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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 Senate
July 1, 1999
Mr. Chairman, Ranking Member Kerry, 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.
Recently, Secretary Cuomo announced an emergency initiative to stop
the loss of affordable housing through opt-outs from the project-based
Section 8 program. This initiative has already convinced many owners
to reconsider their earlier decisions to leave the Section 8 program.
While we have taken substantial steps to address the issue of opt-outs,
we are also looking at a related set of issues presented by the
prepayment of HUD-subsidized mortgages. These cases are somewhat
different from opt-outs and will require a different strategy. Indeed,
the main element of our opt-out strategy, selectively increasing
Section 8 subsidies, is not an option for units without these subsidies.
A carefully designed strategy will be sensitive to the specifics
of the mortgage subsidy programs, continue to protect low-income
tenants, and continue access to affordable housing, especially in
tight markets. As with the opt-out strategy, it is unlikely that
one approach will be the best for all properties. One thing we have
learned from past preservation policies is that it is vital to target
and calibrate incentives to balance the needs of properties and
tenants with fiscal responsibility. Recognizing these needs, Secretary
Cuomo joined with members of this Subcommittee and many of your
colleagues in pledging to work towards a more comprehensive solution
to the loss of HUD-subsidized multifamily housing. Today I would
like to describe the steps HUD has already taken, and more importantly,
discuss a policy framework for considering a more comprehensive
solution.
Communities
At A Cross-Roads: The Challenge Facing HUD Multifamily Housing
Twenty-five years ago, the Federal Government created what would
become the largest rental housing subsidy program in the Nation's
history: the Section 8 program. The Section 8 program complemented
HUD initiatives already in place to subsidize privately owned affordable
housing, particularly the Section 236 and 221 (d)(3) subsidized
mortgage programs. Section 8 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, while the
236 and 221 (d)(3) programs assist over 500,000 families, 60 percent
of which also benefit from project-based Section 8 subsidies. Between
these three programs (Sections 8, 236 and 221 (d)(3)), HUD multifamily
housing 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.
Today, HUD's multifamily subsidy programs stand at a cross-roads,
facing a challenge that could threaten their viability well into
the next millennium. 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 or "opt out" of the Section 8 program. HUD's
recent actions, which I will discuss more fully in a moment, have
done a great deal to calm this uncertainty. A complete response,
however, will require not just a strategy for opt-outs, but an appropriate
strategy for prepayments as well.
HUD research has documented the scale of the challenges facing its
multifamily subsidy programs:
- Trends
in affordable project-based housing. When prepayment restrictions
or Section 8 contracts expire, owners can choose to leave HUD's
multifamily programs. Since October 1996, more than 30,000 subsidized
units in over 500 project-based Section 8 properties have left
the program. An even larger number have prepaid their HUD-subsidized
mortgages during the same period.
- Section
8 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. 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
face regarding the security of their housing.
- These
trends threaten the best affordable housing. Owners who choose
to opt out or prepay 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.
Without further reform to counter these threats, HUD's multifamily
programs risk losing the best of their project-based housing, displacing
thousands of low-income families and seniors, while being left with
properties that do not have the resources to meet their physical
and financial needs. By continuing to remake these programs, 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 families
around the country who go without any housing assistance at all.
Policy
Principles For Further Reform
To guide the needed reform, HUD proposes two simple policy principles:
Offer
a fair return
Preservation
is not enough
Principle
1: Offer a Fair Return
Returns HUD offers to property owners must be based on what a property
is worth. HUD should not offer 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 return. While HUD's
multifamily subsidies were always intended as market-driven programs
dependent on the private sector to provide affordable housing, over
time the programs have moved away from that promise. A mismatch
between subsidies and market rents has evolved over time as rent
adjustments have not tracked changes in localmarkets. Recent Congressional
and HUD actions have begun the process of reform. We now have the
opportunity to finish remaking the programs into the market-driven
models they were 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 is preserving the
best project-based Section 8 properties, improving those that need
additional resources, and retuming the project-based Section 8 program
to its original vision of a market-oriented housing program. This
critical first step can now be extended beyond the Mark-to-Market
legislation with new policy reform.
