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Testimony of the Honorable Mel Martinez
before the
Senate Appropriations Committee
Subcommittee on Veterans and Housing and Urban Development

June 14, 2001

Chairwoman Mikulski, Ranking Member Bond and distinguished Members of the Committee, thank you for this opportunity to discuss the Department of Housing and Urban Development's budget for fiscal year 2002.

The Department of Housing and Urban Development faces a big challenge in the coming years as we find ways to improve housing and expand opportunities for families seeking to improve their quality of life. President Bush and I are committed to restoring the confidence of the Congress and the American people in the operation of this Agency.

Our fiscal year 2002 budget is the first step toward restoring that confidence. This is a compassionate and responsible budget that will allow us to serve people more effectively and empower individuals and communities across the Nation.

This Department's success will not be measured by how much money we spend, but by how many families get the chance to buy their first house and by how many children get the chance to grow up in the kind of neighborhood we all want to live in.

The Administration has set the overall growth for Federal spending at 4 percent. This is a responsible and appropriate level. But the President also recognizes that this Department has a special obligation to help fulfill this Nation's housing and community development needs.

That is why the Department of Housing and Urban Development's proposed budget increases nearly 7 percent for fiscal year 2002. This will allow the Department to meet its priorities in improving housing and community development opportunities for American families. This budget will help low-income families become home owners, increase the amount of affordable rental housing, help low-income individuals build the skills they need to compete in the modern workplace, support community development, meet the needs of special populations, strongly enforce our fair-housing laws, and provide the adequate resources to improve the management of the Department.


Housing particularly homeownership is at the heart of that mission. President Bush has made increasing homeownership especially for low-income families and minorities a top priority of his Administration.

Homeownership plays a vital role in creating strong communities by giving families a stake in their neighborhoods and helping them to build wealth. Although a period of sustained economic growth has helped to raise the overall homeownership rate to a record level, the homeownership rates of minorities and low-income families lag far behind those of other families.

The most recent data show that the homeownership rate for Hispanic and African American households is under 50 percent. By contrast, the homeownership rate for the Nation as a whole is 67 percent. This Department is firmly committed to reducing this gap by increasing the homeownership rates of minority households.

The data indicate that homeownership rates are also lagging in central cities (51.4 percent) and among households with incomes below the area median (51.5 percent). Since minority households are more likely to fall into these categories, it is clear that their homeownership rates can be raised by improving access to homeownership in central cities and among low-income families.

For fiscal year 2002, the Bush Administration has proposed a number of new or expanded initiatives to improve homeownership rates among low-income and minority families. Since the biggest single obstacle to homeownership is the inability to afford a downpayment on a home, two of the initiatives the American Dream Downpayment Fund and the Section 8 Homeownership program focus directly on overcoming this obstacle. A third initiative the Single-Family Housing Tax Credit will subsidize the costs of homes that are rehabilitated or newly constructed for purchase by low-income households, while a fourth initiative FHA's Hybrid Adjustable Rate Mortgage will expand access to homeownership by reducing mortgage payments in the initial years of a mortgage.

The American Dream Downpayment Fund will provide $200 million within the HOME program to match downpayment assistance provided by third parties. This proposal will help 130,000 low-income families overcome the biggest obstacle to homeownership putting together a downpayment.

Another proposal that will help families own their own homes is the expansion of the use of Section 8 vouchers for homeownership. Under soon-to-be-published regulations, voucher-holders will be able to use up to one year's worth of Section 8 assistance for the downpayment on a home. HUD expects this program to be of use to existing voucher holders who can afford the ongoing costs of a mortgage, but who do not have enough savings to cover a downpayment.

Based on legislation enacted in the last Congress, HUD is also implementing an alternative approach to Section 8 homeownership under which the voucher can subsidize ongoing homeownership costs. As part of a pilot program to accommodate the needs of disabled households, HUD will apply higher income eligibility limits to these households.

A third proposal the Single-Family Housing Tax Credit is a $1.7 billion tax credit that will support the rehabilitation or new construction of an estimated 100,000 homes for purchase in low-income neighborhoods over a 5-year period. The program will subsidize up to 50 percent of project costs and benefit low-income families.

In addition to working closely with the Department of Treasury in designing this tax credit, HUD will conduct a thorough review of policies and regulations that may constitute a barrier to the development of affordable single-family homes and consider ways to streamline the development process.

For fiscal year 2002, HUD seeks authority to allow the Federal Housing Administration (FHA) to offer families a hybrid adjustable-rate mortgage. These mortgages reduce the initial homeownership costs by combining a low fixed rate in the early years of the mortgage with a rate that adjusts with the market thereafter. HUD estimates that the introduction of hybrid adjustable rate mortgages will allow FHA to provide mortgages to an additional 40,000 families in fiscal year 2002. It also will yield additional income of $99 million for the FHA and $13 for the Government National Mortgage Association (Ginnie Mae).

These initiatives will complement HUD's existing homeownership programs. The main HUD programs that help families achieve homeownership are the HOME Investment Partnerships Program (HOME), the FHA Mortgage Insurance and the Community Development Block Grant (CDBG) program. HUD also works to expand homeownership opportunities through the efforts of Ginnie Mae, programs for Native American Communities, the Self-Help Opportunities Program (SHOP), Housing Counseling and oversight of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

In fiscal year 2002, HUD will provide $1.796 billion in total HOME funding, the same as in fiscal year 2001. HOME is a flexible block grant that provides support for local affordable housing efforts. Funds are allocated directly to large cities, counties, or consortia of smaller areas (known as "participating jurisdictions") and to states for distribution to other cities and towns. There are currently 594 participating jurisdictions, although that figure is expected to rise in fiscal year 2002.

