U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

32–967 PDF 2007

PUBLIC HOUSING IN THE COMPETITIVE MARKET

PLACE: DO AFFORDABLE AND PUBLIC HOUSING

DEVELOPMENTS BENEFIT FROM PRIVATE MARKET AND OTHER FINANCING TOOLS?

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERALISM

AND THE CENSUS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 23, 2006

Serial No. 109–210

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON FEDERALISM AND THE CENSUS

MICHAEL R. TURNER, Ohio, Chairman

CHARLES W. DENT, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

VIRGINIA FOXX, North Carolina

——— ———

WM. LACY CLAY, Missouri

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

JOHN CUADERES, Staff Director

SHANNON WEINBERG, Counsel

JULIANA FRENCH, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on May 23, 2006 ............................................................................... 1

Statement of:

Clancy, Patrick, president and CEO, the Community Builders, Inc.;

Wendy Dolber, managing director, tax exempt financing, Standard &

Poor’s Rating Services; and Brian Tracey, community development

banking market executive Atlantic Region, Bank of America Corp. ........ 5

Clancy, Patrick .......................................................................................... 5

Dolber, Wendy ........................................................................................... 23

Tracey, Brian ............................................................................................. 62

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

Clancy, Patrick, president and CEO, the Community Builders, Inc., prepared statement of ........................................................................................ 8

Dolber, Wendy, managing director, tax exempt financing, Standard &

Poor’s Rating Services, prepared statement of ........................................... 25

Tracey, Brian, community development banking market executive Atlantic Region, Bank of America Corp., prepared statement of ....................... 64

Turner, Hon. Michael R., a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 3

(1)

PUBLIC HOUSING IN THE COMPETITIVE MARKET PLACE: DO AFFORDABLE AND PUBLIC

HOUSING DEVELOPMENTS BENEFIT FROM

PRIVATE MARKET AND OTHER FINANCING

TOOLS?

TUESDAY, MAY 23, 2006

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FEDERALISM AND THE CENSUS, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

2154, Rayburn House Office Building, Hon. Michael R. Turner

(chairman of the subcommittee) presiding.

Present: Representatives Turner, Dent, Foxx, Clay, and Maloney.

Staff present: Shannon Weinberg, counsel; Juliana French, clerk;

Adam Bordes, minority professional staff member; and Cecelia

Morton, minority office manager.

Mr. TURNER. A quorum being present, this hearing on the Subcommittee on Federalism and the Census will come to order. Welcome to the subcommittee’s hearing entitled, ‘‘Public Housing in

the Competitive Marketplace: Do Affordable and Public Housing

Developments Benefit From Private Market and Other Financing

Tools?’’

This is the third in this series of hearings in the Federalism and

the Census Subcommittee which we are holding on public and lowincome housing. The purpose of today’s hearing is to learn how financiers and developers in the multifamily affordable housing industry obtain structure of the various forms of capital used in the development of low and mixed-income housing developments.

The Federal Government, through the Department of Housing

and Urban Development, and ultimately through the various public

housing authorities, plays a significant role in developing affordable housing by providing seed money for these projects. Federal

funds provided to the low-income tax credit help fix grants, the

Public Housing Capital Fund, and the Capital Fund Financing Program have all been heavily used to leverage additional private

sources of capital for these projects.

Developers have also successfully used other Federal programs,

such as the Home Investment Partnerships Program, the Community Development Block Grant, and CDBG Section 108 loan guarantees to raise capital funds for development projects.

Congress has recently decreased funding for many of these programs in recent years. At the same time, many of the statutory and

2

regulatory requirements of these Federal programs often encumber

the use of Federal moneys, creating significant delays and project

closings. The complex nature of these programs has caused some

would-be investors and lenders to walk away from certain projects.

Our goal here today is to learn from those in the industry and investigate ways in which Congress can streamline the use of the

Federal Government’s various sources of project capital so they can

be more easily integrated into mixed or multi layered financing

packages.

Your comments will help us shape any recommendations that we

make to our colleagues in Congress as well as to the administration

on how we could improve the current system and attract even

greater private investment in affordable housing projects.

The panel that we have today consists of three witnesses from

the private sector who will share with the subcommittee their experiences with the financing of large low-income and mixed-income

housing projects. First, we will hear from Patrick Clancy, president

and CEO of the Community Builders Inc. Community Builders is

a nonprofit developer of low and mixed-income housing projects

over the Boston area. Next we will hear from Wendy Dolber, managing director of tax exempt financing, Standard & Poor’s Rating

Services. Finally we have Brian Tracey, community development

banking market executive for Bank of America’s Atlantic region.

With that, I welcome each of you here today, and I look forward

to your comments. Each witness has kindly prepared written testimony which will be included in the record of this hearing. Witnesses will notice that there is a timer light at the witness table.

The green light indicates that you should begin your prepared remarks, and the red light indicates that the time has expired. The

yellow light will indicate when you have 1 minute left in which to

conclude your remarks.

Our ranking member, Mr. Clay, has notified us that he does intend to join us today, and we’ll be looking for his attendance and

his opening statement at a later time, perhaps. It is the policy of

this committee that all witnesses be sworn in before they testify.

Will the panel please raise your right hands and stand?

[The prepared statement of Hon. Michael R. Turner follows:]

3

4

5

[Witnesses sworn.]

Mr. TURNER. Will the record show that all witnesses have responded in the affirmative. And I want to thank Mr. Clay for his

support and his continued interest in community development and

recognize him for his opening statement.

Mr. CLAY. Thank you, Mr. Chairman. Mr. Chairman, I thank you

for holding today’s hearing on the role of private capital financing

in our Nation’s public housing. As we continue in our work to improve public housing, today’s hearing will allow us to examine how

both Congress and the private sector can work in tandem to meet

the need for public housing nationwide.

Since the enactment of the Low-Income Housing Tax Credit Program in 1986, the role of private capital in public housing has afforded increased options to local housing authorities facing significant building and restoration needs. This partnership is sorely

needed as our Nation’s affordable housing stock is decreasing, and

public housing faces capital improvement needs approaching $20

billion annually. Nevertheless, Federal resources for capital improvements remain inadequate while local agencies face daunting

approval processes for proposed projects that are funded.

As in previous years, the President’s budget for fiscal year 2007

provides no funding for the HOPE VI Program that is essential to

the revitalization programs of dilapidated public housing complexes. In addition, the budget costs are shrinking the amount of

funding for the Public Housing Capital Fund by nearly $250 million from fiscal year 2006 funding level. This is sending the wrong

signal at the wrong time to our capital markets.

I suggest to you, Mr. Chairman, that inconsistent support for

these programs will only lessen the commitment to public housing

from the private sector. If our PHAs cannot depend on long-term

capital commitments from the Federal Government, it makes little

business sense for the private sector to hold up their end of the

bargain. While we in Congress will often step in at the 11th hour

to fund these programs, these solutions lack a firm commitment to

private market participants seeking to provide favorable lending

terms or adequate resources to our PHA.

