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23–735 PDF 2005

OVERSIGHT OF THE RURAL

HOUSING SERVICE AND ITS

FISCAL YEAR 2006 BUDGET

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 10, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–8

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

GARY G. MILLER, California, Vice Chairman 

RICHARD H. BAKER, Louisiana 

PETER T. KING, New York 

WALTER B. JONES, JR., North Carolina 

CHRISTOPHER SHAYS, Connecticut 

PATRICK J. TIBERI, Ohio 

GINNY BROWN-WAITE, Florida 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

STEVAN, PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

MICHAEL G. OXLEY, Ohio 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

BARBARA LEE, California 

MICHAEL E. CAPUANO, Massachusetts 

BERNARD SANDERS, Vermont 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 10, 2005 ................................................................................................. 1

Appendix: 

March 10, 2005 ................................................................................................. 00

WITNESSES 

THURSDAY, MARCH 10, 2005

Davis, Russell T., Administrator, Rural Housing Service, U.S. Department 

of Agriculture ........................................................................................................ 00

Shear, William B., Director, U.S. Government Accountability Office ................. 00

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 00

Harris, Hon. Katherine .................................................................................... 00

Ney, Hon. Robert W. ........................................................................................ 00

Davis, Russell T. ............................................................................................... 00

Shear, William B. ............................................................................................. 00

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Davis, Russell T.: 

Written response to questions from Hon. Steve Pearce ................................ 00

Shear, William B.: 

Written response to questions from Hon. Steve Pearce ................................ 00

U.S. Department of Agriculture State and Area Office Information ................... 00

(1)

OVERSIGHT OF THE RURAL 

HOUSING SERVICE AND ITS 

FISCAL YEAR 2006 BUDGET 

Thursday, March 10, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:11 p.m., in Room 

2128, Rayburn House Office Building, Hon. Robert Ney [chairman 

of the subcommittee] presiding. 

Present: Representatives Ney, Harris, Davis of Kentucky, Waters, Frank, and Davis of Alabama. 

Mr. NEY. [Presiding.] Welcome today to the Housing Subcommittee. We do have another vote coming I think after about 10 

minutes of debate, so once that happens members will be coming 

over. What I was going to do was go ahead with my opening statement, and that way we could go ahead and get this portion out of 

the way. 

The Housing Subcommittee will meet this afternoon to discuss 

USDA’s Rural Housing Service and the agency’s budget proposal 

for fiscal year 2006. The U.S. Department of Agriculture Rural Development, RD, mission area administers programs that are designed to meet the diverse needs of rural communities with a variety of loans, loan guarantees, and grant programs, which include 

technical assistance and cooperative development. 

Within Rural Development’s mission area is the Rural Housing 

Service, RHS as it is known. RHS is responsible for providing decent, safe, affordable housing and community facilities in our rural 

communities. It issues loans and grants for rural single-family 

houses and rural rental housing apartment complexes. In this fiscal year 2006 budget proposal, RHS continues to address a multitude of management and budget challenges in both its single-and 

multifamily housing programs. 

Rural housing continues to have a portfolio of about 17,000 existing multifamily developments that provide housing for about 

470,000 low-income tenants, many of whom are elderly. These developments were primarily built in the 1980s and many are in need 

of repairs and rehabbing. The developments have an outstanding 

indebtedness, I understand, of about $12 billion. 

We are concerned about the physical condition of the existing 

projects, of course, and the ramifications of allowing the projects to 

2

leave the program. Recently, the Supreme Court ruled in favor of 

project owners who wish to pre-pay their loans and remove their 

property from the subsidized market. I have been working on this 

issue a good number of years. I am glad to see that the RHS is 

making progress on addressing the issue. A recent capital needs assessment indicated that only about 10 percent of the projects are 

potentially viable for non-subsidized use and could leave the program itself. This is significantly less than what I think was probably projected. 

The Section 538 multi-housing loan guarantee program was designed to leverage other sources of financing. The fiscal year 2006 

budget proposal includes $200 million for Section 538. I am pleased 

that the administration has doubled the amount available for the 

program from last year, which would help leverage other sources 

of financing for the multifamily housing projects. 

Only in operation for a few years, the program continues to 

evolve. RHS recently published a comprehensive revision of its 

multifamily housing regulations and the administration believes 

this will streamline the program and protect it against potential 

abuses. I support the administration’s efforts to make the Section 

538 program a more attractive component of the complete funding 

package, which includes access to secondary market funds and the 

use of tax credits and other subsidies. RHS programs differ from 

other federal efforts to assist homeownership. According to the 

President’s budget, RHS programs are means-tested and more accessible to low-income rural residents. 

In particular, the budget supports the Section 502 direct loan 

program. The mission of the Section 502 program is to provide direct assistance to those lower-income families that might be on the 

brink of homeownership. After experiencing an increase in income 

and home equity, the borrower is expected to graduate to private 

credit. In this program, the interest rate charged is directly related 

to the income of the individual. All loans are evaluated annually 

to determine if interest rates should be changed or if the borrower 

is eligible to graduate from the program. This is an important program and I look forward to working with the administration to improve its effectiveness. 

Over the past year, management at RHS has made significant 

strides, I believe, to improve the programs under its jurisdiction. 

Recently, USDA commissioned a report to analyze the Rural Development Multifamily Housing Program, identify problems, and provide recommendations for changes to address such problems. It is 

my understanding that the department is in the process of reviewing this report to determine what legislative actions should or can 

be taken. 

As part of this hearing, I have also invited the General Accountability Office, GAO, to discuss its three reports completed last year 

regarding the current issues facing RHS and its mission to provide 

affordable housing to rural communities. It is important that RHS 

continue to improve efficiencies so that its housing programs do not 

become vulnerable to possible future budget cuts. Often, RHS housing programs are the only option for low-and very low-income families. 

3

My roots in rural America run deep. I have a very rural district 

and I was born and raised in the Ohio Valley. I grew to understand 

that a safe and secure home is a foundation for a family unit, 

whether you are in a rural area or in a city or wherever you are 

at in the country. We have done a lot on this subcommittee with 

Congresswoman Maxine Waters of California. In fact, we passed I 

think 11-some bills at one particular time last session without even 

a roll-call vote. This is a lot of credit to Republicans and Democrats 

on the committee, and also with Chairman Oxley and ranking 

member Barney Frank. They have done a lot of work on issues in 

the committee in general, but also in housing. 

We have some areas to go. Minority homeownership, for example, 

is low and we have to do better. So again, whether it is a city or 

a rural area, it is important. But today, of course, we are focusing 

on the rural part. Today, my belief in the importance of homeownership remains the same as it always has been. As the Chairman of the Subcommittee on Housing and Community Opportunity, it is my goal to apply these fundamental values and rural 

experiences to help communities develop new economic vehicles 

that will enable them to grow and prosper. 

I look forward to hearing from our two witnesses today on the 

various ways in which we can have safe, affordable home issues 

and strengthen our rural communities and contribute to the overall 

quality of life for our rural families. 

Let me start with Mr. Russell Davis. He was appointed on July 

12, 2004 to serve as Administrator of the Rural Housing Service. 

Mr. Davis has extensive housing, financial and business experience. Prior to his arrival at USDA, he served as Senior Policy Adviser with the United States Department of Treasury. He has 15 

years of investment banking experience, specializing in public finance and economic development. He earned his bachelor’s degree 

from Harvard and is currently pursuing a graduate degree in applied economics at Johns Hopkins University. 

Mr. Bill Shear is Director of Financial Markets and Community 

Investment at the United States Government Accountability Office, 

GAO. Mr. Shear has directed substantial bodies of work addressing 

community and economic development programs, small business 

lending, the GSEs, which we talk about all the time these days, 

and FHA. Mr. Shear received his Ph.D. in economics from the University of Chicago and formerly served as a lecturer at the University of Pennsylvania. 

I want to welcome both of you. With that, we will start with Mr. 

Davis. 

STATEMENT OF RUSSELL T. DAVIS, ADMINISTRTOR, RURAL 

HOUSING SERVICE, U.S. DEPARTMENT OF AGRICULTURE 

Mr. R. DAVIS. Thank you, Mr. Chairman and members of the 

subcommittee. I would like to thank you for the opportunity to 

present the President’s fiscal year 2006 budget for USDA Rural Development’s housing programs. 

