[Senate Hearing 108-]
[From the U.S. Government Publishing Office]



 
 DEPARTMENTS OF VETERANS AFFAIRS AND HOUSING AND URBAN DEVELOPMENT AND 
        INDEPENDENT AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                              ----------                              


                        THURSDAY, APRIL 1, 2004

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:05 a.m., in room SD-628, Dirksen 
Senate Office Building, Hon. Christopher S. Bond (chairman) 
presiding.
    Present: Senators Bond and Mikulski.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                        Office of the Secretary

STATEMENT OF ALPHONSO JACKSON, SECRETARY
ACCOMPANIED BY:
        ROY A. BERNARDI, ASSISTANT SECRETARY, COMMUNITY PLANNING AND 
            DEVELOPMENT
        MICHAEL LIU, ASSISTANT SECRETARY, PUBLIC AND INDIAN HOUSING
        JOHN WEICHER, ASSISTANT SECRETARY FOR HOUSING--FEDERAL HOUSING 
            COMMISSIONER

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

    Senator Bond. Good morning. The Senate VA/HUD 
Appropriations Subcommittee hearing will come to order.
    We are looking forward to welcoming the newly confirmed, 
some 12 hours old, Secretary of HUD to be joining us. I 
understand he's fallen victim to the traffic. However, looking 
at what OMB presented for HUD, I would be surprised if there 
wasn't some planning on his part to miss out on it. We welcome 
FHA Commissioner John Weicher, Assistant Secretary for Public 
and Indian Housing Michael Liu, and Roy Bernardi, Assistant 
Secretary for Community Planning and Development, who will be 
answering the subcommittee's questions.
    Gentlemen, we have probably more problems with this budget 
than any budget we have been submitted. And in this 
subcommittee, we get lots of bad budgets. This one, I think, 
may take the cake. And I think that we're going to have a very 
difficult time working through it. I look forward, however, to 
working with Secretary Jackson and all of you as we try to sort 
this out.
    We have a vote at 11:30, so we will have to submit 
questions for the record. I am very concerned about HUD's 
Office of Congressional Relations, which failed to meet its 
responsibilities for this hearing. We expect the Office to be 
better prepared in the future.
    Also, Mr. Liu, I understand you requested, over the last 
several days, not to attend this hearing and, instead, send a 
subordinate. That is not acceptable, because this is an 
extremely important hearing. We not only need you to answer our 
questions, but I hope this will be an opportunity for you to 
understand issues that are important to us and our 
constituents.
    The President's budget request for HUD for fiscal year 2005 
proposes some $35.7 billion, a technical increase of $331.8 
million over fiscal year funding level of $35.4. Unfortunately, 
the 2005 funding level doesn't tell the true story about the 
administration's request, which is distorted because of how 
rescission funding and FHA receipts are treated for purposes of 
the 2005 budget. Instead, the HUD proposed budget, as we figure 
it, is actually some $1.4 billion below the amounts we 
appropriated for HUD programs in 2004. That's a substantial 
reduction, which is even more troubling in light of other 
administration budget shortfalls within the jurisdiction of 
this subcommittee. We have been shorted about $1.2 billion in 
VA medical care, and the Clean Water State Revolving Fund in 
EPA has been cut by $500 million, which Office of Management 
and Budget should know by now that Congress is not going to 
accept.
    I know HUD has an obligation to defend the budget and 
policy decision, no matter how troubling. I also understand the 
need for the administration to make difficult funding decisions 
to contain and reduce the Federal budget deficit. Nevertheless, 
this subcommittee is facing huge challenges in funding 
decisions for the entire VA/HUD bill in a very tight funding 
year, and HUD represents one of the largest challenges.
    In addition, this budget includes several substantial 
policy changes that would dramatically alter the direction of 
both Section 8 housing assistance and the FHA's single family 
housing mortgage insurance program, two of HUD's most important 
issues. These are important policy proposals that cannot be 
taken lightly and should not be considered in an appropriations 
bill without comprehensive hearings and debate. We have some 
significant questions about all of them, and, unfortunately, it 
does not look like we're going to have the luxury of the time 
to consider fully these issues.
    We'd like to welcome now, as I said, the 12-hour-ago-
confirmed Secretary of Housing and Urban Development. I know, 
Mr. Secretary, that unless you stayed up all night preparing, 
you're not prepared for this hearing, but we do welcome you. We 
just said what a lousy hand you've been dealt, and we will ask 
your associates questions on it. But there will be a lively 
give and take. And whenever you would like to jump in, please 
feel free to do so. But we've got a lot of problems that we've 
got to deal with.

                            SECTION 8 REFORM

    The administration is proposing to restructure Section 8 
into a new block-grant program to be administered by a public 
housing agency. Two fatal flaws in that proposal; namely, a 
lack of funding and elimination of the requirements that 
Section 8 tenant-based assistance be targeted to our most needy 
families. The Section 8 voucher program currently requires that 
three quarters of all new vouchers serve extremely low-income 
families at or below 30 percent of their median income. These 
are the families with the greatest housing needs, and PHA's 
would no longer have the necessary funds to provide vouchers to 
these families, leaving them to other unsustainable rent 
burdens or homelessness.
    In particular, Section 8 assistance would be funded at 
$18.466 billion in 2005, a decrease of $791 million from the 
2004 funding level of $19.26 billion. That's not enough funding 
to meet the needs of Section 8 anticipated for 2005. CBO, in 
its most recent budget re-estimate, determined that Section 8 
will require funding of some $19.284 billion, which means that 
HUD has a funding shortfall of about $2.2 billion for Section 8 
renewals and tenant protection for 2005 just to sustain the 
program, not add incremental vouchers. It also doesn't address 
other important issues, such as proposed changes and shortfalls 
in the Section 8 administrative fees.
    I understand the administration's frustration with the 
Section 8 tenant-based voucher program, with its annual 
rescissions and poor cost projections. I assure you, we share 
that frustration. But I think this proposal is a poor 
substitute for the flaws in the program. We spent years working 
with HUD in making reforms to the program. In the last 2 years, 
making specific reforms through changes to the Section 8 
account. While we continue to have problems with excess Section 
8 rescissions, the program has become more successful with 
higher utilization rates. Unfortunately, the HUD Section 8 
proposal punishes the program for its success, with the result 
that less families will get vouchers, and, I fear, extremely 
low-income families, those with the greatest housing needs, 
will likely get almost no assistance at all. I agree the 
Section 8 program may cost too much. We should reduce the 
administrative burden, where appropriate. But I think we should 
use a scalpel, not a meat cleaver.
    Even more troubling, based on answers my staff received on 
the underlying analysis supporting the proposal, it's clear 
that HUD has not even done its homework on the proposal's 
impact on the continuing availability to the families who 
currently have vouchers.

                                HOPE VI

    I continue to be troubled by the Department's decision to 
eliminate all funding for the HOPE VI Program. This program was 
designed primarily by this subcommittee to tear down the most 
distressed and obsolete public housing, replacing it with new 
mixed-income and public housing developments that not only 
provide good housing, but help to anchor the economic and 
physical redevelopment of many distressed communities. It's 
worked well, deserves to be funded or replaced with a program 
that is better equipped to address the remaining stock of 
distressed housing.
    I'm especially concerned over the loss of the program since 
HUD has identified some $20 billion or more in deferred 
maintenance and capital needs. These needs will only grow as 
existing PHA inventory deteriorates. I would note that it is 
always troubling to me that OMB, each year, comes back and cuts 
out programs like HOPE VI, rural housing, all of the other 
programs that Congress has added because of the need that we 
see. I don't know where the disconnect is. And if CBO wants to 
come in and testify and tell us why these programs are bad, I'd 
like hear them do it. But we've made the determination, and we 
are continually frustrated by the lack of communication when 
they want to cut out programs we've found to be very helpful.

                      ZERO DOWN PAYMENT INITIATIVE

    I'm deeply troubled by the proposed zero down payment for 
the FHA Homeownership Program. It poses substantial risk to the 
single family mortgage insurance program, because without down 
payments, new homeowners have no stake in their homes, no 
cushion to pay for any big-ticket costs such as a failed 
furnace or a leaky roof.
    From an historical perspective, FHA was almost bankrupt in 
the 1980's due to defaults from housing families with high 
loan-to-value ratios, which also helped to tip marginal 
neighborhoods where FHA foreclosures helped to drive down the 
value of other housing in the neighborhood. Sadly, some 
neighborhoods are still trying to recover from those 
foreclosures. On the human side, families who default on their 
FHA mortgages ruin their credit and likely will be unable to 
purchase housing when homeownership is more appropriate. This 
new policy recommendation seems to place homeownership above 
all other policy goals, including the financial soundness of 
FHA or the appropriateness of homeownership for a family.
    I could go over the items in the IG audit of FHA financial 
statements. Let me just summarize them to say that FHA defaults 
have risen. There is the 2002 actuarial study that projected 
the economic value of the fund at the end of 2003 would be 
$27.3 billion. But now the new estimate is it'll be $22.7 
billion. That's about a $4.6 billion gap, which raises serious 
questions over the need for new economic models.
    In addition, FHA's share of the home-purchase loan market 
fell by 16\1/2\ percent in 2003, after falling by slightly over 
1 percent in 2002, and 1 percent in 2001. In contrast, overall 
purchase loan originations by loan number went up in each of 
these years. This suggests there's growing deterioration in the 
credit quality of the FHA book of business, and FHA is 
essentially pricing itself into underwriting the highest-risk 
mortgages.

                 RURAL HOUSING AND ECONOMIC DEVELOPMENT

    I'll raise other questions in the question period, but I 
also have strong objections to the elimination of the Rural 
Housing and Economic Development Program and the lead-abatement 
grant program, which is something that Senator Mikulski and I 
have determined is a high priority. And I can assure you, in 
our communities, it is a high priority.
    Secretary Jackson, I look forward to working with you on 
reforming HUD. It's a huge task. It's a difficult 
responsibility. I think you have the requisite skills and 
expertise. HUD serves an absolutely critical role with its 
responsibility for providing a safety net of affordable housing 
for low-income and providing needed funding that's a 
cornerstone for community development efforts and for making 
the dream of homeownership a reality. I look forward to working 
with you to rebuild the public confidence in HUD, and ensure 
the HUD's housing community development programs are meeting 
the affordable housing and economic development needs of our 
communities and families. I should say, ``Harsh letter to 
follow,'' but I think we probably understand ourselves.
    I'll now turn it over to Senator Mikulski.

                STATEMENT OF SENATOR BARBARA A. MIKULSKI

    Senator Mikulski. Good morning, Secretary Jackson, and 
congratulations on your confirmation. And, along with Senator 
Bond, I look forward to working with you.
    I want to associate myself with the issues raised by the 
Chairman. They are identical to the issues that I share about 
the challenges that we see in this year's HUD budget request. 
I, too, want to reiterate many of my own particular concerns. 
We note that the budget request is $31.3 billion. But overall 
HUD spending is cut by 3 percent since last year's levels. This 
could mean less affordable housing, more rundown public 
housing, more lead-paint-poisoned children, and more blight and 
deterioration in our communities.

                                HOPE VI

    I'm disappointed that HUD has once again proposed to 
eliminate HOPE VI. I created HOPE VI, on a bipartisan basis 11 
years ago, to address the crisis in public housing. Public 
housing was decrepit, it was distressed. Residents were living 
in zip codes of poverty, and public housing had become a way of 
life, not a way to a better life. We wanted to get the Federal 
Government out of the slum-landlord business and into the 
empowerment business. That was the purpose of HOPE VI. And we 
can go over many of the accomplishments of HOPE VI. We need to 
look at how we can sustain HOPE VI now and look ahead to what a 
new HOPE VI needs to be in the future. I believe HOPE VI does 
need to be refreshed and reformed, but certainly this year, we 
believe, to sustain it should be one of our principles in the 
HUD budget.
    Last year, with the cooperation of the chairman, we asked 
the Urban Institute to give us the lessons learned from HOPE 
VI, what were the best practices, how we could replicate the 
successes, and also, what were the areas of reform that needed 
to be done. They have submitted a report, and we will be 
looking forward to discussions with not only how we can sustain 
the program this year and get best value for communities, as 
well as taxpayers, but also look ahead to the future.

                           AFFORDABLE HOUSING

    The other area that puzzles me is the lack of resources for 
creating affordable housing. Senator Bond and I have long 
supported new production of affordable housing. Investments in 
housing is an investment in the American economy. When you 
build a house here, it's built here; it's not on a slow boat to 
China, a fast track to Mexico, a dial 1-800-somewhere; it is 
right here in the United States. We know working families are 
squeezed and stressed. Housing in the Baltimore/Washington 
Corridor is so hot that an Anne Arundel County Police 
Department official had to move to Pennsylvania for what he 
thought was affordable housing. Well, this is unacceptable. We 
need to look at not only how are we helping the poor, but how 
are we helping the middle class--the firefighter, the police 
officer, the teacher, the call-center person that we want to 
keep here. We need to be able to do this and look at how we can 
increase production.

                      CAPITAL FUND/OPERATING FUND

    We're very concerned, too, though, in terms of our poorer 
citizens, the cuts in the public housing operating and capital 
budget. We believe that this will not only continue to cause 
greater stresses on local governments' budgets, but on the poor 
themselves.

                            LEAD-BASED PAINT

    In addition to this, I'm troubled by the elimination of the 
lead-paint elimination program. Cleaning up lead paint has 
triple value. First of all, it helps children. It makes them 
safer. It also helps them be smarter. The Johns Hopkins people 
who are leaders in this tell me that lead paint causes such 
severe neurological damage, learning disabilities, and lowered 
IQ's that the very presence of lead paint in a community 
guarantees that no one from that community will be able to move 
up and take advantage of an opportunity ladder in our country. 
We need to be able to do something about it.

                           PROPERTY FLIPPING

    A success story that we've had in working with your 
predecessor, Secretary Martinez, was in dealing with flipping 
and predatory lending, and we want to thank HUD for all of its 
cooperation and its investment and expertise, technical 
assistance, and real reform. Flipping is now down 82 percent in 
the city of Baltimore, from the time when both the taxpayer and 
the poor were being gouged. Crooked investors were buying up 
FHA foreclosed property, making cosmetic repairs, working with 
scum appraisers and lenders. Well, thanks to working together, 
we've changed that. But right now what we're looking at is, 
what are some of the other issues that we can do? Even though 
flipping is down, predatory lending still lingers in the sub-
prime market.

                              FHA DEFAULTS

    And also what we're concerned about is additional issues 
with FHA. We're so alarmed that the defaults in FHA-insured 
properties have increased 31 percent. We need to know: why is 
this happening? Is it because of the economy? Is it because 
people are trapped in predatory loans? What's the real reason 
here?

                   SINGLE FAMILY PROPERTY DISPOSITION

    HUD must also be in the neighborhood business. 
Homeownership is good, but it has to be sustainable. The worst 
thing that you can say in a neighborhood is, ``Oh, my God, 
we've got a HUD house.'' A HUD house is where somebody has been 
foreclosed, it's now in HUD hands, and it begins to 
deteriorate, and it creates this economic tipping that Senator 
Bond has talked about. So we have questions related to the 
single family disposition.

                       FHA MULTI-FAMILY DWELLINGS

    Then there's another issue, of FHA apartment buildings. I 
am very concerned that in many of our communities, particularly 
close to the cities, like in my own hometown, the inner-beltway 
communities, that FHA apartment buildings have become public 
housing by proxy. They have landlords who take large amounts of 
Section 8 vouchers. The apartment building itself becomes all 
Section 8. They then skimp on repairs, they skimp on 
maintenance, but they sure don't skimp on taking the subsidy. 
We have terrible problems in many of our apartments here, and 
we've dealt with this with both Secretary Cuomo and Secretary 
Martinez. There was one in eastern Baltimore County that was 
not well maintained: rodent infestation, crime rampant, and 
rundown conditions. It was a blight on the community, and 
essentially we were subsidizing all the aspects of a slum 
landlord. These cannot be tolerated.
    Now, we've worked on that together, and we want to thank 
HUD for their cooperation. But we have to make sure that 
whatever we're paying for, we're not subsidizing slums, and 
that we are in the empowerment business; we're in the 
opportunity business. And through what we do to help people 
help themselves, we're really also creating a stronger economy.
    So we look forward to discussing these issues with you. And 
I now am happy to yield the floor.
    Senator Bond. Thank you very much, Senator Mikulski.
    I'd like to welcome Secretary Jackson and call on him for 
any brief comments he wants to make. I understand you have a 
prior commitment, and you have to leave at 11:00, and we 
understand that. We'll have plenty of work for you in the 
questions for the record, so while you leave, just know that we 
won't forget you.
    Secretary Jackson. Thank you.
    Senator Bond. Again, welcome, Mr. Secretary.

                     STATEMENT OF ALPHONSO JACKSON

    Secretary Jackson. Mr. Chairman and the Ranking Member, let 
me apologize in advance for leaving. It will probably be about 
10 minutes to 11:00, Mr. Chairman.
    But let me say this, that last night I did find that I was 
confirmed by the Senate, and I would like to thank both of you 
all for the work that you all did to make the confirmation come 
to fruition.
    And, as Secretary, I think that Chairman Bond has worked 
with me, and Senator Mikulski, we've had conversations over the 
last month, I am very sensitive to the issues that you have 
raised, and we look forward to work with you to try to resolve 
these issues.
    I guess I come with somewhat of a different background, in 
the sense that I was fortunate to have ran three major housing 
authorities, so many of the issues that you have brought forth 
today are of very much concern of this Department. I don't ever 
say ``my,'' because I think ``my'' is almost like ``I.'' It 
becomes the ``I'' syndrome. I think that HUD, this committee, 
and the Senators can work together to find valid solutions to 
try to resolve many of these problems.
    Lastly, I would say this, that we have two assistant 
secretaries that will be addressing your issues today. Please 
feel free to call me. I am clearly, as the Secretary, at your 
disposal to come and discuss with you, and hopefully sit down 
and resolve many of the issues that we have today.
    I do believe, especially with my encounter with Senator 
Bond and my short encounter with Senator Mikulski, that our 
philosophical viewpoints are the same, that clearly HUD's 
mission is to address the needs of low- and moderate-income 
persons, and to address those needs sufficient enough that they 
might have the same quality of life that most of the people in 
this room have.
    Thank you.
    Senator Bond. Thank you very much, Mr. Secretary.
    And I would say only that I have had a great opportunity to 
work with the Secretary in his prior life, and my prior life, 
and I do know that he has a strong commitment. And I'm sure 
that all of the leaders of HUD do. We've got some real 
differences on how to get there.
    I believe Mr. Bernardi is going to lead off. Is that 
correct?
    Mr. Bernardi. Yes, Senator.
    Senator Bond. I thank you. If you would proceed, and 
introduce your colleagues, as needed.

                      STATEMENT OF ROY A. BERNARDI

    Mr. Bernardi. Thank you.
    Chairman Bond and Ranking Member Mikulski, thank you for 
the invitation this morning to outline our fiscal year 2005 
budget, a budget that's presented by President Bush and the 
Department of Housing and Urban Development. And I'm also 
pleased to be joined by my colleagues, to my left, Commissioner 
Weicher, and Assistant Secretary Liu, to my right.
    To ensure there's appropriate time for questions from the 
Committee, I think I'll focus just on some of the statements of 
HUD's key priorities and some of the new initiatives that we're 
proposing. And I ask that I be allowed to submit my full 
statement for the record, sir.
    Senator Bond. We'll be happy to accept all of your 
statements for the record, and we appreciate your summarizing 
from them.
    Mr. Bernardi. Thank you.
    As you indicated, the programs funded with a $31.3 billion 
budget will create new opportunities for those who seek 
affordable housing and the American dream of homeownership 
while generating stability and prosperity for our communities. 
The key priorities that address this are central to the 
President's plan to help make America a more secure, more 
prosperous, and more hopeful country. Housing, of course, is 
vital to our national prosperity, and remains the lynchpin of 
our economy. The housing market generated robust activity 
throughout the 2001 recession. And, today, housing continues to 
fuel the ongoing economic recovery.
    Homeownership last year reached an all-time high of 68.6 
percent, and fourth-quarter 2003 statistics reveal that, for 
the very first time, a majority of minority households owns a 
home of their own. HUD's 2005 budget will empower our 
Department to build on these successes as we seek to increase 
homeownership, to promote decent and affordable housing free 
from discrimination, encourage the participation of faith-based 
and community organization in HUD's programs, and embrace the 
highest standards of ethics, management, and accountability.
    Let me first discuss homeownership. In June of 2002, 
President Bush announced an aggressive plan to increase the 
number of minority homeowners by at least 5\1/2\ million by the 
end of the decade. More than 1\1/2\ million new minority 
homeowners have been created in the United States since the 
initiative was announced.
    HUD is proposing several new or expanded initiatives to 
continue to increase overall homeownership, while targeting 
assistance to help more minority families experience the 
economic and social benefits of owning a home of their own.

                       AMERICAN DREAM DOWNPAYMENT

    As a first step, HUD proposes to fund the American Dream 
Downpayment Initiative at $200 million in the coming fiscal 
year. The Congress showed great leadership in enacting the 
President's American Dream proposal last year. By fully funding 
the 2005 initiative, we will help 40,000 families across the 
country have the opportunity to come over that biggest hurdle, 
and that's downpayment and closing costs, to own a home of 
their own.

                      ZERO DOWNPAYMENT INITIATIVE

    The administration is proposing an exciting piece of 
legislation that would create a new mortgage product targeted 
to first-time home buyers and that's the Zero Downpayment 
Program. The Zero Downpayment Mortgage Program would allow 
consumers to qualify for FHA loans without having to come up 
with the upfront cash for downpayment and closing costs. And we 
estimate that that will help 150,000 families a year purchase a 
home.
    Studies show that we can further boost homeownership by 
helping families learn about the loan products and services 
that are available to them, and how to avoid abusive lenders. 
So, therefore, our 2005 budget provides a record $45 million to 
educate future homeowners.
    To promote the production of affordable single family homes 
in areas where such housing is scarce, the administration is 
proposing a tax credit of up to 50 percent of the cost of 
construction for constructing a new home or rehabilitating an 
existing home.

                                  SHOP

    Our request of $65 million for the Self-Help Homeownership 
Opportunity Program, our SHOP Program, was more than double the 
funding SHOP received in 2004, and that would help produce some 
5,200 new homes for very low-income families. And Congress 
Builds America was participating last week here in Washington, 
and I had the opportunity to join with some Senators and 
Members of Congress, and to see firsthand how those dollars are 
used through sweat equity to give a low-income individual an 
opportunity to own his or her own home.

                           SECTION 8 REFORMS

    While boosting homeownership, HUD's proposed budget also 
promotes the production and accessibility of affordable housing 
for families and individuals who rent. Three major rental 
assistance programs collectively help approximately 4\1/2\ 
million households nationwide. Our major program, as you 
indicated, is Section 8, which provides both tenant-based 
funding through the Housing Choice Voucher Program, in the 
Office of Public and Indian Housing, and project-based rental 
assistance through HUD's Office of Housing. The administration 
is proposing significant reform of the Housing Choice Voucher 
Program. We need to make it more effective, more efficient, and 
better able to meet the needs of the low-income families that 
depend on it.
    Today, the Section 8 program lacks incentives for families 
to transition out of the program and to begin living 
independent lives. In addition, the program is unsustainable at 
current growth levels. Pre-voucher costs have increased at the 
alarming rate of 23 percent in just the last 2 years.
    The administration's new Flexible Voucher Program will 
serve at least as many Americans as the 1.9 million families 
currently served through the Housing Choice Voucher Program. 
More importantly, our proposed reforms will help families move 
out of assisted housing and into self-sufficiency.

                                  HOME

    The HOME program is a very key initiative for addressing 
the shortage of affordable housing in America. In the 2005 
budget, the proposed total is $2.1 billion, which includes the 
$200 million for the American Dream Downpayment Initiative that 
I mentioned earlier.

                                  CDBG

    HUD is committed to preserving America's cities as vibrant 
hubs of commerce, and making urban and rural communities better 
places to live, work, and raise a family. The 2005 budget 
provides States and localities with the tools they can use to 
improve economic health and to promote community development. 
Perhaps the greatest strength of these economic development 
tools, which includes the highly successful Community 
Development Block Grant Program, is the way that they encourage 
local decision-making to address developing priorities, having 
provided over $104 billion over the last 30 years for the 
cities, counties, and States, and non-entitlement communities 
to do the things that are necessary for a better quality of 
life.
    Through its budget, HUD will strengthen its efforts to 
promote the Nation's most vulnerable, those individuals and 
families who truly need government assistance. The budget funds 
services benefiting adults and children from low-income 
families, the elderly, those with physical and mental 
disabilities, victims of predatory lending, families living in 
housing contaminated by lead-based paint hazards, and persons 
living with HIV/AIDS.

                          SAMARITAN INITIATIVE

    The administration will continue to work to meet the 
challenges of homelessness that confront many American cities. 
The President has made an unprecedented administration wide 
commitment to eliminating chronic homelessness. This commitment 
is reflected in our budget request through proposals such as 
the Samaritan Initiative, which will provide additional housing 
options and services for homeless people, especially those that 
are chronically homeless.
    Finally, Mr. Chairman, our budget creates new opportunities 
to improve HUD's performance in its critically needed housing 
and community development programs. We know that we have work 
to do there. As Secretary Jackson indicated, we look forward to 
working on doing that together with you. I know how important 
that is to this committee. We share your concerns. We continue 
to make progress, and this will remain a top priority.

                           PREPARED STATEMENT

    I want to thank you both, and all the Members of the 
committee, for your efforts. We understand that you have many 
questions. Secretaries Liu and Weicher and myself will be happy 
to try to answer those. And we know that we'll have many more 
fruitful meetings in the future. And thank you for all that you 
do.
    [The statement follows:]

                 Prepared Statement of Roy A. Bernardi

    Chairman Bond, Ranking Member Mikulski, distinguished members of 
the committee, the programs funded within the $31.3 billion HUD budget 
will create new opportunities for those who seek affordable housing and 
the American Dream of homeownership, while generating stability and 
prosperity for our communities. The key priorities it addresses are 
central to the President's plan to help make America a more secure, 
more prosperous, and more hopeful country.
    Housing, of course, is central to our national prosperity and 
remains the lynchpin of our economy. The housing market generated 
robust activity throughout the 2001 recession, and today, housing 
continues to fuel the ongoing economic recovery. Bolstered by 
historically low interest rates, home sales and new housing 
construction have repeatedly outperformed expectations. Homeownership 
last year reached an all-time high of 68.3 percent, and fourth quarter 
2003 statistics revealed that for the first time, a majority of 
minority households own a home of their own.
    The administration's fiscal year 2005 budget request for HUD will 
empower the Department to build on these successes, as we seek to 
increase homeownership through the American Dream Downpayment 
Initiative and two new mortgage products, promote decent affordable 
housing through the newly proposed Flexible Voucher Program, end 
chronic homelessness, encourage the participation of faith-based and 
community organizations in HUD grant programs, and embrace the highest 
standards of ethics, management, and accountability.

                 INCREASING HOMEOWNERSHIP OPPORTUNITIES

    Americans place a high value on homeownership because of its 
benefits to families, communities, and the Nation as a whole are so 
profound.
    Homeownership creates community stakeholders who tend to be active 
in charities, churches, and neighborhood activities. Homeownership 
inspires civic responsibility, and owners are more likely to vote and 
get involved with local issues. Homeownership offers children a stable 
living environment that influences their personal development in many 
positive, measurable ways--at home and in school.
    Homeownership's potential to create wealth is impressive, too. For 
the vast majority of families, the purchase of a home represents the 
path to prosperity. A home is the largest purchase most Americans will 
ever make--a tangible asset that builds equity, credit health, 
borrowing power, and overall wealth.
    Due in part to a robust housing economy and Bush Administration 
budget initiatives focused on promoting homeownership, the 
homeownership rate was higher in 2003 than at any time in this Nation's 
history and, as I said earlier, a majority of minority households are 
homeowners for the first time. That fact, however, masks a deep 
``homeownership gap'' between non-Hispanic whites and minorities; while 
the homeownership rate for non-Hispanic whites is nearly 76 percent; it 
is slightly above 50 percent for African-Americans and Hispanics, and 
55 percent for Native Americans.
    The administration is focused on giving more Americans the 
opportunity to own their own homes, including minority families. In 
June 2002, President Bush announced an aggressive homeownership agenda 
to remove the barriers that block American families from achieving 
homeownership, in the hope of creating at least 5.5 million new 
minority homeowners by the end of this decade. The administration's 
homeownership agenda is dismantling the financial barriers to 
homeownership by providing down payment assistance, increasing the 
supply of affordable homes, increasing support for homeownership 
education programs, and simplifying the homebuying process. More than 
1.53 million new minority homeowners have been created in the United 
States since the initiative was announced.
    Through ``America's Homeownership Challenge,'' the President called 
on the real estate and mortgage finance industries to take concrete 
steps to tear down the barriers to homeownership. In response, HUD 
created the Blueprint for the American Dream Partnership, an 
unprecedented public/private initiative that harnesses the resources of 
the Federal Government with those of the housing industry to accomplish 
the President's goal.
    Additionally, we propose several new or expanded initiatives in 
fiscal year 2005 to continue the increase in overall homeownership, 
which will help improve minority homeownership rates.
    As a first step, the administration proposes to fund the American 
Dream Downpayment Initiative at $200 million in fiscal year 2005. 
President Bush signed the American Dream Downpayment Act into law on 
December 16, 2003, creating homeownership opportunities for thousands 
of Americans who had been unable to cross the most significant obstacle 
to homeownership: high downpayments and closing costs. The Initiative 
will help approximately 40,000 low-income families with the downpayment 
on their first home.
    The administration is proposing a new mortgage insurance product to 
help first-time homebuyers purchase a home by allowing zero downpayment 
loans. Currently, the Federal Housing Administration (FHA) requires a 
minimum downpayment of 3 percent. To cover the higher risk involved, 
premiums will be increased in the short term for these borrowers. This 
program will be implemented at no cost to the government or the 
American taxpayer. This new Zero Downpayment program is expected to 
serve 150,000 families per year, generating about $19 billion in 
endorsements.
    The administration is also proposing a new sub-prime loan product 
called Payment Incentives to offer FHA insurance to families that, due 
to poor credit, would be served either by the private market at a 
higher cost or not at all. Borrowers would be offered FHA loan 
insurance under this new initiative that will allow them to maintain 
their home or to purchase a new home. The new Mutual Mortgage Insurance 
(MMI) mortgage loan program is expected to serve 60,000 families per 
year, and generate an additional $7.9 billion in endorsements.
    Helping families learn about the loan products and services 
available to them and how to identify and avoid predatory lending 
practices is critical to increasing homeownership. Counseling has 
proven to be an extremely important element in both the purchase of a 
home and in helping homeowners keep their homes in times of financial 
stress. The Fiscal Year 2005 Budget will provide a record $45 million 
to support 550,000 families with home purchase and homeownership 
counseling and about 250,000 families with rental counseling. 
Counseling would be required for all families buying homes through the 
Zero Downpayment insurance program.
    A new proposal for fiscal year 2005--the Flexible Voucher Program--
will provide new flexibility to Public Housing Authorities (PHA's) by 
allowing them to offer downpayment assistance or monthly homeownership 
subsidies to families. In addition, through the Flexible Voucher 
Program, the Department will award performance-based bonuses to PHA's 
that participate in homeownership activities. The Flexible Voucher 
Program proposal calls for funding the Housing Choice program as a 
flexible voucher grant, giving a set sum of money to public housing 
authorities (PHA's), rather than promising to fund a certain number of 
units. Using a dollar-based approach rather than a unit-based approach, 
combined with performance measures, will give incentives to PHA's to 
streamline administrative costs and provide more housing opportunities 
for the money they receive. Additionally, incentives will be provided 
to PHA's to encourage work and to emphasize vouchers as a bridge to 
self-sufficiency, not an entitlement or an ongoing handout for housing 
needs.
    The Self-Help Homeownership Opportunity Program (SHOP) provides 
grants to national and regional non-profit organizations to subsidize 
the costs of land acquisition and infrastructure improvements. 
Homebuyers must contribute significant amounts of sweat equity or 
volunteer labor to the construction or rehabilitation of the property. 
The fiscal year 2005 budget request of $65 million more than doubles 
the funding received in 2004, reflecting President Bush's continuing 
commitment to self-help housing organizations such as Habitat for 
Humanity. These funds will help produce approximately 5,200 new homes 
nationwide for very low-income families.
    To promote the production of affordable single-family homes in 
areas where such housing is scarce--and to help revitalize distressed 
communities--a tax credit of up to 50 percent of the cost of 
constructing a new home or rehabilitating an existing home would be 
provided. Eligibility for this new tax credit would be limited to homes 
that are affordable to lower-income households (purchasers whose 
incomes are below 80 percent of local median income).
    The HOME Investment Partnerships program plays a key role in 
addressing the shortage of affordable housing in America. In fiscal 
year 2005, a total of $2.1 billion--which includes $200 million for the 
American Dream Downpayment Initiative--is being proposed for 
participating jurisdictions (States and local governments) to expand 
the Nation's supply of affordable housing. Participating jurisdictions 
have substantial local discretion to determine how to spend these 
funds. In addition to homeownership assistance, HOME funds can be used 
to help renters, new homebuyers, or existing homeowners through 
rehabilitation of substandard housing, acquisition of standard housing, 
new construction, or tenant-based rental assistance. To date, HOME 
grantees have committed funds to provide homebuyer assistance to more 
than 294,000 low-income households. Based on historical trends, 36 
percent of HOME funds will be used for new construction, 47 percent for 
rehabilitation, 14 percent for acquisition, and 3 percent for rental 
assistance.
    Through its mortgage-backed securities program, the Government 
National Mortgage Association--or Ginnie Mae--helps to ensure that 
mortgage funds are available for low- and moderate-income families 
served by FHA and other government programs such as those under the 
Department of Veterans Affairs and the Rural Housing Service of the 
Department of Agriculture. The fiscal year 2005 budget requests $200 
billion in new loan guarantee limitations.
    During fiscal year 2003, Ginnie Mae marked its 35th anniversary and 
guaranteed a record $215.8 billion in mortgage-backed securities. Since 
its inception in 1968, Ginnie Mae has guaranteed more than $2 trillion 
in mortgage-backed securities and helped more than 27 million families 
gain access to affordable housing or lower mortgage costs. HUD's role 
in the secondary mortgage market provides an important public benefit 
to Americans seeking to fulfill their dream of homeownership.
    The administration has proposed broad reform of the supervisory 
system for Government-sponsored enterprises (GSE's) in the housing 
market. As part of this reform, the administration has proposed that 
HUD have the ability to set an enforceable goal encouraging the 
purchase of first-time homebuyer mortgages. While part of their 
charter, the GSE's significantly lag the market for all first-time 
homebuyers regardless of race or ethnicity. This portion of the reform 
is designed to ensure that Fannie Mae and Freddie Mac lead, not lag 
behind, the market.
    In addition, the Fiscal Year 2005 Budget would assess GSE's an 
additional $6.25 million for the expected cost of the HUD Secretary's 
responsibilities under this Act and amendments as outlined in recent 
Administration proposals. These responsibilities include establishing 
and enforcing affordable housing goals for GSE's, ensuring GSE 
compliance with Fair Housing laws, and providing consultation to the 
safety and soundness regulator on the GSEs' new activities.
    HUD has taken bold steps to comprehensively reform the homebuying 
process and make it far less complicated and less expensive for 
consumers. New disclosure requirements proposed by the administration 
under the Real Estate Settlement Procedures Act (RESPA) call for full, 
upfront disclosure and explanation of all fees that buyers pay at 
settlement, making it clear to the borrower what options are available 
for financing a home and what they might cost. They also facilitate 
industry packages with a guaranteed price. This will make its easier 
for consumers to shop for mortgages. By empowering the consumer, this 
competition is expected to reduce the average initial cost of buying a 
home by $700.
    HUD's new regulations would expand homeownership by making the 
homebuying process less complicated, the paperwork less demanding, and 
the mortgage process less expensive. The Department issued a proposed 
rule covering RESPA reform in fiscal year 2002 and anticipates a final 
rule in fiscal year 2004.
    The Fiscal Year 2005 Budget supports five HUD programs that help to 
promote homeownership in Native American and Hawaiian communities.
    Native American Housing Block Grants (NAHBG) provide $647 million 
in funding to federally-recognized tribes and to tribally-designated 
housing entities for a wide variety of affordable housing activities. 
Grants are awarded on a formula basis that was established through 
negotiated rulemaking with the tribes. The NAHBG program allows funds 
to be used to develop new housing units to meet critical shortages in 
housing. Other uses include housing assistance to modernize and 
maintain existing units; housing services, including direct tenant 
rental subsidy; crime prevention; administration of the units; and 
certain model activities.
    The Title VI Federal Guarantees for Tribal Housing program provides 
guaranteed loans to recipients of the Native American Housing Block 
Grant who need additional funds to engage in affordable housing 
activities. The Department's budget proposes to continue funding this 
program at last year's level, which will provide $17.9 million in loan 
guarantee authority.
    The Indian Housing Loan Guarantee (Section 184) program helps 
tribal members and their families to access private mortgage financing 
for the purchase, construction, or rehabilitation of single-family 
homes. The program guarantees payments to lenders in the event of 
default. In fiscal year 2005, $1 million is requested in credit subsidy 
for 100 percent Federal guarantees of approximately $29 million in 
private loans.
    Under the Native Hawaiian Home Loan Guarantee Fund (Section 184A) 
program, loan guarantees will be used primarily to secure private 
financing to purchase, construct, or rehabilitate single-family homes 
on Hawaiian Home Lands. This makes possible the financing of 
construction loans and home mortgages by private financial institutions 
that would otherwise not be possible due to the unique status of 
Hawaiian Home Lands. The Fiscal Year 2005 Budget will provide $1 
million in credit subsidy to secure approximately $37.4 million in 
private loans.
    Modeled after the NAHBG, the Native Hawaiian Housing Block Grant 
program recognizes the documented housing needs of native Hawaiians who 
are eligible to reside on, or who already live on, Hawaiian Home Lands. 
Native Hawaiians experience the worst housing conditions in the State 
and constitute nearly 30 percent of the homeless population. The Fiscal 
Year 2005 Budget will provide $9.5 million. Grant funds will be awarded 
to the Department of Hawaiian Home Lands and may be used to support the 
acquisition, new construction, reconstruction, and rehabilitation of 
affordable housing. Activities include real property acquisition, 
demolition, financing, and development of utilities and utility 
services, as well as administration and planning, housing management 
services, crime prevention, and safety activities.

