Department of Housing and Urban Development: Opportunities to Improve Management of Mortgage Insurance and Rental Assistance Programs
Published: 2013-03-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: HUD operates programs that provide mortgage insurance to homebuyers and subsidize the rents of low-income households. In recent years, HUD's FHA has experienced dramatic growth in its insurance portfolio. Expenditures for HUD's rental voucher program also have risen substantially. Through the MTW demonstration program, HUD has sought to reduce costs and achieve greater cost-effectiveness in federal expenditures for rental housing.
This testimony discusses (1) the financial condition of FHA's insurance fund and FHA's risk management, (2) the costs of the voucher program and options to increase its efficiency, and (3) HUD's efforts to evaluate and monitor the MTW program.
This testimony draws from GAO reports on FHA's insurance fund and oversight capacity ( GAO-10-827R and GAO-12-15), HUD's voucher program (GAO-12-300), and HUD's MTW program (GAO-12-490). GAO also reviewed updated information on the insurance fund and voucher subsidy reserves as of the end of 2012.
section_title: What GAO Found
paragraphs: The Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) faces financial and risk-management challenges. For the fourth straight year, capital reserves for FHA's Mutual Mortgage Insurance Fund are below the statutory minimum. Also, declining balances in the fund's capital reserve account have heightened the possibility that FHA will require additional funds to have sufficient reserves for all future insurance claims on its existing portfolio. Further actions could help to restore FHA's financial soundness. For example, GAO previously concluded that Congress or HUD needs to determine the economic conditions the fund would be expected to withstand without drawing on Department of the Treasury funding. With regard to risk management, FHA has made or plans improvements. For example, FHA implemented an initiative in 2009 to strengthen internal controls and risk assessment for single-family housing and created a risk office in 2010. However, FHA has only recently begun to integrate these activities and conduct annual risk assessments in accordance with HUD guidance. Without integrated and updated risk assessments that identify emerging risks, as GAO recommended, FHA lacks assurance that it has identified all its risks.
Congress and HUD have taken steps to limit cost increases in the Housing Choice Voucher (voucher) program while maintaining assistance for existing program participants. Nonetheless, between 2003 and 2010, program expenditures grew about 9 percent (after adjusting for inflation), mainly due to rising rents, declining household incomes, and decisions to expand the number of assisted households. GAO identified options that, if implemented effectively, could reduce the need for new appropriations, cut expenditures, or increase the number of households assisted. These options include (1) reducing the subsidy reserves (unspent funds) of state and local housing agencies that administer the program, (2) streamlining administrative requirements, and (3) implementing rent reforms and consolidating voucher administration. These options would also involve trade-offs, such as higher rent burdens for low-income households.
Opportunities exist to improve how HUD evaluates and monitors the Moving to Work (MTW) program, which is intended to give state and local housing agencies flexibility to design and test innovative strategies for providing housing assistance. HUD's guidance does not specify that performance information collected from participating housing agencies be outcome-oriented, and HUD has not identified performance indicators for the program. In addition, HUD has not developed a systematic process for identifying lessons learned from the program, which limits HUD's ability to promote useful practices for broader implementation. HUD also has not taken key monitoring steps set out in internal control standards, such as issuing guidance that defines program terms or assessing compliance with all the program's statutory requirements. As a result, HUD lacks assurance that agencies are complying with statutory requirements. Also, without more complete information on program effectiveness and compliance, it will be difficult for Congress to know whether an expanded MTW program would benefit additional agencies and the residents they serve. Consistent with GAO recommendations, HUD has begun to revise guidance on MTW performance reporting.
section_title: What GAO Recommends
paragraphs: GAO has made a number of recommendations to improve FHA's risk management, and FHA has taken some actions. GAO also recommended that HUD consider proposing to Congress options for improving the efficiency of the voucher program. HUD neither agreed nor disagreed and has not yet proposed such options. In addition, GAO recommended that HUD improve MTW information and monitoring. HUD partially agreed with these recommendations and has taken initial steps to improve performance data.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on the Department of  Housing and Urban Development’s (HUD) programs, including the single- family mortgage insurance programs that the Federal Housing  Administration (FHA) administers and HUD’s Housing Choice Voucher  (voucher) and Moving to Work (MTW) programs. To help provide access  to mortgage financing, FHA insures private lenders against borrower  defaults on mortgages that meet FHA criteria. FHA insures almost all of  its single-family mortgages under the Mutual Mortgage Insurance Fund  (insurance fund). To help very low-income households afford rental  housing in the private market, the voucher program pays landlords  subsidies that generally equal the difference between the unit’s rent and  30 percent of the household’s income. The MTW program, among other  purposes, is intended to give participating state and local housing  agencies flexibility to design and test innovative strategies for providing  housing assistance and achieving cost-effectiveness.
