Good morning Mr. Chairman. My name is Charles Wehrwein. I am a Vice President of Mercy Housing and have had direct experience with OMHAR and the M2M program both at Mercy, and in a previous position with one of the largest nonprofit preservation portfolio acquisitions to date. I appreciate the opportunity to offer my comments today on three issues: the progress being made in restructuring rents and debt of the FHA insured Section 8 portfolio, the experience with the operations of OMHAR and its team (including PAEs) and the savings generated by restructurings and the overall impact on preservation of affordable housing. These comments generally reflect the input of other significant organizations in the community development field including the National Housing Trust, LISC, the Housing Partnership Network and NEFPI.
Introduction: Mercy Housing
Mercy Housing is a non-profit affordable housing developer, owner and manager headquartered in Denver, CO, with real estate interests in many other regions throughout the nation. In our 20-year history, we have developed nearly 11,000 units of affordable housing serving more than 27,000 low-, and very low-income Americans on any given day. Mercy Housing regards the preservation of affordable rental housing as essential to the stability and revitalization of communities and the residents who so desperately need this housing, both now and in the future. Mercy and others who work in the community development field remain deeply concerned about the future of preservation in general, and the Mark-to-Market program specifically. To that end, Mercy is launching a targeted preservation initiative that will focus significant human and financial resources on this critical problem.
Case Study: Mercy Housing’s Decatur Place, Denver, CO
Before commenting on the specific issues and policies around the M2M subject, it is helpful to add some real context to the discussion. In that regard, I would like to share with the Subcommittee a specific example of M2M in action.
Mercy owns a 106 unit Section 8 assisted property in Denver, CO. This property serves the transitional housing needs of distressed families (e.g. where a spouse with children has been in an abusive relationship and has had to leave home with virtually nothing). This property’s Section 8 contract expired and it was subject to M2M. The M2M restructuring at Decatur is nearly complete and is expected to close within the next month or so.
An example of a typical resident is Caroline Garcia. She and her four children escaped an abusive relationship with nothing more than the clothes on their backs. She had little education and no job when she arrived at Decatur Place. When told she would have to reside in a 2-bedroom apartment until a 3-bedroom became available, she said it would be much better than the single room apartment they just left. Her first month, she was able to contribute only $4/month to rent. She immediately went to work part-time at the cafeteria where her children attended school. She also took life skills training provided by Mercy at the site, including parenting, financing and computer training. In just two and one-half years, she has completed her education and is now working full-time as a medical transcriber. Her children are healthy and strong, and doing better in school. And she is now contributing $386/month in rent.
This is a great example of the contribution that assisted housing makes in our community. Were it not for the M2M program and the commitment of staff of OMHAR (both the national office and the San Francisco field office), the Colorado Housing Finance Agency (CHFA), the City of Denver and the committed staff and resources of Mercy Housing, this property could not have been sustained.
Progress of Restructuring of the FHA Insured Section 8 Portfolio
The progress of restructurings, which began far to slowly, has now picked up dramatically. In our view, it is solely because of the new owner and nonprofit incentive guidelines that were adopted by OMHAR in fall of 2000. They were created through a cooperative approach that brought together stakeholders from across the spectrum that is a great example of how government should work. These new guidelines, among other things, recognize and allow for a more fair economic treatment of nonprofit purchasers relating to the ongoing costs of ownership and provide for some additional debt relief to encourage nonprofits to pursue purchases of M2M properties. The nonprofit buyer, in turn, commits to an extended period of affordable use. They also provide for improved processing and returns of equity to existing owners that recognize the economics associated with extending affordable use
Prior to these new guidelines, it was simply uneconomic to take on these properties. While the economics are still marginal under the incentives, they make it probable that long-term nonprofit owners can own and operate these properties over time and actually cover some of the costs of ownership. They also recognize the extended affordability commitment by existing owners and have dramatically increased the number of restructurings that have occurred with this group. We applaud OMHAR’s recognition of the inequity in treatment of nonprofit owners and the resultant risk of additional affordable housing losses, and their response to this problem. Without these new incentives, the number of restructurings, especially full restructurings, would not have increased materially and the program would have been a failure.
Extending the authorities present under MAHRA will allow sufficient time for the backlog of these complicated transactions to be completed. It will send a clear and strong message to the entire housing community that Congress is committed to sticking with a consistent approach once it works. This will help to eliminate the potential for stalling by those who would attempt to wait for another program change before acting. It will also allow more nonprofit purchasers to line up the additional resources necessary to help preserve these assets for the future.
We strongly support the extension of authorities beyond their scheduled expiration at the end of FY 2001. We recommend that Subtitle A, of MAHRA be extended for at least five years. Furthermore, we strongly encourage the Subcommittee to recognize and affirm the importance of the new incentives and guidelines implemented by OMHAR, as they are critical to the recent success of the M2M program. Finally, we specifically call the Subcommittee’s attention to the need for continued funding of Intermediary Technical Assistance Grants (ITAG) and Outreach and Training Grants (OTAG) at a level equal to the previous years’ $10 million per year or higher. We further recommend that the Department expedite the availability of these funds to their intermediaries charged with disbursement.
Experience Working with OMHAR and its Team
OMHAR was clearly slow getting out of the gate, both in organizing its operations and in naming and contracting with Participating Administrative Entities (PAEs). The reasons for this are many depending on one’s point of view. Creating an organization from scratch is difficult and time consuming under the best of circumstances. Add to the mix creating this organization in a politically charged atmosphere where salaries and contracting procedures are more limited than in the private sector, and it seems in hindsight that a period of three years to both create OMHAR and complete all necessary transactions was optimistic at best.