                   PROMOTE DECENT AFFORDABLE HOUSING

    The Fiscal Year 2005 Budget promotes the production and 
accessibility of affordable housing for families and individuals who 
rent. This is achieved, in part, by providing States and localities new 
flexibility to respond to local needs.
    HUD has three major rental assistance programs that collectively 
provide rental subsidies to approximately 4.5 million households 
nationwide. The major vehicle for providing rental subsidies is the 
Section 8 program, which is authorized in Section 8 of the U.S. Housing 
Act of 1937. Under this program, HUD provides subsidies to individuals 
(tenant-based) who seek rental housing from qualified and approved 
owners, and also provides subsidies directly to private property owners 
who set aside some or all of their units for low-income families 
(project-based). Currently, HUD subsidizes operation, maintenance, and 
capital improvement of 1.2 million public housing units. In total, 
these programs will provide approximately $23.2 billion in new funds 
each year to support rental costs for low-income individuals and 
families; total rental assistance accounts for approximately 74 percent 
of the total budget for the Department in fiscal year 2005.
    The Fiscal Year 2005 Budget continues to fund Section 8 tenant-
based and project-based rental assistance through the Housing 
Certificate Fund. In addition, public housing is subsidized through the 
Public Housing Operating Fund and the Public Housing Capital Fund.
    HUD also helps to provide affordable rental housing through the 
HOME program, the Native American Housing Block Grant, FHA mortgage 
insurance, and the Community Development Block Grant (CDBG) program. In 
addition, HUD meets the specialized housing needs of the elderly and 
individuals with disabilities through grants for the development and 
operation of supportive housing projects for these target populations.
    The Budget includes a new Flexible Voucher Program (FVP) that would 
replace the Housing Choice Voucher Program and improve the delivery of 
rental and homeownership subsidies for low-income families. The current 
system fails to support families making the transition from public 
assistance to self-reliance and work, and in doing so reduces the 
number of families that could be helped for a given amount of money. 
Under the reform, the Voucher program would be a means for families to 
transition to a better life, and more of them will be helped. The ease 
of administration for HUD and PHA's is the means to that policy end, 
and a bonus for doing the right thing for families.
    Some of the key features of the new FVP include greater PHA 
discretion in meeting local housing needs and serving more families, 
steady and predictable funding levels, and rewards for PHA's that are 
good managers. HUD will also provide performance-based incentives to 
maximize the benefits of available funds and will hold PHA's 
accountable for poor performance. High-performing PHA's that meet 
national objectives, such as increasing the number of participants that 
use the voucher assistance on a transitional (not permanent) basis, 
increasing homeownership, and efficiently assisting families would be 
eligible for performance and incentive bonuses.
    The FVP will simplify program requirements and avoid the ``one size 
fits all'' program design. The FVP provides local and State PHA's with 
greater administrative flexibility to meet the overall program 
objective of providing temporary and transitional housing assistance 
for low-income families. As is current practice, the FVP will be 
administered by PHA's. The FVP would include administrative costs as 
part of the total grant.
    For fiscal year 2005, Project Based Rental Assistance will continue 
to provide funding for renewals of expiring project-based rental 
assistance contracts under Section 8, including amounts necessary to 
maintain performance-based contract administrators. In addition to new 
appropriations, funds existing in this account from prior-year balances 
and from recaptures will augment the amount available to meet amendment 
requirements for on-going contracts that have depleted their funding.
    It is anticipated that approximately 896,000 project-based units 
under rental assistance will require renewal in fiscal year 2005, an 
increase of about 25,000 units from the current fiscal year. This 
continues the upward trend stemming from first-time expirations in 
addition to contracts already under the annual renewal cycle.
    Public Housing is the other major form of assistance that HUD 
provides to the Nation's low-income population. In fiscal year 2005, 
HUD anticipates that there will be approximately 1.2 million public 
housing units occupied by tenants. These units are under the direct 
management of approximately 3,100 PHA's. Tenants pay 30 percent of 
their income for rent and utilities, and HUD subsidies cover much of 
the remaining cost.
    HUD is committed to ensuring that the existing public housing stock 
is either maintained in good condition or is demolished. Maintenance is 
achieved through the subsidy to PHA's for both operating expenses and 
capital needs. Through its regulatory authority, HUD will ensure that 
housing that is no longer viable will be removed from the inventory. It 
will encourage voluntary removal of decaying units when it makes 
economic sense to do so. Many of these decisions will be made at the 
local level, and HUD will work with PHA's to allow greater local 
decision-making.
    The formula distribution of Public Housing Operating Funds takes 
into account the size, location, age of public housing stock, 
occupancy, and other factors intended to reflect the costs of operating 
a well-managed public housing development. In fiscal year 2005, the 
Department's budget provides approximately $3.6 billion in funding for 
the Public Housing Operating Fund.
    This Public Housing Capital Fund program provides formula grants to 
PHA's for major repairs and modernization of units. The fiscal year 
2005 budget will provide $2.7 billion in this account. This amount is 
sufficient to meet new capital improvement needs in fiscal year 2005.
    Of the funds made available, up to $50 million may be maintained in 
the Capital Fund for natural disasters and emergencies. Up to $30 
million can be used for demolition grants--to accelerate the demolition 
of thousands of public housing units that have been approved for 
demolition but remain standing. Also in fiscal year 2005, up to $55 
million will be available for the Resident Opportunity and Self-
Sufficiency (ROSS) program, which provides supportive services and 
assists residents in becoming economically self-sufficient.
    HUD will introduce a demonstration program in 2005 designed to 
improve public housing. The Freedom to House Initiative will maximize 
the ability of local PHA's to make decisions affecting their tenants, 
while simultaneously serving essentially the same numbers of low-income 
families. It will grant to participating demonstration PHA's the 
ability to combine the use of capital and operating funds, to set 
locally determined rent structures, and to free themselves from many of 
the administratively burdensome requirements of Federal reporting. This 
demonstration will also allow HUD and PHA's to shift to an asset-based 
management practice.
    HUD's Moving to Work Program has shown that residents and PHA's 
have benefited from increased local flexibility. These PHA's are 
convinced that their reforms have encouraged residents to seek work, 
work more hours, and pursue opportunities to increase their incomes. 
Freedom to House will continue this experiment in an environment that 
will allow for measurement and comparative evaluation.
    Up to 50 PHA's will be identified to participate in the 
demonstration, while up to 50 others will serve as a control group 
following current public housing laws and regulations. Annual 
assessment of the PHA's will be based on parameters of financial health 
and physical safety and soundness. Performance assessment results and 
other pertinent data will be provided on an annual basis and will 
provide policymakers with the ability to review current practices 
against increased PHA flexibility in order to guide future policy 
decisions.
    HUD will also continue to promote affordable rental housing through 
FHA's multifamily mortgage insurance programs. In fiscal year 2005, FHA 
will reduce the annual mortgage insurance premiums on its largest 
apartment new construction program, Section 221(d)(4), for the third 
year in a row--from 50 basis points in fiscal year 2004 to 45 basis 
points in fiscal year 2005. This is the lowest premium that FHA has 
ever charged for multifamily insurance, and we are able to do so 
because the program is being run on a financially sound and prudent 
basis. With this reduction, the Department estimates that it will 
insure $3.1 billion in apartment development loans through this program 
in fiscal year 2005, producing more than 41,000 additional new rental 
units. Most of these units will be affordable to moderate-income 
families, and most of them will be located in underserved areas.
    When combined with other multifamily mortgage programs, including 
those serving non-profit developers, health care facilities, and 
refinancing mortgagors, FHA anticipates providing support for over 
250,000 new units.
    In addition to the extensive use of HOME funds for homeownership, 
the HOME program has invested heavily in the creation of new affordable 
rental housing. Since its inception, the HOME program has supported the 
building, rehabilitation, and purchase of more than 334,000 rental 
units. Program funds have also provided direct rental assistance to 
more than 100,000 households.
    Native American Housing Block Grants provide a flexible source of 
funding to federally recognized tribes or tribally-designated housing 
entities and is used for a wide variety of affordable housing 
activities. Authorized uses include both rental housing and 
homeownership. The block grant is funded at $647 million in fiscal year 
2005.
    The Native Hawaiian Housing Block Grant is modeled on the NAHBG, 
and provides funding to the Department of Hawaiian Home Lands for a 
wide variety of eligible affordable housing activities, including the 
construction, rehabilitation, and acquisition of rental units for 
native Hawaiians who are eligible to reside on, or who already live on, 
Hawaiian Home Lands.
    Several other HUD programs contribute to rental assistance, 
although not as a primary function. For example, the flexible Community 
Development Block Grant can be used to support rental-housing 
activities. The CDBG program is celebrating its 30th year in 2004, 
having provided over $108 billion in much-needed resources to States, 
rural communities, inner cities, suburban communities, as well as 
counties to benefit low- and moderate-income persons.
    The Department believes that regulatory barrier removal must be an 
essential component of any national housing strategy to address the 
needs of low- and moderate-income families. Therefore, HUD is committed 
to working with States and local communities to reduce regulatory 
barriers to the development of affordable housing.
    In fiscal year 2003, the Department established ``America's 
Affordable Communities Initiative: Bringing Homes Within Reach through 
Regulatory Reform.'' This major new initiative is a Department-wide 
effort charged not only with developing new approaches and incentives 
that can encourage efforts at the local level, but also reviewing and 
reforming HUD's own regulations that may be barriers to expanded 
housing affordability.
    To support this effort, HUD will conduct research and dissemination 
efforts to learn more about the nature and extent of regulatory 
obstacles to affordable housing. Current research underway includes 
developing a methodology for ``housing impact'' analyses. This new tool 
will assist HUD and other Federal agencies, as well as State and local 
governments, to measure the impact of any proposed new regulation on 
housing affordability. Through such an expanded research and 
dissemination effort, HUD will develop the tools and approaches needed 
by State and local governments to address the many barriers that 
restrict the development of affordable housing.

                       STRENGTHENING COMMUNITIES

    HUD is committed to preserving America's cities as vibrant hubs of 
commerce and making communities better places to live, work, and raise 
a family. The fiscal year 2005 budget provides States and localities 
with tools they can put to work improving economic health and promoting 
community development. Perhaps the greatest strength of HUD's economic 
development programs is the emphasis they place on helping communities 
address development priorities through local decision making.
    The flagship of HUD's community and economic development programs 
is the Community Development Block Grant (CDBG) program. In fiscal year 
2005, total funding for the CDBG account will be $4.6 billion. CDBG 
funds go to 1,160 grantees in 944 cities, 165 counties, and 50 States, 
plus Puerto Rico.
    CDBG's popularity is based on the fact that funds may be used for a 
broad range of housing revitalization and community and economic 
development activities, thereby increasing State and local capacity for 
economic revitalization, job creation and retention, neighborhood 
revitalization, public services, community development, renewal of 
distressed communities, and leveraging of non-Federal resources.
    Of the $4.6 billion in fiscal year 2005, $4.3 billion will be 
distributed to entitlement communities, States, and insular areas, and 
$71.6 million will be distributed by a competition to recognized tribes 
for the same uses. The remaining $215 million is for specific purposes 
and programs at the local level and is distributed generally on a 
competitive grant basis. Principal among these initiatives in fiscal 
year 2005 are the Development Challenge Pilot Program, the National 
Community Development Initiative, the University Partnership Grant 
program, and Youthbuild.
    The Fiscal Year 2005 Budget proposes an interagency effort to test 
ways to better coordinate, target, and leverage existing Federal 
community and economic development programs. Under the $10 million 
Development Challenge Pilot Program, competitive grants will be awarded 
to a limited number of communities to develop and implement clear and 
measurable community development goals. The results of this initiative 
are intended to provide valuable information on how performance 
measurement can be made an integral part of CDBG and other community 
and economic development programs.
    HUD participates in the privately organized and initiated NCDI. The 
Fiscal Year 2005 Budget will provide $25 million for the NCDI, in which 
HUD has funded three phases of work since 1994. A fourth phase will 
emphasize the capacity building of community based development 
organizations, including community development corporations, in the 
economic arena and related community revitalization activities through 
the work of intermediaries, including the Local Initiatives Support 
Corporation and the Enterprise Foundation. In addition, the budget 
includes funding for capacity building activities for Habitat for 
Humanity ($4.5 million) and Youthbuild USA ($2 million).
    The Fiscal Year 2005 Budget provides $33.8 million through the 
University Partnership Grant program to assist colleges and 
universities, including minority institutions, to engage in a wide 
range of community development activities. Funds are also provided to 
support graduate programs that attract minority and economically 
disadvantaged students to participate in housing and community 
development fields of study.
    The Fiscal Year 2005 Budget requests $64.6 million for the 
Youthbuild program. Youthbuild is targeted to high school dropouts aged 
16 to 24, and provides these disadvantaged young adults with education 
and employment skills through constructing and rehabilitating housing 
for low-income and homeless people. The program also provides 
opportunities for placement in apprenticeship programs or in jobs. The 
fiscal year 2005 request will serve more than 3,728 young adults.
    The administration continues to work to meet the challenge of 
homelessness that confronts many American cities. The President has 
made an unprecedented, administration-wide commitment to eliminating 
chronic homelessness. The administration is also fundamentally changing 
the way the Nation manages the issue of homelessness by focusing more 
resources on providing permanent housing and supportive services for 
the homeless population, instead of simply providing more shelter beds.
    HUD is an active member of the U.S. Interagency Council on 
Homelessness in its work to coordinate the efforts of 18 Federal 
agencies that address the needs of homeless persons. HUD and its 
partners are focused on improving the delivery of homeless services, 
which includes working to cut government red tape and simplifying the 
funding process.
    The Fiscal Year 2005 Budget continues to address the housing needs 
of homeless individuals and families by funding targeted homeless 
programs at $1.5 billion. Three initiatives are being proposed that 
will provide new direction and streamline the delivery of funds to the 
local and non-profit organizations that serve the homeless population.
    The Fiscal Year 2005 Budget includes the Samaritan Initiative to 
address the President's goal of ending chronic homelessness by 2012 and 
includes $50 million for HUD and $10 million for HHS and VA. Persons 
who experience chronic homelessness are a sub-population of 
approximately 150,000 who often have an addiction or suffer from a 
disabling physical or mental condition, and are homeless for extended 
periods of time or experience multiple episodes of homelessness. These 
individuals, for the most part, get help for a short time but soon fall 
back to the streets and shelters. Thus, they continually remain in the 
homeless system.
    The Samaritan Initiative will fund promising local collaborative 
strategies to move chronically homeless individuals from the streets to 
safe permanent housing with supportive services. It will provide new 
housing options as well as aggressive outreach and services to homeless 
people living on the streets. HUD will continue other, current 
interagency efforts to end chronic homelessness including the joint 
initiative with the Department of Labor to link housing and employment 
services in local communities through One-Stop Career Centers.
    HUD proposes to consolidate its three competitive homeless 
assistance programs into a single program. The consolidation will 
provide more consistent funding from year to year, expand eligible 
activities--including prevention--across programs, eliminate multiple 
match requirements, and simplify the competition and award process.
    The administration again proposes legislation that would transfer 
the Emergency Food and Shelter Program (EFSP) from the Federal 
Emergency Management Agency to HUD. The transfer of this $153 million 
program in its current form would allow for the consolidation of 
emergency shelter assistance--EFSP and the Emergency Shelter Grants 
program--under one agency. EFSP funds are distributed through a 
National Board (a public-private partnership) which in turn allocates 
funds to similar local Boards in eligible jurisdictions. Eligibility 
for funding is based on population, poverty, and unemployment data. The 
Board will be chaired by the Secretary of HUD and will include the 
nonprofit agencies that currently constitute the National Board.
    In addition to funding homeless supportive services, the Fiscal 
Year 2005 Budget funds services benefiting adults and children from 
low-income families, the elderly, those with physical and mental 
disabilities, victims of predatory lending practices, and families 
living in housing contaminated by lead-based paint hazards.
    The Fiscal Year 2005 Budget will provide $773 million in funding 
for the Supportive Housing for the Elderly (Section 202) program. In 
the Section 202 program, funding for housing for the elderly is awarded 
competitively to non-profit organizations that construct new 
facilities. The facilities are also provided with rental assistance 
subsidies, enabling them to accept very low-income residents. Many 
residents live in the facilities for years; over time, these people 
often become frail and less able to live without some additional 
services. Therefore, the program is providing up to $30 million of the 
grants to fund the conversion of all or part of existing properties to 
assisted-living facilities, enabling these elderly residents to remain 
in their units. In addition, up to $53 million of the grant funds will 
be targeted to funding the service coordinators who help elderly 
residents obtain supportive services from the community.
    The Fiscal Year 2005 Budget proposes to fund capital advances of 
$249 million for Supportive Housing for Persons with Disabilities 
(Section 811). The Section 811 program will also continue to set aside 
funds to enable persons with disabilities to live in mainstream 
environments. Up to 25 percent of the grant funds can be used to 
provide Section 8-type vouchers that offer an alternative to congregate 
housing developments. In fiscal year 2005, up to $50 million of the 
grant funds will be used to renew ``mainstream'' Section 8-type 
vouchers so that individuals can continue to use their vouchers to 
obtain rental-housing vouchers in the mainstream rental market.
    In 2005, HUD will provide $295 million in new grant funds for 
housing assistance and related supportive services for low-income 
persons with HIV/AIDS and their families through the Housing 
Opportunities for Persons with AIDS (HOPWA) program. Although most 
grants are allocated by formula, based on the number of cases and 
highest incidence of AIDS, a small portion is provided through 
competition for projects of national significance. The program will 
renew all existing grants in fiscal year 2005 and provide new formula 
grants for an expected two additional jurisdictions. Since 1999, the 
number of formula grantees has risen from 97 to an expected 119 in 
fiscal year 2005.
    A compassionate Nation must ensure that those Americans served by 
HUD--many of whom are struggling families, or individuals facing a 
trying time in their lives--live in a healthy and secure environment 
and have access to tools and opportunities that will help them move 
toward self-sufficiency. HUD's basic programs contribute to this goal 
by providing individuals and families with the housing and services 
that allow them to focus on recovery, job-related skill development, 
and obtaining work or increasing income.
    The Voluntary Graduation Incentive Bonus recognizes PHA's that 
experience higher rates of families that transition out of the public 
housing program. This will be the first initiative in over 20 years to 
affirm that public housing's primary mission is to help low-income 
families gain access to housing for a temporary period while on the 
road toward economic freedom. Public housing should not be managed as a 
permanent housing solution for the poor. HUD will allocate $15 million 
in operating fund monies to those PHA's that exceed a baseline 
transition rate.
    In fiscal year 2005, the Department is introducing the concept of 
performance-based bonuses to PHA's in the Flexible Voucher Program. 
Potential performance standards would be successfully helping families, 
including elderly and disabled individuals, move toward independent 
living, economic self-sufficiency, and homeownership. PHA's that 
successfully achieve this goal will be awarded performance-based 
bonuses.
    The Department's objectives emphasize the outcome of the self-
sufficiency efforts and will measure the changes in the number of 
households no longer needing assistance, with an increase in the number 
of families involved in the Family Self-Sufficiency (FSS) program whose 
predominant source of income is work. PHA's will be rewarded for 
achieving these objectives through an incentive bonus. The bonus 
funding can be used by PHA's for a variety of activities, including 
payment of FSS staff salaries to ensure coordination with State 
agencies, faith-based organizations, and other non-profit providers of 
supportive services; job training, vocational, and educational 
activities; and counseling services.
    The Department will provide $55 million in funds to support the 
Resident Opportunity and Self-Sufficiency (ROSS) program for residents 
of Public and Indian Housing. The main purpose of the funds is to 
provide a link between residents and services that can help them 
achieve self-sufficiency.
    HUD's Lead-Based Paint program is the central element of the 
President's effort to eradicate childhood lead-based paint poisoning. 
In fiscal year 2005, funding for the lead-based paint program will 
increase to $139 million from the $136 million requested by the 
President for fiscal year 2004. Grant funds are targeted to low-income, 
privately owned homes most likely to expose children to lead-based 
paint hazards.
    The program conducts public education and compliance assistance to 
prevent childhood lead poisoning. New estimates from the Centers for 
Disease Control and Prevention (CDC) show that the program has helped 
to reduce the number of children at risk by 50 percent, but that nearly 
half a million children still have too much lead in their bodies.
    Included in the request for this program is $10 million for the 
Healthy Homes Initiative, which is targeted funding to prevent other 
housing-related childhood diseases and injuries such as asthma and 
carbon monoxide poisoning. The President's Taskforce Report notes that 
asthma alone costs the Nation over $6 billion each year. Working with 
other agencies such as the CDC and the Environmental Protection Agency, 
HUD is bringing comprehensive expertise to the table in housing 
rehabilitation and construction, architecture, urban planning, public 
health, environmental science, and engineering to address a variety of 
childhood problems that are associated with housing.

                 ENSURING EQUAL OPPORTUNITY IN HOUSING

    As the primary Federal agency responsible for the administration of 
fair housing laws, HUD is committed to protecting the housing rights of 
all Americans, regardless of race, color, national origin, religion, 
sex, age, familial status, or disability. This commitment is reflected 
in HUD's budget request for fiscal year 2005.
    The goal of HUD's fair housing programs is to ensure that all 
families and individuals have access to a suitable living environment 
free from unlawful discrimination. HUD contributes to fair housing 
enforcement and education by directly enforcing the Federal fair 
housing laws and by funding State and local fair housing efforts 
through two programs: the Fair Housing Assistance Program (FHAP) and 
the Fair Housing Initiatives Program (FHIP).
    The Fiscal Year 2005 Budget will provide $27 million through FHAP 
for State and local jurisdictions that administer laws substantially 
equivalent to the Federal Fair Housing Act. The Department supports 
FHAP agencies by providing funds for capacity building, complaint 
processing, administration, training, and the enhancement of data and 
information systems. FHAP grants are awarded annually on a 
noncompetitive basis. Activities funded by this program play a pivotal 
role in increasing the overall national homeownership rate, which we 
believe will add 5.5 million new minority homeowners by the end of the 
decade.
    Targeted Education and Enforcement Follow Up on Housing 
Discrimination Studies is one of the activities supported through FHAP. 
This education campaign combats discriminatory activities, including 
those against African-Americans, Hispanics, Asians, Pacific Islanders, 
American Indians, Alaskan Natives, native Hawaiians, and persons with 
disabilities.
    FHAP also supports the Fair Housing Training Academy, which will 
serve all FHAP agencies and provide continuing professional fair 
housing training and certification for current and future FHAP staff. 
The curriculum will cover training needed to ensure quality and timely 
investigations of fair housing complaints and includes case processing, 
conciliation skills, compliance monitoring, and testing.
    The Department expects increases in discrimination cases processed 
by State and local fair housing agencies as a result of increased 
education and outreach activities. The fiscal year 2005 FHAP budget 
request supports this increase.
    The Fiscal Year 2005 Budget will provide $20.7 million in grant 
funds for non-profit FHIP agencies nationwide to directly target 
discrimination through education, outreach, and enforcement. The FHIP 
program for fiscal year 2005 is structured to respond to the finding of 
the 3-year National Discrimination Study and related studies, which 
reflect the need to expand education and outreach efforts nationally as 
a result of continuing high levels of discrimination.
    Promoting the fair housing rights of persons with disabilities is a 
Departmental priority and will remain an important initiative within 
FHIP. Fair Housing Act accessibility design and construction training 
and technical guidance are an integral part of the Fair Housing 
Accessibility First Project. Bringing about industry-wide acceptance of 
accessibility as the way to design housing will depend, to a 
significant degree, on easy access to consistently accurate and helpful 
information and guidance on compliance. An extension of the current 
program for at least an additional 1 to 3 years is necessary to achieve 
this goal.
    This project provides training to architects, builders, and others 
on how to design and construct multifamily buildings in compliance with 
the accessibility requirements of the Fair Housing Act. Therefore, the 
Department is requesting $1 million for the first year of a new 3-year 
contract to continue the Fair Housing Accessibility First education and 
outreach training. Fair Housing Accessibility First will maintain a 
hotline and a website to provide personal assistance to housing 
professionals on design and construction problems.

 PROMOTING THE PARTICIPATION OF FAITH-BASED AND COMMUNITY ORGANIZATIONS

    HUD's Center for Faith-Based and Community Initiatives (``the 
Center'') was established by Executive Order 13198 on January 29, 2001. 
Its purpose is to coordinate the Department's efforts to eliminate 
regulatory, contracting, and other obstacles to the participation of 
faith-based and other community organizations in social service 
programs.
    To help returning prisoners rebuild their lives, find work, and 
avoid crime, the fiscal year 2005 President's Budget proposes a 4-year, 
$300 million Prisoner Re-Entry Initiative to be carried out through the 
collaborative efforts of HUD and the Departments of Labor and Justice. 
Harnessing the resources and experience of faith-based and community 
organizations, the Prisoner Re-Entry Initiative will help ex-offenders 
find and keep jobs, secure transitional housing, and receive mentoring. 
HUD's Fiscal Year 2005 Budget includes $25 million for this initiative.
    The 2005 Budget also requests $5 million for a faith-based pilot 
for a multi-city program aimed at increasing the participation of 
faith-based and community-based organizations in the cities' community 
development strategies.
    The Center will continue to play a key role in fiscal year 2005 in 
facilitating intra-departmental and interagency cooperation regarding 
the needs of faith-based and community organizations. It will focus on 
research; law and policy; development of an interagency resource center 
to service faith-based and community partners; and expanding outreach, 
training, and coalition building. Additionally, the Center will 
participate in the furtherance of HUD's overall strategic goals and 
objectives--particularly as they relate to partnerships with faith-
based and community organizations.
    On December 12, 2002, the President issued Executive Order 13279, 
``Equal Protection of the Laws for Faith-Based and Community 
Organizations.'' The intent of the Executive Order is to ensure that 
faith-based and community organizations are not unjustly discriminated 
against by regulations and bureaucratic practices and policies.
    In fiscal year 2005, in compliance with Executive Orders 13198 and 
13279, the Center will focus its work on the following key 
responsibilities: ensuring that the new regulations on faith-based 
organizations are implemented and reflected in all HUD policies; 
outreach to faith-based and community groups through technical 
assistance, the Center's website, interagency summits, and other 
efforts; establishing innovative pilot and demonstration programs to 
increase the participation of faith-based and other community 
organizations in Departmental initiatives; and educating government 
personnel on the faith-based and community initiative.
    Progress on these efforts will be tracked as part of the 
President's Management Agenda (PMA).

   EMBRACING HIGH STANDARDS OF ETHICS, MANAGEMENT, AND ACCOUNTABILITY

    HUD is committed to improving performance in its critically needed 
housing and community development programs, and producing these 
improvements in a manner that reflects the highest standards of ethics, 
management, and accountability.
    The PMA is designed to improve the overall efficiency and 
effectiveness of the Federal Government and to address significant 
management deficiencies at individual agencies. HUD fully embraces this 
sound management agenda and is on-target with the necessary plans and 
actions to meet the challenging goals set by the President. To sustain 
the focus needed to achieve these goals, they have been engrained in 
HUD's strategic and annual performance and operating plans.
    The PMA includes five government-wide and two HUD-specific 
initiatives that are tracked and scored in terms of both baseline goal 
accomplishment and the adequacy of plans and progress towards achieving 
established goals. At HUD, these initiatives are addressing 
longstanding management problems that will require action over a period 
of years in order to achieve the President's goals.
    In addition, the Department expects to build upon its continuing 
efforts to improve field management and Headquarters support to the 
operation and management of HUD's extensive field structure. In 
particular, the Office of Field Policy and Management will continue to 
work toward the effective integration of HUD's programs at the 
community level.

Human Capital
    After many years of downsizing, HUD faces a large number of 
potential retirements and the loss of experienced staff. HUD's staff, 
or ``human capital,'' is its most important asset in the delivery and 
oversight of the Department's mission.
    HUD has taken significant steps to enhance and better use its 
existing staff capacity, and to obtain, develop, and maintain the staff 
capacity necessary to adequately support HUD's future program delivery. 
During fiscal year 2003, HUD completed the Department's Five-Year 
Strategic Human Capital Plan with implementation plans, and in fiscal 
year 2005 will complete comprehensive workforce analyses and plans 
focusing on its core business functions. During fiscal year 2005, HUD 
will implement its comprehensive Departmental workforce plan to ensure 
its workforce is aligned efficiently, skill gaps are assessed and 
corrected, and HUD staff retiring over the next 5 years are succeeded 
by qualified staff to continue quality service and program delivery.

Competitive Sourcing
    HUD is working to determine if competition of staff functions 
identified as commercial would result in better performance and value 
for the government. However, given HUD's significant downsizing and 
extensive outsourcing of administrative and program functions over the 
past decade, opportunities for further competitive sourcing are limited 
and need to be carefully considered in the context of program risk 
exposure. HUD's Competitive Sourcing Plan has initially focused on 
establishing an adequate capacity to support the competitive sourcing 
process, with identifications of some initial opportunities for 
consideration of possible outsourcing, or in sourcing competitions to 
realize the President's goals for cost efficiency savings and improved 
service delivery. HUD will continue to assess its activities for other 
areas where competitive sourcing studies might benefit the Department.

Improved Financial Performance
    HUD has strived over the past 2 years to enhance and stabilize its 
existing financial management systems operating environment to better 
support the Department and produce auditable financial statements in a 
timely manner. HUD has received an unqualified audit opinion on its 
consolidated financial statements for the past 4 consecutive years, and 
has reduced the number of auditor-reported internal control weakness 
issues. In fiscal year 2005, the Department will continue making 
progress to reduce the number of material weaknesses or reportable 
conditions in its financial systems.

Electronic Government/Information Technology
    HUD is not only pursuing increased electronic commerce and actively 
participating in all categories of the President's ``E-Government'' 
initiatives, but is also focused on information technology management 
improvements and maximizing the use of Internet technologies to make 
HUD more efficient, effective, and responsive.
    In fiscal year 2005, HUD will place increased emphasis on the 
Department's E-Government, Privacy Act, Section 508 Disabilities Act, 
and Paperwork Reduction Act Programs. HUD's fiscal year 2005 
information technology portfolio will benefit from continuing efforts 
to improve the IT capital planning process, implement project 
management guidance, strengthen IT project management to achieve 
performance goals, complete major business segments of HUD's IT 
business architecture, and continue to improve systems security on all 
platforms and applications.

Budget and Performance Integration
    HUD developed its portion of the Fiscal Year 2005 Budget with a 
focus on collecting and using quality performance information, 
utilizing full cost accounting principles, and emphasizing program 
evaluations and research to inform decision-makers and managers. 
Staffing and other resources are aligned with strategic goals, 
objectives, and accomplishments. The Department will continue to work 
hard to improve and measure program performance.

HUD Management and Performance
    HUD is aggressively pursuing several major efforts to improve its 
management and performance by strengthening internal controls to 
eliminate material weaknesses and remove HUD programs from the General 
Accounting Office's (GAO) high-risk list.
    HUD's considerable efforts to improve the physical conditions at 
HUD-supported public and assisted housing developments are meeting with 
success. HUD and its housing partners have already achieved the 
original housing quality improvement goals through fiscal year 2005 and 
are raising the bar with new goals.
    HUD overpays hundreds of millions of dollars in low-income rent 
subsidies due to the incomplete reporting of tenant income and the 
improper calculation of tenant rent contributions. Under the PMA, HUD's 
goal is to reduce rental assistance program errors and resulting 
erroneous payments 50 percent by 2005. HUD established aggressive 
interim goals for a 15 percent reduction in 2003 and a 30 percent 
reduction in 2004. The latest study for fiscal year 2003 indicates that 
HUD exceeded its error reduction goal for that year with a 30 percent 
reduction--estimated to be approximately $600 million in reduced 
subsidy errors. Updated error measurement studies will be performed on 
program activity in 2004 and 2005 to assess the effectiveness of 
efforts to reduce program and payment errors. The Department has a 
number of training and monitoring programs in place that should produce 
additional error reductions. In fiscal year 2005, HUD will work with 
its program intermediaries to fully implement new statutory authority 
that enables more effective upfront income verifications to eliminate 
over half of the estimated erroneous assistance payments.
    FHA will continue to vigorously attack predatory lending practices 
that encourage families to buy homes they cannot afford and cause 
homeowners to lose their homes by refinancing into loans with high 
interest rates. Elderly and minority homeowners are particularly 
vulnerable to predatory lending practices, which include property 
``flipping'' (schemes where unscrupulous lenders buy homes and quickly 
resell them at inflated prices to uninformed buyers), home improvement 
scams, unaffordable mortgage loans, repeated refinancings with no 
borrower benefit, and ``packing'' life insurance and other products 
into the loan amount.
    Since 2001, FHA has mounted a vigorous assault on predatory 
lending. FHA developed 16 rules to address deceptive or fraudulent 
practices. This includes the new Appraiser Watch Initiative, 
improvements to the Credit Watch Initiative that will identify problem 
loans and lenders earlier on, new standards for home inspectors, a rule 
to prohibit property ``flipping'' in FHA programs, and rules to prevent 
future swindles like the Section 203(k) scam that threatened the 
availability of affordable housing in New York City. These reforms, and 
the greater transparency they ensure, will make it more difficult for 
unscrupulous lenders to abuse borrowers. The HUD budget ensures that 
consumer education and enhanced financial literacy remain potent 
weapons in combating predatory lending.
    The PMA tasked HUD with streamlining the Consolidated Plan process 
to make it more useful to communities in assessing their own progress 
toward addressing the problems of low-income areas. HUD works closely 
with State and local program stakeholders on this initiative. It is 
anticipated that statutory and/or regulatory proposals to meet the 
intent of the PMA will be announced shortly. Pilot testing of a variety 
of streamlining efforts will be completed during 2004, which may lead 
to additional proposals for change. As an outgrowth of the initiative, 
HUD issued a Notice entitled ``Development of State and Local 
Performance Measurement Systems for CPD Formula Grant Programs,'' which 
provides guidance to communities on developing and implementing 
performance measurement systems.
    HUD acquires over $1 billion in contracted services and goods each 
year. As part of an overall strategy to improve HUD's acquisition 
management, actions are being taken to ensure that HUD's centralized 
contract management information system contains reliable data on the 
number of active contracts, the expected cost of the contracts, and the 
types of goods and services acquired, and that its financial management 
information systems provide complete and reliable obligation and 
expenditure information on HUD's contracting activities. Other aspects 
of HUD's acquisitions management improvement strategy are being 
addressed through the human capital management strategy, which 
incorporates actions to enhance HUD's procurement staff capacity and 
improve guidance and training for acquisition officials throughout HUD.

                               CONCLUSION

    Our success will be judged by the lives and communities we have 
forever changed through our work: the young families who have taken out 
their first mortgage and become homeowners; the once-homeless men and 
women who now have a home; the faith-based and community organizations 
that are successfully using HUD grants to deliver social services; and 
the neighborhoods once facing a shortage of affordable housing that now 
have enough homes for all.
    Empowered by the resources provided for and supported by the 
administration's proposed Budget for fiscal year 2005, new success 
stories will be written and our communities and the entire Nation will 
grow stronger. And more citizens will come to know the American Dream 
for themselves.
    I would like to thank each of you for your support of our efforts. 
We welcome your guidance as we continue our work together.
    Thank you.

