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Testimony of Federal Housing Commissioner
and Assistant Secretary for Housing
William C. Apgar
before the
Subcommittee on Housing and Community Opportunity
United States House of Representatives

May 4, 1999

Mr. Chairman, Ranking Member Frank, Members of the Subcommittee, my name is William Apgar and I am the Assistant Secretary for Housing/Federal Housing Commissioner at the United States Department of Housing and Urban Development (HUD). On behalf of HUD Secretary Andrew Cuomo, I am pleased to testify today at this important hearing.

Twenty-five years ago, the Federal Government created what would become the largest rental housing subsidy program in the Nation�s history: Section 8. The Section 8 program now helps 3 million families around the country afford decent housing, more than double the number of families assisted by the next largest housing program, public housing. Section 8 includes two forms of subsidy: tenant-based and project-based, each assisting roughly one-half the total Section 8 units. The tenant-based program provides vouchers that give residents the freedom to use their subsidies in a wide range of private market housing, while the project-based program provides subsidies tied to specific properties so that the properties themselves remain subsidized. Between the two types of subsidy, Section 8 provides assistance to thousands of families in each and every State around the country�in urban centers and rural farmland, in high rise apartments and single family homes.

Celebrating its twenty-fifth anniversary, the Section 8 program stands at a crossroad, facing a challenge that could threaten its viability for the next 25 years and beyond. Starting in 1975, HUD signed twenty year contracts with private owners to subsidize their properties with project-based Section 8. These long-term contracts are now expiring, creating widespread uncertainty about whether the properties will continue as affordable housing. Without reform, the program risks losing the best of its project-based housing, displacing thousands of low-income families and seniors, while spending too much on the properties that remain. By remaking Section 8, however, a different future is possible�a future which preserves the best project-based housing at a fair price for the taxpayer, a future that expands housing opportunities for the millions of needy families around the country who go without any housing assistance at all.

Drawing on the results of the recently released HUD report entitled "Opting In: Renewing America�s Commitment to Affordable Housing," today I will briefly describe the factors that threaten the loss of thousands of good-quality, affordable units from the project-based Section 8 inventory and outline a set of policy principles to guide programmatic reform. While HUD provides adequate protection to many tenants in properties that opt out, additional steps are necessary to provide more complete protection against hardship. What is needed is a two-pronged approach to stem the crisis. First, as Secretary Cuomo announced last Thursday, HUD will act on an emergency basis to prevent "opt-outs" from the project-based Section 8 program. Second, because HUD�s current authority and resources are limited, the Administration and Congress must work together to reach a comprehensive strategy to protect residents and preserve the best project-based Section 8 housing.

Communities At A Cross-Roads: The Challenge Facing Project-Based Section 8

Section 8 includes two forms of subsidy: tenant-based and project-based. Both help low-income households rent privately-owned housing units, and both pay the difference between what a low-income household can afford�generally defined as 30 percent of their income�and the rent for the unit. The Section 8 tenant-based program provides vouchers that remain with the households that use them�when a family chooses to move, they are free to bring the subsidy to their next home. The project-based Section 8 program, on the other hand, provides subsidies tied to specific properties�when a family moves out, they can not take the subsidy with them, but instead it is used by the next eligible family so that the property itself remains subsidized.

Starting in 1975, HUD signed 20-year contracts with private owners to provide project-based Section 8 subsidy to their properties. These long-term contracts are now expiring, creating widespread fear and uncertainty about whether the properties will continue as affordable housing. The facts are sobering:

  • Expirations are increasing. During the next 5 years, two-thirds of all project-based Section 8 contracts will expire, totaling almost 14,000 properties containing 1 million subsidized housing units. Of course not all of these properties will opt out, but as expirations increase, so does the risk of losing affordable housing. Last year more than 17,000 subsidized units in over 300 properties left the project-based Section 8 program, more than 3 times the total from the year before.
  • Contracts are expiring everywhere. Forty-four States in the country have more than 50 percent of their units expiring in the next 5 years. By September 2004, 89,000 units will expire in California, 81,000 in New York, 69,000 in Ohio, 46,000 in Texas, 41,000 in Illinois, 40,000 in Pennsylvania, 35,000 in Florida and Michigan, 34,000 in Massachusetts, and 29,000 in Indiana. Every State in the country has more than 1,000 units expiring in the next 5 years.
  • One-year renewals compound the problem. Unlike the original long-term contracts, budget constraints have limited contract renewals to 1 year, multiplying the number of contracts that face expiration each year. This magnifies the uncertainty of residents and owners about the security of their housing.
  • Shortage of affordable housing leaves limited options. Despite 6 years of unprecedented economic growth, worst case housing needs remain at or near the all-time high of 5.3 million households. According to a recently released HUD study, "Ironically, the strong economy is a key factor pushing rent levels to new record highs. Rather than benefiting from the surging economy, low-income renters are left to compete for the dwindling supply of affordable rental housing available on the private market." With few places to turn, residents� fears about displacement from project-based Section 8 housing are magnified.