Recipients of HOME funds have substantial discretion to determine how the funds are spent. To date, approximately 45 percent of HOME funds have been spent on assistance to homeowners and new homebuyers, with the balance going to activities that help make rental housing affordable. HOME funds can be used to expand access to homeownership by subsidizing downpayment and closing costs, as well as the costs of acquisition, rehabilitation, and new construction. To date, HOME grantees have committed funds to provide homeownership assistance to more than 320,000 low-income households.

In fiscal year 2001, the HOME program received a substantial increase of nearly $200 million (12 percent) over the prior year's level. For fiscal year 2002, HUD will dedicate this money to the American Dream Downpayment Fund, described above, which is funded as a set-aside within HOME.

FHA insurance continues to be one of the Nation's principal tools for increasing homeownership for moderate-income and first-time homebuyers. FHA insurance helps make homeownership affordable for families who may not qualify for conventional mortgages.

FHA offers a range of different insurance products. In fiscal year 2002, an estimated 1.15 million families will finance their homes through FHA's Mutual Mortgage Insurance Fund. Other FHA homeownership products include insurance for rehabilitation loans, condominiums, energy-efficiency loans, and reverse mortgages for elderly homeowners. In addition, FHA provides mortgage insurance for multi-family developments and health-care facilities.

Many of FHA's single-family programs operate at a surplus, which means that income from premiums is more than enough to cover expected losses from defaults. For example, new mortgages insured by the Mutual Mortgage Insurance Fund in 2002 are expected to generate $2.5 billion over the life of the loan .

In fiscal year 2002, FHA plans to make a number of programmatic reforms to strengthen its financial position. For example, to address losses in the General Insurance and Special Risk portfolios, FHA will raise premiums and review its underwriting criteria in a number of the programs in these portfolios. This will reduce the amount of credit subsidy required to support these programs from $101 million in fiscal year 2001 to $15 million in fiscal year 2002.

Ginnie Mae helps to ensure the availability of mortgage funds for low- and moderate-income families served by FHA and other Federal government programs. Ginnie Mae guarantees securities backed by pools of mortgages insured by FHA or guaranteed by the Rural Housing Service (RHS) or the Department of Veterans Affairs. Through this guarantee, Ginnie Mae has helped to finance homeownership opportunities for more than 24 million families.

Ginnie Mae operates a Targeted Lending Initiative in which the guarantee fees it charges lenders are reduced for mortgages in any of the Nation's 72 Empowerment Zones, Enterprise Communities, and adjacent eligible central city areas. Since its inception in 1996, this incentive has led to over $11 billion to finance more than 121,000 loans in central cities.

The Department's fiscal year 2002 budget also has three programs that are specifically designed to help promote homeownership among Native American communities.

First, the Indian Housing Block Grant provides tribes or tribally designated housing entities with a flexible source of funding for affordable housing and related activities. As provided in the Native American Housing Assistance and Self Determination Act (NAHASDA), block grant funds may be used for a wide range of homeownership and rental activities. The fiscal year 2002 budget provides $649 million, the same level as enacted in fiscal year 2001.

Second, the Title VI Federal Guarantees for Tribal Housing Activities provides loan guarantees for Indian Housing Block Grant recipients who need additional funds to engage in affordable housing activities, but who are unable to borrow from other sources without the guarantee of payment by the Federal Government. The fiscal year 2002 budget provides $6 million in funds set aside within the Indian Housing Block Grant Program as a credit subsidy to guarantee $53 million in private sector loans.

Third, the Indian Home Loan Guarantee Program (Section 184) helps Native Americans to access private mortgage financing for the purchase, construction, or rehabilitation of single-family homes by providing loan guarantees to lenders. The fiscal year 2002 budget provides continued funding of $6 million in credit subsidies to guarantee a total of $234 million of such loans.

To support its homeownership programs for Native American communities, HUD will again provide $2 million to the Native American Indian Housing Council which delivers technical assistance and training to tribally designated entities, conducts research, and provides information on Indian housing and economic development issues.

In addition to the programs discussed above, the fiscal year 2002 budget includes funding for a number of other programs that help families achieve homeownership.

One such program is Housing Counseling, which provides comprehensive housing counseling services, including pre-purchase, default, and renter counseling to eligible homeowners and tenants. By educating families on the homeownership process and the responsibilities and benefits of homeownership, Housing Counseling helps to expand homeownership opportunities. For fiscal year 2002, HUD plans to continue funding this program at $20 million as a set-aside within HOME.

Another such program is the Self-help Homeownership Opportunities Program (SHOP). SHOP provides grants to national and regional nonprofit self-help organizations to subsidize the costs of land acquisition and infrastructure improvements. Homebuyers must contribute a significant amount of sweat equity or volunteer labor to the construction or rehabilitation of the dwellings. For fiscal year 2002, HUD is requesting $22 million for SHOP as a set-aside within the Community Development Block Grant account, an increase of $2 million over fiscal year 2001. The increase reflects the early successes of this program. Fiscal year 2002 grants will help to produce more than 1,400 new homes.

HUD also sets affordable housing goals for two key housing financial institutions over which it has oversight responsibilities: Fannie Mae and Freddie Mac. These Government Sponsored Enterprises (GSEs), play a vital role in financing affordable owner-occupied housing in the Nation through their participation in the secondary mortgage market. Last year, HUD announced new affordable housing goals for the GSEs that will substantially increase the availability of financing for affordable housing. In fiscal year 2002, HUD will continue to monitor the compliance of the GSEs with these goals and work in cooperation with them to find new ways to expand homeownership for all Americans.

In fiscal year 2002, HUD plans to continue to fund a $3 million cooperative agreement with the Housing Assistance Council (HAC). HAC is a nonprofit corporation that works to increase the availability of decent and affordable housing for low-income people in rural areas throughout the United States. In fiscal year 2002, HAC will focus on the affordable housing needs of people living in the "Colonias." These are poor rural communities and neighborhoods along the U.S.-Mexican border that lack basic infrastructure and services, as well as decent and affordable housing.


