Hearing on "Housing and Community Development Needs: The FY 2003 HUD Budget."

Thank you, Chairman Sarbanes, for this opportunity to share with you The Enterprise Foundation’s views on the administration’s fiscal year 2003 budget request for the Department of Housing and Urban Development (HUD).

The Enterprise Foundation is a national nonprofit organization founded in 1982 by Jim and Patty Rouse that mobilizes private capital to support community-based organizations and a wide range of their neighborhood revitalization initiatives. We have raised and invested more than $3.5 billion to produce more than 120,000 affordable homes. Our community partners have used these resources to leverage an additional $7.5 billion in investment in their neighborhoods. Enterprise’s network of local partners includes 1,900 community and faith-based groups, public housing authorities and Native American Tribes in more than 700 locations.

Mr. Chairman, we commend you for calling this hearing. It is typical of your longstanding leadership that you would focus the Committee’s attention on a vital issue others often overlook: the important role the federal government, primarily though HUD, must play in helping meet our nation’s housing needs. We hope today’s hearing initiates a bipartisan effort to forge consensus on steps Congress and the administration can take to assure housing needs do not worsen during this time of great uncertainty in the country and the world.

We also deeply appreciate your and Senator Reed, Senator Kerry and Senator Leahy’s efforts to include housing assistance in the Senate’s economic stimulus legislation. Housing help—especially the $3 billion for the HOME program you have proposed—absolutely should be part of any economic stimulus plan. Housing generates jobs and other economic activity and provides assistance to people who need it most during an economic downturn.

Mr. Chairman, this country faces an affordable housing crisis. Even before September 11, housing needs were far outstripping the capacity of states and localities to meet them. The most current data show nearly 14 million families with critical housing needs, another two million who will experience homelessness this year and a loss over the past decade of more than one million apartments affordable to "extremely low-income" renters (those earning 30 percent or less of area median income). These figures reflect conditions before the terrorist attacks, during a time when the economy was growing. Now that those terrible events have pushed the economy into what could be a prolonged recession, housing needs likely will worsen further.

We commend Congress for increasing funding for many HUD programs in the fiscal year 2002 HUD appropriation above the levels the administration proposed in its budget request. Your colleague from Maryland, Senator Mikulski, along with Senator Bond, was instrumental in that effort. Regrettably, HUD’s budget for the current fiscal year still results in slightly less net new housing assistance than in fiscal year 2001. With the economy worsening, states, cities and communities likely will fall further behind in their efforts to meet their most vulnerable citizens’ housing needs.

Congress and the administration cannot allow this to continue in the fiscal year 2003 appropriations process. We urge HUD to request more adequate funding and Congress to assure that the federal government does its part to help meet our nation’s housing needs next year. We would make the following three broad recommendations to the administration in developing its fiscal year 2003 HUD budget priorities:

• Increase housing production, especially for extremely low-income households;
• Expand the capacity of community-based groups to deliver housing help; and
• Encourage and empower the private sector to do more to help meet housing needs.

Without a substantial increase in federal investment in housing production, this nation will never solve its affordable housing crisis. The federal government has largely withdrawn from housing production over the past 20 years. HUD’s budget in real terms is less than half of what it was in 1980 and only about one-quarter of the Department’s shrunken funding today goes to new production and rehabilitation.

Is it any surprise that the nation now faces a growing deficit of affordable homes for its poorest citizens? The 1999 American Housing Survey reveals an absolute shortage of 2.8 million rental apartments affordable to extremely low-income people. And the problem is worsening rapidly. The number of apartments affordable to extremely low-income renters dropped by 750,000 nationwide between 1997 and 1999 alone, according to HUD.

A simple and effective way Congress could increase affordable housing production would be to increase the annual HOME appropriation. A decade’s worth of evidence certainly argues for it. HOME has financed more than 617,000 affordable homes and currently produces more than 70,000 homes a year. Of HOME-assisted renters, nearly 90 percent are very low-income and 56 percent are extremely low-income. More than half of all HOME-assisted homebuyers earn 60 percent or less of area median income. Every HOME dollar generates an additional $3.93 in public and private investment in housing.

