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79–972 PDF 2002

S. HRG. 107–482

THE MULTIFAMILY ASSISTED HOUSING REFORM

AND AFFORDABILITY ACT OF 1997

HEARING

BEFORE THE

SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

OF THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

EXPLORING THE SUCCESS OF THE ‘‘MULTIFAMILY ASSISTED HOUSING

AND AFFORDABILITY ACT OF 1997’’ AND THE SO-CALLED MARK-TOMARKET LEGISLATION

JUNE 19, 2001

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

JOHN EDWARDS, North Carolina

ZELL MILLER, Georgia

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

DON NICKLES, Oklahoma

STEVEN B. HARRIS, Staff Director and Chief Counsel

WAYNE A. ABERNATHY, Republican Staff Director

JONATHAN MILLER, Professional Staff

MELODY H. FENNEL, Republican Professional Staff Member

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

JACK REED, Rhode Island, Chairman

JOHN F. KERRY, Massachusetts

JOHN EDWARDS, North Carolina

CHRISTOPHER J. DODD, Connecticut

WAYNE ALLARD, Colorado

RICK SANTORUM, Pennsylvania

RICHARD C. SHELBY, Alabama

KARA M. STEIN, Staff Director

TEWANA WILKERSON, Republican Deputy Legislative Assistant

(II)

CONTENTS

TUESDAY, JUNE 19, 2001

Page

Opening statement of Chairman Reed ................................................................... 1

Prepared statement .......................................................................................... 49

Opening statements, comments, or prepared statements of:

Senator Allard ................................................................................................... 2

Senator Corzine ................................................................................................ 4

Prepared statement ................................................................................... 49

Senator Sarbanes .............................................................................................. 6

Prepared statement ................................................................................... 49

Senator Dodd .................................................................................................... 14

Prepared statement ................................................................................... 50

WITNESSES

John C. Weicher, Assistant Secretary for Housing—FHA Commissioner, U.S.

Department of Housing and Urban Development ............................................. 4

Prepared statement .......................................................................................... 50

Response to written questions of: ....................................................................

Senator Allard ........................................................................................... 95

Senator Sarbanes ...................................................................................... 96

Ira G. Peppercorn, Director, Office of MultiFamily Housing Assistance Restructuring, U.S. Department of Housing and Urban Development ............... 7

Prepared statement .......................................................................................... 52

Peter Guerrero, Director, Physical Infrastructure Issues, U.S. General Accounting Office, Accompanied by: Richard Hale ................................................ 14

Prepared statement .......................................................................................... 58

Response to written questions of: ....................................................................

Senator Sarbanes ...................................................................................... 97

Senator Allard ........................................................................................... 102

Charles Wehrwein, Vice President, Mercy Housing, Inc. ..................................... 29

Prepared statement .......................................................................................... 75

Barbara J. Thompson, Director of Policy and Government Affairs, National

Council of State Housing Agencies ..................................................................... 31

Prepared statement .......................................................................................... 78

John Benz, President, Property Advisory Group, Inc. .......................................... 33

Prepared statement .......................................................................................... 82

Cathy Vann, President, Ontra, Inc. ....................................................................... 35

Prepared statement .......................................................................................... 84

Geraldine Thomas, Vice President, National Alliance of HUD Tenants ............. 38

Prepared statement .......................................................................................... 87

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Miscellaneous letters submitted for the record by Senator Jack Reed ............... 103

(III)

(1)

THE MULTIFAMILY ASSISTED HOUSING

REFORM AND AFFORDABILITY ACT OF 1997

TUESDAY, JUNE 19, 2001

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, SUBCOMMITTEE ON HOUSING AND TRANSPORTATION, Washington, DC.

The Subcommittee met at 9:30 a.m., in room SD–538 of the Dirksen Senate Office Building, Senator Jack Reed (Chairman of the

Subcommittee) presiding.

OPENING STATEMENT OF SENATOR JACK REED

Senator REED. Good morning. Let me welcome everyone to this

morning’s hearing and call it to order.

Today’s hearing is about affordable housing and how to keep it

affordable. In particular, we will explore the success of the MultiFamily Assisted Housing Reform and Affordability Act—the socalled Mark-to-Market legislation. This law is scheduled to expire

on September 30, 2001, and we will be attempting to determine

how well it has worked and whether it needs to be reauthorized.

We will have two panels of witnesses. The first panel will consist

of our three Government witnesses; John Weicher, Assistant Secretary for Housing and Urban Development; Ira Peppercorn, Director of the HUD Office of MultiFamily Housing Assistance Restructuring; and Peter Guerrero, Director of Physical Infrastructure at

the General Accounting Office.

Our second panel, will consist of the stakeholders involved in the

restructuring process. I will introduce these individuals later.

We will be asking all of the witnesses to tell us what progress

has been made in restructuring the rents and debts of the FHAinsured Section 8 portfolio, the savings such restructurings have

generated for the Federal Government, the physical condition of

the housing stock, the effectiveness of the Office of MultiFamily

Housing Assistance Restructuring, or OMHAR.

We look forward to examining all of these issues in detail today.

As we well know, Congress passed the Mark-to-Market legislation in 1997 in order to update and restructure Section 8 projectbased developments insured by the FHA. About 8,500 such projects

with over 800,000 units of affordable housing were built in the late

1970’s and the early 1980’s.

The Federal Government guaranteed that these projects would

be built by insuring the mortgages and using Section 8 contracts

to guarantee that the rents would be high enough to pay off the

mortgages. In most markets, these rents were above market value.

2

Typically, the mortgages for these multifamily dwellings had terms

of 40 years and the Section 8 contracts had terms of 20 years.

By the late 1990’s, the 20 year Section 8 contracts started to

expire and the Congress had begun to renew all Section 8 contracts at market rents for a period of only 1 year. In markets in

which the fair market rent was higher than the contract rent, a

simple renewal of the contract was sufficient to continue supporting the property.

However, in many cases, contract rents remained far above local

rents. In these cases, Congress’ decision to renew Section 8 contracts at lower market rents was likely to result in rents too low

to support the remaining mortgage payments on such properties.

As a result, it looked likely that these FHA-insured properties

would default, costing Federal taxpayers tens of billions of dollars.

The Mark-to-Market legislation was passed as an attempt to address this problem. There were two objectives. First and foremost,

the legislation was meant to preserve affordable housing by putting

it on a stronger footing, both financially and physically. And second, the law was designed to reduce the cost to the Federal Government of rental assistance payments.

We also created the Office of MultiFamily Housing Assistance

Restructuring—OMHAR—to accomplish both of these objectives,

with the help of Participating Administrative Entities.

We look forward today to the testimony of our witnesses on the

relative progress the Mark-to-Market Program has had and how we

should reauthorize and extend this program in full or in part.

Let me recognize my colleagues before I formally introduce the

witnesses.

Senator Allard do, you have any comments?

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Yes, Mr. Chairman, brief comments, if I might.

First, I want to congratulate you on holding your first hearing

as the new Chairman of this Subcommittee.

Senator REED. Thank you.

Senator ALLARD. And I look forward to continuing our productive

working relationship. I believe that oversight is an important responsibility of legislators. Maybe it is the most important thing. It

is probably the thing that you get the least credit for because

everybody is looking for how much legislation you can pass and

bills that you can get passed.

I think that it is important that as a Committee, we follow up

and see how the legislation is being implemented once we do pass

it. And I believe that good, effective oversight is a bipartisan issue

and I look forward to working with you as we continue the diligent

oversight conducted by this Subcommittee.

The Housing and Transportation Subcommittee held an oversight

hearing of HUD’s Office of MultiFamily Housing Assistance Restructuring, or OMHAR, 2 years ago. At that time, OMHAR was

just beginning to contract with Participating Administrative Entities. (PAE’s). We did not have the advantage of a broader perspective on the program.

This hearing is an excellent opportunity to revisit the issue and

to evaluate OMHAR’s progress thus far.

3

Congress created the Mark-to-Market Program in 1997, to reduce

Section 8 costs, while preserving the affordability and availability

of low-income rental housing. The purpose of the program is to reduce the property rents to market level, while simultaneously reducing property debt levels and owner costs to a number of tools

authorized by that legislation.

These mortgage restructurings are carried out by participating

administrative entities. As part of the same legislation, Congress

established OMHAR to administer the Mark-to-Market Program

and oversee the Participating Administrative Entities. The legislation authorized the Mark-to-Market Program for 4 years.

Therefore, the Mark-to-Market Program authority and OMHAR’s

administrative authority expires on September 30, 2001.

Even though the program and administrative authority will expire, Section 8 properties with above-market rates will still be required to have their rents reduced to market levels. Without the

proper tools to also restructure the debt, many owners may lack

sufficient funds for property maintenance or mortgage payments.

Because many Section 8 properties are also FHA-insured, this

would result in a significant number of claims against FHA, in addition to many tenant displacements.

Clearly, no one finds this a desirable scenario. By taking up the

issue of mark-to-market reauthorization now, we can avoid it.

I believe that today’s hearing is an excellent step in that direction and will provide Members with an opportunity to examine the

successes and shortcomings of mark-to-market and OMHAR as we

begin to formulate reauthorization legislation. I am pleased that we

have a broad representation of viewpoints at today’s hearing. GAO

has been reviewing OMHAR for sometime now, and I am sure that

they will have valuable insight to share with us.

We will also have a chance to hear the views of the mark-to-market participants, including the perspective of OMHAR, tenants,

public PAE’s, private PAE’s, nonprofits and owners.

I look forward to hearing from all of you.

Finally, I would like to extend a special welcome to Charles

Wehrwein of Mercy Housing, which is headquartered in Denver.

Mercy Housing has been very beneficial, I believe, to the Denver

community and I am pleased to have them represented here today

on a later panel. I would like to welcome him personally.

Again, I want to thank my colleagues for holding this hearing

and I look forward to working with you on this important matter

and also, I personally would like to welcome the witnesses that we

have on the panel.

Thank you, Mr. Chairman.

Senator REED. Thank you very much, Senator. Thank you for

your kind words.

I have a difficult act to follow. You have conducted this Subcommittee with great courtesy and bipartisanship and attention to

substance, and I hope that I can maintain those standards.

Senator ALLARD. I am looking forward to working with you, Mr.

Chairman.

Senator REED. Thank you, Senator.

Senator Corzine.

4

COMMENTS OF SENATOR JON S. CORZINE

Senator CORZINE. Mr. Chairman, I too congratulate you on your

first hearing. And I also would express my gratitude to Senator

Allard for his strong leadership in the short time that I have been

here, and I appreciate working with both of you.

This is an important issue. I have a statement for the record that

I would ask that you include. I welcome the panelists and look forward to finding out more about this program and its effectiveness.

I agree with this oversight comment that Senator Allard was

making as one of our more important responsibilities.

Thank you very much.

Senator REED. Without objection, the statement will be made a

part of the record.

Now let me introduce the panel.

Mr. John Weicher is the newly-confirmed Assistant Secretary for

Housing and also serves as the FHA Commissioner.

Prior to his appointment, Mr. Weicher was a Senior Fellow and

Director of Urban Studies at the Hudson Institute. He has also

served as HUD Assistant Secretary for Policy Development and Research, from 1989 to 1993. He was also Associate Director of Economic Policy at the Office of Management and Budget, from 1987

to 1989, and earlier served as HUD Deputy Assistant Secretary for

Economic Affairs, from 1975 to 1977.

Ira G. Peppercorn is Director of the HUD Office of MultiFamily

Housing Assistance Restructuring—OMHAR. Before his confirmation as Director of OMHAR, Mr. Peppercorn was the General

Deputy Assistant Secretary for Housing, and Federal Housing

Commissioner at the Department of Housing and Urban Development. Before that, he served as the Executive Director of the Indiana Housing Finance Authority. In that capacity, he was the

Senior Advisor to Governors Evan Bayh, our colleague on the

Committee, and Frank O’Bannion, on affordable housing.

Peter Guerrero is GAO’s Director of Physical Infrastructure. In

this capacity, Mr. Guerrero is responsible for managing GAO’s

work on housing, transportation, environmental infrastructure, and

telecommunications issues. Mr. Guerrero’s distinguished Federal

career spans some 29 years. In addition to GAO, Mr. Guerrero has

worked at both the Department of Labor and the Environmental

Protection Agency.

I would also like to introduce Rick Hale to the Committee. He

will be sitting in on the panel today. Mr. Hale was the principal

investigator for the GAO study on the mark-to-market reauthorization, which Mr. Guerrero will speak to today.

Secretary Weicher.

STATEMENT OF JOHN C. WEICHER

ASSISTANT SECRETARY FOR HOUSING–FHA COMMISSIONER

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. WEICHER. Thank you, Mr. Chairman. And thank you for inviting me to testify this morning on the impending expiration of

the Office of MultiFamily Housing Assistance Restructuring. I am

here today to discuss the Administration’s position concerning the

future of OMHAR and its legislative authority.

5

Before I begin, let me express my appreciation to this Committee

for voting to confirm me as Assistant Secretary for Housing and

FHA Commissioner. It is an honor to appear before you today.

I am reminded that the first question at my confirmation hearing

from Senator Sarbanes concerned the Mark-to-Market Program.

Chairman Reed, you also raised the issue during the hearing with

me, so it is fitting that my first hearing before this Subcommittee

should be on the same subject.

Mr. Chairman, the challenges of HUD’s multifamily assisted inventory is the most complex issue that HUD has ever had to face.

I first became involved in this subject 15 years ago as a member

of the Hills-Reuss task force. Congress has enacted major legislation on three separate occasions beginning in 1987. During the

mid-1990’s, Congress wrestled for 3 years with the mark-to-market

concept before finally passing the 1997 Act. The process for dealing

with these properties has taken longer than originally anticipated,

we need to revisit this issue yet again.

Since becoming Commissioner, I have discussed OMHAR with

Secretary Martinez and there are ongoing discussions within the

Administration. Secretary Martinez stated in April the Administration intends to seek an extension of the restructuring authority and

reiterated this position in his testimony before the Senate Appropriations Subcommittee last week.

As this morning’s hearing demonstrates, there appears to be general support for an extension of the restructuring authority beyond

this September, and the Administration will be submitting detailed

legislative recommendations on how to proceed with that extension.

The future of the OMHAR office itself has generated a greater

level of discussion than the extension of its authority.

Until this year, nearly all of OMHAR’s actions were rent

restructurings, without any changes in the mortgage amount. The

first full mortgage restructuring did not occur until the second

quarter of last year.

Since then, however, there has been significant progress. There

are only 30 full mortgage restructurings in the year 2000. So far,

in 2001, there have been 77 in 5 months, and I understand that

an additional 75 are scheduled for closing in the next 60 days. This

is encouraging. But clearly more work needs to be done, and we

want to ensure that this important work is allowed to continue.

Secretary Martinez discussed the future of OMHAR itself in his

Appropriations Subcommittee testimony. He stated that the Department expects to request a 3 year extension for OMHAR with

two changes. It would not be headed by a Presidential appointee,

and it would fall under the authority of the Office of Housing.

Placing OMHAR within Housing would simplify issues of jurisdiction and coordination. At present, Housing is responsible for

making project subsidy payments and managing insurance contracts, while at the same time OMHAR is responsible for restructuring the subsidies and contracts for the future. The same projects

are under the jurisdiction of two separate, equal offices, each reporting to the Secretary. With OMHAR under the authority of the

Commissioner, this anomalous situation would no longer exist. It

would also be easier to coordinate OMHAR with the 18 MultiFamily Hubs in the Office of Housing that are located around the

6

country. We also believe OMHAR will be able to complete its work

faster with a simpler administrative structure.

I want to stress that we certainly recognize the critical nature of

OMHAR’s work and we have every expectation that it will continue

to be fully dedicated to that work and only that work. Having come

halfway through the mark-to-market process, we intend to see it

through to completion.

Since OMHAR would be reporting to the Commissioner, we do

not expect to recommend reauthorization of the position of OMHAR

Director as one requiring appointment by the President and confirmation by the Senate. This would avoid a circumstance where

one Presidential appointee reports to another Presidential appointee of equivalent rank.

We understand that almost two-thirds of the remaining properties subject to debt restructuring have contracts that expire in

the next 2 fiscal years. With an average processing time of about

13 months after contract expiration, we believe that a 3 year extension is appropriate. By 2004, we should all be able to judge

whether any further extension is needed, or whether the small remaining workload can be handled within FHA.

Mr. Chairman, OMHAR was created to strike a balance between

the preservation of affordable rental housing and the rising costs

of renewing expiring Section 8 contracts. That is important work.

For Secretary Martinez and for me, continuing this work is one of

our highest priorities.

We look forward to working with Congress and working with this

Committee in the coming weeks on this important issue.

Thank you.

Senator REED. Thank you very much, Mr. Secretary.

We have been joined by Chairman Sarbanes. And at this time,

I would recognize him for an opening statement.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Well, thank you very much, Mr. Chairman.

I apologize. There was a traffic back-up that prevented me from

getting here at the outset.

I wanted to congratulate you on the occasion of taking on the

gavel of the Housing and Transportation Subcommittee. Given your

ongoing active interest in these issues, we very much look forward

to your leadership of the Subcommittee.

We can use that transportation dimension to address the problems that we encountered here this morning.

[Laughter.]

I also know that you and Senator Allard have worked together

in a very cooperative fashion and we look forward to that relationship continuing.

Actually, the Subcommittee has not been officially reorganized,

nor has the Committee itself been reorganized. That is still pending. Senator Gramm and I talked and we are proceeding, at least

with the hearing schedule. I think we will have to get ourselves

into place before we can actually transact the business agenda. But

we are trying to move ahead and prepare.

This is a very important hearing, to review the bipartisan legislation passed in 1997 to deal with the expiration of Section 8 conVerDate 11-MAY-2000 14:43 Jul 24, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 79972.TXT SBANK4 PsN: SBANK4
7

tracts on FHA-insured buildings. The purpose of that legislation

was to reduce Section 8 rents that were above market, to restructure the mortgages where necessary, and provide for much needed

renovation.

The results we were aiming for and which we seem to have been

achieving to date was the upgrading and preservation of valuable

affordable housing at rates that were more affordable for the Federal Government as well.

The legislation establishing this Mark-to-Market Program, as

well as the Office of MultiFamily Housing Assistance Restructuring, which was created to implement the program, unfortunately

expire at the end of this fiscal year; namely, September 30. Yet, it

is obvious that we need the program to continue. It is making advances, but the job has by no means been completed.

And obviously, we have the responsibility to decide how we want

to proceed with regards to the legislation. I look forward to working

with my colleagues here and with the Administration to come to a

fair determination on how to keep this effort on track.

Let me again thank Senator Reed for holding this hearing. He

has put together two very good panels of witnesses, which, I think

will give an opportunity for all stakeholders to participate. I feel

very keenly that the Committee should proceed in a comprehensive, workman-like manner, in an effort to hear from all interested

parties. And that is what has been set out for today’s agenda. I

think, in the end, this kind of thorough review and comprehensive

airing of the issues will result in better legislation and this hearing

is obviously consistent with that approach.

So, Mr. Chairman, congratulations on assuming the gavel. I look

forward to working with you and Senator Allard and my other colleagues as we address this.

This is one of a list of reauthorizations that I set out last week,

that the Committee has to address over the next few months. We

have various expiring authorizations in different areas of our jurisdiction and this is one of them.

This program is up and going. We would like it to be going much

faster. Presumably, Mr. Peppercorn will address that. But this is

one of the must items on the Committee’s agenda.

Thank you very much for scheduling this very good hearing.

Senator REED. Thank you, Mr. Chairman.

And now, I would like to call on Mr. Peppercorn.

STATEMENT OF IRA G. PEPPERCORN

DIRECTOR, OFFICE OF MULTIFAMILY

HOUSING ASSISTANCE RESTRUCTURING

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. PEPPERCORN. Thank you, Mr. Chairman, Ranking Member

Allard, Senators Sarbanes and Corzine. Thank you very much for

the opportunity to be here today with you to give you a status report on the Mark-to-Market Program.

At this time, I would like to thank Secretary Martinez. He is a

good man. He is going to do a great job. His staff, Commissioner

Weicher, who has a long history and a good history in housing, for

their leadership and for asking honest questions about the Markto-Market Program. If the program is continued—and I hope that

8

it is—I believe that their thoughtful analysis will only serve to

strengthen it.

I would like to give a small caveat this morning and say that,

as you see on television sometimes, the remarks here are my own,

or on the editorial pages. They are my own. They are not necessarily the views of the Administration.

But there has been a lot of dialogue and a lot of good communication between my office and the new team over at HUD.

I would also like to recognize a man that is not here at this moment. I had the honor of serving under Senator Bayh when he was

Governor of Indiana for both of his terms. His leadership and his

vision and his spirit of bipartisanship have assisted me over the

years and has been very inspiring to me and to the others who

elected him to serve.

What I would like to do now is give you a brief, but comprehensive, look at what has been accomplished by OMHAR through the

Mark-to-Market Program, what remains to be done, and what will

be needed in order to allow the Mark-to-Market Program to continue achieving the goals that the Congress envisioned in the

MAHRA legislation.

Congress created the Office of MultiFamily Housing Assistance

Restructuring—OMHAR. It is quite a name, I know. But it has a

very important purpose.

It was created as a semi-independent entity within HUD to address financial crisis in the Section 8 program. Former Senator

Mack noted at the time that an effort to ‘‘reform the Nation’s assisted and insured multifamily housing portfolio’’ was needed in

order to handle what was termed the most difficult problem in

housing at the time. And in fact, this morning, you heard Commissioner Weicher say much the same thing—the most complex issue

that HUD has ever faced.

OMHAR has accomplished much and worked very hard to meet

the challenge of its mission. In fact, some of the challenges are

competing challenges. But unless changes are made to the sunset

provision in the legislation, OMHAR and its restructuring authority will go out of existence on September 30 of this year. However,

the statutory requirement and the need to reduce the rents on the

expiring above-market properties will continue either imperilling

the financial health of properties around the country or creating a

situation where rents are not in fact reduced to market.

There are a number of goals for the Mark-to-Market Program.

Social goals, particularly in terms of preserving affordable housing,

financial and economic goals in terms of reducing the long-term,

project-based assistance, and minimizing the risks of large FHA

losses. And then there are managerial and administrative goals—

promoting, operating, and cost efficiencies, addressing problems

that have occurred over the years by terminating relationships

with owners or managers who have not met their obligations, establishing a network of local public and private entities to administer the Mark-to-Market Program, involving tenants in one of the

most substantive ways that we have ever seen, and providing a

consistent, prudent, and documented process for all participating

properties.

9

The environment today, both the economic and the political environment, differs markedly from when this legislation was first

passed. Fewer properties have entered the program than we had

expected.

Nonetheless, the Mark-to-Market Program offers a win-win opportunity for government, for taxpayers, for tenants, and for communities. And as more deals are closed, we save more money by

reducing excess payments on Section 8 subsidy contracts, ensuring

that the properties involved are on a sound financial footing, preserving needed units of affordable housing, and thereby meeting

the goals of the Mark-to-Market Program.

Before you, you see a chart.

[Pause.]

You almost saw a chart.

[Laughter.]

Almost 900 properties, comprising over 63,000 units, have gone

through the Mark-to-Market process, resulting in a net savings of

almost $900 million, a present value of over half a billion dollars.

A big job remains—about half the properties assigned to OMHAR

are still in the process, representing an additional net savings of

$11⁄2 billion over 20 years, or a present value of over $800 million.

We will talk about the costs later, but the operational costs, not including the PAE’s, are about $40 million. So what we are seeing

is a very significant savings compared to what we are spending.

Chart 3 shows that in addition to the large number of contracts

that expire through the remainder of the fiscal year, there are

3,400 more Section 8 contracts expiring in the next 3 years, about

a third of which are estimated to be above market.

You will hear some folks say that we got off to a slow start. I

will probably agree with that. But what you hear today is that the

Mark-to-Market Program is operating efficiently and effectively.

Part of our management approach, and you will read this in the

various reports on OMHAR, has been to integrate constructive

feedback from all of the stakeholders, enabling us to incorporate

significant improvements in the process.

We have not been the type of organization that set up everything

in place day one and then said, ‘‘We got it right. We got it perfect.’’

We did not, but we spent a lot of time listening to the various

stakeholders, making the needed changes, listening to the owners,

making the needed changes, and adjusting as we went along. We

are operating with an experienced and highly motivated staff and

with public and private contractors.

Let me give you a better idea of what we have done.

We currently have almost 1,800 properties with about 140,000

units. We are facilitating to preserve them. The underwriting

requirements of the Mark-to-Market Program ensure that these

affordable housing properties will be operated in a manner to ensure their ongoing viability. At a time when affordable housing

is in short supply in many parts of the Nation, Mark-to-Market

Program provides critically needed continuity to many communities

and residents.

One of the Nation’s largest apartment owners, Denver-based,

AIMCO, has 110 projects in the program, considers the Markto-Market Program important to AIMCO and its residents in its

10

affordable housing portfolio. And here, though it is not in my

testimony, let me take a side note and say, this was one of the innovations we created. Originally, when AIMCO came in, they

might have had to deal with PAE’s in 25 or 30 different States and

four regional offices.

We created a large owner program so that they could facilitate

access to the properties, and they would only have to deal with one

regional office and two PAE’s. They were able to bring in properties

that not only were expiring before September 30, but, importantly,

after. That is one of the innovations.

What they have said about us is that the program will enable

them to continue to provide safe and decent affordable housing to

qualifying tenants for many years to come while protecting HUD

from claims under its mortgage insurance programs. The program

is an important element in addressing the affordable housing requirements in the country. Their statement has been submitted to

the Subcommittee.

Completed transactions so far have resulted in a savings of just

under $900 million, with $2.4 billion to go. And present value, it

is $500 million and $1.3 billion. This is not a final tally of the

Mark-to-Market Program, since additional properties expected to

enter the Mark-to-Market Program between now and the sunset

date will generate future savings.

I have one property here. The property is called Monview

Heights. It consists of 326 units in West Mifflin Pittsburgh. It is

a working class neighborhood roughly 5 miles from Pittsburgh.

There is going to be a net savings to the Government after a restructuring of almost $12 million.

Now, I know that the way the Federal budget works, you cannot

just take it from one pot and put it into another. But when we have

been paying so much money in excess of the market at a time when

there is such a drain on money for affordable housing, if we can

save that type of money, preserve the housing, keep people in their

place, to the Federal Government as a whole, that is more money

that can be used for other purposes and, hopefully, for affordable

housing. Let me share some of the processes that we adopted to

make sure this happened.

We made sure that there were national standards for consistency, but we enabled local solutions to local communities and local

governments. We utilize a small staff of Government employees to

leverage public and private contractors. There are less than 100

OMHAR employees nationally. We rely on business- and marketoriented principles to set rents. We encourage tenants to participate. And we maintain communications and we share information

with all of the stakeholders.

The result of the process is savings to the Government, and to

the taxpayer, that are generated even as the affordable housing remains available, and even as the physical condition is improved.

The fundamental complexity, though, the reason why you might

have heard we got off to a slow start, has to do with the nature

of the work that must be accomplished to restructure a property.

It is not an easy task.

11

The original thinking of we just set rents to market leads to a

whole host of questions—What is the market? How do you assess

it? How do you appraise it? How do you know?

We just cannot go out there and say, it should be a percentage

of Fair Market Rent (FMR), because most people will tell you that

the fair market rents are often neither fair, nor market.

There is no national database. This really shocked me. There was

no national database where you can go in and submark-to-submarket, find what the rents are in that particular community. So,

property by property, we have had to go in and assess them all individually. These are all one-off, difficult work-outs. They are not

anything that can be done en masse.

The real estate work-outs occur in the context of a very complex

legislative and regulatory environment, and it also includes negotiations with property owners, PAE’s, tenants, lenders, and others

in the community.

Additionally, some properties, despite having rents above market, have physical, financial or managerial problems, even before

the rents are reduced.

The legislative requirements of OMHAR are explicit regarding

transaction costs and cash flow to owners. For instance, there is a

mandatory 75–25 split the moment a deal is restructured.

These terms created some difficult hurdles for us. In some cases,

property conditions or ownership problems have been such that we

have not been able to close a restructuring transaction or continue

assistance on a project-based basis. At that time, we have to figure

out how to best protect the tenants and sometimes we have to

voucher the property.

How has OMHAR responded to these challenges?

We have listened to our stakeholders. We have implemented

changes when prudent and reasonable. We have developed a program as flexible as possible within the context of legislation. And

as a result, starting last summer and moving into the fall, we met

with all kinds of stakeholders, resulting in revisions and initiatives

to address their concerns.

First, we introduced additional performance-based incentives for

participating owners. Every year after the Mark-to-Market Program, if the property meets its physical, managerial, and financial

standards, the property owners will receive a market level of return on the capital they were required to invest.

Now you might say, why didn’t we offer this earlier?

Remember the context in which we were working, where people

were thinking that owners were just simply getting too much.

To have added to that at the time, and this was the direct feedback that we got, was we would make the deal too rich. And so

what we did is we listened and we listened to the owners’ communities and we listened to the tenant groups and we listened to the

nonprofits. I personally sat down with the Inspector General and

I said, this is the problem that we are facing. The deals will not

work from a financial point of view unless we do this. And she put

out her concerns, which had to do with how they were going to be

monitored afterwards, and in the end, agreed with us.

That was not something that we could have done earlier.

12

Second, we introduced incentives for purchasers, recognizing that

the additional costs they will incur over costs typically incurred by

owners. This is true for both for-profit and not-for-profit owners.