    This growing wave of project-based Section 8 expirations is cause for concern:

  • Expirations lead to the loss of project-based Section 8 housing. When contracts expire, either HUD or the owner can choose not to renew. While most properties remain as project-based Section 8 housing, the latest evidence shows that about 10 percent "opt out" and convert to unsubsidized housing. Since October 1996, more than 30,000 subsidized units in over 500 project-based Section 8 properties have left the program. Each month, more than a thousand project-based Section 8 units opt out.
  • Opt-outs can place residents at risk. HUD protects residents in properties that opt out by providing vouchers, which can be used successfully by residents in most areas to remain in their current units or move to other housing. Yet while vouchers are a critical tool, they do not effectively protect residents everywhere. In higher-rent neighborhoods where opt-outs are more likely, residents can be faced with substantial hikes in the portion of the rent they pay. Unable to afford these increases, residents are forced to move and compete for a dwindling supply of affordable housing. In a recent case in Iowa, an opt-out pushed up the average portion of the rent paid by elderly residents by two-thirds. In a rural area with little rental housing, these seniors may be forced to move long distances to find decent affordable housing.
  • Opt-outs threaten the best affordable housing. Owners who choose to opt out can do so because they have good properties in good neighborhoods. The latest data show that 90 percent of the subsidized units in properties whose owners say they will likely opt out are located in low-poverty neighborhoods, where good housing also brings better opportunity�more jobs, better schools, and less crime.
  • Opt-outs are occurring everywhere. Just as Section 8 housing is located throughout the country, so are the properties that leave the project-based program. The latest data show that opt-outs have occurred in 47 States. Since October of 1996, 4,000 units have opted out in California, 3,500 in Texas, 1,800 in New York, 1,500 in Florida and Pennsylvania, 1,100 in Washington and Ohio, 1,000 in North Carolina, 900 in Massachusetts and Michigan, and 700 in Colorado and Indiana.

Policy Principles For Section 8 Reform

The growing wave of contract expirations threatens the future of the Section 8 program. To guide the needed reform, HUD proposes three simple policy principles:

  • Subsidize only good housing
  • Pay a fair price
  • Preservation is not enough

Principle 1: Subsidize Only Good Housing

When a contract expires, HUD will make every effort to keep well-maintained properties in the Section 8 program. HUD is building the public trust, however, by refusing to renew properties in poor condition or extend contracts with property owners unwilling to play by the rules. Under the leadership of Secretary Cuomo, HUD developed a groundbreaking management reform plan called HUD 2020 and is making the plan real. Four critical innovations in particular will ensure that HUD continues to subsidize good properties while ending subsidies to those owners that don�t provide decent housing or are unwilling to play by the rules.

  • Separate the good from the bad. While news reports have highlighted the worst of subsidized housing, HUD has always claimed that these few bad apples were spoiling the rest. HUD�s monitoring was so poor, however, that the agency couldn�t tell the good from the bad. Under HUD 2020, that has changed�this year for the first time in history, the new Real Estate Assessment Center will enable HUD to inspect and score all 44,000 HUD-assisted properties.
  • Take action against the bad properties and bad owners. The new Enforcement Center helps HUD stop subsidizing bad buildings and bad owners. As a result of better enforcement, HUD dramatically increased the number of debarment actions against bad landlords. These efforts do more, however, than end the waste of precious resources�they also improve living conditions and neighborhoods for residents.
  • Reward the good properties. Confirming the claim that the highly visible properties in poor condition represent a small fraction of all HUD-subsidized housing, inspections performed by the Real Estate Assessment Center show that more than 80 percent of project-based Section 8 housing is in good or excellent condition. Previously, without the ability to tell the good apples from the bad, HUD monitored all properties as if they were the same. By using the REAC scoring to shift its oversight and monitoring away from these good buildings and onto the poor performers, however, HUD can do more with less�decreasing the burden on its staff and encouraging owners of good buildings to remain in the Section 8 program.
  • Better manage Section 8 contracts. As envisioned in the HUD 2020 Management Reform Plan, HUD must find partners to effectively oversee and monitor project-based Section 8 contracts. HUD is already doing this effectively with about 20 percent of its 25,000 Section 8 contracts. Relying on these partners to administer the remaining contracts will improve the quality of the housing while allowing HUD staff to focus on other critical tasks.

Principle 2: Pay a Fair Price

Rents that HUD pays will be based on what a property is worth. HUD should not pay more than an owner could get on the open market, but neither should HUD expect owners of good housing in good neighborhoods to accept less than a fair price. While Section 8 was always intended as a market-driven program dependent on the private sector to provide affordable housing, over time the program has moved away from that promise. Project-based Section 8 properties were often built with subsidies out of line with local market rents because these subsidy levels were needed to make the economics of a property work in areas with low-market rents. The mismatch between subsidies and market rents, however, has grown over time as rent adjustments have not tracked changes in local markets. The expiration of Section 8 contracts now offers the opportunity to renegotiate these subsidies to bring them in line with local rents, remaking the program into the market-driven model it was meant to be.