While seeking to expand homeownership opportunities, HUD recognizes that homeownership may not be a practical option for all families, especially those at the bottom of the income scale. To help low-income families afford the high costs of rental housing, HUD provides rental subsidies to more than four million households nationwide through a variety of programs.

To spur the construction of more affordable rental housing, HUD has proposed that the limits for FHA multifamily insurance be increased by 25 percent. Increasing the limits will help to spur the availability of private financing for new production and substantial rehabilitation of residential rental housing in high-cost areas.

The fiscal year 2002 budget seeks to strengthen HUD's current rental assistance programs rather than proposing any new ones. During fiscal year 2002, HUD will focus in particular on improving the utilization of Section 8 vouchers and public-housing capital funds by housing agencies.

This budget funds the project-based and tenant-based Section 8 programs under a single account, known as the Housing Certificate Fund. In the Section 8 voucher program, families live in modestly priced rental housing that they find in the private market. In the project-based Section 8 program, by contrast, families live in specific developments that have a pre-existing contractual relationship with HUD. In both programs, families are expected to contribute 30 percent of their adjusted income for housing costs (rent plus utilities). HUD provides subsidies to cover those rental costs not paid by the tenant.

In fiscal year 2002, HUD will obligate $15.1 billion in new budget authority to renew all expiring Section 8 contracts for one year, an increase of $2.2 billion over fiscal year 2001. The increase is explained largely by the fact that Section 8 contracts were previously funded on a long-term multi-year basis. As long-term Section 8 contracts expire, the number of contracts that need to be renewed each year (and the funding required to do so) increases. Fiscal year 2002 funds will be used to renew expiring contracts for 2.7 million units.

For fiscal year 2002, the Department has requested $197 million for approximately 34,000 additional "incremental" Section 8 vouchers. These vouchers will enable HUD to make progress in reducing the number of low-income renter households with worst-case needs, which stood at 4.9 million in 1999. Rather than targeting the vouchers to any specific purpose, HUD will distribute them through the Fair Share allocation system to public housing agencies (PHAs) that have demonstrated an ability to use effectively their existing vouchers, as measured by high voucher-utilization rates. This process will maximize the ability of housing agencies to meet locally defined needs.

HUD recognizes that in the past, it has not moved as quickly as it should have in issuing incremental vouchers to PHAs. If Congress funds its request for incremental vouchers, HUD will act expeditiously to distribute the vouchers to PHAs.

To further speed assistance to low-income families, HUD has targeted for improvement in 2002 the utilization of existing Section 8 vouchers by PHAs. The most recent available data indicate that housing agencies are utilizing approximately 92 percent of the vouchers under contract for one year or more. By working to improve PHAs' utilization of vouchers, HUD will be able to serve tens of thousands of additional families within existing funding levels.

In addition to funding contract renewals, the Housing Certificate Fund provides funds for a number of additional activities. One of those is the Tenant Protection Program. This program protects families who live in a project-based subsidized development whose owner either chooses to opt-out of the program or is terminated for cause. Such families receive "enhanced" vouchers to help them remain in their developments or tenant-based assistance to move to a new apartment. Housing vouchers are also provided to public-housing tenants displaced by the demolition of distressed public housing. In fiscal year 2002, funds are requested for an estimated 30,000 tenant protection vouchers.

HUD is also requesting funds to continue its performance-based Contract Administrator Program, which funds contracts with designated State or local housing agencies, sometimes in partnership with other public or private entities. Acting as HUD's agent, contractors oversee some 20,000 direct contracts between HUD and project owners for project-based Section 8 assistance. In fiscal year 2002, approximately $196 million will be required to continue these contracts, which run for three years.

HUD will shortly be submitting legislation to continue authority to restructure FHA-insured mortgages in conjunction with "marking" down of excessive rents for certain Section 8 project-based developments to the rents charged in the surrounding market. Authority for the Mark-to-Market restructuring program expires at the end of fiscal year 2001.


The public housing program is funded through the Public Housing Operating Fund, the Public Housing Capital Fund, and the HOPE VI program. .

While no longer supporting the development of new public housing on a major scale, HUD remains committed to sustaining and improving the Nation's public housing by funding public housing operating and capital expenses. Through the HOPE VI program, HUD also funds the demolition of obsolete public housing stock and its replacement with vouchers or new public housing that blends into the community.

The fiscal year 2002 budget provides $3.385 billion for the Public Housing Operating Fund, an increase of $150 million over the fiscal year 2001 enacted levels.

In light of higher-than-expected energy costs, some PHAs are facing a shortage of funds in fiscal year 2001. To address this problem, the Department has moved quickly to provide $105 million of fiscal year 2001 funds to affected agencies.

If this increase is not sufficient to cover costs associated with the sharp and unexpected rise in energy rates , PHAs will be reimbursed for excess utility costs due to rate increases as outlined in regulation.

The Public Housing Capital Fund provides formula grants to PHAs to meet the accrual of new modernization requirements and to reduce the backlog of rehabilitation and modernization requirements.

The fiscal year 2002 budget provides $2.293 billion for the Public Housing Capital Fund, a decrease of $700 million relative to fiscal year 2001. This amount will be sufficient to meet all new modernization requirements. Because PHAs have a large amount of unspent capital funds from prior years, the budget does not provide any new funds to address the backlog of modernization needs. Two other reasons to cut this program include the facts that: QHWRA (Public Housing Reform) gives PHAs the ability to leverage federal funds with private investment to finance capital improvements; and HOPE VI removes the most severely distressed units which represent a disproportionate share of backlog need.

