[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                         OVERSIGHT OF THE RURAL


                        HOUSING SERVICE AND ITS


                        FISCAL YEAR 2006 BUDGET

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 10, 2005

                               __________

       Printed for the use of the Committee on Financial Services



                            Serial No. 109-8







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director
           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana          JULIA CARSON, Indiana
PETER T. KING, New York              BARBARA LEE, California
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         BERNARD SANDERS, Vermont
CHRISTOPHER SHAYS, Connecticut       STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida            ARTUR DAVIS, Alabama
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
STEVAN, PEARCE, New Mexico           AL GREEN, Texas
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
MICHAEL G. OXLEY, Ohio



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 10, 2005...............................................     1
Appendix:
    March 10, 2005...............................................    00

                               WITNESSES
                        Thursday, March 10, 2005

Davis, Russell T., Administrator, Rural Housing Service, U.S. 
  Department of Agriculture......................................    00
Shear, William B., Director, U.S. Government Accountability 
  Office.........................................................    00

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    00
    Harris, Hon. Katherine.......................................    00
    Ney, Hon. Robert W...........................................    00
    Davis, Russell T.............................................    00
    Shear, William B.............................................    00

              Additional Material Submitted for the Record

Davis, Russell T.:
    Written response to questions from Hon. Steve Pearce.........    00
Shear, William B.:
    Written response to questions from Hon. Steve Pearce.........    00
U.S. Department of Agriculture State and Area Office Information.    00


                         OVERSIGHT OF THE RURAL



                        HOUSING SERVICE AND ITS



                        FISCAL YEAR 2006 BUDGET

                              ----------                              


                        Thursday, March 10, 2005

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:11 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Robert Ney 
[chairman of the subcommittee] presiding.
    Present: Representatives Ney, Harris, Davis of Kentucky, 
Waters, Frank, and Davis of Alabama.
    Mr. Ney. [Presiding.] Welcome today to the Housing 
Subcommittee. We do have another vote coming I think after 
about 10 minutes of debate, so once that happens members will 
be coming over. What I was going to do was go ahead with my 
opening statement, and that way we could go ahead and get this 
portion out of the way.
    The Housing Subcommittee will meet this afternoon to 
discuss USDA's Rural Housing Service and the agency's budget 
proposal for fiscal year 2006. The U.S. Department of 
Agriculture Rural Development, RD, mission area administers 
programs that are designed to meet the diverse needs of rural 
communities with a variety of loans, loan guarantees, and grant 
programs, which include technical assistance and cooperative 
development.
    Within Rural Development's mission area is the Rural 
Housing Service, RHS as it is known. RHS is responsible for 
providing decent, safe, affordable housing and community 
facilities in our rural communities. It issues loans and grants 
for rural single-family houses and rural rental housing 
apartment complexes. In this fiscal year 2006 budget proposal, 
RHS continues to address a multitude of management and budget 
challenges in both its single-and multifamily housing programs.
    Rural housing continues to have a portfolio of about 17,000 
existing multifamily developments that provide housing for 
about 470,000 low-income tenants, many of whom are elderly. 
These developments were primarily built in the 1980s and many 
are in need of repairs and rehabbing. The developments have an 
outstanding indebtedness, I understand, of about $12 billion.
    We are concerned about the physical condition of the 
existing projects, of course, and the ramifications of allowing 
the projects to leave the program. Recently, the Supreme Court 
ruled in favor of project owners who wish to pre-pay their 
loans and remove their property from the subsidized market. I 
have been working on this issue a good number of years. I am 
glad to see that the RHS is making progress on addressing the 
issue. A recent capital needs assessment indicated that only 
about 10 percent of the projects are potentially viable for 
non-subsidized use and could leave the program itself. This is 
significantly less than what I think was probably projected.
    The Section 538 multi-housing loan guarantee program was 
designed to leverage other sources of financing. The fiscal 
year 2006 budget proposal includes $200 million for Section 
538. I am pleased that the administration has doubled the 
amount available for the program from last year, which would 
help leverage other sources of financing for the multifamily 
housing projects.
    Only in operation for a few years, the program continues to 
evolve. RHS recently published a comprehensive revision of its 
multifamily housing regulations and the administration believes 
this will streamline the program and protect it against 
potential abuses. I support the administration's efforts to 
make the Section 538 program a more attractive component of the 
complete funding package, which includes access to secondary 
market funds and the use of tax credits and other subsidies. 
RHS programs differ from other federal efforts to assist 
homeownership. According to the President's budget, RHS 
programs are means-tested and more accessible to low-income 
rural residents.
    In particular, the budget supports the Section 502 direct 
loan program. The mission of the Section 502 program is to 
provide direct assistance to those lower-income families that 
might be on the brink of homeownership. After experiencing an 
increase in income and home equity, the borrower is expected to 
graduate to private credit. In this program, the interest rate 
charged is directly related to the income of the individual. 
All loans are evaluated annually to determine if interest rates 
should be changed or if the borrower is eligible to graduate 
from the program. This is an important program and I look 
forward to working with the administration to improve its 
effectiveness.
    Over the past year, management at RHS has made significant 
strides, I believe, to improve the programs under its 
jurisdiction. Recently, USDA commissioned a report to analyze 
the Rural Development Multifamily Housing Program, identify 
problems, and provide recommendations for changes to address 
such problems. It is my understanding that the department is in 
the process of reviewing this report to determine what 
legislative actions should or can be taken.
    As part of this hearing, I have also invited the General 
Accountability Office, GAO, to discuss its three reports 
completed last year regarding the current issues facing RHS and 
its mission to provide affordable housing to rural communities. 
It is important that RHS continue to improve efficiencies so 
that its housing programs do not become vulnerable to possible 
future budget cuts. Often, RHS housing programs are the only 
option for low-and very low-income families.
    My roots in rural America run deep. I have a very rural 
district and I was born and raised in the Ohio Valley. I grew 
to understand that a safe and secure home is a foundation for a 
family unit, whether you are in a rural area or in a city or 
wherever you are at in the country. We have done a lot on this 
subcommittee with Congresswoman Maxine Waters of California. In 
fact, we passed I think 11-some bills at one particular time 
last session without even a roll-call vote. This is a lot of 
credit to Republicans and Democrats on the committee, and also 
with Chairman Oxley and ranking member Barney Frank. They have 
done a lot of work on issues in the committee in general, but 
also in housing.
    We have some areas to go. Minority homeownership, for 
example, is low and we have to do better. So again, whether it 
is a city or a rural area, it is important. But today, of 
course, we are focusing on the rural part. Today, my belief in 
the importance of homeownership remains the same as it always 
has been. As the Chairman of the Subcommittee on Housing and 
Community Opportunity, it is my goal to apply these fundamental 
values and rural experiences to help communities develop new 
economic vehicles that will enable them to grow and prosper.
    I look forward to hearing from our two witnesses today on 
the various ways in which we can have safe, affordable home 
issues and strengthen our rural communities and contribute to 
the overall quality of life for our rural families.
    Let me start with Mr. Russell Davis. He was appointed on 
July 12, 2004 to serve as Administrator of the Rural Housing 
Service. Mr. Davis has extensive housing, financial and 
business experience. Prior to his arrival at USDA, he served as 
Senior Policy Adviser with the United States Department of 
Treasury. He has 15 years of investment banking experience, 
specializing in public finance and economic development. He 
earned his bachelor's degree from Harvard and is currently 
pursuing a graduate degree in applied economics at Johns 
Hopkins University.
    Mr. Bill Shear is Director of Financial Markets and 
Community Investment at the United States Government 
Accountability Office, GAO. Mr. Shear has directed substantial 
bodies of work addressing community and economic development 
programs, small business lending, the GSEs, which we talk about 
all the time these days, and FHA. Mr. Shear received his Ph.D. 
in economics from the University of Chicago and formerly served 
as a lecturer at the University of Pennsylvania.
    I want to welcome both of you. With that, we will start 
with Mr. Davis.

