Subcommittee on Housing and Transportation

Oversight Hearing on the Office of Multifamily Housing Assistance Restructuring
Department of Housing and Urban Development

Prepared Testimony of Mr. John T. McEvoy
Executive Director
National Council of State Housing Agencies

9:30a.m., Thursday, August 5, 1999

A Textbook Case of Federal Failure

Mr. Chairman, I am John McEvoy, Executive Director of the National Council of State Housing Agencies. The Council represents the nation's State Housing Finance Agencies. It is governed by a 16 state board of directors. David Herlinger of your own state serves on that board.

We appreciate the opportunity to appear here this morning. We regret, however, that you should have to take time for this hearing to examine why the thoroughly considered program this Subcommittee wrote and Congress enacted nearly two years ago has not yet produced a single tangible result.

What Congress Provided in the Law It Wrote

Two years ago, when Congress wrote the law for preserving its investment in Section 8 properties while saving federal subsidy dollars through mortgage restructuring, it had three ways to turn:

It could tell HUD to do the mortgage restructuring, though HUD admitted it did not have the capacity to do so;

It could tell HUD to give the restructuring work to the lowest bidder, as HUD insisted; or

It could make HUD give the restructuring job to qualified public agencies, accountable both to the federal government and to their own states, communities, and residents.

Despite HUD's relentless opposition, Congress chose the third course. It required HUD in selecting its restructuring agents to give a priority to any state or local housing finance agency meeting the qualifications of the law.

But HUD has never fully accepted the law Congress wrote. It has defied, delayed, and obstructed its execution. As a result, nearly two years after Congress passed the law, not a single Section 8 mortgage has been restructured under it. In fact the restructuring work has barely begun and only in a few places.

HUD has defeated the law whenever it could by discouraging housing finance agencies from doing this important work. It has nearly driven at least two qualified states out of the program and is on a course likely to drive out others. In at least one other state, it is assigning mortgages for restructuring to the private sector without its consent and in clear violation of the law.

Our purpose here is to lay out the facts as we have experienced them. Then, you can determine what Congress must do to assure its will is carried out. Only then can the communities in which these Section 8 properties are located and the tenants in them have the protection Congress intended for them when it made their state or local housing finance agencies the restructuring agents.

While HUD Fiddles, Money Burns

Mr. Chairman, the real loser here is the public interest. Every month that has passed since Congress enacted this program nearly two years ago has cost American taxpayers more money in the very subsidy costs the law was written to reduce. And, while HUD has dragged its feet, we have been passing through a period of unusually low interest rates, which could have been taken advantage of to reduce the cost of the restructured mortgages and reduce the cost of the federal government subsidy to pay for those mortgages.

Since Congress enacted this law, we've had a general election, the Asian correction, the impeachment of a president, the Russian default, and the bombing of Yugoslavia. It's taken HUD longer to get this process started than it took the United States to fight its way through World War I.

It's a sad and costly story of delay, defiance, and dictation. How did HUD take so long to do so little?

Congress enacted the Section 8 restructuring program in October 1997, 22 months ago.

Instead of simply using the experience Congress meant HUD to acquire in the 1997 restructuring demonstration program and using the same kind of flexible guidelines it had used for the demonstration, HUD took nearly a year, until September 1998, to write a vastly more complicated Interim Rule for the program. (To this day, HUD has never issued a final rule.)

It took almost as long--until August of last year--for HUD to implement a process for housing finance agencies to apply to become restructuring agents.

More than 50 housing finance agencies promptly applied. Though HUD approved 39 as restructuring agents or so-called Participating Administrative Entities (PAEs) in October 1998, the rest, which responded quickly to a HUD notice of deficiencies in their applications, had to wait until the next year for HUD to approve them.

At about that same time, the Administration finally designated the full-time person Congress authorized to run the program. Unfortunately, things got no better.

It took HUD two more months--until late December 1998--to give the approved housing finance agencies even parts of a draft contract. That draft, which HUD pressed them to sign immediately, did not tell them what they would be paid or what they had to do to earn it.

HUD did not make its compensation proposal and scope of work available for two more months, in late February. And then, after an intense, month-long negotiation between HUD and a working group of housing finance agencies on other parts of the contract, HUD withdrew before any serious consideration of compensation could take place, asserting that it wanted to negotiate compensation state-by-state.

Now four months later, only a third of the approved housing finance agencies have signed contracts, several others are in prolonged and apparently stalemated negotiations, and at least two major states, Texas and Virginia, are on the verge of giving up altogether.

Even after signing contracts, states have had to wait while the work piled up. Only within the past two weeks has HUD assigned properties to state housing finance agencies to restructure. Ohio, for example, signed its contract with HUD on May 21, but did not receive its first property until two weeks ago.