                        STATEMENT OF MICHAEL LIU

    Mr. Liu. Thank you, Senator. I will summarize and try and 
move very quickly through my testimony--and Ranking Member.
    In regards to the Section 8 Voucher Program, not wanting to 
replicate what my colleague has said on this subject, let me 
just note that many of the reforms contained in our proposal 
come from suggestions made by the public housing agencies 
themselves, as well as concepts already tested under the Moving 
to Work demonstration. It's also intended to deal with the 
growing complexity of the program.
    Here we have in front of you, sir, our rules, regulations, 
various guidances that have grown around a very well-
intentioned program, a program whose purpose we still support, 
but which we think needs to be rationalized and made more user-
friendly.
    Secondly, may I also mention that, in addition to making 
reforms to the program, the proposals, as a byproduct, add 
another tool to deal with some of the spiraling costs that we 
have all recognized are associated currently with the program.
    Perhaps I could have some assistance here just to show--the 
first chart here indicates the size of the Section 8 tenant-
based voucher program relative to HUD's budget, and that's that 
magenta-colored area there, over half--just a bit over half, 
based on the 2004 enacted budget, sir.

                      PUBLIC HOUSING CAPITAL FUND

    Public housing, capital fund. The capital fund has remained 
stable since 2002, at approximately $2.7 billion, which is our 
request for fiscal year 2005, as well. This steady level of 
financing--of funding allows PHA's to pursue debt financing to 
accelerate the modernization of public housing. Rehabilitation 
that would take 10 to 20 years, using annual appropriations, 
can now be dealt with in 5 years or less. So far, the 
Department has approved over $1.4 billion in debt financing. 
There are over 40 deals in the pipeline now which might range 
anywhere from another billion to $2 billion of private-sector 
dollars into the process of modernization and rehabilitation. 
These tools continue to enhance our ability to address more 
quickly the backlog in annual accrual needs of public housing.

                                HOPE VI

    As to HOPE VI, the Department is not requesting any funding 
for the program for 2005, because we believe the program has 
achieved one of its primary goals of demolishing over 100,000 
units of distressed public housing. However, the other primary 
goal of HOPE VI, revitalization of community, still awaits 
fruition. While this administration has made progress, with 
your assistance, in accelerating development schedules, still 
only 26 grants are completed out of close to 200, and 
approximately $2\1/2\ billion remain unexpended. In addition, 
two more rounds of new grants will be awarded. And, with that, 
we will have the program in existence, with current funding, 
well into past 2010.

                             OPERATING FUND

    Operating subsidy. The Department estimates that the 
request for $3.6 billion for the Operating Fund in 2005 will 
fully fund PHA's according to the current formula. Currently, 
HUD is involved in a negotiated rule-making on this subject. We 
also have proposed a Freedom to House demonstration program, 
built on the Moving-to-Work Program in public housing, and we 
hope that we will get favorable consideration there.
    We are also moving toward asset-based management, which was 
recommended by Harvard in a cost study which was requested by 
the Congress.

                            NATIVE PROGRAMS

    Finally, our programs for Native Americans, Alaskan 
Natives, and Native Hawaiians are basically sustained in past-
year levels, and we are very pleased with the success of the 
obligation and expenditure of amounts in those programs.
    Thank you, sir.
    Senator Bond. Thank you, Mr. Liu.

                       STATEMENT OF JOHN WEICHER

    Dr. Weicher. Thank you, Mr. Chairman. Good morning, Ranking 
Member Mikulski.

                           ZERO DOWN PAYMENT

    I would like to focus on the Zero Down Payment Initiative 
that you referred to in your opening remarks. As you know, 
President Bush has placed major emphasis on promoting 
homeownership, particularly for minority households. This 
initiative has contributed to the record homeownership rate 
that Assistant Secretary Bernardi mentioned a moment ago. 
Housing continues to lead the way in our rebounding economy, 
and the President's housing initiatives will help more 
Americans, particularly minorities, achieve the dream of 
homeownership.
    FHA has contributed to that record. Last year, we insured 
1,365,000 new single family mortgages, the highest total ever. 
Eighty percent of our home-purchase borrowers are first-time 
homebuyers. Forty percent of our first-time homebuyers are 
minority households.
    The fiscal year 2005 budget includes the Zero Down Payment 
Initiative as a major new proposal within our single family 
home mortgage program. First-time homebuyers will be allowed to 
finance 100 percent of the mortgage, as well as all closing 
costs. Potential homebuyers would not have to make FHA's normal 
minimum down payment or pay closing costs out of pocket. It's 
well known that the biggest hurdle to homeownership is having 
the cash for the downpayment and closing costs. Many families 
have a steady income and can afford the monthly mortgage 
payment, but don't have the up-front cash they need. We 
estimate that in the first year of the program, 150,000 
families will be able to buy their own homes.
    To compensate for the higher risk of default, the premiums 
will be higher than FHA's regular downpayment program. The up-
front premium would be set at 2\1/4\ percent, as compared to 
1\1/2\ percent, and the annual premium would be 75 basis 
points, as compared to 50 basis points. After 5 years, the 
annual premium would be reduced to 50 basis points, the same as 
in our regular program.
    I understand your concerns, Mr. Chairman, about the risk 
FHA would incur for this new program. At the higher premium, 
FHA will more than cover our expected claims. As the 
President's budget reports, we calculate that the additional 
$19 billion in mortgage commitments will generate net revenue 
of about $190 million in the first year.
    I also want to note that the 2003 Actuarial Review of the 
MMI Fund calculates our net worth at $22.7 billion, more than 
double the reserves required under the Cranston-Gonzalez 
National Affordable Housing Act.
    It may be worth mentioning that I served at HUD when that 
Act was written, as Assistant Secretary for Policy Development 
and Research, and worked with Congress, worked with the 
authorizing committee, of which you were then a member, to 
develop the FHA reform legislation establishing the financial 
safety and soundness requirements, and reforming the 203(b) 
program.
    I take seriously the need to operate FHA on a sound 
actuarial basis. There are several reasons why the new Zero 
Down Payment Program will increase our net worth. First, 
borrowers will be held to the same underwriting guidelines as 
those who apply for an FHA standard-payment loan. They must 
meet the same payment-to-income and debt-to-income ratios, and 
the same credit standards.
    Moreover, all potential borrowers would be required to 
participate in homeownership counseling. Our program data show 
that homeowners who have pre-purchase counseling are less 
likely to default than those that haven't. This administration 
has doubled the request for counseling funds since 2001, from 
$20 million to $40 million. You have appropriated those funds. 
And this year we're requesting a further increase, to $45 
million.
    We would also require lenders to use our new FHA TOTAL 
Mortgage Scorecard to evaluate the overall credit-worthiness of 
borrowers. It allows FHA lenders to better predict which 
borrowers are good risks, and identify those that are bad 
risks. Further, our legislation would allow the Department to 
include additional requirements for borrowers, as we deem 
necessary.
    Let me finish, briefly, by mentioning, the multifamily 
side, in particular, I know that Congress is concerned about 
the suspensions of activity within the GISRI Fund over the last 
year. We believe our proposed $35 billion commitment level for 
the fund should minimize any possibility of suspension next 
year, and we are monitoring our activity every day this year. 
Secretary Jackson has said he's committed to provide 
information to you by May as to whether we felt we would need 
additional credit commitment authority this year.
    Thank you, Mr. Chairman. I'll be glad to answer any 
questions.

                       FLEXIBLE VOUCHER PROPOSAL

    Senator Bond. Thank you very much, gentlemen.
    Mr. Liu, I'd say that that stack of regs cries out for 
regulatory reform. If we do not go along with the Flexible 
Voucher Program, that should really be fun to get rid of about 
two and a half of those stacks, or more. If you need some help 
from us, we'd be delighted to do it. I came to this body as a 
regulatory reformer, and, man, what a great opportunity right 
there. So I hope that will become a project.
    Let me turn to the proposal. We've asked for analysis from 
HUD, which you've not been able to give us, on what each PHA 
receives in the current year under Section 8, and the amount of 
funds the PHA's would receive under Section 8 funding for 2005. 
If you don't have this data, I don't see how you can make this 
proposal without running models, using rent trends for each 
market in order to understand the impact of the cuts. In fact, 
HUD needs to analyze individual rents by market and possible 
increases to understand the impact of this proposal on low-
income and extremely low-income families. If you have not run 
these models, why not? And if you have not, would you please do 
so, and provide them for the record?
    Mr. Liu. Mr. Chairman, as you know, we are still in the 
2004 year, and we are still calculating doing runs for 
individual PHA's relative to the formulas related to the 2004 
budget. Our proposal for the Flexible Voucher Program deals 
with maintaining whatever proportionate share that a housing 
authority will ultimately get in 2004, to receive that 
proportionate share in 2005. So our ability to give specific 
dollar amounts for any particular PHA is limited at this time 
because of where we are in the process of allocating our 
dollars for 2004. But we do believe that, in the aggregate, 
that allocation--again, keeping the proportionate level to 
whatever ends up being the share of the housing authority in 
2004--will permit that housing agency, under our Flexible 
Voucher Proposal, which ultimately reduces the amount of work 
significantly of what a housing authority has to do in Section 
8, to sustain?
    Senator Bond. Well, this proposal has a ticking time bomb 
in it. We think that the OMB budget is underfunded by about 
$2.2 billion, yet you say that HUD is confident it can maintain 
current levels of service, and even increase the number. But 
I'm concerned about the impact on extremely low-income 
families, those at or below 30 percent of median income. Those 
are the ones that we worked out in the 1998 agreement that we 
would serve them. But if a PHA has to maintain or increase the 
number of vouchers, it would seem to be a very strong incentive 
not to provide assistance to the low-income and, thus, the more 
expensive families needing the vouchers. And it would seem to 
me that the likely result would be a significant decline in the 
percent of low- and extremely low-income families served in the 
PHA's, because they won't be getting the money that they need, 
and yet they'll be charged with getting out more vouchers. I 
don't see how you can avoid that trap.
    Mr. Liu. Mr. Chairman, as we have examined and collected 
information over the years from CORA, with the well-intentioned 
targeting of income that you described, and what we have found 
is that that has been, in some respects, yes, very successful, 
where 80 percent, currently, of those in the program actually 
are at the extremely low-income level, 18 percent are in the 
30-50 percent of median-income level, less than 2 percent in 
the 50-80 percent level.
    The difficulty comes where we definitely do have a limited 
resource--this is not an entitlement program, as we all know--
and where we do have these long waiting lists. And housing 
authorities don't have the flexibility now, when they have 
reached the proportion, to make accommodations for those 
families that earn 35 percent of median income, maybe are 
working; or 40 percent of median income, trying to transition, 
trying to find a way up, and get that housing assistance. 
Housing agencies today don't have that flexibility to make that 
call, make that accommodation. And that's what we are asking 
housing agencies to at least have the option for. We're not 
mandating that they make the change, but they have the option 
to deal with those difficult situations.
    Senator Bond. Thank you, Mr. Liu. I'll come back to these 
questions in my next round of questioning, but I'll turn it 
over to Senator Mikulski.

                                HOPE VI

    Senator Mikulski. Thank you very much, Mr. Chairman.
    I'd like to go to Assistant Secretary Liu and pick up on 
HOPE VI, which, as you know, is very important. I encourage the 
others to jump in. I know, Mr. Bernardi, you were a former 
mayor of Syracuse, and you had a lot of innovative ideas on 
urban development, so you know how it all goes hand in hand. 
HOPE VI was never meant to be a real-estate development, it was 
meant to be community development. It was about a new physical 
architecture and a new social architecture.
    Now, Mr. Liu, you're talking about how we still have $2 
billion in unspent HOPE VI funds. You estimate that this is 
going to go well into the decade. At the same time, what we 
understand is that there are somewhere between 50,000 and 
80,000 severely distressed public-housing units still out 
there. Others, outside of HUD, tell me that, though there is 
the money in the pipeline, this is money that's on its way to 
being committed. This does not deal with the other issues of 
these 47,000 to 80,000. Can you tell me why we are cutting HOPE 
VI? And then, also, are you, at HUD, committed to looking at a 
reauthorization of HOPE VI and looking at lessons learned?
    Mr. Liu. Senator Mikulski, we are definitely focused in on 
attempting to get the projects promised built. Besides the 
$2\1/2\ billion, which is unexpended, there is going to be 
close to a half billion dollars after the announcements are 
made. Then there are billions more on top of that that are 
associated with these projects--some committed, some not yet 
committed, some part of these deals which have to be worked 
out. So----
    Senator Mikulski. Well, how much of what is at HUD is 
uncommitted?
    Mr. Liu. I'd have to check. I don't know the specifics----
    Senator Mikulski. Well, I think that's important to know, 
and I appreciate the promises made, promises kept, where we are 
in the process, because we commit various amounts at various 
stages of development.
    But let's go to the future of HOPE VI. We had been working 
with Secretary Martinez, who formed an internal group on HOPE 
VI to look at the future. Could you tell me where that internal 
group is? And also, using the work of the Urban Institute and 
others who have evaluated the need for this, are you all 
looking at a reauthorization of HOPE VI and what this would be, 
or do you all want to see it die?
    Mr. Liu. We're looking at different tools for the area of 
redevelopment. There are a lot of ideas, a lot of great ideas, 
out there as to how----
    Senator Mikulski. That wasn't my question.
    Mr. Liu. We can----
    Senator Mikulski. That wasn't my question.
    Mr. Liu. Would you repeat the question? I'm sorry, Senator.
    Senator Mikulski. Are you, or are you not, committed to the 
reauthorization of HOPE VI, knowing there needs to be review, 
refresh, reform, but also the restoration of HOPE VI as part of 
an authorized, funded program?
    Mr. Liu. We have submitted our proposal, which is not to 
fund HOPE VI. We are looking at----
    Senator Mikulski. Ever again?
    Mr. Liu [continuing]. Other tools for redevelopment.
    Senator Mikulski. Is the internal group on HOPE VI still at 
work?
    Mr. Liu. We're still talking to people, doing research on 
this issue with that group and others, so the work continues to 
see----
    Senator Mikulski. Work continues, but is it for the purpose 
of looking at what a 21st century HOPE VI would look like?
    Mr. Liu. It would be for the purpose of looking at what a 
21st century redevelopment program--I don't know if we'd call 
it HOPE VI, but some sort of a redevelopment program, yes.
    Senator Mikulski. Well, you know where I am, because we 
have all this distressed housing, and we have more work to be 
done.

                           GAO REPORT ON FHA

    Let me go now to FHA. First of all, Mr. Weicher, thank you 
for the work that you've done to help reduce predatory lending, 
not only in Baltimore, but all over. We understand the GAO is 
releasing a rather scathing report about HUD's disposition 
process today. We've only begun to get a preliminary look at 
it, but they're very, very critical of this, talking about 
payments for $1,500 for a small kitchen cabinet, $4,000 for an 
outdoor stoop with uneven patches. I won't go through all the 
specifics that are hair-raising examples--but could you tell us 
what is your view on the GAO report, particularly in 
implementing their recommendations for monitoring of their 
contractors, getting documentation of costs, and starting to 
take competitive work on repairs for FHA; in other words, 
getting value for their taxpayers' dollar, and ensuring that 
FHA is a good neighbor.
    Dr. Weicher. Yes, thank you, Senator Mikulski.
    We have not seen the final report, but we commented on the 
draft report. And with respect to the examples you cited, these 
all concern properties which we took title to in clearing up a 
203(k) fraud in New York, which occurred in 1999 and 2000, and 
early 2001. The GAO identified $180,000 in payments on those 
properties which they consider to be improper payments. We, 
ourselves, identified almost $900,000 in payments for bills 
from that contractor which we considered bills for work that 
had not been done.
    Senator Mikulski. Yes, but----
    Dr. Weicher. We held----
    Senator Mikulski [continuing]. The GAO report is more than 
the New York report. And I appreciate your efforts to clean it 
up. What about the recommendations on this? There are also 
those that believe that because HUD has contracted out property 
disposition, that debt has become more expensive and fraught, 
rife with waste, rather than bringing it back in-house with HUD 
people who know what to do. So where are we in cleaning up the 
overall issues? Because they cite the lack of internal 
controls, oversight of the single family and multifamily 
programs, and they go into other issues about it. I understand 
you inherited a mess in New York.
    Dr. Weicher. Well, in that vein----
    Senator Mikulski. And I would acknowledge the validity of--
--
    Dr. Weicher [continuing]. In cleaning up that mess, we have 
terminated that contractor, we have referred that contractor to 
the Inspector General, and we held back almost $900,000 from 
the final settlement of the contract with that contractor. 
Beyond that, I can say that, in 2002, the audit done by the 
Inspector General's office indicated that single family REO was 
a reportable condition. In 2003, the audit says that that 
condition has been resolved. I would say that we have----
    Senator Mikulski. Well, that's not what they're saying.
    Dr. Weicher. That's the----
    Senator Mikulski. I really need you to read the report.
    Dr. Weicher. I----
    Senator Mikulski. They're talking about monitoring of 
contractors, getting documentation of the work done, 
competitive bids for repair work. And also: who does the 
property disposition? And there is significant material 
available that says when you contract that out, they're pretty 
sloppy about it.
    Dr. Weicher. Our----
    Senator Mikulski. And this has a lot of issues in it. And I 
know you want to----
    Dr. Weicher. No----
    Senator Mikulski. I mean----
    Dr. Weicher. I can tell you this, Senator; overall, we have 
the lowest loss rate, including the cost of maintaining 
property, that we've ever had in this program. We are losing 26 
cents on the dollar; we've traditionally lost 40 to 45 cents on 
the dollar in this property. We have an inventory of 30,000 
properties. It's down from 50,000 5 years ago. And it's come 
down straight during the recession.
    Senator Mikulski. And I appreciate that good news. But have 
you looked at the GAO report? And do you intend to implement 
their reforms?
    Dr. Weicher. We looked at the report. We looked at the 
draft report. We haven't yet seen the final. We commented on 
the draft report. We took issue with the statements about 
questionable payments, most of the statements about 
questionable payments, which they made in the report. We 
recognize that, in some locations, only two reviews of 
individual invoices were made; whereas, the rules call for 
three, and we are correcting that so that the third review 
occurs, as well. We are also in the process of re-procuring the 
M&M contracts, and we will be re-procuring 24 contracts this 
year with a focus on providing opportunities for small business 
to participate more extensively----
    Senator Mikulski. In doing what?
    Dr. Weicher [continuing]. In the program.
    Senator Mikulski. In doing what?
    Dr. Weicher. In managing--the M&M contractors are the 
management and marketing contractors for the single family REO.
    Senator Mikulski. Well, I'm sorry, I think that this is 
really rife with problems, and we want small business, but 
you've got to really look at competency.
    Dr. Weicher. I'm sorry, I didn't hear you.
    Senator Mikulski. You've got to really look at competency. 
I was appalled to read the executive summary of GAO. I know you 
haven't had a chance to read it. I know we've had other such 
constructive work, and I know you really want to be the steward 
of taxpayers' dollars, as well as a good neighbor with HUD 
property in a community. I'm asking you to look at this. And 
while you're looking at expanding opportunity, let's make good 
use of this money.
    Dr. Weicher. We intend to do that, Senator, and I will be 
happy to, at any future time, have a more extensive discussion 
with you about what we have been doing.
    Senator Bond. Mr. Weicher, following up on that, I see you 
have the report there on the table, just to Mr. Bernardi's 
right. Here is a picture of a new bathroom floor, which was 
approved for payment. You can see the holes in it, it's in 
terrible condition. This is a completed bathroom repair, which 
is a total disaster.
    Now, here on page 38 is a bathroom repair that is so bad it 
should be X-rated. You may have procedures to have people sign 
off on the invoices, but I want to know who the HUD official is 
who is supposed to go out and look at that. I can't believe 
that you approve payments if three people look at an invoice, 
without sending a live person out to see if the work's done. Do 
you do that?
    Dr. Weicher. We do send people to look at repairs in 
individual cases. In this case, all of these refer to the New 
York properties that I mentioned in responding to Senator 
Mikulski. All of these examples are within that $180,000. And 
we did, in fact, pursue those issues with the contractor, and 
we terminated the contractor, we referred the contractor to the 
Inspector General for further investigation, and we held back 
almost $900,000 when we terminated the contract.
    We have a new contractor, and the new contractor has been 
making the repairs, the needed repairs, and, by everything I 
know, doing a good job.
    Senator Bond. Okay. Well, I mean, it took 6 years to get it 
done, and it seems to me if you're going to be paying hard cash 
for somebody to do the repairs, with the wonderful, talented 
field staff you have, you ought not to pay----
    Dr. Weicher. Uh-huh.
    Senator Bond [continuing]. Until somebody goes out and 
looks and sees that the job's done. I mean, am I missing 
something here?
    Dr. Weicher. No, we have, ourselves, been following up on 
these properties ever since we began taking title to them in 
2000 and 2001. We've followed up ourselves. We have tracked the 
performance of the contractor. We have had a lot of discussions 
with that contractor. They improved their performance for a 
while, they deteriorated again, and we terminated them.
    Senator Bond. I'm not worried about the terminated 
contract. I want to make sure now when you get an invoice for 
somebody who's done repair work, does somebody from HUD go out 
and look and see if the job is done?
    Dr. Weicher. Yes. In this area in particular, we've had 
people specifically assigned to look at these properties, and 
they have come back and told us about the problems.
    Senator Bond. Well, I would think that in every area it 
would make sense, before you pay----
    Dr. Weicher. Uh-huh.

                                  FMRS

    Senator Bond [continuing]. Somebody looks at it, because 
this one, obviously the serious problem should have been 
detected. I hope that you will get some real, live HUD person 
to look at it to make sure the work's done before you pay for 
it. Otherwise, you're facing a disaster.
    Let me go back to Mr. Liu. I'm worried about redlining in 
the concentration from this flexible voucher, because you're 
going to be shorting the PHA's, they're going to have to lower 
the amount of rent payments, that there will be a concentration 
of families into poor and distressed communities. And it seems 
to me that the potential is to increase homelessness and 
increase the ``zip codes of poverty'', as my colleague 
describes it. Why is this not a valid concern?
    Mr. Liu. Mr. Chairman, as we have been collecting real 
market rent data from across the country, utilizing both our 
internal resources and those from the private sector--notably 
the Institute of Real-Estate Management, IREM, and Property 
Portfolio Research, PP&R, as well as work done by PD&R--in 
looking at the rents, we have seen that in the majority of 
areas across the country--not all, but in the majority of 
areas, the real rents have actually decreased across the 
market. And just the opposite has occurred with our FMR's, 
which are required to be set by Washington, by statute, and 
which have not been reflective of the changes in the 
marketplace in a timely fashion.
    And the bottom line is, we, in fact, in many, many areas 
across the country, are paying more than what is really needed 
to provide safe and decent housing under Section 8.
    Senator Bond. Well, No. 1, we'd like to have the data, if 
you'd provide that for us today.
    Mr. Liu. Yes.
    [Clerk's Note.--The information referred to has been 
retained in Committee files.]
    Senator Bond. No. 2, why can't you fix the FMR problem?
    Mr. Liu. The FMR problems requires us to do it from 
Washington. And over the years, we have tried--and we are 
looking at it, and we're trying to deal with the issues at the 
edges, but it is very difficult, from Washington, DC, with the 
resources that we have, to go out and do the type of market-
data research that truly reflects where we are.
    Now, we are moving toward----
    Senator Bond. You have staff out in the heartland, don't 
you? You've got a great staff, I know, in Kansas City.
    Mr. Liu. Yes, we do, sir.
    Senator Bond [continuing]. Can't they feed back to you 
something?
    Mr. Liu. Well, we are working within that framework to do 
that, but what compounds this is the 110 percent payment 
standard, which, associated with whatever FMR we can come up 
with, has pushed the costs of the program to a very high level. 
The average payment standard now across the country is at 104 
percent, and it's increasing every year.
    Senator Bond. While you're speaking of Kansas City, we are 
hearing grave concerns that many PHA's, and specifically Kansas 
City, will have a significant shortfall. Kansas City Housing 
Authority projects it'll have a funding shortfall of over $8.7 
million. And even after using its 1 month reserve, HUD's 
formula would still leave them with a shortfall of over $5 
million to support 1,237 families.
    We included statutory language, at the recommendation of 
HUD, because HUD convinced us it was one way to assure that 
assisted-rent increases would reflect the increases of 
comparable unassisted units in the community.
    How does HUD reconcile this failure to recognize the 
problem for 2004 with HUD's proposed total rewrite of Section 8 
and the possible impact on families already receiving vouchers?
    Mr. Liu. Mr. Chairman, the per-unit costs, as you know, 
were capped at the August 1, 2003 level, by statute, in the 
2004 appropriations bill. And although Congress did add a 
billion dollars in funds to the requested amount, there was 
also a rescission of a billion dollars more than proposed by 
the President's request for 2004. So, in total, we did not get, 
you know, the increase needed, perhaps, to deal with the caps, 
which were set for 2004.
    However, the fiscal year is not yet out, and there are 
still adjustments that both we and the housing agencies, as 
directed by Congress, can and need to make. So we're hopeful 
that we do not end up in the shortfall situation, sir.

                            FLEXIBLE VOUCHER

    Senator Bond. You know, I have grave concerns that some 
areas are getting too much money, some areas are not getting 
enough.
    Let me ask one other question. If you really want to deal 
with the problems, why do you propose to maintain the current 
restriction on project-based assistance? If HUD truly wants to 
allow PHA's to meet local housing needs, where there's a 
shortage of housing, where the rents have been driven up, why 
not allow PHA's the ability to use Section 8 assistance to 
develop more low-income housing as part of their mixed-income 
housing approach?
    Mr. Liu. Well, under our flexible voucher proposal, Mr. 
Chairman, as well as under a proposed rule which is out right 
now, we move very much in that very direction, to allow much 
more flexibility on the part of housing authorities to use the 
tenant-based program for project-based reasons. For instance, 
the current cap of only 25 percent of the units in a building 
being eligible for project basing under the tenant-based 
program would be removed under our proposal, the flexible 
voucher. Both in the proposal, as well as in the Flexible 
Voucher Program, that would be listed. We are moving to take 
away site and location requirements of having to come back to 
Washington for review. We'd like to keep that in the field.
    Senator Bond. I'll turn the questioning back to Senator 
Mikulski at this point.

                              FHA AND REAC

    Senator Mikulski. Thank you very much, Mr. Chairman. That 
was an interesting line of questions, and I support the 
direction that you're going in.
    I'd like to come back to FHA again. And it goes to 
something I call ``public housing by proxy.'' And that goes to 
FHA-insured apartment buildings. Stick with me a minute. And 
I'll use Maryland as an example. One of the lessons learned was 
that high-rise public housing didn't work. And as suburbs 
contiguous to urban areas tried to be innovative and use 
Section 8, where they welcomed Section 8, and people moved into 
apartment homes. Well, what we've seen is a pattern, 
particularly the closer you are into a city, is that apartment 
buildings or complexes have all become Section 8. So that's why 
I refer to it as ``public housing by proxy.'' You sticking with 
me on that?
    Dr. Weicher. Yes, certainly.
    Senator Mikulski. Now, what has happened, though, is that 
many of these units are older, many 40 or 50 years old. They do 
not have the oversight provided in public housing, with a 
professional housing authority, and so on.
    Now, here, then, comes my set of questions, which goes to 
the fact of getting value. Section 8 is an opportunity for the 
poor, the way Mr. Liu has talked about, that it becomes the way 
to a better life, and, at the same time, we don't want to be in 
the business of publicly held big public buildings. Well, what 
we're seeing, though, is that these FHA-insured apartment 
buildings, in many instances, have taken on all the 
characteristics of slums, that they're rundown, they're not 
being maintained, that they become concentrations of both 
poverty and crime. But, at the same time, the landlords are 
taking the subsidies.
    What is your role? First of all, I understand you have a 
REAC team that's supposed to inspect those.
    Dr. Weicher. Yes.
    Senator Mikulski. And that there are 250 of them, but 
they're private contractors. What I'm going to is the fact that 
we make sure we're getting value, both for the taxpayer and the 
empowerment aspects. How are you really standing sentry and 
ensuring that these REAC teams, which are done by private 
contractors, not by government inspectors, are really doing 
their job, No. 1, and, No. 2, avoiding cronyism, kickbacks, and 
other kinds of winking and blinking? Because that same private 
contractor might have a deal with the owner of that complex, 
because many of them own several complexes in another area. And 
I know that this is----
    Dr. Weicher. Yeah.
    Senator Mikulski. Could you share with me what your views 
on this and your operational procedures?
    Dr. Weicher. Sure. Part of this, I will refer back to 
Assistant Secretary Liu, because the REAC operation is formally 
part of public and Indian housing. But I can tell you this, we 
have looked at each of these buildings that we insure, and 
these include both the subsidized Section 8 project-based 
buildings and the insured buildings which are not subsidized, 
but which may have Section 8 voucher recipients in them, as 
well as those which have no subsidized recipients at all. We 
inspect each property. If it has a below-60 score, we inspect 
it every year. If it's between 60 and 80, we inspect it every 
other year. Above that, we inspect it every third year. We 
refer any project with a below-60 score to our Departmental 
Enforcement Center, which does its own review of the project 
and works with the owner to have the project upgraded to meet 
our standards.
    Senator Mikulski. And how often, then, would you inspect 
them, then?
    Dr. Weicher. In that situation, we inspect them every year, 
but once they're in the Enforcement Center it's an ongoing 
process of working with the owner and verifying that the owner 
is making the----
    Senator Mikulski. What happens if----
    Dr. Weicher [continuing]. Repairs.
    Senator Mikulski [continuing]. But you do monthly 
inspections, weekly inspections, and so on?
    Dr. Weicher. They're----
    Senator Mikulski. And then I want to come back. How do you 
insure the quality of the inspector? And, Mr. Liu, if you want 
to jump in so you see where I'm heading? We don't want to have 
government-subsidized slums. I like the idea that if you're a 
good-guy landlord, you don't have us running in every hour and 
a half----
    Dr. Weicher. Right.
    Senator Mikulski [continuing]. But if you're on the edge or 
really are a skimmer, we want you in there a lot.
    Dr. Weicher. May I add one thing? The owner is required to 
tell us when the owner has completed the repairs, and then we 
go out and verify that the repairs have been made.
    Senator Mikulski. And you actually go----
    Dr. Weicher. And that, of course----
    Senator Mikulski [continuing]. An onsite----
    Dr. Weicher. Yes.
    Senator Mikulski [continuing]. Repair.
    Dr. Weicher. Yes.
    Senator Mikulski. You don't just go----
    Dr. Weicher. Yes, we do that. I wanted to add that before--
--
    Senator Mikulski. Yes. And Mr. Liu, and also, then, to 
ensure what we would call the independence and vigor of the 
REAC team contractors.
    Mr. Liu. What we have, Senator Mikulski, is--within the 
last year and a half, we had the same concern, because we had 
created a system with our contractors where they would be able 
to bid--let's say a housing authority on the public-housing 
side, or on a multifamily on a project base, without 
necessarily breaking it down on a per-unit base. So we have 
been very concerned about essentially some skimming--ability to 
get some float which is really not associated with the work 
being done.
    We have put together a quality-assurance protocol where we 
do a periodic check of a certain random sample now every, I 
think, 3 months, of the contractors that we have. Secondly, if 
there is a variance of a score, whether it's multi-family or on 
public housing, I think if it varies above 15 points over the 
prior year, we send out a REAC, a HUD team, to do what we call 
a ``confirmatory review'', to check on the work of the 
contracting inspector.
    Finally, we are now in the mode of a demonstration where we 
are working to cut out the middle person right now, because 
contractors who actually do the work are actually 
subcontractors of a few, relatively few, middle contractors, so 
that further diffuses the contact with HUD. And we are 
experimenting now with a system whereby individual contractors 
can bid on individual projects that are available for 
inspection, so that we have a closer link to the actual 
inspectors and inspections being done.

            SALE OF PROPERTY TO OWNERS WITH CODE VIOLATIONS

    Senator Mikulski. Well, I really want to support the 
momentum for reform that you have here, and oversight vigor and 
independence, at the same time, for rewarding good behavior, 
either through the person doing the inspections, or where 
they're really the good landlords, they have a cooperative 
Federal Government. So I want to support you on that.
    The other is that in last year's legislation, we talked 
about a good-neighbor policy and to ask HUD to stop or curtail 
HUD from selling foreclosed buildings to owners with serious 
records of housing-code violations. These were the ones who 
were skipping it up and I call them ``pre-predators'', or 
another kind of way to weasel in.
    Mr. Liu. Yes.
    Senator Mikulski. We won't call them ``predators'', we'll 
call them ``weasels.'' It's not a technical term found in 
regulators but it's out there in the neighborhoods and for the 
taxpayer.
    Could you tell us where you are in helping with this again 
to get value and neighborhood development, et cetera?
    Dr. Weicher. We are in the process of developing 
regulations to prevent the sale of properties to purchasers who 
have demonstrated patterns of housing-code violations. We have 
put together a term sheet for the development of that proposed 
regulation, and asked the General Counsel's office to make that 
a priority, and we will be producing it. I can't give you a 
precise schedule at this point, but we know it's a priority, 
and we will be doing it----
    Senator Mikulski. Yes, we had----
    Dr. Weicher [continuing]. As quickly as we can.
    Senator Mikulski. Yes, we had a April 22 deadline, and----
    Dr. Weicher. If we have a proposed regulation by April 22, 
it will be a substantial achievement. We will certainly keep 
you apprised. But we can't, of course, possibly get a final 
regulation in place----
    Senator Mikulski. But I think you would----
    Dr. Weicher [continuing]. In 3 months.
    Senator Mikulski [continuing]. I think we agree on the 
spirit of the----
    Dr. Weicher. Yes.
    Senator Mikulski [continuing]. Outcome.
    Dr. Weicher. We certainly----
    Senator Mikulski. And then----
    Dr. Weicher [continuing]. Do.

                         FHA FORECLOSURE RATES

    Senator Mikulski [continuing]. As well-paced of a 
implementation as we can.
    Mr. Chairman, if I could just ask, Mr. Weicher, why you got 
our FHA proposal rates up so high?
    Dr. Weicher. Sure.
    Senator Mikulski. And that will be my last question.
    Dr. Weicher. Sure.
    Senator Mikulski. Yes, sir. FHA?
    Dr. Weicher. Sure. Our foreclosure----
    Senator Mikulski. And, again, I really want to thank you 
for our tremendous inroads against predatory lending. At least 
at the FHA level. We've got a lot more to do at the sub-prime 
level. But----
    Dr. Weicher. Thank you for that. May I say, also, we 
haven't quit. We are not resting on our laurels. We have 
additional regulations to address predatory lending. And, just 
last week, we sent up, for the 15-day review period, a proposed 
regulation requiring treble damages to a lender for failure to 
engage in loss mitigation----
    Senator Mikulski. Right.
    Dr. Weicher [continuing]. Which is part of our effort.
    Let me say, with respect to foreclosure rates, our 
foreclosure rates in FHA are dropping, in fiscal year 2004, to 
where they were in fiscal year 2003. They're down nationally. 
They're down in most of the larger metropolitan areas. What we 
have seen is a typical pattern when there is a recession--
foreclosures rise, but they keep on rising after we hit bottom 
in the recession, because people try to hang onto their house 
as long as they can, and people make the payments as long as 
they can. And it's after we've hit bottom in the recession and 
are starting up, but----
    Senator Mikulski. So you think that----
    Dr. Weicher [continuing]. Some of the people who are still 
unemployed fail.
    Senator Mikulski [continuing]. It's a temporary spike----
    Dr. Weicher. Yes.
    Senator Mikulski [continuing]. Rather than a pattern.
    Dr. Weicher. Yes. And we are seeing it start to come down.
    Senator Mikulski. Well, that's good news.
    Dr. Weicher. Our foreclosure rate last year was just over 
1\1/2\ percent of our portfolio, and it's dropping slightly 
this year.