  • Rents above market. Based on the latest data, about half of all project-based Section 8 properties have rents above market. Estimates of the rate HUD pays above market run as high as $1 billion per year. As instructed by historic legislation passed in 1997, HUD has set up the Mark-to-Market program to renew these Section 8 properties while reducing their subsidies to market. The Mark-to-Market program will preserve the best project-based Section 8 properties, improve those that need additional resources, and return the project-based Section 8 program to its original vision of a market-oriented housing program.
  • Rents below market. While tremendous attention has been focused on project-based Section 8 housing with rents above market during recent years, the other half�properties with rents below market�has been nearly forgotten. HUD estimates that these properties receive between $600 and $800 million less per year than they would on the open market. With rents rising rapidly in most market areas, many owners of these properties will have a significant financial incentive to opt out when they expire, posing the most dramatic risk to project-based Section 8 housing. For HUD to keep the best of the below-market properties�those in good condition and good neighborhoods�in the project-based Section 8 program, HUD must have the resources to offer owners a fair price to preserve this valuable affordable housing resource.

Principle 3: Preservation is Not Enough

While the expiration of long-term contracts offers the opportunity to remedy flaws in the project-based Section 8 program, these changes cannot address the growing rental housing crisis. HUD must also use the Section 8 voucher program to complement the preservation of project-based housing and attack the desperate shortage of decent affordable housing.

  • Better protect residents. No matter what HUD does to preserve the best project-based Section 8 housing, there will always be some properties that leave the program by choice of the owner or HUD. As described above, in higher rent neighborhoods and other locations, the voucher payment standard can be lower than the true market rent for the unit where the resident lives. In these cases, residents using vouchers are faced with the choice of substantial increases in their portion of the rent or moving to find housing they can afford. This can be avoided by allowing the payment standard for the voucher to rise to the market rent for as long as the resident remains in the unit. By keeping the resident portion of the rent at an affordable level of 30 percent of income, this "enhanced" form of vouchers protects the resident from the threat of displacement. Currently, HUD can offer these "enhanced" vouchers only in limited cases. By broadening this authority, Congress can avoid resident displacement and ensure that vouchers are an effective tool in all neighborhoods.
  • Increase the number of vouchers. With the Nation facing an affordable housing crisis, Section 8 needs more than reform - it must also grow. HUD research shows that, while Low Income Housing Tax Credits, HOME and other forms of housing subsidies are critical tools in building affordable housing, Section 8 is the most effective housing program for helping households with worst case housing needs. Only by expanding the number of new vouchers each year can Congress and HUD fulfill the Nation�s commitment to its neediest citizens. Last year, in landmark legislation to reform the public housing program, Congress authorized 100,000 new vouchers for fiscal year 2000.

A Two Step Plan For Action

Using the three principles for reform described above, HUD proposes a two-part strategy. First, HUD will act immediately on an emergency basis to prevent certain "opt-outs" from the project-based Section 8 program by using its current limited authority and resources. This portion of the strategy will offer market rents to a highly targeted group of properties that have substantial financial incentives to opt-out because they are currently receiving subsidized rents below what they could receive in the private market. Elements of this targeting include:

  • Properties in good condition. HUD will only offer market rents to properties that are providing the highest quality affordable housing. This criteria will be based on a good or excellent score on the new physical inspection system developed by HUD�s Real Estate Assessment Center.
  • Properties in good neighborhoods. Opt-outs lead to the loss of project-based Section 8 housing in the best neighborhoods - those with the lowest poverty rates and highest rents. These are the same neighborhoods where housing vouchers - which are provided to protect residents by replacing the project-based subsidies - do not always shield residents from significant increases in their rent payments. HUD will target properties located in the best neighborhoods by selecting only properties with market rents higher than 110% of the area rent standard (FMR). Because this criteria will not capture all properties that provide a critical housing resource, HUD may offer market rents to a small group of properties that demonstrate they are critical housing resources on a case-by-case basis. To ensure that subsidies are reasonable, rents offered will be capped at 150% of FMR.
  • Properties most likely to opt out. To ensure that this policy matches HUD�s limited resources, HUD will further target properties most likely to opt out. For-profit owned buildings that have financial incentives to opt-out will be selected, and a five year commitment to accept project-based Section 8 renewals will be required in return.

The second part of the strategy calls for the Administration and Congress to work together to reach a comprehensive legislative strategy to protect residents and preserve the best of project-based Section 8 housing. Highlights of this strategy should include:

  • Market rents for certain properties. The Administration and Congress should build on HUD�s immediate actions by raising selected properties� rents to market. The Administration proposes to spend up to $100 million for this purpose in Fiscal Year 2000.
  • Improve Section 8 renewals. Recent changes in renewal policy have led to greater insecurity for residents and owners through frequent resident notifications and changing rules. The Administration and Congress should explore ways to reduce insecurity by streamlining annual contract renewals.
  • More effective resident protection. In many cases, HUD can better protect residents by offering "enhanced" vouchers that allow them to remain in their homes without substantial rent increases when an opt-out occurs. The Administration and Congress should craft legislation to expand this authority.

This concludes my formal written statement, Mr. Chairman. HUD looks forward to continuing our work with you and the other members of this Committee on this critically important issue.

 

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