HUD has defied Congress' mandate to let qualified housing finance agencies do this work, applying their own expertise and experience without mountainous HUD interference. But much worse, HUD has wasted time and squandered taxpayers' money by letting the Section 8 inventory pile up with no cost savings to the federal government.

HUD Has Never Fully Accepted the Terms of the Law Congress Enacted

In 1995, HUD proposed to Congress that it do the restructuring work through private parties. It has never given up on that plan, even though Congress provided otherwise. HUD bitterly opposed the public agency priority Congress created and has tried to limit and subvert it.

HUD has consistently sought to avoid through rule and regulation what Congress clearly told it to do in legislation. It has blatantly sought to avoid, wherever it can get away with it, the priority role the law has given housing finance agencies. It also has discouraged housing finance agency participation through a mountain of rules and bureaucratic red tape.

HUD Illegally Sought to Limit the Housing Finance Agency Priority

HUD's defiance of the housing finance agency priority Congress created became publicly apparent in four clear violations of the law in HUD's Request for Qualifications (RFQ) to housing finance agencies to become restructuring agents.

The law required HUD to provide a reasonable, exclusive period during which it would consider and select proposals only from state and local housing finance agencies. The RFQ limited that period to just 15 days, during which HUD would make only "preliminary selections," suggesting that HUD intended to review private sector applications before making final selections.

The law required HUD to notify rejected housing finance agencies of the reasons and to give them the opportunity to respond within the priority review period. The RFQ specified that HUD would consider their appeals only after the priority period had expired.

The law required HUD to select a public agency, if qualified, before considering other applicants. The RFQ made clear that HUD would consider private sector applicants while it was still reviewing housing finance agency appeals.

The law made qualified housing finance agencies responsible for restructuring as many eligible properties within their states "as may be agreed upon by the participating administrative entity and the Secretary." The RFQ purported to empower HUD arbitrarily and unilaterally to limit the number of properties a housing finance agency could restructure.

Fortunately, this Committee's leadership last fall defeated HUD efforts to abort the public agency priority entirely, when Senator D'Amato and Senator Mack wrote a forceful letter which caused HUD to decide housing finance agencies' qualifications before selecting private sector firms.

But despite its assurances to this Committee a year ago, HUD continues to threaten agencies still negotiating contracts with HUD that it will assign properties in their states to the private sector if they do not agree to its largely unilateral terms. In at least one state, Pennsylvania, it has assigned properties to a private party without that state's consent.

HUD Is Forcing Qualified States Out by Refusing to Pay Their Costs

HUD has effectively discouraged qualified housing finance agency participation by its illegal refusal to reimburse their reasonable costs.

HUD's September 1998 Interim Rule said that HUD would defer setting any limits on the amount or method of calculating the base fee. The Interim Rule noted that HUD had asked agencies to estimate their costs in their restructuring applications. The Interim Rule specified that HUD would include more specific provisions on fees in its Final Rule after reviewing those estimates, negotiating with the agencies, refining agencies' precise duties, and considering public comments on the Interim Rule.

In the meantime, however, violating that commitment in the Interim Rule, in an October 7 letter notifying housing finance agencies of their selection, HUD stated flatly that the base fee would be $30,000 per property. That letter also specified that if the agency's estimate of its cost per property was higher, it could either revise its proposal or withdraw its application. In other words, figure out a way to do it cheaper or don't do it at all.

The one-fee-fits-all HUD fee fiat could not have been determined by taking account of public comments, since HUD would not receive those comments for several more weeks. And it could not have been based on the scope of work, since HUD had yet to determine it. So what was it based on? HUD insists it has some basis for its figures, but won't say what it is.

In contract negotiations this March between HUD and the working group of housing finance agencies representing almost all agencies seeking to become restructuring agents, the agencies, reflecting the differences in costs among regions, proposed a range of fees, such as HUD permitted under the demonstration. The work HUD was requiring under the permanent program was nearly twice that required under the demonstration since HUD had made its requirements so much more complicated, so the working group suggested increasing the demonstration compensation range of $25,000 to $50,000 per property to $50,000 to $75,000 for the greatly expanded permanent program.

The housing finance agencies made clear that the cost range could be reduced considerably if HUD would eliminate the many unnecessary tasks not required under the demonstration, reimburse separately certain tasks unique to particular transactions, and base a proposed $10,000 incentive fee on circumstances the agencies had some chance of controlling.

Regrettably, HUD refused to respond to the housing finance agencies' suggestion. It withdrew from the negotiations, asserting that it would negotiate compensation state-by-state. In reality, little negotiating has occurred. In fact, many states waited weeks to even get a response to their proposals. And then they got a take-it-or-leave-it offer.

As the months have passed, HUD has adjusted its initial offer, proposing now to pay any housing finance agency $50,000 for the first transaction, $45,000 for the second, $40,000 for the next three, and $35,000 for the rest. That means more in some states which have only few properties to restructure but little at all to those with many more properties. HUD also has offered to reimburse costs associated with certain non-recurring tasks separately, as the working group proposed.