  STATEMENT OF RUSSELL T. DAVIS, ADMINISTRTOR, RURAL HOUSING 
            SERVICE, U.S. DEPARTMENT OF AGRICULTURE

    Mr. R. Davis. Thank you, Mr. Chairman and members of the 
subcommittee. I would like to thank you for the opportunity to 
present the President's fiscal year 2006 budget for USDA Rural 
Development's housing programs.
    I am submitting my testimony in written form for the record 
and I will use this time to highlight our housing budget, which 
I should say has increased significantly from last year. We 
have a number of major new initiatives. In particular, I would 
like to expand on our major new initiative which is for 
multifamily revitalization programs. USDA Rural Development is 
the leading advocate for rural America, with 7,000 employees in 
over 800 offices nationwide. We are committed to the future of 
rural communities. We work every day to increase economic 
opportunity and improve the quality of life in rural America.
    As an integral part of Rural Development, the rural housing 
programs assist rural communities in many fundamental ways. We 
provide a variety of single-family and multifamily housing 
options to residents of rural communities. We also help fund 
medical facilities and other essential community facilities. 
The President's budget provides an overall increase of $400 
million in rural housing programs. The single-family housing 
programs provide several opportunities for rural Americans with 
very low to moderate incomes to purchase homes.
    Of the $4.7 billion in program level requested, $3.7 
billion will be available as loan guarantees for private sector 
loans, including $207 million for refinancing more affordable 
loans for rural families. Also, with $1 billion available for 
direct loans, our commitment to serving those most in need in 
rural America remains strong. This level of funding will 
provide homeownership for approximately 40,000 rural families.
    The total program level request for multifamily housing is 
$1.07 billion. This represents an increase of 30 percent from 
last year's request; $650 million will be used for rental 
assistance, for contract renewals, farm labor housing and 
preservation. These funds will renew more than 46,000 4-year 
rental assistance contracts. We estimate using $27 million for 
multifamily housing direct loans to meet our preservation 
responsibilities, including prepayment prevention incentives.
    The President is also requesting $214 million in new money 
for a multifamily housing revitalization initiative. While the 
budget contains only a single line item for this initiative, it 
is in fact a first step so that this valuable part of rural 
America's infrastructure can be preserved for another 20 to 30 
years. There are approximately 17,000 properties in the Section 
515 portfolio. These are small properties averaging only 26 
units each. They are distinctly rural and can be found in over 
9,000 distinct zip codes. There are a great number of small 
towns covered in this portfolio.
    The tenants in these properties face two immediate dangers. 
The first is that property owners may leave the program by 
prepaying their USDA mortgage. This leaves the tenants 
potentially exposed to higher rents and possible eviction. The 
second danger that the tenants face is that their properties 
may fail either economically or physically, leaving them 
effectively in the same condition as in a prepayment.
    Our goal in the initiative is first and foremost to protect 
the tenants. Protecting them from the prepayment problem has 
become increasingly important. First, we lost an important 
Ninth Circuit Court case, the Kimberly case, and related 
decisions last August. This gave owners the right to prepay 
immediately. A separate set of court challenges took an 
opposite tack, following the lead of last August's Franconia 
decision. These owners are not asking to prepay, but instead to 
be covered for damages for their lost profits, which they claim 
could have been received had the government not broken its 
contract with them. Over 800 properties have sued for damages 
and over 8,000 more are eligible.
    In 2003, Rural Development commissioned a comprehensive 
physical assessment to quantify and place a price tag on this 
prepayment problem. In general, it found good news. Only 10 
percent of the properties, approximately 1,700 properties, are 
in markets where rents are so high that the owners could prepay 
immediately. This represents approximately 50,000 at-risk 
units, but we only believe that only one-third will use legal 
or administrative means to prepay in fiscal year 2006.
    The prepayment tenant protections for fiscal year 2006 are 
simply a recognition of the need to get ahead of a tenant 
displacement problem and manage it in a cost-effective manner. 
The Bush Administration will be submitting a legislative 
package in the near future which will describe our initiative 
whereby the tenants are protected.
    Thank you for the opportunity to present our budget 
proposal. I look forward to working with the subcommittee.
    [The prepared statement of Russell T. Davis can be found on 
page XX in the appendix.]
    Mr. Ney. Director Shear?

   STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Mr. Shear. Mr. Chairman, members of the committee, I am 
pleased to be here this afternoon to discuss work we have 
conducted at the Rural Housing Service. With my written 
statement provided for the record, this oral statement 
addresses three areas: first, a report on how the Rural Housing 
Service determines areas that are eligible for rural housing 
programs; second, three reports on the agency's rental 
assistance budgeting and distribution processes; and third, a 
report commissioned by the Rural Housing Service called the 
comprehensive property assessment.
    In summary, the Rural Housing Service has recently begun to 
make progress in addressing problems we have identified in our 
work. However, several problems at present prevent the agency 
from making the best use of its resources. In particular, 
statutory requirements for program eligibility may not best 
determine areas that should qualify for the agency's housing 
programs. Changes to the way eligibility is defined might allow 
the agency to better designate rural areas and treat 
communities with similar characteristics more consistently. For 
example, while all definitions of ``rural'' are based in part 
on excluding the areas that are urban, we find that statutory 
requirements relating to metropolitan statistical areas 
problematic.
    MSA classifications are county-based, and therefore are 
subject to political boundaries. MSAs are not intended to be 
urban-rural classifications and MSAs can contain, based on 
census bureau designations, both urban and rural areas. Based 
on our analysis, we have found a better guide than MSA to 
better differentiate urban and rural areas. In particular, 
population density and census designations of urbanized areas 
and urban clusters provide a more useful guide to make urban-
rural distinctions. Such changes would require legislative 
action.
    I will now turn to our analysis of the Rural Housing 
Service's budgeting and distribution processes for its rental 
assistance funds. Weaknesses in the agency's budget estimation 
and oversight of rental assistance funds increase the risk that 
the agency is not efficiently or appropriately allocating 
resources. We found that the agency had consistently 
overestimated its budget needs for rental assistance contracts 
in its Section 521 program. Namely, the agency used higher 
inflation rates than recommended and incorrectly applied those 
rates. Using and correctly applying the inflation rates 
provided by the Office of Management and Budget would help the 
agency more accurately estimate its federal assistance needs.
    In addition, we found that the agency lacked sufficient 
internal controls to adequately monitor the use of rental 
assistance funds, particularly in its funds transfer processes, 
its methodology for supervisory reviews of tenant files, and 
tenant income verification processes. The Rural Housing Service 
has recently moved on a number of fronts to correct the rental 
assistance program shortcomings identified in our reports. 
While it is too early for us to fully review the impact of 
these changes, we believe that the changes in how rental 
assistance budgets are estimated and the strengthening of 
internal controls, consistent with our recommendations, would 
result in greater efficiency in the administration of this 
pivotal program.
    Finally, I will provide a few comments addressing the 
recently completed comprehensive property assessment, which the 
Rural Housing Service initiated in response to our May 2002 
study on long-term needs in the Section 515 Multifamily Housing 
Program. This Rural Housing Service assessment was done to 
develop a baseline for assessing the portfolio's physical and 
financial condition. For this purpose, the study collected 
detailed information from a sample of multifamily properties.
    Its principal finding that the agency's multifamily housing 
portfolio was aging rapidly and property reserves and cash-
flows do not appear sufficient for basic maintenance of long-
term rehabilitation needs are consistent with our work in the 
area. As we have stated in the past, such information is 
necessary to help determine how to spend rehabilitation funds 
as effectively as possible and to inform congressional 
decisionmaking about how much funding may be needed in the 
future.
    Mr. Chairman, that concludes my oral statement. I would be 
happy to answer any questions.
    [The prepared statement of William B. Shear can be found on 
page XX in the appendix.]
    Mr. Ney. Thank you. They have called a vote, so I am going 
to go over, and I assume some members will come back. Do you 
have the time to remain? Thank you.
    You are from Maryland, right? You are living in Maryland?
    Mr. Shear. Yes.
    Mr. Ney. Clemson just beat Maryland. I hate to break the 
news to you.
    [Laughter.]
    Mr. Shear. I will get over it.
    [Laughter.]
    [Recess.]
    Mr. Ney. Mr. Frank is on his way. I think what I will do is 
I will go ahead and ask a question and that way it will give a 
little more time when Mr. Frank comes for him to ask a few 
things.
    I wanted to ask, Mr. Davis, can you describe what you see 
as some of the obstacles that we have to homeownership? Not 
every one of them, but the main obstacles we have in the rural 
areas?
    Mr. R. Davis. We run into two problems continually, and 
that is the income levels of the tenants are not often high 
enough to afford the homes that are available, and their 
ability to repay because of debt levels or credit history do 
not allow them to qualify for a normal loan. Those are the two 
hurdles that we find ourselves addressing over and over.
    Mr. Ney. What are some of the things that you can do that 
HUD could not, or why are the programs over there versus what 
HUD could do, or do you have a different flavor to what you are 
doing?
    Mr. R. Davis. Sir, in the single-family homeownership 
program, we have a subsidy component in our direct program that 
allows us to go to much lower incomes than regular market-rate 
loans or even the traditional FHA loans. Our guaranteed loans 
are also targeted to rural areas, and we work with the lenders 
to help them understand the particular needs of rural 
borrowers. This is a distinctly rural program.
    Mr. Ney. Have you initiated any dialogue as a result of 
GAO's reports? Have you initiated any dialogue internally yet 
on any changes or does Congress need to initiate that, or how 
do you see that working?
    Mr. R. Davis. We have been working closely with GAO 
regarding the definition of ``rural'' areas. I will defer to 
Mr. Shear in one moment, if I could just say that we are also 
working with the Economic Research Service within the 
Department of Agriculture to identify the specific impact on 
our programs. We appreciate the work that went into the report 
by GAO and we believe that their recommendations merit that we 
work together. We do believe that out-of-date boundaries serve 
no purpose and we look forward to coming up with a good way of 
ensuring that we are covering all of our rural areas.
    Mr. Ney. I do have a question for you, Mr. Shear, and I am 
sure Mr. Frank will have some questions.
    I think, Mr. Davis, you quoted 10 percent of the 
properties, what was that quote, in your total portfolio? There 
was a quote about 10 percent, I think.
    Mr. R. Davis. In the multifamily portfolio, we have 17,000 
properties. There, at one time, had been a concern about how 
many potentially could prepay; 30 percent or 40 percent? We 
hired a series of consultants to actually go out and conduct a 
very detailed analysis of a statistical sample of properties. 
We found that approximately 1,700 or 10 percent of the 
portfolio are in areas where it is economically viable for them 
to prepay. So we believe that the prepayment problem is smaller 
than we originally expected.
    Mr. Ney. Did GAO, Mr. Shear, find it at around 10 percent?
    Mr. Shear. In what we did, and this was a report a couple 
of years ago, we did not have the specific property information 
that the Rural Housing Service used in their recent assessment. 
What we did is use some kind of macro-type of indicators and 
said that there might be up to 23 percent of properties that 
might consider prepaying, so it was only ``might consider'' 
repaying, not that they would, so we said up to 23 percent. We 
think the 10 percent that the Rural Housing Service just came 
up with is consistent with ours, and rather than saying who 
might consider prepaying, it would be a matter of who would be 
likely to prepay.
    Mr. Ney. Your figures would be?
    Mr. Shear. Yes, it would be consistent in the sense that we 
said it could be up to 23 percent who might consider it, but we 
did not have the specific information to be able to say who 
would be likely to prepay, and that is what this assessment 
that RHS just conducted was able to do for their sample of 
properties.
    Mr. Ney. On the front of your report, I found this 
interesting, you note about the MSAs grandfathering communities 
and demonstrating a serious lack of mortgage credit are of 
marginal utility. So you believe, then, that those designations 
are just of marginal use in grandfathering?
    Mr. Shear. Can I start with the MSA? Then I will go to the 
other characteristics. One of the things is that MSAs are 
county-based. They are based on political boundaries, and they 
have changed over time. And so you end up with some situations 
where it is such a blunt instrument, where certain things do 
not make sense. We think that you could probably devise a 
system that would not, in a sense, require so much 
grandfathering if you used finer-scale information that is 
available in a mapping-type of technology.
    As far as the lack of mortgage credit, there are two points 
on that. One point is that Rural Housing Service basically 
says, all areas that are rural have a lack of mortgage credit. 
So it is not a distinguishing factor. And then the other thing 
is based on research by a number of parties, including USDA's 
Economic Research Service. It appears that the problems with 
lack of mortgage credit is more income-driven, rather than 
being geographically driven. So what makes sense to us, and I 
think it is consistent with RHS's policies, is that in terms of 
how you target your assistance once eligibility is determined, 
you would want to take into account the incomes of the 
potential recipients, rather than making the rural definition 
take into account lack of mortgage credit.
    Mr. Ney. Thank you.
    Mr. Frank?
    Mr. Frank. Thank you, Mr. Chairman.
    Obviously, the series of votes has interrupted this. I do 
not think the sparsity of attendance is any indication of a 
lack of concern on the part of the subcommittee, so I 
appreciate your being here, and I appreciate to the 
Administrator, the chance we have had to discuss these things.
    I think one of the misunderstandings people have is that 
when we talk about affordable housing that we are talking about 
Chicago, New York, Boston, et cetera. Clearly, providing 
