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SECTION 8 HOUSING: WASTE AND 
MISMANAGEMENT 



Y4,G 74/7: H 81/33 

Section 8 Housing: Uaste and nisnan. 



HEAKINGS 

BEFORE THE 

EMPLOYMENT, HOUSING, AND AVIATION 
SUBCOMMITTEE 

OF THE 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

HOUSE OP REPRESENTATIVES 

ONE HUNDRED THIRD CONGRESS 

SECOND SESSION 



JULY 26, AND OCTOBER 6, 1994 



Printed for the use of the Committee on Government Operations 







U.S. government! 



83-254 CC WASHINGTON : 1994 ""'ffdHCUff^^^^f^ 



^^feasfesRv 



For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046467-6 



m 



SECTION 8 HOUSING: WASTE AND 
MISMANAGEMENT 



Y4.G 74/7: H 81/33 

Section 8 Housing: Haste and Hisnan. , . 



HEARINGS 

BEFORE THE 

EMPLOYMENT, HOUSING, AND AVIATION 

SUBCOMMITTEE 

OF THE 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRD CONGRESS 
SECOND SESSION 



JULY 26. AND OCTOBER 6, 1994 



Printed for the use of the Committee on Government Op>erations 




U.S. GOVERNMENT- 
83-254 CC WASHINGTON : 1994 






For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046467-6 



COMMITTEE ON GOVERNMENT OPERATIONS 



JOHN CONYERS, 
CARDISS COLLINS, Illinois 
HENRY A. WAXMAN, California 
MIKE SYNAR, Oklahoma 
STEPHEN L. NEAL. North Carohna 
TOM LANTOS, CaHfomia 
MAJOR R. OWENS, New York 
EDOLPHUS TOWNS, New York 
JOHN M. SPRATT, JR., South Carolina 
GARY A. CONDIT, California 
COLLIN C. PETERSON, Minnesota 
KAREN L. THURMAN, Florida 
BOBBY L. RUSH, Illinois 
CAROLYN B. MALONEY, New York 
THOMAS M. BARRETT, Wisconsin 
DONALD M. PAYNE, New Jersey 
FLOYD H. FLAKE, New York 
JAMES A. HAYES, Louisiana 
CRAIG A. WASHINGTON, Texas 
BARBARA-ROSE COLLINS, Michigan 
CORRINE BROWN, Florida 
MARJORIE MARGOLIES-MEZVINSKY, 

Pennsylvania 
LYNN C. WOOLSEY, CaHfomia 
GENE GREEN, Texas 
BART STUPAK, Michigan 



Jr., Michigan, Chairman 

WILLIAM F. CLINGER, Jr., Pennsylvania 

AL MCCANDLESS, California 

J. DENNIS HASTERT, Illinois 

JON L. KYL, Arizona 

CHRISTOPHER SHAYS, Cwinecticut 

STEVEN SCHIFF, New Mexico 

CHRISTOPHER COX, California 

CRAIG THOMAS, Wyoming 

ILEANA ROS-LEHTINEN, Florida 

DICK ZIMMER, New Jersey 

WILLIAM H. ZELIFF, JR., New Hampshire 

JOHN M. McHUGH, New York 

STEPHEN HORN, California 

DEBORAH PRYCE, Ohio 

JOHN L. MICA, Florida 

ROB PORTMAN, Ohio 

FRANK D. LUCAS, Oklahoma 



BERNARD SANDERS, Vermont 
(Independent) 



JUUAN Epstein, Sta/f Director 
Matthew R. Fletcher, Minority Staff Director 



Employment, Housing, and Aviation SuBcoMMnTEE 

COLLIN C. PETERSON, Minnesota, Chairman 
TOM LANTOS, California WILLIAM H. ZELIFF, JR., Rhode Island 

BOBBY L. RUSH. Ilhnois CHRISTOPHER SHAYS. Connecticut 

FLOYD H. FLAKE. New York JOHN M. McHUGH, New York 

KAREN L. THURMAN, Florida FRANK D. LUCAS, Oklahoma 

BARBARA-ROSE COLLINS, Michigan 

Ex Officio 

JOHN CONYERS, JR., Michigan WILLIAM F. CLINGER, JR., Pennsylvania 

Wendy C. ADLER, staff Director 
' t LINDA Thompson, Professional Staff Member 
-iU'i-^**** June Saxton, C/er* 



Judith A. BLANCHARD, Minority Deputy Staff Director 



m 



i\v^ 



(ID 



CONTENTS 



Page 
Hearing held on: 

July 26, 1994 1 

October 6, 1994 211 

Statement of: 

Austin, Deborah M., director. Legislation and Policy, National Low In- 
come Housing Coalition 329 

Comeau, Phillip, vice president, Multifamily Asset Management, Federal 
Home Loan Mortgage Corporation 316 

England-Joseph, Judy A., Director, Housing and Community Develop- 
ment Issues, U.S. General Accounting Ofnce, accompanied by Dennis 
Fricke, Assistant Director 5, 245 

Fitts, C. Austin, president, Hamilton Securities Group, and former Assist- 
ant Secretaiy for Housing, Federal Housing Conunissioner, U.S. De- 
partment of Housing and Urban Development 302 

Ford, Eugene F., president, Mid-City Financial Corp., and owner of Edge- 
wood Management Corp., Edgewood Terrace Apartments 11, Washing- 
ton, DC, accompanied by Elliot Remold, president, Edgewood Manage- 
ment Corp 171 

Gafihey, Susan, Inspector General, U.S. Department of Housing and 
Urban Development, accompanied by Chris Greer, Assistant Inspector 
General for Audit 55, 214 

Graham, George C, M.D., owner, 6000 South Indiana Apartments, Chi- 
cago, IL 141 

Jackson, Artie, resident. Holiday Lake Apartments, Pompano Beach, FL .. 132 

Orehek, John M., general partner, Edgewood Associates, designated rep- 
resentative of SP Properties 1982 Limited Partnership, that owns 
Edgewood Terrace Apartments, Washington, DC, accompanied by Roy 
Lee in, associate counsel. Security Properties, Inc., Seattle, WA 153 

Peterson, Hon. Collin C, a Representative in Congress from the State 
of Minnesota, and chairman, Employment, Housing, and Aviation Sub- 
committee: Opening statement 1 

Retsinas, Nicolas P., Assistant Secretary, Housing, Federal Housing Com- 
missioner, U.S. Department of Housing and Urban Development, ac- 
companied by Helen Dunlap, Deputy Assistant Secretary for Multifam- 
ily Housing; and Judge Nelson Diaz, general counsel 74, 273 

Letters, statements, etc., submitted for the record by: 

Austin, Deborah M., director. Legislation and Policy, National Low In- 
come Housing Coalition: Prepared statement 333 

Comeau, Phillip, vice president, Multifamily Asset Management, Federal 
Home Loan Mortgage Corporation: Prepared statement 320 

England-Joseph, Judy A., Director, Housing emd Community 
Development Issues, U.S. General Accounting Oflice: Prepared state- 
ments 9, 248 

Fitts, C. Austin, president, Hamilton Securities Group, and former Assist- 
ant Secretaiy for Housing, Federal Housing Commissioner, U.S. De- 
partment of Housing and Urban Development: Prepared statement 305 

Ford, Eugene F., president, Mid-City Financial Corp., and owner of Edge- 
wood Management Corp., Edgewood Terrace Apartments II, Washing- 
ton, DC: Prepared statement 174 

Gaffney, Susan, Inspector General, U.S. Department of Housing and 
Urban Development: Prepared statements 60, 218 

Graham, George C, M.D., owner, 6000 South Indiana Apartments, Chi- 
cago, IL: P*repared statement 143 

Jackson, Artie, resident. Holiday Lake Apartments, Pompano Beach, FL: 

Prepared statement 136 

(III) 



IV 

P«ge 

Letters, statements, etc., submitted for the record bv — Continued 

Orehek, John M., general partner, Edgewood Associates, designated rep- 
resentative of SP Properties 1982 Limited Partnership, that owns 
Edgewood Terrace Apartments, Washington, DC: Preparea statement .. 156 
Retsinas, Nicolas P., Assistant Secretary, Housing, Federal Housing Com- 
missioner, U.S. Department of Housing and Urban Development: 

Liformation concerning contract rents 107 

Information concerning economic analysis 112 

Prepared statements 81, 278 

APPENDIX 
Material submitted for the hearing record 349 



SECTION 8 HOUSING: WASTE AND 
MISMANAGEMENT 



TUESDAY, JULY 26, 1994 

House of Representatives, 
Employment, Housing, and Aviation Subcommittee 

OF the Committee on GJovernment Operations, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 
2247, Raybum House Office Building, Hon. Collin C. Peterson 
(chairman of the subcommittee) presiding. 

Present: Representatives Collin C. Peterson, Floyd H. Flake, Wil- 
liam H. Zeliff, Jr., Christopher Shaj^s, and Frank D. Lucas. 

Also present: Wendy Aaler, staff director; Linda Thompson, pro- 
fessional staff member; June Saxton, clerk; and Judith A. Blan- 
chard, minority deputy staff director. Committee on Grovemment 
Operations. 

OPENING STATEMENT OF CHAIRMAN PETERSON 

Mr. Peterson. The committee will come to order. We apologize. 
We have got a lot of things going on this morning, so we are rear- 
ranging and asking you all to appear in one panel. What we are 
going to do is try to get through the statements before we have to 
break. 

Apparently, the rules are that we have to break during this joint 
session, so we will take a break for however long that happens, and 
we will see how it goes. I would hope that you could stay and be 
here when we get back. We appreciate your being with us. 

The subcommittee will be examining this morning waste and 
mismanagement in the Section 8 project-based assistance program. 
Most of us, I believe, are familiar with the Section 8 Voucher and 
Certificate Pro-am, which provides rent vouchers to tenants who 
may use them in any building that will accept them that qualifies 
under the rules. A program I think that is not as well known is 
the Project-Based Program, which we are going to be examining 
today. In this program, HUD provides rent subsidies and in some 
cases HUD-insured mortgages to private projects, and they are ac- 
tually allocated to the project. 

This is a huge program. To date HUD has provided over $131 
billion in assistance to over 20,000 projects across the Nation. As 
the rent subsidies are tied to the project, not the tenant, tenants 
are often unable to move when a project goes bad, regardless of the 
living conditions, £ind we will see some of those cases here a little 
later. 

(1) 



As we begin this hearing, I want to clearly state that I am not 
interested in pointing fingers and placing blame. I think there is 
plenty of that to go around. What I am interested in is seeing if 
we can develop some permanent solutions to this situation. We 
began to investigate this program out of concern for residents 
trapped in these deplorable conditions. 

A recent report by the HUD Inspector General found that 69 per- 
cent of the units failed to meet HUD's housing quality standards. 
The HUD Inspector General will tell us this morning that 20 per- 
cent of them are in serious trouble. So what is HUD doing about 
this? Apparently, the agency has failed to even inspect 61 percent 
of the proiects that should have been inspected. W^en it does in- 
spect, it does little or nothing to effect the repairs. I think there 
may be some reasons for that so I don't want to necessarily lay all 
the blame on HUD's door step, but the fact is that these problems 
are out there and they are not getting addressed. 

What is it like to live in one of these troubled projects? The GAG 
recently looked at some properties in seven cities. It found families 
living in apartments with rats, exposed wires that could be deadly, 
leaking toilets, sinks, and roofs, and holes in the walls and ceilings. 
In Pompano Beach, FL, a child drowned in a lake next to his apart- 
ment complex after the owner kept delaying repairs of several 
holes in the fence between the complex and the lake. 

I think it is inexcusable that HUD is not inspecting these prop- 
erties or enforcing its own housing quality standards. HUD should 
not find out that a property is in poor condition from the local tele- 
vision news, a tenant's lawsuit, or a congressional hearing. The 
GAG and the HUD IG will both testify that HUD officials could not 
provide them with the most basic information on this program, 
such as the number of properties involved and their general condi- 
tion. 

Even when HUD does inspect, it is often a meaningless exercise 
because HUD officials do not follow up and ensure that problems 
are resolved. For example, the GAG found an owner whose prop- 
erty was inspected in 1993, but did not receive the inspection re- 
port from HUD until almost 1 year later, I don't think that even 
that can be blamed on the U.S. mail, although I am not sure in 
watching some of the television reports. The GAG also spoke with 
the HUD inspector of a project in New York City who said that the 
property hadn't improved in the 6 years that he had been inspect- 
ing it. 

Now, HUD has an entire array of enforcement tools, such as civil 
penalties, putting the project in receivership, and denying rent in- 
creases, to force compliance with these housing standards. But 
quite often, most often they aren't used. The HUD IG will report 
that there is a culture at HUD that results basically in a wholesale 
disregard for the available enforcement tools. 

If HUD doesn't effectively enforce its sanctions, the owners are 
going to get away with just about anything, and in some cases they 
are, while still taking millions of dollars in Federal rent subsidies 
while they do it, allegedly to provide safe, sanitary housing for low 
income tenants. 

In addition, without inspections and sanctions, more and more 
properties are falling into the category of too far gone. Repairs es- 



calate over time and then it becomes economically impossible for 
the owner to make the necessary repairs even if he wants to. 

For example, the HUD IG audited Bethel Church Homes, a Sec- 
tion 8 project with 190 apartments in Athens, GA, and found that 
the project needed over $2 million in repairs. The owner had not 
fixed the problems as they developed. 

There are other ways tnat the Federal taxpayer is losing money. 
The rent for many of these apartments are higher than that for 
comparable apartments in the same neighborhood. There are rea- 
sons for these higher rents in some cases, but by law. Section 8 
rents cannot be significantly higher than rents for similar apart- 
ments in the same area. GAO found a troubled Section 8 property 
in Chicago where the rent for a two-bedroom apartment was over 
$800, and a comparable apartment in a building nearby was just 
over $400. 

Section 8 subsidies work for many projects. Why can't it work for 
others? Why can one well-maintained project be right next to a 
poorly maintained project in the same neignborhood with basically 
the same type of tenants? Today we will hear from two different 
owners whose properties are located right next door to each other, 
Edgewood I and Edgewood II right here in Washington, DC. The 
first property is in terrible shape; the second one is in good condi- 
tion. As I said, they basically have the same kinds of tenants. We 
brought both of those owners here today to talk to us as we exam- 
ine this issue. 

Now, in fairness to HUD, I think that the more I look into this 
I can see that there are no easy policy solutions to the problems 
of this Section 8 housing program. But in spite of that, I think we 
must take steps to resolve these problems, and I think we need to 
do it now. 

After today's hearing, I intend to develop legislation to address 
these problems similar to what we did on the one for one replace- 
ment law and some of the other issues we looked to in the public 
housing area. Hopefully, our witnesses today will also offer some 
suggestions that we can follow up on. I will now recognize the 
ranking member of the committee, the Honorable Bill Zeliff from 
New Hampshire, who has been working with me. We look forward 
to your statement. 

Mr. Zeliff. Thank you, Mr. Chairman. I will be just as brief as 
I can in the interest of time, but appreciate your calling this sub- 
committee together this morning to examine the problems that are 
associated with Section 8 project-based housing programs. 

Mr. Chairman, Americans are compassionate people, and it is an 
inherent part of our American character to lend a hand to those in 
need. However, we also have a right to expect that the assistance 
we provide will be put to good use. We need accountability and we 
need good management practices which, if properly implemented, 
will eliminate and prevent waste and inefficiency. This is particu- 
larly true of our public assistance programs. 

The Section 8 assisted housing program represents an important 
part of our effort to provide one of the most basic of human neces- 
sities — shelter. Of course, providing shelter means more than sim- 
ply putting a roof over people's heads. Recipients of Section 8 as- 
sistance have a right to expect decent, safe, and sanitary housing. 



Taxpayers also deserve to know that their dollars are being well 
used. Unfortunately, as we will hear today, this is not always the 
case. What we will hear about today are families that live in Sec- 
tion 8 housing units that routinely fail to meet HUD's housing 
quality standards. People live in rat and roach-infested apartments 
with no heat or air conditioning, leaking toilets and roofs, and 
holes in the walls and ceilings. 

In some cases, the rents that are paid for these units are higher 
than the rents of comparable housing units in the area. All of this 
is paid for by the American taxpayer. HUD is supposed to inspect 
these housing units to ensure that they meet standards of quality. 
However, these inspections do not always occur nor does the agen- 
cv adequately follow up on the inspections that are done to ensure 
that necessary repairs are done. 

HUD also fails to aggressively take enforcement actions against 
delinquent project owners. It is estimated that 15 to 20 percent of 
Section 8 project-based housing is considered substandard, al- 
though a lack of data makes it difficult to get an exact figure. In 
fact, it could be said that the most troubling aspect of this issue 
may not be the existence of substandard housing. Rather, I am con- 
cerned over the general lack of information from HUD on the exact 
scope of the problem, as well as a general inability of the agency 
to take corrective action. 

I also find it troubling that this subcommittee has held hearings 
to focus attention on various aspects of our troubled housing assist- 
ance programs and the response from this administration has been 
largely nonexistent. It becomes increasingly difficult to justify fund- 
ing programs that are in such fundamental disrepair. 

Mr. Chairman, I hope today's hearing will send a clear signal to 
HUD that we cannot continue to allow these problems to carry on. 
Whether the problem is welfare hotels or decrepit Section 8 hous- 
ing units, we need a results-oriented strategy from the administra- 
tion to solve these problems, not more excuses. We need a time line 
as to when certain things are going to get done. Many of these 
problems have existed for many years, and also carry over from 
other administrations, and I recognize that, but with the limited 
resources that we now have today, taxpayers' interests must be 
represented, and we need to look at not only these issues, but 
maybe extended into the financing end of it, maybe looking at the 
tax situation that has allowed some of this to exist, very com- 
plicated, very technical, but looking forward to the testimony and 
hopefully we can make some progress, Mr. Chairman. 

Mr. Peterson. Thank you, Mr. Zeliff, for that statement. We ap- 
preciate the work you have been doing. I would like to welcome the 
newest member of the Employment, Housing, and Aviation Sub- 
committee, a new Member from Oklahoma, Mr. Frank Lucas. We 
welcome you to the subcommittee. Do you have any statement? You 
don't have to, but it is up to you. 

Mr. Lucas. Just truly appreciate the opportunity to serve on the 
subcommittee with the chairman and the ranking member and 
think that it is indeed a privilege to be able to serve on Govern- 
ment Operations and think that we have a very serious role, as I 
understand this committee's oversight, making sure that the citi- 
zens' interests are well taken care of Thank you, Mr. Chairman. 



Mr. Peterson. Again, welcome to the subcommittee, and we look 
forward to working with you as we proceed. We were going to have 
more panels, but we combined two of the panels. 

Our first panel of witnesses are Judy England-Joseph, the Direc- 
tor of Housing and Community Development Issues with the Gen- 
eral Accounting Office, who is accompanied by Dennis Fricke, As- 
sistant Director for Housing and Community Development; and 
Susan Gaflfhey, back with us again, the Inspector General with the 
U.S. Department of Housing and Urban Development, who is ac- 
companied by Chris Greer, who is also back with us again, assist- 
ant Inspector General for audit; and Nicolas Retsinas, the Assist- 
ant Secretary for Housing, Federal Housing Commissioner with 
HUD, who is accompanied Dy Helen Dunlap, Deputy Assistant Sec- 
retary for Multifamily Housing. 

We appreciate very much you all being with us this morning and 
the work that you are doing. It is the custom of the Government 
Operations Committee investigative hearings to swear in all wit- 
nesses. Do any of you have any problem with being sworn in? If 
not, would you please rise and raise your right hand. 

[Witnesses sworn.] 

Mr. Peterson. Thank you. Please be seated. Your statements 
are going to be included in the record without objection in their en- 
tirety. You can summarize, hit the high points, however you would 
like to proceed, so Ms. England-Joseph, would you begin. 

STATEMENT OF JUDY A. ENGLAND-JOSEPH, DIRECTOR, HOUS- 
ING AND COMMUNITY DEVELOPMENT ISSUES, U.S. GENERAL 
ACCOUNTING OFFICE, ACCOMPANIED BY DENNIS FRICKE, 
ASSISTANT DIRECTOR 

Ms. England-Joseph. Thank you, Mr. Chairman, and members 
of the subcommittee. We are pleased to have the opportunity to tes- 
tify today on matters aflTecting the Nation's ability to provide low- 
income families with decent housing. My testimony will focus on is- 
sues related to the housing and urban development Section 8, 
project-based assisted housing programs, which provide rental as- 
sistance to over 20,000 privately owned properties, and 1.5 million 
low income households nationwide at an estimated annual cost of 
about $5.8 billion. 

At your request, we looked at whether properties being sub- 
sidizea by the Section 8 programs meet HUD s housing quality 
stanaards for safe, decent, and sanitary housing and whether HUD 
is effectively using its enforcement tools to ensure that the assisted 
properties are adequately maintained. You also asked us to provide 
our observations on actions either HUD or the Congress might take 
to help resolve situations in which these properties are very poorly 
maintained. 

According to HUD's regulations and directives and the provisions 
of various contractual agreements, such as the housing assistance 
payment contract, owners of Section 8 project-based assisted prop- 
erties are required to maintain assisted properties in good physical 
condition. HUD field officers, through various oversi^t functions, 
are supposed to ensure that this is the case. HUD is required to 
conduct inspections of assisted properties to assess the performance 
of management agents in operating a project, determine the condi- 



tion of a property's buildings, grounds, and mechanical systems, 
and look at the interiors of a sample of units to determine whether 
the units meet the housing quality standards. 

Our testimony is based on visits we made in June and July of 
this year to properties in both good and poor physical condition in 
seven locations throughout the country — Washington, DC, New 
York, Illinois, Texas, Florida, Nevada, and California. 

We reviewed property files and discussed the properties' histories 
with HUD management, HUD officials and management agents, 
and some owners and tenants. Additionally, we reviewed contrac- 
tual obligations between owners, lenders, and HUD, and the impli- 
cations of HUD taking various actions when properties fail to meet 
housing quality standards. 

Now, before I discuss the results of our work, we would like to 
show a brief videotape depicting the conditions in some of the as- 
sisted properties we visited. 

[Video shown.] 

Ms. England-Joseph. As the videotape showed, physical condi- 
tions in the Section 8 assisted properties we visited ranged from 
very good to very poor. The properties in good physical condition 
shown in the video demonstrate that the Section 8 progp'am can 
work. However, the video also showed that HUD is paying sizable 
rent subsidies for poor quality housing. 

The focus of our testimony today is on the 10 properties in poor 
physical condition so that we could obtain a perspective on the se- 
verity of the problems and understand the factors that impede 
HUD's ability to enforce its housing quality standards. 

In summary, we found the following: In 1993 HUD paid about 
$7 million in rent subsidies to house over 1,200 families in the 10 
distressed properties we visited. In some of these properties, many 
of the physical problems had been longstanding. 

For example, Edgewood Terrace Apartments in Washington, DC, 
which was shown in the video, received unsatisfactory ratings in 
overall management operations from HUD from 1989 to 1993. A 
November 1992 review stated that "many occupied and vacant 
units are unfit for human habitation." 

In stark contrast to this property is one which adjoins it called 
Edgewood Terrace II. Edgewood Terrace II is well maintained, both 
on the interior and exterior, and has a community center that of- 
fers several activities for its tenants. The unit rents for some of the 
distressed properties we visited were equal or higher than those of 
other properties in the same area whose physical condition and 
amenities are much better. 

For example, the rent for a two-bedroom unit at Unity Apart- 
ments in New York City is $1,100, while rent for a two-bedroom 
unit in a well-maintained unsubsidized property in the same gen- 
eral area is between $600 and $750 a month. 

HUD has a wide range of enforcement tools intended to ensure 
that its subsidized housing is maintained according to housing 
quality standards, including applying civil money penalties and ter- 
minating the housing assistance payments contract. 

HUD nas used these tools sparingly and inconsistently. However, 
these tools, when used, can help to ensure that assisted properties 
are well maintained, but they do have certain limitations. For ex- 



ample, civil money penalties only apply to owners of Section 8 as- 
sisted properties whose mortgages are ensured by HUD. 

The termination of a housing assistance payment contract also 
poses problems in that HUD generally does not have the funding 
to provide tenants with long-term alternative housing assistance if 
they are displaced from a property receiving Section 8 project-based 
assistance. Further, if HUD applied the more severe enforcement 
penalties, such as termination of the housing assistance payments 
contract, low-income tenants could be displaced and the Federal 
Government could incur significant additional costs depending on 
the interpretation of laws requiring that properties continue to 
serve low-income tenants. 

Administrative initiatives are under way to help HUD overcome 
some of the impediments to dealing with properties in serious dis- 
repair. These initiatives deal with HUD's improving its information 
and financial systems as well as providing improvements in train- 
ing to its staff. Further, various legislative proposals have been in- 
troduced, such as the reuse of recaptured Section 8 assistance to 
relocate tenants and an expansion of its civil money penalties. 

While these actions are a step in the right direction, they do not 
resolve the immediate problems facing tenants currently living in 
the most severely distressed Section 8 assisted housing. Accord- 
ingly, we are recommending today that the Secretary of HUD begin 
immediately to develop a comprehensive strategy to address the 
very poor physical conditions under which some families supported 
by Section 8 project-based assistance are living. 

As part of this strategy HUD should, through the use of its field 
staff, promptly identify all Section 8 assisted properties with severe 
physical problems and offer affected tenants temporary assistance 
to relocate to safe and decent housing. HUD should also systemati- 
cally notify owners of the problems they identify and take appro- 
priate enforcement action in cases in which owners do not bring 
their properties into compliance with the housing quality stand- 
ards. 

To the extent that budgetary or legislative constraints prevent 
HUD from addressing these conditions, we further recommend that 
the Secretary provide the Congress with an assessment of the re- 
sources and legislative changes the Department needs. 

Mr. Chairman, the focus of our testimony today has been on 
some of the more severely distressed Section 8 project-based as- 
sisted properties and the need for HUD to take immediate action 
to improve the living conditions of tenants in these and other simi- 
larly distressed properties. However, HUD's effectiveness in deal- 
ing with these conditions and minimizing similar situations in the 
future will depend on the Department building the capacity nec- 
essary to manage its large inventory of assisted properties and 
identifying and successfully working with Congress and the Office 
of Management and Budget on the budgetary and legislative issues 
related to this matter. 

In closing, Mr. Chairman, swifl action is needed to address the 
very poor living conditions we found in our review. Our rec- 
ommendation is not intended to be a paperwork exercise, the end 
of which may be years to come. It is instead a set of actions that 



8 

if taken will demonstrate HUD's commitment to enforcing its hous- 
ing quality stemdards. 

The Department's efforts to quickly address the conditions we 
found and to take enforcement action, where appropriate, will send 
a very clear signal to participants in HUD's assisted-housing pro- 
grams that deplorable living conditions will not be tolerated and 
that HUD indeed is a force to be reckoned with in providing safe, 
decent, sanitary housing for low income people. That completes my 
statement. I would be nappy to answer any questions you or the 
committee members might have. 

[The prepared statement of Ms. England-Joseph follows:] 



linited Stales (General Accounting Office 



GAO iTtr, .H 

Before the Lmployment. Housing 
and Aviation Subcommittee, 
Committee on Government Operations, 
House of Representatives 



For Release on Delivery 
Expected at 
10a.m.EDT 
Tuesday 
July 26. 1994 



FEDERALLY ASSISTED 
HOUSING 

Condition of Some Properties 
Receiving Section 8 
Project-Based Assistance Is 
Below Housing Quality 
Standards 



Statement of Judy A. England-Joseph, 

Director, Housing and Community Development Issues, 

Resources, Community, and Economic Development Division 




GAO/T-RCED-94-273 



10 



Mr. Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the results of our 
work for this Subcommittee and for the Ranking Minority Member of 
the House Committee on Appropriations on the Department of Housing 
and Urban Development's (HUD) Section 8 project-based assisted 
housing programs. Under these programs, HUD pays a portion of the 
rent for low-income families living in privately owned rental 
housing. 

HUD provides this assistance for over 20,000 privately owned 
properties nationwide at an estimated annual cost of $5.8 billion. 
The mortgages for about 10,000 of these properties are also insured 
or held by HUD. Although many of these properties are considered 
to be in good physical condition, reports by HUD's field offices, 
HUD'S Office of Inspector General, and the media have identified 
assisted properties where low-income families are living in very 
poor physical conditions. Concerned about these situations, you 
asked us to examine whether (1) the properties being subsidized by 
the Section S programs meet HUD's housing quality standards for 
safe, decent, and sanitary housing and (2) HUD is effectively using 
its enforcement tools to ensure that the assisted properties are 
adequately maintained. You also asked us to provide our 
observations on actions either HUD or the Congress might take to 
help resolve situations in which the properties are very poorly 
maintained. 



11 



Our testimony is based on visits we made in June and July 1994 
to properties, in both good and bad physical condition. In seven 
locations throughout the country, (See app. I.) We selected these 
properties in consultation with HUD headquarters and field office 
staff. We reviewed property files and discussed the properties' 
history with HUD officials, management agents and some owners, and 
tenants. We also documented the rents charged for the properties 
we reviewed and compared these rents with those of other properties 
in the same area. In addition, we reviewed contractual obligations 
between owners, lenders, and HUD and the implications of HUD's 
taking various actions when properties fail to meet the housing 
quality standards. 

In summary, we found the following: 

— Physical conditions in the Section 8 assisted properties we 
visited ranged from very good to very poor. The properties 
in good physical condition demonstrate that the Section 8 
program can work. However, conditions in some properties 
we vi'sited clearly violate HUD's housing quality standards. 
These standards require, among other things, that tenants 
be provided with properly operating sanitary facilities, 
adequate security, properly operating heating and air 
conditioning, and ceiling and walls without serious 
defects. In the distressed properties we visited, families 
were housed in units with, among other things, leaking 



12 



toilets and sinks, exposed electrical wiring, holes in 
walls and ceilings, inoperative air conditioners and smoke 
detectors, missing and broken kitchen cabinets, and 
evidence of roach and rodent infestation. HUD does not 
know the full extent of these conditions in properties 
assisted under the Section 8 project-based programs. 

The unit rents for some of the distressed properties we 
visited are equal to or higher than those of other 
properties in the same area whose physical condition and 
amenities are much better. Thus, the government is paying 
sizeable rent subsidies for poor quality housing. 

HUD has various enforcement tools to ensure that owners 
maintain assisted properties in compliance with the housing 
quality standards--including administrative sanctions such 
as barring or suspending owners from further participation 
in Section 8 programs and terminating the housing 
assistance contract. However, HUD has used these tools 
sparingly and inconsistently. Poor management information 
systems and ineffective oversight of properties have 
seriously impeded HUD's ability to document problems and 
pursue enforcement actions. In addition, under current 
laws, if HUD applied the more severe enforcement penalties, 
(1) low-income tenants could be displaced and (2) the 
federal government could incur significant additional 



13 



costs, depending on the interpretation of laws requiring 
that properties continue to serve low-income tenants. 

-- Administrative and legislative initiatives are under way to 
help HUD overcome some of the impediments to dealing with 
properties in serious disrepair. However, HUD does not 
have an immediate plan of action for assisting tenants in 
the most severely distressed properties and for addressing 
the problems at each property. Moreover, because some of 
the initiatives that have been introduced have broader 
public policy implications, they require further analysis. 

Before we discuss the results of our work in more detail, we 
will show a video tape depicting the conditions in some of the 
assisted properties we visited. Following the video tape, we will 
provide some background information on the Section 8 program and 
discuss further the results of our work. 



14 



BACKGROUND 

HUD'S Section 8 project-based rental assistance programs^ were 
established under Section 8 of the United States Housing Act of 
1937, as amended (42 U.S.C. 1437 et seq.)- The subsidies provided 
under these programs allow about 1.5 million lower-income 
households to obtain housing from private owners. Households 
receiving this assistance must live in designated properties, and 
they are generally required to pay 30 percent of their income for 
rent. HUD generally enters into housing assistance payment 
contracts with the owners of the properties and provides rent 
subsidies to them. The subsidy represents the difference between 
the tenant's payment and the agreed-upon rent. Because these rent 
subsidies are attached to particular units, tenants who move lose 
their rental assistance unless they move to another subsidized 
unit. 



^Unlike tenant-based subsidies, project-based subsidies are 
attached to particular property units. The primary project-based 
assistance programs are (1) the Section 8 Property Disposition 
program, which provides assistance to ensure that properties 
acquired by HUD through foreclosure and eventually resold are 
maintained as low-income housing; (2) the Section 8 Loan Management 
Set-Aside program, which provides assistance to projects with HUD- 
insured and HUD-held mortgages that are experiencing immediate or 
potentially serious financial difficulties; and (3) the Section 8 
New Construction and Substantial Rehabilitation programs, which 
provide assistance to private developers to construct new units or 
to substantially rehabilitate units for rental to low- and 
moderate- income families. 



15 



Although not the subject of today's testimony, two other types 
of tenant-based rental assistance--certif icates and vouchers--are 
provided under HUD's Section 8 programs. An additional 1.3 million 
households use certificates or vouchers to obtain housing. 
Generally, these assisted households may use certificates and 
vouchers to rent from owners of their choice, provided the units 
meet HUD's requirements for rent levels and housing quality 
standards. 

HUD's Section 8 project-based assistance programs are 
administered by the Office of Multifamily Housing Management, 
within the Office of the Assistant Secretary for Housing--Federal 
Housing Commissioner. To a large extent, HUD's field offices carry 
out the programs' activities under the direction of this office. 

Two documents governing HUD and the property owners --the 
housing assistance payments contract and the regulatory agreement 
(for HUD-insured properties) --require owners to maintain assisted 
properties in good physical condition. Also, lenders providing 
mortgages for HUD-insured properties are required, in servicing 
their mortgages, to annually inspect the property and send copies 
of the inspection results to the local HXTO field office, the 
property owner, and the management agent. 

For HUD-insured and -assisted properties, HUD is required, 
as part of its loan servicing activities, to oversee project 



16 



owners, management agents, and lenders to ensure that Section 8 
assisted properties are maintained in good physical condition.^ 
According to the provisions of the housing assistance payments 
contract, HUD is required to have the units inspected at least 
annually to ensure that the property owners are complying with the 
housing quality standards. Inspections are to be conducted by 
HUD'S field offices or contractors to (1) assess the performance of 
management agents in operating a project; (2) determine the 
condition of a property's buildings, grounds, and mechanical 
systems; and (3) look at the interiors of a sample of units to 
determine whether the units meet the housing quality standards. In 
addition, lenders with HUD- insured mortgages are required to 
inspect properties at least once a year and report to HUD. 

CONDITIONS IN SOME HUD-ASSISTED PROPERTIES 
VIOLATE HOUSING QUALITY STANDARDS 

During our review, we found physical conditions ranging from 
very good to very poor in properties receiving Section 8 project- 
based assistance. Properties in good condition were well 
maintained throughout the interior and exterior of the buildings. 
Also, the tenants were afforded various services and amenities, 
such as child care and youth activities. However, the focus of our 
review was on properties in poor physical condition, so that we 
could obtain a perspective on the severity of the problems and 



'in addition to HUD, public housing agencies and state housing 
finance agencies carry out loan servicing activities for some 
Section 8 assisted properties. 



17 



understand the factors that impede HUD from enforcing its housing 
quality standards. 

HUD does not have complete information on the condition of the 
more than 20,000 properties that receive project-based assistance. 
In our review, we found properties in conditions far below HUD's 
housing quality standards. Nevertheless, some of these properties 
had rents that were equal to or greater than those at other 
properties in the same area. Thus, the federal government is 
paying large subsidies for poor quality housing. 



Some Assisted Properties Are 
in Poor Condition 



Ten distressed properties, located in seven cities, are the 
focus of our testimony today. These 10 properties house over 1,200 
families, cost the federal government about $7 million in rent 
subsidies in 1993, and reflect conditions far below HUD's housing 
quality standards. (App. II summarizes the conditions in these 10 
properties. ) 

Among the problems we found in the 10 distressed properties we 
visited were 

-- boarded-up units, some of which were easily accessible 
through unlocked front doors; 



18 



-- missing kitchen cabinets, appliances that were not in 
proper working condition, and leaking toilets and sinks; 

-- inoperative air conditioners and inoperative or missing 
smoke detectors ; 

-- exposed wiring and electrical outlets; 

-- evidence of roach and/or rodent infestation; 

-- poorly maintained walkways, stairs, common areas, and 
laundry rooms; 

-- Inadequate exterior and interior lighting and other 

security problems such as holes in security fences; and 

-- interior ceilings, walls, and floors damaged by water 
leakage. 

In reviewing HUD's inspection reports, we found that many of 
the problems we observed had been previously documented and, in 
some cases, were long-standing. For example: 

-- At Holiday Lake Apartments in Pompano Beach, Florida, 

HUD's Jacksonville Field Office noted significant physical 
deficiencies in the property's exterior and in many of the 



19 



units inspected in May 1993. Also, three inspections over 
the last year rated the property's overall physical 
condition and maintenance policies and practices as 
unsatisfactory. In the November 1993 inspection, for 
example, 114 out of 222 units inspected (51 percent) failed 
to meet the housing quality standards. Furthermore, in the 
March 1994 inspection, the field office found life- 
threatening problems, such as exposed 220 volt wires on 
outside air conditioning units. 

At Edgewood Terrace Apartments in Washington, D.C., HUD's 
Washington, D.C., Field Office rated the property as 
unsatisfactory in overall management operations from 1989 
through 1993. A November 1992 review stated that "many 
occupied and vacant units are unfit for human habitation" 
and described existing physical conditions as "deplorable." 
During a physical inspection conducted in January 1993, all 
of the units inspected failed to meet the housing quality 
standards. An architectural report prepared for HUD in 
July 1994 stated that the property required replacement of 
roofs, windows, heating/air conditioning units, kitchens, 
and bathroom components. 



10 



20 



Large Subsidies Are Being Paid 
for Poor Quality Housing 



HUD is paying significant subsidies to house low-income 
families in the 10 properties we visited with serious physical 
problems. Table 1 provides data on the rents for these properties 
and the rents for well-maintained two-bedroom units in other 
properties in the same area. 



11 



21 



Table 1: Unit Rent. Rental Income, and Subsidies for 10 Physically Distressed 
Properties 





Unit 
rent* 


Rent in 

neighboring 

buildings" 


Rental income 


— calendar year 1993 


City/project 


Property's 
rental 
income 


Section 8 
subsidy 


Subsidy as 

a percent 

of rental 

income 


Washington, D.C. 










Edgewood Terrace 


$751 


$895-920 


$1,415,981 


$558,147 


39 


Skytower 


734 


550-600 


788,595 


638.344 


81 


New York, New York 


Unity= 


1,138 


600-750 


880,680 


681,829 


77 


De Diego Beekman IV 


980 


700-840 


1,374,256 


904,809 


66 


Chicago, Illinois 


6000 S. Indiana Apts. 


849 


435-475 


413,736 


270,553 


65 


1 Tyler, Texas 


Liberty Arms'* 


374 


281-439" 


306,5'>4 


228,960 


75 


Pompano Beach, Florida 


] Holiday Lake" 


434 


f 


943.610 


647.556 


69 


Las Vegas , Nevada 


Sierra Nevada Arms 


468 


600 


1,166,300 


999,507 


86 


Carey Arms 


820 


380 


2,479,712 


1,823,000 


74 


Los Angeles, California 








Urban Rehab II 


667 


659" 


354,902 


208,059 


59 



Note: Section 8 subsidies totaled about $7 million for these 10 properties. 

'Rent charged for a two-bedroom unit. 

"Rent charged for a two-bedroom vinit in a neighboring unsubsidized property. 

■^Rental income and Section 8 subsidy reported are for calendar year 1992. 

"Rental income and Section 8 subsidy reported are for fiscal year 1993. 

"Since there are no unsubsidized properties in the area, the rent for a two-bedroom unit in a 
well-maintained subsidized property is used here. 

'There are no subsidized or unsubsidized properties in the Immediate area. 



12 



22 



In 1993, HUD paid about $7 million in subsidies for the 10 
properties shown in table 1. These subsidies represent between 39 
percent and 86 percent of the owners' total rental income from the 
properties. In five cases, the rents in these subsidized units 
exceeded those of well-maintained properties in the same area; in 
two cases they were comparable; in two cases they were below those 
rents; and in one case there was no other rental property in the 
immediate area. Furthermore, these other properties in the area 
offered residents amenities and services that were superior to 
those offered at the properties in disrepair. For example, one 
property in southeast Washington, D.C., offers day care facilities, 
a learning center, and a special summer program for young people in 
cooperation with the local police. 



FACTORS IMPEDING HUD'S EFFECTIVE ENFORCEMENT 
OF HOUSING QUALITY STANDARDS 



HUD has a wide range of enforcement tools intended to ensure 
that its subsidized housing is maintained according to the housing 
quality standards. These tools, used correctly, can help to ensure 
that Section 8 assisted properties are well maintained, but they 
have certain limitations. In addition, certain factors have 
diminished HUD's ability to effectively use these tools to enforce 
the housing quality standards. 



13 



23 



Enforcement Tools Range in Severity 
but Have Certain Limitations 



HUD'S enforcement tools provide a wide range of penalties that 
the Department can apply if the owners of properties receiving 
Section 8 assistance do not comply with the housing quality 
standards. These tools range in their severity and impact. Among 
the least severe are various administrative sanctions that can 
limit the owners' or management agents' future participation in HUD 
programs. These sanctions are particularly effective with owners 
or management agents who want to continue to participate in HUD 
programs but are less useful when the parties are no longer 
Interested in working with HUD. 

Civil money penalties have potentially greater impact. 
Authorized by the HUD Reform Act of 1989, these penalties apply to 
violations of the regulatory agreement governing HUD- Insured 
properties. Since the regulatory agreement stipulates that owners 
must maintain their properties in good repair, failure to do so is 
a clear violation. According to the law, HUD may assess a penalty 
of up to $25,000 for each violation. However, there are three 
notable limitations to civil money penalties. First, under current 
law, these penalties are limited to the entity that owns the 
property, which In many cases is a partnership with few resources 
other than the insured property. Thus, any money penalty may have 
a limited effect. Second, civil money penalties only apply to 
owners of Section 8 assisted properties whose mortgages are 

14 



24 



Insured by HUD. Finally, identity-of-interest management 
companies' are not covered by civil money penalties. 

Among the most severe penalties HUD can apply are (1) 
suspending Section 8 assistance for Individual units In a property 
that do not comply with the housing quality standards and (2) 
terminating the housing assistance payments contract in cases in 
which a property has a history of serious physical neglect. Either 
action can have serious repercussions for tenants and a property's 
financial viability. At present, HUD generally does not have the 
funding to provide tenants with long-term alternative housing 
assistance if they are displaced from a property receiving Section 
8 project-based assistance. However, according to the terms of the 
housing assistance payments contract, HUD can use the suspended 
Section 8 assistance payment to temporarily rehouse the tenants in 
other units. Aside from the effect on the tenants, suspension or 
termination of Section 8 assistance would directly affect a 
property's cash flow. As a result, these actions are likely to be 
effective with owners who wish to retain their properties but less 
effective with owners of properties that are no longer profitable. 



'An identity-of-interest management company is one in which the 
owner of a property also has an ownership Interest in the 
management company. 

15 



25 



Problems In HUD's Data Systems and Loan 
Servicing Impede Use of Enforcement Tools 

Because of limitations in its capacity, HUD has been impeded 
in its ability to adequately oversee its assisted properties and 
take appropriate action when conditions warrant it. These 
limitations center on poor management information systems and a 
lack of staff capacity to perform effective loan servicing. 

More specifically, HUD's ability to routinely Identify and 
monitor properties in deteriorating physical condltlon--and thus to 
Initiate appropriate enforcement actions--is impaired because the 
Department's information systems do not contain the data necessary 
to do so. Although the information systems in HUD's field offices 
contain data from physical Inspection reports, the systems do not 
(1) contain data on, or reflect, the number of units In each 
property that do not meet HUD's standards for safe and decent 
housing or (2) track the actions taken to address problem 
conditions . 

Unstable' financial conditions in a property, if left 
unresolved, can also contribute to deterioration of the property's 
physical condition and possibly warrant enforcement penalties if 
the financial problems can be attributed to abuses by the owners. 
However, HUD's financial systems, which support oversight of the 
inventory of assisted properties, have been so deficient that they 
have been (1) classified as part of a material internal control 

16 



26 



weakness in loan servicing, under the Federal Managers' Financial 
Integrity Act, since 1987 and (2) cited as not containing adequate 
data to provide early warning of deteriorating financial conditions 
in the properties. 

In addition to problems with the information systems, problems 
with loan servicing also affect HUD's performance in enforcing 
compliance with the housing quality standards. For example, field 
offices, as part of their loan servicing activities, perform 
physical inspections, review financial statements, and conduct on- 
site management reviews of HUD-insured and Section 8 assisted 
properties. However, in an April 1993 report on six field offices, 
HUD'S Office of Inspector General stated that such reviews were not 
conducted in a manner that would consistently identify substandard 
living conditions.* 

The Inspector General's report was one of over a dozen audit 
reports, studies, task forces, and management reviews over the last 
two decades that have Identified long-standing problems with HUD's 
loan servicing activities. These problems included heavy staff 
workloads, the incomplete training of loan servicers, and poor 
supervision and oversight of the loan servicing function. Without 



* Multi-ReQion Audit of HUD's Servicing of Insured Multifamilv 
Projects. U.S. Department of Housing and Urban Development, Office 
of Inspector General, 93-HQ111-0014 (Washington, D.C.: Apr. 30, 
1993). 

17 



27 



effective oversight of properties, HUD is not in a position to 
effectively enforce its housing quality standards. 

Other Factors Further 
Impede Enforcement Actions 

HUD has the authority to terminate Section 8 assistance in all 
units in properties that are in very serious disrepair. However, 
it has rarely taken this action. Furthermore, depending on how 
current laws are interpreted, doing so could create a new set of 
problems, some of which may be costly. 

First, under appropriations law, if Section 8 funds for a 
property are terminated, these "recaptured" funds must be returned 
to the Treasury and cannot be reused by HUD to relocate tenants in 
decent housing in the community. Thus, removing Section 8 
assistance from a run-down property could, unless other funding 
were available, result in the displacement of families. 

Second, if HUD attempts to acquire a distressed property in 
order to improve its physical condition, it may meet resistance 
from the current owners because of the tax consequences. 
Specifically, under current tax law, owners may be required to pay 
a significant tax even if they receive no cash from the sale of the 
property. This tax, known as an "exit tax," is often associated 
with older properties that have been significantly depreciated. 



18 



28 



Finally, if HUD were to apply its most severe enforcement 
penalty--termination of the Section 8 contract on an insured 
property--foreclosure proceedings could result in HUD's becoming 
the property owner. Depending on how the recently enacted 
provisions of federal "preservation" laws are interpreted, HUD may 
be required, if it disposes of any units receiving project-based 
assistance, to replace them with new assisted units. Consequently, 
even if the appropriations law were changed to give HUD the 
authority to reuse recaptured Section 8 funds to relocate tenants 
in decent housing in the community, HUD might need roughly an 
equivalent amount of additional budget authority to sell a 
distressed property. 



SOME CORRECTIVE INITIATIVES ARE UNDER WAY, 
BUT IMMEDIATE ATTENTION IS NEEDED FOR SEVERELY 
DISTRESSED PROPERTIES 



HUD is taking steps to improve its information systems and 
loan servicing activities, and legislation has been introduced in 
the Congress to assist HUD in overcoming certain impediments to 
dealing with properties in very poor physical condition. While 
these actions are a step in the right direction, they do not 
resolve the immediate problems facing tenants living in the most 
severely distressed Section 8 assisted housing. 



19 



29 



HUD'S Actions to Improve Its Oversight 
of Properties Do Not Address 
the Immediate Needs of Tenants 



HUD is making an effort to identify the information needed to 
provide proper oversight of the physical condition of its assisted 
properties and to take steps to collect this information. 
Likewise, to address weaknesses in its financial systems, HUD Is 
developing a national system that it expects to contain an early 
warning component to help identify properties with potential 
problems. According to HUD officials, 75 percent of the 1993 
financial statements for assisted properties have been entered into 
the system, and the Department has begun to analyze a portion of 
them. Finally, HUD is trying to improve its loan servicing 
performance, in part through the use of contractor personnel to 
conduct physical Inspections of the assisted properties. 

These are all positive Initiatives which, if carried out 
effectively, should place HUD in a better position to manage Its 
inventory of assisted properties and take appropriate action if the 
physical condition of any properties begins to decline. However, 
there are some issues in the implementation of these initiatives 
that need to be addressed, and immediate action is needed to assist 
tenants living in the most severely distressed properties. 

First, as we noted earlier, HUD has experienced long-standing 
problems with its information systems, and reports by HUD's 

20 



f\^\ ^\C M ^\C 



30 



Inspector General have for years pointed to deficiencies In HUD's 
capacity to effectively service Its Inventory of assisted 
properties. Although HUD Is taking action to correct these 
problems. It will likely take a number of years to resolve them. 

Second, while we did not assess the quality of property 
inspections performed by outside contractors, staff in some HUD 
field offices expressed concerns about this issue. For example, 
one field office told us that it had required a contractor to redo 
9 of its first 11 inspections because the inspections were 
considered inadequate. In addition, an owner provided us with 
documentation showing that although his property was inspected by a 
contractor in August 1993, he did not receive the report from HUD 
until April 1994. This delay diminished the report's utility. 

Third, as noted earlier, lenders with HUD-insured Section 8 
assisted properties are required to Inspect these properties at 
least once a year and send a copy of the report to HUD. Staff at 
some of the HUD field offices we visited said they relied on 
lenders' inspections because the field offices lacked sufficient 
staff of their own. However, the staff considered these 
inspections generally unreliable in documenting the actual physical 
condition of the properties. 

Finally, although HUD is taking actions on selected distressed 
properties, including some of those we visited, it has not 

21 



31 



developed a comprehensive strategy for promptly identifying and 
dealing with the severely distressed Section 8 assisted properties 
in its inventory. 



Legislation Has Been Proposed to Increase 
HUD'S Flexibility on Distressed Properties 



Legislative proposals have been introduced that would provide 
HUD with additional flexibility in dealing with assisted properties 
in very poor physical condition. While these initiatives are 
designed to address specific problems that HUD faces with 
distressed properties, some raise other issues when they are 
considered in the context of existing laws. 

Three key initiatives are being considered. Senate Bill 2049 
provides for (1) the reuse of recaptured Section 8 project-based 
assistance and (2) an expansion of civil money penalties. Senate 
Bill 1986 and House Bill 3322 provide for tax relief for owners of 
troubled properties. 

Under one provision in Senate Bill 2049, HUD would be allowed 
to reuse Section 8 project-based assistance, recaptured when 
housing assistance payments contracts are terminated, to relocate 
tenants currently living in distressed properties. The bill 
provides HUD with the choice of relocating tenants using either 
certificates or vouchers or providing alternative Section 8 
project-based housing. HUD supports this provision because it 

22 



32 



provides a means to protect tenants who might be displaced if HUD 
terminates the Section 8 housing assistance payments contract for a 
property. In concept, we also support this provision. However, as 
we pointed out earlier, depending on how this provision is 
interpreted, it could, under the current preservation laws, 
increase both the total number of subsidized units and the 
subsidies required to support them. 

Senate Bill 2049 would also expand the application of civil 
money penalties to include all Section 8 project-based assisted 
properties, not just those currently insured by HUD. This bill 
allows civil money penalties to be imposed on owners, general 
partners, and identity of -interest management companies. Although 
HUD has no overall statistics on the results of applying civil 
money penalties. Department officials cited instances in which 
these penalties have been successfully used to get owners to remedy 
problems. However, these officials would like to be able to apply 
these penalties to all Section 8 assisted properties and directly 
to general partners and/or identity-of-interest management 
companies. Although we have not analyzed this option in any 
detail, we support the principle of giving HUD added flexibility in 
dealing with owners of distressed properties. 

To address the problems associated with "exit taxes," Senate 
Bill 1986 and House Bill 3322 propose to amend the tax code to 
relieve current owners of part of their tax liability when they 

23 



33 



sell their properties. If the current tax disincentive to sell 
were removed, some owners of severely distressed properties might 
be replaced with new owners who have the financial incentive and 
means to improve the physical condition of the properties. We 
should point out, however, that the level of the exit tax that 
owners are subject to varies widely among physically distressed 
properties. For example, for one property we reviewed, the exit 
tax would be negligible; for another property, the tax could exceed 
$5 million. Without further analysis, it is not clear to what 
extent the provisions of Senate Bill 1986 and House Bill 3322 would 
assist HUD in getting new owners for distressed properties nor 
whether this policy would be the most economically efficient or 
equitable way to accomplish this purpose. 

CONCLUSIONS 

Section 8 project-based assistance is providing low-income 
tenants with decent, safe, and sanitary housing. However, this 
assistance is sometimes providing tenants with inferior housing at 
a substantial cost to the federal government. 

In the current budgetary climate, all federal agencies are 
forced to consider the cost Implications of their policy decisions. 
With limited funding, HUD needs to make cost-effective choices to 
address distressed housing. However, hampered by inadequate 
Information systems and long-standing problems in its loan 

24 



34 



servicing, HUD cannot (1) accurately report on the condition of its 
inventory of Section 8 project-based assisted properties or (2) 
make the appropriate economic choices. The lack of information 
also impedes HUD from initiating prompt enforcement actions to 
address serious violations of its housing quality standards. 

Further complicating HUD's problems is the Department's lack 
of authority to reuse funds recaptured from terminated Section 8 
contracts to relocate tenants from severely distressed properties 
to other properties of higher quality. Even if new legislation 
gave HUD the flexibility to relocate tenants from a distressed 
property, the Department could, depending on how current 
preservation laws are interpreted, still incur significant 
additional costs for preserving the property. 

HUD has taken steps to begin dealing with its problem 
properties, such as identifying the information needed to provide 
proper oversight of the physical condition of its assisted 
properties and addressing weaknesses in its financial systems. The 
legislation that has been introduced would complement these 
initiatives. Nevertheless, these initiatives have not been pulled 
together into the kind of comprehensive strategy necessary to best 
ensure (1) a prompt remedy for tenants living in the most 
deplora*,'"* conditions and (2) effective oversight to minimize 
future occurrences of, and costs associated with, distressed 
properties. in the absence of a strategy that focuses priority on 

25 



35 



the most severely distressed properties and a clear assessment for 
the Congress of HUD's resource and legislative needs, tenants may 
continue to live in the conditions we have described, at a 
considerable cost to the federal government. 

RECOMMENDATIONS TO THE SECRETARY OF HUD 

We recommend that the Secretary of HUD begin immediately to 
develop a comprehensive strategy to address the very poor physical 
conditions under which some families supported by Section 8 
project-based assistance are living. As part of this strategy, HUD 
should, through the use of its field staff (1) promptly identify 
all Section 8 assisted properties with severe physical problems and 
offer affected tenants temporary assistance to relocate to safe and 
decent housing, (2) systematically notify owners of the problems 
identified, and (3) take appropriate enforcement actions in cases 
in which owners do not bring their properties into compliance with 
the housing quality standards. To the extent that budgetary or 
legislative constraints prevent HUD from addressing these 
conditions, we further recommend that the Secretary provide the 
Congress with an assessment of the resources and legislative 
changes the Department needs . 



26 



36 



Mr. Chairman, the focus of our testimony today has been on 
some of the more severely distressed Section 8 project-based 
assisted properties and the need for HUD to take immediate action 
to Improve the living conditions of tenants in these and other 
similarly distressed properties. However, HUD's effectiveness in 
dealing with these conditions and minimizing similar situations in 
the future will depend on the Department's (1) building the 
capacity necessary to manage its large inventory of assisted 
properties and (2) identifying and successfully working with the 
Congress and the Office and Management and Budget on the budgetary 
and legislative issues related to this matter. 



27 



37 

APPENDIX I APPENDIX I 

PROPERTIES DEPICTED IN THE TESTIMONY AND VIDEO TAPE 

DISTRESSED PROPERTIES 
Washington. D.C. 

Edgewood Terrace Apartments 
601 Edgewood Terrace, NE 
Washington, DC 20017 

Skytower Apartments 
1045 Wahler Place, SE 
Washington, DC 20032 

New York 

Unity Apartments (consists of two buildings) 
1545 St. John's Place 
Brooklyn, New York 11213 

and 

260 Buffalo Avenue 
Brooklyn, New York 11213 

Jose de Diego Beekman IV Apartments 
637-639 East 140th Street 
Bronx, New York 10454 

Illinois 

6000 South Indiana Apartments 
6000 South Indiana Avenue 
Chicago, Illinois 60616 

Texas 

Liberty Arms Apartments 
2601 North Broadway Avenue 
Tyler, Texas 75702 



28 



38 



APPENDIX I APPENDIX I 



Florida 

Holiday Lake Apartments 
831 North Powerllne Road 
Pompano Beach, Florida 33069 



Nevada 

Sierra Nevada Arms Apartments 

1971 Carrara Street 

Las Vegas, Nevada 89106 

Carey Arms Apartments 

2417 Morton Street 

North Las Vegas, Nevada 89030 



California 

Urban Rehab II Apartments 
11605 South Avalon Street 
Los Angeles, California 90071 



WELL MAINTAINED PROPERTIES 

Washington. D.C. 

Atlantic Gardens 
4319 3rd Street, SE 
Washington, DC 20032 

Florida 

Driftwood Terrace 

3146 North West 19th Street 

Ft. Lauderdale, Florida 33311 



29 



39 

APPENDIX II APPENDIX II 

PHYSICAL CONDITION OF 10 DISTRESSED PROPERTIES GAP VISITED 

This appendix describes the physical condition of the ten 
properties we visited. 

Edqewood Terrace Apartments (Washington. D.C.) 

Edgewood Terrace Apartments, located in northeast Washington, 
D.C, is a 292-unit complex consisting of one 8-story mid-rise 
building and three 3-story garden apartment buildings. The 
property was sold to its current owners in 1983. The current 
owners have defaulted on the mortgage, which HUD now holds. At the 
time of our inspection in June 1994, 114 units were occupied and 
178 were vacant. In 1993, this property received $558,000 In 
Section 8 project-based assistance. A two-bedroom apartment in 
this complex rents for $751 a month. The monthly rent for a two- 
bedroom apartment in a neighboring unsubsidized property in good 
physical condition is $895 to $920. 

In 1992, a nonprofit organization, interested in purchasing 
this property, assessed the capital needed and identified repair 
expenses in excess of $23 million. More recently, after HUD became 
the mortgagee in possession, the Department conducted a needs 
assessment and concluded that the property could be repaired for 
about $10 million. Regardless of the total costs, according to 

30 



40 



APPENDIX II APPENDIX II 

Inspection reports that were verified in part by our own on-site 
inspection, the project will require replacement of roofing, 
windows, kitchens, and components of bathrooms and heating and air 
conditioning systems within each apartment. Also, the elevators 
must be upgraded to meet building codes, and the boilers need 
repair or replacement. 

During our visit to the property, we also observed a collapsed 
parking garage and exterior grounds in serious disrepair, including 
play areas, benches, sidewalks, stairways, and general landscaping. 
In addition, we found buildings with filthy and poorly lit hallways 
and common laundry areas. There were marked differences in the 
condition of individual units. A unit in the mid-rise building, 
for example, was in very good condition except for a malfunctioning 
air conditioner and some molding missing from the kitchen counter. 
On the other extreme, some units had broken kitchen cabinets; 
missing security locks; water damage from a leaking roof; insect 
infestation; .and, according to some tenants, a serious rodent 
problem. 

Skvtower Apartments (Washington. D.C.I 

Skytower Apartments, located in southeast Washington, D.C., 
is a 91-unit complex consisting of 10 buildings. Nine of the 10 
garden-style buildings have three floors and one has four floors. 

31 



41 



APPENDIX II APPENDIX II 

Individual units range In size from one to six bedrooms. At 
present, five units are vacant and the remaining 86 are occupied. 
In 1993, this complex received $638,344 in Section 8 project-based 
assistance. A two-bedroom apartment in this complex rents for $734 
a month. The monthly rent for a two-bedroom apartment in a 
neighboring unsubsldized property in good physical condition is 
$550 to $600. 

In 19S3, both a comprehensive management review and a physical 
inspection, which found 20 units below HUD's housing quality 
standards, rated the property as "unsatisfactory." Moreover, 
during a reinspection of housing quality standards conducted from 
May 27 to June 3, 1994, Skytower Apartments was again rated as 
unsatisfactory. According to the inspection report's findings, 
which were verified in part by our own on-site Inspection, lawns in 
common areas were almost completely bare with noticeable erosion; 
all emergency lights, exit lights, and fire extinguishers were 
missing; all 10 buildings required drywall repair and paint; and 
all 10 buildings had inoperative air conditioning systems — some 
systems have not worked for years. 

In our on-site inspection of several units, we also noticed 
ceilings and walls with evidence of water leaks, kitchen and 
bathroom areas in poor condition, and laundry rooms chained and off 
limits to tenants. We also observed a significant insect problem, 

32 



42 



APPENDIX II APPENDIX II 

and tenants told us they kept cats to combat a worsening 
infestation of rats. 

Holiday Lake Apartments (Pompano Beach, Florida) 

Holiday Lake Apartments, located in Pompano Beach, Florida, 
is a 232-unit complex consisting of 16 two-story and three-story 
buildings. The original owner died in 1992, and his brother became 
the property's owner. Currently, 185 units receive Section 8 
project-based assistance and 31 units are vacant. In 1993, this 
property received $648,000 in Section 8 project-based assistance. 
A two-bedroom apartment in this complex rents for $4 34 a month. 
There are no other subsidized or unsubsidized rental properties in 
the vicinity of this complex, so we could not compare rents. 

HUD'S Jacksonville Field Office became aware of the poor 
condition of this property in May of 1993, when a management review 
rated the overall management operations as unsatisfactory. Since 
1993, the field office has conducted three comprehensive physical 
inspections, all resulting in unsatisfactory ratings. In the June 
1993 inspection report, the inspector concluded that $546,205 was 
needed to repair the property's physical deficiencies, which 
Included poorly maintained grounds and inoperative exterior 
lighting and smoke detectors. Although some of the physical 
deficiencies have been corrected since that time, according to 

33 



43 



APPENDIX II APPENDIX II 

HUD'S documents, the property still has serious physical problems, 
as we observed during our visit in June 1994. 

Our observations confirmed many of the same physical problems 
that were reported in HUD physical inspections over the last year. 
These problems included missing kitchen cabinets and doors, large 
holes in walls and floors, unstable toilets and sinks, roach 
infestation, water damage in rooms from outside leaks, and unkempt 
grounds . 

Unity Apartments (New York. New York) 

Unity Apartments, located in the East New York section of 
Brooklyn, New York, is an 83-unit project consisting of two mid- 
rise buildings about a block apart. Currently, two units are 
vacant. It has been owned and managed by the same partners since 
it was developed. In 1992, the property received about $682,000 in 
Section 8 project-based assistance.' A two-bedroom apartment at 
Unity rents for $1,138. In contrast, the rent for a two-bedroom 
unit in an well-maintained unsubsidized property in the same 
general area is between $600 and $750 per month. 



'The assistance amount for 1992 was used because complete data for 
1993 were not available. 



34 



44 



APPENDIX II APPENDIX II 

HUD'S New York Field Office has classified Unity Apartments as 
a "potentially troubled" property both because of its physical 
condition and for financial reasons. The field office's most 
recent inspections of this property indicated, among other things, 
electrical and plumbing problems, inoperative fire alarm and 
intercom systems, broken boilers and elevators, flaking exterior 
walls, and seriously deteriorated windows. According to the field 
office's estimates, it will cost $149,000 to repair these and other 
problems. Financial statements filed by the owner in 1991 and 1992 
show that the property has also sustained large operating losses 
over the last several years. 

While the management company has usually responded to HUD's 
inspection findings by indicating that deficiencies have been 
corrected, our visit in late June showed continuing physical 
deterioration. The problems we noted included an inoperative fire 
alarm system (HUD had made the same finding), a vandalized laundry 
room, a missing entrance door and window, graffiti inside and 
outside, a broken elevator, and a security system that tenants told 
us had not worked for years. The HUD inspector we talked to said 
the property had not improved over the 6 years that he has been 
inspecting it. 



35 



45 

APPENDIX II APPENDIX II 

Jose de Diego Beekman IV Apartments (New York, New York) 

De Diego Beekman IV Apartments, located in the Mott Haven 
section of the Bronx, New York, is a 134-unit complex consisting of 
five separate buildings on several streets. Beekman IV is one 
component of a larger Beekman Houses property, which contains more 
than 1,100 apartments in 38 buildings that were renovated in 
different phases during the 1970s. According to the property's 
June 1994 vacancy report, Beekman IV had two vacant apartments. 
All of the apartments are subsidized with Section 8 project-based 
assistance. In 1993, the property received $904,809 in Section 8 
project-based assistance. A two-bedroom apartment rents for $980; 
according to several local real estate brokers, the monthly rent 
for a two-bedroom unit in a well-maintained unsubsidized property 
in the same area ranges from $700 to $840. 

HUD'S New York Field Office has classified Beekman IV and 
other components of Beekman Houses as "troubled" properties. 
Inspection reports show a long history of inadequate repair 
practices, including major problems with the roofs of numerous 
buildings. An inspection in January 1994 resulted in a "below 
average" rating for the Beekman IV building because of broken 
elevators, rat and mice infestation, leaking sewage, roof leaks, 
and other deficiencies. 



36 



46 



APPENDIX II APPENDIX II 

During our visit at the end of June 1994, It appeared that the 
project's management had taken actions to correct some 
deficiencies; for example, repair and replacement of roofs had 
occurred. However, there are still extensive graffiti inside and 
outside the buildings, broken doors and windows, and elevators that 
are unreliable at best. One factor working against the correction 
effort, however, is the high level of vandalism and Illegal drug 
activity in the neighborhood. The project isanager said it is a 
constant struggle to replace doors, windows, and locks that are 
frequently broken or stolen. To curb some of the vandalism and 
Illegal activity, the management company uses a corps of building 
monitors to patrol common areas and report Incidents to the police. 

6000 South Indiana Apartments f Chicago. Illinois) 

6000 South Indiana Apartments, located on the south side of 
Chicago, Illinois, is a 70-unlt, 12-story, high-rise building. At 
present, 13 units are vacant and 68 units receive Section 8 
project-based assistance. In 1993, the property received $270,553 
in assistance. The monthly rent for a two-bedroom apartment is 
$849. According to local real estate agents, the monthly rent for 
a two-bedroom unit in well-maintained unsubsidized properties in 
the same area ranges from $435 to $475. In 1988, the owner of 6000 
South Indiana Apartments defaulted on the mortgage, which HUD now 
holds. 

37 



47 



APPENDIX II APPENDIX II 

This property has been rated as unsatisfactory in four 
physical inspections conducted by HUD's Chicago Field Office since 
1989- In 1991, 18 apartments were inspected and all failed to meet 
HUD'S housing quality standards. The 1993 inspection report noted 
that the building would require over $933,000 in repairs. These 
repairs would include entirely replacing--in all units--all kitchen 
fixtures and appliances, windows, and floor tiles and, in 
bathrooms, replacing medicine cabinets, lighting, and plumbing 
fixtures. In addition, the inspection report noted that exterior 
and common areas needed extensive repair. Many of the findings 
involved safety items such as elevators, emergency lights, and 
smoke detectors. Under a 1994 HUD-approved management improvement 
plan, $910,000 worth of repairs are scheduled, to be paid for with 
revenues from a recent rent increase. HUD has also awarded the 
building a $175,000 drug elimination grant to address physical 
security deficiencies and provide drug counseling to tenants. HUD 
did not require the owner to contribute to the repair costs. 

Our visit to this property verified the physical conditions 
noted in the field office's inspection reports. We also discovered 
additional safety violations, such as missing hallway fire doors 
and unlit emergency stairways. The building is under new 
management, and we observed one apartment in relatively good shape, 
except that the new kitchen cabinets and sinks that have been 
ordered for all apartments were not yet installed. On the other 

38 



48 



APPENDIX II APPENDIX II 

extreme, we observed some units with large holes in the walls 
caused by water leaking through the roof and from broken plumbing 
fixtures. One hole in a tenant's bathroom opened into the 
building's garbage room, giving insects, rats, and mice direct 
access into this inhabited apartment. Indeed, several tenants 
complained of rat and mice infestation. We also observed kitchen 
cabinets falling apart, missing floor tiles in almost every room, 
and a broken elevator (one of two in this 12-story building). We 
learned that this elevator had been broken for 3 months . 

Liberty Arms Apartments (Tyler. Texas) 

Liberty Arms Apartments is located in Tyler, Texas, about 100 
miles east of Dallas. A 100-unit complex, it consists of eight 2- 
story garden apartment buildings. At present, 20 of the 100 units 
are vacant. In 1993, this property received $228,960 in Section 8 
project-based assistance. The monthly rent for a two-bedroom unit 
is $374. Whl^le there is no unsubsidized housing in the same 
neighborhood or area of town, neighboring subsidized apartment 
complexes in good condition charge between $281 and $439 a month 
for a two-bedroom unit. The owners of the Liberty Arms Apartments 
are current on their mortgage now but have been delinquent on 
several occasions in the past. 



39 



49 



APPENDIX II APPENDIX II 

In June 1994 management review and physical inspection 
reports, HUD's Dallas Field Office identified repair expenses in 
excess of $655,000. According to these reports, this apartment 
complex will require the replacement of roofing, windows, siding, 
plumbing, electrical fixtures, and floor coverings, and at least a 
third of the property's units will need replacement ranges, 
refrigerators, countertops, cabinets, and sheetrock. The reports 
also estimated that it will take at least an additional $100,000 to 
repair the air conditioning system, and it could well cost many 
times this amount. The inspection report concluded that all units 
in this complex are in unsatisfactory condition and that the 20 
vacant units are uninhabitable. Overall, this property was 
considered a health and safety risk to all its residents. 

Aside from those problems that the field office staff 
reported, our visit to the property revealed exterior grounds in 
serious need of improvement--including play areas, sidewalks, 
stairways, and general landscaping. Furthermore, the exterior of 
the buildings had rotted siding, rusted stairs, and broken light 
fixtures. Most of the individual units we observed were in very 
poor condition. For example, one unit had damage to ceiling and 
floor tiles throughout the premises, holes in the ceilings of both 
bathrooms, a continuously running toilet, and serious insect 
infestation. 



40 



50 

APPENDIX II APPENDIX II 

Urban Rehab II Apartments (Los Angeles. California) 

Urban Rehab II Apartments, located in south central Los 
Angeles, consists of six 2-story buildings with 48 two-bedroom 
units. Currently, all units are occupied. In 1993, this property 
received $208,059 in Section 8 project-based assistance. A two- 
bedroom apartment rents for $667 a month. While there is no 
unsubsidized housing in this area of the city, a neighboring 
subsidized complex in better physical condition charges $659 a 
month for a two-bedroom unit. 

Physical inspections and management reviews conducted by HUD's 
Los Angeles Field Office have rated this property as unsatisfactory 
since 1990. Urban Rehab II Apartments has been a continual problem 
for the field office, and tenants have filed numerous complaints 
about its deplorable physical condition. The property's documented 
physical problems include inadequate exterior security, termite 
Infestation in the balconies of upper units, and serious disrepair 
In the landscaping. Individual units had visible signs of roach, 
rat, and mice infestation. 

During our visit to the property, we noted that exhaust fans 
were missing in kitchens and observed signs of leakage In interior 
bathrooms and kitchen ceilings, bullet holes through kitchen 
windows, torn linoleum and carpeting throughout the units, and 

41 



51 



APPENDIX II APPENDIX II 

inoperative smoke alarms. None of the units had working air 
conditioning. In addition, this property is located in a high- 
crime district where theft, vandalism, and graffiti are constant 
problems. Because of the vandals and thieves, the laundry room on 
the site has been closed off and is no longer in use. 

Carey Arms Apartments (Las Vegas, Nevada) 

Carey Arms Apartments, located in north Las Vegas, Nevada, is 
a 289-unit complex consisting of 72 two-story buildings. 
Currently, 77 units are vacant. In 1993, the property received 
$1,823,000 in Section 8 project-based assistance. A two-bedroom 
unit rents for $820 a month. Rent for a two-bedroom unit in a 
well-maintained unsubsidized project in the same vicinity is $380 a 
month. Since January 1991, the owners have not made a mortgage 
payment. HUD currently holds the mortgage and is now foreclosing. 

Physical Inspections and management reviews conducted by HUD's 
Las Vegas Field Office have rated this property as below average or 
unsatisfactory for the past several years. Many of the vacant 
apartments are in such poor condition that the management company 
is considering demolishing them. The last physical inspection 
report, dated October 1993, indicated the property was in need of 
repairs and maintenance estimated to cost $3,055,603. Problems 
cited in this report include dysfunctional and defective irrigation 

42 



52 



APPENDIX II APPENDIX II 

and sewer systems, missing or damaged appliances In the vacant 
units, defective heating and air conditioning systems, termite and 
roach Infestations, and a high degree of crime-related activities. 

During our visit we observed inoperative smoke alarms, garbage 
disposals, and kitchen and bath exhaust fans; water damage and 
leaks from kitchen and bathroom plumbing; and torn and soiled 
carpeting. Exterior walls and sidewalks were covered with 
graffiti, buildings and fences were in need of paint, pot holes and 
loose gravel littered the parking lots, and eight units had been 
severely damaged by fire. 

Sierra Nevada Arms Apartments (Las Vegas. Nevada) 

Sierra Nevada Arms Apartments, located in north Las Vegas, 
Nevada, is a 352-unlt complex consisting of 82 two-story buildings. 
Currently, 113 units are vacant. In 1993, this property received 
$999,507 In Section 8 project-based assistance. A two-bedroom unit 
in this apartment complex rents for $468 a month. The rent for a 
two-bedroom unit In a we 11 -maintained unsubsldlzed property In the 
same vicinity Is $600 a month. 

According to officials in HUD's Las Vegas Field Office, Sierra 
Nevada Arms Apartments is the worst project the office manages. 
Physical and financial problems with this complex have been long- 

43 



53 



APPENDIX II APPENDIX II 

standing, principally because of the owners' inability to 
accumulate a reserve large enough to deal with all the needed 
repairs. While the owners are behind in their mortgage payments, 
they are not yet technically in default. HUD has proposed barring 
the owners from further participation in the Section 8 project- 
based assistance programs because of their negligence at Sierra 
Nevada Arms and because they maintain Section 8 properties in 
substandard condition throughout the country. 

Physical Inspections and management reviews conducted by the 
field office have rated this property as below average or 
unsatisfactory for several years. According to these reviews, the 
property is located in a high-crime area, and many vacant units 
have had kitchen appliances, bathroom fixtures, air conditioning 
and heating units, and electrical fixtures stripped or 
cannibalized. Problems in the occupied units noted in the reviews 
included inoperative appliances, heating systems, air conditioning 
systems, bathroom exhaust fans, and kitchen exhaust fans; plumbing 
leaks; and visible signs of insect infestation. 

Our on-site inspection of this property revealed interior 
units with soiled, stained, and torn carpet and linoleum; 
inoperative appliances, smoke alarms, air conditioning, and heating 
systems; damaged kitchen cabinets with loose and missing drawers; 
severely damaged bathroom vanity tops and commodes; missing closet 

44 



54 



APPENDIX II APPENDIX II 

doors; torn and missing window screens; filthy walls; leaking 
toilets, bathtubs and sinks; and roach, rat and mice infestation. 
Our inspection of the project's exterior revealed faulty sprinkler 
systems with numerous leaks causing flooding throughout the 
grounds. We found that many vacant units were missing doors, 
windows, and screens. Moreover, the laundry room was filthy and in 
poor condition, with extensive graffiti and garbage strewn 
throughout. 



(385431) 



45 



55 

Mr. Peterson. Thank you very much. We want to commend you 
for the fine work you have done on this report. 

Ms. England-Joseph. Thank you. 

Mr. Peterson. And rest assured we will be working with you to 
figure out where we head from here. 

Next, we are going to have Susan Gaffney. Welcome back to the 
committee. As you know she is the Inspector General at HUD. We 
look forward to your testimony. Your full statement will be in- 
cluded in the record. 

STATEMENT OF SUSAN GAFFNEY, INSPECTOR GENERAL, U.S. 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, AC- 
COMPANIED BY CHRIS GREER, ASSISTANT INSPECTOR GEN- 
ERAL FOR AUDIT 

Ms. Gaffney. Thank you, Mr. Chairman, members of the sub- 
committee. You asked that the Office of the Inspector General re- 
port to you on two primary issues: one, the overall condition of 
project-based Section 8 properties and, two, whether there are is- 
sues pertaining to excessive rent levels in those properties. 

With respect to the condition of the properties, I think perhaps 
the most authoritative study that has been done of that subject re- 
sulted from the HUD Reform Act of 1989. HUD, pursuant to that 
law, issued a report last September. The report looked at 13,000 in- 
sured properties, 10,000 of which were assisted. It found that 23 
percent of the properties were distressed, distressed to the point 
where the well-being of the tenants was in jeopardy and the 
projects faced financial failure. The study found another 15 percent 
were stressed; that is, having conditions that, if not remedied with- 
in a short period of time, would cause the properties to fall into the 
distressed category. So we are dealing generally, based on that 
study, with a universe of 38 percent of these properties in a trou- 
bled condition. 

Generally, our view from the Office of Inspector General is that 
at least 30 percent of these properties are in troubled status. Now, 
I will tell you a little about the work that we have done ourselves. 
We have found very severe problems. For instance, in 1990 we 
looked at 15 property disposition projects in the Cincinnati area. 
Our inspectors failed 95 percent of the units we inspected. 

Also, in April 1993, the Office of Inspector General issued a 
major report on loan servicing by HUD throughout the country. We 
looked at 28 troubled multifamily projects and found that 82 per- 
cent of them had substandard physical conditions. We also found, 
as Ms. England-Joseph reported to you, that many of these condi- 
tions had existed over extended periods of time. 

Now, the question is why, why do these conditions exist? And 
Mr. Chairman, as you said, these are not new conditions. They 
have come about over a lengthy period of time, but I would say to 
you also that the Office of Inspector General has for many years 
been telling vou that there are three systemic problems in HUD 
that adversely affect everything that HUD does, and that is par- 
ticularly true in this area of multifamily programs. 

First is staffing problems. Price Waterhouse, in its audit of FHA 
financial statements, said look what is going on. If you want a 



56 

graphic illustration of inadequate staffing resources, a loan servicer 
in a State housing finance agency is responsible for about 20 loans. 

Our typical loan servicer in HUD is responsible for 50 loans, and 
in some cases our loan servicers are responsible for as many as 73 
loans. I ask you to consider whether it is reasonable, with 73 loans 
on your plate, that you are going to be able to do much about serv- 
icing those loans. 

There is also, and I am sure Mr. Retsinas will speak to you about 
this in terms of staffing, a severe problem in expertise. We do not 
have the expertise in asset management generally that we need in 
HUD. We don't need bureaucrats, we need housing specialists who 
really know how to manage and get problems resolved. 

About this staffing problem which we keep talking about. We 
keep talking about it. We, the OIG, keep talking about it and talk- 
ing about it, and nothing happens except that staffing goes down 
every year. So, I think we are going to stop talking about FTEs, 
since it gets us nowhere, and we want to talk to you and the Office 
of Housing now about contracting. If you can't get the resources 
through FTEs, then we urge that Housing go out and procure those 
resources. We do that with full recognition that contracting is a 
very expensive alternative, but this situation should not continue. 

The second area that adversely affects our performance in this 
program is data systems. FHA really doesn't have good data sys- 
tems. Now, they are making progress. CFS TRACS, which is the 
basic system that you have all heard about, is moving along. It will 
take a long time. The management information system for FHA is 
much further beyond us. That management information system is 
so critical because it should be telling us where our properties 
stand in terms of financial condition and in terms of physical condi- 
tion. You will have to ask Mr. Retsinas if he even now has a pro- 
jected date when we will have an integrated system that will pro- 
vide us those data. 

The third area of weakness in HUD that affects this program is 
management controls. In our 1993 audit of loan servicing, we found 
that field offices were not consistently doing physical property in- 
spections and were not consistently doing financial statement re- 
views. Onsite management reviews were not necessarily identifying 
problems, and, more importantly, they weren't leading to the reso- 
lution of those problems identified. 

This kind of situation, when these properties are insured, leads 
to defaults and claims against the FHA insurance fund. I would 
point out to you that this is serious business: in 1993, the insur- 
ance claims totaled about $1 billion for such properties. 

