[Senate Hearing 113-]
[From the U.S. Government Publishing Office]



 
TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES 
                  APPROPRIATIONS FOR FISCAL YEAR 2014

                              ----------                              


                        THURSDAY, APRIL 11, 2013

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Patty Murray (chairman) presiding.
    Present: Senators Murray, Collins, Coats, and Blunt.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                        Office of the Secretary

STATEMENT OF HON. SHAUN DONOVAN, SECRETARY


               opening statement of senator patty murray


    Senator Murray. Good morning. The subcommittee will come to 
order.
    This morning, we welcome Secretary Donovan to the 
subcommittee to discuss the President's fiscal year 2014 budget 
request for the Department of Housing and Urban Development 
(HUD).
    As we begin our discussion of next year's budget, we have 
to really acknowledge where we are today. Because of the 
unwillingness of some in Congress to compromise on fair and 
balanced deficit reduction, we are now living with 
sequestration and the arbitrary cuts to Federal spending that 
it requires.
    Some here in Washington, DC, have claimed that the impact 
is minimal. That is not the story that people all across the 
country who have to live with sequestration's consequences are 
telling.
    The truth is these cuts are having an impact. And in so 
many cases, it is an impact that is being felt by the most 
vulnerable in our society.
    The cut to HUD's section 8 voucher program, for example, is 
more than $938 million, forcing housing authorities to make 
difficult choices to stay within their reduced budgets.
    On the ground, that means tens of thousands of fewer 
vouchers to help our low-income families find safe, affordable 
housing.
    In my home State of Washington, the King County Housing 
Authority announced it will not be reissuing vouchers, leaving 
our low-income Washington families without access to affordable 
housing. Stephen Norman, who is the King County Housing 
Authority director, said immediately after he was forced to 
make these cuts that, ``Because rents are so high, many of 
these families may, quite literally, find themselves out on the 
street as a result of these arbitrary cuts.''
    They are not alone. Many housing authorities across the 
country are being forced to make similar decisions.
    In other communities, families that were in the process of 
finding a place to live after spending months or years on a 
waiting list have been told their voucher has been withdrawn.
    They are losing hope and relief of finally having access to 
affordable housing. Instead, they are left with frustration and 
uncertainty.
    Those families are paying the price for the fact that 
Washington, DC, continues to lurch from crisis to crisis 
instead of compromising around a balanced deficit reduction 
plan.
    As we continue to debate the future of the Federal budget, 
they are a clear reminder that our decisions have consequences, 
because this debate is about more than just numbers, it is 
about people's lives and the Nation's values.
    This debate is also occurring at a critical time for our 
economy. After struggling through the great recession, the 
economy is finally growing. But recent jobs reports highlight 
how fragile our recovery is and that we cannot afford to push 
off the hard choices a budget deal requires.
    Our focus needs to be on creating jobs today, while laying 
a strong foundation for the future.
    A responsible plan will reduce the Nation's deficit. But it 
cannot be at the expense of the most vulnerable or investments 
in things like infrastructure and education that are essential 
for a strong economy.
    The budget we recently passed in the Senate provides a path 
forward that balances responsible spending cuts with necessary 
investments. And I look forward to working with my colleagues 
in both the House and the Senate to try to enact a responsible 
budget compromise.
    This will require hard choices on all sides, but the 
American people expect action.
    So as we continue to work on the budget, we also have to 
begin our work on the fiscal year 2014 appropriations bills. 
And today, this subcommittee begins its work by examining HUD's 
budget request.
    The majority of HUD's budget supports a critical part of 
the Nation's safety net--housing assistance. This includes 
funding for section 8 vouchers, project-based section 8, public 
housing, and homeless assistance grants.
    These programs have long provided low-income Americans with 
safe, affordable housing and shelter in time of crisis. These 
programs are even more important today as families struggle to 
find affordable housing.
    According to HUD's recent report on the worst-case housing 
needs, in 2011, there were over 8.5 million low-income renters 
who spent more than 50 percent of their income on housing, 
lived in severely substandard housing, or both.
    Perhaps even more troubling is the fact that this number 
has grown by 43.5 percent since 2007.
    As we struggle to address the growing housing needs with 
limited resources, Federal programs must be smarter and more 
agile. Neither the taxpayers nor the millions of people who 
rely on these programs can afford waste or inefficiency.
    So it is incumbent upon HUD and this subcommittee to ensure 
accountability. We have to look for ways to improve program 
oversight and delivery by ensuring people are following the 
rules, eliminating outdated regulations, streamlining programs, 
and improving coordination across Government programs to make 
the best use of scarce resources.
    Improving Federal programs goes beyond ensuring compliance. 
It also means focusing on outcomes.
    Successful housing programs are those that create new 
opportunities for their residents so they can improve their 
lives and those of their children.
    In Washington State, I have seen exciting partnerships 
among housing authorities, schools, community colleges, and 
employers designed to reduce poverty and its lasting impacts.
    These partnerships are built on an understanding that 
housing can and should do more than meet the basic need for 
shelter.
    Housing in strong, safe neighborhoods with access to good 
schools, jobs, services, and transportation can help transform 
people's lives.
    The President's budget includes an initiative called 
Ladders to Opportunity, which is focused on creating jobs, 
attracting private investment, improving educational outcomes, 
and increasing economic activity in high-poverty communities 
across the Nation.
    Several proposals in HUD's budget support this initiative, 
including Choice Neighborhoods, the Rental Assistance 
Demonstration, and the Neighborhood Stabilization Initiative.
    In addition, the budget includes a new pilot program to 
help address the needs of the growing low-income elderly 
population, funding to combat mold in Indian country, and 
expansion of the successful Jobs-Plus program for public 
housing residents.
    While all of these proposals address important issues 
facing urban and rural communities across the country, we must 
evaluate both their budgetary cost and HUD's capacity to take 
on new initiatives.
    HUD cannot effectively manage new initiatives at the cost 
of the performance and oversight of their existing programs.
    The Department must improve its oversight of public housing 
authorities and other grantees; deliver on the needed 
investments in its information technology (IT) systems; and 
continue to strengthen the Federal Housing Administration's 
(FHA) Mutual Mortgage Insurance (MMI) Fund, which the budget 
anticipates needing to draw on taxpayer funds for the first 
time in its history.
    As our housing market continues its recovery, now is the 
time to be thinking of the future of the Nation's housing 
policy.
    This conversation is appropriately focused on reforming our 
housing finance system to ensure a strong housing market, 
supported primarily by the private market. But this 
conversation must also address the future of affordable rental 
housing.
    Recently, the Bipartisan Policy Center's Housing Commission 
released recommendations for the future of housing policy. My 
friend, former Senator Kit Bond, was a member. Their 
recommendations support homeownership and the need to reform 
our Nation's housing finance system.
    The commission also reaffirmed the importance of affordable 
housing. Its recommendations provide a very good foundation for 
beginning the discussion of our Nation's housing policy, which 
I look forward to continuing today.

                           PREPARED STATEMENT

    And with that, I will turn it over to my partner, Senator 
Collins.
    [The statement follows:]
               Prepared Statement of Senator Patty Murray
    The subcommittee will come to order. This morning we welcome 
Secretary Donovan to the subcommittee to discuss the President's fiscal 
year 2014 budget request for the Department of Housing and Urban 
Development (HUD). As we begin our discussion of next year's budget, we 
must acknowledge where we are today.
             sequestration's impact on the most vulnerable
    Because of the unwillingness of some in Congress to compromise on 
fair and balanced deficit reduction, we are now living with 
sequestration and the arbitrary cuts to Federal spending it requires.
    And while some here in Washington, DC, have claimed that the impact 
is minimal, that's not the story that people all across the country who 
have to live with sequestration's consequences are telling. The truth 
is these cuts are having an impact. And in so many cases it's an impact 
that's being felt by the most vulnerable in our society.
    The cut to HUD's section 8 voucher program, for example, is more 
than $938 million, forcing housing authorities to make difficult 
choices to stay within their reduced budgets. On the ground, this means 
tens of thousands of fewer vouchers to help low-income families find 
safe, affordable housing.
    In my home State of Washington, the King County Housing Authority 
announced that it will not be re-issuing vouchers, leaving low-income 
Washington families without access to affordable housing. Stephen 
Norman, the King County Housing Authority director, said immediately 
after he was forced to make these cuts that ``Because rents are so 
high, many of these families may, quite literally, find themselves out 
on the street as a result of these arbitrary cuts.''
    And they are not alone. Many housing authorities across the country 
are being forced to make similar decisions. In other communities, 
families that were in the process of finding a place to live after 
spending months or years on a waiting list have been told that their 
voucher has been withdrawn. They are losing the hope and relief of 
finally having access to affordable housing. Instead they are left with 
frustration and uncertainty. These families are paying the price for 
the fact that Washington, DC, continues to lurch from crisis to crisis 
instead of compromising around a balanced deficit reduction plan. As we 
continue to debate the future of the Federal budget, they are a clear 
reminder that our decisions have consequences.
    Because this debate is about more than just numbers, it is about 
people's lives and the Nation's values. This debate is also occurring 
at a critical time for our economy. After struggling through the Great 
Recession, the economy is finally growing. But recent jobs reports 
highlight how fragile our recovery is and that we cannot afford to push 
off the hard choices a budget deal requires.
    Our focus needs to be on creating jobs today, while laying a strong 
foundation for the future. A responsible plan will reduce the Nation's 
deficit. But it cannot be at the expense of the most vulnerable or 
investments in things like infrastructure and education that are 
essential for a strong economy.
    The budget we recently passed in the Senate provides a path forward 
that balances responsible spending cuts with necessary investments. I 
look forward to working with my colleagues in both the House and Senate 
to try to enact a responsible budget compromise. This will require hard 
choices on all sides, but the American public expects action.
    As we continue work on the budget, we must also begin our work on 
the fiscal year 2014 appropriations bills. And today, this subcommittee 
begins its work by examining HUD's budget request.
    The majority of HUD's budget supports a critical part of the 
Nation's safety net--housing assistance. This includes funding for:
  --section 8 vouchers;
  --project-based section 8;
  --public housing; and
  --homeless assistance grants.
    These programs have long provided low-income Americans with safe, 
affordable housing and shelter in times of crises. These programs are 
even more important today as families struggle to find affordable 
housing.
    According to HUD's recent report on the worst case housing needs, 
in 2011, there were over 8.5 million low-income renters who spent more 
than 50 percent of their income on housing, lived in severely 
substandard housing, or both. Perhaps even more troubling is the fact 
this number has grown by 43.5 percent since 2007.
                improving performance and accountability
    As we struggle to address the growing housing needs with limited 
resources, Federal programs must be smarter and more agile. Neither the 
taxpayers nor the millions of people who rely on these programs can 
afford waste or inefficiency. So it is incumbent upon HUD and this 
subcommittee to ensure accountability. We must look for ways to improve 
program oversight and delivery by:
  --Ensuring people are following the rules;
  --Eliminating outdated regulations;
  --Streamlining programs; and
  --Improving coordination across Government programs to make the best 
        use of scarce resources.
    Improving Federal programs goes beyond ensuring compliance. It also 
means focusing on outcomes. Successful housing programs are those that 
create new opportunities for their residents so that they can improve 
their lives and those of their children.
    In Washington State, I have seen exciting partnerships among:
  --Housing authorities;
  --Schools;
  --Community colleges; and
  --Employers designed to reduce poverty and its lasting impacts.
    These partnerships are built on an understanding that housing can 
and should do more than meet the basic need for shelter. Housing in 
strong, safe neighborhoods with access to good schools, jobs, services, 
and transportation can help transform people's lives. The President's 
budget includes an initiative called ``Ladders to Opportunity'', which 
is focused on:
  --Creating jobs;
  --Attracting private investment;
  --Improving educational outcomes; and
  --Increasing economic activity in high poverty communities across the 
        Nation.
    Several proposals in HUD's budget support this initiative, 
including:
  --Choice Neighborhoods;
  --The Rental Assistance Demonstration; and
  --The Neighborhood Stabilization Initiative.
    In addition, the budget includes a new pilot program to help 
address the needs of the growing low-income elderly population, funding 
to combat mold in Indian Country, and expansion of the successful Jobs-
Plus program for public housing residents.
    While all of these proposals address important issues facing urban 
and rural communities across the country, we must evaluate both their 
budgetary cost and HUD's capacity to take on new initiatives.
    HUD cannot effectively manage new initiatives at the cost of the 
performance and oversight of existing programs. The Department must:
  --Improve its oversight of public housing authorities and other 
        grantees;
  --Deliver on the needed investments in its IT systems; and
  --Continue to strengthen FHA's Mutual Mortgage Insurance Fund, which 
        the budget anticipates needing to draw on taxpayer funds for 
        the first time in its history.
    As our housing market continues its recovery, now is the time to be 
thinking of the future of the Nation's housing policy. This 
conversation is appropriately focused on reforming our housing finance 
system to ensure a strong housing market, supported primarily by the 
private market. But this conversation must also address the future of 
affordable rental housing.
    Recently, the Bipartisan Policy Center's Housing Commission 
released recommendations for the future of housing policy. My friend, 
former Senator Kit Bond, was a member. Their recommendations support 
homeownership and the need to reform our Nation's housing finance 
system.
    The Commission also reaffirmed the importance of affordable 
housing. Its recommendations provide a good foundation for beginning 
the discussion of our Nation's housing policy, which I look forward to 
continuing today.
    With that I turn it over to my partner, Senator Collins.

                 STATEMENT OF SENATOR SUSAN M. COLLINS

    Senator Collins. Thank you, Madam Chairman.
    First of all, let me say that I am delighted to be working 
with you once again this year, as we start the fiscal year 2014 
appropriations process under the new leadership of both 
Chairman Mikulski and Vice Chairman Shelby, as well as the 
members of this subcommittee, including our colleagues, Senator 
Coats and Senator Blunt, who have joined us today. I am always 
glad to see strong representation on the Republican side of the 
dais here.
    Mr. Secretary, it is also a great pleasure to see you 
again. I am very happy that you are apparently going to be 
staying on in the second administration, at least for a while, 
since I have found you to be a real straight-shooter and 
dedicated to improving housing opportunities for the people of 
this country. And I look forward to continuing to work with 
you.
    Obviously, we still have very serious budget issues to deal 
with. And we must find a careful balance to ensure that we deal 
with the ongoing unsustainable $16.7 trillion debt, while 
providing housing for our most vulnerable citizens.
    As we begin to construct this spending bill, we continue to 
face difficult decisions given these fiscal constraints. 
Sequestration is going to make some of these decisions even 
tougher.
    I am concerned for the Maine housing authority directors, 
with whom I recently met, who told me they are being forced to 
reduce spending at the expense of families in need. Some of 
them told me that they were actually turning back vouchers 
because they did not have sufficient administrative funds. And 
that certainly is of great concern.
    Yet, even though sequestration cuts have already taken 
effect, the deficit continues to rise. The budget that HUD has 
submitted is $47.6 billion for fiscal year 2014 and an increase 
of nearly $4.2 billion, or 6.67 percent, over the fiscal year 
2013 sequestration levels.
    What would be helpful to me today, however, is to have you 
describe the total resources that are available to HUD, 
including offsetting receipts, and to give us a comparison to 
the pre-sequestration levels, as well. And I understand that 
you are prepared to do that.
    The vast majority of this funding will support renewals for 
rental and homelessness assistance. The budget also provides 
for investment to revitalize neighborhoods and support economic 
development initiatives in communities throughout the country.
    As we prepare the budget, it is critical that we address 
the ongoing challenges with homelessness, which remains a 
personal top priority of mine.
    Chairman Murray and I continue to share this commitment, 
particularly for our Nation's veterans. One out of every six 
men and women in homeless shelters are veterans. And 
unfortunately, veterans are 50 percent more likely to fall into 
homelessness compared to other Americans.
    I am pleased that the budget continues funding for HUD's 
Veterans Affairs Supportive Housing, the HUD-VASH program, at 
$75 million. This level of funding, I am told, will allow us to 
serve an additional 10,000 veterans.
    And it is important to note that this program is working, 
that veterans' homelessness has fallen, and it fell by nearly 
7.2 percent from 2011 to 2012. That demonstrates that programs 
like this work.
    And that needs to be our focus. We need to focus like a 
laser on what kinds of housing programs work, give us the 
biggest bang for the buck, and what kind really have outlived 
their usefulness, are not expansive, and, most of all, are not 
effective in serving families in need.
    In addition to programs that serve the homeless, HUD 
provides important support for affordable rental housing.
    Another important issue which we discussed at length is the 
oversight and monitoring of HUD's programs. In that regard, Mr. 
Secretary, I want to thank you for your work on an 
investigation in Maine into the Maine State Housing Authority 
section 8 voucher program last year. I requested an 
investigation into the troubling cases of serious code 
violations and other poor conditions that were uncovered in 
Oxford County, Maine, and brought to me by the attention of a 
local fire chief who was so concerned. And I appreciate so much 
the work of your Department in addition to the work of the 
inspector general.
    It is critical that federally subsidized properties comply 
with all health, safety, and quality standards. After all, it 
is inexcusable that we are putting residents in units and 
apartments that had serious violations of welfare and safety 
and health standards. But it is doubly offensive when the 
taxpayers are subsidizing those unfit units.
    So those are just some of the issues. I am pleased with the 
increased funding levels for section 202 housing for the 
elderly. This program has provided over 400,000 affordable 
homes for very low-income elderly individuals through a number 
of different financing structures.
    Many people are surprised to learn that Maine has one of 
the largest elderly populations in the country. In fact, if you 
look at the median age, we are the oldest State in the Nation, 
older than Florida even. That raises certain challenges.
    There is one area that I want to highlight in closing, and 
that is the funding level for the community development block 
grant (CDBG) program. As you know, I believe that the level of 
$2.79 billion is truly disappointing. I am told that, if 
enacted, this would be the lowest level of funding since 1976. 
And yet, this program remains the most adaptable, the most 
welcomed community and economic development Federal program for 
meeting the unique needs of communities throughout this 
country.

