR Mark-to-Market
    (M2M) Program, etc.

    Q.4.b. Please provide data on how many properties and units
    have been foreclosed upon, how many of those properties have
    been transferred to nonprofits or for-profits, how many were
    sold with affordability restrictions, and what those
    restrictions are? Please include: How many times in the past 2
    fiscal years has HUD decided that properties being sold through
    foreclosure or from the HUD-owned inventory would receive no
    subsidy, and that tenant-based vouchers for eligible tenants
    would be made available through the local housing authority?

    A.4.b. For subsidized projects sold through either foreclosure
    or from the HUD-owned inventory, it has been the Department's
    policy since 1996 to provide tenant-based vouchers for eligible
    tenants in lieu of project-based Section 8 assistance. See
    attached 2001 and 2002 foreclosure charts (Exhibit #2).

    Q.5.a. We are concerned by a number of instances where
    residents were not given proper notice of what was happening to
    their housing. In Texas, a property was sold at foreclosure
    sale with minimal affordability requirements despite the fact
    that notice was not adequate, and in Los Angeles, the city had
    to go to court to stop an owner from opting-out of Section 8
    because proper notice was not given to the residents. In this
    instance, as we understand it, HUD approved this opt-out even
    though HUD requires that proper notification be given to
    residents. In a news article about this particular issue,
    advocates are quoted as blaming the problem on ``a shift in
    Federal policy that favors giving tenants vouchers rather than
    reserving buildings for low-income residents.'' We are
    concerned that this shift in policy is leading HUD to ignore
    violations of its own requirements. Can you assure us that HUD
    is enforcing notice requirements before owners are permitted to
    opt-out of the Section 8 program? Please provide information an
    how HUD is enforcing these requirements.

    A.5.a. The Section 8 Housing Assistance Payments (HAP)
    contracts between HUD and project owners, which provide for the
    project-based rental assistance, expire by their own terms. HUD
    does not have the legal authority to compel an unwilling owner
    to execute new project-based assistance contracts or to
    unilaterally prevent the contract from expiring. The
    Multifamily Assisted Housing Reform and Affordability Act
    (MAHRAA), 111 Stat. 1384 et seq., provides tools to HUD to use
    in the event that an owner fails to provide adequate notice
    under the Federal statutes. For example, Section 514(d) of
    MAHRAA entitled ``Tenant Rent Protections'' authorizes HUD to
    offer to extend an expiring project-based rental assistance
    contract in order to give an owner sufficient time to provide
    the statutorily required 12-month notice to residents of their
    intent not to renew their project-based Section 8 contract. If
    an owner is unwilling to give adequate Federal notice, MAHRAA
    prohibits the project owners from increasing the resident's
    portion of the rent or evicting the residents for a period of
    1-year. This, in effect, gives the residents benefit of the
    official notice required: It puts residents on notice that
    their subsidy situation may change in 1-year and it gives the
    residents 1-year to make alternate housing arrangements, if
    necessary.
        In addition to the above protections, MAHRAA also provides
    that when a project-based rental assistance contract expires
    and the owner declines to renew or otherwise extend the
    contract, the Secretary must issue enhanced vouchers to
    eligible residents residing in the property at the date the
    project-based contract expired. The language of the statute is
    mandatory. The Secretary must issue the vouchers.
        HUD has issued instructions to its Field Offices and
    Contract Administrators outlining the tenant notification
    requirements, and has provided specific instructions for
    proceeding when an owner has failed to provide proper notice.
    In addition to requiring that owners satisfy all statutory and
    programmatic notice requirements, Chapter 11, Section 11- 4, of
    the Guide requires that owners who wish to opt-out provide HUD
    with a completed ``Contract Renewal Request Form'' not less
    than 120 days prior to contract expiration, confirming the
    decision to opt-out and certifying that the statutory
    notification requirements have been met (see Guide, Chapter 11,
    Section 11- 4(F), and Attachment 3A-2 (Contract Renewal Request
    Form) ). Upon receipt of this form, and if proper tenant notice
    was provided, HUD begins the process of making enhanced voucher
    assistance available to all eligible tenants residing in an
    assisted unit on the date of contract expiration or
    termination.
        Additionally, individual tenants and tenant organizations
    are involved in the notification process from the outset. HUD
    has also published the Tenant Rights and Responsibilities
    Brochure, which provides a tenant with information regarding
    the tenant notification process.
        In instances where faulty notice has been issued, HUD
    provides the owner with the option of a short-term contract,
    which will have a term sufficient to meet a full 1-year notice
    period. Owners who decline to enter into the short-term
    contract must permit the tenants to remain in their units
    without an increase in the amount of rent that the tenant must
    pay.
        Enforcement Examples: Between fiscal year 2000 and 2002,
    there were approximately 74 projects, comprising 3,399 units,
    where HUD offered and the owner accepted an extension of the
    terminating contract in order to meet the required tenant
    notification.

    Q.5.b. Where improper notice has been given to the residents
    HUD does not have to pay the owner the higher rents under
    enhanced vouchers. Has HUD used this tool to force compliance
    with notice requirements? Please provide information on when
    HUD has taken these actions and in how many cases.

    A.5.b. The statute requires that HUD issue enhanced vouchers to
    eligible tenants residing in the property at the date the
    project-based Section 8 contract expires. To date, this tool
    has not been used by the Department to force compliance with
    the tenant notice requirements. However, significant revisions
    to the Section 8 Guide are currently under development and the
    revised guidance will address this matter. The revisions
    include guidance on how to address an owner who fails to issue
    proper 1-year notification to HUD/CA and the tenants. Legally,
    the owner must permit the tenants to remain in their units
    without increasing their portion of the rent for whatever
    period of time is necessary to meet all of the notification
    requirements.
        In cases where improper notice has been provided, eligible
    families residing in the property will still be issued enhanced
    vouchers when the contract expires. The family may use the
    voucher to remain in their current unit or they may elect to
    use the voucher to move to another property. Should the family
    elect to remain in their current unit, the voucher housing
    assistance payments contract may not commence until the full 1-
    year notice has been met. The effect of this action is that the
    owner will not receive any voucher assistance payments until
    proper notice has been provided to the tenants.

