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TUESDAY, MAY 4, 1999
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 2 p.m., in room 2129, Rayburn House Office Building, Hon. Rick Lazio, [chairman of the subcommittee], presiding.

    Present: Chairman Lazio; Representatives Ney, Green, Kelly, Hill, Sweeney, Terry, Metcalf, Leach (ex officio), Frank, J. Maloney of Connecticut, Hooley, Weygand, Vento, Goode, S. Jones of Ohio, and Capuano.

    Chairman LAZIO. Good morning. The hearing shall come to order.

    I want to welcome all of our witnesses and all of the guests who are here in attendance. This promises to be both an important and informative hearing.

    Let me begin by thanking all of the witnesses for being here. Your thoughts on what is an extremely important issue affecting so many vulnerable Americans will be critical in helping us fashion a solution to a problem that demands action. Those involved in Federal housing programs understand the issue. This issue is commonly referred to as the Section 8 opt-out problem.
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    In a nutshell, contracts between the Federal Government and private owners of housing properties, Section 8 contracts, are beginning to expire. These contracts require owners to rent their properties at levels that would make units affordable to low-income persons in return for Section 8 subsidy payments by the Federal Government.

    What we will learn today is that many of these Section 8 owners are choosing not to renew their contracts with the Federal Government. They are opting out. The result is that residents of these projects are suddenly at risk of losing their housing because of potential rent increases they cannot absorb. Many live in areas where vouchers will do them little good because of the shortage of available housing. Many are elderly who have lived in these developments for twenty years and are now at risk of being displaced.

    Owners committed to providing affordable housing are frustrated with how the Federal Government is managing the program, and HUD has over the last year been bedeviled by the problems, searching for a solution. Many residents and their families are frightened. Too many feel they have nowhere to turn.

    We will not stand by while seniors and the most vulnerable among us are forced from their homes or tormented with a choice between shelter or buying needed food and medicine. In late March Chairman Leach, Representative Jim Walsh, the Chairman of the VA, HUD and Independent Agencies Appropriations Subcommittee, and I introduced H.R. 1336, the Emergency Resident Protection Act of 1999, to address this critical problem. Our proposal directs HUD to provide senior citizens and persons with disabilities with sufficient housing assistance to ensure their continued residency in their present apartments.
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    The legislation also seeks to preserve the affordable housing units themselves by setting stronger parameters for HUD to come to renewal terms with owners, requiring the Department to use their authority to encourage renewals where appropriate. I am certainly grateful for Chairman Leach's leadership on this issue and for his appearance here today. His immediate response to the evolving problem, particularly in his home State of Iowa, is a testament to his valuable service to constituents and to this country.

    Representative Frank, the subcommittee's Ranking Member, as well as Representative Vento have also been closely involved in this issue, and I look forward to working with them to move our proposal forward as quickly as possible.

    Finally, I would like to note that HUD has pledged to work hand in hand with Congress to improve the legislation, and I look forward to that collaboration as well. I am confident that recognizing the urgent need for additional resident protections and the growing loss of affordable housing, we can find an appropriate bipartisan solution to what is the country's most grave housing crisis this year.

    Chairman LAZIO. I now turn to Mr. Frank.

    [The prepared statement of Hon. Rick Lazio can be found on page 44 in the appendix.]

    Mr. FRANK. Thank you, Mr. Chairman. You are right, this is a problem that we are absolutely obligated to solve because it is a problem that poor public policy planning a few decades ago created. The notion that we would allow people who are now happy, housed in decent housing, to lose that housing because of some failure on our part in public policy is unthinkable. There are difficult problems that we cannot solve, but this is an easy problem that we created, and I think we should deal with it.
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    It will, as you note, take cooperation between this subcommittee and the appropriators, between the Congress and HUD, and I am pleased that we have set a good mark for that kind of cooperation. I was very happy to accompany Secretary Cuomo to a press conference. The Chairman of the committee was here and some others. I was glad to see HUD using the fullest authority that they now have to deal with this problem, and there are things that we can do to enhance that, and I hope that we will do them.

    I would like to include in the record the opening statement of the Ranking Member on the Minority side, Mr. LaFalce.

    Chairman LAZIO. Without objection, so ordered.

    [The prepared statement of Hon. John J. LaFalce can be found on page 46 in the appendix.]

    Chairman LAZIO. Let me turn to the Chairman of the full panel, the gentleman from Iowa, Mr. Leach.

    Mr. LEACH. Thank you.