This concludes my remarks, and I look forward to our testimony

today. Thank you, Mr. Chairman.

Mr. TURNER. Thank you, Mr. Clay. And with that, we’ll begin

with Mr. Clancy.

STATEMENTS OF PATRICK CLANCY, PRESIDENT AND CEO,

THE COMMUNITY BUILDERS, INC.; WENDY DOLBER, MANAGING DIRECTOR, TAX EXEMPT FINANCING, STANDARD &

POOR’S RATING SERVICES; AND BRIAN TRACEY, COMMUNITY DEVELOPMENT BANKING MARKET EXECUTIVE ATLANTIC REGION, BANK OF AMERICA CORP.

STATEMENT OF PATRICK CLANCY

Mr. CLANCY. Thank you, Mr. Chairman. Good morning. My name

is Pat Clancy. I lead an organization that has been building affordable housing and transforming neighborhoods for over 40 years. I’m

proud of the Community Builders’ record of producing over 20,000

6

units of affordable and mixed-income housing in cities across the

Northeast, the mid-Atlantic and the Midwest.

Let me start by stating the key value proposition. The value of

the housing investment in new mixed income housing that is replacing devastated public housing lies in changed lives and

changed neighborhoods, not simply in the new housing. As the

community development field has evolved, change agents such as

my organization have increasingly come to take a holistic view of

neighborhoods and markets and to propose comprehensive neighborhood revitalization efforts [CNR], rather than small-scale rehabilitation or new construction.

In our view, public investment and public-private development

activity must operate on a scale sufficient to reposition a neighborhood in its regional market and to stimulate broader economic activity.

Prior to the HOPE VI program, the ability to mount large-scale

redevelopment initiatives capable of transforming neighborhoods

was a critical element missing from our urban policy. By now, the

ingredients behind the success of HOPE VI are well known, scales

sufficient to change neighborhood markets, leveraging private sector capital and development capacity, high-quality design, construction and amenities, comprehensive intervention across sectors, and

careful attention to both physical development and human development, with particular emphasis on jobs and improved schools. We

focused our energies on over a dozen redevelopment efforts under

HOPE VI to reach these broader goals, and I’ve included information on Louisville and Chicago as an appendix to my testimony.

From our experience I want to offer some recommendations for

your consideration. No. 1, I would propose to make a larger share

of public housing capital funding available in a competitive basis

rather than by formula. There’s $2.5 billion in public housing capital allocated by formula, and only $100 million this year competitively via HOPE VI. If Congress wants housing authorities to use

more of their capital funding in more leveraged and comprehensive

efforts as I am urging, it should make a higher proportion of that

funding available competitively.

No. 2, reward leverage and comprehensive approaches in competitive allocations. The HOPE VI administrative way does that

now. There would be considerable value in embracing leverage and

comprehensiveness in a legislative framework. For example, Senator Mikulski, in her proposed reauthorization bill, requires partnerships with local schools, and that’s one example of that type of

approach.

No. 3, recognize that you get what you pay for. The early HOPE

VI program allowed for a $250,000 planning grant so authorities

could put teams together, go out and really think through and map

out a long-term revitalization plan before coming in and competing

for the grant itself. That program should be reinstituted, and more

comprehensive efforts should not be penalized but should be rewarded as long as they make consistent progress against ambitious

goals.

There is a funding issue that needs to be addressed in one of two

ways. Either housing authorities who get grants need to be able to

draw that money down and make interim investments with it or

7

the budget outlays need to be planned over multiple years so that

there’s no unreasonable pressure on getting all the money committed in 1 year because these are just not that kind of programs.

With the scope of so many of these efforts being so broad with multiple phases in most instances, the idea that the program should

be curtailed because the money isn’t being spent fast enough is

nuts.

No. 4, we need to explore the next financial frontier. Let me

make it simple. We’re taking the worst environments in neighborhoods and putting them in a position where they become the best

housing, and that creates enormous value. We need to capture that

value both by acquiring additional land for future development and

by capturing the tax revenues that are going to come out of those

increased values. Both of those areas represent a next critical frontier for these efforts, and it’s a critical frontier because it takes leverage beyond tax credits, beyond home, beyond mortgage financing, and it takes us out into capturing the future value and bringing that forward so we can invest today.

I appreciate, as somebody out there for the last 35 years working

at rebuilding neighborhoods, the attention that this committee is

putting on this important topic, and I appreciate the opportunity

to be here in front of you today. Thanks very much.

Mr. TURNER. Thank you.

[The prepared statement of Mr. Clancy follows:]

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Mr. TURNER. Ms. Dolber.

STATEMENT OF WENDY DOLBER

Ms. DOLBER. Mr. Chairman, members of the subcommittee, good

morning. I’m Wendy Dolber, managing director of Standard and

Poor’s Rating Services. I manage the public housing tax—public finance tax exempt housing group where we rate that in connection

with affordable housing. I’d like to focus today on our experience

in rating capital funds securitizations as well as talk more generally about key factors that could enhance a PHA’s acceptance in

the marketplace and help them obtain and maintain strong credit

ratings.

S&P has worked with PHAs for decades, rating debt supported

by multifamily properties or loans. Generally speaking, these

transactions achieve low to high investment grade ratings and do

well on the marketplace. The passage of QHWRA and subsequent

capital funds securitizations introduced two new risks that we

needed to look at. The sufficiency and timeliness of Federal appropriations and the impact of PHA performance on its funding levels.

PHAs and their financing teams work diligently with HUD and the

rating agencies to address these risks and ultimately we were able

to assign ratings ranging from A to AAA if they had bond insurance on 22 capital funds securitizations totaling almost $2 billion.

Key elements of our rating analysis were the strong history of capital fund appropriations, predictable allocation mechanisms and excess coverage of capital funds to bond debt service.

We also look for insulation against potential PHA performance

that could negatively impact their receipt of HUD funding. HUD

addressed performance risk to a large degree through written acknowledgement on every transaction that if a PHA were saying

through poor performance the same thing would not reduce the

funding level below needed to make debt service payments, and we

also allowed PHA capital funds to be paid directly to the bond

trustee. These insurances and processes among other things allowed high investment grade ratings, as long as S&P could analyze

the PHA’s general readiness to carry out its obligations under the

bond program, especially its ability and track record in obligating

and expending HUD funds.

To date, we’ve been able to affirm all outstanding ratings, but

capital fund appropriations have been cut every year since we did

the first rating in 2001, which has resulted in a reduction of debt

service coverage in many cases. We’re concerned that future cuts

could compromise a PHA’s ability to pay debt service. That would

result in lowered ratings, income, and would whittle away investor

confidence. It is possible that more predictability and stability in

the level of annual appropriations could decrease the need for such

high levels of coverage and stretch the Federal dollar as a

leveraging tool. Alternatively, some type of backstop funding mechanism not subject to Federal appropriations could greatly enhance

investor confidence and rating agency confidence.

