[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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
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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.
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    \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.
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    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\
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    \11\ U.S. Department of Housing and Urban Development, Office of 
Policy Development and Research, A Picture of Subsidized Households in 
1998, August 1998.
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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.
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    *Held in Committee files.
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    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.
---------------------------------------------------------------------------
    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.
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    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\
---------------------------------------------------------------------------
    \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:
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
    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.
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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\
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    \6\ A full set of the SAHF's ``Top 10 List'' is attached as Exhibit 
F and incorporated herein by reference.
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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\
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    \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.
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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.
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