These changes have led a number of states, including Colorado, where costs and the condition of the portfolio permit it, to accept HUD's one-size-fits-all fee. Some states with just a few properties may even profit from it. But a number of states, including Massachusetts, with more than half of the entire portfolio and higher costs, cannot.

The law requires HUD to pay Massachusetts and all states their reasonable costs. If HUD does not believe a state's costs reasonable, it is incumbent on HUD to prove them unreasonable before it turns properties in those states over to the private sector.

Massachusetts and other higher cost states have provided detailed justifications of their costs to HUD. They have challenged HUD for months to either accept those costs or point out specifically which ones are too high and by what measure. HUD has refused to do so. Instead HUD continues to defend its assertion that costs are the same for every state by citing private sector bidders of unknown qualification, bidders the law does not permit to compete with housing finance agencies for the restructuring role.

Certainly the federal government should insist on the lowest sound cost, consistent with the congressional mandate to use housing finance agencies. But Congress did not condition the housing finance agency priority on those agencies meeting or beating private sector costs. Congress did not intend the restructuring program, profoundly affecting communities and residents lives, to go to the lowest bidder.

Do some states have higher costs than the private sector? Of course they do. For example, civil service requirements and budget constraints may limit their ability to use temporary personnel, public pension costs are often higher, and the basic costs of doing business are higher in some places than in others.

In giving housing finance agencies the priority restructuring role it did, Congress accepted those higher costs, because it wanted someone responsible to the community to be in charge of the restructuring, not some corporation, probably from out of state, which has no such responsibility. Congress did not require or permit HUD to use private sector bids to judge the reasonableness of state costs. You don't pick your brain surgeon on the basis of the cheapest bid.

In any case, HUD cannot justify its one-fee-fits-all dictate on the grounds of saving the federal government money. Unless you join HUD in the absurd leap that costs are the same everywhere, you have to conclude that if no state will lose money under the single fee structure, some states are being overpaid. What HUD finds obstinately convenient and what is economic reality are two vastly different worlds.

The law is clear that HUD must compensate housing finance agencies for "all reasonable expenses." The law does not permit HUD to refuse to pay an agency's costs just because some private bidder, who may be simply wrong in its estimate or spreading its costs over several states, absorbing losses in one and making a profit in others, says it can do it for less.

The law does not require states to compete against one another to see whose costs are lowest and to get no more reimbursement from HUD, whatever a state's actual reasonable costs, than HUD pays the lowest cost state. In fact, the legislative history is clear that many states were expected--as they have--to employ private sector firms to do some or larger parts of the work under the state's supervision, thus assuring the state's reasonable costs would be higher than if the private contractors did the work unsupervised.

Certainly HUD is required to challenge specific state costs it if it believes specific costs cannot be substantiated. But it cannot reject a state's costs just because they are higher than some other state's costs or some private sector bidder's estimate. But that is exactly what HUD's one-fee-fits-all approach does.

As a practical matter, HUD's approach has been to ignore what states' real costs are and sign up any state which will accept its arbitrary offer, whether that offer pays more or less than that state's actual costs. So HUD can give this Committee no assurance that it has not already paid higher costs than were necessary in the contracts it has already has signed.

The arbitrary character of HUD's approach is especially evident among states which have few properties. Under the one-size-fits-all contract HUD is insisting upon, states with few properties to restructure will be paid different amounts, without regard to the actual costs in any of them. One state has only a single property to restructure. It will be paid $50,000 to do so, regardless of its costs. Its neighbor, which has seven properties, will be paid $41,000. In another part of the country, a state which has only five properties will be paid an average of $43,000, again without reference to its actual costs.

The point of the priority delegation to states to do the work was to assure that community, tenant, and the federal government's interests are all adequately taken into account, not to get the work done at the lowest possible cost.

If You Can't Starve Them Out, Smother 'Em to Death

Even for the housing finance agencies able to persist through HUD's delays and one-fee-fits-all compensation plan, the program is hopelessly burdened by HUD's insistence on doing it its way. Congress chose housing finance agencies, not HUD, to do this work. Yet HUD has written an operations manual which takes so many trees to print it should make Al Gore blush.

This jungle of rules raises costs without any benefit except to have bureaucrats sleep better. It represents a triumph for the bureaucratic belief that producing paper is the same as producing results. It was a major reason why Virginia recently notified HUD that it is on the verge of dropping out of the program, thus helping HUD achieve through a rule book what it could not get through the law book.

To assure housing finance agency capacity to do the work and to limit HUD's discretion to dictate how it is to be done, Congress prescribed a clear set of qualifications in the law that agencies must meet to qualify to do this work, including experience with multifamily financing and financially sound and responsible administrative performance.

