Statement of John C. Weicher
October 9 , 2002
Assistant Secretary for Housing-Federal Housing Commissioner
before the Committee on Banking, Housing
and Urban Affairs
Subcommittee on Housing and
Chairman Reed, Ranking Member Allard, distinguished members of the
Subcommittee, thank you for inviting me to testify on the subject
of affordable housing preservation.
have asked me to discuss specifically several matters that concern
the preservation of the existing stock of affordable housing. I
am happy to do that, but before doing so, I would like to describe
several of the Department's initiatives to increase the available
inventory of affordable housing.
the fiscal year just completed, the Federal Housing Administration's
basic multifamily housing insurance program, Section 221(d)(4),
experienced a very substantial increase in activity. Overall, FHA
made commitments for 198 new construction or substantially rehabilitated
projects, with over 38,000 units and totaling $2.8 billion worth
of mortgage loans. That total dollar figure is easily the biggest
number for the program in the last 10 years, and could well be a
record. It is almost double our activity in FY 2001. Last year FHA
made commitments for 139 projects, with over 21,000 units, totaling
$1.5 billion. That amounts to a 42 percent increase in the number
of projects, a 79 percent increase in apartment units and an 85
percent increase in the dollar value of commitments.
major reason for this dramatic increase is that, in FY 2002, HUD
was able to operate Section 221 (d)(4) on a self-sustaining basis.
By raising the mortgage insurance premium to 80 basis points, we
were able to end the program's dependence on credit subsidy and
terminate the need for appropriations. There is no longer any need
for the industry to be concerned about program delays and stoppages
because of credit subsidy issues. During the last eight years -
from 1994 through 2001 - FHA's credit subsidy programs had to discontinue
operations three times.
know that many people in the industry were concerned that raising
the premium would cripple the program. Clearly, that did not happen.
put Section 221(d)(4) on a self-sustaining basis, FHA is now in
a position to reduce the insurance premium to 57 basis points, which
will make the financing of new or rehabilitated apartments more
affordable. The reduction is a result of a comprehensive review
of the credit subsidy calculations for all FHA multifamily programs,
the first such analysis in a decade. You may recall from my confirmation
hearing that I made a commitment to conduct this study. FHA began
work on the study in June of last year, and we completed it in time
for the new credit subsidy calculations and premiums to be included
in the President's Budget for FY 2003 and to go into effect at the
beginning of this fiscal year. We have lowered the premium on several
self-sustaining programs, and lowered the credit subsidy rate on
almost all of those that still require credit subsidy. The proposed
notice for the premium reduction was published in the Federal
Register for comment in August with comments due by September
30. We expect the final notice to be published within a matter of
days and FHA will permit Section 221(d)(4) commitments that have
not closed to be reprocessed at the 57 basis point premium.
are other reasons for the sharp rise in commitments. Shortly after
he came to HUD, Secretary Martinez announced his support for a 25
percent increase in the statutory per unit limits for the FHA multifamily
mortgage insurance programs. This was the first increase since 1992.
The increase helps to make the FHA programs more feasible in high
cost areas where the programs had not been used for several years.
Philadelphia, for instance, has seen its first FHA-insured multifamily
projects in more than 5 years. Mortgage insurance applications have
been submitted to finance developments in Washington D.C., Baltimore,
St Louis and suburban Minneapolis that would not have been submitted
without the increase in the limits.
The Multifamily Accelerated Processing (MAP) program is another
contributing factor. Having now completed two full years of this
program, we have done more to standardize the process, and we have
demonstrated to the development industry that FHA field staff can
and will provide an expedited review of the mortgage insurance application
I also want to briefly touch upon some of this Administration's
FY 2003 budget proposals that will increase access to or add to
the current inventory of affordable housing.
Administration's budget for this fiscal year includes an additional
$200 million in funding for 34,000 rental housing vouchers, in addition
to the 1.74 million vouchers currently being utilized by low-income
families. The Senate Appropriations Committee only provided funding
for 17,000 new vouchers. The Administration strongly urges Congress
to fully fund our request, either by the full Senate or in conference.
the national vacancy rate is close to an all-time high - 8.5% in
the second quarter this year - there are still areas of the country
with a low vacancy rate. To address this problem, the Administration
also supports the development of affordable housing through programs
such as the Low-Income Housing Tax Credit, which supports about
100,000 new or rehabilitated rental units each year. Two years ago,
Congress enacted a 40 percent increase in the volume limits for
the LIHTC, and caps for tax-exempt housing bond financing were also
raised last year. States can direct these resources to the local
markets where supply is constrained or rents are highest.
