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Hearing Of The House Financial Services Committee - Legislative Options For Preserving Federally- And State-Assisted Affordable Housing And Preventing Displacement Of Low-Income, Elderly And Disabled Tenants

Chaired By: Rep. Barney Frank

Witness: Shaun Donovan, Secretary, Department Of Housing And Urban Development

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REP. FRANK: The hearing will come to order. We have before us again the secretary of Department of Housing and Urban Development, Shaun Donovan.

And we are here on a very important issue: preservation. Forty years ago and more, the federal government began -- I guess actually in the '60s. The first project I was aware of was built in Boston in 1965, the Castle Square Project.

By the way, I do want to make a note as to the Castle Square Project, it was a 221(d)(3), later replaced by 236. It was the affordable housing -- subsidized housing for low-income people, and in the middle of it, a public housing unit. It's family, limited-income, limited-- (inaudible) -- low-income housing with public housing in the middle.

We often hear the argument that housing like that blights the neighborhood. I invite people to Boston. No, it's not my district. It's Capuano's. He'll welcome you. Go to the intersection of Tremont and Arlington streets, right where there's an entrance to the Massachusetts Turnpike. On the southwest corner you will see the Castle Square projects, a project more than 40 years old, for low- income people. It's one of the first racially integrated, at the beginning of the South End of Boston, with a public housing project in the middle.

To the argument that this blights neighborhoods, then walk across Tremont. Now, admittedly Tremont's a wide street -- it's got a divider in the middle, but it's still only one street. On the northwest corner, this is the southwest corner sits a building known as L'Atelier, for our very good stenographer. It is as expensive as any housing in the State of Massachusetts. It is a luxurious building with concierge service that I think costs more, per month, in the rent in one of the buildings across the street.

The people who tell me that affordable housing blights the neighborhood, I need them to go and see an affordable housing project literally across the street from some of the most expensive housing in Massachusetts. And when you are among the most expensive housing in Massachusetts, you're right up there with the rest of the country.

We built these units years ago. They we're built with a proviso that allowed the owners -- who got no-interest loans, in most cases, the federal government (furnished ?) 1 percent I think on the no- interest loans -- after 40 years to terminate the restrictions and to make them market rate.

Now, at the time it may have been thought that, well, nobody's going to want to live in these poor people's houses. But, as another refutation of the argument that this sort of housing blights neighborhoods, many of the kind of people in the socio-economic category who objected when this housing was first built near then, their descendants now want to move into it. It turns out to be quite desirable, in many parts of the country, with a new move towards living in the cities.

We thus have the problem that market rates forces, threatens to take away these units. Now, we have had a policy under the previous administration, the previous Congress, of providing vouchers -- "enhanced vouchers" they were called, because the rents at market would go up -- and keep the current tenant in the building. But, when those tenants died or moved we lost the units.

That has led to a diminution and a number of units set aside for affordable housing. We cannot compel people who have a contractual right to withdraw from this program -- not to "withdraw," they have that contractual right, but most of the people, virtually all of them who built that housing were people who believed in this sort of housing, people who bought it from others, who were people who believed in this sort of housing.

With the appropriate set of incentives, we can keep almost all of these units in the affordable inventory. And while the Section 8 voucher program is a good one, when the federal government simply adds to the demand for housing with annual vouchers, and does nothing to increase the supply -- (and ?) good, conservative economics tells us -- (inaudible) --

So, an annual voucher program should be part of an overall program that includes units. We hope, through the Affordable -- the Low-income Housing Trust Fund, to be able to build some more units. But, at the very least we can prevent the loss of those we have.

So, we are working on legislation -- and, by the way, this is both an urban and a rural matter. There was housing built for rural areas -- and members, you should remember this, we have jurisdiction in this committee over the Rural Housing Service in the Agriculture Department, which has been very well run, and the Administrator, Mr. Davis -- (inaudible) -- administration is very cooperative. We had a lot of good work there. A former member of this committee, Geoff Davis from Kentucky, a Republican; and Lincoln Davis of Tennessee, a Democrat, both former members worked hard to preserve it.

It is our intention to bring forward legislation that will do everything that we can, legally, to preserve these units. It is by far the least expensive way to have a unit. It avoids the problem of where do you locate it, because they're already located; and it avoids the destruction we have in these communities that are (now here ?). So, that is the goal of today's hearing -- to focus on this legislation, which I hope we will be passing soon.

And our goal is -- and it's very appropriate to have the secretary here because he did so much work in the jurisdiction where they supplemented the federal efforts, my own state did, and many other states did -- we believe that the legislation should apply not simply to those that were federally funded, but to any such program -- whether it was federally-, state- or locally-funded, we believe that in granting the fund, to create a legal framework, that we should preserve these units. It's the best thing we can do to keep the affordable housing inventory from shrinking even as we go forward in trying to build them.

So, that is today's hearing, and it is very much in this piece of legislation.

The gentlewoman from West Virginia.

REP. SHELLEY MOORE CAPITO (R-WV): Thank you, Mr. Chairman.

And I'd like to thank the secretary for returning before our committee. And I think we all share the secretary's desire to not only promote homeownership but also to ensure that Americans have access to affordable rental housing.

This legislation before us today includes many sections that I strongly support. Title 8 of the draft legislation is especially important to my home state of West Virginia as it makes important improvements to affordable housing in rural communities. My colleagues, as the chairman mentioned, our colleagues -- Representative Davis from Tennessee, and Representative Davis from Kentucky, are to be commended for their efforts on this legislation.

I'm also pleased with the section of this legislation modernizing the Section 202 program, providing affordable housing for the elderly. (It ?) includes important language that I was able to include in our last Congress.

This section addresses the problem facing smaller, rural states, in that currently their allocation of 202 units is split between metropolitan and non-metropolitan areas, often leading the states having -- not being able to develop their full allocation because they simply cannot afford -- a developer cannot afford, or they cannot find a developer to build a small, non-metropolitan allocation. The new language in this legislation will provide smaller states with the critical flexibility that we asked for so that we can use those allocations (where ?) they are most needed.

While I do support these sections of the bill, I do have some significant reservations about their inclusion in the larger package. Both the rural and senior housing sections have broad bipartisan support, and should -- I believe should be (moved ?) separately to enhance the possibility that they would be accepted both in the House -- by the House and the Senate.

The majority of this legislation addresses preservation of affordable housing in urban areas. It is much more complex. It contains some controversy. This may discourage, I believe, future private sector participation in federal housing programs and ultimately limit the availability of affordable housing.

I think the legislation does carry a significant cost, and there's some new sections that could open up an extensive litigation -- (inaudible) --. I know that extensive work has been done on this draft legislation. I commend the chairman for this and I look forward to working with him and the secretary on many of these provisions. And I yield back.

REP. FRANK: The gentleman from Texas, Mr. Green, is recognized for three minutes.

REP. AL GREEN (D-TX): Thank you, Mr. Chairman.

And I thank the secretary for appearing today. It's good to see you again, Mr. Secretary.

Mr. Chairman, my intelligence indicates to me that more than 900,000 Section 8 units will expire over the next five years. These units are of critical importance at a time when we have high foreclosure rates; at a time when we have tight lending policies; at a time when it's difficult for persons to maintain homes; and we may have more persons who are going to need affordable housing. I think it's exceedingly important that we maintain these 900,000 units.

The empirical evidence seems to indicate that there's a dire need for much more affordable housing in this country. I look forward to hearing from the secretary in terms of how he will maintain, and also move forward with the acquisition of additional affordable units.

I would also mention that in my city we have many persons who find themselves living at "a place called home" -- that is, beneath an overpass; or that is, in an abandoned street with property. The numbers are very difficult to get a handle on, but I contend that if we have one, we have too many. Too many people are finding themselves calling "home" under bridges.

I think that we must do what we can to make sure that we continue to separate the United States of America from many other places in the world, where we just allow people to suffer in the "streets of life" when we can provide opportunities for them. I think we have a duty to do this, and I'm looking forward to hearing the testimony.

I thank you for being here Mr. Chairman -- Mr. Secretary.

And, thank you, Mr. Chairman. I'll yield back the balance of my time.

REP. FRANK: Are there further requests for opening statements?

If not, we will now go to Secretary Donovan, whose presence we once again appreciate.

Mr. Secretary.

SEC. DONOVAN: Thank you, Chairman Frank, Ranking Member Bachus and Ranking Member Capito for your attention to these very, very important issues.

And, Chairman Frank, I want to say, in particular, I have been to that intersection that you've talked about on Tremont Street, and I was surprised myself to learn that it was affordable housing when I first saw it, because it has been so well maintained and it's been so successful. But, I would also --

REP. FRANK: And it's 44 years old.

SEC. DONOVAN: I would also venture to say that, given your encyclopedic knowledge of these programs, it's quite possible that you've visited every street corner where assisted housing exists in this country today. And I want to acknowledge --

REP. FRANK: I was going to say -- I was going to say, Mr. Secretary, that I hope that you were properly respectful of that development since, at 45, I believe it's your elder.

SEC. DONOVAN: (Laughs.) As usual, you are correct. (Laughter.) I do want to acknowledge that you have been a champion and advocate of preservation of HUD-assisted housing for a very long time. And I won't put you on the spot about your age here in this hearing. But, without your effort --

REP. FRANK: I'm one week younger than the Speaker. (Laughter.) So, push it if you want to.

(Laughter.)