HOME is an especially important tool for community-based groups, which have received almost half of all HOME funds, according to the Urban Institute. HOME dollars often provide critical resources to housing developments financed with the Low Income Housing Tax Credit (Housing Credit), which is vital to neighborhood organizations, because they typically do the most difficult developments requiring the deepest subsidy to serve the neediest families. HOME also provides crucial technical assistance and operating support to community-based groups to help them become stronger organizations.

HOME works because it is flexible and allows states, cities and communities to solve whatever housing needs they—not the federal government—determine are most important: homeownership or rental; new construction, rehabilitation, or preservation; elderly, disabled, homeless or working family.

HOME received roughly $1.8 billion in formula funding for fiscal year 2002, the same as fiscal year 2001, plus an additional $50 million for a new downpayment assistance program. We encourage HUD to request and Congress to provide $2.9 billion in HOME funding for fiscal year 2003. This amount would roughly equal an inflation adjustment to HOME’s initial 1993 authorization level of $2 billion.

In addition to a HOME increase, we, like many affordable housing advocates and growing numbers of members of Congress, support a new production program targeted to extremely low-income people. A substantial HOME increase would help significantly address affordable housing needs of families with incomes between 30 percent and 80 percent of area median income. It also would partially alleviate, but not solve, the far more severe housing crisis facing those earning less than 30 percent of area median income. To achieve that objective completely, a new program is needed.

Extremely low-income people face by far the most acute affordable housing needs. In 1999, for every 100 extremely low-income renters there were available only 39 affordable apartments nationwide. And, as noted earlier, that inadequate supply of housing is shrinking fast.

Fortunately, HOME has shown us what a successful program should look like. It should be flexible, allowing for virtually any type of housing development, with an emphasis on rental production, including rehabilitation. It should be administered by states and cities, pursuant to public input. It should leverage additional public and private investment. It should provide a strong role for community-based groups. Beyond those broad, largely non-controversial principles, we offer the following more detailed suggestions for structuring a new production program.

Any new program should serve low-income people exclusively, with the large majority of resources dedicated to extremely low-income people. We recommend that any new program target 75 percent of its funds to extremely low-income households. Of that amount, 30 percent of funds should be targeted to households earning the equivalent of the minimum wage or less. The remaining 25 percent of funds should be targeted to households earning up to 80 percent of area median income, provided that they live in low-income communities. This targeting would assure that the vast majority of resources benefit those that most need housing help, while allowing (and facilitating) some level of mixed-income development in high-poverty neighborhoods that would benefit from it.

Also, any new program should work in combination with existing, effective resources, especially the Housing Credit. The only way to serve extremely poor people with a capital subsidy is to combine resources from several programs. It is particularly important that any new program work with the Housing Credit, which can cover up to 70 percent of construction costs. The Housing Credit generally penalizes developments that receive federal grants, with exceptions for HOME and the Community Development Block Grant. One way to assure that a new program would work with Housing Credits could be to allow, but not require, jurisdictions that receive the new resources to run them, or some portion of them, through their HOME program accounts. This could be accomplished without altering either the HOME statute or the deeper targeting and any longer affordability requirement of a new program.

Finally, any new program should set a minimum rent contribution affordable to extremely low-income people to allow developers, lenders and investors to underwrite developments that serve them. Simply pegging tenant rents to a percentage of their income, which varies by family, prevents sound financial underwriting. We recommend that any new program set a minimum tenant contribution to rent for the extremely low-income apartments of either the greater of 30 percent of the tenant’s income or a standard amount affordable to a tenant whose income is 15 percent of the area median income (state median income for apartments in non-metropolitan areas).

