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Hearing of the House Financial Services Committee - "The Section 8 Voucher Reform Act"

Chaired by: Rep. Barney Frank
Witness: Housing and Urban Development Secretary Shaun Donovan

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REP. FRANK: The hearing will come to order. We are very pleased to be joined -- and I think this is his first appearance before us -- by the Secretary of Housing and Urban Development, Secretary Donovan. He's someone familiar to many of us because he was, for years, in the City of New York, a leading housing administrator.

And he comes to this job -- I believe, Mel Martinez, who was the first secretary of HUD under President Bush, graciously noted that Secretary Donovan came to the job far better prepared than he, and, I think, far better prepared than any other secretary. And we are very happy to have him, and we've already begun a very fruitful collaboration. The bill we sent to the president this week involving mortgages and housing was, at the very last minute, improved by suggestions involving dealing with the second-mortgage situations. So we are very pleased to have the secretary here.

And I also will inject a personal note to say that this is at least one of the first hearings when the Assistant Secretary for Congressional Relations, Mr. Kolvar, is with us, who was previously my administrative assistant, chief of staff. So he is also familiar with much of the business of the committee and the members.

Mr. Secretary, we appreciate having you here. The particular issue is the Section 8 Voucher Reform Act. It's one in which there's been a good deal of bipartisan cooperation. We had a version of this, I believe, that passed last year. We are back at it.

And I am very pleased that we have this opportunity to begin this hearing with you on this subject. We think that this is a piece of legislation that significantly improves an already well-run program and a very important program. And it is essential that we update things, and that's essentially what this is. So I welcome you.

And I will now recognize the ranking member of the subcommittee, the gentlewoman from West Virginia, Ms. Capito.

REP. SHELLEY MOORE CAPITO (R-WV): Thank you, Mr. Chairman. Thanks for holding this important hearing on the Section 8 Voucher Program.

Secretary Donovan, we are really glad to see you here today. I want to congratulate you on your new position as the Secretary of HUD. You certainly have your work cut out for you with the many challenges that we have on a variety of issues.

Today's hearing focuses on the Housing Choice Voucher program or Section 8, as we call it, as it is more commonly known. The Federal Housing Voucher Assistance Program provides assistance to approximately two million low-income families and individuals each year and is administered by more than 2,500 local public-housing authorities.

As you know, this is not the first time that we've tried to reform Section 8. The chairman mentioned that we grappled with these issues over the last two Congresses. And we've worked with this in a bipartisan manner to make this program more efficient and more cost effective. Unfortunately, we haven't gotten it all the way through. So reforming Section 8 is critical to both the future of the program and to the HUD budget in general.

Over the last years, the cost of Housing Choice Voucher program has continued to increase. In 1998, the Housing Certificate Fund consumed 42 percent of HUD's annual budget. But by 2005, it was consuming 62 percent of HUD's budget. And the new administration's budget envisions additionally new vouchers and several changes to encourage PHAs to use their reserves and to put out as many vouchers on the street as possible.

While I understand the importance of this program to many families -- and it serves millions of families -- I remain concerned about the long-term costs associated with new vouchers and the impact of Section 8 funding costs will have on the overall HUD budget and the many other important programs within the HUD budget.

In addition to Section 8 -- you knew I wasn't going to just talk about Section 8 -- HUD faces other challenges in other areas, such as the future viability of the FHA program. The FY 2010 HUD budget requests $798 million in credit subsidy for the reverse-mortgage program, an important program for HUD and for those that provide equity for seniors seeking to stay in their homes.

Many reverse mortgages were made in an appreciating market, but they're now being paid out in a depreciating market that ultimately would have serious implications, I think, for the solvency of the FHA. I have heard some refer to this reverse-mortgage program as the next housing crisis, and I'd like to get, further in the hearing, your comments on that.

In addition, many of the mortgage origination recovery efforts have fallen on the FHA program due to the fact that the standard conventional mortgage markets are not functioning at normal capacity. Lenders are understandably skittish about making loans in a depreciating housing market, and, consequently, lenders are gravitating to the FHA program seeking the 100 percent government guarantee on the mortgages they generate.

Transparency and accountability of the counseling programs are important to me -- we had a hearing with the counseling entities last week -- and the newly-established neighborhood stabilization program are important issues that will require your attention and diligence. These programs have received huge cash infusions over the last couple of years, and we want to make sure the taxpayer's money is being properly used to achieve results.

Finally, as you know, Representative Gary Miller and I recently wrote to you urging the monetization of the $8,000 first-time- homebuyer tax credit subsidy currently available for FHA mortgages. There seemed to be some progress on the issue. However, there has not been a final rule, to my knowledge. And it is my hope we can continue to work together on this issue.

While I know we'll not have time to discuss all of these issues, I trust that Chairman Frank is planning another meeting in the near future to give members of this committee to fully discuss the challenges ahead for the department.

Thank you, again, for being here and for your service, and I look forward to working with you in your capacity.

REP. FRANK: (Off mike) -- from California that chaired the housing subcommittee is recognized for four minutes, and a major author of this bill.

REP. MAXINE WATERS (D-CA): Thank you very much, Chairman Frank, for convening today's hearing on the Section 8 Voucher Reform Act.

Last Congress, I introduced the Section 8 Voucher Reform Act. This legislation, which reformed and expanded the Section 8 program, passed the House on a bipartisan vote of 333 to 83.

The Senate failed to take any action on this legislation. However, I hope, as we begin this process again, that we are able to provide a bill to the presidential signature. This legislation has been a long time in coming and is badly needed by the two-million, low-income families that depend upon Section 8 housing.

Though the Section 8 program qualifying low-income families generally pays 30 percent of their income in rent, the Section 8 Voucher covers the difference between that amount and the market rent. Although that explanation is simple, over the years, the Section 8 program has become increasingly complicated for residents and the 2,500 PHAs that administer the program.

For example, in order to determine the amount of rent paid by a Section 8 resident each year, or at anytime, if there is the slightest change in income, the resident must submit various pay stubs, tax forms and other documents to prove their income. This is required even for those living on fixed incomes. PHAs have to process this information in a time-consuming process that is fraught with errors.

In fact, according to HUD, in 2004, over 40 percent of subsidies were erroneously calculated, meaning that residents were charged either too much or not enough rent. The proposed bill would simplify this process by streamlining the rent determination process and requiring the certification of incomes less often.

The proposed bill also addresses the funding formula for the Section 8 program. Several years ago, the Bush administration changed how vouchers were funded, providing a budget-based allocation instead of funding PHAs based on their actual cost. This has resulted in the loss of over 150,000 vouchers.

In addition, the change also put stress on the ability of voucher holders to move, portability. The ability of a person with a voucher to move anywhere in the United States is essential for not only decentralizing poverty, but also allowing voucher families to move closer to jobs, schools and other opportunities. It provides them with the same freedom of movement that people living in non-subsidized housing enjoy.

However, because of the shortfalls generated by the funding formula and the complicated billing process PHAs must endure -- many PHAs began to severely limit the ability of voucher holders to move.

I am pleased that one of the first actions of the Democratic Congress was to correct this funding formula so that it more accurately reflects PHA costs. However, the Section 8 program still has not recovered from the shock caused by the imposition of a budget- based formula. The legislation before us would establish -- a sustainable and equitable formula that would ensure that PHAs have the resources they need in order to continue to provide housing assistance to those with vouchers.

While this bill is comprehensive, the draft we will be discussing today does not include the Moving-to-Work program, which allows about 30 PHAs to waive most of the rules that govern public housing and Section 8.

Although the chairman and I have agreed that there will be a Moving-to-Work component to this bill, I have several concerns about the Moving-to-Work program. First, I'm deeply concerned about the imposition of time limits and work requirements by Moving-to-Work agencies.

For example, six agencies have time limits, and another four have work requirements. The success of these policies is unproven while their impact could be harmful to residents.

Second, I'm aware that there has been a substantial decrease in the number of vouchers issued by Moving-to-Work agencies. According to one estimate, Moving-to- Work agencies have failed to lease up 24,000 vouchers, even when they had the funding for them.

Lastly, while Moving to Work has been in existence since 1996, there has never been a thorough evaluation of the program. In short, we don't know what works or what doesn't work. We don't know what's hurting residents and what could be helping them. We're hearing that many residents are distressed about the policies being implemented by Moving-to-Work agencies and they are frustrated that these policies seem to go unchecked because of the lack of regulation of Moving-to- Work agencies.