                THE ELDERLY AND FAITH-BASED INITIATIVES

    Senator Mikulski. Mr. Chairman, I know you want to pick up.
    Mr. Liu, are you the senior housing guy? Who's the faith-
based senior housing, where they build senior housing only?
    Dr. Weicher. I'm responsible for 202 and 811, Senator.
    Senator Mikulski. Okay. Something that I will be putting in 
the report, but will be discussing with you at another time, is 
that we're concerned. First of all, we think it's been one of 
the greatest ways for there to be faith-based participation, 
and it's been really wonderful for communities, and it's also 
been constitutionally compliant, so we haven't gotten into the 
separation of church/State issues. What we're also noting is 
that the buildings are getting older. So many were built into 
the 1970's and the 1980's. And the people in them are getting 
old. We've got aging in place. And we're looking to HUD for 
ways for modernization, particularly where we have aging faith-
based facilities, where they're now using philanthropic dollars 
for modernization. And, at the same, to understand that there 
needs to be a service component to it where these are faith-
based, naturally-occurring retirement communities.
    So we're not going to go into that today, but know that I 
want to look at this so that we can continue to have a robust 
faith-based initiative for the elderly, and, at the same time, 
acknowledge that, while they're hesitant to start the new 
because they've got these aging facilities.
    Dr. Weicher. I'll be happy to discuss that with you 
further. We certainly have put in place a regulation to allow 
prepayment and refinancing of the older properties to take 
advantage of the lower interest rates and to provide funds for 
rehabilitation of properties. And we are looking to make sure 
that that program is as effective----
    Senator Mikulski. Well, I'm going to----
    Dr. Weicher [continuing]. As it can possibly be.
    Senator Mikulski [continuing]. Ask my staff to talk to 
yours in more detail.
    Dr. Weicher. I'd be happy to do that, Senator.
    Senator Mikulski. Thank you.

                            ZERO DOWNPAYMENT

    Senator Bond. Thank you very much, Senator Mikulski. We 
will want to follow up with you on the foreclosure and 
delinquency rates. We get some sense that it may be much 
higher.
    Going back to the Zero Down Payment Program, a couple of 
major problems I have with it. It seems to be a decision by FHA 
that it can afford to house as many people as possible, no 
matter the cost of the default to the fund or the impact of a 
family's credit in the future. Did you take those two things 
into account in proposing the Zero Down Payment Program?
    Dr. Weicher. We looked carefully at all aspects of the 
program. We looked at who we could be serving in that program. 
We worked with data that the Federal Reserve produces, the 
Survey of Consumer Finances, which identifies households both 
by assets and by income and by financial history, to see what 
the market could be and who would be in a position to afford 
zero down payment.
    We put in safeguards to hold the default rate down like the 
requirement for counseling, the requirement that the loans be 
scored through our total scorecard, which does a better job of 
predicting risk than anything we've seen in the FHA or the 
conventional market. And we will retain our current 
underwriting requirements on payment-to-income, debt-to-income, 
credit history, as well. We're trying to reach people who have 
good jobs, but who haven't built up the assets to enable them 
to make the down payment.
    Senator Bond. Are you sure you're not going to be 
attracting the highest-risk home buyers into this program?
    Dr. Weicher. No. Because we maintain our credit standards. 
We will serve buyers who are about as risky as the buyers we 
have now, but who have not accumulated the down payment. We 
expect that there will be more defaults in this program than 
there will be in our regular program, and that's why we have 
proposed a higher premium. But we intend to do everything we 
can to make sure that the borrowers we serve are creditworthy.
    Senator Bond. As you may recall, one of my team worked at 
HUD during----
    Dr. Weicher. Yeah.
    Senator Bond [continuing]. Your tenure as----
    Dr. Weicher. I do.
    Senator Bond [continuing]. Assistant Secretary for Policy 
Development and Research. And during that time, you were 
responsible for legislation designed to increase the actuarial 
soundness of the Fund, which included requirements that the 
home buyer have a stake in the home through reasonable down 
payment. One of the most significant concerns at that time was 
the impact of defaulted FHA housing on neighborhoods. As you 
know, through predatory lending issues, defaulted and 
distressed FHA properties, they remain a tremendous burden on 
communities, many of which are fragile.
    How is HUD going to address this issue in the FHA Zero Down 
Payment Program?
    Dr. Weicher. Well, we are addressing it partly, as I said, 
through maintaining our underwriting standards and through the 
counseling requirement. And we know counseling makes a 
difference in people's performance after they buy a home. In 
addition to that, we know something we did not know 10 years 
ago. We have the information now about the importance of credit 
history as measured in FICO scores and other techniques. And we 
know that that is a more important predictor of default than 
the initial down payment or loan-to-value requirement, and we 
will be looking at credit scores in the total.
    And what I would say also is--we were talking earlier about 
the single family side--we have worked hard to acquire and sell 
the single family properties when there is a claim--a 
foreclosure and a claim--and we are turning properties over 
faster than we have in many years. Four years ago, we would own 
a property for 7 months before we'd be able to sell it, on 
average. Now we're down to 5, and we're working to move that--
--
    Senator Bond. Well, we commend you----
    Dr. Weicher [continuing]. Faster.
    Senator Bond [continuing]. For progress in that area. And 
as you might have gathered, I am very much concerned about 
this.
    What would you say to limiting the availability of the FHA 
zero down payment mortgage insurance to a trigger, for example, 
where HUD can only make this insurance available if FHA claims 
for their previous year do not exceed 3\1/2\ percent?
    Dr. Weicher. That would be fine. And if you felt that way--
let me say this. Our claims last year were 1\1/2\ percent. 
There's been some confusion in the press about our defaults. I 
noticed, in the National Journal, a reporter said that 12 
percent of our loans were past due, which has been interpreted 
by some of your colleagues in the House as being in foreclosure 
or in default, but that's not the case. Our defaults have been 
running 3 percent; our foreclosures and claims, half of that. 
And as I said in response to Senator Mikulski, those rates have 
been dropping in this fiscal year.
    Senator Bond. Well, we're hearing things about different 
numbers, as well, so we'll have to do some work with you to get 
those clarified.
    Dr. Weicher. May I mention that FHA's delinquency rate is 
reported as 12 percent, but this is the rate for 30-day 
delinquencies. FHA's 90-day delinquency rates are approximately 
half this rate. And claims over the last 12 months are only 
1\1/2\ percent of the current insurance-in-force. I will be 
happy to provide the program data to anyone who you feel would 
benefit from talking with us about it.
    Senator Bond. We'd be happy to do that.
    Well, as I indicated, we do need to close this down. We do 
have a number of other questions focusing on many of the areas 
of concern.

                       CHAIRMAN'S CLOSING REMARKS

    We appreciate the progress you have made, and we've focused 
on concerns that we have with some of the proposed policies, 
which I have yet to be convinced are good changes. I continue 
to be disappointed that OMB or somebody somewhere has chosen to 
strike out the priorities that this committee and Congress have 
put in, in the past.
    Mr. Bernardi, anything you want to say in closing?

                     ADDITIONAL COMMITTEE QUESTIONS

    Mr. Bernardi. Well, Senator, thank you for the opportunity. 
The questions that you would like answered in writing, we'll 
make sure our congressional relations folks have those, and 
we'll get responses back to you as quickly as we can.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

           Questions Submitted by Senator Christopher S. Bond

            SECTION 8 CERTIFICATE FUND--UNDERLYING ANALYSIS

    Question. According to CBO estimates, HUD's proposed fiscal year 
2005 level is some $2.2 billion less than the CBO-projected needs for 
section 8 contract renewals in fiscal year 2005. This represents a loss 
of section 8 assistance for some 330,000 families.
    We asked for analysis of what each PHA receives for fiscal year 
2004 under section 8 and the amount of funds each PHA will receive 
under section 8 funding for fiscal year 2005. HUD has not been able to 
supply this information which was requested. However, I do not see how 
you seriously can make this proposal without running models using rent 
trends for each market in order to understand the impact of these 
budget cuts. In fact, HUD needs to also analyze the individual rents by 
market and possible increases to understand the impact of this proposal 
on low-income and extremely low-income families. Has HUD run these 
models and conducted this analysis? If not, why not? If not, please do 
so and provide for the record the different models and impact?
    Answer. When the Flexible Voucher Program was proposed, the 
Department did not have an appropriation for fiscal year 2004 and did 
not know the level of funding PHAs would receive in fiscal year 2004 to 
make a comparison on a PHA-by-PHA basis. The proposal submitted based 
requirements at the national level, taking into consideration the cost 
savings that could with the flexibilities that could be implemented in 
a PHA program. That information has been made available via the 
Flexible Voucher Program--White Paper of May 18, 2004 entitled ``The 
Flexible Voucher Program: Why a New Approach to Housing Subsidy is 
Needed.''

          SECTION 8 UNDERFUNDED--EXTREMELY LOW-INCOME FAMILIES

    Question. HUD is proposing to underfund section 8 by some $2.2 
billion in fiscal year 2005. However, HUD has stated that it is 
confident that it will be able to maintain current levels of service 
and even increase the number of families served in the near future. How 
does HUD know this; how does this work--serve more families with less 
funding?
    Answer. The President's Budget for fiscal year proposes to spend 
$13.3 billion on the new Flexible Voucher Program, $1.1 billion less 
than the current Housing Choice Voucher appropriation for fiscal year 
2004. This difference in cost is driven by savings from the redesign of 
the program, not from reductions in the number of families assisted. In 
fact, the Department believes that the improved design of the new 
Flexible Voucher Program can, over time, help a greater number of 
families afford decent housing.
    This is possible because of savings that will result from 
eliminating much of the current 1-month funding reserve, reducing the 
payment standard, reducing income-related errors, and permitting 
greater flexibility in income targeting. The Flexible Voucher Program 
will also trigger savings in administrative costs due to greater 
simplicity and flexibility in income determinations, reduced frequency 
of income certifications, and reduced frequency of housing quality 
inspections. The savings calculations are detailed in a HUD document 
entitled ``The Flexible Voucher Program: Why A New Approach to Housing 
Subsidy Is Needed'' that is currently on HUD's website and is attached.
    [Clerk's Note.--The document may be found at http://www.hud.gov/
utilities/intercept.cfm?/offices/pih/programs/hcv/fvp/wponfvp.pdf.]
    Following are extracts from this document.

    ``Enactment of the Flexible Voucher Program would permit 
substantial savings. The Administration has proposed $1.1 billion less 
in subsidy payments in fiscal year 2005 than Congress appropriated in 
fiscal year 2004, and $59 million less in administrative fees to PHAs. 
However, we estimate that in fiscal year 2005 alone, Flexible Vouchers 
would save $1.804 billion in total, $1.674 billion in subsidies and 
$130 million in administrative expenses.

                    FIRST-YEAR SAVINGS SUMMARY TABLE
                        [In millions of dollars]
------------------------------------------------------------------------
                                                          Administrative
                                              Program         Expense
                                              Savings         Savings
------------------------------------------------------------------------
Payment Standard........................            $815  ..............
Income-related error....................             350  ..............
Reserve elimination.....................             450  ..............
Targeting flexibility...................          59-350  ..............
                                         -------------------------------
      Total.............................           1,674  ..............
                                         -------------------------------
Income flexibility......................  ..............             $56
Less Recertification....................  ..............              45
Less Inspection.........................  ..............              29
                                         -------------------------------
      Total.............................  ..............             130
------------------------------------------------------------------------

``Program Savings
            ``$815 million in first-year savings and annually recurring 
                    savings in excess of $1 billion due to the average 
                    payment standard returning to 95 percent of FMR
    ``After the first year, savings would occur over 12 months, rather 
than 9 months, and more than $1 billion would be saved annually.
            ``$350 million in annually recurring savings from net 
                    income-related error
    ``The Fiscal Year 2004 Appropriations Bill for HUD programs 
authorized HUD to have access to the Department of Health and Human 
Services' (HHS) New Hires database. One of the components of this 
database is a records system with comprehensive income source and 
earnings data reports. An income match for a sample of assisted housing 
tenants in 2000 showed that approximately $700 million in excess 
subsidy payments was paid for voucher program units because of 
intentionally and unintentionally unreported income. It is estimated 
that at least $350 million (50 percent) can be collected and will 
reduce subsidy requirements. The other thing that reduces income-
related error is the actual subsidy calculations, which will decrease 
if not be eliminated by allowing PHAs to simplify rent policies.
            ``$450 million one-time savings from elimination of the 
                    reserves
    ``The 1-month reserve will no longer be required in a dollar-based 
program. However, we plan to leave a small amount in reserves for PHAs 
in the first year of the Flexible Voucher Program to allow for some 
transition.
            ``$59 to $350 million in first-year savings from greater 
                    flexibility in targeting, and out-year savings 
                    significantly higher
    ``Currently 80 percent of new admissions in the voucher program are 
`extremely low-income' families, in excess of the 75 percent of 
admissions that every PHA must reserve for the extremely low-income 
(less than 30 percent of area median income). The actual savings amount 
resulting from targeting flexibility will vary depending on the income 
targeting policies adopted by PHAs. But savings are expected in all 
circumstances.
    ``For example, if PHAs reverted to the pre-QHWRA admission 
percentages of 68 percent extremely low-income, 23 percent very low-
income, and 9 percent low-income families, at least $59 million of 
savings would still result in the first year and at least $118 million 
of savings would result in the second year. If PHAs exercise their 
targeting flexibility by admitting 40 percent extremely low-income 
families, 40 percent very low-income income (30 to 50 percent of area 
median income), and 20 percent low-income (50 to 80 percent of area 
median income) families, as much as $350 million \1\ would be saved.''

    \1\ Savings amount for Scenario 2 of Table 4 (United States 
Department of Housing and Urban Development Housing Certificate Fund 
Analysis of Potential Savings from Income Targeting Flexibility) for 
the Housing Certificate Fund, Congressional Justification for 2005 
Estimates.
---------------------------------------------------------------------------
    Question. I am very concerned about the impact on extremely low-
income families--those who are at or below 30 percent of median income. 
Has HUD looked at the impact of the proposal on extremely low-income 
families--those with the greatest housing need and who are often 
elderly or disabled; esp. since the proposal would eliminate the 
requirement that three-fourths of all vouchers go to extremely low-
income families. Please explain how these families would be protected?
    Answer. You also expressed concern about the Flexible Voucher 
Program provisions to permit greater PHA discretion concerning 
admissions and removal of the extremely low-income targeting 
requirement that was established by law in 1998. It is not true that 
the voucher program will no longer serve poor families who are in need 
of housing--eligibility for the Flexible Voucher Program is still 
restricted to low-income families.
    Like the original tenant-based certificate program, eligibility for 
the Flexible Voucher Program is intended to serve low-income families 
(80 percent of area median or less) without a requirement that 75 
percent of new admissions be families with extremely-low incomes. We do 
not anticipate that PHAs will stop admitting extremely low-income 
families. As stated above, before QHWRA was enacted in 1998 (before 
there was a voucher program targeting requirement), 68 percent of 
voucher program admissions were extremely low-income families. PHA 
admission decisions before QHWRA are the best indicators of what is 
likely to happen if the extremely low-income targeting requirement is 
removed and PHAs are allowed to serve the needs of the low-income 
families on their waiting lists.
    In addition, we do not anticipate that PHAs will stop admitting 
extremely low-income elderly and disabled families. It is noted that 
the voucher program has an outstanding track record in assisting 
disabled families, without any mandatory targeting requirements.
    There are many advantages of providing more PHA flexibility in 
admissions. PHAs will be able to address other local needs such as 
families transitioning from welfare to work, families working full-time 
yet still in need, families experiencing housing emergencies, first-
time, low-income homebuyers, and families at 35 percent or 45 percent 
of adjusted median income who have been on the PHA waiting list for 
prolonged periods of time.
    Question. With limited funds, please provide any data that would 
demonstrate the likely treatment of extremely low-income families under 
this proposal?
    Answer. The Flexible Voucher Program permits PHAs to design 
admission policies that are appropriate based on local needs. Although 
there would no longer be a requirement that at least 75 percent of all 
admissions be extremely low-income families, eligibility for the 
program remains limited to low-income families with incomes below 80 
percent of the area adjusted median income.
    Since each PHA may adopt local admission policies, it is not 
possible to model these local decisions. It is expected, however, that 
the Flexible Voucher Program will be successful in meeting the needs of 
low-income families as has been the case with the Moving to Work 
demonstration, community development block grants, and other programs 
that have maximized local administrative flexibility.

                      REDLINING AND CONCENTRATION

    Question. Under the proposed HUD fiscal year 2005 section 8 block 
grant proposal, it would appear that many to most PHAs would have lower 
their payment standard to the extent that voucher families would be 
forced to rent housing in primarily low-income and distressed 
communities. This appears to mean that HUD would be endorsing policies 
that will effectively result in a type of redlining where low-income 
families will be concentrated into poor and distressed communities? Why 
wouldn't this happen?
    Answer. The Flexible Voucher Program will not force families to 
live in ``redlined'' poor and distressed communities. Instead, the 
Flexible Voucher Program permits maximum PHA flexibility in setting 
payment standard levels. Under the Flexible Voucher Program, PHAs will 
be able to set accurate and appropriate rents for each neighborhood, 
regardless of where the family chooses to live.
    However, HUD believes that many payment standards are now set at 
higher than necessary levels for families to rent modest housing in 
non-distressed areas, and anticipates that PHAs will lower these 
payment standards under the Flexible Voucher Program. In December 2000, 
the average public housing agency (PHA) payment standard was $648, or 
95 percent of the Fair Market Rent (FMR). By December 2003, however, 
the average PHA payment standard was $844, and was equal to 104 percent 
of FMR. During this time, the percentage of program participants with 
payment standards between 101 and 110 percent of FMR rose from 25 
percent to 50 percent of all participants. This 30.25 percent 
nationwide average increase in payment standards between December 2000 
and December 2003 is not supported by the much lower 10.5 percent 
nationwide average increase in gross rents (as measured by Consumer 
Price Index) during this same period. This cost increase has occurred 
even as markets across the country exhibited record high vacancy rates 
and PHAs from across the country report to HUD that rents in their 
markets have declined.
    Question. How does this proposal fit in with HUD's goal of ending 
homelessness by 2012 especially since by all accounts homelessness is 
increasing?
    Answer. Designing programs to effectively address homelessness is a 
difficult task made all the more so by the fact that no objective and 
comprehensive count of the number of homeless exists to help steer 
policies. As such, and setting aside anecdotal stories, HUD would 
dispute that by all accounts homelessness is increasing. Instead, the 
Department points towards an array of programs funded through HUD that 
are successfully helping homeless individuals and families transition 
from the streets into permanent housing and employment. While not a 
central component of HUD's goal of ending homelessness, the Flexible 
Voucher Program gives more flexibility to local PHAs to address 
homelessness based on local needs. One example of the flexibility that 
the Flexible Voucher Program will provide is the ability to allow PHAs 
to give priority to homeless families when vouchers become available.

                 SECTION 8 FISCAL YEAR 2004 SHORTFALLS

    Question. We are hearing concerns that HUD's implementation of how 
rent increases will be calculated under section 8 funding for this year 
will leave many PHAs with shortfalls that could result in the loss of 
affordable housing. As I understand it, the Kansas City Housing 
Authority will have a funding shortfall of over $8.7 million, and that 
even after using its 1-month reserve, HUD's formula would still leave 
them with a shortfall of over $5 million to support 1,237 families. We 
included the statutory language at the strong recommendation of HUD 
because HUD convinced us this was the way to control the spiraling cost 
of rents by ensuring any rent increases would reflect rent costs no 
greater than the rent costs of comparable unassisted units in the 
community. How does HUD reconcile these cost concerns and what is HUD 
doing to educate PHAs on how HUD will implement these rent baselines 
while ensuring that voucher families will be held harmless. Is there a 
problem? If a problem, what is the problem and what is HUD doing to 
resolve the problem?
    Answer. HUD is working diligently to implement the Fiscal Year 2004 
Act. On enacting the Act for this program, Congress has taken two 
important steps to bring the spiraling costs of the Section 8 voucher 
program under control. First, it has returned the program to a budget 
basis, in which public housing agencies (PHAs) are provided a set 
amount of funding. This is how the program operated prior to fiscal 
year 2003. Second, Congress provided the program with a 14 percent 
increase in funding over fiscal year 2003 levels to ensure that the 
transition back to a budget basis would not affect current families 
served.
    Just this week, HUD announced that it is providing funding to 
restore program reserves for approximately 500 PHAs, totally 
approximately $150 million. In addition, HUD has decided to apply the 
full AAF to each PHAs funding level for 2004, rather than phasing it in 
over the year. This will especially help PHAs that have a fiscal year 
ending in June or September of this year.
    HUD is working with PHAs on a daily basis to understand how their 
funding is being calculated as well as steps they can take if their 
voucher costs have risen faster than HUD's AAF. Also, HUD is allowing 
PHAs to appeal the AAF if their actual market rents have increased at a 
faster rate than HUD's AAF.
    The only cost and rent data available to HUD or Congress at the 
time of the Fiscal Year 2004 Act was data reported to HUD by PHAs as of 
August 1, 2003. This PHA-reported cost and rent data was much more 
recent than any data available to your committee in previous years for 
the purposes of calculating funding requirements for the voucher 
program. Not only was the data recent, it represented the highest per-
voucher costs ever. Congress then decided to take HUD's published AAF 
inflation data for each market to adjust the August 2003 costs for 
2004. HUD believes that this was a reasonable approach to funding the 
voucher program in fiscal year 2004. This approach also provided a 14 
percent increase over fiscal year 2003 levels. Such an increase should 
provide adequate funding to support all vouchers in use in 2004, 
notwithstanding some PHAs who will likely have successful appeals for a 
higher AAF based on true rental increases in their markets.
    Question. Assuming a cost of rent problem, how does HUD reconcile 
this failure to recognize this problem for fiscal year 2004 with HUD's 
total rewrite of the section 8 for fiscal year 2004?
    Answer. The Department does not believe there is a problem. The 
Department believes that the fiscal year 2004 budget was developed 
using a reasonable approach to funding the fiscal year 2004 voucher 
program, i.e., adjusting the August 2003 costs by the published AAF 
inflation data for each market. The fiscal year 2004 approach provides 
a 14 percent increase over fiscal year 2003 funding levels. Such an 
increase should provide adequate funding to support all vouchers in use 
in fiscal year 2004, notwithstanding some PHAs who will likely have 
successful appeals for a higher AAF based on true rental increases in 
their markets. Moreover, it is well understood that budgeting and 
funding on a strict unit basis poses significant challenges and exposes 
even the best estimates to be thrown awry.

                        PROJECT-BASED SECTION 8

    Question. The administration's proposal to block grant section 8 to 
PHAs still maintains the current restriction that no more than 20 
percent of section 8 funds may be used for section 8 project-based 
assistance. If HUD truly wants to allow PHAs the flexibility to meet 
local housing conditions, why not allow PHAs unlimited ability to use 
their section 8 assistance to develop more low-income housing as part 
of mixed-income housing? Costs would be more controllable. This also 
would be particularly useful in tight rental markets and could be very 
helpful in keeping rents down over the long haul.
    Answer. In developing the Flexible Voucher Program legislative 
proposal, HUD chose to continue to apply the current statutory 
provision that caps project-basing of tenant-based vouchers to 20 
percent. This was done to preserve the core feature of the popular 
voucher program--freedom of housing choice for families. When a tenant-
based voucher is used for project-basing, the family must live in the 
project-based unit initially and cannot select a unit of the family's 
choice. It is important to note that within the 20 percent cap of 
project-basing, PHAs will have much greater flexibility on how to 
project-base vouchers and develop additional affordable housing units.

      PUBLIC HOUSING CAPITAL FUND--FREEDOM TO HOUSE DEMONSTRATION

    Question. HUD is requesting $5 million within the Capital Fund to 
administer the Freedom to House Demonstration, which is designed to 
test new ways for PHAs to manage their assets. This new 100 PHA 
demonstration is based on the Moving to Work ``Block Grant'' 
Demonstration. From reports developed by Abt Associates on the MTW 
demonstration, it appears that only a few PHAs have utilized this type 
of MTW model and the results are not all in. What have we learned from 
the MTW Block Grant demonstration?
    Answer. In accordance with Section 204 of the Omnibus Consolidated 
Recessions and Appropriations Act of 1996, a report on the evaluation 
of the Moving to Work Demonstration program (MTW) was submitted to 
Congress in January 2004.
    The evaluation of the MTW program, as contained in the January 2004 
report, finds that MTW initiatives include experimentation with changes 
in three main areas: (1) merged funding assistance, (2) subsidy 
formulas, rent rules and time limits, and (3) HUD procedural and 
reporting requirements. Based on the three goals of the MTW 
demonstration as stated in the Appropriations Act, following are some 
determinations about whether or not deregulation and the initiatives 
implemented by the MTW sites are factors that contributed to PHAs 
achieving these goals:
  --Changes in administrative procedures and reporting requirements 
        resulted in more rational and efficient use of time and 
        resources.
  --An administrative benefit resulting from the simplification of rent 
        rules and subsidy calculations is that tenants are less likely 
        to under-report their income and staff are less likely to 
        miscalculate tenant rent.
  --Many PHAs focused on changes to rent rules and/or subsidy formulas 
        to increase employment and self-sufficiency among assisted 
        households.
  --Some PHAs were able to expand housing choice by using their funding 
        fungibility to help finance the acquisition or production of 
        more assisted housing units (one-for-one replacement of public 
        housing units demolished under HOPE VI, building larger units 
        to suit larger families, scattered site acquisitions, and 
        increasing the stock of affordable rental units for voucher 
        holders in tight rental markets).
  --Some PHAs merged their public housing and voucher program waiting 
        lists to make the application process more efficient for staff, 
        and less burdensome and easier to understand for applicants in 
        an effort to give residents increased choice about housing 
        type.
    Question. What are the successes and what are the problems these 
PHAs face?
    Answer. Participating PHAs have realized some interesting results 
while experimenting with: (1) Alternatives to the standard approach for 
establishing tenant rents; (2) Time limits on the receipt of housing 
assistance; (3) Administrative streamlining (to cut costs and 
complexity); (4) Funding flexibility (by combining operating subsidies, 
modernization grants and Section 8 funding into a flexible funding 
stream); (5) Alternate development and financing arrangements to expand 
the stock of affordable housing.
    Evidence to date suggests that deregulation of local HAs may yield 
benefits in terms of program design and implementation innovations.
    For example, several participating PHAs have used the funding 
fungibility authority for standard program uses, but in a more flexible 
and efficient manner, to compensate for ``losses'' in one program area 
and to develop (through construction, acquisition or rehabilitation) 
new, affordable housing units. Some participating PHAs implemented 
changes in housing subsidy formulas with provisions (such as flat 
rents) that reward resident employment and income growth, and/or with 
provisions that penalize unemployment and/or with supplemental services 
and supports to help residents make progress towards self-sufficiency 
and/or with time limits on assistance. Many participants have used the 
demonstration to alter specific procedural and reporting requirements, 
including less frequent re-examination, merged waiting lists, local 
inspection standards and protocols and other streamlining and paperwork 
reduction initiatives.
    The local flexibility and independence permitted under MTW appears 
to allow some PHAs to experiment with innovative solutions to local 
challenges, and to be more responsive to local conditions and 
priorities to an extent not otherwise permissible under standard rules.
    Question. What has been the impact on extremely low-income families 
in these areas? More served, less served?
    Answer. With respect to extremely low-income families (below 30 
percent of median income), there are no measured effects of the 
demonstration on this group. However, the demonstration requires that 
participants ``continue to serve substantially the same total number of 
eligible low income families (below 80 percent of median income) under 
MTW, and to maintain a comparable mix of families by family size, as 
would have been served or assisted if HUD funding sources had not been 
used under the MTW demonstration.'' and that ``at least 75 percent of 
the families assisted by the Agency under the MTW demonstration program 
be very low income families as defined in the 1937 Act'' (below 50 
percent of median income). MTW participants are monitored for 
compliance with these requirements, and no negative impacts have been 
noted to date.
    Inquiries to several MTW PHAs confirm that agencies have continued 
to serve essentially the same income mix of households as they are 
required to do by program guidelines. In addition, trend data about all 
public and assisted tenant households indicate that the number of 
extremely low-income families assisted has increased even beyond 
statutory requirements. Before the Quality Housing and Work 
Responsibility Act (QHWRA) was enacted in 1998 71 percent of public 
housing program admissions were extremely low-income families. Today, 
76 percent of public housing program admissions are extremely low-
income families. In the voucher program, before QHWRA was enacted and 
an extremely low-income targeting requirement was established, 68 
percent of voucher admissions were extremely low-income families. 
Today, extremely low-income families comprise 80 percent of all 
families served. In both the public housing and the voucher program, 
extremely low-income families exceed the targeted numbers of these 
families by 36 percent and 5 percent respectively.
    Question. Also, what unique characteristics do these PHAs share?
    Answer. Characteristics unique to these PHAs are hard to define, as 
the MTW participants vary greatly in size of program, location and 
performance status, etc. However, they do have one thing in common. All 
were interested in participating in the MTW demonstration and testing 
the effects of deregulation. In addition, these PHAs took the 
initiative to develop an MTW proposal and submitted it to HUD. 
Subsequently, they were selected for participation in the MTW 
demonstration in accordance with the Federal Register requirements.
    Question. How would the new demonstration differ from the MTW Block 
Grant demonstration?
    Answer. The Freedom to House demonstration differs in several ways 
from the MTW demonstration as follows:
  --It will be conducted in a more controlled environment, where it 
        will be easier to measure and quantify effects of various 
        changes in policies on the public housing population. Under the 
        Freedom to House demonstration, there will be test and control 
        agencies.
  --The number of participating agencies will be greater.
  --The Freedom to House demonstration will be structured in such a way 
        that time-consuming waiver requests will not be needed.
  --The Freedom to House demonstration will require that participating 
        PHAs implement project based accounting and management.

                              OVERLEASING

    Question. Los Angeles has an overleasing problem in excess of some 
5,000 vouchers and maybe many more. How big is this problem in Los 
Angeles and how big nationwide?
    Answer. The Housing Authority of the City of Los Angeles is 
approximately 10 percent over-leased. Nationwide, there are 80 PHAs 
representing 3 percent of the PHAs affecting 3 percent of the total 
vouchers that have the potential of being over-leased in fiscal year 
2004.
    Question. Why didn't HUD catch this earlier and what is HUD doing 
to address the problem?
    Answer. HUD did not detect this problem earlier because the PHA 
began the trend to over-lease late in calendar year 2003, especially as 
families who ported to other neighboring PHAs were charged to HACLA's 
leasing levels. HUD is addressing the problem through a Memorandum of 
Understanding that was signed in April 2004 that outlines specific 
actions that must be accomplished to reduce the leasing levels, in 
addition to other important management practices and policies that must 
be implemented to improve program performance.
    Additionally, HUD has had staff on-site since April to assess the 
situation and to work with the agency to improve performance through 
intensive technical assistance and guidance. HUD will continue to have 
a presence in the agency until confident that all problems have been 
resolved.
    Question. Has HUD looked at whether this funding represents an 
Anti-Deficiency Act violation and what are HUD's conclusions?
    Answer. HUD's conclusion is that there has been no Anti-Deficiency 
Act violation. In the PHA 2003 fiscal year, the over-leasing occurred 
late in the year and was offset by the under-leasing that had occurred. 
The PHA ended the year at 99 percent utilization of authorized unit 
months, within the authorized level.
    It is the 2004 calendar year (that began on January 1) that will 
have a financial impact as a result of the over-leasing because the PHA 
begins the year at approximately 110 percent. Since the appropriation 
prohibits HUD to provide funding for over-leasing, the PHA has 
implemented an aggressive attrition plan and HUD has required the 
agency to transfer back into the Section 8 account $63 million in 
unobligated administrative fee reserves that had been transferred into 
other accounts. These funds are targeted to cover the cost of over-
leasing during the period of attrition.

                                HOPE VI

    Question. The Budget Request eliminates the HOPE VI program, which 
was funded at $149 million in fiscal year 2004. The HUD Budget 
Justifications conclude that termination was appropriate because this 
program costs more than other programs that serve the same population 
(27 percent more costly than a voucher and 47 percent higher when all 
costs are included) and that projects are slow to move. However, this 
program accomplishes much more than the voucher program since it uses 
public housing capital investment to attract new investment to 
communities and helps to stabilize new communities.
    Also, the Urban Institute in its Lessons from HOPE VI for the 
future of Public Housing echoed a 1998 Abt study that advised that 
public housing inventory has accumulated capital needs backlog of about 
$18 billion, with an additional $2 billion ($1,679 per unit) accruing 
each year. Obviously the loss of HOPE VI funds plus the elimination of 
the Drug Elimination program several years ago has placed a larger and 
larger burden on PHAs, especially since the Operating Fund is 
underfunded per the formula every year. What is HUD proposing to do to 
address the growing problems associated with this deteriorating public 
housing stock?
    Answer. Rather than funding new rounds of HOPE VI grantees in 
fiscal year 2005, it is prudent to allow the Department to aggressively 
manage and complete the grants currently awarded, many of which are 
years from completion. This pause will also give the Department time to 
develop better methods for assessing distress, develop new financing 
tools and delivery mechanisms that are less costly and more efficient. 
Of the 193 HOPE VI Revitalization sites, only 29 sites are completed. 
As of March 31, 2004, $2.3 billion has not been expended out of $5 
billion in HOPE VI Revitalization Grant Awards.
    HUD recognizes that there is an estimated $18 billion capital 
backlog in the public housing inventory. While there is clearly serious 
need for investment in the inventory, it is not clear how much of this 
backlog is represented by severely distressed units needing wholesale 
demolition and replacement as articulated by HOPE VI. Current 
definitions used by HUD to define severe distress were developed in 
response to a sub-set of the public housing inventory that by and large 
no longer exists i.e., severely distressed, super-block, high-rise, 
public housing developments with significant social problems in major 
cities like Cabrini Green and Robert Taylor Homes in Chicago.
    The Department feels that it is unwise to go forward with a full-
scale revitalization program until it can complete a higher percentage 
of existing projects and develop a more quantifiable and accurate 
method for assessing severe distress. In its report, ``Lessons Learned 
from HOPE VI for the Future of Public Housing,'' the Urban Institute 
acknowledged that due to the small number of completed sites and a lack 
of definitive data, it proved difficult to provide a rigorous analysis 
of the HOPE VI program. In fact, the Urban Institute could not conduct 
its study as directed because of a lack of projects that had progressed 
to a reasonable extent.
    Nonetheless, the Department recognizes the importance of addressing 
the current capital backlog within the public housing inventory. In 
most cases this need can be more appropriately met through other 
modernization programs operated by the Department, e.g., the Capital 
Fund, Capital Fund Finance and Mixed-Finance development. The 
Department will encourage housing authorities in need of this 
assistance to submit project proposals to these programs. To date, the 
Department has approved over $1.5 billion in transactions using Capital 
Fund Finance, with approximately $500 million in additional funds in 
the pipeline.