Third, we made use of the statutory authority to forgive second

mortgage debt when appropriate. And Chuck Wehrwein, who will

be speaking later, works for Mercy Housing, was someone on our

stakeholder panel who was working for a nonprofit, who can tell

you about the benefit of the reduction of that debt.

Finally, we introduced reforms to improve the level of communication between owners, OMHAR, PAE’s, and purchasers. We

gave owners and purchasers the right to receive various important

information throughout the restructuring process, and we formalized the notification and appeal process.

Some other things which I will go through quickly.

We created an agreement with Ginnie Mae. We created a large

owner initiative. We have responded to concerns and comments

from our partners. All of these initiatives have demonstrated our

commitment.

So where are we today?

We have closed 126 full restructurings. We have about 75 in the

pipeline in the next 60 days. Five hundred what we call Lites,

which was a program innovation where people could take the rent

reduction without the debt restructuring. We have 116 in owner

negotiations, 331 in due diligence and underwriting, another 300

expected to come in. The thing is moving.

As the Commissioner said, there is absolutely more work to be

done. The program is in place. Yes, it took time for the program

to build its infrastructure. I want to make a side comment here.

One of the things that we did at the very beginning was we

looked and we listened to what had failed in the past. And one of

the lessons was coinsurance.

What people said to me was, do not start rushing in to do deals

right away. Build the infrastructure first. I said this before this

body 2 years ago.

We took a lot of heat for that approach, but in the end, we have

the right structure. We have a structure that stood up to public

scrutiny, not once, not twice, but three times. And we have a program that is working and working in a way that not only financially and not only from a preservation point of view, but also ethically, I feel completely comfortable standing before this body and

saying, we did the right thing.

Staffing—we have less than a 100 staff on board. Only 38 are

permanent, 49 are temporary. And this is one of the core problems.

Two-thirds of our staff is comprised of production staff who oversee

the PAE’s, who review the deals, who conduct the closings. Threequarters of those field staff that are completing the restructurings

are term employees, which means that their jobs with OMHAR expire in 102 days.

The staff has incredible backgrounds. As envisioned under the

legislation, we have people from the RTC, from the FDIC, from

lenders, from nonprofits, from HUD, and from other Federal Government agencies. It is an incredibly broad staff. I am absolutely

impressed by their dedication and their professionalism, especially

13

knowing that some of them are worried about what is going to happen to them personally on the September 30 sunset date.

The PAE’s—our partners, are the third parties who actually do

the nitty-gritty work. And what we have seen is that there has

been a consolidation. We had 42 public PAE’s and nine privates.

We are now working with 25 publics and nine privates. Why?

One of the things that we learned again is that this job was very

tough, difficult real estate work. This was not just tax credit allocation. Nor was it bond issuance. It meant very difficult real estate

knowledge. And what we saw was that there was slower than expected deal flow, which means that the volumes were insufficient.

The restructuring process was much more rigorous than they expected. Their staff had other priorities. And there were many roles

in terms of being a Section 8 contract administrator and lender.

That led to some conflicts.

The consolidation has actually worked very effectively. But with

900 deals under the belt, and more to come, we have a stable capacity. It is important to emphasize that public entities can and

will continue to play a vital role, even though in certain cases being

a PAE has not been the best role.

HFA’s, in their traditional role, and I am a former HFA director,

as affordable housing lender, tax credit allocator, or allocator of

housing grants, they are very well positioned to work with us to

provide funds to restructure properties. In addition to their working relationships, public entities can often be very helpful in

terms of knowledge about the properties and the owners in their

jurisdiction.

Chart 6 shows that we have arrived at a balance—in quality, in

oversight, and in timeliness, that is working. To date, OMHAR has

cost $32.4 million in staff and other costs, due primarily to the financial advisors, achieving savings of $866 million. That is a pretty

impressive ratio.

What do we need to finish the job?

September 30, 2001, the sunset date called for in the MAHRA

legislation, is fast approaching. Planning must occur now to determine the Government’s approach to reducing rents on expiring Section 8 contracts after that date. Without the legislative authority

to reduce a property’s mortgage payment when it is reduced, HUD

will have to watch Section 8 properties struggle with excessive debt

burdens. Owners may cut back on maintenance to make ends meet

or default. And if we do not do something quickly, people are going

to be looking for other positions. Over half of OMHAR’s staff expire

with the sunset.

The Mark-to-Market Program and its stakeholders will need an

assurance of continuity in order to maintain the momentum, in

order to continue to bring the benefits of affordable housing units.

Mr. Chairman, we have a compelling story. We are not only preserving affordable housing, but also doing it at a ratio where cost

savings are 20–1 of what our costs are.

We are happy to work with the new Commissioner and the new

Secretary toward a cooperative solution so that this terrific program can continue.

Thank you.

Senator REED. Thank you very much, Mr. Peppercorn.

14

We have been joined by Senator Dodd of Connecticut. Senator

would you like to make a comment?

COMMENTS OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Mr. Chairman, I would ask unanimous consent

that my comments be included in the record at this point. But let’s

move along with the witnesses.

Senator REED. Thank you.

Without objection, Senator Dodd’s comments will be included in

the record.

Mr. Guerrero, could you strive for 5 minutes?

STATEMENT OF PETER GUERRERO

DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES

U.S. GENERAL ACCOUNTING OFFICE

ACCOMPANIED BY RICHARD HALE

Mr. GUERRERO. Yes, Mr. Chairman.

Senator REED. Thank you.

Mr. GUERRERO. We are pleased to be here today to discuss our

report on the Mark-to-Market Program.

As you know, this program is aimed at preserving affordability

of low-income rental housing, while reducing the cost of rental assistance subsidies. More specifically, the program provides a framework to restructure Section 8 properties by lowering rents when

those contracts expire and by also reducing mortgage debt if such

action is necessary for the properties to continue to have a positive

cash flow. Without such restructuring, rents for many of the approximately 8,500 properties in HUD’s portfolio would substantially exceed market levels, resulting in far higher Federal subsidies under the Section 8 program.

As provided for in the Act, OMHAR has contracted with public

and nonpublic entities—these are referred to as PAE’s—to carry

out the mark-to-market restructurings on behalf of the Federal

Government. There are two kinds of restructurings. The first is

referred to as a full mortgage restructuring and involves resetting a property’s rents to market levels and reducing its mortgage

debt by the amount needed to insure the property achieves a

positive cash flow. The second type is referred to as a rent restructuring and it involves reducing the property’s rent levels, but not

reducing its mortgage debt. This type of restructuring generally occurs when the property is physically and financially sound, so that

it can continue operation at market-level rents with the existing

mortgage.

Legislation does expire at the end of this fiscal year. After that,

HUD will still be required to renew Section 8 contract rents at

market levels, but the tools established by the Act for restructuring

the mortgage notes will no longer be available. OMHAR’s authority

would also terminate at the end of this fiscal year without further

action.

Our statement today focuses on three issues. First, the status of

this program. Second, factors that have affected the pace of the

program. And third, advantages and disadvantages to continuing

the program and OMHAR.

15

In summary, we found, first, as of May 2001, approximately

1,500 properties were in OMHAR’s Mark-to-Market Program. Figure 1 in my written statement shows that about 60 percent of these

properties will receive full mortgage restructurings and the other

40 percent will receive rent restructurings.

Figure 3 in my written statement shows that OMHAR has completed about 12 percent of the properties requiring a full mortgage

restructuring and about 84 percent of the properties requiring rent

reductions.

Figure 4 in my statement shows that OMHAR estimates the Federal Government will realize about $500 million in savings over a

20 year period from the restructurings that it has completed so far.

However, for some properties that have not successfully completed the restructuring process, the requirement to reduce rents to

market has decreased the properties’ cash flows, increasing the

likelihood that these properties will develop physical and financial

problems later on down the road. And we believe that these properties need to be very closely monitored by HUD.

Second, Mr. Chairman, we found that various factors have affected the pace of the program. It took almost 2 years to get it up

and running, during which time, as you heard, OMHAR had established the infrastructure to begin assigning the large volume of

properties to the PAE’s for restructuring.

Other factors may have slowed the process as well. The initial

process that OMHAR used for reviewing and approving restructuring deals and detailed requirements contained in the program’s

operating procedures guide, and the unwillingness of some owners

to participate in the program, were all factors.

However, OMHAR has taken actions to address these matters

and program stakeholders that we talked to, believe that the pace

of the program has improved.

While the program has proceeded more slowly than OMHAR

originally estimated, many stakeholders believe that OMHAR’s

progress in implementing the program has been reasonable, given

the program’s complexity and the number of tasks that needed to

be accomplished.

Third, Mr. Chairman, we found that extending the program past

its scheduled termination date would be more advantageous to the

Federal Government than ending the program.

As shown in Figure 5 in our prepared statement, there is over

1,300 Section 8 contracts with above-market rents that will expire

over the next several years. If rents on these properties are marked

down to market levels, as they would be required to do, even if the

authority expired, without providing for mortgage restructuring,

the reduced rents may not be sufficient to provide revenues to

cover operating expenses, mortgage payments, and much needed

repairs. This would force the owners to reduce expenditures for

maintenance, adding to the possibility of deteriorating properties

and possibly defaults on these properties.

Such outcomes—deteriorating properties and claims against the

FHA insurance fund—are outcomes that are generally viewed as

undesirable and would have an undesirable impact on the affordability of American housing.

16

Extension of the program, on the other hand, would permit Section 8 property owners with above-market rents and unexpired contracts to benefit from the restructuring tools that are currently

available and prevent the adverse effects on affordable housing

that could occur if the program is not continued.

For this reason, all of the program stakeholders who participated

in our panel, our expert panel that we sponsored as part of our

work, support the continuation of the program beyond the end of

this fiscal year when it would otherwise terminate.

Finally, Mr. Chairman, we agree with the view expressed by

most program stakeholders that the administration of the Mark-toMarket Program should continue to reside in an office dedicated to

the program’s implementation and that office needs the resources

and expertise to administer the program and oversee these complex

transactions.

Some stakeholders felt that integrating this program into HUD’s

Office of MultiFamily Housing could improve efficiency, transferring program responsibilities from OMHAR to HUD without dedicated staff to administer the program could disrupt momentum.

There was also concern that if OMHAR staff transferred to HUD

were not assigned specifically to this mark-to-market function, they

could be reassigned by HUD to perform other HUD functions. And

this is given to the fact that we have consistently been told that

the HUD field offices and staff are stretched very thin. So this is

a well-founded concern.

In conclusion, Mr. Chairman, if the legislative authority for the

Mark-to-Market Program is allowed to expire on September 30 of

this year, HUD estimates it will have to reduce the rents to market

levels for some 1,300 properties without having the tools necessary

to mitigate the potential adverse effects of such reductions. Doing

so could both affect the quality and availability of affordable housing. While transferring authority for the Mark-to-Market Program

to HUD’s Office of Housing could potentially help facilitate the coordination of some mark-to-market related functions, care must be

taken to retain program staff resources and expertise.

Thank you.

Senator REED. Thank you very much, Mr. Guerrero.

Let me begin the round of questioning by addressing a question

to Secretary Weicher. Mr. Weicher, what specific changes would

you be urging at this point with respect to extension of the Markto-Market legislation?

Mr. WEICHER. What changes in the authority? Mr. Chairman,

that discussion is still going on within the Administration and at

this point, we do not have a specific set of recommendations to give

you. I wish that we did and I can assure you that we will be giving

you recommendations as quickly as we possibly can.

Senator REED. Thank you. So, we can anticipate informally being

contacted with your proposals, both Senator Allard and I?

Mr. WEICHER. Yes, you can. And formally, on behalf of the Administration as well.

Senator REED. Thank you, Mr. Secretary.

Mr. Guerrero, I will ask you the same question from your perspective, and Mr. Hale’s perspective. What changes would you suggest as we go forward to the mark-to-market?

17

Mr. GUERRERO. We provide in our report that is soon to be issued

a number of specific changes that key stakeholders thought would

be helpful to continue to move this program along. We took no

position on those matters. We simply enumerated them. Some of

them include providing for additional funds to help with the rehabilitation of these properties necessary to keep these deals moving.

Others deal with the administrative process in terms of getting correct rent comparability studies that OMHAR feels that they can

rely on in the beginning of the process—studies that are accurate

and complete.

First I would say that the most important factor, though, that we

recommend here is, prompt action. Because of the deadline,

OMHAR will lose contract staff that have unique expertise in this

program if there continues to be uncertainty with regard to the future of this program. Also, that uncertainty will have an adverse

effect on owners of these properties creating some uncertainty as

to what exactly to do. Is it better to wait? Is it better to come in

now and proceed with these deals? So moving quickly is the most

important thing that we could recommend.

Second, the other thing that we would recommend is certainly renewing the authority for restructuring the mortgages. We think

that that is critical to preventing future defaults and deterioration

of these properties.

Third, we would recommend that wherever this function resides,

whether OMHAR continues, whether it goes to HUD’s Housing Assistant Secretary, it is important to have dedicated staff and resources to continue the momentum of the program.

Senator REED. Thank you, Mr. Guerrero. You point out, as you

alluded to in your report, that, in your words, it would be workable

to place OMHAR under HUD’s Office of Housing, so long as such

action does not disrupt program momentum.

One of the aspects of OMHAR is that, as you point out, many of

the staff are contract staff that are, as I understand, reimbursed

on not a typical civil service scale. Is that correct?

Mr. GUERRERO. That is correct.

Senator REED. So in any transfer of functions directly under

HUD, your presumption would be that you would have to maintain that scale of compensation and the same type of contractual

arrangements?

Mr. GUERRERO. That is correct.

Senator REED. And there is, I presume, a danger by integrating

it into HUD, or at least an issue whether or not that same type

of reimbursement and contract schedule would be maintained.

Secretary Weicher, is that one of the considerations?

Mr. WEICHER. Well, we certainly are aware of the issue, Mr.

Chairman. We know that it is a problem. We know that financial

regulatory staff in Washington are typically paid better than staff

who perform other functions in various Cabinet agencies. So, we

certainly intend to address that question seriously. And while I

cannot offer you a specific recommendation from the Administration on this point, I can restate our commitment to making this

program continue to work, not lose the momentum that has been

built up, and see this thing through to completion as expeditiously

as possible.

18

I might also say that the Secretary has general authority to pay

above the GS scale in certain situations at his discretion and that

becomes a possibility in addition to the differential that is established for financial regulatory personnel.

Senator REED. Thank you.

Let me now call upon Senator Allard, the Ranking Member.

Senator ALLARD. One thing that I think would be helpful to us

on the Committee here is to follow up on the recommendation from

the panel of experts that you had there.

They recommended two main options for program administration. They recommended OMHAR or HUD’s Office of Housing.

Could you explain to us what you view as the pros and cons to each

one of these options?

Mr. HALE. Certainly, Senator Allard. Actually, some of those

have been discussed.

I think the main perspective of people who favor transferring the

program into HUD’s Office of Housing were well articulated by Mr.

Weicher, that they felt like it could facilitate coordination between

the office responsible for the program and other activities conducted by the Office of Housing that deal with multifamily properties covered in this program.

But the preponderance of people that were on our expert panel,

many of whom are here today, supported a continuation of OMHAR

or an OMHAR-like office that would still have resources and expertise dedicated to the administration of the program. And as Mr.

Weicher said, and also Mr. Peppercorn, I think given the complexity of this program and the difficulty of carrying out the restructuring actions under it, it is important to have staff that are

dedicated to the program and understand it and have the capabilities to complete these actions.

Senator ALLARD. Mr. Peppercorn, how long do you think we need

to reauthorize the Mark-to-Market Program?

Mr. PEPPERCORN. Three years seems to be a reasonable number.

When you project out the deal expirations, most of them will have

come in by that time.

Senator ALLARD. Are you of the view that this is something that

we will have to have in place permanently that will always have

a restructuring need out there?

Mr. PEPPERCORN. I think Congress did a pretty wise thing by

saying that a particular office has a sunset date. I think it is a better idea to extend for 3 years, as opposed to permanently, and then

come back at the end of 3 years again and say, do we need this

now or are we done?

Did I answer your question, sir?

Senator ALLARD. I think you did, yes. Not directly, but certainly

indirectly.

[Laughter.]

Now, your estimates also indicate the number of restructurings

will steadily decline with time.

Mr. PEPPERCORN. Yes.

Senator ALLARD. What do you think should be OMHAR’s need as

far as budget and staff members?

Mr. PEPPERCORN. It is going to be about the same for a while because it has taken a little over a full year to complete. So that

19

means that even if they are coming in at about the same level, or

even with a slight decrease in the next year, it is still going to take

1 or 2 years for that work to taper off.

I would say, for the most part, the number is pretty close. We

are actually authorized for 101. We have tried to be efficient. We

are only in the 80’s at this point in time.

Let me also point out that if in fact the work goes down, there

are ways in which the skills and talents of the people in this office

can be used. You have people who really understand real estate,

that understand how to set markets that could potentially do other

work-outs.

So if for some reason the workload drops off, I think the Secretary and the Commissioner have a terrific team that could potentially be deployed for some of the other needs in the organization.

Senator ALLARD. I would like to turn now to the General Accounting Office. I do not know which one of you would need to answer this question. But I would like to have your view on the

length of time for reauthorization. And then your view on administering the office and the number of employees.

Mr. GUERRERO. I think the consensus seems to be around 3 years

and we would support that. We think that is a reasonable number.

There is also merit to having that a firm 3 years because it encourages the parties to come to the table, knowing that there is an end

to this process and that entering into the process sooner than later

is to their mutual advantage.

The resources—we do not really have any particular view as to

what that would entail, but we could get back to you on the record

with some estimate of what resources would be required for that

extension.

Senator ALLARD. Mr. Chairman, I know that I am running short

of time, but I have just one more brief question here, if I may, for

Mr. Peppercorn.

Senator REED. Yes, go right ahead.

Senator ALLARD. Thank you. Would you explain to me in a little

more depth about these properties where we had rent adjustments.

There seems to be a general feeling that they should have had total

debt restructuring, and just what is going on in those properties.

Mr. PEPPERCORN. Absolutely. It is probably the most difficult

problem that we face. When MAHRA was created, what happened

was, in addition to requiring that rents are reduced, there were

also other restrictions that were put on the property. For instance,

the moment you had a dollar written off into a second mortgage,

the proceeds of the cash flow had to be split, 75 percent going back

to the Federal Government, 25 percent going to the owner.

Second, any rehab needs, the owner had to come up with 20 percent in cash of those costs.

Third, and we have adjusted this somewhat, they were asking to

be extended out for 30 years. We were asking them to extend out

for 30 years. They were only getting back a Section 8 contract of

1 to 5 years.

What that created was a dynamic where many owners simply did

not want to participate. They did not want to lock into their cash

flow being so constrained. They did not want to lock into 30 years.

20

And so, what they did was they tried, in essence, to say, we will

take the Lites. We will get our rents reduced. Leave me alone.

What has happened, though, is in certain cases, the property

cannot be sustained, in our belief, sufficiently to keep that going.

What are the options at that point?

We cannot go in and force the owner to accept a debt restructuring. We cannot legally go in and take the property away. So

when an owner says no, I do not want a full debt restructuring, for

whatever reason, it creates the most difficult problem we are facing, which is, we now have a legal obligation to reduce the rent.

We know that the property really needs a debt restructuring. The

owner will not agree. And then the question is, what do you do?

The system that has been created, and we have worked with

both Housing and the GAO on, is a system called a Watchlist.

There is no one I know that is completely comfortable with the way

that is working. We all know it is a challenge. We are absolutely

open to ideas on how to make it better, how to fix the problem, because you are putting your finger on exactly the most important

and most difficult problem we are facing.

Senator ALLARD. Yes, and I am struggling with that myself, and

I was hoping you would have some suggestions.

Thank you, Mr. Chairman.

Mr. PEPPERCORN. Thank you.

Senator REED. Thank you, Senator Allard.

Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Mr. Peppercorn, first of all, let me say that the Members of the

Committee share your generous evaluation of Senator Bayh and we

were pleased to hear it. We will commission the staff to make sure

that he hears of your very kind remarks here this morning.

[Laughter.]

Mr. PEPPERCORN. Thank you.

Senator SARBANES. Mr. Weicher, we are pleased to have you

back, now confirmed as the Assistant Secretary. I thought we had

an interesting nomination hearing. In fact, I thought it was very

useful and very helpful, and perhaps, although you were on the hot

seat for a while, perhaps a good example of how a nomination hearing can be very helpful in terms of clearing a nominee and developing some policy.

Is it the Administration’s intention to actually submit to us a

piece of legislation? Are you just going to give us ideas of what you

think should be done, or is it your intention to actually send us a

draft bill?

Mr. WEICHER. It is our intention to send you a draft bill. It may

not be a long draft bill, but it is our intention to send you one.

Senator SARBANES. All right. Now I was looking at your statement, where you say, ‘‘There appears to be general support for an

extension of the restructuring authority beyond the current scheduled expiration date.’’ Do you see where I am?

Mr. WEICHER. Yes, Senator.

Senator SARBANES. Then you go on to say, ‘‘The Administration

will be submitting legislative recommendations on how best to proceed with that extension.’’ I reread that sentence three or four

21

times. I was kind of looking for the word after submitting, like

soon, promptly—— [Laughter.]

In the near future, post-haste.

[Laughter.]

I did not find it. What is your response to that?

Mr. WEICHER. Senator, I think you are a careful reader.

[Laughter.]

Let me say that we will be submitting legislative recommendations as quickly as possible.

[Laughter.]

And let me say also that the Subcommittee has made clear that

it would like those recommendations as quickly as possible.

Senator SARBANES. Let me underscore that with this observation.

I will put a question to the GAO people.

It is my understanding, at least from general reports, that the

staff that has been assembled at OMHAR, although they have had

some slowdown in getting going, but now they are going, and that

there is generally respect for the quality and the competence of

that staff. Is that correct?

Mr. GUERRERO. I think that is a correct assessment.

Senator SARBANES. Now, Mr. Peppercorn, what is going to happen to that staff if we run up toward the end of the fiscal year and

there is not a reauthorization, and come September 30, you are

confronted with sort of a drop-dead problem?

Mr. PEPPERCORN. They are worried. I mean, we talk regularly.

They are comforted by what Commissioner Weicher and the Secretary have said in terms of their intent and what everybody believes will happen.

But as somebody said to me in one of our regional offices last

week, well, we know what you think, Ira. We know what they

think. We know the direction it is going to go in. But I have a

mortgage to pay and kids to feed. So the closer and closer you get

to September 30 without a formal renewal, the more difficult it is

for the very talented people on the staff to hang in there.

Senator SARBANES. I think generally here, we share a respect for

that staff. I think the intention is to reauthorize. And so, I think

you can communicate that to them as well.

Now, I come back to Mr. Weicher. We are on a fairly tight timeframe here and I want to underscore that. We are in this week and

next week. There is then a break for July 4. We are then back for

a July period. And I think we should be aiming to try to move this

bill through the Senate during that period because, at the end of

that period, there is an August break. We are not here at all in the

month of August, and we come back after Labor Day. If we do not

move the bill out of the Senate during the July period, we will be

a little behind time.

Of course, the House would have to move a bill as well. You

would have to reconcile whatever differences and get something

into law by September 30. So, we really do need something from

the Administration quite quickly.

Now that may argue for you simplifying or streamlining what

you submit. Obviously, the more far-reaching it is, the more it

needs to be worked over.

22

I think my colleagues would agree that is the scheduling framework within which we are now operating. We do not want to lose

these people. It seems that finally, we have a good crew put together and they are doing a good job and we want that process to

continue along.

I feel strongly about this because there is a lot of affordable

housing out there. We do not want to lose it. Some of this restructuring, we are in the process also of refurbishing this housing and

maintaining, sustaining the inventory and keeping it. And we have

a very serious affordable housing problem.

Now, we discussed production at your hearing and that is a separate issue. But at least this existing housing, affordable housing,

I think we have to place a great premium on sustaining it in the

inventory.

Senator ALLARD. Would you yield?

Senator SARBANES. Yes.

Senator ALLARD. How are we doing on filling up your positions,

your appointments, nominations and what not? Do we have your

area where you need suggestions to set public policy in this area?

Do we have those positions pretty well filled, or are we still struggling to get those filled?

Mr. WEICHER. I believe you have two confirmation hearings on

Thursday of this week with Mr. Rosenfeld and Ms. Antonelli. And

I believe there are three others who are in the process of nomination, or being named by the President.

Senator SARBANES. Yes, but the remaining three, they are not

before us.

Mr. WEICHER. No.

Senator SARBANES. The ones that are before us, we will have a

hearing on.

Senator ALLARD. And if there is some way that we can put those

that haven’t been put forward by the Administration, that we can

put them on a faster track or somehow, I think we would all probably appreciate that so that we can move forward and get your recommendations, get as much help on board for you, because this is

pending legislation that is going to come up here quickly.

Senator REED. Again, I think that Senator Sarbanes’ point is

very well taken because of the schedule. We certainly would benefit

from the recommendations of the Administration. But at some

point, just because of the time schedule, we will have to move.

Mr. WEICHER. I think those are all very reasonable statements,

and I think that is a very reasonable schedule, Senator Sarbanes,

that you have set forth. It certainly seems to me to make sense.

If this is legislation that you are trying to deal with on September 29–30 and with detailed changes, then I think we may all

not be very happy with the outcome after the dust settles.

I think we know the schedule. We are working to get you our recommendations as quickly as we can, and we realize the more complicated the recommendations are, the more complicated the legislative consideration process will be.

Senator SARBANES. Well, I think, to sharpen it up, I think it

would be very helpful to have your recommendations by the end of

this month, or certainly into the first week in July, which is when

23

we are away, so that it is available to us when we come back in,

and we can incorporate it into our thinking as we move towards

a fairly prompt mark-up in July.

We not only have the problem of moving it through the Committee, but then finding time on the Senate calendar in order to

take it up, although, hopefully, this would be a noncontroversial

piece of legislation. It would be easier to do, to move it on the floor,

without a great commitment of time. These things have a way

of getting backed up. It would not be so serious if we were not

running the risk of losing this team that has been assembled and

put together, which most everyone thinks is currently doing a

creditable job.

Mr. WEICHER. We certainly do not want to terminate the activities of OMHAR and we do not want them to be terminated by inadvertence, either.

I think, Senator, you have given us a very reasonable timetable

and we will do our best to meet it.

Senator REED. Thank you, Mr. Chairman.

Senator Dodd.

Senator DODD. Thank you, Mr. Chairman. And that is the line

of questioning I had as well for Mr. Weicher.

First of all, let me thank all of you for being here and testifying.

Just to explore this a bit, the timeframe, and Senator Sarbanes

and the Chairman have identified it, well, even in July, we are

looking at a series of appropriations bills which can just consume

the entire time on the floor of the Senate.

One Senator on this kind of a matter could basically kill this, is

the way I see it, with the timelines being what they are. It is not

going to take any Herculean effort here to stop the reauthorization

of this program.

And so, it becomes, I think, not only important in terms of submission, but I would like to just explore with you, to what extent

you think this is worthwhile reauthorizing.

It seems to me that this is not de novo, and I understand the

need for having people in place obviously to help administer. But

we are not talking about the creation of an office here. We are now

talking about an established record, at least I see an established

record, and the GAO seems to confirm that.

I realize you do not have a plan yet. I would like to explore with

you whether or not you think it has been worthwhile.

Obviously, if the Administration in its language is not particularly pleased with this kind of an operation, that you have some

kind of problems with it, I think it is very helpful for us to know

that today.

I can wait for your submission in July, but at that point, I need

to get from you whether or not you think this office and this particular effort has been in the best interest of everyone involved. Or

do you think it ought to go to FHA?

I know there is a turf battle going on here a bit, but aside from

doing that, is this in your view—you are an experienced person.

This is not something we are just bringing up to you today for

the first time. You are very familiar with it. What do you think of

it? We can get into the details of it, but has this been worthwhile

or not?

24

Mr. WEICHER. Well, Senator, to expand a little bit on what I said

in my prepared statement and my opening remarks, the Secretary

has said on behalf of the Administration that we want to extend

the basic authority of OMHAR.

Senator DODD. Yes.

Mr. WEICHER. We are about halfway through a process that you

put in motion in 1997. We think that process should continue. We

do not believe, and I have not heard anyone say this morning, that

at this point, we should adopt a new approach to deal with the last

half of the properties that are going through the system.

The questions are likely to concern the administrative structure

of the office and its relationship with the rest of HUD and it may

involve some suggestions for changes in the specific authorities. I

notice some suggestions in some of the testimony from the second

panel. But, as I also said, this is as tough an issue as any of us

are ever likely to face in HUD, and that is saying something. There

are some competitors for that title.

But this is something that you all have been wrestling with for

years. We have a strategy that you adopted after a great deal of

hard work in 1997, and it is our view to carry that strategy forward to conclusion.

I hope that is responsive.

Senator DODD. It is responsive, and I appreciate that very much.

Are you satisfied as well with Mr. Peppercorn’s numbers in

terms of the cost savings that have been realized up to this point?

Or is there some debate about that?

Mr. WEICHER. There is no debate on them. I have not sat down

myself and gone through the numbers. Having said that, let me

go back and say that there is, as far as I know at this point, no

de-bate on them. I think we all have slightly different numbers.

Those numbers change every time there is a new resolution or

restructuring.

Senator DODD. Yes.

Mr. WEICHER. And I think if you sat down and looked at the testimony of everyone, you will see some differences.

Senator DODD. Is there any authority which exists within the Department, for instance, if we were unable, for whatever reason, to

adopt legislation? Is there some way the Secretary would be allowed or could allow the office to continue in operation for a period

of 60 or 90 days, whatever, if Congress for some reason were unable of adopting, both Houses, a bill that the President was able

to sign?