                           PREPARED STATEMENT

    These are just some of the many issues we are going to have 
to tangle with this year, and I look forward to working with 
the chairman and the members of this subcommittee as we 
consider HUD's fiscal year 2014 budget request.
    Thank you.
    [The statement follows:]
             Prepared Statement of Senator Susan M. Collins
    Thank you, Chairman Murray. I am delighted to join you as we start 
the fiscal year 2014 appropriations process under new leadership of 
both Chairman Mikulski and Vice Chair Shelby, as well as the new 
members of this subcommittee.
    Mr. Secretary, it is nice to see you again. I look forward to 
continuing to work with you to meet the housing and economic 
development needs of families and communities throughout the Nation and 
I look forward to your testimony as we consider the Department of 
Housing and Urban Development's (HUD's) fiscal year 2014 budget 
request.
    As we begin to construct this spending bill, we continue to face 
difficult decisions given the fiscal constraints we remain under. 
Sequestration will make these decisions even tougher. I am also 
concerned for the public housing authorities who are being forced to 
reduce spending at the expense of families in need. While sequester 
cuts have already taken effect, the deficit continues to rise. We must, 
however, find a careful balance to ensure that the Nation's most 
vulnerable are provided for.
    The President's fiscal year 2014 HUD budget request is $47.6 
billion, an increase of nearly $4.2 billion or 6.67 percent above 
fiscal year 2013 enacted levels. The vast majority of this funding will 
support the renewals for rental and homelessness assistance. The budget 
also provides for the investment to revitalize neighborhoods and 
support economic development in communities throughout the country.
    As we prepare the budget for fiscal year 2014, it is critical that 
we address the ongoing challenges with homelessness, which remains a 
top priority of mine. Chairman Murray and I continue to share this 
commitment, particularly for our Nation's veterans. One out of every 
six men and women in homeless shelters are veterans, and unfortunately, 
veterans are 50 percent more likely to fall into homelessness compared 
to other Americans. I am pleased the budget continues funding for HUD's 
Veterans Affairs Supportive Housing (HUD-VASH) program at $75 million. 
This level of funding will serve an additional 10,000 veterans 
nationwide. Veterans' homelessness fell by nearly 7.2 percent from 2011 
to 2012, demonstrating that programs like HUD-VASH work.
    I continue to support the Homeless Assistance Grants program to 
prevent and end homelessness. The budget proposes $2.38 billion for 
this program, which is $575 million over current levels.
    In addition to programs that effectively serve the homeless, HUD 
also provides support for affordable rental housing. The budget 
proposes nearly $20 billion for the Tenant-Based Rental Assistance 
program, of which $1.685 billion is available for administrative costs.
    Another important issue is the oversight and monitoring of HUD's 
programs. Mr. Secretary, I want to thank you for your work into the 
investigation of Maine State Housing Authority's section 8 voucher 
program. Last year, I requested an investigation into the troubling 
cases of code violations and other poor conditions that were uncovered 
in Oxford County. I appreciate the work of your Department, in addition 
to that of Inspector General Montoya. It is critical that federally 
subsidized properties comply with all health, safety, and quality 
standards.
    It is bad enough that taxpayers were charged for substandard units, 
but it is appalling that residents were forced to live in such horrible 
conditions. The welfare and safety of tenants must be safeguarded, and 
federally subsidized properties must represent fair value to the tenant 
and the taxpayer alike.
    Nationwide, more than 5.4 million families receive housing 
assistance through the many programs offered at HUD. Altogether, more 
than 65 percent of HUD-assisted households are elderly or disabled. I 
am pleased to see the increased funding levels for the Section 202 
Housing for the Elderly program. This program has provided over 400,000 
affordable homes for very-low-income elderly individuals through a 
number of different financing structures in the past. Maine has one of 
the largest elderly populations in the United States. In fact, Maine 
has the oldest median age population in the United States.
    Finally, the funding level for the Community Development Block 
Grant (CDBG) program, which is proposed at $2.79 billion is truly 
disappointing. If enacted, this would reach the lowest level of funding 
since 1976. With 1,100 grantees served by an estimated 7,000 local 
governments across the country, CDBG remains the largest and most 
adaptable community and economic development Federal program for 
meeting the unique needs within these communities.
    These are just some of the many issues we are confronted with on 
our subcommittee this year. Chairman Murray, I look forward to working 
with you as we consider HUD's fiscal year 2014 budget request.

    Senator Murray. Thank you very much. And, Senator Collins, 
I appreciate the opportunity to work with you again this year 
on a subcommittee we both care passionately about. It is great 
to work with you.
    Senator Coats, do you have an opening statement?

                     STATEMENT OF SENATOR DAN COATS

    Senator Coats. Madam Chairman, I do.
    I thank you. I look forward to serving on this subcommittee 
with you and our ranking member.
    Not to repeat, but I will repeat Senator Collins' point 
that we are operating during a time where the game has changed. 
Instead of coming here every year on the Appropriations 
Committee and saying, ``how much more are we going to spend 
this year?'' we are faced with a fiscal crisis which requires 
us to say, how can we take better care of the taxpayer dollars 
that are being sent here? How can we better manage our 
Departments? How can we be more efficient with perhaps less to 
spend or not as much to spend as we would like? How can we 
separate the essential from the ``well, we would like to do 
this but can't afford it right now,'' from the ``why are we 
doing that in the first place?'' Or maybe that had a sufficient 
function going forward at one time, but we just cannot justify 
that program.
    All of this to address the fiscal issue in one of two ways: 
One, how can we save money and turn it back and reduce our debt 
and deficit? Second, how can we better transfer this money to 
essential programs instead of wasting it on programs that do 
not seem to work very well?
    Let me just mention a couple things.
    Mr. Secretary, I am not sure my time will allow me to be 
here to ask this direct question, but I will just put it out 
there and you can address it in a general way.
    In 2012, the Government Accountability Office (GAO) found 
that the Federal Government is operating 160 separate housing 
assistance programs and tax expenditures within 20 departments, 
agencies, costing about $170 billion. Is there room here to 
eliminate some of this duplication or to consolidate some of 
this, so that we do not have to have each separate entity here 
staffed all the way down through the administrative positions, 
and so forth? Is there room for this type of consolidation and 
coordination?
    Every business in America has had to do this since the 2008 
collapse. And when we mentioned sequester, they say, ``Five 
percent, 7 percent? I mean, we have had to do 15 percent. We 
have had to do 18 percent. But we are a much more leaner, more 
efficient organization now.''
    We see that everywhere in the private sector, but we do not 
see that in the Federal Government.
    HUD provided a community development block grant in the 
amount of $505,000 to a private entity, Sergeant's Pet Care 
Products, Inc., which specializes in pet shampoo and 
toothpaste. Now, maybe there is justification for this small 
business. I do not know. But it is a private company. They are 
expected to bring in revenue of $140 million in 2012. Why are 
we giving CDBG grants to private companies who are earning 
revenues of over $100 million?
    And last, according to HUD's own inspector general, for 
2012 fiscal year, he said HUD could have put over $3.2 billion 
to better use and has paid over $1.3 billion in questionable 
costs. So that is $4.5 billion in public funds that perhaps 
could have shifted to provide better housing or more effective 
housing, or not spent at all.
    So just in a general way, Mr. Secretary, address the 
broader question. You do not have to provide it here exactly 
the details of this particular loan or justify this or that. 
The larger question of what is HUD doing, what are you doing, 
to try to make your Department more efficient, more effective, 
given the scarcity of funds that we have, and the fact that we 
need to be more careful with the taxpayer dollars. So when you 
have a chance to address that, I would appreciate it.
    And, Madam Chairman, thank you.
    Senator Murray. Thank you very much.
    Senator Blunt.

                     STATEMENT OF SENATOR ROY BLUNT

    Senator Blunt. Chairman, thank you for conducting the 
hearing.
    Secretary, thank you for being here. I look forward to 
working with you and Senator Collins on this important 
subcommittee.
    And I have a statement for the record, and I will just 
submit it for the record.
    [The referenced statement was not available at press time.]
    Senator Murray. Thank you very much.
    With that, Secretary Donovan, we will turn it over to your 
opening statement. And we do have a vote around 11 o'clock, but 
I think we have sufficient time for your statement and 
questions from those of us who are here this morning. I will 
turn it over to you.

                SUMMARY STATEMENT OF HON. SHAUN DONOVAN

    Secretary Donovan. Thank you.
    Chairman Murray, Ranking Member Collins, members of the 
subcommittee, thank you for having me here today.

                        HOUSING AND COMMUNITIES

    HUD's fiscal year 2014 budget proposal will help grow our 
economy from the middle class out by supporting the ongoing 
recovery in our housing market and creating Ladders of 
Opportunity in communities across the country.
    As the President said, our economy is strongest when we 
expand opportunity and reward the hard work of everyone. HUD's 
budget does this by supporting the creation and retention of 
620,000 jobs.
    We followed four main principles in creating our 2014 
budget. The first was to continue support for the resurgent 
housing market, while encouraging the return of private capital 
and rebalancing the Nation's housing finance system.
    Today, the housing market is playing a key role in our 
economic recovery. Rising home values lifted 1.7 million 
families back above water, and home equity grew by more than 
$1.6 trillion in 2012.

                     FEDERAL HOUSING ADMINISTRATION

    FHA continues to play an important role in this effort, 
insuring nearly 1.2 million single-family mortgage loans in 
2012. However, due to reverse mortgages and other loans insured 
during the economic crisis, the fiscal year 2014 budget 
projects that FHA will need $943 million in support from 
Treasury. As you know, any decision to draw from the Treasury 
depends on the actual performance of the fund during the 
current fiscal year.
    We have taken aggressive steps to protect the fund and are 
already seeing strong results from those efforts, even with 
stress from the troubled reverse mortgage program and the now 
banned seller-assisted down payment programs. In fact, while 
the gross budget authority HUD requests in 2014 is $47.6 
billion, a 7-percent increase over the fiscal year 2012 enacted 
level, offsetting receipts from FHA and Ginnie Mae totaling 
$14.5 billion bring the cost to the taxpayer to only $33.1 
billion, almost 12 percent below the fiscal year 2012 enacted 
level.
    Despite this progress, we continue to take responsible 
administrative action, and the fiscal year 2014 budget calls on 
Congress to further assist in stabilizing the fund.

                            ASSISTED HOUSING

    The second principle we used in developing our budget was 
to protect current vulnerable residents. There are 5.4 million 
families who live in HUD-assisted housing, a number we have 
increased by more than 219,000 over the last 3 years through 
better management.
    These households earn just $12,500 a year on average and 
nearly two-thirds have a member who is elderly or disabled.
    Fully funding renewals consumes 84 percent of our proposed 
budget just to keep current residents in their homes, support 
homelessness prevention, and provide basic maintenance to 
public housing.
    And again, to echo your words, chairman, this has never 
been more important with the staggering over 40 percent 
increase in worst-case housing needs we have seen in just 4 
years.

                          EXISTING PARTNERSHIP

    The third principle we followed was to build on existing 
partnerships, helping to create Ladders of Opportunity while 
embracing smart, effective, efficient Government. As the 
President made clear in his State of the Union Address, in too 
many hard-hit communities, the life chances of a child are 
determined not by her talents, but by her ZIP Code. The Promise 
Zones proposed by the President expand investments by HUD, the 
Departments of Education and Justice, and other agencies, while 
coordinating and streamlining this work to maximize impact and 
reduce costs.

                          CHOICE NEIGHBORHOODS

    The $400 million we have requested for our Choice 
Neighborhoods program represents a significant increase that 
will allow us to transform public and assisted housing in our 
hardest hit neighborhoods and ensure our children are prepared 
for the 21st century economy.
    Building on the success of three rounds of neighborhood 
stabilization funding, a $200 million Competitive Neighborhood 
Stabilization Initiative within our community development block 
grant program will address the needs of neighborhoods that 
continue to suffer the negative effects of abandonment and 
foreclosure of privately owned housing.
    Our reorganized Office of Economic Resilience, to be 
located within HUD's Community Development and Planning 
Division, would offer $75 million in integrated planning and 
investment grants that support local investments in 
infrastructure and other development to create jobs and build 
diverse, resilient economies.

                           REGULATORY BURDENS

    The final principle we used in creating this budget was to 
increase efficiency, reduce regulatory burdens, and provide 
flexibility to our partners, allowing them to better manage 
resources.

                           SECTION 8 REFORMS

    I look forward to working with Congress to enact the 
section 8 reforms proposed in our budget, which would save 
approximately $2.8 billion over the next 5 years and streamline 
outdated statutes governing our public and assisted housing.
    Expanding initiatives like the Rental Assistance 
Demonstration and the Moving To Work program will allow more 
public housing authorities the flexibility to pilot innovative 
strategies that will better serve residents, consolidate 
programs, and save taxpayers money.

                       TRANSFORMATION INITIATIVES

    This budget also continues the transformation initiative, 
allowing us to propose increased investments in programs we 
know work and stop funding the ones that do not, and to hold 
our partners accountable for the funding they receive.
    Perhaps the best example of this approach is found in 
Opening Doors, the administration's plan to end homelessness, 
which has dramatically reduced chronic and veterans' 
homelessness over the last 2 years.

                             VASH VOUCHERS

    Because we know these programs save lives as well as 
taxpayer dollars, our budget proposes 10,000 new VASH vouchers 
and a significant increase in our homeless assistance grants.
    Unfortunately, sequestration seriously threatens our 
ability to serve families, communities, and even veterans 
across the Nation with hundreds of thousands likely to lose 
assistance we have worked so hard to preserve.
    While we are attempting to reduce these impacts, there is 
simply no way to prevent serious damage this year, or the 
resulting consequences for fiscal year 2014, unless 
sequestration is reversed with the balanced deficit reduction 
plan proposed by the President.