I’d like to say a few words about our observations in working on

PHAs on the securitizations while more PHAs are testing the waters and many have been very successful in accessing the capital

markets, PHAs as a group do seem reluctant to move forward with

24

bond financing. This may be due to lack of familiarity with the

marketplace and its players, concerns about possible negative impact on HUD funding and the potential liabilities to PHAs or just

ongoing difficulties they face in meeting their mandates with less

resources in a changing environment. Pooled financings are one

way to ease the way for PHAs to enter the capital markets if

they’re unlikely or reluctant to do so.

It presents an efficient vehicle by saving costs of issuance. But

the benefit is limited because PHA’s funding cannot be crosscollateralized. Considering the factors that have strengthened market perception of capital fund securitizations and looking ahead to

more expanded use of QHWRA, and perhaps even to the day, when

PHAs could have their own credit ratings as corporate entities, we

would highlight four key areas for continuing improvement.

First, predictability, stability and fungibility of income sources.

Next, clarity, consistency and dependability regarding the HUD

regulatory environment, especially as it relates to the leveraging of

HUD funding and the potential for financial sanctioning of PHAs,

effective in timely communication with the capital markets on the

part of the issuers and the Federal Government. From our perspective, this is critically important as we rely upon accurate and adequate information to maintain ratings, and PHA’s continuing development of management practices on a par with private market, especially in the areas of asset management and financial expertise

with necessary flexibility to achieve best practices.

In closing, I’d like to thank you for inviting us to participate, and

I look forward to your questions.

[The prepared statement of Ms. Dolber follows:]

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

Mr. TURNER. Mr. Tracey.

STATEMENT OF BRIAN TRACEY

Mr. TRACEY. Good morning. On behalf of the 200,000 associates

working at Bank of America, thank you for the opportunity to

share our thoughts today on the use of private capital for public

housing. As the national leader in community development, Bank

of America works to help build stronger and healthier neighborhoods throughout the country. In support of public housing, Bank

of America acts as a lender, an investor and a real estate developer, working with housing authorities in more than 30 States.

During the last 10 years, Bank of America’s provided more than

$500 million in debt and equity for over 40 PHA mixed-finance

transactions. Our company has also been a leader in structuring

capital fund financing program bonds, which allow PHAs to use

lower-cost tax-exempt debt to accelerate improvements to public

housing properties, providing about one-third of all private capital

supplied to the Nation’s housing authorities using this technique.

This private capital often leverages more limited public funding,

multiplying the benefit of public investment typically four to sixfold.

Clearly, public housing benefits from access to private capital.

Here’s an example of how we’ve worked with one local agency to

combine Federal housing support with a range of public and private resources to benefit low-income residents. Northwestern Regional Housing Authority serves a seven-county area in western

North Carolina. Recently acting as a sole developer, Northwestern

completed 40 rental apartments for very low-income seniors in Elk

Park. This transaction involved the acquisition and conversion of a

historic school building and a total cost of almost $5 million. Northwestern leveraged a mix of public and private funding sources, including project-based Section 8 operating support, low-interest financing from the North Carolina Housing Finance Authority, permanent financing through the Federal Home Loan Bank, AHP program and low-income housing tasked equity construction financing

and State and Federal historic tax credit funding all provided by

Bank of America as lender and investor.

Northwestern’s Elk Park development demonstrates the possibilities of alternative sources of funding not always used by housing

authorities, but this success is far from commonplace, and many

aspects of the current regulatory and funding environment distinctly limit what lenders and investors, such as Bank of America,

can accomplish today.

What are these limitations, and how they can be changed? A few

thoughts, a few recommendations. Congress and HUD should provide stable and predictable funding for public housing.

Northwestern’s success at Elk Park would not have been possible

without an expectation of predictable Federal funding on the part

of the housing authority’s financial partners, and recent proposed

and appropriated funding trends for public housing have undermined private sector confidence and the stability of many of these

programs. HUD should also implement consistent standards for

common types of transactions involving private capital and public

housing. Today, HUD approves every public housing capital grant

63

financing and every public housing transaction involving the lowincome housing tax credit on a case-by-case basis largely centered

here in Washington. Approvals are often very long and coming

even in instances where HUD has approved transactions previously

using substantially identical documentation.

HUD, working with the private sector, should craft a series of

clear, reasonable so-called safe harbor standards for approving

transactions. This safe harbor approach will help create a more entrepreneurial climate for public housing authorities where they can

predictably access the full range of financing tools used by private

developers. One last recommendation, HOPE VI funding should be

restored to the levels prevailing 3 years ago. Bank of America, in

its experience, has seen HOPE VI funding improve not only the

lives of public housing residents, but also act as a catalyst for economic development resulting in private capital flowing to the

stressed areas adjacent to the public housing community. One such

example is Capitol Park in the Peace College area of Raleigh, NC.

This mixed-income, mixed-use community developed by the Raleigh

Housing Authority as sole developer now includes both rental and

single-family homes, a community center, daycare facilities, a charter school and a commercial office building where once was an isolated 25-acre complex of poorly designed public housing.

So who benefits from the use of private dollars to fund public

housing? Well, first and most importantly, we believe the public

housing residents benefit through more money sooner to improve

both their homes and their neighborhoods. Second, the broader

community. As private capital is attracted to the blocks surrounding public housing developments and finally our government and

taxpayers by efficiently leveraging government dollars with private

capital to accomplish more with the same amount of public funding.

Thank you, Mr. Chairman and members of the subcommittee, for

the opportunity to make these observations today. Thank you.

[The prepared statement of Mr. Tracey follows:]

64

65

66

67

68

69

Mr. TURNER. Thank you. Mr. Tracey, I’m going to start with you.

In turning to the issue of the low-income housing tax credit, I have

a couple of questions that are issues that you’ve not really raised.

My experience has been that for Low-Income Housing Tax Credit

Program, the participation by banks as investors or purchasers of

low-income housing tax credits themselves has been really essential for this success. If you look industry-wide, the participation by

other sectors of businesses who could be investors for the tax credits is very minimal. My understanding of part of the reason for that

is not just the great expertise that banks have in being able to

wade through the technical requirements but also the Community

Reinvestment Act incentive that is there for banks. I would like,

if you would, please, talk about that for a moment and the Community Reinvestment Act’s incentive for banks to participate. And

then second, which is the real crux of my question is, once the

Community Reinvestment Act was an incentive for banks to participate in low-income housing tax credits, today are you experiencing enough of a return? Are the projects profitable enough for the

bank? Is your participation in it now for just basic business principles independent and sound enough that you would continue that

even without the Community Reinvestment Act by impacts?