Mr. WEICHER. I do not know, Senator, very simply. I hope that

if that were to happen, if we were in that situation, we would be

able to do that on some basis, but I am not a lawyer and I am not

an expert on legislation.

Senator DODD. I might say if you would take a look at that and

let us know. That might be helpful in terms of just the clock up

here in terms of how we are functioning.

That would also get to the point that Senator Sarbanes has

raised. And again, I would just raise it here.

Have you had a chance to make any assessment of the quality

of the people in this office, Mr. Weicher?

25

Mr. WEICHER. No, Senator, I have not. I have known Mr. Peppercorn since he was at FHA back in 1997 and 1998. Beyond that, as

you know, I have been in office for 18 days and I have not—— Senator DODD. That is a long time.

[Laughter.]

Mr. WEICHER. It seems longer every day.

[Laughter.]

Yet met with the people at OMHAR.

Senator DODD. Very good. You might just take a look because I

think that point of obviously putting together this synergy of talented people, I do not need to tell you how that works. Obviously,

you have seen it in so many different capacities in your life. But

if you lose that, it falls apart, trying to replace it again, can get

right back to the very worthwhile critique of why this program took

so long to get going. And going back to the director of this program

and then putting the staff together. So, I think the notion that we

could end up losing some talented and bright people—the offers are

out there when you are that talented, to be able to move people

very quickly if you are in a situation where you are vulnerable.

I think that is worth mentioning.

Finally, Mr. Peppercorn, one of the concerns we have heard

voiced is that a number of the properties with above-market rents

are not being referred by FHA to OMHAR. What is going on there?

What is the problem there?

Mr. PEPPERCORN. That is something that we have talked to the

Office of Housing about. The properties need to go from the owners

to the HUD field offices and then over to us. I do not know what

the reasons are. And what we do is we look at the model and we

predict which properties we think will come in and which properties have not come in and see where there is a gap.

And we have communicated the data to the Office of Housing

and I believe that it is appropriate for them to really take a hard

look at the very question you are asking.

Senator DODD. Well, Mr. Chairman, I notice that we do not have

anyone from FHA on our panel. You have a very complete panel

here coming up. But I wonder if we might do a letter to FHA.

Senator REED. Actually, Mr. Weicher is the Commissioner.

Senator DODD. Well, I know. But do you have any reason why

that is going on?

Mr. WEICHER. Senator, I do not know why that is happening at

this point. In the process of preparing for this hearing, I became

aware of this as a problem as seen by OMHAR and I have asked

our Office of MultiFamily Housing to ascertain what the problem

may be and see if we can identify for specific projects what else we

should be doing.

It is not our intention, it is not Secretary Martinez’s intention,

not my intention, to delay this process because of confusion and

bureaucratic difficulties between agencies. We do think, as I said

in my statement, that if OMHAR is within Housing, we have

better control over the relationships between the MultiFamily

Hubs and OMHAR and between the rest of the Office of Housing.

So that we do not have complicated conversations about what is

really going on.

Senator DODD. Fine. Yes?

26

Mr. GUERRERO. To put some perspective on this, we observed

that only 32 percent of the expired contracts in the last fiscal year

were referred to OMHAR. A look needs to be taken, as HUD indicated, at the reasons for why that is.

One possible explanation we heard is simply the changing economics in certain markets. We have had a very robust economy in

certain markets. That could account for why some of these properties when their contracts expire do not get forwarded.

Some of our panelists thought perhaps that would suggest a need

for a third party to look at the rent comparability studies that

begin this process, to ensure that they are accurate and reflect the

true market conditions, so that when you begin the process, you

are actually starting with good data.

Senator DODD. Yes.

Mr. GUERRERO. And that would eliminate data as a potential

source of the fact that some properties that should be coming into

the system are not coming into the system.

Senator DODD. That is a good suggestion.

Finally, Mr. Chairman the statute requires the tenants—for you,

Mr. Peppercorn—that significant stakeholders be involved in the

restructuring process. I guess the question that I would ask you is:

Are the PAE’s meeting this requirement?

Mr. PEPPERCORN. I think for the most part the answer is yes. I

know from an OMHAR policy point of view, the answer is absolutely yes.

There have been cases that have been brought to my attention

where the PAE was not paying good enough attention to tenant

issues. Some of the things we have heard in particular were that

tenant meetings were scheduled during the day on family properties. That means that people cannot go. Every single time we

have heard an issue like that, we have stepped in. Some of this

was a learning curve on the part of the PAE’s.

Moreover, about 2 weeks ago, we brought in PAE’s and tenant

groups and OMHAR staff and housing staff from around the country to have a training session, to have people share their experiences honestly.

And my sense of things is, it is not perfect but it is pretty good.

Senator DODD. Did GAO look at that at all?

Mr. HALE. Yes, Senator Dodd. Actually, when we had our expert

panel back in February, that was an issue that came up. We had

representatives from tenant groups there, as well as OMHAR. And

they expressed some concerns about just the things that Mr. Peppercorn was talking about, about meetings not being held appropriately, tenants not getting notification.

And actually, since then, we have followed up a couple of times

and to OMHAR’s credit, they have had a couple of additional conversations where they did bring in representatives, most recently

a couple of weeks ago, from the tenant groups and from a number

of PAE’s to talk about these issues. So that is positive.

Having said that, it is still going to be an ongoing situation that

OMHAR obviously will need to stay on top of to make sure that the

tenants do get a chance to participate.

Senator DODD. Thank you very much.

Thank you, Mr. Chairman very much.

27

Senator REED. Thank you, Senator Dodd.

Thank you to the panel.

There may be additional questions which we would solicit in

writing. And I would urge you to promptly respond so that we can

move this process forward.

Thank you very much.

I would now like to call up the next panel, please.

Before introducing the second panel, I would like to yield to Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Unfortunately, I am going to have to leave for a conflicting engagement. I do want to thank the people on this panel. I have had

a chance to look through their statements and obviously, a great

deal of work has gone into them. And there is really a great deal

there that I think is beneficial to the Committee, and I am most

appreciative for that contribution. I apologize that I am not going

to be able to stay to hear the testimony. I do want to make two

observations, Mr. Chairman.

First of all, I want to observe that the National Leased Housing

Association is quick on the beat. I see that they have John Bentz,

who is one of the directors of the association, to give their testimony today. And it just so happens that Mr. Bentz is from Providence, Rhode Island.

[Laughter.]

Senator REED. Coincidence.

[Laughter.]

Senator SARBANES. And I also want to observe that the Mercy

Housing people are here with Mr. Wehrwein, and that their headquarters is in Denver, Colorado.

Senator Allard had to leave us for a brief period, but I am glad

to see a panel that is staying abreast of the times, Mr. Chairman.

[Laughter.]

Thank you all very much.

Senator REED. Thank you, Mr. Chairman.

Let me first introduce the panel formally and then we will begin

with Mr. Wehrwein.

John Bentz is from my own home State of Rhode Island. John

is here on behalf of the National Leased Housing Association, of

which he is a Director. He is also Cofounder and President of Property Advisory Group, which manages approximately 2,100 housing

units in five States and is based in Providence, Rhode Island.

Mr. Bentz is Past President of the Rhode Island chapter of the

Institute of Real Estate Management and is currently serving as

the Chair person of the Legislative and Emissions Committee. He

is both a certified Property Manager with the Institute of Real Estate Management and a registered Apartment Manager with the

National Homebuilders Association.

Thank you, John, for joining us today.

Ms. Geraldine Thomas is the current Vice President of the

National Alliance of HUD Tenants and has been a resident of

HUD-assisted multifamily housing since 1988. She is Chair of the

association’s mark-to-market task force, which consists of local

affiliated groups for providing outreach and training service to tenants in mark-to-market properties in 25 States. Ms. Thomas has

28

been a board member of the National Association of HUD Tenants

since 1997, and served as the association’s Vice President since

1998. She was honored in June 2001, by the National Association

of HUD Tenants Conference with the organization’s Outstanding

Organizer of the Year Award.

She is an active member of her community and we thank her for

being here. Her community is in the Philadelphia area. Is that

correct?

Ms. THOMAS. Yes.

Senator REED. Thank you.

Barbara J. Thompson is Director of Policy and Government Affairs for the National Council of State Housing Agencies. She is

representing the publicly Participating Administrative Entities.

She oversees the work of the legislative and program staff on regulatory issues related to affordable housing, including banking, tax,

budget, appropriations. Ms. Thompson is responsible for keeping

member finance agencies informed of Congressional activities. She

has served in the New Jersey Governor’s Washington office as a

senior housing lobbyist under two administrations, former Governors Tom Keane and Brendan Byrne.

Cathy Vann is representing the private PAE’s. She is the President of Ontra, a participating administrative entity for OMHAR.

During her 15 years’ tenure at the Ontra companies, Ms. Vann has

been involved in the due-diligence, asset management and disposition of more than $8.5 billion in distressed mortgage and real estate assets in 45 States and Puerto Rico.

Ontra, as a private PAE in the Mark-to-Market Program, has

been awarded 118 full debt restructures, 120 rent restructures, and

22 comparability reviews since their July 1999 contract inception.

And we thank her for joining us.

Finally, Mr. Charles Wehrwein is the Vice President of Mercy

Housing, one of the largest nonprofit developers, owners and managers of service-enriched affordable housing in the United States.

His responsibilities include leading Mercy’s acquisition initiative,

which is focusing on acquiring and preserving portfolios of existing

affordable housing complexes across the country.

Mr. Wehrwein also oversees the Mercy loan fund and the Mercy

housing development division. And prior to joining Mercy, Mr.

Wehrwein served in various capacities, including Chief Operating

Officer with the National Equity Fund, the largest nonprofit syndicator of low-income housing tax credits.

And he has had previous experience in the Federal Government

at HUD, and we thank him for joining us today.

Mr. Wehrwein, would you begin, please?

Senator ALLARD. Mr. Chairman, I would just like to personally

welcome Mr. Wehrwein to the Committee and we look forward to

his testimony.

Senator REED. Thank you, Senator.

29

STATEMENT OF CHARLES WEHRWEIN, VICE PRESIDENT

MERCY HOUSING, INC.

Mr. WEHRWEIN. Thank you, Mr. Chairman, and Senator Allard,

for your kind words.

I wanted to say that my comments also reflect the input of several other significant community development organizations, including the National Housing Trust, LISC, the Housing Partnership Network, and NEFPI.

Mr. Chairman, Mercy Housing and others in the community development field regard the preservation of affordable rental housing as essential to the stability and revitalization of communities

and the residents who so desperately need this housing, both now

and in the future.

Before commenting on the specific issues and policies around the

mark-to-market subject, I would like to share with the Subcommittee a specific example of mark-to-market in action, if I may.

Mercy Housing owns a 106 unit Section 8 assisted property in

Denver, Colorado. This property serves the transitional housing

needs of distressed families. Our Section 8 contract expired and we

were eligible for mark-to-market, and we have entered that process

and expect to close on our transaction within the next month or so.

An example of a typical resident at Decatur Place, which is the

name of this property, is Caroline Garcia. She and her four children escaped an abusive relationship with nothing more than the

clothes on their backs. She had no education when she arrived at

Decatur Place. Her first month there, she was only able to contribute $4 per month toward the rent at the apartment. She immediately went to work part-time at the cafeteria where her children

attended school. She took life skills training provided by Mercy onsite, including parenting, financing and computer training, and she

began her education process. In just 21⁄2 years, she has completed

her education and is now working full-time as a medical transcriber. Her children are healthy and strong, and doing better in

school than they ever have, and she is now contributing $386 a

month toward rent. Were it not for the Mark-to-Market Program,

this property could not have been sustained at this level.

As to the progress of restructurings, clearly, they began far too

slowly. But I think now have picked up dramatically. In our view,

it is solely because of the new owner and nonprofit incentive guidelines that were adopted by OMHAR in the fall of 2000. They were

created through a cooperative approach that brought together

stakeholders from across the spectrum. It has been a great example

of how Government should work.

These new guidelines, among other things, have encouraged the

nonprofits to pursue purchases of mark-to-market properties and

owners to submit to the mark-to-market process.

Prior to these guidelines, it was simply uneconomic to take on

these properties. We applaud OMHAR’s recognition of the risk of

additional affordable housing losses in their response to this problem. Without these incentives, we believe that full restructurings

would not have commenced at the pace that they currently have.

Extending the authorities present under MAHRA will allow sufficient time for the backlogs of these complicated transactions to be

30

completed. It will send a clear and strong message to the entire

housing community that Congress is committed to sticking with a

consistent program once it works.

We strongly support the extension of authorities beyond their

scheduled expiration at the end of fiscal year 2001, and we recommend that Subtitle A, of MAHRA be extended. Furthermore, we

strongly encourage the Subcommittee to recognize and affirm the

importance of the new incentives and guidelines implemented by

OMHAR, as they are critical to the recent success of the Mark-toMarket Program. Finally, we specifically call for the Subcommittee’s attention to the need for continued funding of ITAG and

OTAG grants at levels equal to or exceeding last year’s $10 million.

I would like to turn my comments now toward the experience of

working with OMHAR and its team members.

OMHAR was clearly slow getting out of the gate, as you have

heard, both in organizing its operations and in contracting with the

PAE’s. Creating an organization from scratch is difficult and time

consuming under the best of circumstances and it seems in hindsight that a period of 3 years to both create the organization and

complete all the restructurings was optimistic at best.

Experience with OMHAR’s national office staff and consultants

suggests that they are extremely competent from a technical standpoint and they reach out and seek information and guidance from

many stakeholders.

The assessment of OMHAR’s field staff is somewhat more variable, the largest problem being the communication of their national

policies and the assurance that those are being carried out.

Experience with public PAE’s has been very positive. My personal experience with the Housing Finance Authorities in Colorado

and Missouri have been outstanding. Overall, the staff at the public PAE’s seems competent and professional and the public PAE’s

seem to have a better understanding on how to appropriately strike

a balance between cost savings and quality affordable housing.

From a programmatic standpoint, we would like to see a more

direct linkage between the HFA and other State and local housing

resources and preservation, and would strongly support new funding allocated to the States to accomplish this goal. The Federal

matching grants provisions of the legislation proposed in H.R. 425

and proposed in the past by Senators Sarbanes, Kerry and

Santorum would be an excellent vehicle to accomplish the linking

of State and Federal resources and we would strongly support that.

Experience with the private PAE’s has also been fairly good, although, again, the communications issue seems to be a bit of a

problem. Their nature as profit-motivated entities sometimes

pushes them to focus more on the cost elements than the quality

elements of housing in their locales.

In conclusion, whatever the reasons for the delays in getting

OMHAR off the ground, it is now working. It is a singular business-like unit in the Federal Government that is competent and

improving and it would be a waste of the taxpayers’ resources invested to date, to let it expire, or otherwise reconfigure it, just as

it is beginning to reach its potential.

The work that it was created to do is not yet done. It is a small,

lithe organization with specific technical skills that allow it to be

31

responsive to stakeholders and objectives judged by Congress.

Therefore, I urge you to extend the OMHAR organization in its current configuration by extending Subtitle D of MAHRA.

Thank you, Mr. Chairman. That concludes my testimony.

Senator REED. Thank you very much, Mr. Wehrwein, not only for

the substance of your testimony, but also for your length.

If I could urge everyone to stay as close to 5 minutes as possible,

it would be appreciated. We want to have time for questions.

Your written statement will be included in the record if you want

to summarize also.

Ms. Thompson, please.

STATEMENT OF BARBARA J. THOMPSON

DIRECTOR OF POLICY AND GOVERNMENT AFFAIRS

NATIONAL COUNCIL OF STATE HOUSING AGENCIES

Ms. THOMPSON. Thank you, Mr. Chairman.

Mr. Chairman, I am Barbara Thompson, Director of Policy and

Government Affairs for the National Council of State Housing

Agencies.

The NCSHA represents the Nation’s State Housing Finance

Agencies. Rick Godfrey of your own State of Rhode Island, Mr.

Chairman, serves on NCSHA’s board and is a member of its Executive Committee.

Thank you for this opportunity to testify about the Section 8 restructuring program and the experience of HFA’s serving in it.

First, though, Mr. Chairman, I would like to thank you and Senator Allard and the many Members of this Subcommittee who cosponsored and helped enact legislation in the last Congress to increase the caps on housing bonds and the Low Income Housing Tax

Credit.

Unfortunately, even with these increases, many qualified for

bonds and credit help simply will not get it. Three obsolete program provisions prevent it.

Senate bill 677 fixes these problems. We would appreciate your

cosponsorship and that of your Subcommittee colleagues, and ask

you to encourage your leadership to please include it in a tax bill

this year.

NCSHA and the Nation’s State HFA’s worked very closely with

the Congress to create the restructuring program. With the support

of Congress and the industry, we assured that qualified HFA’s had

a priority right, Senator, to serve as restructuring agents. We knew

that HFA’s would carry out restructurings in a manner that protects the interests of the Federal Government and at the same

time, the properties, the residents, and the surrounding communities. Regrettably, OMHAR has failed to utilize the expertise of

HFA’s. Instead, OMHAR has treated HFA’s as robots, prescribing

their every move, stifling their judgment and their creativity.

Accordingly, though we urge the Subcommittee to reauthorize

the restructuring program, we encourage you to turn its responsibility, responsibility for its administration, over to HUD. We also

recommend that you direct HUD to streamline its many, many

rules and regulations and devolve greater decisionmaking to the

State HFA’s, as Congress always intended.

32

State HFA’s have been strong and successful partners with the

Federal Government when it has permitted them to do their job

with their own expertise and experience.

Congress intended States to have decisionmaking authority and

flexibility when it gave them the priority to serve as PAE’s. Chairman Bond at the time said:

Devolving responsibility and decisionmaking to the State and local level is

one of the primary goals of this Mark-to-Market legislation.

Senator Mack, author of the legislation, said:

I expect HUD to approve many HFA’s as PAE’s and provide them as much

flexibility as possible within appropriate parameters to administer the (permanent) program.

However, OMHAR either never understood that or chose to ignore Congress’ will. Instead, it chose to do the restructuring work.

From the start, OMHAR has dictated down to the finest detail

every step HFA’s must take in restructuring properties. It has denied HFA’s the ability to apply the very expertise, judgment,

knowledge of their local markets, concern for their properties and

communities and tenants, that caused Congress to choose them to

do this work in the first place.

Despite Congress’ many admonitions about streamlining the program and utilizing HFA’s, OMHAR changed little until the Senate

Appropriations Committee last fall told them that its functions

would be transferred to HUD. Since then, OMHAR has made some

progress, but too little, in our opinion, and very late. Though it finally reduced the requirements of its operating procedures guide,

the changes it contains still do not go nearly far enough toward

streamlining and simplifying the program.

OMHAR continues to value process over product, rules over results. Its guidance to PAE’s remains overly prescriptive, confusing,

needlessly complex, ever-changing, and inconsistently interpreted

and applied by its own staff. Its operating guide, Senator, has 22

separate appendices and requires the use of 86 separate forms to

process a single transaction. OMHAR issued 79 ‘‘policy’’ emails to

PAE’s in just the last 14 months. Its financial model, which PAE’s

must use to calculate the necessary financial outcome in a restructuring, is over 40 pages long and unnecessarily complex. It leaves

little room for State judgments.

OMHAR runs a command and control operation. It delegates little authority to its regional offices. Frequently, the regional office

will tell an HFA one thing, while the headquarter office tells them

another. Communication between OMHAR and HUD is very poor.

PAE’s are bounced back and forth between OMHAR and HUD for

decisions and information.

Many HFA’s find OMHAR more interested in saving money than

in preserving properties. OMHAR frequently questions HFA market rent and rehabilitation needs assessments, despite its lack of

familiarity with the properties and the communities within which

they are located.

Policymakers, Senator, will for some time debate the number of

Section 8 properties lost and the Federal subsidy savings forfeited

due to OMHAR’s insistence on doing it its way. But there is another cost—the loss to the restructuring program of State HFA expertise, judgment, experience and commitment to public purpose.

33

Of the original 42 State HFA’s approved as PAE’s, only 22 remain in the program today. Some HFA’s never signed contracts,

believing they could add little value given OMHAR’s prescriptive

approach. Others have declined to renew, severely frustrated with

OMHAR’s unreasonable and irrational rules. Still others have been

forced out by OMHAR often without explanation. Some remain, but

are inactive because OMHAR doesn’t give them assets. It gives

them instead to the privates without the knowledge of the HFA or

their agreement as the law requires.

Your own agency, Mr. Chairman, one of the strongest in the

country, last April received written notice from OMHAR that it

would not renew its contract. That notice gave no explanation for

the termination.

Mr. Chairman, Congress wrote the right plan when it gave priority to public PAE’s to carry out Section 8 restructurings. The

problem is OMHAR never implemented that plan.

You have an opportunity to insist on the system that you established nearly 4 years ago, a system under which the responsibility

for restructuring Section 8 properties is delegated to willing and capable State and local agencies with reasonable Federal oversight

and accountability to the Federal Government, the States, communities, and residents.

Thank you very much, Mr. Chairman, for this opportunity to testify and CSHA and the State HFA’s are committed to working with

you to set the Section 8 restructuring program on the course Congress intended.

Senator REED. Thank you, Ms. Thompson.

John Bentz. John, good to see you here.

STATEMENT OF JOHN BENTZ

PRESIDENT, PROPERTY ADVISORY GROUP, INC.

DIRECTOR OF THE NATIONAL LEASED HOUSING ASSOCIATION

We thank you for the opportunity to appear before you today.

Mr. BENTZ. Same here. It is a pleasure, Senator. I appreciate

Senator Sarbanes’ comments relative to the timeliness of my visit

to this Committee. And I appreciate your hearing me today.

My name is John Bentz. I am President of Property Advisory

Group in Providence, Rhode Island. I am a Director of the National

Leased Housing Association, on whose behalf I testify today.

As a matter of background, for the past 30 years, NLHA has represented the interests of owners, lenders, housing agencies, and

others involved with Section 8 programs, both project-based Section

8 and tenant-based vouchers.

My company alone owns 18 Section 8 properties throughout the

country and we currently have several properties undergoing process in the Mark-to-Market or Section 8 renewal program, as they

are called.

Today, we will focus our comments on the future of OMHAR and

the Mark-to-Market Program. Both issues are of great concern to

NLHA members.

The expiration of OMHAR authorization on September 30 raises

the question of whether the entity is to continue. It is generally

recognized that OMHAR got off to a slow and rocky start and did

not hit its stride until about a year ago. The program was new,

34

OMHAR was not fully staffed, and owners were naturally wary of

a program that could have significant negative consequences to the

projects and to their investors.

However, at this time, OMHAR appears to be functioning on a

higher level. Nearly 140 mortgages have undergone full debt restructuring with 25 to 30 restructurings expected to close each

month through September.

Under the direction of Mr. Peppercorn, OMHAR itself has made

significant reforms to make restructuring more attractive to owners. These reforms include the possibility of enhanced assessments

and project management fees, and allowing interest on the owners’

required deposits to reserves as an eligible project expense. In

other words, OMHAR has shown that it does listen and responds

to concerns raised by the stakeholders.

At this point, the termination of the Mark-to-Market Program

does not appear to be practical. Because of the high cost of Section

8 subsidies, a replacement mechanism would be needed to develop

with no promise of anything better. The question does arise, however, as to whether or not OMHAR should be continued in its

present form or whether the Mark-to-Market Program should be

melded into HUD’s regular multifamily programs.

My opinion is it should be kept separate.

NLHA feels that OMHAR must retain its functional independence in order to retain its current capacity to process debt restructuring. OMHAR has attracted some very talented and experienced

staff members. We believe that their retention is essential to the

continuation of the Mark-to-Market Program to avoid causing fatal

interruptions. I think this has been discussed at great length in the

previous discussions.

We would caution against dismantling OMHAR and simply folding the Mark-to-Market activities into HUD’s regular multifamily

marketing program responsibilities.

Implicit in our belief that OMHAR should be retained is our view

that mortgage restructuring mechanisms as adopted in 1998 should

continue as long as Section 8 rents are to be based on comparable

market rents.

I believe Mr. Peppercorn mentioned FMR’s—are they fair and

are they marketable? Sometimes it is debatable.

There are 400 properties that are anticipated to be eligible for

debt restructuring in fiscal year 2002 alone. Without the legislative

authority to restructure the debt on these properties, the FHA insurance fund will be forced to absorb a high level of mortgage defaults when properties undergo a rent reduction with unsatisfactory burdens being placed on owners and residents.

Although OMHAR has been responsive to a number of suggestions from the housing community, there are other changes that

could be made to improve the program. Most would require

changes to the statute.

In recognition of our time limitations, I will not explain them in

any detail, but simply say that amendments should be made to address: One, owners contributions to rehabilitation costs; two, the inadequacies of market rents in some inner-city neighborhoods and

rural areas, which are a very important item; and three, needed

35

flexibility in certain HUD mortgage programs to improve the Markto-Market Program.

Our written testimony provides more details on these issues and

NLHA’s members are developing more significant legislative recommendations this week which we will provide to the Subcommittee staff.

I thank you for this opportunity to testify this morning.

Senator REED. Thank you very much, Mr. Bentz.

Now, I will call on Ms. Vann.

STATEMENT OF CATHY VANN

PRESIDENT, ONTRA, INC.

Ms. VANN. Thank you, Mr. Chairman.

I am presenting this testimony today as the President of and on

behalf of Ontra, Inc., as a private PAE for OMHAR. To place my

testimony in perspective, during Ontra’s 16 year tenure, we have

had significant experience dealing with distressed Government assets. The $8.5 billion in assets that we have managed through that

16 years have been with the likes of Texas Housing Agency,

FSLIC, FADA, FDIC, RTC, and numerous Texas banks and S&L’s,

including Southwest Plan Institutions.

In the early 1990’s, Ontra received ‘‘above average’’ ratings from

all four Wall Street Investor Rating Agencies to facilitate its participation as a Special Servicer and equity partner in over $2.5 billion in distressed mortgage and real estate asset acquisitions with

AIG, Citicorp, CS First Boston, and Goldman Sachs. About $1 billion of these assets were in a partnership with the Federal Government through the RTC S and N Series program.

Ontra commenced its contract with OMHAR in July 1999 as one

of the first two private PAE’s. They were assigned 120 Rent

Restructurings, referred to as Lites, 118 Debt Restructurings, referred to as Fulls, and 22 Comparability Reviews, for a total asset

count of 260.

In the interest of time, the detailed results are provided for the

written record. But to summarize, Ontra has completed 112 of the

Lites, 83 of the Fulls, and 21 of the 22 Comp Reviews, for a total

of 216 assets that have been either resolved, closed or completed.

The statistics of my report are based on these numbers.

In order to provide the services for this contract, Ontra management has historically dedicated 23 individuals to the delivery of the

required services and currently has 16 staff members fully engaged

in the process.

Much of the remainder of my testimony, the nonstatistical portion, represents the results of my canvassing effort in February of

the eight other private PAE’s in response to a request from the

GAO to participate in a panel regarding the disposition of OMHAR

in the Mark-to-Market Program.

Regarding the progress in rent and debt restructurings, as everyone has said, it had a slow start. But from the private PAE’s perspective, there were two essential drivers to this.

For the first 12 to 18 months, owners appeared disengaged and

largely convinced that if they stalled, the Mark-to-Market would go

away and in all fairness, there was little incentive for the owners

to participate willingly in the program, given the financial strucVerDate 11-MAY-2000 14:43 Jul 24, 2002 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 79972.TXT SBANK4 PsN: SBANK4
36

ture at that time. The owner’s incentive package which was introduced in September 2000, has gone a long way to cure this

problem. Since January 2001, there has been gaining momentum

in the owner community to contemplate, comprehend, and finally,

engage the program.

Of Ontra’s 195 completed Lites and Fulls transactions, and that

includes resolved assets, there were only four opt-outs on Fulls and

five opt-outs on Lites. Opt-outs are where the owner has chosen to

just completely leave the affordable housing program.

The program is very complex. That is the second driver, the complexity of the program. And I want to stress here that, with all the

criticisms of OMHAR, we have a completely different perspective.

We think the program is complex. We think OMHAR’s response to

it has been appropriate.

The following comments I would like to keep in that perspective.

There has been significant ramp-up and learning curve maturation

involved. The following items will speak to this complexity issue.

The heart of the Restructure Transaction has a 45-page model

which includes not only all of the MAHRA business rules written

in, but 14 different analytic schedules. There is eight standard real

estate mortgage analysis schedules, such as operating budget analysis, long-term capital reserves, debt sizing, amortization, claim

sizing, net savings. It includes an additional six schedules to analyze Tenant versus Project-based subsidies, IRP recaptures, Outyear HAP contract recaptures, affordability restrictions, exception

rents, and an analysis of the anticipated repayability of the partial

payment of claim, all in one integrated proforma.

This is a very valuable tool. It is complex, but it is valuable. And

I do not know how we could accomplish what we have accomplished without this sort of tool. Going further on more complexity.

There is a minimum 26 individuals involved, and sometimes as

high as 41 we have counted in a single transaction that have to

be notified, coordinated, copied and satisfied, including four to five

individuals at OMHAR, two to three at HUD, and numerous

others such as local housing authorities, owners, property managers, tenants, OTAG’s, PCA Consultants, and Appraisers, old

lenders, new lenders, four different sets of attorneys and title company personnel.

Once again, that is not an issue that is driven by OMHAR. That

is the nature of the beast. That is what it takes to complete a

transaction with all the parties, as what we believe the Government has intended us to do.

There are four different closing scenarios. There are different

rules and regulations for each of them, the most common of which

is a 223(a)(7), in which there are 55 distinct documents, 8 signatories, and 14 distribution parties.