    Q.5.c. Your statement indicates that this issue will be
    clarified when HUD issues revisions to the Section 8 Renewal
    Guide ``within the next few months.'' When does HUD plan to
    issue the revision? Please provide us with a copy of these
    revisions.

    A.5.c. HUD is in the process of finalizing significant
    revisions to the Section 8 Guide and submitting the revisions
    through the Department's internal clearance process. Upon
    completion of the clearance process, the revisions will be made
    available and HUD anticipates issuing the revised Section 8
    Guidebook during the second quarter of fiscal year 2003. In the
    area of tenant notification, the revisions will include
    guidance that will require HUD's offices to review all tenant
    notification letters within 30 days of receipt. If the owner
    does not comply with the statutory requirements, the owner will
    be advised that a new notification letter must be issued. If a
    faulty notice was provided, the statute requires that the owner
    must permit the tenants to remain in their units without an
    increase in the portion of rent the tenant pays until a full 1-
    year
    notice period has elapsed.

    Q.6.a. Under Section 250 of the National Housing Act, HUD may
    only allow prepayment in those situations where HUD finds that
    ``the project is no longer meeting a need for rental housing
    for low-income families.'' How many prepayments has HUD allowed
    under Section 250?

    A.6.a. Section 250(a) applies only to projects that receive
    some form of subsidy under or in connection with a mortgage
    (i.e., Sections 236 and 221(d)(3) BMIR projects and also
    projects receiving Rent Supplement payments). Accordingly,
    where only the Section 8 assistance or no assistance is
    provided, Section 250(a) is not
    applicable. The 128th Congressional Record S. 4078 supports
    this interpretation.
        HUD has not approved any prepayments based on determination
    under Section 250(a); rather, HUD has made a determination that
    all projects that fall under this requirement are serving a
    low-income housing need. Based on that determination and
    recognizing the need for capital infusion into this type of
    housing in order to preserve the affordable resource, HUD has
    allowed prepayments only in those cases where the owner has
    agreed to ensure the property remains available to low-income
    families in the area. This has been accomplished by placing a
    Deed Use Restriction on these properties that restricts the use
    of the property to the same conditions required under the
    mortgage insurance program.

    Q.6.b. Where prepayments have been allowed, how has HUD made
    the determination that the housing was no longer needed? Please
    provide the written guidelines that HUD uses to make these
    determinations.

    A.6.b. As stated above, HUD has decided that any property
    subject to Section 250(a) is to be kept affordable and has used
    use restrictions to maintain affordability.

    Q.6.c. Please provide information and data on each prepayment
    allowed under Section 250 in the last 2 years.

    A.6.c. As stated above, HUD has not approved any prepayments
    under Section 250.

    Q.7. Last year, we passed the ``Mark-to-Market Extension Act,''
    which the President signed into law in January of this year.
    Section 613 of the law requires HUD to ensure that rent levels
    offered to owners through the project-based program are the
    same as the rent levels offered through enhanced vouchers. We
    included this provision because we heard numerous reports, from
    both owners and residents, that owners were getting higher
    rents through the enhanced voucher program, thereby giving them
    an incentive to opt-out of their long-term affordability
    commitments. What steps has HUD taken to implement Section 613
    of the law, and what have the results been? Please provide data
    and specific examples.

    A.7. Section 613 required HUD to ensure rent levels are
    ``reasonably consistent and reflect rents for comparable
    unassisted units.'' The three types of Section 8 assistance
    affected are project-based Mark-to-Market renewals with market
    rents set by the OMHAR, project-based renewals with rents
    determined by the Multifamily Housing, and enhanced vouchers
    with rents set by owners and approved by public housing
    agencies (PHA) according to a ``rent reasonableness''
    determination. While rent determinations are property specific
    and can only be determined within a range of certainty, a
    reasonable level of consistency in these determinations is
    critical in order to ensure the integrity of Federally-assisted
    housing programs.
        Early on in the Mark-to-Market Program, there was, in fact,
    a systemic problem with inconsistency between OMHAR's and
    Multifamily Housing's rent determinations on project-based
    renewals. This has been addressed by improved coordination
    between the offices. OMHAR has adopted Multifamily Housing's
    appraisal standards (published in Chapter 9 of the Section 8
    Renewal Guide), and Multifamily Housing's management has given
    priority to ensuring appropriate referrals to OMHAR. As a
    result, there has been a marked increase in the percentage of
    properties with Section 8 expirations that are referred to
    OMHAR. During the first 3 quarters of fiscal year 1999, 15
    percent of these properties were referred to OMHAR. During the
    first 3 quarters of fiscal year 2002, 41 percent of projects
    with expiring contracts were referred. For comparison,
    portfolio stratification modeling (provided to Congressional
    staff and the GAO in August 2001) suggested that between 40 and
    45 percent of the portfolio has above market rents.
    Additionally, a number of properties are coming back into the
    M2M pipeline under the ``look back'' authority in Section
    612(f ).
        Rents approved by the PHA's for enhanced voucher units do
    not appear to be a systemic or continuing problem. By statute,
    PHA's must ensure that the owner's requested rent is reasonable
    in comparison with similar unassisted units in the market area.
    Congress did amend Section 8(t) in HUD's fiscal year 2001
    Appropriations Act to allow the Department to impose additional
    reasonable restrictions on rents for enhanced vouchers in order
    to address concerns that enhanced vouchers might encourage
    owners to leave Multifamily Housing's affordable housing
    programs. However, subsequent legislation rendered this
    authority meaningless (Section 902 of Public Law 106 -569), by
    providing that any limitation could not be considered
    ``reasonable'' if it could have an adverse impact on families.
        As you note, there were concerns last year that some PHA's
    were approving enhanced voucher rents that were materially
    greater than the Department's determination of market rent, and
    thus affordable housing units were lost when the owners opted-
    out of their Section 8 contracts. OMHAR has emphasized to the
    PAE's the requirement to share market rent determinations with
    the PHA's, and HUD's Office of Public and Indian Housing (PIH)
    has advised PHA's and PIH Field Office staff on a case-by-case
    basis to not approve rents exceeding those rents unless there
    is a clear material and documented flaw. More formal guidance
    will be issued to that effect in a forthcoming PIH Notice. A
    list of M2M properties that opted-out of their Section 8
    contracts is attached (Exhibit #3).*
    ---------------------------------------------------------------------------
        *Held in Committee files.