Today’s constrained budget environment makes it especially important  that HUD manage these programs as efficiently and effectively as  possible. Our reviews of these programs have highlighted opportunities  for management improvements. My statement today is based on four  GAO reports: a September 2010 report on FHA’s financial condition, a  November 2011 report on FHA’s risk assessment and human capital  management, a March 2012 report on the voucher program, and an April  2012 report on the MTW program. Specifically, I will discuss (1) the  financial condition of FHA’s insurance fund and FHA’s risk management,  (2) the costs of the voucher program and options to increase its  efficiency, and (3) HUD’s efforts to evaluate and monitor the MTW  program.
To do this work, we analyzed actuarial reviews of the insurance fund and  federal budget documents, and interviewed FHA officials, staff from  FHA’s actuarial review contractor, and housing market researchers. We  also analyzed data on FHA’s business volume, market share, workload,  and staff and contractor resources. We reviewed documentation on the  proposed structure and functions of FHA’s Office of Risk Management  and Regulatory Affairs and the Office of Single Family Housing’s internal  quality control initiative. Further, we reviewed documentation related to  workforce and succession planning. For this testimony, we also reviewed  updated information on the insurance fund’s condition as of September  30, 2012. For our study of the voucher program, we reviewed and  analyzed appropriations legislation, budget documents, and HUD’s  annual guidance on the allocation of the program’s appropriation to state  and local housing agencies. We used HUD data to analyze subsidy  reserves and the implications of three types of programmatic reform  options for the voucher program: increasing minimum rents, changing the  percentage of income tenants pay toward rent, and requiring tenants to  pay a percentage of fair market rent. For this testimony, we also reviewed  updated information on housing agency subsidy reserves as of December  31, 2012. For MTW, we reviewed the annual reports (as of January 2012)  for 30 state and local housing agencies, compared HUD’s guidance on  the type of performance information participating agencies should report  with the GPRA (Government Performance and Results Act)  Modernization Act of 2010 (GPRA Modernization Act), and reviewed  documentation of HUD’s monitoring activities. Our prior reports each  include a detailed description of our scope and methodology.
We performed the work on which this statement was based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Background
subsections: section_title: Single-Family Mortgage Programs
paragraphs: FHA’s single-family mortgage programs have played a prominent role in  mortgage financing in the wake of the 2007-2009 financial crisis, the  housing downturn, and the contraction of the conventional mortgage  market. In 2012, FHA insured about $227 billion in single-family  mortgages, and the overall insurance portfolio was about $1.1 trillion.
The Omnibus Budget Reconciliation Act of 1990 required HUD to take  steps to ensure that the insurance fund attained a capital ratio of at least  2 percent by November 2000 and maintained at least that level  thereafter. The capital ratio is the fund’s economic value divided by the  insurance-in-force (outstanding insurance obligations). The act also  required an annual independent actuarial review of the economic net  worth and soundness of the insurance fund. The annual actuarial review  is now a requirement in the Housing and Economic Recovery Act of 2008,  which also requires an annual report to Congress on the results of the  review.
Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other  federal agencies must estimate the net lifetime costs—known as credit  subsidy costs—of their loan insurance or guarantee programs and include  the costs to the government in their annual budgets. Credit subsidy costs  represent the net present value of expected lifetime cash flows, excluding  administrative costs.insurance premiums) exceed expected cash outflows (such as insurance  claims), a program is said to have a negative credit subsidy rate and  generates offsetting receipts that reduce the federal budget deficit. When  the opposite is true, the program is said to have a positive credit subsidy  rate—and therefore requires appropriations. Generally, agencies must  produce annual updates of their subsidy estimates—reestimates—on the  basis of information about actual performance and estimated changes in  future loan performance. FCRA recognized the difficulty of making credit  subsidy estimates that mirrored actual loan performance and provides   When estimated cash inflows (such as borrower  permanent and indefinite budget authority for reestimates that reflect  increased program costs. Upward reestimates increase the federal  budget deficit unless accompanied by reductions in other government  spending or an increase in receipts.
section_title: Housing Choice Voucher Program
paragraphs: In recent years, HUD’s voucher program annually helped provide  affordable rental housing to about 2 million households with very or  extremely low incomes. Approximately 2,400 state and local housing  agencies administer the voucher program on HUD’s behalf. Under the  program, an assisted household pays 30 percent of its monthly adjusted  income or the housing-agency established minimum rent—up to $50— toward its monthly rent. The remainder of the rent— the difference  between (1) the lesser of the unit’s gross rent (rent plus utilities) or a local  “payment standard” and (2) the household’s payment—is paid through a  HUD-subsidized “voucher.” The payment standard is based on the HUD- determined fair market rent for the locality, which HUD annually estimates  for metropolitan and nonmetropolitan areas.agencies can set payment standards (that is, pay subsidies) between 90  and 110 percent of the fair market rent for their areas.