         NATIVE AMERICAN HOUSING BLOCK GRANT PROGRAM (NAHASDA)

    Question. The Budget Request provides $647 million for NAHASDA in 
fiscal year 2005, a decrease of $3 million from the fiscal year 2004 
level. As has been the problem with most block grant programs, this 
funding has been largely static since the creation of the program in 
1996. What has been the overall growth or reduction in the program over 
the last 5 years?
    Answer. The implementation of the Indian Housing Block Grant (IHBG) 
program began in fiscal year 1998. In fiscal year 2000, $620 million 
was appropriated for the program; for fiscal years 2001 and 2002 the 
appropriated amounts were $649 million each year; in fiscal year 2003, 
there was $645 million; and in fiscal year 2004, $650 million was 
appropriated.
    The President's budget proposal for fiscal year 2005 includes $647 
million specifically for Native American housing under the IHBG program 
authorized under the Native American Housing Assistance and Self-
Determination Act. Of that amount, approximately $640 million is for 
direct, formula allocations through the IHBG program.
    The Department made adjustments within the program in the fiscal 
year 2005 request to allow more funds to be available for direct tribal 
use. Reducing set-asides, results in an increase in IHBG grant dollars 
available to tribes. For example, in fiscal year 2004, $2.72 million 
was set-aside for the Working Capital Fund. In fiscal year 2005, the 
Department requests only $500,000 for this purpose.
    On December 27, 2000, Congress created a new program, the Native 
Hawaiian Housing Block Grant (NHHBG) program (section 203 of the 
Omnibus Indian Advancement Act, Public Law 106-568). The NHHBG program, 
codified as Title VIII of the Native American Housing Assistance and 
Self-Determination Act (25 U.S.C. 4101 et seq.), provides the authority 
to support affordable housing activities on the Hawaiian Home Lands for 
Native Hawaiians eligible to reside there. The first year that funds 
were appropriated was fiscal year 2002, in the amount of $9.6 million. 
The amount of $9.6 million was appropriated in fiscal year 2003, and 
there is $9.5 million for the program in fiscal year 2004. For fiscal 
year 2005, the President requested $9.5 million for this program. There 
were across-the-board reductions in each fiscal year that reduced the 
amounts appropriated slightly.
    Question. Is more or less housing being built?
    Answer. Last year we reported that IHBG funding from fiscal year 
1998 through fiscal year 2001, which was the most recent data 
available, resulted in an average of 2,149 units created each year. 
Data are derived from Annual Performance Reports and Indian Housing 
Plans, and reflect dwelling units started and completed. Figures are 
reliable to the extent those reports contain accurate information.
    Data for fiscal year 2002 is now available. It shows that 
nationally, there were 896 rental units constructed, 164 rental units 
acquired, 1,625 homeownership units constructed and 426 homeownership 
units acquired using IHBG funds. This is a total of 3,111 units, nearly 
1,000 more than the average of the previous 5 years.
    Figures are affected by the transition from the way in which 
housing development funds were awarded competitively under the United 
States Housing Act of 1937, and the formula block grant allocation 
method under the IHBG authorized by the Native American Housing 
Assistance and Self-Determination Act of 1996, as amended. Numbers do 
not reflect ``phased projects,'' where it may be necessary for a tribe 
or tribally designated housing entity (TDHE) to complete several pre-
construction steps, such as acquisition of land and development of 
infrastructure prior to actual construction of dwelling units. Phased 
pre-construction activities are necessary in most areas of Indian 
Country, but somewhat more common in the East, the Midwest and the 
Northwest, less common in the Plains States. Alaska's phased 
construction is more the result of limited weather-related building 
seasons, materials acquisition challenges and smaller project sizes.
    Question. Where do most of the funds go, rehabilitation, 
homeownership?
    Answer. Last year HUD reported that, on average, during the 5-year 
period of fiscal year 1998 through fiscal year 2002, Indian tribes or 
their tribally designated housing entities (TDHE) have provided 
assistance designed to preserve the viability of 77,838 units each 
fiscal year.
    Actual data on expenditures by category for fiscal year 2002 now 
exists. It shows that $173 million was spent on modernization of 
dwelling units, $2 million on rehabilitation of rental units, $48 
million on rehabilitation of homeownership units, $86 million on 
construction of new homeownership units, $27 million on acquisition of 
homeownership units, $56 million on construction of new rental units 
and $7 million for acquisition of new rental units.
    The unit count includes moderate or substantial rehabilitation, and 
modernization and operating assistance related to units currently in 
management. It does not include other eligible affordable housing 
activities under the IHBG, such as down payment and buy down 
assistance, minor rehabilitation of under $5,000, housing services, 
housing management services, crime prevention and safety, and model 
activities. The total does include Section 8 type programs operated by 
a tribe or TDHE. Figures are derived from Formula Current Assisted 
Stock (FCAS) data used to determine the FCAS allocation portion of the 
IHBG formula.
    Other sources of funding that increase the availability of 
affordable housing and encourage homeownership; partnerships and 
leveraging funds to benefit Native American families include the Indian 
Community Development Block Grant Program, the Title VI Tribal Housing 
Activities Loan Guarantee Fund and the Section 184 Indian Housing Home 
Loan Guarantee Program.
    Question. Have housing problems increased or decreased for low-
income Native American families over the life of the program?
    Answer. No studies have been conducted by the Department that 
address whether housing problems for low-income Native American 
families have increased or decreased during the life of the program.
    HUD shares your concerns and values your observations regarding the 
housing needs in Native American communities. The Department believes 
that the President's budget request for HUD's Indian housing programs 
supports the progress being made by tribes in providing the housing 
needed throughout Indian Country. The Department is proud of its 
efforts and yet recognizes that much remains to be done.

                           HOMELESS VETERANS

    Question. The Budget Request provides $1.282 billion for Homeless 
Assistance Grants for fiscal year 2005, which is $15 million above the 
fiscal year 2004 level. The administration set a goal of eliminating 
homelessness by 2012. While I find a Prisoner Reentry Initiative and 
Samaritan Housing Initiative interesting, I understand that veterans of 
the late and post-Vietnam period are 3 to 4 times more likely to become 
homeless as other Americans. While the VA needs to be more involved, 
HUD also needs to become more involved. What is HUD doing to 
specifically address this crisis?
    Answer. HUD's Office of Special Needs Assistance Programs has taken 
some very direct steps to develop initiatives that target homeless 
assistance for veterans. Continuum of Care applicants for the Homeless 
Assistance competition are required each year to specify whether the 
proposed project will primarily serve veterans. Of the nearly $1.3 
billion in targeted homeless assistance awarded in 2003, 122 veteran-
specific projects were awarded, totaling approximately $40 million. In 
addition to these funds, HUD awarded $583 million to 1,913 projects 
that indicated that they would serve homeless veterans among other 
homeless persons. During 2003, we estimate that approximately 62,000 
homeless veterans were assisted through HUD's competitive homeless 
programs. Many thousands more were served through HUD's Emergency 
Shelter Grants Program and the Department's mainstream housing 
programs.
    HUD has also developed collaborative interagency initiatives and 
relationships to address the administration's goal of ending chronic 
homelessness by 2012. Many chronically homeless persons, the most 
challenged subpopulation of all, are veterans. Our efforts to meet this 
goal have been broad and comprehensive, and our success in meeting this 
goal will have a proportional impact on veterans. The following are 
descriptions of these initiatives:
    In the $35 million HUD, HHS, and VA Collaborative Initiative to 
Help End Chronic Homelessness, the first program to specifically serve 
chronically homeless people, we required 10 percent of the funds be 
targeted to veterans. HUD has provided $20 million (70 percent) of the 
funding. While this collaboration focuses on housing and employment, 
the grantees also have to offer other essential wrap-around services, 
such as health care, education, and life skills. We believe that 
housing and jobs will help the chronically homeless persons become 
self-sufficient. Eleven communities were chosen from across the Nation 
to provide housing and services for approximately 900 chronically 
homeless persons. The proposed $50 million Samaritan Initiative (HUD 
portion) will build on this model and will further increase our 
capacity to serve the veterans population within the overall targeted 
chronic homeless population.
    The $13.5 million HUD/DOL 5-year demonstration initiative with 
HUD's contribution at the $10.2 million also focuses on housing and 
employment for chronically homeless persons. The HUD/DOL grants will 
enable persons who are chronically homeless to achieve employment and 
self-sufficiency through placement in permanent housing units, 
supplemented by ``customized employment'' strategies through local 
Workforce Investment Boards (WIB). It is expected that nearly 300 
chronically homeless individuals will receive permanent housing and 
employment opportunities in five major cities. Many chronically 
homeless veterans will be included in this population.
    PHASES-Technical Assistance is a grant program awarded in fiscal 
year 2004 to technical assistance providers to develop training 
products that address the special needs of homeless assistance 
providers that serve homeless veterans. The goal is to increase the 
capacity of these providers to successfully apply for HUD Continuum of 
Care Homeless Assistance funding. This will facilitate an increase in 
the number of funded housing and service projects that target homeless 
veterans.

                          CHRONIC HOMELESSNESS

    Question. Two years ago, the administration announced the goal of 
eliminating chronic homelessness in 10 years. I also support this goal. 
Unfortunately, homelessness seems to be getting worse. A 25-city survey 
by the U.S. Conference of Mayors released in December 2003 found that 
request for shelter rose by 13 percent in 2003 while request for food 
assistance grew by 17 percent in fiscal year 2002. What new steps has 
HUD taken or will take to eliminate homelessness by 2012?
    Answer. The administration has set a goal of eliminating chronic 
homelessness by 2012. HUD does not foresee a decline in need for 
homeless emergency and transitional housing in the short-run, as 
illustrated by the U.S. Conference of Mayor's survey. However, HUD's 
focus on continuing to build an inventory of permanent housing and 
integrating inter-Departmental services for the chronically homeless 
population through the $50 million Samaritan Initiative offers, 
according to recent research findings, the chance to gain significant 
savings in resources because the chronic homelessness have been found 
to disproportionately use emergency shelter and services. These 
resources can be then used to more efficiently address the needs of 
other homeless persons.

              PROGRESS IN ELIMINATING CHRONIC HOMELESSNESS

    Question. One of the key components of eliminating chronic 
homelessness is the creation of more permanent housing units. Another 
key component is preventing homelessness from occurring in the first 
place. First, what specific steps the Department has taken towards 
meeting the goal of ending chronic homelessness? Second, does the 
budget request include adequate funding to fully fund all expiring 
Shelter Plus Care housing contracts? Lastly, your budget justification 
notes that the Deputy Secretary has established a Departmental task 
force to identify mainstream HUD resources to help chronic 
homelessness. Can you give us an update on what the task force has 
accomplished so far? Second, does the budget request include adequate 
funding to fund fully all expiring shelter-plus-care housing contracts? 
Lastly, your budget justification notes that the Deputy Secretary has 
established a Departmental task force to identify mainstream HUD 
resources to help chronic homelessness. Can you give us an update on 
what the task force has accomplished thus far?
    Answer. The Department has undertaken several steps itself and in 
concert with other Federal agencies to increase the focus on chronic 
homelessness, targets additional resources to this subpopulation and 
has local Continuums of Care (CoC) identify and address chronic 
homelessness in their planning and prioritization process. For example, 
HUD:
  --Helped develop the chronic homeless initiative with HHS and VA; and 
        contributed $20 million of the $35 million awarded. HUD's funds 
        are for permanent housing; services are funded by HHS and VA.
  --Jointly developed a $13.5 million initiative with DOL for the 
        chronically homeless. HUD contributed $10 million toward this 
        initiative, to be used for permanent housing activities.
  --Awarded $6.5 million in HOME recaptures, targeted to the 
        chronically homeless.
  --In concert with HHS and VA, and in consultation with the 
        Interagency Council on Homelessness, introduced the Samaritan 
        Initiative, a $70 million joint effort that will fund local 
        collaborative strategies to move chronically homeless 
        individuals from the streets to permanent housing with 
        supportive services. HUD is the lead agency and is providing 
        $50 million for this effort.
  --Increased homeless assistance funding for each year of the 
        administration to record levels in support of homeless people, 
        including chronically homeless, and the prevention of those who 
        are at-risk of homelessness.
  --Co-sponsored with HHS, VA, and DOL to fund various policy academies 
        to assist States in accessing mainstream services for the 
        chronically homeless.
  --Added chronic homelessness as a focus to the Continuum of Care 
        planning process. CoC's must identify chronic homeless needs, 
        develop a strategy to meet those needs and measure their 
        progress in addressing those needs. In addition, added an 
        overall requirement that 10 percent of HUD's entire homeless 
        program appropriation be used for chronically homeless 
        projects.
  --Exceeded the homeless goals in HUD's Management Plan; funding the 
        move of 34,307 (goal of 25,000) formerly homeless persons into 
        HUD McKinney-Vento funded permanent housing and helping 45,217 
        (goal of 29,000) homeless adults move from transitional housing 
        into permanent housing.
  --Is working with over 425 Continuums of Care, covering 93 percent of 
        the country, to establish Homeless Management Information 
        Systems (HMIS), which are improving the collection and analysis 
        of data and obtain an unduplicated count of homeless persons 
        and families, including chronically homeless.
  --Is working with other Federal agencies to ease access to mainstream 
        housing and supportive services for chronically homeless, 
        resulting in greater funding of housing rather than services. 
        Currently, the McKinney-Vento homeless assistance grants fund 
        both supportive services and housing.
    The budget request contains full funding to meet Shelter Plus Care 
renewal needs.
    The Deputy Secretary's Task Force continues to meet and assess HUD 
resources to help address chronic homelessness. The use of HOME 
recapture funds for projects targeted to the chronic homeless was an 
example of the Task Force's efforts.

                HUD-VETERANS AFFAIRS SUPPORTIVE HOUSING

    Question. I was disturbed to read a recent Washington Post article 
about the continuing plight of homeless veterans. One tool that has 
shown some success in addressing homeless veterans is the HUD-Veterans 
Affairs Supportive Housing or ``HUD-VASH'' program. How many HUD-VASH 
vouchers have been distributed to homeless veterans and how much money 
is HUD spending on this program? Besides HUD-VASH, what other steps has 
HUD taken to address the needs of homeless veterans?
    Answer. Although the HUD-VASH program is authorized under Section 
12 of the Homeless Veterans Comprehensive Assistance Act of 2001, the 
program has not received any new funding for many years since new VASH 
vouchers are only available if funds for new Section 8 incremental 
vouchers is provided. No incremental vouchers have been provided since 
2001 because rapidly increasing costs of renewing vouchers has 
precluded funding to expand the base of vouchers under lease. In 
addition, the Department does not track the level of continued use of 
prior Section 8 VASH vouchers which is dependent upon local decisions.
    A comprehensive outline of HUD's targeted plans and substantial 
actions to serve homeless veterans is addressed in the response to a 
previous question on this topic and it should be noted that all of 
HUD's homeless programs targeted to ending chronic homelessness as well 
as the historic McKinney-Vento Act programs serve a significant number 
of at-risk veterans and homeless veterans.

                 RURAL HOUSING AND ECONOMIC DEVELOPMENT

    Question. The administration continues to seek the elimination of 
the Rural Housing and Economic Development program, arguing that enough 
is being done through other HUD programs such as HOME and CDBG, and 
that this program is small and duplicative of the RDA programs in the 
Department of Agriculture. However, rural housing remains underfunded 
in Agriculture and is a poor step-child of the crop subsidy programs in 
terms of size and attention. I would like your assessment of why this 
program is not needed, despite the fact that it added some 6,000 
repaired or new affordable housing units in rural areas.
    Answer. This proposal addresses GAO's suggestion to merge similar 
HUD and USDA programs in order to make the process more efficient and 
cost-effective as well as to consolidate capacity building activities. 
The elimination of RHED reflects the existence of duplicative HUD and 
USDA efforts and the fact that USDA has far greater of resources in 
this area.
    USDA's fiscal year 2005 budget, per their submission, includes $2.2 
billion in budget authority for rural development and a projected 
overall program level of $11.626 billion, consisting of grants, loans, 
and related assistance. The request includes $2.6 billion in program 
level funds for the Rural Community Advancement Program and maintains 
the flexibility to transfer funding among programs in this area. The 
$2.6 billion includes $403 million in grant funding, including 
Community Facility, Rural Business Enterprise, and Water and Waste 
Disposal grants. The USDA Rural Housing Service program requests $938 
million in loans and grants and projects a fiscal year 2005 program 
level of $5.3 billion. The grant portion is $669 million of the total. 
It should also be noted that the Department of Agriculture fiscal year 
2005 budget request also rescinds $100 million for planning grants and 
innovation grants to Regional Boards from the Commodity Credit 
Corporation because, ``. . . the program purpose is redundant with the 
mission of Rural Development as a whole and of the Rural Development 
Council around the country, which Rural Development supports''. The HUD 
funding of $25 million for the separate Rural Housing and Economic 
Development Program is overshadowed by USDA's resources and 
infrastructure, which support USDA's historic effort in these areas.

              BROWNFIELDS ECONOMIC DEVELOPMENT INITIATIVE

    Question. HUD is proposing the elimination of the Brownfields 
program because it is slow to expend funds and enough is being done 
through the CDBG program. How much Brownfields activity is being 
conducted through CDBG?
    Answer. At present, there is no single activity code that captures 
all Brownfields cleanup and redevelopment in the reporting system for 
the CDBG program. The most recent activity expenditure report for the 
CDBG program breaks activities down into almost 100 activities, 3 of 
which directly address Brownfields activities: Clean-up of contaminated 
sites/Brownfields; Asbestos removal; and Lead-based paint testing and 
abatement. As a percentage of total CDBG expenditures for the last 3 
fiscal years, the average for the above 3 categories was about 1.6 
percent, or $17.8 million. However, there are other CDBG activities 
that also capture Brownfields redevelopment activity, including but not 
limited to the following: Acquisition; Clearance and demolition; 
Rehabilitation of privately owned commercial/industrial properties; 
Commercial/industrial infrastructure development; Commercial/industrial 
building acquisition, construction and rehabilitation; Parking 
facilities; Flood and drainage facilities; Water & sewer; and Street 
improvements. Taken together, these activities averaged another 2.9 
percent, or up to $32.2 million of the total expenditures of 
approximately $11.1 billion over 3 years, a portion of which was 
undoubtedly expended on Brownfields redevelopment activities.
    In the last comprehensive study of the use of CDBG funds for 
Brownfields redevelopment (``Redeveloping Brownfields: How States and 
Localities Use CDBG Funds''), HUD's Office of Policy Development and 
Research found that CDBG expenditures for Brownfield activities ranged 
from about 2 percent to more than 20 percent of the total block grant 
in entitlement cities that tracked their use of CDBG funds for that 
purpose. Among these cities, CDBG expenditures for Brownfields-related 
activities ranged from $200,000 to more than $5,000,000 for an entire 
redevelopment project.

                      BROWNFIELDS DEVELOPMENT TIME

    Question. How does the development time compare between CDBG and 
Brownfields?
    Answer. It is difficult to compare the development time frame 
associated with Brownfields Economic Development Initiative BEDI- and 
CDBG-assisted development projects since BEDI projects have averaged 
more than $40 million in total project costs involving full-scale 
redevelopment by the private sector while the latter tend to be of 
smaller scale and are frequently confined to the investigation and 
clean-up of a site for prospective redevelopment. BEDI grant funds must 
currently be used in conjunction with a Section 108 loan, which can add 
some additional processing time before the project can get underway.

                       OLDER SECTION 202 PROJECTS

    Question. HUD is beginning to see a number of problems in the 
section 202 program where older 202 projects are no longer economically 
feasible due to either a backlog of repairs or outmoded designs that 
are no longer competitive with the marketplace. What is the extent of 
this problem and what is HUD proposing to do about it?
    Answer. As the Section 202 portfolio continues to age similar to 
the FHA portfolio, the Department will continue to be faced with the 
challenge of dealing with older projects that are no longer 
economically feasible due to outmoded designs or in need of major 
repairs. In 2000, the Department was pleased when Congress passed 
legislation allowing for the prepayment and refinancing of Section 202 
direct loans. The refinancing of these loans allows additional funds to 
be made available to modernize, rehabilitate and make the necessary 
major repairs to these projects. The Department understands that FHA 
insurance is a primary means for refinancing these loans that have 
Section 8 contracts that allow the low-income residents to live in 
these properties on a long-term basis.
    Due to the increasing number of sponsors desiring FHA insurance to 
refinance these aging projects, the Department has been reviewing how 
to provide more flexibility in underwriting the FHA-insured loan. In 
recognition of the great need to assist these affordable elderly 
housing projects and preserve this housing stock, the Department is 
pleased to announce that a policy will be implemented to allow these 
loans to be underwritten at either the Section 8 rent or market rent, 
whichever is greater. This change should substantially enable more 
Section 2020 projects to be refinanced through FHA and provide the 
needed capital to make the necessary repairs and improvements.

                     OFFICE OF LEAD HAZARD CONTROL

    Question. I consider lead-based paint hazards one of the most 
significant problems facing low-income children in urban areas. It is a 
problem that can be solved within our lifetime, a problem with a finite 
cost. Unfortunately, the administration proposes elimination of the 
Bond-Mikulski Lead Hazard Elimination program, which is funded at $50 
million in fiscal year 2004. How does HUD justify that it is doing 
enough to address lead-based paint hazards?
    Answer. HUD agrees that lead-based paint hazards in housing remains 
a significant problem that is solvable. The ``Bond Mikulski Lead Hazard 
Elimination'' program (also known as the Lead Hazard Reduction 
Demonstration program) has made an important contribution. The grantees 
have 350 units either underway or completed. Another 500 units have 
been tested to determine the precise location of lead-based paint 
hazards. In all, over 6,000 units will be completed under the first 
round of funding for this program and the second round will support 
additional units. These two rounds of funding will allow for targeting 
of funds to areas of high need and will further allow these grantees to 
mature their capacity and effort. With this maturation, the Department 
believes that these efforts can be best accommodated by integrating all 
efforts into the regular grant program. The fiscal year 2005 request 
reflects a $14.8 million increase for the regular grant program and we 
believe that these increased funds are sufficient to make the progress 
necessary to meet our target to eliminate lead-based paint poisoning by 
2010.

                            ZERO DOWNPAYMENT

    Question. The administration is proposing a number of FHA mortgage 
insurance program changes, including creating a Zero Downpayment 
program where all fees and costs are rolled into the mortgage (this 
proposal poses substantial financial risks to the FHA Single Family 
Mortgage Insurance program--there are no disincentive against placing 
high-risk families in homes and new homeowners have no stake in these 
homes and obviously have no cushion to pay for any big ticket costs 
such as a failed furnace or leaky roof. From a historical perspective, 
FHA was almost bankrupt in the late 1980's due to defaults from housing 
families with high loan-to-value ratios which also helped to tip 
marginal neighborhoods where FHA foreclosures helped to drive down the 
value of other housing in a neighborhood.)
    More troubling, the IG audit of the FHA financial statements, dated 
November 25, 2003, states, in relevant part, that FHA defaults rose 
from 2.76 percent in fiscal year 1999 to 4.25 percent in fiscal year 
2002. More importantly, loans made in 1999 through 2001 contributed to 
over 50 percent of the total defaults in fiscal year 2002. In addition, 
claims rose 31 percent in fiscal year 2003 to over 85,000 claims, and 
FHA paid claims of $5.5 billion in fiscal year 2002 which rose to $7.8 
billion in fiscal year 2003.
    This is not to say that the FHA Mutual Mortgage Insurance Fund is 
not adequately capitalized. The actuarial study indicates that the MMIF 
is adequately capitalized and likely will be for years to come. 
However, there are serious issues with some of the estimates in the 
study. As I understand it, the 2002 actuarial study projected that 
economic value of the fund at end of fiscal year 2003 would be $27.3 
billion with the new estimate for fiscal year 2003 being $22.7 billion. 
This represents a $4.6 billion flaw which raises serious questions over 
the need for new economic models which would include borrower credit 
data to provide a better glimpse into the credit and default risk of 
the FHA book of business.
    In addition, FHA share of the home purchase loan market fell by 
16.5 percent in 2003 after falling by 1.4 percent in 2002 and 1 percent 
in 2001. In contrast, overall purchase loan originations by loan number 
went up in each of these years with 2003 being a record year for home 
sales. This and other data suggest that there is growing deterioration 
in the credit-quality of the FHA book of business; that FHA is 
essentially pricing itself into underwriting the highest risk 
mortgages.
    HUD seems to be making a decision in the FHA Zero Downpayment 
program that it can afford to house as many people as possible, no 
matter the cost of default to the fund over time or the impact of a 
family's credit in the future. Is this the policy reason for proposing 
the Zero Downpayment program?
    Answer. FHA has designed a Zero Downpayment program to serve 
borrowers who meet FHA's existing underwriting criteria, but lack the 
savings to pay a downpayment and closing costs. FHA expects Zero Down 
claim rates to be higher than those for the regular program and plans 
to charge a mortgage insurance premium sufficient to cover the costs 
that it expects to incur.
    To reduce the risks associated with the program, FHA plans to 
require pre-purchase counseling and the use of the TOTAL mortgage 
scorecard in loan underwriting.

                                FHA RISK

    Question. As discussed, the FHA Zero Downpayment program appears to 
be structured to encourage the highest risk homebuyers to use FHA. Why 
is HUD structuring its portfolio this way? What oversight requirements 
has FHA imposed to ensure that mortgage underwriters do not make 
available mortgage insurance to high-risk, non-creditworthy homebuyers?
    Answer. HUD disagrees that borrowers without the cash to close 
represent ``the highest risk'' homebuyers. The mortgage industry, in 
developing automated risk assessments tools, has discovered that the 
downpayment is much less of a factor in predicting default than 
previously thought. FHA's own mortgage scorecard, TOTAL, also confirmed 
that the borrower's credit and the payment-to-income ratio were much 
more powerful predictors of risk than the initial equity. It is in fact 
``risk layering'' that represents the highest risk homebuyers. Further, 
the cash not used at loan settlement becomes available during the early 
months of the mortgage for payments, minor repairs, and the other costs 
associated with moving to a new home. By offering its own Zero 
Downpayment program, HUD will be able to adopt underwriting 
requirements, structure its insurance premiums, and add loss mitigation 
tools to ensure the financial stability of the mortgage insurance fund.
    FHA will require that all mortgages be risk assessed by its TOTAL 
mortgage scorecard, which looks at credit, and application variables 
found to be predictive of loan performance. While those applications 
that are ``referred'' (i.e., the outcome of the risk-assessment was not 
an ``approve'') to an underwriter for a personal review will not all be 
rejected, FHA expects a substantial portion of referred loans to be 
denied as these represent the greatest risk. FHA also intends to 
aggressively monitor loan performance as well as lender performance 
under this program and prohibit participation rights to lenders with 
unacceptably high claim and default rates, as we do in the regular 
program.

                           DEFAULTED HOUSING

    Question. Dr. Weicher, in the late 1980's, you served HUD Secretary 
Kemp as the Assistant Secretary for Policy Development and Research. 
During that time, you were responsible for legislation designed to 
increase the actuarial soundness of the fund which included 
requirements that homebuyer have a stake in the home through reasonable 
downpayments. One of the most significant concerns at the time was the 
impact of defaulted FHA housing on neighborhoods. As you know, through 
predatory lending issues, defaulted and distressed FHA properties 
remain a tremendous burden on communities, many of which are fragile. 
How is HUD expecting to specifically address this issue in the FHA Zero 
Downpayment program?
    Answer. FHA will promote use of its Loss Mitigation Program by the 
servicing lender as a means of curing default instances. Loss 
Mitigation options include Special Forbearance, a structured repayment 
plan, Mortgage Modification, a recasting of the terms of the mortgage 
and Partial Claim, a loan from HUD secured by a subordinate note that 
becomes due upon payoff of the first mortgage. Non-home retention 
options for borrowers, who can no longer maintain ownership, but wish 
to avoid the stigma of foreclosure, are Deed-in-Lieu and Preforeclosure 
sale. Use of the Loss Mitigation Program has increased markedly since 
program inception in 1996, and is credited with a cure ratio of better 
than 70 percent per instance of use.
    HUD measures and enforces use of loss mitigation by lenders through 
a scoring system called the Tier Ranking System (TRS) developed and 
monitored by HUD's National Servicing Center (NSC) in Oklahoma City. 
Since its inception, the Department has seen a dramatic improvement in 
the utilization of loss mitigation, and most importantly, an increase 
in home retention for borrowers. TRS has been widely accepted in the 
industry and will play a critical role in measuring both the 
effectiveness of Loss Mitigation Tools and also the lenders' servicing 
of their borrowers.
    Providing assistance, as needed, to enable families to retain their 
homes and cure their delinquencies stabilizes neighborhoods that might 
otherwise suffer from deterioration and problems associated with vacant 
and abandoned properties. Avoidance of foreclosure and the resultant 
losses further stabilize the mortgage insurance premiums charged by FHA 
and the Federal budget receipts generated from those premiums.
    HUD's commitment to community revitalization presents a second 
level of effort designed to reduce future incidences of foreclosure. 
When local governments identify neighborhoods with high rates of 
foreclosure and vacant properties, and they commit an investment of 
their own resources to solutions, HUD will designate such neighborhoods 
as revitalization areas and offer special sales incentives on HUD-owned 
(foreclosed) properties. Those properties in revitalization areas are 
first offered for sale at a deep (50 percent) discount to law officers, 
teachers and firemen committing to owner occupancy for a minimum of 3 
years. Remaining properties are then offered at discounts of up to 50 
percent to cities and their nonprofit partners who agree to 
rehabilitate the properties and resell them to mid- and low-income 
owner-occupant buyers.

                   PROPERTY HOLDING PERIOD AND COSTS

    Question. What are the current holding periods for defaulted FHA 
housing and what is the average daily cost for holding this housing?
    Answer. As of May 31, 2004, the average current holding period for 
defaulted FHA housing was 155 days. As of May 31, 2004, FHA's on-hand 
inventory was 28,602. Based on that portfolio, it costs the Department 
approximately $1,080,000 in daily holding expenses.

                       PRIVATE SECTOR COMPARISONS

    Question. How does this compare with the private sector?
    Answer. HUD does not have comparable private sector data.

                          TIME IN FORECLOSURE

    Question. What is the current average time for foreclosing on a FHA 
property that is more than 90 days in arrears?
    Answer. The average time for foreclosing on an FHA property was 8.3 
months for fiscal year 2003.

                            LOSS MITIGATION

    Question. How is HUD dealing with FHA homeowners that have payment 
problems?
    Answer. HUD has loss mitigation programs used by mortgagees to help 
FHA homeowners who have payment problems retain their homes. Also, HUD 
has counseling programs to aid homeowners in learning how to minimize 
payment problems.

                     SECTION 8 ADMINISTRATIVE FEES

    Question. The new HUD Section 8 Block Grant would cap 
administrative fees for PHAs at 7 percent. This is a big reduction. As 
you know, many small and rural PHAs are already underpaid by the 
current section 8 administrative fee scheme. Has HUD analyzed the 
impact of these proposed requirements on PHAs? If not HUD needs to 
conduct this review and submit for the record an assessment of the 
impact on PHAs, especially rural and small PHAs.
    Answer. The Department's original Flexible Voucher proposal did 
include a 7 percent base administrative fee to be paid to PHAs, with an 
additional 2 percent of the total fee account set aside for high 
performance. The base fee was reduced on the fact that the flexibility 
in the proposal will reduce administrative costs of PHAs.
    Subsequent to the proposal, further analysis did identify that the 
reduction of the base level to 7 percent would impose a disparate 
effect on some PHAs. The overall level of funding included in the 
account is adequate for the proposal and HUD is exploring other methods 
to distribute a fee structure that will provide an adequate funding 
level to administer the program. There are several proposals under 
review, and a recommendation will be made very soon.

                        CONTRACT RENEWALS (HCF)

    Question. HUD is requesting $16.92 billion for fiscal year 2005--a 
reduction of $715 million. These funds would be used to renew expiring 
tenant-based and project-based rental assistance contracts and for 
other purposes. How was the fiscal year 2005 request for $16.92 billion 
calculated?
    Answer. From 1998 to 2004, the Housing Certificate Fund has grown 
from 36 percent to 51 percent of the HUD budget. During that same time 
period the budget authority for the Housing Certificate Fund alone has 
risen 105 percent. By comparison, the increase for the non-Section 8 
portions of the Department's budget have risen only 13 percent since 
1998. This rate of increase is unsustainable. Without reform, reduction 
in the number of families served by the voucher program is inevitable.
    The President's Budget for fiscal year 2005 proposes the new 
Flexible Voucher Program. HUD believes that the improved design of the 
new Flexible Voucher Program can help a greater number of families 
afford decent housing. The Flexible Voucher proposal would allow public 
housing agencies to adopt rent structures and other policies that will 
enhance self-sufficiency and reduce long-term dependency.
    The funding level for the Housing Certificate Fund, of which the 
Flexible Voucher Program is a significant portion, was determined by 
taking into account projected leasing levels in the tenant-based 
program (97 percent) as well as the renewal of existing project-based 
contracts. Additional amounts were added to cover administrative fees, 
a central reserve, and anticipated tenant protection needs based on 
historical usage. Funds for contract administrators and the Working 
Capital Fund were also included. Finally, the first year savings from 
the Flexible Voucher Program, both programmatic and administrative, 
were subtracted from the total amount. The result is a reasonable and 
responsible funding level for the Housing Certificate Fund that 
provides for the long-term stability of the Section 8 program.
    Question. The following questions assume that changes to the 
current program have not been authorized for fiscal year 2005. Would 
this funding level be sufficient to fund renewal of all rental 
assistance units currently under lease?
    Answer. No, the amount of funding requested for fiscal year 2005 
assumes adoption of the Flexible Voucher Program. This funding level 
would not be adequate if there are no changes to the current program to 
reduce the cost of providing assistance.
    Question. Would Central Reserve funds be available to make up any 
shortfalls in renewal funding?
    Answer. Only to the extent that additional funding was not provided 
to fund vouchers at a per unit cost above the adjusted August 1, 2003 
cap. However, should Congress change this through subsequent 
legislation the amount requested for the Central Reserve would be 
significantly inadequate to address the shortfall for renewals should 
the requested funding level be enacted without the reforms of the 
Flexible Voucher Program.

                        RENTAL ASSISTANCE (HCF)

    Question. HUD is requesting $163 million for fiscal year 2005--a 
reduction of $43 million. Rental Assistance funds would be used for 
relocation and replacement of housing units demolished pursuant to the 
Omnibus Consolidated Rescissions and Appropriations Act of 1996 (Public 
Law 104-134). According to HUD's budget justification, the rental 
assistance program will have $386 million in fiscal year 2004 
resources, yet the Budget Appendix estimates $217 million in fiscal 
year 2004 obligations by program activity. Obligations by program 
activity are estimated to be $163 million for fiscal year 2005. In the 
past several years, demand has been limited, resulting in large 
carryover balances. How does HUD define obligations by program activity 
as used in the Budget Appendix?
    Answer. ``Obligations by Program Activity'' provides a breakout of 
anticipated obligations in the Housing Certificate Fund by program line 
item.
    Question. How was the fiscal year 2005 request for $163 million 
calculated?
    Answer. The request of $163 million in new Budget Authority for 
Rental Assistance funds was calculated by multiplying the projected 
fiscal year 2005 per units cost ($6,287) times the projected need of 
25,927 units based on historical usage.
    Question. How much fiscal year 2004 program carryover does HUD 
estimate will be available at the start of fiscal year 2005?
    Answer. It is currently anticipated that $170 million will 
carryover from fiscal year 2004 into fiscal year 2005.

                          RENTAL HOUSING (HCF)

    Question. Could part of the $386 million available resources for 
fiscal year 2004 be used to offset the fiscal year 2005 request for 
$163 million?
    Answer. The anticipated carryover of Rental Assistance funds into 
fiscal year 2005 has already been taken into account as part of the 
$1.6 billion proposed rescission.

                          CENTRAL RESERVE FUND

    Question. HUD is requesting $100 million for fiscal year 2005--a 
reduction of $36 million. The Central Reserve was created in 2003 and 
funded at $389 million. HUD's budget justification indicates that $423 
million in total resources will be available in fiscal year 2004. HUD 
indicated previously that the Central Reserve would be obligated in 
full by the end of fiscal year 2004. HUD obligated $105 million in 
fiscal year 2003 and would have to obligate almost 4 times as much in 
fiscal year 2004 to ``fully obligate'' these funds by the end of 2004. 
What formula was used to determine the original estimate for the 
reserve?
    Answer. The Department did not request funding for a Central 
Reserve in fiscal year 2003. The creation of the Central Reserve, and 
the determination of its funding level in fiscal year 2003 was the 
result of Congressional decision-making. As such, the Department is 
unable articulate the formula that was used to determine the original 
estimate for the reserve.
    Question. What is the current estimate for obligations for fiscal 
year 2004?
    Answer. Taking into account carryover, as well as new 
appropriations, it is estimated that $336 million in Central Reserve 
funds will be obligated in fiscal year 2004.
    Question. For fiscal year 2003, how much Central Reserve funding 
was obligated to (1) assist PHAs to lease up to their authorized 
baselines under the Housing Choice Voucher program and (2) fund 
unanticipated rental unit cost increases?
    Answer. In fiscal year 2003, the Department obligated the following 
amounts in the Central Fund:
  --Increase Cost--$69,085,492;
  --Increase Leasing--$5,056,000;
  --Reserves Restoration--$31,193,000.
    Question. How much carryover does HUD currently estimate will be 
available at the start of fiscal year 2005?
    Answer. The Department anticipates that all Central Reserve funds 
will be fully utilized by the end of fiscal year 2004.
    Question. Could part of the $423 million available resources for 
fiscal year 2004 be used to offset the current request in fiscal year 
2005 of $100 million?
    Answer. No. The Department expects that these funds will be fully 
utilized by the end of fiscal year 2004.
    Question. Are Central Reserve funds no-year, 1-year, or multi-year 
funds?
    Answer. Central Reserve funds, as well as all funds in the Housing 
Certificate Fund appropriation, are no-year funds.
    Question. What was the national utilization rate for the Housing 
Choice Voucher Program in fiscal year 2002 and in fiscal year 2003?
    Answer. The fiscal year 2002 unit-based utilization rate was 88.9 
percent and for fiscal year 2003 the utilization rate was 94.9 percent.

          CAPITAL FUND TECHNICAL ASSISTANCE AND MODERNIZATION

    Question. HUD is requesting $35 million in fiscal year 2005--a $15 
million reduction in assistance from fiscal year 2004. However, given 
fiscal year 2003 and 2004 carryovers and obligations of $34.5 million 
and $55.5 million, respectively, HUD has reported that $105 million is 
available in fiscal year 2004 for technical assistance. If HUD 
obligates amounts in 2004 similar to that obligated in 2003, carryover 
balances alone (totaling $71 million) could almost cover twice the 
total amount requested in 2005. What is the projected utilization for 
fiscal year 2004?
    Answer. HUD expects to fully obligate all of its TA and 
modernization funding under the Public Housing Capital Fund to ensure a 
high utilization of resources.
    Question. What is the projected carryover amount for fiscal year 
2005?
    Answer. The Fiscal Year 2005 Budget assumes that all funds under 
the Public Housing Capital Fund will be obligated; therefore, no funds 
are expected to carryover into fiscal year 2005.
    Question. Can HUD absorb more of a reduction than that requested 
(given growing carryover amounts) without impacting the program?
    Answer. The Department's technical assistance request is designed 
to ensure that the Department has the appropriate resources to carry 
out its statutory and legal requirement. In addition, the request 
insures that PHAs and other recipient of HUD resources have the 
appropriate level of assistance. A reduction to the 2005 request for 
technical assistance funding will cause disruptions in the provision of 
technical assistance to the Departments partners and clients. All 
carryover will be obligated by the end of this fiscal year.
    Question. What analysis has been done to support the reduction in 
fiscal year 2005?
    Answer. The 2005 technical assistance request is based on the 
estimated level of technical assistance that will be required to 
implement PIH programs and the Department's internal capacity to 
provide assistance.