I am submitting my testimony in written form for the record and 

I will use this time to highlight our housing budget, which I should 

say has increased significantly from last year. We have a number 

of major new initiatives. In particular, I would like to expand on 

4

our major new initiative which is for multifamily revitalization programs. USDA Rural Development is the leading advocate for rural 

America, with 7,000 employees in over 800 offices nationwide. We 

are committed to the future of rural communities. We work every 

day to increase economic opportunity and improve the quality of 

life in rural America. 

As an integral part of Rural Development, the rural housing programs assist rural communities in many fundamental ways. We 

provide a variety of single-family and multifamily housing options 

to residents of rural communities. We also help fund medical facilities and other essential community facilities. The President’s budget provides an overall increase of $400 million in rural housing programs. The single-family housing programs provide several opportunities for rural Americans with very low to moderate incomes to 

purchase homes. Of the $4.7 billion in program level requested, $3.7 billion will 

be available as loan guarantees for private sector loans, including 

$207 million for refinancing more affordable loans for rural families. Also, with $1 billion available for direct loans, our commitment to serving those most in need in rural America remains 

strong. This level of funding will provide homeownership for approximately 40,000 rural families. The total program level request for multifamily housing is $1.07 

billion. This represents an increase of 30 percent from last year’s 

request; $650 million will be used for rental assistance, for contract 

renewals, farm labor housing and preservation. These funds will 

renew more than 46,000 4-year rental assistance contracts. We estimate using $27 million for multifamily housing direct loans to 

meet our preservation responsibilities, including prepayment prevention incentives. 

The President is also requesting $214 million in new money for 

a multifamily housing revitalization initiative. While the budget 

contains only a single line item for this initiative, it is in fact a 

first step so that this valuable part of rural America’s infrastructure can be preserved for another 20 to 30 years. There are approximately 17,000 properties in the Section 515 portfolio. These 

are small properties averaging only 26 units each. They are distinctly rural and can be found in over 9,000 distinct zip codes. 

There are a great number of small towns covered in this portfolio. 

The tenants in these properties face two immediate dangers. The 

first is that property owners may leave the program by prepaying 

their USDA mortgage. This leaves the tenants potentially exposed 

to higher rents and possible eviction. The second danger that the 

tenants face is that their properties may fail either economically or 

physically, leaving them effectively in the same condition as in a 

prepayment. 

Our goal in the initiative is first and foremost to protect the tenants. Protecting them from the prepayment problem has become increasingly important. First, we lost an important Ninth Circuit 

Court case, the Kimberly case, and related decisions last August. 

This gave owners the right to prepay immediately. A separate set 

of court challenges took an opposite tack, following the lead of last 

August’s Franconia decision. These owners are not asking to prepay, but instead to be covered for damages for their lost profits, 

5

which they claim could have been received had the government not 

broken its contract with them. Over 800 properties have sued for 

damages and over 8,000 more are eligible. 

In 2003, Rural Development commissioned a comprehensive 

physical assessment to quantify and place a price tag on this prepayment problem. In general, it found good news. Only 10 percent 

of the properties, approximately 1,700 properties, are in markets 

where rents are so high that the owners could prepay immediately. 

This represents approximately 50,000 at-risk units, but we only believe that only one-third will use legal or administrative means to 

prepay in fiscal year 2006. 

The prepayment tenant protections for fiscal year 2006 are simply a recognition of the need to get ahead of a tenant displacement 

problem and manage it in a cost-effective manner. The Bush Administration will be submitting a legislative package in the near 

future which will describe our initiative whereby the tenants are 

protected. 

Thank you for the opportunity to present our budget proposal. I 

look forward to working with the subcommittee. 

[The prepared statement of Russell T. Davis can be found on 

page XX in the appendix.] 

Mr. NEY. Director Shear? 

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. SHEAR. Mr. Chairman, members of the committee, I am 

pleased to be here this afternoon to discuss work we have conducted at the Rural Housing Service. With my written statement 

provided for the record, this oral statement addresses three areas: 

first, a report on how the Rural Housing Service determines areas 

that are eligible for rural housing programs; second, three reports 

on the agency’s rental assistance budgeting and distribution processes; and third, a report commissioned by the Rural Housing Service called the comprehensive property assessment. 

In summary, the Rural Housing Service has recently begun to 

make progress in addressing problems we have identified in our 

work. However, several problems at present prevent the agency 

from making the best use of its resources. In particular, statutory 

requirements for program eligibility may not best determine areas 

that should qualify for the agency’s housing programs. Changes to 

the way eligibility is defined might allow the agency to better designate rural areas and treat communities with similar characteristics more consistently. For example, while all definitions of ‘‘rural’’ 

are based in part on excluding the areas that are urban, we find 

that statutory requirements relating to metropolitan statistical 

areas problematic. 

MSA classifications are county-based, and therefore are subject 

to political boundaries. MSAs are not intended to be urban-rural 

classifications and MSAs can contain, based on census bureau designations, both urban and rural areas. Based on our analysis, we 

have found a better guide than MSA to better differentiate urban 

and rural areas. In particular, population density and census designations of urbanized areas and urban clusters provide a more 

6

useful guide to make urban-rural distinctions. Such changes would 

require legislative action. 

I will now turn to our analysis of the Rural Housing Service’s 

budgeting and distribution processes for its rental assistance funds. 

Weaknesses in the agency’s budget estimation and oversight of 

rental assistance funds increase the risk that the agency is not efficiently or appropriately allocating resources. We found that the 

agency had consistently overestimated its budget needs for rental 

assistance contracts in its Section 521 program. Namely, the agency used higher inflation rates than recommended and incorrectly 

applied those rates. Using and correctly applying the inflation rates 

provided by the Office of Management and Budget would help the 

agency more accurately estimate its federal assistance needs. 

In addition, we found that the agency lacked sufficient internal 

controls to adequately monitor the use of rental assistance funds, 

particularly in its funds transfer processes, its methodology for supervisory reviews of tenant files, and tenant income verification 

processes. The Rural Housing Service has recently moved on a 

number of fronts to correct the rental assistance program shortcomings identified in our reports. While it is too early for us to 

fully review the impact of these changes, we believe that the 

changes in how rental assistance budgets are estimated and the 

strengthening of internal controls, consistent with our recommendations, would result in greater efficiency in the administration of this pivotal program. 

Finally, I will provide a few comments addressing the recently 

completed comprehensive property assessment, which the Rural 

Housing Service initiated in response to our May 2002 study on 

long-term needs in the Section 515 Multifamily Housing Program. 

This Rural Housing Service assessment was done to develop a 

baseline for assessing the portfolio’s physical and financial condition. For this purpose, the study collected detailed information from 

a sample of multifamily properties. 

Its principal finding that the agency’s multifamily housing portfolio was aging rapidly and property reserves and cash-flows do not 

appear sufficient for basic maintenance of long-term rehabilitation 

needs are consistent with our work in the area. As we have stated 

in the past, such information is necessary to help determine how 

to spend rehabilitation funds as effectively as possible and to inform congressional decisionmaking about how much funding may 

be needed in the future. 

Mr. Chairman, that concludes my oral statement. I would be 

happy to answer any questions. 

[The prepared statement of William B. Shear can be found on 

page XX in the appendix.] 

Mr. NEY. Thank you. They have called a vote, so I am going to 

go over, and I assume some members will come back. Do you have 

the time to remain? Thank you. 

You are from Maryland, right? You are living in Maryland? 

Mr. SHEAR. Yes. 

Mr. NEY. Clemson just beat Maryland. I hate to break the news 

to you. 

[Laughter.] 

Mr. SHEAR. I will get over it. 

7

[Laughter.] 

[Recess.] 

Mr. NEY. Mr. Frank is on his way. I think what I will do is I 

will go ahead and ask a question and that way it will give a little 

more time when Mr. Frank comes for him to ask a few things. 

I wanted to ask, Mr. Davis, can you describe what you see as 

some of the obstacles that we have to homeownership? Not every 

one of them, but the main obstacles we have in the rural areas? 

Mr. R. DAVIS. We run into two problems continually, and that is 

the income levels of the tenants are not often high enough to afford 

the homes that are available, and their ability to repay because of 

debt levels or credit history do not allow them to qualify for a normal loan. Those are the two hurdles that we find ourselves addressing over and over. 

Mr. NEY. What are some of the things that you can do that HUD 

could not, or why are the programs over there versus what HUD 

could do, or do you have a different flavor to what you are doing? 