                           PREPARED STATEMENT

    I look forward to working with you, both on the fiscal year 
2014 budget and on reversing the harmful cuts imposed by 
sequestration.
    Thank you for the opportunity to testify today. I look 
forward to your questions.
    [The statement follows:]
                Prepared Statement of Hon. Shaun Donovan
    Thank you, Chairman Murray and Ranking Member Collins, for this 
opportunity to discuss how the Department of Housing and Urban 
Development's (HUD's) fiscal year 2014 budget proposal will grow our 
economy from the middle class out--not from the top down--while 
supporting the recovery in our housing market and economy. The 
investments in the Department's programs that this budget makes are 
essential to delivering on the President's promise to make America a 
magnet for jobs and manufacturing, equip every American with the skills 
they need to do those jobs, and ensure that hard work leads to a decent 
living.
    Overall, this budget furthers the Department's mission of 
supporting home ownership, access to affordable housing free from 
discrimination, and community development. The 2014 President's budget 
provides $47.6 billion for HUD programs to support these efforts, in 
addition to a receipts projection of $14.5 billion--representing a net 
decrease of $3.2 billion from the 2012 enacted level. Increases are 
provided to protect vulnerable families and employ proven tools to 
revitalize neighborhoods with distressed HUD-assisted housing and 
concentrated poverty. To build more evidence of what works, State and 
local public housing authorities are offered program flexibilities in 
exchange for designing and rigorously evaluating innovative programs 
and policies. The constrained fiscal environment also forced tough 
choices, including funding reductions to programs that increase the 
supply of affordable housing.
    The Department's budget for fiscal year 2014 follows the roadmap 
the President has laid out for jumpstarting our economy through 
educating, innovating, and building--by targeting our investments to 
the families and geographies that need them the most, and putting 
American back to work. Specifically, this budget:
    Supports the Mortgage Market and Helps Borrowers Who Are at Risk of 
Foreclosure.--The Administration projects that the Federal Housing 
Administration (FHA) will insure $178 billion in mortgage loans in 
2014, supporting new home purchases and refinanced mortgages that 
significantly reduce borrower payments. FHA financing was used for 27 
percent of home purchase loans in 2011, including an estimated 41 
percent of first-time homeowners. FHA's loss mitigation program 
minimizes the risk of financially struggling borrowers going into 
foreclosure, and since the start of the mortgage crisis, it has helped 
more than a million homeowners. Recent increases in FHA premium levels 
will boost FHA's capital reserves and increase Federal revenues.
    The budget also includes $132 million for housing and homeowner 
counseling through HUD and the Neighborhood Reinvestment Corporation 
(NeighborWorks). Over half of these funds are dedicated to foreclosure 
assistance. NeighborWorks' National Foreclosure Mitigation Counseling 
program has assisted over 1.4 households since its inception in 2008.
    Provides Ladders of Opportunity for Anybody Willing To Work Hard 
and Play by the Rules.--The budget provides $400 million for Choice 
Neighborhoods to continue to transform neighborhoods of concentrated 
poverty into opportunity-rich, mixed-income neighborhoods. This funding 
level, which is $280 million above 2012 enacted, will be used to 
revitalize HUD-assisted housing and surrounding neighborhoods through 
partnerships between local governments, housing authorities, 
nonprofits, and for-profit developers. A portion of these funds will be 
targeted to designated Promise Zones--high-poverty communities where 
the Federal Government will partner with local leadership to create 
jobs, leverage private investment, increase economic activity, reduce 
violence, and improve educational opportunities. To further support 
Promise Zones, the budget includes companion investments of $300 
million in the Department of Education's Promise Neighborhoods program, 
$35 million in the Department of Justice's Byrne Criminal Justice 
Innovation Grants program, and continues to support the Strong Cities, 
Strong Communities initiative as well as tax incentives to promote 
investment and economic growth.
    Supports Strategic Infrastructure Planning and Investments To Help 
Make America a Magnet for Jobs.--In addition to the hundreds of 
thousands of jobs that this budget creates both directly and 
indirectly, it makes an essential contribution to the Administration's 
broader effort to discourage outsourcing and encourage ``insourcing.'' 
Specifically, attracting new businesses to our shores depends on urban, 
suburban, and rural areas that feature more housing and transportation 
choices, homes that are near jobs, and transportation networks that 
move goods and people efficiently--which is why this budget includes 
funding for the Office of Economic Resiliency which, as part of the 
Administration's multiagency partnership between HUD, the Department of 
Transportation, and the Environmental Protection Agency, will 
administer $75 million in Integrated Planning and Investment Grants. 
These grants will create incentives for communities to develop and 
implement comprehensive housing and transportation plans, such as 
updates to building codes, land use, and zoning ordinances that result 
in more resilient economic development, improve housing supply response 
to demand, and increase affordable housing near public transit. This 
funding, which builds upon the progress made through Sustainable 
Communities program, would support about 30 additional regional and 
neighborhood planning and implementation grants to enable communities 
to plan for their economic future. This funding embodies the 
President's commitment to being a new kind of Federal partner to 
regions, States, and localities as they tackle planning and economic 
development challenges in the 21st century.
    Of course, smart planning requires sustained follow-through. That 
is why HUD is committed to ensuring that its core community and housing 
development work contributes to more and better transportation choices; 
promotes equitable, affordable housing; helps communities address the 
lingering neighborhood impacts of the foreclosure crisis; and aligns 
Federal policies and funding to remove barriers to local collaboration. 
The budget provides $3 billion for the Community Development Block 
Grant (CDBG) program and neighborhood stabilization activities, and 
proposes reforms to better target CDBG investments to address local 
community development goals. This funding level includes $200 million 
in new competitive funds to continue mitigating the impacts of the 
foreclosure crisis. This funding will provide essential new resources 
to help communities hardest hit by the foreclosure crisis while 
creating jobs through rehabilitating, repurposing, and demolishing 
vacant and blighted properties. The budget also maintains its support 
for the proposed $15 billion Project Rebuild program, which will 
leverage private capital to bring the benefits of neighborhood 
stabilization to national scale.
    Protects the Vulnerable Recipients of HUD Rental Assistance and 
Makes Progress on the Federal Strategic Plan To End Homelessness.--The 
budget includes $20 billion for the Housing Choice Voucher program to 
help more than 2.2 million low-income families afford decent housing in 
neighborhoods of their choice. This funding level supports all existing 
vouchers and provides 10,000 new vouchers targeted to homeless 
veterans. The budget also includes $10.3 billion for the Project-Based 
Rental Assistance program to maintain affordable rental housing for 1.2 
million families, and provides $6.6 billion in operating and capital 
subsidies to preserve affordable public housing for an additional 1.1 
million families.
    The budget provides $2.4 billion for Homeless Assistance Grants, 
$480 million above the 2012 enacted level. This funding maintains the 
approximately 325,000 HUD-funded beds that assist the homeless 
nationwide and expands rapid re-housing and permanent supportive 
housing. Backed with new data and emerging best practices across the 
United States, this evidence-based investment will make further 
progress towards the goals laid out in the Federal Strategic Plan to 
End Homelessness.
    Puts HUD-Subsidized Public and Assisted Housing on a Financially 
Sustainable Path.--This budget also recognizes that we can no longer 
tolerate a federally supported rental housing system that is ``separate 
and unequal''--one which expects public housing authorities (PHAs) to 
house over 1 million families in public housing while subjecting them 
to overly burdensome regulation and denying them access to private 
capital available to virtually every other form of rental housing. To 
bring the public housing program toward mainstream real estate 
financing and management practices and begin to address the $26 billion 
in capital needs, the Department will continue to implement the Rental 
Assistance Demonstration (RAD) enacted in 2012. At the same time, the 
budget provides $10 million for a targeted expansion of RAD to public 
housing properties in high-poverty neighborhoods, including designated 
Promise Zones, where the Administration is also supporting 
comprehensive revitalization efforts.
    Improves the Way Federal Dollars Are Spent and Builds Evidence of 
What Works.--The budget proposes to scale up the Moving To Work (MTW) 
program, which gives high-performing State and local public housing 
authorities (PHAs) various flexibilities in their use of Housing Choice 
Voucher and public housing funds. In exchange for this flexibility, 
PHAs will help design and test innovative policies to support self-
sufficiency and other positive outcomes for families, streamline and 
consolidate program delivery, and reduce long-term costs. In addition, 
PHAs will report on outcomes associated with their MTW activities, and 
those that choose to implement work requirements, time limits on 
assistance, or major rent reform initiatives will participate in 
rigorous evaluations.
    The budget also modernizes the Housing Opportunities for Persons 
With AIDS (HOPWA) program to better reflect the current case 
concentration and understanding of HIV/AIDS and ensure that funds are 
directed in a more equitable and effective manner. This update includes 
a new formula that will distribute HOPWA funds based on the current 
population of people living with HIV/AIDS, fair market rents, and 
poverty rates in order to target funds to areas with the most need. It 
also makes the program more flexible, giving local communities more 
options to provide targeted, timely, and cost-effective interventions. 
The budget's $332 million investment in HOPWA, in combination with the 
proposed modernization, will assist local communities in keeping 
individuals with HIV/AIDS housed, making it easier for them to stay 
connected to treatment, and therefore improving health outcomes for 
this vulnerable population.
    Makes Tough Choices.--The budget provides $950 million for the HOME 
Investment Partnerships Program, 5 percent below the 2012 enacted 
level. At this funding level, HOME will provide grants to State and 
local governments to supply almost 40,000 additional units of 
affordable housing for low-income families. This funding reduction is 
mitigated by the investment of $1 billion in mandatory funding for the 
Housing Trust Fund to finance the development, rehabilitation, and 
preservation of affordable housing for extremely low income families.
    The budget provides a total of $526 million for the Housing for the 
Elderly and Housing for Persons with Disabilities programs, $13.6 
million below the 2012 enacted level. This funding level will support 
all 150,000 existing units in these programs, but limits new 
construction to $40 million for additional supportive housing units. 
These investments directly support research that will build our 
understanding of the intersection between supportive housing and 
healthcare costs, and help identify what works best in allowing seniors 
to age-in-place.
    Reforms Government So That It's Leaner, Smarter, More Transparent, 
and Ready To Succeed.--The American economy of the future requires a 
Federal Government that is efficient, streamlined, and transparent. As 
such, the budget proposes reforms to HUD rental assistance programs 
that would save nearly $400 million in fiscal year 2014 without 
reducing the number of families served--by streamlining programs and 
reforming policies. Moreover, this budget once again calls for the 
flexible use of resources through the Transformation Initiative, which 
the Department will use to invest in technical assistance to build 
local capacity to safeguard and effectively invest taxpayer dollars; 
conduct innovative research, evaluations of program initiatives and 
demonstration programs so we can fund what works and stop funding what 
doesn't; and upgrade the IT infrastructure that tracks and monitors our 
programs.
    In short, this budget will achieve substantial results not only for 
vulnerable, low-income Americans but also for hard-hit local and State 
economies across the country. Its carefully targeted investments will 
enable HUD programs to serve millions of families in thousands of 
communities nationwide, helping to make America a magnet for jobs, and 
ensuring that our workers have the skills they need for those jobs. 
Consistent with its budget proposals in the first term, HUD's fiscal 
year 2014 budget is structured around the five overarching goals the 
Department adopted in its Strategic Plan 2010-2015. These goals reflect 
the Department's--and my--commitment to ``moving the needle'' on some 
of the most fundamental challenges facing America. Indeed, every month, 
I hold HUDStat meetings on one or more of these goals, to assess 
progress and troubleshoot problems in order to: (1) ensure that HUD is 
as streamlined and effective as possible in the way that we administer 
our own programs and partner with other Federal agencies; and (2) hold 
our grantees accountable for their expenditure of taxpayers' hard-
earned dollars.
 goal 1: strengthen the nation's housing market to bolster the economy 
                         and protect consumers
    This Administration entered office confronting the worst economic 
crisis since the Great Depression--as mortgages were sold to people who 
couldn't afford or understand them, while banks packaged them into 
complex securities that they made huge bets on--and bonuses with--other 
people's money. And while the largest factors contributing to this 
crisis were market driven, the American people have turned to Congress 
and the Administration for leadership and action in righting our 
Nation's housing market. HUD remains firmly committed to working 
together with communities and individuals to cope with these 
unprecedented challenges.
Responding to the Market Disruption
    The Federal Housing Administration (FHA) and Government National 
Mortgage Association (GNMA) continue to have a significant impact on 
the Nation's economic recovery. The activities of the Federal 
Government are critical to both supporting the housing market in the 
short term and providing access to homeownership opportunities over the 
long term, and doing both in a way that minimizes risks to taxpayers.
    In 2014, HUD is requesting $400 billion in loan guarantee authority 
for the Mutual Mortgage Insurance Fund, which will provide an estimated 
1.2 million single-family mortgages (at a projected $199.3 billion in 
loan volume) and $30 billion in loan guarantee authority for the 
General and Special Risk Insurance Fund, which will provide an 
estimated 273,000 units in multifamily housing properties and an 
estimated 75,700 beds in healthcare facilities. The need for this 
investment is clear as FHA has stepped up in recent years to address 
the unprecedented challenges wrought by the housing crisis, playing an 
important countercyclical role that has offered stability and liquidity 
throughout the recession. While a recovery of the housing market is 
currently underway, FHA continues to act as a crucial stabilizing 
element in the market, and to assure ongoing access to credit for 
qualified first-time, low-wealth or otherwise underserved borrowers. 
However, FHA's expanded role is and should be temporary.
    FHA's share of the mortgage market has gone from a low of 3.1 
percent of loan originations in 2005, up to a peak of 21.1 percent in 
2010, and more recently down to 16.5 percent in the 4th quarter of 2012 
(U.S. Housing Market Conditions Report, 4th Quarter 2012). In fact, the 
number of FHA single family loan endorsements has declined to levels 
comparable to those seen in fiscal years 2002 and 2003, when FHA's 
market share was lower than it is today, indicating that FHA's current 
slightly elevated market share is primarily due to a substantial 
decrease in the size of the total mortgage market rather than 
exceptionally high FHA loan volumes. As the market continues to recover 
and private capital returns at more normal levels, FHA's role will 
naturally recede.
    As has been true throughout its history, FHA is particularly 
important to borrowers that the conventional market does not adequately 
serve, including qualified borrowers who would otherwise be shut out of 
the mortgage market. Fully 60 percent of all African American and 
Hispanic homebuyers using mortgages rely upon FHA financing and over 30 
percent of all FHA-insured homebuyers are minorities. According to the 
latest Home Mortgage Disclosure Act data, half of all African Americans 
who purchased a home in 2011, and 49 percent of Hispanics, did so with 
FHA financing.
Redoubling Efforts To Keep Homeowners in Their Homes
    While there is work still to be done, HUD is proud of the progress 
this Administration has made in tackling ongoing foreclosure 
challenges. Between April 2009 and February 2013, more than 6.4 million 
foreclosure prevention actions were taken--including nearly 1.7 million 
FHA loss mitigation and early delinquency interventions and 1.5 million 
homeowner assistance actions through the Making Home Affordable 
program, including more than 1.1 million permanent modifications 
through the Home Affordable Modification Program (HAMP)--saving these 
households an estimated $18.5 billion in monthly mortgage payments.
    As part of the Administration's commitment to help responsible 
homeowners stay in their homes, we have actively sought to use our 
current programs and authorities to make homeownership sustainable for 
millions of American families. Examples of our efforts include:
  --Streamline Refinance.--An option that allows borrowers with FHA-
        insured loans who are current on their mortgage to refinance 
        into a new FHA-insured loan at today's low interest rates 
        without requiring additional underwriting, permitting these 
        borrowers to reduce their mortgage payments. This program 
        benefits current FHA borrowers--particularly those whose loan 
        value may exceed the current value of their home--and by 
        lowering a borrower's payment, also reduces risk to FHA. And, 
        because we see potential for more widespread use of this 
        product, FHA made changes to the way in which streamline 
        refinance loans are displayed in the Neighborhood Watch Early 
        Warning System (Neighborhood Watch) to encourage lenders to 
        offer this product more widely to homeowners with FHA-insured 
        mortgages.
  --Changes to FHA's Loss Mitigation Waterfall.--A mortgagee letter 
        published on November 16, 2012, outlined changes to FHA's loss 
        mitigation home retention options. One of the key elements of 
        this update was moving FHA's Home Affordable Modification 
        Program (HAMP) product up in FHA's loss mitigation waterfall so 
        servicers could more quickly offer deeper payment relief to 
        struggling FHA borrowers, resulting in an increase in the 
        number of borrowers being able to retain their homes.
  --Housing Counseling.--In 2014, HUD is requesting $55 million in 
        housing counseling assistance, to improve access to quality 
        affordable housing, expand homeownership opportunities, and 
        preserve homeownership, all of which are especially critical in 
        today's economic climate. With this funding, HUD estimates that 
        2,650 HUD-approved counseling agencies employing an estimated 
        8,000 newly certified housing counselors, will assist a total 
        of 2.5 million renters and owners. HUD-approved counselors help 
        clients learn about purchasing or refinancing a home; rental 
        housing options; reverse mortgages for seniors; foreclosure 
        prevention; loss mitigation; preventing evictions and 
        homelessness; and moving from homelessness to a more stable 
        housing situation. In 2012, 2,410 HUD-approved housing 
        counseling agencies, with grant funds from HUD and other 
        funding sources, assisted over 1.9 million renters and owners.
      HUD's new Office of Housing Counseling has several initiatives to 
        ensure borrowers have access to all rights and remedies 
        afforded to them to stay in their homes. HUD has worked closely 
        with interested States to determine effective ways in which 
        funds from the National Mortgage Servicing Settlement can be 
        used to expand housing counseling resources, resulting in more 
        than $300 million in settlement funds committed to housing 
        counseling or legal services for affected borrowers. HUD-
        approved housing counseling agencies continue to provide 
        foreclosure prevention services, reaching 774,000 families in 
        fiscal year 2012. In addition, FHA is exploring ways to further 
        integrate housing counseling into its loss mitigation program, 
        offering distressed FHA borrowers additional resources with 
        which to assess their options and make decisions appropriate to 
        their situation.
  --Short Refinance Option.--In 2010, FHA made available an option that 
        offers underwater non-FHA borrowers, who are current on their 
        existing mortgage and whose lenders agree to write off at least 
        10 percent of the unpaid principal balance of the first 
        mortgage, the opportunity to refinance into a new FHA-insured 
        mortgage. FHA made enhancements to the program in March of last 
        year and announced an extension to the expiration date of the 
        program in order to increase the number of borrowers who will 
        benefit from this initiative.
  --Strengthening FHA and Paving the Way for Private Capital To 
        Return.--The President's budget shows that FHA, while still 
        under stress from legacy loans, has made significant progress 
        and is on a sound fiscal path moving forward. Like nearly all 
        mortgage market institutions, FHA sustained significant losses 
        due to the precipitous fall in the housing market and home 
        prices, and is putting additional funds aside this year to 
        cover those legacy losses. But, again, like most mortgage 
        lenders, recent and future books of mortgage business are 
        expected to bring healthy gains.
    Throughout the economic crisis, as the FHA's fiscal health faced 
challenges, this Administration took swift and effective action to 
protect the FHA and the American taxpayer alike, as FHA continued to 
fulfill its dual mission of supporting the housing market during tough 
times and providing access to homeownership for underserved 
populations. FHA is currently insuring the strongest loans in its 
history. In contrast to legacy loans, and thanks in large part due to 
changes the Administration has put in place regarding pricing, lender 
enforcement, and risk reduction, the books of business FHA has insured 
since 2010 are vastly superior to any others from recent years, as 
measured by early delinquencies and other metrics. In addition, the 
Administration has raised annual insurance premiums for most FHA 
mortgages by 0.8 percentage points, greatly increasing revenue for the 
FHA fund. And healthier house prices have reduced FHA losses on 
defaulted mortgages.
    Due to the higher quality and large volume of current loans, we 
project FHA will generate $18 billion in receipts during fiscal year 
2013, including $3 billion generated from the new premium increase that 
went into effect April 1, 2013, and reversal of a policy that caused 
FHA to forfeit collection of mortgage insurance premium (MIP) after a 
loan reached 78 percent of its original principal balance. Further, as 
a result of these same changes, the fiscal year 2014 budget projects 
FHA receipts of almost $13 billion, even as FHA market share and loan 
volume continues to be reduced (down to 13.9 percent according to U.S. 
Housing Market Conditions Report, 3rd quarter 2012).
    For FHA's legacy loans, the President's budget forecasts the FHA 
Mutual Mortgage Insurance (MMI) Fund, which provides the fiscal capital 
to support FHA's single family and reverse mortgage guarantees, will 
use $943 million of its mandatory appropriation authority to supplement 
its reserves at the end of fiscal year 2013. The MMI Fund currently has 
approximately $32 billion in cash available to pay claims, so this is 
not a cash problem; it is one of setting the right size of loan loss 
reserves aside. The $943 million figure is based on an annual Office of 
Management and Budget (OMB) re-estimate of the reserves FHA will need 
to hold as of September 30, 2013, for the payment of expected losses 
over the next 30 years on its portfolio of guaranteed loans as of last 
September, based upon Federal Credit Reform Act (FCRA) scoring. This 
potential appropriation is largely due to the existing reverse mortgage 
(HECM) portfolio. This product, particularly as it has been structured 
to date, is sensitive to home prices and economic conditions. This 
results in a negative value of $5.248 billion and a disproportionately 
negative impact to the Fund from the HECM program. The actual need for 
a mandatory appropriation from the Treasury General Fund to the MMI 
fund will not be determined until September 2013, and will be based on 
FHA's realized revenues through the end of the fiscal year. Notably, 
any mandatory appropriation to FHA would not involve approval from 
Congress, as all Federal loan programs have this standing authority. As 
we consider this potential appropriation, let us not forget that FHA 
played a crucial, countercyclical role in bringing the housing market 
from the brink of collapse to a place where it is positive and growing 
again.
       goal 2: meet the need for quality, affordable rental homes
    In an era when more than one-third of all American families rent 
their homes and over 8.5 million unassisted families with very low 
incomes spend more than 50 percent of their income on rent and/or live 
in severely inadequate conditions, it is more important than ever to 
provide a sufficient supply of affordable rental homes for low-income 
families--particularly since, in many communities, affordable rental 
housing does not exist without public support. HUD's fiscal year 2014 
budget maintains HUD's core commitments to providing rental assistance 
to some of our country's most vulnerable households as well as 
distributing housing, infrastructure, and economic development funding 
to States and communities to address their unique needs. Overall, 84 
percent of HUD's total fiscal year 2014 budget authority requested will 
provide rental assistance to over 5.4 million residents of HUD-
subsidized housing, including public housing and HUD grants to homeless 
assistance programs. And, I am proud to say that, despite an era of 
challenging budgets, we have increased the number of families served 
through our rental assistance programs every year.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Detailed data shows how vulnerable these families are to the 
economic downturn. In HUD's core rental assistance programs, including 
tenant-based rental assistance (TBRA), public housing and project-based 
rental assistance (PBRA): 72 percent of families are extremely low-
income (below 30 percent of area median income) and an additional 20 
percent are very low-income (below 50 percent of area median income). 
The devastating effect of the tough economic environment on the housing 
circumstances of poor Americans was underscored this year, when HUD 
released its latest Worst Case Housing Needs study results. HUD defines 
worst case needs as: renters with very low incomes who do not receive 
Government housing assistance and who either pay more than half their 
income for rent, live in severely inadequate conditions, or both. The 
report showed an increase of 43.5 percent in worst case needs renters 
between 2007 and 2011. This is the largest increase in worst case 
housing needs over a 4-year period in the quarter-century history of 
the survey. The need for HUD investments in this area is clear.
Preserving Affordable Housing Opportunities in HUD's Largest Programs
    This budget provides $20 billion for HUD's section 8 TBRA program, 
which is the Nation's largest and preeminent rental assistance program 
for low-income families. For over 35 years it has served as a cost-
effective means for delivering safe and affordable housing in the 
private market. This 2014 funding level is expected to assist 
approximately 2.2 million families by renewing existing vouchers and 
issuing new incremental vouchers to homeless veterans.
    The budget also provides a total of $6.6 billion to operate public 
housing and modernize its aging physical assets through the public 
housing operating ($4.6 billion) and capital ($2 billion) funds, a 
critical investment that will help approximately 1.1 million extremely 
low- to low-income households obtain or retain housing. Similarly, 
through a $10.3 billion request in funding for the PBRA program, the 
Department will provide rental assistance funding to privately owned 
multifamily rental housing projects to serve over 1.2 million families 
nationwide.
Reducing Administrative Burdens and Increasing Efficiency
    This budget recognizes the need to simplify, align, and reform 
programs to reduce administration burdens and increase efficiency 
across programs by:
  --Enabling PHAs To Combine Operating and Capital Funds.--To both 
        simplify the program and reduce the administrative burden on 
        State and local public housing authorities, the budget provides 
        all PHAs with full flexibility to use their operating and 
        capital funds for any eligible capital or operating expense.
  --Providing Flexibility for Public Housing Authorities To Improve 
        Supportive Services for Assisted Households.--The budget 
        proposes streamlining and flexibility measures to help PHAs 
        improve supportive services for assisted families. The Family 
        Self-Sufficiency (FSS) program will be consolidated and aligned 
        to enable PHAs to more uniformly serve both TBRA and public 
        housing residents. This program aims to connect residents to 
        resources and services to find and retain jobs that lead to 
        economic independence and self-sufficiency. In addition, the 
        budget authorizes PHAs to use a portion of their public housing 
        and TBRA funding to augment case management and supportive 
        services coordination provided through FSS or provide other 
        supportive services to increase opportunities for residents.
  --Expanding the Moving To Work (MTW) Program.--The budget proposes to 
        scale up the Moving To Work (MTW) program, which gives high-
        performing State and local public housing authorities (PHAs) 
        various flexibilities in their use of Housing Choice Voucher 
        and public housing funds. In exchange for this flexibility, 
        PHAs will help design and test innovative policies to support 
        self-sufficiency and other positive outcomes for families, 
        streamline and consolidate program delivery, and reduce long-
        term costs. In addition, PHAs will report on outcomes 
        associated with their MTW activities, and those that choose to 
        implement work requirements, time limits on assistance, or 
        major rent reform initiatives will participate in rigorous 
        evaluations.
Rebuilding Our Nation's Affordable Housing Stock
    Over the last 75 years, the Federal Government has invested 
billions of dollars in the development and maintenance of public and 
multifamily housing, which serve as crucial resources for some of our 
country's most vulnerable families. Despite this sizable Federal 
investment and the great demand for deeply affordable rental housing, 
we continue to see a decline in the number of available affordable 
housing units. Unlike other forms of assisted housing that serve very 
similar populations, the public housing stock is nearly fully reliant 
on Federal appropriations from the Capital Fund to make capital 
repairs. Funding and regulatory constraints have impaired the ability 
for these local and State entities to keep up with needed lifecycle 
improvements. The most recent capital needs study of the public housing 
stock, completed in 2010, estimated the backlog of unmet need at 
approximately $26 billion, or $23,365 per unit. Available funding is 
vastly insufficient to meet accruing needs of approximately $3 billion 
per year. Under the strain of this backlog, and without financing tools 
commonly available to other forms of affordable housing, the public 
housing inventory loses an average of 10,000 units annually through 
demolitions or dispositions.
            Rental Assistance Demonstration
    In addition to the public housing stock, the Rental Assistance 
Demonstration (RAD) program targets certain ``at-risk'' HUD legacy 
programs. The 24,000 units assisted under section 8 Moderate 
Rehabilitation (MR) are limited to short-term renewals and constrained 
rent levels that inhibit the recapitalization of the properties. The 
approximately 21,000 units assisted under Rent Supplement (RS) and 
Rental Assistance Program (RAP) have no ability to retain long-term 
project-based assistance beyond the current contract term. As a result, 
as their contracts expire, we can no longer depend on these projects to 
be available as affordable housing assets.
    Conversion to long-term section 8 rental assistance, as permitted 
under RAD, is essential to preserving these scarce affordable housing 
assets and protecting the investment of taxpayer dollars these programs 
represent. Long-term section 8 rental assistance allows for State and 
local entities to leverage sources of private and public capital to 
rehabilitate their properties. While the Department expects and 
continues to process public housing conversions of assistance without 
additional subsidy, HUD requests $10 million in fiscal year 2014 for 
the incremental subsidy costs of converting assistance under RAD for 
very limited purposes. Such funding will be targeted only to public 
housing projects that are: (1) not feasible to convert at current 
funding levels; and (2) located in high-poverty neighborhoods, 
including designated Promise Zones, where the Administration is 
supporting comprehensive revitalization efforts. The Department 
estimates that the $10 million in incremental subsidies will support 
the conversion and redevelopment of approximately 3,300 public housing 
units that would not otherwise be feasible to convert and sufficiently 
stabilize over the long-term, while helping to increase private 
investment in the targeted projects and surrounding neighborhoods.
    In addition to the funding request, each of the legislative 
requests in the 2014 budget for RAD are designed to allow for maximum 
participation by those PHAs and owners whose current funding levels are 
sufficient for conversion. In the first component of RAD, an increase 
in the 60,000 unit cap to 150,000 units, and the exclusion of section 8 
MR properties from the cap will both allow for a greater portion of 
both the public housing and MR stock that can convert at no cost to the 
Federal Government to participate in the demonstration.
            Small Building and Housing Finance Agency Securitization
    Nearly a third of the Nation's renters, more than 20 million 
households, live in small, unsubsidized housing. These 5- to 49-unit 
properties tend to be owned by small businesses--the engines of our 
communities--and are typically more affordable to low- and moderate-
income families. But these properties are at risk of continued 
disinvestment because they can be expensive to finance. Small building 
owners are less likely than other multifamily property owners to be 
able to secure financing to make repairs and improvements. Small 
properties are less likely to have mortgage financing (86 percent of 
large multifamily properties are mortgaged, compared to 61 percent of 
small multifamily properties). Just 14 percent of all fiscal year 2010 
FHA-insured properties were for projects with fewer than 50 units.
    To address this problem, the fiscal year 2014 budget includes a 
legislative provision to support small building finance, and to 
strengthen the Risk Share program as a rental finance tool, seeks 
Congressional authority for Ginnie Mae to guarantee securities 
containing FHA Multifamily Risk Share loans, thereby increasing 
liquidity and decreasing cost of capital. This proposal would apply to 
both State and local Housing Finance Agency Risk Share lenders under 
section 542(c) and new Risk Share lending under section 542(b). The 
proposal would also amend section 542(b) of the statute to allow for 
flexibility in how affordability is determined in order to make it a 
more effective tool to recapitalize existing naturally affordable 5-49 
unit rental properties.
Increasing the Production of Affordable Housing Capital Projects
    In addition to developing tools to address the growing capital 
needs of America's public housing stock, HUD is committed to expanding 
the supply of affordable rental homes in safe, mixed-income communities 
that provide access to jobs, good schools, transportation, and most 
importantly, economic self-sufficiency. Accordingly, in fiscal year 
2013 HUD is working together with its partners to identify ways to make 
the Low Income Housing Tax Credit (LIHTC) program a more flexible and 
nimble tool for the creation and preservation of affordable housing. As 
the primary tool of the Federal Government for developing and 
rehabilitating affordable rental housing, the LIHTC program is 
administered by State agencies with assistance and guidance from the 
Treasury Department and the Internal Revenue Service. It attracts 
capital to low-income rental housing by satisfying some of the Federal 
income tax obligations of investors in certain low-income rental 
properties.
    Since its addition to the tax laws in 1986, the LIHTC program has 
been used to create 1.8 million in affordable rental-housing units 
across the country. Annually, the program supports 95,000 jobs and 
generated $2.7 billion in State, local, and Federal revenues. In fiscal 
year 2014, as part of an ongoing effort to better align Federal rental 
programs, HUD, the Departments of Treasury and Agriculture, the 
Domestic Policy Council (DPC), the Office of Management and Budget 
(OMB), and the National Economic Council (NEC) will continue partnering 
to allow greater flexibility to State and local agencies that 
administer LIHTC programs, as well as to developers and investors, to 
continue to enable the creation of affordable housing in markets where 
it is needed the most.