Another important production program for low-income people is the HOPE VI public housing revitalization program. HOPE VI also stands out as one of the most effective federal initiatives ever to facilitate mixed-income affordable housing and stable neighborhoods. HOPE VI represented a bold admission by Congress that past public housing policy regarding high-rise concentration of the very poor had failed and a radically new approach was needed. The program—and the localities, developers and residents that have worked together to implement it—have delivered. HOPE VI has helped transform dozens of the most distressed neighborhoods in America by building community services and resident support systems along with new homes. HOPE VI received $574 million for fiscal year 2002, the same amount as fiscal year 2001. We encourage HUD to request and Congress to provide this level of funding in fiscal year 2003.

Authorization for HOPE VI expires next year. The work of public housing revitalization is far from over, however. Many high-rise and mid-rise public housing developments, while not "severely distressed," are physically obsolete or are fast approaching that point. Many are still home to high concentrations of extremely poor people. We look forward to working with the Committee and HUD to create a new, successor program to HOPE VI to address these housing needs and turn more dysfunctional, detrimental environments into healthy communities. The new program should incorporate the core principles that have characterized HOPE VI’s success: mixed-income housing; "new urbanist" planning and design elements; provision for infrastructure, community facilities and supportive services; and financial leveraging.

One of the best ways to assure that federal housing funds assist the neediest households and most distressed communities is to build the organizational strength of community and faith-based groups dedicated to helping them. Congress can do that through an existing, proven initiative called "Section 4 Capacity Building for Community Development and Affordable Housing."

"Capacity building" is abstract jargon, but it means the very life of an organization. Capacity building funds help community-based groups hire and retain staff, upgrade computer systems, develop business plans and form new partnerships. There are no ground breakings or ribbon cuttings for capacity building, but without it, neighborhood groups could not achieve the bricks and mortar transformation of their communities. This kind of support is especially vital for smaller organizations with less experience in community development. And it is a wise investment for the federal government, because it ensures that organizations that use federal resources can do so efficiently and effectively.

Congress enacted Section 4 in 1993 to allow HUD to participate in a private sector-led collaborative called the National Community Development Initiative (NCDI). The NCDI had been formed two years earlier by a group of national foundations, financial institutions, Enterprise and the Local Initiatives Support Corporation (LISC), another leading national community development organization. The purpose of the NCDI was to strengthen community groups, attract additional resources to expand their work and build continuing local support for community-based revitalization. Under the initiative, the funders channel resources through Enterprise and LISC to community-based groups in 23 cities. (In 1997, Congress began appropriating capacity building funds through HUD to other intermediaries, such as Habitat for Humanity International and YouthBuild, for use outside NCDI cities, including rural and tribal areas.)

The NCDI’s overwhelming, documented success shows that capacity building is a high-yielding investment in which limited federal resources leverage substantial private capital for a significant community development impact. According to an independent analysis by the Urban Institute, community group strength, production and local support systems have grown significantly thanks to NCDI investment. As a result of the NCDI, the Urban Institute concluded that community-based groups "in many cities are now the most productive developers of affordable housing, outstripping private developers and public housing agencies."

After a decade, we have learned a few lessons about why federal support for nonprofit capacity building is so essential and why it represents a wise investment of very limited federal dollars:

First, federal participation is limited but indispensable. Overall private funding in the NCDI increased dramatically in subsequent funding rounds after HUD joined in 1993. In addition, most HUD funds committed through the NCDI have been in the form of grants, on which neighborhood groups especially depend to build their organizational strength. (Private NCDI funds more often are deployed as loans.) Furthermore, according to the Urban Institute "The single best predictor of the number of capable [community-based groups] in a city is the amount of federal funding channeled by that city government to neighborhood revitalization."

Second, federal participation leverages substantial additional private investment. Recipients of federal capacity building funds are required to match every dollar they receive with three additional dollars of private or public funds. In practice, they leverage even more than that. Private funds account for 85 percent of the roughly $250 million committed through the NCDI through this year, a leverage ratio of more than four-to-one. That $250 million has leveraged more than $2 billion in total community revitalization investment from more than 250 state and local partners.