The purpose of the reduction in capital funds is to draw down capital funds that have been appropriated, but not expended, by PHAs. Recognizing that the funds are primarily for capital improvement projects, HUD expects PHAs to obligate these funds within 18 months and expend them in 36 months. Although not all PHAs are falling behind in scheduled modernization, the buildup of unobligated and unexpended funds by some PHAs indicates that modernization funds may not be reaching the PHAs with the greatest needs or capacity. For example, as of March 1, 2001, $700 million in fiscal year 1998 funds remained unspent by PHAs. HUD plans to review the Capital Fund program and put procedures in place to ensure a more timely and effective reduction of the nearly $18 billion backlog of modernization and rehabilitation needs.

While we provide increased funding for the Public Housing Operating Fund, this Department also provides funds for the demolition and revitalization of severely distressed public housing under the HOPE VI program. The budget requests $574 million for HOPE VI grants in fiscal year 2002, the same as the fiscal year 2001 enacted level.

HOPE VI was launched as part of an effort to demolish 100,000 of the most distressed public housing units. As of the end of fiscal year 2000, HUD had approved applications to demolish nearly 113,000 units and PHAs had actually demolished approximately 60,000. Almost 35,000 of the completed demolitions were carried out in connection with HOPE VI revitalization grants.

The HOPE VI program will expire in fiscal year 2002 and must be reauthorized to continue. The Department is evaluating the HOPE VI program and will submit authorizing language during the coming year to extend and amend the program to target funds to the highest priority needs.

For fiscal year 2002, HUD has proposed the termination of Public Housing Drug Elimination Grant Program (PHDEP), which was funded at $309 million in fiscal year 2001. There are three main reasons for this termination. First, the program is duplicative of the Operating and Capital Funds in that all expenditures that are eligible under PHDEP are also eligible expenditures of one or both of these funds. Second, many other Cabinet Departments have anti-drug programs that can be brought to bear on the problems of drug use and violent crime in public housing. Governmentwide, over $18 billion in Federal funding is projected for fiscal year 2002 on anti-drug programs and illegal drug enforcement efforts. Finally, the Inspector General has severely criticized PHDEP for being the source of funds for such inappropriate activities as staff retreats, bank loans, and Christmas parties. Indeed, the Department itself diverted PHDEP technical assistance funds to implement a gun buy-back program, which the Comptroller General ruled was not a legal use of funds.

Although HUD is not requesting funds for PHDEP, it will fund Operation Safe Home and the Witness Relocation Program. The Inspector General operates a special task force Operation Safe Home which combines the expertise of Federal and local crime-fighting forces to combat violent crime such as illegal drug trafficking and gang-related activity in public and assisted housing developments. In fiscal year 2002, $10 million will be set aside within the Public Housing Operating Fund and transferred to the Inspector General for additional law-enforcement staff.

The Witness Relocation Program assists families that have cooperated in efforts to combat crime in communities. It is a crucial part of Operation Safe Home. Since the initiation of Operation Safe Home, the Inspector General has relocated 650 witnesses whose testimony was essential to the prosecution of perpetrators of violent crimes.


Central to HUD's mission of promoting stronger communities are programs to help low-income working families acquire skills that will increase their earnings and to help families on welfare make progress towards self-sufficiency. HUD also seeks to help low-income families accumulate assets so that they can achieve homeownership, pursue educational opportunities, start a new business, and attain other important goals.

HUD's basic programs contribute to this objective by providing low-income families with the housing stability they may need to focus on obtaining work or increasing their earnings. HUD's homeownership assistance programs also help families accumulate assets. In addition, HUD has a number of programs that focus directly on building assets and skills among low-income families.

The Community Technology Centers program is one such initiative. For fiscal year 2002, HUD will provide $80 million in competitive grants to help communities create or expand computer technology centers in low-income areas. The centers will provide free Internet access and help families acquire computer skills, access educational information, and search for work.

Through the Neighborhood Networks program, HUD has helped to create more than 700 computer technology centers in multifamily assisted housing developments and HOPE VI sites throughout the country. Hundreds of additional computer centers operate in public housing and Native American housing. HUD supports the development of these centers by providing guidebooks and other technical assistance, sharing information on best practices, and allowing the centers to occupy space in affordable housing developments.

Another such program is the Family Self-Sufficiency (FSS) Program. Currently serving some 55,000 families in the tenant-based Section 8 and public-housing programs, FSS promotes the development of local strategies to help families obtain or increase employment so that they can build assets and achieve economic independence and self-sufficiency. FSS helps to link participating families with local opportunities for educational services, job training, counseling, and other services while they are receiving housing assistance. As participating families increase their work effort, the amount of increased rent attributable to increased income from employment is deposited in an escrow account. Families that comply with program rules and become independent of welfare assistance by the end of the 5-year program term can use the funds in the escrow account to purchase a home, pay for higher education, start a business, or other agreed-upon goals.

In fiscal year 2002, HUD will work to increase participation in FSS by providing funding for FSS service coordinators at local housing agencies, helping to spread awareness of successful practices, and promoting partnerships between local housing and welfare agencies. The fiscal year budget provides $46.4 million for FSS coordinators within the Housing Certificate Fund.

The Administration plans to offer additional incentives to encourage savings and asset accumulation by low-income households through the Individual Development Accounts (IDA) initiative. This new program will improve access to savings institutions by creating a mechanism to subsidize the savings of eligible participants. Financial institutions would be allowed a tax credit in exchange for matching contributions to participants' deposits. Individuals would then be able to withdraw their contributions and matching funds, along with earnings, for qualified purposes, such as education expenses, first-time home purchases, and business start-up expenses, that help facilitate entrance into the country's economic mainstream.

The Resident Opportunity and Self-sufficiency Program (ROSS ) provides a range of supportive services to families in public housing through competitive grants to PHAs, resident groups, Indian tribes and other qualified organizations. The services funded through ROSS are designed to help families make progress towards self-sufficiency; enable the elderly and persons with disabilities to live independently through service coordinators and other activities; and support resident management, business development, capacity building and conflict resolution activities.