    Specifically, the revenue provisions of the 2014 budget update 
several revenue proposals that were included in the 2013 budget, and 
the budget also introduces two new proposals:
  --A new proposal for Private Activity Bond Conversion authority that 
        will create much needed flexibility in how States implement the 
        LIHTC program. Specifically, this request will allow States to 
        convert a portion of their tax-exempt Private Activity Bond 
        authority (volume cap) into allocated (so-called 9 percent) 
        LIHTCs to accomplish several goals. First, for many complex 
        preservation projects this proposal eliminates the need for 
        going through unnecessary bond issuance procedures, which 
        reduces transaction costs. Second, not only does the proposal 
        allow States to increase their pool of 9 percent credits, but 
        it brings more projects into the competitive LIHTC allocation 
        process. This effectively gives States more authority to better 
        prioritize projects with limited resources. Third, it would let 
        States avail themselves of the greater flexibility that they 
        have to increase eligible basis (and thus to increase credits) 
        for high-priority projects that are subject to the LIHTC 
        allocation cap (as compared with projects subject to the tax-
        exempt bond cap).
  --A new proposal for a Selection Criterion for Preservation of 
        Affordable Housing. Adding this criterion to Qualified Action 
        Plans under IRC Sec. 42(m)(1)(C) will encourage States to 
        consider how to address the preservation needs of affordable 
        housing.
  --A modification and permanent fix to the Congress' temporary 9 
        percent credit floor provisions in HERA and the American 
        Taxpayer Relief Act of 2012. This proposal to improve the 
        computation of allocated credit rates will revise the present 
        value formula for allocated LIHTCs to increase the annual 
        credit percentage rate and more accurately reflect market 
        practice.
  --An income averaging proposal from the President's fiscal year 2013 
        budget that would encourage a greater range of incomes in 
        LIHTC-supported affordable housing by allowing developers to 
        choose an income-limitation requirement that would be satisfied 
        if households in the low-income units have an average income no 
        greater than 60 percent of AMI, with no household above 80 
        percent AMI. An additional provision would allow certain 
        existing tenants to remain in residence without impairing the 
        developer's entitlement to LIHTCs.
  --A LIHTCs earned by Real Estate Investment Trusts (REITs) proposal 
        from the President's fiscal year 2013 budget that is designed 
        to diversify the pool of investors for LIHTCs and to increase 
        the overall demand for LIHTCs. The proposal would allow a REIT 
        that earns LIHTCs to provide a tax benefit to its investors by 
        paying them tax-exempt dividends in an amount almost triple the 
        amount of the REIT's LIHTCs.
    Finally, the recent Worst Case Housing Needs report underscores 
what has been the case since well before the recent recession, namely, 
that extremely low-income renters face the most severe housing shortage 
and cost burden of any Americans. The 2014 budget once again proposes 
$1 billion in mandatory appropriations for the Housing Trust Fund (HTF) 
to address this critical shortage of housing where it is most 
desperately needed. Enacted in 2008, the HTF was designed to provide 
capital resources to build and rehabilitate housing to fill this 
precise--and growing--gap in the Nation's rental housing market. The 
time has come for Congress to provide this crucial funding.
  goal 3: utilize housing as a platform for improving quality of life
    Stable housing provides an ideal platform for delivering a wide 
variety of health and social services to improve economic, health, and 
broad-based societal outcomes. For some, housing alone is sufficient to 
ensure healthy outcomes, while others require housing with supportive 
services to assist with activities of daily living or long-term self-
sufficiency, as well as proximity to crucial services. HUD's fiscal 
year 2014 budget acknowledges this reality by making critical 
investments in housing and supportive services, and partnering with 
other Federal agencies to maximize resources and best practices. 
Moreover, these investments will save money in the long term, by 
avoiding overuse of expensive emergency and institutional 
interventions.
Preventing and Ending Homelessness, Serving Our Nation's Most 
        Vulnerable
    Nowhere is the relationship between housing and supportive services 
clearer than in the successful efforts in communities around the 
country to address homelessness, which have led to nearly 20 percent 
reductions in veterans homelessness and a 10 percent reduction in 
chronic homelessness over the past 2 years.
    Additionally, this work has yielded a substantial body of research, 
which demonstrates that providing permanent supportive housing to 
chronically ill, chronically homeless individuals and families not only 
ends their homelessness, but also yields substantial cost saving in 
public health, criminal justice, and other systems. This year's budget 
once again invests in this critical effort, by providing $2.381 billion 
in Homeless Assistance Grants, including competitive programs that 
annually serve over 1.5 million homeless families and individuals. This 
includes funding for the Emergency Solutions Grants program, which will 
continue the work of the Homelessness Prevention and Rapid Re-Housing 
Program (in the form of a $60 million set aside)--funded by the 
Recovery Act--that in the last 3 years alone has helped prevent or end 
homelessness for over 1.4 million people nationwide.
    Moreover, HUD continues to focus on the unique needs of homeless 
veterans through both its targeted homeless programs and its mainstream 
housing programs using successful methods and interventions. Currently, 
an estimated one out of every six men and women in our Nation's 
homeless shelters are veterans, and veterans are 50 percent more likely 
to fall into homelessness compared to other Americans. HUD is committed 
to providing affordable housing units to this unique homeless 
population, and has partnered with the Departments of Health and Human 
Services (HHS) and Veterans Affairs (VA) to develop targeted approaches 
to serve the homeless veteran populations. Accordingly, this budget 
includes $75 million for HUD's Veterans Affairs Supportive Housing 
(HUD-VASH) program, which combines tenant-based voucher assistance with 
case management and clinical services tailored to veterans and their 
families. This funding will provide 10,000 new vouchers to help 
veterans move from our streets into permanent supportive housing, in 
addition to the nearly 48,000 already allocated HUD-VASH vouchers, as 
well as the 10,000 vouchers that will be awarded through the fiscal 
year appropriation.
Investing in Leveraging and Serving Our Most Vulnerable
    This budget provides a total of $526 million for the Housing for 
the Elderly and Housing for Persons with Disabilities programs, which 
includes $40 million to support 4,100 additional supportive housing 
units. Doing more with less, the budget proposes reforms to the Housing 
for the Elderly program to target resources to help those most in need, 
reduce the up-front cost of new awards, and better connect residents 
with the supportive services they need to age in place and live 
independently.
    Historically, HUD has provided both capital advances and operating 
subsidies to nonprofit sponsors to construct and manage multifamily 
housing for low-income people with disabilities. In an effort to 
maximize the creation of new affordable units in a time of funding 
restraints, in fiscal year 2012 HUD began providing operating 
assistance to State housing agencies that formed partnerships with 
State healthcare agencies for service provision to low-income persons 
with disabilities. These funds are used to set aside supportive units 
for this target population in affordable housing complexes whose 
capital costs are funded through Low-Income Housing Tax Credits, HOME 
funds, or other sources. Investing section 811 funds under this 
authority allows HUD to rely on the expertise of the State housing 
agencies to administer the award and on the State healthcare agency to 
identify the most critical population to be served and guarantee the 
delivery of appropriate services. In fiscal year 2014, HUD is 
requesting similar authority for the Section 202 program. Drawing on 
lessons learned from implementation in the section 811 program, HUD 
will take advantage of efficiencies inherent in these same agencies' 
oversight responsibilities for tax credits, HOME funds or similar 
housing funding.
       goal 4: build inclusive sustainable communities free from 
                             discrimination
    The American economy suffers when significant numbers of its labor 
force experience individualized or systemic discrimination, or when 
families live in isolated neighborhoods of concentrated poverty. An 
American economy built to last requires an increased supply of 
affordable rental homes in safe, mixed-income communities that provide 
access to jobs, good schools, transportation, high-quality services, 
and most importantly, economic self-sufficiency. As such, HUD's fiscal 
year 2014 budget puts communities in a position to plan for the future 
and draw fully upon their resources, most importantly their people.
    Each year HUD dedicates approximately 15 percent of its funds to 
the capital costs of housing and economic development projects 
throughout the country. Through this investment, HUD and its partners 
are able to provide better opportunities for people living in 
neighborhoods of concentrated poverty and segregation, and offer 
choices that help families live closer to jobs and schools. Programs 
such as the Community Development Block Grant (CDBG) and Choice 
Neighborhoods provide funding for locally driven solutions to 
overarching economic development challenges in areas of need. As with 
HUD's rental assistance programs, HUD's capital grants--including the 
Public Housing Capital Fund, Choice Neighborhoods, CDBG, and HOME--are 
focused on assisting areas of great need, including communities with 
high unemployment.
Preserving HUD's Major Block Grant Programs for Community Development 
        and Housing
    Through both formula and competitive grants, HUD has partnered with 
local organizations and State and local governments to fund innovative 
solutions to community development challenges. Underpinning these 
partnerships is the fundamental philosophy that local decisionmakers 
are best poised to drive a cohesive development strategy, based on a 
keen perception of local needs and priorities. In fiscal year 2014, HUD 
is requesting a total of $3.14 billion in funding for the Community 
Development Fund. These programs aim to support economic development 
initiatives and projects that demonstrate the ability to connect 
private sector growth to some of our country's most distressed citizens 
and communities.
    As part of CPD programming, the Community Development Block Grant 
(CDBG) remains the largest and most adaptable community and economic 
development program in the Federal portfolio for meeting the unique 
needs of States and local governments. Since its inception in 1974, 
CDBG has invested over $135 billion in economic development at the 
local level, investing in infrastructure, providing essential public 
services and housing rehabilitation, and creating jobs primarily for 
low-and moderate-income families. In fiscal year 2014, HUD is 
requesting that $2.8 billion in CPD funds be dedicated to the CDBG 
formula program. Altogether, CDBG funding annually reaches an estimated 
7,000 local governments across the country, in communities of all 
shapes and sizes.
    To begin to respond to concerns that CDBG formula funds need to be 
better targeted to need and be used more effectively, the budget 
proposes several reforms to the program. The budget includes changes to 
establish a minimum CDBG grant threshold and eliminate the community 
``grandfathering'' provision. This will ensure that communities receive 
grants large enough to be effective in advancing the goals of the 
program. Local governments affected by these changes would not lose 
access to CDBG funding; funding would be available through an urban 
county or State-administered CDBG program. In addition to better 
targeting CDBG formula funds, the budget provides $200 million in 
community development funding for a new competitive grant program 
targeted to areas hardest hit by the foreclosure crisis and specific 
activities that support neighborhood stabilization. Where appropriate, 
these grants will be linked to the above-mentioned Promise Zones 
initiative. HUD will seek input from stakeholders over the coming 
months regarding further programmatic changes that would improve the 
targeting of CDBG formula funds and strengthen their accountability and 
performance.
    Often, CDBG dollars alone are not sufficient to complete crucial 
economic development projects that communities desperately need. In 
those instances, HUD offers another potent public investment tool in 
the form of the Section 108 Loan Guarantee program. Section 108 is the 
loan guarantee provision of the CDBG program and allows States and 
local governments to leverage their CDBG funds into federally 
guaranteed loans in order to pursue large-scale physical and economic 
investment projects that can revitalize entire neighborhoods or provide 
affordable housing to low- and moderate-income persons. In fiscal year 
2014, HUD is requesting Section 108 loan guarantee authority of $500 
million and is proposing to implement a fee-based program that will 
eliminate the need for budget authority to cover the program's credit 
subsidy.
Assisting Native Americans and Native Hawaiians
    Through innovative programming, HUD has found new ways to partner 
with American Indian and Alaska Native tribal governments to help these 
communities craft and implement sustainable, locally driven solutions 
to economic development challenges. HUD recognizes the right of Indian 
self-determination and tribal self-governance, and has fostered 
partnerships that allow tribal recipients the flexibility to design and 
implement appropriate, place-based housing programs according to local 
needs and customs. In most of these communities, housing and 
infrastructure needs are severe and widespread, disconnected from 
transportation networks and isolated from key community assets 
including jobs, schools and healthcare facilities. In fiscal year 2014, 
HUD is requesting a total of $739 million to fund programs that will 
directly support housing and economic development in American Indian, 
Alaskan Native, and Native Hawaiian communities nationwide, including:
  --$650 million for the Indian Housing Block Grant program, which is 
        the single largest source of funding for housing on Indian 
        tribal lands today
  --$70 million for Indian Community Development Block Grants, a 
        flexible source of grant funds for federally recognized tribes 
        or eligible Indian entities, requested within the Community 
        Development Fund.
  --$13 million for Native Hawaiian Housing Block Grant program, to 
        develop homeownership units as well as support the prevention 
        of foreclosures and the promotion of responsible homeownership.
  --$6 million for the Indian Housing Loan Guarantee Fund.
Transforming Neighborhoods of Poverty
    The President has made it clear that we must build our economy from 
the middle class out. But that necessity is imperiled when a fifth of 
America's children live in poverty, at a cost of $500 billion per 
year--fully 4 percent of GDP--due to reduced skills development and 
economic productivity, increased later life crime, and poor health, and 
a growing population lives with the problems of concentrated 
neighborhood poverty--high unemployment rates, rampant crime, health 
disparities, inadequate early care and education, struggling schools, 
and disinvestment--all of which isolate them from the global economy.
    That's why HUD's fiscal year 2014 budget provides $400 million for 
the proven tools in the Choice Neighborhoods Initiative, to continue 
transformative investments in high-poverty neighborhoods where 
distressed HUD-assisted public- and privately owned housing is located. 
Choice Neighborhoods--along with RAD--is an essential element of the 
President's Promise Zones initiative. This initiative will revitalize 
many of America's highest-poverty communities by creating jobs, 
attracting private investment, increasing economic activity, improving 
affordable housing, improving educational opportunities, and reducing 
violent crime. Promise Zones are key rungs on the Administration's 
Ladders of Opportunity initiative, which also includes raising the 
minimum wage, increasing access to high-quality preschool, redesigning 
America's high schools, and promoting fatherhood and marriage.
    High-need communities will engage in an open, transparent, 
competitive process to apply for a Promise Zone designation. The 
Promise Zone designation process will ensure rural and Native American 
representation. If approved by Congress, Promise Zones will receive tax 
incentives to stimulate hiring and business investment, alongside with 
Federal partnership and technical assistance aimed at breaking down 
regulatory barriers and using Federal funds available to them at the 
local level more effectively. Promise Zones will be able to access 
investments that further the goals of job creation, additional private 
investment, increased economic activity, expanded educational 
opportunity, and reduction in violent crime. These could include Choice 
Neighborhoods at HUD, Promise Neighborhoods at the Department of 
Education, and Byrne Criminal Justice Innovation at DOJ. The Promise 
Zones initiative builds on the lessons learned from these existing 
place-based programs, for which the budget reflects increases in 
investment across agencies. Other Federal agencies that will be 
aligning their work with that of local Promise Zone partners include 
the Departments of Commerce, Health and Human Services, and 
Agriculture.
    The Choice Neighborhoods initiative is a central element of the 
Administration's inter-agency, place-based strategy to support local 
communities in developing the tools they need to revitalize 
neighborhoods of concentrated poverty into neighborhoods of 
opportunity. The Department's administration of the first rounds of 
funding for Choice Neighborhoods grants exemplify how our practices 
generate effective partnerships with local housing and community 
development efforts. In the past, many Federal grant programs followed 
a rigid, top-down, ``one-size-fits-all'' approach that dictated what 
local policymakers could and could not do rather than listening to them 
and providing the tools they needed to meet local needs. Having served 
in local government myself, I am committed to a collaborative approach 
responsive to local needs--and believe the results thus far demonstrate 
that we are making good on that commitment.
Helping Cities, Towns, and Regions To Plan Their Economic Future
    The President is committed to making America a magnet for jobs. But 
attracting new businesses to our shores depends on urban, suburban, and 
rural areas that feature more housing and transportation choices, homes 
that are near jobs, transportation networks that move goods and people 
efficiently, all while lowering the cost and health burdens on 
families, businesses and the taxpayer. When America's metropolitan 
areas and rural communities are struggling to rebound from the economic 
crisis and compete for jobs on a global scale, 20th century practices 
are just not sufficient to attract businesses that have the flexibility 
to locate wherever they see the potential to hire committed and skilled 
workers. Increasingly, mayors and business and community leaders are 
instituting and demanding new economic development approaches that 
simultaneously recruit businesses based on industry clusters, unique 
resources available in the community, and implement community 
development strategies that ensure that employees have affordable 
housing choices, can get to work quickly and affordably, and are able 
to enjoy a high quality of life.
    The Office of Economic Resilience (OER), located within HUD's 
Office of Community Planning and Development, will foster and incubate 
innovative program, practice and policy throughout the Department and 
with other agencies by partnering with communities to:
  --strengthen and diversify their economies in ways that allow them to 
        effectively compete on a global stage;
  --retain and recruit workers that demand high quality places with 
        robust local services and amenities;
  --address distressed and isolated neighborhoods that minimize access 
        to opportunity for residents; and
  --effectively align and deploy Federal, State, and local funding for 
        development and infrastructure.
    OER will work in partnership with other Federal agencies like the 
Departments of Commerce, Transportation, Agriculture and Energy, Health 
and Human Services, the Environmental Protection Agency, Small Business 
Administration, and others to build the capacity of local, regional, 
and State governments, community organizations and business leaders to 
prepare and execute data-driven community economic development and 
infrastructure investment strategies. OER will fund $75 million in 
Integrated Planning and Investment Grants that will seed or enhance 
locally created, comprehensive blueprints that strategically direct 
public and private investments in development and infrastructure to 
projects that result in: attracting jobs and building diverse and 
resilient economies; significant municipal cost-savings; and stronger, 
more unified local leadership. These grants will create incentives for 
communities to develop and implement comprehensive housing and 
transportation plans, such as updates to building codes, land use, and 
zoning ordinances that result in more resilient economic development, 
improve housing supply response to demand, and increase affordable 
housing near public transit. Integrated Planning and Investment Grants 
will incorporate some of the same features of the previously funded 
Regional Plans for Sustainable Communities and the Community Challenge 
Grants offered by the Office of Sustainable Housing and Communities, 
but using lessons learned from those programs and feedback from local 
leaders and Congress, will prioritize supporting actionable economic 
development strategies, reducing redundancy in federally funded 
planning activities, setting and monitoring performance, and 
identifying how Federal formula funds can be used smartly and 
efficiently in support of economic resilience. As with the previous 
efforts, priority will be placed on directing grants to rural areas, 
cities, counties, metropolitan areas and States that demonstrate 
economic need and are committed to building the cross-sector, cross-
disciplinary partnerships necessary to tackle the tough decisions that 
help make places economically competitive.
    We know how important these planning tools are to regional 
economies--particularly those that rely on integrated supply chains 
that cross national borders and how essential they are to meeting the 
President's charge to double U.S. exports over the next 5 years. These 
investments will leverage other Administration proposals (e.g., 
Infrastructure Bank, Project Rebuild) to help overhaul America's 
deteriorating infrastructure and increase residential and commercial 
construction around transit.
Ensuring Inclusive Housing Nationwide
    An inclusive community is one in which all people--regardless of 
race, ethnicity, religion, sex, disability, or familial status--have 
equal access to housing and economic opportunities. Throughout its 
portfolio of programs, HUD is committed to maintaining that inclusivity 
and providing accountability in housing and lending practices 
nationwide. Through inclusive development, education, enforcement of 
fair housing laws, expanded training and language assistance, HUD will 
affirmatively further fair housing and the ideals of an open society.
    The Fair Housing Initiatives Program (FHIP) is critical to building 
and sustaining inclusive communities. FHIP is the only grant program 
within the Federal Government whose primary purpose is to support 
private efforts to educate the public about fair housing rights and 
conduct private enforcement of the Fair Housing Act. In fiscal year 
2014, HUD is requesting approximately $44 million in FHIP funds, 
representing the Department's strong commitment to fair housing, 
including $28 million to support the efforts of private fair housing 
organizations that conduct private enforcement of the Fair Housing Act. 
The Private Enforcement Initiative (PEI) grantees investigate and test 
housing providers alleged to have engaged in discrimination. The 
requested amount will continue funding to support fair housing 
enforcement by all statutorily eligible private fair housing 
organizations. In addition it will fund fair housing education at the 
local, regional, and national levels.
    The Fair Housing Assistance Program (FHAP) is a critical component 
of HUD's effort to ensure the public's right to housing free from 
discrimination. FHAP multiplies HUD's enforcement capabilities, 
allowing the Department to protect fair housing rights in an efficient 
and effective manner. In fact, FHAP agencies investigate the majority 
of housing discrimination complaints filed in the United States. In 
fiscal year 2014, the budget provides $24.6 million in FHAP grants to 
95 Government agencies, including 37 States, 60 localities, and the 
District of Columbia, to enforce laws that prohibit housing 
discrimination that have been reviewed and deemed substantially 
equivalent to Federal law.
Ensuring That an Economy Built From the Middle Class Out Includes 
        Opportunities for Rural Americans
    The Administration has placed a significant emphasis on ensuring 
that America's rural communities are competitive in the global 
economy--particularly given the reality that rural communities 
generally have less access to public transportation, along with higher 
poverty rates and inadequate housing. HUD serves families in small 
towns and rural communities through almost every major program it 
funds. The State-administered Community Development Block Grants 
(CDBGs) provide approximately $692 million to rural areas, supporting 
over 25,000 jobs both directly and indirectly, providing needed 
infrastructure, economic development, and affordable housing. HUD also 
funds over $300 million in rural areas for affordable housing and 
homeownership programs through its HOME Investment Partnership program, 
directly and indirectly supporting over 5,360 jobs.
    As the single largest sources of funding for housing on Indian 
tribal lands today, programs like Indian Housing Block Grants, Indian 
Housing Loan Guarantees, and Indian Community Development Block Grants 
support development in remote areas where safe, affordable housing is 
desperately needed. HUD also directly supports housing and economic 
development initiatives in remote areas of Hawaii, through the Native 
Hawaiian Housing Block Grant Program and Native Hawaiian Loan Guarantee 
Program. HUD recognizes the right of Indian self-determination and 
tribal self-governance by allowing the recipients the flexibility to 
design and implement appropriate, place-based housing programs 
according to local needs and customs. Taken together, in fiscal year 
2014 HUD is requesting $739 million to fund programs that will support 
housing and development in American Indian, Alaska Native, and Native 
Hawaiian communities.
    In addition, HUD and the Department of Agriculture (USDA) meet 
regularly through an interagency rental housing policy group to better 
align and coordinate affordable rental housing programs. Altogether, 
over 800,000 families in rural communities are directly assisted 
through the Housing Choice Voucher program, public housing, and 
Multifamily programs, with another 450,000 assisted through USDA. For 
homeowners, the FHA helps first-time homebuyers and other qualified 
families all over the country purchase their own homes. More than 1.5 
million of the homes currently insured by the FHA are in rural areas, 
and approximately $545 million in current FHA loans are to rural 
healthcare facilities designated as ``critical access hospitals.'' HUD 
recognizes the unique challenges in these rural areas, and continues to 
develop innovative, community-based programming to meet those needs.
    HUD has also entered into a memorandum of understanding with the 
Department of Treasury's Community Development Financial Institutions 
Fund and the Department of Agriculture--Rural Development, to expand 
the capacity of organizations providing loans and investment capital in 
underserved rural regions. The initiative, which is being piloted in 
colonias along the United States-Mexico border, will improve the 
delivery of funding from Federal agencies and private sources 
supporting small business, affordable housing and community facilities.
              goal 5: transform the way hud does business
    A 21st century American economy that is a magnet for jobs and 
equips its residents with the skills they need for those jobs demands a 
government that's leaner, smarter, and more transparent. The current 
economic and housing crisis; the structural affordability challenges 
facing low-income homeowners and renters; and the new, multidimensional 
challenges facing our urban, suburban, and rural communities all 
require an agency in which the fundamentals matter and the basics 
function. As such, HUD remains committed to transforming the way it 
does business. This transformation is more crucial now than perhaps 
ever before--HUD remains at the forefront of the Federal response to 
the national mortgage crisis, economic recovery, Hurricane Sandy 
recovery, and the structural gap between household incomes and national 
housing prices--roles that require an agency that is nimble and market-
savvy, with the capacity and expertise necessary to galvanize HUD's 
vast network of partners. HUD's 2014 budget reflects these critical 
roles, by investing in transformation, research, and development that 
will be implemented persistently over time.
Investing in Our Staff
    HUD's greatest resource is its dedicated staff. When employees 
attain skills and are motivated to use those skills to help their 
organization reach goals, the capacity of the organization grows and 
employees in the organization grow as well. This is why HUD is 
providing its employees training and leadership development 
opportunities. In addition, many internal rules and regulations have 
become hurdles instead of being helpful. In response, HUD is in the 
process of simplifying and combining programs, streamlining 
regulations, and eliminating rules and constraints. The Department is 
also in the middle of a major reform of its information technology, 
human resources, procurement, and other internal support functions to 
give more authority and flexibility to managers and provide better 
service to HUD customers.
    In fiscal year 2014, HUD is requesting $1.467 billion in salaries 
and expenses, including $127.7 million for HUD's Office of Inspector 
General (OIG). This funding request represents just a 0.6 percent 
increase from the fiscal year 2012 enacted level, and reflects HUD's 
commitment to lean and smart management. The HUD request includes 
several initiatives to streamline the HUD organization, including 
restructuring the accounts, increasing training for our staff, and 
providing significantly more detail on how HUD staff supports programs 
and strategic goals. HUD is making specific investments of more staff 
to manage major rental assistance programs, increasing our ability to 
enforce new fair housing rules, and providing more oversight to our 
community grant programs. The Department will continue to improve 
operations and create a dynamic organization capable of addressing some 
of our Nation's most difficult challenges. HUD remains at the forefront 
of the Federal response to the national mortgage crisis, the economic 
recovery, and the structural gap between household incomes and national 
housing prices. These roles require an agency that is nimble and 
market-savvy, with the capacity and expertise necessary to galvanize 
HUD's vast network of partners, including local officials, nonprofits, 
and faith-based organizations, among others.
Carrying Out Critical Program Demonstrations and Research
    HUD's ongoing transformation is a multiyear effort that can only be 
achieved through the relentless focus of agency leadership, full 
transparency and accountability for real results, and sustained and 
flexible budget resources. The Transformation Initiative (TI) remains 
the primary source of funding for this transformation. Since TI was 
first enacted in 2010, it has bolstered the long-neglected areas of IT 
modernization, research and evaluation, and program demonstrations 
crucial for increasing the efficiency and effectiveness of the 
Department's programs. Further, TI has provided a mechanism for 
innovative, cross-cutting technical assistance that goes beyond program 
compliance to improve grantee capacity, performance and outcomes.
    While the Department's transformation is a crucial long-term 
commitment, HUD continues to prioritize these efforts in a responsible 
manner that ensures HUD's constituent services don't suffer at the 
hands of internal transformation. This year's budget proposes a 
Department-wide HUD Transformation Initiative Fund to be funded by 
transfers from program accounts of up to 0.5 percent at the Secretary's 
discretion. The 2014 budget requests transfers of $80 million into its 
Transformation Initiative Fund for priorities such as:
    Research and Evaluation.--To strategically increase efficiency and 
effectiveness of the Department's programs through examining policy 
questions and assessing program functioning and outcomes. TI-funded 
research complements the data infrastructure created through Research 
and Technology funding of national housing surveys. TI will support 
research priorities developed in a 5-year Research Roadmap by the 
Office of Policy Development and Research. The Roadmap reflects a year-
long process of consulting with stakeholders about the research 
questions that are most relevant and crucial for housing and urban 
development policy and that HUD is best positioned to advance in a 
timely way. For example, one fiscal year 2014 priority project would 
refine HUD's utility models to enable the Department to more accurately 
account for energy usage in housing assistance programs in which 
utility costs are paid by tenants, and thereby help HUD to more 
effectively disburse funds for utilities that are actually consumed.
    Program Demonstrations.--Demonstrations test new program approaches 
in a carefully structured and rigorously evaluated manner, and are 
essential mechanisms for evidence-based policy improvements. For 
example, the Rental Assistance Demonstration (RAD), approved in fiscal 
year 2012, supports the trial conversion of public housing and certain 
multifamily properties to long-term project-based contracts. TI will 
enable evaluation of outcomes. HUD is also proposing, within the Public 
Housing Capital Fund, a $15 million pilot of the evidence-based Jobs-
Plus Demonstration to increase the earnings and employment of public 
housing residents. A process evaluation conducted in tandem through TI 
will document successful local adaptations and how this larger scale 
implementation affects outcomes.
    Surveys and Data Infrastructure.--The Office of Policy Development 
and Research (PD&R) also provides fundamental support for informed 
decisions by the Department and national policy makers through data 
collection and research dissemination. PD&R has a key role in the 
improvement of national housing data infrastructure and meeting other 
key national information needs. In fiscal year 2014, HUD is requesting 
$50 million to fund the Nation's basic data infrastructure and share 
research knowledge on housing and community development. Complementing 
TI, this funding to support foundational housing market surveys 
continue the transformation of PD&R into the Nation's leading research 
organization addressing the wide array of America's housing and urban 
development challenges.
    Delivering Strategic and Cross-Cutting Technical Assistance.--To 
ensure HUD's funds make the most impact in the communities where they 
are invested, HUD has shifted from making small investments in narrow, 
compliance-focused assistance to comprehensive, results-oriented 
capacity building that assists both grantees with deeply rooted 
management and financial challenges, as well as those driving 
innovation by being the first to implement new polices or programs. HUD 
delivers intensive, place-based technical assistance, working hand-in-
hand with jurisdictions, housing authorities, and other stakeholders 
that are experiencing a range of capacity challenges. HUD also provides 
ongoing training and development on principles fundamental to operating 
housing and community development programs effectively, such as 
financial management and using data to drive decisionmaking. HUD's TA 
resources and training are increasingly offered online to make access 
easier for many stakeholders and to reduce the costs of providing TA.
Upgrading the Department's Information Technology Infrastructure
    In fiscal year 2014, HUD is requesting $285 million to support and 
modernize its information technology infrastructure. This request 
includes $45 million for the development, modernization, and 
enhancement of key outdated systems; $116 million for the operations 
and maintenance of our current systems; and $124 million to complete 
the transition to our new IT Infrastructure system, HUDNET. In fiscal 
year 2014, HUD will focus our development efforts on transitioning the 
Department's IT infrastructure from the current antiquated environment 
to a modern, sustainable infrastructure, continued development of a 
modern financial management system that will improve HUD's ability to 
measure, track, and report on program costs and efficacy, and 
transitioning the current FHA systems to a modern platform. These 
changes will allow HUD to deliver services and manage its multi-billion 
dollar programs faster, more accurately and using better information 
for analysis. These funds are crucial to complement HUD's 
transformation efforts, providing resources for maintaining and 
improving Department-wide information technology systems.
                               conclusion
    Madam Chairman, this budget reflects the Administration's 
recognition of the critical role the housing sector must play to ensure 
that America becomes a magnet for jobs that strengthen the Nation's 
middle class, including providing ladders of economic opportunity for 
all Americans. Equally important, it expresses the confidence of the 
President in the capacity of HUD to meet a high standard of 
performance.
    Given the economic moment we are in, HUD's 2014 budget proposal 
isn't about spending more in America's communities--it's about 
investing smarter and more effectively.
    It's about making hard choices to reduce the deficit--and putting 
in place much-needed reforms to hold ourselves to a high standard of 
performance. But most of all, it's about the results we deliver for the 
vulnerable people and places who depend on us most.