Finally, federal participation does not limit local innovation. Almost as important as the scope of HUD’s participation in the NCDI has been the nature of it. As the Urban Institute noted, "HUD’s participation in NCDI was a significant move for the federal government because HUD pledged to act as an equal to the other funders—not imposing its own criteria for selecting cities or [community groups], but instead tailoring its regulatory requirements where possible."

Congress appropriated $25 million in capacity building funds to Enterprise and LISC to split equally in fiscal year 2002. (Additional capacity building funds were appropriated to Habitat for Humanity International and YouthBuild.) Enterprise and LISC receive far more requests for capacity building assistance than they can meet each year. We urge HUD to request and Congress to provide $30 million in nonprofit capacity building funds to Enterprise and LISC for fiscal year 2003.

While we believe the federal government must do much more to help meet the nation’s housing needs, the private sector has a significant role to play as well. Programs like the Housing Credit have shown that limited, targeted federal incentives can generate large private investment in affordable housing that contributes substantially to community revitalization. We recommend that the administration and Congress continue to encourage similar public-private partnerships.

One such example is the Community Development Financial Institutions (CDFI) Fund. While administered by the Treasury Department, the Fund’s budget is funded in the VA, HUD and Independent Agencies appropriation. The Fund stimulates the creation and nurtures the growth of community-based financial institutions working to revitalize distressed and underserved communities. The Fund has made more than $430 million in awards to support a wide range of financial institutions, including community development banks, credit unions, loan funds, venture capital funds and microenterprise loan funds. The Fund provides direct assistance to such institutions, as well as incentives for larger banks to invest in them.

Recipients of funding must match every dollar of federal assistance with at least a dollar from other sources. In practice they leverage federal funding much further. According to a recent Treasury Department survey, 106 recipients of CDFI Core Component funding that received a total of $114 million from 1996 – 1998 made $3.5 billion in community development loans and equity investments during that period. In other words, these institutions leveraged every dollar of federal assistance with an additional $31.

While some CDFIs are engaged in non-housing activities, such as small business and community facilities development, many focus heavily on housing. In 1999, entities that received CDFI Fund Core Component awards financed nearly 25,000 homes and apartments, virtually all of which were affordable to low-income people. Nearly 60 percent of Fund-certified CDFIs serve smaller urban areas and 62 percent serve rural communities.

Regrettably, the fiscal year 2002 HUD appropriation cut the CDFI Fund by almost one-third, from $118 million in fiscal year 2001 to $80 million. Again, we deeply appreciate Congress’ efforts to increase funding above the administration’s request—which would have cut the Fund by more than 40 percent—especially the Senate, which provided $100 million for the Fund in its version of the appropriations bill. We cannot understand why the administration would propose such a sharp cut to a program with a proven track record that leverages an extraordinary amount of additional investment to meet pressing national needs. We urge the administration to request restored funding for the CDFI Fund to the fiscal year 2001 level of $118 million and for Congress to provide that amount in fiscal year 2003.

Another excellent proposal for increasing private investment in affordable housing is the homeownership tax credit the administration included in its fiscal year 2002 budget request. While HUD would have no direct role in the credit, the administration last year included a description of it in its HUD budget request. And while the Banking Committee would not have jurisdiction over the credit, we believe it is important that the Committee, and its many members dedicated to affordable housing, understands and supports this promising proposal.

Most federal low-income housing assistance is for rental housing help. Far fewer resources are available to help produce homeownership housing for low-income families. Homeownership rates for minorities, families earning less than their area’s median income and central city residents are well below the rate for the nation as a whole. The main reason for the lack of affordable homeownership development in many distressed neighborhoods is that it costs more to build or substantially rehabilitate homes than homes can sell for in such areas. Thus, a resource is needed to bridge the difference between the construction cost and market value of homes in low-income communities. A homeownership production tax credit would fill a glaring gap in the housing finance system, increase affordable homeownership opportunity for low-income people, encourage mixed-income development and community revitalization and help combat sprawl.

