Good morning Chairman Mica, Ranking Member Mink and members of the Subcommittee, my name is William C. Apgar, and I am the Assistant Secretary for Housing/Federal Housing Administration Commissioner at the United States Department of Housing and Urban Development (HUD). On behalf of HUD Secretary Andrew Cuomo and the entire HUD team, I am pleased to testify today about how HUD is fulfilling its mission to address the homeownership and affordable housing needs of the nation. I also welcome the opportunity to report back to the Subcommittee on our progress in implementing the Management and Marketing (M&M) initiative - a comprehensive reform of the way FHA disposes of single family Real Estate Owned (REO) properties.

The past twelve months have been a historic year for the Department, as Secretary Cuomo's 2020 Reforms have produced substantial evidence that HUD works. At the start of the year, in October, 1998, our progress in reforming the Department was recognized by Congress, when the House and Senate approved the best HUD budget in a decade; and, the year culminated last month when Congress enacted an even stronger and smarter budget. This budget puts HUD squarely back in the business of creating and preserving desperately needed affordable housing, jobs and economic development for America's people and places in greatest need. The budget recently approved by Congress provides $1.5 billion more for HUD programs than the

Department received in Fiscal Year 1999, including:

• 60,000 new rental assistance vouchers - the largest expansion of affordable housing in seven years. $347 million to provide new Section 8 rental assistance vouchers to 60,000 low-and moderate-income families. This exceeds the 50,000 new vouchers in HUD's 1999 budget. The expansion in this critical program follows a four year period between FY 1995 and 1998 when Congress failed to appropriate any funds for new Section 8 vouchers.

• A Housing Security Plan for Older Americans that will enable HUD to develop a broad range of housing options to meet the changing housing needs of senior citizens.

• Major job creation and economic revitalization initiatives that include the new America's Private Investment Companies (APIC) initiative, a second round of new Urban and Rural Empowerment Zones, and redevelopment of formerly polluted commercial and industrial sites know as brownfields.

• Increased funding for public housing authorities, homeless assistance and prevention programs, and the fight against housing discrimination. The budget calls for an increase in public housing operating funds from $2.8 billion in 1999 to $3.1 billion in 2000, and funding of $575 million for the HOPE VI public housing revitalization program. These programs are transforming public housing by removing and replacing the worst units, restoring troubled public housing authorities to financial integrity, demanding household accountability and promoting greater income diversity.

• Extending and expanding a HUD initiative that will benefit people already living in apartments that receive Project-Based Section 8 rental assistance subsidies. During the past year, communities across the country have experienced the loss of thousands of units of affordable housing when landlords opted out of the Project-Based Section 8 program. When this happens, residents who can't afford big rent increases have to move out of their apartments, and many have nowhere to go. In the next five years, more than 900,000 HUD Project-Based Section 8 contracts with rental property owners will expire. In April, HUD began an emergency initiative to address the growing problem of opt-outs. The new HUD budget supports the approach HUD took in April by incorporating the emergency initiative into law. The initiative provides market rents to below-market properties most likely to opt out, giving landlords of high-quality housing an incentive to remain in the Section 8 program. To protect residents living in apartments that withdraw from the Project-Based Section 8 Program, the budget allows HUD to provide rental assistance that will allow residents to continue paying their current rents. The budget also takes other steps to protect residents.

Mr. Chairman, I think you can see why we believe this budget is a tremendous vote of confidence in the performance of the Department of Housing and Urban Development and the management reforms we've successfully implemented under Secretary Cuomo's leadership.

Building on the strong Congressional endorsement of HUD's overall efforts to expand affordable housing and create jobs through innovative economic development initiatives, FY 1999 was undoubtedly the best year in the Federal Housing Administration's (FHA) 65 year history. Highlights of the year include:

• Overall, FHA assisted 1.3 million families in securing an all-time record $125 billion in mortgage insurance;
• HUD's 1998 legislative victory in securing Congressional approval to increase the FHA loan limits to $208,000 in high cost areas, enabled FHA to help 60,000 more families realize the dream of homeownership in FY 1999;
• FHA multi-family mortgage insurance also reached a record level of $4.1 billion in mortgage credit.

Over the last year, HUD and FHA also implemented several new initiatives to protect the public trust. These include:

• Stepped-up lender monitoring activities. FHA completed over 900 lender monitoring reviews in FY 1999 - a four fold increase over the 1997 level;

• A new Homebuyer Protection Plan to protect the more than one million American consumers using FHA insurance every year. This plan is anchored by a complete overhaul of the FHA appraisal process and development of new appraisal monitoring and enforcement tools;

• A new physical and financial assessment system that for the first time provides detailed information about the condition of HUD's multi-family assisted and insured inventory.

I am proud, Mr. Chairman of all that HUD is doing to address the homeownership and affordable housing needs of the nation, and I thank you for this opportunity to report to the Subcommittee on our progress to date.