Each year, Congress appropriates funding for subsidies for renewal  (existing) and incremental (new) vouchers and administrative expenses.  HUD then allocates the program funding to housing agencies, which are  expected to use all allocated subsidy funding for authorized program  expenses. However, if housing agencies’ allocated amounts exceed the  total cost of their program expenses in a given year, their unused subsidy  funds must be maintained in subsidy reserve accounts. HUD also pays  administrative fees to housing agencies based on the number of units  leased (vouchers used) as of the first of each month. As with subsidy  funding, if the appropriated amount does not fully cover agencies’ fees,  HUD will reduce the amount of funding each housing agency receives to  fit within the appropriated amount.
The voucher program is not an entitlement program; thus, the amount of  budget authority Congress provides through annual appropriations limits  the number of households that the program can assist. Historically,  appropriations for the voucher program (or for other housing programs)  have not been sufficient to assist all households that HUD identified as  having worst-case housing needs—households with very low incomes  that pay more than 50 percent of their incomes in rent, live in substandard  housing, or both.
section_title: Moving to Work Program
paragraphs: HUD implemented the MTW demonstration program in 1999. As of  February 2013, 35 housing agencies were participating. To put in place  the innovations intended under the program’s authorizing legislation,  agencies may request waivers of certain provisions in the United States  Housing Act of 1937, as amended. For example, housing agencies may  combine the funding they are awarded annually from different programs— such as public housing capital funds, public housing operating funds, and  voucher funds—into a single, authoritywide funding source.
The act that created the program requires participating agencies to  address three purposes and meet five requirements. The purposes are to  (1) reduce costs and achieve greater cost-effectiveness in federal  housing expenditures, (2) give families with children incentives to obtain  employment and become self-sufficient, and (3) increase housing choices  for low-income families.
In making these changes, MTW agencies must (1) serve substantially the  same total number of eligible low-income families that they would have  served had funding amounts not been combined; (2) maintain a mix of  families (by family size) comparable to those they would have served  without the demonstration; (3) ensure that at least 75 percent of  households served are very low income; (4) establish a reasonable rent  policy to encourage employment and self-sufficiency; and (5) assure that  the housing provided meets HUD’s housing quality standards.
section_title: The Condition of FHA’s Fund Has Worsened, and FHA’s Risk Assessment Mechanisms Are Not Fully in Place
subsections: section_title: FHA’s Insurance Fund Has a Negative Capital Ratio
paragraphs: The insurance fund’s capital ratio dropped sharply in 2008 and fell below  the statutory minimum in 2009, when economic and market developments  created conditions that simultaneously reduced the fund’s economic value  (the numerator of the ratio) and increased the insurance-in-force (the  denominator of the ratio). According to annual actuarial reviews of the  insurance fund, the capital ratio fell from about 7 percent in 2006 to 3  percent in 2008 and below 2 percent in 2009 (see fig. 1). In 2012, the  ratio fell below zero to negative 1.44 percent.
In its November 2012 report to Congress, HUD cited several reasons for  the declines from 2011 to 2012. These included the following:
First, the estimates of house price appreciation for the 2012 actuarial  study were significantly lower than those used for 2011. The  difference accounted for an estimated $10.5 billion reduction in the  value of the insurance fund compared with the actuary’s 2011  projection of what the fund’s economic value would be at the end of  2012.
Second, the continued decline in interest rates causes a substantial  loss of revenue. Premium revenues from an existing portfolio go down  when more borrowers pay off their mortgages to refinance into lower  rates. The capital ratio calculation does not include those borrowers  who refinance into new FHA-insured loans. In addition, actuarial  projections include higher claim expenses when interest rates stay  low because borrowers who are unable to refinance become more  willing to default. The effects of continued low interest rates resulted in  a reduction of $8 billion in the estimated economic value of the  insurance fund (versus the previous year’s projections).
Third, FHA directed the actuary to adjust the way losses from  defaulted loans and reverse mortgages were reflected in the  economic value of the insurance fund. This resulted in an estimated  $10 billion reduction to the economic value, compared with the 2011  projections.
As the capital ratio declined, the insurance fund’s condition also  worsened from the federal budgetary perspective. FHA annually  estimates the subsidy costs of new activity for its loan insurance program  and also reestimates, or annually updates, prior subsidy cost estimates.  Historically, FHA estimated that its loan insurance program was a  negative subsidy program. On the basis of these estimates, FHA  accumulated substantial balances in a capital reserve account, which  represents amounts in excess of those needed for estimated credit  subsidy costs and helps cover reestimates reflecting unanticipated  increases to those costs (such as higher-than-expected claims). Funds  needed to cover estimated subsidy costs are accounted for in the  insurance fund’s financing account. In recent years, FHA has  transferred billions of dollars annually from the capital reserve account to  the financing account, reflecting increases in estimated credit subsidy  costs (upward subsidy reestimates). As a result, balances in the capital  reserve account fell dramatically, from $19.3 billion at the end of 2008 to  an estimated $3.3 billion at the end of 2012 (see fig. 2). At the end of  2012, the financing account held approximately $35.1 billion.