Mr. TRACEY. That’s a very interesting question, and I think clearly historically as the creditors evolved, we’ve seen more private

capital, primarily through banks, however, attracted to the low-income housing tax credit. As a result, on the one hand, it’s become

a much more efficient credit so prices of the credit are now increased to some cases approaching or exceeding $1 whereas 20, 25

years ago it was much lower than that. So we’ve seen additional

private capital flowing in.

Now, how much of that is a function of Community Reinvestment

Act, and how much is it a function of the attraction to that return?

I can’t really quantify that. I’ve never seen any type of statistical

analysis trying to differentiate between the two. We are clearly

driven in our low-income housing tax credit approach by the requirements of the CRA. At the same time, the returns—and we define returns probably a bit differently, more broadly in the use of

the credits—are still attractive enough that we’re getting positive

overall yields from our portfolio. When I say returns, we’re looking

at the definition of return as also including the other business opportunities to credit drives for us as a financial institution, which

is the opportunity to provide construction and permanent financing

to those developments that benefit from the tax credit.

One other observation, again, because of the increased private

capital flowing into these markets, the returns on low-income housing tax credits are actually quite low, and in some instances, approach the yield for similar type Treasury investments, and the

concern we have is clearly there is a difference between the risk

in a low-income housing tax credit investment and the risks investing in U.S. Treasuries. We’re not quite sure what to make of that

in the financial markets. I think some could say, well, that’s the

effect of the CRA, driving down returns because there’s a nonfinancial component of why private capital is attracted to those investments.

70

Mr. TURNER. Thank you so much for your answer. That was an

excellent answer. Very tough topic and very well described. Once

the investment is made, the issue has been raised of the exit tax,

if you will, of once the purchaser of the tax credits becomes an investor in the project and the period of time in which the tax credits

have expired and the abilities of the investor to exit the project,

then it incurs a tax consequence. Can you talk about that for a moment, because we’re getting our inquiries as to ways that we might

be able to modify.

Now that some of these projects are maturing and the investors

have their investment there and wish to exit the project, could you

speak about those tax consequences and if you have any suggestions as to how that might be addressed?

Mr. TRACEY. Well, I’m not a tax expert, but it is an issue, and

we rely very heavily on others in the industry that are studying

this issue. I know there’s a group that we support, a small collection of developers, attorneys, financial professionals called the Institute for Responsible Housing Preservation. It’s based here in the

District, that is studying this issue. We’ve had several meetings

with officials at HUD to talk about specifically the exit tax and proposals for exit tax relief. Other industry groups, National Housing

Conference, for example, is also focused on this issue. This is becoming more of an obstacle to the preservation of affordable housing as tax credit projects that were done early in the life cycle of

the credit now either have expired or are approaching the end of

the compliance period. And I’m not prepared today to give any recommendations to that effect, either than just refer you to the same

industry professionals we look on for advice.

Mr. TURNER. Thank you. Mr. Clancy, do you have any comments

about the issues of the exit tax?

Mr. CLANCY. The exit tax relief, if applied broadly, could be extremely valuable, but it is an expensive item. What we have been

able to utilize in our attempt to preserve some affordable housing

assets where owners are facing exit tax but want to sell is if, in

fact, the value of the property has gone up to some degree as a

nonprofit, we’ve been able to structure transactions where a charitable contribution, a bargain sale can be structured where the investors get a charitable contribution for contributing their interest

and that deduction can help offset the exit tax and provide relief.

Now, that requires the property have value that there be enough

value in the property, that, in fact, that’s a legitimate deduction

that, in fact, they are, in turning over the property, giving over

value, but I think that mechanisms like that could be further developed in ways that might avoid the large-ticket expense of broadscale exit tax legislation, which we in the industry have been talking about for about 15 years, but you know, obviously the Congress

has not seen fit to enact, given the price tag involved.

Mr. TURNER. Mr. Clancy, you raised a number of issues in your

testimony concerning transitioning funding in programs to a competitive basis. As you are aware, there are a number of communities that have varying levels of expertise and varying levels of access to expertise. A city like Chicago is going to have individuals

even beyond the public housing sector who are going to have complex financial transaction experience, complex real estate and legal

71

experience that may not be easily found in communities where we

have public housing and where that public housing needs to be

remedied.

You have been highly successful and, as you know, I’ve toured

some of the wonderful transformations that you’ve been a part of

that have occurred in Chicago. I’m wondering if you might, for a

moment, please describe to us some of the types of expertise that

you think are necessary in order to be successful. As we look to

what assistance communities are going to need, part of it is funding. I noted the commonality of stability of funding that was in

each of your risks. I wondered if you had all compared notes before

you got here, but I assumed not. But that level of expertise is also

an issue that is necessary even beyond funding. And to just highlight this, as you are aware, part of the problems in continuing

HOPE VI funding is the belief by some members that HOPE VI

funding has not met the level of expertise and performance that

we’ve seen in other communities. So I’d love your thoughts on that.

Mr. CLANCY. Well, I think that the substantial majority of effective HOPE VI production over the last 10 years has happened in

public-private partnerships between housing authorities and development actors with experience in utilization of tax credits, utilization of forms of debt and equity that get combined with public

housing capital. Those development actors—because HOPE VI

itself is a complex program and is layered on top of tax credits—

you’re absolutely right that the actors with the sophistication to

carry out that kind of a complex financing there tend to be many

more of them in large cities than in smaller cities.

I think that this is less true today than it was 10 or 15 years

ago, and the industry has reached a certain level where many of

the lawyers, many of the accountants, many of the smaller developers who were involved in doing affordable housing have had

some degree of experience with public housing capital sources and

could—particularly if some of the recommendations on looking at

ways to streamline and simplify some progress could be made—

could be brought into utilizing those resources.

I think one of the key requirements, Mr. Chairman, that is often

a complicated one, is the way in which housing authorities reach

out to the private sector and the complex procurement regulations

of the department, and oftentimes again, why I recommended reinstituting planning grants, often times housing authorities don’t

quite know what’s possible with a given site and so how do they

reach out for a private partner when they don’t know what they’re

reaching out for?

So there needs to be an understanding and there needs to be

support from HUD, which I think in the early years of the HOPE

VI program, there was for housing authorities to be able to understand how they can procure a partner, how they can acquire the

expertise to enable them, even if they’re a smaller authority to utilize the same kind of techniques that larger cities are able to use.

I think that’s very possible to do.

Mr. TURNER. Ms. Dolber, in looking at your written testimony

and your comments, both my staff and myself are curious about the

issue that you have raised for pooling of resources and in looking

at how that is accomplished. You’re talking about PHAs, having

72

used HUD’s capital fund financing program and the pooling have

been accomplished ranging from two PHAs to 35 PHAs. Could you

just describe this process? Obviously, the lack of a clear relationship between the public housing authorities and, as you have

raised in your comments, the issue of funding sources just raised

several questions about that whole process. If you could elaborate,

I’d appreciate it.