HUD Appropriations Subcommittee Chairman Bond, Floor Manager of the FY 1998 HUD Appropriations Bill which contained the restructuring legislation, made it clear on the Senate floor that HUD was not to micro manage this program when he said, "Indeed devolving responsibility and decision making to the State and local level is one of the primary goals of this mark to market legislation. Not surprisingly, that is also the reason for the priority in selecting State and local housing finance agencies to be PAEs."

Senator Mack, your predecessor as Chair of this Subcommittee, who wrote the restructuring legislation, further elaborated on how Congress expected HUD to work with housing finance agencies under it in a Senate floor colloquy with Senator Bond last July on the FY 1999 HUD Appropriations Bill. Senator Mack said, "HFAs have proven that they have the capacity and willingness to serve as the federal government's partners in affordable housing. ...I expect HUD to approve many HFAs as PAEs and provide them as much flexibility as possible within appropriate parameters to administer the [permanent] program."

HUD could have launched this program months ago simply by updating the 1997 demonstration program's rules to conform with the new law. But it did not. Instead, HUD wrote a whole new encyclopedia of highly prescriptive rules. These rules have driven up the program's costs and will undoubtedly delay its results. In addition, some of these requirements are simply silly.

Here are a just few examples of the kinds of hopeless micro-management Virginia and other housing finance agencies are objecting to:

After receiving a property for restructuring, the housing finance agency must notify the property's owner within three days of a "kick-off" meeting to occur within 15 days of the property's assignment with all the parties to the restructuring process. The demonstration required no comparable meeting, and the housing finance agencies proved perfectly competent to notify affected parties in a timely way.

Every member of an agency's board of directors must fill out a conflict of interest form for every property, whether or not the agency's board has any direct involvement in the restructuring, before HUD will assign the property to the agency for restructuring.

Agencies must prepare a detailed budget for each property restructuring, even though the fee for each property is already set and other expenses are capped and reimbursed at the actual cost to the agency.

Now, Mr. Chairman, HUD has made much of a statement we made to our members about how much the working group of states which negotiated on the contract with HUD achieved during our month long effort to bring a little breathing room into the bureaucratic rain forest this rule book represents.

As you can see from the examples we've cited, our victories against this onslaught of paper were not exactly on the scale of the invasion of Normandy. We did reduce its bulk a little and clarified parts. And we did want to encourage our states that they had not totally wasted their time trying to bring some reason into this process.

But, in the end, this encyclopedia is still what emerged. Maybe it was too much to call these changes victories. After all, as a former governor of Texas is fond of saying: You can put lipstick on a hog and call it Mabel, but a pig is still a pig.

Where There's a Will, There's a Way

Mr. Chairman, you and this Subcommittee will judge the facts in this case. But in assessing how two years could pass without any result under this program, let me share with you a lesson from my own experience.

When I was a young man, I had the privilege of serving in the Office of the Secretary of Defense with three others who also later became secretaries of departments. So, early in my career, I learned that when a Cabinet Secretary wants something done, it happens--and quickly. When the Secretary doesn't want it done, even if Congress has mandated it, it can take forever.

Later, I served at different times as staff director of Senate committees on which two of your distinguished predecessors--Peter Domenick and Bill Armstrong--sat. Though I worked for the Chairman, we all often shared the frustration which comes from being defied, sometimes even in the simplest matter, by incompetence or intransigence in the Administration's bureaucracy.

Whatever HUD's defense for its performance in this case during these two years, the incontrovertible fact is that it has so far stymied congressional expectations of it and has not achieved even a single restructuring. Its performance would not be tolerated in private business and would imperil reelection of any state or local official guilty of similar nonfeasance.

Whether what we see here is bureaucratic intransigence, indifference, inflexibility, ineptitude, or maybe a combination of all four, it is a textbook case of the hopeless obsolescence of command and control bureaucracies. It symbolizes the death rattle of a federal bureaucracy desperately hanging on to tasks better executed by governments closer to the people's problems and more accountable to them.

You, Mr. Chairman, will determine the remedies in this case necessary to protect the integrity of Congress and the public interest in having these properties restructured by housing finance agencies accountable to the people. Let us make just one suggestion to prevent HUD's intransigence from driving out of the program the states which have refused to accept HUD's take it or leave it terms and to finally get this program fully underway. Congress will be back in session September 7, six weeks from now. Why not require HUD to present to this Subcommittee upon its return in September with either signed contracts with those remaining states, which account for more than half the inventory eligible for restructuring, according to HUD's most recently published data, or a detailed justification for its position on any point still in disagreement with any state which has not signed?

Mr. Chairman, thank you deeply for your concern to see that the will of Congress is carried out and that the rights of states, counties, and cities are protected against the kind of federal intransigence this case so sadly demonstrates. We stand ready to help you in any way we can.

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