[Senate Hearing 111-]
[From the U.S. Government Publishing Office]




 
TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES 
                  APPROPRIATIONS FOR FISCAL YEAR 2011

                              ----------                              


                        THURSDAY, MARCH 11, 2010

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:32 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Patty Murray (chairman) presiding.
    Present: Senators Murray, Leahy, and Bond.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                        Office of the Secretary

STATEMENT OF HON. SHAUN DONOVAN, SECRETARY

               OPENING STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. This subcommittee will come to order.
    This morning, this subcommittee will conduct an oversight 
hearing on the Department of Housing and Urban Development's 
budget for fiscal year 2011. We are pleased that Secretary 
Donovan is with us today to discuss his Department and his 
budget.
    Today, the country faces daunting challenges. Unemployment 
remains high. Credit is tight. Housing stability is fragile, 
and the number of homeless Americans is growing. HUD programs 
respond to challenges across the spectrum of this crisis from 
stabilizing the housing market to providing assistance to the 
Nation's most vulnerable.
    This subcommittee's job is to provide the oversight and 
resources to make sure that HUD can effectively fulfill its 
responsibilities. At the same time, we must also continue to 
make investments that will strengthen our economy, create jobs, 
and support our communities, both large and small.
    Just over a year ago, we passed the American Recovery and 
Reinvestment Act, making key investments in public housing, 
community development, and affordable housing to help those in 
need and weather the crisis. I commend HUD for getting this 
funding out the door quickly. And today, we can see it making a 
difference in our communities, improving housing, creating new 
housing, and putting people to work.
    I have seen these dollars at work in my own State. For 
example, in Vancouver, Washington, a Housing Authority is using 
$2.5 million in public housing capital funds to support 
construction and rehabilitation of housing. The jobs created 
from these projects are critical to Clark County, where 
unemployment has now topped 14 percent.
    In Yakima, Washington, where for years we have struggled to 
provide affordable and adequate housing to local workers, 
recovery funds have gone to renovation efforts that have 
improved the lives of families, many with children, who live 
well below the poverty line. But as this funding goes to work 
and as our economy moves toward recovery, we must remain 
focused on stabilizing the housing market.
    As we all know, for most Americans, the family home is 
their largest investment, an asset that provides them with a 
roof over their heads and financial security. This security 
gives Americans the confidence to spend and invest and plan for 
the future.

                     FEDERAL HOUSING ADMINISTRATION

    Stabilizing and improving the housing market is critical to 
the Nation's economic recovery, and the Federal Housing 
Administration has played a vital role in this effort. When the 
private sector became skittish about mortgage lending and 
credit froze, FHA stepped in to make sure that Americans could 
still get a mortgage, and this has helped to stabilize the 
market.
    That is exactly what FHA was created to do. But taking on 
this increased role comes with risks of its own. FHA has gone 
from insuring only 2 percent of the market in 2006 to nearly 30 
percent today. This dramatic increase in business requires 
sufficient staff and the technical capacity to protect FHA from 
risk and fraud.
    Even as FHA's new business grows, it must also continue to 
manage loans that were made during the height of the housing 
boom. Unfortunately, FHA is not immune from the wave of 
foreclosures devastating the housing market. These losses have 
taken their toll on FHA's finances.
    This fall, FHA's capital reserve fund fell below the 
mandatory 2 percent required by Congress. While this does not 
mean that FHA requires Federal relief, it is a cause for 
concern.
    For each of these last 3 years, Senator Bond and I have 
held hearings on FHA to focus attention on the solvency of its 
Mutual Mortgage Insurance Fund. The recent losses to the 
capital reserve fund have now brought this issue into focus for 
others for the first time. FHA must continue to seek ways to 
strengthen the position of its capital reserve fund to ensure 
taxpayers will not be left on the hook to pay for risky or 
fraudulent mortgages.
    Mr. Secretary, I commend you and FHA Commissioner Stevens 
for moving swiftly to assess FHA's risks and to implement 
reforms to reduce its exposure and recapitalize the reserve 
fund. These changes both protect the American taxpayer and 
ensure FHA can continue to provide needed liquidity in the 
market.
    Some of the reforms proposed require a legislative change. 
One of these would allow HUD to increase annual premiums on FHA 
mortgage insurance and is included as part of the budget. I 
will have questions today on this change, and specifically, how 
it would protect FHA from future losses.
    Now, despite some positive signs in the housing market, the 
crisis we face is not over. And for the more than 2.8 million 
Americans facing foreclosure, positive national trends offer 
little comfort. So while I am encouraged today by reports that 
foreclosure filings appear be slowing, and Washington State 
fell 13 percent from this time last year, there are still many 
people at risk of foreclosure.
    Areas in Washington State continue to experience severe 
declines in home values, and nearly a quarter of a million 
Washington State homeowners are underwater today. So for 
families living in Clark and Pierce County, Washington, we want 
to know how the Federal Government can help them hold onto 
their homes and regain economic security.
    Providing help isn't easy, and we don't want to reward 
borrowers that took on mortgages that they could not afford. 
But while so many of the early foreclosures resulted from 
subprime and other exotic mortgages, many of the homeowners 
today who are in trouble are those that are impacted by the 
recession. These are unemployed homeowners and those who owe 
more on their mortgage than the home is worth because of those 
plummeting home values.

                         MORTGAGE MODIFICATION

    Several efforts have been launched to help struggling 
homeowners, including the Home Affordable Modification Program, 
but servicers have been slow to provide permanent 
modifications. To date, only 116,000 homeowners have received 
permanent modifications, which is far short of the 
administration's goal of 3 million to 4 million.
    The President recently announced a new program to help five 
States that have been particularly hit hard by this crisis. 
While this initiative does attempt to address the problems of 
unemployed and underwater borrowers, its geographic 
restrictions will limit its impact on the overall market, 
including other parts of the country, like Washington State's 
Clark and Pierce Counties.
    Your testimony today mentions other ways that we might 
assist struggling homeowners. So, today, I want to discuss how 
we can improve current programs and what other steps may be 
taken to protect families from foreclosure.
    HUD has a broad and important mission. The President's 
budget requests more than $48 billion in fiscal year 2011 in 
recognition of the role the Department plays in supporting 
housing, especially for some of the most vulnerable in our 
society.

                     SECTION 8 AND NEW INITIATIVES

    This funding would maintain critical rental assistance to 
help millions of low-income Americans who rely on section 8 
vouchers or live in project-based or public housing. The 
President's budget also provides funding to continue or expand 
initiatives started in 2010, such as Sustainable Communities 
and Choice Neighborhoods. The budget also proposes new 
initiatives, including Catalytic Investment Competition Grants 
and vouchers for homeless individuals and families.
    The largest new proposal is the $350 million Transforming 
Rental Assistance initiative. This ambitious proposal seeks to 
address the capital needs of public and HUD-assisted housing. 
By fundamentally changing the way this housing is funded, the 
administration hopes to leverage significant private sector 
resources to preserve this irreplaceable stock of affordable 
housing.
    However, the budget offers few details on the changes HUD 
would make or in the long-term costs. While the concept may 
have merit, this subcommittee does not take its 
responsibilities lightly. We require more information if we are 
to give the proposal serious consideration. So I want to have a 
discussion about the long-term plan for this and the cost of 
this initiative.

                             PROPOSED CUTS

    Now, Mr. Secretary, among the promising reforms included in 
the budget, there are several drastic cuts to important 
programs you and I have talked about, including the housing for 
the elderly and disabled. HUD justifies these cuts by citing 
program deficiencies. If these programs aren't working 
effectively, let us fix them. But the President's budget 
doesn't propose any changes. Instead, it brings the programs to 
a halt with a promise to just fix them later.
    I am also concerned by other cuts proposed in this budget 
to programs like the Native American Housing Block Grants and 
the highly successful HOME program. While the President's 
budget made some difficult choices in order to freeze 
discretionary spending, this subcommittee may well be forced to 
consider even further reductions.
    The President's budget assumed receipts from FHA totaling 
$5.8 billion. These receipts would offset some of the spending 
included in the HUD's budget for next year. Last Friday, 
Congress received the Congressional Budget Office's re-estimate 
of the President's budget.
    As a result of continued uncertainty about the housing 
market, CBO concluded the budget would only generate $1.8 
billion in offsetting FHA receipts. That means there could be 
potentially a shortfall of $4 billion just to pay for the 
program increases proposed in the President's budget. That is a 
staggering amount, given the housing needs of this country.
    This subcommittee is going to face a very difficult task to 
provide resources to this Department so that it can continue 
the programs that serve so many Americans across the country, 
from homeless veterans, to first-time homeowners, to families 
that need help accessing affordable housing. Secretary Donovan, 
you have worked very hard to improve HUD's programs, and I hope 
you can offer us suggestions on how to tackle the complex 
housing and community development needs that are facing this 
Nation with limited resources.
    So thank you so much for being at this hearing today. I 
look forward to your testimony in just a few minutes.
    But before we have that, I want to turn it over to my 
partner and ranking member, Senator Bond.

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

    Senator Bond. Thank you very much, Madam Chair, and thank 
you for holding the important hearing.
    We are always pleased to welcome our distinguished 
Secretary of Housing and Urban Development, Secretary Donovan, 
who is passionate about housing and community development. He 
has been working hard to remake the Department, a task that is 
Herculean, to say the least. We wish him well on his efforts, 
but we do have some questions, as the chair has outlined.
    Now it is no surprise to anyone here that there are 
significant deficit issues facing the entire Federal 
Government. Making an already bad situation worse, the 
Congressional Budget Office re-estimated the President's budget 
would add $8.5 trillion to the national debt by 2020, with a 
deficit of $1.5 billion in this fiscal year and another $1.3 
billion in 2011. CBO projects the national debt will balloon to 
some 90 percent of the economy by 2020, while interest payments 
on the debt will soar by $800 billion over the same period.
    But that is only if the interest rates stay the same. And 
no one I know who is versed in finance or economics generally 
will propose that interest rates will not rise significantly 
when lenders see the deficit spending and the tremendous debt 
we have built up. In other words, we are facing a drowning in 
debt with interest rates skyrocketing and adding to an 
increasingly high debt spiral.
    I do not believe, as some in the administration do, that 
making the Federal Government larger is the solution to fixing 
our economic woes. Nevertheless, we are in an unprecedented 
budget crisis, which is domestic and global in nature, 
something we have never faced in my career in Government 
service.
    And as you know, many of the decisions we make on the 
budget and appropriations will be critical to the future 
economic health of the Nation. That includes finding the right 
balance of spending in HUD with regard to both HUD's current 
programs, as well as the dramatic new proposals contained in 
the HUD 2011 budget request.
    I believe a number of your HUD policy and reform 
initiatives are bold and thoughtful, but I am very concerned 
about the cost of these initiatives in both the 2011 budget, as 
well as the potential huge cost in out-years. For the HUD 
budget, this is of particular concern since we recently 
received word, as the chair has noted, that there will be a 
loss of some $4 billion in FHA receipts. That $4 billion hit 
will make funding many of the HUD initiatives even more 
difficult in 2011 and possibly limit funding for this 
subcommittee's other priorities, like transportation and 
infrastructure projects.
    As you well know, Mr. Secretary, I have long warned about 
FHA and the potential consequences to the budget of the 
Department, the appropriations available for this subcommittee, 
and the impact on our national economy. We need to be asking 
tough questions like where is money for new programs going to 
come from.
    If the President is serious about promising fiscal 
restraint, he has to quit treating taxpayer dollars like 
Monopoly money. Our children and grandchildren are going to 
have to pay in the future for every extra dollar we borrow and 
spend, and that is not something I want to be able to tell 
them.

                             PROPOSED CUTS

    While HUD is proposing to create new or expand existing 
programs at great cost to the taxpayer, the Department is also 
proposing to eliminate or cut funding for a number of important 
and proven programs that serve our most vulnerable populations 
like seniors and the disabled, as had been mentioned by the 
Chair, and homeless veterans, something which she and I have 
led the battle to fund. And to say that we are not pleased by 
the budget recommendations I would say, at least for my part, 
is a huge understatement.
    Cuts to these programs like section 202 elderly housing, 
the 811 housing program for persons with disabilities, and the 
capacity-building funding for LISC and Enterprise will make it 
more difficult for low-income seniors or disabled Americans to 
find safe and affordable housing.
    Of all the capacity-building entities I have seen, LISC and 
Enterprise seem to be the ones that are working. I think they 
should be the model, and I think they should continue to have 
the resources they need and not have the funds distributed over 
a wider area, where they do not have the same skills and 
abilities.
    The HUD staff has claimed all of these programs will 
receive funding once needed reforms are made. It seems much 
more likely the non-profits will begin to lose their experts 
during a zero funding year, a brain drain that will only get 
worse if there is not a significant infusion of new funds in 
the very near future. Funding in future years will likely be 
marginal at best, with HUD and the administration arguing that 
202 and 811 will be unneeded once the Transforming Rental 
Assistance, or TRA, program is fully funded, including any 
provisions targeted to the elderly and disabled.

                           RURAL HOUSING FUND

    Also, I was disappointed to see the administration wants to 
eliminate a $25 million rural housing fund, something I fought 
with Senator Harkin to include for many years. This small 
program offers a unique opportunity for HUD's housing and 
community programs to partner with rural development at the 
USDA.
    It is a mistake for the administration to ignore the 
housing needs in our rural communities. Everybody knows the 
housing programs in the city because people see them all the 
time. I live in the rural areas. I see them. I travel the rural 
areas, and I know the need is great. And this budget does not 
recognize it.
    In addition to the dollars and cents, rural versus urban 
questions, I have overall concerns about the proposal we have 
received from HUD. Not to keep using a tired, old analogy, but 
the proposal I received from the Department of Transportation 
and the budget blueprint has left me feeling a little bit like 
Bill Murray in ``Groundhog Day.''
    In other words, the budget blueprint this year asks for 
Congress to write a big check, fails to provide details on the 
programs we are supposed to fund. I have been there. I have 
seen that before. I have done that. And at least Bill Murray 
got smart in ``Groundhog Day,'' and I don't see any of us 
getting smarter or better as we see Groundhog Day come back 
again.

                     TRANSFORMING RENTAL ASSISTANCE

    Despite not having the proposed actual language for TRA, 
HUD's 2011 budget calls for some $350 million for the program, 
with projected annual costs of some $1.5 billion when fully 
implemented. There is an old story, an old saw about a pig in a 
poke, but I won't go into that any further.
    Also before Congress is going to sign any check, we need to 
see the program details. Members of Congress need to see 
specific legislative language for proposed programs, and it has 
to be passed. So there are some guidelines in place. You may 
have good ideas. We may even like those good ideas. We may 
propose them, and they may not come out on the other end of the 
sausage factory.
    So I, for one, have real concerns about potential 
unintended consequences of the TRA that could impact low-income 
families assisted under public housing or other low-income 
housing programs. Broad waiver language will not do the trick 
since there is a widespread risk of abuse and a great danger of 
the lack of transparency.

                    CHOICE NEIGHBORHOODS VS. HOPE VI

    Another program where I need to see some details--and 
Congress and our constituents, the taxpayers, deserve answers--
is on Choice Neighborhoods. Now, we have discussed Choice 
Neighborhoods many times, and you know that I would like to 
claim some credit for HOPE VI. And this $250 million program is 
replacing HOPE VI as the next evolution in affordable housing 
and revitalizing distressed communities.
    And if we can make it better, that is always good. I am 
willing to do that. But in particular, Choice Neighborhoods 
proposes to transfer and merge into its account for 2011 all 
remaining HOPE VI funding, despite having account language that 
is very broad and which has no metrics for measuring success or 
for understanding the grantmaking and implementation process.
    While Choice Neighborhoods appears to be a much more 
ambitious program than HOPE VI, we need more information to 
understand the evolution from HOPE VI to Choice Neighborhoods. 
I was there at the beginning when HOPE VI was a mere idea until 
it became a major program, ultimately going beyond housing and 
transforming entire communities. And I personally know how 
important HOPE VI has been to communities across the Nation.
    Some of our great successes have been in HOPE VI. And that 
is why I don't want to waste the successes of HOPE VI on Choice 
Neighborhoods unless and until we see it is a truly viable 
successor to HOPE VI. I want to ensure this new program is 
designed and implemented in a manner that will revitalize and 
grow our low-income communities beyond the greatest potential 
of HOPE VI. You have assured me that that will happen. I 
believe you said that in good faith, but it is time that we got 
to work on the details.

                                  FHA

    In addition to specific program concerns, I remain very 
concerned, as the Chair has indicated, about the future of FHA 
mortgage insurance. Mr. Secretary, you inherited the FHA 
problems. To your credit, you acknowledged them. You have taken 
a number of important steps to address them.
    Under your guidance, HUD is proposing a number of new 
reforms to put FHA mutual mortgage insurance on a solid 
footing. The proposed reforms include an increase to annual 
premiums, as well as credit-related fix, which would allow 
these borrowers with a FICO score of 580 and above to make a 
3.5 percent down payment, while borrowers with a FICO score 
between 500 and 580 would be required to make a minimum down 
payment of 10 percent. Borrowers with FICO scores below 500 
would be ineligible for FHA mortgage insurance.
    It is not that we are not concerned about those people. But 
before we put somebody in housing, try to get them into owning 
housing we need to make sure that they can afford to pay it. 
When they can't afford to pay it, when they don't have any skin 
in the game, they don't have the means to make the payments and 
then the American dream becomes the American nightmare. Their 
communities suffer, and we have seen the tremendous hardship 
and harm that a whole raft of those mortgages gone badly has 
caused our entire economy and the world's economy.
    While the reforms are important, the FHA still faces many 
challenges. I remain concerned that FHA is a powder keg that 
could explode, leaving taxpayers on the hook for yet another 
bailout.
    When we look at the numbers, just as recently as 2007, FHA 
accounted for less than 4 percent of housing and now, as the 
chair indicates, dominates the market with a share of between 
30 and 60 percent, including refinances. This puts FHA smack in 
the middle of the housing crisis, and I want to be sure that 
FHA is dealing with it despite the obvious staffing and 
expertise shortfall.
    I want to know how HUD is dealing with mortgage default 
litigation problems, especially in light of proposed new FHA 
reforms. How will these reforms impact homeowners with a 
mortgage default crisis who are seeking help from FHA? Have 
mortgage defaults become primarily a Fannie Mae and Freddie Mac 
problem, or is HUD proposing alternative relief?
    While I expect to raise many FHA issues at a scheduled FHA 
budget hearing later this month, an understanding of the 
foundation of current FHA requirements now would be useful.

                       TRANSPARENCY FOR TAXPAYERS

    The last point I make is most important, and that is 
transparency for taxpayers, as we have discussed briefly. I 
discussed at the hearing for the Department of Transportation, 
on its budget for the coming year last week, I am still waiting 
for real transparency in the current administration grantmaking 
process. Congress has role and a responsibility not only in 
authorizing and appropriating Federal funds, but also in 
ensuring that the funds are awarded according to objective and 
understandable criteria, including clear benchmarks to measure 
success.
    This was a particular problem for me and others when HUD 
awarded some $2 billion in competitive neighborhoods 
stabilization programs under the stimulus bill. I have yet to 
receive, and I look forward to getting an understanding, how 
HUD cherry-picked the winners. We saw a lot of--we found out 
later about a lot of good projects which failed. And we want to 
know how the winners were chosen.
    Where is the promised transparency in the HUD grant 
process? It is critical that the process be transparent, so 
Congress and our constituents and those seeking the dollars 
know how the taxpayer dollars are being allocated. In fact, I 
think the process should be no less transparent than the 
current requirements for congressional decisionmaking.
    There has been a lot of criticism of Congress. We cleaned 
up our act. We make it transparent. At a minimum, the criteria 
and process by which grantmaking decisions are made in the 
administration should be posted on the Internet for every 
taxpayer, every potential applicant to see, to understand so 
that community leaders and local people won't be coming to us, 
saying, ``What happened? Where is it going? Why is it going 
there?''
    Cost shares and leveraging of funds also should be made 
available. Information should be on the Internet so they and we 
have access to information about other sources of Federal, 
State, or private funds that may be used to augment grant 
awards.
    In particular, we in Congress expect to be notified of 
award decisions 3 days prior to HUD announcement, with backup 
materials and information on the methodology of the award 
selections, including how these awards meet our housing and 
community development goals. It is critical that the Nation, 
Congress, and the administration fully understand the process 
and decisionmaking of how the billions of Federal housing and 
community dollars are spent.
    Mr. Secretary, I thank you very much, and I look forward to 
your testimony.
    Senator Murray. Thank you very much, Senator Bond.
    I will turn it over to the Secretary for his testimony. And 
just to forewarn you, both Senator Bond and I also have to go 
to an energy and water hearing for a short amount of time. We 
may be changing the gavel back and forth.
    But we will both be very attentive to your statement, and 
we both have a number of questions. So, with that, I will turn 
it over to you, Mr. Secretary.

                    STATEMENT OF HON. SHAUN DONOVAN

    Secretary Donovan. Madam Chairwoman, Ranking Member Bond, 
and members of the subcommittee, thank you for the opportunity 
to testify regarding the fiscal year 2011 budget for the 
Department of Housing and Urban Development, Investing in 
People and Places.
    I appear before you to discuss this budget in a far 
different environment than that of a year ago when our economy 
was hemorrhaging over 700,000 jobs each month, housing prices 
were in freefall, and economic observers warned that a second 
Great Depression was a real possibility. Today, though there is 
still a long way to go, it is clear that our housing market has 
made significant progress toward stability.
    What that has meant to middle-class families is clear. 
First, security, as a result of stabilizing home prices and 
lower financing costs, by the end of September, home equity had 
increased by over $900 billion, $12,000 on average for the 
Nation's 78 million homeowners.
    Second, confidence, though it is still fragile, homeowner 
equity is key to consumer confidence and to bringing new 
borrowers back into the market, helping the economy grow at the 
fastest rate in 6 years and creating jobs.
    Third, money in families' pockets, mortgage rates, which 
have been near historic lows over the past 10 months, have 
spurred a refinancing boom that has helped nearly 4 million 
borrowers save an average of $1,500 per year, pumping $7 
billion annually into local economies and businesses, 
generating additional revenues for our Nation's communities, 
and benefiting our economy more broadly.