    I want to thank you for holding this hearing. This is a very difficult subject matter, and your leadership is appreciated. And I would also say Mr. Frank, probably more than any Member of this subcommittee, has continually reminded us about the difficulty of the appropriations process in housing programs, and I think he has been right more often than not. And I think he made a very thoughtful notation at the press conference earlier last week, I guess, when he indicated that there will be some costs, but the alternatives could be more expensive. I think Mr. Frank was exactly right in saying it in those terms.
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    The real trauma is that the better the housing project and the better the location, the greater the incentive to pull out of the Federal program. And so those owners with the best projects are the ones with the greatest incentive to leave the Government system.

    The other dilemma that is going to be so difficult for us in Congress is that there is a clear cost this year of putting in some incentives to ensure that elderly citizens are protected, but that cost grows each year because each year there is a new group of housing projects that come off the 20-year list, and so we are looking at a longer-term liability than any of us would like as a Federal Government.

    And so what we have to be making clear is that there is a cost, and what are the alternatives. If the alternatives are emptying housing projects of long-term tenants that are of some age, that is socially unacceptable. By the same token, how we do it in such a way that the public is best protected also becomes a challenge for those of us in Congress. But this is a very, very sticky fiscal dilemma, one that is going to take a lot of good judgment at the administrative agency, which is HUD, as well as this subcommittee. And I thank you for holding this hearing.

    Chairman LAZIO. Thank you, Mr. Chairman.

    Mr. Vento.

    Mr. VENTO. I appreciate you holding this hearing, and from the onset I want to recognize the work from my home State of Minnesota on preserving federally assisted housing, and I would ask unanimous consent to place in the record the statement of Governor Ventura and Commissioner of the Minnesota Housing and Finance Agency, Kit Hadley.
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    Chairman LAZIO. Without objection, so ordered.

    [The statements referred to can be found on page 52 in the appendix.]

    Mr. VENTO. I regret that we tried to have a tenant from Minnesota recommended by my office with the support of the Ranking Member testify, but they were not afforded the opportunity. I understand the need to move through the hearing today, but I think it would be helpful to have some testimony from individuals that are affected by this. I note that there is one person on the panel today, but others would have been helpful.

    Anyway, moving beyond that, last week in this room we shared a good moment in housing. Secretary Cuomo and Secretary Apgar told us that HUD could and indeed would use the authority given to the Department by Congress to address the serious opt-out situation on target bases across the country.

    The reason that I point out Minnesota is that we have had some critical problems. They point out that eight out of nine households with Section 8 certificates and three out of four with vouchers are unable to find housing and are forced to return the assistance. This points to the fact that vouchers alone in this case are not going to work to solve our problem.

    Beyond that, Mr. Chairman, I think we have the opportunity to do a lot more. They have, in fact, with some $10 million a year in funding for the last year saved nearly 2,000 affordable housing units with the program that I have envisioned and put together with Congressman Ramstad in H.R. 425. This is a program and method that works. The efforts are yielding results which will assure affordability for fourteen to twenty-one more years. Those are the nature of the commitments that they have been able to attain. We have been joined by nearly 40 of our colleagues in sponsoring that measure, which would enable the national Government to match the efforts in States like Minnesota so we can get back to the business of making commitments to people and neighborhoods and communities across the Nation.
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    While few States currently have programs, we have a successful track record to emulate. The method and idea works. With the enactment of such a policy, Congress could encourage other States, local governments, nonprofits to provide the resources and form the partnerships that will be necessary to address the affordable housing crisis, full partners of the State resources and the ability to target for objects and programs within the State, tailoring the commitments to their needs and to the reality of their local neighborhoods.

    This concept, H.R. 425, is to empower States to develop incentives. This measure provides a $2-to-$1 Federal match. For every dollar that the State puts toward preserving affordable housing units through direct appropriations and/or tax incentives, the Federal Government provides $2. We are also exploring some additional flexibility in the matching provisions so that more States and localities would be able to participate.

    Mr. Chairman, the hearing today will focus on several efforts which would be part of the solution that this Congress prepares for the Nation. The emergency looms larger as we look into the future. We must act so that more of the vulnerable citizens do not become citizens of the streets or residents of more costly housing situations such as nursing homes.

    We must act with dispatch. Even if HUD could develop the perfect program, this would take valuable time; 3,000 to 4,000 units a month are predicted to be lost. The States could use their limited resources to target the key projects rather than trying to cover all projects or more fair market rent markups which would expend vast sums of Federal dollars for arguable results.