So I look forward to hearing from Secretary Donovan's views on these important issues, and I thank you, and I yield back the balance of my time. And, Mr. Chairman, may I just say that I'm pleased that the secretary is here today. He's started his work. He got off to a good start. He's been all over the United States, and, so far, he's doing a good job.

REP. FRANK: The gentleman from California, Mr. Miller, is recognized for two minutes.

REP. GARY G. MILLER (R-CA): Mr. Secretary, welcome, and I think Chairman Frank is wrong. You do look older than 16, no matter what he says. Welcome to have you here and look forward to working with you.

Over the years, we've debated the issue of down payment, the difficulty individuals have with down payments, and the difficulty public housing has, whether it's government or private sector, non- profits that try to provide that and how it's provided to those who need assistance and how we get people out of public housing to home ownership, which is the goal of most individuals, and the concept of being able to accumulate Section 8 Vouchers and use those for down payments.

And Mrs. Capito mentioned that we had sent you a letter talking about being able to use the $8,000 tax credit to short term bridge loans. And then you responded, I think, fairly favorably in your comments. I hope you have time to address your intent -- does the department intend to move forward with this, and if you think so, what's the time frame for the department doing that.

But we are in an unusual transition in this country where a lot of people are losing their homes, many people are out there trying to buy homes for the first time or who've lost a home trying to buy a home, and they might be very credit worthy, and we look to those who are credit worthy and say how can we assist those individuals.

And I think we've done certain things by limiting down-payment- assistance programs, whether -- funded or other options we might have available to us. We've, I think, in some cases made it more difficult for people who really could make the payment if they can get in the house. And I hope, in the future, you think about options that are available to us on that and options about including the private sector.

I mean, it's good to have the government involved, but how do you involve the private sector in dealing with a problem that deals with the private sector, those who need homes? So I hope you take a broad bush and look at this and say what options are available to us? How can we get the biggest bang for the buck? And that biggest bang would be -- including HUD's efforts, but the private-sector funds at the same time.

So I'm looking forward to your testimony today, and I'm looking forward to having an opportunity to ask you questions. And you do look older than 16. I don't care what he says. Welcome.

SEC. DONOVAN: Thank you.

REP. WATERS: Thank you very much. Mr. Green.

REP. GENE GREEN (D-TX): Thank you, Madam Chair.

Madam Chair and Chairman Frank, there are times when indicating that you'd like to associate yourself with the remarks of another is not enough, and on such occasions persons such as the Honorable Emanuel Cleaver, who's seated next to me, and I, we would probably say amen.

And as to the chair's comments, Chairman Frank's comments, I'd like to simply say amen. And as to Chairwoman Waters, her comments, I'd like to say a woman, because I am greatly appreciative that she has given us a clear sense of vision and has been very helpful, as you know, Secretary Donovan, with a number of issues.

We are appreciative that you were able to come to Houston, Texas, and visit the 9th Congressional District that I happen to represent. You were at the DEHAP center there. And Congresswoman Waters was very much instrumental in helping us to facilitate that visit. So I thank you, and I thank her

And I'm most appreciative for the fast start, the way you really hit the ground -- Actually, you didn't hit the ground running. You hit the ground flying, because you were trying to traverse the entirety of the country. And it seems to me that you've done a stellar job. So I thank you for what you've done thus far and look forward to working with you.

And, Madam Chair, I will give some time back to you. I yield back the balance of my time.

REP. WATERS: We don't have any other opening statements on this side. Mr. Cleaver.

REP. CLEAVER (D-MO): Thank you, Madam Chair, and thank you for this hearing. Thank you, Mr. Secretary, for being here.

I think the Section 8 Voucher Reform Act is extremely important, and I am finally excited about the response that this committee is getting to the inconsistencies in the Section 8 Voucher program. We've had problems that are now legend over the past few years. This program impacts millions of people.

And, Mr. Secretary, I lived in public housing, and I can remember my mother, father, three sisters and me living in a two-room apartment, sharing the bathroom with another family living in a two- room apartment as we waited and prayed -- I don't mean the kind of pray that they talk about on TV, like I'm praying for you. I mean, prayed -- that someone would come off the list, so that we could move into a public-housing unit.

My father worked three jobs, and I guess sometimes I get offended in this committee when I hear people put down people who live in public housing and realize that my family lived in public housing with my father working three jobs and my mother going to college and sending four children through college.

So I do come with -- and I try to keep myself calm no matter what I hear, but we do have a problem. Kansas City, Missouri; Independence, Missouri; Lee's Summit, the three largest cities in my district, we have suffered enormously, particularly when the administration zeroed out, in some instances, in others, just severely under funded, the housing programs. And so we are suffering from a wave of foreclosures, like everyone else.

But if you look at what's happening with the people who are in public housing or looking for Section 8 housing, some of them who had made it out of public housing, like our family eventually did, and then they were lured into some kind of subprime loan, and, now -- this is not talked about enough. Now, they find themselves -- after going into their first home with joy and pride, they find themselves now out again. And instead of looking for another home, they can't, because their credit has been ruined. And so they find themselves now standing in line again for a Section 8 Voucher.

And so, Mr. Secretary, I'm pleased that you are here. I think this is a very serious problem I take very seriously and personally, and I know of your history and know that you take it very seriously. So I'm excited about what's going on, and I'm so pleased that our chair has pushed this initiative. Thank you, and I yield back the balance of my time.

REP. WATERS: Thank you very much. There are no more opening statements, and, at this time, I would like to call upon our witness today, our only witness, the Honorable Shaun Donovan, Secretary, U.S. Department of Housing and Urban Development. Welcome, Mr. Secretary. We're delighted that you're here, and we're pleased that you were able to make it on this day, your first hearing before this committee. Thank you.

SEC. DONOVAN: Thank you, Madam Chair. Thank you to Chairman Frank, as well as to Ranking Member Capito, for a warm welcome, and to all the members of the committee for having me here today. And I'm very, very pleased to be here to testify on the draft of the Section 8 Voucher Reform Act, very, very important legislation, from my perspective.

Between the Housing Choice Voucher program and public housing, HUD helps provide affordable housing to over 3.2 million very-low- income families. This legislation would be a key step in improving that assistance.

I agree that the Housing Choice Voucher program needs to be reformed to specifically provide a predictable and improved funding formula for the rental voucher program, to reduce administrative burdens on public housing authorities and Section 8 landlords, and provide protections to residents.

The following are aspects of SEVRA that improve the current program, and I look forward to working with the committee to reform the program.

First and foremost, SEVRA largely establishes a predictable, transparent voucher formula that will encourage PHAs to increase the utilization of funding. As you are well aware, beginning in 2003, Congress began to impose different renewal calculation formulas each year through the appropriations acts in a bid to arrest the growth in cost to renew Section 8 Voucher funding. These efforts did more than just arrest growth, but contributed to a slide in funding utilization, beginning in 2004.

While funding utilization has shown modest improvements in recent years, ensuring that renewal in 2010 will be sufficient to renew both incremental vouchers and the number of families that PHAs were actually assisting at the end of 2008 is a key component to not only stabilizing and continued improvement in voucher leasing, as well as in utilization rates. The formula contained in this draft legislation substantially achieves these objectives.

SEVRA also provides HUD with the authority to reallocate excess funding among PHAs. This provision is long overdue. It would reward the PHAs that are high performers and will serve additional families by reallocating available budget authority to those PHAs that will put the funding to use.

The formula also would allow HUD to make adjustment to the formula based on changes in voucher utilization rates and voucher costs related to natural and other major disasters. This, in turn, would give PHAs much needed flexibility to accommodate those situations where PHAs must adjust to situations out of their control.

I also applaud the draft bill's effort to reduce many burdensome requirements on PHAs and landlords while improving access to affordable housing for tenants. For example, the bill would only require biennial, instead of annual, inspections. This would allow PHAs to concentrate their inspection resources on the more marginal and higher-risk units, but does not prevent them to perform annual inspections should they choose.

The bill would also permit PHAs to make assistance payments to landlords while the owner makes minor repairs in cases where the rental home failed the initial inspection for only non life- threatening conditions. This change would expand potential housing opportunities for families and would be particularly helpful to families in low-vacancy markets.

The draft legislation also proposes to reform the current income and rent calculation system. This is a good thing because these systems are overly complex and administratively burdensome. SEVRA would represent an improvement over the current system. The draft bill would allow PHAs to defer the income re-examination of families with fixed incomes for up to three years, while imposing a simple asset cap for eligibility in lieu of the current complicated and burdensome computation of returns on assets from income.