Ms. DOLBER. The pool financings—the way they work is that a

group of PHAs will issue bonds collectively. So instead of each one

going out with, let’s say Norfolk Housing Authority will go out and

do a $2 million bond transaction on its own, pay over costs of

issuance, and all the other—the costs associated with doing that,

they would team up with a number of other housing authorities in

the State, and they would do it together.

So therefore, the cost of issuance is spread out among all the different housing authorities, and typically these are put together by

an FA an investment banker or a State housing finance agency, as

Pennsylvania Housing did, who will corral all the PHAs together

and bring them into the financing. And the way that it works is

that they will pledge their capital funds, you know, together, but

their capital—Norfolk is only going to be used to pay for Norfolk’s

obligation, and if it had excesses available, it’s not going to help

any other housing authority. So they—there will be a debt service

reserve fund that anybody, you know, could use to pay debt service,

or the trustee will use to pay debt service, but there’s no fungibility

among the PHA funds, and that’s fine, but it’s a very rateable

transaction. It sells well on the marketplace, but what it—what it

doesn’t allow is for a public housing authority that doesn’t have as

much capital funds to bring to the table. They might be—not be

able to participate in the financing.

Mr. TURNER. So it lowers their cost, but not their risk?

Ms. DOLBER. That’s right.

Mr. TURNER. At this point, I’ll turn to Mr. Clay for his questions.

Mr. CLAY. Thank you, Mr. Chairman. I’ll start with Mr. Clancy.

Welcome. Although our public housing authorities have longer

waiting lists than ever, there’s no longer one for one matching requirement concerning the demolition and reconstruction of low-income housing units. Doesn’t this pose a threat to those already on

a waiting list for public housing? And what long-term solutions

would you offer to the shortage of units available?

Mr. CLANCY. I think obviously there are huge funding challenges

that, as somebody committed to supporting good housing and good

supports for low-income families, particularly in urban areas, I’d

feel the lack of resources is an outrage. To talk more particularly

about what happens in the demolition of public housing and its replacement, our experience has been—has been mixed. One of the

interesting things that happens—if you focus on the families that

are in the public housing itself, often times when we get involved,

the housing authority’s already planned for demolition of the public

housing, has already relocated a lot of families, and they’ll be in

other places and then they’re offered, oftentimes, a chance to come

back, oftentimes with requirements like work requirements, for example, in the city of Chicago.

73

What’s interesting is that a lot of the families that actually have

moved have been relocated out of a public housing site don’t want

to come back, even when you build a really attractive, you know,

first-rate mixed-income environment. It’s not always the case, but

what happens many times is again, a lot of these developments

have been very distressed. There’ve been environments that people

who have stayed in those environments are people who don’t have

a choice, and even though people who have been relocated may

have been given a voucher or something else that is not necessarily

a stable, long-term fixed asset in terms of affordable housing, and

so it gives us all concern. Yet for that family, that relocation that

they went through, 9 times out of 10 has been a positive experience, compared to where they were living.

Now, you created a whole new environment, and so it’s a whole

new day, but many times the history of having lived in that environment when it was a bad environment and the fact that a family

may be stably settled in another neighborhood, they don’t want to

come back. What’s more important, I think, is to really focus on the

families that are there, the families that want to make a transition

to the new community, and there’s a real timing challenge there,

because supporting a family that has been on public assistance for

perhaps two generations to meet a jobs requirement, I mean, you’re

talking about needing to work with a family over an extended period of time, needing to deal with a lot of very intractable social

challenges that family faces to enable that family to really become

a strong part of that future community.

And I think one of the disconnects is that we don’t always sustain the attention to that effort in these redevelopments, and while

we create a mixed-income community, I think it’s critically important that, you know, over 3 years, over 5 years, over 10 years, the

kind of public education that happens in a neighborhood, the kind

of support for families to get jobs and to get better jobs need to be

sustained and maintained to really be of service to those—to the

low-income families that really are the core of the mission of the

transformation effort itself.

Mr. CLAY. You mention relocation with voucher and Section 8.

Do you have any examples of some creative relocations, such as a

first-time homeownership?

Mr. CLANCY. I’m aware of limited amounts of that. There has

been some, certainly, for example, in Chicago where we’re working,

we are in the first phase of home ownership that’s happening right

now. There are, I believe, a handful of public housing tenants that

are going into ownership units in the new mixed-income community. That’s a very small number in a large community, but at least

it’s a start. Again, I think that what we expect, actually, in Chicago

where it’s a 3,000-unit total build-out, mixture of rental and sales

is that we hope that a number of our public housing families that

come in as rental families over time will graduate to ownership

units within the same community, and we’re trying to basically end

up with a community that has that kind of escalating opportunity

for those families.

Mr. CLAY. Thank you for that response, Mr. Clancy. Ms. Dolber,

how can your agency factor in the reliability of Federal support of

public capital financing programs when Congress and the adminisVerDate 11-MAY-2000 11:52 Mar 05, 2007 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 D:\DOCS\32967.TXT HGOVREF1 PsN: HGOVREF1
74

tration are constantly at odds over its value? And are tax credits

over a 5 or 10-year budget window more reliable for establishing

the creditworthiness of a PHA? Two questions.

Ms. DOLBER. I can answer the first question. I didn’t really understand the second question about tax credits.

Mr. CLAY. Let’s try the first one.

Ms. DOLBER. OK. I think what you’re talking about is the risk

of appropriations and the declining of appropriations every year

and how we view that, is that right?

Mr. CLAY. Yeah.

Ms. DOLBER. All right. That’s a great question. When we first did

our rating in 2001, the industry was able to supply us with a lot

of very good information about the history of the appropriations.

And so we were able to look at it and feel that we knew what the

track record was, and that in order to make sure that service could

be paid, we look for excess coverage.

So we got comfortable with a lot of the mechanisms that have

been put into place at that time, like negotiated rulemaking and,

you know, things that would allow us to predict what level each individual PHA might get that we would look at in a financing. Now

we knew that in years to come, it could be possible that appropriations could be cut, and that’s why we look for excess coverage.

Without the excess coverage, there’s no way that the bond issues

that we raised would have been investment grade.

Now, in the last 6 years or 5 years, every single year appropriations have been cut. That definitely got our attention. We watch it

very closely, and we really did ask ourselves a question, do we have

to downgrade the bonds? It’s very difficult for us to put our finger

on, what is the level of the Federal Government’s support for public

housing finance? It’s clear the support for public housing, but what

about public housing finance? Because there’s really no one from

the Federal Government that’s going to say to us, don’t worry

about it, everything’s going to be OK.

So we have to look at what’s actually happening out there. So

what we did, we created a stress test, and in order to affirm our

ratings, we had to anticipate that the funding cuts would continue

every single year as long as the bond issue went on. And we made

sure that debt service would be paid irregardless. So what I’m saying is that if we could—because the excess coverage was there, we

could factor it into our rating. However, the track record that we’ve

been looking at is changing. We looked at a pretty stable track

record and a pretty strong track record, and now we have a more

questionable track record. So the question is, what’s going to happen in the future if cuts continue, are we still going to feel that

there’s a strong track record?