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    HUD has taken the critical first step, but we need to do more. Many buildings receive no project-based Section 8 assistance, so there is no opt-out or marking up to market, as an example. In better markets, often those with the greatest affordable housing needs, Section 236 will be lost to the market rate if we do not create a comprehensive solution, a solution that permits the dollars that we are putting toward this problem to address the issue through solutions that we have offered. We can provide the incentives for interested owners to stay in the program or for nonprofits or for-profits to purchase Section 8 or non-Section 8 buildings and extend their affordability further into the future than five years.

    The fact that we engage the States which make real commitments serves as a framework in which we can cooperate, coordinate, and collaborate, permitting a shared response and responsibility. Such could be based upon flexibility that would not occur with a differing set of fixes.

    Mr. Chairman, I look forward to forging ahead, and I am pleased to hear your interest in terms of cooperation, and I think this is an issue that we can solve and get the most bang for the Federal dollars. I hope that you will closely look at our proposal and the results that we have experienced in Minnesota.

    Mr. Chairman, I ask that my full statement be put in the record.

    Chairman LAZIO. Without objection, so ordered.

    [The prepared statement of Hon. Bruce Vento can be found on page 50 in the appendix.]
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    Chairman LAZIO. We will now move to the panel. We have a wonderful quartet, and I am looking forward to it. Let me begin by introducing the first witness who will be testifying.

    Opal Henke is a resident of Westview Apartments in Wahoo, Nebraska. It is a Section 8 property, where she has lived since January of 1998. She is a senior citizen whose only source of support is Social Security and is precisely the type of person most adversely affected by the situation of owners opting out of the program.

    Ms. Henke, let me thank you for making the effort to come forward and for your testimony. You are now recognized.


    Mrs. HENKE. Thank you. My name is Opal Henke, and I live at Westview Apartments in Wahoo, Nebraska, and I am here to represent all of the residents at Westview. Most all of the residents there are either farmers or farmers' wives, and they don't take in much Social Security because they didn't pay in, and if they were asked to move somewhere else, why, it would be hard on them to go out and support themselves and make a living.

    Housing in Wahoo is rather expensive, very expensive, in fact, because we are locally between Omaha and Lincoln, and people come out there and commute back and forth to work, and that is why the rent and everything is so expensive. And if we had to go out and rent something, I don't think that we could do it because there is a shortage of housing in Wahoo.
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    Anyway, I am here to ask for your help, and I appreciate everything that you have done for us so far, and I hope that you can continue to do so. Thank you.

    [The prepared statement of Mrs. Opal Henke can be found on page 115 in the appendix.]

    Chairman LAZIO. Thank you very much.

    The next witness is Dan Roseliep, President and CEO of Heartland Management Company in Des Moines, Iowa. He is a founding board member and immediate past President of the Iowa-Nebraska Affordable Housing Management Association. Heartland Management Company operates 2,500 multifamily apartments in Iowa and Nebraska, which must make it one of the largest in that region.

    I want to thank you for your testimony and look forward to hearing from you. You are now recognized, Mr. Roseliep.


    Mr. ROSELIEP. Thank you, Mr. Chairman and Members of the subcommittee. Heartland's portfolio includes conventional apartments, subsidized elderly and family units, tax credit projects and office properties. Twenty-one of our projects receive Section 8 assistance and contain about 964 units. Unlike most Section 8 inventories in Iowa and Nebraska, ours contain far more family units than elderly.
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    Until recently, Heartland's inventory contained three additional projects, all designed for the elderly and disabled, located in Boone, Newton and Marshalltown, Iowa, containing 168 units.

    After extensive negotiations with HUD, we did not renew the contracts on these projects. In 1998, we agreed to a one-year extension of these contracts at a rent equal to 120 percent of the FMR for the area, only as a temporary measure until permanent renewal authority was in place, since this renewal resulted in a reduction of rents by $70 to $113 per unit per month. These new rents also were lower than market rents. When the contracts expired in 1999, HUD offered to renew at no higher than 120 percent of FMR, although it had statutory authority in 1999 to renew at market. Attached is a table that shows the various rent levels for the three projects.

    At this point the owners did not have confidence that the Government was committed to maintaining the program. After some research, we determined that the projects had a better future as market rate congregate housing. It was our plan to transition the projects gradually to market at the normal turnover rate of 5 to 10 percent a year.

    However, the tenants only received regular vouchers. Many of the assisted tenants have remained in these projects. Therefore, they have a heavy rent burden. In Boone, for example the tenants pay 30 percent of their income plus the difference between the voucher payment standard of $346 and the market rent, which is $450. Enhanced voucher authority as contained in H.R. 1336 would set the payment standard at $450 so tenants could remain in the project and still pay no more than 30 percent of income toward rent. I suggest, however, that many families need this protection as well and that H.R. 1336 should provide it to all low-income assisted tenants.
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    Aside from the initial renewal rents, there are several other troublesome aspects dealing with HUD that encourage owners to plan to opt out, particularly during periods such as this one when interest rates and markets are favorable. First, we are not sure of what the renewal policy will be from year to year, or even month to month. A statutory standard that can be relied upon for planning would be helpful.

