On behalf of the 205,000 members of the National Association of Home Builders, I want to thank you for inviting us to speak on the fiscal year 2003 Department of Housing and Urban Development (HUD) budget. My name is David Curtis, and I am a builder from Wilmington, Delaware. I currently serve as Executive Vice President of Leon N. Weiner & Associates, Inc., which is a Wilmington-based home building, development and property management firm. The Weiner organization and its affiliates are recognized as industry leaders, particularly in the area of providing affordable housing to individuals and families of moderate means. The company has developed and constructed more than 4,500 homes, 9,000 apartments, and several hotels, office and retail facilities.
Two recent reports, one by the Center for Housing Policy, "Paycheck to Paycheck: Working Families and the Cost of Housing in America," and the Joint Center for Housing Studies of Harvard University's, The State of the Nation's Housing Annual Report 2001, have extensively documented the growing problem of housing affordability for low and moderate income households. The Joint Center's report states that, at the end of the last decade, over 14 million owner and renter households spent more than half their incomes on housing. Two million households lived in homes with serious structural deficiencies, and many of those households were also severely cost-burdened. The Center for Housing Policy estimates that 3.7 million households who fall within the category of the "working poor" have critical housing needs.
NAHB strongly supports the mission of HUD and its efforts to meet the nationís housing and community development needs through single-family, multifamily, and urban and rural development initiatives. Most of these efforts include a public-private partnership that involves private, for-profit home builders and that is facilitated through coordination with many other partners including community organizations and state and local governments. In addition to developing and overseeing most of the key federal programs in these areas, HUD also conducts important research and analysis on housing needs and solutions to housing problems.
NAHB views HUDís role in housing as critical to achieving the nationís goal of safe and decent housing for every American. Success in these efforts requires adequate funding and effective and efficient operation of the Department. We recognize there are significant challenges in meeting funding requests throughout the federal budget, but we urge Congress to provide sufficient funds to give HUD the staff and resources necessary to make meaningful progress in addressing the nationís housing and community development needs. Our detailed recommendations follow.
In addition, the HUD budget is a factor in the degree of economic stimulus received by the housing sector and the economy. Our statement also includes observations and recommendations on economic stimulus measures.
The Federal Housing Administration (FHA) Multifamily Programs
The FHA is the only federal program that supports the production and rehabilitation of affordable rental housing units for a range of incomes, not just the very low end of the market. However, while the FHA programs continue to serve a vital function within the housing finance system, the legislative, regulatory and policy framework under which these programs operate are often unnecessarily restrictive and burdensome. On the multifamily side, the programs have been subjected to a series of start-stop cycles that have resulted in significant losses of time and money to developers and longer waits for affordable housing by residents.
Of particular concern to NAHB is HUD's decision to raise the mortgage insurance premium from 50 to 80 basis points for a number of the FHA multifamily mortgage programs, in particular the 221(d)(4) program. According to the model used by HUD and the Office of Management and Budget (OMB) to determine credit subsidy requirements, the higher mortgage insurance premium allows the FHA Section 221(d)(4) multifamily mortgage insurance program to operate without a credit subsidy appropriation. The Administrationís budget for FY 2002 continues the higher premium level.
NAHB has expressed its opposition to the mortgage insurance premium increase as burdensome and unnecessary. NAHB believes the premium increase in the Section 221(d)(4) program will lead to higher rents and reduced production of affordable rental housing. NAHB believes that the assumptions in the model used by HUD and OMB to determine the credit subsidy requirements for the Section 221(d)(4) program are excessively pessimistic. For example, the model places too much weight on the performance of loans from the early 1980s, which were insured under much weaker underwriting standards than employed today and were impacted by the unprecedented retroactive provisions of the 1986 tax act. If the model were revised to address these and other problems, the Section 221(d)(4) program would not require credit subsidy appropriations or an increase in insurance premium.
Congress recognized this problem by directing HUD, in the FY 2002 HUD/VA appropriations bill conference report, to work with the industry to review the technical assumptions provided by HUD to OMB for inclusion in the risk model. FHA Commissioner John Weicher and his staff held several meetings with NAHB where HUD requested and NAHB offered recommendations for alterations to the model. Commissioner Weicher agreed to complete a study of the credit subsidy model by October 1, 2001, so that a revised formula could be in effect for the FY 2003 budget, but has failed to do so. NAHB believes that completing the study of the model and implementing any changes in time for the FY 2003 budget cycle is of utmost importance. We also believe that HUD needs to follow through in working with the industry in finalizing any changes.
Also related to the FHA multifamily programs, we appreciate the support of HUD and applaud the action taken by Congress in the HUD FY 2002 appropriations bill, which raises the FHA multifamily mortgage loan limits by 25 percent. The limits, which remained at the level last set in 1992, made the program unworkable in many major urban areas. The increase in the mortgage loan limits will now help provide affordable housing in many areas where the programs could not be used previously.