affordable housing in the rural areas is a very important piece 
of this. We have some very well-run programs here. I am really 
focused on trying to particularly preserve the affordability. I 
have appreciated some of the conversations we have had.
    Let me say to Mr. Davis, of the units that you now have 
that are in the affordability category, as I understand our 
previous conversation, you do not think there is going to be 
any significant loss of units due to gentrification or economic 
pressure? I understand that there may be some abandonment in 
some areas of the country where there is a sparsity of 
population. To the extent that we have a problem of economic 
forces driving this out of the inventory because people can 
make more money by dumping the poor people, am I correct that 
you do not think that is going to be a serious problem for us? 
That it is a small enough problem so through the right public 
policies we can essentially prevent it from happening?
    Mr. R. Davis. This was one of the major concerns that led 
us to undertake our study. We were surprised when the physical 
inspectors went out and came back with their reports, to find 
that the portfolio was in much better condition than we 
expected. Properties have held up very well. They were well-
constructed, but they were done under cost containment 
restrictions. Our properties were not designed to be the Taj 
Mahal at the time.
    So we have two good forces working in our favor. Number 
one, the properties have held up and can be expected to hold up 
into the future, given adequate rehabilitation and maintenance. 
But at the same time, they are not so attractive and beautiful 
that they can be taken to very high-market rents. They do not 
have pools. A lot of the features of the architecture say that 
this is affordable housing for 1980, no fancy doors on the 
closets and so forth. So they are nice enough to last, but they 
are not nice enough to attract really high rents, and that was 
a surprise to us.
    Mr. Frank. You call to my mind a terribly sexist song, 
which I do not endorse but cite, if you want to be happy for 
the rest of your life, make an ugly woman your wife.
    [Laughter.]
    Obviously, I speak on that from a position of perfect 
neutrality. No one can accuse me of having any particular 
involvement here.
    That is good news. I think one of the problems we have in 
the non-rural areas is that we tend from a combination of poor 
public policy, financial squeeze, and economic forces, to lose 
a lot of the units. I am glad to hear that that is not the case 
here.
    Also, I am pleased that you have these plans through 
vouchers et cetera to protect the tenants, but I take it from 
our conversation that you agree that it is also important that 
we protect the tenancies, that we do not want to simply protect 
them for the existing tenants, and then when they move out, 
lose those to the inventory. You believe you are able to 
control that?
    Mr. R. Davis. Absolutely. The voucher proposal in the 
President's budget, and it is $214 million of new money because 
we care very much about protecting them. But it is not designed 
to detract from the project-based Section 515 program. It is a 
temporary emergency measure to take care of people. I think of 
it kind of like a life raft. It is temporary. It is a last 
resort. We would like to keep them in their properties. We 
would like to keep the properties in our stock. This is only if 
the tenants are lost. Right now, the 515 program has no 
mechanism to protect them.
    Mr. Frank. And also, we talked about while the properties 
are in generally good shape, there is some need for repair, and 
we do note that this budget does not include a lot of money for 
that, but you have some reason to think that in future budgets 
we, and I hope we can kind of make those intentions as public 
as possible. We cannot make them binding, but maybe we can help 
them. It is a kind of a multi-year plan and you do assume later 
in this, before there is any deterioration to the point of 
uninhabitability, that we will get the money for the physical 
improvements necessary. Is that correct?
    Mr. R. Davis. Yes. The important thing is that we want to 
see the entire portfolio rehabilitated and that rehabilitation 
used as a vehicle for extending the use restrictions, so that 
we essentially get the portfolio for another 30 years as 
cheaply as possible. The question is, do we just put all of the 
money in from appropriated money, or do we attract money from 
other properties, cash-flows, and from the private sector? Our 
goal is that we get as much money from other places as 
possible. We believe that we have identified a process to start 
with simple restructurings where we can move money possibly 
between properties or from tax credits.
    Mr. Frank. That raises a question. I would ask, Mr. 
Chairman, to facilitate this, because I would hope we could go 
forward with this, and obviously a lot of it is going to be in 
the appropriations process. Are there any things we can or 
should do through the authorizing legislation that would 
facilitate this?
    Mr. R. Davis. Yes. We will have a legislative proposal 
coming up with the department's legislative package. We are 
looking to take the 515 program out of a very micromanaged 
17,000 silos that cannot share resources, budget-based program, 
into something that incentivizes the owners to bring us extra 
money, bring in tax credit, and in other resources.
    Mr. Frank. I appreciate that. Mr. Chairman, I hope that we 
will be receptive to legislating to help on this.
    Let me just ask, Mr. Shear, if you have any comments on the 
conversation we have just had in terms of does that strike you 
as feasible and within the realm of what we can accomplish?
    Mr. Shear. I think that what is in next year's budget for 
vouchers is something that is very important in that there are 
probably going to be properties that are going to be prepaying, 
the estimate being about 10 percent of properties. It is 
important to protect those tenants. As far as going forward, I 
think back to before my time in housing, when you had certain 
adjustments made with the HUD portfolio, with the Section 8 
portfolio, that RHS will be faced with some similar challenges, 
but RHS's might be perhaps more of a challenge, they are 
manageable, but they might be more of a challenge than what HUD 
had in the sense that you have properties with cash flows that 
do not appear to be sufficient to support those units without 
extra subsidy.
    Mr. Frank. Okay, I appreciate that. Of course, those would 
not be prepayments.
    Mr. Shear. No, those are the other side of the equation.
    Mr. Frank. Are we doomed to lose 10 percent of the units to 
prepayment, or are there things that we could do, in 
cooperation with some of the owners, to diminish that?
    Mr. Shear. We really have not done work on that to really 
form a basis for that.
    Mr. Frank. Ten percent sounds higher than you would have 
sort of estimated to me, in terms of units lost to prepayment.
    Mr. R. Davis. We believe that 10 percent right now have an 
economic incentive. They could raise their rates more than 60 
percent. That is kind of the cut-off. We believe that there is 
a good reason to save a lot of that stock and a lot of the 
State agencies are focusing their resources on those.
    Mr. Frank. Okay. I think that ought to be a priority. 
Again, anything we can do legislatively, and I know we cannot 
order people, we cannot by court decision and should not try to 
take away their property rights, but whatever we can do to 
diminish any loss of units there, I would appreciate it.
    Thank you, Mr. Chairman.
    Mr. Ney. Mr. Davis?
    Mr. Davis of Kentucky. Thank you, Mr. Chairman.
    As some of you know, the housing issue is very near and 
dear to my heart because of my circumstances growing up, and 
particularly in our district. I see quite a number of 
uniquenesses. We are in a district that is transitioning, 
largely rural, transitioning into the Appalachian area. As you 
are looking at budgetary issues, and I am directing this 
question to Mr. Davis, I am interested in your views on some 
creative approaches to dealing with the challenges that we are 
having getting folks into homeownership so they can start 
building a nest egg, building a future, and strengthening the 
families and communities.
    I see burdens ranging from cost, locally material costs, a 
code compliance cost that has nothing to do with safety or 
sound science. Federal regulations I think sometimes get a one-
size-fits-all mentality. For example, in our area where we have 
what our friends out west would not call them mountains, but we 
do in Kentucky, where density issues can push them out of rural 
designation in certain parts of the district.
    What I would be interested in you commenting on, if you 
would, because you have had an opportunity with your team to 
provide some extensive study of alternatives and needs as we 
adapt to the future. Would you share with us your views on the 
types of legislation that you would propose, and perhaps a 
priority of what is most important to you and your team to get 
people into housing?
    Mr. R. Davis. Sure. First of all, if I could say that one 
of the strengths of USDA's Rural Development is that we have 50 
State offices with the ability to manage their own policies 
locally. They use that flexibility to meet needs that are 
peculiar to their areas, and then they share that with the 
other areas. We would like to work with the committee to make 
sure that any of those ideas that are working in one area are 
translated up into something that could be made nationwide, and 
if there are any impediments in statute, we would certainly 
like to look to that.
    The definition of ``rural'' is something that we are 
working on with GAO, and we will obviously implement the will 
of Congress in this matter, but we want to be particularly 
helpful in helping you understand the implications of different 
approaches to defining ``rural.'' We want to make sure that we 
really are putting our money into rural areas and not diffusing 
it into too broad of a definition. But there is a distinction 
between what is an eligible area and what is an area that we 
want to target. Both of those are areas that we would like to 
work with the subcommittee on identifying ways that we can find 
things that work in particular areas in your state. Was there a 
particular program you had in mind?
    Mr. Davis of Kentucky. Well, you are somewhat familiar with 
our needs in the Midwest, and in Kentucky and the Ohio Valley, 
where the Chairman and I are from. Do you have any specific 
types of legislation or any specific piece of legislation that 
you would see as applicable, as a priority that you want to 
bring forward?
    Mr. R. Davis. We do not have one in our legislative package 
that is being prepared at the moment. However, we do believe 
that we will have some comments in conjunction with GAO in the 
coming weeks and months, perhaps, if it may help understand 
where we can write some legislation, or if we could get some 