    Q.8. Another provision of the M2M Extension Act allows the
    second mortgages created by the restructuring to be assigned to
    the nonprofit or Government agency that is acquiring the
    project. The debt assignment would be in lieu of forgiving the
    debt altogether, so there is no cost to the Federal Government.
    In certain circumstance, the assignment is preferable because
    it helps the nonprofit receive tax credits for rehabilitation.
    Please detail how this provision has been put into effect by
    ---------------------------------------------------------------------------
    HUD.

    A.8. The new authority to assign the debt resulting from the
    M2M restructuring was internally reviewed and approved for
    implementation in June 2002. The M2M Operating Procedures Guide
    (Appendix C--Qualified Nonprofit Purchasers) was amended in
    early July to include the administrative procedures needed to
    implement the debt assignment authority. The new authority has
    been well received by the nonprofit community. To date, the
    Department has closed a portfolio of 5 loans involving debt
    assignment, with a second portfolio of 16 loans near closing.
    Six more projects have been identified for a potential purchase
    and debt assignment. It is too early to estimate the number of
    debt assignment transactions that will close over the next 2
    years. When HUD closes a restructuring with the existing owner,
    it allows a 3-year period for a qualified nonprofit to purchase
    the property and apply for debt forgiveness or assignment.

    Q.9. Does HUD consider an owner's refusal to agree to
    reasonable rents established by a PHA, failure to repair units
    to meet Housing Quality Standards, or charging of new market-
    rate security deposits violations of a tenant's Federal
    statutory right to remain? Please explain.

    A.9. As required by statute, an assisted family may elect to
    remain in the same project after expiration of the project-
    based HAP contract. Voucher assistance may only be paid if the
    rent is reasonable and the unit meets the voucher housing
    quality standards. These voucher requirements do not apply
    unless the owner has entered into a voucher HAP contract. There
    is no Federal restriction on the amount of the owner security
    deposit for a nonvoucher family that elects to remain in the
    project. (The PHA has discretion whether to limit the security
    deposit for a voucher participant.)
        There may be cases where the owner disputes the
    ``reasonableness'' of the enhanced voucher rents, as
    established by the PHA. If, after discussion and negotiation
    with the PHA, the owner and the PHA are unable to reach an
    agreement on the appropriateness of the enhanced voucher rent,
    no contract will be executed. Upon expiration of a project-
    based Section 8 contract, the Department does not have the
    authority to require an owner to execute a contract at rents
    less than what the owner is requesting. In these cases, tenants
    will be provided regular vouchers and will be required to seek
    other housing.

    Q.10. In light of the required certification in the opt-out
    notice that the owner will accept enhanced vouchers, if an
    owner later refuses to honor the tenant's statutory right to
    remain by executing voucher assistance contracts for all of the
    affected units, what enforcement actions could the Department
    take, both prior to and after the conversion? Does the
    Department need additional authority to protect tenants?

    A.10. The family may raise claimed violation of the statutory
    election to remain either as a defense in the owner's action
    for eviction or as a basis for injunctive relief against the
    owner. HUD does not need or seek additional statutory
    enforcement authority.

    Q.11. As recognized by HUD's Guide, the tenant's right to
    remain continues until the tenant commits a breach of the
    lease, notwithstanding the expiration of any lease term. This
    is different than the current rule governing ordinary Housing
    Choice Vouchers, where no cause is required at the end of the
    lease term. What steps has the Department taken to ensure that
    tenants, PHA's, and owners are informed of this difference so
    that tenants are not displaced later without cause?

    A.11. Currently, the owner's lease in the Housing Choice
    Voucher Program may provide the owner with the authority to
    terminate the tenancy upon expiration of the lease term.
    However, the tenant's right to remain with enhanced voucher
    assistance as a result of an opt-out is the same as if the
    project-based Section 8 assistance was still in place.
        The Department, in both the Section 8 Renewal Guide and PIH
    Notice 2001- 41 (Section 8 Tenant-Based Assistance [Enhanced
    and Regular Housing Choice Vouchers] For Housing Conversion
    Actions --Policy and Processing Guidance), is consistent with
    instructions regarding the enhanced voucher family's right to
    remain. Guidance in both the Renewal Guide and Notice 2001- 41
    provides that ``. . . the owner may not terminate the tenancy
    of a family that exercises its right to remain except for a
    serious or repeated lease violation or other good cause.''
        In addition, in meetings and training sessions with the
    various program participants (PHA's, residents, and owners),
    the Department emphasizes the differences between the enhanced
    voucher and the regular voucher rules and provides technical
    assistance when necessary.

    Q.12.a. Concerning the eleven properties owned by the HEDCO
    located in Woonsocket and Central Falls, Rhode Island: By way
    of clarification, the 11 properties are each owned by a
    separate, single purpose entity (either corporation or as a
    general or limited partner in a limited partnership). What
    actions did HUD take to ensure the owner provided proper opt-
    out notices under both Federal and State law prior to the
    expiration of the Section 8 contracts?