Now, Mr. Retsinas can talk to you about the actions that he has 
under way. He and Ms. Dunlap have a lot of actions under way. 
They have recognized all of these problems, and they are acting on 
them. But their solutions are long term; the problems are not going 
to be solved overnight. It is going to be a matter of years. 

Now, the question is, to me, what do you do in the meantime? 
And that is why I want to talk to you in terms of the management 
environment at HUD. I want to talk to you about the lack of pro- 
gram enforcement. There is a view at HUD that we are essentially 
a social service agency. What we are about is helping poor people. 



57 

The thinking is that if we take enforcement actions, that will inevi- 
tably lead to one of many negative conclusions. 

For instance, if we declare a default, it results in a claim on the 
insurance fund. Until now, if we recaptured a Section 8 contract, 
the tenants in the project-based property would be left with no 
housing that they could afford. If we abated the Section 8 pay- 
ments, so the thinking goes, what would happen? The owner would 
lose income needed to maintain the property, the property would 
further deteriorate, and who would suffer? The tenants. 

The thinking is generally we can't do much of anything without 
hurting people that we don't want to hurt, whether it is tne insur- 
ance mnd or the tenants. Against this background, the IG has 
launched a major effort to try to do something about what is called 
equity skimming in multifamily insured projects. This is essentially 
when owners take out project revenues and assets for their own 
personal uses in violation of the regulatory agreement. 

We have in the last few months identified some 120 cases of po- 
tential equity skimming. We have referred 70 of them to U.S. attor- 
neys and 50 of those cases have been accepted for prosecution. This 
is a major effort on our part. I don't think it is enough. I think we 
need an equivalent investment by HUD management in enforce- 
ment activities. 

Now, HUD has proposed and there is legislation now being con- 
sidered that would do a lot to help our enforcement activities. 
There is legislation that, if we cancel the Section 8 project, would 
allow us to recapture those funds and use them again. There are 
legislative proposals on the table that would expand the provisions 
of civil money penalties and the provisions of the equity skimming 
statute. 

We think legislation could go further; we think that the Congress 
should be looking further with respect to insured multifamily 
projects. You should be looking at the fact that many of these own- 
ers have put virtually no equity into these projects, which means 
they have very little to lose. You should look at the fact that this 
is nonrecourse debt, which means you can't go at the owners on a 
personal basis. 

All of that legislation would be good. We support it. But, again, 
you are probably talking about a period of years until you get the 
legislation and we get implementing regulations. I think we need 
some immediate action, enforcement action by HUD. 

Our premise in the Office of Inspector Greneral is that you can 
send a message. You don't have to solve every problem, but if you 
target some of these properties and you go at them one by one and 
devise appropriate enforcement actions — ^there is not one answer 
for all of these properties — we believe that HUD could send a major 
message. 

Now, I agree with GAO. I am not interested in strategies, I am 
not talking about plans. I am talking about HUD's actually taking 
affirmative action against some of these owners, and I say to you 
that we would probably have to do so with some risk that some 
people who don't deserve to be hurt may be hurt in the process. 

It is for this reason that I was very interested to see Mr. 
Retsinas' comments about SWAT teams and I look forward to hear- 
ing what he has to say about SWAT teams. Before I get off that 



58 

subject, I want to say one other thing about these Section 8 and 
insured properties. In Operation Safe Home, we have been des- 
perately trying to do something about violent crime at public and 
assisted housing. All I hear when I go talk to law enforcement peo- 
ple across this country is that the problem is as severe in assisted 
housing as it is in public housing, but we can't get near assisted 
housing. Because for security, for drug elimination programs, for 
tenant assistance, for all those services that poor people in bad 
neighborhoods need, we have virtually nothing on the assisted- 
housing side. 

I want to give you an example of this. Aurora, CO is a suburb 
of Denver. Most of the violent crime in Denver is centered around 
assisted housing in Aurora. The Aurora police department knows 
that is where its violent crime is, and it came up with a project 
that involved the local police and us; didn't cost a lot. They put in 
$60,000 of their money. They wanted a matching $60,000 from 
HUD to do a 6-month cleanup in assisted-housing projects, and we 
couldn't come up with $60,000. 

They put their money in and they spent it, and that was the end 
of the project because we couldn't come up with $60,000. I just 
think we should be thinking about assisted housing in terms of all 
those other services that we are providing to public housing. 

Moving on to the second issue: it is — you asked about the rents 
in these project-based Section 8 projects. Recently, just in Decem- 
ber, HUD analyzed a sample of its HUD-insured Section 8 new 
construction and substantial rehabilitation stock of 4,000 assisted 
properties. This analysis concluded that three-quarters of this 
housing stock had assisted rents in excess of the rents of unas- 
sisted units in the neighboring areas. 

Approximately 42 percent of the properties had assisted rents at 
or exceeding 140 percent of local unassisted market rents. Our 
analysis of this situation is that when the rents were initially set, 
they were deliberately set high with some expectation that, over 
the long term, rent adjustments would bring assisted and unas- 
sisted rents into balance. 

In fact, that has not happened. For the projects whose rent in- 
creases result from the annual adjustment factors, the rents have 
simply increased every year. The rents are not supposed to be ma- 
terially different from unassisted rents, and HUD has had a vehicle 
for making sure about that. The vehicle is called comparability 
studies. 

If HUD thought the rents were getting too high, it was supposed 
to do a comparability study and bring them back into balance. 
What has happened is HUD has never done these comparability 
studies consistently or necessarily well. Then, in 1988, owners 
started litigation about whether HUD had the right to do these 
comparability studies. That resulted in a 1993 Supreme Court deci- 
sion that HUD had the ability, had the authority. 

This authority was restated in the HUD Reform Act of 1989, but 
the HUD Reform Act said that HUD had to issue implementing 
regulations. HUD has still not issued implementing regulations, 
which means that HUD has not done any comparability studies 
since 1987. 



59 

Now, there are on the table a number of legislative proposals 
that bring more sanity to this area of rents. They would allow us 
to cap rents and to reduce rents under certain circumstances. I 
think that we can discuss those measures later. By tiie way, the 
OIG supports all of them. 

[The prepared statement of Ms. Graffhey follows:] 



60 



STATEMENT OF 

SUSAK GAFFNEY, INSPECTOR GENERAL 

ACCOMPANIED BY 

CHRIS GREER, ASSISTANT INSPECTOR GENERAL FOR A0DIT 

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

BEFORE THE 
SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION 

OF THE 
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS 

JULY 26, 1994 

Chairman Peterson, and members of the Subcommittee, we are 
pleased to be here today to discuss problems in HUD's Section 8 
project-based assisted housing programs. This hearing is 
particularly important and timely as HUD's current Administration 
attempts to tackle problems associated with troubled projects and 
excessive rental subsidies. 

While data show that about 70 percent of HUD's Section 8-assisted 
multifamily housing stock is relatively trouble-free and appears 
to be of good quality, a disturbing number of projects are 
experiencing deterioration and neglect by their owners. 
Tenants, with their rent subsidies tied to these projects, are 
essentially trapped in deplorable living conditions. Moreover, 
the risk exposure for significant financial losses at these 
troubled projects is enormous. That immediate risk is evident in 
two ways. First, rent levels at many HUD assisted projects are 
significantly higher than rents at comparable unassisted units in 
the area. Second, HUD's insurance funds absorb tremendous losses 
when deteriorated projects default on their mortgages and 
insurance claims are paid. 

Needed Actions 

These troubled projects need immediate attention. HUD must 
ensure that owners, management agents, mortgagees, contract 
administrators, and others are providing low-income families with 
adequate housing under HUD rental subsidy programs, consistent 
with established housing standards and laws. HUD needs to 
improve its loss mitigation procedures, including early warning 
techniques and contract enforcement procedures. 

Unfortunately, HUD suffers from some major systemic weaknesses 
that significantly impact its ability to turn around these 
troubled projects and improve its management and oversight of the 
Section 8-assisted multifamily housing stock. Staffing 
shortages, inadequate data systems and faulty management controls 
adversely impact everything HUD does. These weaknesses are 
particularly evident in HUD's multifamily assisted programs. 
Assistant Secretary Retsinas and his staff have readily 
acknowledged these weaknesses and have embarked on long- and 



61 



short-term plans to do what they can to overcome the past 
weaknesses. Mr. Chairman, as our testimony today will point out, 
these improvements are long overdue and HUD will need assistance 
from 0MB and the Congress in order to make meaningful progress. 

WATDRE AND SCOPE OF PROGRAMS 

To put some perspective on the nature and extent of these issues, 
we would like to provide some brief background information. 

The Section 8 program was established in 1974 to help low-income 
families obtain decent, safe and sanitary housing. The program 
has two components: tenant-based rental assistance and project- 
based rental assistance. Section 8 certificates and vouchers are 
referred to as "tenant-based" assistance; whereas the other types 
of assistance such as New Construction and Substantial/Moderate 
Rehabilitation are known as "project-based" assistance. Tenant- 
based assistance is tied to specific eligible families while 
project-based assistance is tied to specific properties. Thus, 
families who move from project-based assisted properties lose 
their subsidy assistance. 

Section 8 project-based assisted properties approved prior to 
1979 have their rents automatically adjusted through HUD's Annual 
Adjustment Factors, which are based on inflationary increases in 
residential rent and utility and fuel in certain metropolitan 
areas and the four Census Regions. Projects approved after that 
date have their rents adjusted by HUD's budget-based method. 
Under this method, assisted property owners submit annual 
operating budgets to HUD along with documentation in support of 
increases in their operating expenditures. Upon request by an 
owner, HUD uses these submissions to determine if a rent increase 
is warranted and to what extent. 

Over 20,000 properties are currently receiving Section 8 project- 
based assistance from HUD. These properties serve approximately 
1.5 million low-income families. The Federal Government's 
investment in Section 8 project-based assisted multifamily 
housing is enormous. Data show that HUD has provided 
approximately $131 billion of Section 8 budget authority to 
support its Section 8 project-based subsidy programs over the 
past 20 years. Estimated cash outlays of $4.3 billion were made 
in each of fiscal years 1993 and 1994. In addition to these 
direct rental subsidies, the tax code has been used to help 
finance a large share of low income housing assisted projects. 
Tax shelters in the past and tax credits currently have provided 
tens of billions of dollars to the owners or syndicators of the 
projects. 

Many Section 8-assisted projects are HUD insured. In fact, about 
75 percent of HUD's insured multifamily housing portfolio 
receives some form of subsidy from HUD. When HUD insured 

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mortgages default, HUD steps in and pays the lender essentially 
the unpaid balance of the mortgage and then starts the long and 
costly process of managing and disposing of that project. HUD's 
multifamily insurance programs are inherently risky as 
demonstrated by the following statistical profile: 

— Last fiscal year, HUD-FHA paid over $965 million of 
insurance claims. 

— At September 30, 1993, HUD-FHA had about $43.9 billion of 
insurance in force and had established loss reserves of 
about $10.5 billion to cover potential future losses on 
that insurance. 

— At September 30, 1993, HUD-FHA held loans, on which claims 
were previously paid, amounting to about $7.8 billion, 
and $6 billion of that amount, or 80 percent was 
nonper forming . 

— At September 30, 1993, HUD-FHA held foreclosed properties 
for sale of about $823 million and realized losses on the 
sale of foreclosed properties during the year of about 
$357 million. 

Mr. Chairman, you can gauge from these numbers that FHA indeed 
has a great deal of risk exposure and has absorbed and will 
continue to absorb losses in the billions of dollars. 

During the next 5 years, many of HUD's project-based subsidy 
contracts will expire. These contracts encompass hundreds of 
thousands of Section 8-subsidized dwelling units currently 
occupied by low-income families. Late last year, HUD and the 
National Housing Conference convened a Section 8 Preservation 
Task Force to explore ways to deal with expiring Section 8 
project-based subsidy contracts. The Preservation Task Force 
completed its proceedings earlier this year, and legislative 
proposals dealing with the Section 8 preservation issue have been 
initiated as a result of this Task Force and other efforts. 
These expiring Section 8 contracts present HUD with a rare 
opportunity to improve its administration of future subsidy 
contracts, or to restructure the project-based subsidy programs. 

HUD'S MAKAGEMENT AND OVERSIGHT OF INSURED/ ASSISTED PROJECTS 

Over the years, OIG audits and reviews by others have questioned 
HUD'S capacity to manage and monitor its huge portfolio of 
insured and assisted multifamily properties. In fact, since 
1987, HUD has been reporting the area of multifamily loan 
servicing as a "material weakness" pursuant to the Federal 
Managers' Financial Integrity Act. Recently, our semiannual 
reports to the Congress and our financial statement audits of FHA 
have consistently pointed out three systemic weaknesses that 

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impact HUD'S ability to manage and monitor multifamily programs. 
More specifically, our Office has been reporting the need for 
concerted efforts to address resource shortages, inadequate data 
systems, and an ineffective management control environment, 
including a lax enforcement program. 

STAFFING RESOURCES 

HUD currently lacks needed resources in terms of numbers and 
expertise to adequately service the loans and Section 8 contracts 
in an efficient and effective manner. A clear and compelling 
demonstration of the scope of HUD's staffing shortages in this 
regard was contained in the most recent Price Waterhouse audit 
report on FHA. That report pointed out the wide disparity 
between staffing levels at HUD and at other entities involved in 
multifamily housing lending. Whereas state housing finance 
agencies have staff/ loan ratios of 1 to 20, each HUD staff 
person has an average workload of 50 loans. Price Waterhouse 
went on to point out that HUD loans are typically much riskier, 
more troubled and thus more staff intensive, making the noted 
disparity even greater. We believe that the staffing problems at 
FHA are at the critical stage. 

DATA SYSTEMS 

The impact of staffing shortages could be offset somewhat through 
economies relating to the use of automated data. However, HUD 
does not have effective and integrated automated data systems 
that can be relied upon to provide relevant, timely, accurate, 
and complete information. This has contributed to fraud, waste 
and mismanagement in many of HUD's programs, including the 
Section 8-assisted multifamily housing programs. Although it is 
impractical to determine the potential dollar loss resulting from 
HUD's inadequate data systems, the losses in terms of misspent 
subsidies, insurance claims and asset management inefficiencies 
likely runs in the hundreds of millions of dollars. 

MANAGEMENT CONTROLS 

Our audits have disclosed that HUD's management controls in the 
insured/assisted multifamily housing area are weak. For example. 
Field Office physical property inspections, financial statement 
reviews, and on-site management reviews have not been performed 
in a manner that consistently identifies and resolves problems. 
This often contributes to insurance claims, unacceptable housing 
conditions, and excessive or wasteful subsidies. 

In addition, HUD Field Offices are not adequately following up 
with property owners and their management agents to ensure that 
problems identified through HUD's monitoring are being addressed 
in an acceptable manner. Moreover, HUD has not always taken 

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64 



appropriate action to stem and recover excessive or unnecessary 
Section 8 subsidies. 

CONDITION OF ASSISTED MDLTIFAMILY HOOSING STOCK 

While available data indicate that about 70 percent of HUD 
assisted housing stock is of good quality, a disturbing number of 
projects are distressed and low income tenants are trapped in 
deplorable living conditions. HUD sponsored studies and routine 
monitoring procedures often point out the poor quality of some 
units. In addition, our internal and external audit reports over 
the years have cited substandard units that continue to obtain 
subsidies because HUD does not enforce its contracts to obtain 
corrective actions, or recover misspent funds. 

HUD STUDY 

The HUD Reform Act of 1989 required that HUD conduct a study to 
determine the physical renovation needs of the Nation's federally 
assisted distressed multifamily housing inventory and to estimate 
the cost of correcting deficiencies and then maintaining the 
projects in adequate physical condition. 

The study gathered data on over 13,000 insured properties, 10,000 
of which were also assisted by Section 8 or other HUD subsidy 
programs. The study determined that about 23 percent of the 
assisted properties were distressed, i.e., conditions jeopardized 
tenants' well being, impaired sound operations, and, if not 
corrected, will lead to financial failure. Another 15 percent 
were determined to be stressed, i.e., conditions were such that 
continued neglect over a short period would move the property to 
the distressed category. The study also estimated that the 
10,000 projects had physical improvement needs estimated to cost 
$1.1 billion and that the projects had only about $145 million in 
project reserves to fund the needed repairs. This equates to a 
shortfall of $955 million. 

DIG INTERNAL AUDITS 

Two specific GIG audits are noteworthy in discussing housing 
quality. In 1990, we performed a review of the HUD Cincinnati 
Office to determine how well that staff was administering Section 
8 contracts. As part of that review, we inspected a 
representative sample of 86 assisted units at 15 property 
disposition projects. Our inspectors failed 82, or 95 percent, 
of the units we inspected. Those units had a total of .507 
housing violations and most of the units would be considered 
substandard. 

In April 1993, we issued a multi-region audit report covering 
HUD's servicing of insured/assisted multifamily housing projects. 
The audit work was performed during 1991-1993. As part of our 

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review, we inspected 28 troubled multifamily housing projects 
under the jurisdiction of six HUD Field Offices and determined 
that the physical condition of 23, or 82 percent, was 
unsatisfactory or below average. Of the 28 projects inspected, 
we determined that 20, or 71 percent, had inadequate preventive 
maintenance programs. Our tests also showed that HXJD staff had 
not performed any recent Housing Quality Standards (HQS) 
inspections for 17 (61 percent) of the 28 projects we inspected. 

The audit also disclosed that HUD-insured multifamily projects 
remained in poor physical condition for extended periods of time 
and that units receiving Section 8 LMSA assistance often failed 
to meet HUD's housing standards. With respect to the latter, we 
inspected 314 Section 8 LMSA-assisted units and determined that 
216, or nearly 69 percent, failed to meet HUD's housing 
standards. The factors contributing to these conditions were as 
follows: 

• HUD inspection reports did not consistently identify 
all major repairs and their seriousness, the cost of 
repairs, and the location of deficiencies. 

• Field Office follow-up actions and corrective action 
plans were often inadequate to correct violations. 

• Mortgagee inspection reports were not used by Field 
Offices because they considered them to be unreliable 
or useless. 

• Field Office inspections did not always entail checking 
for compliance with HUD's Section 8 Housing Quality 
Standards. 

OIG EXTERNAL REVIEWS 

Rosedale Ridge 

The Rosedale Ridge project, located in Kansas City, is a 161 unit 
complex which was insured under HUD's Section 236 program. 
Eighty one units received Section 8 assistance. Mortgage 
interest rate reductions and rent subsidies approximated $343,000 
per year. The owners purchased the project in 1986. 

In August 1989, at the request of HUD managers, OIG audited the 
project and disclosed numerous equity skimming violations 
amounting to $799,068. 

During the audit, we found that most apartment units contained 
serious tenant health and safety hazards, including roach 
infestation, falling ceilings and windows, and doors that did not 
provide security or protection from the weather. The estimated 
rehabilitation at the project was $1.4 million. Many of the 

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66 



families at this project did not have the luxury of being able to 
move to another apartment of their choice because they relied on 
the HUD unit based subsidies to help make their rent payments. 

The mortgage went into default and was assigned to HUD in October 
1990. HUD paid a mortgage insurance claim of $1.8 million and 
the project was foreclosed in February 1992. The project was 
subsequently sold at a loss of $1.4 million. To maintain the low 
income character of the project, HUD agreed to provide Section 8 
subsidies for all the units in the project with a contract that 
will cost HUD $10.7 million over a 15 year term. Additional 
costs to the Government include Low Income Housing Tax Credits 
worth about $710,000. Thus the total cost to the Federal 
government in this case of equity skimming is staggering indeed. 

Based on the results of this audit we referred the irregularities 
for investigative action and later performed an audit of six 
other projects owned by parties related to the owner of Rosedale 
Ridge. These audits showed similar patterns of abuse. The 
owners were looting the projects and tenants were forced to live 
in deplorable living conditions. We identified about $1.1 
million in additional equity skimming at those projects. HUD 
paid insurance claims in excess of $7.7 million on four of these 
six projects. 

OIG and FBI special agents investigated this case on a 
comprehensive basis for about two years. These efforts 
culminated in October, 1993 when four of the project principals 
pled guilty. One of the owners began a prison term in July 1994, 
one was sentenced last week and the other two individuals are 
awaiting sentencing. In addition, based on the guilty pleas, a 
civil fraud case was brought against the owners and in December 
1993, a $1.6 million double damages judgment was awarded to the 
government on the Rosedale Ridge project. Additional civil 
actions are being pursued on the other projects. 

SNAP I, II, and III 

SNAP I, II, and III is located on scattered sites within a 
historic district of Savannah, Georgia, The project consisted of 
three phases made up of 233 Section 8 assisted units. As early 
as August 1991, HUD's Field Office was reporting serious 
disrepair at the project. As of February 1993, the OIG inspector 
estimated the repair costs at approximately $1.2 million. 

In February 1992, HUD threatened to abate Section 8 rents if the 
next HQS inspection (scheduled for March 1992) noted violations 
that were not corrected within 3 days. 

The HUD March 1992 HQS inspection showed that 216 of the 
project's 233 units (or 93 percent) did not meet HQS. HUD 
notified the owner of the inspection results in July 1992, 4 

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67 



months after the inspection. HUD informed the owner that the 
deficiencies must be corrected by August 1992 or they would abate 
Section 8 subsidies effective September 1, 1992. 

In August 1992, HUD officials met with the owner and agreed to 
postpone the abatement. The owner was having a problem obtaining 
funds to correct the problems, so the owner was given 1 year to 
correct the HQS violations. 

In February 1993, we inspected 17 occupied Section 8 units, and 
found that they all failed the HQS inspection. The OIG inspector 
found many of the same uncorrected deficiencies noted in HUD's 
March 1992 HQS inspection. These deficiencies included serious 
matters such as exposed wiring, roach and rodent infestation, and 
structurally unsound windows, doors and walls. From the date of 
the HUD's inspection through February 1993, HUD paid $64,861 in 
Section 8 subsidies for the 17 units that did not meet program 
standards. 

We referred this case to HUD's Office of General Counsel for 
possible false statements under the Program Fraud Civil Remedies 
Act. This Act authorizes agencies to recover up to double 
damages and civil penalties on the basis of claims that include 
false material facts. The owners were certifying on their 
monthly requests for Section 8 payments that the units were in 
decent, safe, and sanitary condition. This case was declined on 
the basis that 1) HUD's leniency in continuing to make Section 8 
payments directly contradicts any claim by HUD at this time, and 
2) HUD's knowledge of the condition of the units mitigates the 
false statements made by the owner. 

Bethal Church Homes 

Bethal Church Homes , located in Athens, Georgia, consists of two 
phases and 190 units of which 183 (96 percent) are Section 8 
assisted. At the time of our audit, the project needed repairs 
totaling $2.1 million. The need for the repairs developed over 
time due to the owner's inadequate maintenance of the project. 
HUD reported that 80% of the repairs were for HQS violations. 

OIG inspected 14 occupied Section 8 units; all 14 failed with HQS 
violations such as exposed wiring, roach and rodent infestation 
missing or broken smoke detectors, and structurally unsound 
windows, doors, and walls. HUD was paying $3,900 per month in 
Section 8 subsidies for these 14 units. 

In December 1993, we referred this case to HUD's Office of 
General Counsel for a possible false statement by the owner or 
management agent under the Program Fraud Civil Remedies Act. 
The owner certifies on the monthly Section 8 payment voucher that 
the units, for which payments are being requested, are in decent, 
safe and sanitary condition. The case is still under review. 

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PROGRAM ENFORCEMENT 

Program enforcement can be an integral control in rooting out 
fraud and abuse in HUD programs. However, HUD's program 
enforcement has been particularly weak for many reasons. As 
discussed earlier, staffing shortages and inadequate data systems 
preclude effective efforts to monitor owner performance and 
detect situations demanding remedial actions. Even when problems 
are detected, enforcement obstacles exist. Typically, HUD has 
not taken aggressive enforcement actions because effective 
enforcement actions could harm the tenants or HUD. Consequently, 
owners are allowed to have the upper hand in the enforcement 
arena. For example: 

• If HUD declares a default of an insured mortgage, this 
results in acceleration of the debt by the mortgagee, 
the payment of a claim from the FHA insurance fund, and 
a lengthy and expensive disposition process. 

• If HUD defaults a Section 8 contract or other subsidy 
contract, this results in a recapture and rescission of 
the contract authority. However, the subsidized 
tenants are then left without affordable housing. 

• If HUD abates the Section 8 payments on a significant 
number of units in an insured project, the cash flows 
decrease, the owner cannot pay the mortgage or repair 
the units, the residents continue to live in 
unacceptable housing and HUD pays a claim from the 
insurance fund. 

• If HUD decides, as a last resort, to foreclose on 
a project because the owner refuses to take needed 
corrective actions, the owner may quickly hide 
behind Bankruptcy Act protections to delay HUD 
action, thus causing more costs and deteriorated units. 

Other tools employed by HUD may also exacerbate the problems that 
exist or fail to provide a cure. Such tools as decreasing the 
number of Section 8 units or denying rent increases ultimately 
tend to hurt low income tenants and not the project owner, whose 
personal financial status remains unchanged. 

All of these concerns, coupled with the staff intensive and 
lengthy processes involved in taking action, have contributed to 
a culture at HUD that results basically in a wholesale disregard 
for available enforcement tools. Housing quality violations go 
virtually unchecked. A small fraction of misspent funds are 
recovered in the multifamily housing area, thereby providing 
little incentive for owners and agents to adhere to HUD's 
requirements. 

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69 



The Office of Multifamily Housing, under the leadership of Nic 
Retsinas and Helen Dunlap, has embarked on an effort to change 
the program enforcement culture at HUD. A task force, consisting 
of Headquarters and Field Office staff, has been analyzing 
current tools and developing possible ways to improve performance 
in this regard. Without adequate staff and timely data, HUD is 
severely limited in what it can do to detect problems and then 
take the appropriate corrective actions. The enforcement task 
force is attempting to develop some short term measures that can 
work despite the staff and system weaknesses. We certainly 
applaud these efforts and are supporting the task force in 
several significant ways. 

Needed Actions 

HUD is currently taking action on a number of fronts to improve 
its management and enforcement of assisted multifamily housing. 
In the program enforcement area, legislation has been proposed to 
improve the multifamily housing equity skimming statutes, to 
expand civil money penalty provisions, and to allow HUD to 
recapture Section 8 subsidies that now would be lost through 
rescission if enforcement actions are imposed on owners. We 
fully support these legislative initiatives and urge Congress to 
act favorably upon them. HUD is also proposing to modify the 
Bankruptcy Code and to obtain more authority and flexibility to 
foreclose on defaulted properties in a more timely and less 
costly manner. 

In addition, we believe that HUD needs to consider other long- 
term changes to the structure of its multifamily housing programs 
that could significantly change owners' current incentives to 
engage in equity skimming. Such changes would include issues 
dealing with cash equity investments, recourse debt provisions, 
and tax law changes. 

On the management side, we support current efforts to increase 
the amount of funding for Section 8 property disposition. In 
this regard, the proposed Housing Choice and Community Investment 
Act of 1994 would shift Section 8 property disposition from a 
discretionary funding source to a mandatory account, i.e., the 
FHA General Insurance Fund or Special Risk accounts, whichever is 
applicable, rather than through funds provided under the U.S 
Housing Act of 1937. 

We also recommend that HUD move forward expeditiously to improve 
its system for compensating multifamily management companies to 
provide for greater incentives for better performance by such 
companies. Another possibility worthy of consideration is for 
HUD or some privately based organization to establish a 
certification program for managers of HUD-assisted multifamily 
housing projects, which might encompass Section 8 contract 
administrators as well. 

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Another area which we consider vitally important concerns the 
transfer of ownership of some assisted multifamily properties. 
We believe that HUD, in concert with Congress and 0MB, needs to 
develop innovative and cost-efficient ways to transfer ownership 
of some assisted multifamily properties to nonprofits and others. 
This entails the need to address the issues of owners' exit 
taxes, bond issuance and refunding, use of project reserves, and 
purchase costs of properties, among other areas. 

Mr. Chairman, while we applaud the efforts of Mr. Retsinas and 
his staff in recognizing the problems and moving ahead with 
proposed solutions, we want to also emphasize that most of the 
matters discussed above are long-term in nature. Significiant 
actions need to be taken now. HUD must move aggressively against 
bad owners on a high priority basis, and must find ways to 
augment its inadequate staff with contractors or other parties. 
HUD cannot aford to wait for legislative and regulatory changes 
if it hopes to overturn the deplorable living conditions 
confronting many assisted tenants. 

HIGH OR EXCESSIVE SECTION 8 SUBSIDIES 

There is a great deal of evidence that project based Section 8 
assistance is significantly higher than comparable unassisted 
units in many communities. HUD studies, GAO reports and OIG 
audit reports have pointed out serious problems in this area. 

HUD STUDY 

HUD recently analyzed a sample of its HUD-insured Section 8 New 
Construction and Substantial Rehabilitation stock of 4,125 
assisted properties. Based on this analysis, it concluded that 
about three-quarters of this housing stock had assisted rents in 
excess of the unassisted rents they would likely command in their 
local markets (even after completing a program of repairs and 
upgrades of amenities). According to HUD's analysis, 
approximately 42 percent of the Section 8 properties had assisted 
rents at or exceeding 14 percent of local unassisted market 
rents. HUD found that only 23 percent of the Section 8 
properties had assisted rents at or below optimal market rents. 

HUD'S analysis also showed that, because of project debt service 
requirements, most of the Section 8 projects reviewed would 
experience financial shortfalls if their rents were lowered to 
the local unassisted rent levels. Further, this would be true 
even if the loans could be refinanced at much lower interest 
rates. In addition, the current value of many projects would not 
be high enough to allow refinancing even under very favorable 
loan-to-value standards and refinancing costs. 



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OIG AUDITS 

Over the past 5 years, our Office has issued three major internal 
audits that discuss the high cost of Section 8 project based 
assistance. 

In April 1994, we issued a report sunmiarizing our review of the 
Multifamily Preservation Program. We concluded that the program 
as designed by Congress is not flexible enough for HUD officials 
to seek lower cost options to preserving housing. Congress 
recognized the preservation program would be expensive when they 
passed the Preservation Acts (1987 and 1990) . However, they 
found no other alternatives acceptable at that time. We provided 
potential options that could save from 29 to 81 percent of the 
projected Section 8 costs. With an estimated 401,000 units 
eligible for funding under the program, the options could equate 
to savings in the tens of billions of dollars. 

In April 1993, we issued a report covering HUD's administration 
of bond refundings for Section 8 projects. The major focus of 
that audit was HUD's need to revise its current policy and 
practice relating to applying Annual Adjustment Factors to 
numerous bond financed projects. We estimated that at least $200 
million in excess rent increases had been granted by HUD and, 
without needed changes, future increases could be in the billion 
dollar range over the terms of the Section 8 contracts. 

In April 1989, we issued a report on the Section 8 Moderate 
Rehabilitation Program. The major findings in this review 
related to questionable practices in awarding the funding and the 
inappropriate approval of excessive rents. This report was the 
driving force in numerous Congressional hearings and the 
subsequent conviction of several former HUD officials. The 
report estimated that excessive Section 8 rents would amount to 
over half a billion dollars over the terms of the Section 8 
Contracts. In addition, the report pointed out the waste of 
billions of dollars in Low Income Housing Tax Credits on these 
projects. 

The common themes in these reports are the significant problems 
associated with the structure of the project based subsidy 
programs that contribute to situations where HUD subsidized rents 
are initially set much higher than unassisted rents in many 
communities. These problems are compounded by HUD's inability to 
control or limit rent increases. 

When an owner's Section 8 contract rents are being adjusted or 
increased through HUD's Annual Adjustment Factors, HUD must 
ensure by law that any resulting adjusted contract rents will not 
be "materially" different than the rents of comparable unassisted 
units in the local market area. When HUD has reason to believe 
that a "material" difference exists, its policy has been to 

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perform a comparability study. This study consists of surveying 
local rents in a small geographic area surrounding the HUD- 
assisted project whose adjusted rents are being questioned. HUD 
can use its comparability study to cap the amount of any proposed 
rent adjustment. 

Despite the importance of HUD's comparability studies, the 
Department has not ensured that these studies are performed when 
appropriate. Over the years, there has been much confusion and 
inconsistency among HUD's Field Offices in applying comparability 
studies to proposed Section 8 rent adjustments. Our reviews have 
disclosed that Field Offices have either failed to perform such 
studies when warranted or failed to perform them consistently. 
Also, commencing in 1988, HUD's comparability studies have been 
the subject of extensive litigation by owners of HUD-assisted 
properties. The culmination of this litigation was a decision by 
the U.S. Supreme Court on May 9, 1993, which ruled that HUD had 
the authority under its Section 8 subsidy contract to perform 
rent comparability studies. 

Although the HUD Reform Act of 1989 also reaffirmed HUD's 
authority to perform Section 8 rent comparability studies, the 
Act directed HUD to issue regulations in support of such studies. 
As of the current date, HUD has not yet issued its final 
rulemaking on comparability studies; therefore, comparability 
studies have not been performed since December 1989, when a HUD- 
imposed moratorium was placed on the performance of such studies, 
pending issuance of the Department's regulations. 

In addition, our reviews have disclosed that HUD has experienced 
problems with its budget-based method of adjusting owners' rents. 
We have found that owners do not always perform budget-based 
reviews adequately in that some rent increase requests have been 
granted without the benefit of adequate supporting documentation 
and supervisory review of processing decisions. We have found 
that excessive budget-based rent increases have been granted by 
HUD on occasion. The budget-based method of adjusting Section 8 
rents is very staff-intensive when this method is applied 
properly. In addition, HUD cannot ensure that Section 8 project 
operating costs compare favorably to the operating costs of 
comparable unassisted projects in local markets, primarily 
because its data systems are inadequate and lacking such 
information. This is particularly a concern due to the fact that 
some owners use identity-of-interest management companies to 
operate or service projects. 

NEEDED ACTIONS 

There are many actions available to Congress and HUD to address 
the problems of potentially excessive Section 8 project-based 
subsidies. All potential actions need to be considered, 
regardless of how controversial or sensitive they might be. 

-13- 



73 



The Administration's proposed Housing Choice and Community 
Investment Act of 1994 (S. 2049) contains four initiatives which 
will reduce unnecessary Section 8 project-based subsidies by 
capping rent increases based on the Annual Adjustment Factors 
(AAF) , providing incentives for owners to refinance high interest 
mortgages, eliminating the requirement to automatically renew 
liMSA contracts, and reducing the AAF when renters stay in their 
units. The OIG supports these proposals, and I strongly 
recommend that they be enacted by the Congress. 

We also recommend that HUD expedite the issuance of its final 
rulemaking in support of Section 8 rent comparability studies. 
We believe it is imperative that HUD perform comparability 
studies since this is one of the few controls that the Department 
has to prevent excessive or unwarranted rent increases in the 
Section 8 program. 

Another alternative is to freeze Section 8 Annual Adjustment 
Factors for certain locations until such time as all material 
differences between Section 8 rents and comparable unassisted 
local market rents are eliminated. We also believe that Congress 
should consider repealing Section 8(c)(2)(C) of the United States 
Housing Act of 1937 which, in most circumstances, prohibits HUD 
from applying Annual Adjustment Factors to reduce any contract 
rents in effect on or after April 15, 1987 for projects in the 
Section 8 New Construction, Substantial Rehabilitation and 
Moderate Rehabilitation programs. 

Another available option which needs to be pursued more 
frequently by HUD is the Department's consideration and 
application of projects' excess reserves to accommodate increases 
in owners' operating costs in lieu of granting rent increases 
which entail additional subsidy dollars. We also believe that 
HUD should revise the Section 8 Housing Assistance Payments 
Contract for contracts undergoing renewal to provide the 
Department more flexibility to set and adjust Section 8 rents so 
as to better ensure comparability with local unassisted market 
rents. 

Lastly, Congress should continue to provide HUD sufficient funds 
to perform Random Digit Dialing surveys of small local market 
areas or segments of larger areas as a means of establishing 
Section 8 Fair Market Rents and Annual Adjustment Factors. These 
surveys have proven to be an effective means of improving the 
accuracy of Section 8 rents in many areas of the country. 

******************************** 

Mr. Chairman, that concludes my statement for the record. My 
colleague, Chris Greer, and I would be happy to answer any 
questions you or other Subcommittee members may have. 

-14- 



74 

Mr. Peterson. Thank you. Ms. Eneland-Joseph stated that she 
was talking about the increasing civil penalties. As I understand 
it, HUD has never proposed a civil money penalty on anybody ever, 
is that true? 

Ms. Gaffney. No, I think that is not correct. I asked that ques- 
tion the other day and the answer I was given was that — and per- 
haps Mr. Retsinas has better information — HUD has in fact as- 
sessed civil money penalties against lenders for certain fair hous- 
ing, but not against owners. One of the reasons they don't do it is 
because these are single entity organizations, so you are going 
against the proceeds of the projects, you are not getting at the own- 
ers. 

Mr. Peterson. Well, I think it calls into question whether these 
projects, this program makes sense, frankly. 

Mr. Flake, we welcome you to the committee. We are proceeding 
here. Apparently, we have to adjourn at 11 a.m. unless you can tell 
us there is some rule that we don't have to, perhaps you know 
something I don't know. Welcome to the committee. 

Mr. Flake. I know there are Whitewater hearings in another 
room, and I am supposed to be there also. I think I would rather 
be here with you and Mr. Retsinas and others, so I am going to 
stay. 

Mr. Peterson. Well, with that we will move to Assistant Sec- 
retary Retsinas. We appreciate you being with us today. We may 
have to interrupt you in the middle 

Mr. Retsinas. Would you like me to begin after the recess, Mr. 
Chairman? 

Mr. Peterson. Why don't we get started, and we will get 
through this as far as we can. I don't know if they are going to 
come in here and haul us away or what they are going to do, out 
we will see. 

STATEMENT OF NICOLAS P. RETSINAS, ASSISTANT SEC- 
RETARY, HOUSING, AND FEDERAL HOUSING COMMIS- 
SIONER, U.S. DEPARTMENT OF HOUSING AND URBAN DE- 
VELOPMENT, ACCOMPANIED BY HELEN DUNLAP, DEPUTY 
ASSISTANT SECRETARY, MULTIFAMILY HOUSING, AND 
JUDGE NELSON DIAZ, GENERAL COUNSEL 

Mr. Retsinas. Thank you, Mr. Chairman. I will stay as long as 
you do. Mr. Chairman, members of the committee, it is indeed a 
pleasure to be here. You have already acknowledged my Deputy for 
Multifamily Housing, Helen Dunlap. I also want to acknowledge 
our general counsel, Judge Nelson Diaz, who is also here this 
morning. 

Thank you for inviting us here today. I especially want to thank 
you for sharing our sense of urgency about the physical and finan- 
cial condition of our Nation's assisted housing. Well, the truth is 
that the majority of this assisted housing is Doth financially and 
physically sound, but frankly, Mr. Chairman, there is no comfort 
in that for the people who live in the assisted housing that is at 
risk. 

Our position is as long as anyone who is forced to live in sub- 
standard conditions in federally subsidized housing, as long as tax- 
payers feel they are paying inordinately to subsidize such units, we 



75 

must not allow these statistics to dull our sense of urgency about 
this issue. A few moments ago we saw videos of both well-managed 
and troubled assisted housing. These images are much more vivid 
and touch people more deeply, much more than any testimony I 
could give here today. We saw structures that can be considered 
housing only in the sense that they still have exterior walls and 
roofs. We saw broken windows, doors that didn't lock, ceilings that 
were falling in, plumbing that didn't work, broken fixtures, exte- 
riors littered with trash. 

Mr. Chairman, we don't need to look at a video for that. We can 
actually see housing like this any day of the week within a 15 or 
20-minute walk of this hearing room. There are families living in 
taxpayer subsidized, FHA-assisted housing in conditions that none 
of us would tolerate for even a minute. 

Beyond the question of living conditions, Mr. Chairman, there is 
a larger issue of community viability. The worst of our assisted 
housing stock is in our most distressed neighborhoods, at the heart 
of our most distressed communities. This substandard housing is a 
contributing factor to the physical, economic, and indeed spiritual 
deterioration of these neighborhoods and communities. 

President Clinton and Secretary Cisneros have made revitaliza- 
tion of these neighborhoods and communities a top priority for 
HUD and for this administration. As you know, in the 
empowerment zones initiative. Congress has already committed 
substantial tax dollars tov/ard this goal, but that commitment just 
begins to address the need. At the same time, Mr. Chairman, dete- 
riorating taxpayer subsidized, FHA-assisted housing is feeding the 
very decay we are trying to reverse. 

Mr. Chairman, this is an outrageous affront to the taxpayers and 
to common sense. We cannot revitalize communities without turn- 
ing this distressed assisted housing around. Just as you noted, we 
must turn around severely distressed public housing. For the sake 
of individuals and families and for the sake of the long-term health 
of these communities, action on this problem is imperative. 

We understood at the very beginning of our watch that we had 
inherited a critical problem in assisted housing. Last year, shortly 
after Secretary Cisneros took office, he testified before Congress 
that the condition of FHA's multifamily portfolio was the most seri- 
ous problem facing HUD. We found then that an estimated $11.9 
billion of our $45 billion portfolio was at risk. 

Our experience in the 18 months since then, Mr. Chairman, has 
shown us that the situation for residents and communities is even 
more critical than we had first thought. That is not because the sit- 
uation has gotten worse. It is because we have taken a clear, hon- 
est look at it. Realizing, as has been previously noted, that our own 
manpower staff resources were literally overworked and over- 
whelmed, we contracted with outside inspectors to identify physical 
problems with properties. 

We also initiated a closer analysis of properties' financial condi- 
tions. A property's financial situation is a good indicator of its like- 
ly physical condition, and this analysis has red flagged additional 
properties that are likely at physical risk as well as financial risk. 
Our eyes are open. We now see the full dimensions of the problems 



76 

we face, and they are formidable. How did we get into this mess 
and how do we get out of it? 

To a great extent, as one of your colleagues noted, the problems 
of assisted housing developments todav stem from the fact that 
they weren't built primarily to provide decent affordable shelter for 
low-income families. In many cases they were built to provide tax 
shelters for investors. As long as the tax benefits lasted, it was still 
possible to raise the capital required to maintain these develop- 
ments, but the Tax Reform Act of 1986 eliminated these benefits, 
and the partnerships that had been formed to finance the construc- 
tion of these tax-shelter-driven projects no longer had any incentive 
to invest in them. 

Ownership became a liability, not a benefit, and many partners 
simply walked away. This is a sorry financial fact of life, and com- 
plaining about it doesn't solve anything, but this unfortunate his- 
tory is absolutely no excuse for allowing these developments in 
which the taxpayers have already invested so much in foregoing 
tax revenues and spending rent subsidies to fall into disrepair and 
worse. It is no excuse for us to look the other way while the owners 
of these properties abuse them and the people who live there. 

There are other factors which have contributed to the deteriora- 
tion of assisted housing, and they are all amenable to correction. 
There are owners and managers who have not performed well. In 
some cases, there has been outright diversion or skimming of funds 
that should have been used to maintain and improve properties. In 
other cases well intentioned owners and managers have been lit- 
erally overwhelmed by the immensity of the problems they face. In 
others, even competent and qualified owners and managers simply 
have not had the resources they needed. Yes, there are also resi- 
dents who have been both disruptive and destructive. 

HUD's own policies and management deficiencies have exacer- 
bated the problem. As bad as things are with respect to the smaller 
troubled portion of FHA's multifamily portfolio, I believe the situa- 
tion is fixable over time. First, this distressed housing can be reha- 
bilitated. We can transform these liabilities into assets, but we 
must have resources. 

Second, we can correct the ownership and management problems 
which have contributed to their disrepair, but we need legislative 
and regulatory changes. Third, through additional changes in the 
law, we can change the dynamics of these developments so resi- 
dents can become part of the solution instead of the problem. And, 
fourth, we at HUD can and are changing our own policies and pro- 
cedures. We can turn this housing around, Mr. Chairman, and we 
can turn whole communities around with it. That will require a 
comprehensive strategy, and we have one. 

It is a fourfold strategy built around enforcement, repair, resi- 
dent responsibility, and transforming the way we do business at 
HUD. We have already begun to implement it, and I would like to 
take a moment to tell you about our progress to date. 

Mr. Chairman, I can't emphasize enough that our ability to carry 
out this plan, this strategy is directly related to the resources at 
our disposal. First, enforcement. We are already limiting participa- 
tion of individuals, companies, or agencies that have been involved 



77 

in past wrongdoing, and in the case of serious violations, perma- 
nently disbarring them from participating in HUD programs. 

In 1993 and the first 6 months of this year we issued 58 
debarments involving 34 privately owned and management multi- 
family developments and 24 housing authority operated develop- 
ments. As a matter of fact, we actually issued as many debarments 
in the first 6 months of this year as in all of 1993. 

In the case of individuals, companies, or agencies who have al- 
ready shown themselves to be unreliable, we have zero tolerance 
for further wrongdoing. However, these are essentially preventive 
tools which are effective in dealing with individuals, companies, 
and agencies who have already participated in HUD prog^'ams. If 
someone has no track record with us, these tools are of limited use. 

We are taking other actions to expand enforcement. We are step- 
ping up our physical inspections of properties and citing owners for 
failing to meet housing quality standards. We are deploying six 
SWAT teams to restore 30 to 40 severely troubled projects each 
year which we have determined can be restored to physical and fi- 
nancial health. 

I might add, the number could expand significantly if the re- 
sources were there to support them. 

We are acting more aggressively to identify cases where owners 
have diverted funds. For the first time, we are systematically col- 
lecting, automating, and analyzing the annual statement of every 
multiiamily project. All the annual financial statements of insured 
or HUD-held multifamily projects will be entered into a data base. 
This will enable us to more quickly identify problem projects and 
track the flow of money through them. This work is being done by 
outside contractors who are currently entering the financial state- 
ments of the last 3 years into the data base. They have already en- 
tered 65 percent of the 1993 data and are beginning to review and 
analyze it. 

Through our coinsurance asset management contract, we have 
collected over $40 million in excess cash that was being held im- 
properly by owners of formerly coinsured properties. Our contractor 
has also identified many instances in which funds were illegally di- 
verted and unauthorized payments were made. We are pursuing 
civil and criminal actions against violators as part of Operation 
Safe Home. 

Second, repair. Clearly, physical repair of properties is essential 
to turning them around. To date our field offices have received and 
approved 950 plans to repair and rehabilitate properties in our as- 
sisted-housing inventory. Last fall we committed to approve 1,200 
plans this year, and we expect to exceed that goal by 10 percent. 

At this point I would like to give you some examples of what can 
be done when we do have resources. In Pompano Beach, FL, the 
Holiday Lake Apartments which you saw in the video were in seri- 
ous trouble. We have forced a change in management there. We 
have invested $856,000 in flexible subsidy funding. The owner has 
invested another $280,000. 

We have committed additional Section 8 funding to the property 
and we have released $194,000 from the replacement reserve, and 
the property is now being turned around. 



78 

In Chicago, at 6000 South Indiana, also in the video, we forced 
a management change. We committed $1 milHon in special rent in- 
creases, which will be paid through subsidies, to finance capital im- 
provements over a 3-year period. We committed $200,000 in drug 
elimination grant program funds for improved security, closing 
down what was for all intents and purposes a drug bazaar in the 
building lobby. We are refurbishing all the units, replacing 
coimtertops, lotchen cabinets, plumbing fixtures. We are repairing 
the roof and replacing every window in the building. All of this 
work will be completed by the end of this year. 

Mr. Chairman, this is what we are doing with the resources we 
have now. With additional resources and certain legislative 
changes which I will discuss in a moment, we can do much, much 
more. 

Third, resident responsibility and supports. Mr. Chairman, we 
can reform management and make physical repairs, but we won't 
make real progress imless we also change the human dynamics of 
assisted housing. Residents must be encouraged to take respon- 
sibility for their own lives. They must be able to see assisted hous- 
ing as a place to make a transition to better lives. That means we 
have to make social services part of this housing work. 

Here in southeast Washington in Atlantic Gardens there is now 
a daycare facility, a child learning center, and a special summer 
program for young people in cooperation with the police depart- 
ment. These kinds of services enable parents to seek and hold jobs, 
they strengthen family life, and we must expand them. We must 
also change the demographics of assisted housing so that we don't 
concentrate very poor people in these developments. When we pile 
poor people on top of poor people in developments, where absolutely 
everyone is very poor, unemployed, or on public assistance, we are 
really asking for problems. 

In an environment like this, residents have no role models. They 
have no access to the kinds of word-of-mouth networks that really 
lead to jobs. They cannot even beg^n to see a way out of poverty 
no matter how much they would like to find a way out. We must 
alter the residential makeup of these developments so that poor 
people live alongside working people. 

Fourth, transforming HUD. We are transforming HUD into a re- 
sults-oriented department that puts progress ahead of process. De- 
partmentwide, we are eliminating an entire middle layer of re- 
gional bureaucracy and giving our field staff more responsibility 
and authority to make decisions. For our assisted housing inven- 
tory this means our field managers will have more freedom and 
discretion to pursue diversions of funds. 

We are shifting more resources to the field. We are augmenting 
our existing staff with long-term temporary employees, and we an- 
ticipate hiring some permanent positions in the field offices. We 
will be hiring more than 80 people in our field offices, specificallv 
to beef up our asset management efforts. Starting this fall, we will 
begin holding multifamily mortgage note sales to free up staff re- 
sources that are now being directed to servicing HUD-held loans 
rather than making sure that future loans are made in a sound 
manner. 



79 

We have also implemented a housing technician training pro- 
gram to sharpen our staffs asset management skills. These are im- 
mediate steps we are taking to improve our operation in the short 
run. Over the long ran, Mr. Chairman, we must transform FHA to 
be more responsive to the communities we serve. We must be a bet- 
ter partner with the private sector, and with nonprofit community- 
based organizations. 

Tomorrow, as a matter of fact, we are inaugurating a series of 
forums on the future of FHA. These forums will be conducted in 
eight cities around the country and will help us reevaluate our role 
and help us determine how we can better structure FHA to deliver 
services to the public in addition to rethinking how we deliver serv- 
ice. 

Mr. Chairman, we are reviewing our policies to ensure that they 
promote the hard results that we want to achieve. For example, 
with respect to physical maintenance of assisted housing, we are 
considering a major policy revision which will make it easier for 
partnerships to advance the capital needed for repairs. 

Currently, an owner who advances capital may not recover it 
until a project is in a surplus cash position. However, some of the 
most troubled projects which require large capital advances may 
never be in that position. This rule thus serves as a major disincen- 
tive to investment, discouraging owners from doing exactly ^yhat 
we want them to do, infuse new capital into projects when it is 
needed. 

We will change our policy so that owners can invest new capital 
and recover it over time. This is what we have already undertaken, 
but quite frankly, Mr. Chairman, we need your help, and the help 
of your committee to finish this job. We need legislative changes, 
and we need resources, Mr. Chairman. 

There are a number of things I would urge you and this commit- 
tee to consider. One, our Flexible Subsidy Program, which enables 
us to step in to developments like Holiday Lake Apartments and 
help finance needed repairs, must be increased. Two, we must have 
a Capital Grant Repair Program, which can be targeted at any as- 
sisted property with or without mortgage insurance. 

Three, we would like to see a change in the treatment of recov- 
ered Section 8 subsidies. Today, when HUD recaptures Section 8 
subsidies as a result of successful enforcement actions that recap- 
tured budget authority currently returns to the Treasury and is 
lost to us. Subject to appropriations, that budget authority could be 
used to fund another project-based contract or be converted to a 
resident-based subsidy such as vouchers. This would enable us to 
take enforcement actions without reducing the supply of decent, 
safe, and affordable housing. 

Currently, owners cannot transfer their property to new owner- 
ship, with new capital and renewed commitments to maintain the 
housing affordability, without incurring substantial tax liabilities. 
This means the owners' tax consequences drive decisions instead of 
the best interests of the taxpayers and the residents. We must find 
a way to give owners an incentive to turn these properties over so 
others can turn them around. 



80 

In addition, HUD must not be bound by bankruptcy stays when 
owners attempt to avoid foreclosure by hiding behind the protection 
of bankruptcy courts. 

Next, civil money penalties which are currently pending in the 
companion Senate bill should be expanded to include identity of in- 
terest management agents and owners who enter into Section 8 
contracts without mortgage insurance. The Federal preference re- 
quirement for project-based Section 8, which determines the per- 
centage of units that must be reserved for the most needy families, 
should be lowered to bring it in conformance with housing author- 
ity-sponsored Section 8 to permit more income mixing in these de- 
velopments. We must have discretion to increase rents in some 
cases, and thus subsidies, for projects which face unusually difficult 
and legitimate problems. 

Mr. Chairman, there are properties where legitimate needs have 
simply outstripped rental income, and in those cases we must have 
the flexibility to adjust rents on the basis of actual budgets instead 
of simply on the basis of an automatic annual adjustment factor for 
inflation. Otherwise, these developments will face continuous cash- 
flow deficiencies, leading to poor maintenance and ultimately to 
substandard housing. 

Finally, Mr. Chairman, the shallow rent subsidy concept in the 
Senate Dill should be expanded to all applicable Section 8 pro- 
grams. This will enable us to attract working people who need less 
subsidy to assisted housing which will help promote mixed income 
Section 8 communities. 

Mr. Chairman, I know there are people in this room who ques- 
tion HUD's ability to address the problem which is, in part, of its 
own making, but Mr. Chairman there is a new team at HUD today 
and a new spirit. Secretary Cisneros and I are firmly committed to 
restoring our distressed assisted housing. We can do it and we will 
do it, but first we must have the tools and resources to get the job 
done. 

Mr. Chairman, members of this committee, I urge you to give us 
those tools and resources. Together let us assure that the past does 
not become self-perpetuating, but rather a prologue to a much bet- 
ter future. Thank you. 

[The prepared statement of Mr. Retsinas follows:] 



81 



Statement before the 

Committee on Government Operations 

Subcommittee on Em.ployment, Housing and Aviation 

United States House of Representatives 



05 



July 26, 1994 



* 



\ 




O^ -— — - o 






NICOLAS P. RETSINAS 



ASSISTANT SECRETARY FOR HOUSING 
FEDERAL HOUSING COMMISSIONER 



82 



STATEMENT OF 

NICOLAS P. RETSINAS 
ASSISTANT SECRETARY FOR HOUSING - FEDERAL HOUSING COMMISSIONER 

before the 

COMMITTEE ON GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION 

UNITED STATES HOUSE OF REPRESENTATIVES 

July 26, 1994 



Mr. Chairman and Members of the Committee: 

Thanl< you for inviting me here today to discuss one of the most troubling and 
difficult issues facing the nation today, the living conditions of the poor. HUD has the 
responsibility, through its public and assisted housing programs, of supplying funds to 
provide housing for a small portion of the poor population in this country. The 
continued availability and affordability of that housing is critical to fulfilling our 
commitment to our communities and the well being of our citizens. Between the 
public housing and assisted housing stock, we have approximately 4 million units. 
The assisted housing inventory, for which I am responsible, consists of about 1.9 
million units. 

When I came to HUD just over a year ago, I discovered the extent of the many 
problems facing HUD and FHA. Last year, shortly after Secretary Cisneros took 
office, he testified before congress that the most serious problem facing HUD today is 
the condition of the multifamily portfolio. We found that an estimated $1 1 .9 billion of 
the $45 billion multifamily portfolio is at risk. In addition to the enormous financial 
problems, I found a housing stock decaying and HUD staff demoralized by scandal, 
years of inaction, and the inability to get a grip on itself or its resources. This 
administration will not tolerate the neglect, fraud and mismanagement we found in the 
programs. And we will not tolerate the terrible living conditions we have seen in the 
decaying portion of the inventory. After looking at some of the problems, the 
department began to think coherently and comprehensively for the first time about the 
extent and complexity of the problem at hand and began to lay out a four part strategy 
for tackling this issue. Let me give you some background on the inventory and then 
describe our four part strategy. 



83 



GETTING CONTROL OF THE INVENTORY 

The condition of our inventory, both physically and financially, is a great 
concern to me. My colleagues, my predecessors, industry groups, and tenants have 
all appeared before the congress, before different committees, to stress the 
importance of preserving and maintaining this stock. While the goal is clear to all of 
us, the means to reaching the goal are varied, complex, and expensive. However, 
we, the legislative and the executive branches, need to decide on some approaches to 
preserving the stock and then apply the will to carry out the preservation over many 
years. 

I want to say at the outset that the majority of assisted housing stock is in good 
condition, is well maintained, and has responsible owners and tenants. Unfortunately, 
we tend to hear about the minority of properties with ghastly problems. This 
association of terrible conditions and HUD housing assistance has in some instances 
led to the assumption that HUD is responsible for every poorly maintained housing 
project in the country. 

We find the existence of even one decaying property to be intolerable. 
Nevertheless, the minority of properties in bad shape will become the majority if we 
continue on our current trajectory. So far, the past solutions amount to tinkering at the 
margins. The assisted housing inventory is in crisis. It is aging and the Section 8 
rental assistance contracts are expiring. Some parts of it are severely distressed. It is 
in great demand, because affordability is our single greatest housing problem. And it 
needs new infusions of capital to repair and maintain the properties. In many ways 
we, collectively, act as though the profit motivations of the investors are not influenced 
by the world at large. The financial mari<ets and tax assumptions have changed since 
many of these projects were built, affecting owners' decisionmaking. Behind all this is 
the fact that HUD, charged with overseeing these properties, faces serious 
impediments to carrying out its responsibilities and needs adequate tools to address 
multifaceted problems. 

THE INVENTORY 

The assisted housing universe is immense and diverse. It consists of housing 
built under several different programs which were developed during the 1960s and 
1970s to address different housing problems. Some of the older programs. Section 
221(d)(3) and Section 236, along with the Section 8 new construction and substantial 
rehabilitation programs, were designed as production programs, to increase the supply 
of housing available to low and moderate income people. The later Section 8 
programs increased the supply of housing affordable to low and moderate income 
people by providing rent subsidies which enabled tenants to pay the difference 
between a percentage of their income and the rent needed to operate the project. 



84 



This inventory contains over 1 million units of older assisted housing, insured 
under old production programs like Section 236 and Section 221(d)(3). Another 
940,000 units are the newer assisted, subsidized with Section 8, over 40% of which 
are also insured under Section 221(d)(4). This inventory serves roughly 5 million low 
income tenant families, 40% of which are elderly. 

The department recently published a comprehensive study of the assisted 
housing inventory, the first of its kind, addressing not only Section 8 assisted 
properties, but all subsidized insured housing. It found that 30% of the older assisted 
inventory, those insured under Sections 236 and 221(d)(3), had serious backlogs of 
unattended maintenance problems. However, only 14% of the newer assisted 
inventory, insured under Section .221 (d)(4) and largely supported by Section 8 
subsidies, have such a backlog. 

We found that many of the projects with physical problems had financial 
problems also. In fact, there was a correlation between projects which were on the 
edge financially or had financial problems and those with physical problems. We 
found very few projects that were sound financially but had physical problems. The 
financial condition of the property is clearly an indicator of physical problems. We are 
also talking about projects which are aging. Most are between 13 and 25 years old. 
We know that by the time a building is 20 years old, major systems need repair and 
replacement. Buildings cannot be expected to last forever. This has to be factored 
into our discussion about the physical condition of the assisted housing stock and how 
we intend to keep that condition, decent, safe, and sanitary. 

THE PROBLEM 

I would like to spend today focusing on the minority of properties which have 
been allowed to deteriorate and what the department is doing to deal with those 
properties, i would like this hearing to be a part of the on-going dialogue about the 
future of the assisted housing stock. We have some ideas about tools which we 
would like to discuss, although we are not here to make any proposals outside the 
normal legislative processes. We also need to stress that the number of properties in 
bad condition now is a small portion of the entire stock, but it is a harbinger of things 
to come if we fail to act to shore up and repair these aging properties. 

There are a number of reasons for problems, both why they begin and why 
they persist. It would be best to briefly highlight the causes of distress, the effect of a 
distressed property on its community and then to focus on why often problems go 
unsolved. 

There are owners and tenants who do not serve the projects or their 

communities well. In many of the projects highlighted in other testimony here 
today, the conditions are attributable to many causes. There are tenants who 



85 



are not model citizens, who do not leave units or the properties in the best of 
condition. Further, there are owners and managers who do not have skills and 
sometimes the desire to de^l with problem tenants and the problems they leave 
behind. There are troubled neighborhoods where the problems of the streets 
creep into the properties; and troubled properties where the problems of the 
street creep into the units. Once a property starts leaving units vacant, those 
units become a magnet for every bad actor in the community. 

We expect and demand that owners provide decent, safe, and sanitary housing. 
We concentrate on the performance of the owners and blame them for poor 
conditions. However, the tenants also have to bear a responsibility for their 
living conditions. 

The administration has introduced the notion of reciprocity in its discussions 
with you about welfare. We have talked about tenant involvement in the public 
housing programs. We intend to expand the notion of tenant involvement in the 
care and upkeep of our assisted housing inventory. The American taxpayer 
pays to make this housing affordable for the residents. We can expect for this 
lifetime of sustenance, a degree of reciprocity. 

Often the impact of distressed housing on the community is profound. Although 
not emblematic of all distressed housing, once housing becomes troubled and 
the resources available to deal with it are either inadequate or nonexistent, it 
becomes a haven for the undesirable elements of the community who slowly 
"take over" whole buildings, defying all who dare cross their turf. Once drug 
dealers and other criminal types dominate a neighborhood, the remaining 
residents of the community who can, leave. 

Obviously, this problem is beyond the scope of the assisted housing program 
alone. Our mles are specific about what we can and cannot do about a 
property. But we are not blind to the external forces. The secretary has called 
for partnerships in the community to support the whole neighborhood, as well 
as, individual housing projects. We need a holistic approach to caring about 
the neighborhoods. HUD cannot act alone here. We need the states, cities, 
neighborhood organizations, and citizens to join in reclaiming these 
neighborhoods from bad elements. We also need the business community, the 
investors in housing, mortgage lenders, and the secondary market to be more 
involved with the operation of these projects. 

The Tax Reform Act removed an incentive for owners to continue to invest in 
the housing. Unfortunately, our assisted housing programs were sold to 
investors as tax shelters. They started as tax programs, that is, the production 
of housing by raising capital through the distribution of tax benefits to members 
of a partnership. 



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With the clarity of hindsight, we can see the flaw in this approach. The Tax 
Reform Act of 1986 eliminated many of those higher benefits, retrospectively 
and prospectively. Capital previously invested no longer provided a tax shelter. 
Using the tax code to subsidize housing is not only inefficient but hides the cost 
of the subsidy. Ownership became a liability and many partners simply 
disappeared. The remaining owners have little or no direct accountability for 
solving problems. Often the ownership that HUD forecloses on is an empty 
shell with the housing project as its sole asset. 



THE FIRST STEP - DEVELOPING THE STRATEGY 

The enormity of the management problems facing HUD in handling the assisted 
housing portfolio is overwhelming. In July 1993, two months after I came to HUD, I 
convened an asset management work group, a strategic planning team consisting of 
HUD career staff and housing industry representatives. This group solicited and 
received ideas from regional and field office housing management staff and industry 
representatives. I asked that the group develop an action plan that would target four 
specific areas: 

• Improving organizational and administrative support for field offices; 

• Reducing field office workload to allow staff to focus on asset 
management; 

Implementing tools for preventing mortgage defaults and assuring 
financially and physically sound properties; and 

• Improving the management of the HUD held portfolio and obtaining 
enhanced tools through legislation. 

Our purpose was to create an environment which promoted Innovation and 
creativity. We wanted to break the old connections and create new ones to reinvent 
HUD'S management of the multifamily portfolio. 

The Asset Management Work Group has defined the problem, analyzed the 
loan specialist's tasks including the skills and knowledge required to perform them, 
received input from field staff and industry, analyzed the 93 recommendations for 
portfolio improvement received from field and industry, and developed a flexible action 
plan strategy which also satisfies key audit findings. 



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Our primary goal is to assure that the portfolio is properly maintained and 
managed. In order to do this, we have established the following goals: 

• Focusing the existing resources on the areas of highest priority; 

• Suspending or eliminating low priority programs and activities; 

• Implementing new delivery systems utilizing non-HUD sources, eg. risk 
sharing and subsidy layering; and 

Utilizing advanced technology wherever possible. 

You will note that we have combined programmatic and organizational issues in 
our strategy goals. We see them as intertwined. We need to reorient our thinking 
about the portfolio and our operating procedures in order to economically and 
rationally protect the investment in the portfolio. 

THE FOUR POINT STRATEGY 

Having developed a strategy, 1 would like to focus on what I see as the major 
implementation steps. The four point strategy consists of enforcement, repair, 
motivation for resident behavior, and the transformation of the way HUD does 
business. None of these efforts can work without resources and I want to take some 
time to focus on that issue -- what we are doing to more efficiently use existing 
resources and what we will need additionally to fully tackle these problems. 

ENFORCEMENT 

We are enforcing the regulatory agreements and housing quality standards for 
these properties. We are looking at both the financial and physical condition of the 
properties. There are a number of enforcement steps the department has already 
taken to enable it to deal with distressed properties and unresponsive owners swiftly 
without unfairly penalizing the residents of poorly maintained housing. 

Civil Money Penalties 

The HUD Reform Act of 1989 permitted us to impose civil money penalties 
against a project owner who violates the regulatory agreement in certain specified 
v>^ays. Penalties of up to $25,000 per violation can be imposed administratively after a 
hearing with an administrative law judge and other due process protections. While 
success would be never having a need to impose penalties, we are pleased with our 
progress, especially with our double damages remedy. To date, the government has 



88 



obtained district court judgments in 9 cases totalling $16,041,140, settled 3 cases for 
$2,543,152, and have 3 cases pending seeking damages of $5,572,926. 

Annual Financial Statement Contract 

To help us identify diversions and to give us a better picture of the financial 
status of our multifamily projects, we have let a contract to systematically collect, 
automate and analyze the annual financial statement for each multifamily housing 
project. Under this contract, all of the annual financial statements of insured or HUD 
held multifamily projects eventually will be entered into a database. We will then be 
able to more quickly and efficiently identify problem projects and track the flow of 
money through the project. The contractors are currently entering the last three years 
financial statements. They have already entered over 65% of the 1993 data and are 
beginning to review and analyze the information. We expect them to be able to do 
reviews on 30% of the project statements, including all projects in the District of 
Columbia and Los Angeles, this year, another 30% next year and so on until all 
projects have been reviewed and the analyses completed. The contractors will be 
training field staff in financial statement analysis with particular emphasis on the 
identification of diversions and improper expenditures. 

Formerly Coinsured Asset Management Contract - Ervin and Associates 

The formerly coinsured portfolio is, perhaps, one of our most troubled and 
difficult. With coinsurance, the lender was expected to handle the asset management 
and properties were never intended to come into the HUD workload. When the 
program collapsed and Ginnie Mae (GNMA) exercised its rights to assign the 
mortgages to HUD, that set up a channel for these properties to enter HUD's 
workload. We had neither the staff or the resources to absorb this work. As a result, 
in September 1990, we contracted for asset management support services for field 
and headquarters staff. That contract was reissued in August 1993 for a base year 
and four option years, the first of which we will exercise this August. 

The Ervin and Associates coinsurance asset management contract has 
improved HUD's abilities to spot and recover diversions. This contractor has collected 
over $40 million in excess cash that was being held improperly by owners. Ervin and 
Associates has also identified many equity skimming and unauthorized distributions. 
We are currently pursuing civil and criminal actions against the violators, as part of 
Operation Safe Home. The key to this success has been consistent and aggressive 
followup with owners. Since the contract identifies fraud and abuse on a national, 
portfolio basis it enables us to identify similar problems that may exist in an owner's 
portfolio, regardless of location. This coordinated action against such owners on a 
portfolio basis forces the owners to recognize that they have more at risk than a single 
bad project. 



89 



Physical Inspections 

We are stepping up our physical inspections or properties so that we can 
Identify physical problems earlier. Further, we are citing owners for failure to meet the 
Housing Quality Standards as they agreed to do in their original contract with HUD. 
We have the option of declaring owners in technical default for failure to comply with 
the housing quality standards. This is certainly an option open to us and now with the 
changes in the property disposition legislation which makes it easier to exercise this 
option. 

Previous Participation Clearance - 2530 Clearance 

An old enforcement tool which has taken on a new emphasis is the use of the 
previous participation clearance and the threat of debarment. We have always 
required owners and other participants in our programs to submit information on their 
previous participation in HUD programs. The 2530 clearance, as we call it, has 
proven to be a useful tool in screening potential participants for their past problems. It 
has also served as a deterrent because owners, builders, managers planning to use 
HUD programs know they will have to complete this clearance and it will be checked. 
However, the 2530 clearance is limited to those who have previously participated in 
HUD programs. It does not reach those who have never participated in HUD 
programs and, therefore, have no record with us. , 

In addition to checking potential repeat participants when they apply for a 
mortgage or loan, we have an additional tool, debarment and limited denial of 
participation, for individuals and companies who have been determined to have been 
involved in some wrongdoing. We have stepped up the pace of our actions. In the 
first six months of calendar year 1994, we debarred as many owners and managers 
as we did in all of 1993. For participants in our programs, I want the word to get out - 
- we intend to use this enforcement tool. 



REPAIR THE INVENTORY 

Nothing can happen unless we repair the physical real estate. The current 
deterioration affects a minority of the inventory. But the inventory is aging and will 
continue to need repairs and replacement. We need to recognize the need for 
resources to maintain the properties. 

We will deploy a SWAT team to identify and correct problems in the most 
troubled housing. The team will consist of headquarters and field staff working 
together with HUD lawyers and the Inspector General's staff. They will use their skills, 
expertise, creativity and imagination to tackle a limited number of projects, 



90 



approximately 60 to 70, and develop plans which will restore them to physical and 
financial health. 

In order to take control of the troubled inventory, we have asked our field 
offices to identify each troubled or potentially troubled project. As part of the 
performance agreement between HUD and the president, we agreed that we would 
have 1200 projects under an approved plan of action. These plans consist of all the 
actions needed to bring the property into good condition. As of the end of June, 950 
projects have approved plans to repair and rehabilitate projects. We expect that we 
will exceed our goal by 10 percent. But we are not stopping with this year. Next year, 
more action plans will be developed for projects and the existing plans will be 
implemented. 

As we begin to implement the capital needs assessment authority, we need to 
fully fund it so that we can identify the extent of the problems. In addition, we need to 
expand our capital repair program resources, readjust our budget methods for 
applying the annual rent adjustment factors, deal with the tax issues arising from trying 
to remove owners from the properties without going through foreclosure. 

Example - Roxse Homes 

I would like to pause here and give you an idea of how complicated and difficult 
it is to take action against one of these troubled projects. I have chosen Roxse 
Homes in Boston, Massachusetts, because we have finally come to a successful 
conclusion. But it took twenty yearsi 

Roxse Homes is a 364 unit development scattered over 13 sites in the Roxbury 
neighborhood of Boston. It was built in 1972 by a nonprofit corporation made up of 
local ministers using the Section 221(d)(3)BMlR program. That program has since 
been repealed, but it was intended as a low and moderate income program where the 
rent was affordable because the interest rate on the mortgage was subsidized. From 
the beginning, it was in trouble. On August 1, 1974, Roxse Homes, Inc., the owners 
defaulted on the mortgage, and a year later, the project was assigned to HUD. There 
were numerous efforts at formulating a workout; all failed. By 1981 , HUD was 
recommending foreclosure, but the owners made additional efforts to work out their 
problems. There was an attempt to transfer ownership, but that failed. Then the 
lawsuits began - the Boston Redevelopment Authority filed suit to stop the transfer, 
the owners filed bankruptcy, and the courts became involved in the back and forth 
management and ownership of the project. On April 28, 1994, over 10 years from the 
time HUD requested the department of justice to initiate foreclosure, the judge finally 
issued an order of foreclosure. HUD finally purchased the property at the foreclosure 
sale on June 17, 1994. 



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But this is really the beginning of the story. Because now the property is in the 
hands of the Massachusetts Housing Finance Agency (MHFA) which will finance the 
rehabilitation and sale of the property. MHFA is the first state housing agency to 
participate in our risk sharing program which will allow housing finance agencies to 
originate, underwrite, and close multifamily loans which HUD will insure and share a 
percentage of the risk prenaium income. We have the support of the residents of 
Roxse homes in this venture who will participate in the decisionmaking. MHFA will be 
able to assure that the rehabilitation will be of high quality using cost effective 
approaches to providing funds for the rehabilitation and operation. 

What Is Possible 

With time, effort and resources, we can turn projects around. Properties in 
terrible condition can be repaired and rehabilitated and the management can be 
changed. The General Accounting Office has presented a video showing several 
properties with serious physical problems. 

Let me tell you what we have been able to do with two of those properties 
given the resources. The first is Holiday Lake Apartments in Pompano Beach, Florida. 
We forced a change in management, invested $750,000 in flexible subsidy funding 
and had the owner invest another $300,000. We added more Section 8 funding and 
released funds from the replacement reserve. The project is now being turned 
around. The second is 6000 South Indiana in Chicago where we approved $1 million 
special rent increase under Section 8 to finance capital improvements. The money is 
going to refurbishing all the units, replacing countertops, kitchen cabinets, and 
plumbing fixtures. We are repairing the roof and replacing all the windows. All the 
work should be done by Christmas. The management company was replaced. 
Further, we awarded a $200,000 dnjg elimination grant for improved security and to 
close down a dmg bazaar in the lobby. 



RESIDENTS - THEIR ROLE AND RESPONSIBILITY 

We need to recognize the role of the resident in the preservation of the 
property. Residents have to be both supported and responsible. For residents who 
need service, we need to expand the reach of sen/ice coordinators and providers. 

Service Coordinators and Providers 

In our management of elderly housing, we have discovered that service 
coordinators are a critical component of a management team which assists frail 
residents of a project access the supportive services they need from the general 
community. We have found that this prolongs the ability of these people to live in the 
community and keeps them out of expensive nursing homes. But we have found that 



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service coordinators are no less valuable in family projects where they can link 
residents to needed social services, job training, and education. The National 
Affordable Housing Act established service coordinators as an eligible expense under 
the Section 202 program. We need to expand the availability and the eligibility of 
service coordinators in our family projects. 

We also need to encourage owners and managers to reach into the community 
to find social service providers who can help residents of assisted housing. This has 
to be a cooperative effort with providers, local governments, owners, and resident 
organizations. 

We have examples of projects where social services are available and where it 
makes a difference. Not very far from here, in southeast Washington, Atlantic 
Gardens now has a day care facility, a child learning center, and a special summer 
program for young people in cooperation with the police department. This helps 
parents look for jobs and strengthen family life. Services of this kind need to be a part 
of all our assisted housing. 

Demographics 

We must also change the demographics of assisted housing. In the 1980s, 
when projects ran into financial trouble, HUD provided additional Section ? assistance. 
What seemed like a good way to prevent defaults had an unintended side effect. 
Projects which had a range of low income tenants and some moderate income tenants 
changed. Because of the eligibility requirements for Section 8 assistance, the tenancy 
became poorer. The higher income residents, the working poor, left these projects 
and the concentration of tenants on public assistance increased. What is wrong with 
this picture? In an environment where the majority are on public assistance, there are 
no role models who work to emulate and no network to help people find out about 
available jobs. As with public housing, the good intentions of the past have resulted in 
concentrating the least able, the poorest, and the disheartened. This is a pattern we 
have to change. 

In addition, we have to involve residents in the management of the projects. 
We have successful examples of resident involvement which has turned around 
management and maintenance of projects. But most of all, involved residents with 
pride in their homes are the best guarantee that the properties will not be destroyed. 
The actions of the few, the bad apples, who spray paint graffiti, dump trash, and, in 
general, make the property unattractive destroy both the morale and the homes of the 
many decent law-abiding residents. We are trying to do our part, with programs like 
the dnjg elimination grants, but we need the cooperation of the majority of residents. 
They have a responsibility to themselves to keep their homes in good order. We 
justifiably blame the landlord for failing to make repairs, but we have to recognize that 



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the tenant who fails to report a repair or who countenances any destruction of the 
property is just as much to blame. There is a reciprocity and a responsibility. 



TRANSFORMATION - CHANGING THE WAY HUD DOES BUSINESS 

HUD needs to change the way we do business. That is a twofold process. We 
need to look at administrative policies, like how we handle owner advances. We also 
need to look at our human resources, our staff, and how best to develop and deploy 
their talents. Most of all, we need to look at where we want to go and how we intend 
to get there. 

Multifamily Note Sales 

We plan to offer significant portions of our multifamily HUD-held notes for 
purchase at competitive sales, beginning this fall. In addition to raising revenue, this 
action will inject a new dimension into loan servicing and will free up HUD staff 
resources previously committed to servicing those projects so that they will be able to 
work on other projects. 

Supporting HUD Staff 

A well trained staff who understand the job and its importance is one of the 
best investments we as a department can make. We are taking steps to improve the 
staff complement and skills. We are augmenting our existing staff with long term 
temporary employees and we anticipate increasing the number of permanent positions 
in the field offices. We will be hiring more than 80 people in our field offices 
specifically to increase the resources available for our asset management efforts. 

A major initiative is the Housing Technician Training Program. Under this effort, 
57 Housing Technicians recently completed the final step in a concentrated training 
program, including on the job training in HUD asset management, in-house training in 
various technical disciplines, self taught courses, university level classes and training 
sessions taught by such organizations as IREM, Institute of Real Estate Management, 
and Quadel. 

We are also using technology to help us communicate more effectively with 
field staff so that they know the latest information and have the benefit of the latest 
policy decisions. Among the techniques we are employing to do this is an in-house 
bulletin board accessed through our E-mail system, allowing us to quickly put out 
notices of Federal Register publications of importance, new policy memos, and 
instructions to all staff. With over 80 field offices, we have found that the E-mail 
information has preceded the hard copy publications, significantly reducing policy 
information gaps. We are also using teleconferencing as a training and information 



R^.9^a. QS-d 



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dissemination tool, allowing us to reach more field staff at less cost. It also allows us 
to do it more frequently so that staff is continuously involved in the latest technical and 
policy thinking. 

Field Reorganization 

We are currently engaged in an extensive and important reorganization of our 
field staff. We are eliminating the regional offices, thereby reducing a layer of the 
organization and allowing field managers to report directly to me. Field offices are 
being given more responsibility for managing their programs and resources. They will 
be able to make more of the day to day management decisions directly rather than 
having to go through other layers of the organization. This reorganization is designed 
to instill top to bottom accountability for program delivery, provide more customer 
oriented and user friendly services, and allow us to keep pace with changes in the 
financial services community. 

While this reorganization might not appear to be directly related to the topic 
before us today, I believe that increasing the flexibility and accountability of HUD 
managers in the field will give them the freedom and discretion they need to pursue 
diversions of funds. The reorganization is intended to make the most of our limited 
staff resources and provide those closest to the projects with the power to make the 
necessary decisions. This will improve our ability to catch problems early> 

Policy Changes - Owner Advances 

As an example of some of the policy changes we are considering, the 
Department is also seriously considering a major revision to its policy on recovering 
capital advances made by partnerships to address serious or emergency needs not 
met by normal planning and funding mechanisms. Currently, an owner who advances 
capital may not recover it until the project is in a surplus cash position. Some of the 
most troubled projects which require large capital advances may never be in a surplus 
cash position. This in turn provides a negafive incenfive to owners otherwise willing to 
contribute cash to solve a project's financial or physical problems-those projects 
where the capital is most needed. If an owner recovers capital advances before the 
project is in a surplus cash position, the Department considers that a diversion, 
subject to our formidable arsenal of enforcement tools. 

This blind mechanism actually discourages exactly what we want owners to do : 
infuse new capital into projects when it's needed. To obtain infusions of capital we 
must create a policy which allows owners to recover it over time, perhaps with 
interest, as a recognizable cost of doing business -whether or not the project is in a 
surplus cash position . Encouraging rather than tacitly discouraging capital advances 
should help us prevent the kinds of incidents we have all seen on the A&E Networi< 



95 



14 

and will redirect our enforcement efforts toward bona fide fraud and inattentive 
owners. 

FHA and Its Future 

If there is one problem even more acute than the condition of the housing and 
the lack of tools with which to deal with it, it is the problem of FHA itself, an 
organization which has not been able to change with the times or adopt new 
technology to support its mission of providing housing opportunities which are unmet 
by the private sector. If there are to be solutions to the Federal government's ability to 
deal with the kinds of housing problems we have discussed here today, then the 
solutions have to start with the agency charged with that mission. 

We are in the process of re-examining the role of FHA through a series of 
forums around the country. We are asking HUD customers and partners -- the 
residents, housing advocates, housing providers, builders, realtors, mortgage bankers, 
the secondary market, and state and local governments, as well as HUD employees -- 
their vision of the future FHA. From this, we hope to gather some ways in which we 
can remove the barriers to partnership and redefine the FHA's role in the housing 
industry. 