    Senator Murray. Thank you very much, Mr. Secretary. And I 
will begin the questioning by talking about the status of FHA's 
Mutual Mortgage Insurance (MMI) Fund. Your budget states that 
$943 million may be needed to cover expected FHA losses in the 
single-family insurance fund in the fiscal year 2013. That 
follows on the most recent actuarial report showing that the 
capital reserve account would go negative. Can you talk about 
how the condition of the fund has changed in the past year, and 
how HUD arrived at its 2013 shortfall estimate?
    Secretary Donovan. Absolutely.

                     MUTUAL MORTGAGE INSURANCE FUND

    I am glad you raised the actuarial report and where we are. 
Before that report and since, we have taken aggressive actions 
to protect the fund--five different premium increases, 
including most recently at the beginning of this month, that 
will help protect the funds. That leads to, obviously, the 
significant receipts we expect in the budget this year, the 
$14.5 billion that I referred to.
    What that shows you is that the new loans that we are 
making in the fund are the best quality that we have ever seen 
in FHA. And I do not believe, at this point, that we should be 
taking further steps to increase premiums. What we really 
should be focusing on are the loans that are causing the 
damage.
    And those steps that we have already taken, as you can see, 
move us from a negative $16 billion number that was in 
actuarial report to the under negative $1 billion that we have 
in the President's budget.
    The further steps that we need to be taking focus on the 
loans that are causing the deficit. If you just took out the 
reverse mortgage loans from the FHA fund, we would be in a 
positive $4 billion----
    Senator Murray. Why are these such a problem?
    Secretary Donovan. Frankly, the program needs reforms. And 
unfortunately, we do not have the authority to implement those 
reforms without full notice-and-comment rulemaking. That is a 
process that could take 18 months. And one of the things that 
we are asking Congress to do as quickly as possible is give us 
the ability to make these changes to the program through a 
mortgage letter much more quickly rather than having to go 
through this full notice-and-comment rulemaking.

                         REVERSE MORTGAGE LOANS

    The other thing I would say in particular is that, because 
of the nature of the reverse mortgage loans, they are more 
highly sensitive to changes in house prices. So the recent 
economic crisis and housing crisis has had a more severe 
impact.
    So we need to change the Home Equity Conversion Mortgage 
(HECM) program. We are asking for the authority to do that as 
quickly as possible, in addition to the changes we have already 
made.
    The second thing I would say is we need to continue to 
increase the collections that we can make on older loans 
outside of the HECM program. We made a number of changes this 
year. We are going to continue to do that, streamlining short 
sales, improving loan sales. All of those can bring billions of 
dollars to the fund. But we also need help from Congress in 
increasing our enforcement authorities; for example, allowing 
us to remove servicing from lenders that are not doing a good 
enough job helping homeowners and helping protect the taxpayer.
    Senator Murray. Okay, I appreciate that.
    Let me ask you about sequestration. You testified before 
the full Appropriations Committee a few weeks ago about the 
impact on HUD's programs and the people who rely on those. 
Those cuts have now been implemented with some real 
consequences. I am hearing a lot about this at home. I 
mentioned that in my statement.
    Can you talk about how public housing authorities are 
responding to these cuts, and what is their effect, especially 
since this has come so late in the fiscal year?
    Secretary Donovan. Absolutely.