    A.12.a. If an owner does not plan to participate in the Section
    8 project-based program and renew the contract at expiration,
    the owner must provide to the Department at least 1-year notice
    before the contract expiration date of their intent not to
    participate in the Section 8 project-based program. Section
    8(c)(8) of the U.S. Housing Act requires that:

              Not less than 1-year before terminating any contract
            under which assistance payments are received under this
            Section, other than a contract for tenant-based
            assistance under this Section, an owner shall provide
            written notice to the Secretary and the tenants
            involved of the proposed termination. The notice shall
            also include a statement that, if the Congress makes
            funds available, the owner and the Secretary may agree
            to a renewal of the contract, thus avoiding
            termination, and that in the event of termination the
            Department of Housing and Urban Development will
            provide tenant-based rental assistance to all eligible
            residents, enabling them to choose the place they wish
            to rent, which is likely to include the dwelling unit
            in which they currently reside.

            42 U.S.C. Sec. 1437f (c)(8).

        The Federal litigation (People to End Homelessness, et. al.
    v. Martinez, et. al., U.S.D.Ct.,D.R.I., No. 01- 0269T) involved
    four ``scattered-site'' housing projects (known collectively as
    ``the Develcos'') in Woonsocket, Rhode Island, all with HUD-
    insured mortgages and rental assistance to the tenants
    originally under the Section 8 Loan Management Set Aside
    Program and then under the Section 8 Voucher Program.
        The project-based Section 8 contracts for the Develcos
    expired by their own terms on May 31, 2001. HUD's Section 8
    Guidebook provides that ``Section 8 project owners must also
    comply with any State or local notification requirements.''
    This provision is meant only to remind owners to comply with
    any applicable State or local requirements. The Section 8
    Guidebook also states, ``Owners should check with their
    appropriate local authorities to find out about such
    requirements.'' This provision does not place an affirmative
    legal obligation on HUD to ensure that all owners with Section
    8 HAP contracts comply with State law when opting-out (See
    Kenneth Arms Tenant Association, et. al. v. Martinez). Rather,
    these provisions are a reminder to property owners.
        HUD has no statutory or regulatory obligation to
    ``enforce'' Federal or State requirements for notice of HAP
    contract termination against owners in particular cases. In the
    case of the four Develco properties, HUD believes that the
    owner's notice provided to the residents was adequate under the
    applicable Federal law. HUD was not a party to the litigation
    brought in the State Court of Rhode Island in which the
    residents had challenged the owners'
    decision to opt-out of their Section 8 project-based contracts.
    Additionally, neither the Federal nor State courts had imposed
    any
    restriction upon the Department that would have impacted the
    contract opt-outs.
        In regard to the other seven projects, the project-based
    Section 8 contracts expired by their own terms on August 31,
    2001 (Mercedes Apartments IV and Sans Souci Apartments I), on
    September 30, 2001 (David Apartments, Mercedes Apartments II,
    Polonaise Apartments and Roger and Roger Apartments), and on
    January 31, 2002, for the Vulcan Apartments. HUD also made the
    determination for these projects that the notice provided to
    the residents was adequate under the applicable Federal law.

    Q.12.b. Why did HUD provide enhanced vouchers to the owner when
    the owner had clearly failed to comply with both the Federal
    and the State notice requirements, contrary to your written
    statement? Please explain how this expressed position is
    consistent with the Department's position in the Federal
    litigation regarding this matter.

    A.12.b. The Department does not agree with the assertion that
    the owner failed to comply with the Federal notice
    requirements. On the contrary, HUD determined, through careful
    evaluation, that the Federal notice given to the residents and
    to the Secretary was adequate.
        However, even if the notices given by the owners were not
    adequate, HUD would still have been compelled by Section
    524(d)(1) of the MAHRAA to issue enhanced vouchers to all
    eligible residents residing at the projects on the date in
    which the project-based Section 8 contract expired.
        This is precisely the position put forth by the Department
    in the course of the Federal litigation, People to End
    Homelessness v. Martinez. The Court indicated in its Memorandum
    and Order dated March 29, 2002, that ``the principal issue
    presented was whether the owners' alleged failure to give
    sufficient advance notice of their intention to `terminate'
    their contract with HUD requires HUD to continue providing
    project-based assistance for the complex(es).'' The Court
    answered the question in the negative finding that the
    plaintiffs (tenants) were unable to identify any statutory
    provision requiring HUD to continue project-based assistance to
    a housing complex if the owner fails to provide proper notice
    that it is ``terminating'' its contract to participate in the
    program. The Court stated that HUD was required by MAHRAA to
    issue enhanced vouchers to the tenants at the expiration of the
    project-based Section 8 contract irrespective of whether the
    owner provided adequate notice to the tenants (though in this
    case HUD determined that the notice was adequate).

    Q.12.c. Prior to selling the HUD-held mortgages on at least
    five of the properties (two that are involved in the Federal
    litigation and three in the State case), did the Department
    evaluate: (1) whether such sale was in compliance with existing
    Federal laws and regulations; (2) what protections under the
    Regulatory Agreement might be lost; (3) the impact of the
    mortgage sale on the tenants' claims under Rhode Island law and
    possible preservation of the property; and, (4) the fair
    housing implications of this action?