We know some of the problems and we expect to learn more, but we need to 
work together for some of the solutions. 



RESOURCES 

Critical to our four part strategy are the resources to implement it. We are 
working smart, for example, using technology and contracting to analyze the financial 
statements, thereby freeing up staff to work on the more critical projects. However, 
nothing happens without the resources to do it. Without new resources, we cannot 
repair the buildings and make them decent, safe, and sanitary places to live. We 
need legislation to give us teeth for our enforcement effort. We need the staff to carry 
out the responsibilities for maintaining the inventory. HUD and the congress must 
address these issues together. 

We recognize the troublesome fact that FHA lacks the capacity in many 
instances to deal with distressed properties. And we lack the programs needed to 
solve problems and prevent them from recumng. 

FHA lacks the basic tools for dealing with distressed housing. FHA's model 
program. Flexible Subsidy, has long been underfunded and undervalued. For 
instance, the FY 1994 budget for public housing modernization was $3.4 billion. 
FHA's budget for Loan Management Set Aside, and Flexible Subsidy combined 



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was around $260 million, not counting the $100 million special supplemental 
appropriation for earthquake assistance in Los Angeles. Further, Flexible 
Subsidy is a program which is funded largely out of the Section 236 "excess 
income" account. While making Flexible Subsidy a "pay as you go" program, 
and therefore fiscally wise, these funds are in very small supply compared with 
the demand, requiring that they be supplemented through appropriations. 

Loan Management Set Aside (LMSA) Section 8 was the tool of the 80's. When 
markets could not support low and moderate income tenancy (basically above 
50% of the area median income), HUD often alleviated vacancy problems with 
LMSA. This was fine for stabilizing cash flow and keeping projects financially 
stable and repaired, but produced, in concert with the Federal preferences, a 
tenant body with income at the lowest of the low. 

The Federal preference rules, initially intended to address the needs of the very 
poor, has contributed to the malaise of the inner city and FHA assisted housing. 
These apply to 70% of all new units and vacancies in the Section 8 program. 
Where a property is predominantly Section 8 the preferences drive down the 
average incomes of the tenant body and attracted the poorest of the poor along 
with the social pathologies that accompany high concentrations of very, very 
poor people. For instance, in one neighborhood here in Southeast Washington, 
the average income of 1,600 Section 8 tenants living in assisted housing is 14% 
of the area median. 

The application of the Federal preferences underscores yet another disparity 
between the treatment of public housing and FHA assisted. The preference 
rules apply to only 50% of public housing vacancies, but 70% of assisted 
housing. 

Currently, owners transferring their properties to new ownership, with new 
capital and renewed commitments to the extension of low income housing 
affordability, incur substantial tax liabilities. As a result, the owners' tax 
consequences become the driving force in the decisionmaking rather than best 
interests of the residents and the taxpayers. Consideration should be given to 
alternative ways of addressing this problem and their cost and benefit. 

The Annual Adjustment Factor method of adjusting Section 8 rents uses a 
formula for calculating the adjustment. The resulting calculation does not 
always set the rents at the precise amount the project needs. Some properties 
receive more than they need. Others do not receive enough to operate 
successfully causing cash flow deficiencies which inevitably result in poor 
maintenance and the potential for substandard housing. Consideration should 
be given to creating the ability to switch at HUD's discretion between applying 
the annual adjustment factor or the budget based methodology in evaluating 



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annual rent increases for Section 8 New Construction and Substantial 
Rehabilitation projects. This will help avert cash flow deficiencies on AAF 
projects where unusually difficult management problems arise. Cash flow 
deficiencies inevitably result in poor maintenance and the potential for 
substandard housing. 



Creative Solutions to Difficult Problems 

There are a number of things that can happen and happen immediately if a 
number of important legislative initiatives in this year's pending reauthorization bills are 
acted on. Passage of any and all of these initiatives will further expand HDD's ability 
to deal more effectively with bad owners and poorly maintained properties. 

I began this testimony by saying that HUD needed your cooperation in providing 
us with the tools to make our efforts to eliminate the improper diversion of funds from 
our projects. There are some areas the executive and legislative branches should 
jointly consider: 

• When HUD recaptures Section 8 subsidies for violations of HUD 
requirements, the recaptured budget authority is returned to the treasury. 
Subject to appropriations, this budget authority could be used to fund 
another project based contract or be converted to a tenant based 
subsidy such as vouchers. Therefore, HUD could take enforcement 
actions without reducing the supply of decent, safe and sanitary housing 
available to tenants. 

• Although the property disposition legislation passed earlier this year went 
a long way, the Department still seeks to regain its lost authority to be 
exempt from bankruptcy stays when owners attempt to avoid foreclosure 
by hiding behind the protection of the banknjptcy courts. 

• There currently exists no capital grant repair program which can be 
targeted at any assisted property with or without mortgage insurance. 
We have found that, in the absence of other capital funding tools, lack of 
such a repair program leads to further deterioration of the properties. 

• Expansion of Civil Money Penalties in the Senate bill (S.2049) to include 
identity-of-interest managing agents and owners who enter into Section 8 
contracts without mortgage insurance. 

• Fully funded Capital Needs Assessment authority needs to be expanded 
to Section 8 properties, especially in advance of the contract expiration 
and potential renewal. 



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Expand the "shallow rental subsidy" concept in §601 of the Senate bill to 
all applicable Section 8 programs. 



CONCLUSION 

The question remaining is whether any of these actions alone or in concert will 
stem the tide of trouble in the assisted housing portfolio. I am optimistic that given the 
resources they will. There are added ingredients needed, however, and they are time 
and will. Even with the resources, it will take time to repair the real estate. We need 
to plan on two to three years from start to finish on repairing a property. And we need 
the will to stay the course. Because of the long time frames and the extent of the 
resources needed, there must be a partnership and a commitment among the 
legislative, the executive, the owners, and the residents of these properties to improve 
these properties and maintain them as decent affordable housing. 

If the resources and the commitment are not forthcoming, the inventory will 
continue to deteriorate. In five years, my successor will be here before you again 
answering the same questions and looking at the same pictures. Only then, the 
inventory will be five years older and a larger portion of the properties will be as 
distressed as the ones we saw today. We have to take a stand and it must be now. 



99 

Mr. Peterson. Thank you, Mr. Retsinas. We are going to have 
to adjourn here while this joint session takes place, so we would 
request that you would stay around so that we can ask questions 
because it will be about 45 minutes, but — maybe you could think 
about this. 

I tell you, the more I hear this, I really question, I mean I under- 
stand what you are getting at, but I have a real question of wheth- 
er we should even continue this program. I have to tell you that 
even if we gave you everything that you asked for, I am not so sure 
that this whole concept isn't fatally flawed because we get sucked 
into this and we can't get out. And so one thing I would like to 
know that I haven't had time to track is whether you are now 
starting any new projects in this area. In other words, I know you 
are not building anything new, but are you putting money into a 
troubled project and getting them hooked into this system that 
wasn't there before. Could you provide us with that information. 

Mr. Retsinas. I would like to address both questions. 

Mr. Peterson. We will recess here for about 45 minutes or how- 
ever long it takes, and then we will resume questions when we get 
back. 

[Recess taken.] 

Mr. Peterson. I call the subcommittee back to order. My col- 
leagues will be here shortly. 

Mr. Retsinas, I was listening to your plan, and I guess I have 
some questions about whether this particular program can be 
salvaged. Are you now committing any new project-based Section 
8 assistance to projects that don't have them at the present time? 
Is that happening or is it only being used to salvage existing situa- 
tions and address problems? 

Mr. Retsd^as. Let me answer that question as specificallv as I 
understand it, Mr. Chairman, and I would be happy to elaborate 
as you would like. 

On the narrow point of are we authorizing or allocating new Sec- 
tion 8 project-based units with one exception, generally, the answer 
is no. 

The exception is a new initiative authorized by the Congress last 
year that allows us, in cases where we can find pension fund inves- 
tors who, as I am sure you know, are particularly conscious of their 
fiduciary responsibility, in those cases we have the authority to al- 
locate new Section 8 project-based assistance. As a matter of fact, 
we will be announcing those initial awards within the next 30 days 
or so. 

Mr. Peterson. Pension funds would own these projects? 

Mr. Retsinas. Pension funds would be the investors. They would 
generally work through intermediates. 

In some cases, they might be housing finance agencies. In some 
cases, they might be community-based nonprofits. In one of the 
cases they will be working with the government-sponsored enter- 
prises, Fannie Mae and perhaps Freddie Mac, but they would be 
the investors in these projects. It is a way of getting more resources 
into affordable housing. 

Mr. Peterson. How big of an equity position would they have to 
take? 

Mr. Retsinas. The pension funds would be debt investors. 



100 

Mr, Peterson. Where would the equity come from? 

Mr. Retsinas. Again, they would be using local intermediates. 
They would be working with local sponsors. For example, the AFL- 
CIO is a major pension fund investor. They would be working with 
sponsors in various communities throughout 

Mr. Peterson. Would they be nonprofits? 

Mr. Retsinas. In many cases, yes. 

Mr. Peterson. Would they be private? 

Mr. Retsinas. They could be. Generally speaking, the proposals 
we have seen tend to be favored or biased toward community-based 
nonprofits, which I think is healthy. 

Mr. Peterson. Are these going to be any better managers than 
what we have seen under the existing situation? 

Mr. Retsinas. I believe so. 

Mr. Peterson. Why? 

Mr. Retsinas. We believe that these particular investors of pen- 
sion funds have a special responsibility to ensure the adequacy of 
the assets that they own. 

Mr. Peterson. Are you insuring these? 

Mr. Retsinas. In some cases, yes, but in most cases, no. 

Mr. Peterson. Well, then if you are insuring them then they are 
going to be too worried about their fiduciary 

Mr. Retsinas. In almost every case we will not be insuring. The 
insured will be a small minority. This is essentially a noninsured 
program. 

Mr. Peterson. Why wouldn't you insure? 

Mr. Retsinas. In some cases we may be working with a local 
housing finance agency where we have entered into a risk-sharing 
program. But they will be very much a small minority. 

Mr. Peterson. Maybe we could have this discussion in my office. 
That might be constructive. 

One of the things you asked for was more financial assistance 
that you could put into these units to try to, apparently, to upgrade 
the units and do repairs. At the present time, do you nave any ad- 
ditional authority that you have been able to acquire that you have 
been utilizing to shore up some of these units or not? 

Mr. Retsinas. No. In this particular case, we have used the au- 
thority we have. Some disbursements, of course, have not been 
made because they track the actual repairs. But, no, we have run 
out of authority. The demand far exceeds the supply of funds that 
are available. 

Mr. Peterson. But there has been some authority which you 
have used in some cases in the last 

Mr. Retsinas. There has been a small program called the Flexi- 
ble Subsidy Program as one example. 

Mr. Peterson. How many dollars is that? 

Mr. Retsinas. I think last year was $111 million. 

Mr. Peterson. And then you go into these projects that are hav- 
ing trouble and you give them some additional 

Mr. Retsinas. We give them assistance often in the form of a 
subordinated mortgage that would allow them to make the nec- 
essary repairs. 

Mr. Peterson. How do you determine where to put this money 
if you don't even — we have had testimony that we don't have basic 



101 

information about these projects. Is this for particular units you 
have identified? 

Mr. Retsinas. If we had enough money what I would like to do 
is a better inspection system. Right now, we do it through a com- 
petitive process we have something called a notice of fund avail- 
ability that says these funds are available. On the basis of need 
and ability of the sponsors to use the funds we award the funds. 

Mr. Peterson. And they have to make repairs if they get these 
flexible funds? 

Mr. Retsinas. Absolutely. Absolutely. That is an absolute re- 
quirement, Mr. Chairman. 

Mr. Peterson. Do you make sure they do that? 

Mr. Retsinas. Oh, sure. We check as part of the certification of 
their expenditures, yes. 

Mr. I^TERSON. Do you — ^have you checked on this either 

Mr. Greer. We have not done any audits of the flexible subsidy 
program in quite some time. The last one was in 1988. 

Ms. England-Joseph. The question that you might want to ask 
is how the owner pays back that flexible subsidy. How does that 
owner pay it back? It is a loan versus a grant? I am not really sure 
of what you are talking about, Nic, how much of the $120 million 
is grant versus loans. 

Mr. Retsinas. It is all in the form of loans — if I may. 

Mr. Peterson. Yes. That is what I wanted to understand. 

Mr. Retsinas. I wanted to follow protocol, Mr. Chairman, if that 
is fine. 

Mr. Peterson. It won't bother me. 

Mr. Retsinas. They are all in the form of a subordinated note. 
Some of the terms are so — and I will use technical jargon, if I 
may — sofl. That is to say, the terms are such that an outside ob- 
server may say it is a grant because there would effectively over 
time be a low likelihood that there was cash-flow to repay it. 

But it all has some debt relationship through some kind of a re- 
sidual receipt note or some kind of note that secures it. Though it 
is — in the more troubled projects the likelihood that that payment 
would be accelerated and would be early is not high. 

Mr. Peterson. Now if I understand part of what you are saying 
here is we might have a situation and it could be due to the tax 
law change. We may have examples of a property that has got a 
rent that is, say, twice or maybe IV2 times what it is in that area 
and it is in a troubled situation. 

And so what you are saying to us is that you, in order to fix this, 
we were going to make available some additional money, and we 
are going to go in and even raise the rent beyond that. Is that what 
I heard you say? 

Mr. Retsinas. What you heard me say is that I can envision sit- 
uations — although they are a minority — where the rents need to be 
increased. 

Mr. Peterson. If they are double than what they are. 

Mr. Retsinas. Not necessarily if they are double the local market 
rents but there are situations where the project rent exceeds the 
market rent. If there is a commitment to provide necessary social 
services in the absence of a capital assistance program, for exam- 



102 

pie, or a more flexible subsidy program we do not have a more effi- 
cient way of making those changes. 

If I could elaborate with some examples. 

Mr. Peterson. Go ahead. 

Mr. RETSDSfAS. Thank you, Mr. Chairman. 

There are situations where it would be cheaper for the govern- 
ment to make a front-end investment, a capital investment; but be- 
cause there are no funds available, often one has to increase the 
rents. In doing so, you also incur a financing cost in addition to the 
actual costs. 'Hiat is why we are calling for, at least your consider- 
ation of, a more flexible capital program that would allow us to 
make more surgical forms of assistance. 

Mr. Peterson. Why are we doing this? Because we have insured 
the mortgage and if we don't bail this property out, we are going 
to end up stuck with the mortgage? Is tnat why we are doing this? 
Or are we doing this to protect the tenants? Why are we doing 
this? 

Mr. Retsinas. A little bit of both. Each situation is different. In 
some cases, we have contractual responsibilities. In other cases, we 
have a stewardship over the properties. We need to ensure, as I 
pointed out in my testimony, that residents in taxpayer-assisted 
developments have safe, decent, and sound living conditions. 

Mr. Peterson. I understand that, but you are not doing that 
now. 

Mr. Retsinas. We are doing a little bit, but we would like to do 
a lot more. 

Mr. Peterson. I understand, but the reality is that we are not 
doing it. On a lot of this property we are not providing good, safe, 
affordable housing. 

Mr. Retsinas. In many of these properties, we are not. That is 
why we have asked for the additional tools. 

Mr. Peterson. I understand, but I think it is very unlikely, 
given the track record of this progpram, that you are going to get 
the Congress to give you more money to do this — either in this re- 
quest that you have for more people or additional rent subsidies, 
whatever it might be. I think it is very unlikely that the money is 
going to be there. 

I mean, the whole focus of this Congress is to cut the deficit, not 
to find more ways to spend money, you know. So how realistic is 
this? I understand what you are saying, but I have some questions 
about whether it is going to happen. 

And, second, I have some real questions about whether we ought 
to be in this business because we are not doing a very good job and 
we end up getting stuck with this and basically put in a catch-22 
because we are concerned about the tenants. And would we not be 
better off to bite the bullet, if you will, and just terminate this and 
switch the subsidy to a tenant-based subsidy and let the market 
take its course? Have you looked at that? 

Mr. Retsinas. Yes. 

Mr. Peterson. What do you think about that option? 

Mr. Retsinas. In terms of your general comment about how real- 
istic and plausible additional resources are, you are a better judge 
of that. I can't disagpree with your assessment. I just wanted to give 
you an honest assessment that this is the job we want to do. This 



103 

is what it will cost. I owed that to you, and that is what I gave 
you. 

Mr. Peterson. I appreciate that. 

Mr. Retsestas. Thank you. 

On the matter of the tenant based, let me give you an initiative 
we took last year, and let me be candid about the reservations that 
were expressed about that initiative. I think it relates exactly to 
your larger question. What is the continuing responsibility of the 
department and the government to provide affordable housing and 
is this the best way to do it? 

Last year when I began, 13 months ago, one of the immediate 
problems that was clear and visible to me were the restrictions in 
the disposition of housing that was owned by the Department — 
that is, housing that had passed the pale, housing that we had 
foreclosed and taken over. 

It was also clear to me that in those situations there are opportu- 
nities for us not to repeat the mistakes of the past, not continue 
to fund housing in inappropriate conditions; not continue to fund 
high concentrations of poor people. 

We proposed some substantial relief from those restrictions, re- 
lief that would allow us to convert those project-based subsidies 
into tenant-based subsidies. 

As our legislative initiative made its way through the Congress, 
time and again we were told to reduce that discretion. The argu- 
ments were to continue the subsidies where we wanted to argue in 
some situations it is more efficient to turn to vouchers. 

On the larger question, if we were to design the program today, 
if we had the one thing that we haven't asked you for: the author- 
ity to turn the clock back and redesign the programs, we wouldn't 
design yesterday's programs knowing what we know today. We 
would design programs that would, in part, be production programs 
because there are some housing markets where the needs are so 
great, the gaps are so deep, that with any voucher program, there 
would be no place for people to live. 

In other housing markets where the need for new units is not so 
great vouchers afford that kind of flexibility. 

We certainly would not have designed a program that exclusively 
relied on tax benefits, benefits that were taken away over time. 

The difficulty, Mr. Chairman, is not the design of new programs. 
I think the harder question is what do we do with the stock we 
have now and the people there. If we could start with a blank slate, 
then I think all options ought to be open. 

The reality is we have all inherited the conditions we have now, 
and how we deal with that stock and those residents and that obli- 
gation is a real challenge. 

Mr. Peterson. Do we know how much of this troubled housing 
has government-^aranteed loans behind it and what the potential 
exposure is that if we just cut this off and all of this defaulted and 
we ended up with all this property back? 

Ms. Gaffney. About $7 billion. 

Mr. Retsinas. We have $45 billion of insurance in force right 
now. 

Mr. Peterson. Are all these troubled? 

Ms. England-Joseph. Not all of those are subsidized. 



104 

Mr. Retsinas. No. 

Mr. Peterson. That is what I am getting at. Do we know that 
number? 

Ms. England-Joseph. The percentage of the $45 bilhon that is 
siibsidized? 

Mr. Peterson. Well, that is tied to this project-based assistance 
that are in trouble. 

Ms. Gaffney. Let's try it this way. Of the project-based Section 
8 how many are insured/ 

Mr. Peterson. Right. 

Mr. Retsinas. Forty percent. 

Mr. Peterson. How many of the ones that are insured are trou- 
bled? Do we know that information? 

Mr. Greer. I think, Mr. Chairman, rough estimates would be 
somewhere in the neighborhood of 25 percent, based on the loss re- 
serve figures that were established in the most recent FHA audit. 
So if you took 80 percent, which is the rough equivalent of what 
Nic just said was Section 8— you took 80 percent of the $10 billion 
dollars, you would be somewhere in the ball park I think — $7 or 
$8 billion at risk. 

Mr. Peterson. That would be the hit that we would take if we 
did what we needed to do and that would cause the whole thing 
to collapse and we dealt with it. 

Mr. Greer. That is an estimate. Current loss reserve established 
by the FHA. 

Mr. Retsinas. That is an estimate, of course, which I am not 
going to quibble with. That is the financial cost. There are still 
residents. 

Mr. Peterson. I understand. 

Ms. England-Joseph. The other thing we have to remember, in 
the case of Chicago property that we have talked about earlier, the 
hit has already been taken. The claim has been paid on that note, 
and now it is a HUD-held note. So we are talking about not just 
the estimated $7 billion of the current insurance in force portfolio 
but £m additional percentage of properties that are HUD-held that 
would also be a part of this problem. 

Mr. Peterson. I imagine the other side of this problem is there 
aren't a whole lot of folks just looking to get into this business 
right now because there are no tax credits, there is no profit incen- 
tive to, you know, say take over one of these defunct properties and 
^0 in and rehabilitate it and make it into a workable deal, I imag- 
me. Is that not true? 

Mr. Greer. It is not quite as lucrative as it was back in the late 
1970's and early 1980's, that's correct. 

Ms. England-Joseph. Although hasn't HUD experienced just in 
the property disposition process over the last 6 months some suc- 
cess — a great deal of success in selling off those properties? 

Mr. Retsinas. Well, more, certainly. Certainly, the legislation 
helps. The good efforts of Ms. Dunlap and her colleagues are help- 
ing. As I said, things are getting a little better but not quickly 
enough, and the problem is still too deep. But they are getting bet- 
ter, Judy. 

Mr. Peterson. Do we know who has been buying these prop- 
erties? Does anybody have that information? So — I mean, if things 



105 

have picked up and people are starting to get back into this, do we 
know who these people are and do we know what kind of track 
record they have? Are these people that actually know what they 
are doine or are they more problem folks? 

One of the problems with the tax credit situation — people that 
got in it for tax benefits, they didn't want to be in the housing busi- 
ness necessarily. They weren't any good at it. 

Mr. Retsinas. Right. 

Mr. Peterson. And you know that is part of what we are dealing 
with right now. 

Mr. Retsinas. That is true. 

Mr. Peterson. And so I think we have to be careful that what- 
ever we do that we get people into this business that know what 
they are doing and want to be in this business and are going to 
manage things. 

So if you could get me that information, if we don't have it, I 
would appreciate it. 

Ms. DUNLAP. I think I can give you a general overview. 

First of all, to the extent that we are seeing a change in owner- 
ship. 

Judy just mentioned property disposition. Let's deal with that 
first. In property disposition, which are the properties we have 
taken into inventory because they were so bad that there was a 
need to take it in either from a financial standpoint or a physical 
standpoint and then we have resold, most of those we are reselling, 
to the extent we can resell them without restrictions, we are selling 
without insurance. 

But those with restrictions and those Section 8's that are now ac- 
quired under the property disposition law, are being purchased by 
for-profit owners who are interested in cash-flow. There is no ques- 
tion that they are counting on that Section 8 as a portion of that 
structure, and that is what the law requires. 

Mr. Peterson. And this is 

Ms. Dunlap. That is project based, which is what the property 
disposition law requires. To the extent we can sell them without re- 
strictions and/or Section 8, in many cases they are being bought by 
small local investors. 

Mr. Peterson. I guess that was my question. If the project base 
didn't exist, if that wasn't there and you tried to sell them, you 
would have a difficult time. 

Ms. Dunlap. Right. If project based doesn't exist, we have two 
groups of ownership that we are seeing. One is for-profit owners 
who are interested in owning unrestricted multifamily housing, 
and the second are local nonprofits and resident groups, who are 
definitely the No. 1 growing group of interested parties in our 
stock — not just the stock we are disposing of but also stock that is 
transferring from one ownership entity to another. 

We have a lot of local governments that are taking on the re- 
sponsibility for playing a major role in that new ownership struc- 
ture. Some of them count on the Section 8 as part of that; some 
of them don't. 

Mr. Peterson. Mr. Retsinas, you proposed some changes in the 
laws to make sanctions more effective and so forth and so on. Why 



106 

haven't you been more aggressive in using your existing sanctions 
up to this point? 

I am somewhat skeptical when I hear that you have never — 
there has never been civil money penalties assessed against an in- 
vestor and owner. Even if we give you more authority — ^you moved 
against the lending institutions, apparently, but I guess, if you 
have never moved against an owner or a manager, what good is it 
going to do? 

Mr. Retsinas. We have moved against an owner, Mr. Chairman. 

Mr. PETERSON. With civil money penalties? 

Mr. Retsinas. Yes, we have. 

Mr. Peterson. How recent and how often? 

Mr. Retsinas. We did it with a major owner. 

Ms. DuNLAP. We are applying it today as frequently as we have 
cases that we feel are enforceable. We have collected in the North- 
east on two major ownership structures since we began using the 
tool last fall, one for $500,000 and one for $1 million. 

Mr. Peterson. Was that — the first time was last fall? 

Ms. DuNLAP. The first time when we started using it was when 
we arrived, basically, and were able to document cases that were 
enforceable. We are considering using it more actively as we move 
forward. It is a tool that, prior to our arrival, was not being heavily 
used by the department. 

Mr. Peterson. Ms. Gaffney, do you agree with what she said? 

Ms. Gaffney. I think when we are talking about civil money 
penalties we are talking about a specific law and a specific tj^e of 
administrative hearing, and I am not sure. We will nave to work 
this out. 

But in Mr. Retsinas' statement, for instance, it seems to me that 
some of the information under civil money penalties is actually 
double damages through settlements and judgments, which is not 
the same thing. But to my knowledge — and my knowledge is based 
on talking with the lead enforcement attorney in HUD — there have 
been no civil money actions against owners as such, but we are 
going to have to, obviously, work this out. 

Mr. Peterson. Well, you do that. 

This issue of the Section 8 having a higher rent than the com- 
parable rent, that is against the law, right? 

Mr. Retsinas. Section 8 rent is — excuse me, I am not — sorry. 

Mr. Peterson. It is not supposed to be significantly higher than 
the comparable rent in that area. Is that the law? 

Mr. Retsinas. That is a law except that we also have contracts 
that have to be honored. Over time, the Department has tried to 
increase its discretion to lower rents, and there often have been sit- 
uations where that has not been possible. 

Mr. Peterson. So you ignore the law. 

Mr. Retsinas. No, we don't ignore the law. As a matter of fact, 
we are in the process now of 

Mr. Peterson. But, apparently, you were supposed to be doing 
comparability studies and that in 1989 you were directed to issue 
regulations, and they still aren't out. 

Mr. Retsinas. Yes. 

Mr. Peterson. Well, you weren't, but HUD was. 

Mr. Retsinas. HUD was, right. 



107 

Mr. Peterson. They are still not out. You have been there a 
year. 

Mr. Retsinas. Thirteen months. 

Mr. Peterson. And we still don't have them. 

Mr. Retsinas. Well, rather than do comparability studies what's 
important is bringing the rents under control. And what we have 
come up 

Mr. Peterson. Have you reduced the rent for any of these 
projects. 

Mr. Retsinas. Yes, we have. 

Mr. Peterson. How many? 

Mr. Retsinas. I don't know. 

Mr. Peterson. Can you get me the information? 

Mr. Retsinas. Absolutely, Mr. Chairman. I would be happy to. 
Absolutely, Mr. Chairman. 

[The information follows:] 

HUD provided a list of 321 projects in which contract rents had been reduced by 
refinancing the HUD-insured mortgage, rather than as a result of a comparability 
study. 

Mr. Peterson. Have you — are you aware of them reducing rents? 

Mr. Greer. I am not personally aware of a situation. That 
doesn't mean that they haven't happened. We are aware that com- 
parability studies are not being done because the regulations are 
still not out. 

Ms. Gaffney. Could we pursue that point? Because I truly do 
not know where they stand. 

Mr. Retsinas. Rent reductions, Helen. 

Ms. Gaffney. Not in the rent reductions but in the regulations. 

Ms. Dunlap. We began meetings with representatives of the IG's 
office relating to this matter last fall. We agreed to an alternate 
plan which we feel will allow us to reduce rents in a fashion that 
will not require extensive staffing to do comparability studies, 
which would then be tested in court. That plan has been to change 
the method by which we increase rents. Rents would be based on 
the operating expenses of those properties, rather than the market- 
place. This will allow us to be sure we are supporting the rent the 
project needs but not more than the project needs. 

Mr. Peterson. You are arguing then that we have got situations 
where we are paying more rent than we should and we have to put 
more money in to bail them out. And I have to tell you in your pub- 
lic housing program where, apparently, they have to bring in a 
budget in order to get funding — I don't know what they call that 
program, but they have got these projects that are owned evidently 
by HUD and you give them an operating budget. 

Mr. Retsinas. I am not sure of the name. 

Mr. F*ETERS0N. I am not impressed with the way that works. And 
if this is going to be like that — I have seen when HUD gets in- 
volved with setting budgets what happens, and I am not particu- 
larly impressed. We are probably going to have to have a discus- 
sion in my office some day to get at some of this stuff. 

There is one other issue I wanted to pursue and then Mr. Zeliff 
can ask some questions. This discussion about having enough staff 
and developing the data systems and all of that. I mean, I under- 
stsmd that, but, frankly, from what I have — in talking to people I 



108 

have some real questions about whether you have people in your 
Department that actuallv know what is going on with these prop- 
erties and how they work. And I am concerned about that. And do 
you have some 

Mr. Retsinas. Me, too. 

Mr. Peterson [continuing]. Some plan to bring people in to get 
rid of— I mean, I have to tell you the more I look at all these dif- 
ferent government programs, that it almost seems like the things 
that we set up in the government to deal with the problem are now 
the problem, and the biggest trouble we have is trying to figure out 
how to get rid of this stuff that is in place that isn't working so 
we can get something in place that does work. 

And I would imagine what the situation is — you have got some 
people in there that are bureaucrats that shuffle paper but that 
really don't know how the real world works in housing and the tax 
laws and all the other problems that are involved. So how do you 
get those people out and get people in if we are not going to give 
you any more FTEs? How are you going to do that? 

Mr. Retsinas. Well, let me answer that in two ways because 
your points are points that concern me greatly for the same reason 
they concern you. I am not sure I would use the same words, but 
the points concern me. 

First, one of the ways we do that, I think, is by changing the way 
we deliver our services and products. And let me give you examples 
that relate specifically to your State. 

As we look at the origination of new mortgage insurance, it is im- 
portant for me to have a sense that the originators of that mort- 
gage insurance do understand local situations and the need for ap- 
propriate underwriting. So, earlier this year, we signed what we 
call risk-sharing agreements with 27 States and 6 localities aroimd 
the country that would underwrite the mortgage insurance. 

Last week we initiated the first project in the country to a risk- 
sharing program. That was in the State of New Hampshire, Con- 
gressman Zeliff. The New Hampshire Housing Finance Agency, 
which is an excellent agency with an outstanding executive direc- 
tor, had the first project in the country. 

We have signed an agreement with the State of Minnesota to 
also be our underwriter so that, over time, we will be able to 
change. 

Mr. Peterson. Do they share the risk? 

Mr. Retsinas. Yes, 50 percent of the risk. 

Mr. Peterson. What do they get out of this? 

Mr. Retsinas. One, they get affordable housing for their commu- 
nities. Two, they also get a share of premiums. It is a true risk- 
sharing partnership that we are absolutely excited about. I think 
that is going to be the future. 

Mr. Peterson. So you are going to work with housing finance 
agencies and turn over 

Mr. Retsinas. Having been a former director of a housing fi- 
nance agency I have great confidence 

Mr. Peterson. I have much more confidence in them than I do 
in HUD. 

Mr. Retsinas. I have a lot of confidence in housing finance agen- 
cies, and I have confidence in what we are trying to do. 



109 

Second, the point in terms of staff is well taken. This is a De- 
partment that not only has had a reduction of staff over in the last 
decade but, perhaps more significantly, there has been a freeze on 
hires. So the average term of employment of a HUD field office em- 
ployee is over 20 vears. 

I would not call them paper shufflers. I think they are good, hon- 
est, hard-working individuals. In some cases they are certainly 
overwhelmed with the work before them. Further, over the same 
time there has been a continual rejection of money allocated for 
training and other staff upgrading. 

We are paying the price for that today. That is why we are 
changing the defivery system, and that is why and I repeat what 
you heard from the GAO and the Inspector General — if we want to 
deal with this problem, we need people and we need trained people 
to deal with it. 

Ms. England-Joseph. I would like to add something to what Nic 
has just said. 

The issue of resources and capacity I think is an interesting one 
because, on the one hand, we have said in our statement that HUD 
needs greater capacity, needs the kind of skilled employees in order 
to carry out their financial responsibilities. 

But I really think it goes beyond that to an issue of what are the 
priorities and what are the most important actions that we think 
we can do given the resources that we have. 

Because of the fiscal environment we are in today we have got 
to recognize that things are not going to change that quickly. There 
is a culture at HUD tnat for years has said we don't go after own- 
ers; we don't enforce; we don't take actions in terms of onsite in- 
spections; we don't play the role that HUD as a property asset 
owner as well as manager has to play in making these properties 
work well. 

So there is an aspect of this that I think is still within the capac- 
ity of HUD today if those priorities were clearly stated and if ac- 
tions were rewarded rather than discouraged when employees come 
forward with evidence that would indicate something has to hap- 
pen with the particular property or with a particular owner. 

So while I agree that I think HUD needs resources, training, and 
systems, all of those things, they have the ability today to do cer- 
tain things, and it is a matter of trying to figure out how you go 
after your worst rather than managing perhaps the whole 100 per- 
cent. Maybe you go after your — I use the 80-20 rule. You go after 
the 20 percentage that are the worst because that is the part that 
is going to cost you more money and create more problems because 
the 80 percent may be fine. Go after the problems that you know 
are going to be the most difficult and address them first. 

Mr. Fricke. If I could just add, Mr. Chairman, to what Judy just 
said and that goes back to a point that Nic raised earlier and that 
was flexibility. 

I think we would wholeheartedly support the Department gain- 
ing added flexibility in terms of using vouchers or certificates in in- 
stances where properties really no longer make sense to preserve. 
I don't think there would be much argument today that vouchers 
and certificates are the most cost efficient way to house lower in- 
come people. 



110 

Nevertheless, there clearly are properties out there where vouch- 
ers and certificates won't work because the community around 
them — there just isn't the available housing to house the popu- 
lations that are currently being housed in the assisted housing — 
in the assisted property. 

But, again, I think the flexibility that Nic spoke of earlier is 
something we would wholeheartedly support. 

Mr. Peterson. Well, both of you have — Ms. Joseph, you said 
they use their enforcement tools sparingly and inconsistently. And, 
Ms. Gaffney, you said there is a culture at HUD that they won't 
use these tools. If I asked you to grade HUD on an A to F basis 
on how effective they have been using their sanctions at this point, 
what kind of grade would you give HUD? 

Ms. England- Joseph. Given the conditions that we saw — and it 
was easy for us to identify the 10 — and granted there are good 
properties, so I don't want to make it sound like the entire program 
is a problem, but knowing that we found so easily deplorable condi- 
tions I would give them an F on the conditions of those properties 
and actions taken on those properties. 

I probably — let me just say one more thing. I would give them 
a C or a C plus in the fact that they do recognize they have a prob- 
lem and they are trying to figure out how to deal with that prob- 
lem. But there is a long way to go before that goes much beyond 
aC. 

Ms. Gaffney. F. 

Mr. Peterson. F. You give them a C plus for trying? 

Ms. Gaffney. No, I want to be very straightforward about this. 
This team headed by Nic Retsinas and Helen Dunlap is extraor- 
dinarilv committed and talented. And, in IV2 years, I guess it is 
now, they have come up with plans to address problems that ex- 
ceed the imagination. The problem with this whole 

Mr. Peterson. Nothing has happened. 

Ms. Gaffney. Well — but if we stay with it for years, it will hap- 
pen. The trouble is that this team has how long to go, Nic? 

Mr. Retsinas. This administration and then the next one if the 
President is reelected; 6 or 7 more years. 

Ms. Gaffney, But you have read what Senator Glenn has said 
about turnover of political appointees. So the team will change, and 
these efforts are multiyear, and I think thev need to proceed. 
Someone has to have the energy to go forward with these things. 

The trouble is, when a new team comes in, what happens to all 
of that? But, apart from that, what I am trying to say is it is not 
good enough to say we have long-term plans. We cannot see the 
kinds of conditions that GAO has shown us and say not to worry — 
in 5 years we will have systems, we will have staff, we will have 
mechanisms, we will have legislation that will enable us to address 
that stuff. 

Mr. Peterson. I am taking too much time. 

There is one more thing I want to ask you because I understand 
you may have to leave, but I have been having trouble getting fi- 
nancial information on these projects, on these 40 percent of the 
properties that are in trouble. Being a CPA and having done a lot 
of these deals, I would like to look at some of this information and 
judge for myself as to what is going on here. Are you doing an eco- 



Ill 

nomic analysis of these troubled projects, the ones that haven't 
been foreclosed? 

Mr. Retsinas. Yes. 

Mr. Peterson. Do you have that information available? Can you 
get that to me? 

Mr. Retsinas. We do. And we will share whatever we can share. 
There are some things because of a proprietary nature we may not 
be able to, but whatever we can share, our files are open, and we 
would be happy to supply that to you. 

[The information follows:] 



112 



HUD submitted a portion of a HUD Handbook 4350.1 
"Multifamily Asset Management and Project Servicing", Chapter 11, 
Workouts for HUD-Held Projects. The Chapter is guidance to HUD 
field staff on resolving problems in projects assigned to the 
Department, with the objective of reinstating the mortgage. 

HUD also submitted an analysis of 6000 South Indiana Avenue, 
Chicago, Illinois on October 5, 1994. 

nxunsas OTMHBi OTl-trmA 

f6flO fl. mniMn- 



Oq vabruary 14, 1989. the Chicago Of£ioe r^connMadttd 
foreolOBuro on UUe nortgaga of £000 B. Indioaa. On Msy 2^, 
BoadUauarf ro eenu cba 21 aay Cor«cXO0ur« letter Co tbo OVBOT/ 
iffaich had tbe autcmatlc etCect of proventing Ch« looAl Field 
Office from pursuing Curthu; disoussions and n«ge>tiatioiu with 
cbe owner. At cUaC time, au toraclosuree were bandied tnrougu 
Readqviazters . 

Tbere were constant coipl&iace Crcn teoance. Leaal Aid was 
SLCtivAly involved with the tenants. Aie pirojoct «aa In dire need 
of res^alrgi. The owner was very uncoopdi^&tive and constantly 
threatened Ht/D «taff with legal action for acteopting to renady 
the prObleBiB at the project. In late 1991, Haadijaartere returned 
tha foreoloau£« reccSroeadatlon to Chicago WbAA lo<:aJ. offices were 
delegated authority to now handle their own Coreolosores . 

An occupancy review and ylnrvioal Inepeoclon ccspleted in 
July 1991 revealed ecntiAued taajor problesta with the project's 
physical coodltioQ. Tenant cpniplalntB were costiaued to aount. 
In AuguflC 1^1 1 an atteept at cooiplating a oanageoMnt review waa 
made. Bowever, the owner would not aaake his financlail records 
available to field office ecaff repreaantfttivefl . Meetings were 
haid with tenants concerning harasament Ir cha owner. 8t«CC 
continued to attenct to deal with Dr. GranaA, the ovner/nanager, 
but were unsucoeasful . The field office sent another 21 day 
letter to the owner on. February is, 1992, Oq Februasy 19 1 tna 
field office recoovonOed that the Coreolosare be initiated and 
that EUD pursue Mortgages Zn Possession. Oa April 1, regianal 
counsel rejected the racflmwendation for foreclosure, xt was felt 
tha^ insufficient atteioptB were node to r«Sdlve the prablens, 
while Raadqu&zters was pursuing tbs forecloeure. 

On April 21, 1993, a letter was seat to the owner 
withdrawing the Coi^olosure. The field office also provided bia 
vlth the nanee oC three reputable nanagenent oon^kanies. a 
deadline of May 11 was given to the owner to obtain outelda. 
protcBslonal nanagesaent. we cocipleted a ccroprehenalve maxLagaaent 
review on Kay la. There, of course, were KAjor probieim. we 
gave the owner 30 days to present a curative plan. 

On June 1, 1992, Che field office received and forwarded a 
copy of a sumiona filed by the I<egal Aid, to counsel. Oa JUne 36 
anocher 21 day forecloaure letter w»0 sent to Dr. Graham. In the 
mean tine the owner submitted a ouxrativa plan, on cnily i7ch the 
field oCfia« sent n letter to the owner stating that his plan was 
unacceptable and that HDD waa proosading with tha foreeloaure. 
Ttw owner and his attocney net with the field of floe on July as 



113 



ko dlaovisa ttM IvMUSfl. X dAolalon t.o continue cbe Corocloaturo 
would be DAda ci£t«r « kite visit on Auouflt 14. Qa sopceaAMr 2 U)« 
field of tloa withdrew th<i CorvoloaurelnitiAtlv*. Tbo ownac tuid 
agraad to outalda muwgeawab And to rellcqulsb nil conccol ovair 
t:n« pxojact. 

alnca that tlno, loan manasaaeat: ataff has workod wltb CM 
nasager in dav<eloplag and ioatltutlng a ccnopreheaalve plaa to 
ratum tha pxo jtc t to a safa, aanitary &cd oabltabla oooditlea. 
8s>«olflcally( BOD haa approvad a thraa yaar Nanagaoent 
Insroveaent aood Oparating (HXO) Plan t^ch would provida for 
eubacanclaL esvital l^t^HrovettantB ($910,002). funded through a 
c«ab iiicr««>.0e. fbe ovmor bad not bad a ra&c iDcreaQo foe 9 yeaxB 
due to hie falluto to suhnit audited Cinanclal atatestenta. Once 
tha elnemolal BtataiceiitB vara cooaivad. tha rent inoraaae was 
processed and approvad. The additional fufida gecarated by tha 
rent inoreaaa are bainj placad into a repair eaorov. 
AddltlonalXy, tha manager autedttad a Drug SLlmlnatioa grant 
«.ppllcatioa aod w»a succasiful in obtaining and another $17S,000 
to In^prove tha eeourlty ayatem at the twildinsr. 

Repairs are now beln^r nida. The bulldinf la saoure. Tha 
hallways aro clean (need to be paintad in tha woret way, but that 
will be addraaaad ahortly) . Saw viado«ai are oi?dered and will be 
Ina tailed by the end ot tbe year In cblA higa rise bolldtng. 
Kitchen cabiceta In all apartmenta are bein^ inatalled. Haw 
bxMijroon aiiOca and bathroom repolra ace being mde. Naw tllo la 
being laid throughout. Tenant neeting spaod is being developed 
on tha ground Cloor. Tba ownar for all prtotlcal purposes ia not 
Involved La the project end Dot taking any distribution troa tha 
project, tba Legal Md haa dropped HOD £raa thalr law suit 
though It continues to puraue civil actiona agalnafc the owner. 

Questions concemlng ovmer contributions ware raised by GAO 
when tha casa was discussed the case with field offiaa Rta£C. 
The owner did not coae up witb additional funds. Be is no longer 
oontrolling the project funds and is uo longer collaotiog a 
nanageaienfc fee. His wife la no loader e^l^«d by clie peojeobf 
00 toare was aooa financial amsidaratloa by the owner. Eowevar, 
it he bad not ooncadad, HOD would have ocntlnued with tna 
forecloflura. The project is still dello<^eat and a vorhout is 
not in place, but is being negotiated. Tha field office is 
haeltant to dlvart funds frocD the repair prograat at least until 
tha major repair* are oos^lebedi 

After the repairs are coQipleted, the field office will 
x^aeseas the r«st levala at tbe projeoti If tae rents are too 
high, tbey will be reduced. 



114 

Mr. Retsinas, We are doing — the term we use is workouts on 
troubled projects. The first step on that is collecting information. 
I mentioned the contract now where, finally, for the first time, we 
are collecting financial statements on all the projects. These were 
not current until we initiated the project. 

Mr. Peterson. You are collecting that at the present time? 

Mr. Retsinas. Yes. 

Mr. Peterson. You don't have that? 

Mr. Retsinas. We collected 65 percent of it literally at the end 
of last year. 

Mr. Peterson. If you are in a troubled status or some kind of 
problem you can get those financial statements. They can't with- 
hold them from you. 

Mr. Retsinas. No, they cannot. 

Mr. Peterson. So that information will be available to you. Do 
you agree with that? 

Ms. Gaffney. The problem has not been getting the financial 
statements. It is doing anything with them, which is what that con- 
tract is intended to start addressing. 

Mr. Peterson. To some extent, we are in a catch-22. The 
projects have got more repairs than we've got money to allocate. 
The rents are already too high. We have people that aren't taking 
care of things and are destroying the property. You got all those 
other things mixed in here. 

So what do you do? That is my question. I mean, my conclusion 
is that maybe we ought not to be in this business if we can't do 
a better job than we have been doing. 

Mr. Retsinas. Mr. Chairman, I hate to keep focusing on the spe- 
cific, but allow me one more chance because I don't get a chance 
that often for people in the Congress to listen to the extent of this 
problem. Sometimes it is a voice in the wilderness. 

We have legislation now winding its way through the Congress 
as it relates to the Section 8 program. In that legislative initiative 
we have asked for the discretion to say no to contract renewals in 
certain cases. I am not sure 

Mr. Peterson. But you have not gotten through because I just 
came back on the subway with a member of the Appropriations 
Committee of VA-HUD who had seen the piece last night on the 
news, and they don't understand this. I mean, I don't know what 
is going on, but maybe this hearing will help. 

Ms. Gaffney. What do they not understand, Mr. Chairman? 

Mr. Peterson. Well, I don't know. They had an understanding 
of what had been proposed and what was being talked about 
and 

Mr. Retsinas. Well, that's in the authorizing committees, of 
course. 

Mr. Peterson. I am just saying I think there is a problem in 
that we have not been able to get the authorizing and appropria- 
tion committees to really focus on this and understand what is hap- 
pening. They just keep putting more money into this program be- 
cause they don't know what else to do. That is what it seems like 
to me. 



115 

I will say this, that I have had some discussions with members 
of both committees, and they are starting to pay attention, for 
whatever reason. 

Mr, Retsinas. I appreciate your taking that interest. 

Mr. Peterson. I think we need all three committees to sit down 
and start figuring out what we are going to do about this problem 
so we don't keep wasting money. 

Mr. Retsinas. I agree absolutely. That is always better than to 
ruminate about the past, to point fingers, and to talk about what 
needs to be done. The more information we have about what op- 
tions are available and what the cost of those options are, I think 
we would design more informed policies. 

Mr. Peterson. Mr. Zeliff, I know you are just chomping at the 
bit. 

Mr. Zeliff. Am I in the 5-minute rule? 

Mr. Peterson. No, we are here all day. So however long 

Mr. Zeliff. Since we are both cosponsors and signed a petition 
to start the petition on A to Z, this is the kind of stuff that I 
think 

Mr. Peterson. This is P to Z here today. 

Mr. Zeliff [continuing]. That is designed really to try to get at 
some of this. But you have got quite a challenge on your hands, 
and you have been there for 13 months. Some of this — a lot of — 
you inherited — $11.9 billion, if I heard you right. And that is what 
is at risk of the $45 billion total inventory, is that right? 

Mr. Retsinas. That is what I testified. That was the result of the 
audit a year ago when I first joined the administration. We had an 
audit a year later, and the number is $10.3 billion, still much too 
much, by the way. Just to be technically correct, the current num- 
ber at risk is $10.3 billion; $11.9 billion was the number when we 
first joined the administration. 

Mr. Zeliff. You say you made some progress. How would you de- 
scribe what has been the key to your success? 

Mr. Retsinas. I don't think we have had much success at all. 

Ms. Gaffney. We don't necessarily 

Ms, England- Joseph. We wouldn't agree that it is a success, 

Mr. Zeliff. Maybe I can get all three of you to make a comment. 
You want to? 

Mr. Retsinas. First of all, the financial condition is often an indi- 
cator of physical condition. That is why financial statements are 
important. It is not just the money. The money alone would cer- 
tainly guarantee our attention. However, I would agree that we 
have barely sort of touched the surface. 

In many cases, we are putting into action the tools that we have 
talked about today. In other cases, we need more tools. This is a 
problem that has grown over time, and it has to be fixed over time. 
We need to have that understanding and that ongoing commitment 
and realization. 

Ms. Gaffney. Well, with respect to the lost reserves, we have a 
situation where, as I said before, owners are putting in virtually 
no cash equity. The debt is nonrecourse. We can't get at them, and 
they simply can walk. 



116 

This is a situation that is so similar to the savings and loan situ- 
ation where, because of deposit insurance, people were just able to 
take money and go. So 

Mr. Zeliff. Thank you. 

Ms. England-Joseph. The $11 billion down to $10 billion in 
many ways are because of improved data collection and better 
analysis of data, not necessarily a true improvement in the prob- 
lem. So I reallv want to make clear that there isn't a real correla- 
tion between that decrease and real substantial action on the part 
of HUD in improving that portfolio. 

Mr. Retsinas. I must admit. Congressman, even improved data 
collection is at least a modest step. 

Ms. England-Joseph. That is true. 

Mr. Zeliff. But what I got — I will be honest with you. And I 
haven't been here forever, and I don't want to be here forever. 

Mr. Retsinas. Neither do I. 

Mr. Zeliff. I will tell you in the limited time I have been here 
I have never heard so much of a horror story as what you are re- 
sponsible for. How many people help you in this thing? 

Mr. Retsinas. In the whole department? 

Mr. Zeliff. Right. 

Mr. Retsinas. The department has about 13,000 employees. Less 
than half of those are affiliated with housing, though. Half of those 
are associated with our single family mortgage insurance program. 
As you know, last year we insured over 1 million loans with our 
FHA single family insurance program, which I might add turns a 
profit for the government. 

Mr. Zeliff. So what you are asking for — and I guess your prob- 
lems are the staffing, lack of expertise, lack of management con- 
trols, data systems 

Mr. Retsinas. And lack of money. Other than that, I think we 
have the resources we need. 

Mr. Zeliff. Is there a problem with the people that are working 
there? 

Mr. Retsinas. Just what I said. Congressman. I think we have 
good, honest, hard-working Federal Government employees. The 
difficulty is that we haven't had an infusion of new blood over time. 
There have been freezes on new government hiring for all the rea- 
sons that we all understand. We have not been able to bring on 
board people who have entrepreneurial business expertise which is 
why I have turned, for example, to State and local housing finance 
agencies. 

Mr. Zeliff. I appreciate your comment. I am familiar with the 
New Hampshire Housing Authority 

Mr. Retsinas. Outstanding. 

Mr. Zeliff [continuing]. And some of the things that they are 
doing. 

And I guess my — if I had to ask you, then, in a short sentence 
or two, how would you describe your mission now that you have 
been there for 13 months? 

Mr. Retsinas. Our mission is twofold: First, is to correct the 
problems that have occurred over time: fix the problem; and, sec- 
ond, to make a positive contribution to the desperate need that con- 



117 

tinues to exist in this country for affordable housing. These are our 
two primary missions. 

Mr. Zeliff. Do you have — ^have you come up with numbers on 
that need? 

Mr. Retsinas. The need is substantial. It is certainly measured 
different ways. It is measured in terms of people's inability to af- 
ford decent housing. In other cases it is a measure of living condi- 
tions. I refer you to a study completed by the Joint Center for 
Housing Studies at Harvard University, which talked about a gap 
of about 10 million units. 

Mr. Zeliff. Ten million units? 

Mr. Retsinas. I would refer you to that study. I would be happy 
to share a copy with you, Congressman. 

Mr. Zeliff. Just trying to do the arithmetic, of the moneys that 
you have now, I guess what I am trying to get to in terms of look- 
ing at the mission statement, you can accomplish your goal in 
terms of meeting the needs of housing, but not necessarily have 
HUD do the physical management. 

Mr. Retsinas. Absolutely. I think the words I used was "make 
a contribution," not "do." I think we have learned that if the Fed- 
eral Government does it all, it doesn't necessarily get done well. We 
need partnerships. 

Mr. Zeliff. So do your mission statements incorporate you get- 
ting out of the management? 

Mr. Retsinas. Our mission statement incorporates a specific ref- 
erence to partnering. What we need is partners, but we need also 
to be a better partner. We are often too cumbersome to be a good 
partner. One of the reasons we are conducting these forums around 
the country is to listen. We wanted to make sure the forums are 
not conducted in Washington, DC, but in communities all around 
the country. We need to begin to listen how we can be a better 
partner. The partners also have to be locally based. It is the New 
Hampshire Housing Finance Agency or the Minnesota Housing Fi- 
nance Agency whicli I believe has a better understanding of local 
conditions. 

We can bring some value to the table, but we need to have them 
engaged. I am so pleased that so many took advantage of our offer 
and have now entered into these agreements with us. I wish all the 
States would. 

Mr. Peterson. How many have? 

Mr. Retsinas. Twenty-seven States and six localities, including 
those two, and, also. New York. 

Mr. Zeliff. One of the things that troubled me a little bit was 
your comment that the majority of assisted housing is physically 
and financially sound. 

Mr. Retsinas. Sorry, but it is sound. 

Mr. Zeliff. What did you mean, physically and financially 
sound? 

Mr. Retsinas. Just that, it is the kind of housing that if you 
looked at it in the community, you would not identify it as assisted 
housing. It would look like a conventional housing property stock 
doing the job it was intended to do. That is the majority, but the 
majority, I am not going to hide behind statistics. That is still not 
good enough. 



118 

Mr. Zeliff. The HUD Reform Act of 1989, how would you — what 
would you say has been done? What have we learned from that and 
what has been done in terms of improving management since 1989 
with that act? 

Mr. Retsinas. Well, I can't speak to 1989, of course. I can only 
speak to what I have learned, what I have read, what I have talked 
about. 

Mr. Zeliff. I would assume things were worse then than they 
are now? 

Mr. Retsinas. Well, I try not to make assumptions, but clearly 
there were some programs that had fatal flaws in their design, the 
most notable being tne coinsurance program, a program in which 
the Department engaged into partnership with private parties to 
undertake different housing developments. The difficulty was that 
all the incentives were at the front end, and that many of the par- 
ticipants, but not all, but many of the participants took those in- 
centives and ran. 

The risk-sharing agreement I have talked about has two fun- 
damental differences. One, the State of New Hampshire is not 
going to disappear. They are not going to run away. They will be 
our partner over time. No. 2, these are shared risks, from $1 all 
the way through, so what we have done is — and it was done in the 
previous administration, not just our administration, is try to shut 
down programs that didn't work and trying to put into place pro- 
grams that do work. 

Mr. Zeliff. Now, in programs that do work, I would assume, are 
you talking about vouchers, are you talking about — I mean, in 
terms of New Hampshire, for example, what are they doing dif- 
ferent that is going to make — I ^ot your stuff last night, or I guess 
we got it this morning, and I didn't get a chance to read through 
everything this morning, so if you could describe maybe what is it 
ultimately 

Mr. Retsinas. New Hampshire? 

Mr. Zeliff. Right. 

Mr. Retsinas. Sure, I would be happy to. I am proud of it. I do 
think so highly of the program. This is an initiative that allows the 
Department to enter into risk-sharing agi'eements with qualified 
entities such as State and local housing agencies. In this particular 
case I have signed an agreement with tne New Hampshire Housing 
Finance Agency. 

In the agreement they take the responsibility for originating or 
underwriting a mortgage insurance application. They look at a 
local project. I believe, Congressman, it is Mariners Village. 

Mr. Zeliff. I am familiar with the project. 

Mr. Retsinas. In Portsmouth? 

Mr. Zeliff. In Portsmouth, right. 

Mr. Retsinas. In this particular case I believe that they have a 

freater understanding of the local context. They have a greater un- 
erstanding of the marketplace. In return for that, we are prepared 
to share a risk. They do the origination, they do the review, they 
do the oversight, and we share tne risk. I think that is an appro- 
priate role for the Federal Government to rely on local partners to 
take that kind of affinnative action. I believe that is the future, but 
I will know more when I come back from my forums. 



119 

Mr. Fricke. Congressman, if I could just add, that particular 
demonstration program is one which GAO wholeheartedly sup- 
ports. It is a program to help really get capital into the market- 
place. It is a supply side type of program. But on the other side, 
I think it is worth referring to another study — Nic referred to the 
Joint Center for Housing Studies at Harvard — the department, 
themselves, puts out every year for the Congress to study called 
the worst case housing needs. 

Essentially what this study has shown year upon year is that the 
problem, the principal housing problem the country faces is one of 
affordability, not availability. It goes in and points out that in most 
housing markets today there is a vacancy rate at or below the fair 
market rent of 6 percent or greater, saying, again, that vouchers 
and certificates in most markets will work. 

Now, recognizing that a market, a city is a rather large geo- 
graphic area and you have to take it down to neighborhoods so 
there are certainly neighborhoods where vouchers and certificates 
may not work, and, in fact, in some of the properties that we 
looked at, I think it is fair to say that vouchers and certificates 
would not work in all those cases. 

Conversely, there were clearly communities where we went that 
vouchers and certificates, in our judgment, would work and would 
be a more cost effective approach, so, again, I will go back to what 
Nic had commented on earlier, when the Department sought great- 
er flexibility and as the legislation wound down, I guess, and that 
flexibility tnat at least Nic sought may not have been forthcoming, 
I think it is an issue worth revisiting. 

Mr. Zeliff. In terms of, let me just ask you, I think you men- 
tioned Cincinnati or someone did, 95 percent of the units inspected 
failed. I am just curious, when was that? 

Mr. Greer. That was an audit report we issued in 1990. The 
work was done in 1989, I believe. 

Mr. Zeliff. What would it come out right now if we revisited 
that? 

Mr. Greer. I would hope it would be a lot better, but there is 
really no way to say, 

Mr. Retsinas, What it is in Cincinnati today, no, I don't know. 

Mr. Zeliff. Well, I mean in the last 2 years. Has there been an 
improvement? 

Mr. Retsinas. I would have to look at Cincinnati. We have 81 
field offices. I would have to check, Congressman. 

Mr. Zeliff. You mentioned legislation working its way through. 
Is that 

Mr. Retsinas. I hope it's working its way through. At least under 
consideration. 

Mr. Zeliff. In committees in banking? 

Mr. Retsinas. Yes, the authorizing committees, in the House and 
in the Senate. Mr. Fricke said, we tried this last year. We asked 
for more discretion and the discretion got less. I will be as candid 
as I possibly can be. I am concerned about what will happen to the 
legislation this year. 

Mr. Zeliff. Do you have — I assume we have lease arrangements 
with people who are providers and there is probably a lease 
arr angem en t 



120 

Mr. Retsinas. Contracts. 

Mr. Zeliff. Contracts. Whose responsibility is it to oversee that 
certain things get done within that contract? 

Mr. Retsinas. Part of the responsibiHty relates to the depart- 
ment. Part of the responsibility relates to what are called contract 
administrators. For example, in some States we have contracted 
with the housing finance agency to be our contract administrator. 

Mr. Zeliff. But somebody is responsible for seeing that the con- 
tract gets — in terms of the GAO and the IG's office, you see gen- 
erally that the contracts are fulfilled? 

Ms. Gaffney. No. 

Mr. Greer. No, sir, the Cincinnati audit was an audit of HUD 
as a contract administrator. Although that audit is somewhat dated 
now, I am not sure it would be a whole lot different. I think Nic 
and Helen might agree with us that conditions haven't improved a 
whole lot in the contract administration business. 

Mr. Zeliff. It seems to me that all the partners in this thing 
somehow have to agree to something and there has to be some ac- 
countability to see that it gets done. I just see this big money ma- 
chine pumping out dollars, and what I worry about, and I sym- 
pathize because, you know, you inherited it, but I don't see — when 
did you do your strategy? 

Mr. Retsinas. We have been working on it from the first day I 
started. This was the first issue I addressed when I was sworn in 
on May 18, 1993. 

Mr. Zeliff. So the strategy we have here is something that has 
been out there? 

Mr. Retsinas. It has been evolving. The strategy will continue 
to evolve over time. This is a dynamic situation. What I tried to 
do is give you today an outline of the major components. All of it 
continues to be work that we are working on and will continue to 
expand with your support and interest over time. 

Mr. Zeliff. In terms of the IG's office, how would you describe 
your role in this thing and the things that you uncovered? If you 
uncover things that are not right 

Ms. Gaffney. Well, first of all, as Helen Dunlap indicated before, 
we have been working with housing in trying to design programs 
and regulations, and we are serving with them on an enforcement 
task force, but essentially I will be very straightforward and tell 
you to a very large extent we have given up on HUD. 

Mr. Zeliff. That, I think, is probably — thank you for being so 
honest and straightforward. 

Ms. Gaffney. Well, you know, we have an enforcement mental- 
ity. We care about enforcement. That is what IGs are about, so you 
should understand that is our perspective. We believe for instance, 
that equity skimming is a major problem. 

Working through HUD, we have in the past been able to get vir- 
tually nothing done in that area. We had maybe a handful of cases 
referred to the U.S. attorneys, and so in this past year we made 
a determination that we weren't going to go through HUD any- 
more. We were going to go directly to the U.S. attorneys, that we 
were going to make this a major focus of our work, that we weren't 
even going to bother issuing audit reports. 



121 

We are simply determined to go out and get data that will enable 
prosecutions because we believe, and that is our mentality, that 
unless someone gets the message that there is some enforcement 
and there is some expected accountability, why should anyone 
bother being accountable? 

Mr. Zeliff. So that I can understand the process, you make the 
report and you come up with some very alarming evidence. You re- 
port it to HUD and then they have a choice of doing anything with 
it or not? 

Ms. Gaffney. Essentially that is what has happened in the past. 
We are not doing that anymore. 

Mr. Zeliff. They chose not to do anything about it, so then you 
go back into your offices and do whatever you want to do, but you 
don't necessarily have to do it again, so you have chosen not to do 
it again, so basically nobody is doing it? 

Ms. Gaffney. Could you run through that again for me. 

Mr. Zeliff. It seems to me that we are going around in circles. 
You do an audit and you bring it to the people s attention. It gets 
ignored, you have now decided not to do £iny more audits, just 
working with the prosecuting for the U.S. attorney's office. 

Ms. Gaffney. Essentially, if we found potential civil matters in 
an audit report, our practice had been to write it up in an audit 
report, give it to HUD to deal with through the Office of General 
Counsel and the Office of Housing, and then they would respond 
to it and decide what kind of action should be taken on it. 

Mr. Zeliff. If they choose to ignore it, then they do nothing. 

Ms. Gaffney. Yes. Essentially what the IG's office has in the 
past has put it in their hands. 

Mr. Zeliff. And you have no other place to go at that point. 

Ms. Gaffney. That is not our current posture. Our current pos- 
ture is that we are taking unilateral responsibility for going to the 
U.S. attorneys. Now, we nave made a commitment to the Office of 
Housing that we will advise them about what we are doing, and 
that when we pursue these prosecutions we will be pursuing prop- 
erties that are both physically and financially troubled, where the 
tenants are suffering as well as the taxpayer. 

Mr. Zeliff. It worries me a little bit that — I think that that 
needs to be done, but it worries me that we are still not even going 
through the motions of doing the audit. 

Ms. Gaffney. Oh, we are doing audits. We are just not issuing 
the report in the same way. 

Mr. Zeliff. Why wouldn't you be issuing the reports in the same 
way? Even if they are ignoring them, why wouldn't you still have 
the responsibility to do that? 

Ms. Gaffney. Well, I am a little embarrassed to admit this, but 
what we have found is that the process of writing, reviewing, and 
issuing an audit report adds months to the effort, and the U.S. at- 
torneys aren't particularly interested in audit reports. They are 
very interested in facts. 

Mr. Peterson. Could I iust — this equity skimming issue, have 
you reported that to us? I don't recall you bringing this issue to us. 

Ms. Gaffney. Yes. When we announced Operation Safe Home in 
February, we briefed your staff and we briefed other staff, too. 

Mr. Peterson. Maybe it didn't get through to me. 



122 

Ms. Gaffney. No, that is true, we did not brief you. The Oper- 
ation Safe Home 

Mr. Peterson. So you have information on this? 

Ms. Gaffney. Yes, sure. 

Mr. Peterson. Would you make that available to me or get it to 
my office? 

Ms. Gaffney. Absolutely. Could I just take 1 minute and tell you 
what was announced in February was our determined effort to take 
a kind of proactive stance against wrongdoing in HUD 
programs 

Mr. Zeliff. Could I ask one more question? 

Mr. Peterson. Well, Mr. Retsinas has to go and — we are not 

fjoing to cut off questions, but Mr. Retsinas has to go so the prob- 
em is the rest of them will be here, he won't be. 

Mr. Zeliff. Could I ask an important question. 

Mr. Peterson. OK. 

Mr. Zeliff. Again, I apologize, you have to ^o. I am sorry that 
we are being cut short here, but I sympathize with the job that you 
have ahead of you, and to the degree that we can help, I think we 
all want to help, but we sure don't like what we have heard, and 
I think you are dealing with a complete disaster in my judgment 
and, hopefully, we are going to be able to put our finger in the dike 
or do something, but I haven't had a chance to read your whole po- 
sition paper, which, again, we got this morning, and assuming that 
it is very impressive and it does all the right things and that the 
GAO can go home and relax and that the IG's office and all of us 
can do that, is there a time line on that and is there a step-by-step 
chart which tells us what you are going to do and when you are 
going to do it so vou have some really tight accountability and if 
not could we get that? 

Mr. Retsinas. On the one hand, yes. On the other hand, no. On 
the one hand, we have very specific management plan goals, for ex- 
ample, to work out troubled properties, so we can give you numbers 
and specifics. 

On the other hand. Congressman, it depends on the resources 
and tools you give us. For example, I suggested that we are orga- 
nizing SWAT teams that deal with troubled projects. We estimate 
that we can deal with somewhere between 30 to 40 projects with 
current resources. If you could expand the resources, expand the 
tools, we could do much more. Therefore, those time lines are very 
much dependent on the resources allocated. 

Mr. Zeliff. Given present resources, you have a time line in 
there? 

Mr. Retsinas. Yes, we have a specific time line for workouts, and 
can give you specific targets for these SWAT teams. 

Mr. Zeliff. Specific times that you want to be held accountable 
to? 

Mr. Retsinas. Yes. However, let me not kid you, that is not 
going to solve the problem. The resources aren't there to do that. 

Mr. Zeliff. On the record I would like to have copies, if you are 
going to have some meetings in your office on this, we would love 
to be a participant. Thank you. 

Mr. Peterson. I would like to know what these SWAT teams are 
going to do. Could you make that available to me? 



123 

Mr. Retsinas. Absolutely, Congressman. They essentially focus 
on individual projects, but I would be happy to expand on that. 

Mr, Peterson. Could you put it in writing? 

Mr. Retsemas. Of course, sir. 

Mr. Peterson. You have to leave. I don't know, Mr. Flake, do 
you have questions? 

Mr. Retsinas. Mr. Chairman, I appreciate the courtesy. I would 
be happy to come back, but I have to conduct that forum to help 
restructure the new FHA in Detroit. 

Mr. Flake. I realize you have to leave, Mr. Retsinas. Let me 
start by thanking you for coming to the district to see some of the 
many projects we have going in the sixth district in New York. 

Mr. Retsinas. I enjoyed it. 

Mr. Flake. I guess since you do have to go, I can submit ques- 
tions for the record. One thing I would ask, though, if you would 
just take 1 minute, and that is having seen what we are doing 
there and we have probably 1,500 or so various units under con- 
struction, primarily units that are assisted in some way, have you 
found that in dealing with — given that the program basically deals 
with for-profit motives on the part of persons who have the oppor- 
timity to get tax shelters, and when that tax shelter reaches the 
point of its termination, of course you have more problems with 
these properties. 

Having seen what we are doing in that area and probably in 
some other areas around the country, do you find that nonprofits 
might be one way to be able to get to the gut of some of the prob- 
lems that you are having as it relates to creating affordable hous- 
ing. No. 1; No. 2, creating opportunities for those persons who have 
Section 8 vouchers to be able to not just be renters for the rest of 
their life, but because of the way we have structured those pro- 
grams, to create the means by which they can ultimately become 
homeowners, which ultimately takes HUD out of the business of 
trying to hold those properties in the first place. 

Mr. Retsinas. My visit to your district was a real eye opener. It 
was a reaffirmation of all the good work I knew you are doing, and 
now I could see it firsthand. I think there are also, some lessons 
that were reaffirmed in that visit. One lesson is that individual 
project must be viewed especially in its community context that 
projects don't exist in isolation. They exist in relationship to the 
community. The more the sponsor, the developer, and the owner 
are made aware of that relationship and create the necessary link- 
ages, the better chance that project has of succeeding. 

It is clear to me that working with experienced, competent, com- 
munity-based organizations is a good way to proceed. In some com- 
munities those organizations do not have that capacity. In other 
cases, I know examples, and you will see some in the following 
panel, where for-profit developers have been able to forge those 
kinds of links. It is clear, however, that the involvement of resi- 
dents, the involvement of the greater community is a vital part of 
the answer to dealing with these problems. 

I also agree that we need to find incentives to ensure that as- 
sisted housing is more transitional; that is, does not over time be- 
come institutional, residents must have opportunities which allow 
for ownership or other kinds of cooperative housing. We think those 



124 

are directions we need to explore. Certainly you have given us 
some interesting models. 

Mr. Flake. Do you have capability to work with those groupings 
to create necessary capacity? The weakness is technical abilities, 
an ability to draw on professional services and to build an organi- 
zation that can actually become a producer of housing. 

Mr. Retsinas. We are very limited in that ability. We are cur- 
rently facing a budget review that would further reduce what capa- 
bilities we do have. This means it is even more important for us 
to identify local partners. 

In New York, as you know, we are working with the New York 
Housing Development Corp. and with the State insurance agency 
to help provide that. I wish we could manage those resources di- 
rectly, but because of the reasons that the chairman said earlier, 
this is a difficult environment to ask for new resources. 

Mr. Flake. However, if you were refocusing some of those re- 
sources to where you were making investments in capacity building 
and thus making investments ultimately in home ownership, I 
think we would reduce the amount of money necessary to continue 
the program as it currently exists, particularly if we are putting 
people in the New York market where you are paying $700, $800 
a month with a voucher, paying that kind of rent, and the houses 
you saw us having built we are paying, those persons in those 
homes are paying about $800 a month for a mortgage, so that it 
is the same dollars. 

The difference is that they become homeowners, they have a 
rental unit that goes with the apartment, so not only do they own 
it, but they also nave the rental unit for additional income, and it 
takes us right out, it takes us, meaning HUD, right out of that 
market. 

It seems to me if we are going to work with short dollars, we 
refocus those dollars in ways that gives us opportunities for, you 
know my term is always investment. I think our whole orientation 
to social programming has not been one of investment, and that is 
the reason we have a program like this is that this give it, give it, 
give it because there is more where we got it from and we will keep 
going back and getting more, I think that is what is killing us, and 
if we can treat it as investment, I think we can create the same 
kind of communities that you see us doing there. I think we can 
do that anywhere in the country. 

Mr. Retsinas. I think we can. It certainly puts an appropriate 
burden and challenge on all of us, however, to first clean up the 
situation that we have. I agree further that if we would design new 
housing programs today, they would be very, very different from 
the programs we've inherited. They would be programs that are not 
dependent exclusively on the tax code. They would be housing pro- 
grams, not finance programs. That would be the fundamental dif- 
ference. 

The reality is that we have to deal with what we have. I think 
the kinds of initiatives that you have shown in Queens are the kind 
of initiatives and redesign tnat we need to be thinking about. That 
is precisely why I am conducting these forums. 

The first one begins this evening in Detroit and continues all day 
tomorrow. I want to listen: to listen to community-based organiza- 



125 

tions and communities talk about how we can be a better partner 
in a different kind of HUD with a different kind of housing pro- 
gram. 

Mr. Flake. Thank you. I don't want to hold you much longer. Let 
me ask 

Mr. Shays. Would the gentleman yield? 

Mr. Flake. Yes, I will yield, since he has to leave. 

Mr. Shays. Is that all right with the chairman's permission, just 
2 minutes. I know you need to get on your way. I would like to un- 
derstand one element of this. When we did the HUD investigation 
for such a long period of time, we knew that there were proolems 
in a lot of different areas. I understand that you are dealing with 
something that you inherited, but basically the administration has 
been in for 2 years, so there will be a point where that will change. 
I also realize you need resources. 

One of the things that amazes me and maybe you could just tell 
me this, if we negotiate with a landlord and we are putting in such 
extraordinarily high resources, and I guess it is the local housing 
authority that is doing this negotiation, we don't own these facili- 
ties, and to me it seems like a wonderful excuse. If they are not 
doing the job and we are paying market rent, it seems to me like 
we get savings if we get out of there and negotiate with someone 
who is willing to provide the market service for the market rent, 
so I guess my point to you is that I think 

Mr. Retsinas. I agree. 

Mr. Shays. OK What it says to me, though, is there are a phe- 
nomenal amount of resources that are there being wasted — so I 
guess my point to you is that if we don't have the inspectors to 
msike sure the local housing authorities are doing their job, can we 
have such a gigantic penalty to them that if we discover it, the cost 
is so great that they will want to do their jobs before you show up? 

Mr. Retsinas. Well, I think the penalty we need. Congressman, 
I think your analysis is generally correct with two qualifications. 
One, in some cases there are long-term contractual commitments, 
so we need to make sure that those commitments are 

Mr. Shays. But if they don't live up to those commitments, it 
seems to me, we should just get out of there, like see you tomor- 
row, goodbye. 

Mr. Retsinas. Absolutely. The ultimate lever, the ultimate tool 
that I am seeking from the Congress is the ability to say no to re- 
newing that contract. 

Mr. Shays. Or breaking them. Forget renewing them if they 
haven't lived up to them, break them. 

Mr. Peterson. There is some places that you can't do that. You 
haven't heard all the horror stories. 

Mr. Shays. I will listen to the horror stories later. 

Mr. Retsinas. May I make just one point, if I could, Congress- 
man. 

Mr. Shays. Sure. 

Mr. Retsinas. The difficulty is if we were to do that under cur- 
rent law, not that laws can't be changed, but I can only deal with 
current law. Under current law we lose that assistance. We lose 
not only the unit, but more importantly the assistance. We can't 



126 

take that and move it to a nicer project. We are not allowed to do 
that. 

Mr. Shays. But that is because of what we have done? 

Mr. Retsinas. With all due respect, the Congress. 

Mr. Shays. You make it clear to us that we need to change that, 
and that is part of the reason why we do these reports, why we do 
the investigation. I thank the gentleman for yielding. I thank the 
chairman, but could I just say to the chairman, it just seems to me 
that is the reason we are doing this investigation. 

Mr. Peterson. Mr. Retsinas, I think you can see that we need 
you to come back another time. 

Mr. Retsinas. I would like to. 

Mr. Peterson. Would you be willing to do that? 

Mr. Retsinas. I would like to, sir. 

Mr. Peterson. We will set up some kind of a process here where 
we can get together in the committee and have some discussions 
because there is more to this than has come out here today and I 
think we all need a little bit more education, more information, and 
then we will have another hearing and we appreciate you being 
with us today. 

Mr. Retsinas. Thank you for understanding my schedule. I ap- 
preciate it. Thank you for your concern. 

Mr. Flake. Reclaiming my time, several questions. Ms. Gaffney 
and Ms. England-Joseph, I realize in both of your roles you are ba- 
sically not a part of the production end of this, you actually do the 
analysis and evaluation, but in so doing it would seem to me that 
there must be opportunities for you to do some economic analysis, 
particularly GAO, in terms of what it means to continue to make 
the investment or not make the investment, to continue doing busi- 
ness the way we do it versus trying to determine new ways of 
doing business that allows for investments so that you create per- 
manent housing opportunities. 

Would that long term, in either of your opinions, represent for 
us the potential for, one, lower cost and, two, by creating greater 
housing opportunities for people to own ultimately get us out of the 
stream where we are either talking about how to do one-for-one re- 
placement or we are talking about how to create more subsidized 
housing opportunities and other ways. 

What is just your general, broad opinion in terms of how we 
could go about making investments as opposed to having a whole 
lot of people either having vouchers or having Section 8 certificates 
or whatever other means that we have created, and I would ex- 
clude from this, of course, 202 and some of the elderly programs, 
I consider that a different category, but I am talking about for the 
every-day persons who we are providing this large sum of money 
for and the basis of providing them temporary housing in that 
sense, is there a way that you see we can move that makes some 
sense for us long term? 

Ms. England-Joseph. Yes, I think that if we were to approach 
this issue in a more holistic fashion where we look at the individ- 
ual or the community in which that individual lives, try to under- 
stand exactly what it is going to take in order to create economic 
self-sufficiency, because that is what you are talking about, the 



127 

ability for individuals tx) be able to be economically self-sufficient 
is critical. 

I think that there are programs that are either intended as de- 
signed or have been on pieces of paper for a long time, are intended 
to try to achieve the right kind of either social services or assist- 
ance or create the right kind of catalyst within a community so 
that you link people to jobs, with training, and all of those sorts 
of things are, in fact, very critical to creating the right kind of com- 
munity environment for economic self-sufficiency, out I would be 
quick to say that there are a large number of people out there that 
are very, very low income, and that population will need a lot more 
assistance and probably for the long term will need some sort of 
Federal subsidy in order to assist them in achieving or meeting 
their housing needs simply because of the level at which their in- 
come or negative income level is. We have to look at the population 
and understand which part of the population needs what type of 
assistance and services and then how do we best provide that mul- 
titude of services across the whole continuum. 

It is not an easy solution, and obviously it doesn't rest just with 
HUD. I mean, it really rests with a number of departments in gov- 
ernment and programs that really transcend not just government, 
but local and city activities because they all have to work together 
in order to achieve what I think you are talking about. 

Mr. Flake. I think you made the point I was about to raise as 
a question for you, and that is in terms of seeing government as 
a whole as opposed to seeing it in these various parochialized com- 
ponents that all of us make fiefdoms of so that if you are dealing 
with HUD issues that have to do with welfare, those issues ought 
to go into whatever welfare reform and trying to define also how 
you create economic opportunities in the very communities where 
the people need the jobs the most, so it does take more than just 
what HUD does. It is obviously a combination of various functions 
within government, understanding that they could do much more 
together than they all can do individually as they currently do. 

Ms. England-Joseph. We have some work under way that you 
might be interested in where we are trving to look at the unit of 
evaluation or measure as the individual or the place, the commu- 
nity, trying to understand it fi^om that context in terms of the Fed- 
eral Government and how Federal programs are brought to bear in 
that community or for that individual. Often we simply look at it 
from a program perspective and try to determine about what that 
program needs to be changed. I think more and more we are realiz- 
ing that we have got to look at it from the other perspective be- 
cause we have much duplication in government, a lot of bureauc- 
racy, a lot of paperwork in terms of the ways in which people apply 
for grants or personal assistance. There are probably a great deal 
of cost savings that we could achieve if we were to look at it simply 
fi'om a cost efficiency perspective, a much more streamlined ap- 
proach to helping individuals or communities would, in fact, benefit 
the communities more directly because they don't know how to uti- 
lize all the different programs that exist in government. 

Mr. Flake. And a lot of the people in government, unfortunately, 
from my experience have been trained to say, no, and to not be cre- 
ative, so that you don't get much in the long end because they have 



128 

been doing it that way so long and that way js not working and 
nobody is willing to talk about change, and when you come with 
change they are the first people to say you can't do it, and it is not 
written anywhere, but you just never did it that way before. 

I think it is time for us to really rethink how we do the whole 
housing area because I think there is a lot of — even though you 
need more resources, there are a lot of resources that are either 
being underutilized, that are being utilized improperly or may be 
being utilized in such a way that they benefit certain groupingfs 
and those groupings are really not benefiting the overall needs that 
we have as it relates to tr3nng to resolve this problem. 

Ms. Gaffiiey. 

Ms. Gaffney. We have not done the kind of analysis that you 
are talking about of alternatives. But, until this discussion today, 
I haven't heard people focusing on this incredibly expensive en- 
deavor that we are embarked on and wedded to in perpetuity, and 
it consists of insurance that puts our government at enormous risk, 
supplemented by the Section 8 project payments, which involve 
rental assistance payments that are escalating every year, and, you 
know, tax credits can also be involved in these projects. What we 
have been talking about as a result of your hearing is maybe one 
of the useful things we could do is to try to project where this is 
going to put us in 20 years in this Government. Because I think 
if you put all of this together and saw the exposure we have and 
what we are "investing,' but not investing in your terms and what 
we are getting for it, we would all find that this is really not a ten- 
able situation. 

Mr. Flake. Thank you very much. I don't know whether that 
takes us a long way, but I think you get the picture that I am try- 
ing to present. 

Ms. England-Joseph. Before you came we talked a little about 
some of the properties we visited during our review. One of those 
properties is in Chicago, IL. I know I keep trying to get back to this 
property because I think it is such an excellent example of what 
we are trying to talk about in our testimony. 

