Chairman Reed, Senator Allard, and members of the Subcommittee, I am Kit Hadley, Commissioner of the Minnesota Housing Finance Agency. 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.
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. State 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.
HFAs also administer many programs to help preserve affordable rental housing. They finance property acquisition and rehabilitation and provide owners incentives to maintain their housing as affordable or transfer it to entities that will. Many states have added preservation to their criteria for determining which developments receive Housing Credits. Some have set aside a portion of their Housing Credits for preservation.
State HFA efforts to produce and preserve 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 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 and will have crowded out multifamily housing lending as greater amounts of new authority are committed to single-family use.
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 Housing 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 on affordable housing preservation.
The need to preserve affordable rental housing goes hand-in-hand with the need to produce more of it, about which NCSHA testified before this Subcommittee two weeks ago. The same urgent needs that demand the production of more affordable rental housing make it imperative that we protect the existing affordable rental housing stock.
In its much anticipated, recently released report on federal housing policy, the Millennial Housing Commission concluded, "it is critical that the nation adopt a preservation philosophy to guide its housing policy going forward." We wholeheartedly agree and stand ready to help.
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 a deepening 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 housing crisis extends from the very poor to the solidly working class. Indisputably, those 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.
With so many families in urgent need of affordable housing, we cannot afford to lose a single unit of affordable housing. Yet, we are losing staggering numbers of units. According to HUD's 2001 report on worst case housing needs, in 1999 the nation had nearly 1 million fewer apartments with rents affordable to extremely low income families than in 1991. Between 1997 and 1999, the number of apartments affordable to extremely low income families declined by 750,000, or 13 percent.
During the past four years, nearly 150,000 federally assisted units have been lost to mortgage prepayments or owner opt-outs. The threat of further losses looms as subsidy contracts on hundreds of thousands of units expire each year.
A substantial part of the problem is that we are not allocating enough resources to replace housing we lose, repair deteriorating units, and subsidize tenants to help them pay otherwise unaffordable rents. More federal resources must be devoted to producing and preserving affordable rental housing, especially for those with the least income. Changes in the voucher program, such as those Senator Sarbanes' bill, S. 2721, proposes, are also needed.
Instead of increasing housing resources, however, the federal government has reduced them. 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 threefold increase.
This year, Congress rescinded $300 million that could have been used to rehabilitate affordable apartments in need of repair and another $400 million that otherwise could have helped families pay unaffordable rents.
Increased funding for existing HUD programs is essential. However, funneling more resources into these programs alone will not eliminate the affordable housing shortage. New federal subsidy sources are needed to leverage and extend the reach of existing programs.
To respond to the growing need for affordable rental housing and to prevent its further loss, NCSHA advocated in testimony before this Subcommittee two weeks ago the creation of a new source of flexible federal funds administered by state HFAs to produce and preserve rental housing targeted to extremely low income families. We urge you to move quickly to enact this program. In the meantime, we ask you to direct HUD to take several immediate steps to preserve affordable units that might otherwise be lost.
One of the must urgent preservation issues confronting HFAs arises from HUD's recent ruling that certain Section 8 Housing Assistance Payments (HAP) contracts terminate upon the refinancing of the mortgages they support. This ruling, which HUD is on the verge of implementing both prospectively and retroactively, will enable hundreds of owners to opt out of Section 8 contracts believed to guarantee the affordability of the housing they support for another 10 or 20 years.
We urge you to stop HUD from implementing this ruling. If HUD refuses, we ask you to pass legislation protecting the contracts in question for their full terms.
The contracts in question were written between 1975 and 1980, a period of significant Section 8 activity. HUD estimates the contracts support more than 1,000 properties with as many as 150,000 apartments. NCSHA's survey shows that more than 1,300 contracts are involved. At least 278 of these contracts covering 25,000 apartments support mortgages that have been refinanced.
HUD's ruling came after the New Jersey Housing and Mortgage Finance Agency (NJHMFA) and an owner of a property financed by NJHMFA agreed in principle to refinance the NJHMFA mortgage and assign the associated HAP to the new mortgage, as had been done in hundreds of refinancings over the last 20 years. HUD reviewed the refinancing plan, as it always has done.
In reviewing the New Jersey property's refinancing plan, a HUD lawyer interpreted a clause of the Section 8 HAP contract to mean the contract terminates on the date of prepayment of the original mortgage. The clause states the contract term shall not exceed "(1) ___ years (typically 30 or 40) or (2) … a period terminating on the date of the last payment of principal due on the permanent financing."
The HUD lawyer opined that a refinancing requiring the pay-off of the mortgage's outstanding principal balance activated the second provision of this clause, thus terminating the contract. State HFAs, owners, lenders, and even HUD field offices had long understood this provision to mean the date the last payment of principal was due under the terms of the original mortgage, not the date of prepayment of that mortgage caused by a refinancing.