A Report on Implementation of the M&M Initiative

I also am pleased to report back to the Subcommittee that after seven months of operation, six of the seven contractors retained by HUD are generating very positive results, confirming the fundamental premise behind the FHA's Management and marketing (M&M) initiative - that profit-motivated, private sector real estate professionals can more efficiently and effectively manage, market and sell REO properties.

As you may recall from my Spring testimony to the full Committee on Government Reform and Oversight, the National Performance Review (NPR) report on HUD completed in 1994, first suggested that FHA consider privatizing its REO operation. In that report, the NPR recommended that HUD:

"Outsource its property disposition function in order to create higher returns. Private companies operating in a competitive market can normally provide a business service more efficiently than a government staff, which is protected from the rigors of competition. The management and disposition of problem assets is an essentially business, not government function�.This is a suitable task for a business organization with its own money at risk and a clear profit motive tied to maximizing the net return on assets. This is not a suitable task for salaried government staff working from government rules and handbooks"

Mr. Chairman, we tested the power of this idea prior to nationwide implementation, through a more than two year pilot program in three locations - Baltimore, Maryland, New Orleans, Louisiana and Sacramento, California. The results of this extensive pilot showed that private contractors were able to sell REO properties more quickly and at a higher rate of return than HUD. Under the pilot;

• � The average time a property was in inventory was reduced from 211 days to 139 days in Baltimore; from 236 days to 132 days in new Orleans; and, from 162 days to 122 days in Sacramento; and,

• � The average sales price per property increased by $17,108 in Baltimore and by $6,011 in New Orleans.

The M&M Initiative is Generating Greater Returns to FHA

Now we are seeing even more impressive results in our nationwide program. Since implementing the M&M initiative nationwide on March 29, 1999, six of our seven contractors, who had responsibility for more than 60 percent of the total inventory at takeover, have performed very well. They are selling properties much more quickly and at a higher rate of return than HUD did under the old system. For instance, these contractors have:

• Increased HUD's average gross property sales price from $58,815 one year ago, to $73,254 - an increase of 25 percent, or $14,439 per property;
• Increased FHA's net return on sale, the percent of property market value we net after paying all costs associated with managing the property, from 79.30 percent one year ago to 81.26 percent. This improvement represents tremendous progress toward one of the primary program goals I articulated to the full Committee in March: to improve our net return to 81.40 after one year of operation under the M&M initiative;
• � Increased FHA's recovery as a percentage of the mortgage insurance claim from 59.84 percent to 67.53 percent -- an improvement of $3,243 on average per property;
• � Reduced the average time it takes to sell a property. On average, the M&M contractors took only 111 days to sell properties, a vast improvement over HUD's prior performance. When accounting for time HUD held properties prior to transferring responsibility to the M&M contractors, the overall time in inventory average has been reduced from 198 to 191 days, representing considerable progress toward our goal of reducing the average time in inventory to between 150 and 160 days after one full year of operation.

Mr. Chairman, these contractors' strong performance has generated considerable savings to the Department. Taken together, they sold 16,273 properties through September. With an improvement in the net recovery to FHA of $3,243 per property, these sales generated savings of more than $52 million to the Department.

InTown Management Group, Failed to Meet FHA's Performance Standards

Still, despite the overall success of the M&M initiative to date, one contractor, InTown Management Group (ITMG), failed to fulfill the requirements of the M&M contract. ITMG did not properly maintain FHA properties, and they were extremely slow to list properties for sale and enter into sales contracts. From nearly the first day of the new initiative, FHA's new property disposition monitoring and control system detected poor performance by ITMG.

Through this new monitoring and control system FHA inspects the physical condition of 10 percent of all properties in inventory, audits 10 percent of all M&M contractor case files, and completes on-site process observations at the M&M contractor's offices, on a monthly basis. To complement these monitoring activities, FHA staff also conduct on-going analysis of performance measurement reports, prepare comprehensive contractor performance assessment reports for each contract area, and hold monthly performance reviews with the contractors to assess critical performance measures, identify deficiencies and direct corrective actions, on a monthly basis.

This new system detected ITMG's performance failures and provided the specific information necessary to empower FHA officials to take appropriate contracting actions. These actions included:

• Just approximately 45 days into the new initiative, FHA forced ITMG to withdraw from one contract area through a bilateral agreement, under which ITMG acknowledged failure to perform;

• Within approximately 50 days of the start of the contract, FHA sent formal deficiency notices to ITMG for each of their remaining contract areas. These notices identified specific performance failures, and demanded a comprehensive recovery plan;

• Within approximately 95 days, FHA reviewed and rejected ITMG's recovery plan. To further address on-going deficiencies, FHA subsequently demanded a meeting in Washington, DC with ITMG's senior managers to further discuss performance deficiencies;

• In August, after ITMG showed little improvement, I instructed staff to develop a contingency plan in the event ITMG simply could not recover. By the end of the month, we had entered into contingent takeover contracts with three private contractors for the majority of the areas covered by ITMG, and assembled detailed staffing plans for FHA to resume responsibility for managing and marketing properties in the remaining areas.