          SEQUESTRATION'S IMPACT ON PUBLIC HOUSING AUTHORITIES

    First of all, and you really talked about this in your 
statement, Senator, more than 100,000 families that we expect 
to lose vouchers, and we have already seen--you talked about 
the example of King County, where families who are on the 
waiting list who would have gotten a voucher are going to 
remain at risk of homelessness in terrible situations by not 
getting that voucher.
    But there are even more extreme examples around the 
country. We have identified over 700 housing authorities where, 
even if they fully draw down their reserves, stop leasing new 
vouchers, that we do not think will be enough. That means that 
they will literally have to start cutting off families from the 
program----
    Senator Murray. Who are currently in section----
    Secretary Donovan. Who are currently served, or other 
extreme measures, reducing payment standards and other things 
that would have direct impacts on families that are already 
severely stressed. And so we are most concerned about those.
    In the most extreme example, and I know this is 
particularly important to you and the ranking member, we have 
seen housing authorities start to turn back their entire 
programs. In other words, they say we can't administer vouchers 
anymore.
    Senator Murray. Because they do not have the personnel to 
do it?
    Secretary Donovan. Because they do not have the ability to 
do it. Thirteen housing authorities in the first 3 months of 
this year, that is a more than tripling of the rate that we saw 
last year. And last year was already high because of the cuts 
that we have seen in prior--we even have housing authorities 
turning back VASH vouchers. Can you imagine a housing authority 
saying I can't serve a veteran of this country to get them off 
the street?
    Senator Murray. Not because they don't have a population 
that needs it, but because they do not have the personnel?
    Secretary Donovan. Absolutely. Only because they do not 
have the funding.
    Senator Murray. Right.
    Secretary Donovan. Now, beyond that, thanks to the work 
that you did in the recent continuing resolution, we have gone 
from expecting about 100,000 people in our homeless programs to 
be back on the streets--that is down to 60,000. So it is better 
than the 100,000, but it is still 60,000 people that could be 
hurt that way.
    I would also just point to one other example. As Senator 
Blunt knows, Joplin is still recovering from the devastating 
tornado we saw there. You all worked hard to make sure that 
funding was available through the Sandy supplemental. We have 
allocated over $100 million there to Joplin.
    But we are going to see, just in the CDBG program, over 
$800 million of cuts. We believe that is 20,000 jobs in 
reconstructing, not to mention the more than 10,000 families 
and businesses who may never get rebuilt as a result of that.
    Overall, what we are talking about, and you pointed to 
this, just at a time when we are really seeing the economy with 
the ability to take off, just in HUD's budget, we are talking 
about 50,000 jobs lost from sequestration, combining both the 
supplemental funding and the work that we are doing across our 
other programs.
    So these are real impacts on the middle class, on our most 
vulnerable families, and they are happening today, and they 
will continue to grow for the rest of the year if we do not 
reverse sequestration.
    Senator Murray. Yes, and what I am seeing is the impact on 
the broader community, too. As I see that constriction, people 
are once again stopping spending. They are stopping expanding. 
It has had a real impact, so I appreciate your perspective.
    Senator Collins.
    Senator Collins. Thank you, Madam Chairman.
    Mr. Secretary, I was very interested in the exchange that 
you had with Senator Murray about reverse mortgages, because 
over the past couple of years, a retired mortgage banker in 
Maine has repeatedly contacted me to express her well-informed 
view that, in many cases, our seniors are getting into these 
reverse mortgages, and they are turning out to be a disaster 
for them. And she keeps asking why isn't HUD doing more, why 
isn't Congress doing more, to regulate this financial product?
    So it is very interesting to learn today, and to learn 
based on the Home Equity Conversion Mortgage program, I believe 
you called it HECM?
    Secretary Donovan. HECM.
    Senator Collins. HECM. That HECMs are contributing to the 
financial instability of FHA's MMI Fund due to factors that 
included longer mortgage terms than were expected, declining 
home values, and an increase in the number of homes conveyed to 
HUD.
    So I was very glad when Senator Murray asked you about the 
impact of those reverse mortgages on the MMI Fund, especially 
since we are concerned about that fund drawing on the Federal 
Treasury.
    But I am also concerned about the impact on seniors of the 
wider spread use of reverse mortgages.
    For example, the surviving spouse of a borrower with a HECM 
insured loan, if not a party to the mortgage him or herself, 
must pay off the loan upon the mortgager's spouse's death. And 
I am wondering if the spouse even realizes that when the 
reverse mortgage is granted.
    So what is HUD doing to ensure that borrowers and their 
spouses understand that consequence and other potential 
problems with getting a reverse mortgage? We see these ads on 
television. It sounds like it is the best thing since sliced 
bread, and yet, I am hearing that there are a lot of problems. 
And the fact that you are seeing such a negative impact on the 
MMI Fund suggests this is an area that we really need to look 
at.

                 HOME EQUITY CONVERSION MORTGAGE REFORM

    Secretary Donovan. Absolutely. And just to take this 
specific point, Senator, about the spouse, this is an issue 
that does need work and clarification. We are asking for 
legislative language that would clarify this in our budget. But 
we have also made sure that, in the counseling that we require, 
that this is a much more clear focus when seniors are making a 
decision about whether to take a reverse mortgage or not.
    I agree with you that we need to do more outreach and make 
it more clear. We do believe that it is important that a spouse 
should be on the mortgage, be not just a part homeowner but 
actually signed on the mortgage for the financial integrity of 
the program. But we also have taken a number of steps to create 
more options; for example, to create more flexibility to allow 
a sale through the estate to ensure that there are ways to 
recover short of foreclosure in those situations.
    So both the counseling and the flexibility on sale are 
things that we have done. But we need the clarification legally 
to make sure we all understand, because there is pending 
litigation on this, and that has created a lack of clarity as 
well.
    More broadly, I would just say, quickly, for the reverse 
mortgage program, we have taken a number of steps to create 
safer products. We introduced a safer version a few years ago. 
We have enhanced the financial tools in addition to counseling 
that we provide. And we are seeing significant improvement in 
loans that were originated after these changes were put in 
place in 2011. Using an apples-to-apples comparison, default 
rates have come down in half. So we are seeing improvements in 
the safety of the loans.

                    MORATORIUM ON FULL DRAW PROGRAM

    But we are very concerned about what we call the full draw 
program. We have put a moratorium on that program to stop it. 
And we will only reinstitute it if we can get the legislative 
authority we need to make the changes quickly. Otherwise, it 
will take us, as I said, through full notice-and-comment 
rulemaking, probably 18 months or so to be able to institute 
those changes.
    And unfortunately, if we do not have them sooner, we are 
going to have to take more drastic measures that would really 
harm the seniors that should have a reverse mortgage, where it 
can be a productive tool, because by the end of the fiscal 
year, we have to have the program back to making money. We have 
to have it with what we call negative credit subsidy, so have 
it be a profitable program for the Federal Government.
    And the only way that we can do that without this 
legislative change is to impose significant changes on 
principal limit factors and other things that we think do more 
harm than good in some ways.
    Senator Collins. Thank you for that response. That is 
something I am very interested in working with you and the 
chairman on.
    I do recognize that a reverse mortgage can be very helpful 
to some of our seniors, but it seems to me it is fraught with 
risks for others. And the fact that your fund is being hit hard 
suggests that it is also fraught with risk for the Federal 
Government. And of course, those two facts are connected.
    So I do think that we need to take a look at that.
    Let me just touch on one other issue. The budget proposes 
to increase the loan guarantee commitment authority for FHA's 
General and Special Risk Insurance programs from $25 billion to 
$30 billion. And as you are well aware, Chairman Murray and I 
tried very hard to get this anomaly included in the continuing 
resolution. Unfortunately, we were unable to include provisions 
that could prove problematic to final passage, and this was one 
of them, although it should not have been, in my view.
    This important program provides mortgage insurance for the 
construction of multifamily housing, hospitals, and healthcare 
facilities. Based on commitments recorded through January of 
this year, the total demand for mortgage insurance during this 
fiscal year is expected to exceed the commitment limitation 
available.
    If funding is depleted, delays in the approvals of mortgage 
insurance could jeopardize construction projects that add jobs 
to our economy.
    So my question for you, Mr. Secretary, is when do you 
anticipate that the program will reach its current limitation 
of commitment authority during this fiscal year, since we were 
unable to get it increased through the continuing resolution?

        GENERAL AND SPECIAL RISK INSURANCE COMMITMENT AUTHORITY

    Secretary Donovan. Based on our latest projections, we 
expect to run out of commitment authority and have to shut down 
the program in mid-August. So that would be 6 weeks before the 
end of the fiscal year.
    Let me just be clear. There are three reasons why we should 
do this, and we want to push hard to get this. We have done 
this in past years. We want to get this done during the rest of 
the year.
    First, and you made this point, that $5 billion in 
commitment authority is 22,000 jobs. Second, we are also using 
that commitment authority to refinance existing loans that are 
already in the program to record low interest rates. That 
actually saves taxpayers money by making those loans safer 
going forward. Third, the new loans, that $5 billion, will 
actually make the taxpayers about $200 million, because those 
new loans we are making at the higher premiums that are 
charging today make money. And so, in lots of different ways, 
not doing this would be a real mistake.
    Senator Collins. I completely agree with you, and it should 
have been done as part of the continuing resolution. We tried 
mightily to get it in there as an anomaly.
    Secretary Donovan. I know you did, and I appreciate it. I 
think we know where the resistance has been. And I think if we 
work together--I certainly have had conversations already on 
the House side about this. I hope we can get there. We have 
been able to in the past, and really, for the private sector, 
in terms of these jobs and being able to move forward, it would 
be a shame at the time our housing market is recovering to 
reverse that progress.
    Senator Collins. Absolutely. Those three arguments are very 
solid. Thank you.
    Senator Murray. Senator Blunt.
    Senator Blunt. I thank the chairman.
    Secretary Donovan, on the last page of the booklet I have 
here on fiscal year 2014, if I am looking at these figures 
right, it looks like to me that, in the billions, the number 
you had available in fiscal year 2012, was $44.341 billion. The 
number you asked for 2014 is 10 percent higher than that.
    What number did you actually wind up with available to you 
in 2013?
    Is that $44.615 billion what you had available or is that 
pre-sequestration?
    Secretary Donovan. You are looking at 2013?
    Senator Blunt. I am.
    Secretary Donovan. That is pre-sequestration.
    Senator Blunt. So how much did you----

                      SEQUESTRATION BUDGET NUMBERS

    Secretary Donovan. So post-sequestration would be $42.4 
billion. And again, that is on a gross basis. Our receipts from 
FHA and Ginnie Mae total $11.2 billion in 2013. So, on a net 
basis, it would be $31.2 billion.
    And I do not believe the table you have includes those 
receipts, if I am correct.
    Senator Blunt. I think it has $11.204----
    Secretary Donovan. Yes, I am sorry.
    Senator Blunt. A lot higher than 2012 and 2011, more than 
twice as high as 2012 and 2011.
    Secretary Donovan. That is correct. And that is both due to 
the better quality of the loans that we are making, as well as 
the increase in premiums.
    Senator Blunt. And does that affect overall programs, or 
just the programs where those receipts come in?
    Do you actually get to spend that money like it was other 
money available to you?
    Secretary Donovan. Ultimately, that is up to the Congress 
to determine in the allocations for the budget, how much of 
those receipts would stay----
    Senator Blunt. What happened here? What happened here? Did 
you have $11 billion more to spend on other things as supposed 
to the year before, where you had $5.8 billion?
    Secretary Donovan. Again, I do not have the discretion to 
spend that money. But it is a net benefit to the taxpayer. It 
does offset the cost of our programs. So Congress determines 
how to use those receipts.
    Senator Blunt. Okay, back to my earlier point then. Your 
total spending in fiscal year 2013 was higher even with 
sequestration than fiscal year 2012, because of those receipts?
    Secretary Donovan. So with sequestration, it is about a 
$1.9 billion reduction.
    Senator Blunt. Reduction.
    Secretary Donovan. In gross spending. So that is the $44.3 
billion going down to the $42.4 billion.
    Senator Blunt. Why did you decide to submit the numbers as 
if sequestration or the budget caps would not be utilized again 
this year? Was that the direction you got from the Office of 
Management and Budget (OMB)? Or did you decide that on your 
own?
    Secretary Donovan. We wanted to provide both pieces of 
information.
    Here is the reason, fundamentally. The President believes, 
I believe, that, as I said very clearly, that sequestration is 
damaging; it is not the right way to manage these programs; and 
that we should, before the fiscal year is out, we hope to reach 
a comprehensive agreement with Congress that would reverse 
sequestration and put in place a balanced deficit reduction 
plan. And, therefore, we think it is critical to look at not 
just where we are today with sequestration, but also to provide 
the information that shows where we would be without that 
sequestration, as well.
    Senator Blunt. But do you have a list of proposals to show 
where you would be with sequestration? I noticed the President 
yesterday, according to Reuters, had to submit a document that 
reduced his own budget he submitted the day before by $91 
billion, but with no particular prioritization, just taking it, 
I guess, out of the budget like sequestration.
    You do know that is the law, of course?
    Secretary Donovan. Obviously, it is the law, and we are 
living with the consequences.
    In fact, if the----
    Senator Blunt. We also live with the consequences of not 
acting like it is the law. September 28, OMB sent out a 
document to you and everybody else that I put in the 
Congressional Record a couple months ago that said, spend your 
money beginning October 1 as if the law will not be followed. I 
think it actually said, ``as if Congress will change the law,'' 
which is, of course, a nicer way to say that.
    But it would seem to me that we would want to set the 
priorities you want with the money you are likely to get, as 
opposed to the priorities you want with lines that will, in all 
likelihood, I believe, now will be cut. But that is just my 
view as opposed to yours.
    Answer a question for me about veterans' housing, homeless 
veterans. You said you had 60,000 people unserved instead of 
100,000? Was that the comment you made?
    Secretary Donovan. That is in our homeless programs more 
broadly, not just----
    Senator Blunt. Not veterans. Homeless programs more 
broadly.
    What did we do in the continuing resolution that allowed 
you to at least close 40,000 of that anticipated gap from 
100,000 to 60,000?

                     SHORTFALLS UNDER SEQUESTRATION

    Secretary Donovan. There was funding added to our homeless 
assistance grants that allowed us to renew more of the existing 
units that are there. We still are going to have to, if 
sequestration continues, and the continuing resolution, we are 
going to have to eliminate existing programs that house the 
homeless if sequestration is not reversed. And that would be 
about the 60,000 number that I cited.
    Senator Blunt. So the continuing resolution update was 
better for this program than if we had just continue to go with 
past priority-setting efforts.
    Secretary Donovan. Senator, I would just add, to go to your 
question earlier, to be clear, we do believe sequestration 
should be reversed. We believe that is the right course. And 
the President is not going to give up on that.
    But I would also say that if sequestration continues, it 
will make the budget picture worse next year and increase needs 
in many of our programs. Just to give you one example, if 
sequestration continues, we will go into next year with a $1.2 
billion shortfall in our project-based section 8 program. Those 
are contracts that we signed with private owners who manage 
housing that says here is the rent that they are entitled to. 
And so, for us to live up to those contracts, we are in a 
position, if sequestration is not reversed, where, in addition 
to the funding that we have here, is an additional $1.2 billion 
that would be needed to live up to those contracts.
    Senator Blunt. And would those contracts be a priority?
    Secretary Donovan. Absolutely. And as I said in my 
testimony----
    Senator Blunt. Absolutely. So why wouldn't you want to be 
dealing with this subcommittee to try to be sure we were 
helping you meet your priorities before you meet anything else?
    Secretary Donovan. That is exactly why this was a priority 
for us in the budget as I laid it out. Eighty-four percent of 
our budget that goes to renewals is the top priority for us, 
and we have made sure in the budget for next year that every 
single family that is currently served could continue to be 
served.
    Senator Blunt. Well, I am sure you are not the only agency 
that has had to approach this, or decided to approach this, 
this way. But my sense would be that, at some point, we are 
either going to decide we are going to change the law, or it is 
actually the law, and we all need to figure out how to deal 
with that as we are helping set priorities as opposed to vote 
for an appropriations bill that is going to be cut in areas 
that we wouldn't want it cut on a line-by-line basis, and other 
things that were new and aspirational might have had a broader 
debate if you knew they were truly areas that were going to be 
impacted by these funding programs.
    Chairman, thank you for the time.
    Senator Murray. Thank you. And I would just remind all of 
us that we are in a position now where we are trying to work 
between the White House, the House, and the Senate on what 
those levels are going to be. Meanwhile, we have to move our 
appropriations bills forward, and we are all trying to manage 
through that.
    Mr. Secretary, in recent years, examples of housing 
authorities that misused Federal funds or failed to comply with 
important safety regulations have really highlighted the 
importance of oversight. As you work now to improve HUD's 
oversight, it is important to make sure we are not just adding 
new requirements or just asking for more information, but we 
are instead asking for the right information and using it 
effectively.
    What steps are you taking to improve oversight and 
streamline reporting requirements and update regulations?

            OVERSIGHT OF TROUBLED PUBLIC HOUSING AUTHORITIES

    Secretary Donovan. Well, first, I would point to the 
critical section 8 reform legislation that we have proposed. As 
I said, we are looking at $0.5 billion in savings just next 
year, $2.7 billion over 5 years. That is enormously important. 
This does go to Senator Blunt's point as well.
    There are important steps that we can take while serving 
the same number of families to lower costs in the programs.
    We have also taken substantial steps to make sure that the 
minority of public housing authorities, the small number that 
are violating program rules, that are in serious difficulties, 
and are not living up to the standards that we have set, those 
troubled housing authorities, that we are focusing on them and 
either enforcing against them or working with them to correct 
those problems.
    And I do think we are making progress there. If you go back 
to the beginning of administration, we had about 175 troubled 
housing authorities around the country. We are now down to 52. 
And I think that we will continue to make progress. We would be 
happy to provide more information on how we are doing that 
through our FARs effort.
    We have over 100 teams around the country that are working 
with these housing authorities, both to enforce and to improve 
them.
    We made enough progress that we have started working on the 
near-troubled agencies. We have seen about a 10-percent 
reduction in the number of those, and we are going to take 
additional steps. We are looking forward to seeing the results 
of those assessments this year to see if we made further 
progress. And we are actually going to go further upstream to 
those that are, for some reason, in the risk-ranking that we 
are doing, appear to be at risk of troubles.
    So those are all important.
    The other thing I would just make sure we understand here, 
HUD needs to live up to its responsibilities to oversee these 
housing authorities. But these are local entities created under 
State law with boards of directors, executives that have 
authorities for oversight themselves. And we are going to be 
aggressive, and we have been aggressive, in going after 
individuals who are not living up to their standards and also 
that may be violating our rules.
    We are debarring and taking other steps against individuals 
who are not living up to their responsibilities. We need to 
make sure that local responsibility is met.
    Just the last thing I would say is, even where these folks 
are doing a great job--you mentioned Steve Norman in King 
County. Senator Collins mentioned the improvements that we have 
made in the Maine State Housing Authority. They are also not 
magicians. And when you are operating at under 70 percent of 
administrative fees, we have to recognize that the risk here, 
no matter what we do to make the programs more efficient and 
effective, is that oversight will fail, that we will get more 
units, because there are not capital funds to fix them up, that 
are not in decent condition.
    And so while we do everything that we can to create more 
flexibility, the fungibility between operating and capital fund 
is a good example in our budget, to increase oversight, there 
is a limit as to what we can do. And even some of these efforts 
we would like to undertake, we will have to put aside or delay, 
given the funding levels that we have.
    Senator Murray. An excellent point. And on the local 
governance issue, that really is important. And I would like to 
work with you and the inspector general on ways to improve the 
ability of housing authorities and other governing boards to 
identify some of these problems.
    I want to quickly talk about some of the new initiatives. 
As I have traveled around my home State, I have been excited to 
see some of the partnerships housing providers have created to 
address the housing and service needs of people seeking 
assistance.
    Tacoma, King County housing authorities are doing really 
great and exciting work around education. Longview and Walla 
Walla in my State are doing some really great work with our 
veterans' groups. Seattle's Yesler Terrace project supported by 
Choice Neighborhoods involves partnerships with schools, 
community colleges, local employers. And that project is going 
to redevelop housing and the whole surrounding neighborhood, 
while also increasing opportunities for families living in 
them.
    Your budget proposes to make a significant investment in 
Choice Neighborhoods, and I wanted to ask you, how does Choice 
encourage the kind of partnerships and leveraging happening in 
Seattle?