SEC. DONOVAN: (Laughs.) But, without your efforts, many more families would be without affordable shelter. I'm looking forward to working with you and the committee to further the preservation agenda, and would also like to welcome the chairwoman here as well, Congresswoman Waters, it's good to see you as well, and for your tireless advocacy on these issues as well.

This is an important hearing. Today HUD provides rental assistance for over 1.4 million assisted units across the country, and (this stock ?) is a critical resource for countless families, serving the low- and very low-income families who otherwise would not have access to decent, safe affordable housing.

We know from experience that preserving affordable housing is essential. If the current economic crisis has taught us anything is that it's long past time that we have a balanced, comprehensive national housing policy, one that supports homeownership but also provides affordable rental opportunities and ensures nobody falls through the cracks.

Today, there are less than three units available for every four low-income households, and only half the number of units needed for families in extreme poverty. As we watch the number of homeless families with children begin to rise, we remember that a significant factor contributing to the resurgence of homelessness in the early 1980s was the failure to preserve hundreds of thousands of units from an earlier generation of affordable housing. And so we can't afford not to take this challenge on.

And Congress and HUD together are already doing just that. This administration, thanks to Congressional support, is committed to fully funding project-based Section 8 contracts for 12 months, through the Recovery Act, as well as full funding in HUD's 2010 budget. Our budget also requests a higher level of federal funding for housing vouchers, the most direct means to meeting the affordable challenge facing very low income renters and the most efficient means of addressing the increase in homelessness I just referred to.

While we have made progress, more action is needed, which is why I'm pleased to inform the committee that HUD supports the fundamental principles of the draft bill. The bill tackles a detailed list of actions that could be taken on this front, and this legislation provides us with a foundation to move forward in a comprehensive and strategic manner. We must still evaluate its cost and implications, but allow me to highlight three important themes embraced in this bill that will be critical in guiding us forward.

First, HUD needs to be a leader and a partner in preserving critical housing resources. Too often HUD's policies and practices get in the way of preservation efforts instead of supporting them. That is going to change. Going forward, we are adopting a problem- solving ethos and collaborative working relationship with our partners, including owners, residents and local governments.

I recognize that, historically, this may not have always been the case. The draft bill highlights the kind of practices that we can consider changing that will demonstrate this new partnership. For example, when a property is undertaking substantial capital improvements, we can agree to establish the "after rehab" Section 8 rent up front, before the rehabilitation begins. That means that owners, lenders and their financial partners would have the certainty and confidence they need to undertake this new (entity ?) investment, and benefit tenants immediately.

Likewise, we can look at agreeing to enter into longer term Section 8 contracts, subject of course to annual appropriation, and structured to provide HUD the flexibility to cancel contracts with owners of non-performing properties.

This would boost tax creditor -- credit investor confidence by demonstrating our intent to be a long-term partner in the project. This type of action is particularly important at this time when investors are in short supply.

These two examples, among many from the legislation, can be done administratively. We will continue to identify all of the elements in the bill which we might be able to tackle administratively and quickly. And again, we want to be a leader and a partner in this crucial preservation effort.

The second point I want to talk about is information, which is absolutely critical to this effort. We applaud the concept of a national database that will give us access to the information that we need regarding America's affordable housing stock, including how much is HUD-assisted, what developments have multiple financing sources and when mortgages are maturing in order for us to better predict our voucher commitments.

Mr. Chairman, I'm a numbers guy. I'm serious about evidence- based decision-making. A comprehensive database would help us do a far better job of preserving as many units as possible for the least amount of money.

This leads me to the final point. One size does not fit all in approaching the challenge of preserving affordable housing. Ranking Member Capito has already talked about the differences facing rural areas and urban areas. And the data and analysis we do on the portfolio of properties will lead us to tailor our efforts to specific problems. For instance, what is needed for a deeply troubled property in a challenged neighborhood may be very different from what is needed for a well-maintained property in a strong housing market at the end of its mortgage term. A flexible menu of solutions will be required and it must be based on solid data and analysis.

We want to work with you to ensure that we have the needed flexibility in this legislation. One concept that we are very interested in pursuing is linking the preservation of the existing affordable housing developments with broader initiatives that benefit communities. We want to look at prioritizing the preservation of developments that are integral to sustainability, such as those adjacent to significant transportation options or with great access to job opportunities.

My staff led me -- led by my new Deputy Assistant Secretary, Carol Galante, has been working diligently over the past several weeks gathering together owners, tenants, and nonprofit leaders to listen to their thoughts, ideas and suggestions regarding preservation. Congressional staff has been attending these sessions and together we have been working to better understand the challenges we face and how to craft more workable solutions. As these conversations progress, there may be further ideas, like linking -- like the link to sustainability I cited earlier -- that we may wish to have considered. These conversations are an important part of our efforts to work with you as you further refine this bill.

We know how important affordable housing preservation is to the long-term success of our communities. And we recognize that hard choices will need to be made to get the most out of our resources and make a difference for millions of families. We will need to look at the costs and work with you to prioritize what we -- what is essential and what is most cost effective. But with a new set of priorities, a new commitment to collaboration and accountability, and a new way of business doing -- of doing business here at HUD, I am convinced we can and we will.

Thank you

REP. FRANK: Thank you, Mr. Secretary.

One point I made -- mentioned before I just want to explicit. And I hope we're in agreement on this, namely that we're out there to preserve units rather than to vindicate federal programs. So I would hope we could get agreement that whatever tools we offer, whether they are financial or whatever, that we don't discriminate between state and federal, that -- particularly a number of jurisdictions -- New York City, where you were, Massachusetts, really under the aegis originally of a former member of this body, Jim Oakley (sp) , who began as a state senator in Massachusetts a very extensive program in coordination with Mike Dukakis to do housing. So would you agree that we could try to make this fully available so to the extent that states -- it's not coercive -- to the extent that states and -- in the case of New York City -- wanted to take advantage of this, that we could -- we could accommodate that?

SEC. DONOVAN: I think it's very important. I also think it's important, as you talked about earlier, that we ensure that there are federal resources available, that we're also encouraging states and cities to bring their own resources to the table for these efforts as well. So the federal government needs to do its part, but I also think it's important that state and local government do their part as well.

REP. FRANK: That I agree with. Part of this -- now, this is not our jurisdiction. Maybe -- (inaudible) -- maybe you can deal with it. But I am told by many of the owners who have the right to say no to this -- we cannot coerce anybody -- that exit tax relief is an important part of this. Now, I know there's some resistance. Basically what we are talking about with exit tax relief is forgiving some taxes that may be due for owners who agree to do this. Now, I know it isn't jurisdictional. We don't have the jurisdiction; Ways and Means does. But I don't know if you have any original thoughts, you want to just go back and talk to your colleagues at Treasury and elsewhere, but I -- we are going to need some guidance and then, if we decide to do it, some cooperation on the question of exit tax relief. I don't know that you have any particular thoughts on that.

SEC. DONOVAN: I do think it's an important question. And I've seen very directly from my own experience in the private sector as well as in the public sector that the legacy of the accelerated depreciation that was available for these properties has left significant what we call negative capital accounts that stand in the way of often preservation, moving forward. And there has been significant discussion. Senator Schumer and others have drafted bills and introduced bills that would try to target this assistance to properties where they would be preserved long term.

REP. FRANK: I think that -- one of the things that I -- we might do -- the arcana of CBO may not be within our jurisdiction, but OMB we do work with. I would hope that we would, as we cost out exit tax relief, compare it to what the cost of building a new unit would be, because I think that's -- that would clearly help us. So we are talking about whether or not we have this unit. And it would seem to me that the cost of exit tax relief, even with everything else, almost certainly is going to be less in many parts of the country, maybe everywhere, than building new units. So I would hope that we could do that kind of -- that kind of accounting.

SEC. DONOVAN: I would also just mention that enhanced vouchers are obviously a cost --

REP. FRANK: Yes, exactly.

SEC. DONOVAN: -- (inaudible) -- version, as well.

REP. FRANK: That's exactly right, because if you go out a few years, enhanced vouchers -- in fact, one of the arguments that's been made -- and we've debated the voucher program -- by some who are critical of it pointed out the increase in the voucher program. People said, well, look at what a bigger percentage of HUD's budget the voucher program is. Well, that's probably because people cut the rest of it. So when you're the last man standing, you're a larger percentage of the group than before.

But it's also the case that enhanced vouchers are enhanced and they cost more money when, over time, you would reduce that drain if you had the -- if you had the unit.

The only thing that you said that made me sit up a little bit was when you talked about prioritizing these. I would hope that our goal would be to protect any that people want to protect, you know, and I would hope that we would not be running out of resources. So when you say prioritize, maybe those ones you deal with first, it may also be that those are the ones, I guess, to some extent, you prioritize because the ones that are in the lousiest areas are the ones least likely to go out of the inventory and go to market.

But I'm -- (inaudible) -- our goal is, in fact, to preserve every one that's physically still appropriate and that people are going to work with us on?

SEC. DONOVAN: Yeah. Look, I do -- let me -- I want to be clear about that statement.

First of all, there are situations where a property is in poor enough condition that -- it's located somewhere where it would be better to think about -- similar to what has happened on the HOPE VI side -- to think about more fundamental redevelopment rather than preserving the property as it is. So I think there are --

REP. FRANK: Right.