                                  FHA

    The Federal Housing Administration has been essential to 
this improved outlook, in the past year helping more than 
800,000 homeowners refinance into stable, affordable fixed-rate 
mortgages, protecting an additional half million families from 
foreclosure--and that, Senator Bond, I would note, is through 
our loss mitigation programs that you asked about, one-half a 
million families in 2009--guaranteeing approximately 30 percent 
of home purchase loan volume and fully one-half of all loans 
for first-time home buyers.
    With FHA's temporarily increased role, however, as you 
said, Madam Chairwoman comes increased responsibility and risk. 
That is why HUD's fiscal year 2011 budget presents a careful, 
calibrated balancing of FHA's three key responsibilities--
first, providing responsible home ownership opportunities; 
second, supporting the housing market during difficult economic 
times; and third, ensuring the health of the MMI Fund.
    FHA has rolled out a series of measures over the last year 
to mitigate risks and augment the MMI Fund's capital reserves--
first, to increase the mortgage insurance premium; second, to 
raise the combination of FICO scores and down payments for new 
borrowers; third, to reduce seller concessions to industry 
norms; and fourth, to implement a series of significant 
measures aimed at increasing lender responsibility and 
enforcement.
    With the help of Congress, FHA has also begun implementing 
a plan to ensure its technology infrastructure and personnel 
needs reflect this increased responsibility. All of these 
changes will lead to increased receipts for FHA for the 2011 
budget.
    Last Friday, as you mentioned, the Congressional Budget 
Office released its re-estimate of the President's 2011 budget, 
including their view on FHA's proposed changes. Although the 
CBO re-estimate includes a more conservative assessment of how 
new loans made through FHA's MMI Fund will perform in coming 
years, both CBO and the administration forecast that with our 
proposed FHA changes, such credit activity will result in 
significant net receipts to the Government. We differ, however, 
on the amount.
    While the President's budget forecasts, as you said, Madam 
Chairwoman, $5.8 billion in net receipts resulting primarily 
from insurance premiums and other fees, CBO re-estimated these 
net savings at $1.9 billion. In addition, CBO agrees with FHA 
that Ginnie Mae and our GI/SRI fund will produce another 
roughly $1 billion in receipts.
    While recognizing that such a difference with CBO 
complicates budget resolution development, it is important to 
note that the forecast used in the President's budget will 
determine the receipts transferred to FHA's capital reserve 
account. This will help have that fund get back on track to be 
capitalized with the statutorily mandated 2 percent of 
insurance in force. I would also note that based on extensive 
modeling and analysis, we remain confident in our forecast for 
FHA.
    Even with increased FHA receipts, however, because of 
broader need for fiscal responsibility, we have had to make 
very difficult choices in this budget. We have chosen to 
prioritize existing rental assistance in section 8, public 
housing--public housing operating fund, and other areas, which 
has required us to propose difficult cuts in a number of our 
capital programs, as you mentioned, and to target our funding 
to the most catalytic uses.

                     TRANSFORMING RENTAL ASSISTANCE

    On that note, allow me to highlight some key initiatives. 
The first is HUD's multiyear effort called Transforming Rental 
Assistance, or TRA. It does not take a housing expert to see 
that HUD's rental assistance programs desperately need 
simplification. HUD currently provides deep rental assistance 
to more than 4.6 million households through 13 different 
programs, each with its own rules administered by three 
different operating divisions.
    In my career both in the private and public sectors, it was 
a constant struggle to integrate HUD's rental assistance 
streams and capital funding resources into the local, State, 
and private sector financing that was necessary to get the job 
done. But I dealt with HUD subsidy programs for a simple 
reason--because the engine that drives capital investment at 
the scale needed is reliable long-term, market-based stream of 
Federal rental assistance.
    No other mechanism has ever proven as powerful at unlocking 
a broad range of public and private resources to meet the 
capital needs of affordable housing. That said the status quo 
is no longer an option.
    With a public housing program that has unmet capital needs 
upwards of $20 billion, now is the moment to permanently 
reverse the long-term decline in the Nation's public housing 
portfolio and address the physical needs of an aging assisted 
stock. This initiative is anchored by four guiding principles.
    First, that the complexity of HUD's programs is part of the 
problem, and we must streamline and simplify them so that they 
are governed by a single, integrated, coherent set of rules and 
regulations that better aligns with the requirements of other 
Federal, State, local, and private sector financing streams.
    Second, that the key to meeting the long-term capital needs 
of HUD's public and assisted housing lies in shifting from the 
Federal capital and operating subsidy funding structure we have 
today to a Federal operating subsidy that leverages capital 
from private and other public sources.
    Third, that bringing market investment to all of our rental 
programs will also bring market discipline that drives 
fundamental reforms. Only when our programs are built, 
financed, and managed like other housing will we be able to 
attract the mix of incomes and uses and stakeholders that we 
need.
    And fourth, that we must combine the best features of our 
tenant-based and project-based programs to encourage resident 
choice and mobility. TRA reflects HUD's commitment to 
complementing tenant mobility with the benefits that a 
reliable, property-based, long-term rental assistance subsidy 
can have for neighborhood revitalization efforts and as a 
platform for delivering social services.
    To be clear, this commitment to tenant mobility is not to 
restart old ideological debates about place-based versus 
people-based strategies. To revitalize neighborhoods of 
concentrated poverty and segregation, we need the best of both 
approaches. That is why we look forward to continuing to work 
with the subcommittee and authorizers on our Choice 
Neighborhoods initiative to make the redevelopment of 
distressed public and assisted housing the anchor of broader 
community development efforts.

                          CHOICE NEIGHBORHOODS

    Choice Neighborhoods builds on and expands the lessons of 
HOPE VI. Not only that investment at scale can affect dramatic 
change at the community level, but also that for an investment 
to be game-changing, it must take into account more than 
housing alone.
    For too long, HUD's community development programs have 
lacked such a place-based, targeted tool for creating jobs. 
That is why our budget proposes $150 million for a catalytic 
investment fund designed to help distressed communities 
reorient their economies for the 21st century. HUD can't afford 
to make housing investments in isolation from community 
development investments, particularly when so many communities 
are ahead of us in terms of combining housing, economic 
development, and transportation.

                        SUSTAINABLE COMMUNITIES

    That is why it was so important that we launched our 
Sustainable Communities initiative in 2010 to support these 
efforts. I want to thank the subcommittee for making this 
possible and emphasize the need for continued funding in 2011.
    I recognize that I have asked you to help HUD make these 
investments in a difficult fiscal climate. Our approach has 
been to target resources where we get the biggest bang for the 
buck, and nowhere is this clearer than the area of 
homelessness, where we have seen a 30 percent reduction in 
chronic homelessness over the last 4 years.

                              HOMELESSNESS

    Our budget request reflects HUD's commitment to its own 
targeted homeless programs with a $200 million increase. But as 
chair of the Interagency Council on Homelessness as well, 
charged with producing a Federal strategy to end homelessness 
later this spring, it also reflects a commitment to working 
across silos to end homelessness, embodied by our joint housing 
and services for homeless person demonstration with the 
Department of Health and Human Services and the Department of 
Education.

