HUD is the principal federal agency responsible for programs dealing with housing and community development and fair housing opportunities. Its missions reflect a broad range of statutory mandates, ranging from making housing affordable by insuring loans for multifamily projects and providing assistance on behalf of about 4.5 million lower-income tenants, to helping revitalize over 4,000 communities through community development programs, to encouraging homeownership by providing mortgage insurance to about 7 million homeowners who might not have been able to qualify for conventional loans. The diversity of HUD’s missions has resulted in a department that is intricately woven into the financial and social framework of the nation and that interacts with a diverse number of constituencies. For example, thousands of public housing authorities (PHA) and many more private housing owners are key players in administering HUD’s public housing and Section 8 rental housing programs and depend on subsidies from the Department to operate. HUD’s programs also operate through other governmental entities, such as state housing finance agencies, nonprofit groups, and state and local governments. In carrying out its missions, HUD is responsible for a significant amount of tax dollars: The discretionary budget outlays for HUD’s programs were estimated to be close to $31.8 billion in fiscal year 1995, over three-quarters of which was for public and assisted housing programs. In addition, HUD is currently one of the nation’s largest financial institutions, with significant commitments, obligations, and exposure: It has management responsibility and potential liability for more than $400 billion of mortgage insurance, an additional $485 billion in outstanding securities, and over $200 billion in prior years’ budget authority for which it has future financial commitments. In February 1995, we reported that HUD’s top management had begun to focus attention on overhauling the Department’s operations to correct its long-standing management deficiencies—an ineffective organizational structure, an insufficient mix of staff with the proper skills, weak internal controls, and inadequate information and financial management systems.The agency had formulated a new management approach and philosophy that included balancing risks with results, had begun implementing a substantial reorganization of field offices, and had initiated a number of other actions that would address the four management deficiencies. Over the past year, HUD has continued many of these efforts, but problems remain. For example, in September 1995, HUD completed its field reorganization, which eliminated 10 regional offices and transferred direct authority for staff and resources to the Assistant Secretaries. In January 1996, HUD announced additional efforts to empower the field office personnel and continue the Secretary’s efforts to implement the “community first” philosophy by streamlining headquarters and reducing headquarters’ staffing by 40 percent over 2 years. Many of the headquarters staff will be transferred to the field to enhance the agency’s efforts to be more responsive to local communities. According to the HUD Inspector General’s (IG) most recent semiannual report, while field staff endorsed the elimination of the regional management layer, they reported that communication and cooperation among the program offices had suffered badly and that the promised empowerment of field staff had not materialized. In the area of internal controls, the Department’s new management control program was fully implemented over the past year, according to HUD officials. This program is intended to tie planning with risk-abatement strategies. Under the program, managers, as they develop annual management plans, are to identify and prioritize the major risks in each of their programs and then describe how these risks will be abated. According to HUD officials, all of the program offices’ fiscal year 1996 annual management plans contained management control elements, including risk-abatement strategies. Despite improvements, internal controls continue to be a problem. On June 30, 1995, outside auditors issued a disclaimer of opinion on HUD’s fiscal year 1994 consolidated financial statements because weaknesses in internal control and “nonconformances” in systems remained uncorrected.HUD’s most serious internal control weaknesses pertain to its approximately $13 billion grant and subsidy payments to public and Indian housing authorities, including $9.5 billion of its operating subsidies and Section 8 rental assistance. The auditors noted that the existing internal controls and financial systems do not provide adequate assurance that the amounts paid under these programs are valid and correctly calculated, considering tenants’ income and contract rents. As a result, HUD lacks sufficient information to ensure that federally subsidized housing units are occupied by needy lower-income families and that those living in such units are paying the correct rents. In 1995, the Department continued to make progress toward its goals of integrating financial systems, but much remains to be done. During the year, HUD implemented its new administrative accounting system and integrated the system for Public, Indian, and Section 8 housing. In addition, all of the program offices have completed Information Strategy Plans, which identify business and information needs. Despite