SEC. DONOVAN: -- difficult choices that sometimes need to be made. That's why we have a proposal in our budget that would expand on the work that HOPE VI has done successfully -- we've begun discussions with your staff on this --

REP. FRANK: Appreciate it.

SEC. DONOVAN: -- to expand assisted properties as well. But from my own experience -- and the first time I was at HUD, we created a program called Mark-Up to Market. And what we found, as we looked at the data, is that the properties that we were losing, not surprisingly, were the properties that were in locations where rents were the highest and where oftentimes the schools were the strongest, the job opportunities were --

REP. FRANK: So what you're saying -- so in other words, there would be two categories -- one, the projects that are just physically not appropriate to keep going, and we would -- (inaudible). I would hope and maybe more than hope as we get to this legislation with the support, I know, of my colleague from California, that there would be a pretty heady burden of proof on people who didn't want to do a one- for-one replacement of units. And we will be talking about that.

But then, also, yeah, there are units that are in no danger of wealthier people moving in because they don't want to live there, I mean, let's be honest. So yeah, in those cases, the best economic deal for the owner may be to continue in the program because, if I'm correct, while there's a 40-year opt-out, does anything prevent the owner from continuing if he or she wants to continue?

SEC. DONOVAN: There are cases where a mortgage matures and there is assistance that's attached to the mortgage that then expires.

REP. FRANK: Well, then, one of the things you ought to look at is --

SEC. DONOVAN: We would need to come to the table with the --

REP. FRANK: All right. Yeah.

SEC. DONOVAN: -- resources to be able to --

REP. FRANK: Yeah. Okay, in those areas where the mortgage didn't expire but there is no great demand to displace people, then we might very well be willing to consider some five- or 10-year extension of assistance.

SEC. DONOVAN: Mr. Chairman, I almost might add another example of prioritization -- and this is again from my own experience. There was a wrenching -- early in my -- my first time at HUD -- a decision to be made about a property in Iowa where it was in poor condition and the standard procedure would have been to provide vouchers there, but it was in a rural area; it was an absolutely critical resource. And frankly, a voucher would have meant that seniors would have had to move probably 50 miles away --

REP. FRANK: There's nowhere else to live, yeah.

SEC. DONOVAN: -- to be able to find an alternative. And so that's a case where prioritization of preservation made sense, because of the specifics of that --

REP. FRANK: Well, I appreciate it. I'm going to turn it over to --

SEC. DONOVAN: -- situation in a rural area.

REP. FRANK: -- the gentlewoman from West Virginia. But she correctly pointed out the differences in urban and rural, and that's a very important point. Vouchers in some of these rural areas, where the only multi-family housing or the only appropriate housing for a limited-income renter is there, that puts a higher priority on that preservation, because a voucher might just be useless.

The gentlewoman from West Virginia.

REP. CAPITO: Thank you, Mr. Chairman.

And thank you for -- I want to thank the secretary in his opening statements for recognizing -- and in his comments -- the need for the flexibility, because I think that was the aim in my previous -- aim for the elderly to give the flexibility in the rural areas. And the example that you cited in Iowa happens all across in America. I'm sure you're well aware of that.

This kind of leads in my question -- one of my questions, into part of what you were talking about with the chairman. During several of our previous hearings in the 110th Congress, witnesses testified that they're -- affordable -- owners of affordable housing, that they're sort of frustrated with HUD's inability to promulgate meaningful regulations and consistently apply regulations. And in some cases, those that are going to be -- are choosing to opt out of the program at their mortgage maturity date due to basically HUD fatigue. And I was -- I wanted to know what steps does the department intend to take -- and you sort of mentioned a few of these -- to give these owners and their financial partners the certainty and the confidence that they can move forward and see improvements in these areas where they've found deficiencies?

SEC. DONOVAN: Well, first of all, I want to acknowledge that I think that's an extremely important point, and that, having worked at HUD for many years, the issue of HUD fatigue -- not for me personally, but for --

REP. CAPITO: (Laughs.) I hope not yet.

SEC. DONOVAN: -- for owners, it is a real issue. I think, first of all, I would say that we have made significant progress in the first few months with the single most difficult issue over the last few years, which has been the problem of very short-term -- often three month -- contract extensions that have driven owners, frankly, crazy and has led to a significant increase at least to threats to opt out and to the kind of HUD fatigue that you're -- that you're talking about.

So that's one example. I talked about a couple other examples in my testimony where what owners need from HUD is a reliable, predictable partner. So part of this is making sure, whether it's when they're going to do a renovation that we can, in advance of that beginning, saying, well, if you do these certain kinds of work on your property, this is the rent that we would be willing to offer you, so that they can understand whether the transaction will work or not before they embark on the long process of renovation -- that's one example -- the ability for longer-term contracts and, frankly, a broader kind of flexibility and deregulatory approach that I think is very important. This is something that I worked on earlier in my time at HUD, for example, with Mark-Up to Market. We often have restrictions on profits or very onerous regulatory restrictions that frankly I think are no longer appropriate, given the advances that we've made in the way that our subsidy programs work.

So I think there is a broader agenda that we've begun to take on but that this bill would help to further in many ways, and that there also many things we can do administratively, as well.

REP. CAPITO: Okay. I wanted to touch on another topic. You mentioned in your -- in your comments that you reached the critical decision -- will be reaching the critical decision with some of these properties, whether it's better to move forward with preservation or whether it's better to demolish and start over or look at other options because of the age of the property.

And my understanding, in this bill, there is no green element or green building -- we just went through Mr. Perlmutter's bill; had a couple hearings on that. And I think this is a philosophy that is going to become a larger part of our building, both public and private. What kind of vision do you have for that in housing preservation, or is it something you've thought of or are there discussions going forward?

SEC. DONOVAN: I'm very glad you raised that point, because I think it's important. First of all, we have an enormous opportunity with the recovery bill to green this stock very broadly. There was $250 million available in the recovery bill for the assisted housing stock. We already have 400 applications for that $250 million -- so vastly oversubscribed for the funding that we have.

We have taken steps, working with the Department of Energy, to allow multi-family properties across the country to be automatically eligible for weatherization funds. Previously, you literally had to go tenant by tenant to qualify buildings, even though the federal government already knows the incomes of those tenants through whether it's the Section 8 program that -- so I signed an MOU with Secretary Chu to make all of those properties automatically eligible. And there's $5 billion of weatherization funds. We've been working with states to make sure that money can be available to green this stock.

Fundamentally, the principle here is that this is an enormous opportunity, as we preserve properties, when renovation gets done, not just to improve the living conditions of those residents, but to save taxpayers and residents money by doing the commonsense things that will pay for themselves through lower utility bills over time. So we've done an extensive amount of outreach and effort, and I think that's exactly the kind of thing, as I talked about -- further refinements to the bill and the conversations we're now having with congressional staff -- that's -- this is a perfect opportunity to think about this bill as an opportunity for that kind of -- that work, including not just at the building level but also from the community level, as I said, to look to prioritize properties that are already sustainable in the sense that they have low transportation costs; they're accessible to transit or to other -- in rural areas -- to other kinds of options for seniors, et cetera, that would allow them to have a better quality of life and lower expenses on transportation.

REP. CAPITO: Thank you -- (off mike).

REP. FRANK: Gentlewoman from California.

REP. MAXINE WATERS (D-CA): Thank you very much, Mr. Chairman.

Secretary, it's good to see you again. And I appreciate all of the work that you're doing, and I appreciate your challenges. But we're very inspired by your energy and your concern and your experience.

I have two things I'd like to just mention before I ask the question that I prepared for you. One is that we've been working all evening to try and get 50 (million dollars) to $100 million for retrofitting for public housing in the American Clean Energy and Security Act. And as I talk with my staff, in addition to this and the work we're doing with Mr. Perlmutter for a grants program, we think perhaps you ought to have your own green bill. So I'd like to talk with you and, of course, our chairman about that at some point.

The other thing is I'm really concerned about these housing authorities that are running out of Section 8 money. And we have been visited by people from New Jersey, and I think the latest one was Oregon, where the vouchers are no good. And I'm worried about people becoming homeless. Are you aware of this? And what are you doing about it?

SEC. DONOVAN: I'm glad you raised that, Chairwoman. This is an issue that we are looking carefully at. I have -- my assistant secretary for Public Housing just joined us this week on the job. This is the first thing I put on her agenda to look at. We are just getting fuller first quarter data from across the country from every one of our housing authorities, and we are looking at this issue today.

What we have seen from the preliminary analysis of that is that voucher utilization stayed roughly constant in the first quarter, so it doesn't appear that there has been a significant decline over the first few months of the year, but we have heard the same concerns that you have in particular areas. We do have some funding that's available for emergency situations that we can look at, but I also want to make sure that we can come back to you and report that we have adequate funding overall for the year and that we can take care of these situations. And I would expect within the next couple weeks to be able to report back to you on that --

REP. WATERS: Thank you very much.

SEC. DONOVAN: -- with Sandy Henriquez.

REP. WATERS: Thank you, and congratulations on Ms. Mercedes Marquez. You stole her from us in Los Angeles, but that's all right. It was a good steal. And not only can she help Los Angeles, she can help everybody in the country.

SEC. DONOVAN: Well, she's made it through the committee. I'm hopeful that she will be on the job shortly, if the Senate does vote to confirm her.

REP. WATERS: Thank you very much.

