Created in 1965, the Department of Housing and Urban Development (HUD) carries out the federal government’s missions, policies, and programs in housing and community development. Its activities are designed to implement a broad range of statutory mandates, from making housing affordable, to helping revitalize communities, to supporting homeownership. Since 1965, HUD has grown to include some 240 programs and activities and hundreds of billions of dollars in financial commitments. Its annual outlays for fiscal year 1995 were about $29 billion. Studies performed by HUD’s Office of Inspector General, the National Academy of Public Administration (NAPA), GAO, and others have documented inefficiencies in organization and deficiencies in management that impede the effectiveness of HUD’s programs. Leaders in the administration and the Congress agree that HUD must, at a minimum, be restructured to better meet the nation’s housing and community development needs. Some policymakers believe that HUD’s problems are so great that they can be cured only by dismantling the agency and transferring or eliminating its functions. This report focuses on the two most recent proposals to dismantle HUD—S. 1145 and H.R. 2198. For convenience, we refer to both bills, which are identical, as S. 1145. As a new cabinet-level department, HUD took over most, though not all, of the federal housing and community development functions that had been located in independent agencies. Its focus, as defined in the legislation that created it, was primarily urban—”. . . the sound development of the Nation’s communities and metropolitan areas.” HUD took over the rental assistance and low-income housing production functions of the Public Housing Administration and the Housing and Home Finance Agency, the mortgage insurance functions of the Federal Housing Administration (FHA), and the secondary market functions for government-insured and guaranteed loans. HUD did not, however, take over the housing programs administered by the Veterans Administration (VA) and the Rural Housing Service or the economic development programs operated by the Department of Commerce. In addition, HUD does not control the tax policies that affect housing, such as the homeowner’s deductions for mortgage interest and property taxes, and it does not oversee all of the financial institutions, such as banks, savings and loans, and mortgage companies, that participate in the nation’s mortgage markets. Even though HUD has not assumed all of the nation’s housing functions, it has primary responsibilities for programs in four areas—housing assistance, community development, housing finance, and regulatory issues. • Housing Assistance: HUD provides (1) public housing assistance through allocations to public housing authorities and (2) private-market housing assistance through rental subsidies for properties, referred to as project-based assistance, or for tenants, known as tenant-based assistance. In contrast to entitlement programs, which provide benefits to all who qualify, the benefits of HUD’s housing assistance programs are limited by budgetary constraints to only about one-fourth of those who are eligible. • Community Development: Primarily through grants to states, large metropolitan areas called entitlement areas, small cities, towns, and counties, HUD provides funds for local economic development, housing development, and assistance to the homeless. The funding for some programs, such as those for the homeless, may also be distributed directly to nonprofit groups and organizations. • Housing Finance: FHA insures lenders—including mortgage banks, commercial banks, savings banks, and savings and loan associations—against losses on mortgages for single-family properties, multifamily projects, and other facilities. The Government National Mortgage Association (Ginnie Mae), a government-owned corporation within HUD, guarantees investors the timely payment of principal and interest on securities issued by lenders of FHA-insured and VA- and Rural Housing Service-guaranteed loans. • Regulatory Issues: HUD is responsible for regulating interstate land sales, home mortgage settlement services, manufactured housing, lead-based paint abatement, and home mortgage disclosures. The Office of Federal Housing Enterprise Oversight, an independent office within HUD, is responsible for regulating the safety and soundness of Fannie Mae and Freddie Mac. HUD also supports fair housing programs and is partially responsible for enforcing federal fair housing laws. To carry out its many responsibilities, HUD was staffed by about 10,500 employees at the end of fiscal year 1996. Through its programs, HUD makes housing affordable for about 4.5 million lower-income tenants, helps to revitalize over 4,000 communities, and has insured mortgages for about 23 million homeowners. In addition, as a cabinet-level department, HUD has given visibility and priority to housing and community development issues and has built up networks for implementing its programs. In some instances, HUD’s offices have pioneered the development of services. For example, FHA initiated home mortgages with very small down payments and reverse mortgages. Despite these accomplishments, HUD has, over the years, developed both administrative and programmatic problems. In 1994, GAO designated HUD as a high-risk agency because of four long-standing management