Mr. CLAY. Let me reword the second question there. It’s a followup to what you said. Would the S&P view tax credits like, the lowincome tax credit as more reliable than appropriations for PHA ratings?

Ms. DOLBER. Well, it’s a different mechanism that we usually see

coming into a transaction at the beginning, and putting money on

the table, if you will. And we look to see how those funds—from

the sale of the tax credits are going to be used in the financing,

you know, sometimes they’re used in development costs. So this is

75

where they reduce the amount of bonds that have to be issued. So

that type of mechanism where money comes in up front and it’s on

the table, but there are things that can affect whether it’s going to

continue, whether the tax benefits of the tax credit are going to

continue don’t really affect our ratings.

In a sense, because the money is already there, it affects the tax

credit investor because they could lose their tax credits. So if we’re

rating an issue that’s based on the performance, for example, of the

tax credit investor, which we sometimes do, we have to be concerned about what’s going to happen if it loses value for them and

they’re not going to be there the way we expected them to be there,

and usually we expect them to be there and—I mean, a lot of tax

credit investors have actually put money into properties, and that’s

something—because there’s a question about what could happen,

we give what I would say soft credit to that.

Mr. CLAY. Thank you for that response. And my last question is

for Mr. Tracey. Welcome. Are State housing authorities providing

adequate lending options to local authorities who may not have the

technical or economic base to access markets along—and please explain how utilizing property and financing can expand the options

available to public housing authorities.

Mr. TRACEY. When you mention State housing authorities, housing finance authorities, the issuance of bonds?

Mr. CLAY. Yes, yes.

Mr. TRACEY. Thank you. Thank you. I would say generally, yes.

Our experience has been favorable across the country, working

with State housing finance agencies. Again, we’re looking for much

the same as we had referenced consistency, predictability, not so

much of the funding but of the processes themselves because that

makes us more comfortable devoting resources, people resources, financial resources to certain markets. If we have a framework for

working with various State agencies in the issuance of bonds where

we—I won’t mention any particular jurisdictions, but where we’ve

had difficulties is where the rules change, and the rules change frequently.

And that creates a hindrance for us in order to provide our capital. What we’re always looking for is additional places to use our

resources and support community development, whether that be by

providing construction financing, use of taxes and bonds or permanent financing by buying those bonds, creating secondary markets

attracting other capital to purchase those bonds. So anything that

adds or anything that, rather, reduces the friction in those markets, eases costs of transactions, makes us more comfortable, more

likely to put private capital into those particular jurisdictions.

Mr. CLAY. Thank you for that response. I yield back, Mr. Chairman.

Mr. TURNER. We acknowledge that we’ve been joined by Charlie

Dent from Pennsylvania, and Ms. Foxx from North Carolina.

And Mr. Clancy, I’m going to ask you a question that is somewhat off topic, but I’m going to explain, ask you the question so

that you will understand why I’m asking it to you. Whenever we

look at the issue of community development in addition to process

and expertise and financing, there’s also public policy theory that

gets overlaid on everything that we do; and in that discussion of

76

topics of public policy theory, from that, programs are designed,

and rules are established that can restrict or that can permit the

various types of development.

One of those public policy theories that has been bantered about

is the issue of public housing land and whether once public housing

has been established on a piece of land, whether or not that piece

of land shall therefore forever be public housing land.

I happen to be of the opinion that with communities in shifting

both in the location of populations, the shifting of even employment

centers, the shifting and transportation routes, school populations,

construction of schools and response to populations, but as a theory, that it is overly limiting for us to say that once public housing

has been established on a piece of land, that it shall forever be public housing land. Our goal of providing affordable housing should

not be tied to a historical decision that was made at another point

in time when a community had other development factors.

I was wondering if you might have an opinion on that, knowing

the creative things that are occurring in your community and the

shifts that have occurred in populations, if you believe that affordable housing needs can be addressed without overly restricting

once public housing land.

Mr. CLANCY. Affordable housing needs, I think, can only be addressed effectively if, in fact, one is continually attentive to market

forces and market dynamics, and that is, as you describe, Mr.

Chairman, a shifting dynamic, value-shift in neighborhoods and

property needs to be looked at in a very dynamic market-oriented

way. I think that often people who espouse the theory that you are

alluding to are really concerned about the extent to which there’s

long-term commitment to serving the poor, and whether there’s

some place, you know, some way to nail that down so that the commitment doesn’t get extinguished inappropriately.

And I support that 1,000 percent, philosophically, ideologically,

morally, and on a million other levels. But as a real estate professional, I think it’s a huge mistake to take that to one-for-one replacement or to take that to tying land, let’s say, to a particular

use. The whole point is, you’ve got to be able to capture market values. You’ve got to be able to utilize those values to support a diverse population, and that’s, you know, very much the centerpiece,

I think, of our approach.

If I could come back to an earlier question that you asked, because I had a further thought afterwards, smaller localities getting

the sophistication to utilize a program like HOPE VI, you know,

what are the things that HUD has done very successfully over time

when the HOME Program first got passed, CPD, the Community

Planning and Development section of HUD put out a series of technical assistance contracts to organizations that then could work nationally with different localities in apprizing them of how to utilize

the HOME Program to make them more able to be effective in how

they designed local use of HOME. The same thing could be done

to assure that localities—smaller localities, particularly, can acquire the expertise to utilize HOPE VI, and HUD could allocate

some dollars for technical assistance out of public and Indian housing that could support smaller authorities in that effort in the

same way.

77

Mr. TURNER. Mr. Tracey, similarly, I’m going to ask you a question that is more subjective. You had talked about the issue of the

cumbersomeness of the process. And a great recommendation when

looking at a safe harbor process where people could be not on a

case-by-case basis waiting for approval, but know specifically the

area of something that is a cookie cutter-type development that has

occurred before a certainty of approval and a timeline for approval.

So many times when we look at government bureaucracy, it can

fall into two different categories of impact. One is cost, and another

is just straight out barrier to entry, meaning that the cumbersomeness is so great that the expertise required is a barrier for those

who might otherwise enter it.

Cost increase is something that the government can just continue

to subsidize undesirably, but nevertheless we can. Barrier to entry,

though, is something that rises to the level of completely thwarting

our ultimate goal and objective. Knowing that the banks with the

CRA have not only the cumbersomeness but incentive to go

through the process, I wonder whether or not you believed that, in

many instances, the types of cumbersomeness, the processes that

you’re seeing, rise greater to the level of just cost, but actually

thwart our ability to bring people into the process.

Mr. TRACEY. Well, actually, I do think that some of the issues

that have been raised by all of the panelists today do result in barriers in entry, and not so much entry into community development

as a whole, but rather pushing resources into a more certain and

predictable area of community development.

