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. Steven D. Pierce
Executive Director
Massachusetts Housing Finance Agency


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

Thank you Chairman Allard, Senator Kerry and Members of the Subcommittee on Housing and Transportation for the opportunity to present testimony to you today. My name is Steven D. Pierce and I am the Executive Director of the Massachusetts Housing Finance Agency (MHFA), a position which I have held since January 1995. Before I begin, I would like to take this opportunity to thank publicly Senator John Kerry for his long-standing support of MHFA and its programs. Senator Kerry, I appreciate your strong commitment to the creation and preservation of affordable housing not only in Massachusetts, but throughout the country as well.

The focus of my remarks today will be MHFA's experience with the Department of Housing and Urban Development (HUD), and specifically with HUD's Office of Multifamily Housing Assistance Restructuring (OMHAR), and its permanent Mark to Market Program.

MHFA was established by an act of the state legislature in 1966. It is constituted as a public instrumentality of the Commonwealth and has, as one of its primary objectives, the development of affordable rental housing for low- and moderate-income families in Massachusetts. MHFA's statute requires that at least 20 percent of the units in all of its properties be affordable to low-income households. We are, in short, the state's affordable housing bank.

Since making its first loan in 1970, MHFA's portfolio has grown to $4.5 billion in real estate assets. The Agency has made it possible for more than 43,000 families to buy their first homes and has provided attractive and well-maintained rental housing for more than 70,000 families in Massachusetts. By any measure, MHFA is considered to be one of the oldest and strongest housing finance agencies in the country with one of the largest affordable housing portfolios.

MHFA has a long history of financing and managing multi-family housing under nearly every type of federal and state subsidy program. Of particular note, the Agency has:

In addition to all of the financing that MHFA has provided, we are equally committed to providing resident services within our developments. Toward this end, MHFA has allocated a significant amount of its own funds for the establishment of what are now nationally recognized tenant assistance, alcohol intervention and youth activity programs.

This track record, combined with MHFA's demonstrated professional and organizational capacity, resulted in Standard & Poor's awarding the Agency its "top tier status" among housing finance agencies in 1987. Most recently, in June 1999, this designation and our issuer credit rating of "A" was again reaffirmed. On MHFA, Standard and Poor's wrote in Credit Week Municipal, that it considers it to be, "one of the nation's leading state housing finance agencies."

MHFA's Track Record of Partnerships with HUD

MHFA has a 30-year track record of partnering with HUD to design and implement ambitious housing programs. There are three recent examples of this partnership that are particularly relevant to my testimony today. They are:

Demonstration Disposition Program

In 1993, MHFA was one of four housing finance agencies (HFAs) selected by HUD to participate in its Demonstration Disposition Program (or Demo Dispo as it is now commonly known in Boston). Congress established this program in 1987 to help HUD address its growing inventory of foreclosed multi-family housing, most of which was in poor physical condition. Of the HFAs initially selected under this program, MHFA was the only one to successfully execute a contract and begin work. This partnership is particularly noteworthy because it represents the largest single commitment to housing rehabilitation that HUD has made anywhere in this country.

The Demo Dispo program involves the renovation of 2,000 units of HUD-foreclosed housing in the City of Boston and upon its completion, MHFA will have managed $200 million of rehabilitation activity for HUD. Additionally, we will have structured long-term affordability for these developments through one of the last known commitments of 15-year project-based Section 8 subsidy and supported the transformation of this severely distressed housing into attractive resident-controlled developments.

Demo Dispo residents have a vested interest in the future of their housing because they have been involved in every step of the development process from unit design to building rehabilitation and from tenant relocation to resident ownership. This ongoing involvement has led to the creation of a shared vision between MHFA and the residents that has shaped the renovation of this housing in a way that would not have been possible by either party acting on its own. It has also brought together the often competing interests of designing housing that meets the needs of existing residents while renovating units on schedule and on budget.

This intense sense of public purpose and accountability is the foundation for all of MHFA's programs. MHFA brought to this effort not only a variety of resources and substantial experience, but also the professional and organizational capacity to manage financially complex housing initiatives that by their nature require a keen understanding of the state's affordable housing arena.

In this way, then, the Demo Dispo experience has provided MHFA with an important "proving ground" of sorts. While this uniquely ambitious undertaking is not yet complete, we believe that one of the critical elements of its success is that MHFA has been able to operate free of the heavily regulated policies and practices of HUD. This freedom has allowed us to do what is necessary for the property and right for the residents faster and cheaper than would have been possible if intense federal oversight and onerous guidelines had been involved.