Mr. R. DAVIS. Sir, in the single-family homeownership program, 

we have a subsidy component in our direct program that allows us 

to go to much lower incomes than regular market-rate loans or 

even the traditional FHA loans. Our guaranteed loans are also targeted to rural areas, and we work with the lenders to help them 

understand the particular needs of rural borrowers. This is a distinctly rural program. 

Mr. NEY. Have you initiated any dialogue as a result of GAO’s 

reports? Have you initiated any dialogue internally yet on any 

changes or does Congress need to initiate that, or how do you see 

that working? 

Mr. R. DAVIS. We have been working closely with GAO regarding 

the definition of ‘‘rural’’ areas. I will defer to Mr. Shear in one moment, if I could just say that we are also working with the Economic Research Service within the Department of Agriculture to 

identify the specific impact on our programs. We appreciate the 

work that went into the report by GAO and we believe that their 

recommendations merit that we work together. We do believe that 

out-of-date boundaries serve no purpose and we look forward to 

coming up with a good way of ensuring that we are covering all of 

our rural areas. 

Mr. NEY. I do have a question for you, Mr. Shear, and I am sure 

Mr. Frank will have some questions. 

I think, Mr. Davis, you quoted 10 percent of the properties, what 

was that quote, in your total portfolio? There was a quote about 10 

percent, I think. 

Mr. R. DAVIS. In the multifamily portfolio, we have 17,000 properties. There, at one time, had been a concern about how many potentially could prepay; 30 percent or 40 percent? We hired a series 

of consultants to actually go out and conduct a very detailed analysis of a statistical sample of properties. We found that approximately 1,700 or 10 percent of the portfolio are in areas where it 

is economically viable for them to prepay. So we believe that the 

prepayment problem is smaller than we originally expected. 

Mr. NEY. Did GAO, Mr. Shear, find it at around 10 percent? 

Mr. SHEAR. In what we did, and this was a report a couple of 

years ago, we did not have the specific property information that 

8

the Rural Housing Service used in their recent assessment. What 

we did is use some kind of macro-type of indicators and said that 

there might be up to 23 percent of properties that might consider 

prepaying, so it was only ‘‘might consider’’ repaying, not that they 

would, so we said up to 23 percent. We think the 10 percent that 

the Rural Housing Service just came up with is consistent with 

ours, and rather than saying who might consider prepaying, it 

would be a matter of who would be likely to prepay. 

Mr. NEY. Your figures would be? 

Mr. SHEAR. Yes, it would be consistent in the sense that we said 

it could be up to 23 percent who might consider it, but we did not 

have the specific information to be able to say who would be likely 

to prepay, and that is what this assessment that RHS just conducted was able to do for their sample of properties. 

Mr. NEY. On the front of your report, I found this interesting, 

you note about the MSAs grandfathering communities and demonstrating a serious lack of mortgage credit are of marginal utility. 

So you believe, then, that those designations are just of marginal 

use in grandfathering? 

Mr. SHEAR. Can I start with the MSA? Then I will go to the 

other characteristics. One of the things is that MSAs are countybased. They are based on political boundaries, and they have 

changed over time. And so you end up with some situations where 

it is such a blunt instrument, where certain things do not make 

sense. We think that you could probably devise a system that 

would not, in a sense, require so much grandfathering if you used 

finer-scale information that is available in a mapping-type of technology. 

As far as the lack of mortgage credit, there are two points on 

that. One point is that Rural Housing Service basically says, all 

areas that are rural have a lack of mortgage credit. So it is not a 

distinguishing factor. And then the other thing is based on research by a number of parties, including USDA’s Economic Research Service. It appears that the problems with lack of mortgage 

credit is more income-driven, rather than being geographically 

driven. So what makes sense to us, and I think it is consistent with 

RHS’s policies, is that in terms of how you target your assistance 

once eligibility is determined, you would want to take into account 

the incomes of the potential recipients, rather than making the 

rural definition take into account lack of mortgage credit. 

Mr. NEY. Thank you. 

Mr. Frank? 

Mr. FRANK. Thank you, Mr. Chairman. 

Obviously, the series of votes has interrupted this. I do not think 

the sparsity of attendance is any indication of a lack of concern on 

the part of the subcommittee, so I appreciate your being here, and 

I appreciate to the Administrator, the chance we have had to discuss these things. 

I think one of the misunderstandings people have is that when 

we talk about affordable housing that we are talking about Chicago, New York, Boston, et cetera. Clearly, providing affordable 

housing in the rural areas is a very important piece of this. We 

have some very well-run programs here. I am really focused on tryVerDate 0ct 09 2002 12:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\DOCS\23735.TXT FIN1 PsN: MICAH
9

ing to particularly preserve the affordability. I have appreciated 

some of the conversations we have had. 

Let me say to Mr. Davis, of the units that you now have that are 

in the affordability category, as I understand our previous conversation, you do not think there is going to be any significant loss 

of units due to gentrification or economic pressure? I understand 

that there may be some abandonment in some areas of the country 

where there is a sparsity of population. To the extent that we have 

a problem of economic forces driving this out of the inventory because people can make more money by dumping the poor people, 

am I correct that you do not think that is going to be a serious 

problem for us? That it is a small enough problem so through the 

right public policies we can essentially prevent it from happening? 

Mr. R. DAVIS. This was one of the major concerns that led us to 

undertake our study. We were surprised when the physical inspectors went out and came back with their reports, to find that the 

portfolio was in much better condition than we expected. Properties 

have held up very well. They were well-constructed, but they were 

done under cost containment restrictions. Our properties were not 

designed to be the Taj Mahal at the time. 

So we have two good forces working in our favor. Number one, 

the properties have held up and can be expected to hold up into 

the future, given adequate rehabilitation and maintenance. But at 

the same time, they are not so attractive and beautiful that they 

can be taken to very high-market rents. They do not have pools. 

A lot of the features of the architecture say that this is affordable 

housing for 1980, no fancy doors on the closets and so forth. So 

they are nice enough to last, but they are not nice enough to attract really high rents, and that was a surprise to us. 

Mr. FRANK. You call to my mind a terribly sexist song, which I 

do not endorse but cite, if you want to be happy for the rest of your 

life, make an ugly woman your wife. 

[Laughter.] 

Obviously, I speak on that from a position of perfect neutrality. 

No one can accuse me of having any particular involvement here. 

That is good news. I think one of the problems we have in the 

non-rural areas is that we tend from a combination of poor public 

policy, financial squeeze, and economic forces, to lose a lot of the 

units. I am glad to hear that that is not the case here. 

Also, I am pleased that you have these plans through vouchers 

et cetera to protect the tenants, but I take it from our conversation 

that you agree that it is also important that we protect the tenancies, that we do not want to simply protect them for the existing 

tenants, and then when they move out, lose those to the inventory. 

You believe you are able to control that? 

Mr. R. DAVIS. Absolutely. The voucher proposal in the President’s 

budget, and it is $214 million of new money because we care very 

much about protecting them. But it is not designed to detract from 

the project-based Section 515 program. It is a temporary emergency 

measure to take care of people. I think of it kind of like a life raft. 

It is temporary. It is a last resort. We would like to keep them in 

their properties. We would like to keep the properties in our stock. 

This is only if the tenants are lost. Right now, the 515 program has 

no mechanism to protect them. 

10

Mr. FRANK. And also, we talked about while the properties are 

in generally good shape, there is some need for repair, and we do 

note that this budget does not include a lot of money for that, but 

you have some reason to think that in future budgets we, and I 

hope we can kind of make those intentions as public as possible. 

We cannot make them binding, but maybe we can help them. It is 

a kind of a multi-year plan and you do assume later in this, before 

there is any deterioration to the point of uninhabitability, that we 

will get the money for the physical improvements necessary. Is that 

correct? 

Mr. R. DAVIS. Yes. The important thing is that we want to see 

the entire portfolio rehabilitated and that rehabilitation used as a 

vehicle for extending the use restrictions, so that we essentially get 

the portfolio for another 30 years as cheaply as possible. The question is, do we just put all of the money in from appropriated 

money, or do we attract money from other properties, cash-flows, 

and from the private sector? Our goal is that we get as much 

money from other places as possible. We believe that we have identified a process to start with simple restructurings where we can 

move money possibly between properties or from tax credits. 

