Chairman Reed, Senator Allard, and members of the Subcommittee, I am Richard Godfrey, Executive Director of the Rhode Island Housing and Mortgage Finance Corporation. Thank you for this opportunity to testify on behalf of the National Council of State Housing Agencies (NCSHA).
NCSHA represents the Housing Finance Agencies (HFAs) of the 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. I am a member of NCSHA's board of directors and serve as its secretary.
State HFAs allocate the Low Income Housing Tax Credit (Housing Credit) and issue tax-exempt private activity bonds (Housing Bonds) to finance apartments for low income renters and mortgages for lower income first-time homebuyers in nearly every state. They administer the HOME Investment Partnerships (HOME) program in 40 states to provide both rental and homeownership assistance for low income families. Many state HFAs administer other federal housing programs, including Section 8 and homeless assistance.
State HFAs have helped more than 2.2 million lower income families buy their first home with a Mortgage Revenue Bond (MRB) mortgage. HFAs have financed more than 2 million rental apartments for low and moderate income families, including more than 1.4 million apartments for low income families with the Housing Credit. They have provided another 220,000 low income families homeownership and rental housing help through HOME.
State HFA efforts to finance homeownership and rental housing received a boost from Congress' recent passage of a near 50 percent increase in the Housing Credit and Bond volume caps. However, these increases were not enough even to restore the purchasing power these programs had lost to inflation since Congress imposed the caps in 1986. Demand for Housing Credits and Bonds still outstrips their supply in virtually every state.
The availability of scarce Bond financing is severely threatened by the MRB Ten-Year Rule. The rule requires HFAs to use MRB mortgage payments to retire the MRB, rather than make new mortgages to lower income families, once the MRB has been outstanding for more than 10 years.
This arbitrary and obsolete rule puts increased pressure on the already inadequate Bond cap by forcing states to use new Bond authority to finance MRB mortgages, rather than recycling old authority into new mortgages. In three more years, the rule will have wiped out the equivalent of the Bond cap increase you and so many in Congress worked so hard and long to enact.
The Housing Bond and Credit Modernization and Fairness Act, S. 677, repeals the MRB Ten-Year Rule and makes other important changes in the MRB and Credit programs to assure their usefulness in all parts of the country, particularly in very low income, predominantly rural, areas. Seventy-six senators have cosponsored S. 677.
I encourage you, Mr. Chairman, and Senator Sarbanes, to join them in cosponsoring this important bill. I ask all members of the Subcommittee to communicate to the Senate Leadership and Finance Committee Chairman Baucus (D-MT) and Ranking Member Grassley (R-IA) the urgent need to include S. 677 in a viable tax bill this year.
Thank you, Mr. Chairman, for your strong and consistent leadership on affordable housing matters. NCSHA commends you for holding this hearing to shine light on our nation's affordable housing shortage and possible solutions.
Over the last several years, members of Congress, the Millennial Housing Commission (MHC), housing industry groups, and other housing advocates have recognized the critical need for increased production of affordable housing, particularly for our nation's very low and extremely low income renters. Many have presented proposals for increased federal investment to meet this need. Now is the time to identify and combine the best elements of these proposals in an effective response to our nation's affordable rental housing shortage.
A Pressing Need for Affordable Housing Persists throughout the Nation
There is an ever-growing consensus, supported by academic research, newspaper reports, and the personal experience of millions of low income families, that our nation confronts an affordable housing crisis. According to the 1999 Annual Housing Survey, one in seven American families has a severe housing problem, meaning they spend more than half their income on housing or live in substandard housing. That's 15.5 million families, both homeowners and renters.
This crisis extends from the very poor to the solidly working class. Yet indisputably, those families hardest hit are those with the least income. Of the 15.5 million families with severe housing problems, 80 percent are very low income, earning 50 percent of their area's median income (AMI) or less. Nearly 60 percent have extremely low incomes, earning 30 percent of AMI or less.
In its much anticipated, recently released report on federal housing policy, the Millennial Housing Commission concluded:
The most serious housing problem in America is the mismatch between the number of extremely low income renter households and the number of units available to them with acceptable quality and affordable rents. This is a problem in absolute terms, with 6.4 million extremely low income households living in housing that is not affordable. And it is a problem in terms of severity, in that extremely low income households make up only 25 percent of renters, but 76 percent of renter households with severe housing affordability problems.
The Commission found that even if all rental apartments affordable to extremely low income households were appropriately located, the right size, of good quality, and available, the nation would still have a shortage of 1.8 million apartments affordable to them. Many apartments affordable to extremely low income families do not meet these conditions, making the real supply gap much larger.
According to the National Low Income Housing Coalition's just-released report on housing affordability, Out of Reach 2002, the average hourly wage of workers in extremely low income households is $8.37 an hour. Yet, the "housing wage," the average hourly wage necessary to afford a two-bedroom home at the nationally weighted fair market rent (FMR), is $14.66.