                        CONTRACT ADMINISTRATORS

    Question. According to HUD's budget justification, the fiscal year 
2005 budget request proposes $101.9 million in funding for the Contract 
Administrators program--an increase of about $3 million. HUD's Budget 
Appendix reports actual obligations of $170 million in fiscal year 2003 
and estimates fiscal year 2004 obligations at $217 million and fiscal 
year 2005 obligations at $102 million. As of January 5, 2004, there 
were approximately 11,412 contracts under the Contract Administrators 
program, and HUD estimates that the program will include 18,445 
contracts by fiscal year 2005. The Department proposes funding $275 
million in program activity in fiscal year 2005, yet the budget 
appendix estimates obligations by program activity for fiscal year 2005 
of $102 million.
    How does the Department define program activity (in the budget 
justification) and obligations by program activity (in the Budget 
Appendix)? What is the difference?
    Answer. The $275 million in the Budget Justification represents 
total program obligations expected to be funded from all sources in 
fiscal year 2005 including carryover, new budget authority and other 
sources. The $102 million in the Budget Appendix represents obligations 
supportable only by the new BA requested in fiscal year 2005--$101.9 
million.
    Question. How was the fiscal year 2005 request for $101.9 million 
calculated?
    Answer. Represents $100 million fiscal year 2004 request increased 
by a 1.9 percent inflation factor. Remaining funding requirements in 
fiscal year 2005 to be derived from carryover and use of funds made 
available under the Housing Certificate Fund heading.
    Question. What is the total number of contracts under HUD's Section 
8 project-based program?
    Answer. There are 18,975 active contracts, as of September 30, 
2003.
    Question. How many Section 8 contracts were funded under the 
Contract Administrators program in fiscal year 2002 and 2003?
    Answer. Contracts assigned to Contract Administrators are as 
follows:
  --Fiscal year 2002--1,401 Contracts;
  --Fiscal year 2003--306 Contracts.
    It is expected that additional geographic areas will be added to 
the program in fiscal year 2004 including: District of Columbia, 
Connecticut, Arkansas, Virginia, Northern California, Florida, 
Illinois, Utah and Nebraska. Several of these entities have been 
pending resolution of legal issues, which have now largely been 
resolved. It is expected that these areas will begin participating 
within the next several months during fiscal year 2004. This will lead 
to an increase in obligation activity in both fiscal years 2004 and 
2005.
    Question. What is HUD's latest estimate for obligations in fiscal 
year 2004?
    Answer. The latest estimate for obligations in fiscal year 2004 is 
$185 million.
    Question. How much carryover does HUD estimate will be available at 
the start of fiscal year 2005?
    Answer. HUD estimates $32.1 million will be available at the start 
of fiscal year 2005.
    Question. How can estimated obligations fall to $102 million in 
fiscal year 2005 when the number of contracts in the program will be 
increasing from under 12,000 to over 18,000?
    Answer. The $102 million in estimated obligations for fiscal year 
2005 are from fiscal year 2005 appropriations only. Total estimated 
obligations in fiscal year 2005 are estimated to be $275 million.

                        EMERGENCY CAPITAL NEEDS

    Question. HUD is requesting $50 million--an increase of about $10 
million over fiscal year 2004--in reserves for public housing 
authorities emergencies and natural disasters. According to the Budget 
Appendix, these funds are allocated according to the Department's 
approved plan. Trends in the resources for this program shows HUD 
obligating about $9.5 million in 2003 with carryover balances in the 
program totaling $40.1 million. Given additional budget authority 
approved in fiscal year 2004, current resources available in the 
program are almost $80 million. Please provide a copy of the approved 
plan.
    Answer. The reference in the Fiscal Year 2005 Budget Appendix to 
``a Department-approved plan'' refers to the plans submitted by the PHA 
at the time of their request to justify their need for emergency 
capital funding. Accordingly, at this time, there is no approved plan 
indicating how the Department will allocate these funds. By their 
nature, emergencies and disasters are unplanned events, so a funding 
plan cannot be developed in advance of the need, but will be developed 
as emergencies and disaster applications are received. It should be 
noted that HUD believes that it is restricted by appropriation language 
in terms of how funding set aside for emergencies and natural disasters 
can be used: HUD can only use funds that correspond to the year the 
emergency or natural disaster occurred. This restriction limits HUD's 
flexibility to respond to these unforeseen events.
    Question. What analysis has the Department done to justify the need 
for the current request for $50 million in fiscal year 2005?
    Answer. By their nature, it is impossible to predict emergencies 
and disasters. Projections can only be based on past experience. 
Therefore, the fiscal year 2005 request for $50 million is based on an 
analysis of the fiscal year 2000 through 2003 emergency/disaster funds 
that were requested by the Field Office and the amounts that were 
substantiated by Headquarter staff and approved for obligation by the 
Field Office. The substantiated and approved amounts for fiscal years 
2000-2003 are as follows:

------------------------------------------------------------------------
                                                           Fund Requests
                                                           Substantiated
                       Fiscal Year                         and Approved
                                                          for Obligation
------------------------------------------------------------------------
2000....................................................     $62,115,061
2001....................................................      32,330,995
2002....................................................      10,148,605
2003....................................................      24,175,275
------------------------------------------------------------------------

    The estimated requirements of $50 million for fiscal year 2005 is 
also based on the pending requests for fiscal year 2003 carryover funds 
of $40 million. These pending requests exceed the amount made available 
for fiscal year 2003, and all of the fiscal year 2003 emergency and 
disaster monies will be used to fund events that occurred in fiscal 
year 2003.
    Question. What are the projected spend-outs, and utilization in the 
program?
    Answer. By their nature, it is impossible to predict disasters. 
Projections can only be based on past experience. Although PIH has 
carried over $40 million from fiscal year 2003, claims for these funds 
exceed the amount available. To date, PIH has obligated $22,159,440. It 
usually takes a significant amount of time for a PHA to recover from 
the emergency/disaster event and submit a request for funding to PIH 
for review. It takes additional time for PIH to substantiate the 
requests that it receives. The necessary delay often results in PIH 
carrying over funds from this set-aside to the following fiscal year. 
PIH is in the process of substantiating the few remaining claims from 
fiscal year 2003 that remain pending. PIH anticipates that virtually 
all of the fiscal year 2003 funding set-aside for emergencies and 
disasters will be exhausted to fund disasters that occurred in fiscal 
year 2003.
    Question. To what extent does the current request include 
allocations to public housing authorities in New York for the 9/11 
disasters? If so, does this take into account supplemental funds 
appropriated for the New York disaster?
    Answer. PIH has not received any requests from the New York City 
Public Housing Agencies to provide funding related to the 9/11 
disaster.

              AMERICAN DREAM DOWNPAYMENT INITIATIVE (ADDI)

    Question. The administration is proposing $200 million for this 
program in fiscal year 2005 for assistance to low income homebuyers in 
need of down payment assistance that will be distributed by a separate 
formula to participating jurisdictions and States. The distribution 
formula is described in the program's authorizing legislation signed 
into law December 16, 2003. (Note.--The distribution formula is 
outlined in HUD's congressional budget justification). It received 
$87.5 million last year. HUD's original request in fiscal year 2004 
($200 million) was derived based on an estimate of $5,000 per loan down 
payment for 40,000 loans. HUD estimates the fiscal year 2005 request 
will assist 3,000 families in fiscal year 2005 and 40,000 over time. 
What analysis has been done to determine that $5,000 per loan for 
40,000 loans might be needed?
    Answer. The average cash needed for a family at 50 percent of 
median income for downpayment and closing costs on a home whose sales 
price was at 50 percent of the Median Sales Price for the area ranged 
from $4,380 (in the West) down to $2,620 (in the South) according to a 
2000 study conducted by LISC (``Minding the Gap''). Using the mid-range 
average of $3,660 (in the Northeast) and assuming a 5 percent increase 
in home prices per year since the 1999 American Housing Survey data 
used in the study, the cash needed would be $4,671. This figure was 
rounded up to $5,000 to determine the number of families that would be 
assisted with ADDI since eligible properties in the HOME program are 
those up to 95 percent of median income while ``low-income'' is capped 
at 80 percent of median, thus having the overall effect of raising the 
average amount needed for downpayment and closing costs overall.
    Question. What analysis has been done to determine that 3,000 
families would be assisted in fiscal year 2005 and 40,000 over time? 
How long a period does ``over time'' cover?
    Answer. Since the provision of downpayment assistance through ADDI 
is much less complicated and more focused than HOME assistance, an 
outlay level of up to 10 percent can be anticipated over the first 
year. During fiscal year 2005, assistance will be provided 
predominantly from fiscal year 2003 and fiscal year 2004 ADDI funding 
which totaled a combined $161 million (32,000 families assisted over 
time at $5,000 each on average). Fiscal year 2003 and fiscal year 2004 
ADDI funds will become available to participating jurisdictions mostly 
during the fourth quarter of fiscal year 2004 following publication of 
the interim rule reflecting the enacted legislation of December 2003. 
This being the case, the program will only have been in place for 
approximately 1 year by the end of fiscal year 2005. At a 10 percent 
outlay level, approximately $16 million will have been disbursed and at 
least 3,000 households assisted during that period.
    ``Over time'' is that time period required to spend out all fiscal 
year 2005 ADDI funds, assumed to be 4 or 5 years. The 40,000 ``over 
time'' figure is obtained by dividing the $200 million requested level 
by an average per household assistance level of $5,000.

                   ADDI FUNDING FOR FISCAL YEAR 2004

    Question. Why was only $87.5 million approved in 2004?
    Answer. The President's Fiscal Year 2004 Budget requested $200 
million; however, the fiscal year 2004 Consolidated Appropriations Act 
provided $87.5 million (pre-rescission).

          STUDY ON USE OF HOME FUNDS FOR HOMEBUYER ACTIVITIES

    Question. Has HUD completed the study on the use of HOME funds for 
homebuyer activities? If so, please provide a copy.
    Answer. Yes, the Department has completed the study of HOME-
assisted homebuyer programs. The basis of the analysis on production 
was derived from IDIS information, which provides data on the number of 
homebuyers assisted, the average amount of assistance and the 
demographics of those served, e.g. the percentage of minority 
homebuyers. The purpose of the study was to further examine trends in 
IDIS, e.g. the increase in funding directed to homebuyers over time as 
well as study characteristics of programs not reflected in current IDIS 
data, such as the incidence of homebuyer counseling, the neighborhood 
choices of assisted buyers, who is being served, income level, family 
size etc. The study provides valuable insights that inform the 
implementation of ADDI. A copy of the study is attached. The study can 
also be found on the web at: http://www.huduser.org/publications/
hsgfin/homebuy.html.

                   RULING ON ALLOCATION OF ADDI FUNDS

    Question. Has HUD completed the ruling for allocation of the funds? 
If so, please provide a copy.
    Answer. The ADDI interim rule was published in the Federal Register 
on March 30, 2004. The rule was effective on April 29, 2004. A copy is 
provided. The text of the rule can also be viewed at the following URL: 
http://www.hud.gov/offices/cpd/affordablehousing/lawsandregs/regs/
addi.pdf.
    ADDI funds are now available to HOME Program Participating 
Jurisdiction (PJs) and, depending upon the PJs program year start-date 
(e.g., January 1, July 1, etc.), prospective homebuyers may already be 
able to apply.

           IMPACT OF ADDI LEGISLATION ON ALLOCATION OF FUNDS

    Question. Did legislation impact the allocation formula for the 
American Dream program?
    Answer. Yes, the legislation was very specific about the formula 
factor for the distribution of ADDI, providing an amount to each State 
equal to its share of the number of low-income households residing in 
rental housing. Local participating jurisdictions within each State 
would receive a portion of the allocation based on its share of the 
State-wide number of low-income households residing in rental housing 
if they had more than 150,000 in population or garnered more than 
$50,000 in formula funds.

                     CONVERSION TO ASSISTED LIVING

    Question. This fund provides grants to owners of existing HUD-
subsidized elderly properties to convert some or all units in these 
properties to assisted living facilities. The Department is currently 
requesting $30 million for fiscal year 2005, an increase of about $5 
million. Starting in fiscal year 2003, new budget authority for ACLP 
was reduced from about $50 million to about $25 million due to the low 
response from eligible owners. HUD has carried over about $108 million 
from fiscal year 2002 into fiscal year 2003--of which $39 million (plus 
another $25 million in new BA) was made available to applicants in the 
fiscal year 2003 Notice of Funding Availability. What analysis has been 
done to support the current request of $30 million for fiscal year 
2005?
    Answer. Carryover funds in the Conversion to Assisted Living 
Program amounted to $83.1 million at the start of fiscal year 2004. Of 
this amount, $25.3 million had been committed to projects and $57.8 
million remained unobligated.
    A combination of increased outreach efforts and the implementation 
of the Emergency Capital Repair program will have the effect of 
utilizing available carryover balances as well as raising the annual 
level of program awards. It is anticipated that the combined program 
demand through the end of fiscal year 2005 will absorb both the 
available carryover and the $30 million of new authority requested for 
fiscal year 2005.
    Question. Can the current request be offset by carryover funds that 
will be made available again for the fiscal year 2004 Notice of Funding 
Availability?
    Answer. Carryover funds in fiscal years 2004 and fiscal year 2005 
will be part of the funding mix for the combined conversion and 
emergency repair program. The combined program is expected to generate 
sufficient demand to absorb both the carryover as well as the requested 
$30 million of new appropriations requested for fiscal year 2005.
    Question. Has participation in ALCP improved? Specifically, how 
many project owners applied for the ALCP funds in each year for fiscal 
years 2000 through 2003 and how much did they receive in grants?
    Answer. Please see chart below.

----------------------------------------------------------------------------------------------------------------
                                                                                                  Amount Awarded
                           Fiscal Year                             Applications    Applications    (In Millions
                                                                     Received         Funded        of Dollars)
----------------------------------------------------------------------------------------------------------------
2000............................................................              29              13            19.5
2001............................................................              22              12            21.2
2002............................................................              31              21            54.3
2003............................................................              13               9            15.4
----------------------------------------------------------------------------------------------------------------

    Question. In the ``Proposed Changes in Appropriations Language,'' 
HUD states that part of the $30 million may be used for emergency 
capital repairs. What share of this fund is set-aside for this purpose? 
And what analysis has been done to support this request?
    Answer. While no hard analysis was done to substantiate the amount, 
the preliminary estimate for emergency capital repairs in fiscal year 
2005 is $10 million. This estimate was based on the numerous requests 
HUD has received for this type of funding. We believe that as awareness 
of the availability of these funds increases within the industry, 
demand will increase accordingly.

NEED FOR INCREASED FUNDING FOR SERVICE COORDINATORS/CONGREGATE SERVICE 
                                PROGRAMS

    Question. HUD is requesting $53 million in funding for Service 
Coordinators and to fund congregate housing service programs. This is a 
$23 million increase over the fiscal year 2004 enacted level. What 
analysis has been done to justify the need for a $23 million increase 
in this program?
    Answer. Fiscal year 2004 request was based on approximately $20 
million in carryover being available in fiscal year 2004 to supplement 
the requested $30 million. This provided a total programs level of 
almost $50 million for fiscal year 2004. Based on activity to date, we 
fully anticipate utilizing the $50 million by the end of fiscal year 
2004.
    The $53 million funding requested for fiscal year 2005 will be 
sufficient to maintain funding at the historical levels while providing 
$3 million for the Section 811 Housing for Persons with Disabilities 
program.

           SELF-HELP HOMEOWNERSHIP OPPORTUNITY PROGRAM (SHOP)

    Question. HUD is requesting $65 million for the SHOP program--an 
increase of about $38 million over the fiscal year 2004 enacted level. 
According to the budget justification, this increase is designed in 
part to support the administration's goal to triple this program, and 
reflects the ability of the existing participants to expand their 
staffing outreach and production. While demand for such projects are 
demonstrated for two grant recipients, HUD has a total of $51.9 million 
in resources at the end of fiscal year 2004. If HUD obligates what it 
has in the past ($22 million) and the full amount requested ($65 
million) is granted, HUD would have about $94 million available in 
fiscal year 2005 if the full requested amount was granted. Would 
projected program demand require over $90 million in funding for fiscal 
year 2005?
    Answer. Absolutely, SHOP grantees have completed construction on 
11,025 housing units form all funding years as of December 31, 2003. 
The demand for the program has exceeded the supply as evidenced by the 
fact that the $25 million made available under the NOFA process 
generated $47 million in funding requests from applicants even though 
they were aware that available funding was constrained. In addition, 
both the demand for and capacity to use additional funds is further 
evidenced by the fact that only 486 out of 1,600 Habitat for Humanity 
affiliates have received SHOP funding since the program's inception in 
1996 and only 200 currently participate in the program. The additional 
funds requested in fiscal year 2005 could be put to immediate use since 
many local affiliates of the existing national and regional grantees 
have not yet participated in the SHOP Program.
    We continue to believe that this expanded funding for the SHOP 
program is a high priority since the average Federal per-unit SHOP 
investment has been a modest $10,000. The homebuyer's required sweat 
equity contribution significantly reduces the cost of construction, and 
has result in home purchase prices as low as $31,000. The program 
provides Homeownership opportunities for families with average incomes 
between 50 to 65 percent of area median income, some with incomes as 
low as $15,000 per year. The unique structure of the SHOP program and 
the Federal subsidy solely for land costs provides the means to 
successfully reach families whose incomes normally make homeownership 
completely out of reach.
    Finally, the fiscal year 2004 NOFA increased the Federal subsidy 
for land to up to $15,000 recognizing that in some areas the cost of 
land has risen and the opportunities to acquire land for homeownership 
is becoming more difficult. Thus, the additional funding will reflect 
this fiscal year 2004 change and allow for a further increase in 
homeownership opportunities for families with very modest incomes who 
provide substantial sweat equity to make their dream of homeownership 
come true.

                           DEMOLITION GRANTS

    Question. HUD proposes $30 million for Demolition Grants in fiscal 
year 2005. Funds are to be used for relocation, demolition, and site 
remediation for obsolete and distressed pubic housing units. What 
analysis has been done to determine that $30 million might be needed?
    Answer. The Department estimates that there is a need for 
additional appropriated funds to be directed toward assisting PHAs in 
complying with the requirements of Section 202 Mandatory Conversions 
and Section 18 Demolition approvals. The set-aside will aid in 
expediting the actual demolition of units that the Department has 
already approved, but have not yet been demolished. Based on the 
Department's experience in the most recent HOPE VI Demolition grant 
competition, there is clearly a demand for such funds. HUD received 
applications requesting more than $65 million for the most recent 
competition. However, the Notice of Funding Availability only made 
approximately $40 million available.
    Question. Does the HOPE VI program or other HUD programs cover 
similar activities and, if so, what might be covered by these grants 
that may not be covered by HOPE VI or other programs?
    Answer. With the elimination of the HOPE VI program, such funds 
will no longer be available. These funds will be used to accomplish a 
portion of the demolition and related activities that were formally 
executed under the HOPE VI program. PHAs may use Public Housing Capital 
Fund monies to demolish public housing units. However, PHAs are faced 
with tough decisions whether to use these funds toward such costly 
demolition when there are so many other demanding needs. This is why 
the Department believes that setting aside $30 million out of the $2.7 
billion requested in fiscal year 2005 for the Public Housing Capital 
Fund to target the most distressed units is more feasible than an 
individual PHA spending its limited Capital Fund for these purposes.

                     FREEDOM TO HOUSE DEMONSTRATION

    Question. HUD is requesting up to $5 million for the Freedom to 
House Demonstration Initiative. This Initiative will establish a 
demonstration program for 50 PHAs aimed at assessing the impact of 
locally determined public housing programs. It will build on certain 
elements of the Moving to Work demonstration by granting PHAs 
flexibility to manage their resources.
    What analysis was done to justify $5 million request amount?
    Answer. The requested amount of $5 million for the Freedom to House 
Initiative is based on the amount of funds appropriated in fiscal year 
1996 to initiate the Moving to Work Demonstration program.
    Question. Has the performance of the Moving to Work Demonstration 
been assessed? If so, what has resulted from that demonstration?
    Answer. In accordance with Section 204 of the Omnibus Consolidated 
Recessions and Appropriations Act of 1996, a report on the evaluation 
of the Moving to Work Demonstration program (MTW) was submitted to 
Congress in January 2004.
    The evaluation of the MTW program, as contained in the January 2004 
report, finds that MTW initiatives include experimentation with changes 
in three main areas: (1) merged funding assistance, (2) subsidy 
formulas, rent rules and time limits, and (3) HUD procedural and 
reporting requirements. Based on the three goals of the MTW 
demonstration as stated in the Appropriations Act, following are some 
determinations about whether or not deregulation and the initiatives 
implemented by the MTW sites are factors that contributed to PHAs 
achieving these goals:
  --Changes in administrative procedures and reporting requirements 
        resulted in more rational and efficient use of time and 
        resources.
  --An administrative benefit resulting from the simplification of rent 
        rules and subsidy calculations is that tenants are less likely 
        to under-report their income and staff are less likely to 
        miscalculate tenant rent.
  --Many PHAs focused on changes to rent rules and/or subsidy formulas 
        to increase employment and self-sufficiency among assisted 
        households.
  --Some PHAs were able to expand housing choice by using their funding 
        fungibility to help finance the acquisition or production of 
        more assisted housing units (one-for-one replacement of public 
        housing units demolished under HOPE VI, building larger units 
        to suit larger families, scattered site acquisitions, and 
        increasing the stock of affordable rental units for voucher 
        holders in tight rental markets).
  --Some PHAs merged their public housing and voucher program waiting 
        lists to make the application process more efficient for staff, 
        and less burdensome and easier to understand for applicants in 
        an effort to give residents increased choice about housing 
        type.

            PUBLIC HOUSING OPERATING FUND COST STUDY REPORT

    Question. Please provide a copy of the June 6, 2003, Public Housing 
Operating Cost report.
    Answer. Attached is a copy of the report. It can also be found at: 
http://www.gsd.harvard.edu/research/research_centers/phocs/
documents.html.

                      ADMINISTRATIVE RECEIVERSHIPS

    Question. HUD is requesting $10 million to support the costs of 
administrative and judicial receiverships or other intervention 
activities. According to HUD, the average cost of a receivership is 
estimated at $1 million per PHA. Therefore, it appears the office is 
planning to cover about 10 PHAs during fiscal year 2005.
    How many PHAs have courts asserted operational authority over 
through judicial receivership?
    Answer. Since 1985, four PHAs have been placed into judicial 
receivership: (1) Boston, MA, (2) Washington, DC, (3) Kansas City, MO, 
and (4) Chester, PA. Kansas City and Chester are still active judicial 
receiverships.
    Question. How many PHAs has HUD taken over through administrative 
receivership?
    Answer. Since 1985, 14 PHAs have been placed into administrative 
receivership. Eight of those PHAs remain in active administrative 
receivership. Of those 14 administrative receiverships, six have been 
returned to local control. A current listing of active administrative 
receiverships is below:
  --1. Beaumont, TX (Administrative)
  --2. Camden, NJ (Administrative) (Control to be returned by 6/30/04)
  --3. East St. Louis, IL (Administrative)
  --4. New Orleans, LA (Administrative)
  --5. Orange County Housing Authority, TX (Administrative)
  --6. Sanford, FL (Administrative)
  --7. Virgin Islands Housing Authority, VI (Administrative)
  --8. Wellston, MO (Administrative).
    Administrative receiverships returned to local control:
  --1. Chicago, IL (Administrative)
  --2. LaFayette, LA (Administrative)
  --3. San Francisco, CA (Administrative)
  --4. Shelby County, TN (Administrative)
  --5. Springfield, IL (Administrative)
  --6. St. James Parrish, LA (Administrative).
    Question. On what basis is HUD anticipating additional 
receiverships?
    Answer. When PHA deficiencies are demonstrated to be at such a 
level that current local management of the authority is unable to 
effectively remedy the situation, alternative management through 
receiverships is the primary tool for corrective action available to 
the Department. The provisions for administrative receivership stem 
from the PHA's failure to substantially follow HUD requirements to 
maintain decent, safe and sanitary housing (substantial default) or for 
their breach of one or more of the provisions of the Annual 
Contributions Contract (ACC) they have with the Department which 
outlines the parameters for receiving Federal assistance in compliance 
with appropriate statutes, rules and regulations or their failure to 
meet ``substantial improvement'' under the PHAS regulations. In 
accordance with Section 6(j)(3)(A) and its subparts, of the 1937 
Housing Act as amended, HUD anticipates that approximately four PHAs 
will not meet the requirements of meeting ``substantial improvement'' 
under the PHAS program in fiscal year 2005. HUD also anticipates 
another three to five PHAs which are currently experiencing management 
difficulties, either because of lack of effective managerial operations 
or failure to comply with HUD requirements in accordance with Section 
6(f) which may be placed into administrative receivership in fiscal 
year 2005. It should be noted that though HUD's estimates demonstrate 
an average of $1 million per receivership, that figure is just an 
average. Some receiverships, either full or partial, may come either 
under or over that average. Judges make the determination over which 
issues will be addressed under judicial receiverships. Consequently, 
these receiverships typically are more expensive than administrative 
receiverships. Every receivership action is unique. The level of 
resources and assistance necessary to bring the PHA back into 
compliance is dependent upon the extent of the PHA's management 
deficiencies, the size of the Authority and the overall financial and 
physical condition of the PHA. This level of funding should meet HUD's 
projections to adequately address the serious compliance and management 
problems faced by those severely non-compliant PHAs that, as a last 
resort, are placed into receivership for remedial action.
    Question. Are compliance monitoring reviews indicating an increase, 
decrease, or the same number of PHAs likely entering receivership? 
Please provide copies of compliance review summaries.
    Answer. Field Office program compliance reviews are used as one of 
several other indicators to identify PHAs which may likely enter into 
receivership. When determining which PHAs are in serious non-compliance 
thereby necessitating receivership, both program compliance and 
performance assessment information is used. From information residing 
in our performance data systems and communication provided by field 
staff, we are kept abreast of compliance violations. We have noticed a 
slight increase in the number of program compliance findings through 
our program compliance reviews and performance reviews conducted by 
field staff including but not limited to Independent Public Accountant 
Audits, field office program compliance reviews as well as our 
automated performance systems i.e., PHAS and SEMAP. Our early analysis 
suggests that this is a result of the Department's enhanced focus on 
monitoring IPA auditors through our aggressive quality assurance 
process, our enhanced monitoring of PHAs including the Rental Integrity 
Monitoring reviews and Section Eight Management Assessment Program 
confirmatory reviews as well as the full implementation of the PHAS 
program. Copies of program compliance review summaries are being 
retrieved from the relevant Field Offices archives and will be 
submitted by end of July.
    Question. How have receiverships been funded in the past?
    Answer. Historically, receiverships have been funded in a variety 
of ways including through the use of the PHA's own financial means, 
through technical assistance funds and Salaries and Expense funds. The 
Department's first goal is for the PHA's to use their own resources to 
fund receivership activities. Whenever HUD staff has been involved 
either through training or management oversight, we have used HUD 
appropriated Salaries and Expense funds to meet those needs. HUD has 
not had a separate funding account for PHAs in receivership because the 
Authority's operations and financial streams are not altered during the 
receivership. However, HUD has provided technical assistance monies to 
some PHAs in receivership to support training and other activities when 
the use of those dollars was eligible under the technical assistance 
set-asides appropriated to the Department. The current restrictions of 
the Capital Fund Technical Assistance Set-aside allow the use of TA 
funds for Troubled and near-troubled PHAs, but not receiverships.
    Question. Is the request for funding in fiscal year 2005 1-year, 
no-year, or multi-year money?
    Answer. This request is for no-year money.

                       VOLUNTARY GRADUATION BONUS

    Question. HUD is requesting $15 million to provide incentive awards 
to PHAs who increase graduation turnover rates. The program is intended 
to promote the concept that assisted housing is transitional, not 
permanent, by giving PHA's incentives to graduate more families out of 
assisted housing. HUD plans to award PHAs that exceed a baseline number 
of families that have exited public housing. Eligibility thresholds 
would be established for housing authorities depending on size and 
other program factors. What analysis has been done to justify that $15 
million might be needed for the program?
    Answer. Currently HUD's Office of Public and Indian Housing 
administers five programs that specifically promote self sufficiency--
the Resident Opportunity and Self Sufficiency program, which is made up 
of four smaller grants, and the Family Self-Sufficiency program. These 
programs range in cost between $9 million and $15 million annually. HUD 
believes that based on the above funding, the requested $15 million in 
additional funds will reinforce and influence Housing Authorities to 
promote the concept that assisted housing is transitional, not 
permanent. The $15 million is a small portion of funds available to 
support public housing programs, but is a starting point intended to 
encourage transition out of public housing without being such a large 
number as to be detrimental to the operation of public housing 
programs. This amount will be assessed as program activity unfolds.
    Question. Has eligibility criteria for the program been 
established? If so, please document. If not, when does HUD plan to 
establish criteria?
    Answer. The finalized eligibility criteria for the program has not 
been completed, however, HUD has narrowed its focus to one of two-
measurement criteria; the average duration in public housing and the 
end of participation date. Under either methodology units for elderly 
and disabled will not be included.
    Under the average duration in public housing measurement, PIH would 
create a variable that reflects the average length that a tenant 
resides in public housing at the authority. Once a baseline is 
established, the PHA would be measured by including the last 
measurement time frame data versus its baseline. If the overall 
duration has decreased, the PHA would be eligible for bonus funding. A 
new baseline would be established each year.
    Under the end of participation measurement, PIH would establish a 
measure that looks only at the end of participation date or turnover 
rate. The calculation would be the difference between the end of 
participation date or turnover rate for the baseline period versus the 
last measurement time frame. If the end of participation were greater 
than the previous period, the PHA would be eligible for bonus funding. 
A new baseline would be established each year. HUD has already 
completed preliminary research and testing and is in the process of 
finalizing the final criteria and methodology.

                      DEVELOPMENT CHALLENGE PILOT

    Question. HUD is requesting $10 million to test ways to better 
coordinate, target, and leverage existing Federal community and 
economic development programs. The pilot awards new flexible grants in 
fiscal year 2005 to 5 to 10 communities that are prepared to commit to 
ambitious performance targets and to community participation in the 
governance of their development. HUD projects program improvements and 
offsets amounting to $10 million in this program. What analysis has 
been done to justify that $10 million might be needed for the program?
    Answer. The President's Management Agenda, as well as the 
Government Performance and Results Act, call for Federal agencies to 
better integrate their budgets and program performance. This pilot will 
allow HUD to experiment with several communities to examine the benefit 
of various incentives to achieve closer program coordination and 
performance measurement. While a pure numerical analysis was difficult 
to do, the proposal will build on the experience and anecdotal evidence 
in a number of communities, including Richmond, VA, that have begun to 
target for revitalization strategically selected neighborhoods. In some 
cases, improved targeting has more effectively leveraged additional 
resources in communities; resulting in safer neighborhoods, better 
housing and increased property values. These beneficial neighborhood 
effects could more than offset the initial cost of the pilot program 
and would help ensure the efficiency of the $4.3 billion annual level 
of formula funding.
    Question. What is the projected amount needed per award?
    Answer. HUD's Justification initially suggests 5-10 communities 
could be assisted with the $10 million appropriation, but the amounts 
needed will ultimately be determined at a later date based on 
applications. An interagency group will advise on the standards for 
awarding the funds competitively and help develop a common framework of 
performance measures and accountability for the Federal investment.

      PLANNED IMPROVEMENTS/OFFSETS OF DEVELOPMENT CHALLENGE PILOT

    Question. What are the planned improvements/offsets?
    Answer. The information from this pilot will generate information 
that could provide the basis for future reforms or legislative/budget 
proposals. The line ``program improvements/offsets'' represents whether 
there is an increase or decrease in funding for a specific category and 
this proposal is an ``improvement'' rather than an ``offset.''

                           FAITH-BASED PILOT

    Question. HUD is proposing a new 5-city pilot program aimed at 
increasing the participation of faith-based and community organizations 
in the cities' community development strategies. Cities will submit 
plans that demonstrate strategies for involving faith-based and 
community organizations and for making small sub-grants to faith-based 
and community groups. Funding is estimated to provide grants for 5 to 
20 faith-based partners competitively.
    What analysis has been done to justify that $10 million might be 
needed for the program? What is the projected amount needed per award?
    Answer. The requested budgeted amount for the Faith-Based pilot is 
$5 million. While we did not have a numeric analysis as to the scope of 
the request, we did base the funding level on our experience which was 
garnered in large part through over 92 education and training events we 
did in fiscal year 2003. This number includes six field office-
sponsored conferences and six regional conferences, three of which were 
sponsored by the White House office of Faith-Based and Community 
Initiatives. This effort guides us in gauging how many grantees and how 
much funding might be necessary to establish a better model on how to 
further expend and help faith-based and community development 
organizations.
    Funding will vary depending on the proposals received, but would be 
available to cover costs required both to execute its plan and make 
sub-awards to leverage the contribution of grassroots organizations in 
affordable housing and community development activities.
    The flexibility and reach of the $4.3 billion Community Development 
Block Grant formula program is a top priority for communities 
throughout the Nation. The expenditure of $5 million to further develop 
the capacity and activity of Faith Based and other new community 
development organizations within the program is necessary to ensure 
maximum impact of the overall program.

                 STATUS OF SAMARITAN HOUSING INITIATIVE

    Question. HUD is requesting $50 million for Samaritan Housing to 
advance the goal of ending chronic homelessness. When will the new 
Samaritan Housing Initiative be submitted to Congress?
    Answer. Legislation for the Samaritan Initiative was developed and 
introduced as H.R. 4057 by Congressman Rick Renzi of Arizona, on March 
30, 2004. On April 20, 2004, it was referred to the Subcommittee on 
Housing and Community Opportunity. Senate companion legislation has 
been drafted by Senator Allard of Colorado, but has not yet been 
introduced. HUD is ready to implement the program as soon as the 
Congress passes authorizing legislation and the President signs it into 
law.

           FUNDING MECHANISM FOR SAMARITAN HOUSING INITIATIVE

    Question. What funding mechanism is included in the legislation for 
this program (i.e., How will VA and HHS funding be coordinated? How 
will the funds be allocated? Have eligible activities been 
established?)?
    Answer. Funds from HHS and HUD will be pooled. VA will provide in-
kind supportive services. HUD will serve as the administering agency. 
The participating agencies shall establish an interagency 
implementation and monitoring team to review and conduct oversight of 
program grantees. The team shall establish uniform or coordinated 
requirements, standards, procedures, and timetables to the maximum 
extent possible. HHS and VA will provide supportive services. Eligible 
housing activities have been established as acquisition, 
rehabilitation, operating costs, leasing, housing counseling and rental 
assistance.

      ANALYSIS OF FUNDING NEEDED FOR SAMARITAN HOUSING INITIATIVE

    Question. We understand that the $50 million request builds on the 
$35 million funding level of the 2003 Chronic Homeless Initiatives. 
What analysis was done to determine funding levels for that initiative?
    Answer. The fiscal year 2003 $35 million Chronic Homeless 
Initiative was a smaller demonstration program and HUD's portion of the 
program was $20 million. HUD's contribution to the fiscal year 2003 
Initiative was in part, dependant on recaptured program funds and also 
reflected the effort to pursue program design and establish program 
performance. The fiscal year 2005 request for the Samaritan Housing 
initiative proposed $50 million in HUD funds and $10 million each from 
the Department of Veterans Affairs and the Department of Health and 
Human resources. The increased level of funding reflects that the 
program design involving interagency cooperation among several 
Departments has been well developed. In addition, the requested $50 
million funding level dovetails with the overall HUD and other agency 
resources targeted and available to ending chronic homelessness over a 
10-year period. The request in part reflects the view that the number 
of chronic homeless has been estimated as a discrete number of 150,000 
to 200,000. The analysis projects that increased housing resources, 
particularly development of permanent housing for the homeless, coupled 
with improved and increased delivery of related homeless services over 
a 10-year period, can meet the needs of this population. The Department 
believes that this is a realistic projection and outcome if the 
requested total resources are provided.