We are talking about a property that already rents at much high- 
er than the rents in the surrounding area. We are talking about 
a property that is in deplorable condition. I mean we saw a video 
that demonstrated the condition of this property, and this did not 
happen in the last 6 months or the last IV2 years. People told us 
it had been this way for 8 or 9 years. So we are talking about 
major problems. 

While I am pleased to hear that HUD as a part of their four- 
pronged strategy is talking about focusing on that property in par- 
ticular and putting $1.2 million into that property, $1 million in 
flexible subsidy and $200,000 in crime reduction activity, I would 
guess 

Mr. Shays. Would the gentleman yield? 

Mr. Flake. Yes, I will. 

Mr. Shays. Why would HUD put money into that project? I don't 
understand why you would be so pleased about it. 

Ms. ENGI.AND-JOSEPH. I am trying to get from a pleased to a dis- 
pleased. 



129 

Mr. Shays. Think of what you are saying. We are pa3dng — ^you 
are telHng us we are paying above the market price, and it needs 
to be fixed up and HUD is the one who is going to put the money 
in. I yield back. 

Ms. England-Joseph. Forgive me, sir, the only pleasure was to 
know that something might be happening to this property. That is 
the only pleasure, let me make that really clear. 

Mr. Peterson. I hope you can stay because in our next panel the 
owner of this property, I believe, is here, and he has a story to tell 
which is — there is more to this than meets the eye. 

Mr. Flake. I think the $1.2 million comes very late in the game. 

Mr. Peterson. And you know the tax law changes and a lot of 
other things, so it is not — I guess I just want to say that I don't 
think it is totally this person's fault that it is in this shape, but 
I think your point is right. This is crazy what we are doing, and 
this whole idea that we are going to — that is what I was trying to 
get through to the Secretary here that we ought to really think of 
whether we should be doing this at all and maybe it is time to bite 
the bullet. 

It is like my farmers that we kept stringing out that basically 
are broke ana nobody wanted to tell them they were broke, and 
they wasted another 5 years of their life before they finally were 
put out of their misery. Maybe what we need to do is just admit 
that this is a mistake, somehow or bite the bullet and get on to 
some other strategy as Mr. Flake is talking about. We are not ex- 
actly sure what it is, but this is an endless rat hole here if we 
dont. 

Ms. England-Joseph, The reason I brought that particular ex- 
ample up in the context of your earlier question was aside fi*om the 
issue of how we should fix this property, if we should at all, we be- 
lieve that any analysis project-by-project ought not to iust look at 
how much money ao you pour into the property in order to make 
it livable. I mean, we oelieve that you have to look at the surround- 
ing community and do what HUD has said. 

Think about concentrations of poor people. In the community we 
are talking about where this building exists, it is highly con- 
centrated in terms of low income. It is below the average income 
of Chicago, and you have to look at the minority makeup of this 
community in terms of concentration, a concern that HUD has had. 
We have to look at whether there is other available housing in that 
area where we could provide a much more efficient subsidy process, 
meaning tenant-based Section 8 instead of linking the subsidy di- 
rectly back to this project in order to maintain this project's cash- 
flow for some period of time. We are suggesting that when HUD 
makes a decision do it project-by-project and go beyond the dollars 
and cents of what is it going to take to just make it livable. 

HUD has got to look at more cost efficient ways of operating, and 
it has got to look at the social issues that it is really trying to 
achieve, and possibly the bottom line is to do something quite dif- 
ferent. 

Mr. Flake. My last point. Speaking of Chicago, have you exam- 
ined my MINCS program, which is being piloted in Chicago with 
Vince Lane and the Chicago Housing Authority? 

Ms. England-Joseph. I nave not. 



130 

Mr. Flake. Mixed Income Neighborhood Program. 

Ms. Gaffney. No. 

Mr. Flake. What they are doing basically is trying to find new 
ways to use some of the public housing money which we authorized 
for them to do to be able to create some permanent housing. We 
changed the variables in terms of who can live in this housing by 
putting some folk who work, who have jobs in the midst of people 
who may be welfare bound, and it has gotten a great deal of public- 
ity. You might want to take a look at it. 

Vince Lane is the chairman there, and I think we did that legis- 
lation. What is it 3 years ago? About 3 years ago and they produced 
some units. I think it is something you might want to look at be- 
cause I think it has possibilities. I yield, Mr. Chairman. I have to 
go to Whitewater hearings. I am sorry I have to leave. 

Mr. Peterson. We have another panel. Mr. Shays, do you have 
a couple of questions? 

Mr. Shays. I think the next panel is very important, and since 
I missed your basic discussions, I don't feel that I should be getting 
into mucn. However, my assistant here has taken some notes and 
some of what he has taken I find distressing. Since I was here, Ms. 
Gaffney, for your comment, where you said, "I am embarrassed to 
admit, why were you embarrassed? 

Ms. Gaffney. Oh, it is not major — it takes us a long time, us 
auditors, to write audit reports. 

Mr. Shays. OK. So you are not embarrassed that you didn't do 
the reports? Are you going to be doing the reports? 
No. I 1 " 



Ms. Gaffney. No. I need to take a minute and see- 



Mr. Shays. Are the reports in writing? Have they been com- 
pleted? 

Ms. Gaffney. We are not compiling regular, normal audit re- 
ports. 

Mr. Shays. I just find that totally unacceptable. 

Mr. Peterson. Mr. Shays, if you would yield, the problem is if 
you ask them to do that, then this information isn't going to be 
available and we are never going to get anything done. 

Mr. Shays. I find that unacceptable, too, because I don't buy it. 
I don't buy it. I mean if you don't file the report, it is not an official 
document, correct? 

Ms. Gaffney. 'That is correct. 

Mr. Shays. OK, and the coverup continues as far as I am con- 
cerned, so it is just word of mouth between people? 

Mr. Peterson. There is no coverup. We have sufficient informa- 
tion to 

Ms. Gaffney. Wait a minute. Can I clarify? Maybe I can start 
from the beginning. 

Mr. Shays. I don't want you to start from the beginning. No, I 
don't want you to start from the beginning. I just want to know do 
you have reports that you are supposed to do? 

Ms. Gaffney. We are issuing audit reports on every aspect of 
HUD's operations. They are 

Mr. Shays. Except where? 

Ms. Gaffney. In two areas of Operation Safe Home, we have de- 
cided that we need to uncover wrongdoing, to target wrongdoing, 
and try to get prosecutions. Typically if you find wrongdoing in the 



131 

course of an audit, in fact, that audit is put on hold and you do 
an investigation. 

In two areas, equity skimming and fraud in public housing ad- 
ministration, we are going in and we are doing probes. We are 
doing audits, along with investigators specifically targeted to find- 
ing fraud and equity skimming. We take the results of what we 
find, if there is any evidence of wrongdoing, to a U.S. attorney. 

Mr. Shays. But you don't document it in a report? 

Ms. Gaffney. We are not in those two cases issuing a formal re- 
port. 

Mr. Shays. We will have to pursue this later. I do not under- 
stand why you would not document it in a report. It seems to me 
that the report is something that becomes public. A report is some- 
thing that is used by Members on both sides of the aisle, and it 
helps us do our job, and I just 

Ms. Gaffney. Fine. Really, I would be happy to talk to you about 
it. 

Mr. Shays. I just want to — at least I want to make it clear to 
you, I can't imagine our allowing the former Inspector General to 
say that to us under Tom Lantos and Tom Lantos saying, "oh, 
yeah, well, I understand." I don't understand it, and 

Mr. Peterson. You need to be a CPA, Mr. Shays. 

Mr. Shays. No, but see maybe that is the problem. 

Mr. Peterson. We are all messed up like everything else. 

Mr. Shays. But you know what, I don't mean any disrespect to 
you because I think you are doing a terrific job and I didn't mean 
it to come across in any other way. I am just thinking what Tom 
Lantos would be saying to you now. It just seems to me that one 
of the things we encountered with previous Inspector Generals, was 
that they were telling us, and we, Congress, weren't listening. We 
weren't doing our job to the full extent, but one part was that they 
also weren't telling us things that we needed to know. 

Those reports are essential to us to make good policy decisions, 
and you are doing half the job. It seems to me you aren't doing the 
complete job if you don't issue those reports. That is the way it 
seems to me. We, obviously, have a difference of agreement. 

Ms. Gaffney. I would appreciate the opportunity to discuss it 
with you further. 

Mr. Shays. Given that I have missed the testimony and since I 
don't want to be redundant and since it is late, I respect the con- 
cern of the chairman. 

Mr. Peterson. Well, as I said, we are not going to drop this 
issue after this hearing. We need some more information, and we 
are going to be looking into not only this current issue, but we are 
also going to be looking into the tenant-based Section 8. We are 
going to look at the low-income housing tax credit properties as 
well. There is a lot of work that needs to be done. We appreciate 
all of you being with us. Does anybody have anything else they 
want to say? You look like you had something to say? 

Ms. Gaffney. No. 

Mr. Peterson. Thank you very much for your good work. We ap- 
preciate it, and we will continue to talk with you about these is- 
sues. 



132 

Mr. Peterson. Next, we are going to call the final panel. We 
have some of the people here that have been kind enough to be 
with us today to share with us their perspective as people who 
have been involved in this situation. I think folks might be sur- 
prised to hear the other side of the story. I hope people will stay 
around to hear these witnesses. 

If we could have the witnesses come up, we have Artie Jackson, 
who is a resident of the Holiday Lake Apartments in Pompano 
Beach, FL; we have Dr. Greorge Graham, who is the owner of the 
6000 South Indiana Apartments in Chicago, which have been dis- 
cussed here in some detail today; John Orehek, the general partner 
of SP Properties 1982 Limited Partnership that owns Edgewood 
Terrace Apartments, located in Washington, DC, who is accom- 
panied by Roy Lee, associate counsel with the Security Properties 
Inc., Seattle, WA; and Eugene Ford, president of Mid-City Finan- 
cial Corp., owner of Edgewood Terrace Apartments II, in Washing- 
ton, who is accompanied by Elliott Bernold, president of the Edge- 
wood Management Corp. 

The last two apartments named Edgewood are located next to 
each other and are in quite different contrasting condition as we 
said earlier. Have we got everybody lined up here, do we? We ap- 
preciate you all being with us today. We apologize for how long this 
has all taken, but when we did this, we didn't expect that we were 
going to be rimning against Whitewater and King Hussein or that 
we would get into so much discussion, but we do appreciate your 
being here. 

As you noticed probably, those of you who have been with us, it 
is the custom of this committee, because we have investigative 
hearings, to swear in all witnesses so as not to prejudice any of 
them. Do any of you have any objection to being sworn in? If not, 
would you please rise and raise your right hand. 

[Witnesses sworn.] 

Mr. Peterson. Thank you very much. We will start — ^your writ- 
ten statements will become part of the record. I, guess given the 
lateness of the day, if there is a way you can summarize, that 
would be helpful, and we will start with Mr. Jackson. We appre- 
ciate you being with us, and as I said, your statements will all be 
part of the record. If you could summarize them, that would be 
helpful. 

STATEMENT OF ARTIE JACKSON, RESIDENT, HOLIDAY LAKE 
APARTMENTS, POMPANO BEACH, FL 

Mr. Jackson. Good afternoon, Mr. Chairman. It is an honor to 
be here, members of the committee. My name is Artie Jackson. I 
am married, I live with my wife and four children at Holiday Lake 
Apartments in Pompano Beach, FL. I work for the Pompano Mer- 
chandise Mart. I have lived at Holiday Lake since December 1986. 

I am currently right now vice president of the tenant organiza- 
tion, Concerned Citizens of Holiday Lake Apartments. Holiday 
Lake Apartments has 232 units in 15 residential buildings. There 
are also two service buildings; 180 or more receive Section 8 
project-based subsidies. The owners have also, have also applied for 
the remainder to be subsidized as well. 



133 

Behind the project is also a lake, a pretty large-sized lake. That 
is why it is known as Holiday Lake. In 1986 my first apartment 
was a two-bedroom on the first floor. It was totally vermin infested. 
There were roaches in the stove, the refingerator. They were all in 
the cabinets. We used to have to continually scrub inside and out 
regularly just to keep the control of roach feces from building up. 
Marcrum Management were the owners at the time. We com- 
plained to them about the situation, but they basically said they 
couldn't do anything to control the problem. 

We complained so much that finally instead of fixing the problem 
they just moved us to another apartment. That apartment was 
also — this was a three-bedroom, but the problem there was overrun 
with rats and mice, and as fast as I would try to plug up the holes 
in the apartment, they would chew through somewhere else. Our 
children were afraid, they were so afraid at that time to even sit 
in the living room. They wouldn't go in the kitchen because they 
were afraid of getting bitten. 

We complained to the management again about the problem, but 
nothing was ever done. I don't understand why there was never 
anything done, but it just wasn't done. We had problems with the 
leaking in the kitchen and also in the stairwell. That was never 
done, nothing was ever done about that. There was conditions we 
had in the living room, our windows were so cheap they would fall 
out. The panes would actually shake from the wind whenever there 
was a slight wind blowing because they were not even sealed in 
properly, you know. There were problems with the electrical light- 
ing in tne kitchen and in the living room. You would actually hear, 
the lights would flicker on and off when you turned the switch on 
because of the faulty electrical panel in the kitchen. 

When you would actually turn on the light switch in the kitchen 
you could hear the electricity pop, and once again we complained 
about these situations like holes in the bedrooms and whatnot. 
Nothing was ever done. The only thing they did was told us they 
were going to move us again. This time they promised us a newly 
renovated apartment which was supposed to be a three-bedroom 
apartment. 

We moved into that apartment in May 1989. When we first 
moved tiiere the minute we came in we turned on the air condi- 
tioner. There was a foul odor in the house. What happened was ba- 
sically a dead bird got sealed up in the air conditioning duct some- 
how, I don't know how, but this was a new air conditioning unit 
and it had decomposed there and when we went and complained 
to management, they did absolutely nothing to get it out. You 
know, finally outside of complaining we had to go to court and the 
judge had to order them to remove and replace the duct work. 

Since that time there has been numerous problems as well. 
There has been the bathroom toilet that to this date is not mount- 
ed, not even secured to the floor. Water leaks down into our kitch- 
en. You have the cabinets in the kitchen are falling apart. They are 
falHng away from the ceiling, and away from the wall, and the way 
they repaired it, they simply took caulk and just squeezed it be- 
tween the spaces and left it tnat way. 

There is an adjacent apartment that leaks down in our bathroom 
that hasn't been repaired. We just have so many different numer- 



134 

ous things, I don't want to belabor the point, but what I want to 
say is this. You know, my experience and the experience with my 
neighbors is that if there is any kind of repair that is going to cost 
any kind of significant amount of money, it is not going to be done. 
It is just going to be totally neglected, and that seems to be the pol- 
icy, you know, since even prior to when we moved there. 

I can't imagine how HUD could allow this to continually go on. 
For instance, the sprinkler systems, they failed years ago, I mean 
years ago, and to this day they have never been repaired or fixed. 
As far as the complex on the outside, you have grass and weeds, 
and — I mean you don't have gfrass, you have weeds and dirt. This 
is the landscaping. You know, the children have to play around 
trash and broken glass, you know, condoms and stuff laying around 
where they walk barefooted. These kind of conditions exist at Holi- 
day Lake Apartments. 

You have stripped, abandoned cars in many of the parking lots 
that have never been towed, even though there is constant com- 
plaints to the management. Nothing is ever done about the situa- 
tion. Last June 1993 — no, prior to that, before the inspection there 
was only like about seven or eight vacancies, I mean six or seven. 
Now there are about 33, and half of those are being used right now 
for prostitution, for drug dealing. In fact, even as we speak now 
they are still open to this day, nothing has been done. 

That is why I couldn't understand Mr. Retsinas's comment about 
everything is taken care of. It is not taken care of. In fact, you 
know, these apartments are left open and then they are vandalized, 
but in addition to that, you have current management that has 
been going to these apartments and cannibalizing, taking off the 
parts to repair other apartments, taking out hot water tanks, 
doors, anything that they can salvage. 

We had two laundry rooms at one point. Each had eight washers 
and eight dryers. One is shut down so now you have like eight 
washers for the whole complex. This is current. There are large 
gaps still in the fence to this day. A child has already drowned at 
the complex at one time. I have reported on one occasion actually 
the case of vandals, when the fence was actually cut. Nothing was 
ever done about that situation as well. 

Now, there was an inspection done back in June 1993. They 
called it 100 percent housing quality standards inspection. They 
failed that. They also failed a similar inspection in November. I 
keep hearing this talk about how, from Jim Chaplin and Mr. 
Retsinas, about everything being better, but it is not. It is worse, 
and the problems are constantly building. And pumping moneys in 
is not really changing anything. The plumbing is so corroded and 
just deteriorated, it defeats the purpose of going in and actually 
trying to paint over and renew the apartment when, for instance, 
in a couple of the newly renovated apartments there are brown 
stains where you can see the water is actually leaking into the 
apartments. You know, it is not solving the problem. 

Another thing I have a problem with is the fact that they want 
more moneys to take care of this. There has been plenty enough 
moneys spent already to alleviate these problems, but it has been 
wasted. It has been totally wasted, and there has been a lack of 



135 

concern by management and by HUD officials to do anything about 
the problem, and to me, I feel that this is abandonment. 

The people in Broward County have been abandoned by HUD of- 
ficials, the owners, and management. I feel that it is a disgrace and 
that something needs to be done now. We would like for HUD to 
foreclose against the owners because of the reputation that they 
have built in the community. They have shown over and over again 
that they cannot and that they will not do what they are supposed 
to do. 

The last thing I want to say, I am concerned more so about our 
youth and our young people that are growing up there. To me, this 
IS a form of abuse, and it has been an ongoing form of abuse. You 
got HUD officials that won't do anything, you got landlords that 
won't do anything, and it creates an atmosphere of hopelessness 
and despair, and that is what is at Holiday Lake now is a hopeless- 
ness and despair. I am just hoping that something gets done imme- 
diately. We need help out there. We need help, serious help. 

[The prepared statement of Mr. Jackson follows:] 



136 

July 26, 1994 

gTATEKBNT OF ARTIE JACKSON 

TO THE SUBCOMMITTEE ON 

EMPLOYMENT. HODSING AND AVIATION 

I am Artie Jackson. I am married and live with my wi£e 
and four children at Holiday Lake Apartments in Pompano Beach, 
Florida. I work for the Pompano Merchandise Mart in Pompano Beach. 

I have lived at Holiday Lake since December, 1986, and am 
vice-president of the tenants' organization. Concerned Citizens of 
Holiday Lake Apartments. Holiday Lake Apartments has 232 units in 
18 residential buildings, with 2 service buildings. 180-odd 
apartments receive Section 8, project-based subsidies. The owners 
have applied to convert the remainder to Section 8 also. Behind 
the property is a good-sized lake. In 1986, my first apartment was 
a 2-bedroom on the first floor. The apartment was vermin infested. 
Roaches were in the stove, refrigerator, and all the kitchen 
cabinets. We had to scrub the cabinets inside and out regularly to 
try to control the buildup of roach feces. Marcrum Management, the 
operating agent, claimed they couldn't do anything about the 
problem . 

In response to my frequent complaints about that 
apartment, management finally just moved us to another unit rather 
than fix the problems . Our second apartment was overrun by rats 
and mice. As fast as I'd seal up holes in the walls, the rats 
would chew through somewhere else. Our children were so afraid of 
being bitten they refused to go into the kitchen or sit on the 
living room floor to watch television. We also had water leaking 

p. 1 



137 



into both the kitchen and stairs. Both ceilings were eventually 
badly damaged because management never bothered to respond to our 
complaints to fix the leaks. The excuses for not taking care of 
these problems were never-ending. Our living room windows would 
sometimes fall completely out they were so cheap and in such poor 
condition. The window panes rattled in the frames in the slightest 
wind because they weren't puttied in. The living room and kitchen 
lights flickered off and on because of a faulty electrical panel. 
You could even hear the sound of electricity popping when the light 
switches were flicked on. There were holes in the bedroom walls. 
Rather than fix these problems, management told us to move again. 
We were promised a newly-renovated three-bedroom apartment. 

In May 1989, we moved into that apartment, our current 
apartment, a three-bedroom duplex. What we found in this 
supposedly newly-renovated unit was a peirvasive, foul stench. 
There was a decomposing dead bird which had been sealed up into an 
air duct. We complained again to management and, true to form, 
they did nothing to rectify the problem. Finally, I took them to 
Court and a judge ordered management to remove and replace the duct 
work. The apartment also had other problems. The kitchen cabinets 
were pulling away from the ceilings and walls. Management repaired 
this problem by simply caulking the gaping spaces. The upstairs 
toilet is not mounted securely, causing it to leak into the 
downstairs ceiling. This problem has never been fixed to this day. 
A leak from an adjacent apartment also drips into our downstairs 
bathroom. When the air conditioner upstairs required servicing, 
the maintenance people dumped in so much acid that the drip pan 
disintegrated, causing additional leaks into the living room 

p. 2 



138 



downstairs. When I complained about this problem, the on-site 
manager told me I was the problem, not the apartment. 

I finally began a rent withholding action in early 
January 1993. When nothing was done to take care of the problems 
by late January 1993, I went to Legal Aid Service for help. Some 
satisfactory repairs have been made to my apartments over the 
years, but they have been made by me alone and at my own expense. 

My experience and that of my neighbors is that if a 
repair costs any significant money, the repair isn't made. For 
instance, the sprinkler system failed years ago. It's never been 
fixed or replaced. The landscaping now consists of dirt and weeds. 
Anytime management does attempt repairs, the work is so shabby and 
haphazard that the damage is eventually compounded. 

The outside coiranon areas of the complex are in deplorable 
condition. Rats abound, dumpsters overflow, trash, condoms, broken 
glass, and human feces litter areas where little kids play in their 
bare feet. The meter rooms are trash filled and unlocked so that 
electrical panels with dangerous high-voltage lines are within easy 
reach of little children. Stripped, abandoned cars sit rusting in 
many of the seven parking lots at the complex. 

Last June 1993, there were approximately six or seven 
vacant units. Now there are thirty-three. About half are open and 
are havens for drug users and prostitutes. Vandals have caused 
significant damage in many of these empty units. Management has 
further damaged these units by cannibalizing fixtures and appli- 
ances for replacement parts. One of the two laundry rooms is 
locked and non-functioning, leaving eight washers for 200 families. 
There are large gaps in the fencing between the complex and the 

p. 3 



139 



lake. One child has already drowned in the lake. 

The tenants have lodged many, many complaints with 
Pompano Beach Code Enforcement. They respond and cite the owners. 
When fines finally kick in, management makes a hasty, bandaid 
repair — just enough to stop the fine from accumulating. The 
individual and corporate owners in Dallas, Texas are served with 
and sign for Code Enforcement's notices of these violations. Each 
notice asks that they call immediately to discuss the situation. 
The current Code inspector tells me that not once have the owners 
bothered to call. The owners currently owe the City of Pompano 
almost $45,000 in unpaid fines. Code Enforcement currently has 
prosecutions pending on eight units, and investigations are being 
made on twelve other units. The Unsafe Structures inspector is 
investigating complaints about the unsecured empty units. The 
Pompano Beach Building Department was at the project on Monday, 
July 18, investigating the structural integrity of the buildings. 

This complex failed the 100% Housing Quality Standards 
inspection done in June 1993. It also failed overall the 100% 
Housing Quality Standards inspection done in November 1993. 
Notwithstanding what HUD, the owners, and the management say, 
things have gotten worse, not better at Holiday Lake since 
November, 1993. Virtually every apartment now needs completely new 
windows. The plumbing is badly corroded and in terrible condition. 
Newly painted units have brown stains forming on the walls and 
ceilings from leaking pipes. 

And now, we understand the owners want government money 
to pay for cleaning up their own mess in the form of a subsidized 
loan. Ladies and gentlemen, the owners don't live at Holiday Lake. 

p. 4 



140 



They don't even live in Pompano Beach — they live in million- 
dollar-plus homes in Dallas, Texas and Pacific Palisades, 
California. The HUD officials who have apparently abdicated their 
responsibilities don't live there either. But it is the citizens 
of Broward County who have to put up with this disgrace in their 
midst every day, not the owners, and not HUD. And we are sick of 
promises from the owners and management companies, and sick of the 
smiling officials from HUD telling us how much better things are at 
Holiday Lake. I live there and I'm telling you they are not. We 
need help, we needed it long ago, and we need it now more than 
ever. 

Lastly, it is our children who suffer the most. If you 
want to call it like it is, our kids are suffering from abuse by 
their own federal government and these out-of-state landlords . Our 
children are ashcimed to get off their school buses. They're 
ashamed to tell people where they live. They have no place to play 
but in front of dope peddlers, drug abusers, and prostitutes. It's 
a downright shame, and very, very wrong. 

Thank you. 



la: bol\sehA- j ac . stjn 



p. 5 



141 

Mr. Shays. Amen. 

Mr. Peterson. We are going to try to help you, so we appreciate 
very much you being with us today, and your testimony. You have 
been there since 1986? 

Mr. Jackson. It was falling apart even prior to that. 

Mr. Peterson. Thank you. We are going to have some questions 
for you. 

Next we have Dr. Graham who is from Chicago, and doctor, we 
appreciate you being with us today, and we will give you a chance 
to tell your side of the story. 

STATEMENT OF GEORGE C. GRAHAM, M.D^ OWNER, 6000 
SOUTH INDL4NA APARTMENTS, CHICAGO, O^ 

Dr. Graham. I first want to say that wasn't my project. 

Mr. Peterson. No, I understand. 

Mr. Shays. Is yours better? 

Dr. Graham. Well, actually from what I have heard today I guess 
I don't fit into many of these categories as £in owner. They are say- 
ing that owners were taking money out of the project. They were 
saying projects had excessive rents, and my project does not fit any 
of those. 

Actually, I have had this project for about 23 years in the black 
community in Chicago. Right now I mgmage one of the only ones 
that have the same management in that city. They have all basi- 
cally changed hands. I worked very hard with this project. Basi- 
cally, my problem has been underfunded. 

Now, one of the panelists earlier said that this project was get- 
ting more rent. As of March, my one-bedroom apartments were 
$450 a month. My two-bedroom apartments were $500 a month. 
My three-bedroom apartments were $550. It is not about to be 
overfunded, no way. In fact, the going rent in Chicago almost was 
double what mine was. 

Now, I think my problem is this, and I think I made a mistake 
here. It has been a personality problem. For some reason I go down 
and I had a very extreme time getting rent increases. I have some 
exhibits here I have mailed out that shows one of the reasons, 
what they would do basically was come out, look at the property, 
and say something to the effect that there is some violations here 
and then that is a reason for not getting the rent increased. 

Well, how can I fix the property if I don't get a rent increase? 
If you look at the history of this building, if you look at the finan- 
cial statements of the building, you will see Uiis building has been 
grossly underfunded, and they have known that. I have gone in 
and talked to them on numerous occasions, and this has been the 
situation. 

Now, she also mentioned one thing about the fact that this prob- 
lem, this was taken back by the government. I will tell you what 
happened. This is on the paper that I sent to you. Actually, after 
20 years, you know, they say you can sell the property. All of a 
sudden a lot of activity developed around that time that this prop- 
erty could be sold. All of a sudden there was a tenant organization 
that was formed by about 10 people in the building of about 70. 

No. 2, they hired a legal assistamce foundation to help them. I 
started getting all sorts of calls from different buyers who wanted 



142 

to buy the building. They started meeting with people in the build- 
ing saying, they started meeting with developers, and then they 
started passing out literature that I sent you a copy of saying we 
can own the building, so there was an incentive for them to tear 
it up as much as they could and somehow they could get inspectors 
out. They could get the papers out. They could get them to come 
in and see things that had just occurred. But my impression, and 
I will say it is my impression, that they were trying to take my 
building over. They were trying to get the building, that is basically 
what had occurred. 

I was mentioning the fact that they said that the building had 
been backed into — it hadn't been foreclosed but it went into default. 
Now, what had happened is this: My taxes were normally $30,000. 
The local tax authority sent me out a bill for $110,000 that the 
Weyerhauser Mortgage Co. in California, who was the mortgager, 
paid the $110,000 which automatically threw my bill into default. 
That is what I think. 

At that time, I will admit I was about 2 months behind, but that 
is why that building was — and we had a meeting there, and it was 
the local HUD officials in Chicago concerning this, so I just — and 
I look at it this way: Considering the fact that my rents were so 
low, I was losing almost $800,000, I guess— no, about $400,000 or 
$300,000 a year worth of rent on that property, and so this is my 
problem. I did not get enough funding for the building. Now, I have 
a manager taking it over now and all of a sudden everything is 
working fine, the same building. 

Now, another thing they mentioned is the fact that they had 
given money to the project. Well, all they did was brought the rents 
up to what they should be. It went from, the rents that I quoted 
you earlier, which were roughly a little more than half of what the 
normal rents are to what they should be now. Now they are saying 
that money that I have I should use that for 3 years to help reha- 
bilitate the building, and these rents are just the going rents for 
a building that size. It is average. It is not an extra amount of 
money, and so this has been my problem all along, and I will just 
look to make sure I am not missing anything. 

I am trying to give you a synopsis without reading to try to save 
some time. Right now I am in court because the Legal Aid Founda- 
tion — oh, I sent you also a list of tenants who were not a part of 
this, that showed you they knew what I was trying to do to the 
building. This list testifies to the fact that the tenants knew what 
I was trying to do. It was only — and really of that 10 who formed 
the tenant organization, they could only get 5 to initiate this suit, 
which tells you something about the fact that the tenants knew ba- 
sically what was going on. 

I had taken the tenants, many of them, down to HUD. We had 
meetings with some of the local officials, and was trying to get 
things turned around, but I just want to bring out the fact that the 
reason why this building is in the situation it is strictly funding, 
definitely funding. It was grossly underfunded, and it was no way 
in the world that I could run this building that way. 

[The prepared statement of Dr. Graham follows:! 



143 



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CHiak»0. lUUNOI* M*)* 

TiLmoNi (lit) •4e-oao4 

FAX (*ll) •4e-CI«0« 



July 22, 1994 



Cona>'AS» Of The o»iH««S Btotei* 
Hcunv Of Ropr^nentatJvos 
Coni>nl<:te» On Covemnent Opcratlona 
3157 Rnyburn Houso Offloo BulldLni} 
W«ehln<jton, DC 205 15-6143 

RBi eQOO S. iDdi&na ApartmAnt: 
6000 8. In<Uanti 
Chicago, ZL 60619 

Dear Sir»i 

I am z-OGpondlng to tha letfc«r that you Bant mo ooncamlng, 6000 9. Indiana 
building providing you with a brlaif outllno of tha hlctory of tho projaot. 

Tha building was built in 1971, for $1,390,000. Originally thara vara no 
cactlon 8. attls vfas a 231-D3 projeot. Tha rant from tha out cat was not 
enough to cover security. 

I U£ad five different nanagamont flmo over a six to savan yeaura pariod, but 
each time lost tan to flftaen thousands of dollara par yaars , whsra Inourred, ao 
X develop an In hou:«<L of £io« on site nanageinent. 

About aix years aftar I hava tha projaot, I had to glva $35,000, In ordar to 
avart foraoloaed, Each time I applied for rent Inoraaee, I only reolaved baraly 
anouigh to keep tha building running, I havo brought year end'.reporta for avery 
year 1 have had tho building with ne In case anyone would lUco to view then. 

In order to }i>ep the building expense down, I did not tolta ony mknagonont 
feefor the first twelve to fourteen yearo. I also contributed my own money 
toward the project, periodaically. 

It waa obout bIx to seven years after the building was built, that 1 
reclevtng eection 8 subsidies, which covered approximately 70% (seventy percent) 
of tha opartments. Tha ratnaindar of tha apartmant hod to be ranted out, to 
Chicago housing tenants. The Chicago Housing tenants section subsidies, which 
remained with the tenants wherever they went. 

About seven years ago all of the ap2u:tjQent received goverment sootion 0. 
My problems was not getting rent rates that were' high enough to meet tha 
financial needs of tha building. 

In tlio month or March, of this year, I received i«y first inoroaae in five 
yeara. The rent before that tlmo woro $450.00, for ono boOrooD apartnonto, 
(SOO.OO per m:>nth for two bedroom apartments (utd 05SO.OO per month for throo 
bAdrooB apartments. 



144 



OEOR9B C. ORAHAM, M. 
■044 »0 COmkOR •NOVR 

OHI€A«e, ILLINOIS QOei* 

IVLCrMOMt (lit) e4«-0»04 
fMl (111) •4t-0«O4 



July 22, 1994 



l<h«s« >r«nts wer« about 1/3 o£ th« pr»v&llln9 r«nt« at that tlmo. Thi» 
do£ioJ.onoy In funding pr*vont«d rey proper up-k*«p ot tha building, whloti waa 
oxcooclvo dua to tha lar^a numbar of <phl.ldi;an In tha building. During tha tloa 
r havo tha building, I havo to go to court numorouo tlmo for building violation*. 
Vondallora was high fron both Sonant in th« building and outside coming into the 
building, dua to lack ot Beourlty offioacs. 

According to th« original cantact, TVio building oould ba oold aftar twenty 
y&Ars. In 1891 thlc projaot wao twwity yoara old. A few ooouranoos dovelopod 
around thla tlB\a that beara mantlonln?. 

Flrat, about 1 1/2 yeara prior to that, I waa cent an arroneoua tax bill for 
$110,000,' which should have boon $30,000. The billg vera going to Weyerhauser 
Mortgage Company In California. Thoy notified mo of thla aomatlma later. I went 
to the taw authorities etnd Informed them of tho error aj>d began the proceaa of 
oorrecting It. Tha authoritloo roadlly adinlttod that tho bill was an orror and 
indicated that they would corroct lt» but bafoce tl-M procee^. waa oonpleted, 
Woyerhauoer Mortgage paid the $110,000, »rtiloh automatically threw tho building 
into default. I Bubeecjuently had to file a c-ertlrlcat« Of eixor whlvh would 
take two years to for me to r»c«lve the excess money I had paid. 

Aiiothor intorosting development was that of a tenant' organisation in 
tlic' building that waa formod. Thia had nevir ovuuxivd before. It wan comprised 
of about ten tenants.. There are about aeventy aparUncuUt in tli« building. The 
Legal Aid Foundation oubsequently be^aa meeting wiUl developera. Tlicy also bugaii 
passing out handbills to Uia oUior tunoiitti etating that "wo can own tho building". 
It waa impreaalon that davolopara were taking aJvanLaga of tU« faut that the build 
^ing could be sold and the -Jack Kemp Hope Proyxaja, aod wwre uulng the tenants as 
a dceoy, I aloo began receiving lofctora from the local HUD offlou about iL |XisalUle 
forcoloeuro if the physical and financial conditions of Uie bulldl»g wwre uot 
brought up to standard. I began getting letter from potential buyers also. 

I retained a lawyer and notified my congressman who «ent representatives to 
a meeting with HUD. Tlio return of Uia «!Kve»u tax money brought tho mortgage notes 
to throe months behind. 1 turned the building over to Gai>Llaku Mojiageufcuit. 



145 



9BOROC C. ORAHAM. M. D. 
•044 to. OOTTAOt OROVI 

K o. aox ie*»* 

ONtOAOO, ILLINOI* CO*!* 

T«ktrH9Nt Olt) •4»<«04 
fM (lit) Kt-MOA 



1<h« Legal Foundation wa« utad to fil« a law ault for flva o£ tha'tonanto 
of tha tanant orvanlaatlon. Thay, tha te'nanta atato that thay auCforad nantal 
and phyaioal ham dua to tl>a oonAltlona In tha building. Itila caoo Is aoheduled 
t^ 90 to trial tho flrot wook In 6optoinbar> X oakod ttVD oCflolala Cor tha tha, 
back BMnagereant feea that I did not recalva and for tha loana Z made to tha 
building and thay ** »nid no*, X havo baan told that the legal faas of tha trial 
.could increaao to tha axtant that, ahould I loea tho oilso, I oould wind \»p Joalng 
tha building by* baing forood tO avll iti 

I feal vary unhappy about tha faot that after all of my tltna and afforta and 
noney I put Into tha projaot that I an about to losa It. I feel that the problems 
aaaooiatad with thio projaot wora diraotly ralatad to tho faot that I did not 
raoiava anough rant to properly maintain the building. Poc tha most porti ny 
rente were below those HOD properties in my araa. 

t had barely enough money to make r^aira UiAt we vxouasivre due to tha tenant* 
and the large number of ohlldzan in the building. I feel that HUD could have 
brought this to a head long before new before all oC the v^obleoa developed: 
I have had and reaintained this building in a blacX neighborhood in Chicago for 
twanty three years. Only a very fev of the project in the blacK nelglibotliovd 
survived this long vith changing ownera. 

Oord tally Y. 



Wr Goorge Grahan 



146 



\JlmJ 547 WMt JtOkfOO 9<xil*v»i4 

^ •< •''^ ChlMBO, minoJi aoftoe- 8780 



„fti<2ll989 



Sc« Qeorgd C Otali«n 

6044. South Cottftga Orov« Avanu* 

Cblcft^o, Illlnolo 60617 

I>aar Pr* Orahaai 

Subject I ProJ«et Mo. 071-55119 

6000 South XndlAna AvuuU.*' -' 

Chicago, Jlllnola 

Coasldocatlon hag becD g^ven to your raqu^at .to lncr«aa« tho rentala lo 

the captioned project. 

This lect«r Is to «dvlea you that th« r«quastad rent lncreas« haa hsfn 
denied baocd upon the KUD engineer' • On'elto loapsctlon Report dated 
Februor/ 23, 1989 vhloh states In psrtt. 

"Most of the ItoBs noted In previous Inspection' reports dated 
1/11/84 and lL/29/88 show no corroctlvo aotloii being n«de. 
Paragraph 8 of the Regulatory Agreement atatas that oxmers ehall 
nolotaln the mot^gaged prealses, aocooinodaclons, grounds, equipment 
and .appurteoanoes in good repair and condition. ** 

. Contact Edward Hook at 886-2579 ahould you have any quoatlone. 

81ncecely« 
/I 




Be^Ja^la Teealer 

OM-ty, Loan Wanagenent Branch 



147 



Pc. 09orq« C. OrohAn N.O. 

July 2i, 1991 M»y 7,1992 



Former city worker, 7 others 
accui^ of bilking voter group 



. A tanner (rity woricer tnd ••vtn 
biher people h«Mj b«en b\4im6i on 
cbtrpM or blUdfl| • non-pi^t or- 
laniMtion ouf of more th«ii 
S42,00O by ftJtely claiminfi they 
litd registered thouMUtdi of new 
voten. 

. Tt)^ Chicago Voter ResUtratieA 
Potliiion paid the clsht St for 
tvcry new voter rcdsi^red Thi In* 
ilivlduaU Indicted Mondiy hftd 
been certlfled by the Chicago 
^ard or Bloction CbtTuniisiODen 
fs deputy fegiftrtrt, 

; Tho elfiht tfe diareed with fUluu 
*ui hunoreds oT tudil theeU witS 
(he oeme$ or people never sctu&Qy 
(«l(i*te<«d. 

: tSw Chicago Voter Reglstaiioa 



Oo»UCIon used the eudJt ihccu to 
dourmine bow much to p«y eitcli 
deputy n^uv. 

The irxllctincnt cbirtei that 
Robert B. WiUkmi Jr. }4, of (700 
South Shore Drive, a tormor Wt|«r 
Dt9firtrr.ent epjp!oyc«, reaped 
nooHy SSZjOOO. 

' Alto LkA'dtbd on dtv^e* or theft, 
and mutlllation of yl daigff 
« ijteveq /one*, 3 



ftre Seren Tone*,'?^"^ 

itWTi. Mwlewood Ava; EUea- 
beth Hibler, 26, of 684S S. Cornell 
Ave.; Vbiinia Qwon, 25, of 4024 
W. Diviilon Stj Patnda Swtrunk, 

" gd m SUt WRK. a, bam d - 

L S. ihatana A vci Xnelf HWV. 
. oPrairSrCintaae Orove Ave.: 
end Jonathan O'NnC 29, of 3615 
S. Michigan Ave. 



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THIS ARTICLE APPEARED IN LAST WEEK'S TRIBUNE. WE WANT TO FORM A TENANT 
ORGANIZATION THAT IS MORE INTERESTED IN INPROOVING LIVING CONDITIONS IN 
THIS BUILDING THAN ONE THAT IS. TRYING TO SELL IT. IN THIS WAY, YOU ARE MORE 
GUARANTEED OF HAVING A PLACE TO STAY. 






148 



^^^^ C^Jf/i^l/^ 



60 

Chiv. 

Auguet 6, 1992 

UiSf DaparWnsnt Of Houalnfi 

and Urbon Devslopownt 

Chicago Beglorwil Office. Region V 

77 W, Jaok«on, BLVD 

Chicago, IlUnoi* 60604-3507 



RI5: 6000 Indiana Apartrnenta 
Projact No- 071 IL 55 119 

W)RRQUI PLAN FOR BRINGING TUB MORTCAGE OMtENy 

Dear Sirs: 

I am requeetii^ft that you substract $31,000 from the mortgage 
delinquency which represents delinquent replacejnent rcaerva fundfl. 
I have 940,000 In th« teplacement reserve and I am requesting tf^t 
you Bubatroct $15,000 from that to be applied to the delinquency 
amount, leaving $26,000 which repreaentfl elightly over two months 
delinquency vhich can be paid out at §5,U00 per mgnth over o eix 
month period. 

A HUD form demons tratlng thew payments ie accompanying this 
letter. This form it in accordance with the handbook //4350.1CHG-54. 



Oordially Yours, 



I 



G4orsR C. Cranam.MD ' 

leg 



149 



LBl^^r/>^ 



J^^^ (f^^^^/^^^^ 



Indiana Terrace Tenant Organization 

ITTO 

6000 DncDDana ' Byildlng Mooting 

Tuesday, April 7th, 1902 

6:00 P.M. 

Apartment 602 



I. Call to order . Valdri© 3lbb« (6 mln) 

II. Reading of last minutes ' VIcki Mack (6 mln) 

III. T.A. Consultants report Pal SIstrunK (10 mln) 

IV. By-Laws formation/Incorporation . ;eoe Valorle GIbbs (15 mln) 

V. Organization development Pat SIstrunk (10 mln.) 

VI. HUD Planning Grant (dead line April 15th) Group Diecusslon 
Vil. Open Tenant owned Laundry Mat Group Discussion 
VIII. Questions /Answers QroUp Discussion 
IX Closing Remarks 

X. Adjournmient 

Refreshrnents Served 



150 



For more irttoir aiiu 
•■.'- N'L-kle ;n (HOQJ.'Pot \n hWA 



Sa^(f^J^^^^^^'^ 



vK.'iiiW. \. J into I l\.v 

HeaTy the&zreal do 






This lo to confirm th9 fact tti«t w«, tenknts of 6000 ^ Indiana 
CSicngOf IlllnolB are not a part of th* suit fll«<) against tha 
Doportment of Housing end Or* Coorgo Orahan fllod by tha Indiana 
Torraoa Tanant Organisation t>>rough tha Tyaga.1 Xcelctanoa Founda- 
tion. Our slqnabures balow conClra thla fact. 



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152 



^^^/^(^Jm^'^^^'^^ 



BUILDING MEETINGS 
6000 S. INDIANA AVE. 

APT 602 

THURSDAY JAJNiy^BY DSTIHJD^ 



lJ...i^..Ti 



QAH iY5 BEOOmt OWNERS 
OF THE 6000 INOIANA BUILDING? 

ARE TENANTS SERIOUS ABOUT 
IMPROVING OUR LIVING CONDITIONS? 

Don't believe the -hype- 
come to this meeting. 
Hear the real deal.., 

INVITED GUEST: The Leiand Group LTD 

Property Development Consultants 

Refreshments served 

(If you must^ bring your kids) 
And bring a ohair 

For more Information, 
Contact Vickie In #1001, Pat In #602, or Valarl© In *B01. 



153 

Mr. Peterson. Thank you. I have some questions, but we will 
get to those after we get the other witnesses' testimony here. 

Next, we have Mr. Orehek. You are the general partner for the 
Edgewood Terrace Apartments I; is that correct? 

STATEMENT OF JOHN M. OREHEK, GENERAL PARTNER, EDGE- 
WOOD ASSOCIATES, DESIGNATED REPRESENTATIVE OF SP 
PROPERTIES 1982 LIMITED PARTNERSHIP, THAT OWNS 
EDGEWOOD TERRACE APARTMENTS, WASHINGTON, DC, AC- 
COMPANIED BY ROY LEE HI, ASSOCIATE COUNSEL, SECU- 
RITY PROPERTIES, INC., SEATTLE, WA 

Mr. Orehek. Mr. Chairman, thank you. 

Mr. Peterson. Welcome to the committee. 

Mr. Orehek. Committee members, I am actually a general part- 
ner of a general partner of the general partner of Edgewood Associ- 
ates. 

Mr. Peterson. You are the closest one they could get? You are 
way down here at the bottom of the chart. This looks like Senator 
Dole's chart on medical care and you are way down at the bottom, 

Mr. Orehek. They are complicated structures, but they seem to 
work most of the time. 

Edgewood was acquired by Edgewood Associates Partnership 
back in 1982. It was about 12 years old at the time. It went 
through a needs assessment on our part before we acquired it. The 
transfer was approved by HUD from an existing partnership to 
ours. It is important to understand a little bit more about the 
project. It is in seven different buildings. One is a mid-rise build- 
ing, and then there are six buildings of garden style, two and three 
story. 

Now, these are all spread out over about 6 acres, and those 6 
acres are bordered at least on two sides by public streets in the 
northeast guadrant of the city of Washington, DC. The property 
has an unaerlying 221(d)(3) mortgage that is, I think, about $4.8 
million principal as of the end of last year, outstanding $4.8 million 
principal. 

I mentioned before that the property's location is in the northeast 
quadrant. It is in a difficult transitional neighborhood. The prop- 
erty, and most of the information that I am going to give you— 
about the property, is based upon data as of the beginnmg of this 
year or the end of last year, 1993, because we have not had direct 
involvement with the property since that time. HUD has been in 
charge of the property since that time, and they have contracted 
with another management agent to watch the property and man- 
age the property. 

As of that time, however, 48 percent of the units in the building 
or in the buildings were occupied, and not incoincidentally about 48 
percent of the units in the building had Section 8 associated with 
it. The balance are available to market rate renters. With respect 
to the tenant population, it is important to note that approximately 
80 percent of the tenant population consists of families, and most 
of these families are single-parent families. 

The remaining 20 percent or so is elderly and there is a very 
high density of children onsite. I say these things to give you some 
perspective of the amount of activity that goes on, the type of wear 



154 

and tear that you are going to generate on a project that has a 
family orientation rather than an elderly. 

It is very important to note the unit mix because we believe that 
this has been a very major contributing factor to the difficulties 
that the property has experienced. The unit mix ranges from effi- 
ciencies with one bath to four bedrooms. We have about 177 of our 
total 292 that are one-bedroom and two-bedroom units, and then 
about 115 are three and four bedrooms, so the larger units com- 
manding larger rents, are actually a lot more difficult to market 
without associated Section 8. 

The property was acquired in 1983. An affiliate has managed it 
up until January 1994, and during that period of time we have not 
made a profit on the project. In addition to the money that the 
partnership invested in rehabilitating the project at the time it was 
acquired, which was, I believe, in excess of $300,000, the partner- 
ship has invested an additional $600,000 plus of its own money 
into the project, and affiliates of the partnership have not taken 
management fees to the extent of around $450,000. When you com- 
bine that with whatever soft costs there are, such as our oversight 
expenses, we think we have in excess of $1^2 million invested in 
a project that has a $4 million mortgage. 

I think it is fair to point out at this point that on the video it 
indicated that there was approximately a half a million dollars or 
$550,000 or so of government subsidy to the project last year. 
There was a total gross rental income, I believe, of about $1V2 mil- 
lion in 1993 when you combine the Section 8 subsidy with the rent- 
al collections from the tenants. 

Of the half a million dollars, approximately $200,000 went into 
security costs alone, and that was probably not enough. Edge wood 
has been struggling. Why? Primarily for two reasons. No. 1, I don't 
think anyone has anticipated the extent of the neighborhood 
change primarily as a result of the growth of the drug business 
that we as a Nation have and experienced. 

Our property has very easy ingress and egress, and it is ex- 
tremely difficult and costly to secure. It has become a drug haven, 
especially in the garden style buildings which are the larger bed- 
room unit buildings and therefore were harder to rent. Those build- 
ings had a drug-associated use. 

In addition to the crime problem, which we were not anticipating 
at the time that we bought the building nor could we adequately 
fund after what I will discuss with you our many trips to HUD, we 
had one of our major tools, one of our major weapons in our war 
in how to deal with these projects taken away from us in 1986 
when the tax law was changed. Up until that time when we were 
experiencing a problem, such as a financial problem with a prop- 
erty, we were able to go out and bring in new investment dollars. 
These dollars could be used independently or in coniunction with 
some HUD program to solve the current problem, whether it was 
a deficiency in the building or additional security. Lacking that tool 
we were reliant on HUD, and our own limited resources, which, as 
I expressed, we put in quite a few dollars to combat this problem. 

It is probably best that I give you some detailed analysis or de- 
tailed review, historical perspective, if you will, on what happened. 
It won't take too long. As I mentioned, we had struggled for quite 



155 

some time with the crime, the vandalism that resulted in people 
moving out. That resulted in mounting payables. That resulted in 
more difficult time dealing with vendors. That resulted in them 
charging us probably more because of the risk that they were tak- 
ing in providing service to the project, et cetera. It had a snowball 
effect. 

In addition to that or during that time, we always tried, endeav- 
ored to comply with all of HUD's regulations and attempted to pro- 
vide the residents with as decent and safe and sanitary housing as 
we could under the conditions. The property, as of December 31, 
1993, did not meet HUD's housing quality standards, and it is cur- 
rently in need of extensive renovation, estimated to exceed $10 mil- 
lion, and the property must obtain additional financing to address 
its physical requirements. 

As I mentioned, the property is located in a neighborhood with 
a high demand for Section 8 units, but with really no demand for 
larger, unsubsidized, below-market interest rate units, of which we 
have 52 percent of our units. 

From early 1989 through the summer of 1992, Edgewood ap- 
proached HUD on numerous occasions with requests for additional 
HUD Section 8 loan management set-asides and emergency Section 
8 funding. Additionally, we approached HUD for management im- 
provement operations plans acceptance and for a HUD Section 241 
capital improvement loan. 

In both of those cases, we were prepared to put in additional fi- 
nancing if HUD would step to the line with a percentage of the fi- 
nancing. We applied for additional Section 8 units on March 22, 
1989, on July 20, 1990, on July 10, 1991, and February 24, 1992. 
We did not get the additional Section 8. We continued to pursue — 
noting the physical deterioration of the property, we continued to 
pursue other options, as I mentioned, the MIO plan, and those 
were not approved. 

In March 1992 and in June 1992, and then several days there- 
after in June 1993 and September 1993, HUD issued management 
review or physical inspection reports which gave unsatisfactory rat- 
ings in the conditions of the operation of the property. We submit- 
ted numerous appeals and responses to their reports clarifying 
them, addressing the concerns, and to this date, July 26, 1994, we 
have not received any formal acknowledgment or response to our 
appeals and responses. 

We have additionally been attempting to work to transfer the 
property to a nonprofit, which if it can gain financing to acquire 
the property, could hopefully renovate it and turn it around. We 
have been working with that nonprofit and with HUD to accom- 
plish that. To date, we have not reached a successful conclusion to 
that. 

Mr. Peterson. Could we wrap it up now? Mr. Shays has to 
leave, and we will get to more details in the questions unless there 
is something more that you need to add. 

Mr. Orehek. There is more, but I will be prepared to talk about 
it later. 

[The prepared statement of Mr. Orehek and the organizational 
chart referred to follow:] 



156 

Testimony of 

John M. Orehek, Designated Representative 

of SP Properties 1982 Limited Partnership, 

General Partner of Edgewood Associates 

Prepared for the 

Committee on Government Operations Subcommittee 

on Employment, Housing and Aviation 

Relating to Conditions In and the Management of 

Section 8 Project-Based Housing 

The Honorable Collin C. Peterson, Chairman 

July 26, 1994 

Dear Mr. Chairman: 

The following responds to Paragraphs 1, 2 and 3 of your July 9, 1994 letter requesting testimony on 
Edgewood Terrace Apartments, located in Washington, D.C. 

RESPONSE T O PARAGRAPH NO. 1: 

I. BACKGROUND INFORMATION 

Edgewood Terrace Apartments (referred to as "Edgewood I" or "the Property") is owned by 
Edgewood Associates, a District of Columbia limited partnership ("Edgewood"). The general 
partner of Edgewood is SP Properties 1982 limited partnership. Edgewood acquired the Property In 
March of 1983. The 292-unit complex was built on 5.97 acres In 1972. It is constructed of 
reinforced concrete and masonry. There is one mid-rlse building which is seven stories high and 
six garden apartment buildings. The garden apartments are constructed of the same materials as the 
mid-rise building. 

Edgewood I was financed under Section 221(d)(3) of the National Housing Act with a First 
Mortgage In the principal amount of $4,687,407 as of December 31, 1993, and a Second Mortgage 
in the principal amount of $176,528 as of December 31, 1993. In addition, there is also an 

1 



157 



outstanding acquisition note to the March 1983 Seller in the principal amount of $1,360,000 as of 
December 31, 1993. Under terms of the Regulatory Agreement with the United States Department 
of Housing and Urban Development ("HUD"), distributions to the owner were limited to 6% per 
annum of defined equity. No distributions have ever been made to the owner, as Edgewood I 
never made a profit. 

II. I OrATION/NEIGHBORHOOD 

Edgewood I is located in Northeast Washington, DC. 

Public bus service is available along Edgewood Street and there is a subway station six blocks from 
the Property. The subway provides service to the downtown area of the city as well as the 
Maryland and northern Virginia suburbs. 

The Property is located in a neighborhood known as the Edgewood District, which is generally 
regarded as a low income, high crime area. The neighborhood is primarily residential with some 
limited commercial uses in the surrounding area. Edgewood I has a District of Columbia elderly 
public housing complex to the North, and a HUD Section 236 high rise complex to the West. 

III. PROPERTY INFORMATION 

The gross floor area is 215,410 square feet with 157,084 square feet as residential rentable area, 
24,635 square feet as commercial rentable area, and 33,691 square feet as common area. 

As of December, 1993, Edgewood was approximately forty-eight percent (48%) occupied. 

Eighty percent (80%) of the tenant population consists of families (most of which are single parent 
families), with the remaining twenty percent (20%) being elderly. There is a very high density of 
children at this Property. 

As of December 31, 1993, the commercial space was approximately 80% occupied by the D.C. 
Department of Human Sen^ices, a delicatessen, a recreation center and a supermarket. 



158 



At the time the Property was constructed, it was HDD's policy to require a substantial number of 
large family units. The type and size of the units located on the Property are summarized in the 
following table: 



Type of Unit 



Number 



Sq. Feet 



Efficiency/1 Bath 

1 Bedroom/1 Bath 

2 Bedroom/1 Bath 

3 Bedroom/1 Bath 

4 Bedroom/2 Bath 



20 
81 
76 
43 
72 



455 
590 
795 
925 
1,235 



There is a central laundry facility in the mid-rise on the basement level and each of the garden 
apartments has individual laundry facilities. 

Each unit has a kitchen equipped with a gas range, refrigerator and garbage disposal. There is vinyl 
asbestos tile throughout the units. The efficiency, one, two and three bedroom units all have one 
bathroom with a commode, shower/tub and sink. There is a playground and swimming pool. The 
pool is closed due to lack of funds for necessary repairs. 

All of the four bedroom units are located in the three-story garden apartments. All four bedroom 
units have two bathrooms and individual gas heating and cooling systems. 

Rent payment includes electric heat, air conditioning, lighting and gas. 

IV. SECTION B INFORMATION 



• Section 8 Contract No. DC 39M000077 
■ Section 8 Contract No. DC 39000045 

• D.C. Section 8 & Tenant Assistance Payments 





Maximum 


Section 8 






Section 8 


Contract 






Contract 


Amount 


7oof 


nits 


Amount , 


Utilized 


Units 


56 


$257,795 


$231,885 


(19%) 


58 


$370,987 


$333,407 


(207o) 


25 






( 9%) 
(48%) 



159 



Section 8 Unit Monthly Rents (1993): 

a) Efficiency $489 

b) One Bedroom $595 

c) Two Bedroom $683 

d) Three Bedroom $795 

e) Four Bedroom $865 

Rent increases are budget-based. 

V. FINANCIAL INFORMATION AS OF DFCFMBER 31 . 1993 

Operating Costs Without Debt Service (1 993) $1,657,844 

Annual Operating Costs Including Debt Service (1993) $1,815,236 

Replacement Reserve Balance as of December 31,1993 $88,689 

Computation of Surplus Cash, Distributions and Residual 
Receipts as of December 31, 1993 ($2,926,436) 

Although not required by the HUD Mortgage and Regulatory Agreement, property management 
fees of $458,112 that were accrued through December 31, 1993 were waived by the affiliate 
management agent in an attempt to alleviate the financial strain. Edgewood or its Affiliates made 
voluntary advances to fund operating deficits as of December 31, 1993 totaling $603,830. 

Security Costs for 1 993 were $ 1 85,766. 

RESPONSE TO PARAC.RAPH NO. 2 

Edgewood I has been struggling financially for several years. Mounting accounts payable, as well 
as vacancies, high unit turnover, rent collection problems, crime, vandalism and security problems, 
have plagued the Property. The physical condition has steadily deteriorated. Edgewood I is faced 
with the typical problems of a property over 20 years of age, with outdated and inefficient elevator, 
electrical, heating, cooling, and plumbing systems. Nonetheless, within the financial constraints 



160 



and limitations, Edgewood endeavored to comply with all HUD regulations and attempted to 
provide the residents of the Property with decent, safe and sanitary housing. 

The Property, as of December 31, 1993, did not meet HDD's Housing Quality Standards and is 
currently in need of extensive renovation, estimated to exceed $10 Million Dollars. The Property 
must obtain additional financing to address its physical requirements. 

The Property is located in a neighborhood with a high demand for Section 8 units with no demand 
for unsubsidized Below Market Interest Rate ("BMIR") units. Fifty-two percent (52%) of Edgewood 
I's units are BMIR. 

From early 1989 through the Summer of 1992, Edgewood approached HUD on numerous 
occasions with requests for additional HUD Section 8 Loan Management Set Aside ("LMSA") and 
Emergency Section 8, Management Improvement Operations Plans ("MIO Plans") and a HUD 
Section 241 capital improvement loan request. Edgewood applied for additional Section 8 units on 
March 22, 1989, July 20, 1990, July 10, 1991, and February 24, 1992. Edgewood recognized the 
physical deterioration of the Property and diligently pursued possible options for addressing the 
physical problems, including submission of MIO Plans to HUD in May, 1989. A revised MIO Plan 
was submitted in January, 1990 and resubmitted in June, 1990. In July, 1991, an application for a 
conditional commitment for a $10,500,000 HUD 241 capital improvement loan was submitted to 
HUD to address the Property's long and short term physical needs. In October, 1991, the 241 
capital improvement loan application was rejected by HUD, primarily due to the classification by 
HUD of a majority of the line items as deferred maintenance. 

In March 1992, June 1992, June 1993, and September 1993, HUD issued either Management 
Reviews or Physical Inspection Reports which gave "Unsatisfactory" ratings in the conditions and 
operations of the Property. Edgewood submitted numerous appeals and responses to HUD's 
Management Reviews and Physical Inspection Reports. To date, HUD has never formally 
acknowledged or responded to any of Edgewood's appeals and responses. 

In September 1992, HUD informed Edgewood that the Section 8 LMSA/Section 241 capital 
improvement loan proposal submitted by Edgewood and a local non-profit corporation was not 
approved. Accordingly, Edgewood informed HUD of its desire and intention to turn the Property over 
to HUD or its designee and to terminate property management by its affiliated agent. In the Fall of 



161 



1 992, Edgewood defaulted on the first and second mortgages, which were subsequently assigned to 
HUD in the Summer of 1 993. 

During the Spring and Summer of 1993, the local non-profit corporation continued its efforts to obtain 
HUD approval for an acquisition/renovation program for the Property. While Edgewood supported 
that effort, Edgewood requested that HUD take the Property either through deed-in-lieu of foreclosure, 
foreclosure or mortgagee-in-possession. 

On September 2, 1993, HUD again turned down a revised acquisition/rehabilitation proposal 
submitted by the local non-profit corporation. The local non-profit corporation subsequently appealed 
this decision to HUD-Headquarters where it is now pending. 

Edgewood and HUD agreed to have HUD take possession and operating control of the Property 
pursuant to a Mortgagee in Possession Agreement dated December 22, 1993 ("MIP Agreement"). 
Pursuant to the MIP Agreement, all tenant security deposits, operating accounts, existing leases, 
service contracts, etc., were turned over to HUD, together with Edgewood's rights to collect and 
receive rents from the Property. 

On January 14, 1994, HUD assumed operational control and management of the Property under the 
MIP Agreement. HUD is now responsible for the day-to-day operations and maintenance of the 
Property. Since operating control of the Property has been turned over to HUD, Edgewood does not 
have current information on such matters as vacancies, rent roll, current percentage of units that 
receive Section 8 assistance, and accounts payable. 

RESPONSE TO PARAGRAPH NO. 3 

Edgewood I became a troubled HUD project due to a combination of factors. fksL a surrounding 
neighborhood where drug trafficking, crime and vandalism took over and made it impossible to 
protect the Property and its tenants from those forces. Second, a steady decline in the income levels 
of tenants and tenant composition that increasingly lacked family structure and stability. Ihird the 
substantial difficulties in evicting delinquent and undesirable tenants under the laws of the District of 
Columbia. Fourth, a project design which combined large four bedroom garden apartment structures 
with a centralized mid-rise structure; as crime and vandalism took over the neighborhood, its first 
impact was on the surrounding low-rise units which, ultimately, made it virtually impossible to 



162 



adequately secure the mid-rise structure which contained the largest number of tenants. Fifth, with 
the advent of the 1986 Tax Reform Act and the loss of tax benefits to investors in low and moderate 
income housing, it became impossible to raise additional private capital to fund repairs, maintenance, 
capital replacements/improvements and increased security costs; following the Tax Reform Act of 
1986, the Property became totally dependent on HUD and the flow of Section 8 subsidy for survival. 
Sixth, the inability of HUD to timely respond to rent increase requests. Section 241 capital 
improvement loan requests and Edgewood's proposal to convey the Property to a iocal non-profit 
corporation, which had successfully completed the acquisition and renovation of similar low-income 
properties. Seventh. Edgewood and its affiliates have advanced over $1 Million Dollars to Edgewood 
I. Notwithstanding these optional advances, Edgewood simply did not have the resources to deal with 
the magnitude of the drug, crime, vandalism and security problems and the deteriorating physical 
condition of the Property. Ei ghth. HUD was not able to timely respond to requests for assistance or, 
ultimately, Edgewood's request for HUD's approval of the conveyance of the Property to the local 
non-profit corporation. 

RECOMMENDATIONS 

The brief chronology of events surrounding the Property as described in the "Response to Paragraph 
2" above provides a sense of the efforts and frustrations encountered in attempting to deal with the 
physical and operating needs of the Property. The recommendations Edgewood would make as to 
how HUD can improve its assistance to owners and property managers with HUD properties similar 
to Edgewood I are as follows: 

When HUD is made aware of the increasing impact of drugs, crime and vandalism on a HUD 
property, HUD should respond by joining the Owner in requests for greater attention and protection 
from local police authorities and should respond to requests for Section 8 rent increases to cover 
increased security needs or special loan assistance for the acquisition and installation of such security 
devices (electronic surveillance, fencing, etc.). 

For properties such as Edgewood I, where both project design/configuration and original construction 
shortcomings contribute to declining physical condition and habitability, HUD should permit 
demolition of certain units, capital improvement grants, or "soft" capital improvement loans to owners 
who do not have the ability to raise capital to deal with such problems. 



163 



In the case of Edgewood I, the inability to obtain timely responses to requests for Section 8 rent 
increases from HUD was a major contributor to the decline of the Property. An owner and property 
manager of a property such as Edgewood I, which is in a rapidly declining condition due to 
surrounding crime, vandalism and lower-income tenancy, simply should not have to wait a year or 
longer for HUD to act on a rent increase request, a Section 241 capital improvement loan, or other 
legitimate requests for assistance. When HUD perceives a deficiency in an application, it should be 
addressed promptly and HUD should work with the owner to put the application -into acceptable 
form. 

When there is an opportunity for an owner to convey a property such as Edgewood I to a qualified 
locally-based, non-profit corporation with a track record for being able to rehabilitate and operate 
projects such as Edgewood I, HUD should "jump" at such a proposal. 

The above comments on the lack of HUD responsiveness and inability to provide assistance are not 
intended to lay the blame for Edgewood I on HUD. In fact, loan management personnel at the HUD- 
D.C. Field Office are overwhelmed by the number of projects with problems similar to those of 
Edgewood I that they have responsibility for. In our view, it is impossible for HUD staff to effectively 
deal with projects such as Edgewood I, given current staffing and workload levels. There has got to be 
real recognition within the Congress and OMB that HUD cannot effectively manage its portfolio of 
HUD-owned properties and HUD-held mortgaged properties with the resources presently being made 
available. Problem properties such as Edgewood I are enormously consuming of HUD staff time and 
attention, and their problems are complex, difficult and frustrating to deal with. HUD has to get more 
resources focused on properties such as Edgewood I before they have fallen to the bottom rung of the 
affordable housing stock ladder. 

Respectfully submitted, 
EDGEWOOD ASSOCIATES 



164 



Supplemental Testimony of 

John M. Orebek, Designated Representative 

of SP Properties 1982 Limited Partnership, 

General Partner of Edgewood Associates 

Prepared for the 

Committee on Government Opentions Subcommittee 

on Employment, Housing and Aviation 

Relating to Conditions in and the Management of 

Section 8 Project-Based Housing 

The Honorable Collin C. Peterson, Chairman 

August 5. 1994 

Dear Mr. Chairman: 

The following information supplements Edgewood Associates response to Paragraphs 1 and 
2 of your July 9, 1994 letter requesting testimony on Edgewood Terrace Apartments, located in Washington, 
D.C. 

SUPPLEMENT TO PARAGRAPH NO. 1.1 : 

The owner of the property is Edgewood Associates. Edgewood Associates is a District of Columbia limited 
partnership. Its general partners are SP Properties 1982 Limited Partnership ("SP Properties 1982") and 
Edgewood, Ltd. Edgewood, Ltd. is also a limited partner of Edgewood Associates. 

The general partner of Edgewood, Ltd. is SP Properties 1982. The limited partner of Edgewood, Ltd. is 
Combined Properties Limited Partnership ("Combined Properties"). Combined Properties is a Washington 
state limited partnership formed to invest in several real estate properties. The general partner of Combined 
Properties is also SP Properties 1982. The limited partners of Combined Properties are various individual 
investors. 

The general partners of SP Properties 1982 are Paul H. Pfleger, SP Consolidated Limited Partnership ("SP 
Consolidated") and MAE-SPI, L.P. SP Consolidated is also a limited partner of SP Properties 1982. SP 
Consolidated's general partners arc Paul H. Pfleger, John M. Orehek, and John Taylor. The limited partners 
of SP Consolidated are individuals. 



165 



The purchase price for Edgewood Terrace I was Eight Million Seven Hundred Twenty-Five Thousand Seven 
Dollars and No/ 100 ($8,725,007.00). The purchase price was paid as follows: 

(a) $6,116,400 by assumption of two HUD insured mortgages 

(b) $2,158,607 Promissory Note 

(c) $450,000 cash at closing 

As of December 31, 1993, the outstanding bjtlance due under the Promissory Note identified in Paragraph 
(b) above was as follows: 

$1,360,000 Principal 

2.719.994 Accrued Interest 

$4,079,994 Total Due 

The Promissory Note was paid down from the limited partners' capital contributions rather than operating 
income. 

As of December 31, 1993, the outstanding principal of the two HUD insured mortgages was $4,863,935 and 
accrued interest was $221,211. 

The records of Edgewood Associates and Edgewood, Ltd. indicate that their respective partners have 
received, as of December 31, 1993, tax loss allocations in excess of $11 million. However, a substantial 
amount of these tax losses were incurred subsequent to the 1986 Tax Reform Act and therefore may not 
have been fully deductible by the partners. In addition, upon foreclosure of the property or the issuance of a 
Deed in Lieu of Foreclosure to the United States Department of Housing and Urban Development, which is 
expected to occur within the next few months, the partners of Edgewood Associates may be required to 
recapture those tax losses which were deducted that were in excess of their original capital contributions to 
Edgewood Associates or Edgewood, Ltd. It is estimated that the tax recapture to the partners may be in 
excess of $8.7 million which may be taxed at their individual rates. 



166 



SUPPLEMENT TO PARAGRAPH 2 : 

For your information, please find a copy of the HUD Mortgagee In Possession ("MIP") Agreement dated 
December 22, 1993. 

Respectfully submitted. 



EDGEWOOD ASSOCIATES 



167 



\ U. 8. D«p»rtm»nl o) Houting and Urb«n 0«ir»lop«ii»nl 

\ ■ y Witthlngtan. D C FUU Otilc*. Rfglsn III 

'^n-i-'^ Union CenWrPIwi 

820 First SI. N.E. 
Waihlngtoo, D,C. 200M-42O5 



Hr. Paul Pfle^ar 

and M:. Suaaell Lomax 
8» ?covaxtiaB 1982 iimiteij Jartaerahlp 
1601 riCtii Avenue, suite ISOO 
Seattle, waenin^ton <jmoi 

Ml Project Haaei Eflgevood Terrace Apartnenta 
LoeatiOD: 601 Bryaat street, v.t, ■ 

Haahlngton, D. c. 
Project Nuober: 000-S5095-LO 

Dear Sirs: **' 

Tliii letter, when properly execoted by authoriied officer* of 6P Properties 
1982 Limited Partnership (herein called the 'Mortgagor'), ahall conatituta an 
agreement betveec the Mortgagor and tha Aaaratary nf Roualng »T\A Orban 
OavalocaeBt (herein nallail • Sacratary » ) , acting by and through ". Hugh Allan, 
nlractasr, Honaing Mungaaant Dlvlalon, with regard to rSA Project Me.OOO-SSOflS 
(harals ealleid the 'Project'). 

MBBSZAC, the Mortgager has failed to noka poymaata owed to the Secretary 
nndar a Mortgage note eecured by the project, and haa been duly declared to be 
la default by the Secretary ; 

msKZAS, the Reguletory Agreanent entered Into between the Mortgagor and 
the secretary provides tnat the secretary may taxe possession of the project 
after such default by the Mortgagor) 

MBEItSAA, the Mortgagor and secretary wish to provide for the orderly and 
peieuble tiansfer of the poisesslen aad Btsa^eaeht of the project fcea the 
Mortgage to the Secretary. 

HOW, TEZli£rOKI, the Mortgagor and the Secretary agree a* follows: 

1. The Mortgagor will deliver to the Secretary or hi* agents posseeaicn 
of all the property, real, perso.ial or nixed, associated with, 
derived frocD or uaed in the operation of the Project. 

2. The Mortgagor and hla agent will refrain fron interfering in any way 
with the pnaaaaa'ion, praaarvatinn, operation and managemaot of the 
Project by the Kaeretary nr Ma aganta. 



168 



TnS ^»^l?ti°^ i';-*'*''?. »<'5ijf>« ••-''■• **»? e««.«t«rY th« right to collect 
ana recelvs »11 rents, charges and profits from the project. Th« 

Secretary aqrees to ua« this Projact Incon* to pay naoaasary 

expenses for oparating and preaarvin? tha Projaot and to also pay 

the Mortgagnr's obligations und«r tho Hot* and Mortgage vheo Project 

incom« sxeaeda opacatlcg axpeDsas. When operating axpanses exceed 

project ineoae, say advanoea made by the Secretary wili be added to 

tha outstanding indebtedness doe and payable under the Mortgage. 

The Mortgagor shall deliver to the Secretary forthwith, but In on 
event later than the date Hno places it contract managar cn site, 
the £ella«lr.gi 

(a) All funda held as tenant Bacurity deposits, along with an 
accounting ror each tenant or the amount coUacted and data of 
collection. 

(hi All funds in Project oparating aceoonts, reserve fund accounts 
and any othar aecounta derived fora or associated with the 
operation of the Project. 



(c) 



All existing lasses entered Int.o between tb« Mortgagor and the 
ourrent tenants of tha Project and a sehadala of current 
rental rates. 



(d) All supplies, furniture, eqnlpaianfe and ethar personal pxeparty 
aasa«iat*d vith tne Project. 



(•I 



^11 axieting servioa oontraota of the Project including, but 
net limited to, ooatracts fee landscaping, peat control, 
metered laundry equipaient, air -conditioning and heating. 

The Mortgagor will preserve all financial records, books of account 
and related materials and maXe than available to tha Secretary for 
inspection at any tine. The Mortgagor will also provide the 
secretary with a f;.nal financial accounting for the project covering 
the period from tha Mortgagor's last audited financial statement to 
the age of poasessi-c by the Secretary. This accounting Bust be 
prepared by an independent public accountant and certified by tha 
aooountant and tha Mortgagor in accordance with the re^iramants of 
BOL Handbook 4372.1. Tha Mortgagor shall provide this accounting by 
March 1, 1994. 



Tha Kortgagor acknowledgea that the secretary nay set as the agent of the 
Mortgf vor and any othar party who has owrierahlp interest in the projaot 
when necessary to carry out «1] management f\aietloas at the project, sMoh 
as tenant avletiona and rent Incraaaes, which ace reeerved to property 
cwsers by atste law. 

The Mortgagor acknowledges that the Seerecary, in taking poasQSSlon of 
this project, assunaa nont of the liabilibias, ooeta or expenaaa Incurred 
by the Uortgagor prior to tha taJdcg of poaacaaion by the Secretary. 



169 



Th« Koxtgasor aokiiowladgaa that tha aetioaa datallad harain ara to ba 
taXen vltheut prejadiee to :i valvar of any right of the eeorctary In any 
rJiCtar that has or .-nay ria« in connection vlth the Project. 



sacratary of soaiing and 
Urban uevelopnant 



By: 



J. Hugh Allen 



Tltlai Director 

Eouting Kanagaoent Oivltloa 
Dates 



By: 

Title: 
Date: 
By; 

Title: 
Date I 



Moctsa^urCs) i 



Edgeuood Associates, 

SP Properties 1982 Limited Partnership 




Pfieger ij 
Managing General Partner 
December 22, 1993 



170 



ORGANIZATION CHART FOR OWNERSHIP OF EDGEWOOD TERRACE APARTMENTS 
TO ACCOMPANY THE TESTIMONY OF JOHN M. OREHEK 



SUBj: Ownership Structure - Edgcwood Associatei 



EDGEWOOD TERRACE APARTMENTS 
PHASE I 

OWNER 

fcdgewood Associates, a 
District of Columbia llmitSid partnership 

I 



Limited Partner 

Combined Properties 

Limited Partnership General Partner 

1 

SP Properties 1902 Limited Partnership 

General Partners of SP 



MAE-SPI, Ltd. Paul Pfleger SP Consolidated 

Limited Partnership 
CSPC) 
f 
Cftrtftral Partners oTSPC 
Paul H. Pfleger 
John M. Orehek 
JohnTayior 



171 

Mr. Peterson. Mr. Ford. Appreciate you being with us. 

STATEMENT OF EUGENE F. FORD, PRESmENT, MID-CITY FI- 
NANCIAL CORP^ AND OWNER OF EDGEWOOD MANAGEMENT 
CORP., EDGEWOOD TERRACE APARTMENTS D, WASHING. 
TON, DC, ACCOMPANIED BY ELLIOT BERNOLD, PRESIDENT, 
EDGEWOOD MANAGEMENT CORP. 

Mr. Ford. My name is Eugene Ford. I am president of Mid-City 
Financial Corp. and the owner of Edgewood Management Corp. I 
have with me Mr. Elliott Bemold, the president of Edgewood Man- 
agement, as a resource. A bio^aphy of my qualifications and re- 
sponses to the factual information concerning Edgewood II is in my 
written testimony, which I have submitted. I would like the oppor- 
tunity to amend that testimony in light of the things I have heard 
here this morning and the committee s focus, if that is possible. 

Mr. Peterson. Sure. 

Mr. Ford. Thank you. First, I would like to address what I think 
might be a couple of misperceptions. The first is that there aren't 
any good management companies out there. There are a lot of 
them. There are a lot of good ones. There can be a lot of reasons 
that a solution may not be available or something that a manage- 
ment company can control. 

It may be that neither HUD nor the manager imderstand, or are 
getting to the root of the problem and therefore cannot come up 
with the solutions to be implemented. The problem is not that 
there are not good management companies, the problem is that 
there are some bad ones who do not address solutions or who cre- 
ate the problems and that these companies or owners are approved 
or allowed to continue in management or ownership. HUD has 
typically not acted soon enough to see solutions implemented by 
clearing out the managers or owners if they are not responsive. 

The second misconception is that there isn't a lot of good assisted 
housing out there that works. There is a lot of good housing provid- 
ing just what the programs are supposed to provide for the people 
served. There are a lot of tenants enjoying that, and I will tell you 
that if I were to give you a list of the properties that we built and 
owned and managed that you could go to any one of them and they 
are as good or better than any conventional projects in the area, 
and I don't think it is that uncommon. There are a lot of very good 
practitioners in the business. We have been in it 35 years. 

The task of managing assisted properties, particularly in the 
inner city, has become more complicated and requires skills that all 
management companies do not possess. HUD must raise its stand- 
ards for the approval of managers of assisted projects and require 
performance under pain of loss of management or other penalties. 

If HUD has a problem defining these standards, I suggest that 
they seek the help of the National Association of Assisted Housing 
Managers or other industry groups who could also help them on a 
continuing basis. A consulting board or boards of qualified industry 
members could be set up that could make recommendations to 
HUD on core problems and for taking appropriate actions to dis- 
cipline management companies. There is precedent for this in other 
industries, probably the extreme is the NASD, but there is some 
modicum or variation of that that would be very useful to HUD 



172 

here because there is a lot of experience out there. My belief is that 
experienced and capable firms would respond. 

HUD has to develop a program to attract and retain people with 
the potential for significant service to HUD. The environment in 
HUD for the last 15 years has not been conducive to this objective. 
I took two highly educated people from HUD in the early 1980's, 
one of whom is sitting here, and they became president of compa- 
nies of ours. 

In my opinion, these fellows wouldn't have left HUD had condi- 
tions created by the various administrations £ind by legislation, of- 
fered them what they believed to be the opportunity for a real con- 
tribution in their careers at HUD. You must strive to put this fac- 
tor back into the HUD environment. 

I know that HUD is reaching out to do more and a higher level 
of staff training. We have supported the development of a program 
with the University of Maryland on a curriculum for professional 
training for their people and which they hope to broaden arovmd 
the country. You shouldn't stint with funds that they request to ac- 
complish that task, I think. 

HUD should learn to utilize competent management companies 
more than they do. There is a lot of heady tasks taking up a lot 
of time and attention, and diversion fi-om priorities that they ought 
to have that could be very easily put out to competent companies 
based upon their performance. I am thinking of such things as ap- 
proval of replacement reserves, the setting of rent, set whatever 
strict standards and penalties you want, but there are a lot of peo- 
ple out there who can do the job as well or better than HUD and 
save everybody, HUD and the managers, a lot of grief, and hold 
them responsible. 

We have addressed in page 13 and 14 of my written testimony 
some issues on HUD oversight and how to improve it. They are 
understaffed, they are undertrained. They have been given a whole 
load of new responsibilities in recent years. They have three-quar- 
ters of the people involved nonhousing matters, only peripherally 
related to operating and insuring property. 

I think their process has to be drastically changed and with the 
suggestion I have made here. 

HUD has a huge portfolio of BMIRs and 236's in the LIHPRA 
program as well as projects insured in other programs that are 
owned by people who haven't a motive in the world to continue in 
ownership other than to hope that they can keep the project out 
of foreclosure imtil they die. Because of the owners negative basis, 
there is not enough equity for solutions, either under LIHPRA or 
ELIPRA to pay the tax on a sale. It is not in the public or the ten- 
ants interest that they remain in ownership. Legislation to relieve 
these owners of the tax on their negative basis, if the title were 
transferred to HUD, or a HUD approved entitv, would give HUD 
a strong tool for more timely resolution of troubled projects. 