Rents
below market. While tremendous attention has been focused on
project-based Section 8 housing with rents above market, HUD multifamily
properties with rents below market had until recently been nearly
forgotten. HUD estimates that below-market Section 8 properties
receive between $600 and $800 million less per year than they would
on the open market. With rents rising rapidly in some market areas,
many owners of these properties have had a significant financial
incentive to opt out of Section 8 contracts or prepay HUD-subsidized
mortgages, posing the most dramatic risk to project-based multifamily
housing. Building on HUD's recent actions, we can now move beyond
prevention of opt-outs to meet the full range of challenges facing
below-market multifamily housing.
Principle
2: Preservation is Not Enough
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 lef~ to compete for the dwindling supply of affordable rental
housing available on the private market." By its self, preservation
of HUD-subsidized multifamily housing cannot address the growing
rental housing crisis. Instead, the Section 8 voucher program can
be used 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 multifamily housing, there will always be some
properties that leave the programs. HUD protects residents in
properties that opt out or prepay 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 and prepayments
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. 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 prepayments, not in opt-outs. 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 we
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.
HUD
Actions Have Limited Section 8 Opt-Outs
On April 29th, Secretary Cuomo announced a two-part strategy to
protect residents and preserve the best of project-based multifamily
housing. First, HUD acted immediately on an emergency basis to prevent
certain "opt-outs" from the project-based Section 8 program using
its current limited authority and resources. The second part of
the strategy called for the Administration and Congress to work
together on a comprehensive policy solution to the remaining challenges.
The first part of the strategy, HUD's emergency initiative, offers
increased rents to 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. The initiative
allows rents to increase to full market to avoid the loss of the
best properties, but targets the increases to certain properties
- without this targeting, the cost of the initiative could be $600-$800
million per year. Already this emergency initiative has limited
the number of opt-outs - owners around the country have reconsidered
abandoning the Section 8 program and submitted requests for renewals.
This includes owners already in the process of opting out, who were
allowed to reverse their earlier decisions and return to the program.
It also includes owners of so-called "older assisted" properties,
who were able to benefit from the initiative despite a number of
complexities that many thought would stop their participation.
With limited resources, HUD's initiative targeted the properties
most at risk for opting out, and those where an opt-out threatens
displacement of residents. Elements of this targeting include:
- Owners
who provide good housing HUD is only offering market rents
to properties that are providing the highest quality affordable
housing. This criteria is based on a good or excellent score on
the new physical inspection system developed by HUD's Real Estate
Assessment Center. In addition, owners subject to administrative
sanctions are disqualified.
- Properties
in strong markets. Opt-outs have led to the loss of project-based
Section 8 housing in the strongest markets - 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
targeted these strong markets by selecting only properties with
market rents higher than 110% of the area rent standard (FMR).
Because this criteria does not capture all properties that provide
a critical housing resource, HUD is also offering market rents
to a small group of properties that demonstrate they are critical
housing resources on a case-by-case basis - for example, properties
targeted by state and local governments for their own housing
resources.
- Properties
most likely to opt out. To ensure that this policy matches
HUD's limited resources, HUD further targeted properties most
likely to opt out. For-profit owned buildings that have financial
incentives to opt-out are eligible, while non-profit owners or
buildings already restricted to offering affordable housing, for
example by receiving Low Income Housing Tax Credits, are disqualified.
The initiative was crafted to offer targeted owners a financial
return closer to what they would receive in the market in exchange
for preserving their properties as affordable housing. Care was
taken, however, not to oversubsidize properties or increase rents
for unsubsidized residents. This was accomplished by:
- Requiring
a five-year commitment. To guarantee the preservation of affordable
housing for a longer period, a five year commitment to accept
project-based Section 8 renewals is required in retum for market
rents.
- Scrutinizing
market rent levels. To ensure that subsidies are reasonable,
HUD is performing its own comparability studies to determine accurate
market rents, and the rents offered are capped at 150% of FMR.
- Offsetting
market rents for current subsidies. For owners who already
benefit from subsidized mortgages through HUD's other multifamily
programs, the market rents are reduced by the amount of the interest
subsidy. This ensures that total return to the owner for the Section
8 units matches a market alternative, but does not exceed it.
- Increasing
limited distributions. Previously, distributions to owners
were limited to a fixed percentage of the initial equity invested
in the projects. With these limits, increased rents would not
have increased the rerum to owners, and therefore would not have
provided any incentive to remain in the Section 8 program. To
counter this, HUD allowed a dollar-for-dollar increase in the
distributions to owners to match the increase in rents, thereby
stopping opt-outs while keeping reasonable limits on profits.