Now, as I see it in your written testimony, you do not address the issue of national right of first purchase. Section 103 of the draft being prepared by the committee includes language that would provide opportunities for owners of affordable housing to sell the property to nonprofits who would commit to affordability. Such a provision would have been helpful to tenants that were fighting for the preservation of Starrett City, where I first met you when I held a hearing up there. What is HUD's position on the right of first purchase?

SEC. DONOVAN: So, I want to say two things about this. I have -- and it's interesting you mention Starrett City. We had a very extensive process in New York City, when I was there, to attempt to establish a right of first purchase. And I think it's instructive for what's in this bill.

First of all, the legal issues around this are very complex. There are both constitutional issues and often state-level issues in terms of modification or contravening existing contracts. And I think it's very, very important that, as this bill is considered, that those issues be looked into very carefully. What happened in New York was that frankly my agency and I personally warned the city council that we thought the direction that we're going -- they were going would have serious legal issues. And, in fact, they passed the bill and there was a lawsuit and there were two years of confusion that followed and, frankly, disruption in preservation, followed by a court decision that struck down the original bill.

And so I think it's very important that the committee look seriously at the legal issues surrounding this type of provision. So that's the first thing.

The second thing I would say is that, from my experience, having completed more than a dozen tenant-sponsored purchases of these kind of properties in New York and being a strong supporter of tenant involvement is that, frankly, I don't feel that this is the most important tool in terms of allowing tenants to be successful in ensuring their properties are preserved. From my experience, even where there is a right of purchase, the most significant barriers to successful preservation are information, which I think this bill would go a long way to providing -- I think that's an important thing, making sure residents have information and are armed with knowing what's going on through early notices -- second of all, that oftentimes technical assistance in understanding the financial challenges; and then, third, the funding resources to be actually able to preserve a property are the critical ingredients.

And I think those carrots, if you will, are the more important place to focus, rather than the sticks, because I think -- I do have concerns, as I said originally, that there are some significant legal issues with this that could end up, frankly, standing in the way of preservation if it's not crafted very, very carefully.

REP. WATERS: Thank you very much. And being that preservation is a top priority of the chairman, I think we would benefit from his experience and help in getting it done and doing it right.

Thank you very much.

REP. FRANK: No, I completely agree.

The gentleman from Texas, Mr. Neugebauer.

REP. RANDY NEUGEBAUER (R-TX): Thank you, Mr. Chairman.

Mr. Secretary, congratulations. And I'm down here at the end lot here.

You know, one of the things -- I like some of the things you're saying. And one of the things that I hear you say is you're a numbers man, and I am, too. In business, you have to be a numbers person if you're -- if you're going to survive. But sometimes people just look at a certain set of numbers and don't look at the big picture.

And I think in this preservation issue we have to be very careful about that, because sometimes somebody says, well, we can rehab these units for X and then -- opposed to if we, you know, build new units or do other -- have other options that we look at. In many cases, for example, that may not be the most cost-effective option, because in some cases the condition of that property, while you may rehab it some, it may continue to be outdated as far as from maintenance and energy efficiency and those kind of things.

But one of the things we experienced, we went down to New Orleans, for example. And we talk about tenant involvement and we talk about, you know, looking at the numbers to rehab. And one of the things we found was -- we went down there to a unit that had been rehabbed and that -- extraordinary amount of money was spent on that property and that in the end, nobody wanted to live there, and that they spent money on a -- on a monthly basis maintaining those units to keep them fresh -- had to run air conditioners to keep mildew.

And the -- and the opposition to that was that the tenants group were given a voice there and they said, no, we want to -- we want to keep what we have, so we want you to rehab this unit. The alternative was, there were people that were willing to come in and do a mixed-use project there, blending low-income, mod-income, but people resisted that.

So I think what we have to be very careful here -- as we go down the road, I hear of people that want to move to tenant-owned and nonprofit-owned, but quite honestly, we're dealing with limited resources at the federal level. We need everybody's capital at the table. In many cases, as you know, some of the nonprofits don't have a lot of capital. And so that puts a lot more pressure on the federal government to provide more of the assistance.

In Texas, for example, a lot of our -- we've done a lot of tax credit projects there. And they work very effectively.

So what I would hope is, as we move down the road -- and if you are, indeed, a numbers person -- that when we begin to look at that, we look at all of the conditions affecting housing. I've been in the housing business for nearly 40 years. And just the -- just the cost is one of the variables. We have to look at all of the variables.

But this concern I have is if we start sending a signal that, one, we're going to mitigate the rights of the owners, they're not going to want to continue in these projects and, secondly, we're going to send a signal to people thinking about being our partners in the private sector, you have to beware, because your rights get mitigated. Can you kind of help me with your philosophy on that?

SEC. DONOVAN: Well, having worked, as I said earlier, in the private sector as well -- as a lender, also a developer, as well as in the -- in the public sector, I do think it's important, first of all, to recognize that we have made enormous progress in our housing policy by developing strong public-private partnerships, and that I do feel strongly that there is a balance that needs to be struck between incentives. We talked earlier about sort of the heavy hand of regulation that HUD has often had, and that we need to look at ways to make dealing with HUD and participating in these programs simpler and more like the private sector.

Having said that, I would also add that I do think, in general, having looked pretty carefully at the numbers, that -- and I acknowledged earlier that there are cases where preservation doesn't make sense, because of the extent of the rehab costs or other situation. In general, preservation is a more cost-effective approach, when you consider all the long-term costs, than losing that housing as affordable housing and having other alternatives, particularly because, for this doc that we're talking about, enhanced vouchers are the alternative, and they can often be significantly more expensive than the property as it is today.

So while I agree with you that we need to look at the cases very specifically, broadly speaking, preservation has shown to be a more cost-effective approach than either the enhanced vouchers or the new construction.

REP. NEUGEBAUER: But one of the questions that is -- a follow up to that -- sometimes, though, those locations are not conducive for just whatever reason. The neighborhood has changed; the demographics have changed. And there seems to be this resistance that if we have to build better housing in a different location, that somehow we are harming the residents there. You know, I think at some point in time we have to say, you know, well, sometimes it's time to move on and that strangling us to a specific location sometime is not in the best interest of -- and so I think the question is, would you be willing to, at some point in time, say, you know, it's just in our best interests here to move on?

SEC. DONOVAN: Well, in fact, in our budget proposal this year, we have proposed that this form of housing that we're talking about, assisted housing, be eligible for the kind of assistance that HOPE VI has provided to redevelop in situations where creating mixed-income and, frankly, paying attention to broader issues around school reform, making sure that we have what I would call a sustainable community there is very important. So I would agree that there are absolutely situations where assisted housing needs more than just, you know, a $20,000 renovation to be long-term successful.

REP. WATERS: Mr. Watt?

REP. MEL WATT (D-NC): Thank you, Madame Chair.

And welcome, Mr. Secretary. I'm about to violate a cardinal rule that I have, which is asking a question about something that I haven't fully researched myself and fully understand. But we have you here as a captive audience, and I just got the letter from my local Winston- Salem Housing Authority describing a problem that they are having. I haven't had a chance to really digest it, but I'm hoping that you can help me solve the problem, if not today, at least allow me to describe it as best I can.

The summary I have is an email from one of my staff people who is working on this, says that based on the Winston-Salem Authorities current housing assistance payment expenses to landlords and the enormous reduction in calendar year 2009 housing assistance payment funding as evidenced in the funding letter from HUD, we anticipate having a $3.5 million shortfall by December 31, 2009.

We are taking all appropriate measures to reduce our spending, but most will not result in an immediate reduction. Therefore, we anticipate being out of funds by August or having to terminate 1,000 to 1,200 low-income voucher participants in August for the rest of the year.

As I understand it, this resulted as a result of the way expenses were being reported, and HUD divided the reporting fields into two separate ways of reporting, and some housing authorities that tried to adopt this new process of reporting overstated in one category and understated in another category. The total amount would have been the same as if they had reported them all together, but then HUD decided it would use only one of the categories, the one that they understated, to base their numbers on.

Now, I may be off in the way I've described this, so let me shut up and maybe you can help me understand what the problem is and whether there is some way that we may be able to fix this so that we don't -- I mean, the bottom line is we can't afford to have a bunch of people not have vouchers, especially in Winston-Salem, North Carolina, which has been hit very hard by the loss of banking and the loss of textiles and has severe spike in unemployment and has increased demand for these vouchers.

SEC. DONOVAN: Yeah. First of all I would say my staff is here. I would love to get the letter and the information from you immediately after the hearing so that we could look at the details of that.

What I can say broadly is that -- and we talked a little bit about this earlier with the Chairwoman. We have a couple of issues that happened this year in the omnibus appropriation bill for the voucher program.

First of all, there was a $750 million rescission taken from the reserve balances of housing authorities around the country. That -- those reserves had sort of acted as a buffer against the kind of situations that you're talking about.

Second of all, because the bill was passed so far into the fiscal year, it has allowed housing authorities very little planning time compared to a typical year to be able to manage to their budget. And so I do have particular concern and as I mentioned earlier this -- as my new assistant secretary for public housing started this week, this is the very first issue I asked her to take a look at to make sure we understand exactly where the numbers are.

We do have some funds that housing authorities could come in and apply for. We are also looking at whether there are other measures we might take for specific housing authorities that are in the kind of the situation that you're talking about. So we should follow up and look at that.

REP. WATT: All right. Well, I'm --

SEC. DONOVAN: I would agree we don't want to lose anywhere in the country 1,000 or 1,200 vouchers.