The administration’s proposal wisely incorporates many aspects of the Housing Credit that have made it such an effective rental housing production program. We support the administration’s core proposal: 50 percent present value tax credit claimed over 5 years; allocated by the states under a competitive process based on annually determined housing needs; in an amount equal to $1.75 per capita, with a small state minimum, both of which would be indexed to inflation; targeted to families earning 80 percent or less of area median income; available in census tracts with median incomes of 80 percent or less of area median income; awarded to developers to fill the gap between construction costs and market value; limited to 50 percent of development costs; buyer subject to recapture of a portion of any resale gain if the home is sold to a non-qualified buyer within three years of original purchase.

In addition, we recommend the following modifications to the administration’s proposal: the Credit also should be available in rural areas, as defined by Section 520 of the 1949 Housing Act, and on Indian reservations; states should be able to serve buyers earning up to 100 percent of area median income in "Qualified Census Tracts" as defined under the Housing Credit statute (census tracts where more than half the families have 60 percent or less of area median income or where development costs are disproportionately high); and nonprofit developers should receive a minimum of 10 percent of each state’s annual allocation of Credits.

We urge the administration to include the proposal in the fiscal year 2003 budget request and for Congress to enact it next year. A complete list of the many leading housing organizations that support the administration’s homeownership tax credit proposal is attached.

While our testimony deals with HUD’s budget request for fiscal year 2003, we want to conclude with a few words about the future of federal housing support beyond next year. As a member of the Millennial Housing Commission, I have spent much time recently discussing with leaders from throughout the housing industry numerous ideas for improving the affordable housing finance and delivery system. Three ideas in particular have resonated with me. I hope they are helpful to HUD and the Committee in thinking about the "big picture" aspects of federal housing policy, which while part of the annual HUD appropriations process, also transcend it.

First, housing programs and policies are too often isolated from broader goals of enhancing economic opportunity for families and strengthening communities. Viewing housing through such a narrow lens has led to myopic policies that disregard the interconnections between housing and other human and community needs. Housing is the foundation of most families’ savings and many neighborhoods’ stability. In making housing policy, Congress and HUD should consider how housing assistance fits into a larger family and community context.

Second, and very much related to the first point, housing programs must be more flexible. States and localities must be given greater authority to combine housing resources with one another and with other programs that serve the same constituencies and communities, such as welfare, workforce development, child care and transportation programs. We encourage Congress and HUD to explore ways to enable more efficient combination of federal resources, especially when and where they target very low-income people and/or extremely distressed neighborhoods as part of comprehensive community revitalization strategies.

Third, we implore Congress and HUD to develop policies and devote resources to preserving the existing affordable housing stock. The federal government has made a huge investment in the current inventory. Most of it provides decent, affordable housing for low-income people. But we are losing more and more of this precious resource every year to deterioration and conversion to market rate use. More than 1 million low-cost rental apartments were lost during the 1990s. Up to 4 million more affordable apartments (including 1 million federally assisted apartments) are at risk over the next decade. Congress and HUD must address preservation before it is too late. We would look forward to working with both in that effort.

Mr. Chairman, now more than ever, our nation must be strong and united. We believe that sources of that strength and unity include family, faith, community—and a place called home. Now more than ever, home matters. Home is a family’s foundation and an anchor in times of turbulence. Home means security and stability. Home helps define and sustain communities, forming the fabric of our neighborhoods and the relationships that bind us.

Now more than ever, a decent, safe and affordable home is out of reach for too many working Americans. More than 15 million low-income families pay too much in rent, live in run-down housing or are homeless. The supply of affordable apartments is rapidly shrinking nationwide. The slowing economy, along with the recent and substantial loss of jobs in the United States, will put the prospect of an affordable home out of reach for even more low-income Americans. This will strain the fabric of many communities.

The federal government, working with states and localities, the private sector and community-based organizations, has a responsibility to help meet the nation’s most dire housing needs. We sincerely hope that the administration’s fiscal year 2003 HUD budget request will provide the tools necessary to meet this responsibility. Thank you for this opportunity to testify.

Home | Menu | Links | Info | Chairman's Page