legislation that would help. In the Eastern Kentucky area or 
Northern Kentucky, there is a concern that density measures, 
which GAO has been discussing with us, will affect areas that 
might be very mountainous, for example, have a lot of people 
densely packed into a small valley. We want to make sure that 
any changes would not adversely affect those areas, and 
actually might help target them better.
    Mr. Davis of Kentucky. Just a further point. Mr. Shear, you 
may be the person to answer this question, but I am encouraged 
to hear that you are looking at best practices in different 
parts of the country. Is there an ability within the regulatory 
framework to assure that there is not a one-size-fits-all 
approach, that from a regional standpoint, a certain set of 
practices may be very applicable in that region, but not 
necessarily transferable to another region? To have some 
``autonomy'' probably is not the correct word from an 
accountability standpoint, but a uniqueness that you can 
customize to a region and fit with an intent that gives fiscal 
accountability, but is ultimately getting folks into housing in 
effective programs.
    Mr. Shear. I think you outlined what is really ideal state. 
One of the things that has always been present in our work on 
the Rural Housing Service is where does it make sense to have a 
specialized agency dedicated to rural housing? Among the areas 
in particular, I will take Eastern Kentucky in being part of 
the Appalachian region. There are certain regions of the 
country that we think have some very pressing housing needs, 
where those might be the areas where it makes more sense to 
have a separate Rural Housing Service that has the local 
offices, has the field offices, and can be somewhat adaptable 
to local conditions.
    Mr. Davis of Kentucky. Okay. Thank you.
    I yield back, Mr. Chairman.
    Mr. Ney. Thank you.
    The gentlelady from California, our ranking member, Ms. 
Waters.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I am trying to understand the fact that there is an 
increase in the Rural Housing Service budget. At the same time, 
it appears that we are going to lose the opportunity to deal 
with some of the poorest tenants. The information that I am 
looking at, the Section 515 program has funded rental housing 
for some of the country's poorest people living in 17,000 
properties in underserved rural communities across the United 
States. The majority of these properties were built between 
1970 and 1980 and in need of modernization and repair. There 
was a report that was done that talks about the existing tenant 
base, the average age of the property, and of course the income 
and the program supposedly provides subsidized loans for three 
purposes: capital repair of aging 515 units, incentives to 
preserve units as affordable, and capital funds for the new 
construction of new affordable multifamily units.
    How is it then that the budget request reduces Section 515 
loan volume from $100 million to $27 million, a 73 percent cut? 
How do we deal with that?
    Mr. R. Davis. If I can say that we are strongly committed 
to the 515 program. This is why we have a major initiative to 
preserve the program and have added $214 million as our first 
step in doing that. I would say that in the future we will be 
addressing the physical needs of the existing stock. The 27 
million for Section 515 loans, that was $100 million last year. 
We are proposing a lot of for the 538 program. We have doubled 
the size of the Section 538 loan program.
    Ms. Waters. What is the 538? Describe what that money will 
do?
    Mr. R. Davis. Section 538 is guaranteed loans; 515 is 
direct loans straight out of the Treasury to the borrower, and 
has a 1 percent interest rate. The 538 Program is guaranteed. 
The private sector makes the loan at essentially the 
government's borrowing rate. The 538 Program is much more 
flexible for use with the tax credit program, so that it can 
attract tax credits in for rehabilitation.
    So of the difference between the $27 million and the $100 
million, approximately half is for rehabilitation that we can 
do better in the 538 Program.
    Ms. Waters. Does the 538 have any subsidies for renters?
    Mr. R. Davis. Section 538 does not itself have subsidies 
for renters. It has an interest rate credit component, so there 
is a buy-down of the interest rate from higher market levels, 
but it is an indirect subsidy in that it goes into the 
property. What it does, though, is it can be used with the tax 
credits. The Section 515 Program, we cannot mix with tax 
credits because that is considered over-subsidizing under the 
tax code.
    Ms. Waters. The people who are covered by 515 now, would 
they be eligible for these 538 loans?
    Mr. R. Davis. The 538 loans with tax credits will go to 40 
percent of median income. To go below that, we look for other 
state funds or other ways.
    Ms. Waters. So what you are telling me is no; that the 538 
money cannot really be used for these very, very poor people 
whose average income is $9,075? What are they going to do?
    Mr. R. Davis. Again, we are first addressing the structural 
problems of the 515 Program through the revitalization 
initiative. We are using 538 to get people down to 40 percent. 
I understand your comment about the very, very low income, if 
you would categorize, I guess, below 40 percent as what we are 
missing. The difference in the amount being spent on new 
construction last year and in fiscal year 2006 is approximately 
450 units, of which about one-third would have rental 
assistance. We are talking about a small amount. We have added 
a very large amount in the initiative of people that we will be 
bringing into the RA universe. Of the 15,000 units we expect to 
do next year, about 3,000 are people who are not getting RA 
right now.
    Ms. Waters. All right. I guess what I conclude is this, 
that there is a significant cut in the 515 Program. Do we agree 
on that?
    Mr. R. Davis. We believe that we are addressing a major 
program.
    Ms. Waters. No, no, no, no. I did not ask what you are 
addressing. Is there a cut? Does this budget propose a cut in 
Section 515?
    Mr. R. Davis. This budget proposes that we have a shift of 
funds from Section 515 to Section 538.
    Ms. Waters. From $100 million to $27 million.
    Mr. R. Davis. For loans in Section 515.
    Ms. Waters. Okay. Section 515----
    Mr. R. Davis. Yes.
    Ms. Waters. There is a cut from $100 million to $27 
million. Now, do you want to qualify that in some way so that I 
am not talking about all of 515? So what is it you want to tell 
me about that cut?
    Mr. R. Davis. What we look at is the number of people 
served, and we are expanding the number of people who are being 
served.
    Ms. Waters. Okay. So there is a cut, and you are proposing 
that your 538 funding will take care of the people who would 
normally be taken care of with 515?
    Mr. R. Davis. No. I am saying that of the difference 
between $27 million and $100 million, half of that would not 
have been for new construction anyway. It would have been 
rehabilitation and we are not doing that in 515. We are doing 
it in 538. Of the difference, we are picking that up in our 
rental assistance accounts and picking up many more people than 
were covered in the loan account.
    Ms. Waters. Okay.
    Mr. R. Davis. This is really not an attempt to cut the 515 
Program. This is an attempt to broaden the 538 program.
    Ms. Waters. I do not care what the intent is. It looks as 
if some people are going to be lost in the way that you have 
described this funding. Am I right or wrong?
    Mr. R. Davis. We will be doing less new construction with 
the 515 Program. We will be doing more with the 538 and we will 
be doing more with rental assistance.
    Ms. Waters. Okay. Then we have a problem here. I thought 
that there was an understanding that there was an increase that 
everybody would benefit from. It appears that that is not the 
case. Is that correct?
    Mr. R. Davis. There is an increase in the housing budget.
    Mr. Ney. Will the gentlelady yield?
    Ms. Waters. Okay. All right. Yes. It looks as if, and the 
staff is identifying that it is only the top 10 percent that is 
going to benefit with this 538 Program.
    Mr. Ney. Okay. We think we have it solved.
    Ms. Waters. Well, what Clinton is suggesting is that you 
need to describe to us the voucher program and how it works. 
What is the plan here? How does the program work? How is it 
going to work so that it will satisfy our concerns, the voucher 
program?
    Mr. R. Davis. The voucher program is a temporary tenant 
protection program. It is not an attempt to turn a project-
based program into a tenant-based program. We have 50,000 units 
that are in high-cost areas, primarily California, Oregon, 
Washington and a few other high-cost cities where the rents 
could be raised so high if the property were taken to market 
that none of the residents could afford to live there. We have 
no mechanism in the Section 515 Program to provide them with a 
voucher or anything else.
    Until 2006, actually, we have to go to HUD and ask for 
vouchers or ask the state to take care of things. That is a 
mechanism that has been missing in 515 and we are proposing 
that that be put in place. The way it is envisioned, and this 
again will be in our legislative proposal, but the idea is that 
the voucher would be something that could be used portably by 
the tenant to either stay in their current property and pay the 
higher rent, or move to another property in the same area. The 
voucher would be subject to automatic renewal, just as our RA 
program is. For budget purposes we had assumed that people who 
currently have a rental assistance contract unit would get a 5-
year voucher at which point there would be an automatic 
contract renewal subject to appropriations. I cannot promise 
anything about future----
    Ms. Waters. Okay. That is the 10 percent in these high-
priced markets.
    Mr. R. Davis. Yes.
    Ms. Waters. Okay.
    Mr. R. Davis. And may I just add one thing.
    Ms. Waters. Yes, go ahead.
    Mr. R. Davis. I just wanted to say that one valuable 
feature, which is new, is that currently one-third of our 
units, in these properties probably one-quarter, one-quarter of 
the units have people who do not have RA right now. They are 
paying more than 30 percent of their income, so these are the 
overburdened tenants. These tenants who are not now being 
protected down to 30 percent of their income would come into 
the voucher program and would receive the extra assistance. So 
we are actually expanding the universe of people who are 
getting this.
    Ms. Waters. Okay. So then it is not just for what I was 
describing as the top 10 percent. Those people who are eligible 
based on what you just described, who are paying more than they 
should be paying, would also be eligible for vouchers.
    Mr. R. Davis. Yes, in this tenant protection program.
    Ms. Waters. All right.
    Mr. R. Davis. We are not trying to protect high-cost 
properties or owners. We are trying to protect the low-income 