However, in the last 24 months, all of these bases have been effectively covered. The long awaited momentum is currently being

achieved. And note that the average time between acceptance and

close for a standard Full Debt Restructuring, at least for this PAE,

has gone from 15 months for assets assigned prior to January 2001

to 7 months for assets assigned after January 2001, representing

a 114 percent improvement.

37

Regarding the savings to date generated for the Federal Government, based on Ontra’s portfolio, there has been an NPV savings

on 119 completed and closed Lites and Fulls transactions of approximately $106.3 million of which $63.8 million represented 79

Lites, and that included 19 Fulls that went to Lites. And there is

$42.5 million which represents 40 closed or completed Fulls.

The estimated PAE costs to date, at least from our perspective,

is about 3 percent of the NPV savings.

Regarding the physical condition of the housing stock, we looked

at this from two perspectives. The status of the stock as it came

into the program or as it was assigned to us as a PAE, and then

the long-term preservation dollars.

As far as the deferred maintenance which was the status of the

housing as it entered the program, the program calls for escrowing

funds to cure immediate repairs within 12 months after closing.

The repair escrow rehab numbers for Ontra’s 31 closings, and we

have 21 imminently pending closings which will close in the next

30 to 60 days. Of these 52 assets, we have escrowed almost $5.3

million on 4,683 units, 52 projects, which amounts to about a little

over $100,000 per project and about $1,100 per unit. But these

numbers are somewhat skewed because five inner-city properties

represent about 3 million or 60 percent of this total.

When you look at it overall, deferred maintenance in our portfolio has not been a significant issue.

However, the housing is aged. So from a long-term perspective,

the same set of 52 assets closed and pending. The program has allowed us for set-asides of approximately $57.5 million, averaging

just over $12,000 a unit to cover the 20 year long-term capital

needs. This represents an average of about $614 per unit per year

set aside for replacements.

One of the more compelling statistics is that the average reserve deposit prerestructure went from approximately $309 to $439

postrestructure, which represents a 42 percent increase in annual

reserve deposits to the replacement reserve accounts. These numbers seem to point to the fact that although it appears that not

all of the housing is in terrible shape, but that the program is

providing a unique opportunity to reconfigure the economics and

provide for the stabilization, if not the rejuvenation of aged

housing stock and thereby ensure quality affordable housing into

the future.

Regarding the operations of the Office of MultiFamily Housing

Restructuring Assistance, in summary, on this issue, I hope that

my entire testimony speaks to the fact that the program is very

complex by nature. It has achieved definite, significant momentum.

And it is providing solid savings while at the same time capitalizing on a unique opportunity to set the economics straight for the

Nation’s FHA insured Section 8 housing stock, and to ensure continuance, at least in this sector, of quality affordable housing.

OMHAR has been integral to this process and despite the criticism to the program and OMHAR’s implementation of such it

is my company’s opinion that OMHAR has done an admirable job

of juggling the priorities of the numerous stakeholders and the

parties to the transactions, while at the same time developing

well proportioned tools to manage the delivery of a very complex

38

program. There are three additional items I wanted to address very

quickly on a going forward basis.

Senator REED. Could you summarize very quickly, Ms. Vann?

Ms. VANN. Okay. These are okay because they have been said

before.

Senator REED. Thank you very much.

Ms. VANN. Thank you.

Senator REED. Ms. Thomas.

STATEMENT OF GERALDINE THOMAS, VICE PRESIDENT

NATIONAL ALLIANCE OF HUD TENANTS

Ms. THOMAS. Thank you, Senator Reed.

On behalf of the National Alliance of HUD Tenants, I am pleased

to submit these comments on the Mark-to-Market Program. The

National Alliance of HUD Tenants, or NAHT, is the Nation’s first

membership organization representing the 2.1 million families who

live in privately-owned, HUD-assisted housing. Our membership

today includes tenant groups and area-wide coalitions in 30 States.

I want to thank you and the Subcommittee for the honor of

speaking before you today.

Since 1999, NAHT has convened a monthly Mark-to-Market Task

Force, which I chair, consisting of the tenant coalitions among

NAHT’s membership working in the mark-to-market buildings.

The comments we submit today reflect the consensus views of

these NAHT affiliated groups, based on their experience with the

Mark-to-Market Program on the ground in more than 20 States.

In the interest of time, I refer the Subcommittee to our written

statement which explains why many owners have avoided the

Mark-to-Market Program or opt for 1 year Section 8 contract renewals and rent reductions, known as OMHAR Lites. I will say

though, that the main reason for the low level of owner participation in the mark-to-market was the decision by Congress to make

owner participation entirely voluntary.

With a boom economy, owners in many parts of the country have

few reasons to go into mark-to-market and restrict their chance to

make more money for 30 years.

As long as Congress is unwilling to require owners to renew their

expiring Section 8 contracts or to regulate rents for assisted housing, owners will continue to opt-out of HUD programs and demand

ever high levels of Section 8 subsidies, renewals from HUD with

few repairs as the price for staying in the program. Few owners

will choose to go into mark-to-market. The results will be continued

loss of affordable housing and missed opportunities for savings in

the Section 8 program.

Based on the decisions of NAHT Mark-to-Market Task Force and

input from NAHT affiliates from across the Nation, we offer the following recommendations to extend and improve the Mark-to-Market Program this year.

Number one—Extend Mark-to-Market restructuring authority.

NAHT joins the emerging consensus that the authority to restructure mortgages to save costs, as outlined in MAHRA, should be extended indefinitely.

39

Number two—Continue OMHAR as a separate office, reporting

to the Secretary. After a slow start, OMHAR is now functioning

smoothly and produces results at a steady pace for HUD. To throw

sand in the machinery at this time would cause major staff upheaval and confusion that would be both unnecessary and unwise.

Congress should leave the successful Mark-to-Market Program in

the separate office where it is located now, reporting to the Secretary of HUD for at least the next few years.

Number three—Redefine OMHAR’s governmental mission and

transform PAE’s into subcontractors for HUD. The experience with

PAE’s over the past few years shows that turning over HUD functions to State and private agencies is a bad idea. Because of costing

more from the tenants’ point of view, contracting out is undesirable

because it adds to the complexity and confusion for tenants who

now have to deal with several agencies rather than one. It is hard

to educate the private PAE’s in particular about the value and the

role of tenant participation in decisions which affect our lives.

So NAHT recommends that Congress define the essential Government functions of the Mark-to-Market Program—preparation

and approval of the final MRRAS Plan and review of public and

tenant comments and keep them inside of OMHAR.

OMHAR should be allowed to subcontract out specific functions

to PAE’s or others, such as preparing a capital needs assessment

or appraisal in cases where OMHAR staff cannot do them. But

basic Government decisions regarding the MRRAS plan should not

be privatized.

Number four—NAHT offers several recommendations to improve

tenant participation.

A—Improve access to information. Tenants need help from Congress to get assets to project operation budgets and other documents to help HUD expose scams, identify savings, and promote

sales to nonprofits.

B—Extend the $10 million set-aside for technical assistance

funding. Section 514 of the MAHRA expires on September 30. It is

essential that Congress extend this program to continue funding

for the well-designed but under-funded tenant assistance program

which OMHAR has put in place.

C—Extend time for review of the MRRAS Plan. We recommend

that the required time for tenant review of the draft MRRAS Plan

be extended from the current 10 to 30 days.

D—Require written response to tenant comments. We recommend that OMHAR and or the PAE reviewing tenant comments

respond in writing to these comments as it is required in Federal

Environmental Reviews.

E—Require notice to tenants and a required meeting throughout

the mark-to-market process. Most important, tenant notice and at

least one mandatory meeting should be required of all OMHAR

Lites projects. Also, notice to tenants and a guaranteed meeting

should be required if a property is being disqualified or kicked out

of the program, or if an owner changes its decision and changes to

OMHAR Lites, mark-to-market, or opts-out of the program for any

changes in property status. Tenants should also be notified if the

PAE handling their property changes in mid-stream.

40

F—Enforce Notice and Duty to Accept requirements when owners opt-out and fix problems with Enhanced Vouchers. HUD has

stated publicly and in writing that it does not intend to enforce an

owner’s duty to accept Enhanced Vouchers in the event owners optout, even though Congress clearly required this last year.

Nor has HUD always required owners to follow the 1 year notice

to tenants when they decide to opt-out.

Congress should clearly mandate HUD to enforce the law and

use this opportunity to fix remaining problems with Enhanced

Vouchers, which we describe in our statement.

Number five—Support the Preservation Matching Grant bill to

promote sales to nonprofit groups and preservation of mark-to-market buildings. Today, OMHAR does not have access to capital grant

source to help nonprofit groups buy and preserve buildings in the

Mark-to-Market Program. For properties needing repairs, a capital

grant source would also be useful to help owners fix up substandard buildings as part of the MRRAS Plan.

The Preservation Matching Grant bill which passed the House

2 years ago, has been refiled in the House as H.R. 425, and will

soon be refiled in the Senate by Senator Jeffords and others. We

urge the Subcommittee to hold an early hearing to give this bill renewed momentum.

Number six—Adopt a Regulatory Program to Preserve Affordable

Housing. In extending the Mark-to-Market, NAHT believes that

the Congress should establish a national regulatory program to

limit owners’ ability to opt-out, prepay, and obtain windfall profits

through high market rents at the expense of residents in affordable

housing. It would be far preferable and less costly to preserve atrisk units by regulating owner choice to opt-out of HUD programs.

Adoption of national regulations would send owners flocking to

the Mark-to-Market Program and results in major savings to HUD.

It would also mean more repairs for substandard buildings and a

big increase in owners willing to sell to nonprofit groups.

Number seven—Reaffirm and strengthen HUD and OMHAR’s

mandate to preserve mark-to-market buildings with project-based

Section 8 assistance. While the current program appears to have

resulted in only a few voucher conversions, it is premature to conclude that the risk of mass voucherization of HUD housing under

mark-to-market has been avoided, as intended by Congress when

MAHRA was passed. Congress should use this opportunity to clarify its intent to preserve the maximum amount of mark-to-market

eligible stock with project-based Section 8.

Mr. Chairman, thank you for the opportunity to provide testimony to the Subcommittee today. NAHT stands ready to work with

the Subcommittee and OMHAR to make the Mark-to-Market Program work better for tenants and the communities.

Thank you.

Senator REED. Thank you very much, Ms. Thomas.

Let me begin the questioning by addressing the same question to

each of the panelists beginning with Mr. Wehrwein.

Putting aside for just one moment the placement of OMHAR in

HUD, either independent or part of the Housing Office, what is the

single most important change we could introduce into a reauthorization bill?

41

Mr. WEHRWEIN. Senator, I think the most important change that

has already occurred has been the incentive guidelines that have

made it much more economically feasible to undertake these transactions. They are currently not even in regulatory form. And some

more significant support of those guidelines by the Subcommittee

and the Senate would be much appreciated.

Senator REED. Thank you, Mr. Wehrwein.

Ms. Thompson.

Ms. THOMPSON. Yes, Mr. Chairman. The most important thing

you could do in reauthorizing this program is to instruct HUD or

OMHAR, whichever winds up running it, to devolve greater decisionmaking to the State and local governments, as Congress first

intended, and cut the paperwork.

Senator REED. Thank you.

John, you have indicated the three issues. One, owner’s contribution to the rehabilitation fund; two, the inadequacy of certain market rent in urban areas as a problem; and then, finally, just increased flexibility. Would you want to elaborate on any one of

those, or add an additional comment?

Mr. BENTZ. Yes, Senator. The rents that are in the inner-city

areas, and when they do a comparable market study, in a lot of

cases, do not really come up to what you really need to support and

sustain an inner-city development because of the money it takes to

run a development of this type and you are doing a comparable

market study that shows that the rents that you are getting are

excessive and the rents that you are getting are not really excessive because of the items that you have to address in each one of

these facilities.

I think we have gone through a couple of mark-to-market studies

and we are going through a couple of restructurings. The rents that

have showed in the comparable market studies do not really come

to what we really need to run one of these developments.

Senator REED. Thank you.

Ms. Vann, what would you propose on behalf of your organization

or your perspective in terms of other than the replacement of

OMHAR?

Ms. VANN. I would like to make a comment based on the PAE

consensus, private PAE consensus on that canvassing that I did.

And I think from our perspective, we really feel that the program

is working. So, we would prefer not to see many more changes.

Now that we have it set in place and we are on a roll, we would

like to just continue.

Senator REED. Thank you.

Ms. VANN. I am sorry. I cut off so quickly before, I did not get

to thank the Committee. I really do appreciate the opportunity to

present testimony today.

Senator REED. Well, we thank you for coming and for your excellent testimony.

Ms. Thomas, your perspective, please? What would you feel

would be essential to be included in new legislation?

Ms. THOMAS. Yes, just to make sure that tenants are notified up

front and that they are part of the process from the very beginning.

I think that is crucial.

42

Senator REED. How would you evaluate tenant participation

so far based upon your experience and the comments from your

colleagues?

Ms. THOMAS. In some areas, it is good, and in others, it is not

so good. We know that in the beginning, everything was a slow

start. But there has been changes made. But we must continue to

strive to make it even better.

Senator REED. Thank you.

Let me raise an issue here that was joined directly and indirectly

in the testimony. That is, there is a debate about the public versus

private PAE’s. Many State housing finance agencies have extensive

experience—my housing agency in Rhode Island, mortgage finance

housing agency, is an excellent one. Yet, for one reason or another,

as has been indicated, State PAE’s have not done as much work

as the private PAE’s.

Several questions. Why are the private PAE’s doing more? A

related question in my mind is, I presume that they are subject

to the same paperwork requirements, the same models, the same

everything.

I think Ms. Thompson wants to respond. And Ms. Vann, you

might want to respond, too.

Ms. THOMPSON. Certainly. I just want to put the numbers in

some perspective, if I could, first, Mr. Chairman because I think

there is some misconception that somehow the public agencies have

done many fewer restructurings than the private agencies. That is

not true as a percentage of the assets they have been given. They

simply have not been given as many assets as the private sector.

And I addressed that in my testimony because the law required

when they are an improved PAE, a public PAE, that OMHAR mutually agree with them on the assets that they will receive.

Instead, OMHAR, from the very beginning of this program, has

given assets to the private sector without even notifying in many

cases the public sector. And in some cases, it has assigned an asset

and within 2 weeks will call up the agency and say: You know

what? We are moving fast and we want to give this to a private

sector entity. We are just going to take it away from you, for no

reason related to capacity.

Let me give you the percentages because I think it is very instructive. This comes off of OMHAR’s own web site as of yesterday.

The public PAE’s have completed 29 of the 226 full restructurings

they have been given. That is 13 percent. The private PAE’s have

completed 101 of the 653 Fulls they have been given, 15 percent,

just 2 percent more.

Of the Lites, 220 of 258 Lites that the public have been given,

they have finished 85 percent of them. Of the 284 of the 355 Lites

that the private sector received, they have completed only 80 percent. So the public agencies are actually doing better on the Lites,

just 2 percent less on the Fulls restructurings. They simply do not

have the assets.

You have to remember, too, Mr. Chairman, that a number have

dropped out of the program. Some did not even sign their original

contracts because they felt that they just could add no value to

such a prescriptive program—Virginia, Pennsylvania, Michigan,

43

ironically, Governor Engler’s agency headed by Jim Logue, who

was the Multifamily Assistant Secretary at HUD, under Secretary

Kemp, actually was a consultant to the Subcommittee when you

wrote this legislation. His agency has withdrawn because they

think the program is so overly prescriptive, that they are simply

agents. They are not being called upon to use their expertise and

they would rather use it elsewhere.

Senator REED. Thank you.

Ms. Vann, I want to give you a chance to respond if you would

like to.

Ms. VANN. I guess it is hard to speak to what has happened between OMHAR and the public PAE’s because I have been on the

outside looking in.

I know from a private PAE perspective, OMHAR possibly making

up for the slow start in the beginning and its lining up the infrastructure. It seems like maybe—and this is just kind of a perspective, that the private PAE’s or private sector is more driven toward

speed and rolling assets and moving them through. And I think

that strikes to the heart of the disagreement about the prescriptiveness of the program.

Entities who have done a lot of affordable housing have their

way of doing it. And here comes MAHRA, which we believe is a

very specific law and you had to have a very specific program to

make sure that the statute was implemented correctly and according to what Congress intended.

So it has been a benefit to us. And that is the only ying and yang

that I see between the two.

Senator REED. Thank you, Ms. Vann.

Ms. Thompson, before I yield to Senator Allard, if you could just

respond.

Ms. THOMPSON. If I could just respond to that comment.

First of all, the numbers do not suggest that they are doing more

as a percentage, as I said before. But it is very important that we

focus on the point about driven toward speed. This is not a program that should be driven by speed, especially under pressure

from OMHAR because they have so much catching up to do.

This is a program where the States have to look at, should look

at, everyone should look at the preservation needs of these properties. And what we are hearing from the States, and I am not

going to speak to the private experience because I am not familiar

with it, is that OMHAR is not allowing them to do what is necessary to keep these properties in low-income use for the long term.

You are going to have this problem right back before you in a few

years if we do not look at that aspect of the program.

Senator REED. Thank you very much.

Let me turn to the Ranking Member, Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman. And I hope that I

am not duplicating a question that you asked before. We juggle

several balls in the air at the same time and sometimes it requires

us just to step out of the room for a moment or two.

Regarding those properties that we were mentioning in the last

panel, what we call the Watchlist properties, these are properties

with physical and financial troubles that are being monitored by

44

the Office of Housing, what do you think should happen with these

properties and what should be the role of HUD’s Office of Housing?

I thought I would call on you, Mr. Wehrwein, and Ms. Thompson

and Mr. Bentz to respond to that question.

Mr. WEHRWEIN. Thank you, Senator.

I share some of the concerns voiced in the previous panel about

the adequacy of the Watchlist process. In my estimation, it doesn’t

portend well for the future of those assets. And I would argue that

the HUD Office of Housing Resources is probably insufficient to

oversee and manage all of those properties and to assure that, in

fact, they are being monitored closely. I just do not think they have

the resources.

I would suggest that if the Subcommittee were interested in considering any changes to the legislation in terms of reauthorizing

and amending, that one consideration might be that there be consideration given to pushing more of those assets into a required restructuring because, as Ms. Thompson said earlier, I think that in

a different category of assets, we are going to see these same assets

come before us with some problems in 4 or 5 years.

Senator ALLARD. Ms. Thompson.

Ms. THOMPSON. I would simply add, I agree with Mr. Wehrwein.

I would simply add that it is too bad at this point in a relatively

new program in terms of how long it has been really fully operating, that we even have a Watchlist. This is the very thing that

we were trying to get away from. All of these properties were on

a Watchlist technically to begin with, but we are beyond that at

this point. But I agree. I think that restructuring should be done

to those properties because their long-term health, both physically

and financially, managerially, is not assured.

Senator ALLARD. Mr. Bentz.

Mr. BENTZ. Yes, Senator. Thank you. The Watchlist, I think, is

a misnomer because the original intent, as two people previously

testified, was to get the properties out of HUD, and if you are on

a Watchlist, you go back to HUD, to the HUD office, which is something I believe that they were trying to eliminate to begin with.

The restructuring process is somewhat cumbersome and the

Watchlist is something that I think they should reevaluate. It is a

definite problem.

Senator ALLARD. I would like to address this to, Mr. Bentz, and

Ms. Vann, and Ms. Thomas. Last September, HUD released a

package of initiatives for property owners participating in the

Mark-to-Market Program. How helpful have these initiatives been

in bringing reluctant owners to the table from your perspective?

We will start with you, Mr. Bentz.

Mr. BENTZ. I think they have been extremely helpful. We have

done a number of deals over the last 2 or 3 years and we have benefited from some of the changes. I think Senator Reed asked me

a question a little while ago which it kind of went right over my

head with regard to the owner’s participation in the 20 percent

that is supposed to come up with the restructuring of a particular

development.

That has been one of the drawbacks in the entire program, I

think, is the 20 percent that the investors basically have to come

up with. And in a lot of cases, they just do not want to come up

45

with the dollars, so they either opt-out or they go through another

form of restructuring which is not beneficial to the development.

Senator REED. Ms. Vann.

Ms. VANN. I think it has had a significant impact, made a big

difference in our portfolio.

Senator REED. Ms. Thomas.

Ms. THOMAS. I think that, actually, it was a problem in areas because you had owners opting-out and definitely tenants not being

aware of anything. So it was not that great for us.

Senator ALLARD. Do you think that offering such incentives could

have an unintended effect with some owners and make them hold

back from participating in the program and hope that better incentives might come along later?

Ms. THOMAS. Yes.

Senator ALLARD. I would like to have you three answer that.

Mr. BENTZ. Yes. I would say, yes. One of the other drawbacks,

especially in the complete restructuring program, is the 30 year obligation. If you are going to go through a restructuring from an

owner’s standpoint, depending on the area you are in, 30 years is

a long time.

Senator ALLARD. A long time.

Mr. BENTZ. I do not think I am going to be here for another

30 years. Maybe my kids will, but I do not think I will be. The

30 years is one of the biggest drawbacks I think in a lot of the

programs, to get owners and investors to stay in the program.

Senator ALLARD. You are suggesting that maybe we look at these

not so much from a housing aspect, but just almost from a commercial property aspect, where you think in shorter terms, generally.

Mr. BENTZ. Yes.

Senator ALLARD. Ms. Vann.

Ms. VANN. We have not sensed that any of the owners are still

holding out for a better deal. We are starting to sense that the

owners are saying things like, we just want to get this done. We

just want to get through it.

And one of the real positive aspects of the program that I have

seen is that owners are very pleased with the amount of rehab and

rejuvenation of these properties. It is solving a lot of their problems

in that area, also. I do not see any changes in the future that could

make much of a difference in what we are doing.

Senator ALLARD. Ms. Thomas, do you want to add anything?

Ms. THOMAS. Just basically that I am not sure what the owners

are holding out for, whether they are holding out for more money

or not. I do know that we did have problems and still have problems, and that tenants are suffering for it.

Senator ALLARD. Okay. Now the last question, if it is okay, Mr.

Chairman.

Senator REED. Please.

Senator ALLARD. Do you think there is anything more program

administrators could do to remove barriers to owner participation?

We will start with you again, Mr. Bentz.

Mr. BENTZ. I do not think so. I think, overall, the program that

is in place has been, as I said before, somewhat reasonable. I think

it is probably the best that we are going to get at this particular

46

time without specific legislation to address some of the other areas

which I mentioned previously.

Senator ALLARD. Okay. Ms. Vann.

Ms. VANN. I think the cost of small loans, it is cost-prohibitive.

If there was a way that you could see fit to maybe aggregate and

pool loans when they are, say, under $150,000, under $200,000, because what we find, to get lenders to do those smaller loans, the

fees are just incredible. And rightly so because the lenders have to

do FHA servicing. To justify the effort, they have to charge a lot

of fees.

We are left in a limbo area there on the small loans where there

are very little options available to the owners. They can come up

with cash, but then, that kind of presents a problem for them. So

if there could be a way to provide a vehicle for under $200,000, a

ready vehicle, then that would be a great improvement.

Senator ALLARD. Ms. Thomas.

Ms. THOMAS. I just think more money should be available so that

the folks can go through the process. And hopefully, owners will get

on board.

Senator ALLARD. Mr. Chairman, thank you.

Senator REED. Thank you very much, Senator Allard.

Just a final opportunity. You listened to the previous panel. If

you have comments with respect to what they said, Mr. Wehrwein,

a reaction or comment, on any point that you think should be addressed based on the previous panel.

Mr. WEHRWEIN. Thank you, Mr. Chairman. It sounds to me like

there is an awful lot of agreement around the extension of the authorities and the only disagreement is where it lands.

I would just assert that we would attempt to do what would

throw the least, I think someone said, sand in the machinery, and

try to keep this thing moving along and attempt to react to some

of the problems that Ms. Thompson and others have talked about

and attempt to fix a machine that is already working.

Senator REED. Ms. Thompson.

Ms. THOMPSON. Yes, I would like to address something that Mr.

Peppercorn said in his statement.

He talked about the consolidation of the public agencies under

this program. There has been no consolidation. The program provides for no consolidation. What there has been is elimination.

They have driven public agencies out of this program. Forty-two

agencies, Mr. Chairman, Senator Allard, 42 State housing agencies,

including both of yours, applied and went through a rigorous review at HUD and were approved to participate.

Every agency that applied was approved, many more than anyone ever thought would step up to the plate. Now, today, we have

22 participating. And not yours in Rhode Island. And your Colorado agency, Senator Allard, is really struggling. In fact, I spoke

with them about a deal the other day and I finally said, look, I do

not know what to tell you, except call John Carson because he will

help you, and I am very serious. And you will be hearing from

them, John, if you haven’t. The agencies are very frustrated. They

do not have other priorities, as Mr. Peppercorn said. If they did,

why would 42 of them have applied? Why would 42 of them have

47

staffed up and gotten ready to run this program if they had other

priorities?

He also mentioned that the State HFA’s, that this is very difficult real estate work. It is not just allocating credits or allocating

bonds, as though the State HFA’s simply handed those out of a

drive-through window.

They do rigorous analysis under those programs. They are required to by law. The housing credit is probably the most successful Federal housing program ever, as we saw with the GAO report

a few years ago and the fact that you folks increased it in the Congress by 50 percent, 40 percent in the case of bonds, you thought

they were working so well.

Why were they working so well? Because the State and local governments make the decisions based on the unique conditions in

their States and communities, not Washington.

So to say that the very agencies that can run those programs and

run them well and use the same disciplines that they would use

under the OMHAR program, are somehow not capable of running

this program.

And to somehow say that it is not OMHAR that is complex, it

is the program that is complex. OMHAR has created the program.

Those 68 forms that are required for each deal are not required by

the statute you wrote, not in any way, shape or form.

If you think back to the demonstration that you first authorized

as a pilot for this program, it worked very well. But they loaded

all kinds of requirements on top of that, requirements that are not

necessary. They are not driven by the statute. And we urge you to

review that as you look toward the reauthorization.

Thank you.

Senator REED. Thank you.

Mr. Bentz.

Mr. BENTZ. Thank you, Senator. It appears, I think, with past

testimony between Mr. Weicher and Mr. Peppercorn, that there is

a little bit of friction between the two agencies.

I think it is to the benefit of all of us, and especially for those

two gentlemen and their two agencies, to get together to form some

kind of an alliance that is going to allow the program to continue.

And if it has to do with the PAE’s and get them more involved,

I think that that is something that has to happen.

Overall, I think the program has run fairly well over the last 6

months to a year. Everybody has stated that it has taken 3 years

to get underway and I think that is—I do not know whether it is

justifiable or not justifiable. But it was a very cumbersome task

that they had to undertake and I think with the new administration coming in, I think they are going to have to work together to

make the program work.

Senator REED. Thank you.

Ms. Vann.

Ms. VANN. I think the comments that I heard today about moving OMHAR into HUD to achieve better efficiencies and consistency of the program is a plus, as long as the personnel can be

maintained, so we do not have new learning curves, loss of momentum, et cetera.

Senator REED. Thank you.

48

Unless Senator Allard has additional questions, you have the last

word, Ms. Thomas.

Ms. THOMAS. Thank you. I would just like to see OMHAR stay

where it is, and to operate in the way it has been. It is working

now. Let’s just push forward.

I want to thank the Committee once again for the opportunity to

speak before you.

Senator REED. Thank you.

Thank you all for your testimony. There may be written questions and we would request that you respond promptly.

Thank you very much. We are adjourned.

[Whereupon, at 12:04 p.m., the hearing was adjourned.]

[Prepared statements, response to written questions, and additional material supplied for the record follow:]

49

PREPARED STATEMENT OF SENATOR JACK REED

Today’s hearing is about affordable housing and how to keep it affordable. In particular, we will explore the success of the ‘‘MultiFamily Assisted Housing Reform

and Affordability Act’’—the so-called Mark-to-Market legislation. This law is scheduled to expire on September 30 and we will be attempting to determine how well

it has worked and whether it needs to be reauthorized.

Congress passed the Mark-to-Market legislation in 1997 in order to update and

restructure Section 8 project-based developments insured by Federal Housing Authority. About 8,500 such projects with over 800,000 units of affordable housing

were built in the late 1970’s and the early 1980’s.

The Federal Government guaranteed that these projects would be built by insuring the mortgages and using Section 8 contracts to guarantee that the rents would

be high enough to pay off the mortgages. In most markets, these rents were above

market levels. Typically the mortgages for these multifamily dwellings had terms

of 40 years and the Section 8 contracts had terms of 20 years.

By the late 1990’s, the 20 year Section 8 contracts started to expire and Congress

had begun to renew all Section 8 contracts at market rents for a period of only

1 year. In markets in which the fair market rent was higher than the contract rent,

a simple renewal of the contract was sufficient to continue supporting the property.

However, in many cases, contract rents remained far above local rents. In these

cases, Congress’ decision to renew Section 8 contracts at lower market rents was

likely to result in rents too low to support the remaining mortgage payments on

such properties. As a result, it looked likely that these FHA-insured properties

would default, costing Federal taxpayers tens of billions of dollars.

The Mark-to-Market legislation was passed in an attempt to address this problem.

It had two objectives: first and foremost, the legislation was meant to preserve

affordable housing by putting it on a stronger footing, both financially and physically. Second, the law was designed to reduce the cost to the Federal Government

of rental assistance payments.

The Office of MultiFamily Housing Assistance Restructuring (OMHAR) was created to accomplish both of these objectives, with the help of Participating Administrative Entities (PAE’s).