                       HUD'S 2010 TRANSFORMATION

    Last, let me say a few words about HUD, how it's 
transforming the way it does business at the agency. With your 
help, HUD's 2010 Transformation Initiative is allowing us to 
take long-overdue steps to upgrade and modernize our 
Department, helping us replace computer programs written in the 
1980s, build the capacity of communities--Senator Bond, you 
mentioned this, and we have been growing our resources for 
technical assistance--and demonstrate what works and what 
doesn't.
    It has also begun to provide us with the flexibility we 
need to cross-cutting initiatives. But a critical next step for 
2011 is to take this approach further. In part, it is a matter 
of additional funding to move forward with large, multiyear 
projects and demonstrations. But just as important is the 
flexibility to use up to 1 percent of HUD's budget as 
unexpected needs arise during the year.
    For example, to revamp FHA as it stepped up in the mortgage 
market or to provide technical assistance communities trying to 
use neighborhood stabilization funds in the most impactful way. 
These are the kinds of flexible investments other cutting-edge 
organizations have the ability to make, and they are essential 
to building the nimble, results-oriented agency our Nation 
needs and this subcommittee deserves to oversee.
    And so, Madam Chairwoman, this budget continues the 
transformation begun with your help. With the housing market 
showing signs of stabilization, our economy beginning to 
recover, and the need for fiscal discipline crystal clear, now 
is the moment to reorient HUD for the challenges of the 21st 
century. With your help, I believe we can and that we will.
    Thank you.
    [The statement follows:]
                Prepared Statement of Hon. Shaun Donovan
    Madam Chairwoman, Ranking Member Bond, and members of the 
subcommittee, thank you for the opportunity to testify today regarding 
the fiscal year 2011 budget for the Department of Housing and Urban 
Development, Investing in People and Places.
                         a changing environment
    I appear before you to discuss this budget in a far different 
environment from that faced by the Nation and the Department just 1 
year ago. At that time, the economy was hemorrhaging over 700,000 jobs 
each month, housing prices were in freefall, residential investment had 
dropped over 40 percent in just 18 months, and credit was frozen nearly 
solid. Many respected economic observers warned that a second Great 
Depression was a real possibility, sparked of course by a crisis in the 
housing market. Meanwhile, communities across the country--from central 
cities to newly built suburbs to small town rural America--struggled to 
cope with neighborhoods devastated by foreclosure, even as their 
soaring jobless rates and eroding tax base crippled their ability to 
respond.
    One year later, though there is clearly a long way to go, it is 
clear that the Nation's housing market has made significant progress 
toward stability. Through the combination of coordinated efforts by 
Treasury, HUD, and the Federal Reserve to stabilize the housing market, 
we are seeing real signs of optimism.
    As measured by the widely referenced FHFA index, home prices have 
been rising more or less steadily since last April. As recently as 
January 2009 house prices had been projected to decline by as much as 5 
percent in 2009 by leading major macro-economic forecasters. This is 
all the more surprising since most forecasters had underestimated the 
rise in unemployment that has occurred over the past year.
    Allow me to briefly explain what halting the slide in home prices 
and housing wealth has meant to middle-class families.
    First, security. According to the Federal Reserve Board, as a 
result of stabilizing home prices and lower financing costs nationwide, 
home owner equity started to grow again in the second quarter of 2009 
and by the end of September home equity had increased by over $900 
billion, or $12,000 on average for the Nation's nearly 78 million 
homeowners.
    Second, confidence. Homeowner equity is key to consumer confidence 
and is now helping bring new borrowers back into the market. And we all 
know the important role confidence plays in helping our economy grow--
which it did in the last quarter of 2009 at 5.7 percent, the fastest 
rate in 6 years.
    Third, money in families' pockets. Mortgage rates which have been 
at or near historic lows over the past 10 months have spurred a 
refinancing boom that over the past year that has helped nearly 4 
million borrowers to save an average of $1,500 per year on housing 
costs--pumping an additional $7 billion annually into local economies 
and businesses, generating additional revenues for our Nation's cities, 
suburbs, and rural communities.
    At the same time we have taken steps to reverse falling home 
prices, we have also worked to help families keep their homes. In 
partnership with the White House, the Department of Treasury, and other 
Federal regulatory agencies, HUD has helped develop the Making Home 
Affordable plan, and implement its two major initiatives--the Home 
Affordable Refinance Program and Home Affordable Modification Program 
(HAMP). These programs have helped to preserve homeownership for more 
than 1 million families. More than 900,000 households in participating 
trial modifications under HAMP currently are saving an average of over 
$500 per month in mortgage payments. To date, program participants have 
saved more than $2.2 billion.
    And the Federal Housing Administration (FHA) has stepped up to 
fulfill its countercyclical role--to temporarily provide necessary 
liquidity while also working to bring private capital back to credit 
markets. Indeed, the FHA has in the past year alone helped more than 
800,000 homeowners refinance into stable, affordable fixed-rate 
mortgages and deployed its loss mitigation tools to assist an 
additional half million families at risk of foreclosure.
    Of course, just as this crisis has touched different communities in 
different ways, so, too, have they rebounded at different paces. As a 
result, some regions continue to face difficulty, even as others are 
moving toward recovery. That is one reason why the President recently 
announced $1.5 billion in funding to help families in States that have 
suffered an average home price drop of over 20 percent from the peak--
including an innovation fund that will expand the capacity of housing 
finance and similar agencies in the areas hardest-hit in the wake of 
the housing crisis.
    The President's announcement continues the administration's 
response to assist homeowners and stabilize neighborhoods, including 
through the nearly $2 billion that HUD has obligated under the 
Neighborhood Stabilization Program to address the problem of blighted 
neighborhoods, targeting hard-hit communities across the country and 
including major awards in Ohio, Illinois, New Jersey, Pennsylvania and 
other areas that have been deeply affected by the current housing 
problems. The administration continues to explore and refine ways to 
assist homeowners and stabilize neighborhoods struggling with 
foreclosures.
    In addition, HUD has played a key role in implementing the American 
Recovery and Reinvestment Act (ARRA), which, according to the 
nonpartisan Congressional Budget Office is already responsible for 
putting as many as 2.4 million Americans back to work and has put the 
Nation on track toward a full economic recovery--and I would like to 
say a particular word of thanks to this subcommittee for making our 
role in that effort possible.
    HUD has now obligated 98 percent of the $13.6 billion in ARRA funds 
stewarded by the Department--and disbursed $2.9 billion. I would note 
that a portion of HUD's ARRA funding is fully paid out, or expended, 
only once construction or other work is complete--just as when 
individual homeowners pay after they have work done on their homes. 
Therefore, some of HUD's obligated, but not yet expended, funds are 
already generating jobs in the hard hit sectors of housing renovation 
and construction for the purposes of modernizing and ``greening'' 
public and assisted housing, reviving stalled low-income housing tax 
credit projects, and stabilizing neighborhoods devastated by 
foreclosures. Additional HUD-administered ARRA funds are providing 
temporary assistance to families experiencing or at risk of 
homelessness in these difficult economic times.
    While the economy has a long way to go to reach full recovery, and 
the promising indicators emerging steadily are not being experienced by 
all regions or communities equally, it is clear that we have pulled 
back from the economic abyss on which the Nation stood a year ago.
                       roadmap to transformation
    HUD's fiscal year 2010 budget, then, reflected a singular economic 
moment. During the last administration, the Department's annual budget 
submissions chronically underfunded core programs, and many observers 
came to regard the agency as slow moving, bureaucratic, and 
unresponsive to the needs of its partners and customers. HUD's fiscal 
year 2010 budget request, $43.72 billion (net of receipts generated by 
FHA and the Government National Mortgage Association, or ``Ginnie 
Mae'') was a 7 percent increase over the fiscal year 2009 enacted level 
of $40.72 billion and sent the clear message that HUD's programs 
merited funding at levels sufficient to address the housing and 
community development needs of the economic crisis. It also reflected 
this administration's belief that HUD could transform itself into the 
more nimble, results-driven organization required by its increased 
importance.
    In response to HUD's fiscal year 2010 budget proposal, Roadmap to 
Transformation, Congress--with key leadership by this subcommittee, 
working with your counterparts in the House--provided a vote of 
confidence for which I want to express my deepest appreciation. The 
fiscal year 2010 appropriations legislation provided HUD programs 
$43.58 billion (net of receipts), funding needed to stabilize the 
Department's programs across-the-board. Critically, the budget also 
targeted $258.8 million to the Department's proposed Transformation 
Initiative, the cornerstone of the agency's efforts to change the way 
HUD does business. For the first time, HUD has the flexibility to make 
strategic, cross-cutting investments in research and evaluation, major 
demonstration programs, technical assistance and capacity building, and 
next generation technology investments to bring the agency fully into 
the 21st century.
    I appreciate the level of trust this action showed in the new HUD 
leadership and look forward to updating you on the progress we are 
making with this new flexibility.
                     investing in people and places
    As a result of all this work--by Congress, HUD and across the 
administration--we no longer confront an economy or a Department in 
extreme crisis. Still, much work remains, in much changed fiscal 
circumstances. Now that the economic crisis has begun to recede, 
President Obama has committed to reducing the Federal deficit, 
including a 3 year freeze on domestic discretionary spending. HUD's 
fiscal year 2011 budget reflects that fiscal discipline. Net of $6.9 
billion in projected FHA and Ginnie Mae receipts credited to HUD's 
appropriations accounts, this budget proposes overall funding of $41.6 
billion, 5 percent below fiscal year 2010. Not including FHA and Ginnie 
Mae receipts, the budget proposal is $1.6 billion above the 2010 
funding levels. These figures meant that we had difficult choices to 
make--and we chose to prioritize core rental and community development 
programs, fully funding section 8 tenant-based and project-based rental 
assistance, the public housing operating fund, and CDBG.
    Indeed, at the same time, the budget cuts funding for a number of 
programs, including the public housing capital fund, HOME Investment 
Partnerships, Native American Housing Block Grants (NAHBG), the 202 
Supportive Housing Program for the Elderly, and the section 811 
Supportive Housing Program for Persons with Disabilities. In some 
instances, these are programs that received substantial ARRA funding 
(e.g., public housing capital and NAHBG), reducing the need for funds 
in fiscal year 2011. In the case of reductions to new capital grants--
in public housing, section 202, and 811--the Department is recognizing 
that HUD's partners must increasingly access other private and public 
sources of capital as HUD and the Federal Government are facing severe 
resource constraints. During this fiscal year, we will modernize these 
programs to reflect changed fiscal and operational circumstances. 
Simultaneously, the Department has made the difficult decision to 
target HUD's housing investments and target them to their most crucial 
and catalytic uses, primarily rental and operating assistance that best 
enables those partners to leverage additional resources.
    As such, we believe this is a bold budget, with carefully targeted 
investments that will enable HUD programs to: house over 2.4 million 
families in public and assisted housing (over 58 percent elderly or 
disabled); provide tenant based vouchers to more than 2.1 million 
households (over 47 percent elderly or disabled), an increase of 28,000 
over 2009; more than double the annual rate at which HUD assistance 
creates new permanent supportive housing for the homeless; and create 
and retain over 112,000 jobs through HUD's housing and economic 
development investments in communities across the country. In total, by 
the end of fiscal year 2011, HUD expects its direct housing assistance 
programs to reach nearly 5.5 million households, over 200,000 more than 
at the end of fiscal year 2009.
    And in terms of reform, this budget proposes fundamental change 
beyond the Department's fiscal year 2010 proposal. A year ago, urgent 
circumstances called for HUD's programs to be taken largely ``as is'' 
in order to pump desperately needed assistance into the economy in time 
to make a critical difference. With the infusion of ARRA and fiscal 
year 2010 funding having stabilized HUD's programs, the time has come 
to begin transforming them--to make HUD's housing and community 
development programs, and the administrative infrastructure that 
oversees them, more streamlined, efficient, and accountable.
    This budget is a major step in that direction. Specifically, it 
seeks to achieve five overarching goals, drawn from an extensive 
strategic planning process that engaged over 1,500 internal and 
external stakeholders in defining the Department's high priority 
transformation goals and strategies.
goal 1.--strengthen the nation's housing market to bolster the economy 
                         and protect consumers
    With housing still representing the largest asset for most American 
households, it is essential that home prices continue to stabilize in 
order to restore the confidence of American consumers. Americans held 
roughly $6.2 trillion in home equity in the third quarter of 2009, up 
from its lowest point of $5.3 trillion in the first quarter of 2009. 
The central role of housing in the U.S. economy demands that Federal 
agencies involved in housing policymaking rethink and restructure 
programs and policies to support housing as a stable component of the 
economy, and not as a vehicle for over-exuberant and risky investing.
    With that in mind, the fiscal year 2011 budget represents a 
careful, calibrated balancing of FHA's three key responsibilities: 
providing homeownership opportunities to responsible borrowers, 
supporting the housing market during difficult economic times and 
ensuring the health of the MMI Fund.
    FHA provides mortgage insurance to help lenders reduce their 
exposure to risk of default. This assistance allows lenders to make 
capital available to many borrowers who would otherwise have no access 
to the safe, affordable financing needed to purchase a home. As access 
to private capital has contracted in these difficult economic times, 
borrowers and lenders have flocked to FHA and the ready access it 
provides to the secondary market through securitization by Ginnie Mae--
FHA insures approximately 30 percent of all home purchase loans today 
and nearly one-half of those for first-time homebuyers. The increased 
presence of FHA and others in the housing market, including Fannie and 
Freddie, has helped support liquidity in the purchase market, helping 
us ride through these difficult times until private capital returns to 
its natural levels.
    Not only is FHA ensuring the availability of financing for 
responsible first time home purchasers, it is also helping elderly 
homeowners borrow money against the equity of their homes through the 
Home Equity Conversion Mortgage (HECM). This program has grown steadily 
in recent years, to a volume of $30.2 billion in fiscal year 2009.
    It is also providing several outlets of relief for homeowners in 
distress. First, and perhaps most significantly, it is helping 
homeowners extricate themselves from unsustainable mortgages by 
refinancing into 30 year, fixed-rate FHA-insured loans at today's much 
lower rates. Given how important this is as a route to greater borrower 
stability, we are exploring additional ways to leverage the refinance 
option at FHA to help still more distressed homeowners. Further, FHA is 
continuing to assist those already in FHA-insured loans who are facing 
difficulty making payments to stay in their homes through a variety of 
aggressive loss mitigation efforts, which have assisted more than half 
a million homeowners at risk of foreclosure since the beginning of 
2009.
    And finally, FHA is playing an important role in protecting 
homeowners and helping prospective homeowners make informed decisions. 
It is providing counseling to homeowners to help them avoid falling 
into unsustainable loans. And it is fighting mortgage fraud vigorously 
on all fronts, having suspended seven lenders, including Taylor, Bean 
and Whitaker, and withdrawn FHA-approval for over 300 others since last 
summer.
    To support these important efforts, the budget includes $88 million 
for the Housing Counseling Assistance program, which is the only 
dedicated source of Federal funding for the full spectrum of housing 
counseling services. With these funds we also plan to continue our work 
to expand the number of languages in which counseling is available. In 
addition, the budget continues FHA's Mortgage Fraud initiative ($20 
million) launched in fiscal year 2010 as well as implementation of 
sweeping reforms to the Real Estate Settlement and Procedures Act 
(RESPA) beginning in January 2010 and the Secure and Fair Enforcement 
(SAFE) for Mortgage Licensing Act beginning in June 2010.
    With this budget, HUD is projecting that FHA will continue to play 
a prominent role in the mortgage market in fiscal year 2011. 
Accordingly, it requests a combined mortgage insurance commitment 
limitation of $420 billion in fiscal year 2011 for new FHA loan 
commitments for the Mutual Mortgage Insurance (MMI) and General and 
Special Risk Insurance (GI/SRI) funds. The proposed total includes $400 
billion under the MMI Fund, which supports insurance of single family 
forward home mortgages and reverse mortgages under HECM; and $20 
billion under the GI/SRI Fund, which supports multifamily rental and an 
assortment of special purpose insurance programs for hospitals, nursing 
homes, and title I lending. The budget requests a direct loan 
limitation of $50 million for the MMI Fund and $20 million for the GI/
SRI fund to facilitate the sale of HUD-owned properties acquired 
through insurance claims to or for use by low- and moderate-income 
families.
    With FHA's temporarily increased role, however, comes increased 
risk and responsibility. That is why FHA has rolled out a series of 
measures over the last year to strengthen its risk and operational 
management. It has hired its first chief risk officer in its 75 year 
history and created an entire risk management organization and 
reporting structure, tightened its credit standards significantly and, 
as I mentioned, expanded its capacity to rein in or shut down lenders 
who commit fraud or abuse.
    On January 20 of this year, Commissioner Stevens proposed taking 
the following steps to mitigate risk and augment the MMI Fund's capital 
reserves: increase the mortgage insurance premium (MIP); update the 
combination of FICO scores and down payments for new borrowers; reduce 
seller concessions to industry norms; and implement a series of 
significant measures aimed at increasing lender responsibility and 
enforcement. And to strengthen its operational capacity, FHA has begun 
implementing a plan to significantly upgrade its technology 
infrastructure and increase its personnel, to ensure that both are in 
keeping with the increase of its portfolio and responsibility.
    These changes merit additional explanation, as they not only put 
FHA on firmer footing and increase reserves, but also generate 
additional revenues in fiscal year 2011 to contribute to deficit 
reduction. First, insurance revenues from single family loan guarantees 
will grow by increasing the upfront premium to 225 basis points across 
all FHA forward product types (purchase, conventional to FHA 
refinances, and FHA to FHA refinances). The upfront premium increase 
was implemented by mortgagee letter issued on January 21, 2010 and will 
apply to all applications received on or after April 5, 2010.
    Second, FHA is also proposing a ``two-step'' FICO floor for FHA 
purchase borrowers, which would reduce both the claim rate on new 
insurance as well as the loss rate experienced on the claims incurred. 
Purchase borrowers with FICO scores of 580 and above would be required 
to make a minimum 3.5 percent down payment; and those with FICO scores 
between 500-579 would be required to make a minimum down payment of 10 
percent. Applicants below 500 would be ineligible for insurance. These 
changes are being proposed after an exhaustive review of FHA's actual 
claim performance data, which demonstrates that loan performance is 
best predicted by a combination of credit score and downpayment--simply 
raising one element without recognizing the impact of the layering of 
risk factors is not sufficient. We are considering how these changes 
might be applied to refinancing borrowers as well. FHA is proposing to 
publish the two-step FICO proposal in the Federal Register in short 
order with implementation later in 2010. In combination, these 
reforms--which are already permitted under current law--can be expected 
to produce $4.2 billion in offsetting receipts in fiscal year 2011.
    In addition, as noted in the proposed budget, while HUD is moving 
to increase the upfront premium to 225 basis points we are ultimately 
planning to reduce that premium to 100 basis points, offset by a 
proposed increase in the annual premium to 85 basis points for loans 
with loan-to-value ratios (LTV) up to and including 95 percent and to 
90 basis points for LTVs above 95 percent. That change to the annual 
premium will require legislative authority, and we are looking forward 
to working with the authorizing committees as part of that effort. This 
new premium structure is sound policy. This premium structure is also 
more in line with GSE and private mortgage insurers' pricing, which 
facilitates the return of private capital to the mortgage market. 
Indeed, if these changes are adopted during the current fiscal year, 
the estimated value to the MMI Fund would be $200 million in additional 
funds each month, providing better underwriting for FHA loans and 
replenishing capital reserves.
    If implemented, in combination with the two-step FICO floor, this 
change in the premium structure is projected to result in the $5.8 
billion in offsetting FHA receipts reflected in the budget appendix. In 
sum, FHA has taken the kinds of steps necessary to make sure that it 
will remain strong and healthy enough to continue to fulfill its 
mission of serving the underserved and playing a vital counter-cyclical 
role in the housing market.
       goal 2.--meet the need for quality affordable rental homes
    Several recent national indicators have pointed to increasing 
stress in the U.S. rental housing market. Vacancy rates are on the rise 
as a result of the dampened demand and additional supply repurposed 
from the ownership market. Spreads between asking rents and effective 
rents are widening. Asking rents are now $65 higher than effective 
rents (6.6 percent of the effective rent)--the largest gap over the 
past 4 years. While some new renters have been the beneficiaries of 
this softness, drawing concessions from distressed property owners, the 
budgets of many more low-income renters have been strained as household 
incomes fall, due to unemployment and lost hours worked.
    Loss of income stemming from the recession is likely offsetting 
affordability gains from declining rents. Vacancies in the lower end of 
the market remain considerably lower than market levels overall, and 
the number of cost burdened low-income renters is on the rise. Based on 
estimates from the 2008 American Community Survey, 8.7 million renter 
households paid 50 percent or more of their income on housing, up from 
8.3 million renter households in 2007. These figures do not include the 
over 664,000 people who experience homelessness on any given night.
    As HUD Secretary, as well as the current chair of the Interagency 
Council on Homelessness under President Obama, I am committed to making 
real progress in reducing these tragic figures. To do so requires 
substantial investment even in this difficult fiscal year. For this 
reason, the budget provides $1 billion for capitalization of the 
National Housing Trust Fund, to increase development of housing 
affordable to the Nation's lowest income families.
    In addition, HUD's rental assistance and operating subsidy programs 
have never been more needed, nor has the imperative to operate them 
efficiently been clearer. This budget takes three critical steps to 
meet this challenge.
Increases Investment in Core Rental Assistance and Operating Subsidy 
        Programs
    This budget invests over $2.2 billion more than in fiscal year 2010 
to meet the funding needs of the Tenant-based Rental Assistance (TBRA) 
program, the Project-based Rental Assistance (PBRA) program, and the 
public housing Operating Fund.
            Tenant-based Rental Assistance
    The section 8 TBRA or Housing Choice Voucher (HCV) program is a 
cost-effective means for delivering decent, safe, and sanitary housing 
to low-income families in the private market, providing assistance so 
that participants are able to find and lease privately-owned housing. 
In fiscal year 2009, HUD assisted over 2 million families with this 
program; and, in fiscal year 2010, we plan to assist over 76,000 more 
families through new incremental vouchers.
    This budget continues HUD's bedrock commitment to its largest 
program. The calendar year request for 2011 is $19.6 billion, a $1.4 
billion increase over the 2010 Consolidated Appropriations Act and an 
amount estimated to assist 2.2 million households. This represents an 
increase of 34,466 families from fiscal year 2010 projections and 
112,304 more than at the end of fiscal year 2009.
    Of the $19.6 billion request, $17.3 billion will cover the renewal 
of expiring annual contribution contracts (ACC) in calendar year 2011; 
with $1.8 billion for administrative fees; $125 million for tenant 
protection vouchers; $60 million to support family self-sufficiency 
(FSS) activities; and up to $66 million for disaster vouchers for 
families affected by Hurricanes Ike and Gustav. In addition, this 
budget requests $85 million for incremental vouchers to help homeless 
individuals, at-risk families with children, and families with special 
needs stabilize their housing situation and improve their health 
status, as well as $114 million for the shift of the renewal of 
mainstream vouchers from the section 811 account to the TBRA account.
    Through this budget, the Department reaffirms its commitment to 
improving the section 8 program by designing a comprehensive 
development strategy to improve HUD Information Technology systems to 
better manage and administer the voucher program; implementing an 
improved section 8 management assessment program (SEMAP) that will 
ensure strengthened oversight, quality control, and performance metrics 
for the voucher program; continuing the study to develop a formula to 
allocate administrative fees based on the cost of an efficiently 
managed PHA operating the voucher program; developing a study to 
evaluate current housing quality standards and improve the unit 
inspection process; and eliminating unnecessary caps on the number of 
families that each PHA may serve.
            Project-based Rental Assistance (PBRA)
    PBRA assists more than 1.3 million low- and very low-income 
households in obtaining decent, safe, and sanitary housing in private 
accommodations. This critical program serves families, elderly 
households, disabled households, and provides transitional housing for 
the homeless. Through PBRA funding, HUD renews contracts with owners of 
multi-family rental housing--contracts that make up the difference 
between what a household can afford and the approved rent for an 
adequate housing unit in a multi-family development.
    HUD is requesting a total of $9.382 billion to meet PBRA program 
needs. This includes $8.982 billion to be available in fiscal year 2011 
(in addition to the $394 million previously appropriated) and $400 
million to be available in fiscal year 2012. For fiscal year 2011, HUD 
estimates a need of $8.954 billion of new budget authority for contract 
renewals and amendments. The need for section 8 amendment funds results 
from insufficient funds provided for long-term project-based contracts 
funded primarily in the 1970s and 1980s, when long-term contracts (up 
to 40 years) made estimating funding needs problematic, leading to 
frequent underfunding. The current practice of renewing expiring 
contracts for a 1-year term helps to ensure that the problem of 
inadequate funded contracts is not repeated. However, some older long-
term contracts have not reached their termination dates and, therefore, 
have not yet not entered the 1-year renewal cycle and must be provided 
amendment funds for the projects to remain financially viable. The 
Department estimates that total section 8 amendment needs in 2011 will 
be $662 million. The budget request continues the Department's 
commitment to provide full 1-year funding for contract renewals and 
amendments.
            Public Housing Operating Fund
    The public housing Operating Fund provides operating subsidy 
payments to over 3,100 public housing authorities (PHAs) which serve 
1.2 million households in public housing. The fiscal year 2011 budget 
requests $4.8 billion, which will fully fund the operating fund. Full 
funding is essential to the proper operation of public housing, 
provision of quality housing services to residents, and effective use 
of capital fund resources.
Begins to Streamline the Department's Rental Assistance Programs
    It does not take a housing expert to see that HUD's rental 
assistance programs desperately need simplification. HUD currently 
provides deep rental assistance to more than 4.6 million households 
through 13 different programs, each with its own rules, administered by 
3 operating divisions with separate field staff. Too often over time, 
additional programs designed to meet the needs of vulnerable 
populations were added without enough thought to the disjointed system 
that would result. This unwieldy structure ill serves the Department, 
our Government and private sector partners, and--most importantly--the 
people who live in HUD-supported housing.
    In my last job, as commissioner of the New York City Department of 
Housing Preservation and Development, I personally experienced the 
challenges of working with HUD rental assistance to preserve and 
develop affordable housing at a large scale. While implementing the 
city's 165,000 unit New Housing Marketplace plan, it was a constant 
struggle to integrate HUD's rental assistance streams, and capital 
funding resources for that matter, into the local, State, and private 
sector housing financing that was absolutely necessary to leverage to 
get the job done.
    But I was willing to deal with the transaction costs of engaging 
with HUD's less-than-ideally aligned subsidy programs for a simple 
reason: the engine that drives capital investment at the scale needed, 
in a mixed-finance environment, is typically a reliable, long-term, 
market-based, stream of Federal rental assistance. Historically, no 
other mechanism--and no other source of Government funding--has ever 
proven as powerful at unlocking a broad range of public and private 
resources to meet the capital needs of affordable housing. While highly 
imperfect, HUD's rental assistance programs are irreplaceable.
    This said, tolerating the inefficiencies of the status quo is no 
longer an option. The capital needs of our Nation's affordable, 
Federally-assisted housing stock are too substantial and too urgent. 
The Public Housing program in particular has long wrestled with an old 
physical stock and a backlog of unmet capital needs that may exceed $20 
billion. (1) To be sure, nearly two decades of concentrated efforts to 
demolish and redevelop the most distressed public housing projects, 
through HOPE VI and other initiatives, has paid off. The stock is in 
better shape overall than it has been in some time; and (2) the $4 
billion in ARRA funds targeted to public housing capital improvements 
are further stabilizing the portfolio. But this very progress has 
created a unique--but time limited--opportunity to permanently reverse 
the long-term decline in the Nation's public housing portfolio and 
address the physical needs of an aging assisted housing stock.
    My many years of experience of dealing with affordable housing on a 
large scale--both in New York and overseeing HUD's multi-family 
assisted housing programs during the 1990s--have drilled home two key 
lessons. First, it is far more costly to build new units than to 
preserve existing affordable housing. And, second, an affordable 
housing project can limp along for some time with piecemeal, ad hoc 
strategies to address its accumulating capital backlog, but eventually 
the building will reach a ``tipping point'' where its deterioration 
becomes rapid, irreversible and expensive. This moment in time calls 
for a timely, crucial Federal investment to leverage other resources to 
the task of maintaining the number of safe, decent public and assisted 
housing units available to our Nation's poor families--an objective 
that at some point, soon, will cost the taxpayer substantially more to 
achieve by other means.
    Nor can we afford to sustain the disconnect between HUD's largest 
rental and operating assistance programs, given the disproportionate 
impact of the recession on the recipients of HUD assistance and the 
communities where much of HUD's public and assisted housing stock 
remains. More than ever, communities of concentrated poverty need their 
public and assisted housing stock--even the most distressed projects 
that are the targets of our proposed Choice Neighborhoods Initiative--
to serve as anchors of broader neighborhood revitalization efforts. 
Simultaneously, in this challenging economy, tenants of HUD-subsidized 
projects also need the option to pursue opportunities for their 
families in other neighborhoods and communities as and when they arise, 
without losing the subsidy that is so crucial to maintaining their 
housing stability. Today, we lack the seamless connection that should 
exist between HUD's largest project-based assistance programs--PBRA and 
public housing--and the Housing Choice Voucher program, which leaves 
tenants of PBRA and public housing with limited ability to move to 
greater opportunity.
    To address these issues and move HUD's rental housing programs into 
the housing market mainstream, HUD proposes to launch an ambitious, 
multi-year effort called the transforming rental assistance (TRA) 
initiative.
    This initiative is anchored by four guiding principles:
    First, that the complexity of HUD's programs is part of the 
problem--and we must streamline and simplify our programs so that they 
are less costly to operate and easier to use at the local level. 
Ultimately, TRA is intended to move properties assisted under these 
various programs toward a more unified funding approach, governed by an 
integrated, coherent set of rules and regulations that better aligns 
with the requirements of other of Federal, State, local and private 
sector financing streams.
    Second, that the key to meeting the long-term capital needs of 
HUD's public and assisted housing lies in shifting from the Federal 
capital and operating subsidy funding structure we have today--which 
exists in a parallel universe to the rest of the housing finance 
world--to a Federal operating subsidy that leverages capital from other 
sources.
    Third, that bringing market investment to all of our rental 
programs will also bring market discipline that drives fundamental 
reforms. Only when our programs are truly open to private capital will 
we be able to attract the mix of incomes and uses and stakeholders 
necessary to create the sustainable, vibrant communities we need.
    And fourth, that we must combine the best features of our tenant-
based and project-based programs to encourage resident choice and 
mobility. TRA reflects HUD's commitment to complementing tenant 
mobility with the benefits that a reliable, property-based, long term 
rental assistance subsidy can have for neighborhood revitalization 
efforts and as a platform for delivering social services. And in a 
world where the old city/suburb stereotypes are breaking down, and our 
metropolitan areas are emerging as engines of innovation and economic 
growth, we have to ensure our rental assistance programs keep up.
    In 2011, the first phase of TRA will provide $350 million to 
preserve approximately 300,000 units of public and assisted housing, 
increase administrative efficiency at all levels of program operations, 
leverage private capital and enhance housing choice for residents. With 
this request, we expect to leverage over $7.5 billion in other public 
and private sector capital investment. PHAs and private owners will be 
offered the option of converting to long-term, market-based, property-
based rental assistance contracts that include a resident mobility 
feature, which we are working to define in close collaboration with 
current residents, property owners, local governments and a wide 
variety of other stakeholders.
    Most of the fiscal year 2011 downpayment on TRA, up to $290 
million, will be used to fill the gap between the funds otherwise 
available for the selected properties--in most cases the public housing 
Operating Fund subsidy--and the first-year cost of the new contracts. 
As noted above, a reliable funding stream will help place participating 
properties on a sustainable footing from both a physical and a 
financial standpoint, enabling owners to leverage private financing to 
address immediate and long-term capital needs, and freeing them from 
the need for annual capital subsidies.
    Under this voluntary initiative, HUD will prioritize for conversion 
public housing and assisted multifamily properties owned by PHAs. 
Notably, in this regard, TRA delivers on the promise of over a decade's 
worth of movement in the field of public housing toward the private 
sector real-estate model known as ``asset-management,'' by finally 
providing public housing authorities with the resources to successfully 
implement this model in the projects they will continue to own. Three 
types of privately-owned HUD-assisted properties will also be eligible 
for conversion in this first phase: section 8 moderate rehabilitation 
contracts administered by PHAs, and properties assisted under the Rent 
Supplement or Rental Assistance Programs. With this step, we can 
eliminate three smaller legacy programs that have become ``orphans'' as 
new housing programs have evolved. This consolidation will preserve 
these properties for residents, improve property management, and 
streamline HUD oversight to save the taxpayer money.
    Much of the remaining funding, up to $50 million, will be used to 
promote mobility by targeting resources to encourage landlords in a 