Additionally, the earned income disregard provision will provide a positive incentive to reward working families and encourage self- sufficiency efforts on behalf of families. We look forward to working with the Committee to further streamline rent structures.

Another item of interest is the administrative fee provisions. Administrative fees are a vital component of the Housing Choice Voucher program. These funds provide PHAs with the resources necessary to administer the program. Approving units, evaluating tenant eligibility and reviewing applications are personnel-intensive processes for PHAs. These fees are necessary to maintain an effective level of service delivery and ensure that right benefits go to the right people.

The draft provisions would provide HUD the flexibility to utilize either a per unit fee structure of the 2003 rates inflated annually or a HUD regulation that accounts for the costs of administering the Housing Choice Voucher program and could include performance incentives. In fact, we have initiated a research study on administrative fees related to the Housing Choice Voucher program.

Eventually, this study will help determine the distribution of administrative fees based on the number of families assisted by a PHA. The provisions in this draft bill will not only fully fund administration of the Housing Choice Voucher program in the near term, but allow us to develop a more accurate distribution formula in the future.

Finally, I'd like to take a moment to discuss the Moving-to-Work program. I understand that the committee's approach to MTW or Moving to Work is still under discussion, and, thus, this draft does not yet include provisions for the program. I believe that all the other provisions of this draft, however, are testament to the need for flexibility and innovation that MTW has provided us.

And that innovation cannot be confirmed or replicated, however, without rigorous research and study, such as we propose as part of the HUD Transformation Initiative that is found in our 2010 budget proposal. And, of course, tenant protections that ensure families are benefited, and not undermined, by innovation.

For all of these reasons, I am optimistic about the efforts to reform the Housing Choice Voucher program. I have long worked for passage of many of these provisions in the bill. And I am grateful to you for this opportunity to continue that work and look forward to taking advantage of your leadership in this regard. Thank you.

REP. WATERS: Thank you very much. I will now recognize myself for five minutes. Secretary Donovan, last week, I was visited by a person who had received a voucher from the Atlantic City Housing Authority. While he was out looking for a unit to rent with that voucher, the housing authority cancelled his voucher, along with the vouchers of 150 other searchers. This person is now homeless and has no housing resources available to him.

I don't know if you've heard about this case up in Atlantic City. Did you find out, if you've heard about it, why the housing authority cancelled his voucher? Is this a funding issue, an administrative issue? And what is HUD going to do to make sure that that person, and that others who have their vouchers pulled back, will receive housing assistance? What legislation, if any, is needed to -- tenants in this regard?

SEC. DONOVAN: Thank you, Chairwoman, for the question. First of all, for the specifics of this case, we have begun investigating it. Thus far, what I would say is that what we've found shows us that there were significant administrative issues in the oversight of the program in Atlantic City, and that we will come back to you as quickly as we possibly can to give you a full report on what we have found there.

More broadly, what I would say, though, is that there is the risk of a similar outcome for many families around the country for funding reasons, and specifically as a result of the inconsistency and the changes in the Section 8 Voucher formula that we've seen over the past years.

In my prior role in New York, I oversaw the fourth largest voucher program in the country, and so I know very directly the experience of constantly changing rules and what that can mean for the ineffective management of the program, and, ultimately, to the risk that families would not be able to use their vouchers should there need to be a rapid change in the number of families that can be served based on the funding formula.

So I believe many of the provisions in this bill, whether it be the stability of the funding system going forward, the two-percent reserve allowance that can be used to give some more flexibility to housing authorities to better plan and manage the use of their program, all of those aspects of this bill can be very helpful in avoiding this kind of situation from happening more broadly.

REP. WATERS: Thank you very much. There is a section of Los Angeles County where the Section 8 residents are constantly singled out by law enforcement. As a matter of fact, when calls are made to the police, for example, when they come out, they ask people if they are on Section 8. In an attempt to try and get the Section 8 tenants out of this little city, they harass them.

Is there anything in HUD that deals with representing citizens who are being discriminated against, who are being put upon, who are being harassed by local authorities because they'd rather not have them in their cities? Do you know of anything that's available to these citizens or should they try and go through the regular legal processes in order to try and receive some support?

SEC. DONOVAN: One of the most important functions of HUD is to enforce the fair-housing laws. And one of the things I'm proudest of in our budget proposal this year is that we are proposing a substantial increase in funding for our enforcement of fair housing. So I believe we should make sure that there is a partnership established.

We have local fair-housing partners around the country, including across California, and I think it's important that we ensure that those residents know the resources that are available to them, legal protections that are available to them, should it be a case of discrimination against them, and that we would be happy to follow up with you about that issue.

REP. WATERS: Thank you very much. It's been going on for some time, and I'm thinking about holding a hearing in that area in order to go ahead and start to address these problems. But I thank you very much. And, with that, Ms. Capito.

REP. CAPITO: Thank you. Mr. Secretary, I'd like to ask a couple of questions that I alluded to in my opening statement. First of all, let's talk about just in general the funding for the Section 8 program taking up a really large part of HUD's annual budget, going from 42 percent in 1998 to as much as 62 percent in 2005. There's an expansion in the new budget of 2010. What is your opinion on this or how are you feeling about the trend and what do you see for the future of this and other important programs?

SEC. DONOVAN: A couple of comments I would like to make on that, because, obviously, the cost to this program has been increasing and I think there are a number of elements to that that are important.

First of all, I think this bill can contribute to helping to control the cost of administering and overseeing this program. One of the problems that we've seen with the program is the complexity, whether it's in the -- calculations or in a range of other areas, I believe this bill can contribute to significant cost savings in the oversight administration of the program.

One of the other things that has been contributing significantly to the increasing costs of the voucher program, much of that is driven by replacement vouchers that replace either assisted-housing units that opt out or leave the program, as well as public-housing units that leave the program.

And, in many cases, those vouchers can be more expensive than the funding that was required for the original public housing or assisted housing. So I think preservation efforts are quite important in terms of investing in existing public housing that is an important resource and being able to limit the growth of vouchers as a replacement for other housing that should be preserved.

Finally, however, I would say that I think we should and we will continue, as you are attempting to do in this bill, to control the costs of the program to make the program more efficient. But I think particularly at a moment where renters, in particular, have been hard hit by the foreclosure crisis, where unemployment and other issues are effecting not only owners, but renters, one of the little-known facts about the foreclosure crisis is that 40 percent of the victims of foreclosures that are evicted are renters.

And I'm very happy that the president signed a bill yesterday that would protect those renters in the case of foreclosures. I believe that now is a good time for us to be investing in the Section 8 Voucher program, because it does provide a critical protection to families that are most at risk in these economic times.

REP. CAPITO: I appreciate that. Would it be a mistake to say that once a voucher goes out the door from HUD there's no pulling back on the numbers? I mean, I think that's pretty much a standard thought I would have.

So I guess my follow-up question would be, as you're achieving cost savings through this bill and other methods -- and I applaud that. I think that's great -- I would assume that you're going to expand the playing field on the number of vouchers and the number of people that are going to be able to have a voucher. Would that be a correct assumption?

MR. DONOVAN: In the end, obviously, it is up to Congress to decide the funding level for the program, which drives the number of vouchers that are used. We did actually see some years where the number of vouchers available shrunk over the past few years, largely as a result of the uncertainty in the funding formula.

So, ultimately, we've proposed a budget where we would want to see the number of vouchers grow, because we think that's appropriate at this time. We have long waiting lists and far fewer people able to use vouchers than are eligible. But, ultimately, the decision rests with Congress about the number of vouchers to fund. And the program can grow or, frankly, shrink, as it has, depending on that funding.

REP. CAPITO: Right. And I'm aware of the lists. I mean, that exists in my state.

This is on a different topic, one that Congressman Miller and I are concerned about, and that's the $8,000 tax credit, whether it gets monetized for first-time homebuyers with FHA-approved mortgages. Can you expand on that? I know you made some statements last week or the week before. Could you give us an update on that, please?

SEC. DONOVAN: Just generally I would say that the administration has been supportive of that. We were supportive of it when it was included in the recovery bill. Secretary Geithner recently discussed the fact that already more than $3 billion has been used to support that tax credit.

I am supportive of making sure that FHA can be part of helping families be able to become homeowners, and, as you've rightly said, to be able to support the recovery of the housing market more broadly. We have some technical details that we have been working out, and, frankly, we want to make sure that our implementation of this is consistent with HERA and other provisions.