Funding for ROSS in fiscal year 2002 is continued at $55 million, the same level enacted in fiscal year 2001. Consistent with prior practice, it is funded as a set-aside in the CDBG program.

Through its Youthbuild program, HUD provides young high-school dropouts (aged 16-24) with education and job training services, counseling and other support activities and onsite paid training in housing rehabilitation or construction work. This will help these youths find well-paying jobs. The average wage earned by Youthbuild trainees is $7.50 per hour and an impressive 84 percent of the graduates obtain full-time employment or re-enter school on a full-time basis. A wide range of groups are eligible to compete for Youthbuild funds, including nonprofit organizations, State and local housing agencies and State and local governments.

In fiscal year 2002, HUD will continue Youthbuild at last year's level of $60 million and will continue the program as a set-aside within the CDBG program. HUD estimates that this funding will provide training to an estimated 3,774 youths.

HUD has also been active in helping to make "Welfare-to-Work" a reality. The fiscal year 1999 VA-HUD Appropriations Act included funds for up to 50,000 Section 8 vouchers to help families make the transition from welfare to work. Housing vouchers can help families make progress towards self-sufficiency by providing them with the residential stability they may need to focus on obtaining or retaining work as well as the opportunity to move closer to a new job. Although implementation of the Welfare-to-Work Voucher program has been delayed due to the challenges of designing a new program and of coordinating the efforts of local housing and welfare agencies, substantial progress has been made in recent months.

The costs of renewing the existing Welfare-to-Work vouchers are included as part of the overall Section 8 contract renewals in the Housing Certificate Fund. As requested by Congress, HUD's Office of Policy Development and Research is in the process of evaluating this program.


Beyond housing issues, HUD's other core commitments involve community and economic development. Our fiscal year 2002 budget will continue to support these programs, which play an essential role in helping communities address locally determined development priorities and maintaining long-term prosperity.

Much of HUD's community development work is done under the auspices of the Community Development Block Grant Program (CDBG). CDBG provides local communities with a flexible source of funds to help them attract private investment, maintain a high-quality housing stock, rebuild infrastructure and community facilities, provide critical community services, and create new high paying jobs. CDBG funds are provided directly to approximately 1,000 large cities and counties (known as "entitlement communities") and to States for distribution to smaller communities. For fiscal year 2002, HUD has requested a total of $4.8 billion in CDBG funds. This is composed of $4.4 billion for CDBG formula grants and $403 million in set-asides for specific programs. The amount requested for the CDBG formula is the same as the level enacted in fiscal year 2001. This represents a record level of formula funding and a $160 million increase over the amounts appropriated in fiscal years 1999 and 2000.

During fiscal year 2002, the Department will continue to work to increase communities' timely expenditure of previously allocated CDBG funds. Although HUD's efforts over the last few years have led to a 34 percent reduction in the number of communities that are failing to meet their timeliness obligations, there are still a number of communities that are not spending their CDBG funds in a timely manner.

The Department intends to work closely with communities to ensure that comprehensive plans are implemented fully and funds are used expeditiously under the consolidated plan review process.

Although funding for the CDBG formula is maintained at fiscal year 2001 levels, HUD has proposed a substantial reduction in funding of set-asides within CDBG. The enacted level of set-asides within CDBG in fiscal year 2001 was $713 million. The requested level for fiscal year 2002, by contrast, is $403 million, a reduction of $310 million. The principal source of the reduction is the proposed elimination of funding for the Economic Development Initiative and the Neighborhood Initiative Demonstration. These programs, which together totaled $401 million, were earmarked for "special purpose" grants in the appropriations act.

The growth in special purpose grants has been dramatic over the past few years. In fiscal year 2001, the appropriations act contained over 800 individual projects. Administering these individual grants is costly, time-consuming, and distracts HUD staff from its core programs. As most of the special purpose grants would be eligible expenses under the CDBG formula, these types of projects can be funded if deemed to be priorities by local recipients of CDBG funding.

The Section 108 Loan Guarantee program provides a means by which local communities can leverage their CDBG grants to obtain financing for large community revitalization projects. Under this program, the government acts as the guarantor of loans secured by current and future CDBG funds. Section 108 financing is at work in hundreds of communities across America. Over 1,200 projects have been funded since the program's inception in 1978.

In every year since fiscal year 1997, the total loan volume authorized for the Section 108 program has been $1.2 billion. Only about one-third or less of this loan level has been used each year, however, with an average annual utilization of $375 million. To reduce the level of the government's outstanding commitment to levels that reflect actual usage, while at the same time ensuring that any upward surge in loan volume is fully accommodated, the fiscal year 2002 budget is requesting a loan volume of $609 million. HUD will reconsider the loan volume cap for fiscal year 2003 based on this year's demand for the program.

Another HUD program designed to assist in community development is the Empowerment Zones and Enterprise Communities (EZ/EC) Initiative. The EZ/EC initiative is an interagency effort to promote economic development and community revitalization in distressed areas by targeting tax relief and Federal funds to designated Empowerment Zones (EZs) and Enterprise Communities (ECs). EZs and ECs are eligible for an array of different tax credits and other incentives designed to spur investment and economic growth. EZs and ECs also receive some amount of Federal funding for revitalization activities. Grants are used for a wide variety of activities that assist residents and businesses, including workforce preparation and job creation efforts linked to welfare reform; neighborhood development; support for financing capital projects; financing of projects in conjunction with Section 108 loans or other economic development projects. Funds are also used for rental assistance and other housing assistance, policing and healthcare.

To date, there have been two rounds of EZ/EC designations, with a third round authorized but not yet made. In the first round, nine communities (six urban and three rural) were designated as Empowerment Zones and 95 communities were named as Enterprise Communities. Twenty new Empowerment Zones 15 urban and 5 rural were designated in the Round II competition, along with 20 new Enterprise Communities, all rural.