NCSHA, several HFA counsel, and a number of other lawyers with substantial Section 8 expertise disagreed with HUD's opinion and urged HUD's Office of Housing and General Counsel to reverse it. We argued that the only function of the words "date" and "due" in the disputed language is to make clear that the reference is to the full term of the original financing. Otherwise, the provision would simply read, "a period terminating on the last payment of principal on the permanent financing." The addition of the concept of the "date" on which principal is "due" makes clear the language refers to the duration of original mortgage.
For contemporaneous evidence that this is the meaning of the clause, one need only look at the regulations that applied to state agency financings at the time they entered into the contracts. The relevant section (Section 883.206(a)) of the regulations applicable to state agency projects at the time provides:
Since the Contract under which the housing assistance payments are made concerns a project financed by a loan or a loan guarantee from a State agency, the total Contract term may be equal to the term of the HFA financing, not to exceed 40 years for any dwelling unit. (Emphasis supplied.)
HUD itself wrote the contract with the disputed language and published it in the Federal Register with the regulation just cited. One has to place an extraordinary burden of proof on anyone who would interpret the HUD-written contract to disagree with HUD's own regulation.
In addition, the Annual Contributions Contract (ACC) between HUD and the HFA includes nearly identical language stating, the total contract term shall not exceed the shorter of "(1) ___ years (typically 30 or 40) or (2) … a period terminating on the date of the originally scheduled maturity date on the permanent financing." This language proves the intent that the contract term coincide with the term of the financing.
NCSHA further supported our interpretation of the contract clause by providing HUD memoranda between HUD local offices and headquarters concerning the refinancing of a Virginia property showing that HUD had considered whether any provisions in the HAP or related documents triggered a reduction in the term of the HAP. HUD found none.
A HUD field office memorandum requesting headquarters' review and advice asked if the Section 8 owner could refinance the mortgage and assign its HAP contract without adversely affecting the provisions of that contract. The HUD field office memorandum also stated that the HFA involved in the refinancing did not want to undertake any action that could trigger a reduction of the term of the HAP. HUD headquarters responded as follows:
We have previously stated that the statute and the regulations do not require a reduction in the term of the HAP Contract where State Agency participation in the ownership or financing of a project is terminated by reason of a transfer of ownership or refinancing. Where HUD approval of an assignment of the HAP Contract as security for financing is requested … HUD approval cannot be conditioned on either reduction of the term of the HAP Contract or of the maximum housing assistance commitment. This requirement does not provide an opportunity to amend the HAP Contract or to impose new conditions. (Emphasis in original.)
One might question why HUD's guidance did not refer specifically to the HAP language currently at issue in concluding that the refinancing transaction did not shorten the contract's term. The answer is simply that no one in HUD's Office of General Counsel or any other office in HUD-and no one outside the Department-interpreted the HAP language as causing a termination. HUD was not unaware of the language. The correspondence makes clear that the HUD lawyers reviewed all of the documents and applicable program requirements.
Moreover, at this time, HUD was closely analyzing refinancing proposals to determine if it could cut back on outstanding Section 8 commitments. It is significant that, in this period of intense HUD scrutiny for the purpose of reducing contractual obligations, HUD did not put forward the interpretation of the HAP language it is now advancing.
NCSHA also supplied HUD correspondence between HUD's Minneapolis field office and my agency revealing HUD had determined in 1984 that a refinancing allowed it to reduce the term of the contract. Significantly, though, HUD did not conclude at the time that it could terminate the contract. (In 1987, HUD reversed itself, determining that it was no longer necessary to reduce the term of the contract and ratifying that the contract endures through the refinancing.)
HUD's Office of Housing and its Office of General Counsel have had many occasions to consider the effect of refinancings on HAP contracts, both prior to the cited correspondence and subsequent to it. Yet, neither office has ever suggested the HAP terminates upon a refinancing until now. The hundreds of HUD personnel involved in reviewing these transactions over many years were not derelict in their duty. They, and thousands of outside parties involved-lawyers, investors, and HFAs-were reading the contracts and supporting documents correctly.
Despite the evidence invalidating the HUD lawyer's opinion, HUD's General Counsel on June 23 issued an opinion confirming it. The General Counsel found HUD's decision to rewrite in 1980 the disputed contract language sufficient evidence that HUD believed that the original contract language terminated the contract in a refinancing and corrected it so contracts could be continued to their full terms. The 1980 version of the HAP contract states that the total contract term shall not exceed the shorter of "(1) ___ years (typically 30 or 40) or (2) … a period terminating on the date of the originally scheduled maturity date on the permanent financing."
Yet, HUD provides no evidence that it rewrote the contract provision to change its meaning. It is much more plausible that HUD rewrote the language to clarify and confirm the interpretation that has guided its actions and those of its stakeholders since. There is not one opinion, memo, notice, handbook, letter, or any other form of internal or external correspondence or guidance to suggest HUD changed the contract because it believed the original language caused the contract to terminate upon refinancing.