HUD could act much quicker toward resolution of problems if 
they had that tool, and I recommend that you consider that. Mr. 
Bernold just made a comment that we are probably going to amend 
our testimony a little bit to include some comments about some of 
the IG's remarks here. They are not perfect, either, and, however, 
I am sure they are useful. 



173 

Earlier, the chairman talked about looking at the big picture. I 
think the deliverv systems of a lot of things related to successful 
housing need to be fundamentally and structurally changed, both 
at the legislative level and the level of the various agencies respon- 
sible. 

Shelter and housing is one aspect of what comprises an urban 
neighborhood, other big factors for people are security and edu- 
cation for their children. If you are going to address the fundamen- 
tal issue of keeping people with housing options in urban neighbor- 
hoods, the delivery systems that we nave today for the various 
services that are needed have to change. Change will not occur 
until congressional committees and Federal agencies communicate 
much more to develop comprehensive approaches. 

For instance, I would have asked Mr. Retsinas, just how much 
HUD talks to HHS who administers education, daycare, welfare 
programs, and job training, all these things that happen to families 
that are living in HUD projects. 

Our company has spent a lot of time in development of and facili- 
tating social support programs in our management company. We 
have about 25 people doing that, and I will tell you, I think there 
is a real opportunity to put needed services, even down to case 
management, right down at the project level so people aren't wan- 
dering all over town worrying about daycare and transportation. 
Put the services right down there so it is across the hall or in the 
next building. 

With the types of computer systems available today, if systems 
were related to desired services close to home and the family, they 
could be made effective. 

To go back to the issue of staffing and training of HUD employ- 
ees, it is particularly important because the government has bil- 
lions at stake in the upcoming renewal of Section 8 contracts. This 
is a $9 billion per year program and it is vital that HUD nego- 
tiators understand the real alternatives the parties have. It is like- 
ly that HUD should get the professional help it needs from out 
sourcing since I do not believe they can develop qualified staff 
quickly enough. Thank you, 

[The prepared statement of Mr. Ford follows:] 



174 

WRITTEN TESTIMONY OF EUGENE F. FORD 
PRESIDENT OF MID-CITY FINANCIAL CORPORATION 

BEFORE 
SUBCOMMITTEE ON EMPLOYMENT. HOUSING AND AVIATION 

JULY 26. 1994 



175 



CONTENTS 



1. Bio of Experience: 
Eugene F . Ford 

Mid-City Financial Corporation 
Edgewood Management Corporation 



2 . Summary 

3. Detailed Information Requested on Edgewood II 
Apartments 



4. Assessment of Why Some Projects are Troubled 



5. Why Our Projects Are Managed Effectively While 
Others are Not 



6. Recommendations Addressing Problem of Excessive 
Rent Subsidies 

7 . Recommendation for Improving HUD Oversite 



176 



FORD BIO 

I am President of Mid-City Financial Corporation, a successor to a 
business founded in 1965 to be responsive to public purpose housing 
programs for low and moderate income families; an objective which 
we still pursue today. We have been involved in the development of 
48 projects in various programs totaling approximately 12,000 
units. 

An affiliated company, Edgewood Management Corporation, was formed 
in 1973. Its activities include property management, construction 
management services, resident construction coordination ser^/ices, 
and resident social and educational programs. Currently, Edgewood 
manages 73 projects totaling about 15,000 units. All of these 
properties have some degree of rental restriction related to low or 
moderate income use. Sixty- three (63) of the properties have some 
Section 8 or RAP tenants of which thirty-three (33) are 100% 
Section 8. We are most honored to have recently received the 1994 
Commissioner's Award from the Department of Housing and Urban 
Development which states "For your significant contribution to 
HUD'S mission to help people create communities of opportunity". 

I believe all of our projects meet and exceed HUD Housing Quality 
Standards. 



177 



SUMMARY 

My name is Eugene Ford. I am President of Mid-City Financial 
Corporation. My wife and I own Mid-City Financial Corporation and 
Edgewood Management Corporation. 

Mr. Chairman and members, I thank you for this opportunity to 
address the focus of your concerns as to how HUD intends to improve 
the management of troubled properties and how to address the 
problem of providing excess subsidies to owners of some projects. 

You have asked me for a history of my involvement with Section 8 
project based housing and for specific information on Edgewood 
Terrace II. This factual information is contained on pages two and 
three of my submitted written testimony, which I request be made a 
part of the record of the hearing. 

In my spoken testimony, I will address the sxibjective issues 
requested in your letter to me. 

The first comments requested were my views as to why some HUD 
properties are troubled and do not meet housing quality standards. 
There are plenty of reasons within your power to influence, while 



178 

SUMMARY 
Page Two 

others are not. The former includes bad underwriting, bad 
management, unenforced regulations, bad owners, bad HUD policies, 
and many uncontrollcible factors as culture and neighborhoods 
change. Among the causes I have addressed in my written statement 
are: 

A. Root problems lie in FHA'S role as mortgagee 
and HUD'S role as provider of low income rents 
and other benefits to targeted income groups. 
This conflict exacerbated by legislation and 
failing delivery systems, tends to prolong and 
increase problems in troubled properties. 

B. Problem of inadequate reserves. 

C. FHA does not have high enough standards for 
qualification or performance for management 
of these properties . 

D. HUD rules and regulations are not adequately 
enforced. They do not intervene in management 
and mortgage problems with definitive action 



179 

SUMMARY 
Page Three 

soon enough. HUD's expectations are not high 
enough. This reflects the pull or sometimes 
conflicting motives of HUD, the mortgage insuror, 
and HUD, the administrator of a myriad of legislated 
public objectives. Sometimes HUD is put in a 
position of having to make insurance and public 
interest decisions, both of which are bad. The 
skill to make these decisions has to be of high 
quality and reflect experience. The number of 
people capable of this in HUD is limited and 
varies greatly from office to office. 

E. FHA staff is inadequate in number and has the 
wrong priorities given their work load. 

F. Annual adjustment factors are a bad way to 
deal with projects. Some projects need 
budget based rents now. 

G. The ownership of many properties is unsuitable 
for the public objective and tenant satisfaction. 



180 

SUMMARY 
Page Four 

The problem of excessive subsidies is addressed first as 
programatic with built-in structural problems requiring fixing as 
many renewals are coming up and perhaps should be done even sooner. 
Secondly, HUD is not getting the benefits it should from 
refinancing of many higher rate mortgages. Third, many projects 
rehabbed in the inner- cities were done to save HUD from taking an 
immediate mortgage loss and instead perpetuated many poorly planned 
40 year old, functionally obsolete, units into the next century at 
high cost. Considering their present form they should have died so 
that effective renewal could have taken place. 

As to why our projects are managed effectively; technique, 
philosophy and commitment are all very important. There is little 
margin for error in managing the tension between keeping rents low 
and keeping projects healthy. It takes relentless attention, 
experience and control monitoring and is not a business for 
amateurs. Not all management companies managing troubled properties 
are bad managers by a long shot . There are many outstanding 
management companies around the country running Section 8 projects. 
HUD policies and procedures do not utilize all of their talent and 
capacity. 



181 

SUMMARY 
Page Five 

The problem of excessive rent subsidy is addressed as caused by 
various built-in programatic problems. More specifically Annual 
Adjustment Factors in contract rents, unrealistic reserves in some 
state Section 8 programs, and failure to capture the benefits of 
lower interest mortgage and bond financing. It is vital that HUD be 
adequately staffed to administrer the renewal or non-renewal of the 
upcoming Section 8 control . With competent people exercising real 
estate sense, unwavering use of proper market comparable rents as 
criteria, and a willingness to give people vouchers, if necessary, 
the government will save billions of dollars over the contract 
renewal period. All future adjustments should be budget based. The 
NHT and NHC studies contain well thought out policy options. Many 
of the rehab projects in inner-cities never should have been done. 
They resulted in outlandish costs and rents for an obsolete product 
that never should have been perpetuated into the next century. This 
is still going on right now. Policies are not in place to prevent 
this. Furthermore, it is my observation that Section 8 rent 
administration by local agencies has resulted in the worst rent 
abuses and is still going on today. 

In general, HUD has to get some real estate sense back into its 



182 

SUMMARY 
Page Six 

regulations and staff if its wants to control costs. They must stop 
regulating by formulas. They should delegate responsibility to 
highly qualified management companies with a performance record, 
then monitor compliance with specific law and regulations and 
overall performance. Put this burden on the owners and qualified 
managers under penalty of loss of management and fines. The most 
qualified will accept the burden because it will help them 
accomplish their job with more efficiency. It will also help HUD 
with its' staff problems by enabling them to focus on solutions to 
important problems instead of a lot of unnecessary regulatory 
process. 

If HUD has trouble establishing criteria for qualifying or 
assessing a management company's capacity or performance, I believe 
they could get effective assistance from the National Association 
of Assisted Housing Managers (NAHMA) and others in the industry on 
a continuing basis . No one is more concerned with bad management 
performance of this type property than competent committed 
companies in this field. 



183 

INFORMATION REQUESTED 

OS. 

EDGEWOOD TERRACE APARTMENTS. SECTION II 

1. Number of Units: 258 

Percentage of Section 8: 40% (103 units) HUD Project Based 

2.1%(8 units) D. C. Sec. 8 
.8% (2 units) TAP 

Section 8 Annual Contract 

Amount: $409,586.00 

One-Bedroom Monthly Rent: $490.00 

Annual Operating Costs 
(1993) Including Debt 
Service: $1,540,716.00 

Per Unit Per Annum: $6,000.00 

Operating Costs Without 

Debt Service (1993) $1,290,280.00 

Per Unit $5,001.00 

Replacement Reserve 

Balance: $170,210.00 (as of 6/30/94) 

2. Rent Increases are budget -based. 

3. Prior Years' Disburseable 

Surplus Cash: $32,624.00 

4. Allowable Distribution $36,714.00 



184 



ASSESSMENT OF WHY SOME PROJECTS ARE TROUBLED 

1. Many projects are troubled today because HUD has a dual role as 
a mortgage insurer and as a deliverer of low rents and a myriad of 
other benefits to targeted income and other classified groups. It 
has to work through a system where the property is privately owned 
by a single project entity structured, typically, as a limited 
partnership with little incentive and tenuous capacity to respond 
to capital needs . HUD has not acted soon enough or forcefully 
enough to resolve troubles quickly. Projects go downhill very 
quickly in some environments immeasureably increasing costs. 

When troubles arise that require money for the projects to solve, 
such as the most common one of physical problems that cannot be 
corrected because of inadequate reserves (the root of which goes 
back to the 1960's and 1970' s), HUD has developed a myriad of 
techniques over the years to address the issue. Among these 
techniques are (1) "flex- subsidy" with owner participation, which 
had very limited success because the limited return ownership 
entities were not structured or motivated to respond with capital 
and (2) LMSA Section 8, which was very effective in saving many 
troubled properties because it subsidized rents up to a level that 
existing tenants could not pay and the private market would not 
pay. In some cases, this had the problem of precluding new higher 
income market rate tenants 



185 



ASSESSMENT OF WHY SOME PROJECTS ARE TROUBLED 

Page Two 

or existing tenants whose income went up from renting. As a result, 
many of these properties have become 100% Section 8 and are 
impacted with a high imbalance of very low income families. Where 
there is a high concentration of such projects as in Southeast 
Washington, whole areas have simply become a place to warehouse the 
very poor since families with housing options will not move there. 

Two other remedies which HUD has are, in my opinion, more effective 
and should have been and should be used more effectively (1) 
Foreclosure or (2) long term workouts with reduced debt service 
where the owners and managers are worthy. This will keep rents in 
line with the market and motivate existing and new tenants to 
remain . 

Until recently, HUD foreclosure policy has been dreadful and 
immeasurably increased costs . Part of this is the ambivalence 
caused by HUD, the insurer, having to take an immediate hit and 
part is the inability of local HUD management staff to analyze the 
root cause of the problem or inability to make a decision and act 
on it . Congress bears a large burden for this problem due to a lack 
of understanding or political will as to the effect of foreclosure 



186 



ASSESSMENT OF WHY SOME PROJECTS ARE TROUBLED 

Page Three 

on the low income tenants, which certainly could have been 
mitigated in other ways than effectively precluding foreclosure. 
The rule requiring Section 8 for all the units HUD foreclosed and 
not providing adequate Section 8 funds was devastating. There is 
litter everywhere from this policy. 

Recent legislation has modified this burden and HUD seems to be 
moving effectively toward resolving old problems. 

If your concern is getting trovibles resolved and long term costs 
mitigated, HUD's focus should be an early understanding of root 
causes of the problem, and quickly providing workouts responsive to 
the problem or foreclosing and restructuring with new owners in a 
structured sale. Procrastination and the incibility to understand 
the cause of the trouble are your worst problems . Situations 
deteriorate rapidly in this environment. If you need outside 
expertise, direct HUD to get it and give them the money. It is the 
quickest and cheapest solution. 

2. FHA standards for approval of managers of assisted projects are 
too leix. There is not enough emphasis on proven capacity to deal 



, - 187 



ASSESSMENT OF WHY SOME PROJECTS ARE TROUBLED 

Page Four 

with assisted projects, particularly in the inner- city. Too often, 
managers have been approved simply because they were the owners or 
had raised the money and set themselves up to manage. 

3. FHA rules and regulations are not adequately enforced. They do 
not intervene soon enough. Their expectations are not high enough. 
Misplaced concern for the effect on tenants of foreclosure 
immobilized FHA from utilizing its' most useful tool for resolution 
of troubled property and greatly increased costs . This is an 
example of the root problem discussed under Section 1 . 

4. FHA's staff is inadequate or has the wrong priorities. They get 
all tied up in trivial procedures, many of which could be delegated 
effectively. 

5. Some projects that have annual adjustment based budgets should 
be changed to budget based rents. The rents are not adequate to 
properly operate the property. Future costs will increase. This 
problem also reflects the concern discussed in Section 1 . 

6. Existing ownership in many projects has no financial incentive 



188 



ASSESSMENT OF WHY SOME PROJECTS ARE TROXreLED 

Page Five 

to care for the projects. Their only motivation is to keep from 
getting foreclosed so that they are not taxed on their negative 
basis. It is not in FHA's or the tenants' interest that they remain 
in ownership. The project will suffer and so will the tenants. Tax 
relief on non-cash gains should be offered this type property in 
exchange for a deed to HUD or to a motivated owner -manager,- public, 
non-profit or private. 

7. Many central city projects were rehabbed under Sections 221(d) 4 
and 223 -F that had very bad land planning and basic design 
obsolescence and never should have been perpetuated into the next 
century. An example would be the rehc±>bed 608 's in Southeast 
Washington, which are almost 50 years old and which had Section 8 
allocated to them because the market rents are so high that there 
is no market for them. People with higher incomes and who have 
housing options move into the counties at comparable or lower rent 
where the density is 60% of that found in these rehabbed buildings. 
The alternative has open space, is attractive, with more amenities 
(pools, clubhouses, etc.). 



189 

WHY OUR PROJECTS ARE MANAGED EFFECTIVELY 
WHILE OTHER HXTO PROJECTS ARE NOT 

In short, the answer for us is technique, philosophy, and 
commitment . 

Technique - We have very detailed procedures and tasks for on-site 
operation and extensive control systems to assure those tasks are 
performed. Examples would be in the fact that all of the tasks, 
monthly, yearly and beyond for maintenance and landscaping that 
will have to be performed are programmed well in advance. Each 
month the project gets a list of tasks that must be performed that 
month and the system is notified when completed. We inspect all 
units semi-annually with specialists, who are not the project 
employees, for evaluation, work orders and tenant discipline. A lot 
of training of on-site personnel is conducted. We know how many 
square feet of halls to be cleaned, how many square feet of grass 
to be cut, an average time to complete each task or work order and 
a system to monitor effective time utilization and responsiveness 
of on-site staff. Very little is left to chance and compliance with 
procedures and task is mandatory. We centralize accounting and 
income certification for control and performance reasons. 



190 

WHY OUR PROJECTS ARE MANAGED EFFECTIVELY 

WHILE OTHER HUD PROJECTS ARE NOT 

Page Two 

Philosophy and Commitment - We have the benefit, in most cases, of 
having managed many of these properties from their original 
development. We are really vested in them. We can afford long term 
plans and approaches. We believe it is absolutely necessary to 
accomplish three things for a healthy project. 

1. The public program's objective must be accomplished. 

2 . The tenants must get what they are supposed 
to get . 

3. The investor gets what he is entitled to. < 

All our techniques and procedures are directed to these goals. We 
do not let the tenants, or the investors interfere with that and 
try not to let HUD do it either. We are really committed to this. 

We believe that earning the confidence of good tenants by being 
responsive, professional and consistent is the best way to attract 



191 



WHY OUR PROJECTS ARE MANAGED EFFECTIVELY 

WHILE OTHER HUD PROJECTS ARE NOT 

Page Three 

and keep the best tenants and create a positive attitude toward the 
treatment of the property. Our efforts to provide social activities 
and support to the various age groups and interests tends to 
increase tenant's satisfaction and attitudes. 

We attempt to imbue this philosophy in all of our 550 employees. 
The significance of the importance of what they do is emphasized. 
The result of the employee spirit engendered is most apparent when 
you see the dedication from the on-site staff under what, in some 
locations, are very trying or even dangerous circumstances. 

In the final analysis, if HUD and the cities support development 
that cannot compete with other housing options, which people with 
higher income have, there is no chance for mixed income communities 
in stable neighborhoods. You are simply warehousing the poor. HUD 
must become disciplined to use good real estate sense and reject 
any tendency to perpetuate infeasible projects at high rentals in 
order to keep its mortgages current. This is causing the Section 8 
program to bear costs that the mortgage insurance fund should 
incur . 



192 



PROBLEM OF EXCESSIVE RENTAL SUBSIDIES 

I assume that your question concerning excessive rental subsidies 
is directed to the Section 8 New Construction and Substantial 
Rehabilitation Program. 

There are a number of reasons for this . 

First, in some instances, the high rent reflects the original rents 
necessary to support the project, which were higher than the market 
to begin with. In most cases, these rents are inflated by an Annual 
Adjustment Factor that was supposed to track inflationary increases 
in rent. However, in some jurisdictions the factor escalated the 
rents disproportionately to the actual increases in rents in 
comparable projects in the area. However, HUD's original non- 
administration or mal -administration of the Section 8 provision 
allowing it to reduce Section 8 project rents to those of 
comparable rents in the area led to court decisions inhibiting it's 
right to perform comparability studies and legislation preventing 
rent reductions because of comparabilities. HUD now has the right 
to perform such studies and should do so if it feels that Section 
8 rent increases are too great . 



193 

PROBLEM OF EXCESSIVE RENTAL SUBSIDIES 
Page Two 

Bear in mind that this is a relatively short term problem, in many- 
cases, as the original contract will expire in the next few years. 
This year both the House and Senate housing bills address the 
extension of these contracts. This legislation reflects 
recommendations of the National Housing Council and the National 
Housing Trust studies, which had broader participation, and both 
include mechanisms to assure that renewal rents are fair, both in 
relation to the project's budget and to the real prevailing rents 
in the area. My own view is that there should be three (3) criteria 
adequate to deal with existing financing of HUD insured projects. 
A. Rents should not exceed true rent comparability plus a small 
factor built in to deal with program variables and B. Future rent 
adjustments should be budget based. 

Second, some projects, particularly in rehab deals, were probably 
poorly underwritten in two (2) ways. (1) Insufficient rehab was 
done or (2) inadequate initial reserves were established for these 
older buildings. This underwriting results in higher utility, 
maintenance and replacement costs, which are either dealt with by 
higher rents, additional debt service or deterioration of the 



194 

PROBLEM OF EXCESSIVE RENTAL SUBSIDIES 
Page Three 

projects' capacity to attract or keep tenants with housing options. 
My experience in the eighties was that while I did 4,000 rehab 
units, I was non-competitive in purchase pricing in many other 
deals because the proper long run rehab costs were not addressed by 
my competition who's purchase price was increased accordingly. 
Result! The seller walked away with the money instead of it being 
put into the property and FHA insured it . 

Third, in many cases that seem to have excessive rents in relation 
to those in the area, the bonds which provided the orignal project 
financing have been refinanced at a significantly lower interest 
rate. Instead of lowering the monthly interest that the owner must 
pay as a result of the refinancing, HUD has devised a mechanism 
where the savings from the refinancing go either to the state 
housing finance agency, who originally financed the project, or 
directly back to the federal government. In other words, it is not 
the owner who is receiving the benefit of the high rents. You might 
get information and look at just how much money State Housing 
Agencies are pocketing from refinancing the mortgage bonds on 
Section 8 projects at lower rates with no reduction in Section 8 



195 

PROBLEM OF EXCESSIVE RENTAL SUBSIDIES 
Page Four 

subsidy. There are, in fact, huge residual receipts accumulated and 
continuing to accumulate in many State Agency Section 8 housing 
deals, but bond indentures and the Section 8 contracts will 
probably not permit access to them or stop their further 
accumulation from Section 8 rents. 

On the issue of addressing Section 8 contract renewals, I have no 
new suggestions not already contained in the Task Force and NHC 
Reports and pending legislation other than this. (A.) Upon renewal, 
properties providing excessive returns and having rents higher than 
the best comparables, should be abandoned if the owners will not 
bring the rents in line. (B.) All future adjustments should be 
budget based, including properties with automatic adjustments 
located in weak markets that have inadequate income. (C.) I sense 
that HUD might be cible to make some advantageous deals with owners 
receiving high returns from above market rents by negotiating now 
several years before contract expiration. The most effective tool 
to accomplish this would be a longer term contract for lower rents 
starting now and budget based increases . 



196 

PROBLEM OF ESCESSIVE RENTAL SUBSIDIES 
Page Five 

There are over 1.5 million project based Section 8 units having a 
total public outlay of 9 billion dollars per year. HUD is the 
steward of this enormous public outlay. For a variety of reasons it 
does not do a very good job. Congress should insist that it do its' 
job and HUD should let Congress know how much money it needs for 
qualified staff or outside help. This is particularly true as 
existing Section 8 contracts are coming due over the next several 
years. The dollars required to protect the investment by providing 
adequate numbers and quality of staff would be a tiny fraction of 
the 9 billion dollars spent annually and probably save billions of 
dollars over the term of the new contracts. 

Fourth, changes in resident social and cultural conditions result 
in operating costs never anticipated. The biggest of these factors 
is the increasing need for security after the advent of crack 
cocaine and other drugs. Trends in liability for projects in the 
area of security and environmental matters will increase costs in 
the future. Money spent for drug prevention in projects is a cheap 
investment when the costs of losing that battle are considered. 



197 



A. IMPROVED HUD OVERSITE 

HUD's problem of oversite of its projects essentially stems from being an 
agency that is not only understaffed, but the existing staff is untrained and 
lacks the knowledge and skills to make rational decisions concerning its 
portfolio. At the same time that field staff was losing experienced talent and 
staff reductions made, huge additional responsibilities in entirely new areas 
have been added to their load. 

HUD currently has an arsenal of powerful weapons to deal with recalcitrant 
owners and poor management. It can terminate management contracts and 
Section 8 payments, issue temporary denials of participation, foreclose on 
properties, investigate and demand repayment of funds misspent. 

HUD has not effectively used these existing tools for the reasons previously 
listed. In addition, in my experience the staff's lack of real estate knowledge 
has created within HUD the inability to distinguish between problems caused 
by lack of capital, weak markets, poor original construction and those 
caused by poor management or incompetent ownership. HUD tends not to 
analyze the source of the problems but merely tends to blame the 
management company for all problems. 

Since neither the Executive Branch nor Congress is desirous of increasing 
HUD's staff, the oversite process needs to be dramatically changed. The 
Department must minimize its involvement in well-run properties in order to 
free up staff to work on its troubled portfolio. This can be accomplished by 
having each Field Office evaluate their portfolio and divide it into categories. 
Projects would be rated as well managed if they were fiscally and physically 
sound, without any regulatory violations and resident problems. The other 
categories would be projects that have problems but don't require significant 
oversite, and lastly, projects that the staff should concentrate their energy 
on. 

I suggest that projects in the first category that have been owned and 
managed by the same companies for the last three years would be freed 
from most HUD oversite. This would mean, for example, that project 
requests for Replacement Reserve reimbursements and rent increases below 
a percentage established by the Secretary and didn't have any substantive 
resident objections would be automatically approved. Untold hours of staff 
time are devoted to superfluous procedures that could be delegated to 
responsible management companies who would be held accountable for 
compliance with regulations. 



198 



If 80% of a management company's portfolio in an Area Office was in this 
category, then any new management contracts this company enters into 
would not require HUD approval as long as the fee was within HUD's 
guidelines. 

These suggestions should result in more staff time to devote to important 
issues. 

Owners who are forced to change management companies because of poor 
performance could only hire companies that were in this decontrolled 
category. These owners would not be allowed to receive any compensation 
from the new management company's fees or dismiss the new company 
without HUD's prior approval. 

If this system was implemented over a period of years, HUD could eliminate 
the incompetent managers and thus reduce its problems to properties that 
either are failing because they require massive infusion of capital, or the 
property is truly not viable and probably should be demolished. 



ESTABLISHMENT OF EXECUTIVE MANAGEMENT TEAM 

Even with the realignment of personnel, HUD staff do not have the technical 
skills, breath of knowledge or experience to service the most troubled of 
properties. Therefore, HUD should assemble a team of experts who are 
accountable to the Deputy Assistant Secretary's office who will be assigned 
the most troubled properties nationwide. 

Team leaders will have authority to make all decisions regarding the 
formulation of plans for the properties in their portfolio. The team will have 
supervisory control over a select number of out-stationed HUD staff. They 
will have special allocations of Section 8 LMSA, Flexible Subsidy and other 
management tools at their disposal. They will also be authorized to engage 
technical specialists (i.e., appraisers, tax experts, attorneys, architects, 
engineers) to assist in the formulation of their plans. 



199 

Mr. Peterson. Thank you very much. The staff tells me that 
your written testimony was excellent, and if you want to amend 
it 

Mr. Ford. Thank you. 

Mr. Peterson [continuing]. We will be more than willing to ac- 
cept it. 

Now, your building is right next to Mr. Orehek's building, Edge- 
wood Terrace, is that correct? 

Mr. Ford. One of our buildings is next to that building. 

Mr. Peterson. Mr. Shays has to leave. Would you like to ask 
questions? 

Mr. Shays. Just very quickly. 

The one problem I don't understand to start with, first Mr. Jack- 
son, I have to leave £md I would love you to come by my office. I 
will be in my office a little later, so when we are done if you would 
come up. My assistant is right here, Chris Allred. I am not going 
to be asking you any questions, but I appreciate your testimony. 

I don't understand why HUD is responsible for paying more than 
the market rent, and let me ask any of you, should we be paying 
more than the market rent for any housing, Mr. Orehek? I want 
a short answer. 

Mr. Orehek. I think that the short answer is a question; are we 
running a real estate project or is this a small community of very 
concentrated problems? If you are going to do what Mr. Ford is 
suggesting he is doing, which I know is a fact, that he is offering 
social services onsite, too, then he is not just running a real estate 
project. 

Mr. Shays. I am just talking about rental property. Mr. Graham, 
should we be paying more than the market rent? 

Dr. Graham. No, but my project is not getting the market rent. 

Mr. Shays. Then you have an alternative. It is a wonderful alter- 
native. You go out into the market, you just say, I don't like your 
deal. I am going to go into the marketplace because I can do better. 

Dr. Graham. Let me explain it. 

Mr. Shays. If you can't do better— let me just make this point, 
if you can't do better, then we are paying the market rent. 

Dr. Graham. Well, for that type of a building, see you have got 
to look at the building and its expenses. This building could be sit- 
ting right down in a swank neighborhood on North Michigan Ave- 
nue. I have the same two elevators that they may have, I have the 
same basic tax base and everything, you have to charge what the 
average building of that capacity is getting. That is basically what 
is occurring. 

Mr. Shays. So you are not talking about the market rent then, 
you want something based on what you want as a return. 

Dr. Graham. No, not return. 

Mr. Shays. It has nothing to do with the relationship of a neigh- 
borhood and so on. People next door who rent out space have to 
rent at the market value. 

Dr. Graham. You are missing the point. 

Mr. Shays. I think I know the point. 

Dr. Graham. If you can drive a Cadillac in a poor neighborhood, 
you can drive it in a rich neighborhood. The expenses are exactly 



200 

the same, OK? That is all I am trying to say. This building has 
basic expenses for that type of a building. 

Mr. Shays. Your operating expenses may be the same. 

Dr. Graham. That is what I am talking about and in order to 
meet the operating expenses, you have to get the rent, and this 
rent is not meeting it. Furthermore, the average rent, according in 
Chicago was much higher than this, the going rate which is the 
market rate. This is under, to answer your question, this is under 
the market rent. 

Mr. Shays. It is under the market rent in some parts of Chicago, 
but it is clearly over the market rent where your apartment is. 

Dr. Graham. Let me say one thing so you get an idea what is 
going on. No. 1, this building is in an area that is one of the worst 
in Chicago. In other words, snootings, gangs, and dope. You are not 
going to get people to walk in there and rent that in there. You are 
not going to get it. It is my understanding, I thought that their 
basic idea was to provide housing for people in certain areas. 

Now, you will never get anyone to walk in there and spend that 
kind of money when they can go somewhere else and get it. 

Mr. Shays. Dr. Graham, I believe vou, but I am just trying to 
establish something. What you are asking for is that they pay you 
more than the market rent for your area. We may agree or dis- 
agree on that, but that is what you are asking for. 

Dr. Graham. The way you are putting it. 

Mr. Shays. I am not putting it any other way than as a landlord, 
as someone who is a renter. The whole concept was that a renter 
could go in and make an agreement for a price, and there was an 
agreement between buyer and seller. If you don't like the deal, just 
say no to the deal, and if you don't like the deal, then rent it to 
someone else and get whatever you think the market will bear. 
That is the concept, and it strikes me that we have gone way be- 
yond that. 

Dr. Graham. That wasn't the concept I understood at all be- 
cause, No. 1, it was for low income, anybody could not come in 
there for rent. That is not the concept at all. 

Mr. Shays. Then market rate rent is a meaningless term as far 
as you are concerned. 

Dr. Graham. The whole concept for the project the way you are 
putting it wouldn't make sense. If you put that building over there 
and said OK we are not going to rent to people who cannot afford 
it, we are going to rent to the ones who can afford it and pay mar- 
ket rent, that building, you wouldn't have 10 percent of that build- 
ing occupied, and that is being real, and in order to look at any- 
thing vou have to be realistic about it. What you are saying is theo- 
retical and not real. 

Mr. Shays. Dr. Graham, I don't know what you paid for your 
building when you got it. I don't know what is the basis of $1 mil- 
lion mortgage. I don't know if vou paid over the price or under the 
price, but if I take my simple log^c and say, can I just offhand ask 
you what is the percent of your mortgage to the price you paid on 
the facility? 

Mr. Orehek. I don't remember. 

Mr. Shays. That is not acceptable, that is not acceptable. How 
long have you owned this building? 



201 

Mr. Orehek. Since 1983. 

Mr. Shays. OK, 1983. What did you buy the building for? 

Dr. Graham, I would like to know the same question from you 
in a second, too. 

Mr. Orehek. We believe $8,700,000. 

Mr. Shays. You paid $8,700,000 for it in 1983? 

Mr. Orehek. Correct. 

Mr. Shays. How much have you taken out of the building? 

Mr. Orehek. We have invested over a negative million five in 
cash. 

Mr. Shays. Over the course of how long? 

Mr. Orehek. We put in a million five which we will not recover, 

Mr. Shays. How much have you taken out of the building, sir? 
I want to say something to you. 

Mr. Orehek. We haven't taken out any money. 

Mr. Shays. I want to say something to you. You are under oath 
and since 1983 you have taken nothing out of the building, is that 
your under-oath statement? 

Mr. Orehek. That is the under-oath statement. 

Mr. Shays. OK Have you had any tax credits for this building? 
Have you used it in any way for any tax writeoffs? 

Mr. Orehek. Certainly. 

Mr. Shays. OK What kind of tax credits have you taken? 

Mr. Orehek. There were no tax credits. They were tax writeoffs. 

Mr. Shays. OK, how much tax writeoffs have you taken for the 
building? 

Mr. Orehek. The writeoffs 

Mr. Lee. The writeoffs are not cash out of the building. 

Mr. Orehek. Under oath, I am giving you an estimate of 

,700,000 is our guess, and this amount will be recaptured upon 
foreclosure or sale of the property. 

Mr. Shays. Were you given any tax credits, any special tax cred- 
its for this property other than general depreciation? 

Mr. Orehek. No. 

Mr. Shays. Will we be having more hearings? 

Mr. Peterson. Yes, we will. 

Mr. Shays. Thank you. 

Dr. Graham. Could I say one thing? 

Mr. Peterson. Yes. 

Dr. Graham. It is not fair for you to question us like this when 
we are being compared with other properties. That is the thrust I 
got of this meeting, and if they are being given X number of dollars 
for rent and they look very well for you to compare us saying how 
can we look so bad compared to these other properties when they 
are getting more money, so that is not fair for you to say just indi- 
vidualize and say what did you get. Why don t you go out to the 
market rate because that is not applying to these other problems. 

Mr. Shays. I can give you the same invitation as Mr. Jackson. 
I would love to have you come up and continue this conversation, 
but I don't think it is fair for the U.S. Government to make agree- 
ments with people who can't maintain a building, and if you don't 
like the agreement, you have an obligation, and my understanding 
is that even vacant property you get rent from. If it is vacant you 
still get 



202 

Dr. Graham. No, I do not get rent from vacant property, that is 
not true. You misunderstood that. 

Mr. Shays. Property that is not well-maintained you are still get- 
ting income from. I happen to think that is not right. You and I 
disagree on that, but my general feeling is if you don't like the deal 
the government arranges wdth you, then don't take the deal. That 
is my general attitude, but I would be happy in my office later 
today to continue this dialog if you would like, and I truly regret 
that I can't be here longer. 

Mr. Peterson. Thank you, Mr. Shays. I have got a few more 
questions. 

I am going to go back to these two buildings that are next to 
each other. Is yours the same configuration as theirs? 

Mr. Ford. No. At the time Edgewood I was built, it was HUD's 
policy to encourage the development of large units, three and four- 
bedroom units. It is probable that the subsidy allocation or the allo- 
cation of BMIR funds would not have been made to the property 
had that not been the case. 

There is also something that hasn't been said here that I think 
affects the ability to control this area or property. Part of their low- 
rise structures involve larger units, three and four-bedroom units. 
There was also built at the same time in a turn key for the public 
housing about 70 or 80 public housing units contiguous which is 
managed by the public housing people, and that is bad news and 
makes it very difficult to control the things. 

Mr. Peterson. And that is next to their property? 

Mr. Ford. That is correct. It is in the same square as ours. 

Mr. Peterson. You are on 6 acres? 

Mr. Orehek. Yes. 

Mr. Peterson. So it is spread out all over the place? Yours isn't 
that big? 

Mr. Ford. It was originally about a 10-acre tract, 9 or 10 acres, 
and this property is built right there in it of ours. It was built 
later. 

Mr. Peterson. In my experience with this, in smaller commu- 
nities, when you have problem properties, the problems seem to 
overlap and affect the properties nearby. My question is how have 
you been able to not have these public housing problems go over 
into your unit? Have you got some secret silver bullet here? 

Mr. Ford. It is like anything else. It is not one thing. Part of it 
is the high-rise structure, it can be secured better. 

Mr. Peterson, You have a high rise, is that correct? 

Mr. Ford. That is correct. It was built under Mr. Romne/s 
breakthrough. It can be secured easier, that is part of it. Part of 
it is that we have owned it right from the beginning and have had 
the opportunity to continue to do the type of screening that we do 
of tenants, the type of controls that have been subjected for a long 
time to our own disciplines from the beginning, and so I think 
those are two possible reasons. 

Mr. Peterson. You took this over aff:er it had been around for 
10, 15 years? 

Mr. Orehek. I believe 12 years. 

Mr. Peterson. And were there problems when you took it over? 

Mr. Ford. I probably know more about that than he does. 



203 

Mr. Orehek. Gene. 

Mr. Ford. Yes, there were. I built that property. 

Mr. Peterson. Did you sell it to them? 

Mr. Ford. That is correct, and I sold it to them because of some 
other things, these things compound, but basically a lot of problems 
with reserves deriving out of the type of underwriting FHA was 
doing in the late 1960's and the subsequent inflation that took 
place in Vietnam. 

Most of the assisted projects by the late 1980's had found them- 
selves woefully short of adequate reserves to take care of what 
were then replacement problems. I sold this property to them be- 
cause it was a way to raise money to put in the property to fix it, 
and that is why I did it. They passed the ACRS. There was tax 
credits to be gotten, there was syndicators of tax credits and we 
sold it to them and some of the money went in to fix the property 
at the time. 

Mr. Peterson. Were there rehabilitation credits involved in this? 

Mr. Orehek. No, the money went directly in, but there were no 
credits. 

Mr. Peterson. It was a straight tax shelter? 

Mr. Orehek. Right, deductions. 

Mr. Peterson. And you syndicated it? 

Mr. Orehek. Correct. 

Mr. Peterson. You said that as you needed money you got more 
investors? Did you do that between 1983 and 1986? 

Mr. Orehek. In this particular project I don't believe we did. In 
other projects 

Mr. Peterson. But after 1986? 

Mr. Orehek. After 1986 that was no longer an opportunity. 

Mr. Peterson. Who are Edgewood Associates? 

Mr. Orehek. It is a limited partnership. 

Mr. Peterson. We don't know who they are? 

Mr. Orehek. It is — I think you have 

Mr. Peterson. I have the chart, but you are way down here 
under SP Continental. 

Mr. Orehek. I believe Edgewood 

Mr. Peterson. There are all these other layers in between. You 
are not one of the Edgewood Associates? 

Mr. Orehek. Edgewood Associates has a general partner called 
SP 82, which has a general partner of which I am a general part- 
ner, and then the other partners would be a limited partnership. 

Mr. Peterson. Is that public information, who those limited 
partners are? 

Mr. Lee. Yes, it is on file with HUD and with the District of Co- 
lumbia Government, Department of Records. 

Mr. Peterson. Did you put in substantial equity at the time you 

got into this? , , .,. 

Mr. Orehek. The partnership put in over $300,000 to rehabili- 
tate the project when it was purchased. 

Mr. Peterson. You had to put money in to rehabilitate it? 

Mr. Orehek. Pay money to the seller and put money into the re- 
habilitation. 

Mr. Peterson. I am sure that your partners after 1986 were 
wishing that they never would have bought it, right? 



204 

Mr. Orehek. There haven't been a lot of benefits since 1986. 

Mr. Peterson. I suppose that they became passive losses in 
1986, then they couldn't use them? 

Mr. Orehek. Correct, they were phased out. 

Mr. Peterson. Dr. Graham, according to this, your rents are up 
to $849 a month? 

Dr. Graham. Yes, and that is not even as high as some of the 
areas, the buildings in my area are getting, and so 

Mr. Peterson. These numbers you gave us were what they were 
before they gave vou this increase? 

Dr. Graham. As late as March, and this has been going on for 
about 5 years. I have basically been losing all this money. 

Mr. Peterson. Right, now that they have given you an increase, 
you have to put this in the building? 

Dr. Graham. Which means, I would think, that the increase 
would be for me to run the building. They want me to rehabilitate 
it, too, which means that wouldn't be enough money. 

Mr. Peterson. Are you not going to do that? 

Dr. Graham. No, I am just making a statement, I will do what 
I have to do with what I have, but I just want to explain, you 
know, the situation. 

Mr. Peterson. What were the rents when you first built this? 

Dr. Graham. I can't remember. It was about $200 something 
back in 1971 when it started. 

Mr. Peterson. Were there subsidies? 

Dr. Graham. No. See, I had a problem. I had no subsidies. I real- 
ly got a beating when it first came in. Then when they started the 
subsidies, they had a gatro law. I don't know if I am pronouncing 
it right, where there had to be a certain racial makeup, so one- 
thy-d of the building they wouldn't subsidize and that went on for 
a long time and then about 10 years, 11 years ago is when I got 
a subsidy, and I put a lot of my money into it, I didn't mention 
that, too. I almost foreclosed and I had to come up with $35,000, 
and I have been throwing money in that all along. I didn't take 
management fees for about 9, 10, 11 years. 

Mr. Peterson. Do you know how much money you have got 
stuck in this? 

Dr. Graham. It is a lot of money, over $100,000 very easily. 

Mr. Peterson. When you first built this you had to put equity 
into it? 

Dr. Graham. Well, yeah, I had to get 10 percent equity in there 
to get it built. 

Mr. Peterson. You got involved in this because you had a HUD- 
insured loan, correct? 

Dr. Graham. Yes. I had a real estate friend, and he told me this 
was something to go to. 

Mr. Peterson. You were going to foreclose or you couldn't make 
the payments so HUD gave you some Section 8 to keep you going? 

Dr. Graham. I had to come up with, either $35,000 or $40,000, 
and that is when they did and that is what I had to do, and as 
I explained to you, it shows that this thing was taken over by the 
government because of a mistake that was made by the local tax 
authorities where they sent me a bill for $110,000, and the 



205 

Weyerhauser Mortgage, a mortgage company paid it, and that 
threw me behind. 

Mr. Peterson. So that got you in 

Dr. Graham. So all this is something- 



Mr. Peterson. HUD didn't help you with that at all? 

Dr. Graham. No, they didn't help me at all. They were ready — 
it was a group. I am not going to make a statement because I don't 
want to get anybody to sue me, but I got the impression it was a 
plot to get my property, because the tenants that showed up, all 
of this happened right at the 20-year mark when the property 
could be sold. 

I never heard anything from anybody else prior to that, and all 
of a sudden they were demonstrating, passing out pamphlets say- 
ing they could own the building. I think they were thinking in 
terms of this whole program under Jack Kemp. I don't know what 
it was, and they were trying, but really I think it was some devel- 
opers around behind them trying to do this, so — and now they 
hired the Legal Assistance Foundation. I am involved in a lawsuit. 

Mr. Peterson. Now, you don't own this place anymore or you 
don't manage it? 

Mr. Orehek. There is a mortgagee in possession in place with 
HUD. They are in possession and they have a contract manager 
managing. 

Mr. Peterson. So somebody else has taken over? 

Mr. Orehek. Correct. 

Mr. Peterson. Are they having any better luck? 

Mr. Orehek. We have — ^under the agreement, it is my under- 
standing that we are strangers to the project, if you will, and we 
have not been getting updates to know what the project 

Mr. Peterson. You are the general partner and they don't tell 
you what is going on? 

Mr. Orehek. Correct. 

Mr. Peterson. Why do you let them get by with that? 

Mr. Lee. That was the agreement with HUD when we allowed 
them to take the property over. 

Mr. Peterson. So you can't know what is going on? 

Mr. Lee. Well, we have inquired as to what is going on, and the 
information has not reached us yet. 

Mr. Peterson. Our information is that HUD is going to put $10 
million into this. 

Mr. Orehek. I did not understand the question. 

Mr. Peterson. That HUD might put $10 million into this. 

Mr. Orehek. I think we estimated that that might be one of the 
numbers of what it would take to rehabilitate it, but we don't have 
any indication of whether they are going to put that in. 

Mr. Lee. That is correct. In, I believe it was 1989, we put in a 
241 loan application for a $10 million loan at that point in time. 
That loan application was denied. 

Mr. Peterson. So are you in danger of losing this? 

Mr. Lee. Yes. It will either be foreclosed or we will offer a deed 
in lieu of foreclosure. There is one other option, and that may be 
a nonprofit sale which would commit us to selling the property for 
$L 



206 

Mr. Peterson. Mr. Ford, what do you think about this new man- 
agement company? 

Mr. Ford. What do you mean? The one that is in there now? 

Mr. Peterson. Does the management company know what is 
going on or you don't know anything about them? 

Mr. Ford. I don't know that. I nave no opinion. I don't really 
know. I think that they are housekeeping for HUD, in fact, at the 
moment. I don't think there is any initiatives going on other than 
safety initiatives. I would be surprised if there would. I mean the 
worst landlord in the country is HUD, so I assume that there is 
nothinggoing on there. 

Mr. Peterson. Mr. Jackson, I guess you would concur with that 
statement that the worst landlord in the country is HUD? You 
haven't seen them since 1986, you said? 

Mr. Jackson, The officials in HUD of Jacksonville intentionally 
ignore the problems there. 

Mr. Peterson. Could you repeat that please? 

Mr. Jackson. They intentionally ignore the problems there. 

Mr, Peterson. Why do you say intentionally? 

Mr. Jackson. Because they don't want to face the responsibility 
of what they have allowed to get out of control. 

Mr. Peterson. Do you have direct experience with that? Have 
you talked to them? 

Mr. Jackson. Yes. For example, when, is it Carolyn Boston? She 
is the loan person in Jacksonville. She came down to inspect, and 
what I was finding them doing is they were taking her to all of the 
apartments that seemed to have the least defects. So I met with 
her and let her know that the people wanted her to see their apart- 
ments. So we went back through and she saw the holes in the 
walls, and this was even before it hit the media, OK. She saw the 
holes, she saw the rats, she saw the wires hanging out, she saw 
all of this. But yet there is this "it is not a big deal" attitude by 
the officials in HUD. 

Mr. Peterson. By the HUD officials in Jacksonville? 

Mr. Jackson. Yes. 

Mr. Peterson. What has happened since the GAO investigation 
and you have all this media attention, has anything changed? 

Mr, Jackson. No. 

Mr. Peterson. Nothing has changed so far? 

Mr. Jackson. No. I don't understand how Mr. Retsinas can come 
and say things have turned around. That means he had to talk to 
Mr. Chaplin and that means he had to talk to people that are 
under him. Now, after really going out there and looking at what 
it actually is you have to see that that is not the case. You know, 
to me personally, I believe, people are trying to minimize this 
whole situation in order to cover up what it actually is. 

Mr, Peterson. Do you think that they changed the management 
companies? 

Mr. Jackson. They changed the management company, but the 
practices continue. 

Mr. Peterson. They did, but it didn't do anything? 

Mr. Jackson. Changed the management but the practices contin- 
ued. You see, there is this mind set there that HUD is up for the 
pickings, and so they know that HUD is not really going to enforce 



207 

anything, so things can really continue to flow. They can change 
management, after management, after management, but if they are 
not going after the owners, which are the real problem, nothing is 
going to change. 

Mr. Bernold. In my many jobs as noted, I worked for HUD. I 
was director of a housing office, and part of the problem is you 
have a vicious cycle that goes on with HUD. HUD doesn't have 
adequate staff to monitor the properties, therefore by the time it 
gets involved with the property, it is usually beyond a management 
problem. 

When you talk about Edgewood I, is the current management 
company doing anything, no management company can solve the 
problems at Edgewood I. You are talking about a massive trans- 
fusion of capital, and that is a decision HUD has to make. 

Mr. Peterson. Can I stop you right there? I have had some ex- 
perience with this. It is my impression that once a unit or a com- 
plex gets to that position, that even if you go in and get it totally 
renovated that there becomes kind of a psychology or a reputation 
which is very hard to change unless you literally throw everybody 
out and have a whole new concept and a whole new regime. Are 
you worried about that? 

Mr. Bernold. We have turned around numerous complexes that 
have horrendous reputations after you rehabilitate them first sub- 
stantially. 

Mr. Peterson. How do you do it? 

Mr. Bernold. It is all part of the management discipline. I 
mean, one of the key things is being at HUD, HUD was always 
driven by production. When I was there the key thing was you 
have a call, how many units are you producing, the last adminis- 
tration wasn't into production, but they were exactly the opposite. 
They probably called you, how did you produce a unit, but prior to 
that HUD was into production, and that was the key element. 
Therefore you didn't hold up production because you thought 
maybe the management company wasn't competent. 

'The part in turning around the complex, you have to look at all 
the components, and a key component is after you put the bricks 
and mortar together properly, who is going to run it and do they 
have the capacity to run this type of complex. When you are turn- 
ing around the complex, tenant selection is the key. Do they have 
the capacity to enforce the rules? Do they have the systems to 
maintain the property? Do they have a track record that they put 
the capital back when necessary. 

Mr. Peterson. In getting to that third point of yours, the tenant 
selection, as I understand it, under certain of these progn^ams there 
are some fairly strict rules about relocation and from what I am 
told it is quite expensive. 

Mr. Bernold. The preference rules. 

Mr. Peterson. I was told it could cost $20,000 a unit to try to 
relocate these tenants if they know how to work the system. Is that 
true, that they can basically force you to rent an apartment? 

Mr. Bernold. I assume there are horror stories about how you 
could, that the Uniform Relocation Act, and if somebody is truly 
cognizant of the system, that they could 

Mr. Peterson. That doesn't happen in practice? 



208 

Mr. Bernold. Oh, it does. In any governmental program there 
are always people who have the capacity to exploit the program. 

Mr. Peterson. But in general terms that doesn't happen in your 
experience? 

Mr. Bernold. In our experience that hasn't been a problem. 

Mr. Peterson. Let's say you have 100 tenants who are wrecking 
the place and doing all kinds of harmful things to your building, 
what do you do? You rehabilitate it. Everybody has to move out, 
is that what happens? 

Mr. Bernold. We have done rehabilitations in place. It depends 
on what the problem is. 

Mr. Peterson. You allow them to stay there and if they don't fol- 
low your rules, out they go; is that basically what happens? 

Mr. Bernold. Yes. In fact, we can tell vou a scenario that our 
reputation is such that all sorts of people wno don't follow the rules 
leave when they hear we are buying the building. They voluntarily 
exit. 

Mr. Peterson. They go to the other gentleman's place and cause 
him more problems? 

Mr. Bernold. They would have to go somewhere. What one of 
the issues is who houses those highly destructive people who can- 
not be decently housed, whose problems transcend housing, and my 
position is not me. I am not a social worker. I don't have the capac- 
ity. I set up systems to exclude those types, as best I can, those 
types of individuals from living in my complexes, and if I find 
tnem, I evict them. 

Mr. Peterson. You are like the underwriters in the health care 
system, figuring out who is going to get sick and get them out of 
your policy. 

Mr. Bernold. It is almost exact — one of the big keys in manage- 
ment is tenant selection and enforcement of the rules, and then to 
have the capacity to use the money that you collect in rents effi- 
ciently and plan for the future. 

Mr. Peterson. The thing I hear from other people is that they 
can't do this because the Legal Aid Society is suing them and be- 
cause of all these laws that are in place. 

Mr. Bernold. It has become harder and harder to run a prop- 
erty. I mean, on one hand we have this committee talking about 
HUD failures. On the other hand, we have Congress passing laws 
making it virtually impossible for you to manage your property by 
making it harder and harder for you to select what type of individ- 
ual lives in your complex. 

At the current time HUD is actually — one of the problems you 
have, if I may digress for a second, is density. At the current time 
HUD is suing an owner, I don't remember the State, I believe it 
is Indiana, who had a four-bedroom unit. HUD's own counsel said 
two people per bedroom is the limit. 

Well, now they are suing them because they wouldn't put nine 
people in a four bedroom unit because we also have a problem of 
people saying they are trying to solve poverty so the way to solve 
poverty is to move more and more people into the same unit. How- 
ever, nobody asks the question, how many more families are we 
helping. What we are doing is shuffling around the families, so we 
put in a family of nine whose density, just from the density that 



209 

you will create will destroy the complex no matter what the man- 
agement is or the ownership is or we can put in a family of five 
or six whose density is suitable for the unit and would not end up 
destroying the complex. And one time we solved one family's prob- 
lem, the other time we solve a problem of a family momentarily 
and then we lose the complex in the long run, so there is all these 
conflicting issues that are going on. 

Mr. Ford. To make a point, I eliminated that part of this con- 
versation here, but there is a fundamental dicnotomy here of 
things. HUD is a mortgage insurer on one hand. HUD is a deliv- 
erer of assisted housing on one hand. HUD is a monitor of fair 
housing on another hand, and what he is talking about are these 
occupancy rules, the standards in the industry around the world — 
not around the world, in this country have been like up to two peo- 
ple per bedroom. 

HUD's guideline said, yeah, that is an acceptable standard, and 
administrative law judges and Ms. Achtenberg are suing people all 
over the country because you are limiting occupancy to two persons 
to a bedroom, and I will tell you, the point I was going to make, 
that HUD — there are a lot of projects that HUD has got, some that 
we have, that we may ultimately have to give back because we are 
not going to be able to control them when we can't take people with 
unlimited standards for how many people they can put in a unit. 
And I will tell you, you cannot manage a property like that, and 
the bag holder here is going to be the insurance fund. That is a 
relatively new development, I might add. 

Mr. Peterson. Did you want to say something, Dr. Graham, 

Dr. Graham. No. 

Mr. Peterson. Well, I have got some more questions, but we 
have been here a long time today. I appreciate very much all of you 
coming and spending some time with us today, and I think you 
helped, at least helped me understand better what we are up 
against. 

I may use you folks, now that I know who you are, as resource 
people who might be willing to answer some of our questions. We 
are going to continue to look at this. But I think your last point 
here is that one of the things we ought to ask is should we seg- 
regate some of these goals into different agencies so we don't have 
HUD working against each other, probably something that is very 
relevant to look at. 

Mr. Bernold. You should ask some people at HUD what it takes 
to do a policy between the warring factions because of that. 

Mr. Peterson. That is probably one of the reasons why the com- 
parability regulations aren't done after 4^2 years. Anybody else 
nave any burning statement they need to make before we wrap this 
up? If not, we thank you all again for being with us. We will con- 
tinue this at a later date. The subcommittee is adioumed. 

[Whereupon, at 3:05 p.m., the subcommittee adjourned, to recon- 
vene subject to the call of the Chair.] 



SECTION 8 HOUSING: WASTE AND 
MISMANAGEMENT 



THURSDAY, OCTOBER 6, 1994 

House of Representatives, 

Employment, Housing, and Aviation Subcommittee 

OF THE Committee on Government Operations, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 9 a.m., in room 
2247, Raybum House Office Building, Hon. Collin C. Peterson 
(chairman of the subcommittee) presiding. 

Present: Representatives Collin C. Peterson, Bobby L. Rush, 
Karen L. Thurman, William H. Zeliff, Jr., Christopher Shays, and 
Frank D. Lucas. 

Also present: Wendy D. Adler, staff director; Linda Thompson, 
professional staff member; June Livingston, clerk; and Judith A. 
Blanchard, minority deputy staff director. Committee on Grovem- 
ment Operations. 

Mr. Reterson. The subcommittee will come to order. 

Grood morning, everybody. This is the subcommittee's second 
hearing on problems in HUD's Section 8 project-based housing pro- 
gram. This large Federal program provides over $4.3 billion annu- 
ally to more than 20,000 projects across the country. This hearing 
today will explore why millions of those dollars are being misspent. 

Under this program, HUD provides rental subsidies and, often, 
HUD-insured mortgages to private landlords who must provide de- 
cent and safe housing for low-income families. Unlike the Section 
8 Voucher Program, these Section 8 project-based subsidies attach 
to the apartment building rather than to the tenant. So tenants are 
unable to leave a project when living conditions deteriorate. 

Our first hearing revealed widespread serious problems. Sub- 
committee members viewed a dramatic video by the General Ac- 
counting Office of squalid HUD-subsidized apartments. Testimony 
revealed that HUD has not been adequately inspecting the condi- 
tions of its projects. And HUD has not oeen enforcing its own hous- 
ing quality standards with these project owners. 

HUD at that time could not identify which projects in its inven- 
tory across the country were troubled, either financially or phys- 
ically. The HUD Inspector General estimates that about 30 percent 
of these properties are in trouble. 

Both the HUD IG and the GAO gave HUD at that period an "F" 
for not enforcing its sanctions. And the HUD IG testified that there 
is a "culture at HUD that results basically in a wholesale disregard 
for available enforcement tools." 

(211) 



212 

Today's hearing will focus on possible solutions to these prob- 
lems. We will look at what HUD should do with the troubled 
projects in its inventory. While HUD no longer funds the startup 
of any new projects, it still spends hundreds of millions of dollars 
annually to subsidize troubled projects. In some cases more money 
may be justified, but in other cases it may not. But HUD doesn't 
know if investing more money is the right action for a project. And 
that is HUD's real problem: You can't devise a solution until you 
know the extent of the problem. 

HUD gives millions of dollars a year to troubled projects, as I 
said. And the HUD IG will report today that HUD neither collects 
or analyzes adequate financial information on projects. This infor- 
mation we believe is crucial for making cost-effective decisions on 
troubled projects. 

The IG will testify, in their words, "HUD often attempts to turn 
troubled projects around by blindly throwing additional financial 
assistance at them rather than biting the bullet and cutting the 
Federal Government's losses by taking bold aggressive actions, in- 
cluding actions to enforce or terminate its contracts with owners." 

To get a handle on this problem, the subcommittee asked the 
GAO and the HUD IG to provide financial and cost-benefit analy- 
ses of four troubled properties. Their findings today will review the 
issues that HUD must consider when deciding on remedial action 
for a troubled project. 

I think HUD has taken a good first step by forming the SWAT 
teams to identify and resolve problems at 100 projects. A more 
comprehensive solution to HUD's problems is in a bill that I intro- 
duced on September 28. That bill would require that HUD deter- 
mine the best remedial action for a project. 

Before HUD pours any more money into a troubled project, HUD 
would first be required to do a complete financial and cost-benefit 
analysis. Then HUD would be required to select a remedial action, 
which would include funds to renovate the property; rent vouchers 
for tenants to use elsewhere; new project ownership or manage- 
ment; enforcement of sanctions against owners; and, finally, fore- 
closure. HUD would also have to assess each action's impact on the 
tenants, owners, and the community. 

The bill that I have introduced is one possible solution. We hope 
to hear from our witnesses today about other approaches. 

And hopefully we can move this whole issue in the right direc- 
tion. 

I see our ranking member is here. I would like to welcome our 
esteemed ranking member, Mr. Zeliff fi-om New Hampshire. 

Do you have a statement? 

Mr. Zeliff. Thank you Mr. Chairman. I appreciate you calling 
the subcommittee together again this morning to continue the ex- 
amination of the troubled Section 8 housing program. 

Section 8 is a well-intentioned program which has, in my view, 
failed miserably in its mission to provide safe and decent housing 
for low-income Americans. At the last hearing we heard compelling 
testimony from an individual forced to live in an Section 8 project, 
and also testimony regarding lack of enforcement of HUD's own 
standards. 



213 

HUD was enable to provide us with a clear understanding of the 
number of below-standard Section 8 projects across the country. 

I said it then, Mr. Chairman, I will say it again: We do not need 
more excuses from the people who administer these programs and 
the administration itself. We need a results-oriented strategy to 
solve these problems. We owe it to the people living in project- 
based housing as well as the taxpayers who pay the tab to reform 
this flawed program. 

I salute our efforts toward this end, Mr. Chairman. I believe that 
the legislation you have introduced takes a needed step in the right 
direction. 

However, I question whether this is a system that can be fixed. 
Is the solution to this problem to try to fix a program that is by 
many accounts fatally flawed? How much longer shall we confine 
individuals to substandard Section 8 projects when quality housing 
units might be available nearby? 

In my view, we should seriously consider scrapping the project- 
based approach altogether and explore voucher-based programs to 
provide low-income housing to Americans. 

I look forward to hearing testimony from our witnesses. 

Thank you, Mr. Chairman. 

Mr. Peterson. Thank you. 

Mr. Lucas, welcome to the committee. 

Susan Gaffney, the Inspector General of the Department of 
Housing and Urban Development, accompanied by Chris Greer, As- 
sistant Inspector General for Audit with the IG. 

Ms. Judy England-Joseph, Director of the Housing and Commu- 
nity Issues Area with the General Accounting Office, accompanied 
by Dennis Fricke, Assistant Director, Housing and Community De- 
velopment Issues. 

Nicolas Retsinas, Assistant Secretary for Housing, Federal Hous- 
ing Commissioner with HUD, who is accompanied by Helen 
Dunlap, Deputy Assistant Secretary for Multifamily Housing. 

Welcome to all of you. We appreciate your work and coming back 
before the committee. 

As you know, it is our custom in Government Operations inves- 
tigative hearings to swear in all witnesses. Do any of have you any 
problem with that? If not, please stand and raise your right hand. 

[Witnesses sworn.] 

Mr. Peterson. Your written statements will all be entered in the 
record. 

I would like to warn everybody we have to be done at 11 a.m. 
because of the address by Mr. Mandela. It seems like every time 
that this subcommittee has a hearing, some major thing happens. 
I don't know what that means. 

Mr. Zeliff. That means we are doing major things. 

Mr. Peterson. With that, Ms. Gaffney, you may begin. Thank 
you for your work and thank you for being with us. 



214 

STATEMENT OF SUSAN M. GAFFNEY, INSPECTOR GENERAL, 
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, 
ACCOMPANIED BY CHRIS GREER, ASSISTANT INSPECTOR 
GENERAL FOR AUDIT 

Ms. Gaffney, Thank you, Mr, Chairman and members of the 
subcommittee. 

I would like to take one second and introduce some people who 
are here with Chris Greer and me today. They are in the second 
row: George Tilley, Jerry Kite and Ron Jilg, from our Seattle office, 
who actually did the financial analyses that you requested on the 
two prmects. 

And I want to commend your attention to and concern about this 
issue, and just stand back for a minute and remember why this 
concern is so warranted. Our office believes that the multiiamily 

Erograms in HUD are in a state of crisis. It is a crisis that has 
een brought about by changes in the economy, budget consider- 
ations, poncy deficiencies and mismanagement, over quite a long 
period of time. 

Unfortunately, despite all of the indications that we have a cri- 
sis, there doesn't seem to be much discussion outside this sub- 
committee. But the indicators of the crisis are clear. First of all, we 
are investing billions of dollars a year in project-based Section 8 
and we are not sure about the quality of housing that we are get- 
ting as a result of that investment. 

Further, this program works through the private sector, but it 
lacks any of the normal private- sector inducements and incentives 
that bring about efficient and effective management of housing. 

In 1993, you will remember FHA paid almost $1 billion in multi- 
family insurance claims. They also had losses of more than $367 
million on previously foreclosed projects. 

Currently, the loan-loss reserves, that is, the projects that are at 
risk in the portfolio, are in excess of $10.3 billion. That is a quarter 
of the multifamily loan portfolio. 

And finally, and perhaps most importantly for our consideration 
today, within the next few years some 600,000 units covered by 
Section 8 project-based contracts are going to come up for renewal, 
which presents us with a situation of enormous opportunity and 
also enormous risk. 

Against this background it seems to me that these hearings are 
incredibly important. And H.R. 5115 is certainly a move in the 
right direction. I commend you. 

Now, I am going to briefly try to answer the questions that you 
asked us to answer. First of all, you asked whether HUD was per- 
forming the types of comprehensive financial analyses that are 
called for in H.R. 5115, whether HUD has the relevant information 
it needs, whether HUD is exploring fully the alternatives about 
how to deal with these troubled properties, and whether HUD is 
taking effective action. So we need to start with the first point, 
whether HUD has all the relevant information it needs to deal with 
these troubled projects, and the answer is clearly: No, HUD does 
not have all that information. 

HUD has a lot of information. It is collected on a piecemeal basis. 
It is not all current. It is not all consistent. And it certainly is not 
comprehensive. 



215 

I want to take a minute, though, and say that we have testified 
before you before, and in other places, and we have attributed this 
situation to systemic problems in HUD. The systemic problems are 
real. There is a lack of staff capability. There is a lack of decent 
data systems. There is a lack of adequate management controls. 

And we have said for some years, those things need to be fixed. 
And thev do need to be fixed. But we can't wait for them to be 
fixed, which I think is the point Mr. ZelifF was getting to. Nic 
Retsinas and Helen Dunlap have initiated a lot of actions to solve 
the systemic problems. 

In our judgment, those solutions are years in the fiiture. We have 
to figure out some way to deal with the crisis that is before us right 
now. 

In terms of using what information HUD has about these 
projects to deal effectively with the projects, our view is generally 
that HUD deals with current problems on a temporary basis with- 
out considering fully the long-term effects, the long-term viability 
of projects. 

You also asked second about audits of HUD's use of current fi- 
nancial tools to address troubled projects. And we have done some 
work in this area. In 1992, we looked at the loan management set- 
aside program. We found errors, inconsistencies, and omissions in 
29 percent of the applications that we reviewed. We questioned $10 
million in awards made under this program. 

In terms of the flexible subsidy program, in 1983 and 1989, we 
said there were major procedural weaknesses in this program. 
HUD did not change its procedural guidance until May 1992. 

We have looked at other aspects of this program which involve 
HUD's monitoring of State finance agencies in their administration 
of flexible subsidy loans and have found inadequacies. 

Another way that HUD can address troubled projects is through 
special rent adjustments. In 1990 we did an audit and found that 
the process for special rent adjustments was not adequately con- 
trolled, that in some cases special rent adjustments were being 
given for factors already included in the annual adjustment cal- 
culation. 

We found that HUD lacked adequate controls and documentation 
to identify, account for the rent adjustments, and then to follow up 
to see whether in fact the rent adjustments are needed in subse- 
quent periods. 

The bottom line from our perspective is that HUD has not been 
very good in using these tools. That is not really surprising, given 
the basic lack of comprehensive knowledge that HUD has about the 
projects. It is also true that these tools are very, very limited, 
which I want to talk about later. 

Third, you asked us to perform financial analyses of two Section 
8 projects: Holiday Lake Apartments in Pompano Beach, FL, and 
Sierra Nevada Arms in Las Vegas. In collaboration with the Gen- 
eral Accounting Office, we used a consistent approach to doing 
these financial analyses and essentially what we did was compare 
the costs of providing all of the tenants with tenant-based Section 
8 vouchers with the cost of rehabilitating these projects with bor- 
rowed funds and providing Section 8 project-based assistance to all 
of the units in the rehabilitated projects. 



216 

Our findings were that at Holiday Lake, assuming the HUD pro- 
jected rehabilitation costs, the rehabilitation option would be less 
expensive by about $1 million than the tenant-based voucher op- 
tion. 

That calculation changes, though, depending on the cost of the 
rehabilitation. If the rehabilitation costs in fact were $2.66 million 
or more, as opposed to the HUD estimate of $1.33, the tenant- 
based vouchers would become less expensive. 

Incidentally, at Holiday Lake, 20 of the 32 tenants we inter- 
viewed said if they could move, they would move. 

At Sierra Nevada Arms, we had the same kind of finding, which 
is, assuming the HUD costs of rehabilitation, the rehabilitation 
would be approximately $2 million less expensive than providing 
tenant-based vouchers. Again, that calculation changes if the reha- 
bilitation costs are $5.9 million or more. 

But I think the most important thing we learned, Mr. Chairman, 
was not those specifics. What we learned was that first of all, these 
calculations are all case by case. Each one of these projects has a 
peculiar mix of factors. The analysis has to be done intensively and 
based on an individual project and it is complicated. And what we 
did is certainly not the mil range of what needs to be done because 
we were focusing on financial factors as opposed to all of the other 
for instance, social factors that need to be considered. 

It is very clear that HUD needs not only to do these kinds of 
analyses but HUD needs the flexibility once you do the analyses to 
act appropriately with prudent business sense. 

You asked next whether we had recommendations on how HUD 
can make the most cost-effective decisions on troubled projects. We 
have recommendations in that area. We would say to you we also 
need to be very concerned about ways to prevent projects from be- 
coming troubled, because obviously that continues to happen. 

The first step is, HUD has to identify its universe, it has to con- 
duct the kind of analysis that you are calling for in H.R. 5115. We 
have to establish some capability for HUD to act. 

I want to go back to what I said before. HUD doesn't have the 
capability. And I don't see that HUD is going to get the staffing 
resources it needs to deal with these problems. I think training the 
existing HUD staff is going to take years. So we have to look for 
innovative ways to establisn a capability that is not dependent on 
the number of HUD FTE. 

Next, we have a series of proposed legislative changes that are 
included in our written testimony. I am not going to go through 
them all here now. I would like to say, though, I don't think that 
we, the HUD OIG, have all the answers. 

It is clear that the way this program is working, the way it is 
now designed, is not consistent with prudent, businesslike oper- 
ations; that it seems to be premised in a distrust of HUD's ability 
to act prudently; and it seems to be based further in a conviction 
that we must maintain this inventory of affordable housing as op- 
posed to maintaining a stock of affordable housing. The focus in 
this program seems to be on this stock of affordable nousing, owned 
by this group of owners. And I think we must be able to move away 
from that, and if we can't, I really do not see how HUD can act 
to correct these problems. 



217 

All of this is very important particularly because of these con- 
tract renewals that are coming up in the next few years. To my 
knowledge, but you should ask Mr. Retsinas, HUD does not now 
have a comprehensive plan of action for dealing with these contract 
renewals. That prospect of contract renewals is both opportunity 
and enormous risk. 

Finally, I would like to just bring to your attention an example 
of what we consider to be the flawed program design in this area. 
And this is not a topic for discussion, I know, today. It is a matter 
of great concern to us. It is the multifamily prepayment and preser- 
vation program. 

This is a program that was enacted in 1987, and it was enacted 
because of particular market situations in California and Massa- 
chusetts. There was a great fear that what was going to happen 
was that owners of these multifamily projects were going to prepay 
their loans and thereby we would lose those units of affordable 
housing. 

In order to prevent this from happening, we have a law that es- 
sentially locks HUD into providing enormous financial benefits to 
owners who come to us and say they want to exercise those bene- 
fits at their discretion. 

At the discretion of the owners, HUD is providing equity take- 
out loans and increased distributions, and then the way the owner 
is compensated is through higher rents and greater Section 8 sub- 
sidies. 

Part of the problem with this is not just the enormous cost, 
which we estimate at $37 billion 

Mr. Shays. Million? 

Ms. Gaffney. Billion — ^to the taxpayer. Part of what is wrong 
with this scenario is as the rents are increased, they are increased 
not only for the Section 8 units, but for the unassisted units too. 

They can be increased by three times as the result of one of these 
deals. What that means is we drive out tenants who are unas- 
sisted, who are not getting the Section 8 subsidy. 

So I bring this to your attention just because it is one example 
of how constrained HUD is to do tnings that don't seem to make 
a whole lot of sense. 

Thank you. 

[The prepared statement of Ms. Gaffney follows:] 



218 



STATEMENT OF 

SUSAN GAFFNEY, INSPECTOR GENERAL 

ACCOMPANIED BY 

CHRIS GREER, ASSISTANT INSPECTOR GENERAL FOR AUDIT 

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

BEFORE THE 
SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION 

OF THE 
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS 

OCTOBER 6, 1994 



Chairman Peterson, and members of the Subcommittee, we are pleased 
to be here today to further examine problems in HUD's Section 8 
project-based assisted housing programs. At your request, our 
testimony this morning will focus on four areas: 1) the concept of 
financial analysis leading to decisions about possible alternatives 
for dealing with troubled projects and HUD's use of such analyses, 
2) the effectiveness of HUD's use of various financial tools to 
assist troubled projects such as Loan Management Set-Aside, 
Flexible Subsidy Loans and special rent increases, 3) our financial 
analyses of two troubled projects. Holiday Lakes and Sierra Nevada 
Arms, and 4) our recommendations for dealing with troubled projects 
on both a short term and long term basis. 

Mr. Chairman, before we begin our testimony on your specific 
requests, I want to state emphatically that HUD's multifamily 
project based assisted housing programs are in a state of crisis. 
As a matter of fact, I would liken the current situation in many 
respects to the savings and loan debacle. Numerous reports by our 
office, by GAO and by third parties clearly demonstrate that HUD 
needs to develop a coherent and comprehensive plan for dealing with 
troubled projects. Much work remains to be done in that regard. 
In addition. Congress, 0MB and HUD need to collectively develop a 
strategy to deal with the multifamily crisis. Some of the factors 
leading to our conclusions are: 

For several years our Office has reported to Secretaries Kemp 
and Cisneros, and to the Congress and OMB, that Multifamily 
Loan Servicing and Property Disposition are among HUD's major 
progreumnatic problems. Systemic management weaknesses 
associated with staffing shortages, inadequate data systems, 
and faulty management controls adversely impact everything 
that HUD does. These wealcnesses are particularly evident in 
HUD's multifamily assisted programs and contribute to the 
following financial facts: 1) last fiscal year FHA paid over 
$965 million in multifamily insurance claims and realized 
losses of over $357 million on previously foreclosed projects, 
2) at September 30, 1993, HUD established a loss reserve of 



219 



about $10.5 billion on outstanding loans of $43.9 billion, 
i.e. about 24 percent of all loans are at risk, and 3) HUD 
holds mortgages on about $7.8 billion for which claims were 
previously paid. About $6 billion of those mortgages are non- 
performing loans. 

In April 1994, our Office of Audit issued a report that was 
very critical of the Prepayment/Preservation program. I was 
so disturbed by the results of that study that I personally 
transmitted the report to all appropriate Congressional 
committees with jurisdiction over HUD programs. In 
transmitting that report I called the program an emerging 
scandal that will cost the taxpayers billions of dollars. 
With an estimated 400,000 units eligible for assistance under 
the program, tens of billions of dollars are at stake. 

During the next few years, contracts for an estimated 600,000 
units of Section 8 project-based assisted housing will expire. 
Unless aggressive actions are taken now, many of the problems 
being reported today will continue and multiply in the future. 
Our office is launching a review of the contract renewal 
process to determine possible options for dealing with 
expiring contracts . 

Thus, Mr. Chairman, we believe that the timing and subject matter 
of this hearing are crucial . A key element in any debate about the 
future of project based assisted projects must be comprehensive 
financial analyses that lead to logical conclusions about potential 
alternatives. In this regard, the bill (HR 5115) that you 
introduced last week certainly can serve as a catalyst for the 
needed debate. That debate must also consider the substantial lack 
of HUD'S human resources, in terms of both numbers and expertise, 
to deal with the myriad problems plaguing the project based 
assisted projects. Our Office is now convinced that the needed 
resources will not materialize given the current budget situation 
governmentwide . Thus alternative programs or delivery systems must 
be considered in going forward with project based assistance. 

Later in our statement we provide several suggested recommendations 
to significantly change the project based assistance programs. He 
vrould expect that many different segments of the assisted housing 
industry will find our suggestions controversial. Nonetheless, we 
believe dramatic actions are needed to overcome the numerous 
problems associated with current conditions of the assisted housing 
stock. 

We would now like to present our input on yojir specific questions. 

FINANCIAL ANALYSES 

In your invitation letter you asked our opinions on whether HUD 
currently performs the types of financial analyses we will be 
discussing this morning for each of its troubled projects; whether 
the financial information collected include all relevant 



220 



information to make decisions on alternatives to continuing the 
project based assistance on the project; and the effectiveness of 
HUD'S current processes for using relevant information to take 
appropriate actions . 

HUD does not currently perform an analysis to determine the most 
advantageous, least cost alternative to providing decent, safe and 
sanitary affordable housing to tenants living in currently troubled 
projects i^ 

HUD collects project level information from a variety of sources, 
such as its comprehensive and limited project management reviews, 
physical project inspections, tenant file reviews, annual project 
financial statement reviews, and project financial needs surveys. 
Most of this information is collected as part of HUD's routine 
project monitoring processes for the primary purpose of identifying 
compliance deficiencies and labeling projects according to the 
perceived extent of their problems, e.g. - "troubled project" 
status. Aside from the fact that HUD's monitoring information is 
often not readily available, current, accurate or complete, it 
generally is not effectively used to initiate aggressive action to 
remedy identified project performance problems. 

In many HUD solutions, the basic conditions which led to troubled 
status remain the same, but HUD has subsidized temporary relief. 
For HUD to provide affordable housing that best serves the needs of 
the tenants and the community, HUD needs to collect and review 
adequate data on market conditions associated with its troubled 
projects, such as information on other housing sources, area 
occupancy/vacancy rates; area market rents; area occupancy profiles 
by income, family size, race; and location, etc. 

The availability of such information would enable HUD to 
realistically and practically consider and/or pursue: (1) the 
economic and social implications and impacts of alternative subsidy 
or financial assistance mechanisms; (2) changes in project 
ownership or management; and (3) other options such as declaring 
mortgage covenant or regulatory agreement defaults or imposing 
/sanctions. This would then enable HUD to reach a rational 
conclusion as to the impact on existing residents or the community 
at large of applying or not applying various remedial actions. 

In summary, HUD needs to explore a broader range of alternatives 
for providing affordable housing. 

FINANCIAL TOOLS 

In your invitation letter you asked us to discuss any recent 
studies or audits that relate to HUD's effectiveness in using 
current financial tools that can provide additional assistance to 
troubled projects, such as Loan Management Set-Aside (LMSA), 
Flexible Subsidy Loans, or special rent increases. You also asked 



221 



that we Identify some specific examples of questionable decisions 
in the award of additional funds to troubled projects . 

SECTION 8 LMSA 

The clearest examples of waste and abuse of the LMSA program are 
contained in our March 31, 1989 audit report of Discretionary LMSA 
funding. That report clearly demonstrated that former HUD 
officials illegally granted substantial sums of LMSA funding to 
projects with the resultant waste of millions of dollars. This 
program was one of many that came under congressional scrutiny 
during the hearings on the "HUD Scandals." An investigation into 
this matter resulted in former Assistant Secretary Demery pleading 
guilty on June 17, 1993 to several criminal counts relating to the 
award of LMSA in exchange for personal financial benefits. One 
developer alone received HUD subsidies exceeding $15 million on two 
HUD insured projects. 

The HUD Reform Act of 1989 changed the LMSA program from 
discretionary to a nondiscretionary (competitive) funding process. 
Our most recent experience with the non-discretionary LMSA program 
is our July 16, 1992, multi-region audit report that disclosed that 
HUD'S Field Offices were not properly processing non-discretionary 
LMSA applications. We found errors, omissions and inconsistencies 
in 29 percent of the non-discretionary LMSA applications we tested 
causing us to question about $10 million in awarded LMSA 
assistance. In some cases, we found that projects: (1) received 
funding for more units than were needed to stabilize projects' 
financial conditions; (2) had serious financial problems that could 
not be resolved by the additional LMSA assistance; (3) received 
LMSA assistance even though the projects did not have serious 
financial problems or otherwise meet the minimum qualifications or 
priority considerations for funding; (4) charged excessive contract 
rents; and (5) lacked audited financial statements in support of 
their assistance requests. 

The report contains several specific examples of questionable HUD 
decisions in awarding LMSA assistance. For instance, we took 
exception to the LMSA award to the Woods of Castleton project in 
Indianapolis, Indiana. At the time of our review, HUD had provided 
this project owner LMSA assistance for 26 units and subsequent to 
our review an additional 26 units was approved ( we did not review 
that award). We found that the project's cash requirements 
exceeded its rent potential by over $151,000. Even at full 
occupancy, this project would not have been able to meet its cash 
requirements. Moreover, the project's long-term viability could 
not be predicted due to the project's extremely high debt service 
ratio. The HUD Field Office nevertheless approved the LMSA 
assistance for this project despite the HUD Loan Specialist's 
belief that the project had problems which could not be addressed 
by LMSA assistance. LMSA funding for this project may exceed 
$522,000 over the five-year life of the LMSA contract. The project 



222 



subsequently went into default. It is now under a workout 
i agreement with HUD and is current under that agreement. 

FLEXIBLE SUBSIDY 

Our review of the Flexible Subsidy program has been limited in 
recent years. However, prior reviews of this program disclosed 
that HUD'S program guidance was weak in several key areas, 
resulting in the Department's inability to ensure that program 
funds were being used effectively to meet the physical and 
financial needs of projects. We first reported procedural 
weaknesses in the Flexible Subsidy program as far back as 1983, and 
again in 1989. However, it was not until May, 1992, that HUD 
revised its program handbook procedures . Other reviews have 
disclosed problems with HUD's monitoring of State Housing Finance 
Agencies' administration of Flexible Subsidy funds. We found that 
some state agencies: failed to perform proper analyses to determine 
whether physical and financial problems of projects would be 
corrected with Flexible Subsidy funds; advanced funds prior to 
their need; and used funds for ineligible purposes. We found 
instances where HUD advanced Flexible Subsidy funds to state 
agencies for almost four years before they were actually used. One 
state agency earned over $558,000 in interest income by investing 
the excess funds. 