In December 2000, Congress approved legislation to designate nine new EZs, seven in urban areas and two in rural areas. HUD will designate the seven new urban EZs in 2001, while the Department of Agriculture will designate the rural EZs. The legislation also authorized the designation of 40 Renewal Communities, 28 in urban areas and 12 in rural areas, to be designated by HUD by the end of 2001. Businesses in Renewal Communities will benefit from local regulatory streamlining and a variety of Federal tax incentives to stimulate economic growth.

HUD, originally proposed to provide each of the 15 Round II urban Empowerment Zones with $10 million in annual grant funding. Cumulative funding to date has not reached this level, but HUD is seeking funding of $150 million for fiscal year 2002, equaling the originally proposed annual amount.

This Department is also active in helping to redevelop brownfields. Brownfields are vacant or underutilized properties whose redevelopment is hampered by the real or perceived threat of environmental contamination. A recent survey of over 200 cities by the U.S. Conference of Mayors indicated that more than $2.7 billion in additional tax revenues and 675,000 new jobs could be created if brownfields sites were returned to productive use. For fiscal year 2002, HUD proposes to fund the Brownfields Economic Development Initiative at $25 million, the same level as enacted in fiscal year 2001.

The Brownfields Economic Development Initiative makes competitive economic development grants available to local governments in conjunction with Section 108 loan guarantees. The grants enhance the security of the Section 108 loan, facilitating the reclamation of brownfields. HUD works closely with the Environmental Protection Agency to implement strategies to return brownfields to productive uses.

In addition to the programs discussed above, several additional HUD programs help to support local community and economic development.

To help reduce the hazards of lead-based paint, the fiscal year 2002 budget requests a 10 percent increase in funding for the Lead-Based Paint Hazard Reduction and Healthy Homes Programs for a total of $110 million. Pursuant to Executive Order 13045, a multi-agency task force that included HUD, EPA, Justice, and the Centers for Disease Control and Prevention developed a comprehensive 10-year plan to eradicate the risk associated with lead-paint poisoning from American homes. HUD's grants are key to the achievement of this objective. The increased funding in fiscal year 2002 will be distributed through a competitive process to entities that match every Federal dollar with significant additional dollars. All funds, whether private or Federal, must be used for hazard reduction or public education on lead-poisoning prevention.

Included in this request is a set-aside of $10 million to continue the Healthy Homes Initiative, which helps to develop, demonstrate, and promote cost-effective preventative measures to correct multiple safety and health hazards in the home that can cause serious disease and injuries to children.

HUD is also funding the National Community Development Initiative (NCDI). NCDI is a partnership of public and private funders and intermediaries that works to expand the capacity of community development corporations and other community-based and nonprofit organizations to carry out community and economic development. HUD provides NCDI funding to national intermediaries, including Habitat for Humanity, the Enterprise Foundation, and Local Initiatives Support Corporation, which then provide capacity building services to the targeted organizations. The fiscal year 2002 budget requests $29 million for NCDI, an increase of $1 million over fiscal year 2001 levels The additional $1 million will go to Habitat for Humanity to increase funding for their capacity building efforts to $4.4 million.

Colleges and universities can make an important contribution to the revitalization of America's cities and neighborhoods by bringing their intellectual and financial resources to bear on locally identified problems. HUD has several programs that encourage partnerships between colleges and universities and local governments and community-based organizations. These programs include: the Community Outreach Partnership Centers Program, the Historically Black Colleges and Universities Program, the Hispanic-Serving Institutions Assisting Communities Program, the Alaska Native/Native Hawaiian Institutions Assisting Communities Program, and Assistance to Tribal Colleges and Universities. In addition, the Community Development Work Study program provides stipends and tuition support for economically disadvantaged and minority graduate students who plan to pursue careers in community and economic development. The fiscal year 2002 budget funds all of the university programs at fiscal year 2001 levels.

In order to assist with the community and economic development needs of Native American and Insular Area communities, HUD funds Block Grants for Indian and Insular Area Communities within CDBG. The fiscal year 2002 budget provides $69 million for Indian community development block grants and $7 million for community development block grants to Insular Areas (American Samoa, Guam, the Northern Mariana Islands, and the Virgin Islands). Funding for Insular Areas is included within the set-aside for Section 107 grants.

A set-aside of $1.25 million in the Indian Community Development Block Grant will fund the Native eDGE program, an interagency initiative designed to facilitate sustainable economic development within American Indian and Alaska Native communities. Edge includes a telephone call center, a publications clearinghouse, a web site, and a technical assistance information center. The web site links seventeen Federal agencies, educational institutions, and organizations through a single portal so that tribes, Native Americans, lending institutions, and private businesses can collaborate to promote economic growth.


HUD programs provide housing and other essential support to a wide range of populations with special needs, including the elderly, persons with disabilities, homeless persons, and persons with HIV/AIDS.

In fiscal year 2002, HUD will continue its strong level of support by funding the programs targeted for these populations at or above fiscal year 2001 levels. Notable increases include $20 million in additional funding for the Housing Opportunities for Persons with AIDS (HOPWA) program and $20 million for the Improving Access Initiative, which will be used to increase access by disabled persons to the facilities of nonprofit organizations.

In fiscal year 2002, HUD plans to continue its strong support for the elderly by providing $783 million for elderly housing programs, an increase of $6 million over fiscal year 2001 levels.

The principal HUD program targeted specifically to the elderly is the Supportive Housing for the Elderly (Section 202) program. This program provides capital advances to finance the construction and rehabilitation of structures that will serve as supportive housing for low-income elderly persons and provides rent subsidies (known as Project Rental Assistance Contracts (PRAC)) for the projects to help make them affordable. For fiscal year 2002, HUD will provide $679 million for Section 202 grants, an increase of $3 million over fiscal year 2001. The fiscal year 2002 budget also includes $3 million for PRAC renewals.