In addition, the Administration has asked for increased funding
this fiscal year for the HOME block grant program. At the proposed
$1.8 billion funding level, HOME will produce 23,000 new affordable
units and a similar number of rehabilitated units. Provision of
these units will be made through decisions by local governments
concerning their own affordable housing needs. Families with extremely
low incomes will occupy over one-half of these units. By law, Section
8 Voucher holders have access to all units developed with HOME and/or
Section 202 elderly housing, Section 811 disabled housing and Housing
Opportunities for Persons with AIDS programs also produce thousands
of new units a year for special populations.
would also like to report progress on one of the first initiatives
I undertook after becoming FHA Commissioner, and that was to take
a look at the large number of projects in the development pipeline
in the Section 202 and Section 811 programs. A report prepared for
GAO had indicated that there were over 100 Section 202 projects
from the years 1992 to 1997 that had not reached initial closing.
I directed our Office of Multifamily Housing to determine the status
of these projects. We learned that the pipeline data was badly out
of date. Of the 100 projects listed as being in the pipeline, 25
had cancelled - some years ago - and 18 had already closed. I then
directed our staff to bring as many of these old project commitments
as possible to closing, and I am pleased to report that we closed
30 of them.
At the end of FY 2002, the combined total of Section 202 and Section
811 projects funded between 1992 and 1997 that had not reached initial
closing is now down to 26. That number represents only 1.3% of 2058
projects funded during that six-year period. This fiscal year, I
expect those 26 will be closed or cancelled, unless they are in
will continue to try and make improvements to ensure the timely
development of affordable housing under these programs and are working
with our field staff to help accomplish this. We recently completed
two training sessions for our field staff, the first such training
in 11 years. In addition, we changed the awards process so that
it does not reward sponsors that previously have been unable to
demonstrate that they can develop affordable housing in a timely
would now like to address some of the issues this Subcommittee has
raised concerning the preservation of the existing stock of affordable
of the Existing Section 8 and Section 202 Affordable Housing Stock
The Department is committed to preserving the existing stock of
affordable rental housing. Over the last few years, Congress through
legislation has provided for financial tools to provide incentives
and assist project owners to preserve the affordable housing stock.
Working with Congress, the Department has been successful in a number
of areas in its efforts to preserve the affordable housing stock
as well provide incentives to the owners.
Department implemented Mark-to Market and Mark-Up-to-Market to provide
opportunities for owners to make capital improvements and the necessary
repairs to ensure the units are decent, safe and sanitary for the
residents and to ensure the units remain affordable.
the inception of the Mark-to-Market program, HUD's Office of Multifamily
Housing Assistance Restructuring (OMHAR) has successfully closed
debt restructurings on 571 properties. These properties include
over 46,000 units and are now subject to 30-year Use Agreements.
They were provided with over $62 million in escrows to repair properties,
and an infusion of approximately $40 million in immediate Reserve
for Replacement deposits, increasing the long-term physical stability
of the properties. In addition, OHMAR has processed Section 8 contract
renewals and reduced rents on over 120,000 units, resulting in annual
Section 8 savings of over $105 million.
Mark-Up-to-Market program, created in FY 1999, has been similarly
successful. In its first four years, through FY 2002, 632 Section
8 contracts have been renewed and 58,000 affordable housing units
were preserved under this program. To be eligible for Mark-Up-to-Market,
a property must: 1) not have a low and moderate income use restriction
that cannot be eliminated by unilateral action of the owner, 2)
be decent, safe, and sanitary, 3) not be owned by a nonprofit entity,
4) not be a Section 8 Moderate Rehabilitation project, and 5) have
rents exceeding 100% of Fair Market Rents.
the Department uses its statutory authority to enter into multiple-year
Section 8 contracts for those owners choosing the Mark-up-to-Market
rent increase option. Owners must enter into a contract at a minimum
of five years, but not to exceed 20 years. Payments under the contracts
are subject to the availability of appropriations. To limit the
possible cost to the Government for implementing the MU2M option,
the Department capped the rent increase at the comparable market
rent or 150% of Fair Market Rents, whichever is lower.
The Department also recognizes the important contribution that has
been made by nonprofit owners in the development and the preservation
of affordable housing. This is particularly true for those nonprofit
sponsors who have developed Section 202 affordable housing for the
elderly and persons with disabilities. Many of the older Section
202 projects have Section 8 rental assistance. The owners of these
projects are eligible to apply for an increase in their rents to
cover the cost of capital repairs. The program requirements and
process for obtaining the rental increase is described in chapter
15 of the Section 8 contract renewal guide. From FY 1999 through
FY 2002, 1,092 Section 8 contracts in the Section 202 program have
been renewed, with more than 80,000 affordable elderly and disabled
housing units preserved.
all Section 8 project based programs combined, during the last four
fiscal years, a total of 10,695 Section 8 contracts were renewed
and over 778,000 affordable housing units have been preserved.
Interpretation of Section 8 Contractual Provisions for State Finance
Agency-Financed Multifamily Projects
Department's Office of General Counsel recently issued a legal opinion
regarding the contractual provisions governing the term of a Section
8 Housing Assistance Payment Contract (HAP) between a State Housing
Finance Agency and an owner for a State Housing Finance Agency-financed
project executed prior to 1980. It is HUD's position that this is
neither a new policy nor a reinterpretation. The Section 8 contracts
in question provide that the term of the contract terminates "on
the date of the last payment of principal due on the permanent financing."