broad range of communities to participate in the housing voucher 
program and to provide additional services to expand families' housing 
choices. A portion of these funds also may be used to offset the costs 
of combining HCV administrative functions in regions or areas where 
locally-designed plans propose to increase efficiency and effectiveness 
as part of this conversion process.
    By the spring of 2010, the administration will transmit to the 
relevant authorizing committees in Congress proposed legislation to 
authorize the long-term property-based rental assistance contracts, 
with a resident mobility feature, that would be funded by the budget 
request. Enactment of a number of the provisions in the section 8 
Voucher Reform Act is also an integral part of the transforming rental 
assistance initiative. The administration looks forward to working with 
Congress to finalize this vital legislation.
    Without this subcommittee's work on HOPE VI and the Quality Housing 
and Work Responsibility Act, this opportunity would never have arisen. 
In fiscal year 2011, we can together begin to put both public and 
assisted housing on firm financial footing for decades to come, and 
start to meld HUD's disparate rental assistance and capital programs 
into a truly integrated Federal housing finance system. I hope that you 
will help HUD make this breakthrough by funding the TRA initiative.
Increases Investment in Proven and Restructured HUD Homeless Assistance 
        Programs
    Fiscal year 2011 also marks the first year for implementation of 
the Homeless Emergency Assistance and Rapid Transition to Housing 
(HEARTH) Act, which--when signed by President Obama in the spring of 
2009--restructured HUD's homeless assistance programs to incorporate 
nearly two decades of research and on-the-ground experience in 
confronting homelessness. To support implementation of this important 
legislation, the budget requests $2.055 billion for homeless assistance 
funding--a nearly $200 million increase compared to fiscal year 2010.
    This additional investment in homeless assistance programs is 
called for even in a difficult fiscal environment. Culminating in the 
HEARTH Act, HUD's homeless programs have evolved into a more 
performance-driven, outcome-based system for targeting and leveraging 
Federal resources at the local level to combat homelessness. This 
subcommittee played an indispensable role in this process. In the late 
1990s, when less than 20 percent of HUD homeless assistance grants were 
supporting permanent housing solutions for the most disabled homeless 
individuals and families, this subcommittee in fiscal year 1999 joined 
your colleagues in the House in requiring that at least 30 percent of 
these grants be spent annually on the evidence-based practice of 
permanent supportive housing, and set forth the ambitious goal of 
creating 150,000 units of permanent supportive housing for the 
chronically ill, chronically homeless. Over time, the research 
foundation for this targeted investment has only solidified--attached 
to my testimony is a summary of key studies, including several 
published in the Journal of the American Medical Association, 
demonstrating that permanent supportive housing both ends homelessness 
for individuals whom many thought would always live on our streets and 
in shelters, and saves taxpayers money by interrupting their costly 
cycling through shelters, emergency rooms, detox centers, prisons, and 
even hospitals.
    As a consequence of the permanent housing set aside, maintained 
each year by this subcommittee, HUD's homeless assistance grants 
produced an average of 8,878 permanent supportive housing beds annually 
from fiscal year 2001 through fiscal year 2008, and a cumulative total 
of 71,000 beds, with an increasing percentage targeted to the 
chronically homeless (66 percent in fiscal year 2008 compared to 53 
percent in fiscal year 2005, the first year HUD tracked such data). The 
impact was clear and dramatic. In the 4 years from 2005 through 2008, 
the number of chronically homeless individuals dropped by 30 percent, 
certainly one of the greatest social welfare policy achievements of the 
past decade.
    One of the key provisions of the HEARTH Act was its codification of 
the 30 percent permanent housing set aside pioneered by this 
subcommittee. Coupled with the level of funding this budget requests, 
and the alignment of homeless assistance grants with other HUD rental 
assistance subsidies (1 year terms), this provision is projected to 
yield over 9,500 new units of permanent supportive housing for disabled 
individuals and families. This will enable continued progress toward 
ending chronic homelessness.
    The HEARTH Act also codifies the unique competitive process, known 
as the continuum of care (``CoC''), in which HUD homeless assistance 
funding and priorities are incorporated within a robust local planning 
and implementation process. The CoC system provides a coordinated 
housing and service delivery system that enables communities to plan 
for and provide a comprehensive response to homeless individuals and 
families. Communities have worked to establish more cost-effective 
continuums that identify and fill the gaps in housing and services that 
are needed to move homeless families and individuals into permanent 
housing. The CoC is an inclusive process that is coordinated with non-
profit organizations, State and local government agencies, service 
providers, private foundations, faith-based organizations, law 
enforcement, local businesses, and homeless or formerly homeless 
persons. This planning model is based on the understanding that 
homelessness is not merely a lack of shelter, but involves a variety of 
unmet needs--physical, economic, and social.
    Fiscal year 2011 marks the first year for implementation of this 
and other key features of the HEARTH legislation including: increased 
investment in the evidence-based practice of homelessness prevention; 
improvement in the accuracy of the definition of homelessness; support 
for the project operation and local planning activities needed to 
continue the movement of the HUD-supported homeless assistance system 
to a more performance-based and outcome-focused orientation; and 
provision of assistance that better recognizes the needs of rural 
communities.
    In this period of economic hardship, which in many respects mirrors 
the early 1980s when widespread homelessness reappeared for the first 
time since the Great Depression, communities will need all of the tools 
authorized by the HEARTH Act--and the additional resources requested in 
this budget--to meet the needs of those experiencing homelessness, 
including too many of our Nation's veterans. In particular, I am 
concerned that HUD's Annual Homeless Assessment Report data showed a 9 
percent rise in family homelessness from 2007-2008 and the Department's 
more recent quarterly PULSE data from a small number of geographically 
diverse localities across the country that suggests a continued 
increase in homelessness.
  goal 3.--utilize housing as a platform for improving quality of life
    A growing body of evidence points to the role housing plays as an 
essential platform for human and community development. Stable housing 
is the foundation upon which all else in a family's or individual's 
life is built--absent a safe, affordable place to live, it is next to 
impossible to achieve good health, positive educational outcomes, or 
reach one's full economic potential. Indeed, for many persons with 
disabilities living in poverty, lack of stable housing leads to costly 
cycling through crisis-driven systems like emergency rooms, psychiatric 
hospitals, detox centers, and even jails. By the same token, stable 
housing provides an ideal launching pad for the delivery of healthcare 
and other social services focused on improving life outcomes for 
individuals and families. As noted above, a substantial level of 
research has established, for example, that providing permanent 
supportive housing to chronically ill, chronically homeless individuals 
and families not only ends their homelessness, but also yields 
substantial cost savings in public health, criminal justice, and other 
systems--often nearly enough to fully offset the cost of providing the 
permanent housing and supportive services. More recently, scholars have 
focused on housing stability as an important ingredient for children's 
success in school--unsurprisingly, when children are not forced to move 
from place to place and school-to-school, they are more likely to 
succeed academically.
    Capitalizing on these insights, HUD is launching efforts to connect 
housing to services that improve the quality of life for people and 
communities. The fiscal year 2011 budget proposes the following 
important initiatives:
Connects Formerly Homeless Tenants of HUD-housing to Mainstream 
        Supportive Services Programs
    The Department requests $85 million for incremental voucher 
assistance for the new Housing and Services for Homeless Persons 
Demonstration to support groundbreaking collaborations with the 
Department of Health and Human Services (HHS) and the Department of 
Education. This demonstration is premised on the administration's firm 
belief that targeted programs alone cannot end homelessness. Mainstream 
housing, health, and human service programs will have to be more fully 
engaged to prevent future homelessness and significantly reduce the 
number of families and individuals who are currently homeless. Two 
separate initiatives will be funded in an effort to demonstrate how 
mainstream programs can be aligned to significantly impact 
homelessness.
    One initiative will focus on individuals with special needs who are 
homeless or at risk of homelessness. This initiative is designed to 
model ways that resources across HUD and HHS can be brought to bear to 
address the housing and service needs of this vulnerable population. 
Recently released data shows that over 42 percent of the homeless 
population living in shelters has a disabling condition. The 
demonstration would combine Housing Choice Vouchers with health, 
behavioral health and other support services to move and maintain up to 
4,000 chronically homeless individuals with mental and substance use 
disorders into permanent supportive housing.
    Vouchers will be targeted to single, childless adults who are 
homeless and who are already enrolled in Medicaid through coverage 
expansion under State Medicaid waivers or State only initiatives. In 
addition, HHS is seeking $16 million in its fiscal year 2011 budget 
request to provide wraparound funding through grants administered by 
the Substance Abuse and Mental Health Services Administration to 
promote housing stability and improvements in health outcomes for this 
population. HUD and HHS will jointly design the competitive process and 
conduct and evaluation to determine: (1) the cost savings in the 
healthcare and housing systems of the proposed approach; (2) the 
efficacy of replication; and (3) the appropriate cost-sharing among 
Federal agencies for underwriting services that increase housing 
stability and improve health and other outcomes.
    Another initiative will establish a mechanism for HUD, HHS and 
Department of Education programs to be more fully engaged in 
stabilizing homeless families, ultimately resulting in reducing the 
costs associated with poor school performance and poverty. This 
initiative strategically targets these resources to: (1) identify 
families who are homeless or at risk of homelessness, (2) intervene 
with the appropriate array of housing assistance, income supports, and 
services to ensure that the family does not fall into the shelter 
system or onto the street (or if already homeless that the family is 
stably housed and does not return to homelessness), and (3) provide the 
tools necessary to assist the family to build on its resources to 
escape poverty and reach its highest possible level of economic 
security and self-sufficiency.
    HUD will make available a minimum of 6,000 Housing Choice Vouchers 
on a competitive basis and jointly design the competitive process with 
HHS and the Department of Education. Winning proposals will have to 
show that the new vouchers are being targeted to communities with high 
concentrations of homeless families. With guidance from HHS, States 
will need to demonstrate how they will integrate HUD housing assistance 
with other supports--including TANF--these families will need to 
stabilize their housing situation, foster healthy child development, 
and prepare for, find, and retain employment. HHS will provide guidance 
to State TANF agencies and other relevant programs to explain this 
initiative and their role in both the application for the vouchers and 
the implementation of the program. DOE will assist with identifying at-
risk families with children through their network of school based 
homelessness liaisons, and providing basic academic and related 
supports for the children. Locally, applicants will need to show that 
they have designed a well-coordinated and collaborative program with 
the TANF agency, the local public schools, and other community partners 
(e.g., Head Start, child welfare, substance abuse treatment, etc.).
    Collectively, these initiatives represent an unprecedented, ``silo-
busting'' alignment of Federal resources to address the needs of some 
of the country's most vulnerable individuals and families. At the same 
time, we believe they will save the taxpayer significantly in the long 
run. This innovative approach will also involve some collaboration 
across subcommittee jurisdictional lines, and we look forward to 
working with the members of this panel in determining how best to 
facilitate that joint action.
Modernizes the 202 and 811 Supportive Housing Programs for the Elderly 
        and Disabled
    As the Department begins the process of restructuring its rental 
assistance programs, it must also ensure that its programs providing 
capital grants and rental assistance that are sized to the actual costs 
to operate a project (``budget-based'' or ``operating cost-based'') are 
well designed for the world of housing finance in the 21st century. 
Beyond public and assisted housing--the focus of the TRA initiative--
the most prominent examples of such funding streams are the section 202 
and 811 programs, which couple housing and services for the Nation's 
poor elderly and disabled, respectively.
    Although they have provided critical housing for thousands of 
residents, these programs are in need of modernization. Project 
sponsors no longer receive enough funding per grant for the 202 and 811 
programs to be a ``one-stop shop'' to capitalize and sustain a project, 
yet they are subject to a level of bureaucratic oversight that suggests 
they are. This regulatory structure also makes it difficult for project 
sponsors to work with other financing streams, such as low income 
housing tax credits, even as the average grant size requires accessing 
other capital sources. As a result, project development is slowed and, 
coupled with outdated geographic allocation formulae, limited resources 
are spread too thin to reach scale at either the project or national 
programmatic levels. In 2009, the 202 program produced only 3,049 units 
with an average project size of 44 units and the 811 program produced 
only 661 units with an average project size of 10 units.
    Already 10 times as many units are produced under the Low Income 
Housing Tax Credit program. And under the status quo, the total annual 
production of units will continue to decrease as the cost of supporting 
existing 811/202 properties consumes more and more of the overall 
funding allocation. This threatens to make the programs increasingly 
marginal for the Nation's elderly and disabled.
    Accordingly, HUD requests a suspension of funding for section 202 
and 811 Capital Advance Grants in fiscal year 2011 in order to redesign 
the programs to better target their resources to meet the current 
housing and supportive service needs of frail elderly and disabled very 
low-income households. The redesigned programs will maximize HUD's 
financial contribution through enhanced leveraging requirements and 
will also encourage or require partnerships with HHS and other services 
funding streams to create housing that, while not medically licensed, 
still effectively meets the needs of very low-income elderly and 
disabled populations unable to live fully independently. The program 
reforms for both 202 and 811 will include the following: (1) new 
requirements to establish demand to ensure meaningful impact of dollars 
awarded; (2) raised threshold for sponsor eligibility to ensure the 
award of funds only to organizations with unique competency to achieve 
the program goals; (3) streamlined processing to speed development 
timeframes; (4) broader benefits of program dollars achieved by 
facilitating supportive services provided by Medicaid/Medicare Waiver 
programs such as the Program of All-inclusive Care for the Elderly 
(PACE) model services to 202 project residents, (5) encouraging better 
leveraging of other sources of funding, such as low income housing tax 
credits and (6) integrating 811 programs within larger mixed finance, 
mixed use projects.
    goal 4.--build inclusive and sustainable communities free from 
                             discrimination
    The Department's approach to this objective is informed by the 
Obama administration's landmark, Federal Government-wide review of 
``place-based'' policies for the first time in over three decades.
    Place is already at the center of every decision HUD makes. HUD's 
programs today reach nearly every neighborhood in America--58,000 out 
of the approximately 66,000 census tracts in the United States have one 
or more units of HUD assisted housing. But we have taken this 
opportunity to renew our focus on place, with the result that the 
proposed fiscal year 2011 budget allows HUD to better nurture 
sustainable, inclusive neighborhoods and communities across America's 
urban, suburban, and rural landscape.
    One aspect of HUD's refined place-based approach involves making 
communities sustainable for the long-term. Sustainability includes 
improving building level energy efficiency, cutting carbon emissions 
through transit-oriented development, and taking advantage of other 
locational efficiencies. But sustainability also means creating 
``geographies of opportunity,'' places that effectively connect people 
to jobs, quality public schools, and other amenities. Today, too many 
HUD-assisted families are stuck in neighborhoods of concentrated 
poverty and segregation, where one's zip code predicts poor 
educational, employment, and even health outcomes. These neighborhoods 
are not sustainable in their present state.
    This budget lays the groundwork for advancing sustainable and 
inclusive growth patterns at the metropolitan level, communities of 
choice at the neighborhood scale, and energy efficiency at the building 
scale. Specifically, the fiscal year 2011 budget calls for the 
following series of programs and funding levels.
Supports and Improves the Federal Government's Premier Community 
        Development Program
    The economic downturn and foreclosure crisis have significantly 
depleted resources in State and local governments while increasing 
demand for services. Revenue declines often turn quickly into layoffs 
and cuts in services for the poor. Meanwhile, community development 
investments have a heightened role in economic redevelopment and 
stabilization for neighborhoods and regions across the country. During 
these difficult economic times, it is critical that the administration 
support and enhance community development programs and to partner with 
grantees in developing strategies to increase economic vitality, build 
capacity, and build sustainable communities and neighborhoods of 
opportunity. Since 1974, the Community Development Block Grant (CDBG) 
program has provided formula grants to cities and States to catalyze 
economic opportunity and create suitable living environments through an 
extensive array of community development activities.
    The fiscal year 2011 budget proposes a total of $4.380 billion for 
the Community Development Fund, which includes:
  --$3.99 billion for CDBG formula distribution, to meet the 
        President's campaign promise to fully fund CDBG. 
        Simultaneously, the Department proposes a number of 
        improvements to the CDBG program, including revamping the 
        consolidated plans developed by State and local governments, 
        greater accountability, and better performance metrics.
  --$150 million in funding for the second year of the Sustainable 
        Communities Initiative. The initiative has four components in 
        2011, described below. HUD plans to work with the relevant 
        authorizing committees in order to refine these proposals.
    --Sustainable Communities Planning Grants administered by HUD in 
            collaboration with the Department of Transportation (DOT) 
            and the Environmental Protection Agency (EPA). These grants 
            will catalyze the next generation of integrated 
            metropolitan transportation, housing, land use and energy 
            planning using the most sophisticated data, analytics and 
            geographic information systems. Better coordination of 
            transportation, infrastructure and housing investments will 
            result in more sustainable development patterns, more 
            affordable communities, reduced greenhouse gas emissions, 
            and more transit-accessible housing choices for residents 
            and firms.
    --Sustainable Communities Challenge Grants to help localities 
            implement Sustainable Communities Plans they will develop. 
            These investments would provide a local complement to the 
            regional planning initiative, enabling local and multi-
            jurisdictional partnerships to put in place the policies, 
            codes, tools and critical capital investments to achieve 
            sustainable development patterns.
    --The creation and implementation of a capacity-building program 
            and tools clearinghouse, complementing DOT and EPA 
            activities, designed to support both Sustainable 
            Communities grantees and other communities interested in 
            becoming more sustainable.
    --A joint HUD-DOT-EPA research effort designed to advance 
            transportation and housing linkages at every level our 
            agencies work on.
  --$150 million for the Catalytic Investment Competition Grants 
        program to create jobs by providing economic development and 
        gap financing to implement targeted economic investment for 
        neighborhood and community revitalization. For too long, 
        communities have lacked the kind of place-based, targeted, 
        ``game-changing'' Federal capital investment program in the 
        community and economic development arena that HOPE VI has 
        proven to be with respect to severely distressed public 
        housing. The Catalytic Investment Competition would rectify 
        that imbalance by providing ``gap financing'' for innovative, 
        high impact economic development projects at scale that create 
        jobs. The program will create a competitive funding stream that 
        is responsive to changes in market conditions, leverages other 
        neighborhood revitalization resources (including formula CDBG 
        funds), and ultimately increases the economic competitiveness 
        of distressed communities and neighborhoods.
      Under this proposal, my office would be permitted to consider how 
        much and to what extent the project will complement and 
        leverage other community development and revitalization 
        activities such as the Choice Neighborhoods Initiative, Promise 
        Neighborhoods, HOPE VI, Sustainable Communities, or other 
        place-based investments in targeted neighborhoods to improve 
        economic viability, extend neighborhood transformation efforts, 
        and foster viable and sustainable communities. Applicants must 
        develop a plan that includes measurable outcomes for job 
        creation and economic activity, exhibit capacity to implement 
        such plan, and demonstrate approval for the plan from the local 
        jurisdiction. Applicants will be required to leverage other 
        appropriate Federal resources, including but not limited to, 
        Community Development Block Grant formula funding and section 
        108 Loan Guarantees. This will support HUD's effort to partner 
        with grantees to more effectively target community development 
        investments toward neighborhoods with greatest need, 
        disinvestment, or potential for growth.
Enhances and Broadens Capacity Building for our Partners
    The fiscal 2011 budget provides $60 million for a revamped Capacity 
Building program. HUD must embrace a 21st century vision for supporting 
the affordable housing and community development sector and will 
reframe the section 4 program, including renaming the program 
``Capacity Building'', in order to reflect that vision. The objective 
is to expand HUD's funding capabilities, and encourage open competition 
through mainstream and consistent program funding for these activities.
    Working with cities and States to readily understand how to meet 
the needs of their communities, leverage private and other kinds of 
resources, and align existing programs is fundamental to building 
resilience in tough economic times. Increasing capacity at the local 
level is critical as jurisdictions partner with the administration in 
implementing key initiatives such as Choice Neighborhoods, Sustainable 
Communities, and the Catalytic Competition and work to restore the 
economic vitality of their communities. This enhanced program will 
include local governments as technical assistance service recipients.
Takes Choice Neighborhoods to Scale
    The administration will also propose authorizing legislation for 
Choice Neighborhoods, funded at $65 million in fiscal year 2010 on a 
demonstration basis, and at $250 million in the budget. I am 
appreciative that Congress was willing to fund Choice Neighborhoods on 
a demonstration basis in fiscal year 2010, and HUD is now requesting 
that the program be expanded to a level where its impact can be 
significantly broader.
    This initiative will transform distressed neighborhoods where 
public and assisted projects are concentrated into functioning, 
sustainable mixed-income neighborhoods by linking housing improvements 
with appropriate services, schools, public assets, transportation, and 
access to jobs. A strong emphasis will be placed local community 
planning for school and educational improvements including early 
childhood initiatives. Choice Neighborhood grants would build upon the 
successes of public housing transformation under HOPE VI to provide 
support for the preservation and rehabilitation of public and HUD-
assisted housing, within the context of a broader approach to 
concentrated poverty. In addition to public housing authorities, the 
initiative will involve local governments, non profits and for profit 
developers in undertaking comprehensive local planning with input from 
the residents and the community.
    Additionally, HUD is placing a strong emphasis on coordination with 
other Federal agencies, with the expected result that Federal 
investments in education, employment, income support, and social 
services will be better aligned in targeted neighborhoods. To date, the 
Departments of Education, Justice and HHS are working with HUD to 
coordinate investments in neighborhoods of concentrated poverty, 
including those targeted by Choice Neighborhoods. Again, we will be 
working with the House and Senate authorizing committees on these 
efforts.
Protects Consumers From Discrimination in the Housing Market and 
        Affirmatively Furthers the Goals of the Fair Housing Act
    The budget proposes $61.1 million in support of the fair housing 
activities of HUD partners. Some sources estimate that more than 4 
million acts of housing discrimination occur each year. To meaningfully 
address that level of discrimination, the Department, in addition to 
directing its own fair housing enforcement and education efforts, must 
engage outside partners. Therefore, this budget funds State and local 
government agencies to supplement HUD's enforcement role through the 
Fair Housing Assistance Program (FHAP) and provides funding also to 
nonprofit fair housing organizations that provide direct, community-
based assistance to victims of discrimination through the Fair Housing 
Initiatives Program (FHIP). The entities participating in the two 
programs both help individuals seek redress for discrimination they 
have suffered and help eliminate more wide-scale systemic practices of 
discrimination in housing, lending, and other housing-related services. 
This budget provides $28.5 million to State and local agencies in the 
FHAP and $32.6 million to fair housing organizations through the FHIP.
    While this budget does not continue a $10 million initiative within 
the FHIP program, funded in fiscal year 2010, specifically directed at 
mortgage lending discrimination, fair housing funding, generally, and 
FHIP funding, in particular, remains substantially higher than in 
fiscal year 2009. Overall, the $61.1 million requested this year for 
fair housing activities overall represents a 12 percent increase over 
the fiscal year 2009 enacted level of $53.5 million, and the $32.6 
million requested for FHIP, in particular, is fully 18 percent above 
the $27.5 million in fiscal year 2009.
    Since its passage in 1968, the Fair Housing Act has mandated that 
HUD shall ``affirmatively further fair housing'' in the operation of 
its programs. This requires that HUD and recipients of HUD funds not 
only prohibit and refrain from discrimination in the operation of HUD 
programs but also take pro-active steps to overcome effects of past 
discrimination and eliminate unnecessary barriers that deny some 
populations equal housing opportunities. To assist recipients in 
meeting these obligations, the Department is revising its regulations 
to clearly enumerate the specific activities one must undertake to 
``affirmatively further fair housing'' and the consequences for failure 
to comply. To support this effort, $2 million of the FHIP budget will 
support a pilot program whereby fair housing organizations help HUD-
funded jurisdictions comply with these regulations.
    Finally, I want to emphasize that as HUD works through the Choice 
Neighborhoods initiative and across all of its programs to revitalize 
neighborhoods, as well as enable families to choose to move to other 
neighborhoods with lower poverty and greater economic opportunity, HUD 
will strive to ensure that newly revitalized neighborhoods remain 
affordable, inclusive places for low-income people to live.
              goal 5.--transform the way hud does business
    In light of recent natural disasters and the housing and economic 
crises, last year HUD saw a pressing need for adaptability and change. 
To become an innovative agency with the capacity to move beyond legacy 
programs, shape new markets and methods in the production and 
preservation of affordable housing, green the Nation's housing stock, 
and promote sustainable development in communities across America, the 
Department had to remake itself.
    To accelerate the Department's transformation, the fiscal year 2011 
budget makes the following vital reforms.
Develops a Basic Data Infrastructure and Delivers on Presidential 
        Research and Evaluation Priorities
    HUD requests $87 million for the Office of Policy Development and 
Research, an increase of $39 million from fiscal year 2010, to continue 
the transformation of PD&R into the Nation's leading housing research 
organization. The role of housing issues in starting the economic 
crisis, and the importance of housing issues to the Nation's economy, 
shows the urgent need for this housing research. These funds would be 
used for three critical activities:
    Basic Data Infrastructure.--Continue the investment made in fiscal 
year 2010 to support the collection and dissemination of the core data 
needed to support effective decisionmaking about housing. HUD's request 
for this purpose is $55 million, which is $7 million more than the 
fiscal year 2010 appropriated level of $48 million. This will be used 
to conduct housing surveys--including full funding for the American 
Housing Survey--support enhanced research dissemination and 
clearinghouse activities, and underwrite a Young Scholars research 
program.
    Presidential Research and Development Initiative.--As part of the 
administration's Research and Development initiative that is tied to 
the President's national goals of energy, health and sustainability, 
the Department proposes to administer $25 million for research on the 
linkages between the built environment and health, hazard risk 
reduction and resilience, and the development of innovative building 
technologies and building processes.
    Presidential Evaluation Initiative.--Also for fiscal year 2011, the 
President is proposing to fund rigorous evaluations of critical 
programs to inform future policy discussions. The $7 million proposed 
will supplement funding from the Transformation Initiative set-aside to 
support rigorous evaluations of the Family Self-Sufficiency Program, 
potential Rent Reform strategies, and the Choice Neighborhoods program.
Maintains the Department's Existing Technology Infrastructure
    HUD requests $315 million for the Working Capital Fund, to cover 
the steady State operations, corrective maintenance of HUD's existing 
technology systems, and the re-competition of HUD's infrastructure 
support contract. As with fiscal year 2010, this does not include the 
``next generation technology'' development that would be funded through 
the Transformation Initiative, as described below. The bulk of the 
fiscal year 2011 request ($243.5 million) would be in the form of a 
direct appropriation. In addition, HUD seeks a $71.5 million transfer 
from FHA to pay for its share of infrastructure costs and system 
maintenance.
Provides Flexibility and Resources Needed to Fuel Agency Transformation
    As in fiscal year 2010, the Department again seeks the authority to 
set-aside up to 1 percent of HUD's total budget for an agency wide 
Transformation Initiative.
    HUD's fiscal year 2010 Transformation Initiative was intended to 
indeed be transformational. The resources it provides are allowing us 
to take long-overdue steps to upgrade and modernize our Department and 
allow it to function as a 21st century organization. As one example, it 
is helping us replace computer programs written in COBOL in the 1980s 
with those written in the flexible and powerful languages of 2010. In 
addition, HUD has not conducted a major demonstration since the 1990s, 
when the Moving to Opportunity study was conducted. This demonstration 
is still yielding important evidence on how mobility and rental 
assistance interact that guides policy. And local government capacity 
to effectively use Federal resources varies widely and leaves some 
communities at risk of always lagging the pack.
    Further, even in the instance that efforts such as technical 
assistance were adequately funded, they were funded in silos--making 
cross-cutting initiatives that achieve the biggest bang for the buck 
next to impossible.
    The TI approach we propose--allowing for the flexibility to take up 
to 1 percent of our budget and devoting it to four key areas--is 
similar to the approach applied by most cutting-edge institutions. This 
recognizes not only the need to have targeted funding to overhead--but 
the ability to respond to changing circumstances that may require 
overhead to consume an increased share of the budget, a change in the 
mix of activities funded and cross-cutting initiatives.
    While reprogramming requests to the Appropriations Committee 
provide some flexibility along these lines, these are inherently 
limited in comparison to TI funding because of absolute caps in 
statutory appropriations accounts.
    The flexibility inherent in this TI structure allows for the more 
nimble, responsive agency required in a long budget process where 
individual research ideas or investment proposals made in January might 
have been usurped by developments through the course of the year. A 
good example would be the $50 million in Neighborhood Stabilization 
technical assistance HUD made available to communities through ARRA. 
Full funding of the Transformation Initiative will enable HUD to take 
such an approach to scale and continue the delivery of a new level of 
technical assistance and capacity building to Federal funding 
recipients, recognizing that human capital, technical competence and 
institutional support are critical for the success of HUD's partner 
organizations.
    And while we appreciate that the subcommittee did recognize this 
reality in funding this effort for fiscal year 2010 at $258 million, 
which has begun an important process of increasing investment and 
bridging silos, we renew our request for authority to use up to 1 
percent. I would note that this past year we received 110 
groundbreaking research, information technology and technical 
assistance proposals internally--but we were only able to fund a little 
over one-half of these requests. Further, of the demonstrations and IT 
projects that were funded in 2009, many were multi-year projects that 
we have had to plan and operate, in all but the most urgent 
circumstances, with single-year funding.
    Salaries and Expenses Central Fund.--Building on the principle of 
the Transformation Initiative, the budget requests the creation of a 
Salaries and Expenses Central Fund, funded through a 1 percent transfer 
from each of HUD's salaries and expenses accounts. The Fund will 
provide targeted, temporary infusions of resources to any of HUD's 
program offices in order to increase our responsiveness to 
unanticipated crises and new challenges through the hiring of staff 
with appropriate expertise. One example of how this type of funding 
might be used would be in the instance of a national disaster--in 
response to which HUD would be expected to play a key role. Another 
would be FHA, which inside of 3 years has temporarily expanded from 
insuring 2 percent of the market to, as mentioned previously, 
approximately one-third.
    As you know, HUD staff has been meeting with the bipartisan, 
bicameral appropriations staff to discuss our plans in this area, and 
have recently submitted a detailed report on our proposals. And so, 
while I appreciate the level of trust this subcommittee showed in HUD 
leadership for fiscal year 2010, I would hope that the progress we have 
demonstrated and the extraordinary need to build on these successes 
would warrant full funding for the coming fiscal year.
                               conclusion
    In sum, this budget continues the transformation begun with the 
2010 budget--a budget I recognize simply would not have been possible 
absent the leadership and commitment of this subcommittee. With the 
housing market showing signs of stabilization, our economy beginning to 
recover and the need for fiscal discipline crystal clear, now is the 
moment to reorient HUD for the challenges of the 21st century--
retooling its programs and initiatives so it can better fulfill its 
mission to serve American households and communities more effectively 
and more efficiently over decades to come. I am proud of the progress 
we have begun to make in these areas with this subcommittee's support, 
and I look forward to our continued progress through the proposals 
outlined in the fiscal year 2011 budget. Thank you again for the 
opportunity to appear before you to discuss HUD's proposed budget. And 
with that, Madam Chairwoman, I would be glad to answer any questions.
  --HUD is currently conducting a definitive Capital Needs study of the 
        public housing portfolio.
  --Preserving Safe, High Quality Public Housing Should Be a Priority 
        of Federal Housing Policy, Barbara Sard and Will Fischer, 
        October 8, 2008 (noting that ``90 percent of developments meet 
        or exceed housing quality standards, although most developments 
        are more than 30 years old, and many will need 
        rehabilitation.'').