                FAITH-BASED PRISONER RE-ENTRY INITIATIVE

    Question. The budget proposes $25 million to fund HUD's portion of 
a joint Federal initiative with the Departments of Labor and Justice 
designed to help individuals exiting prison make a successful 
transition to community life. What analysis has been done to justify 
that $25 million might be needed for the program? What is the projected 
amount needed per award?
    Answer. The scale of the proposal reflects the high priority of the 
10-year goal of ending chronic homelessness, as well as reducing 
overall homelessness while at the same time recognizing that this is a 
new initiative that will provide many lessons learned to help direct 
future policy. HUD calculates that $6,500 is required to house a 
homeless individual annually. The $25 million figure was calculated by 
figuring that $3,250 could serve nearly 7,700 individuals for 6 months 
as they are coming out of prison and getting re-established.
    Question. How is HUD's portion coordinated with the Departments of 
Labor and Justice?
    Answer. A working group will soon be convened by the White House to 
bring senior officials from the Department of HUD, Labor and Justice to 
plan the programmatic policy for the initiative.

                       ZERO DOWNPAYMENT PROPOSAL

    Question. HUD is proposing a legislative change that would enable 
HUD to insure mortgages with a zero downpayment. Borrowers would also 
be able to finance up-front insurance premiums and certain other 
settlement costs (e.g., initial service charges, appraisal, inspection, 
and other fees in connection with the mortgage--just as they do now 
under FHA's 203(b) program). Borrowers are subject to standard FHA 
requirements for mortgage amounts and income-to-debt ratio. The program 
is targeted to first-time homebuyers, however, borrowers are eligible 
if they have not owned a house in the past 3 years. FHA would charge 
borrowers upfront and annual premiums that are higher than those for 
FHA's regular 203(b) mortgage product. Up-front premiums for this new 
product would be 2.25 percent and annual premiums would be 0.75 percent 
for the first 5 years and then 0.5 percent thereafter. In comparison, 
under the Mutual Mortgage Insurance program, borrowers pay upfront 
premiums of 1.5 percent and annual premiums of 0.5 percent. Borrowers 
would also be required to participate in homebuyer counseling. Per 
HUD's suggested appropriations language, the Secretary would also be 
authorized to establish additional requirements. HUD's budget 
justifications also indicate that this new product could also be 
insured by the GI/SRI fund.
    HUD expects an increased risk of default associated with these 
mortgages; specifically, HUD estimates a default rate of 18.73 percent 
(i.e., lifetime defaults as percentage of disbursements) as compared to 
the estimated default rate of 9.06 for FHA's regular 203(b) mortgage 
product. HUD also estimates a recovery rate of 71.90 percent (i.e., 
recoveries as a percentage of lifetime defaults). HUD estimates that 
these products would have a subsidy rate of -0.95 percent, compared 
with a subsidy rate of -1.93 percent for the Mutual Mortgage Insurance 
program. HUD expects this new program/product to generate 109,000 new 
cases in 2005 and $184 million in additional negative subsidy. HUD also 
estimates that 36,000 cases that would otherwise qualify for the 
regular 203(b) program are expected to choose the zero downpayment 
product; as a result, HUD estimates that (a) the risk of the base 
program will be decreased and (b) this will add $16 million to the 
baseline negative subsidy.
    Will the proposed zero downpayment product be underwritten using 
the new TOTAL Scorecard system? If so, since the zero downpayment 
mortgages are viewed to be ``more risky'' than FHA's standard 203(b) 
product, how will TOTAL Scorecard assess this risk?
    Answer. Yes, all mortgages under the zero downpayment program must 
be risk assessed using the FHA TOTAL mortgage scorecard. The FHA TOTAL 
mortgage scorecard never rejects any application, but rather refers the 
loan application to an individual underwriter for his or her personal 
review of the risk of the mortgage.
    The mortgage scorecard includes the initial loan to value in the 
algorithm. Thus, zero downpayment loans--since they are higher risk--
will be more likely to be referred by the scorecard to an underwriter 
who will analyze the overall risk of the mortgage and make the credit 
decision.

                            TOTAL SCORECARD

    Question. What factors would TOTAL Scorecard weigh most heavily 
when considering whether a borrower with no downpayment would be 
approved?
    Answer. The scorecard algorithm assesses these credit and 
application variables:
  --Borrower's credit
  --Monthly Housing Expense Ratio
  --Number of Monthly Payments in Reserve following loan closing
  --Loan-to-Value (LTV)
  --Loan Term (number of years).

                         UNDERWRITING CRITERIA

    Question. Will HUD require borrowers to meet certain underwriting 
criteria that are not now considered under TOTAL or otherwise 
considered under the standard 203(b) product?
    Answer. HUD will require housing counseling as a condition of loan 
approval. FHA program data show that minority first-time homebuyers who 
received counseling in fiscal years 1998-2000 in order to reduce their 
upfront premium have lower cumulative claim rates than comparable 
homebuyers who did not. Analyses performed by Freddie Mac show similar 
results.

                        ADDITIONAL REQUIREMENTS

    Question. According to HUD budget justification documents, the HUD 
Secretary reserves the right to establish additional requirements for 
the zero downpayment product. At this point in time what, if any, type 
of requirements does the Secretary envision establishing?
    Answer. The administration proposes an upfront premium of 2.25 
percent and an annual premium of 75 basis points for the first 5 years 
of the loan, dropping to 50 basis points until LTV reaches 78 percent. 
Also intended is a requirement to underwrite applicants using the TOTAL 
automated scorecard and that borrowers receive pre-purchase counseling.

                    REDUCTION IN THE HOPE VI PROGRAM

    Question. The administration's fiscal year 2004 budget did not 
request funding for HOPE VI program. This program received $570 million 
in fiscal year 2003. Secretary Martinez indicated that there were 
sufficient unspent funds in the pipeline to keep this program 
operating. However, the House recommended $50 million, the Senate $195 
million, and $150 million was actually provided. Has HUD completed and 
submitted its report to the Appropriations Committee identifying the 
status of each HOPE VI project funded before 1999 and actions taken 
towards timely completion of these projects, detailing the department's 
plans for implementing the recommendations made by GAO, etc.? Please 
provide a copy if available.
    Answer. Yes. This report was submitted to the U.S. House of 
Representatives Committee on Appropriations and the U.S. Senate 
Committee on Appropriations on March 8, 2004 that provides the status 
of each HOPE VI project funded prior to 1999 and any actions taken to 
ensure timely completion of such projects. A copy of the report is 
provided.




                           HOUSING COUNSELING

    Question. Will FHA require borrowers who secure a zero downpayment 
mortgage to participate in homeownership counseling? If so, is FHA--as 
the insurer--planning to implement additional oversight or enhanced 
monitoring of these mortgages? Will FHA require that loan servicers 
conduct additional loan monitoring for zero downpayment loans? What 
plans are in place for assessing the effectiveness of the new zero 
downpayment product?
    Answer. Yes, housing counseling will be a requirement to 
participate. FHA has developed this program to complement its existing 
affordable housing programs. As a result, FHA's existing monitoring and 
review infrastructure provide sufficient and appropriate program 
controls. In addition, because all mortgages made under this program 
will be risk assessed by the TOTAL mortgage scorecard, which allows FHA 
to collect important information about loan characteristics including a 
``ranking'' of the overall perceived risk, FHA will be able to quickly 
determine if underwriting criteria need to be revised based on loan 
performance.
    FHA expects loan servicers to provide the same level of 
professional and responsive service irrespective of the initial equity 
in the property. Servicers are required to track loan performance and 
to report to FHA any instances of default.
    FHA will carefully monitor loan performance. FHA tracks performance 
of all its mortgages by product type, by fiscal year endorsed, by 
originating lender and other criteria as needed. These mortgages will 
be separately identified in FHA's system of records and will be 
monitored for performance, as are all other mortgages that FHA insures.

                      DEMAND FOR ZERO DOWNPAYMENT

    Question. In HUD's budget justification, HUD estimates that the 
demand for the zero downpayment product will be 109,000 new cases in 
2005. How did you come to this estimate, and in developing the 
estimate, did you consider the following:
  --Experience of other agencies, such as VA or USDA?
  --Consult with secondary market participants that purchase zero 
        downpayment mortgages, such as Fannie Mae or Freddie Mac?
  --Consult with other mortgage underwriters, such as private mortgage 
        insurers?
    Answer. In estimating the demand for the Zero Downpayment program, 
FHA took into account its knowledge of the home lending and mortgage 
insurance industries, its experience with homebuyers using various 
types of downpayment assistance, and assumptions about how rapidly it 
could implement a new program.
    Furthermore, FHA's demand estimate is consistent with studies 
showing that initiatives to assist potential homebuyers in overcoming 
the downpayment hurdle will have a larger impact in raising 
homeownership rates than initiatives that lower the interest rates or 
monthly mortgage expenses. These studies show that about 28 percent of 
renters who cannot afford a modestly priced home are constrained only 
by downpayment costs.

                          CONVENTIONAL CREDIT

    Question. In HUD's budget justification, HUD estimates that 36,000 
cases that would otherwise qualify for the regular 203(b) program are 
expected to choose the zero downpayment product. Would the rest of the 
109,000 cases have received loans from the conventional market? Under 
what terms and conditions?
    Answer. HUD does not assume that the rest of the 109,000 cases 
would have received loans from the conventional market. It is unlikely 
that many borrowers seeking a mortgage under the Zero Downpayment 
program would qualify for a conventional mortgage outside of the 
subprime market. Most borrowers would probably postpone the decision to 
purchase a home until they had sufficient savings.

                    CONVENTIONAL ZERO DOWN MORTGAGES

    Question. Currently zero downpayment mortgages are available in the 
conventional market (in which they may use stricter underwriting 
requirements for these products than FHA would be using for the zero 
down product). What is the size of this market? Who makes such loans 
now?
    Answer. HUD does not have data on the size or composition of the 
conventional market for zero downpayment mortgages.

                              CREDIT RISK

    Question. What types of borrowers does FHA expect to attract with 
the zero downpayment product, and how will the credit risk of these 
borrowers compare to the credit risk of borrowers receiving low 
downpayment loans from the conventional market?
    Answer. The program would assist those creditworthy but cash-poor 
working individuals and families excluded from purchasing their first 
home. The program is limited to first-time homebuyers and HUD expects 
that the program would be especially beneficial to those in markets 
where high rental costs inhibit the tenants' ability to save the 
downpayment. As the President said when signing the American Dream 
Downpayment Act, the inability to save the required downpayment is the 
most significant barrier to homeownership. Further, numerous studies 
since have indicated that removing the downpayment barrier would have a 
more dramatic effect on the homeownership rate than would other tools 
because removing the downpayment barrier would address the most 
significant reason why families and individuals cannot afford to 
purchase a home. The downpayment and closing cost barrier would be 
lessened and funds that would otherwise have to go towards the 
downpayment could be used to lower other debts to manageable levels. In 
fact, studies show that about 28 percent of renters who cannot afford a 
modestly priced home are constrained only by downpayment costs.
    FHA does not have credit profiles on low downpayment loans from the 
conventional market so it cannot perform such a comparison.

                           ADVERSE SELECTION

    Question. To what extent does the zero downpayment product address 
the issue of adverse selection as it relates to the borrowers for whom 
FHA is competing with the conventional market?
    Answer. Adverse selection will continue with or without the Zero 
Downpayment product offering; the GSEs have resources not available to 
HUD and offer an array of mortgage products that FHA does not have 
authority to provide. Nevertheless, this program will allow FHA to have 
a product offering similar to those of Fannie Mae and Freddie Mac, and 
without the income and location restrictions often associated with 
those products in the conventional market. FHA's product would be 
available everywhere with only the amount of the mortgage limited by 
property location. Many conventional products are limited to borrowers 
with incomes that do not exceed 100 percent of the area's median or to 
specific geographical areas.

                COMPETITION WITH THE CONVENTIONAL MARKET

    Question. To what extent will FHA be able to compete with the 
conventional market and ensure that the mortgages FHA underwrites are 
not too risky?
    Answer. FHA is not attempting to ``compete'' with the conventional 
market, but rather wishes to operate a successful program that provides 
homeownership opportunities to those creditworthy individuals and 
families that may not qualify under the more stringent guidelines of 
Fannie Mae and Freddie Mac. FHA believes that it can serve that 
underserved segment of the market and do so in a prudent and 
responsible manner by adopting sound credit-underwriting standards.

                       FANNIE MAE AND FREDDIE MAC

    Question. Have Fannie Mae and Freddie Mac implemented pilot 
programs for their low and no downpayment products before making these 
products generally available? If so, did you consider taking such an 
approach with FHA's zero down product?
    Answer. HUD is not privy to the market tests that may have been 
conducted by Fannie Mae and Freddie Mac. However, FHA believes that the 
program should be available nationwide to all qualified families and 
not limited to certain geographical areas or otherwise restricted by 
income limits.

                            LOAN MONITORING

    Question. Will you be monitoring any differently loans made with no 
downpayment? Do you expect that FHA loan servicers to monitor these 
loans any differently? How and when will you know whether these loans 
are performing better or worse than you expected?
    Answer. Since all mortgages made under this program will be risk 
assessed by the TOTAL mortgage scorecard, which allows FHA to collect 
important information about loan characteristics including a 
``ranking'' of the overall perceived risk, FHA will be able to quickly 
determine if underwriting criteria need to be revised based on loan 
performance. In addition, the algorithm that FHA has adopted to select 
mortgage insurance applications for post-endorsement review includes 
the initial loan-to-value; the Zero Downpayment mortgages will be 
selected more often for quality review. The actual ``monitoring,'' for 
which FHA interprets to mean default and claim experience, will be 
performed as usual. FHA expects loan servicers to provide the same 
level of professional and responsive service irrespective of the 
initial equity in the property. FHA tracks performance of all its 
mortgages by product type, by fiscal year endorsed, by originating 
lender. These mortgages will be separately identified in FHA's system 
of records and will be monitored for performance, as are all other 
mortgages that FHA insures. FHA will know as soon as a mortgage insured 
under this program is reported as in default.

                            HOMEOWNER EQUITY

    Question. With a zero downpayment loan, borrowers effectively end 
up with a loan that exceeds the value of the property. Now, in recent 
years home values have been increasing dramatically, but if home values 
were to decline, what value is there to homebuyers in having mortgages 
that exceed the value of the house?
    Answer. Generally, in the long run, home values have tended to 
rise. If home values were to decline for a brief period, borrowers with 
an FHA-insured Zero Downpayment Mortgage might choose to continue to 
enjoy the shelter and housing services provided by their home, 
especially if their borrowing costs compare favorably with rental costs 
in the community.

                      LOAN PERFORMANCE ASSUMPTIONS

    Question. Do you expect the zero downpayment loans to perform worse 
than other FHA insured loans? To what extent? Likewise, how do you 
expect the performance of zero downpayment loans to compare to the 
performance of comparable conventional loans? On what basis did you 
estimate the performance of the zero downpayment loans? For example, 
did FHA take into consideration the following?
  --1. Extrapolate from a subset of a prior program study, such as FHA 
        loans with very low downpayments (i.e., 97 percent or greater)?
  --2. Experience of other agencies, such as VA or USDA?
  --3. Consult with secondary market participants that purchase zero 
        downpayment mortgages, such as Fannie Mae or Freddie Mac?
  --4. Consult with mortgage underwriters, such as private mortgage 
        insurers?
    Answer. FHA does not have data on the performance of conventional 
zero downpayment loans. FHA has conservatively priced the premiums 
required to maintain its fiduciary responsibility to the MMI Fund. In 
addition, many industry sources would argue that credit history is the 
primary indicator of default risk, not the initial equity investment in 
the property.

                         CASH FLOW ASSUMPTIONS

    Question. How would you expect the projected loan performance for 
the zero downpayment product to affect cash flows for existing FHA 
mortgages?
    Answer. FHA expects that, in fiscal year 2005, 36,000 (one-quarter) 
of the homebuyers for the Zero Downpayment program would otherwise have 
been served by the FHA regular program, most probably as homebuyers 
with downpayment assistance. Because these borrowers pose above average 
risk to the Fund, FHA expects that cash flows for its regular program 
will improve.

                              PREPAYMENTS

    Question. How do you expect the zero downpayment product to perform 
in terms of prepayment?
    Answer. FHA did not make any explicit prepayment assumptions for 
the Zero Downpayment program. Loans with higher loan-to-value ratios 
generally prepay more slowly than loans with lower LTV ratios, but most 
FHA loans have high loan-to-value ratios.

                        CREDIT SUBSIDY ANALYSES

    Question. Can you please provide for the committee the analyses HUD 
prepared in developing the estimated credit subsidy for this new 
product, including any analysis showing the expected prepayments and 
foreclosures for these loans and all cash flows, including premiums and 
recoveries.
    Answer. FHA used the regular MMI credit subsidy model for fiscal 
year 2005 with the claim and premium assumptions applicable to the Zero 
Downpayment program to make credit subsidy estimates for the Zero 
Downpayment program.

                            ACTUARIAL REVIEW

    Question. The latest actuarial review of the MMI fund, prepared by 
Deloitte & Touche, states that the MMI fund had an economic value of 
$22.736 billion at the end of fiscal year 2003. How do you expect the 
proposed zero downpayment product to effect the value of the fund over 
the coming years?
    Answer. Because we estimate the zero downpayment loans to have a 
negative credit subsidy, we expect them to contribute to the positive 
economic value of the Fund.

                            ACTUARIAL TOOLS

    Question. GAO recommended in 2001 that HUD should develop criteria 
for measuring the actuarial soundness of the Fund and develop better 
tools for assessing the impact that policy changes may have on the 
volume of riskiness of loans that FHA ensures. What tools have you used 
to evaluate the proposed zero-down product? Generally, what steps has 
HUD taken to improve the tools it uses to assess such policy changes?
    Answer. HUD gauges the soundness of FHA's insurance funds in 
several ways. First, the annual independent actuarial review of the MMI 
Fund provides us with an outside expert's estimate of the capital ratio 
of the overall fund, and the economic value of new business coming into 
the Fund. The capital ratio tells us if the existing books of business 
are financially sound, while the economic value estimates of new 
business tell us if the marginal impact of new loans insured is adding 
or detracting from the financial health of the Fund. Secondly, HUD has 
developed its own cash flow models of FHA's MMI, and GI/SRI Funds 
business, and uses these models: (1) to estimate the liability for loan 
guarantees (net present value of future cash flows from existing 
insured loans) for the existing books of business, and (2) to estimate 
the credit subsidy rate (net present value of all cash flows at the 
time new loans are insured divided by dollars endorsed) on future 
business. Finally, HUD continually monitors trends in defaults and 
claims through regular monthly and quarterly management reports, and 
ad-hoc reports as specific issues or loan performance issues arise.
    For the proposed zero-down product, HUD was able to measure the 
relative claim experience of other loans it already insures for which 
borrowers make no downpayment (specifically loans with downpayment 
assistance), and used this experience to make assumptions as to the 
likely performance of the zero down loans. These assumptions were run 
through our cash flow models along with the higher proposed premium 
structure for these loans to determine that the zero down loans would 
have a negative credit subsidy, and would not adversely affect the 
economic value of the MMI Fund.

                          ACTUARIAL SOUNDNESS

    Question. In proposing the zero down product, does that mean that 
you think that the fund is actuarially sound, and what criteria have 
you developed for making this judgment?
    Answer. Yes, FHA believes that the MMI Fund is actuarially sound 
based on annual independent actuarial analyses which show the fund's 
capital ratio has remained well above the statutory 2 percent minimum 
for 8 years in a row now, and the economic value of new business coming 
into the Fund each year continues to be positive (has a negative credit 
subsidy). Together, these mean that the fund is healthy and new 
business is sound, suggesting the Fund will remain healthy.
    Specifically, the fiscal year 2003 review estimated the economic 
value of the MMI Fund at the end of fiscal year 2003 to be $22.736 
billion and the Fund's Capital Ratio to be 5.21 percent, the eighth 
full year this ratio has exceeded the congressionally mandated target 
of 2.0 percent. (Economic value is the net present value of the Fund's 
reserves plus expected future cash flows, and the capital ratio is 
economic value divided by insurance-in-force.)
    In comparison, the fiscal year 2002 actuarial review estimated the 
economic value and capital ratio of the Fund at $22.636 billion and 
4.52 percent, respectively. The increases in both measures for fiscal 
year 2003 were driven by the large positive economic value Deloitte and 
Touche placed on a record dollar volume of new loans FHA insured in 
fiscal year 2003 along with the rapid prepayment of older loans, 
keeping the end-of-year insurance-in-force (denominator of the capital 
ratio) down.

                              GI/SRI FUND

    Question. The possibility of using the GI/SRI fund to insure the 
zero downpayment product has been raised. Under what circumstances 
would you envision the GI/SRI fund insuring the zero downpayment 
product? What impact would the new zero downpayment product have on the 
credit subsidy rate of the GI/SRI fund?
    Answer. FHA does not plan to create a zero downpayment product in 
the GI/SRI Fund.

                         DOWNPAYMENT ASSISTANCE

    Question. What do you know about the performance of FHA insured 
loans that have received downpayment assistance, and what does this 
tell you about how the new zero down loans may perform?
    Answer. FHA loans to homebuyers with downpayment assistance from 
nonprofits or government agencies have claim rates that are 
approximately twice those of the average FHA borrower.

                    DOWNPAYMENT ASSISTANCE PROGRAMS

    Question. What impact do you see the proposed zero downpayment 
loans having on programs which provide downpayment assistance?
    Answer. FHA expects the Zero Downpayment program to expand 
opportunities for homebuyers to purchase a home without cash for a 
downpayment, especially in communities without downpayment assistance 
providers. Studies suggest that a nationwide program that removes the 
downpayment barrier would especially benefit minority homebuyers.

                           PAYMENT INCENTIVES

    Question. HUD is proposing a legislative change that would enable 
borrowers with poor credit ratings to qualify for FHA insurance. FHA 
would still require borrowers to meet debt, income, and repayment 
ability standards. FHA would also require borrowers to have greater 
owner equity and would charge borrowers upfront and annual premiums 
that are higher than those for FHA's regular 203(b) mortgage product. 
Up-front premiums for this new product would be 2.25 percent and annual 
premiums would be 0.75 percent. Subsequently, the annual premium may be 
reduced or eliminated due to good mortgage payment performance; the 
budget justifications indicate that 60 months would be the trigger 
point. HUD's proposed appropriations language would, however, enable 
HUD to establish and collect an annual premium not exceeding 1.0 
percent of the remaining insured principal. Furthermore, HUD's proposed 
appropriations language dictates that these mortgages would be insured 
by the MMI fund.
    HUD expects an increased risk of default associated with these 
mortgages; specifically, HUD estimates a default rate of 18.73 percent 
(i.e., lifetime defaults as percentage of disbursements) as compared to 
the estimated default rate of 9.06 for FHA's regular 203(b) mortgage 
product. HUD also estimates a recovery rate of 71.90 percent (i.e., 
recoveries as a percentage of lifetime defaults). HUD estimates that 
these mortgages would have a subsidy rate of -0.56 percent and that 
this program will generate 60,000 new mortgages per year and $45 
million in additional negative subsidy. (HUD estimates that its MMI 
program has a subsidy rate of -1.93 percent.)
    Will the underwriting standards for the proposed payment incentives 
product be very similar to those for FHA's 203(b) product? If so, will 
the payment incentives product be underwritten using the new TOTAL 
Scorecard system? Since the payment incentives product is viewed to be 
``more risky'', did HUD consider using more rigorous standards for 
borrowers qualifying for the zero down product?
    Answer. Yes, all mortgages under the payment incentives program 
must be risk assessed using the FHA TOTAL mortgage scorecard. 
Underwriting criteria, other than the downpayment percentage, have not 
yet been developed.

                              OWNER EQUITY

    Question. Are you asking for greater owner equity? If so, How much 
additional equity? How will the other underwriting criteria 
counterweight the additional risk of a loan to a borrower with a lower 
credit score?
    Answer. It was assumed that these loans would not exceed 90 percent 
LTV.

                            ANNUAL PREMIUMS

    Question. Regarding annual premiums associated with the payment 
incentive product: (a) will annual premiums be reduced or eliminated at 
60 months?; (b) will there be specific criteria used to determine that 
premiums will be reduced or eliminated (e.g., what payment history 
would be necessary)?; and (c) if they are reduced, what will they be 
reduced to?
    Answer. It was assumed that borrowers would pay an annual premium 
of 75 basis points for the first 5 years of the loan, dropping to 50 
basis points until the loan was paid down to 78 percent LTV.

                        HOMEOWNERSHIP COUNSELING

    Question. Will FHA require borrowers who secure a payment incentive 
product to participate in homeownership counseling?
    Answer. Housing counseling will be required for purchase 
transaction.

                                 RISKS

    Question. Considering the risks associated with the payment 
incentive product, did HUD consider initiating a pilot program?
    Answer. FHA is confident that the agency can operate the program 
nationwide without first offering the program as a pilot.

                               OVERSIGHT

    Question. Will FHA implement additional oversight or enhanced 
monitoring of payment incentive mortgages?
    Answer. FHA has developed this program to complement its existing 
affordable housing programs. As a result, FHA's existing monitoring and 
review infrastructure provides sufficient and appropriate program 
controls. In addition, since all mortgages made under this program will 
be risk assessed by the TOTAL mortgage scorecard, which allows FHA to 
collect important information about loan characteristics including a 
``ranking'' of the overall perceived risk, FHA will be able to quickly 
determine if underwriting criteria need to be revised based on loan 
performance.

                             LOAN SERVICERS

    Question. Will FHA require that loan servicers conduct additional 
loan monitoring for payment incentives loans?
    Answer. No, FHA expects loan servicers to provide the same level of 
professional and responsive service irrespective of the initial equity 
in the property. Servicers are required to track loan performance and 
to report to FHA any instances of default. Mortgagors may also opt to 
have counseling agencies contact them directly should they become 60 
days delinquent on the mortgage.

                           PROGRAM ASSESSMENT

    Question. What plans are in place for assessing the effectiveness 
of the proposed payment incentives product?
    Answer. FHA will monitor the performance of the Payment Incentives 
program as carefully as it monitors the performance of all of its 
mortgage insurance programs. With a new program, early default and 
claim rates are the best indicators of program performance.

                            VOLUME ESTIMATE

    Question. In HUD's budget justification, HUD estimates that this 
program would generate 60,000 new mortgages per year. How did you come 
to this estimate? In developing this estimate, did you consider the 
following?
  --1. Experience of other agencies, such as VA or USDA?
  --2. Consult with secondary market participants that purchase zero 
        downpayment mortgages, such as Fannie Mae or Freddie Mac?
  --3. Consult with other mortgage underwriters, such as private 
        mortgage insurers?
    Answer. To estimate the potential demand for the Payment Incentives 
program, HUD analyzed data from the Survey of Consumer Finances on 
renters with sufficient income to purchase a home but who have 
imperfect credit.

                            SUBPRIME MARKET

    Question. Currently mortgages are available in the conventional 
market (subprime market) to borrowers with questionable credit 
histories. How relevant is the experience of these mortgages that are 
available through the subprime market? To what extent will FHA be able 
to compete with subprime market and ensure that the mortgages FHA 
underwrites are not too risky?
    Answer. HUD does not have data on the performance of subprime 
loans. In developing underwriting criteria for this program, FHA will 
rely on its experience in serving borrowers with imperfect credit. In 
addition, it will require pre-purchase counseling and the use of the 
TOTAL mortgage scorecard. TOTAL provides FHA with a tool with which to 
manage the incremental risk assumed by the payment incentive loans.

                               BORROWERS

    Question. What types of borrowers does FHA expect to attract with 
the payment incentives product, and how will the credit risk of these 
borrowers compare to the credit risk of borrowers receiving loans 
similar to the payment incentives loans from the conventional market?
    Answer. HUD does not have data on the performance of conventional 
loans. With the Payment Incentives program, FHA expects to serve 
borrowers who have impaired credit, but have the cash for a significant 
downpayment. It also expects to serve borrowers with subprime loans who 
have impaired credit but have established a payment history and wish to 
refinance into a lower cost product.

                            LOAN PERFORMANCE

    Question. Do you expect the payment incentives loans to perform 
worse than other FHA insured loans? To what extent? On what basis did 
you estimate the performance of the payment incentives loans? For 
example, did FHA take into consideration the following:
  --Extrapolate from a subset of a prior program study, such as FHA 
        loans with questionable credit histories?
  --Consult with secondary market participants that purchase zero 
        downpayment mortgages, such as Fannie Mae or Freddie Mac?
  --Consult with mortgage underwriters, such as private mortgage 
        insurers?
    Answer. Based on its experience with credit impaired borrowers and 
its knowledge of the home lending and mortgage insurance industries, 
FHA expects that the Payment Incentives program will have claim rates 
that about double those of its regular program.

                        CREDIT SUBSIDY ANALYSES

    Question. Can you please provide for the committee the analyses HUD 
prepared in developing the estimated credit subsidy for this new 
program, including any analysis showing the expected prepayments and 
foreclosures for these loans and all cash flows, including premiums and 
recoveries?
    Answer. In developing a credit subsidy estimate, FHA used its 
regular MMI credit subsidy model with downpayment, claim rate, and 
premium assumptions applicable to the Payment Incentives program.

                            ACTUARIAL REVIEW

    Question. The latest actuarial review of the MMI fund, prepared by 
Deloitte & Touche, states that the MMI fund had an economic value of 
$22.736 billion at the end of fiscal year 2003. How do you expect the 
payment incentives program to effect the value of the fund over the 
coming years?
    Answer. As with the zero downpayment loans, we estimated that the 
payment incentive loans would have a negative credit subsidy, and 
therefore, we expect them to contribute to the positive economic value 
of the fund.

                          GAO RECOMMENDATIONS

    Question. GAO recommended in 2001 that HUD should develop criteria 
for measuring the actuarial soundness of the Fund and develop better 
tools for assessing the impact that policy changes may have on the 
volume of riskiness of loans that FHA ensures. What tools have you used 
to evaluate the proposed payment incentives product? Generally, what 
steps has HUD taken to develop better tools for assessing such changes?
    Answer. HUD gauges the soundness of FHA's insurance funds in 
several ways. First, the annual independent actuarial review of the MMI 
Fund provides us with an outside expert's estimate of the capital ratio 
of the overall fund, and the economic value of new business coming into 
the Fund. The capital ratio tells us if the existing books of business 
are financially sound, while the economic value estimates of new 
business tell us if the marginal impact of new loans insured is adding 
or detracting from the financial health of the fund. Secondly, HUD has 
developed its own cash flow models of FHA's MMI, and GI/SRI fund 
business, and uses these models: (1) to estimate the liability for loan 
guarantees (net present value of future cash flows from existing 
insured loans divided by dollars endorsed) for the existing books of 
business, and (2) to estimate the credit subsidy rate (net present 
value of all cash flows at the time new loans are insured) on future 
business. Finally, HUD continually monitors trends in defaults and 
claims through regular monthly and quarterly management reports, and 
ad-hoc reports as specific issues or loan performance issues arise.
    For the proposed payment incentive product, HUD will set 
underwriting criteria such that the relative claim rate experience of 
these new loans will be about two times that of the average claim rates 
for all loans currently being insured by the MMI Fund under the regular 
program. Using this claim rate assumption HUD used its cash flow models 
along with the higher proposed premium structure for these loans to 
determine that the payment incentive loans would have a negative credit 
subsidy, and would not adversely affect the economic value of the MMI 
Fund.

                          ACTUARIAL SOUNDNESS

    Question. In proposing the payment incentives product, does that 
mean that you think that the fund is actuarially sound, and what 
criteria have you developed for making this judgment?
    Answer. Yes, FHA believes that the MMI Fund is actuarially sound 
based on annual independent actuarial analyses which show the fund's 
capital ratio has remained well above the statutory 2 percent minimum 
for 8 years in a row now, and the economic value of new business coming 
into the fund each year continues to be positive (has a negative credit 
subsidy). Together, these mean that the fund is healthy and new 
business is sound, suggesting the Fund will remain healthy.

                        UNEARNED PREMIUM REFUNDS

    Question. HUD is proposing a legislative change to restrict 
payments of refunds of unearned upfront premiums to borrowers who 
refinance with a new FHA loan; in other words, HUD would eliminate the 
payment of partial refunds of unearned upfront premiums to borrowers 
who sell their homes or refinance with conventional loans. HUD's 
rationale for this change is to provide an incentive for high quality 
current MMI borrowers to refinance with MMI--as retaining the refund 
for MMI refinances will partially offset the upfront premium cost to 
the borrower for a new loan. The restriction will affect mortgages that 
become insured on or after the date of enactment of the legislation. 
HUD estimates that eliminating refunds for borrowers who refinance with 
conventional loans will add $78 million in negative subsidy. Can you 
explain HUD's rationale for this change?
    Answer. With this policy change, some borrowers who might have 
refinanced into a conventional mortgage will have a small, albeit 
declining, incentive to refinance with FHA.

                             FHA BORROWERS

    Question. Does this mean that an FHA borrower who sells his house 
would lose his upfront premium?
    Answer. Yes, a borrower who sells his house would be ineligible for 
a refund.

                             PROGRAM DEMAND

    Question. What is the expected impact of the proposed change in 
policy on demand for FHA mortgage insurance? How many additional FHA 
borrowers do you estimate will choose to refinance with FHA under this 
proposal? Conversely, how many potential FHA borrowers do you think FHA 
will lose due to the effective increase in the premium?
    Answer. The number of borrowers who choose to refinance with FHA 
depends largely upon interest rates and house price appreciation. When 
interest rates are falling, borrowers whose homes have appreciated 
sufficiently will refinance into conventional mortgages, while those 
whose homes have appreciated more slowly will refinance with FHA. 
Between fiscal year 2001 and 2003, a period of falling interest rates, 
FHA recapture rates (the percent of prepaid loans refinanced with FHA) 
ranged between 18.5 and 24.7 percent. In contrast, in fiscal years 1995 
and 2000, years when interest rates rose, FHA recapture rates were 3.9 
and 3.2 percent, respectively. Borrowers who refinance with FHA are 
unaffected by the policy change. Borrowers who are eligible to 
refinance into conventional mortgages will experience a small and 
declining incentive to remain with FHA.

                        CREDIT SUBSIDY ANALYSIS

    Question. Please provide for the committee the analyses HUD 
prepared in developing the estimated credit subsidy for these proposed 
changes, including any analysis showing the expected prepayments and 
foreclosures for these loans and all cash flows, including premiums and 
recoveries.
    Answer. FHA used the regular MMI credit subsidy model for 
estimating the credit subsidy impact of the change in refund policy. 
All assumptions remained the same except for the assumptions about the 
refund policy.

                      EFFECT ON MMI ECONOMIC VALUE

    Question. The latest actuarial review of the MMI fund, prepared by 
Deloitte & Touche, states that the MMI fund had an economic value of 
$22.736 billion at the end of fiscal year 2003. How do you expect the 
proposed legislative and administrative changes to effect the value of 
the fund over the coming years?
    Answer. Because we believe the administrative changes will result 
in a credit subsidy that is more negative, we believe that the impact 
of these changes on the economic value of the Fund will be positive.

                           ACTUARIAL CRITERIA

    Question. GAO recommended in 2001 that HUD should develop criteria 
for measuring the actuarial soundness of the Fund and develop better 
tools for assessing the impact that policy changes may have on the 
volume of riskiness of loans that FHA ensures. What tools have you used 
to evaluate the proposed changes in refunds of upfront premiums? 
Generally, what steps has HUD taken to develop better tools for 
assessing such policy changes?
     Answer. HUD gauges the soundness of FHA's insurance funds in 
several ways. First, the annual independent actuarial review of the MMI 
fund provides us with an outside expert's estimate of the capital ratio 
of the overall fund, and the economic value of new business coming into 
the fund. The capital ratio tells us if the existing books of business 
are financially sound, while the economic value estimates of new 
business tell us if the marginal impact of new loans insured is adding 
or detracting from the financial health of the fund. Secondly, HUD has 
developed its own cash flow models of FHA's MMI, and GI/SRI fund 
business, and uses these models: (1) to estimate the liability for loan 
guarantees (net present value of future cash flows from existing 
insured loans) for the existing books of business, and (2) to estimate 
the credit subsidy rate (net present value of all cash flows at the 
time new loans are insured divided by dollars endorsed) on future 
business. Finally, HUD continually monitors trends in defaults and 
claims through regular monthly and quarterly management reports, and 
ad-hoc reports as specific issues or loan performance issues arise.
    For the proposed administrative changes, HUD was easily able to 
evaluate the impact of these changes by making small adjustments in its 
cash flow models consistent with the proposed changes.