This means that a worker earning the federal minimum wage, $5.15 an hour, would need to work an average of 114 hours per week in order to earn enough money to rent a two-bedroom apartment at the FMR. Last year, more than 2 million workers in the United States earned the federal minimum wage or less.
There is no state or county in the country where a minimum wage worker can afford a two-bedroom apartment at the FMR. Seventy-five percent of the states have a housing wage of more than twice the prevailing minimum wage. Ninety percent of all renter households live in these states.
Extremely low income families undoubtedly have the most acute housing needs. Since frequently homeownership is not an option for them, more federal resources must be concentrated on producing rental housing affordable to these vulnerable families.
Though very low and extremely low income families have the most acute needs, the need for quality affordable housing extends to low and even middle income families. According to the Commission's report, housing affordable to families earning between 60 and 100 percent of AMI plummeted between 1985 and 1999, dropping by 2.3 million units, or 20 percent.
Steady losses of affordable apartments exacerbate the affordable housing shortage. According to HUD's 2001 report on worst case housing needs, there were almost a million fewer apartments with rents affordable to extremely low income families in 1999 than there had been in 1991. Between 1997 and 1999 alone, the number of apartments affordable to extremely low income families declined by 750,000, or 13 percent. More than 100,000 assisted units have been converted to market rate housing due to owners opting out of federal housing assistance programs. The threat of further losses looms as contracts on hundreds of thousands of units expire each year.
Substantial New Federal Resources Are Needed
Substantially more federal resources must be devoted to producing and preserving affordable rental housing, especially for those with the least income. Rents these families can afford to pay simply are not sufficient to support the production and operation of rental housing without substantial subsidies.
Existing federal resources are not sufficient. Demand for subsidized housing far outstrips supply. Only one-third of families eligible for rental housing help receive it.
Meanwhile, today's HUD budget is a third of what it would have been had it kept pace with inflation since 1976. The HUD budget has remained flat in nominal terms over the last 27 years. It has barely grown from $29.2 billion in 1976 to $30 billion in 2002, losing nearly two-thirds of its purchasing power. During the same period, total federal discretionary budget authority has grown from $194 billion to $635 billion, a three-fold increase.
Increased funding for existing HUD programs is essential. However, funneling more resources into these programs alone will not solve the affordable rental housing shortage.
Existing HUD programs were not designed to produce new rental housing on any significant scale. In fact, one of the only HUD programs actually producing new affordable rental housing today is the HOME program. Despite its achievements, HOME is not the best vehicle for delivering new federal rental production resources.
HOME funding is allocated among more than 600 state and local government recipients. Many of them do not receive funding allocations sufficient to make meaningful investments in rental housing production.
HOME funding also is used to help finance the entire range of affordable housing activities, including down payment assistance, mortgage assistance, home improvement and rehabilitation, tenant-based assistance, lead-based paint abatement, reconstruction, rental rehabilitation, rental production, and acquisition. This further reduces HOME funding availability for rental housing production.
Even the Housing Credit-the single greatest producer of affordable rental housing today-was not designed to serve extremely low income families without additional subsidies. In 2001, 45 states allocated some portion of their Credits to apartments for families earning 50 percent of AMI or less. In 18 of these states, more than half of the apartments allocated Credits in 2001 were dedicated to families earning 50 percent of AMI or less. Nearly half of all states allocated some portion of their Credits to apartments targeted to families earning 30 percent of AMI or less.
While states consistently serve families earning considerably less than the 60 percent of AMI federal income limit, state HFAs In Rhode Island and across the country are finding it increasingly difficult. There are not sufficient subsidies to combine with the Credit to meet the large and growing need among very low and extremely low income families. It is especially difficult to reach such families in areas with very low AMIs.
Utilize the Proven State Housing Delivery System
We believe the affordable rental housing shortage can be solved without designing a complicated new program or delivery system. The delivery system already exists in state HFAs. All that is needed is a federal commitment of new flexible funds allocated through state HFAs to leverage Bonds, Housing Credits, and other resources to reach underserved families, particularly those with very and extremely low incomes.
Any new funding Congress is able to appropriate for this purpose almost certainly will be insufficient to meet the need. Therefore, it is essential that whatever limited funds Congress makes available be delivered through an established, integrated system that facilitates their coordination with other resources and targets them to where they are most urgently needed. This system is already in place at the state level.
NCSHA recommends that any new rental production funds be administered by the states for at least four compelling reasons:
First, only statewide government is in a position to judge and allocate the assistance to the most pressing needs, wherever they exist in each state, in amounts sufficient to make a difference. Housing needs in cities, suburbs, and rural areas do not often exist in isolation from one another.