                                  FHA

    Senator Murray. Thank you very much for your statement, Mr. 
Secretary.
    Let me start because you talked a little bit about your 
opening statement, I did as well, that OMB and CBO differ 
considerably on the amount of receipts that they estimate FHA 
mortgages are going to generate in fiscal year 2011, a 
difference of about $4 billion. How would a reduction of that 
magnitude impact HUD programs?
    Secretary Donovan. Obviously, that kind of reduction would 
be substantial. Again, let me point to the fact that CBO does 
agree that the changes we are proposing in legislation would 
have a positive impact on the fund.
    My FHA Commissioner is testifying today on the House side 
in front of the authorizing committee on those changes. I 
believe it is critical that we do get the authority to increase 
our annual premium and that we continue to do the kind of risk 
management changes and others that we need. CBO fundamentally 
agrees that those changes will add to the receipts.
    We have begun to work closely with CBO to look at the 
reasons for the discrepancy. We would be happy to work closely 
with this subcommittee, as well as the Budget Committee, to 
look at the reasons for that discrepancy. Obviously, as you 
know, while the CBO view is important, it is ultimately 
advisory, and the Budget Committee can make a determination on 
its own about which of the forecasts make the most sense and 
what it is going to choose as the path for the budget.
    And I would further add that, as I mentioned in my 
testimony, we have substantially increased our capacity at FHA 
to monitor the health of the fund, made numerous changes and 
improvements in the way we project it. And in fact, thus far 
this year, we are running ahead of our projections in terms of 
losses and receipts to the FHA Fund.
    I would also add that to ensure that we were being 
conservative in the President's budget we did use a relatively 
conservative house price forecast that has been below what has 
actually happened in the housing market since then.
    So for all of those reasons, I continue to be confident in 
our projections, and we would be happy to provide whatever 
information you and the Budget Committee might need to make a 
final determination about the path of the budget.
    Senator Murray. And are you working with the Budget 
Committee on that?
    Secretary Donovan. We have been working closely with OMB on 
it, and they have been leading discussions with the Budget 
Committee.
    Senator Murray. Okay. Well, one of the paths that you just 
talked about had to do with increasing the premiums on the FHA 
mortgages, those premiums that are used to cover any claims on 
mortgages. But the losses in recent years have caused the 
capital reserve for the FHA to fall below that mandatory 2 
percent. In order to recapitalize that, you are planning on 
increasing the premiums.
    Under existing authority, FHA will increase up front, I 
think, 2.25 percent in April. But you also are saying you need 
authorizing language to do that. How is your progress going 
with the authorizing language, with the authorizing committees 
on that?

                       INCREASE IN ANNUAL PREMIUM

    Secretary Donovan. So we have proposed and we do have the 
current authority to raise the upfront premium to 2.25 percent. 
We believe, and I think there is broad agreement, however, that 
it is a better approach, both safer for homeowners and 
ultimately better for the health of the FHA Fund, to have a 
combination of an increased upfront premium, as well as an 
increase in the annual premium. And we currently do not have 
the authority to raise the annual premium. That is the 
authority that we are seeking through legislation.
    We have had numerous meetings with both sides of the aisle 
on the authorizing committees; have heard a lot of support. In 
fact, Ranking Member Capito introduced her own bill yesterday 
that included a broad range of the proposals that we have. And 
so, I am encouraged by the progress that we are making with the 
authorizing committees on that.
    I would make two other notes. One is that not only is 
increasing the premiums something that is important for the 
health of the fund, but in addition to that, increasing the 
premiums, I think, is the single most important thing FHA can 
do to encourage the private market to return. We are already 
hearing, once we announced the increase in our upfront 
premiums, a number of private mortgage insurers and others 
beginning to move back into the market. And so, I think it----
    Senator Murray. Once you announced the 2.25 percent?
    Secretary Donovan. The 2.25 percent. And so, I believe it 
is important, given that we believe FHA's current role is a 
temporary role, that we want to see the private market return, 
that raising the premiums sends the right signal to the broader 
market and will help others return to the market.
    The last thing I would note is that we do have the current 
authority to raise the upfront premium even further. So 
increased receipts along the lines proposed in the budget are 
not completely dependent on the legislation.
    Senator Murray. Increase above the 2.25?
    Secretary Donovan. Above the 2.25.
    Senator Murray. Do you have authority to do that without--
--
    Secretary Donovan. We do have the ability to go up to 3 
percent currently. However, and again, there is wide agreement 
on this, it is a better path not to raise the upfront premium 
that far or even to keep it at the 2.25 that we have already 
proposed to raise it to, but to increase the annual premium 
further in order to provide more security for homeowners as 
well and a better deal for homeowners and to build the fund 
more quickly.
    Senator Murray. Are you making any progress in the Senate 
Banking Committee?
    Secretary Donovan. We have had very good discussions with 
them on it as well. The House has taken the lead with their own 
bill, but we have heard bipartisan support around many of the 
changes that we have proposed.
    Senator Murray. If we were to get that kind of legislation 
passed, when would you anticipate the capital reserve funds 
will be at or above the required 2 percent? How long would it 
take?
    Secretary Donovan. Based on our numbers, we believe that 
the 2 percent is achievable by 2012 or 2013, based on 
conservative assumptions in house prices.
    Senator Murray. When would the legislation have to be 
enacted in order to have that date?
    Secretary Donovan. One of the keys about getting the 
legislation enacted as quickly as possible is that our 
estimates are that every month sooner we get the legislation is 
another $300 million in net receipts to the FHA Fund. So every 
month that we get that either later or earlier has a $300 
million impact on those funds.

                      STATE OF THE HOUSING MARKET

    Senator Murray. Okay, all right. Well, let me move on.
    It seems that every day there is a new report out there on 
the state of the housing market. But the reality is that 
economists often arrive at completely different conclusions 
from the same housing market data.
    You have testified that housing prices have held steady or 
risen since last April, which provides reason for optimism. 
However, in January, new home sales plummeted to the lowest 
level in 50 years, and many regions in my State continued to 
experience some severe home value losses.
    Do the reductions in home sales that we saw in January make 
you concerned about the stability of the market, and when do 
you expect that we may see home prices stabilize?
    Secretary Donovan. What I would say about that data, widely 
expected with the original expiration of the home buyer tax 
credit that there would be a decline in sales during December 
and January. I would say that the decline in January was 
somewhat worse than expected. Part of that was weather driven, 
frankly. But even beyond that, there were, I think, notes of 
concern that we took from those numbers.
    I think what it highlights most of all is that the levels 
of prices in home sales continue to be fragile. They are still 
above where they were a year earlier, which is, I think, an 
important benchmark. But one of the reasons we supported the 
extension of the home buyers tax credit, as well as we continue 
to support the importance of FHA, the GSEs, and other 
interventions keeping interest rates low is that we are 
concerned about the fragility of the housing market.
    Overall, again--and this goes to your point earlier--when 
we came into office, widely predicted economists on both sides 
of the aisle, and more broadly across the spectrum, expected on 
average another decline of 5 percent in home prices last year. 
That did not happen with the support of the administration. 
Home prices were basically level during last year.
    So I think we have had the impact of stabilizing the 
market. But it is fragile, and we need to continue to focus and 
do more to ensure that we are on the right path with home 
prices.
    Senator Murray. One of the programs that the Federal 
Reserve is going to end is the purchase of mortgage-backed 
securities that has helped quite a bit, and the home buyer tax 
credit is going to expire here shortly. Are you concerned that 
if we don't extend those important initiatives, we are going to 
add to that fragility?
    Secretary Donovan. Typically, the home buying season is 
slowest during these winter months, and we will all be watching 
very closely the sales numbers as we move into the spring and 
as we get closer to the expiration of the tax credit. I would 
say that it is too early to decide that.
    My strong belief based on the indicators that we have seen 
is that the Federal Reserve is taking a very measured approach 
to stepping back that program and will be watching the market 
very closely. We will be doing the same.
    But I think it highlights the fact that with FHA, while we 
have significantly stepped up our risk management, increased 
underwriting requirements, down payments, raising premiums, 
that we must take a balanced approach and not go too far to 
exclude buyers that can be successful in the market. And so, 
that balanced approach, I think, is critical, as well as 
watching the numbers over the next few months in the spring 
buying season very, very closely.
    Senator Murray. Okay. Senator Bond?
    Senator Bond. Do you want to continue your questions and do 
those, and then let me do mine? Then go on, go to E&W, and let 
me--I will, if you trust him to my tender mercies?

                     MAKING HOME AFFORDABLE PROGRAM

    Senator Murray. All, Mr. Secretary, we have reached a 
gentleman's agreement here. I am going to finish the question 
that I need to ask you right now and then turn the gavel over 
to Senator Bond, who is going to ask his questions and then 
come to the Energy Committee, if that is okay with you?
    So I wanted to ask you about the Making Home Affordable 
Program. One of the programs in that, the Home Affordable 
Modification Program, HAMP, reduces a homeowner's monthly 
payments by lowering interest rates or spreading a mortgage out 
over a longer period of time.
    That program was supposed to help about 3 million to 4 
million families by 2012. But as of January, only about 116,000 
homeowners have received permanent modifications under that. We 
are hearing that servicers have been struggling with burdensome 
changing rules, and borrowers are confused. And wondered what 
changes you were looking at on that program?
    Secretary Donovan. So, first of all, I would say that there 
is no question that there were early implementation problems 
with servicers who did not have the capacity to be able to 
reach borrowers and that there has needed to be, and there has 
begun to be, a significant increase in focus, as well as 
resources, at the servicers. We have also taken a number of 
steps to streamline the process, streamline documentation, and 
simplify the process.
    One of the most important changes is that we have announced 
that we will be requiring all documentation to be gathered up 
front, rather than at two different points--at the beginning of 
the trial modification and before permanent. That should 
greatly simplify the process.
    And we have also done an enormous amount of outreach in 
locations around the country to bring homeowners and servicers 
together with fairs and a whole range of other events and 
direct connections. We have folks under the direction of the 
servicers literally going door-to-door to try to get homeowners 
qualified.
    What I would point out is that based on all of those 
efforts, we were able to reach just 1 year after the creation 
of the program--just 1 year after the creation of the program 
more than 1 million homeowners with trial modifications. And I 
think it is very important to point out that those trial 
modifications are having a significant positive impact for 
those families, average savings per month of over $500 and 
significant benefits to them.
    So, based on that, we are on track to reach the 3 million 
to 4 million homeowners that we originally committed to. We are 
concerned that the permanent modifications have not been moving 
quickly enough. We have significantly increased the pace of 
that. And we today are seeing about 50,000 new permanent 
modifications a month, based on our recent experience. And so, 
I do believe while we still have some improvements to go, that 
we are making significant progress in terms of home affordable 
modification.
    I would finally just say that--and by the way, we have 
almost 20,000 of those in the State of Washington. I would be 
happy to share more detailed information with you on that.
    Finally, I would say that that is only a part of the 
broader strategy. And with the announcement the President made 
that you referenced in Nevada just 2 weeks ago, as well as a 
number of other steps that we are taking, I believe we are----
    Senator Murray. Yes. Let me ask you about that. You 
announced this program to help these five States that--in 
Nevada a few weeks ago. What is the specific timetable for 
implementing that program, and when would we start seeing 
results on that?
    Secretary Donovan. So, on that program, what we determined 
is that we have a number of national efforts. We continue to 
examine new national efforts, but that the challenges facing 
those places are quite different depending on the State. For 
example, Michigan's challenges are very different from Nevada's 
or California's.
    And so, what we did was to ask the five States, their State 
housing finance agencies, to come in and propose tailored 
programs for those States that would most effectively target 
the problems that they are seeing. We have seen very effective 
State programs in a number of places, Pennsylvania and others, 
along these lines, particularly targeted at unemployed 
homeowners and underwater homeowners.
    We have asked the States to come in and propose to us 
within the next few weeks plans. We will then review those 
plans, and we hope to be able to approve them within the next 
month to 6 weeks and then to be able to start implementing 
those programs immediately at that point. Again, many of these 
State agencies already have programs up and operational that we 
could enhance or change that could get going very quickly.
    Senator Murray. Okay. Are you looking at expanding that 
all? In my home State, we have about a quarter of a million 
Washington State homeowners today who are underwater, 
representing about 16 percent of our homes, especially in two 
of our counties, Pierce and Clark Counties. Are you looking at 
expanding this to any of the other States?
    Secretary Donovan. What we are looking at, Madam Chair, is 
broader national efforts around negative equity and 
unemployment that could target the issues that you are talking 
about in your State.
    One of the reasons we wanted to take the approach on the 
program that the President announced in Nevada is to test 
models that then potentially could be used in other States. So 
we don't have any immediate plans to expand it until we have 
begun to see the results. But we are working on other efforts, 
which I would be happy to follow up with you on, and talk more 
about, that would nationally target the negative equity issue 
and unemployment that could have real benefits in Washington.

             BACKLOG IN PUBLIC HOUSING CAPITAL IMPROVEMENTS

    Senator Murray. Okay. We would like to hear more about 
that.
    I wanted to ask you about the backlog in capital 
improvements needs in public housing now estimated at over $20 
billion. The President's budget proposes the first phase of an 
ambitious plan designed to leverage significant private sector 
resources to tackle that backlog and preserve those assets.
    I agree. We have got to find a long-term solution on this, 
but I am concerned about the absence of detail in the proposal 
so far and its cost.
    For 2011, the administration is looking for $290 million in 
additional subsidies in order to leverage those private sector 
dollars. When fully implemented, I understand the program is 
going to cost about $1.4 billion each year. How would you 
accommodate this major new requirement, given the President's 
commitment to freeze discretionary spending over the next 3 
years?

                      PUBLIC HOUSING CAPITAL FUND

    Secretary Donovan. I think one of the important points to 
make about this initiative is that the fundamental change that 
we are talking about is shifting from an operating and capital 
approach to one which has only an operating stream. So while 
there are increases that we are proposing in operating 
subsidies in the budget, we will have, particularly over the 
longer term, significant savings and, ultimately, not require 
any capital funding for public housing in a separate account. 
And so, that is one way that we have offsetting savings that 
come from the way that we are proposing this.
    A number of other points, though. That does not account for 
efficiencies that this will achieve. I talked in my testimony 
about the enormous complexity of the current range of programs 
and how difficult it is to achieve mixed financing and other 
things. Part of that are operational costs at the Department, 
which we have the potential to do significant savings on. We 
have begun to estimate those. Those are not simple to estimate.
    Senator Murray. Sure. Are you going to put forward 
proposals to cut the operating stream side of it, expenses?
    Secretary Donovan. The capital?
    Senator Murray. Yes.
    Secretary Donovan. Yes. There will be offsetting reductions 
possible in the public housing capital stream as a result 
because we will be moving to a system where there would only be 
operating subsidy going to those developments. And they would 
use--just as is currently done in almost every other program 
that we have, funding could be raised privately or from tax 
credits or other sources to pay for the capital needs.
    And so, that we would go from this more complex two-subsidy 
system that we have today with public housing to a one-subsidy 
stream. It would require the operating subsidy to be higher, 
but it allows us to offset to a great extent that increased 
cost to the operating subsidy with reductions and, ultimately, 
elimination of the capital stream.
    There will also be significant savings in terms of reduced 
complexity for the developments themselves. The management, 
oversight, the soft costs of hiring lawyers, and all kinds of 
other things around transactions that----
    Senator Murray. It sounds really good. I just want to see 
how it works on paper so we have accountability in the system 
and we know it works.
    Secretary Donovan. And I know that we have been working 
with your staff to try to get more details about the long-term 
costs and savings around the proposal.

                     TRANSFORMING RENTAL ASSISTANCE

    Senator Murray. We will need to see those. Okay, good.
    One of your proposals is to transform rental assistance to 
make sure that tenants have mobility options, even though from 
what I see, the funding is going to be tied to a particular 
unit. Now I understand that you are modeling this proposal on 
one of the provisions of the section 8 Tenant Based Rental 
Assistance Program. Under the existing program, PHAs are 
allowed to commit or project-base a voucher to a particular 
unit.
    Secretary Donovan. That is right.
    Senator Murray. This enables the PHAs to leverage private 
resources to finance the construction or rehabilitation of 
those units. But with project-based vouchers, PHAs are able to 
make sure residents have mobility by providing them with 
another tenant-based voucher from their existing supply if a 
person decides to move.
    However, your proposal would allow participation by 
entities that don't have voucher programs, whether they are 
public housing authorities or owners of other HUD-assisted 
housing. The lack of vouchers would appear to be a barrier to 
mobility in these systems. In these cases, how do you provide 
residents living in this type of housing with mobility options?
    Secretary Donovan. It is an excellent question. And 
mechanically working out the operations of linking those 
housing developments with vouchers is a very important part of 
the proposal. And I would just say broadly, we have been 
spending a lot of time working with stakeholders, talking with 
OMB, within the administration, and also reaching out to the 
authorizers, as well as your staff, to discuss a lot of these 
issues. And we expect not only to have authorizing language, 
but also far more detail based on the input that we are getting 
from stakeholder meetings and others that we are doing.
    On this mobility point specifically, first of all, what we 
are looking to do is to make sure that if a housing authority 
or another entity does not have control of a voucher program 
themselves, that we link them with a voucher program in the 
area where the project is located to ensure that there are 
vouchers available for those families that would move. What we 
are looking at is sizing exactly how big that pool would be and 
to ensure that we are not creating too much of a need for 
additional vouchers to be able to do that because, as you 
rightly said, the cost of that and the potential pressure on 
the voucher program overall is important.
    We believe based on our latest modeling that we can achieve 
significant mobility, if not complete mobility, with the 
existing resources that we have. But we want to come back to 
you with a number of options on that that would say if we want 
to do this amount of mobility, here is what we could do.
    Senator Murray. This is what it would cost.
    Secretary Donovan. If we wanted to do further mobility 
among a broader population, here is what the cost would be, and 
here is how we might be able to work it. So we are working 
through a lot of detail on that and look forward to sitting 
down with you.
    Senator Murray. Okay. We want to be continually updated on 
where you are with that.
    Secretary Donovan. As always, you have hit on a very 
important piece of this, an important point about how we 
achieve that mobility.