    A.12.c. (1) The mortgages sold in the Multifamily and
    Healthcare Loan Sale 2002 -1 were sold in compliance with all
    existing Federal laws and regulations. The authority of the
    Secretary to sell the mortgages sold in the Multifamily and
    Healthcare Loan Sale 2002 -1 is set forth in Section 207(k) of
    the National Housing Act (12 U.S.C. Sec. 1713(k) ), Section
    203(k) of Housing and Community Development Amendments of 1978,
    as amended (12 U.S.C. Sec. 1701z -11), and Section 204 of the
    fiscal year 1997 Appropriations Act, as amended (12 U.S.C.
    Sec. 1715z -11a).
        The mortgages sold in the sale were all unsubsidized.
    Authority for the sale of HUD-held multifamily mortgages is
    found in Section 204 of the fiscal year 1997 Appropriations
    Act, as amended, which authorizes the Secretary to sell
    ``multifamily mortgages held by the Secretary on such terms and
    conditions as the Secretary may determine, notwithstanding any
    other provision of law.''
        (2) The Regulatory Agreements between the owners and HUD
    terminated when the mortgage loans were sold. The Department
    was aware that those provisions of the Regulatory Agreements
    that benefited the tenants, such as the requirement that the
    owner maintain reserve for replacement accounts, would no
    longer remain in effect. However, under existing regulations
    governing the sale of HUD-held mortgages securing unsubsidized
    projects, HUD had no obligation to continue to impose the
    tenant protection provisions of the Regulatory Agreements after
    the loans were sold.
        (3) The Department was not required to assess any impact of
    the mortgage sale on the tenants' claims under Rhode Island
    State law and on the possible preservation of the property. As
    the Department understands, the project-based Section 8
    contracts for the Develco properties expired by their own terms
    on May 31, 2001. As stated earlier, HUD has no responsibility
    to determine whether the notice provided to the tenants met the
    Rhode Island State notice requirements.
        (4) The Department complied with the fair housing
    requirements set forth in 24 CFR 290.39 in connection with the
    sale of loans in the Multifamily and Healthcare Loan Sale
    2002 -1. HUD included in the Loan Sale Agreement for each
    purchaser a provision to implement the regulatory requirement
    regarding nondiscrimination in admitting certificate and
    voucher holders. That provision requires the purchaser of any
    delinquent mortgage loan, and its successors and assigns, to
    record a covenant running with the land as part of any loan
    restructuring or final compromise of the mortgage debt and to
    include a covenant in any foreclosure deed in connection with
    the mortgage. The covenant must provide that the project owner
    shall not unreasonably refuse to lease a dwelling unit offered
    for rent, offer to sell cooperative stock, or otherwise
    discriminate in the terms of tenancy or cooperative purchase
    and sale
    because any existing or prospective tenant or purchaser is a
    certificate or voucher holder.

    Q.12.d. How does the Department justify the significantly
    higher ``market'' rents provided to the owner by the PHA under
    the enhanced voucher program on some of the HEDCO properties,
    when compared with the ``market'' rents for renewal of the
    project-based contract offered by HUD or OMHAR? Shouldn't these
    amounts be roughly comparable? What steps is the Department now
    taking to avoid similar discrepancies in the future?

    A.12.d. The Department is aware that under current law, the
    method of calculating reasonable rents for project-based
    Section 8 HAP contracts (under the MAHRAA) and for tenant-based
    enhanced vouchers (under Section 8(t) of the U.S. Housing Act
    of 1937) may differ. In the case of a restructured project with
    project-based Section 8 participating in the Mark-to-Market
    Program, HUD establishes the rent level at rates it determines
    to be ``comparable'' to the rents currently being charged by
    owners of comparable unsubsidized properties. See Sec. 514(g)
    of MAHRAA.
        However, if an owner of a project with an expiring Federal
    rental assistance contract does not agree to extend the
    contract, Sec. 514(d) of MAHRAA provides that the Secretary
    shall make tenant-based assistance available to tenants
    residing in units assisted under the expiring contract at the
    time of expiration. The tenant-based assistance is in the form
    of enhanced vouchers. When Section 8 rental subsidy is tenant-
    based, the local housing authority administers the subsidy and
    determines tenant qualification (as opposed to project-based
    Section 8 rental subsidy in which the project owner receives
    the subsidy and determines tenant qualifications.) The housing
    authority is also responsible for making the determination that
    the rents charged for the units that eligible voucher holders
    desire to reside in are ``reasonable rents (which rent shall
    include any amount allowed for utilities and shall not exceed
    comparable market rents for the relevant housing market
    area).'' Section 515(c)(3) of MAHRAA.
        While it is logical to conclude that the rent levels for
    project-based and tenant-based Section 8 may differ for the
    same project based upon the fact that comparable rents are
    calculated by the different entities, it is not the
    Department's intention for tenant-based subsidies to far exceed
    project-based subsidies. This is a situation where the
    Administration is carefully analyzing and working to ensure
    that on future project-based Section 8 opt-outs, the comparable
    rents for enhanced voucher units are comparable to maximum
    project-based rent levels for restructured projects and expect
    to correct the problem as quickly as possible.

    Q.12.e. For how many of these properties did the owner prepay?
    Please describe the process. Were you aware of the State
    lawsuit regarding these properties?

    A.12.e. The Department's records indicate that the owner has
    only prepaid the Section 221(d)(3) Market Rate Mortgage on the
    Roger and Roger Apartments at this time. Pursuant to the
    Section 221 (d)(3) Market Rate Mortgage Program, the owner must
    notify the Department 30 days prior to the prepayment of the
    mortgage. The Department is not required to approve the
    prepayment of the mortgage and has no statutory authority to
    stop the prepayment if proper notice was given to HUD.
        The Department was aware that there was ongoing State court
    litigation involving David Apartments, Mercedes II Apartments,
    Mercedes IV Apartments, Sans Souci Apartments, Polonaise
    Apartments, and the Vulcan Apartments. However, the Court had
    not imposed any restrictions upon the Department, which would
    have impacted the prepayment of the mortgages or selling the
    mortgage notes.