REP. WATT: I'm told that this may be a problem that transcends just Winston-Salem and unfortunately I was trying to read and understand it. I heard you talking about this with Chairwoman Waters, and -- but I didn't realize that you were talking about the exact same issue that I was trying to read rapidly and understand.

So if I can just have your commitment to try to work with us to solve this problem, that would be wonderful.

SEC. DONOVAN: Absolutely.

REP. WATT: Thank you, Madame Chair.

REP. MAXINE WATERS (D-CA): Thank you very much.

Mr. Castle.

REP. MICHAEL N. CASTLE (R-DE): Thank you, Madame Chairwoman.

This question is going to be very general, I'm sure, Mr. Secretary, but can you tell us how today's economy is impacting all these programs that you're dealing with -- and by that I assume that the demand for this housing has increased as a result of the economic problems that we have.

I assume that the cities and the states who have helped support some of these programs are probably not contributing as they have before, and I'm not sure what's happening with respect to the conversion to private sales and that kind of thing. But I would have to assume that if the economy was as it was two years ago, things would be different than they are today, and I was wondering if you could give us the import of that from your point of view?

SEC. DONOVAN: Well, I would say two things. First of all, the importance of this housing has been magnified by the current economic crisis. In general, assisted housing serves not just low-income but extremely low-income families. On average we're talking about incomes below the poverty line in most cases for residents of assisted housing where there is deeper subsidy like project based Section 8.

We're also talking about housing in the case of many of the mortgage programs where it makes housing available to families that are in the range of sort of up to 80 percent of median income. So it's both extremely low income as well as low- to some degree moderate-income families that have been affected obviously or have these units available, and the economic crisis that hit those families particularly hard.

The other thing I think that would maybe be a less obvious impact but that also makes this bill particularly important at this moment is that what we had seen over the last few years was an asset bubble not just in single family housing, not just in a whole set of other kinds of investments, but in this kind of stock as well.

Particularly in certain markets, the prices paid per unit for these types of properties increased dramatically and there were many owners looking to the opportunity to convert these properties to condominiums, to a range of other types of option.

The credit crisis has had the effect of driving down the prices for these kind of properties. And I think if -- I -- I'm an optimist myself, I try to look at the opportunities that we have in a crisis like this -- I think that if the committee can move quickly and we can put in place some of the tools that are in this bill, I think there is an opportunity at a very low cost to the taxpayer to preserve long- term these kind of assets for affordable housing in a targeted way.

So I think that there is right now a good opportunity where good long-term preservation owners could come in and be able to purchase these properties at prices that are very cost effective, particularly compared to where they were a couple of years ago, and get a lot of preservation done in the next few years.

That was certainly the strategy we were taking when I left my local job and I think it's something that at the federal level is an important lesson as well.

REP. CASTLE: Sort of along the same lines with the budget situation that we have today -- and I understand the Recovery Act Stimulus Bill type-dollars have gone into all of this -- but what other sources are available in -- to help with the expiring mortgages and the potential loss of affordable housing units. And again, are cities and states of any help in all this to what you are doing?

SEC. DONOVAN: Well, there's really been a growing awareness over the last decade of the importance of preservation of this stock, and today low-income housing tax credits, which were mentioned earlier are generally, thought of as a new production tool. Today, roughly 50 percent of the units that are funded by tax credits are preservation units rather than new construction.

So there has been a growing set of resources dedicated by state government. A majority of states now have preservation set-asides in their tax credit allocation plan and there are lots of other local resources that are available.

The only other thing I would say is that I think if we get the right kind of work done around energy efficiency, there is an enormous opportunity to get private capital moving into these properties because ultimately what we have is long-term savings. If you add, say, $5,000 to the scope of work for an apartment that does a set of low-cost, smart, energy efficiency items, you can save far more than $5,000 over time from those renovations.

The problem is how do you convert that funding into capital today, and private mortgage financing often with FHA insurance and other tools can be a great way to try to get private capital in to help to drive this preservation rather than using subsidy dollars.

REP. WATERS: Ms. McCarthy.

REP. CAROLYN MCCARTHY (D-NY): Thank you, Madame Chair, and thank you Secretary.

Two questions that I want to ask. One has to do with reverse mortgages, especially in this economical time. A lot of my elderly residents are thinking about doing this because they lost most of their money, whatever money they had obviously in their savings accounts and retirement plans. Right now reverse mortgages are extremely expensive and the house -- the value of the house obviously has gone down.

Second question would be mixed housing. You know, going way back, probably in the '50s, there was a lot more mixed housing where you had higher-, middle- and lower income families, you know, living in the same apartment units in some communities.

We're seeing that Long Island, especially where there's a shortage of even rentals is extremely hard, but we're seeing also that certain projects are going in as far as for retirement for wealthy seniors. They're beautiful condos but, you know, myself wouldn't have even been able to afford to go into this.

What are we going to do as far as spurring mixed housing where you have the lower income, middle income and higher income working together, which I personally feel is very good for the lower income families so they'll get good housing. The other incomes from the other two groups can help subsidize those in that housing. And I was just wondering if there was anything in the plan on there.

And just going back -- because I left this bit out -- are we going to have regulations on reversed mortgages to allow for reverse mortgages. And if you can explain the program a little bit better?

SEC. DONOVAN: Yeah. So FHA, which is part of HUD, is the single most important source of mortgage insurance for the reverse mortgage program. And in our budget next year we have actually requested an appropriation to allow us to continue to make reverse mortgages available at a significant scale without any changes in premiums or other loan terms.

And there has been some discussion with the appropriations committees about whether we should make some changes to the program that would eliminate that need for appropriations. Our initial concern was as exactly as you say that during these difficult times, the reverse mortgage has become an even more important tool for seniors to be able to continue meet needs for medical expenses and other key needs that they have. And so our choice in our budget was to keep the fees and the terms of the mortgage the same rather than making them more onerous in order to be able to maintain the program next year, because we are the single most important source.

The other thing I think it is important to mention is that there have been some concerns recently about fraud within the reverse mortgage program. That has generally been around the non-FHA forms of reverse mortgages, but it is something that we are taking very seriously and looking to increase funding next year for our fraud efforts so that we can ensure that seniors are safe when they get these kind of mortgages.

REP. MCCARTHY: I'd like to work with you on that because I think the issues of fraud especially for the seniors is extremely important, and if there's anything we can do here, I'd like to work with you on that legislation.

Mixed housing.

SEC. DONOVAN: Yeah. So from my experience as a local housing official, why there are certain things that we can do at the federal level, much of the issue has been local regulatory barriers that stand in the way of producing that kind of housing, zoning codes and a range of other things. I think it is very important, the federal government is never going to take over that function or should we, those are local decisions. What we can do however is support local decision making that would create incentives and opportunities for the kind of mixed housing you talked about.

This is something I worked on very closely at the local level where we created for example exclusionary zoning that would give bonuses in density for developments that included a mix of housing. Another example is that we provided a reduction in property tax rates for properties that included a mix of different rental levels within those properties.

The issue has been often that not only has HUD not supported the kind of information and best practices around what's being done nationally, but many of our regulations and other things have stood in the way of that kind of development. Whether it be our environmental restrictions or other things that can be overly restrictive. So, I think that there is a lot that we can do and there is a proposal in our 2010 budget, in the Sustainable Community Initiative that would so to support those kinds of efforts.

REP. FRANK: The gentleman from Florida, Mr. Posey.

REP. BILL POSEY (R-FL): Thank you very much Mr. Chairman. Four, three or four questions, friendly questions and would appreciate the greatest possible economy of words so we can work our way through all four of them.

When the housing market burst, how did the lower demand for property, not in your affordable housing segment effect the supply, your supply?

SEC. DONOVAN: There are different situations in different markets, but in general it increased the demand for the kind of housing we're talking about. A little known fact is that 40 percent of those displaced by foreclosures in the country, about 40 percent, we don't have precise numbers, are renters. And so there was a significant increase both in renters for units as well as former home owners looking for rental units particularly at the affordable level as stock to buy.

REP. POSEY: Good explanation. Did many people move up when thing burst and there became some short sells, maybe some bargains on the market for people. Can you answer that?

SEC. DONOVAN: What this has provided is an opportunity particularly for first-time buyers to be able to purchase a home. In fact the recent numbers are half, close to half of all purchasers have been first time purchasers. That's' been assisted by the $8,000 tax credit that was in the in the Recovery the Bill and we've assisted as well by giving FHA guidance to all of our lenders on how they can monetize that in a loan to a first time buyer. So that has been important, that sort of getting into the market as a first time buyer is an important part of stimulating demand again.

REP. POSEY: Do you think that component was successful?

SEC. DONOVAN: I think it has been successful. Yes, I think it has been successful, in an economy of words.

REP. POSEY: You played a key role in implementing the Multi- Family Assisted Housing and Reform Reliability Act, MARA, and provided for the renewal project A of Section 8 based market rents with the goal to preserve the Section 8 portfolio. Do you know or can you provide an estimate on how many units have been converted to market since the implementation?

SEC. DONOVAN: How many have been converted to market?

REP. POSEY: Yeah.

SEC. DONOVAN: I don't. What I can tell you is that since the implementation of that program we have seen a significant decline in the number of properties that have gone to market, it is down from, and I have the exact number here, somewhere, from about 200 properties in the year 2000 to less than 50 in the most recent year. I also think one thing that's very important in this discussion of cost- effectiveness of preservation, the market-to-market program, while preserving tens of thousands of units of housing long term, it has also saved billions of dollars in reductions costs in the Section 8, project based Section 8 program.