    In addition, some certainty as to what the annual rent adjustment policy will be into the future is necessary. Even with that, there is no protection against statutory changes like the one a few years ago that abrogated contract rights of some owners for annual rent adjustments.

    Third, any renewal policy based on market rents, owners need to feel that HUD will accept reasonable and fair rent comparability studies prepared by HUD-approved appraisers and that HUD will not arbitrarily reject appraisals, which we hear happening more and more.

    Fourth, we expect if owners are receiving a fair rent, that the Government should in return expect that the project should be adequately maintained. However, we hear of one incident after another of arbitrary and uninformed inspections by HUD contractors. At some point all this adds up to rejection of any future dealings with HUD, whatever the renewal rent is.

    Finally, the tenants are not spared one day of uncertainty. The moment a contract is renewed, the tenants must be told of its expiration in a year's time and that we can't be sure if it will be renewed, regardless of our desires to renew. That feature of the law needs to be changed, either with multiyear contracts or more meaningful, shorter-term notices, such as 90 days prior to expiration when more is known about funding and renewal terms.
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    [The prepared statement of Mr. Dan Roseliep can be found on page 116 in the appendix.]

    Chairman LAZIO. I thank you.

    The next witness is Randy Lenhoff. He is President of Seldin Company, a real estate management company operating 41 apartment complexes across Iowa and Nebraska. Mr. Lenhoff lives in Omaha, Nebraska, and has been a real estate property manager of multifamily and commercial real estate for over twenty years.

    Mr. Lenhoff, I welcome you to the subcommittee and look forward to your testimony. You are recognized.


    Mr. LENHOFF. Thank you, Mr. Chairman.

    Twenty-two of these apartment communities that we manage have project-based Section 8 contracts; sixteen, containing 1,117 apartment units, were designed and built for the elderly and handicapped. The other six are townhouse complexes designed and built for occupancy of families with children. A list is attached to my testimony. You will note that they are located in medium and small communities across Iowa and Nebraska, including Muscatine, Harlan, and Council Bluffs in Iowa; and Wahoo, Columbus, Norfolk and Grand Island in Nebraska.
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    All these project-based Section 8 contracts are in jeopardy of not being renewed because the current process for renewing Section 8 contracts is cumbersome and not fair to the owners. Current legislation does not protect elderly and handicapped residents, especially in rural communities. If an owner is forced to opt out, the residents are not protected, because current legislation only requires HUD to provide a voucher or certificate at fair market rent. In most rural rental markets, fair market rents as set by HUD are neither fair nor market. The entire Section 8 contract process needs to be at market rent, which is what I understand H.R. 1336 provides.

    If H.R. 1336 is passed, it will provide a safety net for the elderly and handicapped residents and keep them from being used as pawns by either owners or representatives of the Federal Government. A number of residents in our properties have lived there for over twenty years, since the buildings opened, and are now frail as they have aged in place. The owners find themselves in a position where they are torn. Do they renew their contract even though the current regulations require them to take less than market rents for their properties, or do they opt out?

    As example, we manage a midrise elderly apartment community in Council Bluffs, Iowa, containing 102 one- and two-bedroom apartments 100 percent occupied by elderly and handicapped residents. In May of 1998, we had a full appraisal completed on this property by an Iowa certified MAI appraiser indicating our rents on a one-bedroom could be $530, and two-bedroom could be $620 per month. Current rents on this property are $516 for a one-bedroom and $613 for a two-bedroom as allowed by HUD.

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    The Section 8 contract expires October 1, 1999. Under current regulations, the owners will be offered only a one-year renewal at current rents. Rents have gone up in the Council Bluffs area at least 5 to 7 percent this past year. Using 5 percent, a one-bedroom would rent for $556 per month and a two-bedroom for $651 per month. The owners at this time are forced to make a decision whether they are willing to take approximately $35-$40,000 less income per year to keep this property in the Section 8 program. There is no provision for rent increases, so this problem will only get worse each year with each renewal.

    The owners would prefer not to remove this inventory of apartments from the Section 8 program. They are business people, and they cannot afford to continue to take substantially less money for their apartments than they can get in the open marketplace. We have been attempting for over a year to get a fair rent from HUD, and if something is not changed, North Avenue Tower will leave the program, as will most of the Section 8 inventory we manage, if not all.