Mr. FRANK. That raises a question. I would ask, Mr. Chairman, 

to facilitate this, because I would hope we could go forward with 

this, and obviously a lot of it is going to be in the appropriations 

process. Are there any things we can or should do through the authorizing legislation that would facilitate this? 

Mr. R. DAVIS. Yes. We will have a legislative proposal coming up 

with the department’s legislative package. We are looking to take 

the 515 program out of a very micromanaged 17,000 silos that cannot share resources, budget-based program, into something that 

incentivizes the owners to bring us extra money, bring in tax credit, and in other resources. 

Mr. FRANK. I appreciate that. Mr. Chairman, I hope that we will 

be receptive to legislating to help on this. 

Let me just ask, Mr. Shear, if you have any comments on the 

conversation we have just had in terms of does that strike you as 

feasible and within the realm of what we can accomplish? 

Mr. SHEAR. I think that what is in next year’s budget for vouchers is something that is very important in that there are probably 

going to be properties that are going to be prepaying, the estimate 

being about 10 percent of properties. It is important to protect 

those tenants. As far as going forward, I think back to before my 

time in housing, when you had certain adjustments made with the 

HUD portfolio, with the Section 8 portfolio, that RHS will be faced 

with some similar challenges, but RHS’s might be perhaps more of 

a challenge, they are manageable, but they might be more of a 

challenge than what HUD had in the sense that you have properties with cash flows that do not appear to be sufficient to support 

those units without extra subsidy. 

Mr. FRANK. Okay, I appreciate that. Of course, those would not 

be prepayments. 

Mr. SHEAR. No, those are the other side of the equation. 

Mr. FRANK. Are we doomed to lose 10 percent of the units to prepayment, or are there things that we could do, in cooperation with 

some of the owners, to diminish that? 

11

Mr. SHEAR. We really have not done work on that to really form 

a basis for that. 

Mr. FRANK. Ten percent sounds higher than you would have sort 

of estimated to me, in terms of units lost to prepayment. 

Mr. R. DAVIS. We believe that 10 percent right now have an economic incentive. They could raise their rates more than 60 percent. 

That is kind of the cut-off. We believe that there is a good reason 

to save a lot of that stock and a lot of the State agencies are focusing their resources on those. 

Mr. FRANK. Okay. I think that ought to be a priority. Again, anything we can do legislatively, and I know we cannot order people, 

we cannot by court decision and should not try to take away their 

property rights, but whatever we can do to diminish any loss of 

units there, I would appreciate it. 

Thank you, Mr. Chairman. 

Mr. NEY. Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman. 

As some of you know, the housing issue is very near and dear 

to my heart because of my circumstances growing up, and particularly in our district. I see quite a number of uniquenesses. We are 

in a district that is transitioning, largely rural, transitioning into 

the Appalachian area. As you are looking at budgetary issues, and 

I am directing this question to Mr. Davis, I am interested in your 

views on some creative approaches to dealing with the challenges 

that we are having getting folks into homeownership so they can 

start building a nest egg, building a future, and strengthening the 

families and communities. 

I see burdens ranging from cost, locally material costs, a code 

compliance cost that has nothing to do with safety or sound 

science. Federal regulations I think sometimes get a one-size-fitsall mentality. For example, in our area where we have what our 

friends out west would not call them mountains, but we do in Kentucky, where density issues can push them out of rural designation 

in certain parts of the district. 

What I would be interested in you commenting on, if you would, 

because you have had an opportunity with your team to provide 

some extensive study of alternatives and needs as we adapt to the 

future. Would you share with us your views on the types of legislation that you would propose, and perhaps a priority of what is most 

important to you and your team to get people into housing? 

Mr. R. DAVIS. Sure. First of all, if I could say that one of the 

strengths of USDA’s Rural Development is that we have 50 State 

offices with the ability to manage their own policies locally. They 

use that flexibility to meet needs that are peculiar to their areas, 

and then they share that with the other areas. We would like to 

work with the committee to make sure that any of those ideas that 

are working in one area are translated up into something that 

could be made nationwide, and if there are any impediments in 

statute, we would certainly like to look to that. 

The definition of ‘‘rural’’ is something that we are working on 

with GAO, and we will obviously implement the will of Congress 

in this matter, but we want to be particularly helpful in helping 

you understand the implications of different approaches to defining 

‘‘rural.’’ We want to make sure that we really are putting our 

12

money into rural areas and not diffusing it into too broad of a definition. But there is a distinction between what is an eligible area 

and what is an area that we want to target. Both of those are areas 

that we would like to work with the subcommittee on identifying 

ways that we can find things that work in particular areas in your 

state. Was there a particular program you had in mind? 

Mr. DAVIS OF KENTUCKY. Well, you are somewhat familiar with 

our needs in the Midwest, and in Kentucky and the Ohio Valley, 

where the Chairman and I are from. Do you have any specific types 

of legislation or any specific piece of legislation that you would see 

as applicable, as a priority that you want to bring forward? 

Mr. R. DAVIS. We do not have one in our legislative package that 

is being prepared at the moment. However, we do believe that we 

will have some comments in conjunction with GAO in the coming 

weeks and months, perhaps, if it may help understand where we 

can write some legislation, or if we could get some legislation that 

would help. In the Eastern Kentucky area or Northern Kentucky, 

there is a concern that density measures, which GAO has been discussing with us, will affect areas that might be very mountainous, 

for example, have a lot of people densely packed into a small valley. We want to make sure that any changes would not adversely 

affect those areas, and actually might help target them better. 

Mr. DAVIS OF KENTUCKY. Just a further point. Mr. Shear, you 

may be the person to answer this question, but I am encouraged 

to hear that you are looking at best practices in different parts of 

the country. Is there an ability within the regulatory framework to 

assure that there is not a one-size-fits-all approach, that from a regional standpoint, a certain set of practices may be very applicable 

in that region, but not necessarily transferable to another region? 

To have some ‘‘autonomy’’ probably is not the correct word from an 

accountability standpoint, but a uniqueness that you can customize 

to a region and fit with an intent that gives fiscal accountability, 

but is ultimately getting folks into housing in effective programs. 

Mr. SHEAR. I think you outlined what is really ideal state. One 

of the things that has always been present in our work on the 

Rural Housing Service is where does it make sense to have a specialized agency dedicated to rural housing? Among the areas in 

particular, I will take Eastern Kentucky in being part of the Appalachian region. There are certain regions of the country that we 

think have some very pressing housing needs, where those might 

be the areas where it makes more sense to have a separate Rural 

Housing Service that has the local offices, has the field offices, and 

can be somewhat adaptable to local conditions. 

Mr. DAVIS OF KENTUCKY. Okay. Thank you. 

I yield back, Mr. Chairman. 

Mr. NEY. Thank you. 

The gentlelady from California, our ranking member, Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I am trying to understand the fact that there is an increase in 

the Rural Housing Service budget. At the same time, it appears 

that we are going to lose the opportunity to deal with some of the 

poorest tenants. The information that I am looking at, the Section 

515 program has funded rental housing for some of the country’s 

13

poorest people living in 17,000 properties in underserved rural 

communities across the United States. The majority of these properties were built between 1970 and 1980 and in need of modernization and repair. There was a report that was done that talks about 

the existing tenant base, the average age of the property, and of 

course the income and the program supposedly provides subsidized 

loans for three purposes: capital repair of aging 515 units, incentives to preserve units as affordable, and capital funds for the new 

construction of new affordable multifamily units. 

How is it then that the budget request reduces Section 515 loan volume from $100 million to $27 million, a 73 percent cut? How do 

we deal with that? 

Mr. R. DAVIS. If I can say that we are strongly committed to the 

515 program. This is why we have a major initiative to preserve 

the program and have added $214 million as our first step in doing 

that. I would say that in the future we will be addressing the physical needs of the existing stock. The 27 million for Section 515 

loans, that was $100 million last year. We are proposing a lot of 

for the 538 program. We have doubled the size of the Section 538 

loan program. 

Ms. WATERS. What is the 538? Describe what that money will 

do? 

Mr. R. DAVIS. Section 538 is guaranteed loans; 515 is direct loans 

straight out of the Treasury to the borrower, and has a 1 percent 

interest rate. The 538 Program is guaranteed. The private sector 

makes the loan at essentially the government’s borrowing rate. The 

538 Program is much more flexible for use with the tax credit program, so that it can attract tax credits in for rehabilitation. So of the difference between the $27 million and the $100 million, approximately half is for rehabilitation that we can do better 

in the 538 Program. 