tenants in these properties.
    Ms. Waters. All right. Thank you.
    Mr. Ney. Mr. Davis?
    Mr. Davis of Alabama. Thank you, Mr. Chairman.
    Let me pick up on I suppose the same area that Ms. Waters 
is pursuing, but a slightly different aspect of it. One of the 
concerns obviously that we have is around the vagueness of the 
voucher program, and frankly I do not know if we know as much 
about it as we would like to make a critique on it. One of the 
concerns that we have is are we going to be covering people who 
are suffering in rural areas and low-income areas to the degree 
that we need, or are we only going to be covering just a subset 
of those people who live in communities that have certain 
characteristics?
    Alabama, for example, certainly rural Alabama does not have 
a hot real estate market. It is not an area where real estate 
values are exploding out of people's reach or capacity. The 
problem in rural Alabama is substandard housing, low incomes, 
poor housing stock, that kind of thing, lack of credit. How 
does this voucher program affect people? Does it reach people 
and will the money be there in the program to reach people who 
are living in rural areas that are not experiencing rapid rises 
in property values?
    Mr. R. Davis. This voucher program is a tenant-protection 
program for those facing prepayment. So it is aimed at high-
cost areas. I can get a list of any properties that might be 
affected in Alabama or other areas.
    Mr. Davis of Alabama. I can guarantee you, there are very 
few high-cost areas in Wilcox County, Green County, Perry 
County and Dallas County.
    Mr. R. Davis. It is very likely. Where it could happen, 
though, is where an area was rural and then a town or a city 
grew and created upward pressure on rents. It may be possible 
that that has happened in one of your areas.
    Mr. Davis of Alabama. Let me tell you my concern about 
that. I am on the Budget Committee. We just finished our markup 
last night. We will vote up a budget next week in the House and 
Senate side. Over and over, this conversation happened, that we 
are trying to assess our priorities. We are trying to decide 
what we can really spend money on, where we can improve 
efficiencies. It strikes me that the primary housing problem in 
rural America is honestly not the one you just described. You 
have described a particular problem, people who have moved into 
rural areas and the values in these areas are escalating beyond 
their immediate reach. That is a problem in America.
    The much larger, more acute problem in America, and rural 
America, seems to be low-income people who are living in areas, 
or even moderate-income people living in areas the banks do not 
want to go into, areas where there is not an active development 
market, and in areas where the quality of the housing stock may 
be poor. That seems to me to be a much more acute problem.
    So as we refine the 515 Program, my concern is that it 
seems that we may be narrowing its scope instead of widening 
its scope to really get at the problem. I mean, tell me if I am 
wrong or if I am missing something when I say that.
    Mr. R. Davis. You are correct that there is a problem with 
income levels in rural America for buying certain single-family 
homes above a very modest level. Let me speak to both of our 
single-family and our multifamily programs. Under our single-
family programs, we are increasingly targeting areas of the 
country that private lenders shy away from. That is one of the 
values of our guarantee program, that we have targeted areas 
that we can direct lenders to provide financing. We do not want 
our private lenders to just sit in the cities and make the 
loans that are close by.
    Mr. Davis of Alabama. What is the criteria for those target 
areas?
    Mr. R. Davis. Well, they generally are income and general 
economic indicators of median income and unemployment. The 
targeting decisions are administrative. When I spoke earlier of 
the 50 state directors, we have our State offices look to see 
what are the problems in their states to make sure that they 
set targeting criteria that are the most useful to them. So we 
have an effort there. In our direct loan program, we are 
increasingly targeting very low income people as opposed to 
low-income people. Fifty-five percent of our loans are now 
going to very low income as opposed to low income. So we are 
pushing that program farther down the income scale and we are 
pushing the guaranteed program farther out into the outer 
areas.
    On the multifamily side, it is important to understand that 
this prepayment voucher program is part one of a two-part 
story. Part two is the 14,000 properties that need 
rehabilitation. That is something that will grow over the next 
2 to 3 years and hit its stride, but will go on for another 8 
to 10 years. We need to rehabilitate 14,000 properties 
basically in the next 10 years. But that will create an 
industry that knows how to make a lot of little loans in rural 
America for multifamily. We believe that that will help 
generate more of this housing in these areas from the private 
sector.
    Mr. Davis of Alabama. Okay. Mr. Chairman, my time appears 
to have expired.
    Mr. Ney. We have a little bit more time, too. I was going 
to ask a question, but if you all want to ask any more 
questions, it would be fine.
    The question I had is, as you start to develop from the 
report some changes that you want to do, do you sit down with 
GAO that wrote the report and try to get their perspective on 
it? They wrote the report and they know what it is.
    Mr. R. Davis. For the prepayment problem or the rural 
definition issue?
    Mr. Ney. Either that you want to change.
    Mr. R. Davis. We work closely with GAO to get their input. 
We can provide information to you as it is developed.
    Mr. Ney. The question I had, Mr. Shear, is you provide a 
lot of studies to GAO.
    Mr. Shear. Yes.
    Mr. Ney. I should say GAO has provided a lot of studies to 
the Congress and the committees. What is your assessment of the 
Rural Health Service at this time? Has it made progress? Has 
not? What is your assessment, just overall?
    Mr. Shear. I think overall, I have something very positive 
to report, and certainly more positive than I have been able to 
report in the past in that when we look at certain suggested 
changes that would improve the efficiency of the programs, 
improve the efficiency of the subsidy process, that when we 
look at those operations there appears to be changes along the 
lines that are consistent with our recommendations.
    So I would say certainly in the last few months, we have 
not been able to go back in and say, how well are these 
changes, whether it is in the budget estimation process or in 
terms of addressing internal control, but we see a much more 
receptive environment, a much more constructive engagement than 
we have experienced in the past. So we are hopeful. We have not 
been back in to take a close look at some of the things we have 
looked at even as recently as the last few months.
    Mr. Ney. Bakersfield, California is in here; Brookside, 
Ohio, of course which I am familiar with, is in there, where 
you have a dividing line that divides one house from the other 
and one would be a different classification depending on which 
side of the street you are on. You have Bakersfield, and you 
mentioned Belpre, which is across, I used to represent Belpre a 
long time ago.
    Those are examples of where the definitions should be 
changed.
    Mr. Shear. I would call this that what we are pointing at 
is using a different type of guide. Population will always be 
important in defining what is a rural area, but what we are 
looking for is a different guide to try to make such 
determinations, rather than a county-based system where you are 
using political boundaries. I think that is the most important 
thing that comes out of this, because of the way different 
types of rural areas and urban areas change over time, and how 
even the definitions of ``metropolitan areas'' change over 
time.
    In terms of the examples we have there, there is a question 
at the Economic Research Service at USDA, there is a lot of 
research that has gone into how do you define a degree of 
rurality, and that would get into this question of trying to 
pose how could you redefine eligible areas in terms of looking 
at rurality. Here, we use those examples in this testimony and 
in our report to try and give an example of where lines are 
blurred. Because of changes that have occurred over time, in 
either definition or in terms of demographics, it draws into 
question of how difficult it is to determine what is truly a 
rural area. We think it can provide, you know, the guidance 
that can lead to a better basis for defining what should be 
eligible for Rural Housing Service programs.
    Mr. Ney. It is kind of tricky when you deal with the 
changed definition in the sense of, as you are writing up the 
law, how does it affect so many communities. It is a process 
that we have to be pretty careful on, is it not?
    Mr. Shear. I think there is a lot of care involved either 
in using current statutory language like, for example, you 
brought up Belpre and I hope that we have not created a problem 
for ourselves by referring to a district that you used to 
represent. But at any rate, there is a problem with the 
existing definition when you have different state and field 
offices and loan officers, different officials from those field 
offices from RHS that are making decisions where there is no 
real clear guidance and it is hard to get at. What are we 
trying to get at with these rural definitions, when the 
characteristics of counties and their geographic extent is very 
different in different parts of the country. The definition of 
metropolitan statistical areas is very different.
    So we think that to some degree coming up with a new guide 
to this might lead to greater clarity in how we define rurality 
because it is based on the characteristics of those specific 
geographic areas themselves, rather than being focused on 
political boundaries.
    Mr. Ney. The gentlelady from California?
    Ms. Waters. Thank you very much.
    Let me just change the questioning a bit to ask about how 
you are organized so that I can better understand. How are you 
organized? Where is your main office? Where are your offices? 
And how do you interact with all the rural areas of America? 
Just kind of give me a brief.
    Mr. R. Davis. Sure. Rural Development's mission area within 
the Department of Agriculture has three areas: Rural Housing 
Service, Rural Utilities Service, and Rural Business Service. 
All three are headquartered in Washington, D.C., but are 
decentralized in the sense that every state has a State office 
with a political director who has the flexibility to make 
decisions within that state.
    The offices in the field can offer any of the services from 
any of the different areas, so we have people who in the 
morning might work on housing issues and might work on business 
issues in the afternoon. We are really trying to get them all 