                            HUD-VASH PROGRAM

    Senator Murray. Okay. And lastly, I wanted to ask you about 
the HUD-VASH program. You know this is really important to both 
Senator Bond and I. We have worked very hard to include it in 
our budgets and appropriations over the last several years.
    I have heard wonderful stories from veterans in my home 
State, in Walla Walla, Washington, that have gotten jobs, 
gotten healthcare, and gained sobriety because they have these 
vouchers. There are similar stories across the country. But I 
know this program has faced some challenges in implementation 
in some parts of the country, and the VA is, as you know, 
struggling to quickly hire case managers and adapt to this new 
model of permanent supportive housing.
    Based on the most recent data, it appears that now only 
about half of the vouchers that we provided in fiscal years 
2008 and 2009 are actually being used. Can you tell me what HUD 
and VA are doing to overcome these problems and make it 
successful? Because we know when it gets out there and people 
are using it, it makes a huge difference for our veterans. But 
having administrative challenges at any level here on the 
ground is a disservice to the veterans.
    If you can talk to me about what HUD and VA are doing?
    Secretary Donovan. Absolutely. And let me just start by 
saying your support and championing of this program has been 
absolutely critical, and we believe it is having a tremendous 
impact on veterans, despite some of the challenges that you 
talked about.
    I also would put it in the context of the commitment that 
the President and Secretary Shinseki have made to end veterans' 
homelessness. VA has included a $265 million increase in 
funding for veterans homelessness in its proposal for 2011. So 
this is in the context of broad support for the intent of the 
program and, more broadly, ending veterans homelessness.
    The way I would characterize the challenges largely are 
that VA is an expert in healthcare. What has been required in 
order to make the program effective and to fully utilize the 
vouchers has been building a capacity beyond healthcare that 
includes community-based outreach and the ability to connect 
the healthcare and other services available at VA hospitals 
with the housing and other support services that may be 
necessary.
    Where we have seen great success is where VA hospitals have 
built that capacity, and we have begun to connect them with our 
continuums of care, community-based providers where they can 
form links to ensure they are finding veterans where they are, 
whether it is on the streets or in shelters, as well as helping 
to build their capacity and understanding about the latest 
techniques of whether it is housing first, supported housing, 
and others.
    And so, whether it is in Washington, DC or in many other 
places, we are seeing significant increases in utilization of 
those vouchers with those targeted strategies. And we have now 
developed with VA a plan to try to more broadly spread those. 
We have spoken about this, and you had a number of good points 
the last time we spoke about this that we are incorporating 
into that thinking, and we want to come back with you with a 
response on that.
    Senator Murray. Okay. Well, my subcommittee really wants to 
work with both you and the VA to get this out. I was really 
disappointed the President's budget didn't include any funding 
for 2011. We can't let administrative lack of dialogue or lack 
of working on problems keep these vouchers from going to our 
vets.
    So we want to keep working with you on the implementation, 
and clearly, that remains a high priority for this 
subcommittee, and I thank you for being committed to that and 
working with the VA on that.
    Secretary Donovan. Thank you.
    Senator Murray. Senator Leahy has joined us. Senator Leahy, 
I will just let you know I have to run to the Energy and Water 
Committee really quickly. Senator Bond is on his way back. I am 
going to, without asking you, turn the gavel over to you and 
allow you to go ahead and question the Secretary.
    Senator HUD will be--Senator HUD, he would love that.
    Senator Bond will be back shortly. And if you finish before 
he gets back, if you could just put it in temporary recess, he 
will be here within----

                             RURAL AMERICA

    Senator Leahy [presiding]. Of course, and I am going back 
to a mark-up in Judiciary. But I was able to get permission to 
leave the Judiciary meeting, funny how that works.
    Thank you, Madam Chair. And thank you for the tremendous 
job you do on this and other appropriation matters.
    Secretary, it is good to see you, and I appreciate having 
you here to discuss the administration's budget request. So 
many of the programs in your Department have served my State 
very well, you have got one heck of a portfolio, and there are 
probably days when you wish it wasn't quite as much. But I 
would welcome you up to Vermont sometime to see the good things 
HUD has done to provide affordable housing, especially in our 
rural communities.
    We always think of housing in urban settings, but my home 
State has only 660,000 people, and a lot of it is very rural. 
But something that works in rural Vermont could also work in 
rural California, or New York, or Texas, or elsewhere.
    Now I know others have asked you about the Department's 
proposal to cut the budgets of the 811 and 202 programs and the 
HOME program. I worry about this because as I look at the 
budget, I am afraid there is a shift of priorities from rural 
areas, rural America to urban areas, and I remind everybody 
that rural America still is a third or more of America's 
population.
    Of course, back at the time of Franklin Roosevelt, they 
were concerned about rural America, and we had rural 
electrification, a number of other programs that made an 
enormous difference in society. I know it did with my 
grandparents in Vermont and others.
    But Vermont and other rural States rely on these programs 
to build affordable housing for low-income, elderly, and 
disabled residents. So if Congress agrees with your budget 
proposals, how are you going to deal with the problems of rural 
America?
    Secretary Donovan. Senator, thank you for the question. I 
look forward to visiting you in Vermont. It is, I probably 
shouldn't say this in a Senate hearing, one of my favorite 
States. I spent a lot of time there----
    Senator Leahy. Mine, too.
    Secretary Donovan [continuing]. Growing up, and just a 
beautiful, beautiful place.
    So let me say a couple things about this. First of all, we 
had to make some very difficult choices in the budget this 
year, given the broader outlines of the Federal budget deficit, 
and we made a fundamental choice to focus on existing 
households that we serve and ensuring that we were fully 
funding our major rental assistance programs. That required 
capital cuts in a number of different areas. Just to be clear, 
those rental assistance programs are critical in rural areas of 
the country as well, and we would be happy to get you more 
detail on how they support rural areas.
    I would also say that, today, the single most important way 
that we fund housing for the elderly and disabled in rural 
areas and other areas is through the tax credit program. Eight 
times more senior housing is developed through tax credits than 
through 202 and over 10 times more for people with 
disabilities. And so----
    Senator Leahy. But I still come back to my basic point. I 
worry about the way this is set up, that we are seeing a shift 
from rural to urban, and that is what I am going to be most 
concerned about. Because there is no way I could support--I 
could support an appropriation that did that.
    Secretary Donovan. And I believe that that is, in fact, not 
the case. Section 202 and 811 are equally available in a range 
of areas. But let me point to a few things that I think are 
particularly targeted to rural areas in the 2011 budget 
proposal.

                        SUSTAINABLE COMMUNITIES

    First of all, we will, for the first time ever, be 
establishing a program specifically targeted to rural 
homelessness in 2011. That has never been done before. We 
have--because of the work of this subcommittee, in our 2010 
budget, we will be making Sustainable Communities funding 
available for the first time with a specific 25 percent set-
aside for smaller communities, and that is a critical effort. 
We are also building on our experience in investing in rural 
economic development through a proposed catalytic investment 
fund, which will be an important resource available in rural 
areas as well.
    So not only do I believe that we have housing resources 
specifically for constructing senior housing and housing for 
people with disabilities in rural areas, but that we are 
actually increasing our focus on rural areas with a number of 
different proposals in the budget.

                         SHARED EQUITY PROGRAMS

    Senator Leahy. Thank you. I look at some of the different 
things you have done--the administration has done and Congress 
has supported to promote home ownership. In HUD's previous 
budget request, the Department expressed interest in an 
innovative home ownership model known as shared equity. It is 
typically run by nonprofits.
    They promote home ownership among low- and middle-income 
families by providing down payment assistance. The 
affordability of the home is retained. When the buyer 
eventually sells the home, the nonprofit recoups what they put 
for the down payment and also part of the appreciation. They 
also usually have the right of first refusal to buy the 
property. If Congress included funding for a pilot program to 
increase shared equity programs, is that something your 
Department would support?
    Secretary Donovan. We certainly not only believe in shared 
equity models, but there are a number of ways that we have 
begun to support those. What I would suggest is that we would 
love to sit down with your staff and explain what we are 
already doing around shared equity and see if there is a way we 
could get to a pilot of the kind that you are talking about, 
even under existing authority, and then describe, be able to 
figure out what additional authority might be needed to achieve 
what you are----

                     MAKING HOME AFFORDABLE PROGRAM

    Senator Leahy. Thank you. And we will. Whenever you would 
like, we will make sure we have our folks ready.
    And in your prepared remarks that were read earlier, you 
spoke about the housing market. You noted that a lot has been 
done by the administration to right the ship, and I am pleased 
that many Americans have been helped by the Making Home 
Affordable Program. I think we all know the societal value of 
home ownership and community value and everything else, to say 
nothing about the economic well-being of the country.
    I am concerned about some who have slipped through the 
cracks. One of the concerns I hear most often on housing when I 
am home in Vermont is that some of the lenders in the program 
aren't abiding by the rules. The homeowner has been having a 
hard time getting straight answers, and it is frustrating 
because I will hear questions, whether walking down the street 
or at the grocery store or wherever. They say, ``We can't get a 
straight answer.''
    Is your Department and Treasury looking at this issue of 
whether this is happening in States? Because it is to all our 
benefit if people can be homeowners, but they are going to have 
to have--they are going to have to be able to get the answers 
they need.
    Secretary Donovan. There is no question that particularly 
in the early months of the program, servicers--there were 
significant problems with servicers. There continue to be 
significant problems in some cases.
    We have both pushed servicers to create better 
communication, more resources, and more people in their call 
centers, going door-to-door to do that. But we have also 
created very specific standards for exactly what the timelines 
need to be for servicers to get back to homeowners with a clear 
response on whether they are eligible or not. We did that just 
a month or so ago.
    And in addition to that, we have begun to impose penalties 
on servicers who are not following those guidelines. So, yes, 
we are hearing those issues, and we are taking action on them.
    Senator Leahy. Good. I must admit, and as Senator Bond 
knows, when somebody corners you in the grocery store and they 
have got a concern, they have got a concern. And I sometimes 
find those--actually, I like that. In a small State like ours, 
everybody knows everybody. And nobody hesitates to come up and 
ask you the questions. And this thing is occurring too often to 
make me think it is just a random issue.
    Senator Bond is here, who knows these issues as well as 
anybody, and I am going to turn the gavel over to him.
    Senator Bond. Well, I appreciate getting the gavel back 
from my good friend. Senator Leahy has outlined the concerns we 
have in rural America. I had raised those earlier, Pat, before 
you came, and they had--we had one little $25 million rural 
housing program for HUD to work with USDA, and that was gone.
    So I was interested to know that the Secretary had said 
while they have zero budgeted, that something new is going to 
spring full-blown out of somewhere. And I can assure you that 
those of us who live in places where we don't have a rush hour, 
we have a rush minute, there are--they can't even--radio 
stations can't even sell drive time advertising because nobody 
is in the car that long unless they are driving to another 
city. And then that is----
    Senator Leahy. If the Senator would yield? Last week, 
Marcelle and I were in Vermont, and I got in the car. We were 
driving somewhere. And as I go out of the driveway, I started 
to reach for the radio to hear the traffic report, as I do when 
I am driving back and forth in Washington. And I am like, 
``What am I doing? There is no traffic.''
    But I have been in some of the rural areas of your State, 
which is so beautiful, it made me think of home. But the needs 
are the same. And with that, now that we have done our bit----
    Senator Bond. A little soft shoe there.
    Senator Leahy [continuing]. To show you that we care about 
rural America, but Secretary Donovan, I know you do, too. So 
thank you.

                           RURAL HOMELESSNESS

    Senator Bond. Thank you, Pat.
    And Mr. Secretary, maybe you would want to comment on that? 
You have got a new rural housing initiative to replace rural 
housing?
    Secretary Donovan. Well, I mentioned as you were coming in, 
a range of efforts in the budget. That is an issue I know you 
care a lot about. We will be implementing the first-ever rural 
homelessness effort specifically in the budget and that is 
something that, particularly given that we have seen a 56 
percent increase in rural and suburban family homelessness over 
the last year, absolutely critical.
    We are expanding efforts for economic development. The $25 
million that you talked about was targeted to economic 
development, and we are proposing a $150 million fund in the 
budget, which would have a portion of it specifically targeted 
for rural areas. So I don't believe that we are not going to 
have the kind of effort----
    Senator Bond. I will just ask the question. Are you going 
to work with the USDA on rural development?
    Secretary Donovan. Absolutely.

                      TRANSPARENCY IN HUD PROGRAMS

    Senator Bond. That is one of the secrets because you need 
the housing. You need what USDA can bring. And I think it is 
important that you maintain that collaboration. If you are 
talking about moving 25 to 150, I am happy with that. But I 
just--I want to work with you to make sure that it continues to 
work because, as Senator Leahy said and I know, there are 
problems there.
    Let me go to the issue of transparency, and I mentioned to 
you before I sat down that I am concerned that HUD 
decisionmaking is open and objective. Are there political 
decisions which enter into that? Do you get directives from 
either the top of the administration or Congress on how you 
make those? Are those transparent?
    Secretary Donovan. Absolutely.
    Senator Bond. And to what extent are those involved in the 
decisionmaking?
    Secretary Donovan. Let me be very clear. My ``absolutely'' 
was to the transparency. We make our decisions, particularly on 
competitive grants, in a highly transparent way. We publish the 
criteria for those as we did with NSP2. We have--with every 
single Recovery Act grant, have made those available on 
recovery.gov, our Web site, with detailed information about 
where the money is going, how it is being used.
    We have every applicant who wants to sit down with us and 
go through the details of how their application was reviewed 
and scored, we respond to those requests. We would be happy to 
sit down with you about any specifics around that.
    As you know, whether it is HOPE VI or a range of others, we 
run competitions, and we follow very, very strict guidelines in 
terms of how they are evaluated and----
    Senator Bond. Is there any notification or transparency as 
to those who apply? We hear about some, but we don't even know 
if we know all of the ones that are coming from our State so we 
can follow them. Is there a posting of the applications?
    Secretary Donovan. We notify members in advance of making 
those announcements.
    Senator Bond. Yes. But when you get the applications, do 
you notify? Is there any public notice of the application? Who 
is in there? Do you advise the representatives in Congress of 
those in advance of the process?
    Secretary Donovan. I will say I am not sure if we have a 
standard process for notifying members about applications in 
advance. We can certainly get back to you with more detail on 
the process we do follow.
    Senator Bond. My staff has some questions about that, and 
we are a little concerned. We look forward to working with you 
on that.
    Secretary Donovan. Okay.

                   SUSTAINABLE COMMUNITIES INITIATIVE

    Senator Bond. Because I think most members, certainly over 
on the Senate side and, I would assume, on the House side, 
would like to know if there are 3, 10, 15, or 20 coming in from 
our State. Because we want to work with them, and we may be 
able to shed some light on community support because we are out 
there. We are listening to the people. We know some of the 
challenges they face, what the State and local priorities are 
as well, and we want to see those taken into account.
    If the State is putting money into it and the locality has 
some skin in the game, to me, that is a very good indicator 
that this is something the Feds should look at carefully.
    Let me ask some questions about--a major question about 
sustainability. Your DOT friends call it ``livability.'' I 
don't know if that debate has been going on for a long time. 
But I want to make sure, once again, that the Federal 
Government is not forcing conclusions on local communities.
    How do you make these sustainability decisions? Do you do 
it with DOT and EPA? How much involvement do the State and the 
local governments have in working with you to make those 
sustainability determinations?
    Secretary Donovan. Let me say two things about that. First 
of all, we here--the fundamental issue here is that more and 
more American families are spending a huge portion of their 
budgets--the average family today spends 52 percent of their 
budget on housing and transportation combined. And not only 
that, they are sick of sitting in traffic rather than seeing 
their family or having long commutes in rural areas in some 
cases to get to jobs. There is a whole range of challenges that 
we see.
    And so, we feel we are responding to local needs and 
choices on that front. But the problem has always been that 
housing and transportation investments haven't been coordinated 
at the Federal level because there wasn't the kind of 
partnership that we are talking about.
    So we have begun to coordinate very closely with the 
Department of Transportation, with DOE--Department of Energy--
and Environmental Protection Administration, just to give you 
an example. On the recent TIGER grants that were awarded as 
part of the Recovery Act, we had HUD staff and EPA staff 
actively involved in the process, first time it has ever 
happened, of evaluating TIGER grants, to look at the connection 
of those to housing. So that is an example of that.
    On the State and local piece of this, we believe very 
strongly that this is not a one-size-fits-all. And so, the very 
first initiative we are undertaking in our Sustainable 
Communities initiative is to provide, thanks to the 
subcommittee's leadership, planning grants for local 
communities to be able to decide how they want to coordinate 
housing and transportation. This is not about us telling them. 
This is us providing help to them so that they can do the kind 
of planning and coordination, provide technical assistance. 
What are the best practices?
    And in fact, I don't know if you were here, 25 percent of 
that planning money is specifically directed to smaller places 
to ensure that this isn't just an urban or even suburban 
investment, but that we are doing planning. Tom Vilsack is very 
eloquent about this. We have worked a lot with him and his 
Department.
    Is how do we ensure in rural areas, whether it is main 
street where stores are leaving, that main street, whether it 
is figuring out what to do with upper floors of buildings along 
those main streets in small towns, whether it is connecting 
seniors to the services that they need, with kinds of transit 
that you wouldn't see in larger urban areas. A whole range of 
ways that we can work together and those planning grants are 
the key first step, funded by our 2010 budget, to be able to 
help local communities decide how they want to meet these 
challenges.

                        STAFFING FOR INITIATIVE

    Senator Bond. Well, I think that is very important that you 
have a right to ask of the local communities or regional areas 
what their plans are, and that is something I have worked on 
for about 40 years. And making sure they have it all together 
and know what they are doing is important. And we would hope 
that the Federal agencies would make sure there are good plans 
that support the plans.
    Now, how many FTEs at HUD are working on this? Are you 
adding people? Are you reallocating people from other areas? 
How many folks do you have working on that?
    Secretary Donovan. I just asked my folks to get me the 
precise details. We have established an Office of Sustainable 
Housing and Communities. It is a small office. And the idea of 
that office is to coordinate, as I just talked about, with 
other departments that are working on this, as well as within 
the agency.
    So, for example, where we are retrofitting public housing, 
what we want to make sure of is we don't have three different 
standards or different approaches to our multifamily programs, 
our public housing programs. So we are creating unified best 
practice standards that we would apply across the Department. 
And so, that is the nature of that office.
    For 2010, and this was a discussion I believe we had in 
some significant detail with your staff on the subcommittee, we 
have 20 FTEs in total for 2010. And we expect for 2011 to have 
23 FTEs. So it is a relatively small office, again coordinating 
just policy and programs across--between the departments, as 
well as across different silos within HUD.
    Senator Bond. I know the coordination is very good. You 
ought to decide with DOT whether it is sustainability or 
livability would be helpful. If you could at least agree on a 
title, that would be a good--a good start.
    On the FTEs, our big deal is are you dealing with the 
overall staff problems, making sure you have enough in FHA 
while you are moving people around? We know you need help, but 
do you have the FTEs you need?
    Secretary Donovan. Thanks to both the investments you made 
in the 2009 budget, as well as the investments in 2010 and some 
flexibility that you gave us in 2010, one of the concerns that 
I had when I came in--and we have worked very collaboratively 
with you--is that we had created very specific restrictions 
across nine different pieces of HUD in terms of FTEs. And the 
flexibility that you have given us has allowed us to increase 
hiring substantially.
    In FHA, we have literally hundreds of additional staff that 
we are bringing on to do that while trying to make sure that we 
are not overall increasing the size of the staff of the 
Department beyond what is necessary.

                     SECTIONS 202 AND 811 PROGRAMS

    Senator Bond. Now I have--as I indicated, I have some 
concerns about if there is a cutback in the 2012 budget based 
on problems with the deficit. I would like to know how HUD 
plans to deal with it, and when you have put funding on hold 
for 202 and 811. Are you going to make sure that those 
programs--we will not overlook the people who are served by 202 
and 811 while you push the current priorities. How are we going 
to make sure that those people are covered?
    Secretary Donovan. So, first of all, I think one of the 
most important things to recognize is that the vast majority of 
housing for seniors and people with disabilities today gets 
produced not by 202 and 811, but by the tax credit and other 
funding sources.
    The issue--and I will tell you very honestly, I dealt with 
this very directly in my prior work, both in the private and 
public sector. It is very, very difficult, close to impossible 
in some communities to develop new 202 and 811s because the 
program is really designed, frankly, for the 20th century, not 
the 21st century.
    And because of the amount of funding that is available, the 
way that it is distributed, the rules that apply there is 
almost no case where a community can develop a 202 or an 811 
without finding tax credits and a range of other sources to 
complement it. And yet, at the same time, the rules are not 
built so that you can combine those funding sources.
    So what we are proposing, just to be very clear, is not 
that we eliminate the program. We believe the intent of the 
program is absolutely critical. But what we need to do is 
reform the program so that it works efficiently with today's 
way of producing affordable housing for seniors and people with 
disabilities.
    There is a reform bill that is being discussed on the House 
side where we agree with a large number of those changes. In 
addition, we believe there are other steps that could be taken, 
for example, to link up with the health funding streams at HHS 
that are often necessary, like PACE, for seniors as they age in 
202s. And we need to make sure that we get the program right, 
we believe, before we continue to build new units under 202.
    Senator Bond. What I am worried about, I guess we are 
letting loose of the trapeze bar, and I want to see a trapeze 
bar there to hang onto. And the other thing is to manage, to 
continue the services and providing services in many of these 
target populations is critical.
    That is why Senator Murray and I promoted the VASH program 
to bring the VA and HUD together because the homeless veterans 
are very near and dear to my heart. They have some very serious 
problems that cannot be fixed with housing alone. I want to 
make sure that we continue those services.
    Certainly, you will have no argument from me on a need to 
clarify, consolidate, and simplify the HUD programs. That has 
been--that has been the thicket that every HUD Secretary I have 
known has found to be unmanageable. At the same time, as 
Senator Murray referred to it, I personally have a minimum 
amount of high confidence in the authorizing committees' 
ability to deal successfully with these legislative changes in 
time to ensure there is not a gap.
    And we are going to have to work with you on that because 
anybody who looks at the legislative calendar in the United 
States Congress knows that even getting our appropriations 
bills done is going to be a challenge. And we are going to have 
to have some discussion because the banking committees are 
trying to bite off financial regulation and that one is not 
going to be a simple mark-up in 2 days on the floor, at least 
in the Senate. And man, there is not enough time to do it.

                     TRANSFORMING RENTAL ASSISTANCE

    So we need to work with you on that. The TRA program, it is 
very optimistic. I would just ask you, what do you see as the 
key elements and the advantages of the TRA program over current 
programs?
    Secretary Donovan. So, today, given the way particularly 
let us take public housing as an example operates. Because it 
functions with both an operating subsidy and a capital subsidy, 
it is essentially 100 percent Government funded. And because of 
that, it is almost impossible, short of HOPE VI, to create with 
public housing the kind of mixed income, mixed use, 21st 
century housing that I believe our residents deserve and that 
our communities deserve.
    And so, fundamentally, what TRA is trying to achieve, 
beyond the simplification and all the benefits that come with 
that, is to bring public housing and our other programs into 
the mainstream, to stop having them be in some ways a parallel 
universe, if you will, from the way the rest of our housing 
market operates.
    And if you look at whether it is tax credits or the new 
ways that we develop affordable housing, they have all of those 
benefits public housing has not been able to get. At the same 
time, public housing has been underinvested in because it 
hasn't been able to access, whether it is tax credits or, more 
broadly, private capital or other forms of public capital.
    The fundamental reason for that is because we have this 
dual system of operating subsidy and capital subsidy. So what 
may seem deceptively simple at one level, but I think has very, 
very powerful benefits is not just consolidating all these 
programs, but shifting to a system where we have one operating 
stream that allows public housing to leverage private debt, mix 
uses, mix incomes. All of the things that we do in the best 
public--best affordable housing today, we can achieve by 
shifting from this.
    And the last thing I would say is the fact that a low-
income family has to make a choice between keeping their 
subsidy or moving, whether it is to get a job in a different 
community or a different neighborhood, to follow family, or for 
whatever reason they may choose to move, that fundamental 
choice that they have to make today, I believe, isn't fair. And 
so, one of the key areas of the program would try to change 
that is to say let us give families more choices for mobility 
as we do in certain of our programs today but, at the same 
time, ensure that we keep the project-based, long-term stream 
of funding available for that property that I know you believe, 
and I agree, is so important to our efforts to keep communities 
strong.
    Senator Bond. I think when TRA was promised, was proposed--
the legislation was promised this month--it is clearly a big 
and controversial effort, had lots of questions with it. And I 
think we need to have discussions with you about it and debate, 
I hope, sometime. I don't know when we can ever get floor 
debate, but have it brought up for thorough congressional 
debate.
    So when are we going to see it, and how much legislation is 
needed? My staff is saying that perhaps 90 percent of it can be 
done by regulation. What do you see as the process? When will 
we see the product? When will we get to start on the process?
    Secretary Donovan. So, first of all, let me just say I 
completely agree with you that this is an ambitious, large-
scale effort, and I want to be clear, this will not be achieved 
in 1 year or one budget cycle. And so, what we have proposed is 
to begin it in 2011, focused on 300,000 units out of a much 
broader stock that is probably 10 times that size.
    So we don't believe that it is achievable, I think this 
aligns with what you just said, that all of this cannot be done 
in 1 year. It is going to take some time. Having said that, we 
will--we have been working very closely within the Department 
with stakeholders, begun discussions with the authorizing 
committees as well about legislation.
    We are committed to meeting the timeline that we laid out 
to get draft legislation put forward, and I would suggest that 
we would be happy to sit down as soon as possible with you and 
your staff to begin to answer any questions that you have and 
go through the details.
    Senator Bond. Well, we want to see what needs to be done. 
And if you are focusing on 300,000 units, that goes back to my 
initial concern. All the other programs that are being zeroed 
out, what is going to happen to those needs in areas that are 
not covered by the 300,000 units?
    So, I mean, there are a lot of questions, and I think we 
will have to--we will know the scope of the questions when we 
see your proposal.
    So we need to have that soon, and at least in the 
appropriations process, we need to have that and to deal with 
it where we can and see what regulations need to be done, what 
has to be fixed legislatively or by appropriations or by 
regulation.
    Secretary Donovan. Yes.