                          CHOICE NEIGHBORHOODS

    Secretary Donovan. Yes, I very much appreciate you raising 
this because the President strongly believes that we can reach 
our balanced deficit reduction while still investing more in 
the programs that are going to create jobs and growth, and help 
people be ready for those jobs through these Ladders to 
Opportunity.
    And I would just quibble a little bit with your use of the 
term ``new initiatives.'' I do want to be very clear that 
everything in this budget, whether it is in Choice 
Neighborhoods, the Neighborhood Stabilization Investment, Jobs-
Plus, some of the other things that you mentioned, those are 
all things that are tested at this point and that we have done.
    We are proposing an effort to coordinate these better 
through Promise Zones, but it is not a new program, in the 
sense that it is simply scaling up existing initiatives or 
things that we have proposed before.
    One of the things that I think is so impressive about 
Choice Neighborhoods--and you have seen it directly, just about 
anybody who goes to see the transformation of these 
neighborhoods--is that they have enormous leveraging of what 
work is being done, whether it is at the Department of 
Education, that is why we want to link up with their Promise 
Neighborhoods effort. But it also brings so much private 
capital.
    So just take the nine grantees that we have done so far in 
implementation grants for Choice Neighborhoods. They have 
raised over $2 billion in capital for investment and job 
creation. That is over eight times a multiple of the money that 
we have put in on the Federal side.
    So some people might say, well, we ought to put this money 
into the regular capital fund account. But I think we can get 
more bang for the buck if we put it into Choice Neighborhoods 
and leverage all of this other private capital that can go to 
work creating jobs.
    The other thing that it recognizes is, what is the cost of 
the child that grows up in that neighborhood and ends up in a 
homeless shelter, that ends up not being able to get a job 
because they are not getting a decent education?
    Senator Murray. Never finishes, yes.
    Secretary Donovan. We estimate that the 20 percent of kids 
growing up in poverty in this country costs us $0.5 trillion a 
year in lost productivity and wages.
    And that is a cost that we have to avoid. And that is why 
the President focused on this Promise Zones coordination 
effort, to make sure that not only we are giving these kids a 
chance, we are living up to the American promise, but that we 
are also avoiding those enormous costs of failure.
    Where are our future workers going to come from if we are 
leaving all these kids behind? And that is a cost we can't 
afford to bear.
    Senator Murray. Right. Well, I really appreciate that. And 
as I have seen in my State, the partnerships that are created 
through these initiatives really do make a difference.
    Secretary Donovan. Seattle Housing Authority Yesler is a 
terrific example.
    Senator Murray. Great example, yes.
    Senator Collins.
    Senator Collins. Thank you, Madam Chairman. Madam Chairman, 
I am going to submit the remainder of my questions for the 
record, because I think if I get into a long exchange, we will 
get into the vote that is coming up very shortly, which 
probably makes the Secretary very happy. But I do want to make 
one----
    Secretary Donovan. This is one of the few hearings I love 
spending time in.
    Senator Collins. He is tactful as well.
    I do want to say that the budget presentation--and this 
isn't just HUD's, it is across the board. Because of the way it 
was done this year, comparing to fiscal year 2012 rather than 
to the enacted sequestered amount, is extremely confusing.
    I had to have my staff write out for me, and HUD's is even 
more confusing because you have offsetting receipts, which a 
lot of agencies and departments don't. So I had to have them 
write out for me fiscal 2012 enacted, then what is the amount 
with receipts; fiscal 2013, the sequester year, what is the 
amount with receipts; fiscal 2014, what is the request and what 
is the amount with receipts.
    And I think to prevent confusion as we begin marking up and 
putting together a bill, we need a clearer chart from you. I 
mean, you can glean it from some of this, but it isn't easy.
    And I suspect that that is because you were instructed by 
OMB to pretend the sequestration is going to go away and do 
your comparisons to fiscal year 2012.
    Is that an accurate assumption on my part, or can we get a 
more straightforward chart?
    Secretary Donovan. I will hand you this in about 30 seconds 
when we finish. So, yes, we do have that.
    And look, obviously, we want to provide whatever 
information you need to make decisions.
    I do think it is a fundamental point here that the 
President believes, we all believe, that sequestration is not 
the right policy, and that we ought to reverse it, that we can 
reverse it. And particularly building into our budget, for 
instance, this $1.2 billion hole for project-based section 8, 
if we believe we can get there and not have that was not just a 
``we were instructed'' but it was a policy choice that we made 
that we fully believe in.
    Senator Murray. Can I just say that this is all going to 
have to be resolved? The House is looking at a different number 
than the Senate, and, at some point, we are going to have to 
have an agreement.
    But we are moving forward as if we are enacting a budget 
that has--well, we will hear from our chairman of the 
Appropriations Committee what exactly our subcommittee 
allocations are. But they have to move forward now. We can't 
wait for several months for the budget to be decided between 
the House and the Senate.
    So this will all come to a head at some point, but I think 
we are trying to manage between the guesses at this point.
    Senator Collins. And I agree with that, and I also am no 
fan of sequestration. We do need to reduce our spending. But to 
do these mindless automatic meat axe cuts does not reflect 
priority setting, which is what we are supposed to do.
    But that doesn't mean that we shouldn't be looking at 
budget constraints and reduce spending.
    I am just trying to figure out what the real numbers are 
here and you need to make that----
    Senator Murray. So is the Appropriations Committee 
chairman.
    Senator Collins. You need to make that easier for us, not 
harder, just by your views on sequestration, which I may well 
largely share, and despite the hope that this goes away and 
that we come up with a more rational priority-based budget.
    But it truly was extremely difficult to follow the figures.

                    RENTAL ASSISTANCE DEMONSTRATION

    Secretary Donovan. I apologize. And I also just would say, 
to thank you, Senator and the chairman, for the remarkable way 
that we have worked together on some of these.
    Let me just give you one example. You talked about, are 
there smart things that we can do to save money, consolidate 
programs? Last year, you gave us the authority to begin our 
RAD, Rental Assistance Demonstration. We have already gotten 
either commitments or letters of interest to convert to the 
section 8 platform from two-thirds of all the units across the 
country in two of the legacy programs--we call them orphan 
programs, about 14,000 apartments across the country--that we 
should be looking to move to a platform.
    We have 13 different rental assistance programs. With what 
we are proposing in our budget, I think we could easily 
complete that conversion and end up with fewer programs with no 
additional appropriations, no other work.
    So I do think that there are lots of things that we can 
continue to do, as you say, not with the meat axe, not with 
these--as Senator Graham said the other day, he asked all of 
his witnesses, so you are saying this is stupid, sequestration? 
We sort of looked at each other, is this a trick question? But 
yes, it is.
    There are smart ways we can do this, and we have been able 
to do that in the past. We did it last year, and I am sure that 
we can continue going forward in making those smart decisions 
while not hurting the veterans, the families, the seniors, the 
people with disabilities that so often depend on our programs.
    Senator Collins. Thank you.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Murray. Thank you. And I do have additional 
questions I will submit for the record and remind my colleagues 
that we will leave the hearing record open for 1 week for 
additional questions.
    And, Mr. Secretary, thank you so much again for your 
incredible work on this. We look forward to working with you as 
we work through the numbers.
    Secretary Donovan. Thanks for your partnership.
    [The following questions were not asked at the hearing, but 
were submitted to the Department subsequent to the hearing:]
           Questions Submitted by Senator Barbara A. Mikulski
                           super storm sandy
    Question. Super-Storm Sandy's wrath had a measurable impact on 
residents of Maryland, and especially on the residents of Garrett 
County. Maryland suffered a double whammy. Our coastal areas along the 
beloved Chesapeake Bay and the Atlantic Ocean were hit by the 
hurricane. In Garrett County, called the Switzerland of Maryland, we 
were hit by a blizzard.
    Homes were destroyed or damaged, nearly all of the county lost 
power for a week. More than 100 people had to stay in shelters during 
the storm. Fallen trees, debris, and power lines blocked almost all of 
the county roadways.
    Fire companies were not able to respond to several structure fires 
because of the blocked roadways. The county lost their primary and 
backup 911 call center for 5 days. And the local hospital operated on 
Code Yellow Divert (critical patient intake only) for 4 days during the 
storm.
    30,000 people live in Garrett County, almost 10 percent below the 
poverty line, and almost 15 percent are seniors. Residents have 
experienced significant costs after electrical masts were ripped from 
homes during the storm. Electrical companies repairing the lines will 
not hook up homes to power until residents repair electrical masts at 
their own expense.
    My first legislation as Chairman of the Appropriations Committee 
was taking over the disaster spending bill to get it passed into law. 
And the Sandy Task Force has been hard at work. The TV cameras have 
left, but the compelling human need has not.
    Secretary Donovan, I'm grateful for the work that you and the Task 
Force have been doing, and I appreciated it when you assured me at the 
last hearing on Super-Storm Sandy that Community Development Block 
Grant Program Disaster Recovery (CDBG-DR) funds could help ``fill 
gaps'' for areas that didn't get Individual Assistance (IA) from the 
Federal Emergency Management Agency (FEMA).
    I'm concerned that IA qualification may act as a barrier to Garrett 
County getting the help it needs for its poor and elderly residents.
    Will you work with me and my staff to ensure that the county gets 
the help that it needs in the coming rounds of CDBG-DR funding 
releases?
    Answer. Madam Chairwoman, please be assured that the Department is 
evaluating the full range of recovery needs associated with Hurricane 
Sandy and will be making additional allocations of CDBG-DR funding in 
response to these needs. I would appreciate the opportunity to better 
understand the needs in Garrett County as a result of Hurricane Sandy 
and would be happy to have our CDBG disaster recovery staff meet with 
Garrett County officials and work with you and your staff to ensure 
that we fully understand the scope of the county's unaddressed recovery 
needs.
                                 ______
                                 
           Questions Submitted by Senator Frank R. Lautenberg
    community development block grant disaster recovery action plan
    Question. On March 28, I signed a letter urging the Department of 
Housing and Urban Development (HUD) to quickly review New Jersey's 
proposed Community Development Block Grant (CDBG) Disaster Recovery 
Action Plan. As you know, the $1.8 billion in Federal disaster recovery 
aid that is the subject of the plan cannot be distributed until HUD 
approves the plan. When will HUD complete its review?
    Answer. The Department completed its review of the State of New 
Jersey CDBG disaster recovery action plan in late April and approval of 
the plan was announced on April 29, 2013. Both State officials and HUD 
have signed the initial grant agreement and funds are currently 
available to the State.
                     cdbg disaster recovery funding
    Question. On March 5, HUD issued a notice regarding the criteria 
for the initial allocation of $5.4 billion in Community Development 
Block Grant (CDBG) disaster recovery funding. This notice prohibited 
the use of these funds to cover costs incurred by privately-owned, but 
publicly-regulated electric utilities in response to Superstorm Sandy. 
In previous disasters, these entities did qualify. This change in 
precedent will likely result in increased electricity bills for New 
Jersey residents and could hurt the ability to strengthen critical 
power infrastructure. Will HUD include privately-owned, but publicly-
regulated electric utilities as qualified CDBG recipients in the next 
allocation to protect New Jersey ratepayers from rate increases?
    Answer. In its December 7, 2012, request to Congress for assistance 
in response to Hurricane Sandy, the administration indicated its 
intention to limit Community Development Block Grant disaster recovery 
(CDBG-DR) assistance to for-profit entities solely to small businesses. 
This position is reflected in the Federal Register Notice that HUD 
issued on March 5, 2013, governing the use of CDBG-DR funds. The 
Federal Register Notice defines ``small business'' by applying Small 
Business Administration definitions as found in 13 CFR 121. The Notice 
also specifically prohibits the provision of CDBG-DR assistance to 
privately owned utilities for any purpose. The Department will consider 
the full range of recovery needs when establishing requirements 
applicable to future CDBG-DR allocations in response to Hurricane Sandy 
but will remain consistent with overall administration policy in the 
use of these funds.
                   cdbg disaster recovery action plan
    Question. New Jersey's proposed Community Development Block Grant 
Disaster Recovery Action Plan provides $825 million to assist 
homeowners, while providing only $254 million to rebuild rental 
housing. This allocation has raised concerns because 43 percent of New 
Jersey households registering for Federal Emergency Management Agency 
(FEMA) assistance as a result of Sandy are renters, and many are low-
income families. Will you commit to carefully reviewing New Jersey's 
plan to make sure that all families in New Jersey--both renters and 
homeowners--get the help they need?
    Answer. The New Jersey CDBG-DR action plan approved by HUD on April 
29, 2013, directs approximately 33 percent of housing program funds to 
multifamily/rental properties uses. This represented an increase of 5 
percent from the State's initial proposed allocation to multifamily/
rental purposes. The Department has conducted its own analysis of the 
owner/renter split in the FEMA data and believes the State's allocation 
of 33 percent for multifamily/rental purposes is consistent with the 
data.
    Question. Superstorm Sandy damaged more than 800 public housing 
units in my State, displacing 100 families. New Jersey's proposed 
Community Development Block Grant Disaster Recovery Action Plan sets 
aside only $5 million to support public housing unit repairs. I am 
concerned that--because of the pre-existing backlog of public housing 
capital repair needs--this amount may be inadequate. What share of the 
Sandy-damaged public housing units in New Jersey will it be possible to 
restore to a state of good repair with this and other anticipated 
Federal funding?
    Answer. As part of the Department`s review of New Jersey's CDBG-DR 
action plan, HUD discussed with State officials the proposed public 
housing allocation of $5 million. The Department is pleased to report 
that as part of the HUD-approved action plan, the State increased the 
public housing allocation from $5 million to $20 million. Further, the 
State is committed to reassessing public housing recovery needs as 
additional information becomes available and additional allocations are 
made by HUD.
                public housing drug elimination program
    Question. Prior to 2002, public housing authorities were able to 
fund safety, security, and drug- and gang-prevention activities through 
the Public Housing Drug Elimination Program, which I created. That 
program was eliminated by the Bush administration. In the absence of 
dedicated funding, how is your agency working with public housing to 
make their facilities safe and drug-free?
    Answer. Annually a portion of the Emergency/Disaster set aside 
within the Capital Fund is made available for funding safety and 
security grants. This funding provides assistance to public housing 
agencies for emergency capital needs including safety and security 
measures necessary to address crime and drug-related activity.
    Emergency safety and security grant funds may be used to install, 
repair, or replace capital needs items including, but not limited to 
the following:
  --security systems/cameras;
  --fencing;
  --lighting systems;
  --emergency alarm systems;
  --window bars;
  --deadbolt locks; and
  --doors.
    Outside of the Safety and Security set-aside competition, physical 
improvements to the property, such as fencing, security cameras, or 
additional lighting, are eligible Capital Fund modernization activities 
under current laws and regulations. Public housing agencies (PHAs) can 
also use their Operating Fund subsidy for ``anticrime and anti-drug 
activities, including the costs of providing adequate security for 
public housing residents, including above-baseline police service 
agreements.'' (U.S. Housing Act.)
          public housing authorities--emergency capital needs
    Question. In fiscal year 2013, Congress allocated up to $20 million 
for grants to public housing authorities to address emergency capital 
needs, including ``safety and security measures necessary to address 
crime and drug-related activity.'' Of the $20 million emergency capital 
needs allocation, what share has HUD set aside for safety and security 
measures?
    Answer. The Department plans to set aside $3 million initially for 
safety and security measures. At the end of the fiscal year, if funds 
remain that were not awarded for emergencies/disasters, the Department 
will make additional safety and security awards for applications that 
were received and determined to be eligible, which could not be funded 
due to the limited funds.
                                 ______
                                 