So I think it's an important example of the way preservation can both preserve affordable housing and save taxpayer dollars at the same time.

REP. POSEY: Good explanation, thank you. Part of the bill, when it talks about limitations, I guess to the new financing, it says, "the secretary may exercise the authority to treat projects as eligible multi-family housing project pursuant to the subsection only to the extension that the number of units in the such projects do not exceed 10 percent of all units for which section 517 is completed. I wonder if you could explain that, it's on page 109 of the proposed bill, explain that a little bit. And maybe help us to understand the 10 percent as a good value.

SEC. DONOVAN: So in the market-to-market program there are certain properties in particular markets where the typical rent limit have been difficult to achieve and that can be for a number of reasons. It happens to be on a street or in a particular condition that is just different from the overall neighborhood. It may be that it is a particularly important senior housing resource that has a set of services or other amenities available that is very different from surrounding properties. I've seen this, one of the very early section 8 properties I worked on was in Dodge City, Kansas, and was the most important senior housing resources in all of Dodge City. Those exception rents are necessary in those kinds of cases where you have an unusual property that doesn't meet the typical rules. And that the limitation that is in the legislation has restricted in some cases that ability to preserve those kinds of properties without more exception rents.

REP. FRANK: Mr. Secretary, we are going to get you out of Dodge, but you will still be in Kansas.

REP. DENNIS MOORE (D-KS): Mr. Secretary, as we consider the draft legislation from Chairman Frank I appreciate the point that if the government does not preserve and improve affordable housing that has been produced through public/private partnerships, we stand to lose billions of taxpayer dollars from our prior investments. On that point, Mr. Secretary, how would Chairman Frank's draft legislation protect prior taxpayer investments in affordable housing?

SEC. DONOVAN: I think it goes a long way to helping us to increase authority and flexibility to do that. In general, and I talked about this earlier, in general , the cost of protecting these properties relative to enhanced vouchers, relative to replacement housing has typically been less than half when you compare it to the loss of these properties and to markup to market or whatever other alternatives there are. So, in general, it is an important component.

And I just want to mention specifically I found the numbers I was looking for earlier and this is an example to go to your point, with the market to market program and other efforts, decoupling and other things that have been put into place, the number of opt outs has decreased from 288 properties in 2000 down to 44 in 2008 and so I think that does demonstrate that it can be cost effective to preserve properties relative to the alternative.

REP. MOORE: Thank you sir. As the Oversight and Investigations Subcommittee Chair, I am looking for potential areas of waste, fraud and abuse. Just last week our Subcommittee heard testimony from HUD's Inspector General to hear his thoughts on how we can strengthen oversight on FHA and HUD programs. With regard to waste, fraud and abuse, Mr. Secretary, do you agree the draft legislation proposed by Chairman Frank does protect and guard against potential misuse of taxpayers' dollars?

SEC. DONOVAN: I do. I think that there are a number of provisions that are important, and overall I think that we have made some strides, but there is farther that we can go. Over the last few years there has been an increase in the use of automated systems, I know this from my own work at the local level, to really look at tenant income levels and a range of other things in a more automated way which, which both reduces the costs to the program but also allows us to ensure that truly low income people who need this resources are being benefited. And that has lead to a real reduction in the overpayments that we do on behalf of the federal programs and I think that this bill will allow us to go further in some of these efforts.

REP. MOORE: Thank you. Mr. Chairman, I yield back.

REP. FRANK: The gentleman from California, Mr. Miller?

REP. GARY MILLER (R-CA): Thank you Mr. Chairman. Mr. Secretary, you talked about the pressure on the rental market and a lot of that is due to banks having to foreclose on property, people are being put out, some of those properties are used for rental properties In my area, in Southern California Yosemite (SEMIO ?) County, 76 percent of the homes on the market are distressed properties, in LA County, about 58 percent, I think Orange County is about 45 percent and the chairman been working with me on a bill I introduced, 2529, that allows banks, when they foreclose on these properties to lease them for up to five years. And that relieves many of the problems banks have today.

They are forcing properties onto the market, thereby driving the value of homes down farther, distressing the neighborhoods and plus the market to market situation the banks are placed in, they have no choice but to do this regulators are forcing them basically to do this. If we can accomplish this it then takes a non-performing asset on the part of a bank it's a performing asset on the rental market, plus I think it will relief a lot of the pressure we're facing n the rental market. The chairman's agreed to put this on the consent calendar, it will go right to the floor, our side's reviewing it now and I hope we can enact it rapidly and I think it will relieve a lot of this pressure that we're facing in the marketplace.

The last time you were here, I was teasing you a little bit and we were joking back and forth, but we were talking about down payment of systems and how it's funded. And said you believe that down payment of systems is an effective tool, if it's done right. And I introduced a bill with my colleagues Al Green and Maxine Waters and we've been patient, working on this for quite a few years, trying to resolve this, dealing with equity, working with the fact that the appraisals have to be done properly, and that there is equity in the unit once people buy it. And you said you would review it, have you reviewed it?

SEC. DONOVAN: We have begun reviewing it, actually we have been in touch with Congressman Greene's office.

REP. MILLER: Good, I'm glad. He's been bugging me on this.

SEC. DONOVAN: I hopeful that my FHA Commissioner should be in place shortly, looking at the time, I think it is a 10:30 vote in the committee and I am hopeful that he will be in place. What I've communicated to Congressman Green's staff is what I would like do is, as soon as my FHA Commissioner is on board is to then set up a meeting with your offices to be able to discuss the legislation. I want to make sure I have real leadership in place around FHA to be able to look at the bill and make sure we can get back to you,

REP. MILLER: My friend Mr. Green, Ms. Waters and I have tried real hard to make sure DPA is a gift, not a loan, define that within the bill, that it creates immediate equity, which I know was a concern on your part before, and that it's a true gift in the bill and the civil monetary penalties would go against any appraisers who inflated it in any fashion because that was a concern of ours too and you're right in bringing that issue up because that was a huge concern for us that the question of equity was resolved, the question of stability and safe and soundness were dealt with in this, but I think the thing we are looking at in DPA is a private sector program that doesn't cost the taxpayers anything, which is good.

The bill, the language deals with high underwriting standards, which I know was a concern for you that we made the sure the standards were appropriate, that the language was in there that it is absolutely a gift, the DPA could never be repaid in the bill and basically anybody who participated had to have home owner counseling. And we've dealt with all of that, but I think there is a situation in the marketplace today.

As you are aware of people have lost homes, people would like to buy homes, we've done a lot to the tax codes to help people with down payments, but there is another option that's available to help people and I think we need to look at that opportunity and I think we need to. And hopefully we have done this in legislation the way we have drafted the bill, to provide safety and soundness and you can look at this program and say it is a good viable program, there is a way to enforce it, there is a way to make sure the appraisals are done properly.

And one thing, a problem we've dealt with recently in HVCC I think you're aware of, is we've taken the right away from a mortgage broker or a realtor to do an appraisal on a piece of property and thereby placed that opportunity with many different lenders and see who could provide the home owner the best opportunity and the best deal. And we're seeing a press report recently, a problem associated with this, especially when you are just allowing a bank to do an appraisal.

Many times in this distressed market place you'll use, you'll have an appraisal that's done by an outside appraiser does not understand the marketplace in and of itself and they are basically basing appraisals on distressed properties. Have you looked into that in any fashion?

SEC. DONOVAN: We have heard this concern in a number of places. We have frankly limited control over the broader appraiser industry, but we have been looking at it relative to

REP. MILLER: But we've limited it to

SEC. DONOVAN: FHA

REP. MILLER: We've limited the overall appraisal industry and made it specific to just a lender, and lenders, I'm not saying that lenders are mad, but many times a lender will use an appraiser who is not associated with a given area, it's just a group that they use and y concern is that we are coming up with appraisals that are not valid, based on a given, valid, justified area and comes up with an appraisal that comes up with too many of these properties that are just distressed.

SEC. DONOVAN: I do think that, that certainly as issue that I that we're aware of. The broader issue as we've see it, is the number of distressed properties that are coming on the market, driving those appraisals down and I do think there were recent numbers, just released on existing home sale and the numbers were relatively positive compared to what we've seen in the prior month.

REP. MILLER: -- going to introduce those into --

SEC. DONOVAN: Specifically the distressed sales dropped from about half the sales to roughly one-third. Hopefully that can help deal with some of the appraisal problems.

REP. MILLER: Thank you.

REP. FRANK: The gentleman from Georgia.

REP. DAVID SCOTT (D-GA): Thank you Mr. Chairman. Mr. Secretary, welcome. I'd like to get three questions in if I may. The first one is this. We have an abundance of seniors and other people with disabilities that are finding it more difficult to find adequate housing.

Mr. Secretary we've got another group coming on with a great deal of disability, what we would call a new disability population emerging and that is our veterans who are coming back, especially from the war in Iraq with the downsizing and drawback over there. And these veterans have sustained traumatic brain injuries, a new deal which many health care professionals are describing as a distinct injury within the Iraq War. And as more and more of our troops are coming home and trying to acclimate back into their communities, we as a government must ensure that they have homes to come back to provide that assistance.