Ms. WATERS. Does the 538 have any subsidies for renters? 

Mr. R. DAVIS. Section 538 does not itself have subsidies for renters. It has an interest rate credit component, so there is a buydown of the interest rate from higher market levels, but it is an 

indirect subsidy in that it goes into the property. What it does, 

though, is it can be used with the tax credits. The Section 515 Program, we cannot mix with tax credits because that is considered 

over-subsidizing under the tax code. 

Ms. WATERS. The people who are covered by 515 now, would they 

be eligible for these 538 loans? 

Mr. R. DAVIS. The 538 loans with tax credits will go to 40 percent of median income. To go below that, we look for other state 

funds or other ways. 

Ms. WATERS. So what you are telling me is no; that the 538 

money cannot really be used for these very, very poor people whose 

average income is $9,075? What are they going to do? 

Mr. R. DAVIS. Again, we are first addressing the structural problems of the 515 Program through the revitalization initiative. We 

are using 538 to get people down to 40 percent. I understand your 

comment about the very, very low income, if you would categorize, 

I guess, below 40 percent as what we are missing. The difference 

in the amount being spent on new construction last year and in fiscal year 2006 is approximately 450 units, of which about one-third 

14

would have rental assistance. We are talking about a small 

amount. We have added a very large amount in the initiative of 

people that we will be bringing into the RA universe. Of the 15,000 

units we expect to do next year, about 3,000 are people who are 

not getting RA right now. 

Ms. WATERS. All right. I guess what I conclude is this, that there 

is a significant cut in the 515 Program. Do we agree on that? 

Mr. R. DAVIS. We believe that we are addressing a major program. 

Ms. WATERS. No, no, no, no. I did not ask what you are addressing. Is there a cut? Does this budget propose a cut in Section 515? 

Mr. R. DAVIS. This budget proposes that we have a shift of funds 

from Section 515 to Section 538. 

Ms. WATERS. From $100 million to $27 million. 

Mr. R. DAVIS. For loans in Section 515. 

Ms. WATERS. Okay. Section 515——

Mr. R. DAVIS. Yes. 

Ms. WATERS. There is a cut from $100 million to $27 million. 

Now, do you want to qualify that in some way so that I am not 

talking about all of 515? So what is it you want to tell me about 

that cut? 

Mr. R. DAVIS. What we look at is the number of people served, 

and we are expanding the number of people who are being served. 

Ms. WATERS. Okay. So there is a cut, and you are proposing that 

your 538 funding will take care of the people who would normally 

be taken care of with 515? 

Mr. R. DAVIS. No. I am saying that of the difference between $27 

million and $100 million, half of that would not have been for new 

construction anyway. It would have been rehabilitation and we are 

not doing that in 515. We are doing it in 538. Of the difference, 

we are picking that up in our rental assistance accounts and picking up many more people than were covered in the loan account. 

Ms. WATERS. Okay. 

Mr. R. DAVIS. This is really not an attempt to cut the 515 Program. This is an attempt to broaden the 538 program. 

Ms. WATERS. I do not care what the intent is. It looks as if some 

people are going to be lost in the way that you have described this 

funding. Am I right or wrong? 

Mr. R. DAVIS. We will be doing less new construction with the 

515 Program. We will be doing more with the 538 and we will be 

doing more with rental assistance. 

Ms. WATERS. Okay. Then we have a problem here. I thought that 

there was an understanding that there was an increase that everybody would benefit from. It appears that that is not the case. Is 

that correct? 

Mr. R. DAVIS. There is an increase in the housing budget. 

Mr. NEY. Will the gentlelady yield? 

Ms. WATERS. Okay. All right. Yes. It looks as if, and the staff is 

identifying that it is only the top 10 percent that is going to benefit 

with this 538 Program. 

Mr. NEY. Okay. We think we have it solved. 

Ms. WATERS. Well, what Clinton is suggesting is that you need 

to describe to us the voucher program and how it works. What is 

15

the plan here? How does the program work? How is it going to 

work so that it will satisfy our concerns, the voucher program? 

Mr. R. DAVIS. The voucher program is a temporary tenant protection program. It is not an attempt to turn a project-based program 

into a tenant-based program. We have 50,000 units that are in 

high-cost areas, primarily California, Oregon, Washington and a 

few other high-cost cities where the rents could be raised so high 

if the property were taken to market that none of the residents 

could afford to live there. We have no mechanism in the Section 

515 Program to provide them with a voucher or anything else. 

Until 2006, actually, we have to go to HUD and ask for vouchers 

or ask the state to take care of things. That is a mechanism that 

has been missing in 515 and we are proposing that that be put in 

place. The way it is envisioned, and this again will be in our legislative proposal, but the idea is that the voucher would be something that could be used portably by the tenant to either stay in 

their current property and pay the higher rent, or move to another 

property in the same area. The voucher would be subject to automatic renewal, just as our RA program is. For budget purposes we 

had assumed that people who currently have a rental assistance 

contract unit would get a 5-year voucher at which point there 

would be an automatic contract renewal subject to appropriations. 

I cannot promise anything about future——

Ms. WATERS. Okay. That is the 10 percent in these high-priced 

markets. 

Mr. R. DAVIS. Yes. 

Ms. WATERS. Okay. 

Mr. R. DAVIS. And may I just add one thing. 

Ms. WATERS. Yes, go ahead. 

Mr. R. DAVIS. I just wanted to say that one valuable feature, 

which is new, is that currently one-third of our units, in these 

properties probably one-quarter, one-quarter of the units have people who do not have RA right now. They are paying more than 30 

percent of their income, so these are the overburdened tenants. 

These tenants who are not now being protected down to 30 percent 

of their income would come into the voucher program and would 

receive the extra assistance. So we are actually expanding the universe of people who are getting this. 

Ms. WATERS. Okay. So then it is not just for what I was describing as the top 10 percent. Those people who are eligible based on 

what you just described, who are paying more than they should be 

paying, would also be eligible for vouchers. 

Mr. R. DAVIS. Yes, in this tenant protection program. 

Ms. WATERS. All right. 

Mr. R. DAVIS. We are not trying to protect high-cost properties 

or owners. We are trying to protect the low-income tenants in these 

properties. 

Ms. WATERS. All right. Thank you. 

Mr. NEY. Mr. Davis? 

Mr. DAVIS OF ALABAMA. Thank you, Mr. Chairman. 

Let me pick up on I suppose the same area that Ms. Waters is 

pursuing, but a slightly different aspect of it. One of the concerns 

obviously that we have is around the vagueness of the voucher program, and frankly I do not know if we know as much about it as 

16

we would like to make a critique on it. One of the concerns that 

we have is are we going to be covering people who are suffering in 

rural areas and low-income areas to the degree that we need, or 

are we only going to be covering just a subset of those people who 

live in communities that have certain characteristics? 

Alabama, for example, certainly rural Alabama does not have a 

hot real estate market. It is not an area where real estate values 

are exploding out of people’s reach or capacity. The problem in 

rural Alabama is substandard housing, low incomes, poor housing 

stock, that kind of thing, lack of credit. How does this voucher program affect people? Does it reach people and will the money be 

there in the program to reach people who are living in rural areas 

that are not experiencing rapid rises in property values? 

Mr. R. DAVIS. This voucher program is a tenant-protection program for those facing prepayment. So it is aimed at high-cost 

areas. I can get a list of any properties that might be affected in 

Alabama or other areas. 

Mr. DAVIS OF ALABAMA. I can guarantee you, there are very few 

high-cost areas in Wilcox County, Green County, Perry County and 

Dallas County. 

Mr. R. DAVIS. It is very likely. Where it could happen, though, 

is where an area was rural and then a town or a city grew and created upward pressure on rents. It may be possible that that has 

happened in one of your areas. 

Mr. DAVIS OF ALABAMA. Let me tell you my concern about that. 

I am on the Budget Committee. We just finished our markup last 

night. We will vote up a budget next week in the House and Senate 

side. Over and over, this conversation happened, that we are trying 

to assess our priorities. We are trying to decide what we can really 

spend money on, where we can improve efficiencies. It strikes me 

that the primary housing problem in rural America is honestly not 

the one you just described. You have described a particular problem, people who have moved into rural areas and the values in 

these areas are escalating beyond their immediate reach. That is 

a problem in America. 