We were disappointed, however, that the increase was not indexed to account for inflation each year. Without indexing, the loan limits will rapidly become outdated, leaving us in the same position as before. We urge you to include an inflation index to the mortgage loan limits in the FY 2003 budget, and we recommend using the U.S. Bureau of the Census Annual Construction Cost Index. This index is used to derive the annual value of general construction costs put into place and is a measure of the impact of inflation on construction costs. It is the best readily available index published on an annual basis.
Additionally, there are a few cities where costs, particularly for land, have risen so dramatically over the past several years that the 25 percent increase will not be sufficient to enable developers to use the FHA programs. While the Secretary has discretion to adjust the limits by a high cost factor, we believe that a legislative change is needed to recognize that there are some very high cost cities that should be permitted to exceed the current 110 percent high cost factor. We encourage you to consider making such a legislative change.
HUD Budget Recommendations
NAHB believes that it is essential to maintain a strong federal commitment to housing assistance programs for low- and moderate-income families and provide incentives for greater involvement by state and local governments to develop affordable housing solutions. As such, we support adequate funding levels for the housing programs that will help achieve these goals.
HOME Investments Partnerships Program
NAHB is very supportive of the HOME program. It is an important and flexible block grant that state and local governments use to address their locally identified affordable housing needs. HOME funds have become an important source of gap financing for developers using tax-exempt bonds, low-income housing tax credits and other affordable housing financing. HOME funds are also an important source of assistance for first-time homebuyers. We support a funding level of at least $2 billion, without funds earmarked for specific purposes. We believe the participating jurisdictions already have the flexibility to use HOME funds to meet their specific housing needs, which can vary considerably.
Community Development Block Grants (CDBG)
NAHB was disappointed that the funding for the CDBG program was reduced from $4.4 billion in FY 2001 to $4.34 billion in FY 2002. NAHB supports a funding level of $4.8 billion. This program, which provides flexible funding so that communities can meet housing and economic development needs as they see fit, is a cornerstone in the effort to revitalize our nation's cities and rural areas. We were pleased that HUD recently changed its position on prohibiting the use of CDBG funds for the new construction of single-family housing. We urge Congress to consider allowing the use of CDBG funds for the new construction of multifamily housing as well.
While NAHB understands the reason Secretary Martinez requested fewer vouchers for FY 2002, it is nonetheless a dramatic reduction from the FY 2001 level of 79,000 vouchers. We understand that, in some localities, vouchers were not being utilized efficiently; however, HUD is taking steps to address this issue, which should help improve utilization rates. At the same time, Congress needs to be aware that demand for Section 8 vouchers has not declined. In fact, in many localities, residents face waits of five or more years before they can receive a voucher. We urge Congress to provide funds for all Section 8 contract renewals and, additionally, provide funding for 79,000 new incremental vouchers in FY 2003. The Section 8 voucher program is critical to addressing the housing needs of extremely low and very low-income residents, especially during economically difficult times when more families are facing unemployment and rising housing costs.
Partnership for Advancing Technology in Housing (PATH)
NAHB is supportive of the $8.75 million that was included in the FY 2002 budget. This program is vital to the accelerated development of new housing technologies, designs and practices that can significantly improve the quality of housing and save energy without raising the cost of construction. We urge you to continue funding of this innovative program.
The Rural Housing and Economic Development Program
While much progress has been made in improving housing in rural America, there remains a considerable unmet need, particularly among very-low- and low-income rural households. NAHB supports the Senate's restoration of the Rural Housing and Economic Development Program because it provides funding for important technical assistance, such as homeownership counseling, to those who live in rural communities. Our members report that credit problems and lack of knowledge about the home buying process are serious issues in rural communities and that programs to address these issues are valuable and needed services. We support maintaining a funding level of at least $25 million.
Finally, under the Economic Development initiative, we support funding for the HomeAid America program, whose mission is to build or renovate shelters for temporarily homeless men, women and children across America by establishing chapters in affiliation with home building associations throughout the country. We are very appreciative of the $490,000 earmark for FY 2002, and we look forward to working with the Committee next year on continued funding.
Housing Preservation -- Restructuring the Portfolio of HUD-Assisted Multifamily Properties
HUD, through the Office of Multifamily Housing Assistance Restructuring (OMHAR), is carrying out a program, created by Congress in 1996, to restructure the portfolio of HUD-assisted multifamily properties. The goal of the program, often referred to as "Mark-to-Market", is to keep properties with expiring federal rental assistance contracts in the affordable housing stock while, at the same time, reducing the amount of federal budget dollars required to provide rental assistance to residents of those properties. This is accomplished by either a restructuring of the mortgage and a rent reduction or by just a rent reduction.
