[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
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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
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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.
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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.
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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.
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*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.
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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\
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\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\
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\2\ Joint Center for Housing Studies of Harvard University, The
State of the Nation's Housing: 2001, p. 10.
Assisted communities are home to only 3 percent of the
Nation's senior population.\3\ Nevertheless, as elderly households
age in place, the need for future affordable assisted living
increases. The possibility of converting elderly, subsidized
dwellings to assisted living facilities is just now being explored.
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\3\ Ibid.
4.6 million elderly households are renters; almost a third of
these households--1.5 million--pay more than 50 percent of their
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incomes for rent and/or are living in substandard housing.
The median net worth of elderly rental households is less than
$7,000 compared with the median net worth of $141,000 for elderly
homeowners.\4\
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\4\ Ibid.
Older renters in subsidized housing are two to three times as
likely to report disabilities than older homeowners.\5\
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\5\ AARP Public Policy Institute, Adding Assisted Living to
Subsidized Housing: Serving Frail Persons with Low Incomes, Wilden and
Redfoot, January 2002.
Wealth and income disparities will widen, limiting the housing
choice of poor elderly households: ``[t]he sharp disparity in
wealth among baby boomers will carry well into their retirement
years, leaving many lower-income seniors with few housing and
special care options. Elderly renters will face particularly
onerous housing cost burdens.'' \6\
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\6\ Housing for Seniors, 2001.
The number of older persons residing in subsidized housing
(over 1.9 million) is greater than the number of persons residing
in our Nation's nursing homes.\7\
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\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\
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\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.
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Of the apartments owned by the SAHF, 34,460--more than half--are
Federally-assisted and/or insured. The vast majority of those involve
some sort of HUD insurance or subsidy. Because this is the Subcommittee
of jurisdiction for the policies of HUD, we are especially grateful
that its Members are obviously concerned about the preservation and
improvement of HUD assisted and/or insured multifamily stock. As we
explain below, this housing is a unique resource. Once lost, it is
virtually impossible to replace.
Once it is shown that this stock is worth saving--and it is worth
saving--the next question is, ``What are the critical components to its
preservation?'' We believe the answer should be guided by the following
principles:
HUD should strongly encourage the preservation of this stock
where it is of value to the residents and the community in which it
operates.
HUD should encourage the new stewardship of these assets in
interested owners, especially national and regional nonprofit
owners with the capacity to own and recapitalize HUD multifamily
real estate. SAHF is especially concerned that HUD does not
recognize the benefits of long-term ownership by strong, mission
driven, nonprofit organizations. Too often, Federal funds have been
used to purchase
affordability multiple times on the same property. In particular,
we believe that HUD has not taken into account independent
resources that organizations like members of SAHF can bring to
rehabilitation and strengthening of HUD-assisted developments.
Congress should immediately make clear to HUD that its new
``interpretation'' of the automatic termination of HUD subsidies
upon refinance of the State housing financed, Section 8
developments, constructed between 1975 -1979, is contrary to
Congressional intent and practice over the past 20 years.
Congress should take steps to assure the financial markets
that Section 8 properties will continue to receive ongoing
subsidies, so long as those subsidies are at or below market.
This testimony will cover three areas:
1. First, why preserving Federally-assisted housing is important.
2. Second, how members of SAHF are able to help HUD meet its
responsibility to preserve this stock by securing additional State and
local funds to maintain and improve Federally-assisted housing.
3. Third, a summary of the SAHF's specific recommendations on
preservation of HUD-assisted and/or insured, multifamily housing,
focusing in particular on:
a. The need for HUD to assure nonprofit organizations that it
will permit distributions to nonprofits on the same basis as to
for-profit owners.
b. The need for HUD to provide predictable access to ``up to
20'' year Section 8 contracts, subject to annual
appropriations.
Preserving the Stock of Federally-Assisted Housing is Crucial
The demand for decent, safe, affordable housing remains high, while
the supply of such housing is shrinking: According to a recent State of
the Nation's Housing Report, ``The red-hot economy has done little to
relieve the housing problems of low-income households.'' \1\ Federally-
subsidized units continue to disappear: Between 1995 and 2001, the
number of directly Federally-subsidized units fell by over 200,000
units. Contracts on another one million units will expire within 5
years. According to a December 2001 report by the Center for Housing
Policy, ``Housing America's Working Families,'' there are 13.7 million
families currently experiencing critical housing needs, meaning that
they pay more than half of their income for housing and/or live in a
severely inadequate unit.
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\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\
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\2\ Meeting Our Nation's Housing Challenges, Report of the
Bipartisan Millennial Housing Commission Appointed by the Congress of
the United States, 2002, pp. 31-33.
Thus, the preservation of existing affordable housing is a critical
goal. There are a variety of ways to accomplish this important public
policy objective. The advantage of a multifaceted preservation approach
is that the investment can create a stock of permanently affordable
housing.