If the capital reserve account were to be depleted due to additional  upward reestimates, FHA would need to draw on permanent and  indefinite budget authority to have sufficient reserves for all future  insurance claims on its existing portfolio. The President’s budget for 2013  contained a $9.3 billion upward reestimate in FHA’s credit subsidy costs  for the insurance fund. The budget indicated that the reestimate would  deplete FHA’s capital reserve account in 2012, potentially causing FHA to  draw on $688 million in permanent and indefinite budget authority.  However, according to FHA, the agency ultimately did not need to draw  on this authority because of premium increases and higher-than- anticipated loan volumes. In its 2012 report to Congress, HUD noted that  information (the insurance fund valuation) in the forthcoming President’s  budget for 2014 will determine the adequacy of the capital balance in the  insurance fund and thus the need to draw on permanent and indefinite  budget authority in the current fiscal year. The President’s budget is  expected to be released in the spring of 2013.
The 2012 actuarial analysis projects that the capital ratio will be positive  by 2014 and return to above the statutory 2 percent minimum in 2017.  This forecast was based on assumptions such as the level of future  lending activity and house prices for multiple years, which are difficult to  predict. The forecast also assumed no changes in policy or other actions  by FHA that might accelerate “recovery” time.
FHA plans policy changes that may accelerate increases to the ratio,  including premium increases. For example, effective April 1, 2013, FHA  announced that it will increase the annual insurance premiums most new  borrowers pay between 0.05 and 0.10 percentage points. The annual  premium for loans of $625,500 or more will be set at the statutory  maximum of 1.5 or 1.55 percent, depending on the loan-to-value ratio.  Effective June 3, 2013, for new loans FHA also announced that it will  require borrowers to continue to pay annual premiums, regardless of loan  value. Previously, premiums could be eliminated after loans (principal  amounts) declined to 78 percent of their original value.
Further actions could help to restore FHA’s long-term financial soundness  and define its future role. For example, we previously concluded that  Congress or HUD needs to determine the economic conditions the  insurance fund would be expected to withstand without borrowing from  Treasury (drawing on permanent and indefinite budget authority).
Considering the importance of defining the economic conditions FHA  should withstand, as well as continuing uncertainty over the resolution of  Fannie Mae and Freddie Mac and the potential impact of their resolution  on FHA, in February 2013 we included FHA in a high-risk area called  “modernizing the U.S. financial regulatory system and the federal role in  housing finance.”
section_title: Actions to Improve Risk Assessment and Human Capital Management Are Still in Process
paragraphs: In November 2011, we reported on several weaknesses in FHA’s risk- assessment efforts. Specifically, we noted that:
FHA’s risk-assessment strategy was not integrated throughout the  organization. Although a consultant’s report recommended that FHA  integrate risk assessment and reporting throughout the organization,  the Office of Single Family Housing’s 2009 quality control initiative  (designed to strengthen internal controls and risk assessment) and  the Office of Risk Management’s activities remained separate  efforts. FHA officials noted that until the Office of Risk Management (which was created in 2010) set up a governance process, such  integration would not be possible. FHA officials stated they were  making every effort to help ensure that Office of Risk Management  activities complemented program office activities.
Contrary to HUD guidance, the Office of Single Family Housing had  not conducted an annual, systematic review of risks to its program  and administrative functions since 2009. According to an official in this  office, management intended to conduct an annual assessment but  changes in senior leadership in the office and the few staff available to  perform assessments (because of attrition and increased workload)  hampered these efforts.
The Office of Single Family Housing’s risk-assessment efforts did not  include procedures for anticipating potential risks presented by  changing conditions. The consultant’s report proposed a reporting  process and templates for identifying emerging risks. Office of Risk  Management officials told us that once they were operational, risk  committees would determine the exact design and content of these  reports and templates.
We concluded that all these factors limited FHA’s effectiveness in  identifying, planning for, and addressing risk. Based on the consultant’s  findings, as well as our internal control guidance and HUD guidance, we  recommended that FHA (1) integrate the internal quality control initiative  of the Office of Single Family Housing into the processes of the Office of  Risk Management, (2) conduct an annual risk assessment, and (3)  establish ongoing mechanisms—such as using report templates from the  consultant’s report—to anticipate and address risks that might be caused  by changing conditions. HUD agreed with our recommendations.
FHA has begun addressing recommendations made by the consultant.  For instance, in June 2012 it finalized the delegations of authority needed  for the Office of Risk Management and Regulatory Affairs to establish and  maintain risk-management policies, activities, and controls for FHA. It  also formed a Single Family Credit Risk Committee and an Operational  Risk Committee.
FHA also has begun addressing our November 2011 recommendations  by taking the following actions:
FHA has begun integrating its quality control initiatives into the  processes of the Office of Risk Management. For example, the Office  of Risk Management and Regulatory Affairs is reviewing the results of  quality control activities as it prepares baseline operational risk  assessments.