In addition to providing funds for new Section 202 developments, the fiscal year 2002 budget includes $50 million to cover the costs of converting existing Section 202 developments to assisted living facilities and another $50 million for service coordinators that help the elderly maintain their independence. Both of these activities are funded at fiscal year 2001 levels.

More than 1.3 million elderly households are also served by public housing and tenant-based and project-based Section 8 programs.

In addition to programs for the elderly, this Department also places a strong emphasis on meeting the needs of the disabled. The Supportive Housing for the Disabled (Section 811) program provides capital advances to construct or rehabilitate rental housing with supportive services for very low-income persons with disabilities. (As noted below, a portion of Section 811 funds is used for tenant-based rental assistance.) For fiscal year 2002, HUD will provide $217 million for new Section 811 grants, the same level as in fiscal year 2001. The budget will also provide $1 million for PRAC renewals to help keep existing Section 811 developments affordable.

In recognition of the importance of providing non-elderly persons with disabilities with mainstream housing opportunities, the Department plans to continue to set-aside a portion of Section 811 funds to provide these households with tenant-based vouchers that they can use to rent private market apartments of their choice. Public housing agencies will also continue to have the authority to provide vouchers to non-elderly persons with disabilities pursuant to designated public housing plans.

Some 500,000 households with one or more disabled persons are also served by public housing and project-based and tenant-based Section 8 programs.

As part of a Governmentwide effort to improve the access of disabled persons to community services, HUD's fiscal year 2002 budget includes $20 million as a set-aside within the CDBG account for the Improving Access Initiative. This initiative will provide competitive grants to help organizations that are exempt from the Americans with Disabilities Act and have limited resources to make their facilities accessible to the disabled. Among other eligible organizations are civic organizations and religiously affiliated service providers.

Of particular importance to the Department of Housing and Urban Development are the needs of the neediest among us who lack even the most basic shelter. The fiscal year 2002 budget continues to provide strong support for homeless persons by funding HUD's homeless programs at fiscal year 2001 levels. In fiscal year 2002, a total of $1.12 billion is provided for homeless assistance grants and shelter plus care renewals.

The Department will focus on providing permanent housing solutions to those without homes and work closely with the Department of Health and Human Services and other agencies to identify and remedy the barriers to homeless persons' access to mainstream supportive services programs. As specified by Congress, at least 30 percent of Continuum of Care funding will be used to provide homeless persons with permanent housing.

The Continuum of Care process allows local communities to determine their own priorities for the use of HUD homeless programs funding. Under this process, communities submit Continuum of Care plans to HUD which describe local priorities and rank specific projects according to locally identified needs. HUD provides funding to communities that provide for maximum participation by local homeless providers and representatives of homeless clients, that clearly identify gaps in housing and service needs, and that coordinate homeless assistance with mainstream health, social services and employment programs.

The Continuum of Care funds three programs geared toward the needs of the homeless. The first is the Supportive Housing Program, which provides funds to develop supportive housing and services that will allow homeless persons to live as independently as possible. Funds are used for transitional housing (up to 24 months) and permanent housing for persons with disabilities.

The second is the Shelter Plus Care Program, which provides rental assistance for hard-to-serve homeless persons with disabilities in connection with supportive services funded from sources outside the program. This is a form of permanent housing. In fiscal year 2001, a special account was created to fund renewals of expiring Shelter Plus Care contracts. In fiscal year 2002, HUD will continue to fund these renewals at $100 million.

The third program under the Continuum of Care is the Section 8 Moderate Rehabilitation for Single Room Occupancy (SRO) Dwellings for Homeless Individuals Program, which provides rental assistance for homeless persons through the moderate rehabilitation of SRO dwellings.

In addition to funding these three homeless programs, HUD will provide approximately $150 in Emergency Shelter Grants by formula. These grants are used for the rehabilitation or conversion of buildings into homeless shelters, as well as certain related social services, operating expenses, homeless prevention activities, and administrative costs.

Finally, the Department will continue to work in fiscal year 2002 to implement the Congressional mandate to develop and implement new systems to track homeless individuals as they enter and exit the network of homeless services programs and to provide unduplicated counts of the number of homeless persons served. HUD believes it essential to get a fix on the reach of HUD's homelessness programs so that the performance of these programs can be measured.

HUD is also concerned about the special housing needs of those suffering from HIV/AIDS. The Housing Opportunities for Persons with AIDS (HOPWA) program funds housing assistance and related supportive services for low-income persons with HIV/AIDS and their families. Grants are provided by formula allocations to States and metropolitan areas with the largest number of cases and highest incidence of AIDS. In addition, a small portion of funds is awarded competitively among projects proposed by State and local governments and nonprofit organizations.

In fiscal year 2002, HUD will provide $277 million for the HOPWA program, an increase of $20 million over fiscal year 2001 levels. This will support an increase in the number of jurisdictions eligible for funding based on increases in the number of persons with AIDS as reported to the Centers for Disease Control and Prevention.


HUD is committed to vigorous enforcement of the fair-housing laws to help ensure that all households have equal access to rental housing and homeownership opportunities. For fiscal year 2002, the Department plans to increase the amount of funding available for fair-housing enforcement and education activities by 16 percent over current levels. The Department also plans further steps to decrease the incidence of predatory lending.

HUD contributes to fair-housing enforcement and education by directly enforcing the Federal fair-housing laws and by funding State and local fair-housing efforts through two grant programs.

The first grant program is the Fair Housing Assistance Program (FHAP), which strengthens nationwide enforcement efforts by providing grants to State and local agencies to enforce laws that are substantially equivalent to the Federal Fair Housing Act. For fiscal year 2002, HUD will provide $23 million for FHAP, an increase of $1 million over current levels.