              Questions Submitted by Senator Daniel Coats
                  better stewards of taxpayer dollars
    Question. We are operating during a time where the game has 
changed. Instead of coming here every year in the Appropriations 
Committee and asking ``how much more are we going to spend this year?'' 
we are faced with a fiscal crisis which requires us to ask ``how can we 
take better care of the taxpayer dollars that are being sent here?'' We 
must all ask how we can better manage and oversee Federal departments. 
How we can separate the essential projects from the projects we'd like 
to do but can't afford it right now from the projects where we ask 
``why are we doing this in the first place?'' Please describe how you 
are working to save money in the Department of Housing and Urban 
Development (HUD). Furthermore, please explain how you are working to 
prioritize funding requests for essential programs instead of programs 
that don't seem to work very well.
    Answer. The Department strongly shares your belief of the 
importance of credible stewardship of taxpayer funds, particularly in 
the difficult fiscal environment for discretionary programs. The 
Department is proposing several significant cost savings proposals 
identified below as well as policy changes that will further strengthen 
our successful program efforts.
    As you would agree, HUD's mission--to create strong, sustainable, 
inclusive communities and quality, affordable homes for all--is crucial 
to our Nation's well-being, particularly at a time when nearly 8.5 
million households were found to have worst case housing needs in 2011, 
an increase of about 1.4 million in only 2 years, largely reflecting 
the lack of affordable housing. These very low-income renters do not 
receive government housing assistance and either paid more than half 
their monthly incomes in rent, lived in substandard housing, or both. 
Housing needs cut across all regions of the country and included all 
racial and ethnic groups, regardless of whether they lived in cities, 
suburbs, or rural areas, and were found across various household types, 
including families with children, senior citizens, and persons with 
disabilities. Without HUD assistance, a fiscal year 2011 HUD study 
projected that 68 percent of the tenants we assist would be added to 
the worst case housing needs rolls.
    To help address the affordable housing need, HUD dedicated a 
majority of its fiscal year 2014 funding request to serve families with 
the greatest financial needs and support those most vulnerable. More 
than three-quarters of HUD's fiscal year 2014 budget request will 
provide rental assistance to almost 5.4 million residents of HUD-
subsidized housing, including public housing and HUD grants to homeless 
assistance programs. Also, more than three-quarters of HUD-assistance 
households are extremely low-income--i.e., below 30 percent of area 
median income, and over 65 percent of HUD-assisted households are 
elderly and disabled.
    Key contributing programs that support affordable housing 
development, preservation of existing units and past investments, or 
rental assistance to low-income families and associated cost savings 
efforts:
  --Tenant-Based Rental Assistance (Fiscal Year 2014 Request--$19.9 
        Billion).--The section 8 Housing Choice Voucher program is the 
        Federal Government's major program for assisting very low-
        income families, the elderly, and persons with disabilities to 
        afford decent, safe, and sanitary housing in the private 
        market. The program currently serves almost 2.2 million 
        families. At the same time, the fiscal year 2014 request 
        supports approximately 700,000 landlords and property owners 
        who participate in the program by providing a fair market rent 
        so that they can meet mortgage payments, local tax obligations, 
        utility expenses, and maintain properties in good physical 
        condition.
    The overall requested amount reflects $235 million in anticipated 
        savings in 2014 from proposed changes to income targeting that 
        will increase the eligibility of more working poor families, 
        particularly in rural areas ($155 million), the increase in 
        tenant income contribution from raising the medical expense 
        exclusion threshold from 3 to 10 percent ($30 million), and a 
        change in how utility allowances are determined in the cases of 
        families who rent units that are larger than the bedroom size 
        of the voucher for which they qualify under the public housing 
        agency (PHA) subsidy standards ($50 million).
  --Project-Based Rental Assistance (Fiscal Year 2014 Request--$10.3 
        Billion)--The Project-Based Rental Assistance program provides 
        rental assistance for eligible tenants residing in specific 
        multifamily rental developments. This program serves 
        approximately 1.2 million low-income and very low-income 
        households that are primarily seniors, families with children, 
        and persons with disabilities.
    The overall request reflects $240 million in anticipated savings 
        from policy changes that apply residual receipts accounts to 
        offset assistance payments for new and old regulation contracts 
        ($105 million); require the appraiser for certain owner-
        commissioned rent comparability studies to provide additional 
        support to justify the conclusions of the study ($35 million); 
        limit rent levels for certain contracts renewed for projects 
        with current rents that exceed market rents ($8 million); 
        reduce the time period over which an owner may claim vacancy 
        payments from 60 days to 30 days ($7 million); and increase 
        tenant income contribution from raising the medical expense 
        exclusion threshold from 3 to 10 percent ($85 million).
  --Public Housing (Fiscal Year 2014 Request--$6.6 Billion).--The 
        Public Housing program provides affordable, publically owned 
        housing units to approximately 1.1 million families who cannot 
        afford or will not be served by housing in the private market, 
        60 percent of whom are fixed-income seniors or families in 
        which the head-of-household is a disabled person. The Public 
        Housing Capital Fund serves as the primary source of funding 
        for public housing rehabilitation and development, and the 
        Public Housing Operating Fund provides the operating subsidy 
        payments to public housing authorities for the operation, 
        management, and maintenance of the rental housing.
    --Moving To Work--The fiscal year 2014 budget proposes to scale up 
            the Moving To Work demonstration in which high-performing 
            State and local public housing agencies are given various 
            flexibilities in operating their public housing programs. 
            In exchange for this flexibility, public housing agencies 
            help design and test innovative policies that use Federal 
            dollars more efficiently, help residents become self-
            sufficient, streamline and consolidate program delivery, 
            and reduce long-term costs.
    --Rental Assistance Demonstration.--The Rental Assistance 
            Demonstration, enacted in 2012, targets HUD-assisted 
            properties that are at risk of being lost from the Nation's 
            affordable housing stock inventory. It allows the 
            conversion of public housing and other HUD-assisted 
            properties to long-term, project-based section 8 rental 
            assistance as a tool for public housing agencies to 
            leverage private debt and equity to address their 
            properties' immediate and long-term capital needs, 
            estimated at approximately $26 billion (2010). The fiscal 
            year 2014 budget requests $10 million for targeted 
            expansion of the demonstration to public housing properties 
            in high-poverty neighborhoods, including designated Promise 
            Zones where the administration is also supporting 
            comprehensive revitalization efforts.
  --Homeless Assistance Grants (Fiscal Year 2014 Request--$2.4 
        Billion).--The administration is committed--through Opening 
        Doors: Federal Strategic Plan To Prevent and End Homelessness--
        to ending chronic homelessness by 2015; homelessness among 
        veterans by 2015; and homelessness for families, youth, and 
        children by 2020, and setting a path to ending all types of 
        homelessness. This commitment has already resulted in a 
        decrease in the number of chronically homeless persons by 19.3 
        percent since 2007. Chronic homeless are the most expensive 
        portion of the homeless population. Homelessness among veterans 
        has declined by 7.2 percent between January 2011 and January 
        2012. In addition, as of April 2012, almost 40,000 veterans 
        have been housed with a HUD-Veterans Affairs Supportive Housing 
        (VASH) voucher, funded through the Tenant-Based Rental 
        Assistance program. The fiscal year 2014 budget request 
        maintains the approximately 325,000 HUD-funded beds that assist 
        the homeless nationwide, expands rapid re-housing and permanent 
        supportive housing, and targets--through HUD-VASH vouchers--
        chronic homeless veterans.
  --Housing Opportunities for Persons With AIDS (Fiscal Year 2014 
        Request--$332 Million).--This program provides housing 
        assistance and supportive services for very low-income persons 
        living with Human Immunodeficiency Virus (HIV) infection who 
        are at risk of homelessness. The budget--through a forthcoming 
        legislative proposal--modernizes the program to improve 
        targeting of resources by basing the funding formula on Centers 
        for Disease Control and Prevention (CDC) data on persons living 
        with HIV/AIDS rather than cumulative AIDS cases, and by 
        incorporating local housing costs and poverty rates into the 
        formula.
    The remainder of HUD's fiscal year 2014 budget is dedicated to 
capital grants, which are used by communities to develop and repair 
affordable housing or support economic development activities and 
infrastructure, and other diverse initiatives, including service 
coordination, Fair Housing and Equal Opportunity, Healthy Homes and 
Lead Hazard Reduction, to name a few. In fact, the budget reflects some 
of the tough choices that needed to be made in the capital grant 
programs, for example. The budget provides $950 million for the HOME 
Investment Partnerships Program (HOME), 5 percent below the 2012 
enacted level, in addition to proposed amendments that would improve 
the targeting focus and effectiveness of the overall program at the 
constrained resource level. The budget provides $2.798 billion for the 
Community Development Block Grant formula allocation, which is a $150 
million reduction for formula allocation purposes in comparison to 
fiscal year 2012. Doing more with less, however, the budget proposes 
several reforms to improve targeting and the effectiveness of this 
program, including changes to the allocation process.
    Also, HUD's Transformation Initiative (TI) Fund remains the primary 
source of funding for HUD's multi-year effort to fundamentally 
transform the agency through the use of evidence and improved 
partnership with the Department's grantees and other partners. The TI 
Fund enables HUD to initiate projects that re-engineer fundamental 
business processes, streamline programs and operations, enhance 
accountability and respond to cross-cutting and urgent challenges more 
nimbly and effectively. Transformation Initiative priorities are: (1) 
research and evaluations to build a foundation of current data on 
program effectiveness and emerging policy issues; (2) program 
demonstrations to test new program approaches in a carefully structured 
and rigorously evaluated manner; and (3) technical assistance to 
diffuse evidence-based innovation and support State and local partners 
to improve their capacity to use public resources effectively. In 
addition, HUD will focus its information technology development efforts 
on modernizing the Department infrastructure, including the continual 
development of a modern financial management system that will improve 
HUD's ability to measure, track, and report on program costs and 
efficacy. These information technology investments will allow the 
Department to deliver services and manage its multi-billion dollar 
programs faster, more accurately, and using better information for 
analysis.
    Finally, the Department is taking steps to protect the Federal 
Housing Administration (FHA) fund, reduce risk, and modernize the FHA. 
The Administration projects that the FHA will insure $199.3 billion in 
mortgage loans in 2014, supporting new home purchases and refinanced 
mortgages that significantly reduce borrower payments. FHA's loss 
mitigation program minimizes the risk of financially struggling 
homeowners going into foreclosure. Recent increases in FHA premium 
levels will boast FHA's capital reserves and increase Federal revenues. 
In addition, legislative proposals would provide additional authority 
to ensure that FHA borrowers are receiving the level of delinquency 
assistance needed from servicers, and stronger and more flexible 
enforcement authorities so that FHA can better identify non-compliance 
and poor performance and take action to avoid losses.
                      housing assistance programs
    Question. In 2012, the Government Accountability Office (GAO) found 
the Federal Government is operating 160 housing assistance programs and 
tax expenditures within 20 Departments and agencies costing about $170 
billion.\1\ Despite these programs, homeownership rates fell to a 17-
year low in the third quarter of 2012. The effectiveness of the 
programs is also often inconclusive. What is HUD doing to address this 
puzzle of 160 overlapping and duplicative programs?
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    \1\ http://www.gao.gov/assets/590/588818.pdf.
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    Answer. The Department has numerous examples of the effectiveness 
of its housing assistance programs. In the absence of these programs, 
for example, many of the Nation's most vulnerable families would be at 
imminent risk of homelessness, there would be far fewer affordable 
housing units, and many of the current first-time and minority 
homeowners might not own homes with affordable, sustainable, fair, and 
transparent mortgages. Below are key examples of the broad reach and 
success of HUD's major housing programs. In an accompanying question, 
we have also provided reforms and savings proposals included in the 
President's budget for various HUD programs. The Department recognizes 
that each spending and tax expenditure program is enacted into law by 
Congress and reflects commitments to broader housing by goals and 
involves specific mission and individual program designs. Finally, the 
Department does not target a specific individual homeownership rate but 
is committed to providing a strengthened mortgage and housing 
environment that supports and expands appropriate homeownership 
including targeting to low-income and other populations who with proper 
assistance can responsibly participate in the opportunities afforded 
through homeownership.
    HUD Programs Support and Sustain Homeownership.--Federal Housing 
Administration (FHA) financing was used for 27 percent of home purchase 
loans in 2011, including an estimated 41 percent of first-time 
homeowners. Fully 60 percent of all African American and Hispanic 
homebuyers using mortgages rely upon FHA financing and over 30 percent 
of all FHA-insured homebuyers are minorities. According to the latest 
Home Mortgage Disclosure Act data, half of all African Americans who 
purchased a home in 2011, and 49 percent of Hispanics, did so with FHA 
financing.
    Between April 2009 and February 2013, more than 6.4 million 
foreclosure prevention actions were taken--including nearly 1.7 million 
FHA loss mitigation and early delinquency interventions and 1.5 million 
homeowner assistance actions through the Making Home Affordable 
program, including more than 1.1 million permanent modifications 
through the Home Affordable Modification Program (HAMP)--saving these 
households an estimated $18.5 billion in monthly mortgage payments.
    HUD Programs Produce Desperately Needed Affordable Housing Units.--
HUD's HOME Investment Partnership Program completed 1,095,946 
affordable units in the past 20 years, of which 460,692 were for new 
homebuyers, 212,100 were for owner-occupied rehabilitation and 423,154 
were new and rehabilitated rental units. Thirty-seven percent of those 
assisted by HOME with affordable rental housing between 2008 and 2012 
were extremely low-income families (families with incomes below 30 
percent of area median income).
    HUD Programs House Vulnerable Families.--The Housing Choice Voucher 
(HCV) program helps 2.2 million low-income families afford decent 
housing in neighborhoods of their choice. This program serves the most 
economically vulnerable families in the country, including families 
with disabilities, elderly families, formerly homeless veterans, and 
families with children. Of the families currently receiving HCV 
assistance, 78 percent are extremely low-income, with incomes at or 
below 30 percent of the area median income, 40 percent have a disabled 
head of household, and 18 percent are elderly families.
    Many families assisted by the program formerly experienced worst-
case housing needs and without the benefit of this program would be at 
immediate risk of homelessness. The most recent Office of Policy 
Development and Research (PD&R) report estimated there were nearly 8.5 
million families with worst case housing needs in 2011--an increase of 
about 1.4 million in only 2 years. A family is defined as having a 
``worst-case'' housing need if it pays more than half of its income 
toward rent or lives in severely inadequate physical conditions, or 
both (Worst Case Housing Needs 2011: A Report to Congress--Summary 
(2013). Department of Housing and Urban Development, Office of Policy 
Development and Research).
                           hud grant criteria
    Question. HUD provided a Community Block Development Grant (CDBG) 
in the amount of $505,000 to Sergeant's Pet Care Products, Inc. which 
specializes in pet shampoo and toothpaste.\2\ This company was expected 
to bring in $140 million in revenue in 2012.\3\
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    \2\ http://www.governor.nebraska.gov/news/2012/03/19_sarpy_co.html.
    \3\ http://www.morganlewis.com/pubs/Law360_PerrigoWin_13sept12.pdf.
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    Secretary Donovan, how is HUD working to ensure that its grant 
awards are focused on worthwhile projects? Do you believe that we 
should provide awards of over half a million dollars to private 
companies with revenue over $100 million?
    Answer. Loans to for-profit entities are statutorily eligible 
activities under the Community Development Block Grant (CDBG) program. 
The State of Nebraska uses a portion of its annual State CDBG funding 
and CDBG program income to support its Economic Development Revolving 
Loan Fund to provide assistance to businesses and to create jobs. In 
this particular instance, Nebraska awarded funds to Sarpy County which, 
in turn, provided a loan to Sergeant's Pet Care Products to purchase 
machinery and equipment as part of a $7.5 million project. The project 
will help create 58 new full-time jobs, 40 of which will be targeted to 
low- and moderate-income persons, and will help retain 72 existing 
positions. According to State officials, the project is on track with 
all funds anticipated to be drawn and expended by the end of June 2013 
and projected jobs to be created by the end of January 2014. The 
project meets all CDBG eligible requirements, national objective 
requirements and public benefit requirements.
                        overall use of hud funds
    Question. According to HUD's Office of the Inspector General (OIG), 
in fiscal year 2012, HUD could have put over $3.2 billion to better use 
and paid over $1.3 billion in questionable costs.\4\ This represents 
over $4.5 billion in public funds that could have been better spent 
providing housing aid to people in need or not spent at all. Secretary 
Donovan, how do you explain this egregious use of funds that your own 
Inspector General identified?
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    \4\ http://www.hudoig.gov/pdf/sar/sar-68.pdf (page II).
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    Answer. The majority of funds that you are highlighting as funds 
that could be put to better use are constituted by four major items 
described below. The Department does not believe that the 
classification of funds that can be ``better used'' is useful or 
transparent in informing the public regarding the details of these 
significant financing issues. The Department would like to stress the 
many areas of agreement with the Office of the Inspector General (OIG) 
and the positive actions taken to meet specific circumstances including 
enactment of statutory authority by Congress for large portions of the 
total amounts--proposals that the Department actually initiated. In 
like manner, the Department emphasizes the need to examine the 
specifics of each case of financial action classified under the 
heading, ``questionable costs.'' For instance, the fact that a 
guaranteed loan program that was enacted by Congress for 1 year only 
did not have full subscription to the program does not seem to be well 
defined as funds that could be put to better use.
Four Items That Constitute the Vast Majority of Funds OIG Labeled as 
        Having Potential ``Better Use''
    Item 1 involves the FHA Preforeclosure Sale Program, which 
accounted for approximately $800 million of the $3.2 billion identified 
by the OIG. The OIG conclusions derive from an examination of 61 claims 
involved in the $25 billion national foreclosure settlement that was a 
great accomplishment involving the Department, the OIG and 49 State 
Attorneys General. This landmark settlement is resulting in recovery of 
funds for thousands of families impacted by improper foreclosure 
proceedings as well as having provided additional resources for the 
Federal Housing Administration (FHA) Single Family Mortgage Insurance 
program. In addition, in a larger context the Department is working 
diligently on both an operational, regulatory and statutory basis to 
further reduce risks involved in the FHA mortgage programs and thereby 
further strengthen the financial position of the FHA funds. While the 
FHA has agreed to implement the OIG's recommendations, we do not agree 
with the characterization that the funds in question could have been 
put to better use.
    Items 2 and 3 reflect an OIG review done covering fiscal year 2012 
that recommended that $1 billion in Public Housing Operating Subsidy be 
offset by limiting reserves held by public housing authorities to 6 
months. The audit also recommended an additional $890 million could be 
used as an offset from PHAs' Housing Choice Voucher (HCV) program net 
restricted assets (NRA), `` . . . if it is determined these funds are 
in excess.'' The Department worked closely with the Congress on this 
issue and the enacted fiscal year 2012 Appropriations bill did provide 
for a $750 million Operating Subsidy offset (initiated by the 
Department) and an additional $650 million reduction in HCV NRA as 
proposed in the audit, but at levels that were considered by Congress 
and the Department to be more appropriate.
    Item 4 reflects a recommendation by the OIG to return funds in the 
amount of $471.8 million to the U.S. Treasury from the Emergency 
Homeowners' Loan Program since all of the funds were not obligated. 
This loan program was authorized at $1 billion for 1 year only and the 
Department did follow the direction discussed by the OIG to return 
several hundred million dollars to the U.S. Treasury recognizing that 
the subscription to the program was less than originally projected by 
the Congress when they enacted the legislation.
Two Items That Constitute the Vast Majority of OIG Identified 
        ``Questionable Costs''
    Under the category of questionable costs the OIG report includes 
$322.2 million under the FHA Preforeclosure Sale Program discussed 
above and an additional $807.3 million, of which the majority share is 
associated with FHA-insured loans made by Countrywide Home Loans, 
Incorporated (later sold to Bank of America). As described on page 27 
of the OIG semiannual report covering through September 30, 2012, Bank 
of America has paid FHA nearly $471 million to settle the Countrywide 
portion of the consent judgment and has also agreed to a deferred 
settlement payment to FHA of $850 million.
                   fha's preforeclosure sales program
    Question. HUD's OIG also reviewed the Federal Housing 
Administration's (FHA's) Preforeclosure Sales Program in fiscal year 
2012. Of 80 claims statistically sampled, 61 did not meet the criteria 
for participation in the program. As a result, it is estimated that HUD 
paid $1.6 billion in claims.\5\ How do you intend to strengthen program 
controls and obtain reimbursement from those lenders that were not 
previously pardoned from repayment in the national mortgage settlement?
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    \5\ http://www.hudoig.gov/pdf/sar/sar-68.pdf (page III).
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    Answer. The Department provided an auditee response to the Office 
of Inspector General (OIG) audit of the Federal Housing 
Administration's (FHA's) Preforeclosure Sale Program (PFS); Audit 
Report No. 2012-KC-0004. The auditee response dated September 17, 2012, 
stipulated that the Office of Single Family Housing agrees that its PFS 
policies should align with market execution. To achieve this objective, 
FHA agreed: (1) to introduce a streamline PFS approval based on loan 
characteristics and borrower credit profile; and (2) specify income 
documentation requirements for the deficit income test that must be met 
for borrowers that do not meet the streamline requirements. OIG 
reviewed the corrective action stipulated above and a mortgagee letter 
that will achieve the two objectives referenced is scheduled to be 
issued in the 4th quarter of fiscal year 2013, pending OMB approval.
    [A copy of HUD's complete auditee response follows:]
HUD Memorandum--Auditee Response to OIG's Audit of FHA's Preforeclosure 
                              Sale Program
                                                September 17, 2012.
For: Ronald J. Hosking,
Regional Inspector General for Audit, 7AGA

From: Charles S. Coulter,
Deputy Assistant Secretary, Single Family Housing, HUD

Subject: Auditee Response, FHA Preforeclosure Sale Program, Audit No.: 
        2012-KC-000X
    The Office of Inspector General (OIG) reviewed the Federal Housing 
Administration's (FHA) Preforeclosure Sale Program. OIG performed this 
nationwide audit because of noted significant deficiencies in borrower 
qualifications during their audit of CitiMortgage's compliance with 
FHA's Preforeclosure Sale (PFS) claims (2011-KC-1005, September 30, 
2011). OIG's audit objective was to determine whether the U.S. 
Department of Housing and Urban Development (HUD) paid claims for only 
those preforeclosure transactions that met the criteria for 
participation in the program.
    The Office of Single Family Housing acknowledges that existing PFS 
policy and lender execution against that policy is inconsistent. To 
improve alignment and ensure that the long-term interest of the FHA 
Insurance Fund are met, FHA is working toward: (1) introducing a 
streamline PFS approval policy based on loan characteristics and 
borrower credit profile; and (2) specifying income documentation 
requirements for the deficit income test that must be met for borrowers 
that do not meet the streamline requirements.
    The Office of Single Family Housing would also note that the 80 
loans sampled by the OIG had an average credit score of 596 and an 
average delinquency of 8.7 months. Given this profile, it is likely 
that most of the 80 loans would have been conveyed to FHA as real 
estate owned (REO) if the PFS transactions had not been approved. Since 
the recovery rate of all PFS transactions is 53 percent and the 
recovery rate for single family REO sales in 36 percent, the claims 
paid by FHA on the PFS transactions were lower than they otherwise 
would have been and may have resulted in a net benefit to the FHA 
Insurance Fund of as much as $170 million.
    Regardless of the economic impact to the FHA Insurance Fund, the 
Office of Single Family Housing recognizes the need for strong, clear 
PFS policies and lender oversight. The Office of Single Family Housing 
will work closely with the OIG to ensure that these objectives are met 
and that the issues identified in the report are rectified.

                          SUBCOMMITTEE RECESS

    Senator Murray. This hearing is recessed until next 
Thursday, April 18 at 10 a.m., at which time we will hold a 
hearing on the Federal Aviation Administration's budget 
request.
    [Whereupon, at 11:06 a.m., Thursday, April 11, the 
subcommittee was recessed, to reconvene at 10 a.m., Thursday, 
April 18.]