The much larger, more acute problem in America, and rural 

America, seems to be low-income people who are living in areas, or 

even moderate-income people living in areas the banks do not want 

to go into, areas where there is not an active development market, 

and in areas where the quality of the housing stock may be poor. 

That seems to me to be a much more acute problem. 

So as we refine the 515 Program, my concern is that it seems 

that we may be narrowing its scope instead of widening its scope 

to really get at the problem. I mean, tell me if I am wrong or if 

I am missing something when I say that. 

Mr. R. DAVIS. You are correct that there is a problem with income levels in rural America for buying certain single-family homes 

above a very modest level. Let me speak to both of our single-family and our multifamily programs. Under our single-family programs, we are increasingly targeting areas of the country that private lenders shy away from. That is one of the values of our guarantee program, that we have targeted areas that we can direct 

lenders to provide financing. We do not want our private lenders 

to just sit in the cities and make the loans that are close by. 

17

Mr. DAVIS OF ALABAMA. What is the criteria for those target 

areas? 

Mr. R. DAVIS. Well, they generally are income and general economic indicators of median income and unemployment. The targeting decisions are administrative. When I spoke earlier of the 50 

state directors, we have our State offices look to see what are the 

problems in their states to make sure that they set targeting criteria that are the most useful to them. So we have an effort there. 

In our direct loan program, we are increasingly targeting very low 

income people as opposed to low-income people. Fifty-five percent 

of our loans are now going to very low income as opposed to low 

income. So we are pushing that program farther down the income 

scale and we are pushing the guaranteed program farther out into 

the outer areas. 

On the multifamily side, it is important to understand that this 

prepayment voucher program is part one of a two-part story. Part 

two is the 14,000 properties that need rehabilitation. That is something that will grow over the next 2 to 3 years and hit its stride, 

but will go on for another 8 to 10 years. We need to rehabilitate 

14,000 properties basically in the next 10 years. But that will create an industry that knows how to make a lot of little loans in 

rural America for multifamily. We believe that that will help generate more of this housing in these areas from the private sector. 

Mr. DAVIS OF ALABAMA. Okay. Mr. Chairman, my time appears 

to have expired. 

Mr. NEY. We have a little bit more time, too. I was going to ask 

a question, but if you all want to ask any more questions, it would 

be fine. 

The question I had is, as you start to develop from the report 

some changes that you want to do, do you sit down with GAO that 

wrote the report and try to get their perspective on it? They wrote 

the report and they know what it is. 

Mr. R. DAVIS. For the prepayment problem or the rural definition 

issue? 

Mr. NEY. Either that you want to change. 

Mr. R. DAVIS. We work closely with GAO to get their input. We 

can provide information to you as it is developed. 

Mr. NEY. The question I had, Mr. Shear, is you provide a lot of 

studies to GAO. 

Mr. SHEAR. Yes. 

Mr. NEY. I should say GAO has provided a lot of studies to the 

Congress and the committees. What is your assessment of the 

Rural Health Service at this time? Has it made progress? Has not? 

What is your assessment, just overall? 

Mr. SHEAR. I think overall, I have something very positive to report, and certainly more positive than I have been able to report 

in the past in that when we look at certain suggested changes that 

would improve the efficiency of the programs, improve the efficiency of the subsidy process, that when we look at those operations there appears to be changes along the lines that are consistent with our recommendations. 

So I would say certainly in the last few months, we have not 

been able to go back in and say, how well are these changes, 

whether it is in the budget estimation process or in terms of adVerDate 0ct 09 2002 12:47 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\23735.TXT FIN1 PsN: MICAH
18

dressing internal control, but we see a much more receptive environment, a much more constructive engagement than we have experienced in the past. So we are hopeful. We have not been back 

in to take a close look at some of the things we have looked at even 

as recently as the last few months. 

Mr. NEY. Bakersfield, California is in here; Brookside, Ohio, of 

course which I am familiar with, is in there, where you have a dividing line that divides one house from the other and one would 

be a different classification depending on which side of the street 

you are on. You have Bakersfield, and you mentioned Belpre, 

which is across, I used to represent Belpre a long time ago. 

Those are examples of where the definitions should be changed. 

Mr. SHEAR. I would call this that what we are pointing at is 

using a different type of guide. Population will always be important 

in defining what is a rural area, but what we are looking for is a 

different guide to try to make such determinations, rather than a 

county-based system where you are using political boundaries. I 

think that is the most important thing that comes out of this, because of the way different types of rural areas and urban areas 

change over time, and how even the definitions of ‘‘metropolitan 

areas’’ change over time. 

In terms of the examples we have there, there is a question at 

the Economic Research Service at USDA, there is a lot of research 

that has gone into how do you define a degree of rurality, and that 

would get into this question of trying to pose how could you redefine eligible areas in terms of looking at rurality. Here, we use 

those examples in this testimony and in our report to try and give 

an example of where lines are blurred. Because of changes that 

have occurred over time, in either definition or in terms of demographics, it draws into question of how difficult it is to determine 

what is truly a rural area. We think it can provide, you know, the 

guidance that can lead to a better basis for defining what should 

be eligible for Rural Housing Service programs. 

Mr. NEY. It is kind of tricky when you deal with the changed definition in the sense of, as you are writing up the law, how does it 

affect so many communities. It is a process that we have to be pretty careful on, is it not? 

Mr. SHEAR. I think there is a lot of care involved either in using 

current statutory language like, for example, you brought up 

Belpre and I hope that we have not created a problem for ourselves 

by referring to a district that you used to represent. But at any 

rate, there is a problem with the existing definition when you have 

different state and field offices and loan officers, different officials 

from those field offices from RHS that are making decisions where 

there is no real clear guidance and it is hard to get at. What are 

we trying to get at with these rural definitions, when the characteristics of counties and their geographic extent is very different in 

different parts of the country. The definition of metropolitan statistical areas is very different. 

So we think that to some degree coming up with a new guide to 

this might lead to greater clarity in how we define rurality because 

it is based on the characteristics of those specific geographic areas 

themselves, rather than being focused on political boundaries. 

Mr. NEY. The gentlelady from California? 

19

Ms. WATERS. Thank you very much. 

Let me just change the questioning a bit to ask about how you 

are organized so that I can better understand. How are you organized? Where is your main office? Where are your offices? And how 

do you interact with all the rural areas of America? Just kind of 

give me a brief. 

Mr. R. DAVIS. Sure. Rural Development’s mission area within the 

Department of Agriculture has three areas: Rural Housing Service, 

Rural Utilities Service, and Rural Business Service. All three are 

headquartered in Washington, D.C., but are decentralized in the 

sense that every state has a State office with a political director 

who has the flexibility to make decisions within that state. 

The offices in the field can offer any of the services from any of 

the different areas, so we have people who in the morning might 

work on housing issues and might work on business issues in the 

afternoon. We are really trying to get them all working together because in small communities you need to have different programs 

working well with each other. 

The national office mostly sets the regulatory policy and provides 

guidance and instruction to the field, but the decision-making, the 

servicing of the loans and the origination of the loans, all of those 

decisions are done locally. We have 700 offices in rural areas, plus 

we can have temporary offices for areas that are farther out, Indian reservations and places like that. We can have people go out 

and set up for 1 day a month or 1 day a week, things like that. 

So we have very, very broad physical coverage of the country. 

Ms. WATERS. If I may, and if you do not mind, I would like to 

ask about Alabama, because I get a better understanding of how 

you work based on what I have been able to see in that state. 

Where is your State office in Alabama? 

Mr. R. DAVIS. It is in Montgomery. 

Ms. WATERS. It is in Montgomery. If I am in Selma and I want 

to make a loan, I want to get the services, what do I do? 

Mr. R. DAVIS. You would go to your local office and they would 

show you your options. 

Ms. WATERS. You mean, if I was in Selma, I would go to——

Mr. R. DAVIS. There is probably an area office, I do not know 

what is closest to Selma, but there will be offices. 

Ms. WATERS. In Birmingham? In Selma? 

Mr. R. DAVIS. Near Selma, there will be a field office. 

Ms. WATERS. Do you know where it is? 

Mr. R. DAVIS. I do not know. 

Mr. DAVIS OF ALABAMA. Is that a question to me, Ms. Waters? 

Ms. WATERS. Yes. 