SPECIAL RENT ADJUSTMENTS 

Several years ago, we performed an internal survey of HUD's 
processing and approval of Section 8 special contract rent 
adjustments. At the time of our survey, owners could apply to HUD 
for special contract rent adjustments as a result of "substantial 
general" increases in their property taxes, utility rates, or 
similar costs (e.g., insurance). These special rent adjustments 
have since been expanded to crime-related cost increases and to 
provide service coordinators . Owners are required to demonstrate 
that these types of costs are not adequately accommodated by rent 
adjustments granted by HUD through its Annual Adjustment Factors. 
Our survey disclosed that HUD was unduly expanding the scope of 
special rent adjustments to areas that appeared to be covered by 
the Annual Adjustment Factors. We also found that control records 
in support of these rent adjustments were inadequate; consequently, 
HUD was unable to account for all the special rent adjustments it 
may have granted and adequately follow up with projects to 
determine if the rent adjustments were still needed by the 
projects. We further concluded that the processing of Section 8 
special rent adjustments was not always in conformity with HUD's 
established policies and that such processing was highly vulnerable 
to fraud, waste, and abuse. 

In summary, Mr. Chairman, HUD does not have a good track record in 
administering these financial tools. Moreover, we believe that the 
tools need to be significantly changed or eliminated in the future. 



223 



PREPATKENT/PRESERVATION ISSUES 

At this point we want to express our strong opinions about the 
Multifamily Prepayment/Preservation program. Although this program 
is not classified as a financial tool to aid problem projects, the 
program's objectives are the same. Our audit of activity to date 
shows that it is not achieving its "af fordability" objective 
without an exorbitant cost to taxpayers and/or undue enrichment of 
project owners. In April 1994, we issued a major report on the 
Multifamily Prepayment/Preservation Program. The report concluded 
that the Preservation Act, while well intentioned, was designed and 
passed by Congress in 1987 and amended in 1990, as a totally 
inflexible and enormously costly method of preserving low income 
housing. The Act was passed based primarily on the housing markets 
in California and Massachusetts. Since the property values in 
these two states had significantly appreciated, the fear was that 
project owners would opt to prepay their mortgages and 
significantly decrease the supply of low income housing. These 
fears have not materialized and we believe significant 
modifications are needed to the legislation now to reflect current 
not past conditions . 

In our report, we estimated that if the legislation were revised to 
provide HUD with the flexibility to analyze and implement the least 
cost method of funding long term low income housing, costs could be 
reduced by tens of billions of dollars below the current inflexible 
owner-driven program. 

The preservation program causes increased costs to HUD by 
compensating property owners through FHA-insured loans (equity 
take-out loans) or increased annual distributions. HUD and 
residents pay for the owners compensation through increased rents 
that cause higher vacancy rates for unassisted units. Therefore, 
preservation increases the risk to the FHA insurance fund if HUD 
rental subsidies do not offset vacancies and unassisted resident 
rents that are lower than the Section 8 rent. 

Some of the cost-saving options that could be explored include: 

- Purchasing projects and giving them to housing agencies 
to manage. 

- Allowing owners to prepay and purchase new or existing 
housing needed to replace units lost to prepayment. 

Constructing replacement housing for units lost to 
prepayment . 

- Allowing owners to prepay and arrange for Section 8 
project-based assistance of units in currently unassisted 
projects to replace units lost to prepayment. 



224 



- Allowing owners to prepay and give Section 8 vouchers or 
certificates to those residentc that qualify for rental 
assistance. 

Providing a grant to rehabilitate the project in exchange 
for a commitment to remain low income housing for the 
remaining useful life of the project, if a project has no 
equity and wants to stay in the program 

IKPACT OF TITLE 2 PRESERVATION PROGRAM IN BOSTON 

As a follow-up to previous preservation audit work done in the 
Boston, MA. area, our staff is currently analyzing the actual 
effect of the program on HUD costs, the tenants, the owners and the 
community. Our preliminary results are instructive in that they 
dramatically show the impact of the inflexibility of the laws. 
Pertinent data relating to two projects under review, follow: 

Sherwood Park- is an 81 unit, 221(d)3-BMIR project and rents are 
subsidized through a lower than market interest rate. The 
preservation plan of action for Sherwood Park was approved in 
December 1991. Among the incentives provided to the owner were an 
equity take-out loan of $3.8 million and annual Section 8 contract 
authority of $344,000 for 30 units of project based Section 8 to 
support the new debt service requirements resulting from the equity 
loan. The project is in good physical condition because the owners 
used $1.2 million from the equity loan for capital improvements. 

The incentives under the preservation program will be very costly 
and have driven many market rate tenants from the project. Under 
the interest rate reduction program rents for three bedroom units 
were about $357. Under a phased in approach those rents will 
increase to $1059 over a three year period. Meanwhile, Section 8 
rents are $1690, or 170% of the Fair Market Rents. Over the long 
term, in order to avoid a default or project deterioration, HUD 
will have to either increase the Section 8 rents more or increase 
the numbers of Section 8 units to keep pace with the increased debt 
service and the loss of market rate tenants . 

Georgetowne I and II contain 967 units subsidized under the 22 1(d) 3 
BMIR program with 456 units under an existing LMSA Section 8 
contract. The preservation plans of action for both projects were 
approved in September 1992. HUD provided incentives included 
equity take-out loans of $36.9 million and additional annual 
Section 8 contract authority of $6.3 million for 343 units to 
support the debt service. Both projects are in good condition. The 
owners put only $1.7 million from the loan, back into the project 
in capital improvements. The balance of the proceeds of the loan 
was used to pay off the long term debt of the partnerships and pay 
distributions to the partners. 

Like Sherwood Park, the incentives have affected the project 



225 



dramatically. Under the rent reduction subsidy, rental rates for 
three bedroom units were about $475. Under a phased in approach 
those rents will increase to about $995. Meanwhile, Section 8 
rents are $1078 and will have to rise further to offset the loss of 
market rent and moderate income tenants as they move because of the 
exorbitant rents caused by the preservation program. Since the 
Plan of Actions (POAs) was approved a total of 231 tenants (24%) 
have moved from Georgetowne I 6 II. For Sherwood Park a total of 
37 (46%) tenants moved out. These incentives are very costly and 
have driven 86% of the moderate and market tenants from Sherwood. 

It would be far less costly to provide owners with rehabilitation 
loans at no cost and eliminate equity take-out loans entirely. We 
recommend the repeal of Title I and VI preservation legislation. 

FINANCIAL ANALYSES SPECIFIC PROJECTS 

In your invitation letter you asked that we provide the findings of 
our financial analyses of two specific projects that were included 
in the video presented by the General Accounting Office at the July 
26, 1994 hearing. 

The two projects reviewed by the OIG are Holiday Lake Apartments in 
Pompano Beach, Florida and Sierra Nevada Arms in Las Vegas, Nevada. 

Holiday Lake Apartments is a 232 unit apartment complex 
insured under the Section 236 program. The complex currently 
receives Section 8 project based assistance for 220 units. 

Sierra Nevada Arms is a 352 unit apartment complex also 
insured under the Section 236 program. The complex currently 
receives Section 8 project-based assistance for 290 units. 

Our financial analysis compared the cost of providing Section 8 
tenant based vouchers to all residents in the project (Voucher 
Option), to rehabilitating the project with borrowed funds and 
providing Section 8 project based assistance to all units in the 
property to cover the cost of the rehabilitation (Rehab Option). 
We estimated the cost of these options using comparable market 
rents for the area and various percentages of the Section 8 fair 
market rents. All of our calculations below assume Section 8 rents 
at the projects are set at the level necessary to cover project 
expenses and rents at units where vouchers are used are equal to 
comparable market rents . 

Specific details concerning our methodology and findings are 
contained in the appendices to our statement. I would like to 
summarize those findings for you now. 

HOLIDAY LAKE APARTMENTS 

For Holiday Lake J^artments our analysis showed that the Rehab 

8 



226 



Option is approximately $1.08 million less expensive than the 
Voucher option. This estimate used HUD's documented rehabilitation 
costs of $1.33 million. However, if rehabilitation costs exceed 
$2.66 million then the Voucher option becomes the lower cost 
option. 

In addition to the basic analysis above we calculated the cost of 
some variations on the Rehab Option without consideration of any 
restrictions under existing HUD programs . We calculated the costs 
for: 

a. Paying for the rehabilitation cost up front, and 

b. Improving the tenant mix by limiting the number of units 
with project based assistance. 

If HUD had the cibility to pay the rehabilitation costs up front 
rather than providing Section 8 subsidy to repay the loan, the cost 
of the Rehab Option is reduced by approximately $2.9 million. This 
makes the Rehab Option approximately $4 million less than the 
Voucher Option. 

To have the project compete in the market place, rely less on HUD 
assistance, and increase the income mix of the tenants, the number 
of units with project based assistance could be reduced and 
replaced with Vouchers. For example, reducing project based 
assistance to 20 percent of the units and providing vouchers to the 
remaining tenants would cost $12.8 million. This is still less 
expensive than the Voucher Option by $215,614. 

The decisions on factors other than purely financial analysis, such 
as whether or not to lower project based assistance, are difficult 
decisions that require additional input on the housing needs of the 
tenants and surrounding community. During our review 20 of the 32 
tenants interviewed said they would move if given the opportunity. 

SIERRA NEVADA ARMS 

For Sierra Nevada Arms our analysis showed that the Rehab Option is 
approximately $1.88 million less expensive than the Voucher Option. 
This estimate used HUD's dociimented rehabilitation costs of $2.66 
million. Our calculations show that if rehabilitation costs exceed 
$5.90 million then the Voucher Option becomes the lower cost 
option. 

In addition to the basic analysis above we calculated the cost of 
some variations on the Rehab Option without consideration of any 
restrictions under existing HUD programs . We calculated the costs 
for: 

a. Paying for the rehabilitation cost up front, and 

b. Improving the tenant mix by limiting the number of units 
with project based assistance. 



227 



If HUD had the ability to pay the rehabilitation costs up front 
rather than providing Section 8 subsidy to repay the loan, the cost 
of the Rehab Option is reduced by approximately $4 million. This 
makes the Rehab Option approximately $5.9 million less than the 
Voucher Option. 

To have the project compete in the market place, rely less on HUD 
assistance, and increase the income mix of the tenants, the number 
of units with project based assistance could be reduced and 
replaced with Vouchers. For excimple, reducing project based 
assistance to 20 percent of the units and providing vouchers to the 
remaining tenants would cost $17.1 million. This is still less 
expensive than the Voucher Option by $377,000. 

The decisions on factors other than purely financial analysis, such 
as whether or not to lower project based assistance, are difficult 
decisions that require additional input on the housing needs of the 
tenants and surrounding community. 

DIG RECOMMENDATIONS 

In your invitation letter you asked that we provide our 
recommendations on how HUD can make the most cost-effective 
decisions regarding actions to take on troubled projects. Our 
office has been reporting to the Secretary and to Congress for 
years on major systemic weaknesses that effect everything that HUD 
does. These three weaknesses include the lack of human resources, 
effective and reliable data systems and sound management control 
environment. The impact of these deficiencies on Multifeunily 
Housing prograuns, and especially the troubled assisted housing 
projects, is enormous. Our Office is now convinced that radical 
changes need to be made at HUD, not only to address the systemic 
management weaknesses but also to restructure and rethink how HUD 
deals with the programmatic problems on both a short and long 
basis. 

Mr. Chairman, I would like to take this opportunity to not only 
respond to your specific request regarding recommendations to 
address troubled projects, but I would also like to discuss some of 
the actions necessary to prevent projects from becoming troubled. 
If we neglect the latter, we run the risk of fighting an endless 
battle where new troubled projects replace the old ones. I believe 
that many actions are necessary and feasible, both short-term and 
long-term, to restore the viability of HUD's troubled portfolio. 
For the short-term, perhaps the most logical course of action is to 
fix the problem as best we can. However, for the long-term, I 
believe that bolder and more innovative actions are required to 
restructure HUD's housing insurance and subsidy programs, and the 
way they are delivered to communities across this Nation. Some of 
these remedies will require legislative action; others are within 
the administrative discretion of HUD and need to be taken 
immediately. With these thoughts in mind, I believe the following 

10 



228 



recommendations should be considered by HUD and Congress. Appendix 
4 attempts to describe the needed changes graphically. 

TROOBLED PROJECTS 

A. Administrative Actions 

1. HUD should identify the universe of troubled properties 
and develop profiles showing the financial and operating 
status of each of its troubled properties. Compilation 
of this information would enable HUD to make more 
effective and timely decisions on its troubled portfolio 
and would facilitate HUD's progreun enforcement. 

2. HUD needs to assess the costs and benefits of the 
programs they have for helping troubled projects to 
enable the Department to make informed decisions on what 
types of assistance to use based on individual projects 
circumstances . 

3. HUD should develop or acquire the capacity and expertise 
necessary to enable the Department to effectively deal 
with the problems of troubled projects. 

B. LEGISLATIVE ACTIONS 

1. Title IV of the Housing and Community Development Act of 
1992 requiring owners of subsidized projects to prepare 
comprehensive needs assessments of their projects should 
be repealed. We favor moiie comprehensive legislation 
similar to that being proposed by the Subcommittee 
requiring assessment of the physical and financial 
condition and needs, as well as an analysis of the 
housing needs of the tenants and community, for each 
troubled project in HUD's portfolio. 

2. HUD should be required to develop a national plan for 
providing affordable housing through Section 8 project 
based assistance. This plan should require the 
Department to use the assessments described above to make 
decisions regarding the most beneficial method of 
providing affordable housing that meets the needs of the 
tenants, the community, and HUD. HUD should have the 
flexibility to pursue continuing subsidy in the current 
project only if their analysis shows it is the most 
preferable form of housing considering both the housing 
needs in the market and the cost of the subsidy. 

HUD should be given the authority and flexibility to 
discontinue subsidizing all or part of the current 
project if there is a less expensive viable form of 
housing available in the market. 

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229 



HUD'S property disposition process should give the 
Department the flexibility to limit the amount of Section 
8 project based rental assistance to the amount necessary 
to meet the needs of the tenants and community where the 
project is located. This should include the flexibility 
for HUD to dispose of properties with no rental 
assistance if other less expensive viable options for 
providing the housing exist. 

These recommendations are q[uite similar to the 
legislative proposal you introduced last week that among 
other things mandates assessments of troubled projects 
and the preparation of action plans. In addition, HUD's 
Assistant Secretary for Housing has established SWAT 
teams to review troubled projects and their resource 
needs. We fully support these efforts and intend to work 
closely with the Assistant Secretary's staff and the 
Subcommittee to ensure these assessments are implemented 
effectively 

We support HUD'S proposal to shift Section 8 property 
disposition from a discretionary funding source to a 
mandatory account . 

HUD should be given the flexibility to transfer all or a 
portion of Section 8 authority from one project to 
another or from project based assistance to tenant based 
certificates or vouchers without risk of having Section 
8 assistance rescinded. 

HUD should be given the explicit authority and 
flexibility to undertake refinancing initiatives 
involving some form of risk-sharing with Fannie Mae, 
Freddie Mac, state and local agencies, and others. Only 
the risk that represents a new incremental risk should be 
scored when a HUD-insured mortgage is refinanced. 

HUD should be given the authority and flexibility to use 
previously budgeted interest reduction payments to pay 
off the principal on Section 236 mortgages in cases where 
the balance of the interest reduction payment funding 
exceeds the principal balance. 

In the short-term Congress should authorize and 
appropriate increases in HUD's funding to enable the 
Department to develop or acquire the capacity and 
expertise necessary to effectively deal with the problems 
of troubled projects. 

Legislation should be passed modifying the Bankruptcy 
Code to provide the Department with the flexibility to 
foreclose on defaulted properties in a more timely and 

-12- 



230 



less costly manner. This legislation should also totally 
exempt the Department from the automatic stay provisions 
of the Code which prevent the Department from foreclosing 
on owners and taking possession of their properties. 

MULTIFAMILT PRESERVATION AND SECTION 8 CONTRACT RENEWALS 

A. Administrative Actions 

1. All decisions on continuing assistance to multifamily 
projects whether preservation or renewal of Section 8 
project based assistance should be based on a 
comprehensive physical, financial, and social impact 
analysis as proposed for troubled projects. 

2. HUD should revise all new Section 8 project based 
assistance contracts to provide the Department more 
flexibility to set and adjust contract rents based on 
comparable market rents. 

B. Legislative Actions 

1. Congress should repeal all multifamily preservation 
legislation. This action should terminate all processing 
so that no more projects are preserved under these 
statutes . The current multifamily preservation programs 
eliminate HUD's ability to make decisions on the benefits 
and need for housing before providing additional taxpayer 
dollars to owners. All determinations on whether the 
housing should be funded are either dictated in the 
statutes or made by the project owner. 

2. Legislation addressing Section 8 project based contract 
renewals is needed that specifically gives the Department 
the authority to pursue different options for providing 
the housing necessary to meet the needs of the tenants 
and the community based on a physical, financial, and 
social analysis as described for troubled projects. 
These options need to include reducing or terminating the 
assistance to any individual project if the analyses 
determine this is appropriate. 

PREVENTION/COST SAVINGS OPPORTUNITIES 

A. Administrative Actions 

1. HUD needs to refine their system for analyzing projects 
to detect early warning signs for projects becoming 
troubled and place greater emphasis on preventative 
measures to deter project defaults and prevent projects 
from becoming troubled. 

-13- 



231 



2. HUD should Issue regulations regarding rent comparability 
and its use in setting rents for multifamily projects. 
The regulations should apply comparability to all 
projects no matter what method is used for rent 
increases. 

3. HUD should use project reserve funds when ever feasible 
in lieu of granting rent increases for multifamily 
projects. 

4. HUD should evaluate and modify their systems for 
compensation of property owners and managers to provide 
incentives rather than disincentives for improving the 
efficiency of project operations, increasing tenant 
involvement in project management decisions, accelerating 
transfers of ownership, and encouraging the use of 
nonprofits where appropriate. 

ORGAKIZATIONAL AND PROGRAM RESTRUCTURING 

A. Administrative Actions 

1. HUD needs to restructure its multifamily project based 
assisted/insured programs and delivery systems to give 
the department the flexibility necessary to provide the 
types of assistance most beneficial to tenants, 
communities, and HUD based on physical, financial, and 
social analyses. 

2. FHA should become a more market-oriented entity. 
Consequently, any overhauling of the multifamily housing 
programs could be done in conjunction with the 
restructuring of FHA. 

ENFORCEMENT 

A. Administrative Actions 

1. HUD needs to get tough and use existing enforcement 
tools. However, HUD' s culture has a wholesale disregard 
for available enforcement tools . To change the culture 
HUD needs enforcement tools that impact the owner not 
tenants and the Department, or the flexibility to operate 
existing programs in a manner that allows use of existing 
enforcemnet tools without harming tenants and the 
Department. All the recommendations we have discussed 
either provide enforcement tools that will not harm 
tenants or that will provide the flexibility needed to 
use existing tools without harming the tenant. 



-14- 



232 



B. Legislative Actions 

1. Provisions to improve HUD's enforcement capabilities have 
been included in HUD's current housing reauthorization 
bills, although we understand that passage is unlikely 
this session. These provisions are designed to improve 
the equity skimming statutes and expand current civil 
money penalty provisions. We fully support each of these 
legislative initiatives and urge that they be included in 
future housing legislation. 

2. Our office has already initiated other legislative 
changes in the statutes to make equity skimming a money 
laundering offense, and hold owners personally liable for 
losses incurred by the Federal Government as a result of 
equity skimming and the obstructing of any Federal audit. 
I am attaching a copy of these suggested changes to my 
statement for the Subcommittee's information and 
consideration . 

In conclusion, Mr. Chairman, HUD's Multifamily project based 
assistance programs are in a state of crisis. Nic Retsinas, Helen 
Dunlap and their dedicated staff desperately need help from you, 
your fellow congressmen, 0MB and the housing industry to overcome 
the current situation. Drastic actions are needed now. I truly 
hope this hearing will help stimulate the needed debate about the 
future course of affordable rental housing. 

******************************** 
Thank you I He will be pleased to respond to any questions. 



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233 



APPENDIX 1 
PAGE 1 Of 5 



FINANCIAL ANALYSIS 
HOLIDAT LAKE APARTMENTS 



The Holiday Lake Apartments project, located in Pompano Beach, 
Florida, is a 232 unit complex that was insured under HUD's 
Section 236 program in 1972. The 232 units consisted ofs 



1 


bedrooms 


78 


2 


bedrooms 


96 


3 


bedrooms 


58 
., 232 



Holiday Lake Apartments currently has 220 assisted units. 
According to a HUD official. Section 8 assistance for 139 
units was received by the project in 1976. In 1984, an 
additional 46 units were assisted, and in 1994 35 more were 
added . 

In August 1990, HUD determined that the project was a low 
risk. Therefore, it would not be subjected to further HUD on- 
site reviews until 1993. The low risk was based on: the 
satisfactory physical condition; financial reviews that did 
not raise concerns; and adequate replacement reserves. 
Further, subsequent FNMA mortgagee inspections in 1991 and 
1992 disclosed that the property was in satisfactory physical 
condition. 

In January 1993, the owners requested a rent increase. In 
March 1993, the tenants took exception to the rent increase 
because of the physical condition of the project. HUD's on- 
site management review in May 1993, confirmed the project's 
physical condition was substandard. As a result, HUD declared 
the project troubled due to its substandard physical 
condition. 

After the management review and physical inspection, HUD's 
strategy to correct the project's poor physical condition 
included: 

• Meeting with the owner to require a change in project 
management and to request that the owner contribute 
additional cash, 

• Processing a Flexible Subsidy Loan application to provide 
funds to repair the project, and 

• Providing additional Section 8 assistance for 35 units. 

-16- 



234 



APPENDIX 1 
PAGE 2 of 5 

As of September 14, 1994 the status of HUD's actions were: 

• The project's management was changed in January 1994; and 
according to HUD officials, the ovmer entity contributed 
$210,000 in cash to the project. Also the owner entity 
paid outstanding payables of $70,000. 

• HUD processed the owner's application for a Flexible 
Subsidy Loan in the amount of $856,425 which was reserved 
for Holiday Lake Apartments in July 1994. However, the 
final Flexible Subsidy Loan documents has not yet been 
signed. 

• HUD approved Section 8 Loan Management Set-Aside (LMSA) 
for 35 additional units (effective August 1994). 

On September 15, 1994, HUD's Deputy Assistant Secretary for 
Multifamily Housing Programs made a site visit to Holiday Lake 
Apartments. Based on her observations, she stopped HUD's 
approval of the Flexible Subsidy Loan and called for another 
inspection of all of the units on October 4, 1994. For units 
not meeting standards, HUD will issue a notice that the owner 
has 30 days to bring the units up to standards or rental 
assistance payments will be abated. 

HUD is now providing Section 8 project based rental assistance 
to 94 percent of the units. The Section 8 contracts cost HUD 
$1 million per year; and the interest reduction payment 
provides an average payment of $158,000 per year. Additional 
Federal financial assistance includes Low Income Housing Tax 
Credits of $220,000 per year through 1998. 

Financial analysis performed by HUD on the project. 

The process used by HUD to make decisions on Holiday Lake 
Apartments included a review of funding sources to pay for the 
necessary repairs and an analysis of assisting the project 
with a Flexible Subsidy Loan or foreclosing on the project. 

The review of funding sources included funds available from 
the project and contributions from the owner. HUD then 
considered the sources available to fund the repairs through 
HUD programs including Flexible Subsidy Loan and LMSA (Loan 
Management Set Aside). 



■17- 



235 



APPENDIX 1 
PAGE 3 of 5 

The project owners applied for operating funds to repair the 
project through HUD's Flexible Subsidy Loan program. Under 
this program, HUD performed a least cost analysis comparing 
the cost to assist the project with a operating Flexible 
Subsidy Loan with the cost to foreclose and sell the project. 
The analysis showed that it was less costly to provide the 
operating Flexible Subsidy Loan ($856,425) rather than 
foreclose and sell the project ($1,594,627). 

However, our review showed the following problems with HUD's 
least cost analysis: 

• The "best ballpark" sales price was extremely low. HUD 
used $250,000 while our appraisal showed a market value 
of $2.2 million 

• The estimated foreclosure and sale costs did not include 
all costs that would be incurred such as advertising, 
repair survey, and financing costs. 

If the appraised market value was substituted for the sales 
price in the least cost analysis, foreclosure and sale of the 
project would be less costly than providing an operating 
flexible subsidy loan. 

The following table shows the federal cost of the Voucher and 
Rehabilitation Options at different rent levels. The columns 
in the table show the estimated federal costs of the Voucher 
and Rehab Options for 15, 20, and 30 years as shown on the 
left side of the table, and at different rent levels shown in 
each column. The first column uses the minimum rent level 
needed to operate and rehabilitate the project with a 15-year 
loan. The second colmnn uses comparable market rent levels 
and the last two columns use the stated percentages of the 
fair market rents. As the rents are increased the cost of 
vouchers increases faster than the cost of rehabilitating the 
project. In fact, the increase in cost for the Rehab Option 
represents increases in revenue not expenses. 



-18- 



236 



APPENDIX 1 
PAGE 4 of 5 







Preeent value cost of section 8 voucher* 




SMtion 8 


Coeta tor rents 


Comparable 






Contract 


to pay off the 


MarVet 






Term in 


15 year loan 


rents 


Percentage of Fair 


IMartcat Ram 


(yaara) 


64.5^ of fUin 


(aa repaired) 


S5 


100 


ISyeare 










Voucher option 




$13,008,554 


$16,728,774 




Totai coat 


$12,260,480 


$20,000,281 


Rehabilitation option 




$12,205,457 


$13,572,940 




Total COM 


$11,930,480 


$14,775,483 


20 years 










Voucher option 




$16,133,842 


$20,771,104 




Total coat 


$15,201,367 


$24,848,044 


Rehabilitation option 




$15,110,200 


$17,107,563 




"Total coat 


$14,708,564 


$18,864,015 


30 years 










Voucher option 




$21,180,327 


$27598.360 




Total cost 


$19,950,093 


$32,678,468 


Rehabilitation option 




$19,931,659 


$23,116,800 




Total cost 


$19,291,181 


$25,917,766 



Comparison of the Voucher Option cost at comparable market rents 
to the Rehabilitation Option cost at rents to pay off a 15 year 
loan. 



Voucher Option cost 
Rehabilitation Option cost 
Rehabilitation Option savings 



$13,008,554 
Sll.930.480 
S 1.078.074 



Comparison of the cost to rehabilitate the project with loan 
financing versus a grant. 



Rehabilitation costs with a loan $11,930,480 
Rehabilitation costs with a grant $ 8.986.365 
Rehabilitation savings with a grant S 2.944 , 115 



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237 



APPENDIX 1 
PAGE 5 of 5 



Comparison of the cost of the Voucher Option cost at compareible 
market rents to the Rehabilitation Option cost when a grant 5s 
used. 



Voucher Option cost 
Rehabilitation costs with a grant 
Rehabilitation savings with a grant 



$13,008,554 
S 8.986.365 
$ 4,022.189 



Cost to reduce project based assistance to 20 percent of the 
units and to provide vouchers at comparable market rents to the 
remaining tenants . 



Rehabilitation Option costs 
20 percent 

Voucher Option cost 

80 percent 

Total 



$11,930,480 

20% S2. 386. 096 

$13,008,554 

80% 310.406.843 

$12.792.939 



Comparison of the Voucher Option cost at comparable market rents 
to the cost or reducing project assistance to 20 percent and 
providing vouchers . 



Voucher Option cost 

20% project and 80% voucher cost 

Savings 



$13,008,554 
$12.792.939 
$ 215.614 



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238 



APPENDIX 2 
PAGE 1 Of 4 



FINANCIAL ANALYSIS 
SIERRA NEVADA ARMS 

1. The Sierra Nevada Arms project, located in Las Vegas, Nevada, 
is a 352 unit complex that was insured under HXJD's Section 236 
program in 1970. The 352 units consisted of: 

1 bedrooms 8 8 

2 bedrooms 176 

3 bedrooms 88 

352 

Sierra Nevada Arms currently has 290 assisted units. The 
project received Section 8 assistance in four increments: 50 
units in 1981, 140 units in 1984, 40 units in 1986, and 60 
units in 1988. According to documents in the HUD project 
files and discussions with HUD officials, the project received 
the assistance in 1981, 1986, and 1988 to provide assistance 
to residents paying more than 25 percent of their income for 
rent and to provide additional income to the project for 
financial and physical problems. The 140 units of section 8 
assistance provided in 1984 was a conversion of the project's 
rent supplement contract to Section 8. 

Sierra Nevada Arms has been classified by HUD as a troubled 
project for at least 8 years. Since HUD declared Sierra 
Nevada Arms troubled the project has continued to have both 
physical and financial problems. According to HUD staff the 
project is in an area that has deteriorated over the years 
both physically and socially. Incomes in the area are low and 
gangs have moved into the area. 

In an attempt to alleviate the physical and financial problems 
at Sierra Nevada Arms, HUD has provided an additional 100 
units of Section 8 assistance to the project since declaring 
the project troubled. However, the projects condition has not 
improved. In July 1994 HUD performed a management review of 
the project which revealed an unsatisfactory management rating 
as well as significant physical deficiencies. In August 1994 
the Section 236 mortgage was assigned to HUD and the Las Vegas 
office processed a recommendation for foreclosure on the 
mortgage. In September 1994, HUD notified the project owner 
that they would discontinue payments on the project's four 
Section 8 contracts if the project's physical condition is not 
improved . 



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239 



APPENDIX 2 
PAGE 2 Of 4 

2. After recommending foreclosure on the mortgage and notifying 
the project owner of the potential for abatement, HUD's 
strategy to correct the project's poor physical condition 
included: 

• A 100 percent unit inspection of the project and abating 
Section 8 payments for all units that do not meed HUD's 
Section 8 Housing Quality Standards; 

• Providing a tenant based Section 8 certificate or voucher 
to residents in all units for which rents are abated so 
that they have the opportunity to find alternate housing; 
and 

• Actively pursuing a transfer of physical assets to new 
ownership. 

As of September 22, 1994 the status of HUD's actions were: 

• The 100 percent unit inspection is scheduled to begin on 
October 11, 1994. Certificates or vouchers will be 
available and issued immediately upon failing any unit 
for Housing Quality Standard deficiencies. 

• HUD had received one Transfer of Physical Assets 
application for Sierra Nevada Arms. However, the 
application was sent back to the organization because it 
was dependent on State tax credits which the State would 
not provide. 

• According to HUD staff in Las Vegas they would prefer to 
actively pursue a Transfer of Physical Assets rather than 
foreclose on the mortgage. Two organizations in the Las 
Vegas area have expressed interest in purchasing the 
property . 

3. HUD is now providing Section 8 project based rental assistance 
to 82 percent of the units and a monthly interest reduction 
payment. The rental assistance contracts cost HUD $1.1 
million per year and is providing an average interest 
reduction payment of $295,800 per year. 

4. Financial analysis performed by HUD on the project. 

HUD does not make comprehensive analysis of various 
alternatives for troubled projects. 



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240 



APPENDIX 2 
PAGE 3 of 4 



For Sierra Nevada Arms HUD has only performed the required 
reviews of monthly accounting reports and audited financial 
statements for troubled projects. The purpose of these 
reviews is to detect specific financial problems at the 
project. 

The following table shows the federal cost of the Voucher and 
Rehabilitation Options at different rent levels. The columns 
in the table show the estimated federal costs of the Voucher 
and Rehab Options for 15, 20, and 30 years as shown on the 
left side of the table, and at different rent levels shown in 
each column. The first column uses the minimum rent level 
needed to operate and rehabilitate the project with a 15-year 
loan. The second column uses comparable market rent levels 
and the last two columns use the stated percentages of the 
fair market rents. As the rents are increased the cost of 
vouchers increases faster than the cost of rehabilitating the 
project. In fact, the increase in cost for the Rehab Option 
represents increases in revenue not expenses. 

PrM«nt value co«t of Mctjon 8 voucher* 



Sections 


Costs for rents 


Comparable 






Contracl 


to pay oft the 


IMaitiet 






Tenn in 


IS year loan 


rents 


Percentage of Fair Marttet Rent 


(yeani) 


59.4^ of FMn 


(as repaired) 


S5 


100 


15 year* 










Voucher option 




$17,483,063 


$23,786,423 




Total cost 


°°°^ $16,030,465 


$28,331^17 


Rehabrlttalion option 




$14,130,689 


$18,446,408 




Total cost 


$15,595,465 


$20,116,968 


20 years 










Voucher option 




$20,607,931 


$29,542,595 




^^ cost 


°^ $19,874,778 


$35,207,690 


Rehabilitation option 




$16,587,510 


$23,291,934 




"Total cost 


™" $19,127,808 


$25,732,005 


aOyeora 










Voucher option 




$24,741,366 


$36,837,235 




^otal cost 


"^ $26,082,290 


$46,311,300 


Rehabilitation option 




$20,039,330 


$31,657,432 




Total cost 


™™ $25,017,014 


$36,548,548 



-23- 



241 



APPENDIX 2 
PAGE 4 Of 4 



Comparison of the Voucher Option cost at comparable market rents 
to the Rehabilitation Option cost at rents to pay off a 15 year 
loan. 

Voucher Option cost $17,483,063 

Rehabilitation Option cost $15.595.465 

Rehabilitation Option savings $ 1.887.598 

Comparison of the cost to rehabilitate the project with loan 
financing versus a grant. 

Rehabilitation costs with a loan $15,595,465 
Rehabilitation costs with a grant $11.553.841 
Rehabilitation savings with a grant $ 4.041.624 

Comparison of the cost of the Voucher Option cost at comparable 
market rents to the Rehabilitation Option cost when a grant is 
used. 

Voucher Option cost $17,483,063 

Rehabilitation costs with a grant Sll.553.841 
Rehabilitation savings with a grant $ 5.929.222 

Comparison to reduce project based assistance to 20 percent of 
the units and to provide vouchers at comparable market rents to 
the remaining tenants. 

Rehabilitation option costs $15,595,465 

20 percent 20% $ 3.119.093 

Voucher Option cost $17,483,063 

80 percent 80% S13.986.450 

Total $17.105,543 

Comparison of the Voucher Option cost at comparable market rents 
to the cost or reducing project assistance to 20 percent and 
providing vouchers . 

Voucher Option cost $17,483,063 

20% project and 80% voucher cost S17.105.543 
Savings $ 377.520 



-24- 



242 



APPENDIX 3 
PAGE 1 of 2 



METHODOLOGT 



Computation Methodology for the Financial Analysis of the Holiday 
Lake Apartments and Sierra Nevada Arms Apartments 

1. Replacement of project based rental assistance with tenant 
based rental assistance provided through vouchers . 

A. Cost of tenant based rental assistance (Vouchers) 

(1) We determined the maximum yearly rental assistance 
payments for the number of project units based on 
comparable rents and various levels of the fair 
market rent . 

(2) We adjusted the maximum yearly rental assistance 
payments for the anticipated annual increase in 
rents . 

(3) To estimate the rental assistance needed we 
adjusted the anticipated maximum yearly rental 
assistance payments for estimated occupancy levels 
and resident contributions. 

(4) We determined the present value of the stream of 
rental assistance payments. 

(5) We estimated the additional costs for relocation of 
residents. 

(6) We estimated the total cost of tenant based rental 
assistance by adding the present value of the 
stream of rental assistance payments and the 
relocation costs. 

B. Cost of rehabilitating the project and providing project 
based rental assistance. 

(1) We estimated the project income and expenses to 
determine the cash flow available for debt service. 

(2) Based on the estimated cash flow we determined the 
maximum mortgage amount that could be amortized. 
We estimated the rehabilitation costs for the 
project. 

(3) We compared the maximum mortgage amount and the 
rehabilitation costs to determine if project income 
would be sufficient to make debt service payments 
or if a added federal assistance would be needed. 

(4) We estimated the cost of rehabilitating the project 
and providing rental assistance. 

C. We varied the rental levels used in computations of A and 
B above. 



-25- 



243 



APPENDIX 3 
PAGE 2 of 2 



We compared the estimated costs. 



To perform this analysis we used several assumptions. We 
assumed: 



(A 
(B 

(C 

(D 
(E 

(F 

(G 
(H 

(I 
(J 

(K 



There were no federal housing laws that limited HUD' s 

actions to address the troubled projects. 

The existing outstanding mortgage would be paid off under 

both the voucher and rehabilitation options so they need 

not be considered under either option. 

That there are no other costs associated with the 

existing outstanding mortgage other than the principle 

and interest reduction payments . 

For comparison purposes the rental assistance amount is 

the same for the voucher and rehabilitation options . 

Section 8 rental assistance would be provided for each 

project unit as project based or tenant based depending 

on the action being evaluated. 

The residents receiving Section 8 rental assistance would 

contribute the same amount towards rent under either the 

Voucher or Rehab Options . 

Project operating expenses would be the same as reflected 

in the latest audited financial statement. 

Project operating costs will increase at the same rate as 

estimated rent increases . 

Rents would increase at the same rate as the Section 8 

Existing Fair Market Rents between 1986 and 1993. 

The deposits to the project reserve for replacements 

would be increased to the amount projected by project 

management after taking rehabilitation into 

consideration . 

The rehabilitation costs estimated by HUD were accurate 

for the necessary repairs to make the project decent safe 

and sanitary. 

For revenue purposes, we estimated that vacancy rates 

%rould be 5 percent. 



-26- 



244 



APPENDIX 4 
PAGE 1 OF 1 



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245 

Mr. Peterson. Thank you very much. 
Ms. Joseph. 

STATEMENT OF JUDY ENGLAND-JOSEPH, DIRECTOR, HOUS- 
ING AND COMMUNITY DEVELOPMENT ISSUES, U.S. GENERAL 
ACCOUNTING OFFICE, ACCOMPANIED BY DENNIS FRICKE, 
ASSISTANT DIRECTOR 

Ms. England-Joseph. Good morning, Mr. Chairman and mem- 
bers of the subcommittee. 

We are pleased to be here today to follow up on our earlier testi- 
mony on the Department of Housing and Urban Development's 
Section 8 project-based assisted housing programs. These pro- 
grams, as you know, provide rental assistance to over 20,000 pri- 
vately owned properties and 1.5 million low-income households na- 
tionwide at an estimated annual cost of $5.8 billion. 

My previous testimony focused on assisted properties where low- 
income families are living in very, very poor physical conditions. 
And because of this subcommittee's ongoing concern about these 
conditions and questions raised about HUDs ability to effectively 
respond to these problems, you asked us to, one, compare the cost 
of rehabilitating two physically distressed properties, Edgewood 
Terrace Apartments in Washington, DC and 6000 South Indiana 
Apartments in Chicago, IL, with the cost of providing certificates 
and vouchers; two, determine the views of tenants and community 
leaders about these options; and three, identify legislative and ad- 
ministrative factors limiting HUD's discretion in dealing with phys- 
ically distressed properties. 

In conducting our analysis, we had the two properties appraised, 
documented the rents in the areas where these properties are lo- 
cated, met with tenants and community leaders to obtain their 
views on the options examined, met with HUD officials to discuss 
actions the Department has taken on these and similarly distressed 
properties, and met with HUD's attorneys to discuss current laws 
on property disposition that affect HUD's decisions. 

In considering the options for both Edgewood Terrace Apart- 
ments and 6000 South Indiana Apartments, we did not limit our- 
selves by current law requiring HUD to preserve subsidized multi- 
family properties for low-income families. 

In summary, we found the following. Because the costs of the 
housing alternatives differ depending on each and every property, 
physically distressed properties need to be analyzed and decisions 
made on each of those properties on a case-by-case basis. Rehabili- 
tating Edgewood Terrace Apartments could result in Federal costs 
that are millions of dollars higher than the cost of providing certifi- 
cates and vouchers. At 6000 South Indiana Apartments, the costs 
of rehabilitation are comparable to the costs of providing certifi- 
cates and vouchers. 

Although tenants were generally very dissatisfied with the cur- 
rent conditions at both Edgewood Terrace Apartments and 6000 
South Indiana Apartments, their views were mixed on whether 
they would prefer to remain in their current residences or be given 
the choice of moving elsewhere. And community leaders in these 
neighborhoods generally believed that the properties should be re- 
habilitated. 



246 

Current laws limit HUD's discretion in dealing with physically 
distressed properties. Providing HUD with more options could 
allow the Department to make more cost-effective decisions about 
its housing assistance. 

And finally, HUD lacks a comprehensive strategy for focusing on 
these properties and its management information systems are poor. 
As a result, the Department is not systematically identifying and 
addressing conditions in its most physically distressed properties. 

Current housing policy has generally supported preserving sub- 
sidized housing and has not required HUD to consider housing al- 
ternatives. As we stated in our earlier testimony, the current budg- 
etary climate requires all Federal agencies to consider the cost im- 
plications of their policy decisions. Yet, in dealing with its portfolio 
of physically distressed properties, HUD is limited by legislation 
that precludes it from using funds recaptured from terminated Sec- 
tion 8 contracts to relocate tenants from these severely distressed 
properties to other properties of higher quality. And current laws 
also limit HUD's discretion to use vouchers and certificates in deal- 
ing with physically distressed properties. Providing HUD with 
greater flexibility in using certificates and vouchers would require 
congressional action. 

In dealing with distressed properties, it is important that HUD 
balance fiscal responsibility and the interest of affected tenants and 
communities. We support the provisions of H.R. 5115 that would 
require these cost implications along with other factors like the 
views of tenants and community leaders to be carefully weighed in 
HUD's decision on how to proceed with individual properties. We 
also support the bill's provision that would authorize the Depart- 
ment to use recaptured Section 8 program funds to relocate tenants 
currently living in physically distressed properties by offering them 
vouchers and certificates. 

HUD is limited by inadequate information systems, as you have 
just heard, and the lack of a comprehensive strategy which would 
focus on these very properties that are severely distressed. While 
improved financial and management information systems are criti- 
cal for the ongoing management of this inventory of assisted prop- 
erties and capital needs assessments are crucial for determining re- 
pair costs, current limitations in these data sources do not find 
should not preclude HUD from systematically identifying those as- 
sisted properties that are in the worst physical condition. Simple 
walkthrough inspections by either HUD field office staff or outside 
inspectors could provide HUD immediately with information on 
how many properties are in conditions similar to those that we re- 
ported to you in July 1994. This information, together with data 
from the past inspection reports on the properties, would put HUD 
in a position to systematically notify property owners of the need 
to address physical problems, and take appropriate enforcement ac- 
tion when owners do not bring their properties into compliance 
with housing quality standards. 

Finally, we recognize that HUD faces some very difficult and se- 
rious challenges in dealing with properties that have fallen into se- 
rious disrepair. For some properties that are obsolete and located 
in unstable neighborhoods, the decision to dispose of the property, 
if HUD had the legal discretion, would not be a difficult one. On 



247 

the other hand, properties Hke Edgewood Terrace Apartments, if 
rehabilitated, have excellent potential as a low-income housing re- 
source. However, because, in this case, rehabilitation costs exceed 
by millions of dollars the cost of housing families with vouchers 
and certificates, the Department is actually faced with a very dif- 
ficult decision. 

And it is with that decision that I would like to offer a final ob- 
servation. For every $1 million spent to rehabilitate a property like 
Edgewood Terrace, in excess of what it would cost to provide vouch- 
ers and certificates for alternative housing, approximately another 
150 families could be provided with housing assistance for 1 year. 
This is not an inconsequential number considering the Nation's 
sizeable homeless population and the fact that today, for every 
household that receives housing assistance, there are actually two 
other eligible households that do not. 

That ends my prepared statement, sir. I would be happy to an- 
swer any questions you and the committee members might have. 

[The prepared statement of Ms. England-Joseph follows:] 



r»»r Rclc.isc i>ti Dc"livci\ 
E\|h.\icil ;il 
'i.i.in.E.D.T. 
TliursUay. 
OclKbcrh. hW4 



248 



1 nilcd .Slales (ieiicnil Accimiiliii); OITice 



(^ AO Testimony 

Before the Employment. Housing and Aviation Subcommittee 
Coininittee on Covemnient Operations. 
House ot" Representatives 



FEDERALLY ASSISTED 
HOUSING 

Expanding HUD's Options for 
Dealing with Physically 
Distressed Properties 



Statement of Judy A. England-Joseph. 

Director. Housing and Coninuinily Development Issues. 

Resources. Community, and Economic Development Division 




(;a()/i-r( i;i)-'>5-.«H 



249 



Mr. Chairman and Members of the Subcommittee: 

We are pleased to be here today to follow up on our earlier 
testimony on the Department of Housing and Urban Development's 
(HUD) Section 8 project-based assisted housing programs.' Under 
these programs, HUD pays a portion of the rent for low-income 
families living in privately owned rental housing. HUD provides 
this assistance for over 20,000 privately owned properties 
nationwide at an estimated annual cost of $5.8 billion. The 
mortgages for about 10,000 of these properties are also insured or 
held by HUD. 

Although many of these properties are considered to be in good 
physical condition, our previous testimony focused on assisted 
properties where low-income families are living in very poor 
physical conditions. Because of the Subcommittee's ongoing concern 
about these conditions and questions raised about HUD's ability to 
effectively respond to these problems, you asked us to (1) compare 
the costs of rehabilitating two physically distressed properties 
with the costs of other alternatives for housing the tenants, (2) 
determine the views of tenants and community leaders on these 
options, and (3) identify legislative and administrative factors 
limiting HUD's discretion in dealing with physically distressed 
properties. 

At the Subcommittee's request, our testimony today is based on 
analyses of two properties discussed in our earlier testimony: 
Edgewood Terrace Apartments in Washington, D.C., and 6000 South 
Indiana Apartments in Chicago, Illinois. While we recognize that 
factors other than cost can influence decisions about dealing with 
distressed properties, the current budgetary climate requires 



' Federally Assisted Housing: Conditions of Some Properties 
Receiving Section 8 Pro1ect-Based Assistance Is Below Housing 
Quality Standards {GAO/T-RCED-94-273, July 26, 1994). 



250 



federal agencies to carefully weigh the cost implications of their 
policy decisions. As directed by the Subcommittee, we compared the 
costs of rehabilitating the two properties and the costs of housing 
tenants in these properties after rehabilitation with the costs of 
providing alternative housing assistance. Although our analyses 
assumed that HUD's choices among the options were not restricted by 
current laws and regulations, our earlier testimony and this 
statement discuss factors limiting HUD's discretion in dealing with 
federally subsidized properties. 

In conducting our analyses, we had the two properties 
appraised, met with tenants and community leaders to obtain their 
views on the options we examined, and met with HUD officials to 
discuss and document actions the Department has taken to deal with 
these and similarly distressed properties. In addition, we met 
with HUD attorneys to discuss current laws on property disposition 
that affect HUD's decisions. 

In summary, we found the following: 

-- Because the costs of the housing alternatives differ 

depending on the property, physically distressed properties 
need to be analyzed on a case-by-case basis. 
Rehabilitating Edgewood Terrace Apartments could cost 
millions of dollars more than providing the tenants with 
alternative housing in the community. At 6000 South 
Indiana Apartments, the costs of rehabilitation are 
comparable with the costs of providing alternative housing. 

-- Although tenants were generally very dissatisfied with the 
current conditions at both Edgewood Terrace Apartments and 
6000 South Indiana Apartments, their views were mixed on 
whether they would prefer to remain in their current 
residences or be given the choice of moving elsewhere. 
Community leaders in the neighborhoods of both properties 

2 



251 



generally believe that the properties should be 
rehabilitated. 

— Current laws limit HUD's discretion in dealing with 

physically distressed properties. Providing HUD with more 
options could allow the Department to make more cost- 
effective decisions about its housing assistance. 

-- HUD lacks a comprehensive strategy for focusing on thesa 
properties, and its management information systems are 
poor. As a result, the Department is not systematically 
identifying and addressing conditions in its most 
physically distressed properties. 

Before discussing these findings in detail, we would like to 
provide you with some background information. 

BACKGROUND 

HUD's Section 8 project-based rental assistance programs^ were 
established under Section 8 of the United States Housing Act of 
1937, as amended (42 U.S.C. 1437 et seq.). The subsidies provided 
under these programs allow about 1.5 million lower-income 
households to obtain housing from private owners. Households 



'Unlike tenant-based subsidies, project-based subsidies are 
attached to particular property units. The primary project-based 
assistance programs are the (1) Section 8 Property Disposition 
program, which provides assistance to ensure that properties 
acquired by HUD through foreclosure and eventually resold are 
maintained as low-income housing; (2) Section 8 Loan Management 
Set-Aside program, which provides assistance to projects with 
HUD- insured and HUD-held mortgages that are experiencing 
immediate or potentially serious financial difficulties; and (3) 
Section 8 New Construction and Substantial Rehabilitation 
programs, which provide assistance to private developers to 
construct new units or to substantially rehabilitate units for 
rental to low- and moderate- income families. 



252 



receiving this assistance must live in designated properties, and 
they are generally required to pay 30 percent of their income for 
rent. HUD enters into housing assistance payment contracts with 
the owners of the properties and provides rent subsidies to them. 
The subsidy represents the difference between the tenant's payment 
and the agreed-upon rent. Because these rent subsidies are 
attached to particular units, tenants who move lose their rental 
assistance unless they move to another subsidized unit. 

In addition to project-based assistance, two types of tenant- 
based rental assistance--certif icates and vouchers--are provided 
under HUD's Section 8 programs. Another 1.3 million households use 
certificates or vouchers to obtain housing. Tenant-based 
assistance differs from project-based assistance in that households 
may use certificates or vouchers to rent from owners of their 
choice, provided the units meet HUD's requirements for rent levels 
and housing quality standards for decent, safe, and sanitary 
housing. 

Physically distressed multifamily properties, including some 
receiving Section 8 project-based assistance, may require 
additional financial assistance from HUD to improve their 
conditions and ensure their continued financial viability. The 
primary forms of remedial assistance available are the Flexible 
Subsidy Program and the Section 8 Loan Management Set-Aside 
Program. The Flexible Subsidy Program provides, among other 
things, reduced-interest loans to improve the physical conditions 
of older properties that receive interest subsidies for their HUD- 
insured mortgages.^ The Section 8 Loan Management Set-Aside 



'During the 1960s, two major low-interest mortgage loan programs 
were created to offer incentives for the development of 
affordable rental housing. Under the Section 221(d)(3) Below 
Market Interest Rate program and the Section 236 Mortgage 
Insurance and Interest Reduction Payments program, sponsors of 
low- and moderate- income housing received subsidies on interest 
rates for their HUD- insured mortgages and rent subsidies for 
qualified tenants. 



253 



Program provides additional funds to a distressed property through 
increases in rental income. 

COSTS OF ALTERNATIVES DIFFER 
DEPENDING ON THE PROPERTY 

The costs of the alternatlves--rehabilitating and continuing 
to provide project-based rental subsidies or providing alternative 
housing through certificates and vouchers--varied between the two 
properties we reviewed. Rehabilitating Edgewood Terrace Apartments 
to preserve all its units would be more costly than providing 
certificates or vouchers to an equivalent number of families and 
significantly more costly than providing such assistance only to 
the tenants currently residing there. At 6000 South Indiana 
Apartments, the rehabilitation costs are comparable to the cost of 
providing the tenants with certificates or vouchers. 

Edgewood Terrace Apartments 

At Edgewood Terrace Apartments, a 292-unit complex in 
northeast Washington, D.C., HUD provides Section 8 project-based 
assistance for 114 units, all of which were occupied as of August 
31, 1994. The remaining 178 units are vacant. The property was 
sold to its current owner in 1983. Subsequently, the owner 
defaulted on the federally insured mortgage, which HUD now holds. 
HUD is considering several proposals from a nonprofit corporation 
that wants to acquire Edgewood Terrace Apartments . 

We analyzed the costs over 15 years of three options for this 
complex:* 

— rehabilitating the entire complex and providing Section 8 
project-based assistance for all 292 units. 



*We chose 15 years because it is the expected length of a Section 
8 contract. 



254 



-- providing 292 famiiies with certificates or vouchers that 
would allow them to obtain alternative housing,^ and 

-- providing certificates or vouchers to the 114 families 
currently receiving assistance. 

To evaluate the rehabilitation costs, we began with a detailed 
assessment of capital needs prepared by the nonprofit corporation 
interested in acquiring the property. According to this 
assessment, it will cost approximately $20.8 million to 
comprehensively rehabilitate the property. 

Next, we examined alternatives for financing the costs of 
rehabilitation through a mixture of debt financing (mortgage) and 
cash investment. Because the amount of cash investment is directly 
related to the property's rental income, we assumed three different 
rent levels in our analysis. The first level of rents represents a 
slight upward adjustment of the market rents currently charged for 
unsubsidized units in well-maintained properties in the 
neighborhood of Edgewood Terrace Apartments. This upward 
adjustment recognizes the value of the improvements that would be 
made to the property through rehabilitation. We set the next two 
rent levels at different percentages of the HUD-established fair 
market rent (FMR)' for the entire market area in order to evaluate 
different combinations of the initial cash investment required and 



^Providing Section 8 subsidies for 292 families, whether through 
rehabilitation or the alternative option of certificates and 
vouchers, represents the maximum potential federal cost under 
either option. Subsidizing fewer units would result in 
comparable cost reductions for both options. 

*In general, the fair market rent (FMR) for an area is the amount 
needed to pay the gross rent (shelter plus utilities) for modest, 
decent, safe, and sanitary housing. HUD sets the FMR at the 45th 
percentile of a market area's rental housing; that is, the level 
at which about 45 percent of an area's rental housing can be 
obtained. 



255 



the amount of debt that could be supported by the property's 
rental income. We also used these rent levels to compare the costs 
of rehabilitation and continued rental subsidies with the costs of 
housing tenants with certificates and vouchers. 

As figure 1 shows, the costs to rehabilitate Edgewood Terrace 
Apartments and provide 15 years of subsidized assistance to its 
tenants is clearly higher than providing certificates and vouchers 
to either 292 or 114 families. Depending on the rent level 
established for the units, and therefore the government's 
continuing subsidy, we estimate that the costs to rehabilitate plus 
provide project-based assistance for all 292 units will range from 
$36.9 million to $40.9 million. Providing certificates or vouchers 
for 292 families for 15 years would cost from $23.1 million to 
$34.6 million, depending on the rents certificate and voucher 
holders are charged for their units. The least costly alternative 
is to provide comparable assistance to the 114 families now 
receiving Section 8 subsidies. We estimate these costs to range 
from $9.8 million to $14.3 million. 



256 



Figure 1; Comparative Costs of the Three Options at Three Rent 



Levels 



4S 
40 
35 
30 
25 
20 
IS 
10 
5 




Cod* In MlUlon* o( Oeltom 



/ 



^♦* 



« 



.* 



/ 



/ 



/ 



f)Mit Laval 



— ■■— Rahabihlation ol 292 Unils 
^^ Cenificaias or Vouchefs lor 292 Faniilies 
• ••••■ Cenilicates Of Vouchers tor 114 Families 
Note Costs are stated as the preser^t value of costs over a tSyear period 



Comparing the cost of rehabilitating Edgewood Terrace 
Apartments with the cost of providing a comparable number of 
families with certificates and vouchers depends on two key 
variables: first, the way the rehabilitation costs are financed; 
and second, the rent levels and the government's resulting cost for 
units chosen by families using the certificates or vouchers. Any 
of the rehabilitation and continued subsidy costs shown in figure 1 
can be compared with the cost of providing certificates and 
vouchers at various rent levels. However, regardless of which 
option is chosen, certificates and vouchers are always less costly 



6 



257 



than rehabilitation and the related subsidies for Edgewood Terrace 
Apartments . 

For example, financing the $20.8 million in rehabilitation 
costs at market rents would require an initial cash investment of 
about $15.1 million (see app. I). This cash investment, along with 
the $21.8 million^ in rental subsidies that would be needed to 
support 292 families in the rehabilitated property for 15 years, 
equals the total cost of $36.9 million shown in figure 1. When 
these costs are compared with the cost of providing families with 
certificates or vouchers in neighborhoods where rents are 85 
percent of FMRs,° certificates and vouchers would be less expensive 
by about $7.8 million ($36.9 million minus $29.1 million). If, on 
the other hand, a greater portion of the rehabilitation costs were 
financed through higher rents (assume 100 percent of the FMR) , then 
the total cost of rehabilitating the property and providing rental 
subsidies over 15 years would be about $40.9 million. If this 
total is compared with the costs of providing subsidies for 15 
years to tenants electing to use vouchers and certificates in areas 
where market rents are comparable to those in the Edgewood area, 
the cost difference between the options would increase to about 
$17.8 million ($40.9 million minus $23.1 million). 

As expected, the comparative costs of providing certificates 
and vouchers for only 114 families would be substantially less than 
rehabilitating the entire complex of 292 units. Specifically, if 



'Our rental subsidy cost estimates represent the net present 
value of future rental subsidies, discounted at an annual rate of 
7.5 percent. 

'Edgewood Terrace Apartments is located in an area where good- 
quality housing rents at about 70 percent of the FMR. 
Consequently, when making comparisons between rehabilitating and 
providing certificates and vouchers, it is important to recognize 
that areas where rents are at 85 and 100 percent of the FMR have 
greater economic value, generally because of added amenities, 
than the Edgewood market area. 



258 



these 114 families relocated to properties where rent levels were 
85 percent of the FMR, and the rehabilitation of Edgewood Terrace 
Apartments were financed at similar rents, the cost difference 
between these options would be about $29.1 million (39.0 million in 
rehabilitation and related Section 8 subsidies minus $9.9 million, 
the costs of certificates or vouchers over 15 years for 114 
families) . 

In our cost computations for certificates and vouchers we 
included the costs of relocating the tenants and disposing of 
Edgewood Terrace Apartments. Also, we recognize that comparing the 
costs of rehabilitation with the costs of certificates and vouchers 
presumes that these two options are equally viable; that is, that 
rental units are available in the community at or below the FMR and 
that landlords will be willing to rent to tenants who use 
certificates or vouchers. In appendix II, we discuss the viability 
of this type of assistance in the Washington, D.C., market. 

Finally, while the principal focus of our analyses comparing 
the two options was on cost, we recognize that other factors 
associated with the property also need to be considered. For 
example, Edgewood Terrace Apartments is well located with respect 
to employment, neighborhood services, and public transportation. 
It also has excellent access to hospitals, colleges, and 
businesses. Given these and other advantages, if the property were 
rehabilitated it could offer excellent potential as a low-income 
housing resource. However, this potential has to be weighed 
against the significant costs of rehabilitation. For every $1 
million spent to rehabilitate a property like Edgewood in excess of 
the cost to provide alternative housing through certificates and 
vouchers, approximately 150 more families could be provided with 
housing assistance for 1 year. This is not an inconsequential 
number considering the nation's sizeable homeless population and 
the fact that today, for every household that receives housing 
assistance, two other eligible households do not. 



259 



6000 South Indiana Apartments 

We also analyzed the cost of rehabilitating 6000 South Indiana 
Apartments and compared it with the cost of providing 70 families 
with certificates or vouchers. At this 12-story property, located 
on the south side of Chicago, Illinois, HUD provides Section 8 
project-based assistance for 68 of the 70 units. As of September 
30, 1994, nine units were vacant. In 1988, the project's owner 
defaulted on the federally insured mortgage, which HUD now holds. 
Earlier this year, HUD approved a substantial Increase in the 
property's rents in order to fund renovations estimated to cost 
$1,3 million. 

Again, comparisons between the costs of rehabilitating 6000 
South Indiana Apartments and the costs of providing an equivalent 
number of families with certificates or vouchers depends on both 
how the rehabilitation is financed and how much rent is charged on 
units for families using certificates and vouchers. Given the 
actual financing arrangements made for rehabilitating these 
apartments and, considering the additional costs of providing 15 
years of Section 8 assistance to the residents, we estimate the 
total costs to be $5 million. While there is some variation in 
costs between this option and that of relocating the tenants and 
providing them with certificates or vouchers for 15 years, the cost 
of the latter option also approximates $5 million. 

VIEWS OF TENANTS AND COMMUNITY LEADERS 

In order to solicit the views of a broad group of tenants, we 
either posted notices at the properties inviting tenants to meet 
with us or contacted them directly by telephone. The tenants we 
spoke with, although generally dissatisfied with the physical 
conditions at both Edgewood Terrace and 6000 South Indiana 
Apartments, had mixed views on whether they would prefer to 
continue living in their current residences or be given the chance 

11 



260 



to move elsewhere with a certificate or voucher. However, 
community leaders active in community development, business, 
government, and social services in the neighborhoods of these 
properties generally agreed that both should be rehabilitated and 
preserved as low-income housing. They noted, however, that the 
social problems affecting the tenants and the properties would also 
have to be addressed to ensure the properties' viability. 

Tenants ' Views 

The majority of tenants that we spoke with at Edgewood Terrace 
characterized the condition of their apartments as either fair, 
poor, or very poor. Tenants were also unhappy with the way the 
property has been managed over the years and the way its physical 
condition has been allowed to deteriorate. Many also noted that 
the property and surrounding neighborhood suffer from a serious 
drug problem. Despite these problems, however, some of the tenants 
noted that they like Edgewood because, among other things, it is 
convenient to amenities such as stores and transportation. 

When asked whether they would like to continue living in 
Edgewood or be given the chance to find alternative housing using a 
voucher or certificate, tenants responded differently, in part 
depending on their age. Many of the elderly tenants we spoke with 
said that they would rather continue to live in Edgewood than 
move.' However, they noted that they would like to see major 
improvements in Edgewood 's physical condition, the way the property 
is managed, and the security that is provided. They would also 
like to see the drug problem eliminated. Among the reasons they 
cited for wanting to stay at Edgewood were its convenience to 
shopping and the length of time they have lived there. Some also 



'HUD defines an elderly person as one who is 62 years of age or 
older. 

12 



261 



expressed concern about whether they would be able to locate 
alternative housing using a voucher or certificate. (See app. II.) 

Many of the nonelderly tenants we spoke with said they would 
rather move from Edgewood. However, some had concerns about 
whether they would be able to locate alternative housing. 

At 6000 South Indiana Apartments, almost all of the tenants we 
spoke with said that their units were in fair, poor, or very poor 
condition. Many expressed concern about problems with gangs and 
drugs in the neighborhood. Tenants cited mismanagement by the 
owner as the primary cause of the building's poor physical 
condition. The majority of those we interviewed said they would 
move to other housing if they could obtain the same low rent they 
are paying now. 

Community Leaders' Views 

The community leaders near Edgewood Terrace Apartments favored 
rehabilitation because they considered the property a valuable 
housing resource that had fallen into disrepair as a result of 
years of mismanagement and poor oversight by housing officials. 
They generally agreed, however, that without efforts to address the 
social and economic needs of the tenants, physical improvements to 
the property would not be enough. In their view, the tenants at 
Edgewood need access to social services, education, training, and 
jobs. 

Community leaders in the neighborhood of 6000 South Indiana 
Apartments were also in favor of rehabilitating the property rather 
than giving the tenants vouchers or certificates to move elsewhere. 
In their view, rehabilitation would help the community avoid the 
problems of having another vacant building or vacant lot. They 
also considered it important to address the social and economic 
needs of the tenants. Community leaders blamed HUD for not taking 

13 



262 



swift action against the owner when the property's problems became 
known in 1989. 



CERTAIN REQUIREMENTS LIMIT HUD'S 
DISCRETION IN DEALING WITH PHYSICALLY 
DISTRESSED PROPERTIES 



Current legislation and regulations on property disposition 
limit HUD'S discretion in dealing with physically distressed 
properties. Under these requirements, HUD must generally provide 
Section 8 project-based assistance to units in a project that 
previously received it. Other units in the property that did not 
receive project-based assistance may be subject to restrictions on 
the amount of rent that can be charged. In addition, if HUD 
cancels Section 8 project-based assistance at a project in serious 
disrepair, it cannot now use those funds for other housing 
assistance. 

Preservation Requirements 
Limit HUD'S Options 

In disposing of a multifamily property that it owns, HUD must 
decide whether to preserve it as rental housing for low-income 
persons or not to preserve it, possibly resulting in the property's 
demolition. The Multifamily Housing Property Disposition Reform 
Act of 1994 mandates that HUD follow certain procedures when 
disposing of multifamily properties. One of the act's major goals 
is to preserve housing so that it remains available to and 
affordable by low-income persons. 

Under the law, if HUD decides to preserve the property as low- 
income rental housing, it may provide project-based assistance to 
the new owner or certificates or vouchers to the property's 
tenants. However, these options are subject to certain 
requirements and limitations, depending on whether the project was 
originally (1) subsidized with mortgage-related assistance, (2) 

14 



263 



subsidized with Section 8 project-based rental assistance, or (3) 
unsubsidized. 

In general, HUD must provide Section 8 project-based 
assistance to any units In a project that previously received it. 
If a project received mortgage-related assistance, HUD is required 
to ensure that any units that did not previously receive project- 
based assistance remain available to and affordable by low-income 
persons, and new owners may be required to establish restrictions 
on use or rent levels so the units remain affordable. 

With the goal of creating mixed income projects, the act 
permits HUD to reduce the number of units that receive project- 
based assistance In subsidized projects if HUD (1) uses either rent 
restrictions or project-based assistance to set aside an equal 
number of units in unsubsidized properties in the same market area 
to be used as affordable housing for very- low- income families and 
(2) makes tenant-based assistance available to every low-income 
family residing in a unit for which HUD is required to provide 
project-based assistance. 

HUD is subject to certain limitations if it decides to provide 
tenant-based assistance rather than project-based assistance to a 
project. Tenant-based assistance can only be offered 

-- in lieu of project-based assistance when projects are 
located in markets that have an adequate supply of 
habitable and affordable low-income housing, 

-- if HUD determines that low-income housing will be available 
to the tenants who receive such assistance, and 

-- for up to 10 percent of the aggregate number of subsidized 
or formerly subsidized units that HUD disposes of in any 
fiscal year. 

15 



264 



HUD may decide not to preserve a physically distressed 
property as rental housing for low-income persons, which may result 
in the property's demolition. However, under HUD's regulations, 
this decision may be made only under one or more conditions, 
including the following: (1) the costs of rehabilitation are such 
that rents for existing housing will be higher than 144 percent of 
the FMR for subsidized projects and the rents obtainable in the 
market for unsubsidized projects; (2) preservation is not feasible 
because of environmental factors that cannot be mitigated by HUD or 
the purchaser of the property; (3) rehabilitation would cost 
substantially more than constructing new housing; or (4) HUD 
conclusively demonstrates that decent and affordable low-income 
housing is not needed in the community for current residents or 
people who want to live in the community. 

Proposed Legislation Would Increase 

HUD's Discretion and Focus Attention 

on the Most Severely Distressed Properties 

Legislation has been proposed that would (1) increase HUD's 
discretion in dealing with physically distressed properties 
(S. 2281) and (2) direct HUD to give priority to its most severely 
distressed properties and make decisions that consider both the 
costs and social implications of different housing alternatives 
(H.R. 5115). However, it is still unclear how the preservation 
requirements discussed above would affect the implementation of 
these legislative proposals. 

HUD has the authority to terminate project-based assistance 
in properties that are in poor physical condition. However, under 
appropriations law, if this assistance is terminated, these 
"recaptured" funds must be returned to the Treasury and cannot be 
used by HUD to relocate tenants in decent housing in the community. 
Under one provision in S. 2281, HUD would be allowed to use these 



16 



265 



recaptured funds to provide either certificates or vouchers to the 
tenants or alternative project-based assisted housing. 

This proposed provision raises a question as to how the 
preservation requirements would apply when HUD becomes the owner of 
a property that is forced into foreclosure proceedings as a result 
of HUD'S decision to terminate the property's contract for project- 
based assistance. As mentioned previously, HUD is generally 
required to provide project-based assistance to those units that 
previously received it. Consequently, if appropriations law were 
changed to give HUD the authority to use recaptured project-based 
assistance funds to relocate tenants in decent housing in the 
community, HUD might need an equivalent amount of additional budget 
authority to provide project-based assistance if it wished to sell 
a distressed property. 

H.R. 5115, recently introduced by the Subcommittee Chairman, 
is aimed at Improving HUD's management of the Section 8 project- 
based assistance program. In summary, the bill calls for HUD to 
(1) identify severely troubled properties; (2) analyze the 
financial and social impacts in order to assist the Department in 
determining what remedial actions need to be taken on distressed 
properties; and (3) choose the most cost-effective action to take, 
while considering Its effect on tenants, owners, and the community. 

HUD LACKS INFORMATION TO SYSTEMATICALLY IDENTIFY AND ADDRESS 
CONDITIONS IN THE MOST PHYSICALLY DISTRESSED PROPERTIES 

HUD's ability to identify and address conditions In the most 

physically distressed properties is impaired because the Department 

lacks the information needed to do so. Furthermore, HUD has not 

yet begun, as required by law, to collect Information on the 
financial and other assistance needed by owners of older, assisted 
multifamily properties. Although HUD has begun several 

initiatives, it has not initiated a comprehensive effort to 

17 



266 



identify those Section 8 properties in the worst physicai 
condition, nor has it developed a strategy to systematically 
address the problems with those properties. Doing so is critical 
in order to (1) determine with greater certainty the magnitude of 
the problem nationwide and (2) give priority to those families 
living in the worst conditions. The Congress and the 
administration also need this information in considering the 
implications of different housing polices and choices. 

Problems in HDD's Data Systems Impede 
Effective Actions 

As we stated in our July testimony, one of HUD's major 
limitations is poor management information systems. More 
specifically, HUD's ability to routinely identify and monitor 
properties in deteriorating physical condition is impaired because 
the Department's information systems do not contain the data needed 
to do so. HUD is making progress in improving its financial 
systems, which supply key data for evaluating the financial 
solvency of properties. However, until these data can be 
integrated with data on the properties' physical conditions, HUD's 
oversight of the inventory of assisted properties will continue to 
be impaired. 

Comprehensive Needs Assessments Are Not Being 
Submitted for Assisted Multifamily Properties 

Under the Housing and Community Development Act of 1992, as 
amended, owners of older, assisted multifamily properties are 
required to submit comprehensive needs assessments to HUD. Each 
assessment, which is to be prepared by an entity independent of the 
owner, must contain a description of the current and future 
financial or other assistance needed to ensure that the property is 
well maintained and financially viable. The assessment must also 
describe any resources available ror meeting the current and future 

18 



267 



needs of the property and the likelihood of obtaining these 
resources. 

These assessments would provide HUD with useful information 
for making decisions about how to address any identified problems. 
Furthermore, HUD is required to use these assessments as the basis 
for its decisions on assisting physically and financially troubled 
projects under the Flexible Subsidy and Loan Management Set-Aside 
programs. According to HUD officials, however, owners are not 
submitting these comprehensive needs assessments because HUD has 
not yet issued guidelines or regulations implementing the 
requirement that they do so. 

In addition, HUD has yet to systematically identify those 
projects with the most severe physical problems. While improved 
management information systems are critical for the ongoing 
management of HUD's inventory of assisted properties, and needs 
assessments are crucial for determining repair costs, current 
limitations in these data sources do not preclude HUD from 
systematically identifying those assisted properties that are in 
the worst physical condition. Simple walk-through inspections by 
either HUD field office staff or outside inspectors could provide 
HUD with information on how many properties are in conditions 
similar to those we discussed at the July 1994 hearing. This 
information, together with data from the past inspection reports on 
the properties, would put HUD in a position to (1) systematically 
notify property owners of the need to address physical problems at 
the properties and (2) take appropriate enforcement actions when 
owners do not bring their properties into compliance with housing 
quality standards. 

CONCLUSIONS 

Each federally assisted property that has fallen into serious 
disrepair needs to be analyzed on a case-by-case basis to compare 

19 



268 



the cost of rehabilitation and the associated costs of providing 
rent subsidies that continue after the property is rehabilitated 
with the cost of providing the tenants with certificates or 
vouchers. Among the more important factors to be analyzed are the 
total cost of rehabilitation, market rents in the area in which the 
property is located, applicable fair market rents, vacancy rates, 
and the views of tenants and community leaders on what should be 
done with the property. 

Current housing policies have generally supported preserving 
subsidized housing and have not required HUD to consider housing 
alternatives. One way of preserving properties like Edgewood 
Terrace Apartments is through government-supported rents well above 
local market levels. 

As we stated in our earlier testimony, the current budgetary 
climate requires all federal agencies to consider the cost 
implications of their policy decisions. Yet in dealing with its 
portfolio of physically distressed properties, HUD is limited by 
legislation that precludes it from using funds recaptured from 
terminated Section 8 contracts to relocate tenants from severely 
distressed properties to other properties of higher quality. 
Current laws also limit HUD's discretion to use certificates or 
vouchers in dealing with physically distressed properties. 
Providing HUD with greater flexibility in using certificates and 
vouchers would require congressional action. 

In dealing with distressed properties, it is important that 
HUD balance fiscal responsibility and the interests of affected 
tenants and communities. We support the provisions of H.R. 5115 
that would require these cost implications, along with other 
factors like the views of tenants and community leaders, to be 
carefully weighed in HUD's decisions on how to proceed with 
individual properties. We also support the bill's provision that 
would authorize the Department to use recaptured Section 8 program 

20 



269 



funds to relocate tenants currently living in physically distressed 
properties by offering them certificates and vouchers. Debate on 
this bill might also consider broadening the general authority of 
the Department to use certificates and vouchers as an option in 
disposing of formerly subsidized properties. 

Finally, HUD is limited by the lack of a comprehensive 
strategy focusing on the properties and by inadequate information 
systems. As we recommended in our July 1994 testimony, HUD needs 
to develop such a strategy to address the very poor physical 
conditions of properties like Edgewood Terrace Apartments and 6000 
South Indiana Avenue. We said that as part of this strategy, HUD 
should, through the use of its field staff or with the help of 
outside contractors (1) promptly identify all Section 8 assisted 
properties with severe physical problems and offer affected tenants 
temporary assistance to relocate to safe and decent housing, (2) 
systematically notify owners of the problems identified, and (3) 
take appropriate enforcement actions in cases in which owners do 
not bring their properties into compliance with housing quality 
standards. Also, to the extent that budgetary or legislative 
constraints prevent HUD from addressing these conditions, and limit 
its options in disposing of physically distressed properties, we 
recommended that HUD provide the Congress with an assessment of the 
resources and legislative changes the Department needs. 



21 



270 



APPENDIX I 



APPENDIX I 



COST OF FINANCING THE REHABILITATION OF EDGEWOOD 
TERRACE APARTMENTS AT FOUR RENT LEVELS 





Market rents 


Rents at 85 

percent of 

FMR 


Rents at 100 

percent of 

FMR 


Rents at 132 

percent of 

FMR 


Potential rental IncMi 


ne 








Efficiency (20) 


$ 480/mo. 


$ 538/mo. 


$ 633 /mo. 


$ 836/mo. 


1 bedroom (81) 


560/mo. 


611/mo. 


719/mo. 


949/mo. 


2 bedroom (76) 


660/mo. 


717/mo. 


844/mo. 


1.114/mo. 


3 bedroom (43) 


760/mo. 


977/mo. 


1.149/mo. 


1.517/mo. 


4 bedroom (72) 


810/mo. 


1.177/mo. 


1,385/mo. 


1.828/mo. 


Yearly income at 100 
percent occupancy 


$ 2,353.440 


$ 2,898.534 


$ 3.410.040 


$4,501,253 


Calculation of maximun 


I mortgage 








Effective gross 
income (97 percent 
occupancy) 


2,282,837 


2.811.578 


3.307.739 


4.366,215 


Total operating 
expenses / replacement 
reserve 


(1,500,967) 


(1.500.967) 


(1.500,967) 


(1,500,967) 


Net operating income 


781,870 


1.310.611 


1.806,772 


2.865,248 


Debt financing 
supported by rent 
levels (15-year term 
at interest rate of 
9.37 percent) 


5,715,252 


9,580.203 


13,207,002 


20,944, 171 


Calculation of cash sv 


ibsidy 








Total rehabilitation 
expense 


20,777,608 


20,777.608 


20,777,608 


20,777,608 


Debt financing 
supported by rent 
levels 


5,715,252 


9.580,203 


13,207,002 


20,777,608 


Cash investment 
needed 


15.062,356 


11.197.405 


7.570,606 






Note: FMR = fair market rent. 



22 



271 



APPENDIX II APPENDIX II 

VIABILITY OF CERTIFICATES AND VOUCHERS AS AN ALTERNATIVE 
TO REHABILITATION IN THE WASHINGTON, D.C., MARKET 

To evaluate whether certificates and vouchers are a viable 
alternative to rehabilitating Edgewood Terrace Apartments, we 
considered several additional issues. We looked at the vacancy 
rates in the community to determine whether units are available at 
or below the fair market rent (FMR). We also considered whether 
landlords are willing to rent to tenants with certificates and 
vouchers. Finally, we examined the rents that tenants using 
certificates and vouchers would likely have to pay to rent units 
that meet housing quality standards. 

According to 1990 Census data, the vacancy rate for units 
renting at or below the FMR was about 8 percent in Washington, 
D.C., and 11 percent for the Washington, D.C., metropolitan 
statistical area. We were unable to obtain other statistically 
reliable data to update these figures. 

In examining whether landlords are willing to rent to tenants 
with this type of assistance, we contacted the Department of Public 
and Assisted Housing in Washington, D.C., in an attempt to get an 
indication of whether such families are experiencing difficulty in 
locating rental housing. This Department, which administers the 
city's certificate and voucher programs, did not respond to our 
request for information. Nevertheless, we note that several 
thousand families in Washington, D.C., are successfully using 
certificates and vouchers. In addition, the willingness of 
landlords to accept tenants with such assistance was the subject of 
a study commissioned by the National Multifamily Housing Council. ^° 
The Council's final report concluded that several fundamental 



" Final Report on Recommendations on Ways to Make the Section 8 
Program More Acceptable in the Private Rental Market . Abt 
Associates, Inc. (Cambridge, Mass: Mar. 1994). 

23 



272 



APPENDIX II APPENDIX II 

changes to the requirements and regulations of the certificate and 
voucher programs could significantly increase private owners' 
participation. These changes focused on increasing the 
accountability and responsibility of the housing authorities that 
administer the program, the owners who rent units under the 
program, and the residents who live in the Section 8 units, while 
still maintaining the program's goals of providing affordable, good 
quality housing to low-income families. We recognize that, even if 
these changes are made, families can still experience difficulty in 
finding affordable rental housing in specific neighborhoods. 

As noted in the body of our testimony, if tenants at Edgewood 
Terrace Apartments were provided with certificates or vouchers and 
chose to relocate in more expensive neighborhoods, either at 85 
percent of the FMR or at 100 percent of the FMR, the costs of this 
assistance could be significantly less than the costs of 
rehabilitating the property. 



(385441) 

24 



273 

Mr. Peterson. Thank you very much. We appreciate your being 
with us. 

Finally, Secretary Retsinas, we appreciate you being with us. We 
know you have a tough job. We don't mean to pick on you. We are 
glad to have you back with us today. We look forward to your testi- 
mony. 

STATEMENT OF NICOLAS P. RETSINAS, ASSISTANT SEC- 
RETARY, HOUSING, FEDERAL HOUSING COMMISSION, U.S. 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, AC- 
COMPANIED BY HELEN DUNLAP, DEPUTY ASSISTANT SEC- 
RETARY FOR MULTIFAMILY HOUSING 

Mr. Retsinas. Thank you, Mr. Chairman and members of the 
committee. Thank you for this opportunity. 

I welcome, Mr. Chairman, your opening statement where you 
said you were interested in constructive solutions. This has been a 
problem, as you have all pointed out, that has been in the making 
a long, longtime, and we need to be about the business of fixing it. 
We need to be about that business as constructively as possible. 

I appreciate the focus on this problem. It is one that merits the 
focus. There have been times when I have felt like a lone voice in 
the wilderness. When I joined this administration last spring, my 
first appearance was before your colleagues on the banking com- 
mittee. In that appearance, I proposed legislation that would give 
us substantial relief and flexibility from the restrictions that were 
imposed by this Congress on the multifamily property disposition 
program. 

A bill emerged 10 months later that met some of those goals, but 
still did not give us the flexibility that we sought and that we do 
need, as Ms. England^oseph and Ms. Gaffney indicated. 

Further, I regret to inform you, but in the spirit of candor which 
I know you would wish, this year, this past week, we learned that 
our reauthorization, the Housing Act of 1994, was not to be. In that 
bill, in that bill were provisions that would give us more flexibility, 
give us the opportunity to say no to certain Section 8 contract re- 
newals. But now we will not have that flexibilitv. 

So I am pleased we are going to focus, £ind I hope this bears finiit 
in the future in terms of me same spirit that you and members of 
the committee have in terms of giving us that flexibility, is passed 
on to your colleagues as relates to this. 

As I said when I testified here in July, Mr. Chairman, it is to- 
tally unacceptable to us in the department that anyone should be 
forced to live in substandard conditions in federally subsidized 
housing. And it is equally unacceptable that taxpayers should be 
saddled with the burden of subsidizing substandard properties. 