Our panel of witnesses, both Government witnesses and stakeholders involved in

the restructuring process, will tell us what progress has been made in restructuring

the rents and debts of the FHA-insured Section 8 portfolio; the savings such

restructurings have generated for the Federal Government; the physical condition

of the housing stock that is being preserved; and the effectiveness of the Office of

MultiFamily Housing Restructuring Assistance or OMHAR.

We look forward to their testimony.

—————

PREPARED STATEMENT OF SENATOR JON S. CORZINE

Thank you, Mr. Chairman, for holding this hearing and I also want to thank all

of the witnesses for appearing here today to help discuss the status of the Markto-Market Program and to help us determine what we need to do to continue to

preserve the FHA insurance fund while also maintaining safe, quality housing for

low-to-moderate income Americans across this country.

Although I am new to the Committee, I believe the issue of affordable housing

is of the utmost importance to our Nation. This is especially true in the current economic climate when so many working families are struggling to find access to decent, safe, affordable housing and when economic indicators suggest that we may

be facing a downturn. I am looking forward to learning more about the Mark-toMarket Program and to having a productive discussion as to how we may best move

this program forward.

Again, Mr. Chairman, I thank you for holding this hearing and I look forward to

hearing from our witnesses today.

—————

PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

Mr. Chairman, I want to congratulate you on the occasion of your taking the gavel

of the Housing and Transportation Subcommittee. Given your ongoing active interest in these issues, I look forward to your leadership of the Subcommittee.

50

While the Subcommittee has not yet been officially reorganized, Senator Gramm

graciously encouraged us to proceed with this and other hearings as we try to get

the work of the Committee done.

Today’s hearing is an important review of the status of bipartisan legislation

passed in 1997 to deal with the problem of expiring Section 8 contracts on FHA insured buildings. The purpose of that legislation was to reduce Section 8 rents that

were above market, restructure the mortgages where necessary, and provide for

needed renovation. The result we were aiming for, and seem to be achieving to date,

was the upgrading and preservation of valuable affordable housing at rates the Federal Government could afford.

The legislation establishing this ‘‘Mark-to-Market’’ Program, as well as the Office

of MultiFamily Housing Assistance Restructuring (OMHAR), which was created to

implement the program, expires at the end of this fiscal year. Yet, the need for the

program will continue for a number of years to come.

It is our responsibility to decide how we want to proceed with regards to the legislation. It is my intention to work with my colleagues in the Congress and in the

Administration to come to a fair determination on how to keep this effort on track.

Again, I want to thank Senator Reed for holding this hearing. He has put together

two very good panels of witnesses that provide an opportunity for all the stakeholders to participate. I feel very strongly that the Committee should proceed in a

methodical, workmanlike manner in an effort to hear from all interested parties. In

the end, this kind of thorough review and comprehensive airing of the issues should

result in better legislation. This hearing is consistent with this approach.

Mr. Chairman, I look forward to reading the testimony.

—————

PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD

The Mark-to-Market Program got off to a slow start after Congress passed the

‘‘MultiFamily Assisted Housing Reform and Affordability Act’’ in 1997. But in the

couple of years that the program has been operating, it has helped put hundreds

of housing projects on a more sound financial footing.

It is my understanding that the program has already saved taxpayers $450 million by helping housing projects restructure their debts and reduce their costs so

that the Government could in turn reduce the cost of Section 8 vouchers without

causing hardship to low-income tenants. Nearly 600 projects have already undergone some type of restructuring under the Mark-to-Market Program and the program appears to be achieving its goals.

When the program started there were about 8,500 projects that were eligible for

restructuring. Those projects had more than 800,000 housing units—that is 800,000

places that people call home. And the Mark-to-Market Program can help focus resources where they should be focused on maintaining those units, rather than simply servicing debt. The program has worked well for some, but it could be working

well for many others.

In my opinion, OMHAR and the Mark-to-Market Program have gotten off to a

good start and it is my hope that the witnesses will provide some insights to explain

how we can ensure that the full benefits of the program can be realized.

—————

PREPARED STATEMENT OF JOHN C. WEICHER

ASSISTANT SECRETARY FOR HOUSING–FHA COMMISSIONER

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

JUNE 19, 2001

Chairman Reed, Ranking Member Allard, distinguished Members of the Subcommittee, thank you for inviting me to testify on the impending expiration of the

Office of MultiFamily Housing Assistance Restructuring. As you know, the restructuring authority and the authorization for OMHAR expires on September 30, as

part of ‘‘The MultiFamily Assisted Housing Reform and Affordability Act.’’ I am here

this morning to discuss the Administration’s position concerning the future of

OMHAR and its legislative authorities.

Before I begin, let me express my appreciation to this Committee for its support

of my confirmation as Assistant Secretary for Housing–FHA Commissioner. It is an

honor to appear before you today.

51

I am reminded that the first question from Senator Sarbanes at my confirmation

hearing concerned the ‘‘Mark-to-Market’’ Program. Chairman Reed also raised the

issue of mark-to-market during the hearing. So it is fitting that my first hearing

before this Subcommittee should be on the same subject.

Mr. Chairman, the challenges of HUD’s multifamily assisted inventory involve

some of the most complex issues that the Department has had to address. I first

became involved in this subject 15 years ago as a member of the Hills-Reuss task

force. Congress passed legislation in 1987 and again in 1990, but the problems remained unresolved. During the mid-1990’s, Congress wrestled for 3 years with the

mark-to-market concept before finally passing ‘‘The MultiFamily Assisted Housing

Reform and Affordability Act’’ in 1997. The process for dealing with these properties

has taken longer than originally anticipated, for a variety of reasons, so we now

need to revisit this issue yet again.

Since assuming the position of Commissioner, I have discussed with Secretary

Martinez the future of these authorities and the implications for public policy, particularly with regard to the residents of these properties. Discussions within the Administration are still ongoing, and will necessarily involve the Office of Management

and Budget, among others, before a final recommendation is made. However, HUD’s

fiscal year 2002 budget proposal submitted to Congress in April acknowledged the

Administration’s intention to seek an extension of the debt restructuring authority.

In his testimony before the Senate Appropriations Subcommittee last week, Secretary Martinez stated that there continues to be a need for this program, and that

HUD would be seeking an extension of the restructuring tools.

There appears to be general support for an extension of the restructuring authority beyond the current scheduled expiration date. The Administration will be submitting legislative recommendations on how best to proceed with that extension.

OMHAR estimates that over 2,500 Section 8 properties have contracts that expire

after this fiscal year; approximately 1,300 are estimated by OMHAR to be above

market. There is a continuing statutory requirement to mark down rents to market

levels. Without the mortgage restructuring tools, it seems likely that many of these

properties would default on the mortgages. This would expose FHA to significant

claims and place the housing of thousands of families in jeopardy.

The future of the OMHAR office itself has generated a greater level of discussion

than the extension of the restructuring authorities. The first few years of OMHAR

were less productive than had been hoped for a variety of reasons. In large

part, the first 2 years were spent establishing program infrastructure and assigning

the properties to the Participating Administrative Entities (PAE’s) for restructuring

actions.

OMHAR did not complete any restructurings until the fourth quarter of 1999,

some 2 years after it was created. These first completions were rent restructurings,

without any changes in the mortgage amount. The first full mortgage restructuring

did not occur until the second quarter of 2000.

Since then, however, there has been significant progress. OMHAR completed 423

rent restructurings by the end of 2000 and has completed another 63 through May

of this year. More importantly, the pace of full mortgage restructurings has picked

up sharply this year. There were 30 full mortgage restructurings in 2000, and another 77 so far in 2001. Further, I understand that an additional 75 full restructurings are scheduled for closing in the next 60 days. Since full mortgage restructurings are more complicated, this is encouraging. But clearly more needs to be

done, and we want to ensure that this important work is allowed to continue.

In his Appropriations Subcommittee testimony last week, Secretary Martinez also

discussed the future organizational structure of OMHAR. He stated that the Department expects to request a 3 year extension for OMHAR with two changes: (1) that

the office would no longer be headed by a Presidential appointee, (2) and that

OMHAR would fall under the authority of the Office of Housing.

Accordingly, we may recommend to Congress the continuation of a separate

OMHAR office dedicated to this work, but under the authority of the FHA Commissioner, rather than maintaining its current position as an independent office. This

move would simplify issues of jurisdiction and coordination. At present, the Office

of Housing is responsible for subsidy payments and the management of insurance

contracts, while at the same time OMHAR is responsible for restructuring them

for the future. The same projects are under the jurisdiction of two separate, equal

offices, each reporting to the Secretary simultaneously. With OMHAR under the

authority of the Commissioner, this anomalous situation would no longer exist. In

addition, this proposed structure would facilitate coordination between OMHAR

and the 18 Multifamily Hubs, which are located throughout the country and have

detailed information and knowledge on any particular property in the field. We

52

believe the completion of OMHAR’s work would be expedited by a simpler administrative structure.

At the same time, we certainly recognize the critical nature of the work under

OMHAR, and would have every expectation that the office would be fully dedicated

to that work and only that work. Having come halfway through the mark-to-market

process, we intend to see it through to completion.

In addition, since OMHAR would be an entity reporting to the Commissioner, we

do not expect to recommend reauthorization of the position of OMHAR Director as

one requiring appointment by the President and confirmation by the Senate. This

would avoid a circumstance where one Presidential appointee reports to another

Presidential appointee of equivalent rank.

We understand that the bulk—almost two-thirds—of the 1,300 anticipated properties subject to debt restructuring have contracts that expire in the next 2 fiscal

years. With an average processing time of approximately 13 months following contract expiration, we believe an extension of 3 years beyond fiscal year 2001 is appropriate. By 2004, we should all be able to judge whether any further extension is

needed, or whether the small remaining workload can be handled within FHA.

Mr. Chairman, OMHAR and the authority it exercises were enacted to strike a

balance between the preservation of affordable rental housing and the rising costs

of renewing expiring Section 8 contracts. If Congress had not intervened, projectbased Section 8 renewal needs would have reached $7 billion annually by 2007. Recently, encouraging progress had been made in preserving the viability of many of

these properties. But much work remains to be done. For Secretary Martinez, and

for me, the continuation of this work is one of our highest priorities. We look forward to working with Congress and this Committee in the coming weeks on this

important issue.

Thank you.

—————

PREPARED STATEMENT OF IRA G. PEPPERCORN

DIRECTOR, OFFICE OF MULTIFAMILY HOUSING ASSISTANCE RESTRUCTURING

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

JUNE 19, 2001

Mr. Chairman, Ranking Member Allard, and distinguished Members of the Subcommittee, thank you for the opportunity for me to be here today in order to give

you a status report on the Mark-to-Market Program. I would like to give you a brief

but comprehensive look at what has been accomplished by OMHAR through the

Mark-to-Market Program, what remains to be done, and what will be needed in

order to allow the Mark-to-Market Program to continue achieving the goals that

Congress envisioned in the MAHRA legislation.

At this time I would like to thank Secretary Martinez’ Office and John Weicher,

Assistant Secretary for Housing—FHA Commissioner, for their leadership and for

asking the honest questions about the Mark-to-Market Program’s continuation.

If continued, I believe their thoughtful analysis will only serve to strengthen the

program.

I would also like to recognize the leadership of a man serving on this Committee,

Senator Evan Bayh, under whom I had the honor of serving for 8 years.

Let Me Start With A Brief Background On OMHAR

Congress created the Office of MultiFamily Housing Assistance Restructuring

(OMHAR) as a semi-independent entity within HUD to address a financial crisis in

the Section 8 program for affordable housing assistance. Former Senator Connie

Mack noted at the time that an effort to ‘‘reform the Nation’s assisted and insured

multifamily housing portfolio’’ was needed in order to handle what was termed the

most difficult problem in housing at the time. OMHAR has accomplished much and

worked hard to meet the challenge of its mission. Unless changes are made to the

sunset provision in the MAHRA legislation, OMHAR and its restructuring authority

will go out of existence on September 30, 2001. However, the statutory requirement

and the need to reduce the rents on expiring above-market, Section 8 contracts will

continue. The many goals of the Mark-to-Market Program can be grouped into three

categories:

Social

• Preserving affordable housing by maintaining the long-term physical and financial

integrity of the privately-owned, publicly-subsidized rental housing insured or

held by FHA.

53

Financial/Economic

• Reducing long-term project-based Section 8 rental assistance costs. • Reducing the risks of large FHA insurance costs.

Management/Administrative

• Promoting operating and cost efficiencies in Section 8 assisted properties. • Addressing problem properties by terminating relationships with owners who

have not met their obligations and responsibilities to HUD and/or to their tenants. • Establishing a nationwide network of local public and private entities to administer the Mark-to-Market Program. • Engaging and organizing tenant and local community participation in the restructuring process to preserve affordable housing. • Providing a consistent, prudent, and documented process for all participating

properties.

The Mark-to-Market Program offers a ‘‘win-win’’ opportunity for the Government,

taxpayers, tenants, and communities, as more deals are closed, we are saving more

money by reducing excess payments on Section 8 subsidy contracts, while ensuring

that the properties involved are on a sound financial footing, and preserving needed

units of affordable housing in good condition, thereby meeting the goals of the Markto-Market Program.

Almost 900 properties—comprising over 63,000 units—have gone through the

mark-to-market process, resulting in net savings of $895 million. A big job remains—about half of the proerties assigned to OMHAR still remain to be completed.

In addition to the large number of contracts expiring through the remainder of this fiscal year, there are 3,715 more Section 8 contracts expiring in

the next 3 fiscal years, almost half of which could be above market.

The Mark-to-Market Program is operating efficiently. Part of our management approach has been to integrate constructive feedback from all

stakeholders—this has enabled us to incorporate significant improvements

in the process. We are operating with an experienced and highly motivated

staff and experienced public and private sector contractors (our Participating Administrative Entities or PAE’s), we are running with momentum.

Let Me Give You A Better Idea of the Scope of the Program

The Mark-to-Market Program is currently facilitating the preservation of over

140,000 units of affordable housing in 1,739 properties. The underwriting requirements of the Mark-to-Market Program ensure that these affordable housing properties will be operated in a manner to ensure their ongoing economic viability and

good physical condition. At a time when affordable housing is in short supply in

many parts of the Nation, the Mark-to-Market Program provides critically needed

continuity to many communities and residents.

A PAE’s partner highlighted in his letter of support to the Subcommittee that

‘‘discussions regarding OMHAR and the mortgage restructuring process frequently

forget the manner in which it impacts the resident—the quality of housing provided

to the residents under mark-to-market (M2M) has dramatically improved.’’

In addition, one of the Nation’s largest apartment owners, Denver based Apartment Investment and Management Company (AIMCO), who has 110 projects in the

program, considers the Mark-to-Market Program ‘‘important to AIMCO and

residents in [its] affordable housing portfolio. The program will enable [them] to

continue to provide safe and decent affordable housing to qualifying tenants for

many years to come while protecting HUD from claims under its mortgage insurance programs. The program is an important element in addressing the affordable

housing requirements in the country.’’ Their statement has been submitted to the

Subcommittee.

Completed transactions so far have resulted in net savings of $895 million. Once

all deals in the current pipeline are completed, we estimate that the savings represent $2.4 billion, while at the same time ensuring that these 140,000 units of

affordable housing remain part of the affordable housing stock. This is not the final

tally of mark-to-market savings, since additional properties expected to enter the

Mark-to-Market Program between now and the sunset date will generate additional

savings. In addition, there are future savings to be captured from the Section 8 contracts expiring over the next 3 to 5 years.

In furtherance of our goals, we have adopted processes that:

• Require the application of national standards for consistency, while enabling solutions tailored to local conditions and community requirements.

• Utilize a small staff of Government employees to leverage both public and private

contractors.

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• Rely on market-oriented principles to set rents.

• Encourage meaningful participation by tenants in the affected housing units.

• Maintain communications and share information and concerns with all stakeholders, including owners, lenders, HUD offices, tenants, and Government agents,

on an ongoing basis.

OMHAR Tackles Many Challenges In Pursuit of Its Mission

As I mentioned earlier, the result of the process is savings to the Government,

and to the taxpayer, that are generated even as the affordable housing remains

available, and as the physical condition of the housing is improved, when needed.

First of all, the fundamental complexity of the Mark-to-Market Program is due

to the nature of the work that must be accomplished in order to restructure a property. These real estate workouts occur in the context of a complex legislative and

regulatory environment, and involve negotiations between property owners, PAE’s,

tenants, lenders, and other community stakeholders.

Some properties, despite having these above market rents, are physically, financially, or managerially stressed even before the rents are reduced. The legislative

requirements of the Mark-to-Market Program are explicit regarding transaction

costs and cash flow to owners after restructuring and these terms have created difficult hurdles to a successful restructuring for some owners.

In some cases, property conditions or ownership problems have been such that

we have not been able to close restructuring transactions or continue project-based

assistance; tenant protections and providing vouchers has been a key goal in

such cases.

In a letter of support submitted to this Subcommittee, a public PAE partner of

ours captured perfectly the challenge we balance every day: ‘‘while these [social,

financial, and administrative] are admirable goals, they continuously compete with

one another and speak volumes about the complexity of the process.’’

How Has OMHAR Responded To These Challenges?

We have listened to our stakeholders, we have implemented changes where prudent, and we have striven to create as flexible a program as possible within the context of the legislation. As a result, beginning in the fall of last year, we implemented

revisions and initiatives to address the concerns of our stakeholders.

First, we introduced additional performance-based incentives for participating

owners. Each year after mark-to-market, if a property meets program standards for

financial, physical and managerial soundness, the property owners will receive a

market level of return on the capital they were required to invest in order to pursue

mark-to-market, plus a greater share of property cash flow for that year. We believe

this reform is vital for the long-term health of the properties and aligns the interests of HUD and the owner community. We also believe it appropriately rewards

owners for achieving HUD’s public policy objectives. Purchasers are also eligible for

these same performance-based incentives.

Second, we introduced incentives for purchasers, recognizing the additional costs

they will incur, over and above costs typically incurred by stay-in owners. This feature was necessary in order to ensure that, whenever an owner chooses to sell a

mark-to-market property, there will be a capable and desirable purchaser willing to

take over the property and take it through mark-to-market.

We have made use of our statutory authority under MAHRA § 517a5, to forgive

second mortgage debt, when appropriate. PAE’s may consider second mortgage debt

forgiveness for independent, tenant endorsed, community-based nonprofit and public

agency purchasers who accept a longer use agreement, agree not to sell the property

for a 10 year period, and agree to reinvest a portion of cash flow in the property.

This reform is consistent with our statutory responsibility to facilitate transfers

when owners desire to sell.

Finally, we introduced reforms to improve the level of communication between

OMHAR, PAE’s, owners, and purchasers. Specifically, we gave the owners and purchasers the right to receive various important information throughout the restructuring process, and we formalized the notification and appeal processes to give

owners and purchasers additional assurances that their point of view would be solicited, heard, and considered.

We have reached an agreement with Ginnie Mae to facilitate the securitization

of small mortgage loans created for mark-to-market properties, thereby increasing

the availability and decreasing the cost of these small mortgage loans.

We have created a ‘‘large owner initiative’’ under which owners of large portfolios

were given the opportunity to centralize processing of all of their properties with

one or two PAE’s. This initiative is now directly responsible for a significant share

of new transactions coming in to OMHAR.

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We have responded to concerns and comments received from our PAE partners

and greatly streamlined standard program guidance, giving PAE’s additional flexibility, and placing a premium on their professional judgment of what is best for

each property.

All of these initiatives demonstrate our commitment to a workable program that

circumvents hurdles and responds to valid stakeholder issues—all the while continuing to achieve the mission and ensuring public accountability.

We have all come a long way, especially in this past year. But there is still a high

level of ongoing activity in the Mark-to-Market Program, and much work remains

to be done.

• Closed 126 full restructurings through May 2001—10 more have already closed

this month to date. • Another 27 closings are scheduled for this month. • 47 more closings are being scheduled at this time. • 116 transactions are approved and are now in owner negotiations. • 169 deals are currently in approval stages. • 331 properties are in due diligence and underwriting. • Expect approximately 300 new assets will enter the program by sunset. • Roughly another 1,700 of the 3,500 properties with expiring Section 8 contracts

through fiscal year 2004 are expected to be above market.

As you can see, there is more work to do, which will bring more savings and will

preserve more affordable housing. We have the infrastructure in place, with a

momentum that can be sustained in order to complete the task that Congress

envisioned.

OMHAR and its partners are positioned to complete that work. The program is

in place. Yes, it took time for the Mark-to-Market Program to build its infrastructure, to work with its partners to ramp up production to our satisfaction, and to

the satisfaction of others. But we are now there. The processes work, and we are

meeting the goals of the program. Let me detail the resources in place to complete

our mission.

Staffing

We currently have 87 staff on board, of which 38 are permanent and 49 are temporary. Chart 6: Two-thirds of our staff is comprised of production staff—meaning

overseeing PAE’s, reviewing and underwriting deals, and conducting closing and

post closing activities: Chart 7: Specifically, three quarters of our field staff that are

completing restructurings are term employees—which means that their jobs with

OMHAR expire in 102 days.

The staff has exceptional and very diverse backgrounds. As envisioned under the

legislation’s creation, many have RTC, FDIC workout, and DUS underwriting experience. These staff are trained and experienced and have established effective oversight and direction for the Mark-to-Market Program. I, personally, continue to be

impressed by the professionalism of the OMHAR staff and their commitment to

boosting production numbers and meeting the goals of the program in the face of

the looming September 30 sunset date.

Chart 8: Our partners, the PAE’s, are the 3rd parties through which the nitty

gritty work of restructuring gets done. At our peak, we had contractual relationships with 51 PAE’s (42 publics and 9 privates); and we are now working with 34

PAE’s (25 publics and 9 privates). Why did this consolidation happen? There are

many reasons we can identify:

• A lack of deal inflow meant that volumes were insufficient for either the PAE’s or OMHAR to justify continued participation. • The restructuring process was much more rigorous and time-consuming than

anticipated. • The mark-to-market restructuring is a ‘‘real estate workout’’ and the ability to

negotiate in controversial situations wasn’t an expertise that some PAE’s had or

wanted to develop. • The various roles of being the Section 8 contract administrator, lending to the

local affordable community, developing more housing with some of the owners,

and doing mark-to-market restructuring, presented conflicts of interest in some

cases.

With approximately 900 deals under our belt, we have developed a stable capacity

amongst our PAE’s. And let me assure you, we have stellar performers—both public

and private.

Given the magnitude of the training, management and oversight efforts required

by OMHAR, I think it is important to share with you that the capacity between the

public and private PAE’s is quite different. The average private PAE manages 66

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deals, while the average public PAE manages 7 deals. While OMHAR continues to

be committed to the statutory preference for public PAE’s, and we are very pleased

with the quality of many of the public PAE’s performance, when a PAE with very

few deals does not perform in a timely manner or does not deliver quality work

products, it is very labor intensive with little product to show for the effort. When

numerous PAE’s with few deals do not perform in a timely manner or do not deliver

quality work products, it ties up limited staff resources and impedes production. All

nonrenewals to date have occurred in public PAE’s, who had capacity, competing

priority, and/or performance issues.

It is important to emphasize that public entities continue to play a vital role in

the mark-to-market process, even though in certain cases it has not proved appropriate or efficient for them to serve as PAE’s. Finance agencies, in their traditional

roles as affordable housing lender, tax credit allocator, or allocator of State affordable housing grants and low-interest loan funds, are well positioned to provide new

funds to restructured properties. Congress intended this in designating HFA’s as part of the restructuring process—to date, however, the public PAE’s have brought

additional funding to less than a dozen deals. Finance agencies can make the difference between preserving housing for the long term or losing it from the affordable

housing stock, by facilitating the use of additional sources of funds that can be instrumental to a successful restructuring. Because States have not typically brought

outside sources to OMHAR deals, OMHAR issued clarifications that it does not seek

to recoup external funds brought into mark-to-market properties and wants them

invested entirely into properties in their States.

In addition, due to their historical working relationships, public entities often

have a wealth of information about the properties and owners in their jurisdictions,

and about the appropriate level of rents and operating expenses. With this background, with their sensitivity to the challenges facing these properties, and with

their established working relationships with community stakeholders—such as tenant associations—public entities are a valuable resource and can play a role in the

mark-to-market process. OMHAR staff is currently working with HFA’s on strategies for utilizing public entities in roles beyond the PAE’s role, in recognition of the

value that we think they can add.

We have arrived at a balance in partners, in quality, in oversight, and in timeliness that is working. And we are performing efficiently. To date OMHAR has cost

$66.2 million in PAE’s staff costs and FHA claims to achieve those savings of $895

million over 20 years. Looking at the present value of those savings—$517 million—

still shows a 7.8:1 savings to cost ratio. In other words, for every dollar of cost, we

save almost $8.

OMHAR has not yet reached its peak for completions of full debt restructurings.

We have seen improved results with a significant increase in full restructurings

since February. We have assets moving through every stage of the pipeline; we and

the PAE’s have learned much; we have become more creative in addressing the challenges, and we have improved our timeliness with each passing month. We have developed an expertise not easily or readily able to be replicated. We want to finish

the job we signed on to do.

This is echoed by another public PAE partner in a letter of support recently submitted to the Subcommittee: . . . ‘‘It would be a travesty for the program to not

continue. OMHAR has learned lessons, adapted the program, and built working

relationships with PAE’s that will allow them to successfully accomplish the goals

of MAHRA.’’

What Do We Need To Complete the Job?

September 30, 2001, the sunset date called for in the MAHRA legislation, is fast

approaching. Planning must occur now to determine the Government’s approach to

reducing rents on expiring Section 8 contracts after the sunset date. Without the

legislative authority to reduce a property’s mortgage payments when its rents are

reduced, HUD will have to watch Section 8 properties struggle with excessive debt

burdens. Owners may cut back on maintenance to make ends meet, or default on

their FHA insured loans. The residents of these properties are negatively impacted

by failing properties. The resulting costs to HUD exceed the costs of restructuring

the mortgage debt under mark-to-market.

Furthermore, with over half of OMHAR’s staff on term appointments that expire

with sunset, the legislative authority to continue their terms beyond sunset and

keep this dedicated group of staff together is key to the continued success of the

program.

The Mark-to-Market Program and its stakeholders need an assurance of continuity in order to maintain momentum, and to continue to bring its benefits to the

affordable housing units with Section 8 contracts that are only now approaching

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expiration. The ability to reduce a property’s mortgage payments is crucial for the

mark-to-market mission of preserving affordable housing at market rents. And we

believe it benefits the financial savings goals to address these workouts proactively

and with the consistent methodology and process that we have developed.

Mr. Chairman, I believe we have a compelling story to tell. Affordable housing is

being preserved for those in need, at a cost savings to the taxpayer. There is nevertheless much work still to be done. I believe with more time we will have a resounding success story to tell.

Thank you, Mr. Chairman, I would be pleased to answer any questions.

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PREPARED STATEMENT OF CHARLES WEHRWEIN

VICE PRESIDENT

MERCY HOUSING, INC.

JUNE 19, 2001

Good morning, Mr. Chairman. My name is Charles Wehrwein. I am a Vice President of Mercy Housing, Inc. and have had direct experience with OMHAR and the

M2M Program both at Mercy, and in a previous position with one of the largest nonprofit preservation portfolio acquisitions to date. I appreciate the opportunity to

offer my comments today on three issues: the progress being made in restructuring

rents and debt of the FHA insured Section 8 portfolio, the experience with the operations of OMHAR and its team—including PAE’s—and the savings generated by

restructurings and the overall impact on preservation of affordable housing. These

comments generally reflect the input of other significant organizations in the community development field including the National Housing Trust, LISC, the Housing

Partnership Network, and NEFPI.

Introduction: Mercy Housing

Mercy Housing is a nonprofit affordable housing developer, owner, and manager

headquartered in Denver, CO, with real estate interests in many other regions

throughout the Nation. In our 20 year history, we have developed nearly 11,000

units of affordable housing serving more than 27,000 low-, and very low-income

Americans on any given day. Mercy Housing regards the preservation of affordable

rental housing as essential to the stability and revitalization of communities and the

residents who so desperately need this housing, both now and in the future. Mercy

and others who work in the community development field remain deeply concerned

about the future of preservation in general, and the Mark-to-Market Program specifically. To that end, Mercy is launching a targeted preservation initiative that will

focus significant human and financial resources on this critical problem.

Case Study: Mercy Housing’s Decatur Place, Denver, CO

Before commenting on the specific issues and policies around the M2M subject,

it is helpful to add some real context to the discussion. In that regard, I would like

to share with the Subcommittee a specific example of M2M in action.

Mercy owns a 106 unit Section 8 assisted property in Denver, CO. This property

serves the transitional housing needs of distressed families—that is where a spouse

with children has been in an abusive relationship and has had to leave home with

virtually nothing. This property’s Section 8 contract expired and it was subject to

M2M. The M2M restructuring at Decatur is nearly complete and is expected to close

within the next month or so.

An example of a typical resident is Caroline Garcia. She and her four children

escaped an abusive relationship with nothing more than the clothes on their backs.

She had little education and no job when she arrived at Decatur Place. When told

she would have to reside in a two-bedroom apartment until a three-bedroom became

available, she said it would be much better than the single room apartment they

just left. Her first month, she was able to contribute only $4 per month for rent.

She immediately went to work part-time at the cafeteria where her children attended school. She also took life skills training provided by Mercy at the site, including parenting, financing and computer training. In just 21⁄2 years, she has completed

her education and is now working full-time as a medical transcriber. Her children

are healthy and strong, and doing better in school. And she is now contributing

$386 per month for rent.

This is a great example of the contribution that assisted housing makes in our

community. Were it not for the M2M Program and the commitment of staff of

OMHAR—both the national office and the San Francisco field office—the Colorado

Housing Finance Agency (CHFA), the City of Denver and the committed staff and

resources of Mercy Housing, this property could not have been sustained.