working together because in small communities you need to have 
different programs working well with each other.
    The national office mostly sets the regulatory policy and 
provides guidance and instruction to the field, but the 
decision-making, the servicing of the loans and the origination 
of the loans, all of those decisions are done locally. We have 
700 offices in rural areas, plus we can have temporary offices 
for areas that are farther out, Indian reservations and places 
like that. We can have people go out and set up for 1 day a 
month or 1 day a week, things like that. So we have very, very 
broad physical coverage of the country.
    Ms. Waters. If I may, and if you do not mind, I would like 
to ask about Alabama, because I get a better understanding of 
how you work based on what I have been able to see in that 
state. Where is your State office in Alabama?
    Mr. R. Davis. It is in Montgomery.
    Ms. Waters. It is in Montgomery. If I am in Selma and I 
want to make a loan, I want to get the services, what do I do?
    Mr. R. Davis. You would go to your local office and they 
would show you your options.
    Ms. Waters. You mean, if I was in Selma, I would go to----
    Mr. R. Davis. There is probably an area office, I do not 
know what is closest to Selma, but there will be offices.
    Ms. Waters. In Birmingham? In Selma?
    Mr. R. Davis. Near Selma, there will be a field office.
    Ms. Waters. Do you know where it is?
    Mr. R. Davis. I do not know.
    Mr. Davis of Alabama. Is that a question to me, Ms. Waters?
    Ms. Waters. Yes.
    Mr. Davis of Alabama. I would assume if you have an office 
in Montgomery, you probably do not have one in Selma. Whether 
that is good or bad, that is my assumption because they are 45 
minutes apart, but obviously I do not think you have an office 
in Selma.
    Mr. R. Davis. I do not. We can provide a list of the 
offices.
    Ms. Waters. That is okay. I am just trying to get an idea 
of how you work, so I get a better feel for it. So that someone 
living in Selma wanted to avail themselves of the services, how 
do they get to know or learn about what you do?
    Mr. R. Davis. We have regular outreach programs to the 
community, but most directly they would come to our office, the 
Rural Development office that is closest to them.
    Ms. Waters. Yes, but I am Miss Jones and I live over by the 
railroad track someplace. I have never heard of you. How do I 
hear about you?
    Mr. R. Davis. We do community outreach efforts to advertise 
our existence and our programs, but we generally have the 
applicants apply directly to our offices. If you are asking if 
we set up in satellite buildings or something like that, is 
that something you would suggest?
    Ms. Waters. No, I am just asking how do you get the 
information out about your program? Where would you say you 
have the largest concentration of dollars in the United States? 
In what state?
    Mr. R. Davis. The largest concentrations will be in the 
largest states. We allocate to the different states based on 
population measures.
    Ms. Waters. So you do have an allocation formula?
    Mr. R. Davis. We allocate to the states according to a 
formula that may have some flexibility, but it is predominantly 
population in rural areas.
    Ms. Waters. So in the State of California, because I heard 
Bakersfield mentioned, California has an allocation that takes 
care of all of our rural areas also?
    Mr. R. Davis. The state will get an allocation, and then 
they have areas, their area offices that they have divided the 
state and they will presumably allocate to each of those 
offices an amount for that area.
    Ms. Waters. Whatever it is that you are doing, does it 
work? I mean, do you feel that the information is disseminated 
in ways where the average person who needs the service would 
know about it?
    Mr. R. Davis. We understand that marketing is something 
that we must continually be doing, and that is a major part of 
what people do with their time in our local offices. We are 
limited by the nature of our budget, but we spend an enormous 
amount of time reaching out to housing groups in the area, 
local community groups, getting the word out. Because if those 
allocations to each of the states are not put out, we pull it 
back and give it to another state that does put it out. So 
there is a lot of competition between the states to make sure 
they get rid of their monies, as it were, so that they do not 
lose it. So there is a real effort to get the word out.
    Ms. Waters. All right. I am going to ask if my staff can 
get with your staff so that I can get an organizational chart 
with the identification of all of your offices at the state 
level, and then the offices in the areas associated with the 
state. I want to take a look at the budget, for example, for my 
state.
    Mr. R. Davis. Sure.
    Ms. Waters. And see how that works. We may need to interact 
with your staff to ask a number of questions so that we can get 
a better sense of how all of this works.
    Mr. R. Davis. We would be happy to provide that 
information.
    Ms. Waters. Thank you.
    Mr. Ney. Mr. Davis?
    Mr. Davis of Alabama. I have a few, Mr. Chairman, and I 
recognize Ms. Harris just walked in, so Ms. Harris I will try 
not to take too much time. Let me for a moment pick up on Ms. 
Waters' point because I want to make sure you all get the point 
that I think that she is trying to make to you. The problem in 
a lot of southern states is when we are trying to engage in 
efforts to reach people in the rural communities, we often put 
the offices in the nearest urban community to that rural 
community. You go to Montgomery and Selma because that is the 
more convenient place. I think the point that she is making, 
and I do it as a point that you should think about, is 
structuring some of your offices and some of your outreach to 
meet the physical realities in these communities.
    It is a challenge doing outreach in rural Alabama, rural 
Mississippi and rural Georgia. You are dealing with people who 
may not have the same access to real estate agents. You do not 
have as many real estate agents. You do not have as many banks. 
The conventional kinds of institutions that you all depend on 
in your suburban southern cities just are not there in the 
rural areas, so it is not just enough to say, okay, we are in 
Montgomery, we are 45 minutes away. I assume that is the point 
that she was making to you.
    Let me go back and spend my last round of questions on, 
again, priorities. If we are going to have a new $214 million 
on the table and we are going to try to do something of 
interest with the 515's, let's focus again on the choice. Are 
we trying to deal with tenant protection or are we trying to 
deal more with the housing stock problem? One criticism that 
has been offered of these changes is that by centering the 
relief, if you will, around the tenants and not around 
preserving the property, we are missing a major problem in 
rural America, which is the decline of housing stock.
    This is how it plays out in practice. In the suburbs of the 
world, if one area kind of begins to deteriorate, you have a 
new subdivision spring up and they meet the demand, and people 
move out, they move into a new area, and everybody's kind of 
left better off. It does not work that way in the rural area, 
though, because as you all know very well, you do not get a lot 
of new subdivisions built in the Selma, Alabamas and some of 
these other communities. And when housing stock deteriorates in 
downtown Selma and downtown Marion, Alabama, it just stays 
deteriorated and no new divisions come along. This is a unique 
and particular problem in the rural south.
    Is this the best use of your innovation? Is this the best 
use of this $214 million dealing with tenant protection, as 
opposed to finding ways to continue to push harder on the 
housing stock issue?
    Mr. R. Davis. First of all, if I could say that we have 
increased our single-family lending programs by $400 million 
this year over 2005. We recognize there is a need and we are 
working to meet as much of the need as possible, given the 
difficult budget choices. The $214 million is for a very 
immediate problem that has very serious immediate consequences. 
Somebody cannot pay their rent, and is potentially being 
evicted, and is potentially being thrown out of the program.
    We feel a need to protect the program overall by making 
sure that it is understood that we do not want this kind of a 
loss to the 515 program. So our first year's effort is aiming 
most of its money at the tenant protections. There are out-
years, though, where we have a much bigger task, which is the 
physical rehabilitation and repair of these properties. This 
gets, I believe, to your issue of the general deterioration. We 
need to start putting money into these properties because there 
is no mechanism now to adequately fund rehabilitation.
    Mr. Davis of Alabama. I would just make two final points 
before Ms. Harris takes the floor. The first one, I would 
quibble a little bit with the priority choice because I 
understand the point that you are making. The point that you 
are making is we are trying to meet payment prices right now, 
but the problem is because of the way that you define the 
payment prices and the communities that would be within the 
ambit of that definition, you are not getting a whole lot of 
folks who are really in need. You are getting people who are 
frankly living in the Autauga Counties of the world. Autauga 
County is a rural county in Alabama that is having a lot of 
growth because a lot of new people and new businesses have 
moved in. Property values are taking off. But that is not the 
same as the Dallas Counties of the world that she was talking 
about, or the Perry Counties of the world, where you do not 
have the high values. I would think, if I had to weigh into the 
argument, that the need is more acute in these low-value areas.
    The final point that I would make is, this housing stock 
issue is a critical one and I think that it should be very much 
what the heart of the 515 program is about because again you 
are not getting successor subdivisions in a lot of parts of 
rural Alabama and Mississippi. When these areas begin to 
decline, they stay in a permanent state of decline and that is 
a real problem. That is why housing stock is more critical and 
a more unique problem in the rural south than other places.
    Thank you, Mr. Chairman.
    Mr. Ney. Thank you.
    The gentlelady from Florida, Ms. Harris?
    Ms. Harris. Thank you, Mr. Chairman, and thank you for 
holding this important meeting today. I thank the guests for 
coming.
    I come from a Florida district on the coast, but it goes 
into the center part of the state, and actually that is where I 
spend my summers. It is the heartland of citrus and cattle, but 
very fragile economies associated with it. Ironically, when we 
had four hurricanes, three swept through and devastated these 
communities that were already counties of critical economic 