    We have another property in Harlan, Iowa. In 1998, our rents were found to be $30 above the market. HUD immediately demanded that we lower the rents, which the owners agreed to. HUD demands a write-down of rents in some locations, but refused to recognize market rents in other locations.

    We also manage Sunset Ridge Apartments, a 120-unit two-, three-and four-bedroom family apartment complex in Omaha in which over 300 children reside. The property was originally built under the 236 program. We had an approved plan of action under Title VI, but it was never funded, so in 1997 the owners opted out. Market rent in the area allowed us to raise the rent approximately $100 per month. The residents in this preserved property were provided enhanced sticky vouchers. The transition to market was smooth, and most of the residents have stayed in place, resulting in a successful mixed-income project.
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    H.R. 1336 will protect the tenants through enhanced vouchers in case of an opt-out. However, the provisions setting rents upon renewal at the higher of current rent or 90 percent of the market rent will end up shortchanging the residents and the owners. That is why H.R. 1336 needs to be amended to mandate the renewals be at the market rent.

    There are a number of administrative and regulatory barriers in the renewal process in addition to the simple fact that market rents should drive this program. First and foremost is that HUD is woefully understaffed, and they are having difficulty processing and getting the renewal proposals to owners on a timely basis. Also, HUD appraisers have been very aggressive in their challenges to rent comparability studies, and there is not a reasonable process in the appeal process in the event the independent appraiser and HUD appraiser do not agree. There is uncertainty from year to year as to what HUD renewal policy will be, and the required one-year notices, frankly, scare our residents. Ongoing uncertainty about annual rent adjustments and no policy guidelines from HUD have certainly convinced many owners that the best thing to do is opt out. Also uncertainty about the inspection process and enforcement is confusing. It has encouraged owners to move away from doing business in the Federal programs.

    I would like to conclude my testimony by stating that I know that HUD has many very good, dedicated and hard-working employees. However, at this time the Department is severely understaffed. H.R. 1336 is certainly a positive step forward. Legislatively we have seen a tendency to wait until there is a crisis before we fix housing programs. Well thought out, consistent policies, fairly administered would provide an environment in which owners would be willing to continue to do business with the Federal Government rather than opt out of Section 8 contracts. Rents must provide a fair return on the risk capital invested in these existing properties.
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    Thank you for allowing me this time.

    [The prepared statement of Randall R. Lenhoff can be found on page 121 in the appendix.]

    Chairman LAZIO. Thank you very much.

    The next witness is Michael Bodaken, who is the President of the National Housing Trust. I want to welcome you today.

    As head of the organization, Mr. Bodaken is directly involved in the provision of technical assistance to resident groups and nonprofit organizations interested in purchasing affordable, multifamily housing developments, as well as all of the organization's other activities. His efforts have involved acquisition and rehabilitation financing for over 5,000 units, requiring a combined commitment of over $100 million.

    I want to welcome you to the subcommittee and thank you for your assistance. I look forward to your testimony, and you are now recognized.


    Mr. BODAKEN. Thank you, Mr. Chairman and Members of the subcommittee. Thank you for allowing the National Housing Trust to participate in today's hearing. My name is Michael Bodaken, and I am head of the Trust, an organization dedicated to the improvement and preservation of multifamily affordable housing.
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    Mr. Chairman, H.R. 1336 recognizes the twin problems that are posed by Section 8 opt-outs and prepayment of HUD mortgages, something that I think Chairman Leach has properly characterized as bedeviling, and I think it is a bedeviling situation. But we believe that if properly amended, H.R. 1336 forms the framework of solving this problem, of allowing us to deal with the twin problems, the problem of the tenant losing his or her home and the problem of the loss of affordable housing on the other side. I would like to provide you six suggestions which I think can be useful in guiding the subcommittee at this time and have closure on this issue this year.

    The first point I would like to make is to recognize what we have at risk over the next five years. I use that timeframe because attached to my testimony is the data that demonstrates the half-a-million-dollar below-market apartments whose Section 8 contract renewals expire between now and 2004; 500,000 apartments, 280,000 of which are located in the home States of the Members of this subcommittee, that is inexorably happening. The time to act is now, and I think we all recognize that, and I am heartened by the response of the subcommittee.