Progress of Restructuring of the FHA Insured Section 8 Portfolio

The progress of restructurings, which began far to slowly, has now picked up dramatically. In our view, it is solely because of the new owner and nonprofit incentive

guidelines that were adopted by OMHAR in fall of 2000. They were created through

a cooperative approach that brought together stakeholders from across the spectrum

that is a great example of how Government should work. These new guidelines,

among other things, recognize and allow for a more fair economic treatment of nonprofit purchasers relating to the ongoing costs of ownership and provide for some

additional debt relief to encourage nonprofits to pursue purchases of M2M properties. The nonprofit buyer, in turn, commits to an extended period of affordable

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use. They also provide for improved processing and returns of equity to existing

owners that recognize the economics associated with extending affordable use.

Prior to these new guidelines, it was simply uneconomic to take on these properties. While the economics are still marginal under the incentives, they make it

probable that long-term nonprofit owners can own and operate these properties over

time and actually cover some of the costs of ownership. They also recognize the

extended affordability commitment by existing owners and have dramatically

increased the number of restructurings that have occurred with this group. We

applaud OMHAR’s recognition of the inequity in treatment of nonprofit owners and

the resultant risk of additional affordable housing losses, and their response to this

problem. Without these new incentives, the number of restructurings, especially full

restructurings, would not have increased materially and the program would have

been a failure.

Extending the authorities present under MAHRA will allow sufficient time for the

backlog of these complicated transactions to be completed. It will send a clear and

strong message to the entire housing community that Congress is committed to

sticking with a consistent approach once it works. This will help to eliminate the

potential for stalling by those who would attempt to wait for another program

change before acting. It will also allow more nonprofit purchasers to line up the additional resources necessary to help preserve these assets for the future.

We strongly support the extension of authorities beyond their scheduled expiration at the end of fiscal year 2001. We recommend that Subtitle A, of MAHRA be

extended for at least 5 years. Furthermore, we strongly encourage the Subcommittee

to recognize and affirm the importance of the new incentives and guidelines implemented by OMHAR, as they are critical to the recent success of the M2M Program.

Finally, we specifically call the Subcommittee’s attention to the need for continued

funding of Intermediary Technical Assistance Grants (ITAG) and Outreach and

Training Grants (OTAG) at a level equal to the previous years’ $10 million per year

or higher. We further recommend that the Department expedite the availability of

these funds to their intermediaries charged with disbursement.

Experience Working with OMHAR and Its Team

OMHAR was clearly slow getting out of the gate, both in organizing its operations

and in naming and contracting with Participating Administrative Entities (PAE’s).

The reasons for this are many depending on one’s point of view. Creating an organization from scratch is difficult and time consuming under the best of circumstances.

Add to the mix creating this organization in a politically charged atmosphere where

salaries and contracting procedures are more limited than in the private sector, and

it seems in hindsight that a period of 3 years to both create OMHAR and complete

all necessary transactions was optimistic at best.

Experience with OMHAR’s national office staff and consultants suggests that they

are extremely competent from a technical standpoint, are willing to work with all

stakeholders, and they have worked very hard to get this program underway once

the organization was up and running. The consolidated expertise in the national office is especially effective at dealing with the myriad complications that many of

these deals bring.

The assessment of OMHAR’s field staff from the perspective of many nonprofit

stakeholders is more variable. The largest problem overall seems to be the effectiveness of communication of national office policies and positions and the assurance

that these policies and procedures are being followed consistently. This problem

is exacerbated by the fact that OMHAR has been unable to fill open positions due

to their impending sunset. More time to accomplish this important task and more

certainty about the future of OMHAR would alleviate many of the problems in

this area.

Experience with public PAE’s has been mostly positive, and my personal experiences with Housing Finance Authorities in Colorado and Missouri have been outstanding. These PAE’s have a very good sense of their markets and the standards

housing should meet in those markets. Overall, the staff at the public PAE’s seems

competent and professional. Public PAE’s have a better understanding on how to

appropriately strike a balance between cost savings and quality affordable housing.

As with the rest of the M2M implementation, it is taking some time for all of

these entities to get up to speed with what is effectively a new program. Like the

comment above, time and certainty will improve this experience more still.

From a programmatic standpoint, we would like to see a more direct linkage between HFA and other State and local housing resources and preservation, and

would strongly support new funding allocated to the States to accomplish this goal.

This leveraging of, and link to, more locally driven housing resources would

strengthen the link between the public PAE and the HUD-assisted/insured assets

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in their communities. The Federal matching grants provisions of the legislation

proposed in H.R. 425 and proposed in the past by Senators Sarbanes, Kerry,

and Santorum (Section 401 of S. 2733 introduced last year) would be an excellent

vehicle to accomplish the linking of State and Federal resources and we strongly

support it.

Experience with the private PAE’s has been generally good. As with my comments

earlier on OMHAR field offices, communications of national policies and priorities

could be improved upon. Their nature as profit-motivated contractors sometimes

leads to less ownership of a deal when compared to public PAE’s and possibly a

focus on cost considerations versus the quality and context of the property at the

local level.

In conclusion, whatever the reasons for the delays in getting OMHAR off the

ground, it is now working. It is a singular businesslike unit in the Federal Government that is competent and improving and it would be a waste of the taxpayer’s

resources invested to date, to let it expire, or otherwise reconfigure it, just as it is

beginning to reach its potential. This would be analogous to building a factory, creating new tooling, training new employees, and then closing it down just as production got underway. The work it was created to do is not yet done.

Based upon my experience as a Deputy Assistant Secretary for MultiFamily Housing at HUD/FHA, it is my strong feeling that transferring the OMHAR staff into

the HUD mainstream will at best, create serious delays of 6 months or more as it

is assimilated into the system, and more probably, cripple the program. As it stands

today, OMHAR is a model for future Government program operations. It is a small,

lithe organization with specific technical skills that allow it to be responsive to

stakeholders and objectively judged by Congress. If it is assimilated more directly

into HUD, and especially if its wage scale and special contracting flexibility are

taken away, many key staff will either leave for the private sector, or be drawn into

other responsibilities at the Department. Therefore, I urge you to extend the

OMHAR organization in its current configuration by extending Subtitle D of

MAHRA for 5 years or more. I would also encourage Congress and the Administration to consider other ways that this technical capacity could be used to deal with

more problem assets or asset categories throughout the assisted/insured HUD portfolio. For example, these same skill sets would be useful to HUD in dealing with

‘‘work outs’’—for example where insurance claims have been paid or where the Secretary has taken ownership of a property through foreclosure.

Preservation and the Cost of the M2M Program

As to the question of the cost effectiveness of the program we cannot provide the

Subcommittee with the specific costs of the program versus projections that are

5 years old or more. What we can comment on, however, is the cost effectiveness

of preserving this limited and essential affordable housing. Anecdotally, the cost of

purchasing, rehabilitating and preserving existing rental housing is often in the

range of $20,000–$40,000, which compares very favorably to the cost to build new

and/or the permanent loss of potentially hundreds of thousands of units from the

affordable housing inventory.

The conclusion here is clear. Even if the marginal cost of restructuring mortgages

and reunderwriting projects results in a modest increase in costs—which we do not

assume here—failure to act would result in both higher replacement costs and/or

the loss of irreplaceable housing resources that the Government has already invested billions of dollars in. Preserving the existing assets and the project-based

contracts associated with them is good public policy and good fiscal policy and we

believe that OMHAR and the M2M Program are effective tools in accomplishing

these public policy goals and should be extended.

Finally, mission driven organizations like Mercy Housing, the National Housing

Trust, the Housing Partnership Network, NEFPI, and LISC and its Community Development Corporation partners are ready to help serve the public purpose of preserving the valuable investment that our Nation has made in affordable housing.

To that end, these organizations need capital support to be able to preserve and

maintain this housing over the long term. We strongly support legislation that

would accomplish this like that proposed in Section 402 of S. 2733 introduced by

Senators Sarbanes, Kerry, and Santorum last year, with funding limited to those

direct and intermediary nonprofit organizations that have a demonstrated track

record and commitment toward the development and long-term ownership of affordable housing.

This concludes my testimony. I appreciate the opportunity to be with you today

and share our experiences. I would be happy to respond to any questions you have

and to work with your staff to follow-up on or amplify any issues brought to light.

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PREPARED STATEMENT OF BARBARA J. THOMPSON

DIRECTOR OF POLICY AND GOVERNMENT AFFAIRS

NATIONAL COUNCIL OF STATE HOUSING AGENCIES

JUNE 19, 2001

Mr. Chairman and Senator Allard, I am Barbara Thompson, Director of Policy

and Government Affairs for the National Council of State Housing Agencies

(NCSHA). I will become NCSHA’s Executive Director on July 1.

NCSHA represents the Nation’s State Housing Finance Agencies (HFA’s). Richard

Godfrey of your own State, Mr. Chairman, is NCSHA’s Secretary.

Thank you for this opportunity to testify about the future of the Section 8 restructuring program and the experience of State HFA’s serving in it. Before I turn to

that, however, I want to thank the Chairman, Senator Allard, and the many other

Subcommittee Members who cosponsored and helped enact legislation in the last

Congress to increase substantially and index for inflation the caps on tax-exempt

private activity bonds (Bonds) and the Low Income Housing Tax Credit (Housing

Credit). Now, tens of thousands of additional lower-income families each year will

buy their first home or rent a decent, affordable apartment.

Unfortunately, many people qualified to receive housing help under these programs still will not get it. Three obsolete provisions prevent it: the Ten-Year Rule,

which forbids States to recycle billions of dollars in MRB mortgage payments to

make new mortgages; MRB purchase price limits, derived from 8 year old home

sales price data, despite dramatic increases in home prices in the last 8 years; and

Housing Credit income eligibility rules, which make development infeasible in many

very low-income, frequently rural, areas.

Senators Breaux and Hatch introduced S. 677, the Housing Bond and Credit Modernization and Fairness Act of 2001, to fix these problems. Thank you, Senator

Allard, for your early cosponsorship. We urge all Subcommittee Members to cosponsor S. 677 soon and to press your leadership and Finance Committee colleagues to

include it in a tax bill this year.

NCSHA and our member State HFA’s worked very closely with the Congress to

help create the Section 8 restructuring program, to preserve Section 8 properties

while reducing subsidy costs to the Federal Government. With the support of Congress and the industry, we fought successfully to ensure that the restructuring program provided qualified State and local public agencies a priority right to serve as

restructuring agents, to ensure that restructurings were carried out in a manner

that protects the interests of the Federal Government, the properties, the residents,

and the surrounding communities. Regrettably, the Office of MultiFamily Housing

Assistance Restructuring (OMHAR) has failed to utilize the talents of State HFA’s,

as Congress intended. Instead, OMHAR has treated HFA’s as automatons, prescribing their every move and stifling their creativity.

Accordingly, we urge the Subcommittee to reauthorize the restructuring program,

but place responsibility for it in HUD’s Office of Housing, as both the Senate Appropriations Committee and the Administration have proposed. We further recommend

that you direct HUD to delegate responsibility for restructurings on a priority basis

to qualified and willing State and local HFA’s, with reasonable HUD oversight, as

Congress always intended.

State HFA’s and the Federal Government Are Strong Housing Partners

During the last three decades, State HFA’s have assumed a primary role in financing affordable housing. Their success in blending business-like efficiency with

accomplishing their public mission has earned HFA’s the respect of the Congress,

their States, and the community at large.

Congress, in turn, has entrusted States with administering the Bond and Housing

Credit programs, the only Federal programs dedicated to financing lower-income,

first-time homebuyer mortgages and low-income apartment construction.

With Bonds and the Housing Credit, State HFA’s have financed more than two

million first-time, lower-income homebuyer mortgages and over two million apartments, including 1.2 million with the Housing Credit. They have issued nearly $140

billion in Bonds without a default and with foreclosure and delinquency rates far

lower than industry averages.

State HFA’s have accomplished these outstanding results because Congress has

permitted them to employ Federal resources flexibly to respond effectively and

imaginatively to their unique and diverse housing needs. Congress has enlisted

HFA’s to apply their expertise, experience, and knowledge of their communities to

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solve housing problems particular to their own States. That is why the Bond and

Credit programs are so successful, and that is why Congress increased authority

under those programs by nearly 50 percent last year, the largest single increase in

Federal housing assistance ever.

State HFA’s have also been strong and successful partners with HUD, when HUD

has permitted them to use their talent and expertise to do the job. Most recently,

33 State HFA’s have successfully assumed HUD’s responsibility for the administration of 750,000 Section 8 project-based units. More than 30 State HFA’s participate

in the FHA–HFA risk-sharing program, under which HUD allows them to use their

own proven multifamily underwriting standards, just as they do in the Bond and

Credit programs.

Empower the States to Do the Job Congress Intended Them to Do

Congress intended States to have this same decisionmaking authority and flexibility to respond to their housing needs and conditions when it gave them priority

to serve as Participating Administrative Entities (PAE’s) in the Section 8 restructuring program. HUD Appropriations Subcommittee Chairman Bond, Floor Manager

of the Fiscal Year 1998 HUD Appropriations Bill, which contained the restructuring

legislation, made that clear on the Senate floor when he said, ‘‘Indeed, devolving responsibility and decision-making to the State and local level is one of the primary

goals of this Mark-to-Market legislation. Not surprisingly, that is also the reason

for the priority in selecting State and local housing finance agencies to be PAE’s.’’

Senator Mack, then Chairman of the Housing Subcommittee, who wrote the restructuring legislation, further elaborated on how Congress expected OMHAR to

work with HFA’s in a July 1998 Senate floor colloquy with Senator Bond on the Fiscal Year 1999 HUD Appropriations Bill. The Senator said, ‘‘HFA’s have proven that

they have the capacity and willingness to serve as the Federal Government’s partners in affordable housing . . . I expect HUD to approve many HFA’s as PAE’s and

provide them as much flexibility as possible within appropriate parameters to administer the (permanent) program.’’

However, OMHAR either never understood or chose to ignore the Congress’ will

that HFA’s, not OMHAR, do the restructuring work. From the start, OMHAR has

dictated down to the finest detail every step HFA’s must take in restructuring properties. It has denied HFA’s the ability to apply the very expertise, judgment, knowledge of their local housing markets, and concern for properties, communities, and

tenants that caused Congress to choose them to do this work in the first place.

In August 1999, NCSHA’s Executive Director John McEvoy and Massachusetts

Housing Finance Agency Executive Director Steven Pierce, in testimony before this

Subcommittee, told the story of OMHAR’s heavy-handed micromanagement and bureaucratic interference. With your permission, Mr. Chairman, I would like to submit

their statements for this hearing record for the benefit of those Senators who were

not then Members of this Subcommittee.

At the time of that hearing, nearly 2 years after the program’s enactment, twothirds of State HFA’s approved by HUD to participate as PAE’s were still trapped

in seemingly endless negotiations with OMHAR on their contracts, OMHAR had

released its encyclopedic Operating Procedures Guide (OPG), and not a single full

restructuring had been completed.

At that hearing, nearly 2 years ago now, NCSHA strongly urged OMHAR to abandon its prescriptive approach and release the expertise, mission-oriented judgment,

and experience of the State HFA PAE’s to carry out the work Congress intended

them to perform. In response to NCSHA’s and his own State’s testimony, then

Ranking Minority Member Kerry said, ‘‘We ought to be able to reduce the bureaucracy, which is everybody’s enemy, and see if we cannot streamline this thing in a

way that makes more sense.’’

That same fall, in its HUD appropriations report (Senate Rpt. 106–161), the Senate Appropriations Committee said:

The Committee is further concerned that the Department’s staffing justification for OMHAR does not reflect its roles and responsibilities as envisioned by the ‘‘Mark-to-Market’’ legislation. OMHAR and HUD have not

provided the Committee any convincing evidence that 101 staff is needed

to run a program that was envisioned to be implemented primarily by publicly accountable third parties, namely State and local housing finance

agencies. While the Committee appreciates OMHAR’s efforts to ensure public accountability, the Committee is concerned that the procedures and processes in place may be overly prescriptive and potentially result in delaying

the completion of transactions. The intent of mark-to-market was to provide

as much flexibility as possible within reasonable parameters to allow the

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third parties to perform their duties in an efficient and effective manner.

The role of OMHAR was to ensure that proper procedures were in place,

qualified and publicly accountable entities were selected to act on behalf of

the Federal Government, and to perform post-audit oversight duties after

a reasonable period of time and number of deals were completed. It is not

evident that HUD and OMHAR have structured the program to meet the

intent of the law.

Despite Congress’ admonitions, little changed until more than a year later, after

the Senate Appropriations Committee recommended in its fiscal year 2001 HUD appropriations report (Senate Rpt. 106–410) that OMHAR’s functions be transferred

to HUD’s Office of MultiFamily Housing beginning in fiscal year 2001. The Committee said, ‘‘the program has been fraught with delays due to unnecessary and prolonged negotiations tactics by OMHAR, an overly prescriptive operating guide, and

the inability to fully utilize State housing finance agencies that were intended by

Congress to administer most of the restructuring activities.’’ The Committee encouraged OMHAR ‘‘to streamline the restructuring process and provide the flexibility

necessary for the State housing finance agencies to administer the program as intended by the Congress.’’

Since then, OMHAR has made some progress, though too little, very late. It has

completed the restructuring of more than 100 properties, due in significant part to

its new owner incentives, which have brought previously reluctant owners to the

negotiating table and helped PAE’s expedite transactions.

OMHAR also finally reduced the requirements of its OPG, 3 years into the program. It was not until January 2001 that OMHAR issued its completed, revised

guide. The changes it contains still do not go nearly far enough toward streamlining

and simplifying the program.

Bureaucracy Still Rules

Despite its progress, OMHAR continues to value process over product, rules over

results. Its guidance to PAE’s remains overly prescriptive, confusing, needlessly

complex, ever changing, and inconsistently interpreted and applied by its own staff.

The OPG has 22 separate appendices and requires the use of 86 forms to process

a single transaction. OMHAR has issued 79 ‘‘policy’’ emails to PAE’s in the past 14

months, each containing an average of two to three policy changes.

OMHAR continues constantly to change its requirements and processes, rarely do

these changes contribute to meaningful streamlining or program simplification.

Often changes are not clearly communicated to the PAE’s. Sometimes they are not

communicated at all. For example, OMHAR criticized one State HFA for using an

‘‘old’’ form. When the HFA pointed out that it retrieved the form from OMHAR’s

website and its date was more current than that of the form OMHAR said it should

have used, OMHAR told the State to ignore the form on its website, since it had

been posted for such a short time, and use the old form instead.

OMHAR’s ‘‘Financial Model,’’ which it requires PAE’s to use to calculate the ‘‘necessary’’ financial outcome in a restructuring, is over 40 pages long, unnecessarily

complex and unwieldy, and leaves little room for State underwriting judgments. The

model has gone through five revisions, each one resulting in a more complex model

than the previous one. Regardless of how far along a transaction might be under

one financial model, OMHAR requires that it be submitted for its review under the

latest model.

OMHAR runs a command and control operation, delegating little authority to its

regional offices. Both OMHAR headquarters and its regional offices review restructuring proposals simultaneously. Frequently, the regional office will tell a State

HFA to proceed one way, only to be reversed later in the process by headquarters.

In addition, communication and coordination between OMHAR and HUD is poor.

Many times PAE’s are bounced back and forth between OMHAR and HUD for information and decisions.

HFA’s also report that OMHAR’s constant second-guessing has resulted in multiple project underwritings, delaying results and undermining their ability to negotiate effectively with owners. Many HFA’s find that OMHAR is more interested in

saving money than in preserving properties for the long-term. OMHAR frequently

questions HFA market rent and rehabilitation needs assessments, despite its lack

of familiarity with the properties and local market conditions. For example, OMHAR

initially rejected one State HFA’s recommendation that an elevator be installed in

a multistory elderly housing property with a prolonged high vacancy rate on its

upper floors. When OMHAR finally relented and an elevator was installed, the vacancy rate dropped significantly. While the HFA achieved the right outcome for the

property, it involved unnecessary hassle and costly delay.

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OMHAR imposes very strict timeframes on PAE’s, yet it imposes no similar discipline on itself. State HFA’s report prolonged delays by OMHAR in responding to

their requests. OMHAR frequently loses paperwork, requiring HFA’s to resubmit

the same information time and time again. OMHAR refuses to relieve PAE’s from

deadlines which its actions, or more frequently, inaction, cause them to miss.

OMHAR’s Internet Tracking System and Resource Desk are seriously flawed and

deficient. Costly to establish, they have failed to significantly facilitate the restructuring process. OMHAR scrapped the tracking system for a 2 month period last

summer because it was fraught with software glitches. The Resource Desk at last

count contained over 1,500 questions, with answers that are often ambiguous and

inconsistent with responses to other similar questions.

OMHAR’s conflict of interest certification requirements are overreaching. They require PAE’s to execute a separate certification for each assigned asset on behalf of

all ‘‘restricted persons.’’ ‘‘Restricted persons’’ is so broadly defined it includes PAE

staff, board members, and third-party contractors and their employees. For one

State, this amounts to over 60 individual certifications to accept a single asset from

OMHAR. The same State engaged an environmental contractor to complete an environmental review who determined that to meet OMHAR’s requirements, the employees of the laboratory performing tests on asbestos and lead-paint samples had

to sign certifications!

The Cost of OMHAR’s Intransigence

For some time, policymakers will debate the number of Section 8 properties lost

and Federal subsidy savings forfeited due to OMHAR’s insistence on doing it its

way. But there is another cost: the loss to the restructuring program of State HFA’s

expertise, judgment, experience, and commitment to public purpose.

In August 1999, NCSHA told this Subcommittee that OMHAR had driven at least

two qualified HFA’s out of the program and was on a course to drive out others.

That statement proved prophetic. Of the original 42 State HFA’s approved as PAE’s,

only 22 remain in the program today. A number of those are actively considering

withdrawing.

Some State HFA’s decided not to sign contracts with OMHAR, believing they

could add little value to the program given OMHAR’s prescriptive approach. A number participated the first year, but declined to renew their contracts, severely frustrated with OMHAR’s unreasonable and irrational rules and failure to assign them

assets. Still others have been forced out of the program by OMHAR, often without

any explanation. Some remain in the program, but are inactive because OMHAR

gives their assets to private PAE’s, often without their knowledge or agreement, as

the restructuring law requires.

Your own agency, Mr. Chairman, the Rhode Island Housing and Mortgage Finance Corporation (RIHMFC), last April received written notice from OMHAR that

it would not renew its contract. In that communication, OMHAR gave no reason for

terminating the relationship. OMHAR never granted RIHMFC Executive Director

Richard Godfrey’s request the previous July for a meeting with its director to discuss Rhode Island’s concerns with the restructuring process.

The New Hampshire Housing Finance Agency (NHHFA) recently terminated its

contract with OMHAR after OMHAR informed the agency by telephone in late January of its unilateral decision to withdraw NHHFA’s first full restructuring asset—

assigned earlier that month—and reassign it to a private PAE. In response to

NHHFA’s letter objecting to the transfer, the OMHAR director wrote, ‘‘The decision

was solely based on the fact that as of the end of January 2001, due to the limited

number of available New Hampshire assets, NHHFA had not yet had the opportunity to undertake a full mortgage restructuring. Consequently, and recognizing

admittedly, the complexity of the M2M Program and the learning curve of all PAE’s,

it did not seem in the best interest of NHHFA or OMHAR for NHHFA to go forward

with this, perhaps the only available, full mortgage restructuring. Unfortunately,

this was presented to you as a final decision, rather than a point of discussion.’’ I

would like your permission, Mr. Chairman, to submit this correspondence, and that

of the RIHMFC with OMHAR, for the record.

Implement the Plan Congress Wrote

Mr. Chairman, Congress wrote the right plan when it gave priority to public

PAE’s to carry out Section 8 property restructurings subject to OMHAR’s oversight.

The problem is OMHAR never implemented that plan.

With OMHAR’s scheduled sunset, you have an opportunity to insist on the system

that you established nearly 4 years ago, a system under which the responsibility for

restructuring Section 8 properties is delegated on a priority basis to capable and

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willing State and local public agencies with reasonable Federal oversight and accountability to the Federal Government, their States, communities, and residents.

We believe the Administration is committed to implementing that system. We

urge that the restructuring program be reauthorized, but responsibility for its implementation be transferred to HUD, as the Administration proposes. If OMHAR is

retained, it should lose its independent status. Its director should report to the FHA

Commissioner. We further recommend that Congress direct HUD to review and

streamline OMHAR’s rules and procedures and devolve greater decisionmaking

authority under it to qualified public HFA’s.

Some will say HUD does not have the capacity to take on this responsibility. We

disagree. We are not suggesting that HUD perform Section 8 restructurings. We are

asking that HUD oversee State and local HFA’s and others who qualify to do the

restructuring work.

Some will say leave OMHAR alone. It is not perfect, but it is a lot better than

it was. We must not settle for that. Too much restructuring work remains to be

done. Too much is at stake.

Thank you, Mr. Chairman, for this opportunity to testify. NCSHA and the State

HFA’s are committed to working with you to set the Section 8 restructuring on the

course Congress intended.

—————

PREPARED STATEMENT OF JOHN BENTZ

PRESIDENT, PROPERTY ADVISORY GROUP, INC.

DIRECTOR OF THE NATIONAL LEASED HOUSING ASSOCIATION

JUNE 19, 2001

Mr. Chairman and Members of the Committee: My name is John Bentz, President

of Property Advisory Group, Inc. of Providence, Rhode Island and a Director of the

National Leased Housing Association, on whose behalf I testify today. I am accompanied by Denise Muha, Executive Director of NLHA and Charles L. Edson, Association Counsel. We thank you for the opportunity to appear before you today.

As a matter of background, for the past 30 years, NLHA has represented the interests of private sector participants in the Section 8 program including owners,

managers and lenders, as well as housing authorities and other public officials who

administer various HUD programs including the Section 8 Voucher Program. We

will focus our comments on this hearing’s important issue concerning the future of

the Office of MultiFamily Housing Assistance Restructuring (OMHAR) and the

Mark-to-Market Program, both of great concern to our members.

The Future of OMHAR

As you are aware, OMHAR’s authorization expires on September 30 placing

squarely before Congress the issue of whether that entity is to continue. It is generally recognized that OMHAR got off to a slow and rocky start and did not really

hit its stride until about a year ago. The program was new, OMHAR was not fully

staffed, and owners were naturally wary of a program that could have significant

negative consequences to the project and their investors. Indeed, OMHAR did not

complete its 100th restructuring until a few months ago—over 3 years from the

Agency’s creation in 1997.

We have reached a point where OMHAR appears to be functioning at a higher

level. Nearly 140 mortgages have undergone full debt restructuring with 25 to 30

mortgage restructurings expected to close each month through September. Further,

OMHAR has approved and implemented hundreds of OMHAR Lites—a lowering of

Section 8 rents to market without debt restructuring.

Recognizing the need to attract more owners, OMHAR itself has made significant

reforms to make restructuring more attractive to owners. These reforms include the

possibility of enhanced asset and project management fees and allowing interest on

the owner’s required deposit to reserves as an eligible project expense. In other

words, OMHAR has shown that it does listen and that it can implement significant

changes while implementing its program and we anticipate that issues brought to

OMHAR’s attention will continue to be addressed.

At this point, the termination of the Mark-to-Market Program does not appear

practical. Because of the continuing high costs of Section 8 subsidies, a replacement

mechanism would need to be developed with no promise of anything better. The

question does arise, however, as to whether or not OMHAR should be continued in

its present form, or whether the Mark-to-Market Program should be melded into

HUD’s regular multifamily program activities.

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For a number of reasons, NLHA feels that the Mark-to-Market Program must

continue to be separately administered. Whether it is administered by an entity

called OMHAR or named something else is not the most important question. We

would not object if OMHAR were to be continued in its present form. We also understand, however, the argument that the OMHAR Director should report to the FHA

Commissioner, and not directly to the Secretary and Congress, and would understand if a decision were made to bring OMHAR into the Office of the Assistant Secretary of Housing.

If this is done, however, we caution you as follows: First, we think it would be

a mistake to simply fold the mark-to-market activities into the Department’s regular

multifamily monitoring activities. Such a move would unduly burden staff already

stretched by retirement and attrition. The mark-to-market process is highly complex

and benefits greatly from having well trained and specialized staff focused exclusively on its mission. Second, OMHAR has attracted some very talented and experienced staff members. We believe that their retention is essential to the continuation

of the Mark-to-Market Program without causing fatal interruption. We understand

that moving mark-to-market into the Office of Housing raises some pay rate and

other personnel issues. We hope that these can be resolved in order to maintain and

build upon the momentum that has been generated, short of dismantling the current OMHAR staff.

Mortgage Restructuring

Implicit in our previous discussion is our view that the mortgage restructuring

mechanism adopted in the fiscal year 1998 VA/HUD and Independent Agencies Appropriation Act should continue as long as Section 8 rents are to be based on comparable market data. There are 400 properties that are anticipated to be eligible for

debt restructuring in fiscal year 2002 alone. Without the legislative authority to restructure the debt on these properties, the FHA insurance fund will be forced to absorb a high level of mortgage defaults when properties undergo a rent reduction

with unsatisfactory burdens being placed on owners and residents.