                          STATEMENT OF MICHAEL BODAKEN
                                  on behalf of
                 Stewards of Affordable Housing for the Future
                                October 16, 2002
    Introduction
        The following testimony on the critical need for preservation of
    multifamily homes is presented on behalf of Stewards of Affordable
    Housing for the Future (``SAHF,'' pronounced like ``safe'').
        Formed in June of this year, the founding members of SAHF are: The
    National Affordable Housing Trust, Mercy Housing, Inc., National Church
    Residences, Inc., the NHP Foundation, NHT/Enterprise Preservation
    Corporation, Preservation of Affordable Housing, Inc., Retirement
    Housing Foundation and Volunteers of America.
        The founding members are all nationally active owners of affordable
    housing, committed to the mission of providing and preserving
    affordable homes for the long-term, keeping them well maintained and
    enhancing resident services for the people who live there. Together,
    the members of SAHF own and control over 62,000 affordable apartments
    in 41 States the District of Columbia, Puerto Rico, and the U.S. Virgin
    Islands. (See Exhibit A.)*
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        *All Exhibits held in Committee.
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        Of the apartments owned by the SAHF, 34,460--more than half--are
    Federally-assisted and/or insured. The vast majority of those involve
    some sort of HUD insurance or subsidy. Because this is the Subcommittee
    of jurisdiction for the policies of HUD, we are especially grateful
    that its Members are obviously concerned about the preservation and
    improvement of HUD assisted and/or insured multifamily stock. As we
    explain below, this housing is a unique resource. Once lost, it is
    virtually impossible to replace.
        Once it is shown that this stock is worth saving--and it is worth
    saving--the next question is, ``What are the critical components to its
    preservation?'' We believe the answer should be guided by the following
    principles:

     HUD should strongly encourage the preservation of this stock
        where it is of value to the residents and the community in which it
        operates.

     HUD should encourage the new stewardship of these assets in
        interested owners, especially national and regional nonprofit
        owners with the capacity to own and recapitalize HUD multifamily
        real estate. SAHF is especially concerned that HUD does not
        recognize the benefits of long-term ownership by strong, mission
        driven, nonprofit organizations. Too often, Federal funds have been
        used to purchase
        affordability multiple times on the same property. In particular,
        we believe that HUD has not taken into account independent
        resources that organizations like members of SAHF can bring to
        rehabilitation and strengthening of HUD-assisted developments.

     Congress should immediately make clear to HUD that its new
        ``interpretation'' of the automatic termination of HUD subsidies
        upon refinance of the State housing financed, Section 8
        developments, constructed between 1975 -1979, is contrary to
        Congressional intent and practice over the past 20 years.

     Congress should take steps to assure the financial markets
        that Section 8 properties will continue to receive ongoing
        subsidies, so long as those subsidies are at or below market.

        This testimony will cover three areas:

        1. First, why preserving Federally-assisted housing is important.

        2. Second, how members of SAHF are able to help HUD meet its
    responsibility to preserve this stock by securing additional State and
    local funds to maintain and improve Federally-assisted housing.

        3. Third, a summary of the SAHF's specific recommendations on
    preservation of HUD-assisted and/or insured, multifamily housing,
    focusing in particular on:

              a. The need for HUD to assure nonprofit organizations that it
            will permit distributions to nonprofits on the same basis as to
            for-profit owners.
              b. The need for HUD to provide predictable access to ``up to
            20'' year Section 8 contracts, subject to annual
            appropriations.
    Preserving the Stock of Federally-Assisted Housing is Crucial
        The demand for decent, safe, affordable housing remains high, while
    the supply of such housing is shrinking: According to a recent State of
    the Nation's Housing Report, ``The red-hot economy has done little to
    relieve the housing problems of low-income households.'' \1\ Federally-
    subsidized units continue to disappear: Between 1995 and 2001, the
    number of directly Federally-subsidized units fell by over 200,000
    units. Contracts on another one million units will expire within 5
    years. According to a December 2001 report by the Center for Housing
    Policy, ``Housing America's Working Families,'' there are 13.7 million
    families currently experiencing critical housing needs, meaning that
    they pay more than half of their income for housing and/or live in a
    severely inadequate unit.
    ---------------------------------------------------------------------------
        \1\ ``State of the Nation's Housing 2000,'' Joint Center for
    Housing Studies of Harvard University, p. 23.
    ---------------------------------------------------------------------------
        Action must be taken now to preserve and to improve affordable
    rental homes
    because:

     Any additional loss of affordable homes will have an adverse
        impact on the growing number of economically disadvantaged
        households in this country. According to this year's HUD report
        ``Waiting in Vain: An Update on America's Rental Housing Crisis,''
        time on waiting lists is growing, the number of families on the
        lists is increasing, and the lowest-income families and seniors
        have limited options.

     The affordable housing stock that is most susceptible to
        opting-out of long-term affordability requirements is the housing
        stock that is most irreplaceable. Conversion opportunities are
        greatest for housing located in strong market areas. In these
        areas, the barriers to entry of zoning restrictions and high land
        costs are also greatest. The secret story that the numbers do not
        tell is that the affordable housing stock that is lost is lost in
        communities in which replacement affordable housing is not likely
        to ever be built. In order to compete for scarce resources, new
        production is inexorably driven to areas in which the zoning and
        cost barriers to entry are lowest.

     Section 8 contracts are expiring en masse, adding to the
        complexity of the preservation dilemma. Two-thirds of all project-
        based Section 8 contracts will expire in the next 4 years, totaling
        approximately 6,000 properties containing one million subsidized
        apartments. The expiring contracts are geographically diffuse: In
        44 States, more than half of Section 8 units will expire in the
        next 5 years. Many owners are prepaying their mortgages or opting-
        out of the Section 8 program. Those that do renew their contracts
        must do so every year, dependent upon funding allocated by the
        Congress. The consequences of this unstable atmosphere of shifting
        policy are falling upon the shoulders of our Nation's poor. (For a
        map color coded by State describing Section 8 expirations, please
        see Exhibit B.)