We also want to make sure, frankly, that this is not something that is abused. We want to make sure that we're part of the solution with FHA and that we're bringing folks who are going to use the tax credits who might be at risk of some of the scams and other people who are trying to take advantage of the credit. We want to bring them into FHA and make sure that we do it in a way that protects against fraud and abuse. And so we're finalizing those details and I would expect to have something released very shortly.

REP. CAPITO: Very shortly. Thank you. I think that's it for me. Thanks.

REP. FRANK: Mr. Secretary, first, let me get to the question of -- Section 8 has been an increasing part of the budget, because there are two aspects of that. One is that Section 8 has gone up. The other is everything else has gone down. I would be more impressed with an absolute measure, because we have had a period when much of the rest of the budget was reduced.

And, in part, Section 8 went up because there was a policy followed which -- the people in power who believed it, to shift units from the inventory of affordable units to market units occupied by a Section 8 tenant with an enhanced voucher.

So when you let the unit go technically out of the affordable inventory and you then fill it with a Section 8 tenant with an enhanced voucher, two things happen. The Section 8 budget goes up and the other part of the budget goes down. So, yes, I'd like to see the Section 8 percentage be reduced, partly by restoring funding to things like public housing and other efforts to build units that we have lost.

Now, I have one specific issue that concerns me. The gentleman from California has raised it as well, Mr. Miller, and that's the Catch-22 we have with condominium financing. Now, we have it at the FHA. You have it even more at Fannie Mae and Freddie Mac. We have policies that say you can't get financing for a unit in a condominium unless the building is 70-percent already owner-occupied financing, but, then, because we have that restriction, you can't get them. So we never get there.

And the notion that qualified buyers who can meet every other test are turned down for financing I think is unfair to the buyer and is hurting us with the condominium piece. And I had thought that was going to get reduced to 50 percent. And I know Fannie Mae and Freddie Mac are not under your jurisdiction, but I do know that they respect -- your housing expertise. I would strongly urge you to look at that policy because I think it is a Catch-22, and it is resulting in difficulty in getting that kind of financing.

I was also told, in particular, that there was some problem with the eligibility of three-decker units, which as you know is a very important form of housing in the New England area. So we're going to ask you to look at that.

And then the last point, just one question. I assume we're in agreement that you presided very ably in a city where there was a good deal of affordable housing subsidized by the federal government, by the state government and even, I think somewhat uniquely, in New York with city funds.

I believe that preserving that existing stock is the best use we can of any given dollars, partly because by preserving existing affordable units, you get away from the whole question of whether you build it and people who don't like you living there -- The argument that if you have affordable housing built in your neighborhood that ruins the neighborhood is somewhat undercut by the fact that our biggest problem with that kind of housing now is that the people who used to object to it -- at least the same kind of people -- now want to move into it and bid the poor people out.

Now, I just want to know, in the city of Boston, on the corner or Arlington and Tremont Streets, there exists one of the first of the 221(d)(3) projects, the Castle Square Project, which has in the middle of it an elderly-housing, public-housing project. And so this is affordable housing and public housing.

Across Tremont Street is Atelier, where, I think, the monthly fee for concierge services is greater than the rent you pay for the whole shebang across the street. So we have across the street from one of the oldest 221(d)(3) public-housing combines, private residential housing that is as expensive as any, I think, in the country, and, certainly, as in Massachusetts.

The only question would be this -- Much of it was federal. The practice in the past has been to focus on preserving the federally- funded part. But we're not just doing this because of our previous investment. We're doing this to preserve housing units.

Can we be working together so that we expand these programs, so that the role of the federal government is to help preserve that affordable inventory, no matter how it was originally financed, that we work whether it's -- mass housing or any of these others?

And I would hope we could agree that we could do that. As I said, I think dollar for dollar, and in terms of politics of location, preserving existing affordable units. And that's, again, why we got a higher budget for Section 8. The policy previously of the administration and the majority in power from that period was don't preserve the units. Just give the tenant an enhanced voucher until either she dies or moves. I'd like us to get into the preservation of the units and include units no matter how financed. Could you respond?

SEC. DONOVAN: As you rightly say, Mr. Chairman, that is a very, very important resource in certain parts of the country. It's a resource that I know very well from my own experience in New York.

What I would say is a couple of things. First of all, we've got a lot of work to do, I think, at HUD. And you and Chairman Rangel have already begun down that path to make all of our programs work more effectively together.

One of the big barriers to this is that we've got too many different sets of rules even within the federal programs, much less the flexibility to allow the federal programs to work effectively with state and local programs. And I think this also goes to Ranking Member Capito's point about the cost of our programs.

Frankly, we're spending too much on administration and legal fees and other parts of the programs because of the complexity and the lack of their ability to work together. So one of my priorities is to try to simplify -- as you're proposing to do here, with the Section 8 Voucher program -- to simplify more broadly our programs, so that they can work more effectively and more flexibly together.

REP. FRANK: Apologize. I thought the gentleman from California had already asked his questions.

REP. MILLER: No, are you ignoring me again, Mr. Chairman.

REP. FRANK: Not successfully, no.

REP. MILLER: (Laughs.) Thank you. It's good to have you here. When I was a younger man, I was a builder, contractor, developer -- When I was in my 20s, I did some HUD work, and I just have a strong feeling towards doing what you can to help people gain the opportunity of home ownership. And I understand that not everybody is a ready for home ownership all the time, but you try to do what you can to assist people in that direction.

And a good friend of mine, former Secretary Alfonso Jackson, who I really respect, he came to me the first term of President Bush and he asked me to support the American Dream Down Payment Initiative. And in his argument for why HUD should get involved in this, and the government, he showed me how the seller-funded down-payment-assistance program was working in the private sector.

And he said we'll pattern it after that and we can get double the bang for the buck. We can not only get the benefit from the private- sector dollars, we can have the government involved in a program.

So I supported it and got behind it and voted for it, and the next thing I knew, within a few years, the government was trying to put the seller-funded non-profit assistance programs out of business, which meant only HUD could do the work. And I know there was litigation over that situation.

I had asked HUD if there's a high propensity of foreclosure in the seller-funded versus the government funded, could you please send me the documents to demonstrate that, and nobody ever could. I'm not impugning anybody in saying that, but I think a judge in a private lawsuit asked the same question of HUD and HUD never could either. And I mean no disrespect for HUD, but I wanted to see the data because it didn't make sense to me why the government could do something if we use the same appraisal, pro forma, we use the same underwriting standards that the private sector couldn't do.

And a group of us here have got together some numerous occasions and tried to introduce legislation to rectify what we thought was an injustice to a lot of the private sector to continue to work in that arena and yet provide good underwriting standards that never put the HUD budget at risk through guaranteeing FHA loans.

And we introduced H.R. 600, which we believed would do that. It's the FHA Seller-Funded Down-Payment Reform Act. And we tried to make sure in drafting the bill that it was budget neutral, so that we did not put the government at risk of any loss. And it basically helps credit-worthy homeowners, ready families to become homeowners. Have you taken a position on that?

SEC. DONOVAN: I have not taken a position on that bill. Make a couple of comments on that, Congressman. First of all, I do believe that down-payment assistance can be an effective tool if done right.

From my own experience as a local housing official, we created or preserved 17,000 units of home ownership for low- and moderate-income people. And when I left my job, we had only five foreclosures among those 17,000. We used down-payment assistance fairly widely.

But I think one of the key things among the ways that I think that was implemented safely was that there was real equity created for those homeowners by the down-payment assistance.

REP. MILLER: That's making sure the appraisal is done properly and using real --

SEC. DONOVAN: That, but also the down payment effectively becomes equity for that homeowner. So it's not just that the appraisal is done correctly, but that you don't end up with effectively 100 percent or even more of the true value of the house financed.

REP. MILLER: I agree.

SEC. DONOVAN: So and second thing I would say is I'd be very happy to share the facts as we know them with you about the performance of the seller-funded down-payment assistance. From my look at it, at the time when we did the last review of the FHA fund, despite the fact that seller-funded down-payment loans represented only 14 percent of the loans in the portfolio, they represented more than 30 percent of the losses and the foreclosures.

And so, to me, that demonstrates that there is some real danger in the way that program had been implemented. And, at this point, that has been -- you know, last summer, disallowed, that we are not able to offer that. And, frankly, given the performance of those loans, I understand the reason that those practices were ended.

So I want to make clear I think there are safe ways to provide down-payment assistance --

REP. MILLER: And you said, if they're done right. If you could please work with us on your interpretation of if they're done right, so we at least have a criteria we know in which to work, we'd really appreciate that. And I'll let you finish your comments there.