Changes to Restructuring

Although OMHAR has been responsive to a number of suggestions from the housing community, there are other changes that could be made to make the program

attractive to owners—many of these would require changes to the statute. NLHA

is holding its annual meeting this week and we will use this opportunity to develop

specific legislative recommendations that we will submit to you within the next few

weeks. They will likely include the following:

• There is now a statutory requirement that owners share in necessary rehabilitation costs. This creates an unacceptable burden for owners in many instances. We

are dealing with older properties by definition, which often need significant rehabilitation. Owners are generally limited partnerships, with general partners

who are typically unable to respond to cash calls for any number of reasons. We

suggest that the statute be changed to permit the rehabilitation to go forward

without the requirement of owner contribution.

• While there is an exception rent standard that would permit the restructuring of

mortgages where the comparative market rents are too low to support project

operations, the standard is too rigid for productive use in many instances. The

Mark-to-Market Program generally, by setting rents in accordance with market

comparable properties, results in lower rents for properties located in rural areas

and in depressed inner-city urban areas. These are often the properties that need

assistance the most.

In this regard, the statute provides that, in most cases, exception rent levels are

to be limited to 120 percent of HUD approved Fair Market Rents (FMR’s). While

on first glance that might appear fair, in fact it results in significant rent reductions

for some properties which—because of age, security costs, utility costs, and so

forth—require higher rents if they are to be operated successfully. We do not believe

that the Government intends to withdraw its support for helping low-income tenants in depressed rural areas, or in impacted urban neighborhoods, but this is what

the current program in many cases, requires.

• Similarly, in the case of these exception rent projects, OMHAR and owners must

agree on appropriate expense levels on which to build exception rents. In some

instances, this has proven impossible, where OMHAR simply disagrees with historical operating costs of properties, and owners are of the belief that the

OMHAR-required expense reductions would inevitably lead to the failure of the

properties. A better mechanism needs to be found to resolve these issues.

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• Properties with insured mortgages and HUD held mortgages are, in some instances, treated differently. Properties with insured mortgages, where some first

mortgage debt is to remain, can have those mortgages restructured using Section

223(a)(7). This treatment is not now available for HUD held mortgages, where

Section 223(f) refinancing is required. The Section 223(f) process contains many

more restrictions, and takes months longer to process, resulting in unnecessary

costs and delays. On the other hand, Section 223(a)(7) mortgages have a term

limit which ends 12 years after the current mortgage term, which should be made

consistent with the Section 223(f) program, that generally provides a maximum

35 year term. Such a change would eliminate the third mortgages that are often

required as part of the restructuring. Third mortgages raise additional tax concerns for owners. • When the Mark-to-Market Program was developed, it was anticipated that full

debt restructurings would be processed more quickly than has occurred. We believe, this is because no one appreciated many of the complicated scenarios that

arise when dealing with owner issues. Those issues include obtaining limited partner consents, extending partnership terms to coincide with restructured mortgage

terms, financing issues, and expense determinations. During processing, when existing Section 8 contracts or contract extensions expire, the owner too often finds

that its rents are being reduced to market without the benefit of the restructuring, which is still in processing or negotiation. Thus, the village is destroyed

while being saved. Significant additional flexibility is needed on this point.

Overall, we must remember that we are dealing not with a short-term problem,

but with a long-term issue. The statute requires that properties going through full

debt restructuring commit themselves to at least 30 years of Section 8 usage, as

long as Section 8 subsidies are available, and that rents shall increase on the basis

of an annual Operating Cost Adjustment Factor (OCAF). The program as now constituted does not provide for a way to increase rents or attract other funds to accommodate unanticipated emergency situations. For example, this year’s utility rise in

many parts of the country would take a long time to be reflected in OCAF adjustments, if they ever are. Similarly, project specific rehabilitation needs, or increased

security needs, which may not be evidenced in market comparable properties, are

not being addressed. In other instances, we will find, through hindsight, that project

underwriting was not all that it could have been. Some mechanism must be developed to permit flexibility in appropriate circumstances to avoid project failure at a

later date.

Thank you very much for the opportunity to share our views. We look forward

to working with the Subcommittee as these issues are addressed. Please contact

NLHA’s Executive Director, Denise B. Muha, with any questions regarding the Association’s testimony.

—————

PREPARED STATEMENT OF CATHY VANN

PRESIDENT, ONTRA, INC.

JUNE 19, 2001

Background/Testimony Perspective

I am presenting this testimony today as the President of and on behalf of Ontra,

Inc., as a Private PAE for OMHAR. By way of placing this testimony in perspective

for the Subcommittee please note that throughout its entire 161⁄2 year tenure Ontra

has been involved in the due diligence, asset management and disposition of over

$8.5 billion in distressed mortgage and real estate assets in 45 States and Puerto

Rico. The clients for whom Ontra has provided professional distressed asset servicing have included but are not limited to the Texas Housing Agency, FSLIC, FADA,

FDIC, RTC and numerous Texas banks and S&L’s. In addition Ontra has received ‘‘Above Average’’ ratings from all four Wall Street Investor Rating Agencies to facili- tate its participation as the Special Servicer and equity partner in over $2.5 billion

in distressed mortgage and real estate asset acquisitions with AIG, Citicorp, CS

First Boston, and Goldman Sachs. Approximately $1 billion of these acquisitions involved a partnership with AIG and the Federal Government through the RTC S and

N Series disposition program.

Ontra commenced its contract with OMHAR in July of 1999. Since contract inception Ontra has been assigned 120 Rent Restructurings (Lites), 118 Debt Restructurings (Fulls) and 22 Comparability Reviews. In the interest of time the following

results are provided for the written record and I will address them in summary in

the discussion regarding Government savings below.

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For Rent Restructurings/Lites

Result No. of Assets

Assigned .............................................................................................. 120

Completed ........................................................................................... 112

Remained a Lite ................................................................................. 55

Converted to Full ............................................................................... 41

Owner Opt Out ................................................................................... 5

Ineligible (Below Market) .................................................................. 8

Withdrawn .......................................................................................... 3

For Full Debt Restructurings/Fulls

Result No. of Assets

Assigned .............................................................................................. 118

Converted to Lite ................................................................................ 19

Closed .................................................................................................. 31

Completed ........................................................................................... 9

Owner Opt Out ................................................................................... 4

Failed Fulls ......................................................................................... 5

Ineligible (Below Market) .................................................................. 3

In order to provide the services for this contract, Ontra management historically

dedicated 23 individuals to the delivery of the required services and currently has

16 staff members fully engaged in the process.

The remainder of my testimony represents the results of a canvassing effort in

February of this year whereby I surveyed all of the 8 other Private PAE’s in response to a request from the GAO to participate in a panel discussion regarding the

disposition of the M2M Program and OMHAR’s operations.

Progress in FHA Insured/Section 8 Portfolio Rent and Debt Restructurings

The Program definitely experienced a slow start from the Private PAE’s perspective. There were two essential drivers of this situation as follows:

• For the first 12–18 months of the program the owners appeared disengaged and

largely convinced that if they stalled, M2M would go away and in all fairness

there was little incentive for an owner to participate willingly given the financial

structure at that time. The owner’s incentive package was introduced in September of 2000 and since January of 2001 there appears to be gaining momentum

in the owner community to contemplate, comprehend and engage the program.

The program is very complex and has required significant ramp up and learning

curve maturation in an ever changing environment. Please note the following items,

which speak to the complexity issue.

• The heart of the Restructure Transaction is represented by a 45-page model that

includes all of the basic MAHRA business rules. In addition to eight schedules

providing standard real estate/mortgage analysis such as Operating Budget Analysis, Long-Term Capital Reserve Analysis, Debt Sizing, Amortization, Claim

Sizing and Net Savings it includes an additional six schedules to fully analyze

Tenant versus Project-based subsidies, IRP recaptures, Outyear HAP contract recaptures, affordability restrictions, exception rents and an analysis of the anticipated repayability of the partial payment of claim all in one integrated proforma.

• The number of parties/stakeholders to a single transaction is significant and includes at a minimum 26 individuals for each single transaction including at least

four to five individuals at OMHAR, two to three at HUD and numerous others

including Owners, Property Managers, Tenants, OTAG’s, PCA Consultants and

Appraisers, and at least four different sets of Attorneys and Title Company

personnel.

• There are four different and distinct closing scenarios the most common of which

is a 223(a)(7). A single transaction of this type involves 55 distinct documents

with 8 signatories and 14 distribution parties.

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However over the last 24 months, all of these bases have been effectively covered

and the long awaited momentum is currently being achieved. By way of demonstrating this please note that the average time between acceptance and close date

for a standard Full Debt Restructuring for this PAE has changed from 15 months

for assets assigned prior to January 2001 to 7 months for assets assigned after January 2001 representing a 114 percent improvement in program implementation with

time as the measure.

Savings to Date Generated By This Program for the Federal Government

Based on Ontra’s portfolio the savings to date are provided for the written record

below but in the interest of time is summarized as follows. A total of 119 transactions have resulted in approximately $106.3 million of which $63.8 million represents 79 completed Lites and $42.5 million represents the 40 closed and completed

Fulls.

Transaction Type No. Completed/Closed 20 Year NPV Savings

Debt Restructures Closed ............ 31 $ 32,473,466

Debt Restructures Completed ...... 9 $ 9,976,894

Rent Restructures Completed

(Includes Fulls to Lites and

Closed Lites).

79 $ 63,800,205

Totals .................................. 119 $106,250,545

The Physical Condition of the Housing Stock Being Preserved

One of the key benefits of this program is that it ensures that the assets are now

being upgraded systematically. In order to put this into perspective, Please Note:

Deferred Maintenance/Prerestructure Status

The program calls for the escrowing of funds to cure the ‘‘immediate repairs’’ within 12 months after closing. These repairs are what the industry traditionally

considers deferred maintenance. The Rehab Escrow Repair numbers for Ontra’s 31

closings and 21 eminently pending (next 30–45 days) are as follows:

Total Rehab Escrow No. Projects No. Units

Deferred Maintenance

Per Project Per Unit

$5,294,790 52 4,683 $101,823 $1,131

We have found however that there is some skewing in these numbers with five

inner-city projects representing just over $3 million (60 percent) of the deferred

maintenance. Therefore, it appears that the deferred maintenance is not a major

issue at least in this PAE’s portfolio.

Long-Term Preservation of the Quality of the Housing Stock

For this same set of 52 assets—closed and pending—the program has allowed for

set-asides of approximately $57.5 million ($57,488,155) averaging just over $12,000

($12,276) per unit to cover the 20 year long-term capital needs of these projects.

This represents an average of $614 per unit per year being set aside for replacements.

One of the more compelling statistics from this PAE’s closed and pending portfolio

is that the average reserve deposit/unit/year was $309 prerestructure and $439 postrestructure representing a 42 percent increase in annual reserve deposits to the

replacement reserve accounts. These numbers seem to point to the fact that this

program is providing a unique opportunity to reconfigure the economics and provide

for the stabilization if not the rejuvenation of aged housing stock and thereby ensure quality affordable housing into the future.

The Operations of the Office of MultiFamily

Housing Restructuring Assistance

In summary, this entire testimony speaks to the fact that the program is very

complex by nature, that there is definite, significant momentum at the current time,

that the program is providing solid savings while at the same time capitalizing on

a unique opportunity to ‘‘set the economics straight’’ for the Nation’s FHA insured

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Section 8 housing stock and to ensure continuance, at least in this sector, of quality

affordable housing.

OMHAR has been integral in this process and despite the criticisms of the program and OMHAR’s implementation of such it is my company’s opinion that

OMHAR has done an admirable job of juggling the priorities of the numerous stakeholders and parties to the transactions while at the same time developing well proportioned tools to manage the delivery of a very complex program.

Other Issues of Interest/Concern/Potential Improvements

Based on the February 2001 survey of the private PAE’s the following opinions

are offered for additional consideration by the Subcommittee.

Advantages/Disadvantages of a Transfer of the

Current OMHAR Functions to HUD

1. It was a consensus of the Private PAE’s that a transfer of responsibilities

to HUD would be a duplication of effort and would entail an enormous loss of

momentum, as new personnel attempt to get familiar with the overall program

as well as with the status of individual assets.

2. Having the time and ability to apply a robust focus on program results is

considered critical by all private PAE’s. It was felt that OMHAR with its singular focus is well suited to bring the program to final fruition. It was hoped

that at least some consistency in personnel can be maintained.

Program Prescriptiveness

We are aware that OMHAR has received significant criticism regarding the OPG,

the Model and other policy and procedure vehicles that they have provided to the

PAE’s. From our (Ontra’s) perspective given the complexity of the statute, the extensive program requirements and the complex nature of the issues involved, the

tools provided by OMHAR were an absolute necessity. It occurs to us that if the

Federal Government wants to ensure consistent and fair treatment of all the stakeholders, reliable underwriting to ensure that all owners are treated fairly and

consistently, and that the result achieved is a fully accountable application of the

statute, then the tools provided by OMHAR, in our opinion, have been well proportioned to the task.

Private PAE Compensation

This topic was of major concern among the private PAE’s. Although the program

was competitively bid, the PAE’s did not have the same insight into the intricacies

of the program that they now have. The program has not only turned out to be

much more involved than originally estimated but also as issues arose during the

development of the program over the last 24 months the scope of work expanded

quite substantially. OMHAR is currently in the process of considering our concerns

and we hope to see a solution soon. We have but one request that whatever incentive compensation changes ensue that they be applied for all assets currently undergoing active restructure or at least make the changes effective as of January of 2001

for any assets not yet closed.

I would like to close by respectfully thanking the Committee for the opportunity

to present these views. Thank you.

—————

PREPARED STATEMENT OF GERALDINE THOMAS

VICE PRESIDENT

NATIONAL ALLIANCE OF HUD TENANTS

JUNE 19, 2001

On behalf of the National Alliance of HUD Tenants, we are pleased to submit

these comments on the implementation of the MultiFamily Assisted Housing Reform

and Affordability Act of 1997 (MAHRA). While MAHRA actually encompasses a

broader range of Section 8 contract renewal options and programs, we understand

that the Subcommittee today is gathering testimony on the implementation of the

Mark (Down) to Market Program (M2M) by the Office of MultiFamily Housing Restructuring Assistance (OMHAR) created under the statute. Accordingly, our comments here are limited to our experience with the Mark Down to Market Program

in MAHRA.

Founded in 1991, the National Alliance of HUD Tenants (NAHT) is the Nation’s

first and only membership organization representing the 2.1 million families who

live in privately-owned, HUD-assisted housing, including the tens of thousands of

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families who may be affected by the Mark-to-Market Program. Our membership

today includes voting member tenant groups and 45 area-wide tenant coalitions or

organizing projects in 30 States and the District of Columbia. We are governed by

an all-tenant Board of Directors elected by member organizations from all 10 of

HUD’s administrative regions at our annual June Conference. I have served as a

NAHT Board Vice President since 1998, and currently Chair NAHT’s Mark-to-Market Task Force. I also serve as the President of the Philadelphia Regional Alliance

of HUD Tenants (PRAHT), which organizes tenants in the Philadelphia area, and

thus have direct experience in organizing tenants in the M2M Program.

One of the most important features of MAHRA, sought by NAHT in our testimony

before the Subcommittee in 1997, was the Congressional mandate for HUD to encourage tenant participation in the M2M Program and the provision of funds to help

accomplish this goal. In response, HUD created the Outreach and Training Grant

(OTAG) program to help tenants get involved in the program. Since 1999, NAHT

has convened a monthly Mark-to-Market Task Force consisting of the area-wide tenant coalitions or organizing projects among NAHT’s membership working in M2M

buildings, including those which have received OTAG Grants from HUD.

The comments we submit today reflect the consensus views of these NAHT affiliated groups, based on their extensive experience with the implementation of the

M2M Program ‘‘on the ground’’ in more than 20 States, including those such as

Ohio, Pennsylvania, Illinois, Florida and New York with a large number of M2Meligible buildings.

Summary Comments on M2M Implementation

There appears to be an emerging consensus that although the M2M Program was

slow in getting off the ground, owner participation and OMHAR performance have

finally reached a reasonable stride within the past year. Nonetheless, some observations are in order based on the experience of NAHT affiliates in the field which

should be taken into account in future action by Congress.

Many owners have avoided M2M. First, many owners with high project-based Section 8 contract rents have avoided going into full M2M restructuring than was

hoped by Congress or HUD when the program was crafted in 1997. In high market

areas such as Boston, Manhattan or the West Coast, owners with Section 8 contract

rents well above 120 percent of the FMR, which were originally thought to be prime

candidates for M2M, have found they could achieve higher rent yields by switching

over to HUD’s Mark UP to Market initiative—actually increasing HUD’s Section 8

outlays—or opting-out of the Section 8 program entirely. Tenants, HUD and elected

officials have universally supported Marking Up these contracts as a preferred alternative to opt-outs, which both lose precious affordable housing units and initially

cost HUD more through mandatory Enhanced Vouchers at full market rent levels.

In many more markets, owners thought to be eligible for M2M restructuring have

opted instead for HUD’s OMHAR Lites alternative—a much higher proportion than

anticipated by OMHAR at the start of the program. These owners are willing to absorb a marginal cut in Section 8 subsidies to estimated ‘‘market’’ levels typically in

exchange for a 1 year contract extension, in effect keeping their options open in the

event future market conditions make opt-outs or Mark UP to Market a viable alternative. The fact that many owners have easily made the OMHAR Lite market adjustment suggests that many project-based Section 8 contracts may well have been

inflated beyond actual costs by years of generous Annual Adjustment Factor (AAF)

increases before MAHRA. These OMHAR Lite renewals leave both the tenants and

the housing stock at continued risk of future opt-out decisions by owners.

So it appears that fewer owners than anticipated have chosen the full M2M

restructuring path. Generally, buildings going into M2M are located in relatively

depressed market areas with few prospects for an economic upturn in the foreseeable future. For these buildings, however, concentrated in ‘‘Rust Belt’’ States

where real estate markets have generally lagged behind, M2M restructuring can be

a viable option.

But on the whole, the economic ‘‘boom’’ of the past several years has meant high

and rising rental market conditions for many owners, and a corresponding reduction

in the number of owners for whom M2M is an attractive option. It has also meant

that owners in ‘‘healthier’’ market areas are collectively in a stronger position to demand—and get—ever higher Section 8 contract renewals, with few ‘‘strings’’ attached such as repair requirements or long-term affordability agreements, from

HUD and local agencies alike as the alternative to opting-out.

Similarly, while MAHRA contemplated transfers of M2M eligible buildings to nonprofit groups and provided for ‘‘disqualified’’ properties to be sold to nonprofits, in

practice this has occurred very rarely. The specter of owner opt-outs has dampened

efforts to transfer properties in any market area which can sustain rents; many

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owners facing disqualification can simply walk away from M2M and opt-out,

defusing enforcement efforts. OMHAR has responded with a detailed and thoughtful

series of policy initiatives to promote transfers to nonprofit buyers, within the limits

provided by the statute; to date, however, there have been few takers. NAHT and

its affiliates, as well as OMHAR Director Ira Peppercorn, have identified the lack

of a capital grant funding source for Preservation, which helped encourage such

transfers under the now-defunct Title VI Preservation Program, as one of the reasons for the paucity of nonprofit purchase offers under M2M.

Fundamental to the lack of owner participation in M2M, however, was the decision by Congress to make owner participation in M2M entirely voluntary. Unlike

the Title VI Preservation Program, which required owners to participate in a regulatory framework which preserved affordable housing while guaranteeing owners

full market value, MAHRA allowed owners to decide whether to participate in M2M

or ‘‘opt-out’’ of Section 8 completely. As amended in 1999, owners can now also participate in Mark UP to Market, but participation is still voluntary.

As long as Congress is unwilling to require owner participation in Section 8 renewals and/or regulate rents for assisted housing, owners will continue to opt-out of the

program and/or negotiate ever higher levels of Section 8 renewals from HUD, with

few repairs, as the price of staying in the program. And fewer owners will choose

to restructure under M2M. The result will be continued erosion of the affordable

housing stock and missed opportunities for savings in the Section 8 program.

‘‘Devolution’’ of decisions to PAE’s has slowed program implementation and added

to complexity and costs. Another reason for the late start of the M2M Program appears to be administrative. The Congressional choice to ‘‘devolve’’ administration to

State or private ‘‘Participating Administrative Entities’’ (PAE’s) added a hugely complicated layer to the program. It took a long time for OMHAR to negotiate complicated administrative and fee agreements with an ever-shifting cast of PAE’s to implement the program. Data from HUD’s recent extension of the ‘‘devolution’’ concept to Section 8 Contract Administration suggests that ‘‘contracting out’’ HUD

functions to State or private entities adds additional costs, as well as delays, to

delegated programs.

Interestingly, as OMHAR has attempted to implement the PAE’s mandate,

OMHAR has been compelled to transform its approach once the M2M Program hit

the ground. For example, it turned out that many of the public agency PAE’s which

Congress assumed would carry out the program in fact were not that interested. As

a result, OMHAR has found itself dealing with fewer public agency PAE’s in the

past 2 years and has ended up delegating to a small number of ‘‘private’’ PAE’s handling a large number of States each. Because of complaints from the field by tenants

and others about the performance of many private PAE’s, OMHAR has also increased its oversight over these agencies. So although Congress intended M2M to

be administered by State and private entities, ‘‘real world’’ conditions have required

a ‘‘recentralization’’ of the program back to HUD, with a small number of PAE’s operating across State lines.

Another trend has been OMHAR’s creation of its ‘‘Large Owner Initiative,’’ whereby OMHAR Headquarters handles a large number of transactions for large national

owners such as AIMCO, in recognition of the fact that ownership of HUD housing

is increasingly concentrated among a small number of national and regional firms.

Perhaps half of the HUD Section 8 stock is owned by fewer than 20 ownership entities; these owners found it inconvenient and costly to deal with a myriad set of local

agencies and themselves have preferred to deal with one central administrator:

HUD.

NAHT believes that these evolutionary trends in administration of M2M point both

to legislative adjustments in M2M, as well as provide lessons applicable to other initiatives, such as Contract Administration of Section 8 by State Housing Finance

Agencies.

Jury still out on final results of restructuring. Because of program delays, few

M2M Restructuring Plans have reached the ‘‘closing’’ stage. As a result, NAHT and

its affiliates have few cases to report where organized tenant groups have participated and been heard in the final MRRAS Plan which accompanies restructuring.

Accordingly, we offer no evaluation or comments on how effective M2M has been

from the point of view of substantive repairs and management improvements sought

by residents.

One area worth noting, however, where Congressional and tenant concerns may

have been satisfied to date is in the apparently minimal extent of ‘‘voucherization’’

of family developments in the M2M restructuring process. Reflecting a compromise

between Congress and the Clinton Administration, MAHRA allowed PAE’s to

‘‘voucherize’’ family developments in high vacancy rate areas as part of a final

restructuring plan, provided several determinations were made by the PAE. (The

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Clinton Administration attempted to negotiate a broader mandate for voucherization; the Senate, backed by NAHT and other constituency groups, advocated for

maximal renewal of project-based subsidies.)

To date, NAHT is aware of only one instance of ‘‘voucherization’’ in the country

under the full restructuring program, although 13 OMHAR Lite properties have

been ‘‘voucherized.’’ However, OMHAR’s summary reports of the M2M pipeline do

not indicate which, if any, properties have been converted to vouchers, or how many

voucher conversions are under consideration by PAE’s. Hopefully, most PAE’s have

concluded that project-based renewals are either mandated or warranted in the

buildings they have reviewed up to the draft MRRAS Plan stage. While Congressional design of MAHRA appears to have avoided large-scale voucherization, it

would be advisable for Congress to use this opportunity to reaffirm and strengthen

HUD and OMHAR’s mandate to maximally preserve M2M buildings with projectbased Section 8 assistance wherever possible.

Progress has been made toward tenant participation, but more can be done.

MAHRA mandated HUD to provide for tenant participation in the program. NAHT

and its affiliates were active advocates throughout the M2M rulemaking process to

ensure that this goal was reflected in M2M Program regulations.

OMHAR deserves much credit for establishing a formal tenant participation process in the final M2M regulations including two required meetings with residents in

M2M properties; for mandating that tenants and their associations be granted thirdparty beneficiary status in the Use Agreements accompanying MRRAS Plans in

restructured properties; for publishing an Operating Procedures Guide which guarantees residents’ right to participate in the program; and, despite some delays, for

designing and funding a workable system of technical assistance programs (OTAG’s,

ITAG’s, and VISTA Volunteers). OMHAR’s administration of the $10 million annual

set-aside for technical assistance provided in Section 514 of MAHRA has resulted

in an OTAG-funded support structure for tenant participation in about 30 States,

including most of those with large M2M portfolios. OMHAR has been effective in

selecting appropriate local partners to carry out tenant technical assistance work in

the field—itself no small achievement. As the M2M Program reaches its full stride,

this technical assistance infrastructure is well-positioned to serve the tenants affected by M2M in most of the country.

OMHAR has also been responsive to complaints from NAHT affiliates and OTAG

grantees in the field that PAE’s—particularly the private PAE’s—were failing to

meet OMHAR’s requirements for tenant participation. In July 2000, NAHT’s M2M

Task Force collected complaints from OTAG’s across the country regarding private

PAE’s failure to follow tenant participation requirements, such as notice to residents

for required tenant meetings. The problem grew in magnitude as a small number

of private PAE’s took increasing numbers of States in their service areas. Following

a teleconference call with OMHAR Director Ira Peppercorn in April 2001, which detailed these problems, OMHAR has been able to secure a marked improvement in

the performance of several of the private PAE’s. OMHAR has also responded to

NAHT’s suggestion for a face-to-face conference among OTAG’s and PAE’s to work

out tenant participation protocols in greater detail.

Still, more can be done. The 10 day comment period on MRRAS Plans provided

by OMHAR is not enough; at least 30 days is needed for tenants and their advisers

to comment meaningfully. Requirements to provide notice and mandatory meetings

with tenants should be extended to OMHAR Lite buildings and to decisions to ‘‘disqualify’’ an owner or otherwise to change the status of a property. OMHAR policies

still deny access to tenants to basic information about the project’s operating budget,

essential information to help tenants comment meaningfully on the property’s management plan. And there remain major gaps in HUD enforcement of the Congressional mandate to provide One Year Notice to Tenants when owners decide to

opt-out of Section 8—originally required in MAHRA—and to enforce the owners’

Duty to Accept Enhanced Vouchers when owners opt-out. Recommendations to improve these and other aspects of tenant participation are provided below.

Recommendations for Legislative Improvements to the M2M Program

Based on discussion of NAHT’s M2M Task Force and input from NAHT affiliates

and OTAG providers across the Nation, we recommend the following action by Congress to extend and improve the M2M Program this year.

(1) Extend M2M restructuring authority. NAHT joins the emerging consensus that

the authority to restructure mortgages to save costs, as outlined in MAHRA, should

be extended indefinitely.

(2) Continue OMHAR as a separate office, reporting to the Secretary. After a slow

start, OMHAR is now functioning smoothly and generating results at a steady pace

for the Department, given the limitations of the program designed by Congress and

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the reluctance of owners to voluntarily participate in a ‘‘boom’’ real estate market.

To throw sand in the machinery at this time, or spark inevitable personnel upheavals and administrative confusion that would ensue by a radical restructuring of the

program would be both unnecessary and unwise. OMHAR is not broke; we do not

need to ‘‘fix’’ it.

NAHT’s M2M Task Force wrestled with the question of whether OMHAR should

be folded back into the Office of Housing. Generally, NAHT has favored rebuilding,

not dismantling, HUD’s Office of MultiFamily Housing over the years. We have generally been opposed to the ‘‘devolution’’ of HUD functions to the States, and to the

deregulation and voucherization of HUD housing stock which some have linked to

the devolution strategy. Likewise, we are generally opposed to ‘‘contracting out’’

HUD functions such as contract renewal decisions for Section 8—a process strikingly similar, and perhaps modeled on, the delegation of M2M decisionmaking to

PAE’s.

Just last week, NAHT testified before the Commercial Activities Panel created by

Congress and opposed the $196 million cost of Section 8 Contract Administration

(C/A) to State Housing Finance Agencies. Instead, we pointed out that for a little

over half of this amount, HUD could hire 1,000 new MultiFamily Housing Staff—

double current staffing levels—for $115 million, more than enough to do the same

work in-house.

At the same time, we must recognize that the Office of Housing has been seriously understaffed for many years. The forced retirements, layoffs and ‘‘reinvention’’

of the past few years have decimated the HUD Headquarters MultiFamily Staff and

Field Offices alike. Many of the Department’s most experienced personnel, and most

of its ‘‘institutional memory’’ in the MultiFamily Housing field, are gone from the

Agency. To compound this problem, most of the remaining HUD bureaucracy is eligible for retirement in the next 2 years.

So while rebuilding HUD’s Office of MultiFamily Housing (OMFH) is a desirable

goal, we must recognize it cannot happen overnight. Accordingly, we recommend

that Congress begin the long-term project of rebuilding HUD by phasing out the

C/A system and folding these functions back into the OMFH; repealing the $196

million line outlay expense for Contract Administration; adding $115 million to

HUD’s Salaries and Expense Account; and targeting these funds to hire and train

new 1,000 MultiFamily Staff over the next few years. (Actually, up to 1,750 new

staff will have to be hired and trained, including replacements for existing staff who

may retire.)

In the meantime, and until this happens, it would be irresponsible to turn over

administration of the M2M Program now to OMFH until it is restaffed and trained

to handle the job. We fully support moving in this direction, and beginning this

process now. But given the magnitude of the personnel challenge and pending upheavals facing OMFH, Congress should leave the successful M2M Program in the

separate office where it is located now, reporting to the Secretary, for at least the next

few years.