FHA-HFA Risk Sharing Program

MHFA also successfully partners with HUD in the FHA-HFA Risk Sharing Program which, like the Demo Dispo program, is short on process and long on results. Interestingly, HFAs and HUD jointly designed this program. In fact, I am proud to say that Robert Pyne, MHFA's Director of Development, was one of the principal participants in this process. Under this program, MHFA has financed 2,137 units of mixed income rental housing representing more than $180 million in financing.

MHFA, as a Tier One Agency, has been delegated all underwriting, loan processing and closing responsibilities for loans. This program includes many of the same tasks required under the Permanent Mark to Market Program, but has minimal supervision and regulation by HUD. Under this program, MHFA must determine the appropriate level of supportable debt, assess the ongoing physical needs of the property, as well as evaluate the development's management plan. The Risk Sharing Program acknowledges the ability and resources that HFAs can bring to bear to produce and preserve affordable housing when permitted to do so in a flexible regulatory environment. From MHFA's perspective, Risk Sharing should represent the business model that is most relevant to the Permanent Mark to Market Program.

Demonstration Mark to Market Program

Building on this experience as HUD's agent in the delivery of federal housing programs is MHFA's participation in the Demonstration Section 8 Mark to Market Program. In fiscal year 1998, HUD assigned to MHFA four Section 8 developments for restructuring under the program. The results of these four restructurings have been very impressive and include these benefits to the federal government:

We believe that MHFA is the first housing finance agency to have completed all of the restructurings initially assigned to it. Additionally, MHFA's fees for these transactions, even including incentives that have yet to be paid, amounted to less than 5% of the total savings that MHFA was able to achieve for the federal government.

MHFA's Participation in the Permanent Mark to Market Program

Based on MHFA's experience in the Demonstration, we looked forward to becoming involved in the Permanent Mark to Market Program for two reasons. The first was our desire to help HUD financially restructure these loans in order to capture critical Section 8 cost savings for a program that has come to be known by everyone as a "budget buster". Second, was the more local concern of preserving these important and much needed affordable units in Massachusetts' ever tightening affordable housing market. As such, MHFA was encouraged when Congress, through the passage of the permanent program legislation, reflected the value that housing finance agencies can bring to this program by creating a priority for them to act as restructuring agents for HUD.

It is important to note that MHFA's experience in the Demonstration Program has provided us with valuable insight into the time and effort that each restructuring transaction requires. This was exactly the point of Congress' initial authorization of the Mark to Market Program in its Demonstration form. We thought that the designation of HFAs as priority restructuring agents in the legislation evidenced Congress' intent to move functions out of HUD's centralized bureaucracy to state and local agencies with the capacity to accomplish the program's goals. Unfortunately, as events have unfolded, it appears that OMHAR has chosen to follow a different model, which imposes an unwieldy and highly bureaucratic program emphasizing process at the expense of results.

To date, despite the positive and cordial discussions that MHFA has had with individual OMHAR staff persons, we continue to have serious concerns about MHFA's participation in the Permanent Mark to Market program. From the Agency's perspective there continue to be three major issues that have seriously impeded our ability to move forward and sign a PRA with OMHAR. Those three issues are:

MHFA and other members of an HFA working group attempted to engage OMHAR in a discussion about a reasonable compensation framework. In this context, MHFA shared with OMHAR our estimation of the total processing time each transaction would require, based upon a detailed analysis of the OPG and our experience in the Demonstration Program. However, OMHAR has not shared its own information with MHFA, other PAEs, or even Congressional staff who have requested it. And unfortunately, OMHAR decided in April to disengage from discussions with the working group on the basis that compensation was an issue to be decided on a state-by-state basis.

Further, OMHAR has insisted on a process laden program guide. They refuse to permit HFAs to use their own underwriting templates, spreadsheet analyses and processing forms which are far less onerous than OMHAR's and would enable HFAs to significantly streamline restructurings. OMHAR's 400-page OPG for the Permanent Program dwarfs the approximately 200-page guide for the Risk Sharing Program and represents a classic example of OMHAR's unwillingness to rely on the proven expertise of HFAs and its reluctance to delegate this enormous workload.

The OPG contains 57 separate forms (representing 100-pages) that must be completed for each restructuring transaction. It also contains a detailed, almost day-to-day, procedure that must be followed. This is in stark contrast to the Demonstration Program that required only that a business plan, a restructuring commitment and a closing file be submitted for each transaction.