Still, despite these quick and decisive actions, ITMG's performance did not improve. By September, ITMG's failure to sell properties had caused FHA's national inventory of REO homes to swell from 41,579 at the start of the Initiative, to 51,404, an increase of approximately 9,800 homes. Fully 95 percent of this increase in the national inventory was due to ITMG's failure to perform. After starting with just 16,803 homes in inventory for all its contract areas on March 31, ITMG's inventory had grown to 26,165 at the end of September, an increase of 9,362 homes. During this period, ITMG sold just approximately 2,200 homes.

By comparison, all other contractors combined sold more than 16,000 homes during the same time period. As a result, the combined inventory in their contract areas remained relatively stable, increasing only slightly from 24,776 on March 31, to 25,239 at the end of September, an increase of 463 properties, or two percent.

Due to this and other ITMG failures, HUD terminated all ITMG contracts for default on September 22, 1999. On that same day, the three takeover contractors and HUD staff assumed full operation in all of the impacted contract areas.

Takeover Contractors Are Performing Well

Mr. Chairman, I am pleased to report to the Subcommittee that the private contractors and HUD staff who assumed responsibility for the properties formerly under ITMG contracts are performing very well. In the days immediately following ITMG's termination, these contractors placed a priority on: (1) protecting consumers by ensuring that all scheduled sales proceeded uninterrupted; (2) addressing property maintenance deficiencies created by ITMG nonperformance; and, (3) listing more properties for sale to reduce the bloated inventory in these areas. Where necessary, FHA is bonding or providing escrow deposits to remove liens placed by subcontractors who have not been paid by ITMG, and permit the sale of properties to proceed in a timely manner.

Over the last approximately thirty days since ITMG was terminated, these contractors and staff together have:

• Listed or re-listed 6,407 properties for sale;
• Put another 2,487 properties under a sales contract; and,
• Completed the sale of 1,919 properties - nearly as many property sales as ITMG accomplished in more than five months of operation (approximately 2,200 sales).

With the national system freed of the drag created by ITMG's failure to perform, the entire national M&M system sold 7,140 properties in the month of October, the highest monthly total to date under the new Initiative, and considerably more than the 5,300 sales per month HUD averaged last year under the old property disposition method. As the new contractors gain momentum in their new areas, I anticipate FHA will continue to reduce the national inventory throughout the remainder of this fiscal year.

The Cause of ITMG's Failure

Mr. Chairman, ITMG failed because its three principles simply did not deliver the resources they promised in their proposal for services to the Department - resources they had at their disposal, but they simply did not dedicate to the FHA contract areas. It is important to recognize that ITMG was a partnership of three very experienced principles, each of whom had led companies that previously performed well under HUD and other federal contracts, including:

1. Melton Harrell, President of InTown Properties, Inc., a very experienced property management firm with a strong record of managing thousands of properties in 23 states nationwide for HUD and the Department of the Army;

2. Larry Latham, President of Larry Latham Auctioneers, LTD, one of the nation's premier real estate auction firms, with prior exclusive national contracts with HUD, the Resolution Trust Corporation (RTC), the Federal Deposit Insurance Corporation (FDIC) and the Veterans Administration (VA). Mr. Latham also is a principle of the highly successful online real estate marketing firm, Homebid.Com, which recently was featured in a Forbes magazine article on successful real estate internet companies. ITMG's proposal identified Mr. Latham as a Vice President of ITMG in charge of marketing.

3. Albert Gonzales, of Gonzales Consulting Services, Inc, a successful property management and auditing and quality control system consulting firm, with nearly a decade government contracting experience. Mr. Gonzales also was identified in ITMG's proposal as a Vice President of ITMG, for subcontractor outreach and training.

Taken together, these three principles and ITMG had the resources and capacity to meet all M&M contract requirements. Their proposal for services identified a clear and rational division of labor, with each partner assuming responsibility for an important aspect of ITMG's operation. However, once the contract began ITMG simply did not deliver the resources.

Mr. Chairman, I believe ITMG misrepresented to HUD the resources they would devote to this contact, and in doing so may have committed a fraud against HUD and the U.S. government. That is why I recently moved to immediately suspend each of ITMG's principles from all government contracting, and also proposed that they be debarred for a ten year period. Moreover, I have asked HUD's Office of General Counsel to refer the three principles to HUD's Office of Inspector General and the Department of Justice, for criminal investigation.

Conclusion

Mr. Chairman, I would like to thank you for this opportunity to testify today. I would like to conclude by reiterating that I believe HUD and FHA reform is headed in the right direction. Thank you for this opportunity to testify, and I look forward to answering your questions.

Content Archived: January 20, 2009