And if you would have a time to have your staff review H.R. 600 to see if you think we're on the right track, and if you think there are some modifications that can be made to that, because I know, as members on both sides of the aisle here, they believe it can be a viable program if it's handled properly and under the proper underwriting criteria. But we'd love to work with you on that and get your opinion as how you would see that program working and how we can do it for the betterment of HUD and for the people who need the assistance. Thank you. I yield back.

MR. FRANK: Gentleman from California, Mr. Baca.

REP. JOE BACA (D-CA): Thank you very much, Mr. Chairman. Thank you very much for being here, Mr. Secretary. It seems to me that one of the biggest problems with the Section 8 program is the transferring of the vouchers.

Because of the administrative headaches and costs of transferring a voucher from one jurisdiction to another, public-housing agencies often end up limiting the transferability of the voucher, which can prevent a person and their families from pursuing opportunities elsewhere, like good-paying jobs.

What are some of the possible solutions to this problem that you would advocate or like to see explored during this reform process? I know you've mentioned simplified, but what's your definition of simplified?

SEC. DONOVAN: So on this point, I think one of the positive things about the bill -- I didn't mention it in my testimony, but we are supportive of it -- is it gives HUD authority to work out a vastly simplified way to make sure that what we call portability, the ability to take a voucher from one jurisdiction to another, is simplified, and, in fact, encouraged.

There's no question one of the benefits of the voucher program is the ability to take that voucher, even if it means to a different city, a different part of the country. So I would be happy to work with you more on the specifics of how we would think about doing it. The bill would give us the ability to set rules around that.

Much of this has to do with getting rid of some of the barriers to doing that right now, the way that the funding is provided, and there are lots of other details that make it quite complex to do it at this point. We'd be happy to share more information with you.

REP. BACA: Thank you. We look forward to working with you to make sure we keep more people in their homes or opportunity to stay in a home. Another question I have do you think that the changes to the inspection process would do enough to relieve landlords' reluctance to participate in vouchers program, which is question number one. And, number two, can you think of any other incentives that would be used to increase participation and put more people in housing instead of being homeless?

SEC. DONOVAN: I think the provision you talked about and many other provisions in the bill will help to encourage landlord participation in the program. There's no question in my mind that this will go a long way to do that.

I do think there are additional steps that we could take, and I look forward to working with the committee on trying to implement a number of those going forward.

REP. BACA: We look forward to hearing about those additional steps, so this way we can go forward. Until we hear from them, then it's hard to tell our constituents what those steps are from what they need to do. So I'd look forward to hearing that.

Third is last year in San Bernardino County -- and that's the area that I represent in California -- over 8,000 Section 8 Vouchers were issued. However, it is my understanding that these vouchers were issued to people who had been previously enrolled in the program. That means previously enrolled in the program.

A new applicant may, in some cases, have to wait years to get relief for their local public housing authority. Surely, there must be something that can be done to improve the situation, so they don't have to wait that long. Unfortunately, because of the tough economic times, more and more people are experiencing the harsh reality of not being able to make their rent or mortgage payment. This program, as it stands now, seems to be silent on that issue. What steps can be taken to improve access to people that really need the relief?

SEC. DONOVAN: I'm not familiar with the specific list of folks that you're talking about who might have previously been eligible. I'd love to get more information from you about that.

I do think that one of the challenges that we've seen in many parts of the country is that the current funding formula restricts the ability for many housing authorities that are strong performing housing authorities that have been effective to use their reserves because they're already using 100 percent of the number of units that they're authorized. So, currently, we have both a cap on units as well as on budget. Massachusetts is one of those agencies and there are others around the country as well.

We are proposing in our budget, just as the funding formula in the SEVRA bill would do, to lift the unit caps to allow more flexibility where there are adequate budget resources to be able to increase the number of people that are served. So that's one way that I think this bill could help to do that. And I'd love to get more information about --

REP. BACA: Thank you, yes, because a majority of the priorities are given to those who are already receiving it versus those that need to receive assistance. So we need to have a balance between those that are on that that want to continue to have the Voucher Eight, but those also that need to get Voucher Eight as well. So I think if we can look for a balance, we look forward to working with you. Again, thank you very much.

SEC. DONOVAN: Thank you.

MR. FRANK: -- Mr. Secretary, I want to reemphasize the point, and I hadn't fully focused on it, but if you have a cap both on units and on reserves, to some extent, the benefit an authority gets from planning cheaper rents is vitiated, because if it saves money on the rents, but uses up all its units, it doesn't get to use that. Now, in an ideal world, that wouldn't be a factor, but I don't live there. So it does seem to me what you say that's very important to make it a cap on funds, not on units, which further incentivizes people to find cheaper units and then get some benefits.

SEC. DONOVAN: It also, I would say, Mr. Chairman, incentivizes housing authorities to be more efficient. Right now, any of the benefits of saved costs won't allow them to serve --

REP. FRANK: People.

SEC. DONOVAN: There aren't the incentives that there should be for cost savings in the program. And I think that, again, goes to the point of this will help to increase the efficiency and the cost effectiveness of the program.

REP. FRANK: Thank you. The gentleman from New Jersey.

REP. SCOTT GARRETT (R-NJ): Thank you very much, Mr. Chairman. Good afternoon to you, Mr. Secretary.

SEC. DONOVAN: Good afternoon.

REP. GARRETT: I must say cabinet officers are looking younger and younger or maybe -- (laughter) --

SEC. DONOVAN: You didn't see me before the first hundred days.

REP. GARRETT: The first hundred days. Touche. Regarding the $1 billion in the affordable housing trust fund, that money was originally supposed to come from profits in GSEs. You remember profits in GSEs. Since that's no longer the case, how will you be requesting the money, since we can no longer rely on profits from GSEs?

SEC. DONOVAN: We are proposing a $1-billion injection for the national housing trust fund --

REP. GARRETT: Yes.

SEC. DONOVAN: -- in our budget. And we are already discussing and working with the appropriations committee to find the necessary offsets for that in the budget. So we haven't determined precisely that, where that would come from.

REP. GARRETT: So it's a work in progress and you will have an answer to that by some time in the autumn?

SEC. DONOVAN: Well, obviously, it would have to be resolved as part of the budget discussions leading up to the passage of a fiscal year 2010 budget, hopefully by the beginning of the fiscal year.

REP. GARRETT: Thank you for that answer.

On another issue on reverse mortgage, the reverse mortgage program, as I understand it, the budget contains roughly $800 million in credit subsidy for that. Is the change in home-price assumptions the only reason the administration feels the need to ask for credit subsidy for that program?

SEC. DONOVAN: One point for context that I would make, overall, in the FHA programs, and to focus for a moment on the FHA forward program, the main single-family program that's used in the FHA single- family fund, we expect the loans originated during fiscal year 2010 to produce a surplus of $1.7 billion. So, overall, I want to be clear that FHA continues to make money for the taxpayer on net when you include all the programs together.

With the HECM Program, the reverse-mortgage program, it is the sensitivity to house prices that is driving that request. We felt that given the way that the reverse-mortgage program operates, and it's far more greater sensitivity to house prices, that using a relatively conservative projection over the long term of where house prices would go, that this was a reasonable estimate of what the costs would be.

We further felt that, given the economic climate that seniors are facing today, that it would be better to continue the program, particularly in light of the overall profitability of FHA, at the current premiums, rather than raising premiums for seniors as a proposal and having a cost-neutral program for 2010.

REP. GARRETT: Thank you very much. I yield back the balance of my time, Mr. Chairman.

REP. FRANK: Thank you. The gentlewoman from New York.

REP. NYDIA VELAZQUEZ (D-NY): Thank you, Mr. Chairman. Secretary Donovan.

SEC. DONOVAN: Good to see you.

REP. VELAZQUEZ: New Yorkers are very proud of your service, and we know that you're going to bring a strong leadership for this agency that is in such a need. I would like to ask you, last Congress, the House passed a Section 8 reform bill that included significant changes to the Moving-to-Work Program. Although this draft that we are considering doesn't include enhancement to MTW, can you explain why a program like that will be good for PHAs and residents?

SEC. DONOVAN: Well, as I alluded to in my testimony, with the right kind of measurement and analysis that would demonstrate where the innovations are actually working in MTW, how they're working, so that those could be replicated, in addition, with tenant protections that would ensure families are served at an equal level and that particularly the lowest-income families continue to be served by the voucher program, I do believe that Moving to Work can be an effective tool for creating more flexibility and innovation for strong housing authorities.