Mr. DAVIS OF ALABAMA. I would assume if you have an office in 

Montgomery, you probably do not have one in Selma. Whether that 

is good or bad, that is my assumption because they are 45 minutes 

apart, but obviously I do not think you have an office in Selma. 

Mr. R. DAVIS. I do not. We can provide a list of the offices. 

Ms. WATERS. That is okay. I am just trying to get an idea of how 

you work, so I get a better feel for it. So that someone living in 

Selma wanted to avail themselves of the services, how do they get 

to know or learn about what you do? 

20

Mr. R. DAVIS. We have regular outreach programs to the community, but most directly they would come to our office, the Rural Development office that is closest to them. 

Ms. WATERS. Yes, but I am Miss Jones and I live over by the 

railroad track someplace. I have never heard of you. How do I hear 

about you? 

Mr. R. DAVIS. We do community outreach efforts to advertise our 

existence and our programs, but we generally have the applicants 

apply directly to our offices. If you are asking if we set up in satellite buildings or something like that, is that something you would 

suggest? 

Ms. WATERS. No, I am just asking how do you get the information out about your program? Where would you say you have the 

largest concentration of dollars in the United States? In what 

state? 

Mr. R. DAVIS. The largest concentrations will be in the largest 

states. We allocate to the different states based on population 

measures. 

Ms. WATERS. So you do have an allocation formula? 

Mr. R. DAVIS. We allocate to the states according to a formula 

that may have some flexibility, but it is predominantly population 

in rural areas. 

Ms. WATERS. So in the State of California, because I heard Bakersfield mentioned, California has an allocation that takes care of 

all of our rural areas also? 

Mr. R. DAVIS. The state will get an allocation, and then they 

have areas, their area offices that they have divided the state and 

they will presumably allocate to each of those offices an amount for 

that area. 

Ms. WATERS. Whatever it is that you are doing, does it work? I 

mean, do you feel that the information is disseminated in ways 

where the average person who needs the service would know about 

it? 

Mr. R. DAVIS. We understand that marketing is something that 

we must continually be doing, and that is a major part of what people do with their time in our local offices. We are limited by the 

nature of our budget, but we spend an enormous amount of time 

reaching out to housing groups in the area, local community 

groups, getting the word out. Because if those allocations to each 

of the states are not put out, we pull it back and give it to another 

state that does put it out. So there is a lot of competition between 

the states to make sure they get rid of their monies, as it were, so 

that they do not lose it. So there is a real effort to get the word 

out. 

Ms. WATERS. All right. I am going to ask if my staff can get with 

your staff so that I can get an organizational chart with the identification of all of your offices at the state level, and then the offices 

in the areas associated with the state. I want to take a look at the 

budget, for example, for my state. 

Mr. R. DAVIS. Sure. 

Ms. WATERS. And see how that works. We may need to interact 

with your staff to ask a number of questions so that we can get 

a better sense of how all of this works. 

Mr. R. DAVIS. We would be happy to provide that information. 

21

Ms. WATERS. Thank you. 

Mr. NEY. Mr. Davis? 

Mr. DAVIS OF ALABAMA. I have a few, Mr. Chairman, and I recognize Ms. Harris just walked in, so Ms. Harris I will try not to take 

too much time. Let me for a moment pick up on Ms. Waters’ point 

because I want to make sure you all get the point that I think that 

she is trying to make to you. The problem in a lot of southern 

states is when we are trying to engage in efforts to reach people 

in the rural communities, we often put the offices in the nearest 

urban community to that rural community. You go to Montgomery 

and Selma because that is the more convenient place. I think the 

point that she is making, and I do it as a point that you should 

think about, is structuring some of your offices and some of your 

outreach to meet the physical realities in these communities. 

It is a challenge doing outreach in rural Alabama, rural Mississippi and rural Georgia. You are dealing with people who may 

not have the same access to real estate agents. You do not have 

as many real estate agents. You do not have as many banks. The 

conventional kinds of institutions that you all depend on in your 

suburban southern cities just are not there in the rural areas, so 

it is not just enough to say, okay, we are in Montgomery, we are 

45 minutes away. I assume that is the point that she was making 

to you. 

Let me go back and spend my last round of questions on, again, 

priorities. If we are going to have a new $214 million on the table 

and we are going to try to do something of interest with the 515’s, 

let’s focus again on the choice. Are we trying to deal with tenant 

protection or are we trying to deal more with the housing stock 

problem? One criticism that has been offered of these changes is 

that by centering the relief, if you will, around the tenants and not 

around preserving the property, we are missing a major problem in 

rural America, which is the decline of housing stock. 

This is how it plays out in practice. In the suburbs of the world, 

if one area kind of begins to deteriorate, you have a new subdivision spring up and they meet the demand, and people move out, 

they move into a new area, and everybody’s kind of left better off. 

It does not work that way in the rural area, though, because as you 

all know very well, you do not get a lot of new subdivisions built 

in the Selma, Alabamas and some of these other communities. And 

when housing stock deteriorates in downtown Selma and downtown 

Marion, Alabama, it just stays deteriorated and no new divisions 

come along. This is a unique and particular problem in the rural 

south. 

Is this the best use of your innovation? Is this the best use of 

this $214 million dealing with tenant protection, as opposed to 

finding ways to continue to push harder on the housing stock 

issue? 

Mr. R. DAVIS. First of all, if I could say that we have increased 

our single-family lending programs by $400 million this year over 

2005. We recognize there is a need and we are working to meet as 

much of the need as possible, given the difficult budget choices. 

The $214 million is for a very immediate problem that has very serious immediate consequences. Somebody cannot pay their rent, 

22

and is potentially being evicted, and is potentially being thrown out 

of the program. 

We feel a need to protect the program overall by making sure 

that it is understood that we do not want this kind of a loss to the 

515 program. So our first year’s effort is aiming most of its money 

at the tenant protections. There are out-years, though, where we 

have a much bigger task, which is the physical rehabilitation and 

repair of these properties. This gets, I believe, to your issue of the 

general deterioration. We need to start putting money into these 

properties because there is no mechanism now to adequately fund 

rehabilitation. 

Mr. DAVIS OF ALABAMA. I would just make two final points before 

Ms. Harris takes the floor. The first one, I would quibble a little 

bit with the priority choice because I understand the point that you 

are making. The point that you are making is we are trying to 

meet payment prices right now, but the problem is because of the 

way that you define the payment prices and the communities that 

would be within the ambit of that definition, you are not getting 

a whole lot of folks who are really in need. You are getting people 

who are frankly living in the Autauga Counties of the world. 

Autauga County is a rural county in Alabama that is having a lot 

of growth because a lot of new people and new businesses have 

moved in. Property values are taking off. But that is not the same 

as the Dallas Counties of the world that she was talking about, or 

the Perry Counties of the world, where you do not have the high 

values. I would think, if I had to weigh into the argument, that the 

need is more acute in these low-value areas. 

The final point that I would make is, this housing stock issue is 

a critical one and I think that it should be very much what the 

heart of the 515 program is about because again you are not getting successor subdivisions in a lot of parts of rural Alabama and 

Mississippi. When these areas begin to decline, they stay in a permanent state of decline and that is a real problem. That is why 

housing stock is more critical and a more unique problem in the 

rural south than other places. 

Thank you, Mr. Chairman. 

Mr. NEY. Thank you. 

The gentlelady from Florida, Ms. Harris? 

Ms. HARRIS. Thank you, Mr. Chairman, and thank you for holding this important meeting today. I thank the guests for coming. 

I come from a Florida district on the coast, but it goes into the 

center part of the state, and actually that is where I spend my 

summers. It is the heartland of citrus and cattle, but very fragile 

economies associated with it. Ironically, when we had four hurricanes, three swept through and devastated these communities that 

were already counties of critical economic concern. So consequently, 

there are still blue tarps everywhere. It might have devastated the 

community, but it has not devastated the residents’ morale. 

I will share with you. The Chairman came down in the fourth 

hurricane. We were having a barbecue for all those folks whose 

homes had been destroyed, and right when we were starting to eat, 

here comes the fourth hurricane. You know what they said? They 

are so glad it is coming in our path again because there is nothing 

23

left to destroy, and not hitting someone else. So the Chairman saw 

first-hand that kind of devastation. 

What happens in Rural Development, while I commend you efforts, it is so difficult for some of these communities, as they were 

saying, Selma versus Montgomery, to understand the network and 

the challenges. It is also difficult for them to have the understanding of the data. 