As you remember in the campaign there was a great deal of debate. One of the candidates pointed out that we have veterans sleeping under the viaducts and all over. I can tell you that to a degree, some of that is true. We have to put a new focusing on helping these troops, understanding the nature of this brain trauma and this understanding that they are disabled. I would like to ask, what are we doing to ensure that they are being taken care of and what specifically can you do as Secretary of HUD to make sure they are dealt with?

SEC. DONOVAN: Thank you for raising this issue, because it is an enormously important issue and it is one that has been an important focus in my first few months on the job. First of all, one of the most hopeful opportunities that we have is that Senator Murray and our Appropriations Committee has provided to us, now two years in a row, Section 8 vouchers specifically targeted at veterans at risk of homelessness. And that program called VASH just last week, I believe we allocated an additional 10,000 of those vouchers to communities throughout the country. That's on top of 10,000 we had originally allocated the year before, and of which about 71 percent have now been authorized for use by voucher, by veterans around the country.

So that's one important step, we also have a pilot that we've started and this will be an immediate focus, I just became chairman of the Interagency Council on Homelessness, and we agreed at our first meeting that this would be an area of focus for us, to go beyond these two initial efforts to help further.

REP. SCOTT: That's excellent and I just want to extend my willingness to work with you. I've set up a hotline in my office because we have a serious problem down there to work with the office on that, and I'd certainly like to work with you.

SEC. DONOVAN: Great.

REP. SCOTT: My second question has to do with, I represent about 30, I represent 32 cities towns and seven counties in and around the Atlanta metro area, and I continue to hear complaints from the housing authorities in many of these towns that I represent that they are having difficulty in being reimbursed for the money they must put forward when a recipient uses a section 8 voucher in their city, rather than in the city where it was originally issued. They're telling me that the originating cities are not being forthcoming in sending reimbursements. Has the Department, has HUD been made aware of this problem? And if it has, what steps has HUD taken, or can it take remedy the situation?

SEC. DONOVAN: This is the problem that we call portability, which is, an important feature of a voucher is to be able to follow a job, follow family, whatever it might be, the people that use that voucher in other jurisdictions. And this has been an on-going problem. There are some changes that we can and are making to help this, but the fundamental issue is a funding issue and a legislative issue and we have been working closely with the authorizing committees including this one around the Section 8 Reform Act. There was a hearing on it the other day and this is one of the issues that would be solved by that bill.

REP. SCOTT: Excellent. Let me see if I can squeeze in my last question.

HOPE6, the Hope VI program is a jewel in the especially Atlanta area. It is a great program; I think you know by our, my good friend Renee Glover, very successful. And it has facilitated decentralization of poverty, integrated extremely low income families into the main stream, leveraged tax dollars; however, this initiative has not been without some challenges. And I want to keep it going, and let it be successful. But, it is also important to mention that HOPE 6 has lead to a lot of solutions that are a lot better than any other option open to us and has been immeasurably more effective than to maintain the status quo. I'd like for you to elaborate just briefly on the main challenges you see with this program as well as the moving to work program.

SEC. DONOVAN: Very briefly. I do believe that in general the HOPE6 program has been quite successful. There are issues that we have seen around replacement housing and adequate replacement housing that have been issues in some areas. Costs of the program in some areas, but broadly speaking it is, has been a success. So much so that we are proposing in our budget to more than double the amount of funding available for this kind of comprehensive redevelopment and as, I mentioned earlier

REP. SCOTT: Good.

SEC. DONOVAN: to expand the ability to include assisted housing as well as public housing in these kinds of efforts, in addition to link it up with school reform. Because where it hasn't succeeded as well as it such as should it hasn't been as integrated into other kinds of community revitalizations such as schools as it should be.

REP. SCOTT: Thank you very much.

REP. FRANK: The gentlewoman from Illinois.

REP. JUDY BIGGERT (R-IL): Thank you Mr. Chairman. Thank you for being here Mr. Secretary. I've got just a couple of questions. When we are looking at the aging baby boomer population, I'm worried, I think it kind of points to an affordable housing crisis for the elderly, but my concern, I'm wondering what's happening to the Moving to Work program.

I know that in the last administration, in some legislation, had talked about expansion of that program and I'm, was, the reason I'm concerned is because one of my housing authority groups was really interested in being a part of that and we can't ,there doesn't seem to be much data on it. Is that a viable program that's going to be expanded or what is the status of it?

SEC. DONOVAN: The Moving to Work Program has been an issue in terms of potential expansion or changes in the Section 8 Voucher Reform Act that I just mentioned. In general what I would say is that our sense is that the program has provided increased flexibility that has been positive in general. We do have concerns first of all that there has not been the kind of rigorous evaluation of the program that would be most helpful in understanding exactly what those benefits are. And that has been a wider issue with HUD frankly, I'm very committed to expanding our research and evaluation efforts and I think it is very important that the bill, should it move forward, includes that.

The other issue is really around tenant protections and ensuring that the kind of innovation and flexibility that's provided ensures that we continue to serve the people who need it most and to ensure that they are protected, and in fact, beyond just protected, have the kind of incentives for work and other things that are important in terms of self-sufficiency in there. So I think those are both issues that I have talked about previously in testimony and that we are hopeful will be included in the Section 8 Voucher Reform Act.

REP. BIGGERT: Do you, do you think that that would be something that would be helpful as far as the affordable housing? We've got people moving, moving on and you're going to have, the housing stock is available, is that, do you have any data on that as to how many people?

SEC. DONOVAN: We have limited data available about the impacts of the flexibility we've provided. I do think we've seen some examples of innovative approaches in Seattle and other, in King County and in other places, but unfortunately, we don't have the kind of comprehensive data that we would need to be able to say exactly how the program is

REP. BIGGERT: What are then some of the other programs then that you see that will really address the needs of the elderly population?

SEC. DONOVAN: A couple of things I would say on that front. I believe we have a real opportunity to provide more effective solutions for the aging baby boomer generation by allowing them to stay in their homes rather than have to move to more institutional settings, that are not only against what they would choose, but also, frankly, more expensive for the taxpayer in terms of the costs of those options. So we're looking at a range of ways within our program, whether it be a 202 program which is, specifically is for low income seniors, examining the tax credit program, our service coordinators, there's a range of ways we can help to provide seniors the kind of support they need in where they currently live in their communities rather than forcing them to move to more institutional settings, more expensive settings, outside of their communities.

REP. BIGGERT: Then, then just one other questions which is really kind of off, off the topic, but I think that I asked you, you at the last meeting if there's been any, yeah, progress about getting RSPA and TILA together, what is, what is the timetable for getting RSPA and, coordinated with TILA for the rulemaking?

SEC. DONOVAN: There's a short term answer to that and a long term answer to that, which Chairman Frank knows very well. First of all we have begun a working group with the Federal Reserve to try to better coordinate RSPA and TILA. I've spoken with Chairman Bernanke about that and his staff is working actively on that with my staff to try and do that.

In the longer run we have proposed as part of our regulatory reform proposal that we create a single, more thoughtful and effective Consumer Protection Agency and that is something that obviously Chairman Frank has been working closely on. Part of the proposal is that both RSPA and TILA enforcement would move to that new agency and would be enforced in a completely integrated way by a single agency rather than in the kind of divided fashion that is now across multiple

REP. BIGGERT: This isn't the Consumer Protection Agency that we're talking about, or is it?

SEC. DONOVAN: Absolutely.

REP. BIGGERT: Okay. Thank you, I yield back.

REP. FRANK: Thank, thank the gentlewoman. You know there are conflicts within the government because of different jurisdictions, but this Committee has jurisdiction over both RSPA and TILA, so if we can't get that one resolved then we are culpable and we are determined to do it, different subcommittees, but it's in the same full committee.

The gentleman from Texas.

REP. GREEN: Thank you Mr. Chair. Mr. Secretary, I was very pleased to hear your comments about the veteran population. AS you know we have about one hundred to one hundred thirty thousand, depending on who's counting, sleeping on the streets of life nightly, about 300,000 will annually find themselves in and off the streets of life with a homeless problem, with a homelessness problem. We would also like to call to your attention that we have passed legislation called the Homes for Heroes from this committee, honored to have the Housing Subcommittee Chair to of a great assistance with this piece of legislation, as well as the Chair. It passed 417 to 2 and it has gone to the Senate.

It provides for a holistic approach to dealing with homelessness among the veterans. It allows us to have a person in HUD, and I'm hoping this will give you the flexibility you seek, a person within HUD whose responsibility it is to monitor homelessness among veterans and to report to Congress, give us a report as to the status on the progress that's being made or the lack thereof. That they'll also deal with the HUD FASH program that you called to our attention providing about 20,000 more of these vouchers, hopefully that will give you additional flexibility as well.

Many of these veterans, as you know, are persons who are, who suffer from substance abuse.

It provides counseling, and helps various agencies, NGOs that deal with these issues by giving them grants so they can help us to facilitate moving veterans from homelessness to jobs and housing. I would, I would like to, if I may, pass on the actual bill to you, I am sure that you can pull it up quite easily, but it is something that I would invite you to take a look at because I think it goes a long way to helping us with homelessness among the veterans.

I would also like to mention to you, very briefly the down payment bill. What we are proposing now is very much unlike what was in place before. It recognizes that empirical evidence suggests that those who have FICA scores greater that 679 perform at the same level as those persons who receive down payment assistance from relatives or from some entity of the government for example. But it also recognizes that those who have FICA scores below 679 may not. And as a result there is s risk-based pricing for them such that we don't end up having to subsidize the program. The program continues to pay for itself by virtue of additional premiums that are paid and by virtue of the additional down payment that is required.