And so, again, I do think it can be, just as this broader bill itself, an important tool for innovation, with the right kinds of safeguards. And those, I would just say, Congresswoman, are very much like -- as you know, we had a lengthy discussion with your staff, with many advocates in New York and others about the best way for New York to implement the Moving to Work or the TIP Program that would be known with the changes. I believe that that is the kind of model that we could think about more broadly for the country.

REP. VELAZQUEZ: So, in terms of timing, do you suggest that we delay any expansion of MTW until appropriate evaluations are conducted or should we go ahead and authorize an expansion that includes a strong evaluation component for participating PHAs?

SEC. DONOVAN: Obviously, that's, I know, a decision that the Congress has been thinking about and ultimately will be part of the resolution. I do believe that there is some value in expanding the numbers somewhat. I don't have any exact estimate of what we would think that would be at this point, but, again, that has to come with the kind of protections and the kind of evaluation that we've talked about.

REP. VELAZQUEZ: Okay. And in terms of the appropriation for 150,000 incremental vouchers for the period of 2010 through 2014, given the economic downturn and the fact that homelessness is on the rise, is 150,000 new vouchers sufficient?

MORE I guess you're going to say that that is up to Congress to say, to decide. But let me ask you this other question. Could you describe how we should best allocate this increment of vouchers?

SEC. DONOVAN: So first of all, I do believe, and the president believes very strongly that providing funding for more vouchers is important. It's the reason we proposed an equivalent of a $1.8 billion increase in the voucher program in our 2010 budget proposal.

I believe that -- and this is really the direction that our budget went, that given the uncertainty of the formula, funding over the last two years, given the way that many housing authorities have now eaten into their reserves significantly, the kind of situations that we talked about earlier in Atlantic City, which are the result not of administrative issues as they are there, but of an inability to access reserves and other problems. I believe a general expansion of the funding for existing vouchers makes the most sense, and that's the way we've proposed it in our budget.

And that the kind of funding formula that's in this bill supports exactly the right kind of incentives for housing authorities to fully utilize their vouchers. And if they don't, to be able to reallocate that funding to places that will use them.

REP. VELAZQUEZ: Thank you.

SEC. DONOVAN: Thank you.

REP. FRANK: Ms. Biggert, you're recognized, please.

REP. JUDY BIGGERT (R-IL): Thank you, Mr. Chairman, and thank you for being here Mr. Secretary. I've got a couple of questions, so I want to get through them.

And just following up on the moving to work, I know that there are housing authorities in my district that are very interested in getting into that program, and I think it's a very useful program. I also wanted to ask you about the Family Self-Sufficiency Program that was put in by Congress just not to long ago. Is that going to be something that is really going to help to move people out of the public housing and into finding homes on their own?

SEC. DONOVAN: From my own experience, Family Self-Sufficiency is a very important effort. And in fact, we supported in New York a significant expansion of Family Self-Sufficiency with city dollars in addition to federal funding. I think one of the issues there, like with MTW, is that despite the success that I saw with my own eyes that, I think, antidotally we've seen in many parts of the country, we haven't had comprehensive research about the program to show what works best and what doesn't. So I certainly am excited about seeing Family Self-Sufficiency continue and expand, but also, I think we need to do some rigorous research about it to make sure that the best models are being replicated in other places.

REP. BIGGERT: Thank you. And do you see an expansion of the Moving to Work Program?

SEC. DONOVAN: Again, I do believe that there -- it's warranted that there be some expansion. I can't give you an exact number. But again, I do believe it has to be paired with the right kind of evaluation, and the right kind of tenant protection.

REP. BIGGERT: Okay. And this is a question that comes up I think every time that the secretary of HUD is here, and that is the technology, the outdated technology to do all of these programs. Are you going to move forward? Is there budget for improving the technology for information?

SEC. DONOVAN: I couldn't agree more that this is an issue. Thankfully, Congress appropriated in the 2009 budget $4 million to do a comprehensive technology study for the department. That is now underway. And in addition, in the 2010 budget, we are proposing a -- we are calling it a transformation initiative that would give us significantly increased and more flexible funding to allow us to provide greater technology and greater integration of systems for the department. So I couldn't agree more that this is a serious issue.

REP. BIGGERT: Okay. Then RESPA. If the Federal Reserve is moving forward with their new disclosure rules under the Truth in Lending Act -- and they won't be ready for probably another year. There was a proposal to delay RESPA until the two bodies, you and the Fed could work together. Do you foresee changing any parts of RESPA, or do you see that it might be to wait and see and work together, or how is that going to resolve itself when they're both working on the same thing?

SEC. DONOVAN: I would say there's no question that President Obama and I, and more broadly, the administration are committed to really taking a hard look at our regulatory structure overall. Chairman Frank, many others have been engaged already in this discussion.

And as part of that, Chairman Bernanke and I have already begun discussions. Our staffs have started working together on ensuring that while we are strengthening our regulatory system, we are also simplifying it. I think we can both benefit consumers while also making a more efficient and effective market for industry at the same time on many issues, and I think this is one of them. So we are committed to that, creating a joint process, and we have begun work on that.

What I would also say, and I announced this just recently, is that I don't believe, given some of the benefits of the recent RESPA rule, that we should delay implementation of that pending those discussions. I don't think it's an either/or. And therefore, we have withdrawn one portion of the RESPA rule that has to do with something called required use because there was some unclear language there. We are redrafting that and we will re-release it. But pending that, we are moving forward with the rest of the rule towards implementation, while at the same time ensuring for the long term that we harmonize RESPA and FELA (ph) more effectively.

REP. BIGGERT: Thank you. And then just one more quick question, and that's on the homeless children and -- that was discussed at bill signing yesterday as part of inclusion in one of those bills. Are you going to be working with Secretary Duncan then on -- to make sure that no child falls through the cracks with the housing, and they will get the help that they need?

SEC. DONOVAN: Absolutely. And in fact, we have already begun work. There was important funding in the recovery bill as well to help us better track and make sure exactly, as you say, that homeless children don't fall through the cracks.

Also, we've made a lot of progress in the last few years in the country around chronic homelessness, but we've seen an increase in family homelessness in many places. There was $1.5 billion in the recovery bill that we're implementing that can be used in a new way in our programs that can prevent homelessness, rather than just fighting it once it's occurred. And so that prevention and rapid re-housing effort is already underway.

We've released a notice on it, and we're working with communities to get that funding out as quickly as possible. Obviously, helping those families stay housed will help to prevent children from becoming homeless in the first place.

REP. BIGGERT: Thank you. This has been a very important issue for me, so I'd love to work with you, if possible.

SEC. DONOVAN: I'd love to work with you. Thank you.

REP. BIGGERT: Thank you.

REP. FRANK: Thank you. The chair next recognizes Mr. Green.

REP. GREEN: Thank you, Mr. Chairman. Thank you again, Mr. Secretary.

Mr. Secretary, not withstanding high unemployment, not withstanding the high rate of foreclosures, we still have persons who can afford to make a monthly mortgage payment, but who cannot afford a down payment. And Mr. Miller, Representative Miller on the committee mentioned this earlier. The seller-assisted down payment program may be something that can not only help people, but also help the economy in this recovery that we are trying to achieve.

I was very pleased to hear you say that you have some degree of flexibility, and that you want to see real equity in the homes that are purchased with these seller-assisted payments, down payments. I think that's fair. I also would like for you to know that we have looked at this and looked at risk-based pricing as a means of making sure that the premiums paid will cover the cost of the program. I think that this is a means by which we can have a program that's totally self-sufficient, that doesn't require government intervention, other than to monitor the program, and will cause a good number of persons to move into homes who are now paying rent that may very well be higher than the mortgage payment that they will ultimately have after having received some assistance from the seller.

Now, the empirical evidence that I've had an opportunity to peruse seems to indicate that the difference between the down payment being paid by the buyer versus a relative of the buyer, which is still in place, or some municipality or some agency of the government, there is a difference, but it's not so vastly different that it would merit our not taking another look at this. So I'm pleased that you've indicated that you're willing to.

And what I'd like to do is have an opportunity to visit with you about this at some point in the near future. I' know you're really busy, but if you can make some time for us to visit, maybe we can fashion a program that will be a great benefit to the many persons who truly can afford to make these payments. I don't want to see a program where we put persons in homes that cannot afford them. When they will have the equity that you've made reference to, and also, wherein we will start to impact the economy in a positive way by getting many of these homes that are going to be at some point on the market at reasonable prices. The time to start to buy is probably yesterday or today or tomorrow, but sometime right away, and many persons will be able to move into these. So I'd ask you to give a response, and then I have one other issue that I'll broach.