FHA developed a plan for conducting an inaugural annual risk  assessment (including preparing baseline operational risk  assessments) for the Office of Single Family Housing.
As previously noted, FHA has created committees to address credit  and operational risks. The charters for both committees indicate that  they are to discuss and address emerging risks. And, as part of the  annual risk-assessment process mentioned above, FHA plans to  identify emerging risks.
However, some of the initiatives taken in response to our  recommendations have not been completed or put fully in place. For  example, FHA does not expect to complete its inaugural risk assessment  until September 2013. These initiatives are critical to FHA’s efforts to  assess and manage risk.
Our November 2011 report also identified weaknesses in FHA’s human  capital management. Specifically, we noted that  leading organizations use workforce planning practices that include  defining critical skills and skill gaps, but FHA’s approach did not have  mechanisms for doing so or a current workforce plan.  contrary to our internal control standards and HUD guidance, FHA  also did not have a current succession plan. We noted that succession planning was particularly important because, as of July  2011, almost 50 percent of Single Family Housing staff at  headquarters were eligible to retire in the next 3 years. The  percentage of staff eligible to retire at the homeownership centers was  even higher—63 percent. Additionally, while single-family loan volume  grew significantly from 2006 to 2010, staffing levels for the Office of  Single Family Housing remained relatively constant.
We concluded that without a more comprehensive workforce planning  process that included succession planning, FHA’s ability to systematically  identify future workforce needs and plan for upcoming retirements was  limited. We recommended that FHA develop workforce and succession  plans for the Office of Single Family Housing. HUD agreed with our  recommendations.
Since our November 2011 report, FHA has developed a workforce  analysis and succession plan that identifies gaps in critical competencies  and additional steps that need to be taken, although the timing of many of  these steps is not specified. Completing these steps remains critical to  ensuring that the agency has adequate staff to effectively oversee its  mortgage insurance programs.
section_title: Opportunities Exist to Increase Efficiencies in HUD’s Voucher Program
paragraphs: We reported in March 2012 that appropriations for the voucher program  increased from $14.8 billion in 2005 to $18.4 billion in 2011 (about 24  percent). HUD disburses appropriated funds to housing agencies for  program expenses such as subsidy payments to landlords and  administrative costs. From 2003 through 2010, housing agencies’  expenditures increased from approximately $11.7 billion to $15.1 billion  (about 29 percent). After adjusting for inflation, total expenditures grew by  8.8 percent over this period.
Several factors affected voucher program costs from 2003 to 2010,  including (1) increases in subsidy costs for existing vouchers, (2) subsidy  costs for new vouchers, and (3) administrative fees paid to housing  agencies. After adjusting for inflation,  subsidy costs for existing vouchers grew 2.4 percent. Two factors  generally explain this growth—increasing rents and decreasing  incomes. First, rents outpaced inflation. As rents increase, HUD and  housing agencies must pay larger subsidies to cover the increases,  assuming no changes to household incomes. Second, tenant incomes  declined. Specifically, the median annual income of voucher-assisted  households fell about 3 percent (from about $11,000 to $10,700, in  2011 dollars). As incomes decline, assisted households pay less  towards rent, requiring larger subsidies to cover the difference  between rents and tenant payments.  subsidy costs for new vouchers grew 4.4 percent, accounting for half  the overall constant dollar increase in expenditures. Congress  increased the size of the program by adding new vouchers for groups  such as homeless veterans and nonelderly disabled households. administrative fees paid to housing agencies grew about 2 percent,  although the fees housing agencies have received over the years  have been less than the amount for which they were eligible due to  reductions in appropriations. Housing agencies noted that the cost of  doing business increased. For example, higher gasoline prices  contributed to higher inspection costs, especially for housing agencies  administering vouchers over large areas.
The design and goals of the voucher program also contributed to overall  program costs. The voucher program has various features to give priority  to the poorest households, and serving these households requires greater  subsidies. For instance, housing agencies must lease 75 percent of their  new vouchers to extremely low-income households. Despite increases in  program costs, our work and other published studies have found that  vouchers generally were more cost-effective in providing housing  assistance than federal programs designed to build or rehabilitate low- income housing.
subsections: section_title: Steps Congress and HUD Took to Manage Cost Increases
paragraphs: Since 2003, Congress and HUD have taken some actions to limit the  extent of increases, while maintaining assistance for existing program  participants. For example, in 2003, Congress changed the voucher  program’s funding formula to tie renewal funding for vouchers to actual  costs and leasing rates, rather than the number of authorized vouchers  (used or unused). Also, each year since 2004, Congress has provided  administrative fees that were at least 6 percent lower than the 2003 rate.