these efforts, as of September 1995, HUD had 88 systems in operation or under development, 60 of which are generally not in compliance with the provisions of Office of Management and Budget (OMB) Circular A-127.HUD’s financial systems continue to be identified as high-risk by OMB. The Department deserves credit for its continued emphasis on addressing its long-standing management deficiencies, including a fundamental restructuring of the agency. However, departmental restructuring is still far from being accomplished. HUD’s challenge will be to continue to sustain its focus and commitment to addressing the agency’s long-standing deficiencies while at the same time downsizing the agency, devolving authority to field offices, and providing greater program flexibility to communities. As HUD and the Congress continue to look at ways to reform the Department, they will face the challenge of finding the proper balance between local flexibility and authority and proper accountability for federal funds. Furthermore, until the Department completes its goal of integrating financial management systems, which remains years away, the lack of good information will plague the Department in many areas and limit its capacity to adequately monitor funds. Substantially restructuring programs and providing greater local flexibility to communities will in all likelihood also require new systems. While HUD has formulated approaches and initiated actions to address its department-wide deficiencies, these plans are far from reaching fruition and problems continue. In addition, we believe that until the agency and the Congress are successful in working through the proposals for a major restructuring of the agency, which include consolidating hundreds of program activities, HUD has only a limited capacity to eliminate the Department-wide deficiencies that led us to designate it as high-risk. Accordingly, we believe that both now and for the foreseeable future, the agency’s programs will be high-risk in terms of their vulnerability to waste, fraud, and abuse. As of September 30, 1995, FHA’s portfolio of insured multifamily loans consisted of 15,785 mortgages with unpaid principal balances of $47.7 billion. About $38.5 billion of the insurance supports more than 14,000 multifamily apartment properties. The remainder of the insurance supports hospitals ($4.9 billion) and nursing homes ($4.3 billion). In addition to mortgage insurance, most of the FHA-insured properties receive some form of direct assistance or subsidy, such as below-market interest rates or Section 8 project-based rental assistance. HUD also provides Section 8 project-based assistance for properties that are not insured by FHA. According to HUD’s data, the Department has 6,391 Section 8 contracts with projects not insured by FHA containing about 375,000 units receiving project-based assistance. The fundamental problems that HUD faces in overseeing the multifamily housing portfolio, which we discussed before this Subcommittee last year, continue. Specifically, for a large proportion of this housing, the government is paying more to house lower-income families than what is needed to provide them decent, affordable housing. The insured multifamily properties also expose the federal government to substantial current and future financial liabilities from default claims. A 1993 study of multifamily rental properties with HUD-insured or HUD-held mortgages found that almost one-fourth of the properties reviewed were “distressed.” Properties were considered distressed if they failed to provide sound housing and lacked the resources to correct deficiencies or if they were likely to fail financially. The reasons for these problems are varied, including design flaws in programs; the Department’s dual role as assistance provider and insurer; and long-standing deficiencies in staffing, data systems, and management controls. Program design flaws have resulted in HUD’s subsidizing rents at many properties that are far above market rents. In particular, this problem occurs under HUD’s Section 8 new construction and substantial rehabilitation programs, in which the Department paid for the initial costs of development by establishing rents above the market levels and continued to raise the rents regularly. HUD’s dual role as assistance provider and insurer has contributed to inadequate enforcement of the Department’s standards for the condition of properties and decisions by the agency to increase subsidies in order to avoid claims stemming from loan defaults. In addition, as noted in our June 1995 report on default prevention, inadequate management has resulted in poor living conditions for families with low incomes in a number of insured multifamily properties and contributed to a large number of past and anticipated defaults on FHA-insured loans. During this past year, HUD has attempted to address these problems through a legislative proposal known as “mark to market.” The proposal was applicable to about 8,500 properties that both have FHA insurance and receive Section 8 project-based assistance. According to HUD’s data, project-based assistance is provided for approximately 700,000 of the 855,000 apartment units covered. The proposal was aimed at ending the interdependence of subsidies and insurance claims, eliminating the excess Section 8 subsidy costs, and improving the physical condition of properties in poor condition—generally older properties with low rents.