It is my understanding that up until the recent OGC opinion, Housing
Finance Agencies have interpreted the HAP contract language to mean
that new financing is included as "permanent financing," and that
the contract does not terminate when an owner refinances the original
Department has identified approximately 1400 Section 8 HAP contracts
at most that potentially could be impacted by this recent OGC opinion.
This maximum number could be further reduced by the dozen or so
states that have strong prepayment restrictions. In an effort to
lessen the impact of this opinion on the existing assisted tenancies,
minimize the loss of affordable housing units, and to assure the
availability of continued rental assistance for project residents,
HUD has proposed to the State Housing Finance Agencies two alternatives
for the affected project owners:
The owner may elect to extend the maximum term of the HAP contract
from the date of the prepayment to terminate at the originally
scheduled maturity date of the permanent financing, or
The owner may elect to renew the project-based Section 8 contract
in accordance with the Multifamily Assisted Housing Reform and
Affordability Act (MAHRA).
an affected owner could choose neither option and exercise the right
to opt out of the Section 8 contract. In this case, the owner must
provide HUD and the tenants with the proper one-year notice of HAP
recognize the concerns of project owners, state agencies, and members
of Congress about the potential consequences for the affordable
housing stock, and we have been discussing the situation and possible
options with the Council of State Housing Finance Agencies, among
of Regulations That Will Allow Nonprofit Organizations to Create
For-profit Limited Partnerships For The Section 202 Program
original law that allowed for-profit participation in the Section
202 program was included in the American Homeownership and Economic
Opportunity Act of 2000. Included in the same Act, was a provision
related to the refinancing of existing Section 202 projects. On
August 23, 2002, the Department issued Notice H2002-16 to implement
this provision. Since then, my office has focused its efforts on
the rulemaking associated with the provision regarding for-profit
participation in the Section 202 program. We are working diligently
on the required regulation and expect to submit it to OMB for review
in the near future. We know that the nonprofit organizations are
eager to use the capital advance to leverage additional funds to
develop more additional affordable housing or services for the elderly.
HUD funded eight Section 202 projects in fiscal year 2001 where
the sponsors indicated that they anticipated developing a mixed-finance
Enforcement of Regulations When Owners Opt Out of Section 8 Contracts
We have been pleased to work with the members of this Subcommittee
to ensure that owners with developments that have project-based
Section 8 assistance provide proper notice when opting-out of the
Section 8 program. It was never the intent of the Department to
reward owners who do not comply with the required Federal notice
requirements. The forthcoming revisions to the Section 8 Contract
Renewal guide will clarify this point, and will be available within
the next few months. We have worked with our Offices of General
Counsel and Public and Indian Housing to develop a consistent policy
that does not reward owners yet protects the tenants at the projects
where the owner chooses to opt-out.
owner who fails to provide proper one-year opt-out notification
must permit the tenants to remain in their units without increasing
their portion of the rent for whatever period of time is necessary
to meet all of the notification requirements. Eligible families
residing in the property will be issued vouchers when the contract
expires. The family may use the voucher to remain in their current
unit or elect to use the voucher to move to another property. Should
the family elect to remain in their current unit, the voucher housing
assistance payments contract does not commence until the full one-year
notice requirement has been met. The effect of this action is that
the owner will not receive any voucher assistance payments until
proper notice has been provided to the tenants.
instances where project owners need additional time to meet the
one-year notice requirement, they are encouraged to enter into a
short-term contract renewal with a term long enough to ensure that
the tenants receive a full one-year notice of contract expiration.
Otherwise, the owner will only receive the tenant portion of the
rent the families were paying under the expired contract until the
full one-year notice period has been met.
of the Utilization of Interest Reduction Payments Funds to Rehabilitate
Existing Affordable Housing
Department will continue to consider the implementation of Section
236(s) depending on the availability of future year Section 236
recaptures. Questions regarding the availability of funds derived
from old contract authority converted to budget authority were not
resolved until the spring of 2002.
Members know, the Emergency Supplemental Appropriations Act included
a $300 million rescission of recaptured IRP funds from mortgages
insured by Section 236 that have been prepaid. At this time, it
does not appear that there are adequate funds beyond the rescission
to implement a program.
of future prepayments which provide the recaptured funds available
for rehabilitation are uncertain. Two initiatives by the Department
that help to preserve the affordable stock have reduced the amount
of future IRP funds available for recapture. HUD allows Section
236 owners to decouple the IRP from the mortgage at prepayment in
return for extended affordability restrictions. Those IRP funds
are not available for recapture.
addition, Section 236 owners with Section 8 subsidies may apply
to have their Section 8 rents marked up to market. Approximately
$40 million in IRP funds have been used to capitalize project reserves
for replacement for projects that have been marked-to-market by
concludes my statement, Mr. Chairman. Thank you for the opportunity
to appear before this Subcommittee.
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