HUD has also taken steps to increase program efficiencies. For example,  according to HUD reports, steps taken by the agency have reduced  improper payments (subsidy over- and underpayments) from $1.1 billion  in 2000 to $440 million in 2009. These steps include providing housing  agencies with fraud detection tools, such as the Enterprise Income  Verification system, which makes tenant income and wage data available  to housing agencies. This system was fully implemented in 2005. In 2010,  HUD began studying the administrative fee structure for the voucher  program to ascertain how much it costs a housing agency to run an  efficient program. Because the study is ongoing, the extent to which it will  identify ways to improve efficiency is not yet clear.
section_title: Options to Reduce Program Costs or Increase Efficiencies
paragraphs: We identified several options that if implemented effectively, could reduce  voucher program costs or allow housing agencies to assist additional  households. Each option would require congressional action to  implement. These options, which include rent reform and administrative  consolidation, also involve difficult policy decisions that will affect some of  the most vulnerable members of the population and alter long-standing  program priorities and practices.
Improved information on the level of subsidy reserve funding housing  agencies should maintain could aid budget decisions and reduce the  need for new appropriations. Housing agencies have accumulated  subsidy reserves (unspent funds) that Congress could use to (1) reduce  program appropriations (through a rescission and offset) and potentially  meet other needs or (2) direct HUD to assist more households.agencies may under-lease or receive more funding than they can spend  in a year. Unless rescinded and offset, housing agencies can keep  unused subsidy funding in reserve accounts and spend it (for authorized  expenses) in future years. As of December 31, 2012, 2,178 housing  agencies had a total of approximately $1.2 billion in subsidy reserves.
HUD has requested the authority to offset and, in some cases,  redistribute “excess” reserves (those beyond what is needed to fund  defined contingencies). But HUD has not developed specific or consistent  criteria defining what constitutes excess reserves or how it would  redistribute funding among housing agencies. For example, HUD officials  told us that housing agencies should retain approximately 8.5 percent (or  1 month’s worth) of their annual funding allocations in reserves. However,  in its 2010 and 2011 budget proposals, HUD defined excess reserves as  those above 4 and 6 percent, respectively, of allocated amounts.
In our March 2012 report, we concluded that providing Congress with  better information on subsidy reserves could help ensure that disbursed  funds would be used to assist households rather than remain unused.We recommended that HUD provide information to Congress on (1) the  estimated amount of excess subsidy reserves and (2) criteria for how it  will redistribute excess reserves among housing agencies. HUD neither  agreed nor disagreed with our recommendations. However, HUD officials  subsequently told us that, upon request, they provide information to  HUD’s Appropriations Committee on subsidy reserve levels, including  balances above certain minimum reserve levels. We will continue to  monitor the agency’s progress in implementing our recommendations.
As we indicated in our March 2012 report, in various budget requests for  2004 through 2012, HUD requested the authority to put in place reforms  that could decrease voucher program subsidy costs, administrative costs,  or both. These reforms include streamlining complex and burdensome  requirements and improving the delivery and oversight of rental  assistance. For example, housing agencies must re-examine household  income and composition at least annually. HUD wants to extend the time  between re-examinations from 1 year to 3 years and between unit  inspections from 1 year to 2 years. According to one program  administrator, annual re-examinations and inspections account for more  than 50 percent of administrative costs in the voucher programs the  agency administers. Although some of the changes needed to simplify  and streamline the voucher program would require congressional action,  HUD’s forthcoming study of the program’s administrative fee structure  and the experiences of housing agencies in the MTW program may  provide insight into specific reforms to ease administrative burden.
We recommended in our March 2012 report that HUD consider proposing  to Congress options for streamlining and simplifying the administration of  the voucher program and making corresponding changes to the  administrative fee formula to reflect any new or revised administrative   We stated that such proposals should be informed by  requirements.results of HUD’s ongoing administrative fee study and the experience of  the MTW program. HUD neither agreed nor disagreed with our  recommendations. As of March 2013, HUD had not made such proposals  to Congress.
If implemented, rent reform (that is, changes to the calculation of  households’ payment toward rent) and the consolidation of voucher  administration under fewer housing agencies could yield substantial cost  savings, allow housing agencies to serve additional households if  Congress were to reinvest annual cost savings in the voucher program, or  both. Furthermore, these options are not mutually exclusive; that is, cost  savings or additional households served could be greater if both options  were implemented.
Because about 90 percent of voucher program funds are used to pay  subsidies, decreasing the subsidy (or, alternatively stated, increasing the  household contribution toward rent) will yield the greatest costs savings.  As shown in table 1, our March 2012 report estimated the effect of  several options that change the minimum rents households must pay or  different formulas for calculating what tenants pay. For example,  increasing minimum rents to $75 would yield an estimated $67 million in  annual cost savings or allow housing agencies to serve an estimated  8,600 additional households. Requiring assisted households to pay 30  percent of their gross income (rather than net income) in rent would yield  an estimated annual savings of $513 million or allow housing agencies to  serve an estimated 76,000 additional households.