                        PREMIUM REFUND CRITERIA

    Question. In proposing changes involving refunds of the upfront 
premium, does that mean that you think that the fund is actuarially 
sound, and what criteria have you developed for making this judgment?
    Answer. Yes, FHA believes that the MMI Fund is actuarially sound 
based on annual independent actuarial analyses which show the fund's 
capital ratio has remained well above the statutory 2 percent minimum 
for 8 years in a row now, and the economic value of new business coming 
into the fund each year continues to be positive (has a negative credit 
subsidy). Together, these mean that the fund is healthy and new 
business is sound, suggesting the fund will remain healthy.

                         PREMIUM EARNING PERIOD

    Question. HUD is proposing an administrative change to shorten the 
time available for partial rebates of upfront insurance premiums from 
the current 5 years to 3 years. Only homeowners repaying their FHA 
loans within this period (i.e., 3 years) would get a portion of the 
upfront premium back, on a sliding scale of amortization. This 
provision will only apply to loans insured after the effective date of 
the administrative changes. HUD estimates that this will yield $91 
million in additional negative subsidy. Can you explain the rationale 
behind this change? FHA borrowers used to be eligible to receive this 
rebate for up to 7 years after the loan was originated. This was 
changed to 5 years, and now HUD is seeking to change the time limit to 
3 years. That is, what has changed that causes you to believe that FHA 
should accelerate the speed with which it earns the upfront premium?
    Answer. The cash flow analysis shows that MMIF upfront premiums 
approximately equal claim outflows at the end of 3 years, suggesting 
the premium is fully earned before the cut-off of the current 5-year 
refund schedule.

                            SUBSIDY ESTIMATE

    Question. In HUD's budget justification, it states that this change 
is expected to yield additional negative subsidy of $91 million. How 
did HUD arrive at this estimate?
    Answer. FHA used the regular MMIF credit subsidy model for 
estimating the credit subsidy impact of the change in refund policy. 
All assumptions remained the same except for the assumptions about the 
refund policy.

                        CREDIT SUBSIDY ANALYSES

    Question. Please provide the analyses HUD prepared in developing 
the estimated credit subsidy for these proposed changes, including any 
analysis showing the expected prepayments and foreclosures for these 
loans and all cash flows, including premiums and recoveries.
    Answer. FHA used the regular MMIF credit subsidy model for 
estimating the credit subsidy impact of the change in refund policy. 
All assumptions remained the same except for the assumptions about the 
refund policy.

                   LEAD BASED PAINT REDUCTION OFFSETS

    Question. HUD is requesting $139 million for lead based paint 
hazard reduction--a $35 million reduction over the amount enacted in 
fiscal year 2004. The reduction results largely from the $49.7 million 
for grants targeted at areas with the highest lead paint abatement 
needs--Lead Hazard Demonstration Project. According to the budget 
justification, no funding is requested for fiscal year 2005 for this 
project because the program needs can now be met (offset) in part 
through the Lead Hazard Control Grants Program. The budget also 
increased the Lead Hazard Control Grants Program by $14.8 million. In 
addition, HUD eliminated the $25 million Lead Reduction Initiative from 
the HOME program under Community Planning and Development. What 
analysis was done to justify eliminating the Lead Reduction Initiative 
from the HOME program?
    Answer. The Lead Reduction Initiative within the HOME program was 
never funded by Congress. After further discussion and analysis, it 
became clear that the activities under this program appeared to largely 
duplicate the Department's regular and successful Lead Hazard Control 
Program because lead-based paint activities are already an eligible 
expense under the HOME program. Thus, it was not proposed again in the 
President's budget request for the HOME program.

              STATUS OF UNEXPENDED BALANCES (ALL PROGRAMS)

    Question. HUD carries over large unobligated uncommitted balances 
from year to year. These balances result from underutilization of 
program funds and other reasons. According to HUD's Budget Appendix, 
its fiscal year 2003 end-of-year unobligated balance was $8.9 billion. 
While the amount unexpended needs to be reconciled, some of these funds 
may be available to offset HUD's fiscal year 2005 budget request.
    Are unexpended balances being used to offset HUD's fiscal year 2005 
budget request? If so, can this action be attributed to their 
assessment of unexpended balances (recommended by GAO in 1999, 2001 and 
again in 2002)?
    Answer. Yes, unexpended balances are being used to offset HUD's 
fiscal year 2005 budget request. In addition to the smaller rescissions 
proposed in other HUD programs, $1.6 billion is proposed for a 
rescission under the Housing Certificate Fund. HUD has been proposing 
offsets/rescissions in its Budget request at least since the 1997 
Budget, long before any GAO recommendations.

                  STATUS OF UNEXPENDED BALANCES (HCF)

    Question. About $3.28 billion of the total amount in unobligated 
uncommitted funds remained in the Housing Certificate Fund at the end 
of fiscal year 2003. HUD's fiscal year 2004 end of year unobligated 
balance estimate for the Housing Certificate Fund is $184 million. 
While the amount unexpended needs to be reconciled, some of these funds 
may be available to offset HUD's fiscal year 2005 budget request. How 
much of the $3.28 billion is attributable to unexpended obligations 
with in the Housing Certificate Fund in the Section 8 Moderate 
Rehabilitation program and in the Section 236 Multifamily Mortgage 
Interest Reduction program?
    Answer. Section 236 Multifamily Mortgage Interest Reduction 
programs a separate program, therefore, none of the unexpended balances 
in the Housing Certificate Fund are associated with Section 236.
    Question. How much of these unexpended obligations will likely be 
needed for program purposes?
    Answer. All unexpended obligations are needed for program purposes.
    Question. How does HUD intend to reduce its unexpended balance in 
the Housing Certificate Fund to $184 million at the end of fiscal year 
2004 as estimated in HUD's Budget Appendix?
    Answer. HUD does not intend to reduce its unexpended balance in the 
Housing Certificate Fund to $184 million at the end of fiscal year 
2004, but rather, the unobligated balance. The unexpended balance 
includes funds that have already been obligated as well as unobligated 
funds. The unobligated balance (the $184 million in the Budget 
Appendix) is that those funds that have not been obligated.

                     HOMELESS DEMONSTRATION PROJECT

    Question. This was a new initiative approved in fiscal year 2003 
for a 2-year period ending in fiscal year 2005. Funds totaling $10 
million were appropriated at that time. The Congress requested that HUD 
report on the demonstration by March 15, 2004. In response, HUD 
indicates that it is reporting as part of the Congressional Budget 
Justification. As such, HUD states that it is proposing to serve 
homeless persons that have substance abuse issues, and demonstration 
funds would be used to provide housing. Other resources would be 
leveraged to provide needed supportive services. Through a competitive 
selection process, HUD expects to identify best practices and share 
this information with other homeless providers. HUD is carrying over $9 
million in program funds in fiscal year 2005. What has HUD accomplished 
under this program since 2003? What analysis has been done to justify 
that $10 million might be needed for the program? What is the projected 
amount needed per award? Why haven't funds been obligated? What is the 
projected utilization?
    Answer. Since this initiative was funded by Congress, we requested 
and recently received clarification of Congress' intent for the 
program. While a needs assessment has not been conducted, a substantial 
portion of chronically homeless people have substance abuse and/or 
mental illness issues. These individuals either have been on the street 
for at least a year or have had four episodes of homelessness in the 
past 3 years. This group is particularly vulnerable. They need 
permanent housing with comprehensive services. We would anticipate that 
the awards per project would be up to $2 million. Once the housing 
demonstration program is developed and funds are awarded, we would 
expect that funds would be expended within 3 years.
      public housing capital fund--freedom to house demonstration
    Question. What are the successes and what are the problems these 
PHAs face?
    Answer. Participating PHAs have realized some interesting results 
while experimenting with: (1) Alternatives to the standard approach for 
establishing tenant rents; (2) Time limits on the receipt of housing 
assistance; (3) Administrative streamlining (to cut costs and 
complexity); (4) Funding flexibility (by combining operating subsidies, 
modernization grants and Section 8 funding into a flexible funding 
stream); and (5) Alternate development and financing arrangements to 
expand the stock of affordable housing.
    Evidence to date suggests that deregulation of local HAs may yield 
benefits in terms of program design and implementation innovations.
    For example, several participating PHAs have used the funding 
fungibility authority for standard program uses, but in a more flexible 
and efficient manner, to compensate for ``losses'' in one program area 
and to develop (through construction, acquisition or rehabilitation) 
new, affordable housing units. Some participating PHAs implemented 
changes in housing subsidy formulas with provisions (such as flat 
rents) that reward resident employment and income growth, and/or with 
provisions that penalize unemployment and/or with supplemental services 
and supports to help residents make progress towards self-sufficiency 
and/or with time limits on assistance. Many participants have used the 
demonstration to alter specific procedural and reporting requirements, 
including less frequent re-examination, merged waiting lists, local 
inspection standards and protocols and other streamlining and paperwork 
reduction initiatives.
    The local flexibility and independence permitted under MTW appears 
to allow some PHAs to experiment with innovative solutions to local 
challenges, and to be more responsive to local conditions and 
priorities to an extent not otherwise permissible under standard rules.

                                 OMHAR

    Question. In 2001, the Congress reauthorized the ``mark-to-market'' 
program. One of the key provisions of the reauthorization bill requires 
the Office of Multifamily Housing and Assistance Restructuring or 
``OMHAR'' to be brought under the direct supervision of the Federal 
Housing Commissioner on October 1, 2004. Can you tell me how OMHAR is 
operating and what transition plans you have in mind to move the office 
under FHA by October 1?
    Answer. OMHAR continues to operate effectively. They have completed 
1,102 restructuring transactions to date. The Office of Housing will 
assume OMHAR's activities once OMHAR sunsets on September 30, 2004. A 
reorganizational plan to effect this change was approved by Deputy 
Secretary Bernardi on June 22, 2004 and submitted to the appropriate 
committees in the Senate and House on July 9, 2004.

                      SECTION 811 DISABLED HOUSING

    Question. There is a concern that vouchers that are funded under 
this account are moved into the mainstream voucher program after being 
turned in and thus lost to the disabled population. What does HUD do to 
ensure these vouchers remain funded and available to only eligible 
persons with disabilities?
    Answer. All of the Mainstream Notices of Funding Availability 
(NOFAs) issued from fiscal years 1997 have included language indicating 
Mainstream vouchers from Housing for Persons with Disabilities Fund 
must be initially issued to disabled families, and must be reissued to 
disabled families upon turnover. Several months ago, HUD initiated 
changes to its procedures that will enable it to track the usage of 
Mainstream vouchers (5-year budget authority derived from Section 811 
appropriations) designated for disabled families. By no later than 
September 2004, public housing agencies (PHAs) will be required to 
begin reporting electronically to HUD (using the Form HUD-50058, Family 
Report) on the usage by disabled families of these Mainstream vouchers.

                         SALARIES AND EXPENSES

    Question. According to HUD's Budget Appendix, the Department is 
requesting $592 million to fund salaries and expenses in fiscal year 
2005--an increase of about $48 million over the amount enacted in 
fiscal year 2004 ($544 million). (Note.--However, the amount enacted in 
fiscal year 2004 does not reconcile with HUD's Congressional Budget 
Justification. HUD's justification reports $547 million as the enacted 
amount in fiscal year 2004). Despite differences in amounts observed in 
the enacted amount for fiscal year 2004, HUD's budget justification 
states that the amount requested in fiscal year 2005 would support 
9,405 full time equivalent staff (FTE) in fiscal year 2005. This 
reflects current FTE increases totaling 126 in the fiscal year 2004 
budget, and increases due to anticipated pay raises, time-in-grade 
increases, promotions, health and other benefits.
    HUD's resource estimation allocation process (REAP) supports a 
requirement of 9,661 FTEs in fiscal year 2005. According to HUD's 
justification, the 9,405 FTE level reflects a pathway to the REAP 
target of 9,661, incorporating current staffing levels, approved 
reorganizations, and planned workload accomplishments for fiscal year 
2004 and 2005. It appears that the administration is not requesting the 
increase in staff dictated by its REAP analysis. In addition, HUD's 
justification indicates that the 9,405 level includes $3 million in 
funding for 8 FTEs for HUD's Center for Faith-Based and Community 
Initiatives.
    If Congress in fiscal year 2005 does not approve the Center, will 
there be a need for the full proposed 9,405 level? Does the 2004 FTE 
level (9,405) factor in the Faith-Based Initiative? If so should it be 
reduced by 8 FTE? Please reconcile Salaries and Expense enacted levels 
for fiscal year 2004 between the Budget Justification and the Budget 
Appendix.
    Answer. HUD's Center for Faith-Based and Community Initiatives 
(CFBI) was established by Executive Order 13198, Agency 
Responsibilities with Respect to Faith-Based and Community Initiatives, 
on January 29, 2001. The purpose of establishing this Executive 
Department Center was to coordinate department efforts to eliminate 
regulatory, contracting, and other programmatic obstacles to the 
participation of faith-based and other community organizations in the 
provision of social services. Since 2001, Congress has approved annual 
budgetary requests for this organization each year through fiscal year 
2004.
    Fiscal year 2004 FTE level of 9,405 includes 8 FTE for CFBI and 
should not be reduced by 8 FTE. Congress approved 8 FTE in the House of 
Representatives Conference Report 108-401, Page 1103, dated November 
25, 2003 specifically for the CFBI.
    HUD's Salaries and Expenses enacted levels for fiscal year 2004 in 
the 2005 Congressional Budget Justification and the 2005 President's 
Budget Appendix are reconciled.
    The 2005 Congressional Budget Justification, Page I-1, Enacted 2004 
column, line ``Salaries and Expenses, HUD'' reflects $547,000 and line 
``Rescission Public Law 10807'' reflects -$3,227 the .059 percent 
across-the-board rescission, resulting in a net request of $543,773.
    The President's Budget Appendix, Page 555, Program and Financing 
Schedule, 2004 Estimated column, lines 43.00 Appropriations (Total 
Discretionary) and 89.00 Budget Authority reflects $544, the amount net 
of the rescission, that reconciles with the Budget Justification.
                                 ______
                                 
              Questions Submitted by Senator Conrad Burns

             MONTANA SECTION 8 VOUCHER PROGRAM WAITING LIST

    Question. The current waiting list for the State of Montana Section 
8 program numbers over 7,685 for a number of vouchers of roughly half 
this amount. Public housing authorities around the State have 
separately operated Section 8 programs with similarly long waiting 
lists. A typical wait in Montana communities for a voucher runs from 2 
to 7 years depending on if you qualify for a priority on the waiting 
list. How will drastic cuts to the voucher program affect these waiting 
periods?
    Answer. The Flexible Voucher Program is expected to be able to 
serve at least the current number of families assisted, if not more. 
HUD expects that the program reforms and the administrative flexibility 
provided to PHAs will result in an increase in the number of families 
that can be assisted under the Flexible Voucher Program. These reforms 
will help more needy families make the transition from public 
assistance to self-reliance and work. As more families transition out 
of the program, more families on the waiting list will be served. The 
Flexible Voucher Program will also encourage and enable PHAs to 
maximize Federal subsidy to serve more families, as was the case in the 
original Voucher Program.
    Question. The current waiting list for the State of Montana Section 
8 program numbers over 7,685 for a number of vouchers of roughly half 
this amount. Public housing authorities around the State have 
separately operated Section 8 programs with similarly long waiting 
lists. A typical wait in Montana communities for a voucher runs from 2 
to 7 years depending on if you qualify for a priority on the waiting 
list. How will drastic cuts to the voucher program affect these waiting 
periods?
    Answer. The Flexible Voucher Program is expected to be able to 
serve at least the current number of families assisted, if not more. 
HUD expects that the program reforms and the administrative flexibility 
provided to PHAs will result in an increase in the number of families 
that can be assisted under the Flexible Voucher Program. These reforms 
will help more needy families make the transition from public 
assistance to self-reliance and work. As more families transition out 
of the program, more families on the waiting list will be served. The 
Flexible Voucher Program will also encourage and enable PHAs to 
maximize Federal subsidy to serve more families, as was the case in the 
original Voucher Program.

                TARGETING LOW-INCOME AND DISABLED PEOPLE

    Question. By making these reductions, are you targeting the people 
(low-income and disabled) that need this program the most?
    Answer. The Flexible Voucher Program is intended to preserve and 
improve assistance for low-income and disabled families in need of 
housing. As previously stated, HUD expects that the program reforms and 
the administrative flexibility provided to PHAs will result in an 
increase in the number of disabled and other low-income families that 
can be assisted under the Flexible Voucher Program.

                             M&M CONTRACTOR

    Question. What is the status of the renewal of the First Preston 
contract?
    Answer. The First Preston's contract expires on July 31, 2004 and 
we are negotiating a transition period to a new M&M contractor.

                               METH HOMES

    Question. What procedures are in place for HUD and First Preston to 
handle meth homes?
    Answer. These types of homes are not common in HUD's portfolio and 
are treated on a case-by-case basis. When it has been determined that a 
meth home has been acquired by HUD, the home is tested by an 
environmental organization. If abatement is necessary, HUD is 
responsible for ensuring that the work is completed. Full disclosure at 
the time of property listing is made to advise potential purchasers 
that the property was a meth home and what steps HUD has taken to 
resolve outstanding issues.
    In those instances where HUD and/or its management and marketing 
(M&M) contractors are not aware that a meth home was sold and it is 
subsequently brought to HUD's attention, the home is inspected/tested 
and abated as necessary.

                             FIRST PRESTON

    Question. Will First Preston services be ``regionalized''?
    Answer. No, First Preston's will not be regionalized.

                      PUBLIC HOUSING RESTRUCTURING

    Question. What steps is HUD taking to help with restructuring of 
public housing?
    Answer. The Department actively works with a wide array of 
stakeholders in the preservation of assisted, affordable housing. 
Specific restructuring tools were provided by the Multifamily Assisted 
Housing Reform and Affordability Act of 1997 (MAHRA) to the Office of 
Multifamily Housing Assistance Restructuring (OMHAR). OMHAR sunsets on 
September 30, 2004, but the Mark-to-Market (M2M) restructuring 
authorities under MAHRA continue until September 30, 2006.

                              OMHAR SUNSET

    Question. With OMHAR ready to sunset after this fiscal year, will 
restructuring services revert back to the HUD agency?
    Answer. Yes. The Office of Multifamily Housing Assistance 
Restructuring (OMHAR) sunsets on September 30, 2004, but the Department 
retains the Mark-to-Market (M2M) restructuring authorities under the 
Multifamily Assisted Housing Reform and Affordability Act of 1997 
(MAHRA) until September 30, 2006.

                      RESTRUCTURING PUBLIC HOUSING

    Question. Will there be additional training for these folks to 
conduct a fair and equitable survey for comparable rents?
    Answer. It is anticipated that the existing group of Participating 
Administrative Entities (PAEs) will continue to perform their 
contractual roles in determining market rents as part of their due 
diligence, when developing their recommendation for a restructuring 
plan. The Department will continue to provide oversight, direction and 
training to the PAEs. This includes the PAEs responsibility for rent 
determinations.

                       MANUFACTURED HOUSING RULES

    Question. When will the rules for Manufactured Housing be released? 
These were initially passed in the 107th Congress and States like 
Montana do not currently have the infrastructure to deal with issues 
surrounding manufactured homes.
    Answer. The Department is working to publish a proposed rule for 
the Model Installation Standards this year. The Department is also 
developing the proposed regulations for both the installation and 
dispute resolution programs.
    The Manufactured Housing Improvement Act of 2000 mandates that the 
Department establish the new installation and dispute resolution 
programs by December 2005. Advanced Notices of Proposed Rulemaking for 
these programs were published for comment in March 2003. The Department 
is cooperating with the Manufactured Housing Consensus Committee to 
maintain a timely publication schedule for the rules.
    The Department understands that States such as Montana do not 
currently have the infrastructure to deal with issues surrounding 
manufactured homes. In Montana, and any other State that chooses not to 
establish a manufactured housing installation or dispute resolution 
program, the Department will assume the responsibility for 
administration of these programs.

                      SAFETY AND SECURITY FUNDING

    Question. The drug elimination funds were cut last year from their 
budget. They asked for security measures/funding due to the budget 
cuts, especially with regard to the large public housing facilities. 
Public housing could be the subject to terrorist attacks, meth labs, 
and/or prostitution organizations. The President's budget came out with 
zero funding for safety and security. How can these problems be 
addressed?
    Answer. Anti-drug and anti-crime activities, formerly associated 
with the Public Housing Drug Elimination Program, are currently 
allowable expenses of a Public Housing Agency (PHA) under the Public 
Housing Operating Fund. As with any allowable expense, including 
protective services, it is a matter of local determination and priority 
to establish the level of services a PHA wishes to provide for its 
residents.

         FAMILY SELF-SUFFICIENCY COORDINATOR POSITIONS FUNDING

    Question. Additionally, the budget also cut the Restoration/
Continuation of the (FSS) Family Self Sufficiency position, who keeps 
families moving to Section 8 homeownership. Without this person, they 
don't have the personnel resources to focus on this priority. How can 
the President's goal of increased homeownership be met with the 
elimination of this essential position?
    Answer. Family self-sufficiency activities will remain a core 
component of the Flexible Voucher Program and PHAs participating in 
self-sufficiency activities will be rewarded through incentive bonuses. 
The administrative fee bonus funding may be used for activities such as 
FSS staff salaries to ensure coordination with supportive service 
providers, job training and vocational and educational activities.
    Further, homeownership assistance for first-time homebuyers is an 
enhanced activity under the Flexible Voucher Program. The PHA may 
provide monthly assistance payments to the homebuyer, or may choose 
instead to provide assistance for the family in the form of a one-time 
grant of up to $10,000 to be used as down payment assistance.
    Additionally, the Flexible Voucher Program will permit PHAs to 
design local homeownership programs that address the concerns of local 
lenders and realtors. HUD expects that this flexibility, along with the 
new downpayment option, will enhance, not hinder, successful PHA 
homeownership efforts. PHAs will have the flexibility to address any 
current lending, real estate or other programmatic barriers that impede 
wider use of the homeownership voucher option in their communities.

                        PROPOSED SECTION 8 CUTS

    Question. The proposal cuts over $1 billion in funding from this 
year's actual funding level. The proposal does not provide full funding 
for fiscal year 2005. Full funding to pay for all vouchers currently 
leased requires $1.6 billion more than the administration's request. 
Future spending is proposed to be even greater upwards of 30 percent of 
current funding by fiscal year 2009. Why are these cuts proposed when 
the Section 8 program is significantly underfunded currently, and with 
need far outstripping current resources by two or three times the 
current funding level?
    Answer. The Flexible Voucher Program is expected to be able to 
serve at least the current number of families assisted, if not more, 
and at funding levels more sustainable than the current program 
structure will allow. The program reforms and administrative 
flexibility provided to PHAs will result in an increase in the number 
of families that can be assisted under the Flexible Voucher Program. 
This is possible because of savings that will result from badly needed 
program reforms that reduce the nearly $2 billion in improper payments 
that are being made every year, permitting greater flexibility by PHAs 
to reduce overhead costs and streamline the assistance process, and by 
encouraging PHAs to provide only as much Federal assistance as needed 
to pay for fair market rents rather than exceeding market rents. The 
Flexible Voucher Program will also trigger savings in administrative 
costs due to greater simplicity and flexibility in income 
determinations, reducing the necessity of income certifications, and 
streamlining housing quality inspections.

                           PREDATORY LENDING

    Question. What efforts are being made to combat predatory lending 
practices?
    Answer. Since the Spring of 1999, HUD has been actively involved in 
combating predatory lending through research, regulation, consumer 
education and enforcement actions against lenders, appraisers, real 
estate brokers, and other companies and individuals that have 
victimized homebuyers. Below are HUD's numerous efforts:
  --Research.--HUD, through various offices and divisions, is actively 
        engaged in efforts to understand how predatory lending 
        practices occur and their effects on victims so that effective 
        strategies and tactics may be developed to effectively address 
        the problem.
    --Reference/Research Information.
      -- HUD Policy Development and Research maintains a predatory 
            lending subject in its electronic FieldWorks, a reference 
            to sources of information on various topics.
      -- PD&R annually compiles a list of subprime lender specialists 
            that can be used with HMDA data to identify subprime 
            lending patterns. This list has made it possible for 
            researchers and policy analysts to examine both national 
            and local subprime lending patterns.
      -- PD&R has research in progress that will examine the role of 
            prime lenders and borrower credit quality on subprime 
            lending patterns in low-income and minority areas. This 
            research is also looking at the importance of non-
            traditional lenders (e.g., pawnshops, payday lenders, cash 
            checkers) in low-income and minority neighborhoods.
    --Collaboration.--The Baltimore Predatory Lending Task Force is a 
            group sponsored by the Community Law Center of Baltimore 
            and has been meeting monthly since 1999. The Task Force is 
            examining all aspects of the issue using Baltimore as a 
            kind of ``laboratory.'' The Task Force has produced studies 
            and a report to Congress. A wide range of advocacy groups, 
            Federal, State and local government officials, and 
            community groups participate.
  --Regulations and Administrative Actions.
    --Anti-flipping Rule.--HUD published a rule on May 1, 2003, to stop 
            unscrupulous investors from quickly reselling properties at 
            inflated values using an FHA-insured loan. The rule makes 
            properties that have been sold within 90 days of previous 
            sale ineligible for FHA insurance, effectively prohibiting 
            the quick purchase and resale of the property.
    --Government Sponsored Enterprise (GSE) Oversight.--HUD's most 
            recent regulation establishing the current goals published 
            in October 2000 includes a provision that prohibits Fannie 
            and Freddie from receiving credit toward their affordable 
            housing goals for purchasing loans that are deemed by HUD's 
            Office of Housing to be high-cost and contain prepaid, 
            single-premium credit life insurance; or prepayment 
            penalties.
    --Lender Accountability Rule (pending).--HUD published a Proposed 
            Lender Accountability Rule in January 2003, that would re-
            establish requirements previously published in 1994 Lender 
            Select regulation, whereby lenders are held accountable for 
            the quality of FHA appraisals. The proposed rule provides 
            that lenders are held strictly accountable for the quality 
            of appraisals on properties securing FHA insured mortgages; 
            provides that lenders who submit appraisals to HUD that do 
            not meet FHA requirements are subject to the imposition of 
            sanctions by the HUD Mortgagee Review Board; applies to 
            both sponsor lenders, who underwrite loans, and loan 
            correspondent lenders, who originate loans on behalf of 
            their sponsors; and will help protect the FHA Insurance 
            Fund, ensure better compliance with appraisal standards, 
            and help to ensure that homebuyers receive an accurate 
            statement of appraised value. The Final Rule is scheduled 
            for issuance in 2004.
    --Appraiser Standard Rule.--HUD published a Final Rule in May 2003 
            and an implementing mortgagee letter in June 2003, that 
            establishes more stringent licensing and certification 
            requirements for FHA Roster appraisers, based on industry-
            recognized Appraiser Qualifications Board (AQB) standards 
            for education and experience; provides for a 12-month 
            phase-in period for all appraisers currently on the FHA 
            Appraiser Roster to meet the minimum licensing/
            certification criteria; does not permit ``grandfathering'' 
            of appraisers who are currently on the FHA Appraiser 
            Roster. All appraisers who previously qualified for State 
            licensing, and placement on FHA's Roster under reduced 
            educational or experience requirements will have until June 
            2004 to meet the new, more stringent levels; clarifies 
            FHA's procedures for sanctioning and removing appraisers 
            from the FHA Appraiser Roster.
    --Appraiser Watch Initiative.--In September 2003, FHA formally 
            announced deployment of the Appraiser Watch tool, a 
            monitoring tool that FHA now uses to identify appraisers 
            for review. The system uses traditional risk-based factors 
            to select appraisers for performance evaluation. Using 
            Appraiser Watch, FHA has been able to conduct a relatively 
            small number of field reviews that result in a much higher 
            rate of removals of poorly performing appraisers from FHA's 
            Appraiser Roster.
  --Enforcement Mechanisms and Tools.
    --Departmental Enforcement Center (Center), Office of General 
            Counsel.--The Center ``works cooperatively with HUD's 
            program offices to assure compliance of business agreements 
            and regulations.'' Tools available to the Center 
            particularly suited to predatory lending violators include 
            suspension and debarment actions and pursuing Civil Money 
            Penalties (CMPs) or double damages.
    --Mortgagee Review Board (MRB).--The Board oversees the performance 
            of lenders participating in FHA insurance programs and has 
            the authority to withdraw approval to participate in the 
            programs for serious violations. This includes violations 
            related to predatory lending practices when the activity 
            involves a HUD program. The MRB works closely with the 
            Enforcement Center.
    --Fair Housing Initiatives Program (FHIP).--FHIP supports important 
            help from private fair housing organizations by funding 
            enforcement and education and outreach activities carried 
            out by private, non-profit fair housing organizations. Most 
            recently, HUD competitively awarded a $600,000 contract to 
            carry out enforcement testing and education and outreach in 
            geographic areas where sub-prime lenders and mortgage 
            companies are suspected of engaging in predatory lending 
            practices. The education component of the contract includes 
            conducting seminars, housing counseling for buyers and 
            renters, developing brochures and newsletters, and a range 
            of other activities to inform and educate the public about 
            lending discrimination and particularly predatory lending 
            tactics.
  --Public Education.--HUD supports a wide variety of information 
        sources and assistance available to the public.
    --Internet.--Recognizing that an increasingly large number of 
            Americans use the Internet as a source of information, the 
            Department uses this medium to communicate with the public 
            about predatory lending. Web pages cover various subjects, 
            including contact information.
      -- Training.--Various offices and divisions provide training to 
            the industry focusing on how to identify, avoid or self-
            protect against predatory lending.
      -- Local Information.--HUD supports web pages special to each 
            State providing local information for consumers in the 
            State.
      -- Section 8 Tenants to Homeowners.--HUD has issued guidance to 
            State and local public housing authorities (PHA) to protect 
            low-income families participating in the Section 8 
            homeownership program from abusive lending practices. With 
            this guidance, PHAs are establishing policies to prevent 
            program participants from agreeing to financing they cannot 
            afford. PHAs are working with local lenders that have been 
            educated about the voucher homeownership program to 
            establish solid working relationships. Based on 
            recommendations by a joint HUD-Treasury task force report 
            in 2000 on predatory lending, HUD has issued guidance to 
            PHAs on how to review lender qualifications and loan terms 
            for any ``predatory'' features before issuing a down 
            payment voucher.
  --Intervention.--The Department supports measures to intervene in the 
        homebuying process in an effort to prevent predatory lending 
        abuses and, where the opportunity is available as a result of 
        legislation, to correct abuses.
    --Homebuyer Counseling.--The Department awards housing counseling 
            grants to agencies all across the country. In fiscal year 
            2003, HUD made over 440 awards, totaling approximately $38 
            million in grants, to nonprofit housing counseling 
            organizations, including 17 awards to national or regional 
            entities that represent another 400 or so affiliate housing 
            counseling agencies. Of the $38 million awarded, $2.7 
            million was awarded specifically to combat predatory 
            lending or to assist victims of predatory lending.
    --Loss Mitigation.--Is a process to avoid foreclosure. The lender 
            tries to help a borrower who has been unable to make loan 
            payments and is in danger of defaulting on his or her loan. 
            The National Servicing Center (NSC) in HUD plays an 
            important role on behalf of FHA borrowers by using its 
            authority and influence as the mortgage insurer to 
            encourage lenders of FHA loans to work with borrowers in 
            difficulty in an attempt to preserve the loan and the home. 
            NSC administers this program.
    --Foreclosure Holds.--Pending foreclosures on FHA insured loans may 
            be held for predatory loan reviews. NSC has placed 
            ``holds'' on 8,453 threatened foreclosures since August 
            2000, of which 380 were suspected predatory lending causes.
  --Other New Measures.
    --Office of Fair Housing and Equal Opportunity (FHEO) Organization 
            Changes.--FHEO is creating a Division dedicated to the 
            education of consumers nationwide. The new Division will 
            address a range of housing discrimination issues, with 
            special attention given to minority communities and the 
            dangers of predatory lending. It will also respond to this 
            administration's challenge to promote minority 
            homeownership by helping to ensure that those minorities 
            who are already homeowners stay in their homes.
    --Federal Interagency Task Force on Fair Lending.--HUD participates 
            on the Federal Interagency Task Force on Fair Lending, 
            which is comprised of ten agencies, including the Federal 
            Reserve Board, and the Department of Justice. We have 
            worked together to prepare and release a brochure titled, 
            ``Putting Your Home on the Loan Line is Risky Business.'' 
            The brochure warns consumers about the potential pitfalls 
            of borrowing money using their home as collateral. The 
            brochure highlights the risks of high-cost home loans, and 
            provides tips for getting the best financing possible.
                                 ______
                                 
            Questions Submitted by Senator Pete V. Domenici

                           SAMARITAN HOUSING

    Question. The Bush Administration's Samaritan initiative represents 
an important step forward in reorienting Federal homeless policy toward 
a focus on ending chronic homelessness. It is welcomed by many of us on 
this committee. As you know, it is Congress that initiated this policy 
when we first proposed a 30 percent minimum requirement on HUD within 
the McKinney-Vento program for the development of permanent housing 
targeted to people with disabilities experiencing chronic homelessness. 
How do you envision the Samaritan initiative building on what this 
subcommittee has already done with respect to focusing on chronic 
homelessness and permanent supportive housing under the McKinney Act?
    Answer. Since 1987, the programs created by Congress under the 
McKinney-Vento Homeless Assistance Act have been a major source of 
Federal assistance to States, local governments, and nonprofits 
organizations for the purpose of developing and implementing permanent 
housing. The 30 percent permanent housing requirement contained each 
year in the appropriations law has served as an additional incentive 
for providers to develop permanent housing for homeless persons, 
including those who are chronically homeless. The Samaritan initiative 
would provide added focus and resources to current efforts. Samaritan 
would be the first Federal program dedicated to the chronically 
homeless population. Moreover, the program's unique design of having a 
joint collaboration between HUD, and the Departments of Health and 
Human Services (HHS) and Veterans Affairs, will demonstrate to 
communities that agencies, including those locally, can pool resources 
to effectively end chronic homelessness.

                      PERMANENT SUPPORTIVE HOUSING

    Question. What else can Congress be doing to push the Department of 
Health and Human Services to fund services in permanent supportive 
housing where HUD support is diminishing?
    Answer. The vast majority of funds administered by the Department 
of Health and Human Services (HHS) are in mandatory, entitlement 
programs that for the most part are administered by State agencies. HHS 
has indicated that currently States have sufficient flexibility to use 
these funds to address the needs of homeless persons. Given this and to 
help States focus their attention on this important issue, HHS 
initiated State Policy Academies. HUD joined HHS in this effort both 
financially and operationally. HHS, HUD and later other Federal 
agencies met with key stakeholders from each participating State to 
develop specific plans to access their mainstream resources for 
homeless persons. We are now assessing the results of that effort. To 
further increase access to HHS and other Federal agencies' mainstream 
programs, HUD and HHS jointly developed a CD-ROM. The interactive CD-
ROM is designed for outreach workers and case managers to better assist 
homeless persons in accessing Medicaid, TANF and other mainstream 
programs. HUD is strongly encouraging providers to use HHS and other 
Federal mainstream service programs through the annual continuum of 
care competition. The continuum application provides points based on 
the extent to which communities help homeless persons access mainstream 
programs.

                           SHELTER PLUS CARE

    Question. Is HUD committed to maintaining ongoing funding for 
Shelter Plus Care renewals in fiscal year 2005 and beyond to ensure 
that the goal of 150,000 units of permanent supportive housing is met 
over the next decade?
    Answer. The law does not provide for a separate appropriation for 
Shelter Plus Care (S+C) renewals. Rather these renewals are funded 
through the Homeless Assistance Grants account, as are all other HUD 
homeless assistance programs. As provided for each year in 
appropriations language, HUD non-competitively awards S+C renewals that 
meet the standards set forth in the law. Remaining funds are used for 
the Emergency Shelter Grants (ESG) program and the national continuum 
of care competition for new S+C and Section 8 SRO projects, and new and 
renewal Supportive Housing Program projects. This past year, 
approximately $141 million of the 2003 appropriation was required for 
S+C renewals; $150 million was awarded for ESG and approximately $975 
million remained available for the continuum of care competition.
    The achievement of the bold gold to eliminate chronic homelessness 
will require a multiple of resources requested in HUD's budget 
including the McKinney-Vento programs, the Samaritan Housing 
Initiative, the Prisoner Re-Entry Initiative as well as resources 
provided through the HOME, CDBG, Public Housing and Section 8 programs. 
Continued support of growing renewal needs is clearly a major component 
of the overall strategy.

                          SUBCOMMITTEE RECESS

    Senator Bond. We will do that, and look forward to working 
with you, and with the new Secretary.
    Thanks very much. The hearing is recessed.
    [Whereupon, at 11:30 a.m., Thursday, April 1, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