     More than 2,000 project-based Section 8 units are lost each
        month to opt-outs, and conversion to unsubsidized housing.
        According to the National Housing Trust, nearly 200,000 such
        apartments have been converted to market rate already. (See
        attached map, Exhibit C.)

     According to HUD, the average income of those residing in HUD
        subsidized housing is less than $10,000/annually. Obviously, these
        families and elderly households do not have an effective housing
        choice in the unregulated housing market.

     According to HUD, minority households occupy more than half of
        these apartments. Hence, these families will disproportionately
        shoulder the adverse affects of additional losses of Federally-
        assisted and insured homes.

     Rent increases are outpacing inflation in all 23 metro areas
        surveyed by the CPI as of 2000.

     In the 1970's, this Nation produced 200,000 units per year
        affordable to low-income households. Even with the recent tax
        credit boost, we currently produce less than half that amount.

     As noted by the Millennial Housing Commission, the cost of
        preservation is less expensive than new construction. New tax
        credit housing amounts to approximately 80,000 units. The cost of
        replacing the 120,000 ``lost'' units is much greater than
        maintaining that stock.

     Maintaining and renovating existing housing not only helps
        existing renters, but also helps maintain healthy communities.\2\
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        \2\ Meeting Our Nation's Housing Challenges, Report of the
    Bipartisan Millennial Housing Commission Appointed by the Congress of
    the United States, 2002, pp. 31-33.

        Thus, the preservation of existing affordable housing is a critical
    goal. There are a variety of ways to accomplish this important public
    policy objective. The advantage of a multifaceted preservation approach
    is that the investment can create a stock of permanently affordable
    housing.
    If HUD Stands Ready to Preserve Properties, Members of SAHF are
    Able to Assist HUD in Recapitalizing HUD Stock
        From around 1966 -1984, HUD housing programs allowed the private
    sector to produce nearly two million affordable housing units located
    in nearly every nook and cranny of the Nation. Today, much of that
    stock is in need of repair and new stewardship.
        It is our collective and respectful observation that the
    Subcommittee should make clear to HUD that its mission is not to stand
    idle while HUD rental housing either converts to market rate
    conventional housing or becomes more and more deteriorated. Instead, as
    the Congress has made clear for over 15 years, with statutorily
    provided programs ranging from LIHPRHA to Mark-to-Market to Interest
    Reduction Payment Decoupling, HUD now has a responsibility to preserve
    and improve its aging stock.\3\
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        \3\ The most recent example of HUD's lack of perceived preservation
    responsibility was HUD's failure to protect against the loss of $300
    million of Interested Reduction Payment subsidies, funds that could
    have been used for rehabilitation of HUD properties. The latest
    ``reinterpretation'' of law constitutes another place where HUD is
    actively or through passivity undermining longstanding preservation
    policy.
    ---------------------------------------------------------------------------
        The good news is that if HUD does indeed make clear that it will do
    its part, members of SAHF are willing and able to bring new State and
    local resources to help HUD satisfy its statutorily provided mission
    and avoid unnecessary foreclosure and disposition costs. SAHF members
    already own and operate nearly 35,000 HUD assisted and insured
    apartments throughout the Nation. So long as HUD stands ready and
    willing to maintain existing Section 8 subsidies, we are able to
    convince State and local housing providers that their resources are
    best used in preserving local HUD projects.\4\ For example:
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        \4\ As we explain below, the Congress must do its part as well. For
    example, lenders must be assured that current in place, Section 8
    subsidies will be renewed.

     In Anderson, South Carolina, the National Housing Trust/
        Enterprise Preservation Corporation was asked to rehabilitate a
        tired, severely undermanaged, drug plagued 200-unit property. The
        property was one of the only truly affordable housing developments
        in the somewhat gentrifying area. Once HUD agreed to allow NHT/
        Enterprise to separate the Interest Reduction Payment from the
        existing mortgage--a tool that has no budgetary cost whatsoever--
        NHT/Enterprise was able to secure tax credits and State bonds, and
        via a deferred developer fee, bring almost $19,000/unit in
        rehabilitation to the property. NHT/Enterprise also created a
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        community learning center and funded a police substation on site.

     In the State of Missouri, Preservation of Affordable Housing
        Inc. (``POAH'') has, together with the State of Missouri Housing
        Development Commission, helped
        to save and revitalize 2,700 HUD-insured apartments located in
        Independence,
        Missouri. The new Hawthorne Place Community Center and
        rehabilitation of
        Hawthorne Place Apartments will be celebrated with Senator Kit Bond
        (R-MO) on October 16, 2002. Again, once HUD agreed to use its Mark-
        to-Market tool, a tool that has no additional ongoing subsidy cost
        to HUD, POAH brought new resources totaling $25 million to the
        properties.

     In Denver, Colorado, Mercy Housing Southwest, with the
        Colorado Housing and Finance Authority, city of Denver, Colorado
        Division of Housing and HUD, preserved 106 units of transitional
        housing for single parents through the HUD Mark-to-Market Program.
        The financial restructuring of Decatur Place, built in the early
        1980's and home to more than 300 parents and children, created more
        than $1 million in equity for the rehabilitation of the building.
        The rehabilitation is almost complete and includes new windows and
        other significant exterior work, new carpet, and new bathroom and
        kitchen fixtures and appliances. Without Mark-to-Market, Decatur
        Place, located in one of Denver's lowest-income neighborhoods,
        would have continued to operate in substandard conditions. Worse,
        it might have been foreclosed upon due to the high costs of
        operation, maintenance, and providing services to its residents.
        Thanks to the Mark-to-Market Program, other Federal, State, local,
        and private sources of support were joined together to preserve
        this important community resource.