Moreover, housing needs, job and commercial development, transportation burdens, health care availability, human services demands, and other neighborhood development requirements flood across city and county political boundaries, sometimes across broad areas of a state. These interrelated needs cannot be addressed as fairly, effectively, or efficiently by a proliferation of individual subdivisions acting alone. States can work with local governments to recognize and address these needs.
States are uniquely positioned. They are close to real local issues and housing needs, but have enough perspective to bring a state and regional focus to problems that cannot be solved within individual municipal boundaries. States are in an unparalleled position to ensure that funding is applied where it is most needed and integrated with other public investments in our physical, economic, and human infrastructure.
States have the ability to bring together state agencies and resources in ways the federal government and local communities cannot. For example, state HFAs have partnered with welfare agencies to use Temporary Assistance to Needy Families (TANF) funds to provide housing assistance to families attempting to make the transition from welfare to work. They have teamed up with state health and human services agencies to obtain Medicaid waivers to cover the cost of services in HFA-financed assisted living. They work with state departments of mental health and retardation to provide quality housing linked to supportive services for people with mental illness and retardation.
State HFAs also successfully partner with local governments, nonprofits, the private sector, resident and community groups, and service providers to address the diverse housing challenges they confront. Through comprehensive and coordinated state, regional, and local planning, state HFAs can assure that housing is developed where it is most needed and in sustainable communities with access to jobs, transportation, schools, health care, and other services.
Second, the funds potentially available for any new production program under any reasonably anticipated budget scenario will be too scarce to be divisible among more than the 50 states, if relative needs in all parts of each state are to be considered and prioritized adequately, and the funds marshaled to meet them. Dividing into more than 50 parts whatever additional housing funding Congress provides would dilute those funds in many places to amounts too little to be effective or meaningful.
Programs such as HOME and CDBG that divide limited resources between hundreds of local communities simply are not conducive to large scale, expensive production activities. This fractionalization makes these programs very popular among a broad base of local governments, but distributes funds without regard to consideration of or prioritization among statewide or even regional needs and in shares frequently too small to address whatever needs exist even in the county or city receiving them. State level administration is the only possible way to bring always-too-scarce federal assistance to bear in the most comprehensive, coordinated, cost-effective fashion on the most pressing multifamily production problems, wherever they exist in each state.
Third, only state government has the capacity in every state to administer sophisticated multifamily financing. State housing agencies possess statewide focus, sophisticated finance, underwriting, and asset management capacity, and a multi-decade record of responsibility, effectiveness, accountability, and success in administering tens of billions of dollars of housing assistance. They are investment grade rated.
States are the only point in the entire federal system where all federal and state housing resources-Housing Bonds, Housing Credits, HOME, Federal Home Loan Bank advances, FHA insurance, and state-provided funds-can be accessed in one place and brought to bear on housing needs.
Fourth, federal oversight capability can be more effectively concentrated on 50 entities than on programs spread among hundreds of states and municipalities, a point which HUD itself recently recognized in limiting to the states the delegation of contract administration on its 850,000 unit Section 8 project-based portfolio. We expect that HUD will supervise the proper use of funds it allocates, but eschew prescriptive regulations or micro-management of state administrators.
Any new production vehicle should leverage and expand the reach of the current housing programs and be integrated with existing state housing plans and funding systems. It is essential that any income, rent, or other rules be flexible enough to ensure compatibility with the Housing Credit and other federal housing programs, for the combination of this new funding with them will almost always be necessary to reach extremely low income families.
We propose that new rental production funds be allocated by State HFAs, subject to a state allocation plan, modeled on and coordinated with the Housing Credit qualified allocation plan. The plan, developed with extensive public input, including from local governments and nonprofits, would identify the state's priority rental housing needs and strategies for using the funds to address them.
States should be empowered to use funds for a wide range of activities, including project-based assistance, new construction, rehabilitation, and preservation. Funds should not be encumbered with program set-asides.
Finally, it is essential that states have the flexibility they need to tailor innovative solutions to their unique and varied housing problems. HUD regulation must be limited to that which is necessary to assure nondiscrimination and accountability for the use of funds to achieve the goals Congress has set. Irrational and unnecessarily burdensome rules, regulations, and reporting requirements frustrate state HFAs and their partners, smother creativity, and delay results.
The Solution is at Hand; The Time to Act is Now
Members of Congress in both houses and from both sides of the aisle have long recognized the need for increased production of affordable rental housing. The congressionally mandated Millennial Housing Commission report confirms this need.
Several members of Congress, the Commission, and a number of industry groups, including NCSHA, have put forward proposals for addressing this need. Many of these proposals, particularly Senator Kerry's National Housing Trust Fund Act of 2001 (S. 1248) and Senator Bond's Affordable Housing Expansion Act of 2002 (S. 2967), contain many of the essential elements outlined in this testimony, including state administration, deep income targeting, and flexible program rules.
We are confident that legislation incorporating these elements would attract broad bipartisan support. We urge you to move forward and pledge our full support.
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