    Second, I would point out to the subcommittee, as others have pointed out, that vouchers are absolutely essential, but they are not sufficient. I use those terms because there are some who have in the past argued that enhanced vouchers are enough to protect us in this situation. But as we all know, there are at least two reasons why that is not precisely correct. One is, as accurately testified by people on this panel before me, vouchers don't work equally well everywhere. They work very well in some situations, but they don't work very well for anyone in tight housing markets and rural markets, and they don't work very well, frankly, for anyone who is elderly or disabled no matter what the housing market is. So we have to have a balanced housing policy, a policy that does enhanced vouchers plus which H.R. 1336 is a good step toward.
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    I would point out how, however, that we need in H.R. 1336 direction from Congress. This is a third and essential point. There have been again some discussion about whether or not there should be more or less discretion given in this situation to the Department. We welcome very much HUD's four-month short-term fix which was announced last week. We very much think that is the precise direction to go, but we are in a situation where we need a long-term fix, a five-year fix to deal with this situation we are in.

    The subcommittee has put something on the table for us to work with that will allow that. What needs to be done in the situation is to narrow the parameters of that discretion to, as testified earlier, to mandate the Department, and not only this Administration, but for future Administrations, to provide comparable market rents to prevent the opt-out, to prevent the owners from essentially leaving the inventory, because right now all that is provided is a voucher, and the voucher will facilitate the very opt-outs that we are trying to prevent. If all we provide owners is vouchers and don't mark up project-based Section 8 rents, we are going to see more opt-outs, not less.

    Fourth, no more free rides. If owners are given property-based assistance up to market, the public should get something in return. Right now H.R. 1336 does, in fact, move HUD in the direction of giving property-based subsidies up toward market, but it does nothing to require the owners give something in return, and we think that there needs to be some kind of long-term affordability commitment that gives the public a notion that we will not all be sitting here again in five or six years.

    Next, we would urge you all to think about a comprehensive solution to this problem. As you may know, Mr. Chairman, housing advocates, people like myself, support both H.R. 1336 and H.R. 425 submitted by Congressman Vento, a bipartisan legislation with Congressman Ramstad. We do that for a particular reason. H.R. 1336 does what is needed to bring incomes up, to support the properties and to protect the residents. H.R. 425 brings in State and local governments to try to recapitalize and rehabilitate this very same housing stock so it keeps it decent, safe and affordable for the people who live there. So it is a comprehensive approach.
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    I would like to close by talking about expenditures. I don't think that there is any question that there will be expenditures required to try to deal with this very significant issue. But lack of action will very much cause you to spend more. The provision of enhanced vouchers that go to market, as we have seen in the prepayment situation where prepayments have soared in the last 2 1/2 years, will cause HUD to again and again provide more enhanced vouchers, which actually cost the Government as much or more in trying to keep the housing affordable for the people who live there now and for people in the future. The time is now. The bill is yours to amend and I think deal with this situation. We believe if we do this right, we can protect not only the housing, but the people who live there. Thank you.

    [The prepared statement of Michael Bodaken can be found on page 126 in the appendix.]

    Chairman LAZIO. Thank you.

    I want to thank the entire panel for their testimony.

    Let me begin, if I can, by asking a question of Mrs. Henke, because you are really a representative of a lot of people that are affected. You are where our focus is, on the tenants.

    I just returned from the Balkans and visiting refugee camps, and you see people who have nothing and have lost their homes, and they have no focal point in their life anymore, and while I am not trying to make a parallel here, it makes one think about how important it is to have a sense of home to go back to. All of the other needs become less relevant if you don't have a roof over your head.
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    Let me ask you this: For yourself and maybe some of your friends that you live with, what would you do if you were notified that you had to leave your building because the owner of the building had an opportunity to convert your unit to higher rents, to market rents, after twenty years of keeping the rents affordable? What would you do?

    Mrs. HENKE. Well, I imagine that most would have to go depend on their children or something. I have a daughter that lives in Hastings that I know would take me. But, you know, some of these people when they get these letters, they panic. They don't know what they are going to do. How do you really explain to them, you know? I have tried to explain to them not to worry, you know.

    But as far as what I would do, I don't know what I would do. You don't want to depend on your children. They have families to raise.

    Chairman LAZIO. I presume that some don't have children.

    Mrs. HENKE. There are a lot who have outlived their children, or some never had children. I don't know, but I know that they really do get upset.

    Chairman LAZIO. Do you feel as though the Department of Housing, HUD, has been helpful in helping you think through how this might work?

    Mrs. HENKE. You bet it has. It really makes you stop and think about a lot of things.
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    Chairman LAZIO. Has HUD been involved in that? Have they been educating you and others?

    Mrs. HENKE. Well, I think they have, yes.

    Chairman LAZIO. What types of things have they been doing?