NAHB strongly supports the goals of the Mark-to-Market program and looks forward to the completion of work by Congress to pass reauthorization legislation for the program, which sunsets this year. And, as mentioned earlier, we urge Congress to continue to provide the funding needed by HUD to renew the rental assistance contracts on the Mark-to Market properties. This initiative is the only federal program available to preserve this major component of our stock of affordable rental housing, representing more than 1.3 million housing units. While the program got off to a slow start, it appears to be picking up momentum and clearly has the potential for making significant progress toward the goals it is charged to pursue.
As the program moves forward, some improvements and clarifications should be made in administrative processes and procedures. In particular, NAHB is very interested in working with HUD and other interested parties to develop more accurate and equitable processes for determining rents and to improve the operation and productivity of the Mark-to-Market program.
New Rental Housing Production Program
Despite the nation's general prosperity, there continues to be a critical shortage of affordable rental housing. As mentioned previously, two recent reports, one by the Center for Housing Policy, "Paycheck to Paycheck: Working Families and the Cost of Housing in America," and the second, the Joint Center for Housing Studies of Harvard University's The State of the Nation's Housing Annual Report 2001, have extensively documented the growing problem of meeting the housing needs of 3.7 million households who are the "working poor." The Center is focusing on this group because there are signs of persistent and worsening housing affordability for them in all parts of the country, including cities, suburbs and rural areas, despite the recent economic prosperity.
Workers in municipal jobs, such as teachers and police officers, and in the services sectors, such as janitors, licensed practical nurses and salespeople, fall into this group of people and are a large and growing component of many local economies. The growth in such jobs, however, is not matched by the growth in the supply of affordable housing, creating an increasingly difficult situation for both renters and homeowners.
NAHB believes there is a need for a new multifamily rental housing production program that would meet the affordable housing needs of households with incomes between 60 and 100 percent of AMI, America's "working poor," as described in the reports. These households are not eligible for housing assistance through most current federal housing programs.
NAHB has developed a program that is designed to increase and maintain the affordable housing stock over the long term. The program would not require large federal budget outlays. Instead, affordability would be generated through lower interest rates available by securities backed by the full faith and credit of the federal government. Federal subsidies would be required in some instances and would be provided through modest interest-rate buydowns. A portion of the units (up to 25 percent) would serve households below 60 percent of AMI, although a modified rental assistance voucher program would be needed to assist these households.
The program is designed to use government resources as efficiently as possible, with the amount of subsidy required per development small relative to the amount of housing produced. A wide range of households will be served by producing mixed-income housing. The program ensures long-term affordability (40 years+) and provides incentives to owners through the deferral of profits, contingent on property performance (both financially and physically) until long-term affordability is satisfied. It builds in adequate reserves from cash flow for on-going maintenance and future capital improvements. Finally, the NAHB proposal avoids the establishment of new program bureaucracy, because it could be administered in the same fashion as the HOME, CDBG and tax credit programs.
NAHB believes that the establishment of a new rental housing production program should be a top housing priority for the Administration and Congress in the coming year. Several bills have already been introduced in Congress, and the Millennial Housing Commission is expected to offer a recommendation on a new rental production program as well. NAHB is committed to continuing its work with its housing partners, HUD and Congress towards this goal.
HUDís focus should also reflect the current economic situation, and the realization that housing can and should play a major role in leading an economic recovery. To that end, NAHB has proposed an economic stimulus package designed to produce jobs, income and new revenue to federal, state and local governments. Among the initiatives included in this package are a temporary first-time home buyer tax credit, a temporary increase in the low-income housing tax credit (LIHTC), and a temporary removal of the tax-exempt bond ceiling.
The NAHB proposal for a 10 percent first-time home buyer tax credit is similar to the one proposed by President Bush in 1992. The estimated economic impact of this credit would total $27 billion in labor and business income in the community where the homes are built, and $15.6 billion to workers outside the area producing goods and services for the new homes. This translates into an additional 1.2 million jobs created. The local governments in the area would see an added $4.3 billion and all other governments would receive an additional $18.7 billion. The federal governmentís revenues would increase by $15.8 billion alone.
The temporary increase in the dollar amount of LIHTCs awarded to states would be similar in magnitude to the permanent per capita increase enacted in the recent past. This would stimulate the production of $28,000 additional low-income units, $780 million in income, and support over 21,000 full-time jobs.
Tax-exempt bonds are used by themselves and in combination with the LIHTC and other programs to produce affordable rental housing. To achieve a strong short-term economic stimulus, we recommend temporarily removing the limits on the amount of private activity tax-exempt bonds a state may issue. We estimate the impact on multifamily production would be an additional 15,000 units, generating $470,000 million in income and 13,300 full-time jobs. In addition to this, expansion of other private activities financed by these bonds would provide further stimulus.