That’s likely one of the reasons why yields are so low and declining in low-income housing tax credits because that is a more certain or predictable program. It has a history. Many players have

been involved in that market for quite a number of years. Our experience, I think, on working with capital grant financing could

also help illustrate the point. Our company was involved in structuring the very first cap grant financing which was a taxable loan

to the D.C. Housing Authority here in Washington.

And QHWRA had been around since 1998. We closed our transaction, I think, in 2000. So it took 2 years for the first transaction

to be closed after the legislation had been enacted that enabled

that type of financing. Two years is a long time in the finance industry.

One of the issues was that there was no standard, no safe harbor

for what the transaction would look like. We were making that up

as we structured the financing with HUD and the D.C. Housing

Authority. The one point that was still unsettled very close to closing was the degree of leverage permitted, which is a critical point.

How much of the cap grant payment stream would HUD permit

the D.C. Housing Authority to borrow against?

As those types of issues became resolved, then we’ve seen the

market evolve; and private capital flows in; and instead of more expensive taxable financing, which was what we were able to put together 5 years ago, now we’re in the tax exempt arena with lower

transaction costs on a pooled basis and so forth. All of that should

have been compressed, though, into a much shorter timeframe

rather than taking the 5 to 6 years that it did for that market to

evolve.

78

And with consistent standards up front, more parties would have

been attracted to that type of structure; and again, the lack of consistent standard of framework for that particular financing structure, you know, it wouldn’t have acted as a barrier to entry.

In 2000, Bank of America, D.C. Housing Authority, we were pretty much it, even though the legislation had been on the books for

2 years.

Mr. TURNER. Thank you for that. I want to recognize Mr. Dent.

Mr. DENT. Thank you, Mr. Chairman. Thank you for holding this

hearing. Thanks, too, to our panelists.

Mr. Clancy, over the past 20 years, one of the better Federal incentives for private investment in affordable housing has been the

Federal low-income housing tax credit. Many hundreds of units of

affordable housing have been constructed and developed in my district because of this Federal initiative. However, over the past few

years, that production has dropped off to near zero. What kinds of

changes to the tax credit program would you recommend to

strengthen that program?

I’d like to start with you, Mr. Clancy. If any others have an opinion. I would be pleased to hear that.

Mr. CLANCY. It’s a multifaceted answer. And let me try to—the

reason why production would have tailored off to zero in your district, I suspect, has more to do with some of the other resources

that are necessary to make a tax credit project feasible. The tax

credit program itself has continued and, as Mr. Tracey has said,

has actually gotten somewhat more efficient over the last few

years; but most tax credit developments have either significant—

for example, in Pennsylvania, the State HOME Program of PHFA

or local Community Development Block Grant or other resources

going into the housing.

So I don’t know the particular situation and why the decline is

taking place. I do think generally the credit is a very specific and

not very flexible vehicle and that one area that would make it more

broadly useable would be if, in fact, instead of everybody having to

be under 60 percent a median, let’s say, to get the credit, you might

have a band of people who are at 30 percent a median and a band

that are at 50 percent of the median and a band that might be at

70 or 80 percent the median; and as long as it averaged out to 60,

you could get credit on all the units, some of those kind of simplifying changes that would make it more flexible. But again, it’s been

a very effective piece of legislation.

The tax committees have made only minor changes to it; and it

is, as you say, still the biggest resource that’s supporting affordable

housing today.

Mr. DENT. Anybody else want anything to that?

Mr. TRACEY. No. I would just make two comments. I would concur with what Mr. Clancy said about the need to create more income, diversification in low-income housing tax credit projects. If

there has been a push to define affordable housing not just to supporting the very low income or low income but new definition, work

force housing, those that 80 percent to 100 percent, 120 percent of

median income are also struggling in finding adequate and affordable housing as well.

79

And the second comment, too, would be to focus on both scarcity

of land in many markets, and also the high cost of that land, which

does prevent much affordable housing from being constructed, notwithstanding any tax credit programs. It’s just very high cost to

entry in the affordable housing market because of the scarcity and

the cost of the land in many of our markets.

Mr. DENT. Thank you. Mr. Clancy, back to you. I know the Community Builders often acts as the tax syndicator in tax credit deals.

Is that correct?

Mr. CLANCY. Yes. We are a principal in the work that we do, but

we also directly structure and design the tax credit investment and

work directly with—Bank of America is one investor that we often

work with. We work with many of the major financial institutions

and directly structure investments with them.

Mr. DENT. Can you describe the role that syndicator in those

transactions and essentially in how they benefit?

Mr. CLANCY. Basically for us, it’s been really a critical tool of affordable housing, and I won’t bore you with the whole history; but

going back to 1970 when we did the first nonprofit-sponsored tax

shelter syndication for affordable housing in the South End of Boston, the tax incentives available under the code—and obviously,

since 1986, the low-income housing credit are such a central part

that we end up, for example, in a typical transaction. Whether it’s

HOPE VI or whether it’s just a tax credit transaction, we will end

up with perhaps as much as 60 percent of our total development

cost coming out of the tax credit value and as little as maybe 15

percent coming out of a first mortgage financing. And let’s say the

other 25 percent coming out of perhaps public housing capital or

HOME or CDBG or other kind of grant resources.

So in the mix, the largest private investment piece is the low-income housing tax credit. So being able to structure that effectively,

being able to bring investors in on a basis that maximizes the return to the project from their investment, and also one of the

things that has been important for us in that industry for the last

35 years, is to be able to bring investors in on the basis that is

completely compatible with long-term affordability of that housing,

is one of the structures that we’ve insisted on, as I say, going back

35 years.

Mr. DENT. Thank you. And I guess, finally, I will just maybe

touch on HOPE VI, and maybe prior to my arriving here, you may

have touched on that issue. But in my district, we have a substantial HOPE VI project underway, and it’s been helping us attract a

considerable amount of private investment; and, of course, HOPE

VI funding has been diminishing in recent years, and with it, a

number of communities in which obviously housing projects can

benefit. So that is a problem.

Do you have any experience with HOPE VI? Any of you that you

would like to speak to; and if so, what is it about that program that

attracts so much private investment?

Mr. CLANCY. Well, I think, as I did stress in my testimony, I

think one of the things that has enabled HOPE VI to do that has

been that since 1995 in the competitive allocation rounds, it has actually encouraged housing authorities to leverage the grant that

they receive with private debt and equity; and so to be competitive

80

for funding, it really has created an active marketplace of housing

authorities who, to get the money, have almost got to leverage the

money with private debt and equity.

So one of my recommendations is to look at the total funding for

housing authorities, total capital funding and make more of it competitive so that, in fact, you get that same—and have the competitions be—provide a preference for leveraging and for taking a more

comprehensive approach so that, in fact, you could expand the extent to which public housing capital was leveraged with private

debt and equity, was combined with things like the low-income

housing tax credit.