(3) Redefine OMHAR’s governmental mission and transform PAE’s into subcontractors for HUD. The lessons of the PAE’s experiment in M2M underscore

NAHT’s conclusion that devolution of HUD functions to State and private entities

is a bad idea. Besides being inherently more costly, from the tenants’ point of view

contracting out is also undesirable because it adds to the administrative complexity

and confusion of having to deal with several agencies rather than one. Moreover,

NAHT’s experience with the private PAE’s in particular suggests it is difficult to

educate the private sector on the value and role of tenant and ‘‘customer’’ participation in decisions which affect them.

As noted above, the implementation of M2M has been evolving in a direction of

greater administrative oversight by OMHAR of a shrinking number of PAE’s, who

have been acting more and more as subcontractors to OMHAR rather than independent entities acting in OMHAR’s stead. NAHT believes that Congress should

recognize and further promote this evolution in legislation this year. Specifically, we

recommend that Congress define the minimum governmental functions of the M2M

Program—preparation and approval of the final MRRAS Plan and review of public

and tenant comments at different stages of the process—and relegate them to

OMHAR.

Congress should also specify that PAE’s—especially private PAE’s—should not be

delegated these fundamentally governmental functions. OMHAR may choose, and

should be allowed, to subcontract out specific functions ancillary to preparing the

Plan—such as preparation of a Capital Needs Assessment, appraisal, underwriting

or environmental testing—to outside contractors, in cases where in-house staff cannot perform them. These outside contractors may be private PAE’s or others. But

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the essential governmental function—decisions regarding the MRRAS Plan and subsidy commitments which go with it—should not be ‘‘privatized.’’ (4) Encourage tenant participation. NAHT offers several recommendations to further improve tenant participation in the M2M process.

(a) Improve access to information. Congress should mandate that HUD release the

Operating Statement of Profit and Loss (formerly Form 92410) to tenant groups

which request it, as part of their review of operating expenses and preparation of

a Management Plan under the M2M process (or other processes under MAHRA). As

residents of the properties, tenants have the greatest stake in knowing how their

rent money—and subsidy dollars—are being spent. Residents also know a great deal

about what is going on in their building, and can help act as HUD’s ‘‘Eyes and Ears’’ to ensure that funds are spent properly. Similarly, Congress should mandate release

of the balances in Reserve for Replacement Accounts for M2M properties. With access to these documents, residents can help identify scams, waste, and double-dipping, can help OMHAR and PAE’s more accurately assess repair and operating

needs, and can help identify potential nonprofit transfer opportunities. Congress

should likewise mandate that HUD release the prospective operating budget of M2M

properties prepared under the MRRAS plan. Although OMHAR has promised the

release of this document, few PAE’s have in fact done so, even when requested by

local tenant groups.

OMHAR has acknowledged that there is no legal barrier to releasing these data

under the Freedom of Information Act, despite earlier claims to this effect. Instead,

OMHAR has declined to restore HUD’s earlier policy releasing this document due

to a fear of owner opposition. But honest owners should not fear release of this information to residents, if they have nothing to hide. Congressional intervention is

needed to ensure release of this document to residents.

Similarly, Congress should mandate the release of HUD’s Previous Participation

Form 2530—redacted to remove Social Security or EIN numbers—to resident groups

upon request, so that tenants learn what other properties are owned or managed

by the principals who control their building. With this information, tenants can research or contact tenants in other buildings to explore common issues or problems.

(b) Extend the $10 million set-aside for technical assistance funding. Section 514

of MAHRA, which authorizes HUD to provide up to $10 million annually from the

$14 billion Section 8 Certificate Fund for technical assistance to tenants in expiring

Section 8 buildings (NOT just those eligible for M2M) ‘‘sunsets’’ on September 30,

2001. As mentioned above, OMHAR has done a good job in designing programs to

make good use of these funds. However, existing programs remain underfunded. Extending this authority will provide sufficient funds to continue existing commitments and meet reasonable demand for funds in the future.

At the same time, Congress should fix an unusual, unintended glitch in the wording of Section 514 which has been interpreted by HUD’s Office of General Counsel

to prohibit its ‘‘rollover’’ of unexpended annual balances into the next fiscal year,

as is the case with most HUD programs. As a result, OMHAR discovered that funds

authorized by Congress in prior fiscal years which had not been ‘‘obligated’’ during

that fiscal year were ‘‘lost’’ at the end of that year, and were thus not available to

meet program commitments. Of the $40 million authorized by Congress from fiscal

year 1997 through fiscal year 2001, only about $12 million has been actually obligated financially to HUD grant programs to date—another $8 million is in the pipeline. The rest—some $20 million—has reverted to the Certificate Fund and may no

longer be available. In extending Section 514, we recommend that this glitch be

fixed to allow the rollover of unobligated funds to successive fiscal years.

We also recommend that Congress clarify that Section 514 funds can be used to

assist tenants in Section 202 and 515 buildings, and buildings receiving Enhanced

Vouchers—for example, Section 8 opt-out and/or mortgage prepayment buildings—

and other voucher conversions from project-based Section—for example, HUD Property Disposition/foreclosure buildings—from the Certificate Fund as well. NAHT

affiliates have reported requests from tenants in these buildings for assistance,

but are unable to use OTAG or ITAG funds to assist them under current eligibility

definitions.

(c) Extend time for review of the MRRAS Plan. We recommend that the required

time for review be extended from the current 10 to 30 days for tenant review and

comments, on the draft MRRAS Plan.

(d) Require written response to tenant comments. We recommend that OMHAR

and/or the PAE reviewing tenant comments respond, in writing, to these comments,

stating reasons for concurrence or nonconcurrence, as is required in Federal Environmental Reviews.

(e) Require notice to tenants and a required meeting throughout the M2M process.

Most important, tenant notice and at least one mandatory meeting should be reVerDate 11-MAY-2000 14:43 Jul 24, 2002 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6621 79972.TXT SBANK4 PsN: SBANK4
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quired of all OMHAR Lite projects. The unexpectedly high volume of OMHAR Lites

dramatically underscores the need for a guaranteed tenant role in this process. In

particular, tenants have a stake in ensuring that reductions in project income in a

Lite building do not adversely affect project operations, repairs or reserves.

Similarly, notice to tenants and a guaranteed meeting should be required at the

end of the M2M process if a property is being disqualified or kicked out of the program, or if an owner changes its decision and changes to OMHAR Lites, Mark Up

to Market, or opts-out of the program—any change in property status. Tenants

should also be notified if the PAE handling their property changes in mid-stream.

(f) Enforce Notice and Duty to Accept requirements when owners opt-out and fix

problems with Enhanced Vouchers. When owners opt-out, HUD should affirmatively

enforce its own standards. While this should be obvious, unfortunately HUD has

stated publicly and in writing that it does not intend to enforce an owner’s duty to

accept Enhanced Vouchers in the event of an opt-out, even though HUD’s Section

8 Guide clearly states that owners are so obligated. Likewise, HUD has not always

required owners to adhere to the One Year Notice of Opt-Out to tenants. Congress

should clearly mandate HUD to enforce its own standards.

Congress should use the opportunity when it extends M2M to further amend

those sections of MAHRA that provide Enhanced Vouchers in the event of opt-outs.

Briefly, problems requiring a legislative fix this year, where HUD does not believe

it has a mandate, include eliminating PHA rescreening of tenants when they switch

to Enhanced Vouchers, and allowing ‘‘empty nester’’ Section 236 tenants to keep an

overhoused apartment, provided they pay ‘‘market’’ or FMR rent.

(5) Support the Preservation Matching Grant bill to provide a capital grant source

to promote nonprofit transfers and preservation of M2M buildings. As indicated

above, OMHAR’s restructuring ‘‘toolbox’’ does not today include a Capital Grant

source to help potential nonprofit purchasers assemble the resources to buy and preserve buildings undergoing the M2M process. For properties needing repairs, a Capital Grant source would be a useful tool to help an owner fix a substandard building

as part of a MRRAS Plan.

At a recent forum convened by the Government Accounting Office, OMHAR Director Ira Peppercorn concurred with NAHT and other participants that passage of a

Capital Grant program by Congress would be a welcome additional tool to help

OMHAR in its preservation mission. Fortunately, prospects have improved for passage of the Preservation Matching Grant bill which passed the House in the last

session but did not get out of this Subcommittee in the Senate. With strong bipartisan support in both Houses, we are hopeful that the Preservation Matching

Grant will pass in this session. The bill has been refiled in the House as H.R. 425,

and is soon to be refiled in the Senate by Senator Jeffords and others. We strongly

urge the Subcommittee to hold an early hearing to give this bill renewed momentum

when it is refiled.

(6) Adopt Regulatory Program to Preserve Affordable Housing. In extending the

M2M Program, NAHT believes that Congress should establish a national regulatory

framework to limit owners’ ability to opt-out, prepay, and obtain windfall profits

through high market rents at the expense of residents and the Nation’s investment

in affordable housing. It would be far preferable and less costly to preserve at-risk

units by regulating owner ‘‘choice’’ to opt-out of HUD programs.

Congress has the authority to extend regulation or to require owners to seek and

accept Congressional offers of additional Section 8 subsidies in order to achieve the

overriding public purposes of preventing tenant displacement and preserving housing at the least cost to the Government. For example, restoring the regulatory

framework of the Title VI Preservation Program and extending its concepts to expiring Section 8 contracts would preserve more units and would be cheaper in the

long run than replacing lost units with new construction. NAHT would prefer this

approach.

Creation of a regulatory framework would result in a dramatic upsurge of owners

seeking full M2M restructuring at lower Section 8 rent levels, fewer OMHAR Lites

and ‘‘opt-outs,’’ and greatly increased cost savings in the Federal Section 8 Certificate Fund as a result. It would also greatly increase OMHAR’s leverage in

negotiating higher repair and operating standards and longer-term affordability

in exchange for the financial benefits of restructuring than is the case in an unregulated environment where owners can walk away from the process at any time.

It would also result in a dramatic increase in owners willing to sell to nonprofit

organizations.

In the meantime, at the Federal level, both Congress and the Administration have

now acknowledged the need to provide funds as incentives to persuade owners voluntarily to remain in HUD’s subsidy programs. As the experience under MAHRA

shows, these solutions will be more expensive in the absence of a Federal regulatory

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framework, and many units will still be lost. However, voluntary financial incentives remain less expensive than the cost of doing nothing, which would leave society a huge unpaid bill for new replacement housing and fuel the hidden costs of

homelessness and despair. So Congress should extend the M2M Program, supplemented by Preservation Matching Grants, even in the absence of a regulatory

framework to preserve housing at the least cost to the Government.

(7) Reaffirm and strengthen HUD and OMHAR’s mandate to preserve M2M buildings with project-based Section 8 assistance. As indicated above, while the current

program design appears to have resulted in a minimal number of voucher conversions, the relatively small number of completed ‘‘closings’’—129 out of 904 properties

accepted for M2M assignment as of June 11, 2001—suggests that caution on this

point may be warranted before concluding that massive voucherization has been

avoided. Congress should use this opportunity to clarify its intent to preserve the

maximum amount of the M2M-eligible stock with project-based Section 8 assistance.

Mr. Chairman, thank you for the opportunity to provide testimony to the Subcommittee today. NAHT stands ready to work with the Subcommittee and with

OMHAR to make the M2M Program work better for tenants and our communities.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD

FROM JOHN C. WEICHER

Q.1. What is going to happen to the properties that require full

mortgage restructuring but only received rent reductions? What

can HUD do to ensure their physical and financial health? Would

it be accurate to say that some of those owners are receiving Government subsidies but neglecting to keep up their properties? And,

if so, what actions has HUD taken against these owners?

A.1. There are approximately 200 properties that are identified as

requiring full mortgage restructuring but that only received rent

reductions. These properties have been placed on a ‘‘watch list’’ and

will be closely monitored by our field offices to assure that the owners meet their responsibilities for property maintenance and financial soundness.

Through HUD’s Real Estate Assessment Center, these properties

will be inspected and analyzed for any trend to deterioration or financial compliance issues. We fully intend to protect tenants in

these properties from living in housing that is less than fully acceptable and will take appropriate servicing measures against any

owners who do not maintain their properties, including referral to

the Departmental Enforcement Center.

Q.2. The same Act that established the Mark-to-Market Program

gave HUD the authority to issue grants for the capital costs of rehabilitation to owners of eligible mark-to-market properties. The

grants are to be funded with money recaptured from contracts for

interest reduction payments. Though HUD has not yet exercised

this authority, HUD’s 2001 and 2002 budgets contain fund balances from these recaptured payments.

How much money is available from recaptured interest reduction

payments for rehabilitation grants? How has this money been used

since the enactment of MAHRA? What are HUD’s plans for this

money? Does HUD plan to exercise its authority to issue rehabilitation grants?

A.2. To date, OMHAR had $22,521,724 in available interest reduction payments (IRP’s) from properties going through its debt restructuring process, and has used its authority under MAHRA to

apply the funds as follows:

• $19,570,724 was used to fund the Reserve-for-Replacement accounts of the properties from which the IRP was ‘‘recaptured.’’

• $1,954,000 was used to subsidize the debt service on the property.

• The remaining $997,000 was actually recaptured and returned to

HUD.

For the rest of the Department, the fiscal year 2002 budget proposes to amend the multifamily rehabilitation program authority

under Section 236(s) by repealing provisions which were designed

to offer loans to owners to rehabilitate multifamily projects due to

the outlay costs of implementing this authority.

HUD currently has the authority to provide grants under Section

236(s) to owners for these purposes, although that authority has

yet to be implemented for several reasons. First, the authority

deals with highly complex financial issues. Second, it had been

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HUD’s intention under the previous Administration to implement

the grant authority simultaneous with the implementation of the

loan authority, which was not enacted until more recently. As a result, implementation of the grant authority has not yet taken place.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM JOHN C. WEICHER

Q.1. One concern that I have heard voiced is that a number of

properties with above-market rents are not being referred by FHA

to OMHAR. Do the panelists agree with that assessment? If so,

what is the best way of addressing that problem? For example,

should OMHAR be given the function of doing the initial reviews

of rents?

A.1. There have been instances of properties with above-market

rents not being referred to OMHAR. Where this has happened we

in FHA have worked with the offices to review the reasons why.

We often found that rents that appeared to be above-market

were actually at the market when reviewed under our rent comparability requirements. Many of the markets have substantially

strengthened in recent months, so that rents in those markets have

risen to the level of the project rents.

There are also properties where the rents in the immediate

neighborhood are different than the rents for the Zip Code as a

whole. The model used for initially determining whether a property

was above market used Zip Code information. And, property rents

vary by property condition.

Some types of properties may not have been referred because the

initial guidance was unclear. For instance, the initial guidance on

Section 8 renewals for FHA insured, State bond financed properties

initially seemed to exempt such properties (this has been corrected

in subsequent guidance).

There are other reasons why a property may not be referred to

OMHAR. We recently surveyed the field on a sample of 13 properties that OMHAR reviewed for rent comparability and had contract rents above market. All except one was not sent to OMHAR

for debt restructuring for legitimate reasons unrelated to rent levels; these reasons ranged from owner ineligibility to prepayment.

The one exception was based on a miscommunication where the

local office thought they had sent it for restructuring; OMHAR had

treated as only a request for rent comparability. (This property has

been subsequently returned to OMHAR for restructuring.)

We are reviewing all of the properties with Section 8 renewals

since October 1, 2000, that OMHAR’s model indicates should have

been submitted to them for rent or debt restructuring. Any properties with contract rents still above market will be identified for

special review and, if necessary, steps taken to bring the rents in

line at the earliest opportunity.

Looking ahead, I think it is now clear to all of our owners that

Congress fully intends to continue the requirement to bring properties to market rent if they are going to continue to receive Section 8 subsidies. At the same time, OMHAR has improved its track

record for processing its deals and holding its PAE’s accountable

for timely processing. Both factors should result in all eligible properties receiving the assistance they need through OMHAR.

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OMHAR is already able to provide rent comparability studies

and analysis where needed. We believe, for the reasons cited above,

that the process would continue to work and to improve, without

additional Congressional requirements.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM PETER GUERRERO

Q.1. Some participants in the program have complained that

OMHAR’s operating procedures guide is far too detailed and prescriptive, and the controls it has put in place are too onerous and

time consuming. Do you agree? Does the guide give the PAE’s

enough flexibility to deal with the specifics of individual deals?

A.1. Of the 15 participating administrative entities we contacted,

including 10 public and 5 nonpublic entities, 7 believed the extensive requirements contained in the operating procedures guide has

been a hindrance to completing the restructurings in a timely manner. For example, one public participating administrative entity

told us the guide is tedious and time consuming to follow and becomes a source of frustration when the entity is trying to solve

problems by thinking creatively. However, the Participating Administrative Entities provided few specific examples of overly prescriptive requirements that contributed to delays. As a result of

concerns with the operating procedures guide, OMHAR streamlined

its requirements and reissued the guide in January 2001. OMHAR

believes the revised guide makes clear its reliance on good judgment and quality restructuring by the Participating Administrative

Entity and notes OMHAR’s willingness to consider alternative approaches that reach the goals of the program. OMHAR said the emphasis throughout the revised guide is toward flexibility in reaching common sense conclusions and logical restructuring outcomes.

The remaining eight Participating Administrative Entities we

contacted said the operating procedures guide was necessary to ensure consistency in the program and did not impede their ability

to complete the restructuring transactions in a timely manner. Furthermore, most program stakeholders participating on our expert

panel believed the guide somewhat or greatly accelerated the processing of restructuring transactions. While we did not conduct a

thorough examination of all the requirements contained in the operating procedures guide, we tend to agree with the majority of

Participating Administrative Entities who believe the guide was

necessary to ensure consistency in the program. While the guide

contains specific requirements that Participating Administrative

Entities must follow in reaching decisions on various restructuring

issues affecting a property and how those decisions are to be documented, it allows the entities to reach decisions based on the property’s specific circumstances. Accordingly, we believe that it gives

Participating Administrative Entities sufficient flexibility to deal

with the specifies of individual restructuring transactions.

Q.2. Do the guidelines ensure consistent results across State lines?

In your view, is this a desirable goal?

A.2. The operating procedures guide outlines a uniform process for

all Participating Administrative Entities to follow in completing a

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sults across State lines, which we believe is a desirable goal. The

law requires OMHAR to assign properties for restructuring to the

Participating Administrative Entities based on the entities’ geographic jurisdictions. Consequently, Section 8 property owners with

properties in several States may be dealing with several different

entities. Without a national mark-to-market protocol to ensure consistency, there is increased likelihood that such owners would become frustrated trying to negotiate transactions with the different

Participating Administrative Entities, which may be following different restructuring processes.

Q.3. Has the increased involvement of HUD in the operations and

staffing of OMHAR in the past several months had any impact on

OMHAR’s ability to do its work?

A.3. According to OMHAR, the Office has been unable to obtain

new staff due to the current hiring freeze by HUD, despite the fact

that OMHAR is exempt from this policy. OMHAR also noted that

HUD has not allowed internal promotions due to budget constraints. OMHAR stated that they need to fill vacated positions

and promote staff in order to maintain the progress made in restructuring Section 8 properties. OMHAR noted that the law gives

them the statutory authority to hire and promote staff as needed.

Section 574(a) of the law states that the Director of OMHAR can

appoint and determine the compensation of employees that is

necessary to carry out the functions of the Office. According to

HUD, restrictions on hiring and promotions were the result of

OMHAR’s scheduled termination on September 30, 2001. HUD

stated that hiring and promoting staff did not make sense with

OMHAR scheduled to terminate. HUD did say that the restrictions

would be lifted if OMHAR’s authority is extended.

Q.4. As you know, the law gave State and local housing finance

agencies a priority in becoming restructuring agents for HUD, or

PAE’s. While there are more public PAE’s, the private PAE’s are

doing more of the work. This is particularly true for the more complex full restructurings. Why is this the case? How have public and

private PAE’s performed to date? To what do you attribute any differences in performance? For example, did OMHAR simply not give

public PAE’s assets, or did public PAE’s get assets later than private PAE’s? In addition, Barbara Thompson testified that, on a percentage basis, public PAE’s did as well as private PAE’s in terms

of speed. Is this true?

A.4. Of the 138 full mortgage restructurings completed by June 15,

2001, nonpublic Participating Administrative Entities completed

106 (77 percent) and the public entities completed the remaining

32 (23 percent). On average, the nonpublic Participating Administrative Entities took less time to complete the full mortgage

restructurings once they accepted the property from OMHAR for

restructuring—about 395 days compared with an average of 475

days for the public entities. The nonpublic Participating Administrative Entities also completed more rent restructurings and required less time to complete the restructurings than the public

entities. For example, of the 500 rent restructurings completed as

of June 15, 2001, the nonpublics completed 278 (56 percent) and

required about 180 days to finish the process compared with the

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public entities that completed 219 (44 percent) and required an

average of 221 days. According to OMHAR, public entities may be

less willing to put pressure on the owners to cooperate in a timely

manner, or may engage in more lengthy negotiations to get the

best deal for the owner. While both of these actions cause delays

in completing the transactions, OMHAR said public entities may

feel compelled to do so since they have established long-term relationships with the property owners. OMHAR also noted that nonpublic Participating Administrative Entities seem to be more interested in earning the incentive payments for timely completion of

the restructurings than the public entities. OMHAR believes this

may be largely attributable to the fact that the nonpublic entities

receive a significantly lower base fee than the public entities.

OMHAR has assigned more properties to the nonpublic Participating Administrative Entities for restructuring. For example, as of

June 15, 2001, OMHAR had assigned 700 properties requiring full

mortgage restructurings to nonpublic entities and 234 properties to

public entities. For those properties requiring only rent restructuring, OMHAR assigned 345 to nonpublics and 243 to publics.

According to OMHAR, nonpublic Participating Administrative

Entities are assigned properties in States where there is no public

Participating Administrative Entity presence, the public entity has

been capped either by their own election or by OMHAR due to performance, or there is a ‘‘large-owner’’ memorandum of understanding involving multijurisdictional properties—used for those

owners with a large number of Section 8 properties located in various States.

Q.5. In your view, do public PAE’s have the staff to handle M2M

work? Do private PAE’s have enough staff?

A.5. While we did not specifically evaluate the Participating Administrative Entities’ capacity to complete mark-to-market restructurings, we found that the nonpublic entities tended to have more

staff dedicated to work on the program, although they also tended

to have larger workloads. Additionally, OMHAR told us that the

skills, expertise and seniority at both a staffing and organizational

level were significantly lower for a number of the public Participating Administrative Entities, and that the capacity of some public entities has proven to be significantly less than indicated in

their original proposals.

Q.6. The witness from the National Association of State Housing

Agencies, Ms. Thompson, says in her testimony that OMHAR has

created many impediments to State agencies participating in the

Mark-to-Market Program. In your view, is this accurate? If so, how

have the private PAE’s been able to complete so many projects? Are

there impediments unique to the public PAE’s, or are there different requirements for the public vs. private PAE’s?

A.6. We are not clear to which impediments Ms. Thompson is referring, although we are aware that her organization has not been

pleased with the compensation that the public Participating Administrative Entities receive to complete the restructurings, the

program’s operating procedures guide, or some of the program’s

conflict of interest provisions. However, public Participating Administrative Entities receive higher compensation than the nonVerDate 11-MAY-2000 14:43 Jul 24, 2002 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6601 79972.TXT SBANK4 PsN: SBANK4
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publics and the restructuring process, including any conflict of interest provisions, outlined in the program’s operating procedures

guide applies to both public and nonpublic entities. According to

OMHAR, there are no restructuring requirements that are unique

to the public Participating Administrative Entities.

Q.7. The law authorized OMHAR to establish exception rents in

certain circumstances. The Congress provided this authority to provide OMHAR with some flexibility. There were two specific circumstances that were considered: First, inner-city properties where

local market rents were too low to support the operation of a

project that was generally considered to be an anchor in an otherwise blighted community. The Congress clearly expected OMHAR

to provide rents to continue to maintain such properties. Second,

the Congress felt that exception rents would be needed in rural

areas. Has OMHAR been exercising this authority? In what cases?

A.7. Section 514g(2) of the law states that exception rents are to

be allowed if a Participating Administrative Entity determines that

the housing needs of the tenants and the community cannot be

adequately addressed through implementation of the rent limitation required through a mortgage restructuring. The law allows

Participating Administrative Entities to provide exception rents

that do not exceed 120 percent of Fair Market Rents for up to 20

percent of the expiring Section 8 contract units in a fiscal year. The

law also allows OMHAR to grant waivers for rents that exceed 120

percent of Fair Market Rents for up to 5 percent of all units restructured in any fiscal year. While OMHAR said they did not have

an identifier to determine whether the exception rent properties

were located in inner cities or rural areas, they could provide the

number of properties receiving exception rents to date. Accordingly,

36 properties have received exception rents as of July 2, 2001.

OMHAR noted that several reasons exist for properties receiving

exception rents, including: (1) when market rents will not support

the property’s expenses, such as in cases where rents are stable

and expenses are increasing as may frequently occur in rural areas

or in areas marked by generally poorer economics, low growth, or

even population decline; (2) when the housing should be retained

since acceptable, affordable options are not available which is often

the case in rural areas where the mark-to-market property may be

the only rental housing; (3) when older properties that are characterized by increasing expenses for repair and maintenance and the

need to increase deposits to the replacement reserves—effectively

an expense—for the future have higher expenses than other properties; and (4) when properties have higher expenses than market

rate properties because of the additional administrative burdens of

Section 8—that is, the need for additional security and/or maintenance in stressed areas.

Q.8. One clear reason for giving State housing finance agencies a

priority in the law was that the Congress felt that public agencies

would be more aggressive about enforcing the mission of maintaining affordable housing in strong physical and financial condition for

the full term of the 30 year affordability commitment. From discussion with program participants, has there been a difference in the

performance of the public and private PAE’s with regards to adeVerDate 11-MAY-2000 14:43 Jul 24, 2002 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6601 79972.TXT SBANK4 PsN: SBANK4
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quate rehabilitation, adequate reserve for replacement for future

capital needs, or other ‘‘mission’’-related indicators keeping the

long-term affordability in mind?

A.8. Since we did not include an examination of differences between public and nonpublic Participating Administrative Entity

performance as part of our work, we are not in a position to judge

whether there have been any meaningful differences between public and nonpublic entities’ performance of mission-related activities,

such as their actions to address property rehabilitation needs. In

analyzing the dollar amounts of rehabilitation required for the

138 completed full mortgage restructurings—as of June 15, 2001—

we found that, on average, public Participating Administrative

Entities required more rehab funds than nonpublic entities. For

example, for the restructurings completed by public entities an

average of about $106,000 per property in rehabilitation was

required, while the nonpublic entities required an average of

about $53,000 per property in rehabilitation for the restructurings they completed. We also found that for 44 percent of the properties restructured by nonpublic entities, no rehabilitation was required, compared to 13 percent of the properties restructured by

public entities.

Q.9. As a follow-up, is there some general and consistent standard

of rehabilitation and replacement reserves that can be incorporated

into the statute or the regulations that ensures that building will

continue in good shape for the 30 years?

A.9. None of the members of our expert panel or other program

stakeholders that we met with specifically suggested that there

needs to be a revision of the legislative or regulatory standards

regarding property rehabilitation. Requirements in the Mark-toMarket legislation and regulations and in OMHAR’s operating procedures guide make it clear that properties are not only to receive

necessary rehabilitation when the property goes through restructuring, but also that the property be maintained in decent, safe,

and sanitary condition over the long term. For example, Section

401.558 of the regulations state that a restructuring plan must require the owner to maintain the project in a decent and safe condition and Section 401.560 of the regulations requires that each

Participating Administrative Entity establish management standards that, among other things, require the project management to

protect the physical integrity of the property over the long term

through preventative maintenance, repair, or replacement.

OMHAR’s operating procedures guide specifies a number of steps

that Participating Administrative Entities must follow in determining how to address property rehabilitation needs. Among other

things, it states that Participating Administrative Entities are to

determine the deposits to the replacement reserve that are needed

to maintain the property in acceptable physical condition over the

term of the mortgage.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD

FROM PETER GUERRERO

Q.1. In your opinion, how effective is the process for monitoring the

physical and financial health of the properties that needed full

restructurings but only received rent reductions?

A.1. As we noted in our testimony, while the Mark-to-Market Program has resulted in Section 8 savings, the requirement that rents

be reduced to market has increased the risk of physical and financial problems for some properties. This includes 75 properties that,

as of June 15, 2001, OMHAR had processed as rent restructurings,

but which did not meet OMHAR’s underwriting criteria and 78

properties that OMHAR had processed as full mortgage restructurings, but for which OMHAR reduced the properties’ rents to

market without restructuring the properties’ mortgages. We found

that while HUD’s Office of Housing had developed guidance for its

field offices to follow in monitoring the physical and financial condition of such properties, the guidance did not specifically cover the

78 properties processed as full mortgage restructurings. HUD has

recently agreed to revise the guidance so that it will include all

properties that may be at risk and to strengthen other provisions

contained in the guidance. However, these revisions were not yet

finalized as of July 2, 2001. While this is a positive step, it will be

important for both HUD and the Congress to ensure that any problems that arise at these properties are quickly identified and corrected before they affect the property’s value and impair the well

being of property residents.

Q.2. What changes in resources, if any, will be required in extending the Mark-to-Market Program?

A.2. While we have not performed any analyses on the resources

needed to administer the program, it seems likely that the workload for restructuring properties would continue to remain at current levels for the next 3 years. Therefore, it appears that

OMHAR’s resources would also need to remain at approximately

their current levels for the same period. As we noted in our testimony, OMHAR estimated that over 1,300 Section 8 properties with

above-market rents would expire after fiscal year 2002. Of those

properties, over 1,150 (88 percent) will expire by the end of fiscal

year 2004.

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