    Mrs. HENKE. Well, the only thing I can say is that they go through Vivian, and Vivian comes to us, and they have helped us in every way.

    Chairman LAZIO. Who is Vivian?

    Mrs. HENKE. Vivian is our manager.

    Chairman LAZIO. So the manager is the one who talks to you about——

    Mrs. HENKE. She talks to me more than I hear from Seldin's.

    Chairman LAZIO. From the owners of the building?

    Mrs. HENKE. But if something like this comes up, they come out and explain to us.

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    Chairman LAZIO. But how about the Federal Government itself, has anybody from the Federal Government been out?

    Mrs. HENKE. I don't think they have. I don't know.

    Chairman LAZIO. Let me turn, if I can, to Mr. Bodaken, because I think your testimony was important in many different ways. You discussed where HUD is, where they have been. In your opinion, is there anything that HUD could have done or the Administration could have done prior to these proposed changes to avert this crisis in confidence or anxiety that many seniors feel in having to lose their homes?

    Mr. BODAKEN. I think any casual observer of what is going on understands that there is a reluctance higher up in the Administration to deal with this issue from early-on. There was a tension, I will put it that way, a strong tension between the Department and the Office of Management and Budget on this issue who I believe I implicitly referred to earlier by saying that enhanced vouchers was not enough. I was specifically referring to OMB in that testimony.

    It has been a long time; it has been 19 months since HUD has been authorized to do something about this, and there are those, including myself, who have been asking the Department to do something for quite some time on this issue. We are very happy that they have come forward.

    I will repeat that I don't believe that this administrative notice is going to save us from what we have ahead. The forecast is grim, and I think your bill gives us the ability to deal with this on a more long-term basis. I believe it will help HUD, frankly, to direct them to what needs to be done.
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    Chairman LAZIO. You think that they have to be directed?

    Mr. BODAKEN. I do believe, otherwise you will end up in that same tug of war. I think that is essentially what happened in 1997. There was discretion, and nothing could come out because they could not solve that within the Administration.

    Chairman LAZIO. How long have you and other housing advocates been raising that issue with HUD?

    Mr. BODAKEN. Certainly well over a year since the passage of the bill, shortly after passage of the bill.

    Chairman LAZIO. Thank you very much.

    I turn now to Mr. Frank.

    Mr. FRANK. Thank you, Mr. Chairman.

    Let me be explicit where Mr. Bodaken was implicit. OMB was resistant. I had conversations with OMB. One of the things that was helpful was that the Director of OMB used to work for a Member of Congress who was the predecessor of the predecessor of my colleague from Massachusetts here, a guy named O'Neill, and Speaker O'Neill represented precisely those parts of the greater Boston area where housing costs are highest. And frankly, it helped that we could ask Mr. Lew to draw on his experience as an aide to Tip O'Neill in our ability to persuade him that going higher was necessary to prevent the loss of housing. But I would say that HUD was being cooperative. Lower down at OMB we ran into some resistance, but Mr. Lew's understanding of the greater Boston housing market and his ability to project that into other markets where we had these difficulties was very helpful.
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    But on the budget situation, let me ask Mr. Lenhoff, you said one of the problems is that HUD is seriously understaffed. Did I understand that correctly?

    Mr. LENHOFF. That is my perception. I think there is not enough staffing. I think there has been a serious undercutting of that Department. I am not a good statistician, but I know that the department that we work with, the local department both in Nebraska, Iowa and the region, are understaffed. There is not enough people out there. I think we have cut it back too far.

    Mr. FRANK. Some budget cuts are foolish cuts, and I appreciate you as a private-sector, responsible individual trying to work with HUD pointing out that some budget cuts, those that are not voluntary by HUD, but were cuts imposed by congressional budget action, are mistaken if we are going to be effective in these areas like inspections. People like to boast about cutting headquarters staff or cutting administrative staff, and that hurts because we have these obligations, and I think, Mr. Roseliep, you referred both to uncertainty and difficulty with inspections. An understaffed department cannot do its job. I am glad to have you say that.

    The other issue, your one difference with the bill, H.R. 1336, is that it would set a maximum of 90 percent of market rent, and you think that it should be 100 percent to avoid opt-outs?

    Mr. LENHOFF. Right. I think you create a real problem. If my rents are $600 a month, and I have 100 units at $6,000 a month, you take that times 12, it equals $72,000 a year. If you have an owner sitting there and he can make $72,000 a year, there is a real inclination to go with that.
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    Mr. FRANK. Particularly if we were structured so that you could get more with an enhanced voucher if you opted out than if you stayed in.