While each of these options could reduce costs or create administrative  efficiencies—each also involves trade-offs. Under each option, some  households would have to pay more in rent than they currently pay. From  2 to 92 percent of households would experience an increase in their  monthly payment: setting a minimum rent of $50 would affect the fewest  households and increasing rent to 35 percent of adjusted income would  affect the most. The options also would have varying effects on different  types of households (such as families with children, persons with  disabilities, and the elderly). We noted disparities by geographic area  (such as high-cost versus low-cost rental markets) as well. For example,  setting household rental payments based on a percentage of the  applicable fair market rent would place greater burdens on households in  high-cost areas.
We concluded in our March 2012 report that consolidating voucher  program administration under fewer housing agencies could yield a more  efficient oversight and administrative structure and cost savings for HUD  and housing agencies. HUD spends considerable resources in  overseeing the more than 2,400 housing agencies that administer the  voucher program. According to a 2008 HUD study, the department  dedicated from more than half to two-thirds of its level of oversight to 10  percent of its units (generally, housing agencies that administered 400 or  fewer vouchers and about 5 percent of total program funds). According to  agency officials, consolidating voucher administration under fewer  agencies would decrease HUD’s oversight responsibilities. However,  current information on the magnitude of these savings was not available  when we conducted our 2012 review.
section_title: Opportunities Exist to Improve Information on and Monitoring of the MTW Program
paragraphs: As we reported in April 2012, HUD has not identified standard  performance data and indicators needed to evaluate the MTW program.  Housing agencies in the MTW program report annually on their activities,  which include efforts to reduce administrative costs and encourage  residents to work. However, the usefulness of this information is limited  because, in some cases, it is not outcome-oriented. For example, for  similar activities designed to promote family self-sufficiency, one MTW  agency reported only the number of participants, which is generally  considered an output, and another did not provide any performance  information. In contrast, a third agency reported on the average income of  program graduates, which we consider an outcome. To be consistent with  the GPRA Modernization Act, HUD’s guidance on reporting performance  information should indicate the importance of outcome-oriented   Without more specific guidance on the reporting of  information.performance information—for example, to report quantifiable and  outcome-oriented information—HUD cannot be assured of collecting  information that reflects the outcomes of individual activities.
Our April 2012 report also noted that HUD has not identified the  performance data that would be needed to assess the results of similar  MTW activities or of the program as a whole. Researchers and others  have noted the limitations of the program’s initial design in terms of  evaluation. Specifically, it lacks standard performance data. Obtaining  performance information from demonstration programs that are intended  to test whether an approach (or any of several approaches) can obtain  positive results is critical. This information helps determine whether the program has led to improvements consistent with its purposes. HUD  started collecting additional data from MTW agencies (including  household size, income, and educational attainment), but has not yet  analyzed the data. And since 2009, HUD required agencies to provide  information on the impact of activities, including benchmarks and metrics,  in their annual MTW reports. While these reports are informative, they do  not lend themselves to quantitative analysis because the reporting  requirements do not call for standardized data, such as the number of  residents who found employment. Whether these data are sufficient to  assess similar activities and the program as a whole is not clear, and  HUD has not identified the data it would need for such an assessment.
HUD also has not established performance indicators for the MTW  program. The GPRA Modernization Act requires that federal agencies  establish efficiency, output, and outcome indicators for each program  activity as appropriate. Internal control standards also require the  establishment of performance indicators. As we noted in 2012, specific  performance indicators for the MTW program could be based on the three  statutory purposes of the program. For example, agencies could report on  the savings achieved (reducing costs). However, without performance  indicators HUD cannot demonstrate the results of the program.
The shortage of analysis and performance indicators has hindered  comprehensive evaluation efforts, although such evaluations are key to  determining the success of any demonstration program. We  recommended that HUD (1) improve its guidance to MTW agencies on  providing performance information in their annual reports by requiring that  such information be quantifiable and outcome-oriented, (2) develop and  implement a plan for quantitatively assessing the effectiveness of similar  activities and for the program, and (3) establish performance indicators  for the program. HUD generally agreed with our recommendations.  Consistent with our recommendations, HUD has taken initial steps to  revise performance reporting requirements for MTW agencies, but these  requirements had not yet been finalized as of March 2013.
Furthermore, as we indicated in our 2012 report, while HUD has identified  some lessons learned on an ad hoc basis, it does not have a systematic  process in place for identifying such lessons. As previously noted,  obtaining impact information from demonstration programs is critical.