HUD Assistant Secretary for Housing John Weicher has accepted the General Counsel's opinion and is preparing to implement the ruling soon. HUD intends to give owners who have refinanced mortgages supported by the affected HAP contracts or refinance such mortgages in the future the option of: (1) amending their contracts to extend them through the original full term; (2) entering into a new contract under current renewal terms, such as mark-up-to-market; or (3) opting out of the Section 8 program, after a 12-month tenant notice period.
Concerned about the risk HUD's ruling poses to thousands of affordable apartments and their residents and HUD's failure to consult Congress before moving forward, we alerted Congress to HUD's plans and asked it to intervene. Other groups, including the National Housing Trust, the National Low Income Housing Coalition, the National Alliance of HUD Tenants, and the Stewards of Affordable Housing for the Future, have supported our efforts.
Representatives of the Moody's Investors Service and Standard and Poor's rating agencies also have weighed in with concerns that HUD's ruling could disrupt the market for Section 8 bonds and undermine ratings on state housing bond programs. Even if HFAs are successful, as they were in the New Jersey case, in persuading owners to stay in the program, owners who choose one-year renewals place HFA bonds issued with the backing of long-term Section 8 contracts at risk. HFAs' bond ratings could suffer and their costs of doing business could increase-costs that ultimately will be borne by the low income families HFAs exist to serve.
Mr. Chairman, you, Senator Sarbanes, and several other members have asked HUD to reconsider its ruling. Yet, in a recent meeting, HUD told NCSHA it would not reverse it. Alternatively, we have suggested to HUD that it join NCSHA in devising legislation clarifying that these contracts are to extend for their full term. We have supplied HUD suggested language, which we understand HUD is currently reviewing.
Failing enactment of such legislation, HFAs may be forced to litigate this matter and ask the courts to reverse HUD's ruling or prohibit HUD from implementing it. While no HFAs want to take this action and, to the best of my knowledge, have not yet, it may be their only way to resolve this issue. I urge you to help convince HUD to avoid this legal battle by reversing its opinion or working with you to devise legislation that clarifies that these contracts are to extend for their full term.
What makes HUD's expenditure of time and effort on this HAP ruling especially galling is the presence of major preservation problems HUD should be addressing. Instead of using its energies implementing a ruling giving owners the ability to opt out of the Section 8 program, HUD should spend more time in other areas where they can advance affordable housing preservation.
In 1997, Congress enacted the Multifamily Assisted Housing Reform and Affordability Act to establish the Section 8 restructuring program, establish a new system for renewing expiring Section 8 contracts, and authorize a new preservation grants program using recaptured interest reduction payment (IRP) subsidies from Section 236 projects. Recaptured IRP subsidies were to be used to provide critically needed repair and modernization funding for federally assisted low income housing projects that otherwise lack sufficient reserves and capital to finance needed repairs. These units are home to tens of thousands of elderly or low income Americans.
HUD never implemented this program. After HUD piled up $300 million that could have preserved thousands of apartments critically needed to meet low income families' affordable housing needs, Congress rescinded the money HUD had not used over the five years it had been authorized. We urge you to ensure that HUD implements this valuable and needed program. We further recommend that you allow non-FHA-insured properties access to this program. Currently, only FHA-insured properties are eligible, despite the critical needs of assisted properties without FHA insurance.
We are also concerned that HUD has not placed a high enough priority on preservation in its implementation of the Section 8 restructuring program. State HFAs acting as participating administrative entities under the program report that HUD's underwriting guidelines sometimes do not allow for adequate resources to ensure the property's viability into the future. Additionally, HUD's policy of placing properties on its "watch list" exposes them to financial risk with little HUD oversight, as the General Accounting Office recently found.
We are encouraged that oversight of the Office of Multifamily Housing Assistance Restructuring (OMHAR) now resides in the Office of the Assistant Secretary for Housing and hope HUD will urge OMHAR to place a high priority on preservation. We support OMHAR's policy of allowing additional subsidies to support added rehabilitation to improve the chances a property will stay affordable longer than without such subsidies, but are concerned that OMHAR has not officially promulgated this policy.
Finally, State HFAs are concerned that rent adjustments available to uninsured Section 8 properties do not allow rents to rise with project expenses and may trigger defaults. We recommend Congress permit HUD to increase rents to a budget-based rent when necessary for the property to meet reasonable expenses and allow rents to rise to comparable market rents when an annual rent adjustment factor will not increase rents to market.
Standard and Poor's has downgraded several ratings on local Section 8 bond issues and is undertaking a comprehensive review of all Section 8 deals prompted by inadequate rent increases resulting from Congress' rent adjustment freeze on uninsured Section 8 properties. The current policy threatens many projects' financial condition and will lead to an increasing number of bond rating downgrades and mortgage defaults.
Mr. Chairman, Senator Allard, and Subcommittee members, thank you for this opportunity to testify on the urgent need to preserve our nation's affordable housing stock. NCSHA and our member state HFAs are ready to help you in any way we can.
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