SEC. DONOVAN: As I said, I'd be happy to review the legislation and to look at it. I do have serious concerns about the evidence that I've looked at that shows that the seller-funded down payment loans were more than twice as likely to default as the average loans in the FHA portfolio. And I think the important difference about traditional down payment assistance, as it's been provided through the home program, as we provided it in my own experience, is that it didn't require repayment, that there was no premium associated with it, and therefore, that I created effectively real equity for the buyer. And so that would certainly be the principle that I would bring to look at it.

REP. GREEN: Thank you. I would gladly work with you around that principle of real equity in the home.

Now, I'd like to move to one additional area, and it has to do with the waiting list that we have. In some places, they actually shut these waiting lists down. They don't continue to allow persons to become a part of a list after a while because, my assumption is that they know that they can never get to some people who are on the list. Has this been your experience?

SEC. DONOVAN: Yes, it has, and I think it's fairly traditional around the country that waiting lists are closed. Partly because if you have families that are on the waiting list for a significant period of time, that information about those families is often outdated or not useful, and requires opening up the waiting list again or reaching back out to them. And so it has been the traditional practice of housing authorities to open and close waiting lists depending on the availability of vouchers.

REP. GREEN: Have you used the waiting list to ascertain the number of people who are actually waiting? Do you do that? I'm not sure how that is used in terms of empirical evidence.

SEC. DONOVAN: I'm not aware of any comprehensive tracking of that. Those numbers are kept individually by the more than 3,100 housing authorities around the country.

I'm not aware that we have those numbers, but I will certainly go back and check and see if we do and provide them to you.

REP. GREEN: And if we are not -- and I'm hurrying because my time is up. If we are not, would that be beneficial to have a means by which we could get that empirical evidence into your office so that you could actually see --

SEC. DONOVAN: Let me talk with the folks in the program about whether we have a way that we could do that and how useful that might be.

REP. GREEN: Thank you very much.

SEC. DONOVAN: Thank you.

REP. GREEN: I look forward to visiting with you.

SEC. DONOVAN: Thank you.

REP. FRANK: The gentleman's time has expired. Thank you.

Mr. Paulsen, you're up, sir.

REP. ERIK PAULSEN (R-MN): Thank you, Mr. Chairman.

Mr. Secretary, there's been a lot of reports in the media about the financial solvency or financial stability, I should say, of the FHA program. Is the FHA program in financial trouble?

SEC. DONOVAN: Generally, what I would say is that like every other loan product in this market, we have seen increases in our delinquency and our losses, and that I do have some concerns, particularly around improving FHA systems, our staffing, our resources and a range of others. And we have begun that process thanks in large part to assistance from Congress and our recent budget.

Having said that, I would make two fundamental points. There are places where I've seen FHA referred to as the next subprime, and I think that this is frankly inflammatory and incorrect because FHA has continued through this entire crisis that we've seen in the mortgage market to offer fixed-rate 30-year financing and safe longer-term adjustable rate products, and had never offered the kind of subprime or exploding fees, option ARMS, the kind of products that got us into trouble in the first place.

And in fact, while our defaults and our delinquencies have increased, they remain one-third of the level in the subprime market. So it is a very different situation than we've seen in the subprime lenders. Also, our loans are concentrated in areas of the country that had seen much less runoff in the market. We do not have heavy concentration in California, in Florida and Arizona, Nevada, those parts of the markets. It's much more in other parts of the country that haven't seen the same kind of runoff and then declines.

And also, with the recent changes to eliminate the seller-funded down payment program, we believe that that will save the FHA, that change alone, roughly $2.5 billion in 2010. And as a result of that, and the other things I've talked about, we expect the FHA, new FHA originations in the single-family program to earn the taxpayer $1.7 billion in the new loans originated in 2010.

So I think overall what that says is we should all be concerned and watching closely, particularly focused on fraud and other issues. The president signed a bill yesterday that's going to significantly increase our powers to stop fraud. But I think overall, the signs are encouraging that FHA can continue to be an active player in the market very safely.

REP. PAULSEN: So Mr. Secretary -- and I don't know the details of the budget request. And so you're saying that the money -- because, you know, Congress has been asked to come back over and over for additional bailouts in many different facets of the financial sector and service area. And so with the FHA area in particular, there's a request, right? And it's not going to necessarily increase premiums to borrowers, but there is a component for the budget. But you're saying there will be a net gain for the taxpayer?

SEC. DONOVAN: That's correct. There's an $800 million request for the reverse mortgage program for seniors, which is really -- operates much more like an annuity than it does as a traditional mortgage product, so it's quite different. But savings to the taxpayer of $1.7 billion for loans we expect to be originated in 2010.

Just one other note I would make, that -- the 2010 budget really focuses on new loans that will be made in 2010. Another important measure is the actuarial review that we do of the FHA fund every year. That will be completed over the summer, and I think that will also be an important measure to help with the fund. Based on our latest projections, we would expect that the fund remains above the minimum 2 percent reserve acquired by Congress, but I think depending on where the housing market goes in the next few months, I do have some concern that we might drop below that.

That does not mean we would need a quote, unquote, "bailout." That simply means that we would reach a level that would heighten our concern about the level of reserves for the FHA fund, and that we may need to make some changes to the fund at that point. So I think encouraging news about the 2010 budget, but we continue to watch in closely, and would be back to Congress with more information this summer.

REP. PAULSEN: Okay. I have no further questions. I yield back my time.

REP. FRANK: Thank you.

Mr. Secretary, I want to -- before I ask you a question, I just wanted to thank and commend subcommittee chairwoman Maxine Waters for her work on housing issues, and for her work specifically on the issues we're talking about today.

Mr. Secretary, thank you for your testimony this afternoon. It seems that this draft bill in improving the Section-8 voucher program makes a lot of sense. But I want to ask you a question about HUD programs more broadly than just the bill here.

Is there sufficient transparency and oversight built into HUD programs to protect against waste, fraud and abuse in your estimation, sir?

SEC. DONOVAN: First of all, I would echo your comments about the chairwoman and the importance --

REP. FRANK: Thank you.

SEC. DONOVAN: -- of her work broadly, and particularly this bill that we're discussing today.

REP. FRANK: Thank you.

SEC. DONOVAN: I believe, and I would particularly focus on the FHA programs, that we do need to do more to strengthen our oversight of HUD's programs, and I am absolutely committed to doing that. And in fact, one important step in that direction was taken yesterday when the president signed a bill that will allow us, in FHA, to take more aggressive action against fraudulent behavior, as well as to increase funding for oversight against fraud.

We've also proposed in our 2010 budget a $37 million initiative to increase our efforts to look at mortgage fraud within our programs, and frankly more broadly across the market through our fair lending efforts. Those will compliment with efforts of the Justice Department, the Treasury Department, the Federal Trade Commission and a number of others who also, through the bill signed yesterday, will get increased resources and powers to go after fraud.

I think the most important element of that is that we have not previously had the authority to go after many of the non-bank institutions that were responsible for a large share of the subprime lending and the defaults. The bill signed yesterday gives us those powers. So I do think we've made an important step in our budget, and in the bill signed yesterday.

REP. FRANK: Well, as chairman of the Subcommittee on Oversight and Investigation, and as a former prosecutor myself before I came to Congress, I really appreciate what you're doing there because I think it's very important.

I think the public has just had it up to here with people that have abused some of our federal programs, and I so appreciate the strong steps you've taken that you talked about right here.

Ms. Jenkins. Thank you, sir. I yield back my time, and you're next Ms. Jenkins.

REP. LYNN JENKINS (R-KS): Thank you, Mr. Chair. And thank you, Mr. Secretary for --

SEC. DONOVAN: Thank you.

REP. JENKINS: -- for joining us today.

As you know, manufactured housing regulated by you provides affordable, non-subsidized homeownership for millions of Americans and consumers, particularly lower and moderate-income families. Back in 2000, Congress passed a Manufactured Housing Improvement Act in order to reform and modernize key aspects of the HUD regulatory programs for manufactured housing. And among those reforms was a provision to require and fund a non-career appointed official to administer the program. We have been advised, though, that this position has not yet been filled. Do you intend to fill the position with a political appointee?