NAHBís economic stimulus package also targets two HUD programs, recommending increases in the FHA multifamily mortgage limits and HOME grant spending. The 25 percent FHA loan limit increase in the FY 2002 appropriations bill was a step in the right direction and should provide an annual economic stimulus on the order of 4,000 units of new construction and $150 million in wages, enough to support over 4,000 full-time jobs. As mentioned previously, however, that bill failed to provide further increases for high-cost metropolitan areas, such as Boston, New York, and San Francisco. Not only are additional increases necessary to make the program work effectively in those areas, we estimate that the total economic impact in terms of income, jobs, and government revenue generated would be roughly one-fourth greater than the stimulus provided by the 25 percent loan limit increase alone.
We have already expressed our support for the HOME program as a proven mechanism for producing affordable housing. In addition to an annual funding level of at least $2 billion, we recommend a one-time increase in the dollar amount of HOME grants awarded to states as a desirable way to provide a short-term boost to the U.S. economy stimulus. An increase of $500 million would produce approximately 6,400 new multifamily units, which would generate about $175 million in wages and support 4,800 full-time jobs.
Single Family FHA
A 1996 change in a HUD regulation may create problems for 10-year warranty programs and for the home builders using those programs. The result of the regulation will be to increase the risks to warranty providers, which will in turn result in increased costs for warranty coverage.
On July 9, 1996, HUD published a Final Rule that dealt with a broad range of issues relating to FHA-insured single-family loans. HUD viewed these changes as "technical improvements" and, therefore, did not publish the proposed changes for public comment prior to publication in final form.
The problem relating to 10-year insurance-backed warranty programs arises from a change in the Code of Federal Regulations, section 203.204(g) wherein the word "or" in the following sentence is changed to "and." Before this change, this section read as follows:
"ÖA Plan must contain pre-arbitration conciliation provisions at no cost to the homeowner, or provision for judicial resolution of disputes, but arbitration, which must be available to a homeowner during the entire term of the coverage contract, must be an assured recourse for a dissatisfied homeowner."
This change did not come to light until recently, when HUD told a large home building company that their warranty program, based on an in-house risk retention group, would have to contain the "and" language.
Warranty programs are reviewed and approved by HUD on a 24-month cycle. At the time of the last renewal in 1999, one major warranty provider was permitted by HUD to retain the "or" language in its warranty. Another major warranty firm has addressed HUDís requirements by adding an addendum to their warranty documents that permits the judicial alternative on warranties for homes purchased using FHA-insured loans while retaining an arbitration-only warranty for conventionally financed homes.
NAHB is concerned that, by requiring warrantors to offer the judicial alternative, HUD is opening the door for homeowner lawsuits, which greatly increases the risk exposure to warranty providers thereby adding to consumer home buying costs, since any additional risk borne by warranty providers would be passed along to home buyers in the form of increased premiums. For example, one warranty provider has indicated its average warranty premium would increase approximately 29 percent on warranties that offer the home buyer a judicial option and premiums would increase by a significantly larger margin for high-risk states such as Texas and Colorado.
In addition, a Uniform Limited Warranty, which was proposed to HUD by NAHBís Home Buyer Warranty Task Force in May 2000, calls for binding arbitration. Therefore, the current rule also negatively impacts the proposed Uniform Limited Warranty.
NAHB believes that the Federal Arbitration Act and recent case law support the use of binding arbitration as a legal and desirable method of resolving disputes in warranty matters and that HUDís requirement that a judicial option must be offered to homeowners, while legal, is not necessary or desirable.
NAHB agrees with home builders and warranty firms that arbitration is a fair and legal means of resolving warranty disputes, and that HUD should not mandate that 10-year insurance-backed warranties contain a provision offering home buyers the right to seek either a judicial remedy or arbitration.
Surveys and Housing Information
The budget of the Office of Policy Development and Research (PD&R) supports several current surveys of housing activity and conditions. HUD sponsors current construction activity surveys of homes built for sale, apartments for rent and manufactured housing produced. These vital housing indicators are important to the industry and to the rest of the economy as indicators of the health of the housing sector.
PD&R also supports the American Housing Survey, a survey of the condition of the housing stock and household characteristics. The survey has been conducted since 1973 and provides the housing community with consistent information about the American housing stock, condition, affordability and change. We urge you to continue funding both of these information sources.
In addition, there are a number of areas where a lack of data is hampering efforts to develop new sources of financing for housing. For example, more consistent and comprehensive data on multifamily properties and related mortgages are needed before additional steps can be taken to develop new ways to attract funds for affordable multifamily housing from the capital markets. Sufficient funding should be available to support such data collection efforts by PD&R.
Mr. Chairman, NAHB appreciates the opportunity to share our priorities and concerns with you as the fiscal year 2003 HUD budget is developed. We look forward to continuing to work with Congress, HUD and our industry partners in achieving the goal of a decent and safe home for every American.
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