                      CHOICE NEIGHBORHOODS PROGRAM

    Senator Bond. And the other thing, I appreciate you 
mentioning my old friend, HOPE VI again. How is Choice 
Neighborhoods better, bigger, longer, stronger an improvement, 
and what is going to be different about Choice Neighborhoods?
    Secretary Donovan. So let me try and be as specific as 
possible in terms of some of those changes.
    Senator Bond. Capsulize it, if you can.
    Secretary Donovan. I go to places all the time and hear how 
great HOPE VI is. And I want to be very clear; this program is 
building on HOPE VI, not doing away with it in any means.
    One of the constant issues I hear is we have done this 
wonderful HOPE VI redevelopment. But across the street is a 
project that is assisted with a different HUD program that we 
have no tool to be able to redevelop. And specifically, what I 
mean is our multifamily programs don't have that same option.
    Or there are 10 or 20 foreclosed homes on the next block 
that are the real problem in that neighborhood. They are 
creating crime. They are bringing down values. And yet we don't 
have the flexibility in HOPE VI today to be able to include 
that kind of housing as well.
    So what we want to do with Choice Neighborhoods is to say 
it has been so effective on public housing, let us allow it to 
be used for our privately owned assisted housing or for other 
housing in a community. And that could be combined with public 
housing.
    In other words, the housing authority could come in and 
say, ``We are going to do this public housing development, but 
we are also going to do the assisted housing across the 
street.'' We have got many examples where they are in the very 
same neighborhood or even across the street.
    Or if the most challenging thing that you have in St. Louis 
or any other community is not a public housing development--and 
I know a number of them in St. Louis, for example, or Kansas 
City. But it is, in fact, a privately owned housing development 
that is the real problem. This would be a tool available to 
redevelop that housing.
    So I think that, in some ways, is the most fundamental 
change is that it takes what has been so successful in HOPE VI 
and expands it to our broader program. It just doesn't make 
sense to me, frankly, Senator, that if simply because we fund 
something with a different program at HUD--and this is a little 
bit the theory behind TRA--that we ought to have totally 
different rules and programs available to them. This is trying 
to spread the lessons and broaden HOPE VI to other forms of 
housing.
    Senator Bond. Is that something, what you are talking about 
in needing to reach out and deal with others; is this something 
that should be fixed? Can it be fixed by the HOME funds that 
are given to localities?
    Secretary Donovan. I don't believe, fundamentally, that it 
can be fixed by the HOME funds. Because traditionally, the way 
HOME funds are used is either in moderate rehabilitation or new 
construction. These are much more complex, really neighborhood 
revitalization schemes and redevelopments. And so----
    Senator Bond. We want to know how--I mean, are we wasting 
money on HOME. I thought that HOME was going to do that. So we 
have a limited pot of money available, and I want to work with 
you to make sure we use those dollars the best way we can.
    Secretary Donovan. You know HOPE VI as well as anybody, and 
I think you know that what has been the secret of it is that it 
goes beyond just the bricks and mortar. HOME is a bricks and 
mortar program. And so, I think the fundamental difference is 
that whether it is HOPE VI or Choice Neighborhoods allows you 
to build in, whether it is a community room that has computer 
services available, whether it is the services that are 
available for literacy or other things for families, 
educational programs--all of those pieces that have really made 
HOPE VI so successful because it is about more than the bricks 
and mortar is something that Choice Neighborhoods would allow 
us to do. HOME is a bricks and mortar program.

                          FHA MORTGAGE REFORM

    Senator Bond. As you know, I have worked long and hard to 
get child care centers and education centers and community 
centers. But when you are talking about a bunch of foreclosed 
houses, you have got a bricks and mortar problem in the 
community.
    Well, anyhow, this is a lot more discussion to be had 
later. Let me ask a final question on FHA mortgage insurance 
reform. How are you dealing with the mortgage default problems, 
especially in light of the proposed FHA reforms?
    How will the reforms impact the homeowners who are seeking 
help with mortgage defaults? Are these defaults primarily a GSE 
problem, or is FHA going to get in and start and put more 
taxpayer credit cards on the line explicitly rather than the 
implicit situation we have now?
    Secretary Donovan. So, going forward, we clearly believe--
and this is why we have proposed the legislation and the 
changes that we have--that there are things we need to be doing 
to tighten to avoid future defaults. It is why we have 
suspended over 170 lenders last year, to say we would no longer 
do business with them.
    We have taken a number of steps that we are proposing 
legislatively to allow us to have greater powers to get rid of 
not just lenders, but the principles of those lenders from our 
programs. So we have a range of things we need to do more 
strongly.
    What I would say, though, is if you look at what has 
happened over the last year, defaults in FHA have certainly 
risen, but they have risen much more slowly than subprime and 
even prime mortgages at the GSEs to the point where, today, 
subprime defaults are triple what we see in FHA.
    So there is definitely more that we can do, but I think our 
full underwriting, fixed rate, no liar loan, all of the things 
that we have done traditionally and that we are strengthening 
to ensure we don't make the same mistakes that were made in the 
subprime movement have helped us not have the same level of 
defaults.
    The only other thing I would say is we have the most 
extensive, most aggressive loss mitigation set of tools that 
exist. They allowed us to help about a half a million 
homeowners, last year, stay in their homes, despite the fact 
that they were struggling to make their payments.
    And so, that, along with the Home Affordable Modification 
Program and other new options that we have introduced, I 
believe allow us not just to avoid future defaults, but also to 
ensure that existing families that are struggling with 
unemployment remain in their homes where possible. We are not 
going to stop every foreclosure, nor should we. But I think we 
have taken very aggressive actions to do that.
    Senator Bond. I appreciate knowing about that. In Missouri, 
we had a very aggressive U.S. attorney who files a number of 
criminal indictments, and some of these are not just people who 
should be disbarred. But I hope where you find the requisite 
potential criminal intent, you refer them for criminal 
prosecution because some of this is shoddy, but in some 
instances, it is criminal.
    Obviously, there is much more to discuss. But the good news 
is I am being advised that I am running late for a whole bunch 
of things that are stacked up. So we will have to let you go 
with thanks. We look forward to continuing to work on many of 
these things. We have just started the discussion.

                     ADDITIONAL COMMITTEE QUESTIONS

    The hearing record will remain open for additional 
questions.
    [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 Patty Murray
                     affordable housing for seniors
    Question. Thank you for your testimony Mr. Donovan. The Nation's 
shortage of affordable housing for seniors is significant. Currently, 
there are at least 10 seniors vying for every available section 202 
unit. By 2020, an additional 730,000 senior housing units will be 
needed to address the growing housing needs of low-income seniors. Yet, 
the administration has proposed to eliminate construction funding for 
new 202 developments in order to redesign the 202 program. While I 
support efforts to reform the section 202 program, there is no doubt 
redesigning the program will be a lengthy process. How long does HUD 
propose to continue this funding freeze?
    Answer. HUD intends to return back to Congress in June with a 
legislative proposal. In addition, HUD will be working concurrently to 
implement a range of administrative reforms. While the goal is to 
effect the reform of the program as quickly as possible, at this point 
it is too soon to forecast how long this implementation process will 
take.
    Question. Why is HUD not able to work on redesigning the program 
while continuing to fund new projects?
    Answer. HUD is currently working on developing a roadmap for reform 
of the section 202 and 811 programs. This reform and redesign will 
increase the programs' cost effectiveness. While this redesign effort 
is underway, given overall budgetary constraints, HUD must focus its 
limited resources on its core rental and operating assistance programs 
(including renewals for existing section 202 programs). It is these 
programs that can best leverage additional private and public 
resources.
    Question. What is the administration's interim plan to address the 
growing demand for affordable senior housing while the redesigning 
process takes place?
    Answer. The administration's fiscal year 2011 budget preserves 
critical resources for the elderly by maintaining full funding of core 
rental assistance programs such as section 202 operating renewals, 
Project Based Rental Assistance, the Public Housing Operating Fund, and 
Housing Choice Vouchers. In addition, new units will continue to come 
on line through the low-income housing tax credit program which 
produces approximately 10 times the number of affordable senior housing 
units as section 202. In addition, approximately 5,800 units of section 
202 will become available to for the elderly in fiscal years 2011 and 
2012 as a result of prior year funding commitments.
                 supportive housing for the elderly act
    Question. As you may know, Senator Schumer and I have introduced 
the section 202 Supportive Housing for the Elderly Act (S. 118), which 
would promote new construction, preservation, and conversion of section 
202 housing by streamlining and simplifying administrative processes. 
Is it possible for HUD to make any of the suggested reforms to the 
section 202 program through report language or bill language included 
in S. 118?
    Answer. HUD generally supports the direction that S. 118 takes the 
section 202 program. S. 118 includes facilitation of mixed finance 
structures, enhances preservation of existing projects, and refines the 
geographic allocation issues. However, a number of further items are 
currently being reviewed by HUD staff which are not fully addressed in 
S. 118. For example, we need more work to be done on building synergies 
with Health and Human Services and State Medicaid and Medicare programs 
to make sure that we bring into our section 202 projects elderly 
residents who can best take advantage of PACE and other Medicaid home 
and community based waiver programs. Staff will be looking at all of 
the items contained within S. 118 and can certainly work with the 
Congress to determine whether the reform plan can best be effected as 
stand alone legislation or as part of a revised S. 118 bill.
           section 202 supportive housing for the elderly act
    Question. Alternatively, can HUD implement any of the proposed 
changes administratively through the processing of applications or in 
the notices of funding availability (NOFAs)?
    Answer. Yes. HUD anticipates implementing a wide range of 
administrative changes, in addition to proposing statutory changes, to 
affect a comprehensive reform of the section 202 program.
             section 202 and low-income housing tax credits
    Question. Based on your testimony, HUD will make it easier to take 
advantage of low-income housing tax credits (LIHTCs). While I am 
supportive of this effort, I want to be clear that the neediest 
seniors, such as those eligible for section 202 housing, may not 
benefit from this change given that section 202 units must be 
affordable to tenants at or below 30 percent of area median income, as 
opposed to LIHTCs, which require that housing be affordable to those at 
or below 60 percent of area median income. Can you expand on this 
initiative? Specifically: How does HUD plan to account for the housing 
needs of the most vulnerable seniors, such as the 202-eligible 
population, through increased use of LIHTCs?
    Answer. As part of the overall reform vision, HUD anticipates 
modernizing the section 202 program to make it easier for sponsors to 
work with other funding sources, such as the Low-Income Housing Tax 
Credit program (LIHTC). This reflects the fact that the section 202 
program is no longer a ``one-stop shop'' to capitalize and sustain a 
project but rather serves as the critical final piece of an overall 
financing structure. Layering LIHTC with section 202 funding does not 
reduce affordability relative to section 202 program requirements; 
rather it makes LIHTC work to support a lower-income population. By 
leveraging LIHTC, which in recent years produced 10 times as many units 
of low-income housing for the elderly as the section 202 program, more 
projects can be made financially feasible and the reach of the section 
202 program can be effectively expanded.
    Question. Current law allows section 202 developers to use LIHTCs 
in conjunction with HUD funding. How will HUD specifically make this a 
more streamlined and accessible process?
    Answer. The level of regulatory oversight associated with section 
202 is commensurate with that which would be associated with full 
Federal funding of the development costs of construction. Yet even 
today, the program is expected to leverage a range of funding sources, 
often including low income housing tax credits. These other sources of 
funds bring with them important oversight, whether through State 
Housing Finance Agencies or local municipal lenders or from the 
involvement of tax credit investors and commercial lenders. These 
parties provide layers of accountability which HUD should generally not 
need to duplicate. As part of HUD's on-going review of the program, HUD 
will be looking to simplify its processing and oversight to better 
reflect its expected role in these kinds of projects.
                     low-income housing tax credits
    Question. Does HUD envision using 202 and 811 project rental 
assistance contract (PRAC) to subsidize LIHTC units as is currently 
done with tenant-based section 8 assistance?
    Answer. For sponsors who are able to bring other sources of funds 
to a project such that they don't require any capital advance funds 
from HUD, but otherwise are able to comply with the requirement of the 
section 202 or section 811 programs, HUD may consider the option of 
providing them with operating assistance only. Under this scenario, 
these projects would still serve the same populations, but at a much 
lower upfront cost to HUD. It's not clear at this time that this 
scenario would have significant utilization given the challenges 
sponsors generally face in identifying capital funds.
                              section 202
    Question. Lastly, I want to applaud HUDs proposed changes to make 
section 202 a platform for the delivery of supportive services so that 
seniors can age in place. However, section 202 housing must serve a 
varied senior population, not just frail elders that qualify for 
nursing home-level care. In your testimony and budget submission you 
mention the Program of All Inclusive Care for the Elderly (PACE). Is it 
HUD's intent to limit the section 202 program to seniors who are frail 
and/or participants in the PACE program?
    Answer. HUD is working with stakeholders and its counterparts at 
the Department of Health and Humans Services to answer that question. 
It's HUD's understanding that PACE must be considered only one of a 
number of programs serving frail or near frail elderly in the 
community, particularly because PACE is only available in 30 States. 
Medicaid Home and Community-Based Service (HCBS) waivers is another 
program that has applicability to the section 202 program; HCBS waivers 
are found in 49 States. The section 202 program is an independent 
living program which does not require licensure, so it is unlikely that 
it would make sense for HUD to require all residents in a given 
building to be frail. Today, estimates suggest that 38 percent of 
current section 202 residents are frail or near-frail.
                       self-help housing program
    Question. The Housing Assistance Council, as authorized by Public 
Law 110-246, receives funding to help support housing efforts in rural 
communities through the Self-Help Housing program. The HUD budget 
removed the funding for the Self-Help Housing program and instead 
merged it with the Capacity Building program in HUD. Unfortunately, the 
Capacity Building program as proposed by HUD is only funded at $60 
million for fiscal year 2011, a decrease of $12 million from last year. 
I am deeply concerned about cutting funding to this program. Self-help 
housing and, more specifically the Housing Assistance Council have 
helped create affordable housing for rural communities across the 
country. These cuts may defer much needed resources to rural 
communities and limit housing options for rural residents. How is HUD 
going to ensure that rural communities will be able to access funds as 
the programs are merged together?
    Answer. The Self-help Homeownership Opportunity Program (SHOP) is 
not proposed for merger into the Capacity Building program. In the 
fiscal year 2011 budget request, HUD proposed to merge SHOP into the 
HOME Investment Partnerships Program (HOME). Self-help housing, 
including activity costs for land acquisition and infrastructure 
improvements, is already eligible under both HOME and the Community 
Development Block Grant Program (CDBG). Significant amounts of HOME and 
CDBG funding are already available to State and local grantees to fund 
self-help housing opportunities for low-income households, including in 
rural areas. In fact, the State CDBG program provides funding 
exclusively to all non-metropolitan areas of the State, including rural 
areas, far exceeding the coverage area, and funding level, of all of 
the SHOP grantees combined. It is true that self-help housing will be 
competing with other eligible activities for State or local HOME or 
CDBG funding, but Housing Assistance Council and other SHOP providers 
should be able to make a case for a share of the funding based on their 
past successful performance in SHOP.
    In addition, HUD has requested increased funding for a newly 
designed Capacity Building program totaling $60 million, $10 million 
more than the $50 million appropriated to the current section 4 
Capacity Building program within HUD's SHOP account.
    Finally, $25 million of fiscal year 2010 funding is being made 
available for competition in HUD's Rural Housing Innovation program 
specifically targeted to rural communities.
    Question. How will HUD split the funding between self-help housing 
and the capacity building entities such as LISC and Enterprise 
Community Partners?
    Answer. In the fiscal year 2011 budget request, the Self-help 
Homeownership Opportunity Program (SHOP) is proposed to be merged into 
the HOME Investment Partnerships Program (HOME). Self-help housing, 
including activity costs for land acquisition and infrastructure 
improvements, is already eligible under both the HOME and the Community 
Development Block Grant Programs (CDBG). Significant amounts of HOME 
and CDBG funding are available to State and local grantees to fund 
self-help housing opportunities for low-income households, in both 
urban and rural areas.
    The fiscal year 2011 budget HUD has requested increased funding for 
a newly designed Capacity Building program totaling $60 million, $10 
million more than the $50 million appropriated to the current section 4 
Capacity Building program within HUD's SHOP account. These funds would 
be made available for competition through a Notice of Funding 
Availability.
    Recipients will include national and regional intermediaries with 
local affiliates and partnerships, and consortia of intermediaries with 
demonstrated expertise. Funding for assistance will support 
organization and core skills of line staff and management so they can 
be partners with the administration as they implement key initiatives 
such as Choice Neighborhoods, Sustainable Communities, and the 
Catalytic Competition and work to restore the economic vitality of 
communities with significant needs.
                                 ______
                                 
            Questions Submitted by Senator Patrick J. Leahy
                              section 811
    Question. The Final Rule for the HUD 811 program published in the 
Federal Register on September 13, 2005 section 891.809 lists a number 
of limitations on capital advances under that program including: (c) 
facilities currently owned and operated by the sponsor as housing for 
persons with disabilities, except with rehabilitation as defined in 24 
CFR 891.105. However, recent HUD NOFAs for the 811 program essentially 
precludes funding applications involving such rehabilitation by stating 
that the refinancing of any Federal funded or assisted project or any 
project insured or guaranteed by a Federal agency is not permissible 
under section 811 and also that if the housing already serves persons 
with disabilities it can be rehabilitated as long as it hasn't operated 
as housing for persons with disabilities for longer than 1 year prior 
to the application deadline. Recognizing the importance of supportive 
housing to prevent homelessness and the fact that it is at least half 
as expensive to preserve existing units as to create new ones, would 
HUD consider allowing in the next NOFA the possibility of funding 
capital advances when rehabilitation is occurring as defined in 24 CFR 
891.105? If not, would HUD entertain an 811 pilot in Vermont in which 
rehabilitation of units housing people with disabilities takes place?
    Answer. Section 891.809 is in subpart F of the regulations and 
these regulations govern the mixed finance feature of the section 811 
Program. HUD's understanding is that the intent of this mixed finance 
feature was to encourage the construction of additional units. The 
Department believes that it is important to use its limited resources 
to increase the supply of affordable housing for this population of 
very low-income households. Various policy changes for the overall 
program are currently under review.
                              section 202
    Question. In Vermont, as well as in other rural and urban areas of 
the country, section 202 housing serves a varied senior population, 
including a substantial number of very frail elders. In my home State 
we are developing a service delivery model that would layer very nicely 
onto HUD 202 housing and meet the wide range of needs our seniors 
have--needs that no single existing program can meet. In the 
Department's budget submission to Congress, the rational for zeroing 
out the 202 was program is that it needs improvement. I understand that 
most of the reforms to the section 202 program can be made 
administratively in your processing of applications or in the NOFAs. 
What is HUD's timeline for the internal process of reform and is it 
possible to finish these reforms in time for the fiscal year 2011 
funding round if Congress provides funding for section 202 this year? 
Can we help implement any of those changes through report language or 
bill language included in the subcommittee's bill?
    Answer. We plan to return back to Congress in June with a 
legislative proposal. Our proposal will be based on analysis of the 
section 202 program by HUD staff as well as feedback solicited from 
stakeholder groups. We look forward to working with Congress to 
determine the best way to implement these recommended changes.
                                 ______
                                 