deficiencies—weak internal controls; poorly integrated, ineffective, and generally unreliable information and financial management systems; an ineffective organization; and an insufficient mix of staff with the proper skills. Internal control weaknesses, such as not having the necessary data and management processes, contributed to the HUD scandals of 1989. Deficient information and financial management systems have not supported program managers’ needs or provided adequate control over housing and community development programs. Organizational problems have included overlapping and ill-defined responsibilities and authorities between the Department’s headquarters and field organizations and a fundamental lack of management accountability and responsibility. Not having enough staff with the proper skills has hampered the monitoring and oversight of programs and delayed the updating of procedures. While HUD has formulated approaches and initiated actions to address its departmentwide deficiencies, its efforts are far from reaching fruition and problems continue. In response to legislation and other initiatives, programs were created with missions that overlap or are linked only tangentially to primary missions within HUD. In December 1994, HUD’s Inspector General recommended eliminating, consolidating, or restructuring many of HUD’s 240 programs and activities, 91 of which, the Inspector General said, were questionably related to the Department’s primary mission. We reported that several of the larger programs on this list seemed to contribute directly to meeting the housing needs of low-income people. However, we estimated that 27 programs listed by the Inspector General could be reassessed to determine the need for them and their relative value in achieving HUD’s mission. Other problems cited by the Inspector General included disproportionately high administrative costs, inflexible program requirements, and a multiplicity of programs with similar objectives that promote separate federal and local bureaucracies. Until the problems that we and the Inspector General identified are resolved, HUD’s programs are likely to remain vulnerable to waste, fraud, and abuse. Further exacerbating these concerns is the need to reduce discretionary spending governmentwide over the next several years to balance the budget by early in the next century. Most balanced budget plans include a freeze in discretionary spending at current nominal levels, meaning that by the year 2002, spending will be nearly 20 percent lower than it would be if it were allowed to increase with inflation. HUD’s problems have led to studies and proposals for change, including the administration’s reinvention plans, the National Academy of Public Administration’s (NAPA) study, and several bills to reorganize or dismantle HUD. These proposals uniformly recognize the need to revise the delivery of housing and community development services. They also recognize that budgetary constraints dictate changes. However, the proposals differ in the role they envision for the federal government. The administration’s initial reinvention plans, introduced in December 1994, assume the need for a cabinet-level housing and community development agency and focus on restructuring and consolidating programs. Initially, the plans proposed to (1) remove public housing authorities from HUD’s subsidy programs and make them compete in the private market; (2) consolidate 60 major categorical programs into three flexible, performance-based funds; and (3) transform FHA into a results-oriented, financially accountable credit-enhancement operation. In 1996, the administration updated its plans, retaining most of the provisions but revising the proposal for public housing. Under the current plans, HUD would continue to subsidize public housing but would consolidate and streamline programs to improve its delivery of services to low-income residents. The NAPA study, issued in July 1994, recommended that the Congress and HUD restructure the agency to consolidate its programs and reform its management. The study suggested that if HUD did not operate under a clear mandate and in an effective manner in 5 years, its existence should be reevaluated. In addition, the study recommended that HUD modify its operations and work from the bottom up rather than from the top down, supporting local initiatives consistent with its mission instead of imposing its own strategies on localities. For most programs, the study proposed a shift in decision-making authority from headquarters to the field and from the federal government to the state or local level. Finally, the study recommended that the Congress give HUD broad waiver and demonstration authority to allow the states to experiment with changes in their housing and community development programs. Between February 1995 and August 1995, the 104th Congress introduced five bills in the House and Senate to dismantle HUD. These bills would move farther than the NAPA study in shifting power from the federal government to the states, and they would transfer some governmental responsibilities to the private sector. Furthermore, they would transfer the remaining federal responsibilities to other federal agencies and terminate HUD’s existence. The two most recent bills—S. 1145 and H.R. 2198—are the subject of this report. For convenience, we refer to both bills, which are identical, as S. 1145.