Since 2000, HUD has identified some activities that could be replicated by  other housing agencies. For example, a HUD-sponsored contractor  developed five case studies to describe some of the issues involved in  implementing the MTW demonstration. However, these and subsequent  efforts have shortcomings. In most cases, the practices were chosen  based on the opinions of HUD or contracted staff and largely involved  anecdotal (or qualitative) data rather than quantitative data. Also, HUD  has not established criteria, such as demonstrated performance, for  identifying lessons learned or made regular efforts to review and identify  lessons learned. Because HUD does not currently have a systematic  process for identifying lessons learned, it is limited in its ability to promote  useful practices that could be implemented more broadly. Thus, we  recommended that HUD create a process to systematically identify  lessons learned. In response to this recommendation, HUD stated that  once its revised reporting requirements were implemented, the resulting  data would inform an effort to establish lessons learned.
subsections: section_title: HUD Could Strengthen Monitoring Policies and Procedures
paragraphs: HUD has policies and procedures in place to monitor MTW agencies but  could do more to ensure that MTW agencies demonstrate compliance  with statutory requirements and to identify possible risks relating to each  agency’s activities. For example, as noted in our 2012 report, HUD has  not issued guidance to participating agencies clarifying key program  terms, including definitions of the purposes and statutory requirements of  the MTW program. Internal control standards require the establishment of  clear, consistent goals and objectives. Agencies also must link each of  their activities to one of the three program purposes cited in the MTW  authorizing legislation. However, HUD has not clearly defined what the  language in some of these purposes means, such as “increasing housing  choices for low-income families.” HUD officials told us that they plan to  update their guidance to MTW agencies to more completely collect  information related to the program’s statutory purposes and requirements.  They acknowledged that the guidance could be strengthened. As a first  step, they noted that they planned to require agencies to define “self- sufficiency” by choosing one of the definitions provided by HUD or  creating their own. Without clarifying key terms and establishing a  process for assessing compliance with statutory requirements, HUD lacks  assurance that agencies are complying with the statute.
Additionally, our 2012 report indicated that HUD only recently assessed  agencies’ compliance with two self-certified requirements (to serve  substantially the same total number of eligible low-income families that  they would have served had funding amounts not been combined and  ensure that at least 75 percent of households served are very low  income). Further, HUD has not assessed compliance with the third self- certified requirement (to maintain a comparable mix of families). Internal  control standards require control activities to be in place to address  program risks. In addressing these risks, management should formulate  an approach for assessing compliance with program requirements.  Without a process for systematically assessing compliance with statutory  requirements, HUD lacks assurance that agencies are complying with  them.
Furthermore, as we reported in 2012, HUD has not annually assessed  program risks, despite its own requirement to do so, and has not  developed risk-based monitoring procedures. HUD’s internal control  standards require program offices to perform an annual risk assessment  of their programs or administrative functions using a HUD risk- assessment worksheet. By not performing annual risk assessments or tailoring its monitoring efforts to reflect the perceived risk of each MTW  agency, HUD lacks assurance that it has properly identified and  addressed risks that may prevent agencies from addressing program  purposes and meeting statutory requirements. HUD also lacks assurance  that it is efficiently using its limited monitoring resources.
Finally, our 2012 report indicated that HUD does not have policies or  procedures in place to verify the accuracy of key information that  agencies self-report, such as the number of program participants and the  average income of program graduates. Internal control standards and  guidance emphasize the need for federal agencies to have control  activities in place to help ensure that program participants report  information accurately. For example, HUD staff do not verify self- reported performance information during their reviews of annual reports  or annual site visits. GAO guidance on data reliability recommends  tracing a sample of data records to source documents to determine  whether the data accurately and completely reflect the source  documents.performance information, it lacks assurance that this information is  accurate. To the extent that HUD relies on this information to assess  program compliance with statutory purposes and requirements, its  analyses are limited.
Because HUD does not verify the accuracy of any reported  To improve HUD’s oversight over the MTW program, we recommended in   April 2012 that HUD (1) issue guidance that clarifies key program terms,  such as the statutory purposes and requirements MTW agencies must  meet; (2) develop and implement a systematic process for assessing  compliance with statutory requirements; (3) conduct an annual risk  assessment for MTW and implement risk-based monitoring policies and  procedures; and (4) implement control activities to verify the accuracy of a  sample of the performance information that MTW agencies self-report.  HUD partially agreed with our recommendations, citing potential  difficulties in verifying MTW performance data. HUD also described steps  it was taking to improve its guidance to MTW agencies and implement  risk-based monitoring procedures. As of March 2013, this guidance had  not yet been finalized. Without more complete information on program  effectiveness and compliance, it will be difficult for Congress to know  whether an expanded MTW program would benefit additional agencies  and the residents they serve.
Mr. Chairman, Ranking Member Pastor, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy  to respond to any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact me at 202- 512-8678 or sciremj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Daniel Garcia-Diaz, Director; Paige Smith, Assistant Director;  Steve Westley; Assistant Director; Stephen Brown; Emily Chalmers;  William Chatlos; Cory Marzullo; John McGrail; Marc Molino; Lisa Moore;  Daniel Newman; Lauren Nunnally; José R. Peña; Josephine Perez; Beth  Reed Fritts; Barbara Roesmann; and Andrew Stavisky.
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