- Protecting
non-Section 8 residents. The Section 8 program shields low-income
residents from rent increases under the initiative by limiting
their contribution to 30% of income. Residents of properties with
subsidized mortgages who do not benefit from Section 8 payments,
however, would have paid any increases themselves due to the fixed
level of subsidy provided by the mortgages. To avoid the hardship
and potential displacement of residents that would result, the
initiative limited rent increases in partially Section 8 properties
to only the Section 8 units.
A
Policy Framework
The initiative I have just described has gone a long way to stopping
opt-outs from the project-based Section 8 program, but HUD does
not have the authority or resources to address a number of other
challenges that face HUD's multifamily programs. Our assessment
suggests there are five areas for HUD and Congress to focus on going
forward:
Market
rents for certain properties. Building on HUD's emergency actions,
a longer-term program should be established to raise selected properties'
rents to market. This program should include targeting criteria
for which properties' rents will be increased and specific commitments
that will be required from owners in return for increased rents.
By extending the criteria and commitments embodied in HUD's initiative
described above to a full fiscal year, 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. Recognizing this, Congress
provided for a single notification under a five-year contract that
could replace the current annual notifications. HUD is using this
provision as part of the five-year commitment required from owners
under its emergency initiative described above. More can be done,
however. Extending this authority to allow a single notification
prior to the expiration of a contract of any length would encourage
longer-term preservation of affordable housing while removing the
fear among residents caused by misleading notices each and every
year. Second, renewal of Section 8 contracts could provide greater
security to owners while reducing HUD's administrative burden. Currently,
owners may be required to perform a study of comparable market rents
each year at the renewal of the contract. A better alternative would
be to allow an operating cost adjustment to be applied for four
years, with a comparability study needed only every fifth year to
ensure that rents remain in line with the local market.
Market
returns for other properties. While lifting Section 8 rents
to market and providing more secure renewals can limit opt-outs
of valuable affordable housing, these actions will have limited
success in avoiding prepayments in properties that are important
to preserve as project-based housing. Limiting prepayments is more
difficult than limiting opt-outs because the subsidy level provided
by the mortgages is fixed. Part of a potential solution could be
a reexamination of current limits on rents, distributions and "excess
income," all of which were called for by statute at a time when
subsidized rents were not linked to local markets. Now that Congress
has realigned project-based Section 8 rents so they are driven by
local market conditions, we could further this change by realigning
rents, distributions and "excess income" more closely to market
in HUD's other privately-owned project-based properties. These changes
could be targeted to the best properties and none of them would
require additional appropriations. Rents in Section 236 and 221
(d)(3) properties could be capped at the market level (offset for
the interest subsidy) instead of the current budget-based formula,
although still limited to 30% of residents' incomes. Distributions
could be revised to allow for recognition of project equity built
up over time instead of remaining tied to the original equity contribution.
And continuing a trend by Congress over recent years, "excess income"
could be made available to the owners of certain 236 projects to
better approach a true market return.
New
resources and ownership. Even when owners choose to remain in
HUD's multifamily subsidy programs, there are cases when new ownership
or resources are needed to preserve decent affordable housing. Whether
for tax or other business reasons, owners may be effectively locked
into ownership despite a waning interest in running the property.
Or in markets where local rents are below what is needed to pay
for recapitalization later in the project's life cycle, other forms
of resources may be necessary outside of current rent and interest
subsidies. Any effort to stop the loss of affordable housing should
take account of these cases by encouraging the transfer of properties
to more motivated owners, particularly tenant organizations and
non-profits. One way to do this is through targeted increases in
Section 8 rents to market for valuable properties in strong markets
that would not otherwise be eligible but agree to a transfer to
a tenant organization or non-profit. A second method would be to
target federal subsidies to affordable multifamily properties that
receive state and local contributions subsidizing a transfer or
recapitalization. Finally, the current legislation guiding the disposition
of properties foreclosed by HUD could be made permanent, including
the option to transfer properties to resident organizations and
non-profits with Up-Front Grants in negotiated sales.
More
effective resident protection. Even with a comprehensive proposal
that includes all the suggested changes I have discussed, there
will still be cases where owners choose to opt out. In these 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. Any proposed solution should give
HUD the authority to offer "enhanced" vouchers in all opt-outs at
up to market rent levels. In addition, Congress could clarify the
permissible increases in "enhanced" rent levels over time by allowing
them to track reasonable increases after the first year.
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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