Experience with OMHAR’s national office staff and consultants suggests that they are extremely competent from a technical standpoint, are willing to work with all stakeholders, and they have worked very hard to get this program underway once the organization was up and running. The consolidated expertise in the national office is especially effective at dealing with the myriad complications that many of these deals bring.
The assessment of OMHAR’s field staff from the perspective of many nonprofit stakeholders is more variable. The largest problem overall seems to be the effectiveness of communication of national office policies and positions and the assurance that these policies and procedures are being followed consistently. This problem is exacerbated by the fact that OMHAR has been unable to fill open positions due to their impending sunset. More time to accomplish this important task and more certainty about the future of OMHAR would alleviate many of the problems in this area.
Experience with public PAEs has been mostly positive, and my personal experiences with Housing Finance Authorities in Colorado and Missouri have been outstanding. These PAEs have a very good sense of their markets and the standards housing should meet in those markets. Overall, the staff at the public PAEs seems competent and professional. Public PAEs have a better understanding on how to appropriately strike a balance between cost savings and quality affordable housing.
As with the rest of the M2M implementation, it is taking some time for all of these entities to get up to speed with what is effectively a new program. Like the comment above, time and certainty will improve this experience more still.
From a programmatic standpoint, we would like to see a more direct linkage between HFA and other state and local housing resources and preservation, and would strongly support new funding allocated to the states to accomplish this goal. This leveraging of, and link to, more locally driven housing resources would strengthen the link between the public PAE and the HUD-assisted/insured assets in their communities. The federal matching grants provisions of legislation proposed in H.R. 425 and proposed in the past by Senators Sarbanes, Kerry and Santorum (Section 401 of S. 2733 introduced last year) would be an excellent vehicle to accomplish the linking of state and federal resources and we strongly support it.
Experience with the private PAEs has been generally good. As with my comments earlier on OMHAR field offices, communications of national policies and priorities could be improved upon. Their nature as profit-motivated contractors sometimes leads to less ownership of a deal when compared to public PAEs and possibly a focus on cost considerations versus the quality and context of the property at the local level.
In conclusion, whatever the reasons for the delays in getting OMHAR off the ground, it is now working. It is a singular businesslike unit in the federal government that is competent and improving and it would be a waste of the taxpayer’s resources invested to date, to let it expire, or otherwise reconfigure it, just as it is beginning to reach its potential. This would be analogous to building a factory, creating new tooling, training new employees, and then closing it down just as production got underway. The work it was created to do is not yet done.
Based upon my experience as a Deputy Assistant Secretary for Multifamily Housing at HUD/FHA, it is my strong feeling that transferring the OMHAR staff into the HUD mainstream will at best, create serious delays of six months or more as it is assimilated into the system, and more probably, cripple the program. As it stands today, OMHAR is a model for future government program operations. It is a small, lithe organization with specific technical skills that allow it to be responsive to stakeholders and objectively judged by Congress. If it is assimilated more directly into HUD, and especially if its wage scale and special contracting flexibility are taken away, many key staff will either leave for the private sector, or be drawn into other responsibilities at the Department. Therefore, I urge you to extend the OMHAR organization in its current configuration by extending Subtitle D of MAHRA for five years or more. I would also encourage Congress and the Administration to consider other ways that this technical capacity could be used to deal with more problem assets or asset categories throughout the assisted/insured HUD portfolio. For example, these same skill sets would be useful to HUD in dealing with "work outs" (i.e. where insurance claims have been paid or where the Secretary has taken ownership of a property through foreclosure.
Preservation and the Cost of the M2M Program
As to the question of the cost effectiveness of the program we cannot provide the Subcommittee with the specific costs of the program versus projections that are 5 years old or more. What we can comment on, however, is the cost effectiveness of preserving this limited and essential affordable housing. Anecdotally, the cost of purchasing, rehabilitating and preserving existing rental housing is often in the range of $20,000 - $40,000, which compares very favorably to the cost to build new and/or the permanent loss of potentially hundreds of thousands of units from the affordable housing inventory.
The conclusion here is clear. Even if the marginal cost of restructuring mortgages and reunderwriting projects results in a modest increase in costs (which we do not assume here), failure to act would result in both higher replacement costs and/or the loss of irreplaceable housing resources that the government has already invested billions of dollars in. Preserving the existing assets and the project-based contracts associated with them is good public policy and good fiscal policy and we believe that OMHAR and the M2M program are effective tools in accomplishing these public policy goals and should be extended.
Finally, mission driven organizations like Mercy Housing, the National Housing Trust, the Housing Partnership Network, NEFPI and LISC and its Community Development Corporation partners are ready to help serve the public purpose of preserving the valuable investment that our nation has made in affordable housing. To that end, these organizations need capital support to be able to preserve and maintain this housing over the long term. We strongly support legislation that would accomplish this like that proposed in Section 402 of S. 2733 introduced by Senators Sarbanes, Kerry and Santorum last year, with funding limited to those direct and intermediary non-profit organizations that have a demonstrated track record and commitment towards the development and long-term ownership of affordable housing.
This concludes my testimony. I appreciate the opportunity to be with you today and share our experiences. I would be happy to respond to any questions you have and to work with your staff to follow-up on or amplify any issues brought to light.
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