            Questions Submitted by Senator Dianne Feinstein
        neighborhood stabilization program funding distribution
    Question. California is at the center of the home foreclosure 
crisis. The California metro areas of Stockton, Merced, San Bernardino 
and Riverside in particular have among the highest foreclosure rates in 
the country. And while the national annual increase in foreclosures 
appears to be leveling off, nearly 140,000 foreclosures were filed in 
California this year--one of the highest rates in the country.
    It is concerning to me that some of the hardest-hit areas of the 
country, such as Fresno, Merced, and Stockton, have been entirely left 
out for funding under the Neighborhood Stabilization Program (NSP) 
under the American Recovery and Reinvestment Act.
    On January 14, 2010 the Department announced the second round of 
NSP awards totaling $318 million in investment for California, yet 
nearly all applications submitted by projects in the Central Valley 
were rejected, despite a foreclosure rate of 13 percent in that area. 
This raises serious concerns to me that a Federal program designed to 
stabilize and rehabilitate the hardest-hit communities could have 
completely overlooked the Nation's epicenter for foreclosures.
    Why are areas with the highest foreclosure rates being denied NSP 
funding?
    Answer. The Neighborhood Stabilization Program 2 (NSP2) funds were 
distributed on a competitive basis as required by the Recovery Act. The 
Department reviewed 482 applications that requested, in aggregate, more 
than $15 billion, more than 7\1/2\ times the available funding. The 
Department established a thorough process to review applications and 
was ultimately able to fund 56 applications, less than 12 percent of 
total. Of the funded applications, 31 received less than the amount 
requested in order to increase the total number of applications 
receiving funding.
    NSP2 applicants had to respond to six factors: Need in Target 
Geography; Demonstrated Capacity; Soundness of Approach; Leveraging of 
Other Funds or Removal of Substantial Negative Effects; Energy 
Efficiency Improvement and Sustainable Development Factors; and 
Neighborhood Transformation. Every applicant for NSP2 funding had to 
demonstrate a high level of need in order to be eligible to apply for 
assistance but this was only one aspect of the competition. The bottom 
line is that NSP2 was a competition and some grantees responded in a 
more comprehensive manner than others. Ultimately, HUD's review process 
awarded funds to the highest rated applications and need represented 
only one aspect of that competition.
    Question. What specific measures is the Department using to 
determine the funding distribution for NSP?
    Answer. The Neighborhood Stabilization Program 1 funding was 
distributed through a formula, and the criteria for that formula were 
identified in the Housing and Economic Recovery Act (HERA) of 2008. The 
criteria included: number and percent of foreclosures; number and 
percent of subprime mortgages; and number and percent of mortgages at 
risk of default.
    Neighborhood Stabilization Program 2 funding was distributed 
through a competitive program, using 6 factors: Level of need in Target 
Geography; Demonstrated Capacity; Soundness of Approach; Leveraging of 
Other Funds or Removal of Substantial Negative Effects; Energy 
Efficiency Improvement and Sustainable Development Factors; and 
Neighborhood Transformation. Further detail on the factors can be found 
in the Notice of Funding Availability (NOFA) issued on May 4, 2009. 
This NOFA can be viewed on the HUD Web site at: http://www.hud.gov/
offices/cpd/communitydevelopment/programs/neighborhoodspg/pdf/
nsp2.nofa.pdf.
    Question. What is main rationale for not including additional 
funding for this important program in the fiscal year 2011 budget?
    Answer. While the Department did not request NSP funding as part of 
the fiscal year 2011 budget, Secretary Donovan has announced his 
support for an additional $2.1 billion for NSP funding to continue 
efforts already in place and to help address foreclosure and 
abandonment problems in communities that have not been reached via NSP1 
or NSP2.
    The administration also announced plans to reallocate funds awarded 
through NSP1 that have not yet been committed to specific projects in 
order to drive more funding to the hardest hit communities. HUD has 
already awarded nearly $6 billion in NSP grants to help State and local 
governments respond to rising foreclosures and falling home values. 
Nearly $4 billion funded NSP1 through the Housing and Economic Recovery 
Act of 2008 (HERA) and an additional $2 billion funded NSP2 through the 
American Recovery and Reinvestment Act of 2009 (Recovery Act). The 
initial NSP1 funds provided each State government with a ``base 
allocation'' of $19.6 million without regard to varying degrees of 
need. Eighteen months later, the Department will recapture money from 
communities that have not yet committed NSP1 funding, and reallocate it 
to city and county governments with very high foreclosure and/or 
vacancy rates and their jurisdiction, based on the most recent data. 
HUD estimates that 70 percent of the $3.9 billion in NSP1 funds would 
be obligated by the 18-month deadline this Fall, in September and 
October 2010, for a recapture of approximately $1 billion.
    Through the recapturing process, HUD is working to use the 
resources we have already received and build on the success and lessons 
from NSP1 and NSP2, ideally with additional funding for a third round, 
to best target the recovery in hard hit areas based on their 
foreclosure and delinquency rates, vacancy problems and unemployment. 
We also want to go a step further by providing funds to help homeowners 
avoid foreclosure.
   community development fund catalytic investment competition grant 
                              distribution
    Question. The new Catalytic Investment Competition Grant program 
proposed under the Community Development Fund in the administration's 
budget request would provide economic development and gap financing to 
implement targeted investments for neighborhood revitalization. I am 
encouraged to see HUD further its efforts to help communities with the 
greatest need and potential for growth. How would the proposed $150 
million grant program take into account areas that are high-cost, such 
as California, to ensure they are not left out?
    Answer. The Catalytic Investment Competition will use the 
authorities of CDBG to provide capital for high impact, innovative 
economic development projects and to capitalize meaningful investments 
for neighborhood and community revitalization. Unlike CDBG, consortia 
including high capacity non-governmental entities may apply along with 
governmental entities.
    While HUD has not fully developed the competition framework, please 
be assured any program design will provide a level playing field for 
all applicants including those in high cost areas. Applicants will be 
required to develop a plan that includes measurable outcomes for job 
creation and economic activity and exhibit capacity to implement the 
plan. They will be encouraged to leverage other public and private 
community development and revitalization programs and to augment other 
place-based strategies, such as Choice Neighborhoods, Promise 
Neighborhoods, HOPE VI, and Sustainable Communities to help strengthen 
existing and planned investments in targeted neighborhoods to improve 
economic viability, extend neighborhood transformation efforts, and 
foster viable and sustainable communities.
               section 202 housing for low-income seniors
    Question. The administration's budget proposes to reduce funding to 
support the construction of housing for very low-income elderly. The 
Department's section 202 housing program was funded at nearly $825 
million in fiscal year 2010, but the administration has requested $274 
million for fiscal year 2011. This is a cut of nearly 67 percent to a 
program that many elderly Californians rely on for affordable housing. 
How will the Department continue to offer affordable rental housing to 
low-income seniors despite such a major budget cut?
    Answer. The $274 million requested for section 202 in fiscal year 
2011 will cover the cost of project renewals only; no new production 
funds are being requested. These renewal funds will support the nearly 
400,000 elderly residents who currently live in section 202 housing. In 
addition, in fiscal year 2011, HUD expects to house over 2.4 million 
families in public and assisted housing of which 58 percent are elderly 
or disabled and provide tenant based vouchers to more than 2.1 million 
households of which 47 percent are elderly or disabled. As well, HUD 
anticipates approximately 5,800 new units of section 202 will come on 
line during fiscal years 2011 and 2012 because of prior year funding 
commitments. The Department will submit a section 202/811 legislative 
proposal in June that will address these issues.
            self-help home ownership program (shop) funding
    Question. The administration's proposed budget does not request 
funding for the Self-help Home Ownership Program, which helps non-
profit organizations leverage funds from outside private organizations 
to assist home buyers.
    The budget request proposes that the HOME Investment Partnerships 
Program could instead fund SHOP projects, yet the funding for HOME is 
also proposed to be cut from $1.82 billion in fiscal year 2010 to $1.64 
billion in fiscal year 2011.
    It is my understanding that SHOP makes revolving funds available to 
non-profit organizations for future land development. In many urban 
areas, there are local funds that work in cooperation with HOME. In 
small and rural communities, however, there are seldom such funds 
available, making SHOP particularly important for these communities.
    How will the Department help support non-profit organizations that 
assist low income families despite eliminating the SHOP program and 
reducing funding for the HOME program?
    Answer. HOME funds are distributed by a needs based formula and all 
States, including those with significant rural area, are guaranteed a 
minimum HOME formula allocation. By statute, HOME funding for housing 
programs must be used for low-income families, including those that 
live in rural areas. In addition to HOME funds, a significant amount of 
State Community Development Block Grant funding is made available to 
local communities that are rural in nature.
    Most current affiliates of SHOP grantees (non-profit organizations) 
already qualify, or can easily qualify, as a Community Housing 
Development Opportunity (CHDOs) in the HOME program. This would make 
them eligible for funding for self-help home ownership activities from 
the 15 percent minimum set-aside of HOME funds specifically for 
qualified CHDOs, giving them an advantage over other groups competing 
for funds. In addition, CHDOs are eligible to retain proceeds from 
development activities, and annual funds for CHDO operating expenses. 
The CDBG program may also be used to create revolving loan funds at the 
State and local level for community development and housing activities 
in rural areas. The State CDBG program provides funding for these 
activities exclusively to jurisdictions in non-metropolitan areas.
    SHOP funding is structured as direct funding to grantees for 
immediate use--it does not provide funding specifically for revolving 
loan funds. Two current SHOP grantees, the Housing Assistance Council 
and Habitat for Humanity, are national organizations that require their 
local affiliate organizations to repay 20 and 25 percent of the SHOP 
funds distributed to them for local self help home ownership programs 
back to these national organizations for deposit in their revolving 
loan funds. However, these loan funds are not necessarily used for 
self-help housing, but for a variety of other community development 
activities.
                                 ______
                                 
           Questions Submitted by Senator Frank R. Lautenberg
                      public housing capital fund
    Question. The President's budget request proposes a $456 million 
cut in the Public Housing Capital Fund. The $4 billion provided for the 
fund in last year's economic recovery act was meant to supplement 
regular appropriations, not replace them.
    Given the substantial backlog of capital needs--estimated by your 
own agency to be as high as $24 billion--what is the justification for 
cutting funding that is so critical for the long-term sustainability of 
public housing?
    Answer. The Department agrees that there is a substantial backlog 
of deferred capital needs in the public housing program. Given fiscal 
constraints, the Department cannot realistically request enough funding 
to solve the backlog of capital needs through annual Capital Fund 
appropriations. For this reason, the Department is proposing to launch 
a multiyear effort called Transforming Rental Assistance (TRA). This 
initiative will preserve HUD-funded public and assisted housing, stem 
the loss of affordable units, enhance housing choice for residents and 
streamline the administration of HUD's rental assistance programs. In 
2011, the first phase of this initiative would provide $350 million to 
preserve approximately 300,000 units of public and assisted housing by 
leveraging over $7 billion in private investment.
    At this point, PHAs have access to post transfers for operating 
purposes from Recovery Act formula funding ($3 billion), Recovery Act 
competitive funding ($1 billion) and Capital Funds allocated pursuant 
to the standard annual appropriation for 2009 ($2.2 billion). In June, 
the Department will post transfers for operating purposes ($2.3 
billion) from the Capital Funds pursuant to the 2010 appropriation. 
PHAs, therefore, will have access to more Capital Funds in 2011 because 
of the large amount of Capital Funding made available in 2009 and 2010.
    In previous years, PHAs have funded 8-11 percent of their Capital 
Funds to operations in order to make up for a shortfall in Operating 
Funds. The Department's fiscal year 2011 budget request for the 
Operating Fund is for 100 percent of the eligible costs. Given the 
higher level of funding for the Operating Fund, PHAs will be able to 
keep an extra 8-11 percent in the Capital Fund account rather than 
funding it and will, therefore, be able to address more Capital Fund 
needs.
    Furthermore, PHAs continue to be able to obtain private financing 
through the Capital Fund Financing Program (CFFP) and through mixed 
finance transactions. PIH anticipates that PHAs will be able to borrow 
over $100 million in CFFP financing alone in 2011 (not including 
amounts leveraged in mixed finance transactions).
    Ultimately the Department believes that PHAs will have their best 
opportunity to address the backlog in capital need through 
participation in the Transforming Rental Assistance (TRA) initiative. 
PHAs that convert properties from the public housing program to a 
project based contract model under TRA can expect to position those 
properties to take advantage of private sector financing and leveraging 
to address capital needs backlog in a way that is not possible under 
the conventional public housing program.
                        drug elimination program
    Question. Public housing authorities in New Jersey and around the 
country continue to face safety and security issues as a result of 
drugs and criminal activity. Prior to fiscal year 2002, public housing 
authorities were able to fund safety, security, and drug- and gang-
prevention activities through the Public Housing Drug Elimination 
Program (PHDEP). Since that program has been eliminated, public housing 
authorities have struggled to find the funding they need to keep their 
properties free of drugs and crime. Does HUD have any plans to 
reinstate PHDEP? Is your agency willing to work with this subcommittee 
to get this program restored this year?
    Answer. Safety and security of the public housing residents is part 
of the overall mission of the Department. Any capital improvements that 
improve the safety and security of public housing developments are an 
eligible use of the Capital Fund. However, some PHAs face greater needs 
stemming from unanticipated immediate needs that increase the threats 
to the safety and security of their residents. Emergency Capital Need 
in the amount of $5 million of the 2009 funding had been made available 
to address the needs for 2009 and $2 million of the 2010 funding is 
being made available to address the needs in 2010. The 2010 amount may 
be increased depending on the demand for funds from other types of 
emergencies and non-presidentially declared disasters. The Department 
is issuing a notice in June 2010 that defines the safety and security 
emergencies that will be covered by this funding and details the 
application process. The Department is always willing to discuss any 
ideas that will effectively improve the safety and security of our 
program recipients.
                        emergency capital needs
    Question. In both fiscal year 2009 and fiscal year 2010, Congress 
allocated $20 million to address the emergency capital needs of public 
housing authorities, including ``safety and security measures necessary 
to address crime and drug-related activity.'' As of February of this 
year, no applications had been received for this funding, largely 
because HUD had not issued any notices or guidance. Last December, I 
sent you a letter requesting that you make this guidance available as 
soon as possible. In your response dated February 5, 2010, you stated 
that you intended to ``make this information available to PHAs in the 
near future.''
    Has HUD provided public housing authorities with a formal 
notification of this funding?
    When do you expect eligibility guidelines, especially as they 
relate to the safety and security portion of this funding, to be made 
available to public housing authorities?
    Answer. Safety and security of the public housing residents is part 
of the overall mission of the Department. Any capital improvements that 
improve the safety and security of public housing developments are an 
eligible use of the Capital Fund. However, some PHAs face greater needs 
stemming from unanticipated immediate needs that increase the threats 
to the safety and security of their residents. Five million dollars of 
the 2009 funding had been made available to address the needs for 2009, 
and $2 million of the 2010 funding is being made available to address 
the needs in 2010. The 2010 amount may be increased depending on the 
demand for funds from other types of emergencies and non-presidentially 
declared disasters. The Department is issuing a notice in June 2010 
that defines the safety and security emergencies that will be covered 
by this funding and details the application process.
             section 202 supportive housing for the elderly
    Question. The President's budget request includes a drastic cut to 
the section 202 Supportive Housing for the Elderly program. Although I 
understand the need to redesign and modernize this program, demand for 
section 202 housing remains high and I am concerned about the effect 
this proposal will have on the Nation's stock of senior housing. Why is 
it necessary to suspend funding in order to reauthorize and modernize 
section 202?
    Answer. In the context of severe resource constraints, the 
administration's fiscal year 2011 budget targets housing investments to 
their most crucial and catalytic uses, primarily rental and operating 
assistance that best enable HUD's partners to leverage additional 
resources. HUD requested the suspension of sections 202 and 811 Capital 
Advance Grants in fiscal year 2011 in order to put both programs 
through a thorough review. Both programs have suffered from a lack of 
updating and an overhaul was needed to better target HUD's resources to 
more cost-effectively meet the current housing and supportive service 
needs of frail elderly and disabled very low-income households. The 
Department will submit a section 202/811 legislative proposal in June 
that will address these issues.
                                 ______
                                 
              Question Submitted by Senator Susan Collins
                             housing first
    Question. Housing First is an approach to ending homelessness that 
centers on providing homeless people with housing quickly and then 
providing services as needed. Maine has one Housing First model called 
Logan Place, a low income housing property serving 30 chronically 
homeless people. A second Housing First model, Florence House, is 
expected to open at the end of this month and will serve 25 chronically 
homeless women.
    Studies have shown that the Housing First model is highly effective 
at helping people maintain housing stability when they have a history 
of homelessness and disabilities. The Housing First approach does not 
require tenants to be sober or engage in services at the time of entry; 
rather, they are moved directly from the streets or emergency shelters 
and the services required to help them remain housed are provided to 
them.
    An in-depth study was performed in Maine on the cost of housing 
people vs. their remaining homeless, which assessed 99 participants, 
including most of the residents at Logan Place. The study concluded 
that housing people cost less than allowing people to remain homeless, 
and services were delivered in a more cost-effective manner.
    Is the administration considering the advantages of a Housing First 
approach to help address the growing number of homeless people?
    Answer. HUD's McKinney-Vento funded Permanent Supportive Housing 
(PSH) program grantees are given flexibility to design programs that 
meet the community's needs--including PSH programs that use the Housing 
First model. New HEARTH Act legislation allows this flexibility to 
continue for PSH programs. In general, communities have moved away from 
offering shelter-only alternatives, into service-based interventions 
such as safe havens, outreach, housing first and permanent supportive 
housing. By encouraging Continuum of Care (CoC's) to shift from funding 
services to housing activities, HUD shifted millions of dollars from 
services funding into funding for housing activities. Persons with 
disabilities, including the Housing First target population of 
primarily chronically homeless persons, will continue to be targeted 
with 30 percent of annual homeless assistance awards. In the past, HUD 
has met and exceeded the Congressional requirement of 30 percent for 
permanent housing for persons with disabilities, which remains a 
requirement under HEARTH.
                                 ______
                                 
               Question Submitted by Senator Thad Cochran
                          manufactured housing
    Question. Mr. Secretary, manufactured housing production has 
dropped to an annual rate of fewer than 50,000 homes, compared to 
nearly 400,000 units in 1998. Can you explain why the new FHA title I 
program rules for manufactured housing, which were authorized by 
Congress in the Housing and Economic Recovery Act of 2008, have not 
been issued?
    Answer. The new Federal Housing Administration (FHA) title I 
program rules for the Manufactured Home Loan Program were issued on 
April 14, 2009, by title I letter, TI-481.
    The Housing and Economic Recovery Act of 2008 (HERA) provided for 
several changes to FHA programs to be initially implemented by notice 
in order to facilitate implementation of long-desired changes to FHA 
programs without having to wait for the often 12-month period it takes 
for a formal rule to be issued. On this basis, HUD implemented the HERA 
changes to FHA title I Manufactured Home Loan Program by title I 
letter. Although HUD implemented the new requirements by letter, HUD 
solicited comment on HUD's implementation of these requirements through 
an April 21, 2009 Federal Register publication.
    HUD is currently developing the final rule, which takes into 
consideration the 7 public comments received in response to the April 
21, 2009 solicitation of comments. HUD believed that it was prudent to 
ensure sufficient public comment and did not rush to codify new 
regulations based on the title I letter, TI-481, issued April 14, 2009. 
HUD believed that before codifying these requirements, it would benefit 
by seeing how the new requirements worked in practice, and whether 
clarifications or modifications would be needed before formal 
codification. HUD believes that it has benefitted from the year-long 
experience it has had in seeing how the rules in the title I letter 
have worked. HUD is developing the rule for codification, and will not 
only take into consideration the 7 public comments received, but also 
the experience to date of HUD and industry operating under the new 
requirements for the past year. However, until that rule is issued, 
title I Letter, TI-481, dated April 14, 2009, remains the rule 
implementing document.
    Question. You say in your statement that ``the Federal Housing 
Administration (FHA) has stepped up to fulfill its countercyclical 
roll--to temporarily provide necessary liquidity while also working to 
bring private capital back to credit markets'', but this has not been 
the case for manufactured housing. Do you believe that a non-career 
administrator for the manufactured housing program would address this 
disparity?
    Answer. The FHA Commissioner has taken the leadership to address 
this disparity by responding to an invitation from Representative 
Donnelly of Indiana. Both the Congressman and the Commissioner will be 
meeting on June 2 in Elkhart, Indiana with key lenders along with 
Ginnie Mae, Fannie Mae, Freddie Mac and manufacturers to identify the 
issues for which these parties are seeking further clarification and 
information regarding the complex financial problems in both the 
primary and secondary markets.
    Question. Manufactured housing plays an important role in the 
housing market by providing families, often with a limited income, an 
opportunity for home ownership. What is HUD doing to help promote the 
manufactured housing marketplace, including international 
opportunities?
    Answer. HUD has worked to highlight the home ownership and 
community opportunities available with manufactured housing. This has 
included reports to help builders understand how manufactured housing 
could be used in their construction efforts. It is HUD's general 
position that factory built construction (including manufactured, 
modular, and panelized) provides many opportunities and can contribute 
to local development activities. In addition, HUD provides Federal 
insurance through the FHA for loans to finance the purchase of 
manufactured homes.
    Also as noted in the response to question No. 4, HUD is working 
closely with the State Department and USAID on a variety of 
international housing development and urban policy issues. In meeting 
with representatives of other governments, HUD officials will take 
advantage of these new opportunities to highlight the benefits of U.S. 
factory built housing and related construction materials and products.
    Moreover, many housing products produced in the United States can 
be used internationally. HUD has worked with builders and manufacturers 
to help them understand how they might take advantage of opportunities 
for international sales. The manufactured housing building code (the 
HUD-code) is unique to the Unites States and may not be accepted in 
other countries. Therefore, manufacturers of HUD-code homes may elect 
to offer similar products produced on the same production line or 
produce other types of factory-built housing that can be more easily 
shipped such as panelized housing. In many cases, the manufactured 
housing production line could be used for many similar products.
    Question. I understand that you will be attending the United 
Nations World Urban Forum. This is especially unusual as HUD seldom, if 
ever, plays a role in international housing issues. Nevertheless, this 
is an opportunity to note the potentially inexpensive cost and housing 
opportunities represented by manufactured housing in many parts of the 
world. I urge you to use this opportunity to highlight the benefits and 
promote the use of manufactured housing to the international audience.
    Answer. HUD has engaged in international exchange programs for 
several decades. However, under the Obama administration, HUD has 
considerably expanded the scope and nature of its contacts with other 
governments and international organizations. The administration 
believes that many lessons can be learned from experience of other 
countries, and has seen value in these relationships. HUD is working 
closely with the State Department and USAID on a variety of 
international housing development and urban policy issues. In meeting 
with representatives of other governments, HUD officials will take 
advantage of these new opportunities to highlight the benefits of U.S. 
factory built housing and related construction materials and products.
    Moreover, many housing products produced in the United States can 
be used internationally. HUD has worked with builders and manufacturers 
to help them understand how they might take advantage of opportunities 
for international sales. The manufactured housing building code (the 
HUD-code) is unique to the Unites States and may not be accepted in 
other countries. Manufacturers of HUD-code homes may elect to offer 
similar products produced on the same production line or produce other 
types of factory-built housing that can be more easily shipped such as 
panelized housing. In many cases, the manufactured housing production 
line could be used for many similar products.
    Question. There have been a number of articles recently regarding 
the sale of thousands of manufactured housing units by FEMA into the 
marketplace. People have raised serious concerns about environmental 
and cost issues regarding these units. As the housing regulator for the 
Nation, what is your opinion on the potential impact on the marketplace 
for new manufactured units? What is HUD's role in the resale of units, 
especially since another Federal agency is involved? If there are 
environmental issues, who is looking at those issues, and who is 
responsible for any related decisions?
    Answer. HUD has no role in GSA's resale of the temporary housing 
units as HUD's regulatory role is limited to new sales and not resale. 
HUD regulates only how the home was designed, the compliance of the 
home when the manufacturer provided it to the first purchaser, and the 
first installation of the home. A small fraction of the units FEMA is 
selling through GSA are HUD-code manufactured housing. These 
manufactured housing units were produced to the same standards as all 
manufactured housing and have received periodic inspections and 
maintenance during their use. The small size of the FEMA manufactured 
homes is in stark contrast with the size of most of the manufactured 
housing units available in the United States. It appears unlikely a 
home buyer interested in a larger home would purchase one of these 
units instead of a new manufactured home. We anticipate the FEMA 
manufactured homes entering the resale market will be less expensive 
than new units, a result of the units being used and the smaller, 
single wide form. This could provide to some degree, increased home 
ownership opportunities for families of modest means. Following 
Hurricane Katrina, many manufacturers in the region produced units 
under contract to FEMA that are now available for resale. It is 
reasonable to expect that local retailers would be involved in the 
purchase, inspection, resale and installation of the units. HUD is not 
involved in the safety aspects of the units being sold through GSA and 
these issues rest with FEMA and questions should be addressed to FEMA.

                          SUBCOMMITTEE RECESS

    Senator Bond. The subcommittee will hold the next hearing 
on Thursday, March 25, at 9:30 a.m., on the Federal Housing 
Administration.
    Thank you very much, Mr. Secretary.
    Secretary Donovan. Thank you, Senator. And let me just 
recognize the great work and partnership that we have with Ken 
Donohue, who is our inspector general, around a lot of these 
fraud issues. I don't want to let the record close without 
recognizing his partnership.
    Senator Bond. A very important additional tool that you and 
we have and we appreciate his good work.
    Thank you.
    Secretary Donovan. Thank you.
    [Whereupon, at 11:20 a.m., Thursday, March 11, the 
subcommittee was recessed, to reconvene at 9:30 a.m., Thursday, 
March 25.]
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