If HUD Stands Ready to Preserve Properties, Members of SAHF are
Able to Assist HUD in Recapitalizing HUD Stock
From around 1966 -1984, HUD housing programs allowed the private
sector to produce nearly two million affordable housing units located
in nearly every nook and cranny of the Nation. Today, much of that
stock is in need of repair and new stewardship.
It is our collective and respectful observation that the
Subcommittee should make clear to HUD that its mission is not to stand
idle while HUD rental housing either converts to market rate
conventional housing or becomes more and more deteriorated. Instead, as
the Congress has made clear for over 15 years, with statutorily
provided programs ranging from LIHPRHA to Mark-to-Market to Interest
Reduction Payment Decoupling, HUD now has a responsibility to preserve
and improve its aging stock.\3\
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\3\ The most recent example of HUD's lack of perceived preservation
responsibility was HUD's failure to protect against the loss of $300
million of Interested Reduction Payment subsidies, funds that could
have been used for rehabilitation of HUD properties. The latest
``reinterpretation'' of law constitutes another place where HUD is
actively or through passivity undermining longstanding preservation
policy.
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The good news is that if HUD does indeed make clear that it will do
its part, members of SAHF are willing and able to bring new State and
local resources to help HUD satisfy its statutorily provided mission
and avoid unnecessary foreclosure and disposition costs. SAHF members
already own and operate nearly 35,000 HUD assisted and insured
apartments throughout the Nation. So long as HUD stands ready and
willing to maintain existing Section 8 subsidies, we are able to
convince State and local housing providers that their resources are
best used in preserving local HUD projects.\4\ For example:
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\4\ As we explain below, the Congress must do its part as well. For
example, lenders must be assured that current in place, Section 8
subsidies will be renewed.
In Anderson, South Carolina, the National Housing Trust/
Enterprise Preservation Corporation was asked to rehabilitate a
tired, severely undermanaged, drug plagued 200-unit property. The
property was one of the only truly affordable housing developments
in the somewhat gentrifying area. Once HUD agreed to allow NHT/
Enterprise to separate the Interest Reduction Payment from the
existing mortgage--a tool that has no budgetary cost whatsoever--
NHT/Enterprise was able to secure tax credits and State bonds, and
via a deferred developer fee, bring almost $19,000/unit in
rehabilitation to the property. NHT/Enterprise also created a
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community learning center and funded a police substation on site.
In the State of Missouri, Preservation of Affordable Housing
Inc. (``POAH'') has, together with the State of Missouri Housing
Development Commission, helped
to save and revitalize 2,700 HUD-insured apartments located in
Independence,
Missouri. The new Hawthorne Place Community Center and
rehabilitation of
Hawthorne Place Apartments will be celebrated with Senator Kit Bond
(R-MO) on October 16, 2002. Again, once HUD agreed to use its Mark-
to-Market tool, a tool that has no additional ongoing subsidy cost
to HUD, POAH brought new resources totaling $25 million to the
properties.
In Denver, Colorado, Mercy Housing Southwest, with the
Colorado Housing and Finance Authority, city of Denver, Colorado
Division of Housing and HUD, preserved 106 units of transitional
housing for single parents through the HUD Mark-to-Market Program.
The financial restructuring of Decatur Place, built in the early
1980's and home to more than 300 parents and children, created more
than $1 million in equity for the rehabilitation of the building.
The rehabilitation is almost complete and includes new windows and
other significant exterior work, new carpet, and new bathroom and
kitchen fixtures and appliances. Without Mark-to-Market, Decatur
Place, located in one of Denver's lowest-income neighborhoods,
would have continued to operate in substandard conditions. Worse,
it might have been foreclosed upon due to the high costs of
operation, maintenance, and providing services to its residents.
Thanks to the Mark-to-Market Program, other Federal, State, local,
and private sources of support were joined together to preserve
this important community resource.
The Subcommittee has already heard testimony from another SAHF
member, National Church Residences, and about NCR's important
preservation of a HUD property in Manhattan, Kansas.
Photos of some properties saved by members of SAHF are attached as
Exhibit D to this testimony.\5\
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\5\ SAHF's experience in securing tax credits to help rehabilitate
HUD-assisted housing is not unusual. In point of fact, State Housing
Finance Agencies are increasingly allocating a preference or priority
in their tax credit allocation plans for preservation. According to the
National Housing Trust, some 30 or more State Housing Finance Agencies
prioritize the use of scarcely allocated, very competitively sought tax
credits for preservation. There is, of course, no little irony in the
fact that the States are taking up the preservation gauntlet while HUD
is generally perceived to be somewhat disinterested in the topic.
Nevertheless, it is heartening to note that there are important
resources, resources allocated at the State level, devoted to
preservation of HUD assisted housing.
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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.