Because I think even though the HOPE VI work has been very

high visibility and has been fairly dramatic in a number of places,

we’ve still only really scratched the surface of the overall capital

needs for public housing. And the more leverage that can be

brought to meeting those needs, the quicker we’ll be able to meet

more of them.

Mr. DENT. Thank you. Anybody else wish to add anything on

HOPE VI?

Mr. TRACEY. I would. Yes, thank you.

Bank of America has been involved as a lender investor and actually real estate developer in more than two dozen HOPE VI

projects across the country, and our experience has generally been

very positive. In particular, we view the multiplier effect as very

common in the successful HOPE VI developments; and effect often

gets overlooked in judging the success of the projects, we believe.

One example is right up 95 on the west side of Baltimore, two

different HOPE VI projects, Lexington Terrace and what’s now

known as Heritage Crossing. Initially, homes were selling there for

$65,000. So on the face of it, the criticism was, why should our government be selling homes at $65,000 when they cost $165,000? But

upwards of 5, 7, 8 years later, private capital has now been attracted into that area. There are homeowners from Washington

now buying $400,000 homes in that same community, in the surrounding neighborhoods.

The University of Maryland has now crossed over Martin Luther

King Boulevard, which was a dividing line for the community, and

has built a biotech center in that same community. So when taking

the long view and stepping back and doing the overall returns to

the community, we think the HOPE VI program has actually been

very effective and very efficient.

Mr. DENT. Thank you. I think it’s been a good program too. I just

wanted to get your feedback on this. Thank you, Mr. Chairman. I

have no further questions.

Mr. TURNER. Thank you. We’ve been notified that in the next 10

minutes, we’ll have a series of votes. So what I’d like to do is in

closing, allow each of you, if there are other thoughts that you have

or other issues that we have not raised that you would like to place

on the record or a question that you’ve heard someone else answer

that you would like to comment on, get any closing additional

thoughts that you might have that you would like to leave with us

on the record.

Before I do that, I would like to ask Ms. Dolber, our staff have

prepared a number of questions that are highly technical in reVerDate 11-MAY-2000 11:52 Mar 05, 2007 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 D:\DOCS\32967.TXT HGOVREF1 PsN: HGOVREF1
81

sponse to your statements; and rather than go through those in

this format, I was wondering if you might be kind enough if we

submitted those questions to you in writing, if you would respond

back to us in writing that we would make it part of this record.

Ms. DOLBER. Sure. I would be happy to.

Mr. TURNER. I would greatly appreciate that. And with that, I

would like to turn for opportunities for closing statements. So I’ll

start with Mr. Clancy.

Mr. CLANCY. Thank you, Mr. Chairman. And thank you for the

opportunity to be here today. There’s just one item that I would

point to that we haven’t expressly dealt with; and I did cover briefly in my written testimony; and that is that this same challenge

of re-engineering and repositioning and dealing dynamically with

distressed affordable housing assets exists in the privately owned

Section 8 assisted housing portfolio that we’ve talked a lot about

in the public housing arena. And the same kind of approaches are,

I think, critically important in that arena. There is a section that

was passed, Section 318 of the HUD Appropriations Act of 2006—

2005, gave a 2-year window for moving project-based Section 8 contracts from obsolete developments to new developments or to other

developments.

That’s the first real avenue for, in effect, applying a HOPE VItype approach to distressed Section 8 properties; and I think housing authorities should be encouraged; and I think HUD should be

encouraged to look creatively at ways to use Section 318 to accomplish some of the same things that the committee has viewed positively that have been accomplished in public housing revitalization.

Thank you very much.

Mr. TURNER. Thank you. Ms. Dolber.

Ms. DOLBER. Thank you. I’d also like to thank you again for inviting us to be here. The communications with the capital markets

about federally funded types of transactions is very important, and

we really appreciate the opportunity to be able to provide our

thoughts.

I’ve mentioned the importance of communication. It really helps

to help us make decisions about where things are going, and it

helps investors as well.

I wanted to make a comment about what Mr. Clancy said about

competitive grants, if there was an aspect of competitiveness to it.

While that might not work for a structured financing like the capital funds securitizations that have been done because you have to

know how much each PHA is going to get, the thing that would be

beneficial for something like that would be that it does instill the

competitive spirit and a drive for excellence, which is really needed

in the industry.

And if PHAs are going to get their own credit ratings as opposed

to just getting ratings on issues that they might do, you know, a

finite issue like the capital fund securitization, if they had their

own ratings, that competitive ability to compete would help them

a lot, I think, to move forward to that kind of thing. But in a strictly structured financing, it doesn’t work as well.

Mr. TURNER. Thank you. One of the questions that we have for

you is your thoughts about transitioning to a rating for the agencies themselves and your recommendations on those processes. So

82

it’s good that you raise that in your closing because that’s one of

the questions that we’ll be coming to. Mr. Tracey.

Mr. TRACEY. Just one final observation and really a summary.

We talked quite a bit about the need for predictability, stability

and funding sources for public housing from the providers of private capital. Also, however, there is a need for a legal structure for

these transactions that provide secure collateral. Again, that comes

due to the certainty involved in the transactions that we are lender

or investor. Within the final point too, which we didn’t address is,

which ties back to the reference to CRA, is the need from the private markets for adequate and consistent returns because if we

build a market that’s dependent only on the negative incentives of

CRA, we haven’t built a market that’s sustainable over time, because as banks move in and out of compliance with CRA, as the

regulation changed, it’s been weakened in recent years unfortunately. In our view, that will not provide the consistent source of

capital, I think, we all want from our public housing authorities.

So from our perspective, I think there’s often a misconception

that our capital is limited by the CRA, and that’s really not a true

statement. There is ample private capital that will flow into public

housing markets, provided we have a stable, predictable source of

funding, safe and secure collateral and adequate returns.

Mr. TURNER. Mr. Tracey, I appreciate your comments in that regard; and I do think that alone is an issue that this committee

needs to pursue further, although the crux of our success may be

the relationships that are currently there, through CRA and the

banks and their expertise, our ability to encourage an expansion of

these types of investment opportunities and greater—other industry sector participation is going to be based on our ability to transition, make it more interactive, make it more stable and less of a

negative consequence, more of a positive. I’m certain we’ll be having further discussions with you on your ideas and thoughts as how

we can accomplish that.

I want to thank all of you for your participation. I know that in

addition to the time you’ve taken today, you’ve put in considerable

preparation for your testimony today, but I also want to thank you

for your dedication to your careers and your expertise to this important area because I know each of you, as you look into the communities that you’ve impacted, can see real changes have occurred

as a result of your choice to dedicate yourselves to what you’re

doing and real changes for the lives of the people who have benefited for the programs and the projects which you’ve applied your

expertise. So thank you for that.

And with that, we’ll be adjourned.

[Whereupon, at 11:19 a.m., the subcommittee was adjourned.]

Æ