concern. So consequently, there are still blue tarps 
everywhere. It might have devastated the community, but it has 
not devastated the residents' morale.
    I will share with you. The Chairman came down in the fourth 
hurricane. We were having a barbecue for all those folks whose 
homes had been destroyed, and right when we were starting to 
eat, here comes the fourth hurricane. You know what they said? 
They are so glad it is coming in our path again because there 
is nothing left to destroy, and not hitting someone else. So 
the Chairman saw first-hand that kind of devastation.
    What happens in Rural Development, while I commend you 
efforts, it is so difficult for some of these communities, as 
they were saying, Selma versus Montgomery, to understand the 
network and the challenges. It is also difficult for them to 
have the understanding of the data.
    So what I would like to ask you first is, with regard to 
the hurricanes, what is the coordination that is going on 
between HUD and FEMA? Can you discuss the efforts from Rural 
Housing to assist in these areas? And do you believe that you 
have the necessary resources to provide this kind of 
assistance?
    Mr. R. Davis. Thank you for asking these questions, because 
the hurricane situation was something that we cared very much 
about last year. It is actually leading to some of the 
initiatives in this budget. I would like to describe the 
linkage there.
    First of all, you had asked about FEMA. There is kind of an 
ordering in which problems are dealt with. FEMA stands ahead of 
us in line. We have in our mortgage insurance programs, private 
insurers who have insured the homes, and FEMA and the insurers 
generally take care of those issues. A bigger issue is what we 
do with people who are displaced. We have 300 units of 
multifamily housing in Florida destroyed in the hurricanes last 
year. Our immediate concern was, how do we house the people who 
were in units that were destroyed? That was where it became 
very painfully clear that the Section 515 program did not have 
a backup like HUD's voucher program. We had no mechanism for 
putting those people into, say, HUD housing or into market-rate 
housing.
    Now, we had a limited ability to put some of them into 
other Rural Development housing, but one of the reasons for our 
voucher program is to be able to use emergency tenant 
protections to cover just situations like this. So we believe 
that in the future we will be able to handle these types of 
things.
    Second, we have a responsibility to our borrowers in 
Florida when a disaster occurs. We have a centralized servicing 
center that offers directly to the borrowers in the case of a 
disaster a moratorium on their mortgage statements. Within 2 
days, I believe, of the end of the first hurricane last year, 
we had letters that had gone out to I believe it was 11,000 
borrowers in Florida offering them no-questions-asked 6-month 
moratorium on their mortgage payments. They have other things 
to do with their money at that moment. The payments moved to 
the back end of the mortgage. So we have ways of helping the 
situation immediately from a financial point of view. We do not 
have the boots on the ground that FEMA has, but we do stand 
behind them in our ability to help.
    Ms. Harris. Further on that, you were mentioning some of 
these programs, but these municipalities, one county has about 
33,000; one has about 27,000. And there are tens of millions of 
dollars that they have not taken advantage of in years past, 
just through a simple lack of knowledge. So I think that in 
trying to anticipate those critical housing needs, we are going 
to have to come to understand how to address that technical 
assistance that is going to be so necessary for them to be able 
to access those essential funds.
    Farm worker housing, I mean, not only do we have workforce 
housing that is a problem and then affordable housing, but now 
we have this hurricane housing and then of course our farm 
worker or temporary worker housing. It has been particularly 
impacted by the hurricanes this season. Many of the people that 
were affected were living in the woods or in shacks or in these 
containers, if you will, after the hurricanes. But whatever, 
however you look at it, it is really substandard.
    A lot of the rural counties do not even have the manpower 
or the resources to provide for the laborers, and they are 
essential to the local economy. So we are really focused on 
trying to provide better technical assistance to the rural 
housing authority. Actually, Chairman Ney came down and met in 
this very small house that we were working with the housing 
authority. I guess my question would be, do you believe that 
you are creating a program that would provide better technical 
assistance to help with some of these concerns? And how would 
you go about addressing that, and where do you think we should 
go to be able to help those folks that are in such desperate 
and dire need?
    Mr. R. Davis. It is a good question. You had mentioned farm 
labor housing. I was just looking at the numbers here. We are 
increasing our funding for farm labor housing this year. It was 
something that Secretary Veneman was personally interested in. 
I know that when I would go into meetings, she would always 
say, ``How are the people down in Imokalee?'' She had gone to 
the opening down there. This is something that we have $56 
million in program funding proposed for the coming year, and an 
additional $5 million of rental assistance. Farm labor housing 
is something we understand is important to rural areas.
    We have some existing tecnical assistance programs, and we 
would be happy to work with the committee on identifying new 
things that we might be able to try.
    Ms. Harris. We are going to have a housing summit in our 
district that we are working on, but there is just such a vast 
continuum of needs. I just know that in such economically 
fragile areas that are agricultural in nature, if we do not 
have those temporary workers in a place for them to live, if we 
do not have the workers for construction, if we do not have the 
workers for the hospitality industry, all of these types of 
things that are so vital throughout our region, we will come to 
a grinding halt.
    So the housing issue obviously is really crucial after such 
a devastating series of natural disasters that are hurricanes.
    Mr. R. Davis. I appreciate that. Anything we can do to 
help, we will be glad to do.
    Ms. Harris. We will be calling on you. Thanks.
    Mr. Ney. I want to note that I appreciate the member's 
being here. We had floods back home, a series of three of them 
in most places. In Tuscola County, we evacuated about 6,000-
some people, and then we have some communities that were really 
hard hit. I don't know if you are connected to this or not, I 
will have to find out, but we brought in the temporary, 
sometimes containers for people to live in, but I thought it 
was by FEMA. When I was up there with the emergency management 
services, I think FEMA I thought acquired them from HUD, but 
they possibly came from you?
    Mr. R. Davis. I do not believe that those would have come 
from us.
    Mr. Ney. The temporary trailers and things like that that 
were brought in.
    Mr. R. Davis. Right. Those were probably FEMA's units, but 
we participate with FEMA whenever there is a disaster. We set 
up tent with them and work with them directly.
    Mr. Ney. Yes. One other question, you are going to set up a 
voucher? That $200 million, that would be to set up a voucher 
program?
    Mr. R. Davis. It will be predominantly a voucher tenant-
protection program. We want to keep the focus on tenant 
protection as opposed to just vouchers because it sounds like 
we are being frivolous with the program. It is really what is 
the best way to protect the tenants in those prepaying 
properties. We believe that will be an enhanced voucher of some 
sort.
    Mr. Ney. This must have been before your time, but now that 
you are there, but you had an 8-year plan developed. You all 
knew that we were going to lose the Supreme Court case, I 
assume, or we had a good chance to lose the case.
    Mr. R. Davis. I am sorry I am not a lawyer. This is a 
Department of Justice issue.
    Mr. Ney. Then I apologize. I am a teacher, not a lawyer.
    Mr. R. Davis. They had been winning, however we lost our 
appeals on both the quiet title and the contract damages cases, 
both precedent-setting cases we lost.
    Mr. Ney. I mean, it is a concern. We have talked about what 
happens to all the people. There is no incentive. So you have 
developed something towards an incentive program, though, over 
a period of years?
    Mr. R. Davis. Well, we have a small program to handle 
prepayments that do come in. In fact, we have $5.9 million in 
RA for next year and $27 million for preservation loans to take 
care of those equity incentives. We give the owner their equity 
loan so that they stay in the program. So we do have that 
continuing program. The $214 million is in addition to that.
    The comprehensive property assessment that we released 
showed that it was much more expensive to take the incentive 
approach than to take the voucher approach. So as a cost 
matter, we are looking more to vouchers as opposed to owner 
incentives.
    Mr. Ney. We have the study here that the ICF did.
    Mr. R. Davis. Yes.
    Mr. Ney. Because one thing I had looked at in one of the 
programs was to get some incentive for people to come back in 
and to prepay, the people that owned the properties. Then it 
was a fear, well, people would just go in and then dump people 
out, but I always felt that the court case was coming so it was 
something that was going to have to be dealt with. So you 
should be able to take this?
    Mr. R. Davis. Right. The purpose for this initiative is we 
believe that time is here.
    Mr. Ney. This study that we have here, is this not going to 
be how you take this study and you make your strategic plan to 
deal with it?
    Mr. R. Davis. Our legislative package will have more 
details in it, but we are following the general thrust of the 
study's recommendations, which is that we look toward tenant 
protections as opposed to incentives, and that we really focus 
on the 90 percent of the properties that need rehabilitation, 
getting money into them primarily through debt restructuring, 
and money from the outside wherever possible.
    Mr. Ney. Thank you very much. I appreciate both witnesses.
    I would note that some members may have additional 
questions for the panel, and the member who want to ask 
additional questions, they can submit it in writing. Without 
objection, the hearing record will remain open for 30 days for 
members to submit written questions to the witnesses and place 
their responses in the record.
    I appreciate your patience and time with us today. Thank 
you, and to the members, for being here.
    [Whereupon, at 4:03 p.m., the subcommittee was adjourned.]
                            A P P E N D I X



                             March 10, 2005
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