SEC. DONOVAN: I would say, honestly, Congresswoman, that's not a decision that's been made at this point. We are still evaluating our overall funding and staffing levels. As you know, an important part of the last few months has been staffing up, understanding the budget that we have, as well as the number of political slots versus career slots. And so I have not made a decision about that at this point. I would be happy to discuss with you further your interest in that, and we'll make sure when we've made that decision to let you know.

REP. JENKINS: Okay. Any timeline?

SEC. DONOVAN: I don't have a specific timeline at this point. Given your interest, I will certainly pledge to you to get back to you quickly on it.

REP. JENKINS: Okay. Excellent.

Could you also comment on how you view the department's implementation of the Manufactured Housing Improvement Act, and are there any aspects of the legislation that needs to -- need to be improved upon?

SEC. DONOVAN: Well, one of the early issues that I faced when I arrived as secretary is that there were important provisions in Title II that were passed last summer that had not yet been implemented. And in fact, there was concern within the department that we might need an extended rulemaking process to implement those, despite the wishes of Congress to move quickly on that.

We evaluated that, made the decision that we would not go through a full rulemaking process, and that we are finalizing a mortgage E- letter around that that will implement those provisions. So that I think is -- was the most significant concern I had heard and dealt with when I arrived as secretary, and we're moving forward on that.

REP. JENKINS: Okay. Thank you, Mr. Secretary.

SEC. DONOVAN: Thank you.

REP. JENKINS: Thank you, Mr. Chair. I yield back the remainder of my time.

REP. FRANK: Thank you very much.

Mr. Sherman, you're next, sir.

REP. BRAD SHERMAN (D-CA): Thank you.

I've asked my district staff to focus on the problems in our own area dealing with the Section-8 program. And Mr. Secretary, they basically say you folks are doing a good job. The concerns all tend to focus, and I've talked to people in other parts of the country as well, at favoritism and inefficiency with the local folks that are involved in the administration of Section-8. And so I hope that your people would be doing all proper controls and exercising those controls with an eye toward making sure that these federal dollars are spent well and without favoritism.

One particular area in the area of local control where it could clash with federal objectives is the area of portability. Obviously, we want people to live as close to their jobs as possible, especially given today's cost of transportation, the effect on the environment, et cetera. We want people who are struggling to get by to live close to their support systems, to their family. We want them to be able to go where the jobs are. Nothing would be worse than a labor market screaming for employees in one place, but people feel compelled to live somewhere else.

So portability's an important federal objective, and yet I hear story after story of disputes, situations where the two agencies fight between themselves in just processing this transfer. And the problem might be remedied by greater enforcement by HUD. We might even want to see local housing agencies fined or penalized in some way if they cause repeated inordinate delays in the processing of transfers.

I realize you've been on the job I think less than 100 days, so I don't know if this has percolated up to you. But what do we do to make sure that people with Section-8 vouchers can live where they need to live?

SEC. DONOVAN: So before I answer that, Congressman, I just wanted to note Congresswoman Jenkins just left. I've been informed by my staff that as usual, they're ahead of me, and the mortgage E-letter I just referenced has actually already been released. So I just wanted to make sure the record reflected that, and we'll obviously get in touch with the Congresswoman's office directly.

On this issue of portability, it is a significant issue. I believe very strongly that one of the benefits of the voucher program is just as you said, Congressman, to allow the freedom of choice to move to new communities, to follow jobs, or whatever other reasons there may be to move. And then to ensure that access to opportunity is one of the hallmarks of the voucher program.

And I believe strongly in a very -- that there's a very positive provision in this bill that will allow HUD to remove a number of the current barriers to affective portability. There simply are, in terms of the way we fund and reimburse housing authorities for those. Frankly, it's somewhat understandable the kind of squabbles that you talked about that we end up with between housing authorities. So the flexibility that this bill will give us to do that I think is very, very important. And we would implement those as quickly as possible.

REP. SHERMAN: So if we pass the bill you want, you'll solve this problem.

SEC. DONOVAN: And more than that, the provisions in this bill are good provisions that would help us to solve it.

REP. SHERMAN: I yield back.

REP. FRANK: The chair next recognizes Congressman Cleaver.

REP. EMANUEL CLEAVER (D-MO): Thank you, Mr. Chairman.

Mr. Secretary, thank you again for being here. My first question really doesn't have much to do with the voucher program potentially. But have you decided yet whether you're going to have regional secretaries? Secretary Cuomo had regional representatives. Have you made the decision?

SEC. DONOVAN: We will certainly have -- they're currently called regional director positions. We will be hiring, and in fact, have begun looking at candidates for those positions around the country. I also frankly believe that those positions need to be higher profile and more effective in the field.

One of the issues I think, frankly, is that HUD has operated too much in silence, where we have different programs that don't effectively work together on the ground. The staff doesn't communicate as effectively as needed. And therefore, having a strong leader on the ground that really understands not just programs and process, but people and places, and how to bring the programs together is very important.

So I do believe those roles not only need to be filled, but to be even more important and a focus for my efforts.

REP. CLEAVER: Well, connected with that is that there's been a long-standing argument about whether or not the rent basis -- the income-based rent should be done on a regional level because the dramatic difference in housing across the nation. I mean, it's been a long-standing argument that -- I was mayor during the '90s in Kansas City, Missouri. It was an argument then. And it's brought on in part because what happened -- and it's terrible. I've suffered from it from having lived in public housing.

When you start doing Section-8 vouchers in many of the cities, you'll end up having a little enclave of Section-8 vouchers. And so the children who grow up there are -- you know, they are recognized, pointed out, and in many instances, discriminated against because they come from -- there's one near our house. I had to stop my own children from referring to the area as, "the children from the valley." And it happens, you know, all over the country.

And it's because, you know, there's a certain amount, there's a certain allotment for the acquisition of the property, or the -- how much we will subsidize the owner of the property who uses the property for Section-8. And it turns out that the only affordable properties are usually in minority neighborhoods, low-income neighborhoods. So then you bring in -- I'm telling you stuff you already know. You did it in New York. But, sir, you understand the issue.

And at some point, Mr. Secretary, we need to change -- something needs to happen. I don't know if we need to go to a greater flexibility based on regions, or whether or not we use more dollars so that we can do more -- what used to be called scattered site housing, which didn't scatter very well. But do you have any ideas on how we can stop this? The kids who grow up in those areas, I mean, the teachers and the schools, they all know them. Everybody knows them. The buses stop in those areas, and it's just really one of the most unfair things. I was a kid who grew up in the projects. You know, look at the little Cleaver boy. He came from the projects.

SEC. DONOVAN: Congressman, I appreciate your passion about this issue, and the personal connection you have too, and I couldn't agree more that this is an issue. It's not just in the voucher program, but broadly across HUD's programs that we need to attack. And I think there are ways, and I would love to discuss more whether in this bill or in other ways there are ways that we could do that.

Two things I would mention on this. I think we have begun, particularly in the focus with Hope 6 on public housing, to focus on really undoing some of that damage in public housing, and that that work has been effective. And in fact, we proposed in our budget an expansion and change to Hope 6 into an effort we call Choice Neighborhoods.

REP. CLEAVER: Yeah.

SEC. DONOVAN: Which would be aimed not just at expanding the funding available, but also allowing not just public housing, but also assisted housing and even privately owned housing in neighborhoods of concentrated poverty to be eligible for these comprehensive efforts.

But at the other end of the spectrum, and I think you pointed this out as well, we have to create a broader geography of opportunity in our metropolitan areas by focusing as well on areas that currently don't have affordable housing available. This is something that I worked very hard on in New York to create through inclusionary zoning and other efforts, mixed income housing in neighborhoods that otherwise would've been 100 percent market rate or luxury housing.

And so I think there are a range of ways that we need to approach this, and our budget also has some efforts that would support it. It's an initiative we call sustainable communities, which really will support local efforts, whether it's through inclusionary zoning or others to do exactly what you're talking about. So I couldn't agree more, and I think we have to work on that in many, many different ways, not just in the voucher program.

REP. FRANK: The gentleman's time has expired.

Mr. Secretary, I do appreciate your coming here today. We all appreciate your testifying and your answering questions of the members today. The chair notes that some members may have additional questions for this panel, for the -- not he panel, but the witness here, that you may wish -- that they may wish to submit in writing.

Without objection, the hearing record will remain open for 30 days for members to submit written questions to the witness, the secretary, and for the secretary to replace his response in the record. And we do again appreciate your being here.

The hearing is adjourned. (Sounds gavel.)

SEC. DONOVAN: Thank you very much.

REP. FRANK: Thank you.

END.


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