Furthermore, as I said, it is completely intolerable to us that the 
deteriorating federally assisted housing developments are literally 
endangering whole neighborhoods and communities. 

Our mission is not only housing, but helping to build stronger 
communities. That increases our sense of urgency about cleaning 
up the assisted housing mess. 

Mr. Chairman, while we and this administration inherited this 
mess, I am not going to waste your time today by assessing blame. 
At this stage of the game, blame is beside the point. All that mat- 



274 

ters now is that we do everything we can to repair the damage and 
make all of our assisted housing work for residents, for taxpayers 
and for communities. 

Last month you sent me a letter in which you posed a series of 
very thoughtful questions. I brought the answers with me and I 
submit them for the record for you and your colleagues. But since 
time is limited and the questions somewhat technical and the re- 
sponses detailed, I would like to submit my answers separately for 
the record. Of course, I will be happy to elaborate in the question 
and answer period. 

Mr. Chairman, there is no denying that much too much of our 
Section 8 assisted housing is in serious trouble. And the question 
facing us today is twofold. First, is it worth the effort and expense 
to turn this housing around? Second, if it is, how do we do it? 

In answer to the first question, we simply do not walk away fi-om 
the residents in troubled assisted housing. The neighborhoods sur- 
rounding these troubled housing are often in trouble themselves. 

If we walk away from this housing, we also walk away from the 
communities. We contribute to their decline. We leave them at 
greater risk than they already are. 

Because, Mr. Chairman, if we are not willing to clean up the 
mess we helped make, who will? Who will take the risk in invest- 
ing in a deteriorating community when there is so much competi- 
tion for investment from other places which hold more immediate 
promise? 

We have a responsibility to turn these developments around, not 
only for their own sake but for the communities' sake. We cannot 
and must not view them in isolation, as a building here and a 
building there. We must see them as part of larger communities, 
and we must understand that by turning them around, making 
them work better, we help communities work better. 

There is another reason we cannot walk away from these trou- 
bled developments: the people who live there. The majority are peo- 
ple who are trying to raise families and make ends meet. They live 
in assisted housing simply because they do not earn enough to af- 
ford market rents. 

I think it is fair to say many of these residents, working people 
with children, could end up in homeless shelters and on the streets 
if we walk away. At a time when 600,000 Americans are homeless, 
the last thing we want to do is put more people on the streets. 

Finally, Mr. Chairman, who ultimately pays the price for deterio- 
rating communities and increased hopelessness? The taxpayers. 
They pay the bill for public safety and public health and for welfare 
and unemployment. When communities decay, economies decline, 
jobs disappear, and people wind up on the streets. So we cannot 
walk away from all assisted housing developments. We must turn 
them around and make them work, for communities, for residents, 
and for taxpayers. 

This, however, does not mean we need to turn around all as- 
sisted housing developments. There will be projects that we must 
and should provide tenants with vouchers to relocate elsewhere. 

When I was here in July, I outlined a four-point comprehensive 
strategy for addressing the needs of troubled assisted housing. This 



275 

is built on enforcement, repair, resident responsibility and chang- 
ing the way we do business at HUD. 

I would like to take a few moments this morning to highlight 
some of the key things we have done to advance the strategy since 
your last hearing in July. Then I would like to talk about the legis- 
lative changes that I personally believe should be considered in 
order to build on this progress. 

In July I said we would establish SWAT teams to restore these 
projects to physical and financial health. We have now taken this 
plan from the drawing board to reality. Within the next 2 weeks, 
24 of our most knowledgeable and capable professionals will be 
brought together here for training and orientation. After that week- 
long session, they will immediately deploy to severely distressed as- 
sisted housing developments in key communities to replace ineffec- 
tive management, fine new owners where necessary, repair prop- 
erties, and engage residents and local communities and various 
community groups in the future of these developments. 

Our field staff and the Inspector General's office have already 
identified 90 projects for SWAT team attention. One of other goals 
is to start restoring approximately 100 properties in the first year. 
In many cases it will take many years to fully turn these properties 
around. However, in the next 6 to 12 months you will see dramatic 
improvements to these properties. I encourage your participation in 
that effort. 

When I last came here I said we would engage residents, and we 
are doing that. Last week in Denver, under our new safe neighbor- 
hood action plan initiative, residents of assisted housing met with 
assisted housing owners and managers, local government officials, 
HUD staff and officials from the Justice Department and other 
agencies to discuss ways to deal with crime and security in assisted 
housing neighborhoods and to map out strategy to turn the assisted 
housing communities around. 

For the first time HUD is bringing local officials, law enforce- 
ment, owners and managers, and residents together to deal with 
crime and other social issues in assisted housing communities. In 
various cities like Detroit, Denver, Boston and Columbus, grass- 
roots strategies are emerging. 

Mr. Chairman, we will once again ask residents to be part of the 
solution of turning communities around. I am also pleased to an- 
nounce this morning that the department has made significant 
progress in permitting special rent increases to fund service coordi- 
nators in certain assisted properties. Service coordinators will link 
residents with use services, counseling, training, and other services 
are which will help them to lift themselves to better lives. 

When I testified in July I said we would change the way we do 
business. I am pleased to report today that last week we reassigned 
87 performing multifamily mortgages to Fannie Mae. By that one 
action we reduced our HUD-held portfolio by 8 percent, freeing our 
staff to focus on the early warning and loss mitigation of poten- 
tially troubled properties. 

This is just a start. We have announced two additional sales to 
the private sector which will total approximately 300 mortgages. 
This is good business for HUD. 



276 

Mr. Chairman, all these accomplishments I have just mentioned 
are tangible evidence that HUD and FHA are starting to work. We 
are working better for the American people, we are making as- 
sisted housing work better. However, I think it is important to 
focus on real projects, real communities, and real people. 

I would like to tell you about German o-Millgate, a 22-year-old as- 
sisted housing development on the South Side of Chicago. It origi- 
nally served a mixed income population. But the closure of a near- 
by steel plant decimated the community economically and the de- 
velopment's residents became increasingly lower income. It slipped 
into neglect and decay. 

HUD, with the help of the Illinois Housing Development Author- 
ity, brought a severely delinquent mortgage current, preventing a 
foreclosure. At the same time, 350 units were completely rehabili- 
tated. We did more than simply save the mortgage and rehabilitate 
the structure. A daycare center was established, as well as an 
after-school learning center, a summer work program for the youth. 
The seven units not rehabilitated were gutted and transformed into 
a community meeting center. All the funding for these programs 
have been provided by the new private owners. 

Trenton Park here in Washington, DC, a HUD-owned, 259-unit 
development was once a severe threat to an otherwise decent resi- 
dential neighborhood. HUD set aside units in affordable market 
rates for middle-income renters and subsidized the balance of the 
units to restore Trenton Park as a mixed-income development. We 
also established an aggressive resident ownership training program 
and a daycare center. In addition, we sought to maximize employ- 
ment opportimities for residents in both the rehabilitation and 
management of the property. 

More significantly, the commvmity, not HUD, made a commit- 
ment to assist market rate residents who could no longer meet 
their rent obligations. This creative alternative to the more tradi- 
tional approach of rehabilitation with 100 percent subsidy support 
required innovative ideas from the private sector and a willingness 
by HUD to accept them and work to achieve an effective com- 
promise solution within the severe limitations of the disposition 
statute. 

We can be proud of what we have accomplished so far, but I 
would be the first to admit it is just a start. There are some addi- 
tional critical statutory changes I personally believe we should con- 
sider to build on the work we have begun to make assisted housing 
work for communities, residents, and taxpayers. 

First, I believe we need more funding flexibility. If we are really 
going to make headway, we have to be able to spend our limited 
dollars smarter. Our current flexible subsidy programs are too nar- 
rowly focused. It is just not simple enough to address the physical, 
financial, and social problems of assisted housing. 

Consolidating the flexible subsidy program with other resources 
would enable FHA to address financial issues, physical problems, 
drug and crime prevention, support services for residents and other 
needs in a timely and expeditious manner. 

Second, I believe we must modify our preference rule to bring as- 
sisted housing into conformance with public housing. Preferences 
in assisted housing must apply to no more than halfof the vacant 



277 

units instead of the 70 percent under the preference rule now. 
Without this change, we will continue to concentrate very loNv-in- 
come families in assisted housing. Experience has proven this is 
unhealthy, both for residents and surrounding communities. 

Third, I believe we must change the way rents are adjusted. Cur- 
rent rent calculation formulas do not consistently set rents for the 
amounts the property requires. Some collect more than they need. 
Others don't collect enough. 

We need to be able to switch at our discretion between the an- 
nual adjustment factor and the budget-based methodology in evalu- 
ating rent increases for these Section 8 projects. This will help 
avert cash-flow inconsistencies. We also need to be able to decrease 
rents where they are excessive. 

Finally, I want to mention the possibility of forgiving a portion 
of the tax liability accruing on the capital gains realized when a 
partnership transfers a project. While this is something I person- 
ally favor, any such proposal must be considered in the broader 
context of overall tax policy. 

While the administration does not support it at this time, we 
continue to consult with Treasury on the impact and feasibility of 
this tax reform. 

Mr. Chairman, I know we are all in agreement on the critical 
need to do this. I want to thank you for your constructive legisla- 
tive proposals. I believe it provides a base for us to begin to work 
together and think through how we want to balance our flexibility 
with what are very legitimate public policy objectives. 

I am particularly interested in your proposal to support the re- 
peal and prohibition of lowering Section 8 rents, the improvements 
on the comparabiHty reviews and the recapture of Section 8 project- 
based funds. 

Mr. Chairman and members of this committee, I want to thank 
you again for the opportunity to address you today. I know we all 
share the same goal: making assisted housing work the way Con- 
gress intended it to work for residents, communities and taxpayers. 
And I look forward to working with you and this committee to see 
that it does. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Retsinas follows:] 



278 



STATEMENT BEFORE 

THE HOUSE COMIVHTTEE ON 

COVERNMENT OPERATIONS 

SUBCOMIMITTEE ON 

EMPLOYMENT, HOUSING AND AVIATION 

OCTOBER 6, 1994 



.^ 



^VAB NTo^ 




^^N DEV^^ 



By 

NICOLAS P. RETSINAS 

ASSISTANT SECRETARY FOR HOUSING 

FEDERAL HOUSING COMMISSIONER 



279 



Statt'inciit of 

Nicolas P. Retsinas 
Assistant Secretary for Housing/Federal Housing Commissioner 

before the 

Committee on Government Operations 

Subcommittee on Employment, Housing and Aviation 

United States House of Representatives 

October 6, 1994 



Mr. Chairman and members of the commiilce: 

Thank you for inviting mc back here today to update the committee on what HUD is doing 
to identify troubled assisted-liousing, and what we're doing to preserve and dispose of this 
troubled housing. 

Mr. Chairman, we appreciate and sliare your concern about the physical and financial 
condition of the estimated 400,000 units of Section 8 assisted housing that are seriously at 
risk today. These 400,000 units represent 20 percent of HUD's 2 million-unit assisted- 
housing inventory, and in our view, that is 20 percent too much. 

As I said when I testified here in .luiy, Mr. Chairman, it is totally unacceptable to us that 
anyone should be forced to live in substandard conditions in federally subsidized housing, 
and it is equally unacceptable that taxpayers should be saddled with the burden of subsidizing 
substandard properties. 

I'urlherniore, as I said in July, it is completely intolerable to us at MUD that deteriorating 
federally assisted housing developments are literally endangering whole neighborhoods and 
communities. Our mission is not only housing, but helping to build stronger comniunilies, 
and that increases our sen.se of urgency about cleaning up the assisted-housing mess. 

Mr. Chairman, though we in this administration inherited this mess, I am not going to 
waste your time today by trying to assess blame. At this stage of the game, blame is beside 
the point. All that inatters now is that we do everything we can to repair the damage and 
make all of our assisted housing work for residents, taxpayers, and communities. 

In this, as in so many other matters, that's what we were sent here to do: make things 
work for ordinary people. Mr. Chairman and members of this committee, I know this is your 
goal as well. 

Mr. Chairman, last month, you sent me a letter in which you posed a scries of very 
thoughtful questions. I've brought the answers with me. But since time is limited, and since 



280 



the questions are somewhat technical and the responses are detailed, I would like to submit 
my answers separately for the record. Of course, I will be happy to respond to these and any 
other questions you might have following my statement. 

Mr. Chairman, as I've just said, there is no denying that much too much of our Section 8 
assisted housing is in serious trouble. And the question facing us today is twofold: 

First: Is it worth the effort and expense to turn this housing around? 

And, second: If it is, how do we do it? 

Mr. Chairman, in answer to the first question, we simply cannot walk away from the 
residents in troubled assisted housing. 

The neighborhoods surrounding this troubled housing are often in trouble themselves. If 
we walk away from this housing, we also walk away from these communities. We contribute 
to their decline. We leave them at greater risk than they already are. 

Because, Mr. Chairman, if we are not willing to clean up the mess we've helped make, 
who will? Who is going to take the risk of investing in a deteriorating community, when 
there is so much competition for investment from other places which hold more immediate 
promise? 

We have a responsibility to turn these developments around, not only for their own sake, 
but for the communities' sake. We cannot view them in isolation - as a building here and a 
building there. We must see them as part of communities, and we must understand that by 
turning them around, making them work better, we help communities work better. 

There is another reason we cannot walk away from all troubled developments, Mr. 
Chairman: the people who live there. 

The overwhelming majority of assisted-housing residents arc working people who are 
trying to raise families and make ends meet. They live in assisted housing because they 
don't earn enough to afford market rents. 

Mr. Chaimian, I think it's fair to say that many of these residents - working people with 
children - will end up in homeless shelters or on the streets if we walk away from all this 
housing. And at a time when 600,000 Americans are already homeless, the last thing we 
want to do is catapult more people into the streets. 

And finally, Mr. Chairman, who is it who ultimately pays the price for deteriorating 
communities and increased homelessness? Tiie taxpayers. They pay the bill for public safety 
and public health -- and for welfare and unemployment - when communities decay, and 
economies decline, and jobs disappear, and people wind up on the streets. 



281 



So we cannot walk away from all assisted-housing developments. We must turn them 
around; we must make them work. We must make them work for communities, for 
residents, and for taxpayers. This, however, does not mean we need to turn around all 
assisted-housing developments. There may be projects that we must and should provide 
tenants with vouchers to relocate elsewhere. 

Mr. Chairman, when I was here in July, I outlined a four-point strategy for addressing the 
needs of troubled assisted housing. This strategy is built on enforcement, repair, resident 
responsibility, and changing the way we do business at HUD. 

I'd like to take a few moments to highlight some of the key things we have done to 
advance this strategy since your last hearing in July, and then I would like to talk about the 
legislative changes that 1 personally believe should be considered in order to build on this 
progress. 

When I testified in July, I said we were going to establish "SWAT" teams to restore 
several score of severely troubled projects to physical and financial health. 

We have taken this plan from the drawing board - where it was in July - to reality. 

In 18 days, 24 of our most knowledgeable, capable professionals - who have committed 
an entire year to this effort - will be brought together here in Washington for training and 
orientation. And after that week-long session, they will immediately deploy to severely 
distressed assisted housing developments in key communities - to replace ineffective 
management, find new owners where necessary, repair properties, and engage residents, 
local government and various community groups in the future of these developments. Our 
field staff and the IG's office have already identified 90 projects for SWAT team attention. 
One of our goals is to start restoring approximately 100 properties in the first year. In many 
cases, it will take years to fully turn these distressed properties around. However. I can 
assure you that, within next 6 to 12 months, you will see dramatic improvements to these 
properties. 

I said we would move quickly on this, and we have. 

When I last came here, I said we would engage residents, and we are doing that. 

Last week in Denver, under our new Safe Neighborhood Action Plan (SNAP) initiative, 
residents of assisted housing met with assisted housing owners and managers, local 
government officials, HUD staff, and officials from the Justice Department, the HUD 
Inspector General's office and other agencies to discuss ways to deal with crime and security 
in assisted housing neighborhoods and to map out strategy to turn the assisted housing 
corrtmunities around. 



282 



For the first time, HUD is bringing local officials, law enforcement, owners and 
managers, and residents together to deal with crime and other social issues in assisted- 
housing communities. In various cities, like Detroit, Denver, Boston, and Columbus, 
grassroots strategies are emerging. Mr. Chairman, we will once again ask residents to be 
part of the solution — turning communities around. 

Mr. Chairman, I am pleased to announce that the Department has made significant 
progress in permitting special rent increases to fund service coordinators in certain assisted 
properties. This notice will be issued in the near future. These coordinators will link 
residents with youth services, parenting skills classes, counseling, training and other services 
which will help them to lift themselves to better lives. 

When I testified in July, Mr. Chairman, I said we were changing the way we do business. 
I am pleased to be able to report today that last week we reassigned 87 performing 
multifamily mortgages to Fannie Mae. In one week, Mr. Chairman, we reduced our HUD- 
held portfolio by 8 percent, freeing our staff to focus on the early warning and loss 
mitigation of potentially troubled properties. This is just a start. We have announced two 
additional sales, which will total approximately 300 mortgages. This is good business for 
HUD. 

Mr. Chairman, all these accomplishments I've just mentioned are tangible evidence that 
HUD and FHA are changing. We're working better for the American people; we're making 
assisted housing work better. 

I'd like to take just a moment to tell you what this means for actual residents and 
communities. 

Germano-Milgate 

First, Mr. Chairman, I'd like to tell you about Germano-Milgate, a 22-year-old assisted- 
housing development on the South Side of Chicago. Germano-Milgate originally served a 
mixed-income population, but the closure of a nearby steel plant decimated the community 
economically and the development's residents became increasingly lower income. It slipped 
into neglect and decay. 

At Germano-Milgate, HUD, with the help of the Illinois Housing Development Authority, 
brought a severely delinquent mortgage current — averting a costly and disruptive 
foreclosure. At the same time, 350 of the development's 357 units were completely 
rehabilitated, with complete occupancy scheduled for this December. 

We did more than simply save the mortgage and rehabilitate the structure. A day care 
center was established, as was an after-school learning center for children age 9-12, and a 
summer work program exclusively for Germano-Milgate youth The seven units that were 
not rehabilitated were gutted and transformed into a community center and meeting hall for 



283 



the newly formed residents' association. All the funding for these programs has been 
provided by the new, private owners. 

Germano-Milgate is now a community asset instead of a liability. It's working. 

Trenton Park 

We've made assisted housing work in here in Southeast Washington, Mr. Chairman. It's 
now working at Trenton Park, a HUD-owned, 259-unit development, which was once a 
severe threat to an otherwise decent residential neighborhood. 

To turn Trenton Park and the community around, HUD set aside units at affordable 
market rates for middle-income renters, and subsidized the balance of tlie units -- to restore 
Trenton Park as a mixed-income development. 

We also established an aggressive resident ownership training program and a day care 
center. In addition, we sought to maximize employment opportunities for residents in both 
the rehabilitation and management of the property. More significantly, the community, not 
HUD, made a commitment to assist market-rate residents who could no longer meet their 
rent obligations, through an Emergency Rent Fund. 

This creative alternative to the more traditional approach of rehabilitation and 100-percent 
subsidy support required innovative ideas from the private sector and a willingness by HUD 
to accept them and work to achieve an effective compromise solution within the limitations of 
the disposition statute. 

Mr. Chairman, we can be proud of what we've accomplished so far, but it's just a start. 

There are some critical statutory changes that I personally believe we should consider to 
build on the work we've begun and to really make assisted housing work for communities, 
residents and taxpayers. 

First: I believe we need more funding flexibility. If we're really going to make headway, 
we've got to he able to spend our dollars smarter. Our current flexible subsidy program is 
too narrowly focused; it's not supple enough to address the physical, financial and social 
problems of assisted housing. 

Consolidating the Flexible Subsidy program with other resources would enable FHA to 
address financial issues, physical problems, drug and crime prevention, support services for 
residents, and other needs in a timely and expeditious manner. 

Second: I believe we must modify our preference rule to bring assisted housing into 
conformance with public housing. Preferences in assisted housing must apply to no more 
than half of vacant units, instead of the 70 percent which are under the preference rule now. 



284 



Without this change, we will continue to concentrate very-low-incomc families in assisted 
housing, and experience has proven that this is unhealthy, both for residents and surrounding 
communities. 

Third: I believe we must change the way rents are adjusted. Current rent-calculation 
formulas do not consistently set rents at the amount a project requires. Some properties 
collect more than they need. Others do not receive enough rent to operate successfully. We 
need to be able to switch at our discretion between the annual adjustment factor and the 
budget-based methodology in evaluating annual rent increases for Section 8 New 
Construction and Substantial Rehabilitation projects. This will help avert cash-flow 
deficiencies in assisted projects where unusually difficult management problems occur. We 
also need to be able to decrease rents where they are excessive. 

Finally, I want to mention the possibility of forgiving a portion of the tax liability accruing 
on the capital gains realized when a partnership transfers a project. While this is something I 
personally favor, any such proposal must be considered in the broader context of overall tax 
policy. While the Administration does not support exit tax reform at this time, the 
Department continues to consult with Treasury on the feasibility and impact of exit tax 
reform. 

Mr. Chairman, these changes could enhance our ability to address the needs of troubled 
assisted housing. And I know we're all in agreement on the critical need to do this. 

I would like to thank you, Mr. Chairman, for the legislation you recently introduced - the 
Section 8 Project-Based Program Management and Improvement Act, H.R. 5115. Your 
support for the repeal of the prohibition on lowering Section 8 rents, improved comparability 
reviews, and the recapture of Section 8 project-based funds for reuse as vouchers or 
certificates when properties are foreclosed is especially appreciated. 

Mr. Chairman and members of this committee, I want to thank you again for the 
opportunity to address you today. I know we all share the same goal — making assisted 
housing work the way Congress intended it to work for residents, communities and taxpayers 
- and I look forward to working with you and this committee to see that it does. 

Thank you. 



285 



ADDENDUM TO THE TESTIMONY OF 

NICOLAS P. RETSINAS 
ASSISTANT SECRETARY FOR HOUSING - FEDERAL HOUSING 

COMMISSIONER 

before the 

COMMITTEE ON GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION 

UNITED STATES HOUSE OF REPRESENTATIVES 

October 6, 1994 



1. What steps has HUD taken to identify its troubled projects? 

The Department is taking steps to refine existing tools and introduce new 
tools to enhance our system for identifying our troubled properties. We have also 
contracted with outside experts in the financial areas to help us identify problem 
projects. Since many of our systems are either new or in its early stage of 
implementation, it is difficult to gauge its overall effectiveness at this time. However, 
one thing is clear - more reviews need to be done, and I am working to see this 
occurs. 

identification tools that the Department has now are: 

Financial Statement Analysis Contract 

Another effort has been to enter into a contract for the analysis of 
financial statements submitted by owners of all properties, whether troubled 
on non-troubled. An outgrowth of these efforts is the development of an early 
warning system which would provide field offices with information of the 
property's physical and financial health at a time when steps can be taken to 
correct the problems before a claim is filed against the insurance fund. 

o Capital Needs Assessments 

Specifically, HUD has contracted for physical inspections of insured 
non-troubled properties, thereby freeing up field office staff time to focus on 
the physical conditions in the troubled portion of the inventory, including the 
identification of problems and the development of a plan to cure the 
deficiencies. 



286 



o Comprehensive Multifamily Servicing Program 

Tiiis provides indices to help identify specific troubled properties, to 
determine the extent to which troubled properties affect the total inventory, 
and to lay out a course of action to be taken once troubled multifamily 
properties are identified. This program shows good potential for helping us 
cure problems before they escalate. However, implementation has not been 
as fast or as extensive as we would like. Resource constraints are affecting 
our ability to subject a large number of projects to comprehensive multifamily 
servicing. Field staff are using this tool to the extent resources and expertise 
are available. 

The department has taken a more aggressive approach to the servicing of 
troubled properties by attempting to delve further into the root causes of the 
problems leading to designation as troubled. We find that this is important to 
resolving our universe of identified troubled properties, as well as providing early 
warning indicators for conditions which can lead to troubled property designations 
quickly. 



2. Is HUD performing a financial analysis to determine what actions to take 
on its troubled projects? A financial analysis would include the 
following information for each project: 1) factual information, 2) 
financial information, 3) an assessment of the social impact of each 
option HUD could take, and 4) a comparison of options HUD could take 
(see Attachment for details on the content of the financial analysis). 
Specifically, what are the elements of the financial analysis that HUD is 
currently performing? Please be prepared to present a recent financial 
analysis of a troubled project at the hearing. 

3. Is HUD performing a financial analysis of each troubled project? 

As we continue to stress, HUD's comprehensive monitoring and enforcement 
strategies are still in their infancy. The kinds of financial analysis that the question 
suggests are still beyond the Department's reach. For example, the annual financial 
statement and on site physical inspections and management reviews collect the 
kinds of factual information necessary to assess the extent of physical and financial 
distress. However, arraying options which would include choices to abandon the 
property by giving all tenants portable subsidies, or acquiring and demolishing the 
property have not been included in the Department's decision making strategies. 
This is partly because the Department's stated goals have emphasized the 
presen/ation of the housing stock. 



287 



The financial statement contract has played an important role in the analysis 
of the troubled inventory, however, it does not replace the important function the 
loan servicer plays in this process. While this analysis can present key ratios which 
indicate the fiscal health of a property, it does not tell the whole story. HUD will now 
conduct a financial statement analysis on every property in the HUD inventory, 
however, the ability to conduct an in-depth analysis, beyond the ratios, where the 
root of the problems are often revealed is highly dependant upon adequate staff with 
the training and resources to analyze the projects. 

A good example of the limitations of relying on financial statement analysis 
alone as a warning of trouble is the Holiday Lake project in Pompano Beach, 
Florida. While this project was in very poor physical condition, the financial 
statements did not give field office staff an indication of the severity of the problems. 
It took a Legal Aid threat to sue the owner to alert the field office to the troubled 
nature of the property. 

It is clear that a simple financial analysis often does not determine what 
actions need to be taken to resolve the problems of a troubled property. Rather it 
takes the skills of a capable loan servicer, with the time and ability to look beyond 
the numbers to find the root of the problems. In some instances they may be 
physical, financial, social or, as in most cases, it is a combination of the three. 

4. When the information is collected, does HUD have a process to make a 
decision on actions to take on troubled projects? 

The Department's procedures for assessing and acting on troubled projects 
have long been codified in handbook instructions to its field offices. These 
instructions include methods for reinstating the mortgage, effecting required repairs 
and preparing to foreclose on the property. A key part of this assessment is the 
Least Cost Analysis, this assists the loan servicer in deciding which course of 
action, both financially and socially is in the best interest of HUD. In many cases 
the answer is foreclosure. For the other cases the Department works with the 
owner of the property to craft a rehabilitation and mortgage reinstatement plan, 
which may or may not include additional Federal assistance. In those instances 
where owners cannot or do not cooperate or where a sale cannot be effected, he 
Department's sole option is foreclosure. 

5. When HUD provides additional funds to a troubled project through Loan 
Management Set Aside, Flexible Subsidy, or special rent increases, what 
type of assessment does HUD perform to determine which properties 
will receive additional funding and the funding amount? Please 
describe this assessment. 



288 



LMSA 

HUD field offices are required to review the projects' current audited financial 
statements, budget, project payment fiistories and tenant profiled prior to 
consideration for LI\/ISA funding. This process is necessary to evaluate 
appropriateness and project need for the addition of section 8 funding. The project 
and its ownership are then subjected to an intense review before an award is made. 
Since funds are limited, projects must compete for them against other projects. 
Until recently, funding competitions were conducted on a national basis. In 1994, 
funds were allocated to HUD's regional jurisdictions and funding decisions were 
delegated to the regional directors of Housing. Programmatic criteria consisting of 
requirements such as owner compliance with the regulatory agreement, and 
certification that the problems of the project are not caused by the owner, as well as 
housing quality standards adherence, must be met prior to the receipt of funds 
under this program. The number of units to be awarded are calculated based on 
the minimum number necessary to resolve the problems in the project. 

FLEXIBLE SUBSIDY 

The order of funding for flexible subsidy mandated by statute has, until this 
year, required the funding of insured properties over all other applicants. In 
addition, HUD regulations provide for preference to be given in emergency repairs 
and then to troubled properties. Therefore, after a property is determined to be 
eligible for assistance under the program types listed in the statute, the priority for 
funding is determined first based on whether or not they are HUD insured and next 
based on the emergency health and safety needs outlined in the MIO Plan as well 
as whether or not they are defined as troubled by the HUD field office. 

SPECIAL RENT INCREASES 

In May, 1994, the department issued a notice establishing the requirements 
and procedures for processing special rent increases for non-drug related crime 
prevention activities for properties whose rents are adjusted using the annual 
adjustment factor (AAF). This action enables properties to receive additional 
financial assistance to develop means of dealing with such activities on-site. The 
down-side is that additional funding to deal with crime-related activity must come 
from the existing funding for amendments, a limited funding source. An additional 
notice providing for similar adjustments for service coordinators is neanng 
completion and should be published shortly. 



What options does HUD have for disposition of troubled projects under 
the current property disposition laws? Describe any statutory 
impediments to the disposition of troubled projects, and any legislative 



289 



changes on property disposition needed to assist HUD in taking action 
on troubled projects. 

The department's ability to foreclose on multifamlly properties and dispose of 
them in the most cost effective manner is indeed an important activity, although 
further streamlining the department's property disposition practices alone is not the 
panacea in addressing the issues of housing quality standards in section 8 assisted 
properties. 

Foreclosure is one component of a larger enforcement strategy, one which 
needs to be enlarged and enhanced if the department is going to realistically 
address the difficult area of housing quality. A number of additional components 
were in the authorization bills which failed to reach conference: 

Expansion of civil money penalties, as proposed in the Senate bill, to 
include identity of interest managing agents and for any owner who 
violates a provision of the section 8 contract. 

o Expansion of capital needs assessment authority to all section 8 
properties, especially in advance of the contract expiration and 
potential renewal. 

The ability to reuse section 8 subsidy funds recaptured from projects 

whose owners have been subject to enforcement actions. 

Finally, there is the issue of acquiring and disposing of properties, for which 
there is no prospect of working out the physical and financial difficulties of a project 
without resorting to foreclosure. 

Some background on the development of the Multifamlly Property Disposition 
Reform Act of 1994 is necessary. When this administration assumed control of the 
department, the HUD owned inventory, and the cost of selling it under existing law 
was identified as one of the top issues for HUD. Imbedded in that problem was the 
concern that the law might be requiring us to preserve property that should be torn 
down or converted to other uses including market rate housing. 

In refining the original submission to congress, office of Housing officials 
consulted with residents, community groups and advocates, such as the National 
Housing Law Project, and repeatedly heard concern about granting HUD flexibility in 
this area. Frankly, given some of the history of HUD, people worried that HUD 
would not make reasonable judgments, especially when funds are scarce, and that 
units would be lost to the affordable housing inventory. 



290 



HUD sent up a bill which we felt balanced the needs and resources in a 
responsible way, and granted HUD additional discretion in several important areas. 
Over a six month period, we negotiated several issues that balanced HUD's need 
for flexibility with the concern for preserving units and protecting tenants. The 
department understands and accepts that the legislation obtained was the best 
product of that process. In response to your question, however, HUD has identified 
a number of areas where negotiations produced compromise language. 

HUD's original proposal was to use five year section 8 subsidies for 
"unsubsidized" properties. This would have netted short term budget 
savings, allowing section 8 dollars to go farther. The enacted law provides for a 
15 year term, with a lesser term only when tenants pay section 8 rents for 15 years. 
This means that if HUD attempted to maximize budget authority by entering into 
shorter term contracts, it could only do so by guaranteeing the tenants low rents 
without guaranteeing the subsidy to the purchaser. It is essentially an unworkable 
option. 

HUD's proposal would have generated "mandatory" savings, and used 
them for grants to state and local governments, or their designee, who would 
take ownership of HUD properties. This would have augmented HUD staff 
resources by transferring property to these entities with the resources for 
rehabilitation. The enacted law provides for grants on an individual project basis 
from appropriated section 8 funds and subjects them to outlay caps. Further, the 
appropriations committees have rejected the mandatory savings approach. 

HUD's proposal would have allowed up to 10 percent of the units in the 
subsidized inventory of owned property annually to be converted to tenant- 
based assistance. The enacted law limited this to 10 percent of sales in a given 
year This results in significant reduction in the flexibility to use this tool, and links it 
to appropriations of 15 year subsidy for 90 percent of sales. HUD's proposal would 
have created a mandatory program to subsidize the sale of HUD-owned and HUD- 
held properties. The enacted law did not include this proposal. 

HUD's proposal would have sold unsubsidized property either with 
discretionary tenant-based assistance in the case of hardship or without 
assistance. The enacted law provides a two year rent freeze for all very low 
income residents who would pay more than 30 percent of their income for rent. This 
will involve some administrative burden and impact some on our price. 

The Department is generally satisfied with the language in the existing law, 
and now wants a chance to demonstrate the usefulness of the flexibility granted 
before asking for additional tools. 



291 



Provide an update of HUD's 4-point plan outlined at the Subcommittee's 
July 26, 1994 hearing, and include a description of the purpose and 
activities of the SWAT Teams. Also provide a status report on the 
conditions of the ten properties included in the GAO testimony. 



A. ENFORCEMENT 

/ need to emphasize that the last three of the initiatives below, that were 
introduced during my last testimony, are still in their infancy. It will be some time 
before they are fully effective and can produce measurable results. Further, and I 
cannot emphasize this too much, Mr. Chairman, effectively implementing these 
initiatives is reliant on a fully functioning infrastructure-one that is not fully 
reorganized. However, changing the Department's priorities, from rote protection of 
the insurance fund to ensuring the habitability of assisted housing, is a long term 
effort, attempting to undo a decade's worth of misdirection and neglect. 

o The Department continues to aggressively pursue Civil Money 

Penalties and enthusiastically endorses their extension to managing 
agents and Section 8 contracts, as provided in the Senate authorization 
bill. 

o As of October 1 of this year, almost 90% of the 1993 Annual Financial 
Statements will have been reviewed, an increase of over 25% from 
last year 

a The Coinsurance Asset Management Contract continues to be an 

effective tool in ferreting out equity skimming. 

Contracted Physical Inspections continue to be a high priority 

especially where there are indications that Section 8 units do not meet 
Housing Quality Standards. 

B. REPAIR THE INVENTORY - THE SWAT TEAM 

The most dramatic of the steps we have taken since July is the formation of 
SWAT teams within FHA to examine the inventory and identify troubled projects. 

The SWAT approach provides a concentrated focus of skills and enforcement to 
prevent the failure of projects (assignment and claim payment) and to mitigate 
losses to the government. The goals of this effort are to: 

Reduce loss/risk to the FHA insurance fund. 



292 



• Signal owners and manager that HUD is serious about enforcing 
program compliance. 

• Signiricant improvement in the physical and financial conditions of the 
targeted projects. 

• Identify ways that SWAT and Operation Safe Home can work together. 

Develop models for improving the department's ability to cure troubled 
project conditions and to take appropriate enforcement actions. 

Additional SWAT material are attached. 



C. RESIDENTS - THEIR ROLE AND RESPONSIBILITY 

A notice will be issued shortly which will permit special rent increases to fund 
service coordinators in federally assisted properties whose rents are adjusted using 
the AAF. This funding will enable property owners/managers to hire service 
coordinators to identify and coordinate programs for residents ranging from teen and 
youth activities, housekeeping and parenting skills, and counseling and training. 

D TRANSFORMATION - CHANGING THE WAY HUD DOES 
BUSINESS 

o Two small IVIultifamily Notes Sales will be held later this month. A 
larger sale is scheduled for February 1995. 

As I mentioned on July 26, the Housing Technician Program has 
recently graduated 57 thoroughly trained field personnel. This 
intensive, three-year program was designed to relegate routine loan 
servicing tasks to high trained technical staff so that experienced asset 
managers can focus their time and energy on the sort of intensive and 
specific activities that troubled projects require. The positive impact of 
the Housing Technician Program is already being felt, enabling field 
personnel to be tapped for the SWAT teams. 

o Our Field Reorganization is in its final stages of implementation. 

Since its purpose is to allocate decision making authority at the lowest 
practicable level, it is designed to reverse another unfortunate tendency 
of the last decade: the notion that field offices cannot make tough 
decisions: that those decisions must be made in a bottle-necked 
headquarters. 



293 



9 

Ms. Dunlap's staff last month completed the awesome task of 
screening and interviewing the 362 applicants for the 51 key multifamily 
management positions in our field offices. I have forwarded my 
nominations for those positions to the Secretary The selections will be 
announced by the end of this month. 

As I stated in my July testimony, I feel strongly that this new 
organization will be better suited to address the tasks this 
subcommittee is concerned with: inspection, enforcement and a bottom 
line emphasis on quality housing. 



294 

Mr. Peterson. Thank you. 

We are, as I said, under significant time constraint. We need to 
get to the next panel by 10:15 a.m. And there are more members 
here than I expected. I don't know how many of you have burning 
questions. Any questions that you have, you can submit to the 
panel in writing, and they will answer them, I am sure. 

I am going to limit you to maybe two questions, if you can get 
them done in 3 minutes. The rule is that when the bulb goes off, 
whoever is talking must stop. We will see how this goes. But we 
are going to be finished by 11 a.m. 

Thanks for being here, Mr. Lucas, we appreciate it. 

HUD has taken a good first step, as I said, with these SWAT 
teams. 

Mr. Retsinas. Thank you. 

Mr. Peterson. Did you first identify all of the troubled projects 
before you chose these hundred? How did you choose these hun- 
dred? 

Mr. Retsinas. Let me ask my colleague, Helen Dunlap, who 
works with this on a daily basis, to focus on the details. 

We looked at a number of different data sources in our own 
records. As you know, we are required and we perform an annual 
audit and that turned up certain information. We consulted with 
our field offices. We really put all that information together. 

Let me have Helen Dunlap, if I could, Mr. Chairman, walk 
through the steps we took. 

Helen. 

Ms. Dunlap. Our intent in the identification of the projects was 
to identify them as quickly as possible so that we can begin the 
process. We used- 

Mr. Peterson. Did you look at all of them? 

Ms. Dunlap. We looked at all the sources we have and developed 
a list of troubled projects. 

Let me tell you wnat those are. First, we asked the IG for their 
list of concerns. Second is, we inquired of each field office in the 
country, and they identified a substantial list. Third, we have a list 
of troubled projects that we have been developing strategies for in 
the field offices, approximately 1,400 total. We used that list. Last 
and most importantly, we went back to the audit for this last year 
and pulled up the names and specific data on each project in that 
audit that was identified as substandard or doubtful from a finan- 
cial standpoint. 

We then did a complete analysis of the financial and physical in- 
formation that we have on those projects so that we could pick the 
hundred on which we could meet the objectives that we have talked 
about previously. 

Mr. Peterson. How many projects did vou look at? 

Ms. Dunlap. We looked at a total of about 2,400 in our first 
screening. 

Mr. Peterson. I understand that some people think there may 
be 6,000 troubled proiects. 

Ms. England^oseph, what do you think about what they did? Do 
vou think they looked at everything when they came up with these 
hundred? 



295 

Ms. England-Joseph. I think they realized the data bases they 
have are not complete. They may feel that the 2,400 that they fo- 
cused on may be their worst, but I don't know that anyone has a 
degree of confidence about the xiniverse. 

At the last hearing, I think both the IG and Nic talked about 
what might be the percentage of this portfolio that is troubled. And 
I believe you all were talking about the range of 20 to 30 percent 
of the total inventory. 

Mr. Retsinas. That was financial trouble, right. 

Ms. England-Joseph. Financial has to be the first stage but 
then you have to go out to visit those properties to determine the 
physical condition. Did you visit all the financially troubled? 

Mr. Retsinas. That was in the data base. 

Ms. DUNLAP. Visiting those properties that we have identified is 
the first task of the SWAT teams. The key at this point is to get 
the data to begin the process of evaluation. 

Ms. England-Joseph. Some of the properties we visited when 
we reported back to you, and I — there were only 10 we looked at, 
and focused on some of the most troubled we could identify, some 
of those would not have shown up as financially distressed. So 
there is a question about the ways in which they have narrowed 
the scope of their troubled inventory. 

Mr. Peterson. Mr. Secretary, if you are going to deal with 100 
of these projects a year, how long will it take you to complete all 
of them? How many years? 

Mr. Retsinas. We are going to deal with them as quickly and ex- 
peditiously as we can. As I indicated last time, the pace of our deal- 
ing with these projects is on the one hand affected by the legisla- 
tive relief, much of which you seek for us, as well as the resources 
we have. 

However, it is a very, very important objective of the SWAT team 
effort is to change the way we do business. So if we can learn and 
learn and train ourselves in a better way to do business, the num- 
ber of projects can increase geometrically. But the pace over time 
is reflected by resources and flexibility. 

Mr. Peterson. My time is up, but the 100 is just a place to start. 
You are not locked into 100 projects a year? 

Mr. Retsinas. The key, as Ms. Dunlap indicated, is starting, be- 
cause we can count and look and study, but starting is the most 
important thing to do. 

Mr. Peterson. Mr. Zeliff. 

Mr. Zeliff. I don't know if I can do this in three minutes. It is 
a challenge. 

What I am hearing on this side of the table, and I want you to 
have a chgince to respond, is that we have got mismanagement 
throughout from top to bottom, in HUD, and these programs have 
been identified back as far as back as 1983, probably even earlier. 

And, you know I haven't been there for that whole period of time, 
so you are trying to make a valiant effort here. I guess what I 
would like to ask Susan Graffney and Judy England-Joseph to do 
is give me your steps, one, two, and three, within current law, first 
acknowledge or not acknowledge whether mismanagement is the 
real root of this, and then, if I can, have you follow up, you are 
talking about SWAT team, but we are dealing with mismanage- 



296 

ment, don't we have to start from the top to the bottom? The 
SWAT team is going to tell you move about what you already know. 

Maybe just let's get into the mismanagement end of it, and let's 
talk about the steps one, two, and three, and maybe can you re- 
spond to that. 

Ms. Gaffney. The mismanagement is years and years of man- 
agement neglect at HUD. I don't want you to think that I am ac- 
cusing Helen and Nic of mismanagement. But over a period of 
years you have to understand that HUD staffing resources have 
dwindled. They lack expertise in asset management, seriously lack 
the needed expertise. 

Mr. Zeliff. That also comes into management. 

Ms. Gaffney. Oh, of course. 

Mr. Zeliff. And accountability. 

Ms. Gaffney. HUD has, over a period of years, not built data 
systems to support their actions. 

Mr. Zeliff. Again, that is management. 

Ms. Gaffney. Of course. The controls within the program are 
virtually nonexistent. This has been a kind of just business as 
usual. So we are now in a situation where we can't, they can't man- 
age. It is impossible to manage effectively within this environment. 
Because they don't have the tools. 

So we have to look for some other way to address the immediate 
situation. But as Nic said and Judy said, this is not just a manage- 
ment problem. There is an enormous program design problem here. 
And that is a legislative issue. 

Mr. Zeuff. Steps one, two, and three? 

Ms. Gaffney. Steps one, two, and three 

Mr. Zeliff. Within existing law. Or is it the law we can blame? 

Ms. Gaffney. No, first of all, the SWATs are a good idea. I 
would hate not to support SWATs, because I think my colleagues 
at HUD would be very upset with me after what we have been 
through. But I don't think they are adequate. I think we need to 
do what Judy England-Joseph talked about, and that is we need 
to get a comprehensive assessment of these projects. 

And if we have to 

Mr. Zeliff. Immediately? 

Ms. Gaffney. Immediately. And if we have to pay big bucks to 
do that, then I propose to you that we should do that. 

Mr. Zeuff. That is step one? 

Ms. Gaffney. That is step one. Step two, concurrently — we 
should be working with the Congress right now. We should be 
drawing attention to the need for legislative change. I don't know 
how. 

Mr. Zeliff. And what is step three? 

Ms. Gaffney. Step three is to continue with the systemic 
changes that are under way that aren't going to help us in the 
short term, I think. 

Mr. Zeliff. Judy, just quickly 

Ms. England-Joseph. First step, leadership. One of the things 
I found when I went to visit some of the field offices after our hear- 
ing was that the message had not gotten out to that field office 
staff. Change? were not under way. It was business as usual. 



297 

Business as usual is the culture associated with doing nothing, 
limiting ourselves because of all of the excuses about lack of re- 
sources, lack of knowledge, when I think some of this can be fairly 
simple. 

Two, I think we need to do inspections. We have got to go out 
and do the very thing we have on the books, saying we have to go 
out and inspect these properties, document those inspections. We 
reported last time they don't even document — ^it is poor documenta- 
tion on the part of HUD, so that anyone has a track record to take 
action. 

And three, take action against owners. 

Mr. Zeliff. Mr. Chairman, in fairness, at some point in the other 
questioning I hope we will have a chance to give the Secretary to 
respond. 

Mrs. Thurman. Mr. Chairman, I would yield my time so that we 
could continue this. 

Mr. Zeliff. I don't think it is fair to you if you can't respond. 

Mr. Retsinas. I don't take it in that spirit. There is enough 
blame to go around. I could, for example, point out that over the 
last decade, a number of inspectors were cut by the administration 
and the Congress by 25 percent, but that does us no good because 
that is the past and that is the result. 

I would agree with Ms. Gaflfney, as I heard her synopsis, that the 
focus is appropriate. We must be prepared to pay the price for what 
we need to do, invest in systems and other kinds of things we need 
to do. 

Second, we need the legislative changes and the flexibility. I en- 
dorse that. I endorsed it a year ago. I endorse it today. I will en- 
dorse it tomorrow. This is something we need to do. 

Third, we need to focus on systematic change. We need to take 
time and focus on time. We need to have a new way of doing busi- 
ness. 

Judy's point is also well taken. We are in the middle of a reorga- 
nization. A good part of that is changing some of the leadership 
structure, but we are constrained by very legitimate budget con- 
straints. I don't question the constraints. We are constrained to 
pick that leadership structure from our current work force. 

I wish we had the ability to call in some new people to help us. 
But we are not going to be able to do that. I think that is an appro- 
priate focus. 

Mr. Zeliff. Thank you, Mr. Chairman. 

Mr. Peterson. Mr. Rush. 

Mr. Rush. Thank you, Mr. Chairman. 

Mr. Chairman, I am very concerned about this particular prob- 
lem we are dealing with and that we are focusing in on. I want to 
commend you for this hearing, the second hearing you have had re- 
garding this particular issue. 

I am particularly concerned because one of the projects that has 
been under the spotlight is in my district. I do know in the city of 
Chicago there are serious, serious problems in terms of Section 8 
and Section 8 properties and how they are managed. And I am glad 
to have an opportunity to discuss this with the witnesses here, 
with the panel here. 



298 

Let me just ask, I guess the Secretary, there is some type of dis- 
continuity between your assessment that is in your report here, 
that the tenants at the 6000 South Indiana Building, that they in 
fact did not have any complaints, that they did not voice any com- 
plaints. 

This was given to me here. It says, "Resident complaints are vir- 
tually nonexistent." And I think that is at variance with your 
study, that the residents did complain, Ms. Gaffney, is that right? 
Ms. England-Joseph said that. 

Mr. Retsinas. We can clarify that, if you like. Congressman 
Rush, Helen's staff has personally visited this project, I would like 
her to respond to that. 

Ms. DuNLAP. There are two reasons. One, unfortunately sys- 
temic, and part of the reality of what we have to deal with, which 
is that tenants over the years have given up on complaining to 
HUD. That is a reality of what we need to do to change the cor- 
porate culture, as Judy mentioned a few minutes ago. 

The second is, as you know, we have had a rehabilitation effort 
going on at 6000 South Indiana, and since that effort has begun, 
and tenant complaints coming into the Department have dropped, 
as one would expect, I am certain if I went out to that property and 
interviewed the tenants, we would find a mix of views, as we do 
in most properties. 

Mr. Rush, Well, it seems to me, I have heard the recommenda- 
tions and I have heard some of the testimony this morning, and I 
think that is one of the missing elements, frankly. 

Tenants are the first ones who know about deterioration in a 
property. And they do complain. And if in fact there is no systemic 
way of including those complaints into your process that would 
trigger the agencies to respond, and if the tenants aren't encour- 
aged to complain — a lot of time tenants don't complain because 
they have a property manager who is intimidating, they have got 
other kinds of environments that exist there, they get frustrated in 
the process, and I think that that has really given tremendous 
cause for the type of deterioration across the board. 

And I just don't see or hear anything, Mr. Chairman, relative to 
how we are going to include, empower tenants to be involved in 
terms of the problem-solving procedures in these sectional develop- 
ments. 

Ms. DuNLAP. Congressman, let me respond specifically: as we 
conduct property inspections with the SWAT teams and by the field 
offices, we have a new policy which invites tenants to participate 
in those inspections. 

That is a new behavior. I must tell you also that that is a dif- 
ficult behavior for HUD employees who for many years have seen, 
as have both the managers and the owners, the residents as a com- 
modity in the marketplace. Involving those residents not just in the 
inspections but in the overall planning for that property, is very 
much part of our strategy. I could spend quite a bit of time outlin- 
ing specifically some of the other things we are doing. 

Mr. Rush. Mr. Chairman, if I could just say this, you know, still 
you are only going to involve tenants through the SWAT team, 
which is going to limit the tenants' capacity and enthusiasm 



299 

Ms. DUNLAP. That is not what I said. We are inviting tenants 
whenever we inspect properties to know about that inspection and 
to be available if they are interested in participating. 

Mr. Rush. What kind of methods are you going to employ prior 
to your inspections? If a tenant began right now, if a tenant has 
a serious problem in terms of plumbing in an apartment and they 
can't get any kind of response from the management because of in- 
difference by the management, then what is that tenant to do? 

To wait for to you inspect that property, and when you have got 
6,000 pieces of property across the country you have to inspect, 
they have got to wait until you get around to them in order to get 
some redress from the system? 

Ms. DuNLAP. I understand the question. At this point we don't 
have enough people to go out on every single tenant complaint. I 
can tell you that we are changing our response to those complaints 
by talking to those tenants. 

If we are going to do what you suggest, we are really going to 
need a system of intermediaries to work with us to respond to 
those complaints as thev come in. And frankly, more importantly, 
change the relationship between managers and tenants. 

Let me give you an illustration of something we did last week 
that I think represents that. We brought together 20 of the largest 
management companies in this country and major tenant leader- 
ship, and spent a whole day work together on the new management 
handbook in the same room at the same time. There was a lot of 
new insight on both sides of the table. Those are the kinds of 
things we have got to do if we are going to change the tenant com- 
plaint process. 

Mr. Rush. Thank you, Mr. Chairman. 

Ms. Gaffney. I would just like to say I have no doubt the Office 
of Housing is very concerned about the residents and it has been 
a long time coming in HUD, because I don't think the residents 
had been seen as our clients for years and years. 

But I would say to you, it would be a mistake for HUD, as much 
as we care about residents, to try to be responsive to them. The 
people who are benefiting from tnis whole system and this whole 
program financially are the owners. 

Now, what is wrong with the system that the owners don't have 
to care what the residents have to say? That is the question. And 
that goes to the program design, truly it does. 

Mr. Peterson. It is disconnected, the way it is set up. It doesn't 
have anything to do with residents because somebody else is pay- 
ing the bill. That is the problem. 

Mrs. Thurman. I have lots of questions, but I understand time 
is at a premium. 

Mr. Zeliff. She is a great American. 

Mr. Peterson. That will be in a brochure next week. 

Ms. Joseph, you have been out visiting, and what I have heard 
is that when you go out to these field offices, they are telling you 
it is pretty much business as usual. The message has not gotten 
out to these field offices. Is that correct? 

Ms. England-Joseph. Yes, sir. I have shared that with HUD of- 
ficials, and it could be that in the last few weeks a message has 
gone out. 



300 

Mr. Peterson. How do you respond to that? 

Ms. DUNLAP. Judy shared that. First I have had several con- 
versations with field offices as a result. 

Second, we put a lot of people from headquarters in the field dur- 
ing the month of September. Their primary message was that en- 
forcement is the No. 1 activity of the department and habitability 
of property is our goal. 

And lastly and most importantly, we are modeling that behavior 
through a series of foreclosures, many of which are represented by 
the people sitting behind me. 

Mr. Peterson. We need to get HUD focused. I think we have got 
their attention. How much of tiiis problem is caused by us? 

If we don't pass these bills and give them the flexibility to get 
rid of some of these dumb ideas we have put in the statute, how 
much chance do they have of fixing this? 

Ms. England-Joseph. One of the things you asked us to do is 
look at the Edgewood Apartments here in DC. I would presume 
that one question that would be a bottom-line question is, afler all 
that analysis, what shall we do with that property? 

Under current law, HUD would have to spend around $37 mil- 
lion in order to rehabilitate it, in order to then finance it through 
rents that would be able to cash-flow that property for the useful 
life of that property. 

The choices to HUD in trying to decide whether they should de- 
molish it because it may not be worth that investment, it may just 
be the kind of property that we should say, folks, no more money, 
don't pour good money afler bad, let's walk away, let's do some- 
thing else with that money. 

HUD can't do that. So tne simple question for today is, they can't 
make the kind of choices that I think you are asking them to make, 
and those are legally bound. 

Mr. Peterson. How are we going to get these other committees 
that have the ability to change this to do it? 

Ms. Gaffney. I think one of the problems is that we see this as 
a crisis, but no one else seems to; there is a feeling that we can 
continue doing business as usual. 

Mr. Peterson. Why is that? 

Ms. Gaffney. Perhaps we haven't presented the situation — 
Chris, do you have views? 

Mr. Peterson. Has this been given to these committees when 
they were in the decisionmaking process on this, and they just say 
it is too much to deal with, so- 



Ms. Gaffney. Can I just say one thing- 



Mr. Peterson. They pickedf up a few things but they didn't pick 
up enough. Even if we pass the bill that is over in the Senate, it 
still doesn't give you everything you need. 

Mr. Retsinas. It is better. Better would be good. 

Mr. Peterson. But it does not give you what you need. 

Ms. Gaffney. I think what needs to happen is there needs to be 
a real dialog between 0MB and HUD and the Congress, a serious 
dialog, whicn to my knowledge hasn't happened, on all aspects of 
this multifamily program. And I just think that people are afraid 
perhaps to even- 



Mr. Peterson. Face it. 



301 

Ms. Gaffney [continuing]. Face it. I want to give you an exam- 
ple. I think it was in April, we issued an audit report on the pre- 
payment and preservation program. And as a reinvented OIG, we 
had taken it on as a major policy issue, and we sent that report 
to every congressional committee that we could think of, told them 
we thought it represented a scandal, said we would do anything to 
work with them. 

We got no response. 

Mr. Peterson. After the election, maybe we should call a sum- 
mit, and get all of these people in one room. I will help you do that. 
We have got to sit down, outside of the regular process, and try to 
get everybody in the room, and just take this thing on, because it 
is going to get totally out of control, if it isn't already. 

Mr. Retsinas. I would welcome that. We would want to be a part 
of that, of course. 

Not in defense of your colleagues, but I think what often happens 
is there are well-intentioned goals and objectives, and each individ- 
ual objective for each individual program may sound OK, but when 
you stop to aggregate it, it doesn't make sense. That is why we ask 
for flexibility. I can't answer the question of why it wasn't granted, 
in part because of mistrust from the past, in part because of con- 
flicting public policy objectives. But Susan is right, you are right. 
The time is upon us. It has been upon us. And we certainly appre- 
ciate getting your attention on this important matter. 

Mr. Rush. Mr. Chairman, if you will yield for one moment, as a 
member of the Banking Committee which has jurisdiction on this, 
I know there is an extreme amount of work we have been involved 
in, and a lot of results we have been able to achieve over the last — 
this last term here. And I do agree, though, that as part of our de- 
liberations, I am a Member of the Subcommittee on Housing in the 
Banking Committee, you know, we focus on public housing, then 
we are missing Section 8 type housing. We focus on mortgages and 
credit lending and credit-style commimities and how mortgages — 
the CRA requirements, then we are missing a certain aspect. 

So I think there needs to be some overall coordination particu- 
larly in the area of Section 8 housing and public housing. And we 
can get an overall game plan rather man focusing in on one aspect 
of it per term. 

Mr. Peterson. Yes, I think that has been part of the problem. 
We trv to fix something, and it pops up somewhere else. One hand 
doesn t know what the other is doing. That is why we need to call 
a summit and get everybody together. 

Mrs. Thurman, we have got a couple of minutes. 

Mrs. Thurman. Mr. Chairman, the only thing I would say, be- 
cause I think we are headed in a positive direction here, and I 
don't know how it works up here, but it may be to our advantage 
to even send a letter from this committee to put them on notice so 
that they recognize we are very serious about this, and also letting 
the committees that would handle this kind of legislation also be 
on notice, to kind of follow up with what Susan has said. 

I mean, they couldn't even get a response. That is pretty signifi- 
cant to me, that if there is an emergency out there to a situation 
that is not happening, we need to, as those that are supposed to 
be looking at the operations, make those committees and those 



302 

folks aware there really are some problems so that we can correct 
it. 

Mr. Peterson. We sent letters on public housing, and they did 
respond and put it in their legislation. So we did make some 
progress. But in the Senate, somebody woke up with a hangover 
and it came out again. 

Hopefully, we can do something similar. I think the problem is 
that when they have been asked what can we do the traditional re- 
sponse is, "more money, more people." They don't want to hear 
that. That is not going to work. There is not going to be more 
money and more people. We have to give them the flexibility to bite 
the bullet on these projects and do what has to be done. It has got 
to be something that politically some people aren't going to like be- 
cause it is going to impact tenants and owners. But we have got 
to do it. We can t just keep papering over this and putting it back 
in the corner. 

Mrs. Thurman. Mr. Chairman, and the reason I even bring that 
up is because staff will be here during these next couple of months, 
and maybe as they are 

Mr. Peterson. Well, we will be here. We will be here to deal 
with GATT. Maybe we can convene something in December. Be- 
cause I don't think we can wait until we get into the appropriation 
and authorization process. It is too late. You have got this whole 
train going by that time. So let's try to do something in December. 

I thank you all very much for a very constructive dialog and tes- 
timony. 

Mr. Peterson. We will move to the next panel. We have Austin 
Fitts, President, Hamilton Securities Group, and Former Assistant 
Secretary for Housing, Federal Housing Commissioner. We have 
Austin Fitts, President, Hamilton Securities Group, who had the 
job before Mr. Retsinas at HUD. 

We have Phillip Comeau, vice president of Multifamily Asset 
Management, Federal Home Loan Mortgage Corporation. 

And Deborah Austin, Director of Legislation and Policy, National 
Low-Income Housing Coalition. 

Thank you for bemg here. It is the custom of our committee, as 
you know, to swear in all witnesses. I assume you don't have an 
objection. Please stand and raise your right hand. 

[Witnesses sworn.] 

Mr. Peterson. Your statements will be entered in the record in 
their entirety. I ask you to summarize as best you can, and recog- 
nize the time constraints. We have about 37 minutes, and they are 
going to cut us off. 

So, Ms. Fitts, I appreciate you being with us today. 

STATEMENT OF C. AUSTIN FITTS, PRESIDENT, HAMILTON SE- 
CURITIES GROUP, AND FORMER ASSISTANT SECRETARY 
FOR HOUSING, FEDERAL HOUSING COMMISSIONER, U.S. DE- 
PARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Ms. Fitts. Thank you very much. I would like to thank the com- 
mittee for this opportunity to speak to you. I have submitted writ- 
ten testimony for the record, and rather than make an opening 
statement, because of the press of time, in fact what I would like 
to do is respond to one question or really two questions that I 



303 

thought were excellent, and I think it was the gentleman to your 
right who said, one, two, three. What I would nke to do in sum- 
ming my testimony is give you my one, two, three. 

Here are some of the things I think you need if you really want 
to fix this portfolio on a timely basis. One of the things that would 
help the department do this is a substantial investment in a PC- 
based network throughout HUD that is not dependent on the HUD 
mainframes. While this may sound like a very minor detail in 
terms of operational capacity to collect information, to know what 
is a troubled project on any kind of a timely basis, this is extremely 
important. 

Second of all, continued support from this committee for the de- 
partment to continue to issue insurance on a reinsurance basis as 
opposed to through one mortgage at a time. What this permits 
HUD to do is to, as the Inspector General stated, reengineer the 
programs so that when servicing is needed over time, it is done by 
a local partner who is far more competent to do that or national 
partner who is far more competent to do that than a Federal bu- 
reaucracy can possibly be. 

Third of all, I would continue to support the idea of disposition 
strategies in subcontracting where they make sense, including sub- 
contracting master servicing on mortgage insurance in force which 
would permit far more — I think you stated, Mr, Chairman, looking 
at 100 properties is not doing something on a scale where you have 
20,000. That would give the department I think a very prudent 
way to do it on a huge scale quickly. 

To address the issue of doing what has to be done, to be perfectly 
blunt, when Congress decided they wanted the S&L real estate 
portfolio cleaned up, they gave tremendous expedited operational 
freedom to the RTC, whetner it was waiving constraints under 
FAR, whether it was the ability beyond civil service rules to bring 
in very qualified people on one 1 and 2-year positions. 

In this instance what could be done is to provide for these re- 
sources to be fimded out of the FHA fund, which is an existing pro- 
vision, but it would require working with the budget committees 
and 0MB, but it would frankly be very minor, and the scheme of 
the money saved could easily be done. We are talking about tiny 
dollars in the scheme of the savings to the Federal Government. 

The last thing I would do is nold hearings or make sure the 
Banking Committee held hearings on what it would take to make 
tenant-based subsidies work. There is no doubt, Mr. Rush, that 
tenants know what to do. But they can't do it with tenant-based 
subsidy if that tenant-based subsidy is not responsive to the infor- 
mation they have. 

It is not enough to say you are empowering tenants. You have 
to empower tenants, if that is what you are going to do it also 
needs to move from project-based subsidy to tenant based. 

The last thing I would do is face the economics of both project- 
based Section 8 and its relationship to the FHA fund. Frankly, I 
don't think that we are going to lose a lot of money if we face this 
situation. I think the Federal Government, because much of this 
stock is insured by the FHA fund, is paying 2 or 3 times for a prop- 
erty when it is a lot cheaper to just pay once. And by moving Sec- 
tion 8 subsidy over time to economic rents and restructuring the 



304 

debt that the Federal Government is liable for, what will happen 
is you may spend some more money today, but you will save $2 to 
$3 in the FHA fund over time. 

So I would submit to you that the conventional wisdom that it 
is expensive to fix this problem may be misleading. It is probably 
more expensive not to fix this problem. That is just on the Federal 
income statement. It doesn't include the cost to the neighborhoods 
and tenants and many other people. And I will say this, the value 
of private property owners next door will drop as a result of not 
fixing this problem. 

So if I had to give you a list of one, two. three, I made it a little 
bit longer, but those are the items. I would recommend that a joint 
action oy the Banking Committees and some of the Budget Com- 
mittees, with 0MB in the room, could fix this if the goal is to fix 
the portfolio. 

[The prepared statement of Ms. Fitts follows:] 



305 



Testimony of C. Austin Fitts 



U.S. House of Representatives 

Committee on Government Operations 

Subcommittee on Employment, Housing and Aviation 



October 6, 1994 



The Hamilton Securities Group, Inc. 

1410 Q street, N.W. 

Washington, D.C. 20009 

202/483-6009 



306 

Testimony of C. Austin Fitts 

Good Morning Mr. Chairman and Members of the Subcommittee. 

Thank you for providing me the opportunity to testify today on Section 8 project- 
based assistance. My name is C. Austin Fitts, and I am a principal at the 
Hamilton Securities Group, a real estate merchant banking firm located here in 
Washington, DC. 

My knowledge of this area is based primarily on my experience serving as the 
Assistant Secretary for Housing/Federal Housing Commissioner at the U.S. 
Department of Housing and Urban Development from 1989-1990. For a more 
complete description of my background, I have attached my resume to this 
testimony. As described there, my career has focused on the U.S. financial 
system and a broad range of capital markets. We have focused at Hamilton on 
housing, real estate and economic development, primarily in underserved 
markets. Attached as an Exhibit is a recent study we undertook of the 
muitifamily mortgage markets. 

Mr. Chairman, let me first disclose that Hamilton Securities serves as HUD's 
financial advisor and loan sale advisor on the asset management and disposition 
of its muitifamily mortgage portfolio. 1 want to reiterate for the Committee. Mr. 
Chairman, that I am not here in that capacity, but as a member of the private 
sector. The thoughts here are my own, and do not reflect any relationship or 
special knowledge of the Department's activities in the project-based Section 8 
area. 



307 



&//> 3^ /^ O^ C/^ <V^ Testimony of C. Austin Fitts 



'>'^- October 6, 1994 Page 2 



Let me commend you and your Subcommittee for holding these hearings and for 
addressing such an important issue. The multifamily portfolio assisted and 
financed by HUD represents the largest multifamily position of any owner or 
financial institution in the United States. The portfolio -- its condition, ownership, 
location and economics - is complicated, and its management has long-term 
liability and budget implications for the federal government. Most importantly, its 
current legal and regulatory constraints are not in sync with market realities and 
prudent management going forward. Someone must tackle this issue before it 
consumes the Department, and I want to commend you and your Subcommittee 
for undertaking this challenging task. 



I. Section 8 Project-Based Subsidy: A Strategic Framework 

HUD is the largest single investor in apartment buildings in the country - larger 
than any private real estate company, larger than Freddie Mac and Fannie Mae, 
larger than any state or local government, and larger than any other federal 
agency with property assets. 

All US real estate ~ single family, multifamily and commercial ~ underwent 
profound changes beginning in the mid-1980s, from which the country is still 
adjusting. Essentially, an industry that had for years been driven by profits from 
capital gains - fueled by tax benefits, inflation and inflows of capital and federal 
credit - experienced a sudden and substantial market correction And the trigger 
for this correction was profound change in our nation's economy. 



308 



<^^ 5^ ./3 C/^ ., r^ , Q^ Testimony ore. Austin Fi«s 



October 6, 1994 Page 3 

For a variety of reasons as we move from an industrial to an information 
economy, increased productivity is best served by reducing subsidies provided to 
real estate. And indeed, several factors did in fact converge in the late 1980s to 
diminish incentives for investment in real estate, including apartments. These 
factors included reduced inflation, as well as federal tax, credit and regulatory 
changes. The result was a substantial "mark to market" of the value of virtually 
all income producing properties. 

Following the passage of the 1986 Tax Act and the Financial Institutions Reform, 
Recovery, and Enforcement Act in 1989, the value of the nation's multifamily 
portfolio decreased significantly. It has taken the real estate and the capital 
markets some time to recognize and grapple with the size and nature of this 
reduction in value. 

The savings and loan industry was the first part of the real estate world to have 
to deal with declining portfolio values. In passing FIRREA, Congress essentially 
dictated that the S&L industry mark its portfolios of mortgages and real estate to 
market -- and face up to its losses through disposition. Assets were to be sold at 
whatever price the market would bear. In the process, the Resolution Trust 
Corporation led the way in the restructuring and recapitalization of a meaningful 
portion of the nation's real estate. The RTC did a commendable job of inventing 
a new market for investing and valuing real estate in this new and more 
productive world. 

The RTC's efforts, coupled with pressure from federal and state regulators, led 
other private financial institutions -- banks, insurance companies and credit 
companies among them -- to begin to mark down the value of their own portfolios 
and dispose of these assets. This process has continued to fuel the development 



309 



t_>V^ CyCri^/^^'/fh/f tZZrrf/xYty^ ^^>r<///. ._>V/.^. 



Testimony of C. Austin Fitts 
October 6, 1994 Pa);c 4 



of a liquid market for disposed real estate and mortgages, a secondary market 
for resulting securitizations, and an infrastructure of increasingly productive and 
efficient servicing and asset management organizations. 

So here we are in 1994. The federal government has taken the lead in 
stimulating the nation's transition to the required lower levels of investment in 
real estate. The federal government has forced private financial institutions to 
recognize the reality of their own balance sheets and take actions to put their 
finances and operations on a healthy and realistic basis. Make no mistake about 
it. The federal government showed great leadership and courage in facing this 
issue in the late 1980s. Our economy and our real estate markets are much 
healthier today for it, even though transition has been difficult. 

You are probably wondering how all of this is relevant to our discussion of 
Section 8 project-based subsidy? The reason is that to discuss an issue, you 
must first understand what the problem is. And the major problem facing Section 
8 project-based subsidy is not that this is a structurally flawed program - 
although it certainly is. Section 8's flaws are a symptom of a far wider problem - 
one faced not only by HUD in its portfolios of real estate, mortgage assets and 
loans - but also by credit and loan programs throughout the federal government. 

The problem is that despite all of its outstanding efforts to convert the private 
markets to sound balance sheet practices, the federal government has failed to 
apply the same requirements and sound financial management practices to its 
own balance sheet. And nowhere is this problem more evident than in the 
federal portfolios related to real estate. 



310 



&//' ^^ /S CJ^ C<^ ^Z' Testimony of C. Austin Fitts 



'^*^- October 6, 1994 Pages 



Why has the federal government failed to face economic reality and restructure 
its own real estate assets? There are three reasons. First, the government did 
not wish to have to bear the implications to its current budget of recognizing this 
financial reality. Better to pretend that the market would go up -- and defer the 
problem a little longer. Secondly, the operational implications of what is required 
to fix the problem are significant, and would require substantial programmatic 
and administrative changes. Third, recent reforms, supported by this 
Subcommittee, are finally providing reliable financial reporting to Congress 
through audited financial statements and actuarial analysis. Public officials are 
now becoming equipped with the information necessary to understand, quantify 
and address the costs of not applying the same standards to their own portfolios. 

Despite the difficulties, however, the federal government must now mark its own 
portfolios to market - just as it required the private financial institutions it 
regulates to do as a matter of sound management practice. The time has come 
to free these assets from the burden of trying to hold to a value they cannot 
produce and to permit a healthy and sensible recapitalization of the Section 8 
portfolios. This must be accomplished in a manner which delivers taxpayers an 
appropriate social and financial return on their investment and fulfills the 
fundamental purposes for which these important assets were created. 

To relate this strategic framework to the specifics of project-based Section 8, we 
need to look at both the Section 8 program -- as well as Section 8 within the 
context of overall federal housing policy. I would recommend that the 
Committee's work would be made easier by establishing a senes of guidelines to 
determine the best way to move forward in addressing Section 8's programmatic 
flaws. 1 have suggested some guidelines below. 



311 



'^^ 3i^ ./S Q^ .>. C^ y ^ Testimony of C. Austin FiJts 

^^A^ C/Ca^/ne^/h^ ^^ecf/it/i^sa ^tr^^. K^/^tr. October 6, 1994 Page 6 

II. Section 8 Project Based Subsidy: Guiding Principles for Addressing 
Programmatic Change 

There are 164 basic fact patterns in the assisted housing portfolio. To fix 

project-based Section 8 in a way that improves the situation, rather than causes 
tremendous lost, waste and dislocation, the federal government must design an 
action plan based on workout tools that are responsive to the great diversity of 
local markets and real estate throughout the nation. Imposing a single national 
model is one of the greatest dangers before us. 

The Section 8 project-based portfolio is, for all intents and purposes, the 
FHA mortgage insurance portfolio. A substantial majority of FHA's General 
Fund mortgage insurance outstanding is collateralized by properties which are 
supported by federal project-based subsidy. If Section 8 properties are written 
down to reflect the reality of economic rents - either today or as contracts 
mature for renewal ~ we will by definition address the substantial mark down and 
restructuring of the related federal government debt. 

The recapitalization and restructuring of the Section 8 portfolio can only be 
done on a prudent and fiscally sound basis if appropriate resources are 
provided. Asking the current HUD operation to design and execute a successful 
restructuring under current regulatory and operational restraints is akin to landing 
U.S. forces on the beaches of Normandy armed with water pistols. When 
• Congress determined that the S&L portfolio had to be restructured, the 
lawmakers provided the requisite resources and administrative flexibility. The 
RTC was given exemptions to Federal Acquisition Regulations, Civil Services 
provisions and other regulatory provisions. If this Subcommittee is serious about 
restructuring the Section 8 portfolio in a manner that is consistent with prudent 



312 



^^ ^^ ./2 C/^ C/:P Q^ Testimony of C. Austin Fitts 

%^ne CTuzf^iec/h^ir -Jyerf/tf/i'^^ ^^fr-f//i. k^/ic. October 6, 1994 Page 7 

use of taxpayers' dollars and responsive to the needs of neighborhoods and 
communities, it must address the issue of the moratorium on Congressionally- 
imposed operational constraints. It must also support HDD's recommendations at 
the end of this year to restructure FHA's operations on a permanent and 
enduring basis so that if we fix this problem, it will not be repeated. 

For a program restructuring to work, Congress must create incentives for 
capable property managers and owners to assume responsibility for the 
success of the portfolio in partnership with HUD and for undercapitalized 
and inefficient owners and managers to leave the portfolio. The criteria of 
any plan must focus on the needs of tenants and neighborhoods and the value 
of the taxpayer dollar - not on ideological wars between the private and public 
sector. 

Properties -- like cars and toasters -- at some point need a place to go to 
die. Congress must support a policy that permits removing properties from the 
stock without a unit-for-unit replacement requirement. Otherwise, we will 
continue to spend substantial amounts of money to house one family in one unit 
which could pay for up to five families to be housed in five units. If a piece of 
real estate doesn't work anymore, there is no policy in the world - and no 
amount of money - that can save it. 

Recapitalization of the Section 8 portfolio should be subject to 
performance standards which HUD can track and use to demonstrate how 
the federal government is maximizing the number of people served and 
housing units made available for the dollars expended. Without clear and 
measurable standards, this portfolio and program will go astray again. This 
Congress needs to assume responsibility to encourage HUD to invest in the 



313 



'^Z' ^^ y^ O^ -y. O^ ^ 9^ Testimony of C. Austin Fitts 

or y October 6, 1994 Paee 8 



October 6, 1994 Page 8 

information infrastructure necessary to make prudent management possible. 
There is no inigher return on the taxpayers' dollar than that which the Department 
could derive from a consistent and reliable flow of information on a time basis 
about Its financial and real estate assets -- chief among them the assisted 
housing portfolio. The committee needs to take active steps to make sure HUD 
is given the resources and authority to make this investment. 

A successful Section 8 recapitalization requires that Congress support 
HDD's "A" Team. This Subcommittee should work with and support HUD's 
leadership The Administration's housing team represents experienced and 
seasoned housing professionals, the best and the brightest of a new generation 
of experts in housing and community finance. They have earned their stripes in 
state and local government and the private sector. I believe it is the housing 
industry's perception -- and fairly so -- that if this Congress will not support 
management changes led by the "A" Team, FHA and HUD will pass the point of 
no return in their ability to serve the assisted housing portfolio, as well as the 
fundamental federal housing mission. Congress should view the presence of 
this team as an opportunity to finally implement important and lasting 
improvements. 

III. Section 8 Project Based Subsidy: Guiding Principles for Strategic 
Change in the Context of Overall Federal Housing Policy 

Two important issues under the jurisdiction of other Committees need to 
be considered in the context of restructuring Section 8. The first issue is 
budget outlays; the second is exit taxes. The continued attempt to lower 
budget outlays for Section 8 is triggering outlays through the FHA fund in later 
years -- in substantial excess of what was saved on Section 8 spending in the 



314 



<S^ ^^ y^ (^ (^y^ CV' Testimony of C. Austin Fitts 

K^Ae (yCc(-/^i^K>'M' C^/ecMit/ce^ ^^ic/^. t^/zc. October 6, 1994 Page 9 

first place. Failure to recognize the financial relationship between Section 8 and 
FHA insurance in the appropriations process is causing the federal government 
to borrow nnoney from itself at interest rates that would make a loan shark blush. 
As for exit taxes, many of HUD's private sector partners are limited in their ability 
to rehab, workout or transfer Section 8 properties because of recapture liabilities. 
While it is absolutely legitimate to argue that these owners received the benefit of 
this depreciation and should be liable under recapture, the reality is that so long 
as a restructuring causes recapture problems that owners cannot or will not 
handle, the properties fester and the tenants suffer. We must decide which is 
more important: building neighborhoods or punishing developers. 

It is time to make vouchers and tenant-based subsidy work. One of the fatal 
flaws of project-based subsidy is that it has reached a level of complexity that 
would stump Albert Einstein. The desire for a simple solution is understandable 
and wholesale replacement of project-based subsidy with vouchers over night 
sounds convenient. However, this is a dog that will not hunt. Over time, 
vouchers can be made a far more cost efficient approach ~ but only if there is 
serious programmatic reform of vouchers. Making vouchers work is not a matter 
of more money. Rather, it requires reaching into the heart of darkness of racism 
as it is practiced in local housing markets throughout the country ~ and doing 
something about it. If we are not prepared to make tenant-based subsidy work, 
we will be hard pressed to evolve out of project-based subsidy. 

We must beware of the three greatest fallacies about housing policy to 
have an informed debate about Section 8. First, contrary to conventional 
wisdom, it is more expensive to the federal government to not restructure this 
portfolio than to restructure it. 



315 



&//> ^^ ./2 C/^ . C/^ . '^ Testimony of C. Austin Fitts 

«_y/fe CyCa^TM^/h^/i, ^yecMt/^ieA ^^*p^«> K^nr. October 6, 1994 Page 10 

Second, only a minor portion of the overall federal housing budget goes to low 
and moderate income people. While it may be newsworthy to focus on the waste 
that occurs on subsidies for low and moderate income people, the waste that 
occurs from broader tax and credit subsidies which benefit the rest of society is 
just as real. 

Third, investment in neighborhoods in underserved markets -- both urban and 
rural - is not only important to the nation's economy - it can be done effectively 
and responsibly. But we have to be willing to contemplate substantial change. 

Finally, we must remember. Restructuring the Section 8 portfolio is not primahly 
about fixing real estate. The federal government lost money on this portfolio 
because it spent lavishly on bricks and mortar - but failed to make the properties 
serve the tenants or the surrounding neighborhoods. This time around, the 
restructuring plan must provide for the necessary investment in people and 
communities - in partnership with a diverse group of community builders - 
public, private and nonprofit. This is not only a matter of public policy. It is 
necessary to ensure that the portfolio is placed on a sound economic basis and 
that the restructuring itself represents a prudent investment going forward. 

In closing, let me thank you again, Mr. Chairman, for the opportunity to join you 
and the Subcommittee. I hope these comments are of assistance to you and the 
other members as you address Section 8 project-based subsidy issues. Thank 
you for your commitment to housing and for your dedication to sound and 
responsible government. I look fonward to responding to any questions that you 
and the Subcommittee may have. 



316 

Mr. Peterson. Thank you. That was very good. 
Mr, Comeau. 

STATEMENT OF PHILLIP COMEAU, VICE PRESIDENT, MULTI- 
FAMILY ASSET MANAGEMENT, FEDERAL HOME LOAN MORT- 
GAGE CORPORATION 

Mr. Comeau. Mr. Chairman and members of the subcommittee, 
my name is Phil Comeau. I am vice president of Multifamily Asset 
Management at Freddie Mac. Thank you for inviting me here 
today. 

Let me start by saying that while I am not an expert on HUD- 
financed projects, Freddie Mac has had significant experience in 
managing distressed real estate and I hope my insights will be 
helpful with regard to HUD's loan portfolio. 

Before I begin, I would like to take a minute to commend Assist- 
ant Secretary for Housing, Nic Retsinas, and Deputy Assistant Sec- 
retary Helen Dunlap, on their tremendous efforts to bring HUD's 
multifamily portfolio under control. These two people have the ex- 
pertise, compassion, and commitment that are necessary to tackle 
the significant problems that face HUD with respect to multifamily 
housing. 

Moreover, I commend the subcommittee for its efforts to address 
HUD's need for resources and flexibility to effectively deal with its 
multifamily portfolio. 

In late 1990, Freddie Mac had an $11 billion multifamily port- 
folio of 12,000 loans which began to hemorrhage badly. The com- 
bination of poor initial underwriting, a soft economy in certain re- 
gions and overbuilding, resulted in rents being depressed while op- 
erating expenses increased. 

As a result of these factors, many properties were not able to pay 
both their operating expenses and the mortgage payments. Delin- 
quencies shot up to a peak of $760 million, and our real estate 
owned properties, or REO, those that we own through foreclosure, 
hit a peak of 250 properties. 

Out of necessity we have become very proficient in performing 
loan servicing and managing both delinquent loans and REO, Our 
troubled portfolio was about one sixth the size of HUD's, 

I would like to stress, Mr, Chairman, that stabilizing our port- 
folio, reengineering our systems, and restructuring our multifamily 
division was a long and arduous task. 

Furthermore, it did not happen overnight. Our lessons came at 
considerable cost. 

