Subcommittee on Housing and Transportation

Hearing on the HUD Section-8 Opt-out Crisis

Prepared Testimony of the Honorable William C. Apgar
Assistant Secretary for Housing and Federal Housing Commissioner
Department of Housing and Urban Development

9:30a.m., Thursday, July 1, 1999

Mr. Chairman, Ranking Member Kerry, Members of the Subcommittee, my name is William Apgar and I am the Assistant Secretary for Housing/Federal Housing Commissioner at the United States Department of Housing and Urban Development (HUD). On behalf of HUD Secretary Andrew Cuomo, I am pleased to testify today at this important hearing.

Recently, Secretary Cuomo announced an emergency initiative to stop the loss of affordable housing through opt-outs from the project-based Section 8 program. This initiative has already convinced many owners to reconsider their earlier decisions to leave the Section 8 program. While we have taken substantial steps to address the issue of opt-outs, we are also looking at a related set of issues presented by the prepayment of HUD subsidized mortgages. These cases are somewhat different from opt-outs and will require a different strategy. Indeed, the main element of our opt-out strategy, selectively increasing Section 8 subsidies, is not an option for units without these subsidies. A carefully designed strategy will be sensitive to the specifics of the mortgage subsidy programs, continue to protect low-income tenants, and continue access to affordable housing, especially in tight markets. As with the opt-out strategy, it is unlikely that one approach will be the best for all properties. One thing we have learned from past preservation policies is that it is vital to target and calibrate incentives to balance the needs of properties and tenants with fiscal responsibility. Recognizing these needs, Secretary Cuomo joined with members of this Subcommittee and many of your colleagues in pledging to work towards a more comprehensive solution to the loss of HUD-subsidized multifamily housing. Today I would like to describe the steps HUD has already taken, and more importantly, discuss a policy framework for considering a more comprehensive solution.

Communities At A Cross-Roads: The Challenge Facing HUD Multifamily Housing

Twenty-five years ago, the Federal Government created what would become the largest rental housing subsidy program in the Nation's history: the Section 8 program. The Section 8 program complemented HUD initiatives already in place to subsidize privately owned affordable housing, particularly the Section 236 and 221(d)(3) subsidized mortgage programs. Section 8 now helps 3 million families around the country afford decent housing, more than double the number of families assisted by the next largest housing program, while the 236 and 221(d)(3) programs assist over 500,000 families, 60 percent of which also benefit from project-based Section 8 subsidies. Between these three programs (Sections 8, 236 and 221(d)(3)), HUD multifamily housing provides assistance to thousands of families in each and every State around the country in urban centers and rural farmland, in high rise apartments and single family homes.

Today, HUD's multifamily subsidy programs stand at a cross-roads, facing a challenge that could threaten their viability well into the next millennium. Starting in 1975, HUD signed twenty year contracts with private owners to subsidize their properties with project-based Section 8. These long-term contracts are now expiring, creating widespread uncertainty about whether the properties will continue as affordable housing or "opt out" of the Section 8 program. HUD's recent actions, which I will discuss more fully in a moment, have done a great deal to calm this uncertainty. A complete response, however, will require not just a strategy for opt-outs, but an appropriate strategy for prepayments as well. HUD research has documented the scale of the challenges facing its multifamily subsidy programs:

Without further reform to counter these threats, I-IUD's multifamily programs risk losing the best of their project-based housing, displacing thousands of low-income families and seniors, while being left with properties that do not have the resources to meet their physical and financial needs. By continuing to remake these programs, however, a different future is possible-a future which preserves the best project-based housing at a fair price for the taxpayer, a future that expands housing opportunities for the millions of families around the country who go without any housing assistance at all.

Policy Principles For Further Reform

To guide the needed reform, HUD proposes two simple policy principles:

Principle 1: Offer a Fair Return

Returns HUD offers to property owners must be based on what a property is worth. HUD should not offer more than an owner could get on the open market, but neither should HUD expect owners of good housing in good neighborhoods to accept less than a fair return. While HUD's multifamily subsidies were always intended as market driven programs dependent on the private sector to provide affordable housing, over time the programs have moved away from that promise. A mismatch between subsidies and market rents has evolved over time as rent adjustments have not tracked changes in local markets. Recent Congressional and HUD actions have begun the process of reform. We now have the opportunity to finish remaking the programs into the market-driven models they were meant to be.

Principle 2: Preservation is Not Enough

Despite 6 years of unprecedented economic growth, worst case housing needs remain at or near the all-time high of 5.3 million households. According to a recently released HUD study, "Ironically, the strong economy is a key factor pushing rent levels to new record highs. Rather than benefitting from the surging economy, low-income renters are left to compete for the dwindling supply of affordable rental housing available on the private market." By its self, preservation of HUD-subsidized multifamily housing cannot address the growing rental housing crisis. Instead, the Section 8 voucher program can be used to complement the preservation of project-based housing and attack the desperate shortage of decent affordable housing.

HUD Actions Have Limited Section 8 Opt-Outs

On April 29th, Secretary Cuomo announced a two-part strategy to protect residents and preserve the best of project-based multifamily housing. First, HUD acted immediately on an emergency basis to prevent certain "opt-outs" from the project-based Section 8 program using its current limited authority and resources. The second part of the strategy called for the Administration and Congress to work together on a comprehensive policy solution to the remaining challenges.

The first part of the strategy, HUD's emergency initiative, offers increased rents to properties that have substantial financial incentives to opt-out because they are currently receiving subsidized rents below what they could receive in the private market. The initiative allows rents to increase to full market to avoid the loss of the best properties, but targets the increases to certain properties - without this targeting, the cost of the initiative could be $600-$800 million per year. Already this emergency initiative has limited the number of opt-outs - owners around the country have reconsidered abandoning the Section 8 program and submitted requests for renewals. This includes owners already in the process of opting out, who were allowed to reverse their earlier decisions and return to the program. It also includes owners of so-called "older assisted" properties, who were able to benefit from the initiative despite a number of complexities that many thought would stop their participation.

With limited resources, HUD's initiative targeted the properties most at risk for opting out, and those where an opt-out threatens displacement of residents. Elements of this targeting include:

The initiative was crafted to offer targeted owners a financial return closer to what they would receive in the market in exchange for preserving their properties as affordable housing. Care was taken, however, not to oversubsidize properties or increase rents for unsubsidized residents. This was accomplished by:

A Policy Framework

The initiative I have just described has gone a long way to stopping opt-outs from the project-based Section 8 program, but HUD does not have the authority or resources to address a number of other challenges that face HUD's multifamily programs. Our assessment suggests there are five areas for HUD and Congress to focus on going forward:

This concludes my formal written statement, Mr. Chairman. HUD looks forward to continuing our work with you and the other members of this Committee on this critically important issue.

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