So what I would like to ask you first is, with regard to the hurricanes, what is the coordination that is going on between HUD and 

FEMA? Can you discuss the efforts from Rural Housing to assist 

in these areas? And do you believe that you have the necessary resources to provide this kind of assistance? 

Mr. R. DAVIS. Thank you for asking these questions, because the 

hurricane situation was something that we cared very much about 

last year. It is actually leading to some of the initiatives in this 

budget. I would like to describe the linkage there. 

First of all, you had asked about FEMA. There is kind of an ordering in which problems are dealt with. FEMA stands ahead of us 

in line. We have in our mortgage insurance programs, private insurers who have insured the homes, and FEMA and the insurers 

generally take care of those issues. A bigger issue is what we do 

with people who are displaced. We have 300 units of multifamily 

housing in Florida destroyed in the hurricanes last year. Our immediate concern was, how do we house the people who were in 

units that were destroyed? That was where it became very painfully clear that the Section 515 program did not have a backup like 

HUD’s voucher program. We had no mechanism for putting those 

people into, say, HUD housing or into market-rate housing. 

Now, we had a limited ability to put some of them into other 

Rural Development housing, but one of the reasons for our voucher 

program is to be able to use emergency tenant protections to cover 

just situations like this. So we believe that in the future we will 

be able to handle these types of things. 

Second, we have a responsibility to our borrowers in Florida 

when a disaster occurs. We have a centralized servicing center that 

offers directly to the borrowers in the case of a disaster a moratorium on their mortgage statements. Within 2 days, I believe, of the 

end of the first hurricane last year, we had letters that had gone 

out to I believe it was 11,000 borrowers in Florida offering them 

no-questions-asked 6-month moratorium on their mortgage payments. They have other things to do with their money at that moment. The payments moved to the back end of the mortgage. So we 

have ways of helping the situation immediately from a financial 

point of view. We do not have the boots on the ground that FEMA 

has, but we do stand behind them in our ability to help. 

Ms. HARRIS. Further on that, you were mentioning some of these 

programs, but these municipalities, one county has about 33,000; 

one has about 27,000. And there are tens of millions of dollars that 

they have not taken advantage of in years past, just through a simple lack of knowledge. So I think that in trying to anticipate those 

critical housing needs, we are going to have to come to understand 

how to address that technical assistance that is going to be so necessary for them to be able to access those essential funds. 

24

Farm worker housing, I mean, not only do we have workforce 

housing that is a problem and then affordable housing, but now we 

have this hurricane housing and then of course our farm worker or 

temporary worker housing. It has been particularly impacted by 

the hurricanes this season. Many of the people that were affected 

were living in the woods or in shacks or in these containers, if you 

will, after the hurricanes. But whatever, however you look at it, it 

is really substandard. 

A lot of the rural counties do not even have the manpower or the 

resources to provide for the laborers, and they are essential to the 

local economy. So we are really focused on trying to provide better 

technical assistance to the rural housing authority. Actually, Chairman Ney came down and met in this very small house that we 

were working with the housing authority. I guess my question 

would be, do you believe that you are creating a program that 

would provide better technical assistance to help with some of 

these concerns? And how would you go about addressing that, and 

where do you think we should go to be able to help those folks that 

are in such desperate and dire need? 

Mr. R. DAVIS. It is a good question. You had mentioned farm 

labor housing. I was just looking at the numbers here. We are increasing our funding for farm labor housing this year. It was something that Secretary Veneman was personally interested in. I know 

that when I would go into meetings, she would always say, ‘‘How 

are the people down in Imokalee?’’ She had gone to the opening 

down there. This is something that we have $56 million in program 

funding proposed for the coming year, and an additional $5 million 

of rental assistance. Farm labor housing is something we understand is important to rural areas. 

We have some existing tecnical assistance programs, and we 

would be happy to work with the committee on identifying new 

things that we might be able to try. 

Ms. HARRIS. We are going to have a housing summit in our district that we are working on, but there is just such a vast continuum of needs. I just know that in such economically fragile 

areas that are agricultural in nature, if we do not have those temporary workers in a place for them to live, if we do not have the 

workers for construction, if we do not have the workers for the hospitality industry, all of these types of things that are so vital 

throughout our region, we will come to a grinding halt. 

So the housing issue obviously is really crucial after such a devastating series of natural disasters that are hurricanes. 

Mr. R. DAVIS. I appreciate that. Anything we can do to help, we 

will be glad to do. 

Ms. HARRIS. We will be calling on you. Thanks. 

Mr. NEY. I want to note that I appreciate the member’s being 

here. We had floods back home, a series of three of them in most 

places. In Tuscola County, we evacuated about 6,000-some people, 

and then we have some communities that were really hard hit. I 

don’t know if you are connected to this or not, I will have to find 

out, but we brought in the temporary, sometimes containers for 

people to live in, but I thought it was by FEMA. When I was up 

there with the emergency management services, I think FEMA I 

25

thought acquired them from HUD, but they possibly came from 

you? 

Mr. R. DAVIS. I do not believe that those would have come from 

us. 

Mr. NEY. The temporary trailers and things like that that were 

brought in. 

Mr. R. DAVIS. Right. Those were probably FEMA’s units, but we 

participate with FEMA whenever there is a disaster. We set up 

tent with them and work with them directly. 

Mr. NEY. Yes. One other question, you are going to set up a 

voucher? That $200 million, that would be to set up a voucher program? 

Mr. R. DAVIS. It will be predominantly a voucher tenant-protection program. We want to keep the focus on tenant protection as 

opposed to just vouchers because it sounds like we are being frivolous with the program. It is really what is the best way to protect 

the tenants in those prepaying properties. We believe that will be 

an enhanced voucher of some sort. 

Mr. NEY. This must have been before your time, but now that 

you are there, but you had an 8-year plan developed. You all knew 

that we were going to lose the Supreme Court case, I assume, or 

we had a good chance to lose the case. 

Mr. R. DAVIS. I am sorry I am not a lawyer. This is a Department of Justice issue. 

Mr. NEY. Then I apologize. I am a teacher, not a lawyer. 

Mr. R. DAVIS. They had been winning, however we lost our appeals on both the quiet title and the contract damages cases, both 

precedent-setting cases we lost. 

Mr. NEY. I mean, it is a concern. We have talked about what 

happens to all the people. There is no incentive. So you have developed something towards an incentive program, though, over a period of years? 

Mr. R. DAVIS. Well, we have a small program to handle prepayments that do come in. In fact, we have $5.9 million in RA for next 

year and $27 million for preservation loans to take care of those 

equity incentives. We give the owner their equity loan so that they 

stay in the program. So we do have that continuing program. The 

$214 million is in addition to that. 

The comprehensive property assessment that we released showed 

that it was much more expensive to take the incentive approach 

than to take the voucher approach. So as a cost matter, we are 

looking more to vouchers as opposed to owner incentives. 

Mr. NEY. We have the study here that the ICF did. 

Mr. R. DAVIS. Yes. 

Mr. NEY. Because one thing I had looked at in one of the programs was to get some incentive for people to come back in and to 

prepay, the people that owned the properties. Then it was a fear, 

well, people would just go in and then dump people out, but I always felt that the court case was coming so it was something that 

was going to have to be dealt with. So you should be able to take 

this? 

Mr. R. DAVIS. Right. The purpose for this initiative is we believe 

that time is here. 

26

Mr. NEY. This study that we have here, is this not going to be 

how you take this study and you make your strategic plan to deal 

with it? 

Mr. R. DAVIS. Our legislative package will have more details in 

it, but we are following the general thrust of the study’s recommendations, which is that we look toward tenant protections as 

opposed to incentives, and that we really focus on the 90 percent 

of the properties that need rehabilitation, getting money into them 

primarily through debt restructuring, and money from the outside 

wherever possible. 

Mr. NEY. Thank you very much. I appreciate both witnesses. 

I would note that some members may have additional questions 

for the panel, and the member who want to ask additional questions, they can submit it in writing. Without objection, the hearing 

record will remain open for 30 days for members to submit written 

questions to the witnesses and place their responses in the record. 

I appreciate your patience and time with us today. Thank you, 

and to the members, for being here. 

[Whereupon, at 4:03 p.m., the subcommittee was adjourned.] 

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A P P E N D I X

March 10, 2005

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