     The Subcommittee has already heard testimony from another SAHF
        member, National Church Residences, and about NCR's important
        preservation of a HUD property in Manhattan, Kansas.

        Photos of some properties saved by members of SAHF are attached as
    Exhibit D to this testimony.\5\
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        \5\ SAHF's experience in securing tax credits to help rehabilitate
    HUD-assisted housing is not unusual. In point of fact, State Housing
    Finance Agencies are increasingly allocating a preference or priority
    in their tax credit allocation plans for preservation. According to the
    National Housing Trust, some 30 or more State Housing Finance Agencies
    prioritize the use of scarcely allocated, very competitively sought tax
    credits for preservation. There is, of course, no little irony in the
    fact that the States are taking up the preservation gauntlet while HUD
    is generally perceived to be somewhat disinterested in the topic.
    Nevertheless, it is heartening to note that there are important
    resources, resources allocated at the State level, devoted to
    preservation of HUD assisted housing.
    ---------------------------------------------------------------------------
    SAHF's Recommendations to the Subcommittee on Preservation
    of HUD-Assisted Stock
    HUD ``Reinterpretation'' of Section 8 Contracts Upon Refinance
    of Underlying Mortgage
        The Subcommittee has heard a great deal about this issue from the
    National Council of State Housing Finance Agencies and others. Suffice
    it to say that SAHF has registered its concern about the subject to
    Secretary Mel Martinez in a letter dated August 12, 2002, attached as
    Exhibit E to our testimony.
        Also attached to this testimony is SAHF's ``Top 10 List'' of
    recommendations (See
    Exhibit F) that we believe are essential to help us address the
    Nation's critical
    rental housing shortage. Of these, we would like to highlight the
    following as particularly relevant to the preservation dilemma faced by
    HUD.\6\
    ---------------------------------------------------------------------------
        \6\ A full set of the SAHF's ``Top 10 List'' is attached as Exhibit
    F and incorporated herein by reference.
    ---------------------------------------------------------------------------
    Rights to Distributions
        HUD should remove the archaic restrictions on the right of
    nonprofit sponsors to receive distributions from the operation of
    affordable housing as long as the distributions are used for affordable
    housing. In short, HUD should provide a just and reasonable return to
    nonprofit owners of HUD-assisted and insured housing, to allow them to
    preserve and produce affordable housing.
        For-profit owners may take distributions and profits from HUD-
    assisted and insured properties for their personal use. Paradoxically,
    nonprofits often may not take them for charitable purposes. These
    regulatory and handbook provisions, presumably meant to prevent private
    ``inurement'' instead frustrate our ability to support weak projects
    with strong ones and to develop the capital base for preservation and
    new development.
    Twenty-Year Section 8 Contracts
        HUD should provide ready and predictable access to 20-year Mark-Up-
    to-Market Section 8 contracts, subject to annual appropriations, in
    connection with nonprofit acquisition and perpetual preservation of
    affordable housing. Congress has the responsibility of making this
    clear, either in legislation or report language, so that the financial
    markets can be assured that these properties can provide a reliable and
    prudent return on their investment.
        In strong markets, in Boston, Massachusetts, Washington, DC, and
    many parts of California, for example, current owners have powerful
    economic incentives to convert to market rate use. These are the very
    communities where the affordable housing cannot be replaced. Even
    though vouchers protect current tenants, the apartments are eventually
    lost as affordable housing. Twenty-year Mark-Up-to-Market contracts can
    enable us to purchase the housing for long-term affordability.\7\
    ---------------------------------------------------------------------------
        \7\ Of course, the members of SAHF believe vouchers are an
    essential element to provide affordable housing for low-income
    households. Vouchers are an indispensable element of any affordable
    housing delivery system. It does not follow, however, that vouchers or
    certificates are the only means to provide suitable housing for poor
    households. This is not the case for several reasons. First, the
    voucher may not provide a large enough subsidy to permit the family to
    stay in the community. Second, in many urban markets, it is difficult
    for residents to locate and secure 3 or 4 bedroom apartments with
    vouchers. Also, displaced seniors will have great difficulty using
    vouchers to access units with meals and support systems. Finally,
    vouchers appear not to work as well for families facing discriminatory
    barriers, such as minorities and handicapped individuals. This argues
    for preserving the housing now as a unique community resource to help
    serve mixed-income, racially diverse populations.
    ---------------------------------------------------------------------------
    Exit Tax Relief
        Although we fully recognize the Senate Subcommittee on Housing and
    Transportation is not the committee of jurisdiction for tax
    legislation, we take this occasion to observe that Congress should
    provide relief from ``exit taxes'' to those who sell affordable housing
    to nonprofits for long-term, affordable use.
        Because depreciation and other losses have reduced their tax bases,
    owners of older subsidized housing often would face significant taxes
    on phantom ``gains'' but receive no cash if they transfer their
    properties. As a result, they continue to hold the properties but fail
    to maintain them. Relief from these exit taxes on noncash gains when an
    owner transfers to a nonprofit would put this irreplaceable housing in
    the hands of long-term stewards. There are a variety of ways exit tax
    relief could be implemented: One could permit the noncash gain upon
    transfer or sale to be nontaxable if the transfer is for $1 plus the
    outstanding mortgage balance to a qualified, nonprofit purchasers.

    Conclusion
        Thank you for the opportunity to submit this testimony on the
    preservation concerns we all share. Now is an appropriate time for us
    to ``rethink'' how we preserve good housing stock in decent
    neighborhoods, housing that serves as a unique resource to communities.
    We sincerely believe that if HUD becomes a predictable preservation
    partner, SAHF members and others will bring significantly more
    resources to help HUD conserve HUD rental housing. SAHF members have
    created and/or sustained 35,000 HUD-assisted apartments in more than 40
    States. We stand ready, willing, and able to do more.