I think that if a close look at this will give you a better idea of, under unanimous consent, I be allowed to pass onto you a summary of what we plan to process, especially when we do have an opportunity to visit, you will have had the opportunity to peruse this summary. Mr. Chairman with your consent and permission and by unanimous consent I'd like present this to the Secretary.

REP. FRANK: Without objection and it will be made part of the record.

REP. GREEN: Yes, sir.

REP. FRANK: As far as handing it to the Secretary, he's own his own. (Laughter.)

REP. GREEN: Okay.

REP. FRANK: I can make it for the record.

REP. GREEN: Okay. Thank you. I'll make it part of the record and pass one on to you.

SEC. DONOVAN: Okay. Let the record state that I will accept.

REP. GREEN: Thank you, Mr. Secretary, thank you. And, Mr. Secretary, in closing I do have to say this. Chairman Waters and Chairman Frank have really been of great benefit on these two pieces of legislation. This is something that we have been working on for quite a bit of time and I believe that these, these pieces of legislation can help us without creating the type of cost that we sometimes have to endure when we bring new pieces of legislation online. That's how the down payment assistance program works.

Now finally, I want to share something with you. A friend of mine, B.B. King has a song and I'm speaking now for the tenants, it's called "Everybody Wants to Know Why I Sing the Blues" and in that song in one verse reads, or is, "I laid in the ghetto flats, cold and numb, heard the rats tell the bedbugs to give the roaches some." And then he goes onto say "I stood in line down at the County Hall, I heard a man say, we're going to build some apartments for ya'll, and everybody wants to know why I sing the blues."

Now I mention this to you because many people blame tenants, for wanting to stay where they are in and live in conditions that are less than acceptable. Well, tenants have had promises made that haven't been kept. And tenants have good sense they know that before they agree to have something demolished that they can get in the future, they ought to try to hold on to what they have now.

So many of them are willing live in conditions that are less than what you or I might live in, but they do so because they are afraid that if it demolished, they won't get something new. Example, in New Orleans, one for one replacement was promised; so far that promise has not been kept. And I have persons who can validate what I say. So we have tenants in New Orleans who are a little bit disenchanted, who didn't want to leave what they had, but it is only because they know that promises made are not always promises kept. And everybody wants to know why they sing the blues, because we don't always keep our promises.

Thank you.

SEC. DONOVAN: Well said.

REP. FRANK: Thank you. The gentleman from Missouri.

REP. EMANUEL CLEAVER (D-MO): Mr. Secretary, the Temptations have a song called -- (laughter).

Thank you Mr. Chairman. Mr. Secretary, thank you for being here. And my comments won't be quite as colorful as my long time friend the judge which also were profound. Before I get into the 108 Program, I'm sorry, the Section 8 program, I want to talk about the 108 program, if you could, because it could have some impact. I'm wondering whether or not you and your staff are looking at the 108 loan program whether or not there is a need for updating it.

I was the mayor of Kansas City and we were the first city to use the 108 loan program and we built a downtown hotel and things have changed since those days. We didn't have to -- at first we didn't have to use the CBDG fund to guarantee the loan or the general fund which I guess is happening in a lot of cities. In light of what's going on in the banking industry and there a lot of urban developments that won't get started now because of what banks are doing do you think there is any need to take a serious look at updating the 108 loan fund so that it is contemporary with the issue we are confronting?

SEC. DONOVAN: In fact I do and we do have a proposal in our 2010 budget that would change the way the 108 program works to basically make it self-financing rather than making it dependent on specific appropriation. Our concern has been as that the demand has often, particularly as you have said with the credit crisis, could exceed those appropriations. And so we think that we also now have enough of a track record in the lending in the 108 program and a very limited loss rate in that program that we would establish, the way we do with many of our other loan programs a credit subsidy rate and have it be self-financing going forward.

REP. CLEAVER: Like a revolving loan firm?

SEC. DONOVAN: Not necessarily revolving, but that it would no longer require the

REP.CLEAVER: The CBDG?

SEC. DONOVAN: the appropriations and the CBDG offsets the way that it has. We would be happy to share more information with you on that.

REP.CLEAVER: Yes, I am very much interested in that program. I think it was one of the best programs to come along from HUD in terms of saving the cities. I'm sure there may be some that who would argue that, but I have arguments to counter that.

If we could go to the Section 8 program, we are going to lose in the next few years, almost a -- there is a possibility that we could lose up to 1 million 108 certificates or the housing that is currently available, the contracts will expire. I'm not sure of the exact numbers, but I think it is near, close to 1 million.

SEC. DONOVAN: Close to 1 million, yeah.

REP. CLEAVER: And so, we're going, I'm assuming you're going, your staff will be directed to be begin to work with all of the owners to see what can be done to get them to agree to another contract. But one of the things I would ask you to consider and if it is not feasible I'd like to hear your comments and that is, in Kansas City we are doing called Green Impact Zone, we are doing 150 blocks with smart grid

SEC. DONOVAN: I've heard about it.

REP. CLEAVER: and the whole nine yards, what I'm wondering is, we've lost about 2,000 housing units over the last 10 years, they're gone, the city eventually demolished them because they were considered dangerous buildings and so they're gone and there are also many empty properties there. Is it feasible that as we lose these, or as we have to deal with about 1 million units needing new contracts that we can acquire in the urban corridors, dangerous buildings, doing some rehab like we are doing with money from the stimulus anyway and create additional housing with housing that would otherwise be demolished? I'm worried about sustainability and recycling.

SEC. DONOVAN: In fact in this bill there are provisions that would allow HUD to move existing Section 8 contracts to other properties. This is something that actually I pursued personally at a local level and I think I would love to have some more discussion with the committee about flexibility that would be needed to do the kinds of innovative things that you are talking to ensure that this can actually work. Because the current way, the current way that this is structured in current law is fairly cumbersome to use; it has been difficult given all the realities of

REP. CLEAVER: Yeah.

SEC. DONOVAN: how real estate works, to make this provision functional, to move Section 8 units to be able to preserve them, even if it's in a different property. And I think even with what's in the bill, some added flexibility to that would make it useful to make it really effective

REP.CLEAVER: I would really like to spend time with

REP. FRANK: Let me invite my colleague to work with the staff of committee and the subcommittee and help be part of that process and I am always glad to have members who are have a particular interest in a particular provision, so I would be glad to have you and your staff work on that.

The gentleman from Indiana.

REP. ANDRE CARSON (D-IN): Thank you Mr. Chairman. I am grateful for your advocacy on this issue. I have a question. Mr. Secretary, the Chairman's inclusion of a National Preservation Database in this bill is essential to empowering tenants and advocates.

Do you see any advantage to in expanding the notification requirements in the bill to require HUD to proactively reach out to Congressional offices, local tenant protection groups, legal services and community groups, when a multi-family owner notifies your agency that it intends to terminate affordability restrictions?

SEC. DONOVAN: First of all, and I worked on this very directly when I was at HUD the first time. I think that that notification and providing as much information as possible to residents is very, very important. In fact, when I was at HUD the first time we increased the amount if disclosure that we would do, provided information to residents, posted in offices, so expanded that. I do believe that that is important.

Two things I would say about that. First of all, and this applies to the Database as well. There are certain types of information that are protected. And we've got to be careful and we would like to work with the committee on ensuring that protections of competitive information, certain financial information that we are clear on what legal protections there are. Short of those I think releasing information, the more information the better.

The second thing I would say is that one, one risk is that if we require, so early in the process, that there be notifications, what can happen is that owners, to protect their options, will make those notifications and that will have the effect, if there are no specification plans to opt out of the property, to cause undue concern and fear on behalf of the residents. And so there are some provisions for example in the bill that would require a two-year notification rather than a one-year notification.

I think we need to look carefully and discuss what is the most appropriate time for that -- that information. It has to be earlier so that the tenants can get together if they want to purchase the property, if they want to work with a non-profit or another purchaser, they have time to do that effective to preserve their property. On the other hand we don't want to do it so early so that we are unnecessarily frightening residents when in fact the owner may not have any concrete plans at that point in terms of what they're doing with the property. So there is some balance that we have to strike my belief is to ensure the right information to residents, but not unduly concerning them when in fact the owners haven't made a decision yet.

REP. CARSON: Thank you Mr. Secretary. I yield back Mr. Chairman.

REP. FRANK: I'll take advantage of that to say I am glad that you made that last point because there is that balance. And we don't want to force premature and maybe unnecessary decisions, so that is, and I will say this. In an atmosphere in which we have the right legislation and a cooperative administration, the need for that notice may be less than it was. Seriously, if the notice is there and it is very important in an adversarial situation, but in a cooperative situation we don't have to, I think, rely as much on that.

Mr. Secretary this has been very useful, it has been a wholly constructive exchange of information which means that it will attract no attention in the media, but it will advance legislation and I am confident that in listening to people on all sides here that we will have a comprehensive preservation bill with your great help ready to go by the end of the year.

And I will say that I have spoken to my colleagues in the Senate, Senator Jack Reed who does housing, and others, Senator Schumer of course is well aware of the importance of this from his own state. So I am pretty optimistic that we will have very good piece of legislation available for signature by the end of the year.

The hearing is adjourned.


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