OMHAR has attempted to impose a compensation scheme that has no apparent relationship to the work required to be performed, little or no empirical evidence derived from the Demonstration Program or similar experiences in the mortgage banking industry, and no recognition of the differences among states in terms of cost or expected work load. Recognizing that the overall fee constraints of the much larger Permanent Program were tighter than those of the Demonstration Program, MHFA has made several frustrating attempts to negotiate an acceptable fee and incentive structure with OMHAR. Each of our proposals included fees that were significantly lower than what we had earned in the Demonstration Program, notwithstanding the significantly increased work required, and were designed to reward expedited processing and savings generated to the federal government. In an attempt to break this apparent stalemate in negotiations, MHFA's most recent proposal to OMHAR conceded the $35,000 Base Fee (with meaningful performance-based incentives) and the imposition of the OPG requirements, but eliminated the artificial distinction between debt restructurings and refinancings. We believe that this would allow MHFA to recover its legitimate costs to operate this program, but stay within OMHAR's expressed compensation parameters. To date, we have had no official response from OMHAR.

At this point, something needs to give. OMHAR either has to pay more money to cover the reasonable costs that we incur completing all the new requirements for the permanent program, or it must allow us to complete these restructurings as we did in the Demonstration -with less bureaucratic oversight and a greater focus on results, not process.

It is important to note, as it seems likely that OMHAR's Director will do, that there are some HFAs that have executed contracts and have agreed to perform the work according to OMHAR's fee structure. However, twenty-three HFAs have not signed PRAs including Massachusetts, California, Pennsylvania, New York, Wisconsin and others, recognizing that OMHAR is insisting on a compensation structure that will not cover our reasonable costs which will be incurred under the Mark to Market Program, as mandated by the Multifamily Assisted Housing Reform and Affordability Act of 1997. It is our continued hope that the compensation issue can be resolved.

Conclusion

While MHFA continues to be frustrated by our dealings with OMHAR, we have not lost sight of what is at stake - that substantial cost savings can and should be achieved by restructuring these properties. Further, and perhaps just as important, these cost savings can be realized without diminishing the quality of the properties. Our participation in the Demonstration Program illustrates that significant and sustained subsidy savings can be achieved. Again, on four properties alone, MHFA was able to save HUD $978,000 annually or $12.2 million (discounted for present value) over the remaining term of the mortgages.

There are few who would disagree with the assessment that without a vehicle to contain Section 8 costs, HUD's budget will be severely constrained and, so too, federal housing policy. There is also another important issue. As Members of this Subcommittee know from the Banking Committee's most recent briefing by Chairman Greenspan, the time to maximize savings under this program is now - when we can take advantage of the current low-interest rate environment to produce greater savings for the federal government. The longer that it takes to negotiate with OMHAR, the more it will delay the closing of these Mark to Market transactions. In the end, interest rates invariably will go up and an opportunity to realize substantial cost savings will have been lost.

MHFA is ready to begin the work now. We have consistently negotiated in good faith over a period of many months and we await a response to our third proposal to OMHAR. At a minimum, MHFA is looking for OMHAR to stop its delaying tactics and either approve our proposal or offer a constructive counter proposal that addresses our concerns. Ideally, MHFA would also urge OMHAR to implement a more streamlined program. The restructuring of the Section 8 portfolio is critical. Every day, week and month that has elapsed - without an agreement - and therefore without any actual work being done - has added to the overwhelming backlog of Section 8 properties awaiting restructuring.

What is needed is a more flexible approach from OMHAR that relies on the capacity of HFAs as public partners to underwrite and restructure developments to achieve the subsidy saving goals of this program. Congress provided a priority for HFAs, because it recognizes the professional and technical ability that we possess combined with our public purpose and accountability in the financing and preservation of affordable rental housing.

In short, MHFA is asking that we be permitted to restructure the Section 8 inventory in Massachusetts with OMHAR oversight and direction, but with fair and reasonable compensation and a minimum of the regulatory processes and procedures contained in the OPG that ultimately serve no other purpose than to drive up costs and minimize achievable savings.

MHFA knows that HUD is capable of moving quickly to implement a program as it has shown with the recently implemented "Mark Up to Market Program", which will actually cost the federal government money. We ask that you direct OMHAR to show similar speed in finalizing this very important program which will save the federal government money.

Thank you for providing me with the opportunity to testify before you today on this program which is critical to the preservation of the nation's Section 8 housing portfolio.




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