The second program is the Fair Housing Initiatives Program (FHIP), which provides funds to public and private fair-housing groups, as well as to State and local agencies, for activities that educate the public and the housing industry about fair-housing laws including accessibility requirements, investigate allegations of discrimination and help to combat predatory lending practices and reduce barriers to minority homeownership.

In fiscal year 2001, FHIP was funded at $24 million, of which $7.5 million was dedicated to the National Survey of Housing Discrimination, a major study of housing discrimination being conducted by the Urban Institute. This left $16.5 million for FHIP grants. As no additional funding for the survey is needed in fiscal year 2002, the fiscal year 2002 level of $23 million provides an effective increase for FHIP grants of $6.5 million.

The additional $6.5 million in fiscal year 2002 FHIP funding will be directed towards increasing the number of organizations that receive funding for activities to enforce the rights granted under the Fair Housing Act and substantially equivalent State and local laws through education, outreach, prevention, and other enforcement activities. This funding increase will significantly expand the geographic distribution of FHIP awards to communities that are currently underserved or not served at all by fair-housing organizations. In fiscal year 2000, HUD was only able to fund 42 percent of eligible applicants. With the increase in funds, HUD will be able to fund 72 percent of the eligible applicants.

During fiscal year 2002, HUD also plans to continue its efforts to combat predatory lending. The Department will work closely with interested parties, including consumer groups, Federal, State and local regulators, and the industry to put an end to predatory lending practices, increase financial literacy, and expand access to homeownership and private mortgage credit. As part of this overall effort, HUD will consider ways to better enforce existing laws which may include strengthening existing regulations as well as assess the need for legislative action to better protect consumers and stop unfair lending practices.


Despite the progress of the last twelve years, much more needs to be done to resolve HUD's serious management challenges. Although HUD is no longer listed by the General Accounting Office as a "high-risk" agency, many of its major programs continue to bear this label. This Administration has made improving the management and restoring the focus of this Department its number one priority. It is a message that Congress has told HUD repeatedly throughout the years. And this Administration is finally listening.

The starting point for any improvement in how this Department operates is proper use of staff. During fiscal year 2002, HUD will review staffing levels against program needs to rationalize the distribution of staff resources. HUD's efforts will be aided by the new Resource Estimation and Allocation Process which will help the Department to assess where staffing should be increased or decreased to administer its programs effectively. HUD is also working to develop a long-term staffing strategy to meet the rapid increase in retirements expected over the next several years. Currently, the average HUD employee is 48 years old with 18 years of Federal service. To ensure HUD's continued ability to deliver its programs in an effective and timely manner, HUD must develop a strategy for dealing with this loss of talent and experience.

HUD will also continue its efforts to improve oversight of the local housing agencies and property owners who administer its housing programs. Although the Department recognizes that the physical inspections protocol used to assess public housing and multifamily assisted housing needs further refinement to ensure consistent and fair results, it plans to continue to assess the physical condition of HUD-assisted housing to ensure that it is decent and safe.

The Department will also take steps to improve income and rent determinations to reduce subsidy overpayments. HUD overpays hundreds of millions of dollars in low-income rent subsidies due to the incomplete reporting of tenant income, the improper calculation of tenant rent contributions, and the failure to collect fully all outstanding rent. During fiscal year 2002, HUD will implement a number of measures to resolve this problem, including the development of tools to assist housing agencies and housing owners in the determination of income and calculation of rent, and the introduction of a quality control program to monitor the performance of these intermediaries. HUD also plans to review the current laws and regulations regarding income and rent determinations to ascertain whether their simplification would facilitate program compliance.

The Department is greatly concerned that some recipients of HUD funding are either failing to utilize all of the funds provided by HUD or failing to obligate and spend the funds in a timely manner. These practices significantly diminish the effectiveness of HUD's programs. HUD will be reviewing the following programs to determine how to increase the rates of expenditure of funds: Section 8 vouchers and project-based renewals, the Section 202 program, CDBG, and the Public Housing Capital Fund.

Inadequate information systems have weakened FHA's ability to monitor lenders that use its guarantees and contributed to HUD's failure to obtain a clean opinion from its auditors in 1999. A fraudulent scheme known as "property-flipping" recently highlighted internal weaknesses in FHA's single-family systems and controls. To combat this scheme last year, FHA implemented emergency foreclosure moratoria to protect borrowers in areas where property flipping was prevalent. During fiscal year 2002, FHA will strengthen the integrity of its internal systems and controls to eliminate the need for foreclosure moratoria and other emergency responses. Actions will include improving the loan origination process and providing better monitoring of lenders and appraisers.

The Department is committed to the continued review and evaluation of its programs to determine what is working well and what needs to be improved. HUD is also committed to continuing to conduct surveys and research to collect the factual information on housing markets and conditions necessary to inform the policy decisions of HUD, Congress and State and local governments. To this end, the fiscal year 2002 budget provides $43 million in funding for basic research and technology, the same amount as in fiscal year 2001.

Finally, HUD recognizes the importance of the work being conducted by two Congressional Commissions: the Millennial Housing Commission and the Commission on Affordable Housing and Health Care Facility Needs in the 21st Century. HUD is prepared to assist Congress in assembling factual information on the extent of the Nation's housing needs, analyzing HUD's programs, and developing proposals for improving current housing programs.

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This Administration is openly and strongly committed to focused programs and an efficient government that works. And my approach to the task will focus on four governing principles.

First, our mission will be to serve people, not programs.

Second, we will have the discipline to stick to our mission. Mission creep is mission death.

Third, we will be good stewards of our resources.

Fourth, we will observe the highest ethical standards. This means more than prosecuting graft. It means rejecting the subtler corruption of settling for good appearances rather than insisting on good results.

As we seek to fulfill our mission, this Department is committed to continuing a strong relationship with Congress so that together we can make the Department of Housing and Urban Development an efficient and effective fighter on behalf of America's housing and community development needs.

Thank you.

Content Archived: March 12, 2010

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