Chairman Reed, Ranking Member Allard, distinguished members of the Subcommittee, thank you for inviting me to testify on the subject of affordable housing preservation.

You 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.

In 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.

One 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.

I know that many people in the industry were concerned that raising the premium would cripple the program. Clearly, that did not happen.

Having 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.

There 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 packages.

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.

The 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.

Although 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 LIHTC support.

HUD's 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.

I 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 litigation.

We 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 manner.

I would now like to address some of the issues this Subcommittee has raised concerning the preservation of the existing stock of affordable housing.

Preservation 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.

The 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.

Since 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.

The 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.

Additionally, 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.

For 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.

HUD's Interpretation of Section 8 Contractual Provisions for State Finance Agency-Financed Multifamily Projects

The 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 mortgage.

The 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:

1) 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

2) The owner may elect to renew the project-based Section 8 contract in accordance with the Multifamily Assisted Housing Reform and Affordability Act (MAHRA).

However, 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 contract termination.

We 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 others.

Status of Regulations That Will Allow Nonprofit Organizations to Create For-profit Limited Partnerships For The Section 202 Program

The 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 project.

HUD's 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.

Any 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.

In 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.

Status of the Utilization of Interest Reduction Payments Funds to Rehabilitate Existing Affordable Housing

The 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.

As 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.

Estimates 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.

In 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 OMHAR.

This concludes my statement, Mr. Chairman. Thank you for the opportunity to appear before this Subcommittee.

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