We suspended our multifamily program for 3 years beginning in 
1990 when we realized the gravity of our multifamily problems. At 
that time, multifamily represented only 3 percent of our portfolio 
but generated almost half of our losses. Since that time we have 
written off over $600 million. 

Our success in turning around our multifamily portfolio was the 
result of. No, 1, developing a state-of-the-art management informa- 
tion system; No, 2, hiring experienced asset management profes- 
sionals; No. 3, developing expeditious processes that give our staff 
the authority to make and implement timely real estate judgments; 
and No, 4, substantially upgrading the quality of our seller/ 
servicers. 



317 

We are now back in the market of making new loans and expect 
to originate about $1.4 billion of new business this year. 

Freadie Mac's asset management process is fairly simple. On per- 
forming loans, a qualified seller/servicer does a physical inspocoion, 
determines income and expenses, and values the property annu- 
ally. 

I would like to repeat that. This is all done annually. This infor- 
mation is transmitted to us electronically and on any given day we 
can generate reports and analyses which analyze the portfolio in a 
wide variety of ways. 

If a loan becomes delinquent, we move very quickly and deci- 
sively to inspect the property, value it, and develop a resolution 
plan. One of the lessons we have learned is that time delays result 
in asset deterioration from both deferred maintenance and tenant 
fi*ustration. 

If a property is being managed well, our preferred resolution 
strategy is to do a workout. In our workouts, we will accrue that 
portion of debt service which the property cannot support. We will 
advance new money to stabilize the property if this investment re- 
sults in a comparable increase in value. 

Our workouts on overleveraged properties are done recognizing 
that the most we can expect to accomplish is to stabilize the prop- 
erty and receive 100 percent of current market value which can be 
substantially less than the current loan amount. 

If the loan goes into REO, we immediately bring in a property 
management company that is skilled in distressed real estate to 
address life and safety issues and to address asset preservation 
needs. Our objective is to protect the tenants by providing decent 
and safe housing in these properties. 

We list our REO properties with local brokers and generally sell 
them one or two at a time. Our average REO hold period is ap- 

Eroximately 11 months. We perform due diligence reviews on the 
uyers to assure that we are not selling to "slumlords." Our experi- 
ence demonstrates there is a strong private market to buy REO. In 
addition, most of our REO properties are affordable to families with 
incomes of 50 to 70 percent of median. 

We have found that seller financing and rehabilitation financing 
is critical to selling certain properties and ensuring that these 
properties will be operated in a decent manner. For example, a five 
to $6,000 per unit investment in many projects will convert them 
fi-om a blighted property to decent, affordable housing. 

We have learned that distressed loans do not mean that the 
properties are slums. However, these properties will become slums 
and suffer serious asset deterioration unless the problems causing 
the delinquency are dealt with promptly. An early warning system 
is critical to uncovering the problems at a point when prompt ac- 
tion can be taken. 

Now, I would like to focus my comments on issues that Congress 
and HUD should consider in addressing HUD's troubled portfolio. 
My observations and recommendations come in part from Freddie 
Mac's experience in cleaning up its own portfolio and redesigning 
our program. Freddie Mac's success was due in large part to the 
flexibility we had as a private corporation. We are able to act 
quickly to implement solutions and deploy the necessary resources. 



318 

As a government agency, HUD is in an entirely different situa- 
tion. However, some of the lessons we have learned at Freddie Mac 
can and should be considered by Congress and HUD. 

There is no doubt that HUD has a huge problem portfolio that 
will be expensive to fix in the best of circumstances. However, 
HUD can reduce its ultimate losses by billions of dollars if it uti- 
lizes strong asset management techniques. Although the problem is 
enormous, I believe that it is imminently solvable. 

My conclusions and recommendation with regard to HUD are as 
follows. First, clear and consistent objectives are critical to success. 
HUD and Congress needs to agree on the desired objectives. Do you 
want to minimize losses, or do you want to retain housing stock at 
any cost, or do you want to strike a balance between these two? 

In addition to clarifying the objectives, I believe that the follow- 
ing actions are important first steps. 

First, develop and implement a state-of-the-art management in- 
formation system which will give HUD current and easy to use in- 
formation. 

Second, hire experienced professionals to make decisions and be 
accountable for them. Empower these professionals to make timely 
decisions — a quick 95 percent solution is far better than a slow 99 
percent solution. 

Third, streamline and simplify the decisionmaking process — an 
inefficient process can require twice as much staff as necessary. 

Fourth, utilize the private sector via loan sales or asset manage- 
ment contracts. Vendors should be hired based on performance and 
results — not based on the lowest bid. Time is critical and HUD 
needs the ability to enter into contracts quickly and flexibly. Often- 
times, nonprofit organizations, although very well intentioned, do 
not have sufficient expertise or capacity to deal with distressed 
loans and REO in any quantity. 

Fifth, broaden HUD's loss mitigation techniques. Workouts 
should be pursued with good borrowers. If foreclosure is pursued, 
HUD should recogn^ize that generally the most they can recover is 
100 percent of the property's current value, less fx)reclosure costs 
and less lost interest during the process. 

Workouts need to be done with this in mind. The current loan 
balance is interesting but irrelevant at this point. In fact, HUD 
could benefit enormously from having the flexibility to make soft 
second mortgages for that portion of the loan balance that exceeds 
the current property value. 

HUD also needs the flexibility to invest new money in many of 
these properties. Often a $1,000 to $2,000 unit investment in a 
property will generate far better results for HUD than foreclosure. 

HUD should provide seller financing on its REO. Many prop- 
erties have substantial deferred maintenance and also will need re- 
habilitation financing which HUD should be authorized to provide. 

Sixth, when HUD wants to cancel a project-based Section 8 con- 
tract for poor performance, HUD should have the discretion to 
transfer the project-based Section 8 to tenant-based Section 8 as- 
sistance. Without this authority HUD can't penalize poor property 
managers without also penalizing the tenants. 

Seventh, to the extent that Congress and HUD continue afford- 
ability restrictions on projects sold out of REO, they should recog- 



319 

nize that private financing is only feasible for such projects to the 
extent that 15-year project-based Section 8 is available to cover the 
restricted units. 

Eighth, HUD needs to alter borrower behavior by enforcing rem- 
edies and replacing poor property managers. 

In conclusion, Mr. Chairman, I would like to say that while much 
work needs to be done, recent actions taken by Congress as well 
as many of the initiatives embarked upon by HUD are steps in the 
right direction and clearly demonstrate their understanding and 
commitment to resolving their problems. There is no doubt, how- 
ever, that these efforts are often hampered by regulatory and stat- 
utory barriers. 

Without changing these regulatory and statutory barriers and 
providing the necessary resources, HUD doesn't have a fighting 
chance to fix the problem. 

I again commend you and your subcommittee for your efforts to 
determine the appropriate tools and strategies to allow HUD to 
move forward. 

I will be happy to answer any questions you may have. 

[The prepared statement of Mr. Comeau follows:] 



320 



1101 Pennsylvania Ave., NW. Suite 950 

PC Box 37347 

Washington. DC 20077-7347 



TESTIMONY OF PHILLIP E. COMEAU 

R^die VICE PRESIDENT OF MULTIFAMILY ASSET MANAGEMENT 

Mac 
^^^ FEDERAL HOME LOAN MORTGAGE CORPORATION 



BEFORE THE SUBCOMMITTEE ON EMPLOYMENT, HOUSING 

AND AVIATION 

COMMITTEE ON GOVERNMENT OPERATIONS 



OCTOBER 6, 1994 



321 



Mr. Chairman and members of the subcommittee, my name is Phillip E. 
Comeau, I am the Vice President of Multifamily Asset Management at the 
Federal Home Loan Mortgage Corporation (Treddie Mac"). Thank you for 
inviting me here today to discuss Freddie Mac's multifamily housing 
program, and specifically our asset management process for our multifamily 
properties. I appreciate this opportunity, and while I am not an expert on 
HUD-financed properties, Freddie Mac has had significant experience in 
managing distressed multifamily loans and I hope that our insights will be 
helpful. 

My testimony includes an overview of Freddie Mac and the secondary 
mortgage market, a brief history of Freddie Mac's past multifamily problems 
and the lessons we've learned, and finally, a description of our asset 
management processes and some observations and recommendations 
regarding HUD's troubled loan portfolio. 

Before I begin, I would like to take a minute to commend the Assistant 
Secretary for Housing, Nic Retsinas, and the Deputy Assistant Secretary for 
Multifamily Housing, Helen Dunlap, on their tremendous efforts to bring 
HUD's multifamily portfolio under control. These two people have the 
expertise, compassion and commitment needed to tackle the significant 
problems that face HUD with respect to multifamily housing. Moreover, I 
commend this subcommittee for its efforts to address HUD's need for 
resources and flexibility to deal effectively with its multifamily portfolio. 



I. OVERVIEW OF FREDDIE MAC AND THE SECONDARY MORTGAGE 

MARKET 

America has the best housing finance system in the world, in large part due 
to the existence of a strong secondary market. Today mortgage credit is 
widely available across the country on the best terms that the capital market 
has to offer. We estimate that the efficiencies produced by the secondary 
market have saved American homebuyers approximately 1/2 of one percent, 
or about $5 billion each year. 

Freddie Mac has played an instrumental role in the success of America's 
housing finance system. As part of the secondary market, Freddie Mac 
serves as a link between the primary mortgage market, where mortgages 
are originated, and the national and international capital markets. By 
purchasing mortgages with funds obtained from the capital markets, Freddie 
Mac enables individual homebuyers to obtain mortgage credit at the lowest 
possible rates. Freddie Mac purchases conventional mortgages from 
primary lenders across the nation and packages the lion's share of those 
mortgages into securities. We, in turn, sell the securities to investors so 



322 



that the cycle can begin again. This allows a homebuyer in Minnesota the 
same access to mortgage funds as a homebuyer in California or New York. 

Congress created Freddie Mac in 1970. Until then, the cost and availability 
of mortgage credit varied by region because the primary source of funds for 
mortgage credit -- thrift institution deposits - was not always plentiful in the 
areas needing such credit. In addition, the individual homebuyer had no 
access to the national and international capital markets. Variances in 
mortgage funding affected not only the individual homebuyer, but also the 
housing market and economy as a whole. 

Freddie Mac was created to address these issues by developing a national 
secondary market for both single and multifamily credit. To accomplish this, 
Freddie Mac and Fannie Mae built the infrastructure for this market through 
the development of standardized mortgage loan documents and underwriting 
guidelines that allowed the wholesale purchase of loans on a nationwide 
basis. Freddie Mac also assembled a network of primary market lenders, 
commonly referred to as Seller/Servicers. 

While Freddie Mac has been in existence for almost 25 years, the past five 
years have been a time of tremendous change for the corporation. In 
particular, the change from quasi-government ownership to wholly private 
ownership has been revolutionary. 

The enactment of the Financial Institutions Reform, Recovery and 
Enforcement Act of 1989 (TIRREA'l significantly changed Freddie Mac's 
corporate governance structure. Prior to 1989, Freddie Mac's stockholders 
were savings and loan institutions and other members of the Federal Home 
Loan Bank System. Under FIRREA, our preferred stock was converted to 
common stock, and general public ownership of Freddie Mac was permitted 
for the first time. FIRREA also authorized a new Board of Directors for 
Freddie Mac, 13 of which are elected by the shareholders, and five 
appointed by the President of the United States. FIRREA completed the 
transformation of Freddie Mac from a quasi-governmental agency to a 
shareholder-owned private corporation. By providing stable corporate 
governance and access to equity capital, this change strengthened Freddie 
Mac's ability to meet the nation's housing finance needs. 

II. MULTIFAMILY FINANCING 

Since the mid-1980s, the combination of a soft economy and overbuilding 
of rental housing in certain regions has resulted in depressed rent levels. At 
the same time, operating expenses have increased. As a result of these two 
factors, many properties have not been able to pay both their operating 



323 



expenses and the mortgage payment and have consequently become 
distressed. 

Freddie Mac suspended its multifamily purchase program in late fall of 1990, 
when serious delinquencies escalated, resulting in cumulative losses of more 
than $600 million. At that time, multifamily loans represented only three 
percent of Freddie Mac's portfolio, but generated one half of our losses - a 
loss rate 1 7 times greater than for single-family homes. 

Some of the factors contributing to these losses, such as declining rents and 
property values, and increasing expenses, were not within our control. 
Other factors, however, were within our control. For example, many of our 
problems were the result of appraisals based on rosy projections of vacancy 
rates, unrealistic increases in rents and unrealistically low operating 
expenses. These appraisals were obtained by lenders and not adequately 
reviewed by Freddie Mac. 

Another factor leading to Freddie Mac's problems was lenders who were 
not located in the same areas as the properties they serviced. For example, 
servicers located in Florida were managing loans in New York. Most did not 
know the local market or have the resources to inspect buildings. Many of 
these lenders walked away from their responsibilities when the loans 
became troubled and their costs rose. These factors were compounded by 
changing urban neighborhoods where crime and drugs were ail too real a 
fact of life. 

I can't overstate the deadly spiral that occurs when an owner either does 
not or cannot provide the resources needed to manage a property 
appropriately. In this scenario, apartment buildings will very rapidly lose 
quality tenants, vacancies will go up and rents will be forced down. If these 
problems are not resolved promptly, a property can become blighted within 
six to twenty-four months. 

Freddie Mac learned two key lessons from its experience: First, sound 
multifamily financing requires well-designed programs, sufficient, 
experienced staffing and quality local lenders that know their neighborhoods 
and their business partners. Second, when a multifamily loan defaults, the 
tenants and the communities suffer, as well as the lender. 

Freddie Mac was successful in turning around its multifamily portfolio 
because we worked to develop a state of the art management information 
system; we hired experienced asset management professionals; we 
developed expeditious processes that gave our staff the authority to make 
timely real estate judgments and implement them and we substantially 
upgraded the quality of our Seller/Servicers. 



324 



Under our new multifamily progrann, Freddie Mac will: 

1 . Purchase mortgages for the purpose of acquisition, rehabilitation 
and refinance of existing properties; 

2. Use state-of-the-art tools to underwrite, monitor and manage our 
multifamily purchases; and 

3. Select lenders for their capital and their multifamily experience in 
local markets. 

Freddie Mac's redesigned multifamily programs will enable it to respond 
aggressively to the challenge of financing decent, affordable housing for 
America's renters. In 1994, we expect to commit $1.4 billion in funds for 
multifamily housing. 

III. FREDDIE MAC'S ASSET MANAGEMENT PROCESS 



The following highlights key elements of Freddie Mac's asset management 
process: 

• On performing loans, a qualified Seller/Servicer, each year, physically 
inspects the property, determines income and expenses, and values the 
property. Extensive loan information is transmitted to us electronically, 
and on any given day we can generate reports and analyses that 
examine the portfolio in a wide variety of ways. 

• If a loan becomes delinquent, we move very quickly and decisively. One 
of the lessons we have learned is that time delays result in asset 
deterioration from both deferred maintenance and tenant frustration. 
When delinquencies occur, Freddie Mac personnel promptly inspect the 
property, value it and develop a business plan to resolve the loan 
delinquency. If the property is being managed poorly, we aggressively 
use receivers to stabilize it. 

• If the property is being managed well, our preferred resolution strategy is 
to do a workout where the terms of the loan are changed in order to 
avoid a foreclosure. 

In our workouts, we will accrue that portion of debt service which the 
property cannot support. 

We will advance new money to stabilize a property if this investment 
results in a comparable increase in value. 



325 



Our workouts on over-leveraged properties are done recognizing that 
the most we can expect to accomplish is to stabilize the property and 
receive 100 percent of value. Recovery of any collateral deficiencies 
or accruals through property appreciation is icing on the cake. Any 
loan amount over current property value is in all likelihood not 
recoverable. 

• We motivate the borrowers in two ways: one, by putting the borrowers 
money or legal rights at risk as a condition of the workout and two, by 
allowing the borrower to share in the appreciation of the property. 

• If the property goes into REO, we immediately bring in a property 
management company that specializes in distressed real estate to 
address life and safety issues and to address asset preservation needs. 
Our objective is to provide decent, safe housing in these properties. 

• We list our REO properties with local brokers and generally sell them one 
or two at a time. We undertake due diligence reviews on the buyers to 
assure that we are not selling to '^lum lords". One reason that we do 
not do bulk sales is because we cannot do this same level of due 
diligence on the buyers. 

• We have found that seller financing and rehabilitation financing is critical 
to selling certain properties and ensuring that the properties will be 
operated in a decent manner. For example, a $5-6,000 per unit 
investment in many projects will convert them from blighted properties to 
decent affordable housing. 

We have been selling properties at 100 percent of value and our average 
REO hold period is approximately 1 1 months. In addition, most of our REO 
properties are affordable to families with incomes of 50 -70 percent of the 
median. Our experience demonstrates that there is a strong private market 
for REO. 

We have learned that distressed loans do not mean the properties are slums. 
These properties will become slums, however, and suffer serious asset 
deterioration unless the problems causing the delinquency are dealt with 
promptly. Problems that can lead to delinquency include poor property 
management, a sudden rise in operating expenses or a decline in revenues, 
or an unexpected capital improvement need. Each of these problems 
requires a different solution. Physical repair of the properties is essential to 
turning them around and stabilizing them. An early warning system is 



326 



critical to uncovering problems such as these so that prompt action can be 
taken. 

IV. RECOMMENDATIONS 

I would now like to focus my comments on issues that Congress and HUD 
should take under consideration as efforts continue with regard to HUD's 
multifamily portfolio. My observations and recommendations come in part 
from experience in cleaning-up our own multifamily portfolio and redesigning 
our program. It is important to recognize that Freddie Mac's success was 
due in large part to the flexibility we had, as a private corporation, in 
implementing appropriate solutions and our ability to direct and redeploy 
resources to these solutions promptly. As a government agency, HUD is in 
an entirely different situation. However, some of the lessons learned by 
Freddie Mac can and should be considered when developing strategies for 
HUD's own multifamily problems. 

My conclusions and recommendation with regard to HUD are as follows: 

• HUD and Congress should agree on objectives-do you want to: 

a) minimize losses; 

b) retain subsidized housing stock at any cost; or 

c) minimize losses while preserving decent, affordable 
housing. 

However, regardless of the objectives, I believe the following actions are 
important first steps. 

• Develop and implement electronically transmitted management 
information systems which will give HUD current information of 
loan status, value, income, expenses, property condition, market 
conditions, and other liens, if any. This information is critical and 
needs to be readily accessible for proper development of resolution 
plans. 

• Hire experienced professionals who are willing to make decisions 
and be accountable for them. 

• Empower these professional to make timely decisions-a quick 95 
percent solution is better than a slow 99 percent solution. 

• Streamline and simplify the decision-making process-en inefficient 
process can require twice as much staff as necessary. 



327 



• Utilize the private sector via loan sales or asset management 
contracts. Vendors should be hired based on performance and 
results-not necessarily based on the lowest bid. Time is critical 
and HUD needs the ability to enter into contracts quickly and 
flexibly. 

• Broaden HUD's loss mitigation techniques: 

1. Workouts should be pursued wherever possible. Often 
foreclosure is an expensive and inefficient solution. If 
foreclosure is pursued, the most HUD can expect to recover 
is 100 percent of the property's current value, less 
foreclosure costs and lost interest during the process. 
Workouts need to be done with this in mind. The current 
loan balance is interesting but irrelevant at this point. HUD 
could also benefit from having the flexibility to make a soft 
second mortgage for that portion of the loan balance that 
exceeds current loan value. 

2. HUD also needs the flexibility to invest new money in many 
of these properties. Often a $1,000 - 2,000 unit investment 
in a property will generate far better results for HUD than 
foreclosure. Borrowers need to be motivated to invest new 
money into these projects. 

3. HUD should provide seller financing on its REO. Many 
properties have substantial deferred maintenance and also 
will need rehabilitation financing provided by HUD. These 
properties have construction and lease-up risk which a 
prudent private lender would not assume. 



HUD needs to alter borrower behavior. As such, it is important that 
HUD: 

1 . Enforce remedies against general partners and management 
companies where there is fraud, waste, or continuing 
serious code violations; 

2. Require borrowers to replace poor property managers— 
particularly where the management company is a related 
entity; 



328 



3. Negotiate with borrowers on a portfolio basis-don't 
foreclose on the severely distressed properties and leave the 
general partner with all the good projects; 

4. Reduce property management fees to market rates. 

Recognizing the need to assure that properties that have received 
government subsidies should remain affordable, Congress should continue 
to review the desirability of placing extensive and complicated restrictions 
on all multifamily properties in HDD's inventory as a condition for the 
disposition of the property. HUD should have the ability to take individual 
market conditions into account and establish affordability restrictions or 
subsidy assistance based on those conditions. It has been Freddie Mac's 
experience that in many markets, properties we have sold from our REO 
have rents affordable to low-income families. Rigid affordability restrictions 
inhibit the sale of troubled loans and foreclosed properties. Further, such 
restrictions can place HUD in a catch-22 of having to dispose of loans or 
properties without the subsidies to support that disposition. In this regard, I 
want to commend Congress for beginning to address this issue in the 
Multifamily Housing Property Disposition Reform Act of 1994, P.L. 103-233 
(1994) enacted earlier this year. These reforms will help address the 
backlog in HUD's REO inventory. 

Finally, I believe that in any future HUD multifamily programs, borrower and 
servicer interests need to be aligned with HUD's need for loans with long- 
term viability. In the past, large up-front fees and tax considerations 
motivated many new loans rather than long term viability of the project. 

V. CONCLUSION 

In conclusion, Mr. Chairman, there is no doubt that HUD has some serious 
problems in their portfolio and that they will be expensive to fix in the best 
of circumstances. However, I also believe that these problems are solvable. 
With strong asset management processes and skilled staff who are 
accountable for their decisions, HUD can reduce the government's losses by 
billions of dollars. 

While much work remains to be done, many of the changes enacted by 
Congress earlier this year and the initiatives embarked upon by HUD are 
steps in the right direction and clearly demonstrate an increased 
understanding and commitment to addressing the problems in HUD's 
multifamily portfolio. There is no doubt, however, that these efforts are 
hampered by regulatory and statutory barriers. I again commend you and 
your subcommittee for your efforts in removing these barriers and 
determining the appropriate tools and strategies that are necessary before 
significant progress can be made. 



329 

Mr. Peterson. Thank you. 
Ms. Austin. 

STATEMENT OF DEBORAH M. AUSTD^, DIRECTOR, LEGISLA- 
TION AND POUCY, NATIONAL LOW INCOME HOUSING COA- 
LITION 

Ms. Austin. Thank you, Mr. Chairman. My name is Deborah 
Austin. I appear today as director of legislation and policy of the 
National Low Income Housing Coalition. On behalf of the coali- 
tion's board, we want to thank you for this opportunity to present 
our views on the record. 

We are pleased that the subcommittee has decided to continue its 
exploration of the challenges facing this troubled inventory. I think 
it is appropriate, however, to talk a little bit about the housing cri- 
sis that low-income Americans are facing before we speak directly 
to the crisis in the stock itself. 

Currently there are approximately 5.5 million American house- 
holds living in federally subsidized low-income housing. Unfortu- 
nately, for every low-income household now living in subsidized 
housing, there is anotherunassisted, very low-income renter house- 
hold with a worst-case housing need. 

Of the 5.5 million units that are subsidized, about IV2 million 
are subsidized with a project-based Section 8 program. 

Our Nation has committed itself to addressing low-income hous- 
ing needs with good reason. According to the 1990 census, one in 
10 American families paid more than half of their income for rent. 
Just over 7 million renter households had income below 30 percent 
of the median income, and another 5.1 million had incomes be- 
tween 31 percent and 50 percent of the area median. 

Low-income renter households strongly related to strong housing 
burdens and housing problems; 58 percent of extremely low-income 
households have severe cost burdens, as do 23 percent of very low- 
income renters. In contrast, only 1 percent of moderate-income 
renters paid more than half of their income for rent. 

Clearly, housing options for poor renter households are severely 
constrained by cost. And the most prevalent housing problem 
among these households is one of affordability. 

There are approximately 20,000 projects produced through these 
Section 8 programs, which represents a scarce and a very precious 
resource that must be preserved to prevent us from falling back- 
wards in our quest to solve our crisis. 

The coalition is concerned that the growing negative media at- 
tention and the public policy dialog concerning the troubled as- 
sisted housing inventory will precipitate a rush to judpnent about 
the wisdom of continuing project-based subsidies. Substantially 
meeting current unmet needs through income subsidies assumes 
the presence of those IV2 million units that are project assisted 
through Section 8. 

Without this permanently affordable housing stock, the chances 
of low-income searchers finding units of adequate size and quality 
in many markets are substantially decreased. 

If all project-based Section 8 were phased out in the State of New 
York, an additional 120,000 low-income households would have to 
find housing. If tenants opted to stay in their current neighbor- 



330 

hoods, a substantial number of these units would need to be lo- 
cated in New York City, which has one of the lowest residential va- 
cancy rates in the country. 

In addition to market absorption problems, heavy reliance on 
tenant-based subsidies to solve the problems of the distressed in- 
ventory has other difficulties. It assumes that the tenant based 
subsidy program under Section 8 does not face similar issues of 
housing quality violations, excessive rents in some markets, lacks 
inspection programs and resource shortages. 

It focuses on immediate solutions for current tenants to the det- 
riment of the housing needs of future income qualified tenants. 
Lastly, it does not provide a solution for the abandoned buildings 
and impact the communities that would be left behind if we would 
go to a total portable subsidy approach. 

It has been estimated that nearly 25 percent of its stock is dis- 
tressed. These projects represent a top priority for HUD interven- 
tion. 

At the committee's hearing last time, Assistant Secretair 
Retsinas announced the formation of special SWAT teams which 
would be deployed to deal with the worst of the stock. We support 
this concept. However, while the Secretary should be complimented 
for the effort to assess the conditions, we are afraid this solution 
is a slow solution, something that could take some 30 years given 
what we know now about the resources that HUD has available 
and the number of projects that are in trouble. 

For projects that have deteriorated to a point of presenting life- 
threatening hazards to their tenants, HUD has little choice but to 
seek receiverships or foreclosures. This places the properties under 
HUD's immediate control and allow rehabilitation and manage- 
ment services to be contracted out while new and responsible own- 
ers and managers are identified. 

A policy driven solely by concern for the insurance fund is penny- 
wise and pound-foolisn when it leaves thousands of residents on 
the line and inept housing providers are literally robbing the gov- 
ernment of millions. Claims on the fund would eventually be miti- 
gated by the prudent expenditure of dollars now appropriated and 
wasted in payments to owners who provide very little in return. 

The Low-Income Housing Information Service is our affiliate who 
does our research, and they held a series of six public forums this 
year in partnership with local grassroots organizations and HUD 
to elicit input from residents of HUD assisted housing on the issue 
of expiring Section 8 contracts. 

Through the forums, they met with over 1,000 tenants. While the 
information solicited was given in the context of questions about re- 
newal of Section 8 contracts, it is instructive and sheds light on the 
issue of resident involvement in the workout of troubled properties, 
and the type of preservation strategies that would be supportive. 

Opinions vary from State to State, although consensus emerged 
in several key areas. One, generally where HUD or owners elect 
not to renew a contract, residents do not find a tenant-based assist- 
ance is generally an acceptable solution. 

Residents that we talked with favored a strong project-based 
preservation mandate. Generally in working through alternatives 



331 

for preservation and contract renewals, residents viewed involun- 
tary displacement as a major threat and the least desirable option. 

In the event that HUD or the owner seeks to transfer owner- 
ships, residents, and resident-sponsored nonprofits should be given 
adequate opportunity and support to control and/or purchase those 
properties. 

Tenants also felt that the presence of service coordinators were 
very important to their units £ind their project. They were valuable 
assets. As long as those coordinators were essentially residents 
themselves, resident input was sought on the coordinator's role and 
ongoing performance. 

This information also sheds light on the issue of resident involve- 
ment on the issue of troubled properties. 

In preparing for this hearing, I had the opportunity to talk with 
many residents who do live in troubled properties. I will not go 
through and recount those issues. But I will submit them for the 
record for your review in my testimony. 

This year, in the course of the housing reauthorization process, 
we supported and lobbied for many legislative reforms to the Sec- 
tion 8 program which were included in either the House or the 
Senate versions of this year's bill. Unfortunately, it looks like that 
bill is not going to go forward. And we do commend the chairman 
for introducing a legislative proposal which picks up some of those 
reforms. 

Our goals in the course of this reauthorization process were to 
create a strong preservation presumption which would preserve 
high-cost properties and economically diverse and gentrified neigh- 
borhoods; authorize the Secretary to exercise eminent domain pow- 
ers to preserve projects that would otherwise be lost to the pro- 
gram; create strong antidisplacement protections; and authorize 
tenant inspections on request, tenant-initiated rent withholding, 
and repair and deduct rights for residents to enforce housing qual- 
ity. 

We supported the creation of a strong priority purchaser program 
so that tenants would be given the opportunity to purchase these 
projects and control them if they are lost through nonrenewal, and 
so the tenants could be involved in every step of the process. We 
sought strong relocation assistance for displaced tenants, and tech- 
nical assistance to support tenant buy-outs. 

Expanding civil money penalties giving HUD the authority to 
move project-based contracts to different projects, tenant rent with- 
holding, and use of abated housing assistance payments to make 
repairs, all have the potential to improve HUD's enforcement and 
oversight. 

The coalition would also support tax relief to owners, to facilitate 
transfers of ownership, if the transferees agree to use affbrdability 
restrictions for the remaining useful life of these projects. 

None of these options provide the kind of immediate relief that 
is needed to remedy particularly severe conditions. Unfortunately, 
as you said, the housing bill is unlikely to be enacted in the near 
future and the problems are still with us now. 

We urge this committee to set as its highest priority the use of 
its influence and authority to implement a funding system that is 



332 

sufficient to address the most urgent rehabilitation and security 
needs in the stock. 

All congressional committees with jurisdiction over HUD oper- 
ations and budget, including appropriations and budget commit- 
tees, must join to establish and implement this priority. It is not 
enough to call for investigations and analysis unless all involved 
are willing to back up their statements of concern with the power 
of the purse. Otherwise the program and the people who depend on 
them for their homes will be left vulnerable to a never-ending se- 
ries of media attacks and political postures with devastating rami- 
fications. 

I am very supportive for the call for a summit on this issue to 
raise the level of dialog and concern in the Congress and the ad- 
ministration regarding these project. 

I will close my statement right now and thank you very much 
for the opportunity. 

[The prepared statement of Ms. Austin follows:] 



333 

National 

Low Income Housing Coalition 

1012 Fourteenth St, NW, #1200, Washington, DC 20005 ■ 202/662/1530 ■ (Fax) 202-393-1973 
Karm V. Hill. Ch»ir Cuthing N. Dolbure. Pnsidmt 

Dealing With Troubled Section 8 Housing 
Statement of Deborah M. Austin, Director of Legislation and Policy, before 
the Subcommittee on Housing, Aviation and Employment, Committee on 
Government Operations, U.S. House of Representatives, October 6, 1994. 

Mr Chairman, members of the Subcommittee, my name is Deborah Austin, I appear 
today as Director of Legislation and Policy of the National Low Income Housing Coalition 
("NLIHC") The Coalition is a nonpartisan, nonprofit information and advocacy organization 
Our members include low income residents, community-based nonprofit organizations, public 
agencies and other housing providers The Coalition is governed by an elected Board of 
Directors from across the country, which meets twice a year to review and set policies for the 
group The Coalition is affiliated with the Low Income Housing Information Service, 
("LIHIS") a nonprofit public education, policy development and research group. 

On behalf of the Coalition's board and members throughout the country, I want to 
thank the Chairman for giving us the opportunity share our views We are pleased that the 
Subcommittee has decided to continue its exploration of the challenges facing the Department 
of Housing and Urban Development, owners and residents of the distressed inventory We 
think It appropriate to preface our remarks with a few comments that highlight the housng 
crisis facing many low income Americans, and the pitfalls of abandoning these project-based 
approaches in favor of portable tenant-based subsidies 

/. Housing Needs and Federal Housing Assistance 

Currently, there are approximately 5 5 million American households living in federally 
subsidized low income housing Most live in housing subsidized by the Department of 
Housing and Urban Development (HUTD), but about 500,000 live in housing subsidized 
through the rural housing programs of the Farmer's Home Administration These units are the 
total amount of housing achieved by federal low income housing programs over more than 
half a century, beginning with the emergency and public housing programs launched in the 
depression of the 1930's 

Unfortunately, for every low income household now living in subsidized housing, 
there is another unassisted very low income renter household with a "worst case" housing 
need Of the 5 5 million units of subsidized housing, about 15 million are subsidized 
through project-based Section 8 assistance 

Our nation has committed itself to addressing low income housing need with good 
reason According to the 1990 census, one in ten American families paid more than half of 
their income for rent Just over seven million renter households had incomes below 30% of 
median ("extremely low income"), and another 5 1 million had income between 31% and 
50% Low renter income is strongly related to severe housing cost burdens Among renters. 



334 



58% of extremely low income households had severe cost burdens, as did 23% of very low 
income renters In contrast, only 1% of moderate income renters paid more than half of 
income for rent Clearly, housing options for poor renter households are severely constrained 
by costs and the most prevelant housing problem among households with "worst case" 
housing needs is one of affordability, rather than substandard conditions or overcrowding. 
The approximately 20,000 projects produced through the New Construction, Substantial and 
Moderate Rehabilitation, Section 8 programs during the 1970's and 1980's represent a 
precious and scarce resource that must be preserved to prevent us from falling backward in 
our quest to solve Amenca's housing cnsis 

//. The Project-based Option Should Be Retained 

The National Low Income Housing Coalition is concerned that the growing negative 
media attention and the public policy dialogue concerning the troubled assisted housing 
inventory will precipitate a rush to judgement about the wisdom of continuing Section 8 
project-based subsidies. 

Substantially meeting unmet needs through income subsidies, assumes the presence of 
the 1 5 million units currently receiving a project-based subsidy through Section 8 Without 
this permanently affordable housing stock, the chances of all low income searchers finding 
units of adequate size and quality m many markets are substantially decreased 

If all project-based Section 8 were phased out m the State of New York, an additional 
120,000 low income households would have to find housing If tenants opted to stay in their 
current neighborhoods, a substantial number of these units would need to be located in New 
York City which has one of the lowest residential rental vacancy rates m the country In 
addition to market absorption problems, heavy reliance on tenant-based subsidies to solve the 
problems of the distressed inventory faces other problems; 

• It assumes that the tenant-based subsidy program does not face similar issues of 
housing quality violations, excessive rents, lax inspection programs and resource 
shortages, 

• It focuses on immediate solutions for current tenants to the detriment of the housing 
needs of future income qualified tenants, and 

• It does not provide a solution for the abandoned buildings and impacted communities 
that would be left behind By failing to preserve these buildings, it will contribute to 
cycles of decay and abandonment 



///. Severely Distressed Projects: Resident Needs Must Be Protected 

It has been estimated that nearly 25% of the stock is distressed These projects 
represent a top prionty for HUD intervention At the Committee's last heanng Asst 
Secretary Retsinas announced the formation of special SWAT teams which would be 
deployed to deal with the worst of the troubled stock They would target 60 or 70 projects 
annually Assuming only 10% of the units fall in that category, it could take 30 years using 
current resources to make an impact m the 2,000 projects which are most extremely 



335 



distressed While the Asst Secretary should be complimented for the effort so far to assess 
the condition of the stock, and craft a response, a 30 year solution for residents living in 
barely habitable dwellings is clearly unacceptable 

What are the answers? 

For projects that have deteriorated to the point of presenting life threatening hazards to 
their tenants, HUD has little choice but to seek receiverships or foreclosures These options 
place the properties under HUD's immediate control and allow rehab and management 
services to be contracted out while new and responsible owners and managers are identified 
A policy driven only by concern for the FHA insurance fimd is penny wise and pound 
foolish, when the lives of thousands of residents are on the line and inept or unmotivated 
housing providers are literally robbing the government of millions Ideally, dollars lost to the 
government through claims on the fund, would eventually be mitigated by the prudent 
expenditure of dollars now appropriated and wasted in payments to owners who provide very 
little in return 

The Low Income Housing Information Service , held a series of six public forums 
this year in partnership with local grassroots organizations and HUD, to elicit input from 
residents of HUD assisted housing on the issue of expiring Section 8 contracts Through the 
forums, LIHIS met with over 1,000 tenants While the information solicited was given in 
the context of questions about renewal of Section 8 contracts, it is instructive and sheds light 
on the issue of resident involvement in the workout of troubled properties and the type of 
preservation strategies that would be supported Although opinions varied from state to 
state, a consensus emerged in several key areas: 

Generally, where HUD or owners elect not to renew a Section 8 contract, residents do 
not find that tenant-based assistance is an acceptable solution Residents favor a 
strong project-based preservation mandate Generally, in working through alternatives 
for preservation and contract renewal, residents view involuntary displacement as a 
major threat and the least desirable option, 

• In the event that HUD or the owner seek to transfer ownership, residents and resident 

sponsored non-profits should be given adequate opportimity and support to control 
and/or purchase the property, and 

Tenants felt that project Service Coordinators were a valuable asset to the project so 
long as (1) those coordinators were residents, (2) resident input was sought on the 
Coordinator's role and ongoing performance and (3) Coordinators were not used to 
create barriers between the tenants and management or otherwise interfere with 
resident organizing activities. 

This information also sheds light on the issue of resident involvement m the workout 
of troubled properties and the type of preservation strategies that should be supported 

In preparing for this hearing, I had the opportunity to speak with tenant representatives 
and tenant organizers regarding the conditions residents face m troubled projects Tenant 
organizers for Jose de Diego in Bronx New York, noted that the eight buildings in the 
complex have more than 3,000 outstanding housing quality violations, 500 of which pose 
immediate threats to tenant safety It should be noted that tenant caused damages and 



336 



vandalism can not be blamed for the failure of major systems like elevators, roofs and 
plumbing At this project, tenants have consistently complained about elevators which do not 
work Tragically, last year an 8 year old boy fell to his death down an elevator shaft Yet, 
the problems persist today 

The management at Jose de Diego has promised to take care of "certified" violations 
and has embarked upon a lengthy and vague process to determine which of the 1,200 
violations are certifiable Although tenant representatives are scheduled to meet with 
management, management has not provided information regarding the repair schedule and the 
procedures for making effective complaints despite their promise to deliver the information 
over a month ago Jose de Diego Beekman is 100% Section 8 and receives 9 million dollars 
a year in housing subsidies Can HUD exercise no oversight here'' 

Holiday Lakes Apanments in Pompano Beach Florida, has a long and tortured 
history of awful conditions and bad management Artie Jackson, a tenant leader at the 
complex placed much of the details about Holiday Lakes in the record at the Subcommittee's 
hearing on July 26 I will not recite the horror stories (including the death of a child resulting 
from improper maintenance of the exterior grounds) a second time Suffice it to say that, 
despite the Department's desire to work with the current managers, the tenants have decided 
that their interests would be best served by getting a new owner/manager to the site and have 
sued in federal court to compel HUD to do so Why doesn't HUD facilitate a more 
constructive role for resident involvement m the turn- around of this projecf 

NLIHC supported and lobbied for many of the legislative reforms in the Section 8 
program which were included in either the House or the Senate versions of this year's housing 
reauthorization bill Working in a coordinated effort with the National Alliance of HUD 
Tenants (NAHT) and the National Housing Law Project (NHLP), we mounted a 
comprehensive pro-tenant advocacy agenda around the issue of expiring Section 8 contracts 
Again, these issues are relevant to questions surrounding tenant involvement in decisions 
regarding distressed projects Our goals were to 

Create a strong preservation presumption, which would preserve high cost properties 
in economically diverse and gentrifying neighborhoods. 



Authorize the Secretary to exercise emininent domain powers to preserve properties 
that would otherwise would be lost to the program. 

Create strong anti-displacement protections. 

Authorize tenant inspections on request, tenant- initiated rent witholding and repair- 
and -deduct rights for residents to enforce housing quality. 

Create a strong priority purchaser program so that tenants would be given the 
opportunity to purchase and control projects lost through non-renewal 
to inform and involve tenants at every step of the renewal process, and 

Provide relocation assistance for displaced tenants and technical assistance to support 
tenant sponsored buyouts 



337 



Expanding civil money penalties, giving HUD the authority to move project-based 
contracts to differing projects, tenant rent withholding and use of abated housing assistance 
payments to make repairs, all have the potential to improve HUD's enforcement and oversight 
The Coalition would also support tax relief to owners to facilitate transfers of ownership if the 
transferees agree to use and affordability restrictions for the remaining useful life of the 
project and tenants are consulted in the process None of these options however, provide the 
kind of immediate relief that is needed to remedy particularly severe conditions 
Unfortunately, the housing bill is unlikely to be enacted in the near future and a truly 
comprehensive effort will require more money than the department currently has available 

We urge this committee to set as its highest priority, the use of its influence and 
authority to implement a funding system that is sufficient to address the most urgent rehab 
and security needs in the stock All Congressional committees with jurisdiction over HUD 
operations and budget, including the Appropriations and Budget Committees must join to 
establish and implement this priority It is not enough to call for investigations and analysis 
unless all involved are willing to back up their statements of concern with the power of the 
purse Otherwise, the program and the people who depend on for their homes will be left 
vulnerable to a never ending series of media attacks and political posturing with devastating 
ramifications 

We agree with HUD that a glaring deficiency in the program is the absence of a 
comprehensive capital grants program It is unthinkable that a bureaucracy charged with 
oversight and enforcement of housing quality standards in 1 5 million aging units is 
without an adequate reserve of flexible rehab funds to make the program work By 1998, it 
is estimated that the cost of renewing Section 8 contracts alone will use up to one-fourth of 
HUD's entire budget authority When we arrive at this precipice, we will need to point to a 
well managed and financially healthy inventory that is providing good housing and strong 
communities for low income Americans or nsk irreparably damaging the public's trust in the 
government, industry and advocates' ability to deliver. 

IV. HUD Should Work with Residents to Move Beyond Crisis Management 

The Department needs more resources to get at the worst conditions in its troubled 
stock However, a major attitudinal shift toward residents is also in order The goodwill and 
openness that is often expressed at HUD headquarters toward resident concerns and initiatives 
is a far cry from the anti-tenant attitudes that permeate many of the regional and area field 
offices If ever a bottoms-up solution was called for it is in the area of tenant/HUD relations 
The huge gap between pro-tenant rhetoric in Washington and the hostility and suspicion 
residents face when dealing with HUD field staff must be closed Given current fiscal 
constraints, these residents represent more than HUD customers or clients They are 
themselves a potential resource to HUD in monitoring and enforcing quality standards, 
devising comprehensive solutions for distressed projects and stabilizing buildings that are in a 
downward spiral 

We recommend that the Department develop a comprehensive set of reforms, aimed at 
.involving residents in the dialogue and decisions about the management and preservation of 
this stock Proposals to implement such a reform were jointly submitted two years ago by 
the Low Income Housing Information Service and the National Alliance of HUD Tenants 
An excerpt from the full set of recommendations is attached as Appendix I to this statement. 



338 



V. Highlighting the Good Projects: Sharing Success 

We consider it equally important for the subcommittee and HUD to highlight 
successes as well as to analyze failures NLIHC is currently circulating a short questionnaire 
to members and allies to determine where the program seems to be working effectively We 
plan to do follow up calls and expand this information HUD could certainly benefit from 
building Its understanding of the owners and managers who have a track record for well run 
projects (especially older family buildings) and identifying areas where its own area offices 
are exercising proper oversight Building models and replicating success are key ingredients 
for long term support of the Section 8 Project-Based program We will be glad to share our 
findings with the Subcommittee as we develop our report on the surveys 

Thank you for the opportunity to share our views 



Deborah Austin 

Director of Legislation & Policy 



339 



APPENDIX I 

Excerpts from the 1992 joint LTHTS/NAHT Recommendations to FTUD 

T. Adopt a HTTP Tenant BiH of Rights to End QwTier Harassment of Tenant 

Organizations and Protect the Right to Organize 

Karassment by owners/managers of tenant organizations and individual tenants who assert their 
rights is almost universal in HUD housing across the country. HUD has done very little to 
combat the pervasive climate of fear and intimidation that afflicts lens of thousands of low 
income people and inhibits resident aspirations to own or otherwise take charge of their lives; 
in fact, many HUD staff have added to this problem by hostile or indifferent responses to tenant 
representatives. We strongly urge a concerted approach by HUD at all levels to end this 
profoundly un-Ameriesn environment In housing aided by tiUU funds. 

In particular, HUD should act zi. once to end these practices in bufldings which it directly manages. 

W A(fopt Juft Cause for EviaioTis and Right to Withhold RenL HUD shoald amend leases to 
specify thai e%-ictions can onJy be made for specified, "just canses', . juch as non-payment of rent, 
disrjrbance of other people's rights, proven criminal activity, etc Retaliatory evietioni for ezsrcisiiig 
tettant rights should be cleaHy prohibited in the lease' and in HUD policy. 

HUD shonld also recognize a tenant's right to uithhold rent (including the Total Tenant Payment in 
Secaon 8 units) for substindard conditioiis and to "repair and deduct" fom rent, with proper notice. A 
fmding by a HUD inspector of non-compliance should constitute one definition that substandard 
conditions exist 

2> ?nhTicize tenants rights and the right to organize. HUD should notify, tn plain and appropriate 
language, every tenant of their basic rights, including steps residents can take to enforce them. This notice 
should also identify responsibilities of owners and managers (such as m aintaining waiting lists, fransfas, 
etc.) and provide phone numbers of HUD staff, enforcement agencies, and local tenant and legal service 
orgisnizations who can help. 

KUD should also notify residents, and post notices in buildings, of their right to organize and 
odierwise assert their rights. A revised version of Sccrctao' Kemp's memo on this topic should be posted 
and sent to all residents. 

HUD's standard Lease should be revised to include a statement of each tenants legal rights, including 
the right to organize. Leases shonld be provided in appropriate languages to residents. 

HUD's Resident Initiative staff should conduct woriishops for tenants on tenant rights, HUD policy 
and procedures, including the Comprehensive Multifamily Service Policy. 

3) Nntirv owners of their obligation to resriect tenants rights . HUD should nob'fy owners and 
managers of the right of tenants to organize and assert individual rights and specify that violadoos are 
grounds for termination, default or civil monetary penalties, particularly in HUD-owned or held buildings 
which HUD itself manages. Memo should state that HUD is aware that this it a problem. The notice 
should specifically state the types of actions which constitute harassment, including: 



340 



a) Denying residents fires, accessible meeting space. 

b) Sending management representatives to tenant meeting unless specifically rc^uetted by 
the tenants organization. 

c) Allowing management employees or contractors to run for office in the tenants 
organizanon. 

d) ■ ■ Evicting, tkreatening to evict, wittbolding entitlements (such as qnalifiei traasfersX or 

otherar-lss penalizing trsidents for organizing or asserting their rights 

e) Attempting to advenely influence resident leaders by ofEering individual inincemenis 
such as employment, preferential transfers or vacancies, rent abatements, favored repairs, 
or other beneCts not available lo all residents in the development. 

f) Attempting to form a compctins residents organization nnder the eontrol of the 
management company or owner. 

HUD should nodfy owners of their obligsaon to provide &es, accessible community space for use by 
rrsid.mts snd resident groups 

41 Penalize owners who viotate tenants rights . HUD should severely penalize managers who 
undermine tenant rights as specified above. HUD shonld issue a notice to HUD staff specifying penalties 
incjuding rsmovaJ of management agent, default, civil monetziy penalties, debarment and limited denial 
of psraciparioii and iastrucring KUD Field Staff to include an assessment of these issues as part of JIUD 
management reviews. HUD'j Resides! tritiative staff should be assigned specific responsibilities to 
implement these policies and respond to tenant complaints. 

KUD should further deSae Indicator 10 of Attachment 1 of the Compreheasive Multtfamfly Service 
Policy, to include the above examples of tenant harassment as "Indicators of Troubled Projects" requiring 
prioritization by HUD staff. 

la HUD-owned or held buildings which KUD itself manages, HUD should taminate management 
agents who violate tenants rights. 

S^ Prnhihit HTTP proncrTv managers from norchating HTTP buil(iingt. To minimize incentives 
for managers to unduly influence or undermine resident groups or leaders, HUD should restore the 
prohibition on property managers or contractors employed by HUD from owning, or participating in 
ownership, of HUD buildings after Property Disposition. 

C\ Upgrade standards for independent tenant organizations. T he Salamone Memorandum (9/4/91) 
regarding "Resident Initiatjves in MultifamDy Property Disposition" should be amended to add the 
following additional requirements to ensure the integrity and independence of resident organizations 
seeking negotiated sales: 

a) demonstrated independent, "arms-Length" relationship to management company 

b) Ey-Lawi which prohibit employees of management agents or contractors from serving as 
oSicers of the residents organization. 



341 



i) Cairanttt right of rwidenti to commeBt. «nd TTUD ranooae. AHow residcati or resuJent 
representatives to coonmcnt on, and require HUD to respond in writing to jpedfic resident com meats; on 
the documents listed above. 

Guarantee a meeting with appropriate HUD otTieiaJs regarding any potcndal mqor decisioa aOcctzng 
their building to a tesidcat groups which request! it, prior to the decitioa being made. - 

S) Allow tenant nartidpation in tctectioo/retnnval of managers . Tenanls thould bo partscn with HUD 
in rrviewing management performance snder the CMSP. HUD should establish a giievsscs process for 
residents to seek removal and other sanctions against managers of their developments 

Require notice and review by residents and groups when management contracts in multifsmily boosing 
are up for renewal at least three months prior to expiration. Residents sKonId be ailowed to comment on 
renewal to owners and HUD. Owners and HUD should be required to respond in writing. 

Allow residetit organizations to advise HUD on the selection of an interim maaagement agent &bm 
HUD's Source List when HUD becomes MIP, prior to selection 

Apply President Bush's proposal, to allow pablic housing resident groups to replace managers, to 
privately-owned HUD-assisted properties as well 

g> Tmnrove and clarify enforcement ontiops. Publish a notice leaing specific jtandanla fcr 
penalties in addition to default, including removal of management agent, xrea or nanooal debarment, 
limited denial of participation, and issuance of specific civil monetary penalties pursuant to 24 CFR Pan 
30. 

KUD should clarify that the following actions by ownsr/manaesrs will be subject to penalties. Form 
HUD-9834, Management Review Report, should be upgraded to include a detailed, spcciilc assessment 
of performance on these itetns: 

a) Violation or undermining the right of tenants to organize or utilize their rights Cae« list 
above. UQ) ) 

b) Failure to follow HUD. requirsments for tenant transfers, filling vacancies horn the 
waiting list, or rsccztificatiotis 

c) Selling of apartments or other leasing irrtgularides 

d) Discriminarory pracaees 

e) Uoanthorizsd TPA's 

f) Failure to take reasonable steps to eliminate illegal drug-related activity from the property 
e) Failure to comply with local Laws governing landlord/tennnt relations (for example. 

regarding security deposits, improper penalties and fees, etc) 

Establish greats' flexibility is HUD enforcement of Section S contracts to allow partial withholding ' 
of federal government share snd/or direct payment of third parties for a building whose owncr/manago' 
is in non-compliance. 



Where HUD inspections conelnde there are violatioas ia specific units and o^tntos hayc Eailed to 
correct them tn a timely manner, HUD shall withhold the federal govenimeni't share of rent /br that unit 
until the violation is corrected. 

HUD should disclose ttpon request the general standards defined by each Field Office of what 
constitutes 'serious deficiencies' and the 'waste' provision of die mortgage under applicable state law, 
and allow public comment on the OfTice's findings 
implement these policies and respond to tenant complaints. 

T^ Enfist tenants as parmen in etiforcemenL HUD should enlist tenants as partBen to enforce the 
CMSP. HUD should clarify that residents and resident organizations have standing to sue ia federal court 
to enforce HUD standards and contracts against oon-petfo^ming owners/managers. 

TOTAL P. 05 



342 

Mr. Peterson. Thank you. I appreciate you being with us. 

Ms. FiTTS. That is OK. 

Mr. Peterson. I want to say something that may not be too pop- 
ular, but I think it needs to be said, and I will get your reaction. 

One of the problems is that we have a disconnect with this pro- 
gram in that it doesn't require people to live up to their respon- 
sibilities, or the market can't work because it is really discon- 
nected, both on the landlord side and to some extent on the tenant 
side. I wonder if you would agree with that. You are arguing we 
ought to maintain the stock, and I think everybody agrees with 
that. 

The problem is that a lot of the stock is not working. We do not 
have the money to fix it under the current program. And frankly, 
I think the landlords in certain of these circumstances are a big 
part of the problem, but I think we also have tenants that are part 
of the problem. And I don't know how we get at that. 

We are as a government providing a significant amount of sub- 
sidy and benefit for these tenants, and certainly in these cir- 
cumstances they do not take the responsibility of doing their part 
in keeping that unit. So I think we have got problems on all of 
these different sides. I don't know how we get at it, because this 
is a small minority of landlords, it is probably a small minority of 
tenants. 

But it is causing problems for everybody in the whole system. Is 
your group looking at that end of things? Do you have any ideas 
on how we can empower tenants? 

Ms. Austin. With the residents I have talked with, the com- 
plaints that they have expressed to me are not the kind of com- 
plaints that are generally caused by tenant-caused damages. Ele- 
vators, plumbing, major systems, exterior parameter fences left in 
disrepair; that is generally not brought on by tenant vandalism. 

Mr. Peterson. Once a project gets to a certain level it really 
starts to deteriorate and you get tenant problems. And I think that 
is where we are with some of these projects. 

Mr. COMEAU. But, Mr. Chairman, in a well-maintained property, 
the tenants won't damage the property. 

Mr. Peterson. It is kind of a chicken and egg thing. 

Mr. Comeau. That is right. What happens in the Section 8 prop- 
erties, if you have a property that is not Section 8 and is not being 
well maintained, people will leave it and go someplace else, or if 
they choose to stay, they will stay and they may destroy the prop- 
erty. 

In the project-based Section 8, they don't have an option so they 
are forced to stay and they take it out on the building. 

Mr. Peterson. And so given that we have that situation in cer- 
tain of these properties, I think that is where the push is coming 
to eliminate this program, because people see this going on. 

How do we resolve that? We aren't going to figure that out here 
today, but I think I am attracted to the idea of turning this whole 
thing more to a market-oriented situation where the people's action 
has some impact on themselves, that they have to have some re- 
sponsibility in all this, whether they are landlords, whether they 
are tenants, whether it is us on the government side of things. 



343 

And the problem with this system, is that there is no responsibil- 
ity. They don't have to take responsibility for their actions at some 
point in this program. Somehow or other we have to change that. 

Ms. Austin. Mr. Chairman, I would just like to add that part of 
what can happen is to start to gather and look at the good prop- 
erties. And you had an excellent example of a well-msinaged prop- 
erty at your last hearing. And to develop some models. 

How do those managers work? How do those residents live and 
carry forth their responsibilities as residents? 

I think will you find there is quite a bit of that going on. But 
you have to have a fundamental commitment to the idea, notion of 
developing and nurturing a low-income, working-class project, com- 
munity, and making that work. And most residents are very inter- 
ested in getting involved. They want to see their communities 
turned around. 

Mr. Peterson. I have visited them. I am aware of that. You were 
talking about the Section 8 that was project based and the Section 
8 that was vouched. 

Ms. FiTTS. Yes. Let me make two suggestions. First of all, I want 
to emphasize that I don't think there is enough money in the Fed- 
eral budget to immediately pay for housing for every low and mod- 
erate-income American who needs it. I will tell you that I do not 
think that the problem of fixing this portfolio has anything to do 
with money. I think there is plenty of money. 

If vou look at the current expenditures that will be paid for this 
portK)lio, I think the problem is the rules you use to apply to that 
money, I think if you say we are not going to upset one property 
manager, we are not going to upset one tenant, we are not going 
to upset one constituent, men, yes, the only way you will solve it 
is with more money. 

Mr. Peterson. That is what we have now. 

Ms. Fitts. But the conventional wisdom that there is not enough 
money is false. 

Mr. Peterson. Under the current circumstances there is not 
enough money. 

Ms. Fitts. Under the current rulings. But I submit to you that 
throwing money at the problem will not solve it. Let me give you 
an example. 

Today a substantial amount of money is spent on project-based 
Section 8 to make sure that the debt on that project 

Mr. Peterson. Is paid. 

Ms. Fitts. Is paid. Now, if FHA was a private financial institu- 
tion, under the rules that this Congress applies to Citicorp or any 
reasonable financial institution in this country, they are required 
by law and regulation to recognize the fact that that debt is worth- 
less and should be written down. 

The refusal to write that debt down does two things. It forces 
this waste of project-based subsidy, and it permits a situation 
where an entire bureaucracy at HUD who would like to fix the 
problem cannot do it, because they are not allowed to face the kind 
of markdown that is they have to take in the FHA fund to get the 
problem fixed. 

So it gets back to rules. To the extent that the U.S. Congress is 
willing to apply the same rules to their own balance sheet that 



344 

they have required the S&L industry and the private financial 
markets to, the problem can be fixed. 

Mr. Peterson. But if you start doing that you are probably going 
to be displacing some low-income residents. You will have groups 
coming in arguing not to do that because they are going to be 
afi*aid they are going to lose the properties. 

Ms. FiTTS. I think you will have many groups arguing not to do 
it, but I don't think you need to displace one tenant. 

Mr. Peterson. I agree with you. But you will get people coming 
in objecting to it. 

Ms. FiTTS. Absolutely. 

Mr. Peterson. That is how we got to this situation. 

Ms. Fitts. Well, but the Congress has to decide what is the cri- 
teria: To fix the portfolio or keep everybody happy. 

Mr. Peterson. I agree. What do you want to do, Mrs. Thurman? 
Do you want to fix this? 

Mrs. Thurman. I think I want to fix it. 

In your testimony, you have attached I guess it is a bill of rights 
or appendix to this, and you have suggested this had actually been 
given to Congress 2 years ago. Was there ever any discussion about 
it? 

Ms. Austin. Actually, no, there was a hearing on the troubled in- 
ventory 2 years ago, and so this was entered into the record at that 
time, and we, as a part of our regular round of meetings with mem- 
bers of the Banking Committee and so forth, have raised these is- 
sues pretty consistently. National Alliance of HUD Tenants has 
had lots of meetings with HUD and others on the Hill regarding 
these issues. So the dialog has been ongoing. 

Mrs. Thurman. One of the things that I found interesting in the 
testimony, not only from you all, but also the group before us, was 
that there always seems to be this concern that what is happening 
in Washington is not getting into the HUD regional offices. 

Could any of you give us some ideas other than maybe the com- 
puter data system that can help us straighten those out? Because 
it is not just in HUD. It seems to be in just about every agency. 

Ms. Fitts. I would like to address that, because I think one of 
the solutions is not to make the people at HUD work harder and 
try more. A Federal agency in the 1990's cannot possibly be in the 
business of local individual project business. 

If you look at what is happening to General Motors, IBM, if you 
walk into any bookstore in America, you see books that say, 
reengineer, reengineer, and what that means is let's redefine and 
let everybody do what they are good at. 

What HUD is good at is providing credit enhancement and sub- 
sidy on scale in very efficient ways. But what they are not good at 
is asset management in 25,000 different markets across America, 
because to be responsive to a local community you have to be part 
of that local community. 

And so frankly, as the Inspector General mentioned, you have 
got to reengineer these programs so that you have somebody man- 
aging, and frankly it can't be HUD. You cannot have a Federal bu- 
reaucracy being entrepreneurial and quick, because if you show me 
at entrepreneurial government at a Federal level, I will show you 



345 

a corrupt government at a Federal level. But that is what you will 
need if you want to be responsible to tenants in local markets. 

I assure you, you can never set up enough systems or phone 
banks or 800 numbers at HUD to be responsive to all those people. 

Ms. Austin. I would agn*ee with that, that there does need to be 
a retooling at the local level. But what I mentioned in the state- 
ment is an attitudinal shift which I think is something HUD can 
accomplish by reaching out and letting the field know that this is 
a new day, tnat residents are welcomed at area offices, that resi- 
dents are partners in this process. 

So that is a little separate from the actual management and 
operational shift that has to happen, to really get the bureaucracy 
out, its tentacles out into each individual project. 

Mrs. Thijrman. Also in your testimony, and it is kind of scary, 
but — and you skipped over it, was the conversation about what has 
happened where I guess a child had died from going down an ele- 
vator shaft, and then in my home State in Florida there was an 
area where two children actually have died. 

Tell me what happens with this kind of a situation. I mean, they 
take it to somebody, and it just falls on deaf ears, or does anybody 
come out and investigate, does anybody look at it, are there any 
violations? 

Ms. Austin. The situation in Florida, counsel has been retained 
to try to enforce — well, try to compel the transfer of ownership at 
that property. That is my understanding of the current status of 
it. There is a suit pending in Federal Court. 

I think tenants are demoralized in some of these instances, but 
they do make their voice heard to the best of their abilities. In 
many instances you have owners who are really absentee owners, 
managers and owners who aren't working in close coordination 
with one another. So you just have a structural situation that is 
not responsive to what is going on in these tenants' lives from day- 
to-day. 

Mrs. Thurman. Thank you. 

Mr. Peterson. Well, we are getting close. You have all provided 
some good information. I think we do need to get everybody to- 
gether in a room and come to some resolution. Because we clearly 
have some folks trying to do one thing in this program and some 
folks are trying to do another, and they are not working the way 
they should. 

And if we could get the tenants to have some ownership in this 
and have some involvement and to feel that they are being listened 
to, I think that would solve a lot of these problems. If they feel that 
this is part of their deal and that they have some ownership in it, 
they could solve a lot of the problems in those buildings and 
projects themselves, if they have the way to do it. 

But I agree, I don't think HUD can do this. We can maybe struc- 
ture the system. 

One last thing on this computer business. At one of our hearings 
we talked about this early on with HUD after I got here, the fact 
that they have seven systems and they can't talk to each other. As 
far as I understand, they are now creating an eighth system that 
won't be able to talk to the other seven or anybody else. 



346 

I am not sure why that happens, because GSA gets involved in 
this or what. But this isn't unique to HUD, It seems Hke every 
agency gets into this quagmire. We would be better off if we gave 
every government employee a budget of $2,000 and told them to go 
to Radio Shack. We would end up with a more efficient system. 

Ms. FiTTS. The one immediate thing you could do is to write to 
the Secretarj' and ask him why the system's responsibility for 
housing and FHA is in a different department which doesn't coordi- 
nate or report to the FHA commissioner, and why, in a world 
where these services can be provided at very low cost, a system 
cannot be put in that is PC-based? 

Mr. Peterson. We asked him that at that other hearing. I am 
not sure we got any good answer other than they had formed this 
committee and the committee decided that they should do this this 
way. 

Ms. FiTTS. Mr. Chairman, this is a problem — if this committee 
could do one thing to fix this quickly, this is the single most impor- 
tant thing. It is within the department's control. But it requires 
changes in delegations of responsibility. And it requires a recogni- 
tion by a system that has tremendous vested interests in 
mainframes. We are in a PC-based world. 

Mr. Peterson. We were 5 years ago. 

Ms. FiTTS. How right you are. And this must be done. 

Mr. Peterson. I tnink we told them that at this other hearing. 
It didn't have any effect. But it is not just HUD. The Agriculture 
Department is in the same shape. FAA, to a certain extent — they 
all are in this quagmire. And they always blame somebody else. 
When you talk to them, they say GSA has these requirements and 
they have to go through this bidding process. I think the best thing 
we could do is say the GSA cannot have anything to do with com- 
puters. 

Mrs. Thurman. Austin, when you were there, had you made 
some of these same kind of recommendations as well that you are 
making to us today? 

Ms. FiTTS. Yes, there are three things we did which now give the 
FHA and the HUD the ability to do many things the other agencies 
can't do, and frankly are an opportunity for this committee. The 
first thing we did was we found a way — and frankly had to go to 
the White House to get the permission. We walked in the door and 
found 7,000 people with 100 computers and within 18 months had 
made provisions, and I think it took about 24 months, 7,000 people 
all had 286 PCs which were networked. 

Is it enough? No, because many of them, to the field system, 
have to run through the mainframe. 

What that has done is that has radically changed the speed with 
which that bureaucracy can move. But again, under current con- 
straints. 

Mr. Peterson. Where were these computers? Over in the main 
office here? 

Ms. FiTTS. No, every employee of the FHA, all 7,000 field and 
headquarters. So one portion of HUD and I believe the other de- 
partments are. But I can't speak to that. 

The second thing we did was we persuaded 0MB to require all 
the Federal credit programs, but including the ones at HUD, to 



347 

have annual outside audited financial statements and actuarial 
studies. Those studies gave us the ability to start to find out, you 
know, what the economics and therefore what the choices for pol- 
icymakers were, which we had no idea, and took months to find 
out. 

Now, that is not enough. But if you create the kind of senior 
asset management talent that you must have internal, it must be 
internal, and you give them the tools with a very fi^ankly extremely 
inexpensive PC-based system nationwide, you can start to provide 
to this committee the kind of highly specific recommendations you 
have asked for today that can change this. And I think you would 
be stunned if you knew how mundane some of them were. 

Mr. Peterson. I understand how it can be done. I am very skep- 
tical that it will ever get through the bureaucracy. The software is 
there. This is not rocket science. All you need is a modem and you 
can hook everybody up. But I will guarantee you if you go over 
there and try to tell them, by the time you get done they will have 
some huge convoluted deal set up, and it gets screwed up. 

Ms. FiTTS. I will tell you, Mr. Chairman, first of all I think the 
bureaucracy that I worked with — and I can only speak to one por- 
tion of the department — is filled with many wonderful, talented 
people who would love to fix this. Frankly, one of the advantages 
they developed when they got the PCs, inadequate as they are, is 
they just started to fix it in complete defiance of the political ap- 
pointees, which fi^ankly I have to tell you is not such a bad thing. 

So I think that there are many portions of the bureaucracy that 
would love to do this and would do just a fine job. 

Mr. CoMEAU. At Freddie Mac 

Mr. Peterson. I agree with that. If they were left to their own 
devices, they would do the right thing. I just think somebody will 
get in the way to stop them. Tmat is what I think will happen. 

Ms. FiTTS. Absolutely. 

Mr. Comeau. It can be done, and at Freddie Mac we started from 
scratch and developed probably the most sophisticated manage- 
ment information system in about 6 months. So 

Mr. Peterson. Did you have anything in place? 

Mr. Comeau. As Austin said, it was archaic. And so it was basi- 
cally going from scratch and going to PC-based systems that are all 
linked together and talking together. 

Mr. Peterson. I know it is not hard to do. 

Ms. Austin. Now is a great opportunity, with Nic Retsinas and 
Helen Dunlap at the helm, two very talented people. Helen Dunlap 
has a great track record in working with residents. We have had 
many dialogs with her office this year. 

With that kind of talent at the top, there are some barriers that 
can be removed very quickly if the capacity and resources are pro- 
vided to the department. 

Ms. Fitts. One last thing, Mr. Chairman. One of the reasons 
that the leadership at HUD has not come forward with many of the 
specifics that we are talking about today, perhaps at the speed 
which you would like, is they have implemented a restructuring 
initiative. I think they have done it the right way, and their goal 
is by the end of the year to come forward with alternatives and op- 
tions and recommendations as to how a piece of the agency, the one 



348 

that does this, can be reengineered — ^progframs, organizations, 
structure — to start to be able to efficiently deliver the congp'essional 
mission. And I think that this portfolio is an important piece of 
that. 

And what this committee can do, whether it is PCs or other 
things, is look at that definitive list from the people who really 
have the responsibility and the information and try to be as sup- 
portive as they possibly can. 

Mrs. Thurman. Then in the suggestion we made of kind of hav- 
ing the summit toward the end of the year and bringfing all the 
parties together, then we believe this would be a good timing based 
on what you have just said here today. 

Ms. FiTTS. Yes, but in the meantime I would hold 0MB account- 
able. If I were the American taxpayer, and I am, and we are talk- 
ing about a portfolio — just the insured portion is approximately $35 
billion — I would want to know what excuse there was that a $10 
million investment in PCs was not possible. 

Now, 0MB can fix that if they want to. That is easy. 

Mr. Peterson. They can do it without any legislative authority? 

Ms. FiTTS. Mr. Chairman, they can — if vou were at HUD, they 
can do anything to you. They can certainly make you put in $10 
million of PCs. 

Mr. Peterson. The money is there in the budget. They just have 
to rearrange it. 

Ms. FiTTS. And you have to understand, with respect to the in- 
sured portfolio, that there is legislative authority to fund these 
things out of the fund. The budget cap on that is an issue, and I 
think should be addressed at the time of the restructuring. 

Mr. Peterson. Well, thank you all very much. We appreciate it. 
Thank you all for being with us. 

The subcommittee is adjourned. 

[Whereupon, at 11:15 a.m., the subcommittee was adjourned, to 
reconvene subject to the call of the Chair.] 



APPENDIX 



Material Submitted for the Hearing Record 

..'•-'a. U. s. Department of Housing and Urban Development 

/' t^rh i Washington, DC. 20410-4500 

'v.„..-<^ August 4, 1994 



OFFICE OF INSPECTOR OENERAL 



^ 

Honorable Collin C. Peterson 
Chairman, Subcommittee on Employment, 

Housing and Aviation 
Committee on Government Operations 
U.S. House of Representatives 
Washington, D.C. 20515 

Dear Mr. Chairman: 

This is to follow up on two matters which were 
discussed during the July 26 hearing on Section 8 project- 
based housing. The specific matters that need clarification 
are the extent to which civil money penalties have been 
assessed on multifamily property owners and the status of 
HUD'S proposed rule on rent comparability studies. 

Civil Money Penalties 

During the hearing, I testified that I had been advised 
by HUD'S Office of General Counsel that, to date, no civil 
money penalties have been assessed on property owners. 
However, Helen Dunlap, Deputy Assistant Secretary for 
Multifamily Housing Progreims, stated during the hearing that 
civil money penalties had been collected from two owners. 

I was referring to HUD's authority to assess "civil 
money penalties" against project owners pursuant to Title I, 
Subtitle A, Sections 108 and 109, of the Department of 
Bousing and Urban Development Reform Act of 1989. After 
further exeunination, we have found that no such penalties 
have been assessed upon or collected from multifamily 
project owners. 

In her testimony, Ms. Dunlap was referring to two cases 
involving multifamily project owners that my staff audited. 
In both cases, we reported significant amounts of funds 
diverted from the projects. For the first case, we reported 
about $8 million in diversions of project funds. In 
addition to recommending recovery of the misspent funds, we 
referred the case to HUD's Office of Housing in April 1993 
for its assessment of civil money penalties against the 
agent/owner for violating applicable HUD regulations. In 
May 1994, the Office of Housing responded to our referral by 
indicating that this case was settled and that civil money 
penalties were no longer appropriate. The settlement 
referred to by the Office of Housing would involve the 
repayment of $8.2 million to the projects and $1.33 million 
to HUD if the proposed Repayment Agreement receives the 
approval of the Bankruptcy Court and the partners of the 

(349) 



350 



agent /owner. To date, the Repayment Agreement has not been 
executed and no monies have been collected by HUD because of 
problems with obtaining the partners' approvals. 

The other case referred to by Ms. Dunlap involves a 
multifamily agent /owner which we audited in 1991 and again 
in 1993. We have reported over $5 million in misspent 
project funds. As part of the resolution of these audits, a 
settlement agreement between HUD and the owner required the 
owner to: (1) pay HUD $500,000 to settle litigation 
initiated by HUD to resolve the 1991 audit; and (2) repay 
the projects the amounts agreed upon by HUD and the owner as 
improperly spent by the owner. The agreement makes no 
reference to civil money penalties. The cimounts to be 
repaid will be derived from the resale of the projects under 
HUD's low-income housing preservation programs which will 
provide the funds for the repayments. The repayments have 
not yet been made by the owner. 

Rent Comparability Studies 

During the hearing, Ms. Dunlap indicated that HUD is 
planning to change the basis on which Section 8 rent 
increases are set, using operating expenses of the assisted 
properties. We understand this to mean that HUD is 
attempting to develop Annual Adjustment Factors (AAFs) which 
would be based on actual increases in projects' operating 
costs in given geographical areas, rather than the current 
inflationary increases derived from changes in the Consumer 
Price Index. Ms. Dunlap also indicated that our respective 
offices have been meeting on this matter. While our offices 
have indeed been discussing this important matter, agreement 
on a plan of action has not been reached. 

The issue of annual rent increases for Section 8 
projects is a long-standing problem that continues to cost 
HUD millions in excessive subsidies each year. These 
unnecessary and unreasonable subsidies continue because HUD 
has not yet issued regulations for performing rent 
comparability tests as required by Section 8 contracts. 

We first reported this problem to HUD management in 
1985. More recently, we reported the problem of excessive 
Section 8 rent increases in our October 1992 and April 1993 
audit reports on the refunding or refinancing of Section 8 
projects financed with tax-exempt bonds. The primary issue 
involving refunded bond projects was that, under the method 
used to refinance the mortgages, annual rent adjustment 
factor were being applied to pre-ref inancing contract rents 
which resulted in excessive rent increases. While the 
Office of Housing agreed to pursue other methods for 
adjusting Section 8 rents, we have been unsuccessful in 



351 



agreeing upon a workable method for eliminating excessive 
rent increases. 

i 

We agree that the methodology referenced by Ms. Dunlap 
could be a less staff intensive manner to provide rents and 
subsidies that are reasonable when compared to rent 
comparability tests. However, the Office of Housing has 
expressed concerns to us that HUD does not currently have 
the capability to implement such a methodology and was 
unsure when such a procedure could be put in place. 

Until such time as a more effective method than 
comparability studies is developed, we believe that HUD 
needs to take immediate steps to issue and implement its 
comparability study regulations and related instructions . 

We welcome the opportunity to work with you and your 
staff to address the problems confronting HUD in 
administering its Section 8 project-based prograuns. We also 
look forward to briefing you and your staff on our 
"Operation Safe Home" initiative. 

Sincerely, 

Susan Gaf fney ' U 
Inspector General 



352 



COMMITTEE ON GOVERNMENT OPERATIONS 
SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION 
SECTION 8 HOUSING 

WRITTEN TESTIMONY OF ROGERLINE NICHOLSON, PRESIDENT OF EDGEWOOD 
TERRACE I RESIDENTS' ASSOCIATION, INC. 



Mr. Chairman and Members of the Committee: 

My name is Rogerline Nicholson, President of the Edgewood 
Terrace I Residents Association, Inc. at Edgewood Terrace I 
("Edgewood") . I have lived at the property for 20 years. The 
residents created the Residents' Association at Edgewood about four 
years ago because we wanted to be a force for positive change at 
the property. 

I remember Edgewood at its best in the 1970' s. The grounds 
were clean. The area were safe. There was no drug dealing or 
gambling at all. There was even a well-maintained swimming pool 
for all of us to swim in. It was a fine place to live and to raise 
your children. 

Today, nearly twenty years later, the property is in serious 
disrepair. After years of neglect of maintenance, the systems have 
broken down. Rehabilitation is an absolute necessity. We are tired 
of the excuses we hear on a daily bases as to why this item or that 
item cannot be fixed. I welcome you to take even a quick visit to 
Edgewood and you will see why we need help. 

Yet with all of the problems we face today, I am also here to 
tell you that we still believe in Edgewood, and our community 
remains strong. We have a deep commitment to the Edgewood 
neighborhood, and we have a strong social investment in seeing it 
improved to its former condition. Edgewood is a 292 unit property, 
and the Edgewood community as a whole is home to over 800 families. 
Edgewood is in an excellent location with a good blend of 
homeowners and apartment dwellers. There is a shopping center and 
many retail stores conveniently nearby. Transportation is 
accessible, with bus lines and a metro station within walking 
distance, which is an enormous benefit for our elderly residents, 
and for the many residents who do not drive. There are two 
elementary schools, one junior high, and one high school, all 
within walking distance. There are also numerous churches and 
hospitals in the neighborhood. In addition, our community support 
has been generous. Many groups and individuals have given their 
time to work with the residents on creating a comprehensive plan 
involving health services and outreach for the community. Thus, we 
are very concerned to hear that Edgewood could ever be closed down. 
Any decision to demolish Edgewood might solve HUD's problems. But 
it will be incredibly shortsighted since this property impacts the 
entire Edgewood community, not just the families who live there. 



353 



To give you an indication of the type of support we have at 
Edgewood, and why the future of our people remains bright, I will 
mention but a few of the concerned groups who are working with us 
now: Beacon House Ministry which provides tutoring and after school 
care for our children; The Harrison Institute for Public Law at 
Georgetown University which is providing legal support and training 
for the Association; Catholic University which has provided 
assistance in surveying the residents' needs and has developed a 
detailed plan for implementing community services at the site. In 
addition to these groups, Community Preservation and Development 
Corporation ("CPDC") has worked with us since 1991 as the potential 
developer of the site. CPDC has a detailed and workable plan for 
rehabilitation of the property that the residents support and that 
is economically viable. 

The answer is not to give up, and rip apart the Edgewood 
community. The way to restore our homes to the dignity appropriate 
for our community is remember that accountability starts at the 
top. It is time for HUD to become responsive to the residents' 
requests, and take an active concern for the conditions at our 
property. Even having a simple phone call returned from HUD is a 
major undertaking. We are asking no more than for restoring 
Edgewood to a decent place for our families to live - but we are 
also asking for no less than a governmental commitment to become 
responsive to the residents' concerns. 

In closing, I would summarize the wishes of the residents as 
follows; First, we want to stay at Edgewood; Second, we want HUD to 
commit the resources necessary to restore Edgewood to the place it 
once was and could be again; and Third, we want HUD to start 
listening to the concerns of the residents and to allow the 
residents to have a greater say in the decision-making process 
about the future course of Edgewood, which after all, is our home. 
We have invested considerable time and energy, as have the 
organizations working with us, to ensure that Edgewood will have 
the type of future that all of the residents deserve. We do not 
want to see this effort go to waste. Thank you. 



354 



3 9999 05982 437 3 



STATEMENT OF REPRESENTATZVB JAMES BILBSAY 

ST7BMITTED TO THE StTBCOMMZTTEE ON 

EMPLOYMENT, HOUSING AND AVIATION 

OF THE 

HOUSE COMMITTEE ON GOVERNMENT OPERATIONS 

OCTOBER 6, 1994 

Mr. Chairman, thank you for the opportunity to submit 
testimony before the Subcommittee today. I would like to begin 
by commending the efforts of this Subcommittee, and especially 
you Chairman Peterson, in bringing into the light deficiencies in 
the Section 8 housing program. 

I have recently visited one of the worst federally funded 
housing projects in the nation. I am sad to say that it is 
located in my Congressional District. The Sierra Nevada Arms 
Apartments are a dismal example of what our federal housing 
programs can become if left improperly supervised. 

I toured the Sierra Nevada Arms with HUD Assistant Secretary 
Andrew Cuomo. The conditions we witnessed are absolutely 
horrendous. We saw buildings in desperate need of repair. Some 
were gutted by fire, others in conditions that were totally 
uninha±5i table . 

Children were left to play on a hard-dirt playground just a 
few feet from these burned -out buildings where exposed electrical 
wiring was within easy reach of any curious child. Residents had 
attempted to put up make- shift fences to protect their children 
from these conditions, howevey, their effectiveness against a 
curious child was questionable. 

During the tour. Assistant Secretary Cuomo himself said, "We 
have to do something about this. It is wrong to have children 
subjected to this. Human beings should not have to live this 
way. " 

Mr. Chairman, I could not agree more. 

The Sierra Nevada Arms is a 352 unit project. It has 
received below average or unsatisfactory ratings from HUD for the 
past five years. Ifet Sierra Nevada Arms continues to collect 
more than one million dollars each year in federal housing 
siibsidies. This situation is simply outrageous. Something must 
be done . 

Throughout this bureaucratic debacle, there is a bottom 
line. It is the residents who suffer. The people we are trying 
most to help are not being served. Our federal dollars are being 
wasted. We are not achieving our goals. 



355 



HUD now holds the mortgage on the Sierra Nevada Arms and may 
have to foreclose on the property to rectify the tangled web of 
problems there. 

I realize this Subcommittee is intent on finding solutions 
in this area. I look forward to working with you to move forward 
any recommendations you might arrive at in this area. 

It is my hope that we can again find our original purpose - 
one of serving the American people. Let us find a way to assure 
our constituents that their federal teLx dollars will be used to 
give a hand up to the people who need it most, rather than 
allowing slumlords to line their pockets. 



Thank you Mr. Chairman. 



o 



ISBN 0-16-046467-6 




9 7801 




60M64676 



90000