    Mr. Roseliep, what is your comment on that?

    Mr. ROSELIEP. I would agree. It is an incentive to opt out.

    Mr. FRANK. If we are, in fact, trying not to have people opt out, that argues for equality in the two numbers. My own sense would be the 100 percent.

    I did notice one of you mentioned that when rents fell below market, HUD was quick to recapture that, and I think that is appropriate, but we should also be quick to pay them back. People said, ''Gee, if you go above that, you don't want them to opt out,'' and Mr. Leach alluded to what I said before. If you believe the Federal Government has no business subsidizing housing, the cheapest thing to do is to let it go. If you believe subsidizing housing is a legitimate Government function, I am convinced that the marginal cost of preventing opt-outs is less than any other way of getting that unit on a long-term basis. Meeting 100 percent of market to prevent an opt-out is, I think, a cheaper way to get a comparable unit than the other. Then if you factor in, as Ms. Henke is obviously the expert in, the comfort of being able to stay in your own home and not having to pick up and go somewhere else, you have a network of friends and shopping, and so forth, it seems to be the case is very strong for making that 100 percent, not 90 percent as the number.

    Thank you, Mr. Chairman.
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    Chairman LAZIO. Thank you, Mr. Frank.

    Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman. Having been with you on that trip to the refugee camps, I want to concur with your remarks. We have seen people who have lost absolutely everything and seen the devastation that that has created in their lives. Moving is a very difficult experience at best for most people.

    In a prior life, as I was wafting through the first year of law school, I met a fellow who had owned a number of properties who had decided that he was going to try to put them into some kind of a housing program. Unfortunately, it did not work, and he walked away from every single one of the buildings, which is one of the reasons I am such a strong supporter of the Section 8 housing program. We need those units. I agree with my colleague from Massachusetts that when we look at the bottom line financially, I feel very strongly that this may be our best way to keep these units up and online.

    That being said, I am very interested in asking a couple of questions, first of all, for Mr. Roseliep.

    You spoke of the very difficult circumstances that you have been confronted with in your negotiations with HUD. I am wondering if we could just kind of go at what you think HUD could have done to encourage you to renew your contract with the Federal Government?

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    Mr. ROSELIEP. We were alarmed when the renewal terms were offered at 120 percent, with a reduction from $70 to $113 per month, and I think we were very concerned that the properties may fail. We think that the situation could have improved had we been allowed to renew closer to market. I think that is the simple answer.

    Mrs. KELLY. So it was a financial bottom line for you that made you choose not to allow these units?

    Mr. ROSELIEP. In large part it was, yes. It is not desirable to be in a position where your decision causes displacement, and we weighed in the human factors and tried to do everything we could to avoid situations that would put people in that circumstance. But we have an obligation as well to limited partners, investors, and as I say, we were concerned with the severe rent cuts for that temporary one-year renewal term, that that would put the properties in jeopardy.

    Mrs. KELLY. I am going to ask you another question that you are going to have to simply pull out of your knowledge of the people you are working with, the owners of the property.

    How do you think they felt when they knew they were going to pull out, possibly move people out of their own homes?

    Mr. ROSELIEP. It is very undesirable. I think they felt bad. Our projects are named Prairie Village, and it was not our intention to break up the village or cause that kind of stress.
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    Mrs. KELLY. But they did it, and that is the problem, isn't it?

    Mr. ROSELIEP. Yes.

    Mrs. KELLY. Thank you very much for answering that.

    I have a question for you, Mr. Bodaken. To your knowledge, did the Administration include any measures to address the opt-out issue in their budget request for fiscal year 2000?

    Mr. BODAKEN. No, I don't believe they did. I think there was again an attempt to do so in the initial negotiations with OMB in September/October of last year, but those negotiations failed.

    Mrs. KELLY. Do you think that this is a problem that HUD wasn't able to speak to the Administration strongly enough in order to try to work something out with the Administration? What do you think went on there?

    Mr. BODAKEN. I wasn't involved in negotiations. I can just tell you—I don't want to be trying to characterize somebody else's attitude or behavior. I just know the facts, which are, I think they attempted to do it and it didn't work.

    Certainly, the crisis was emerging and had emerged by that time, and again, any reasonable observer of what was going on knew that we had lost tens of thousands of apartments at that time. And I certainly believe the Administration should have included something in their budget, and I believe now that H.R. 1336 is out there, we will get, hopefully, some Administration support for both the enhanced vouchers, which I think that OMB will support, and protecting the housing which is so fundamental and which I think you are starting on the right foot in incorporating, as I mentioned, H.R. 425.
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    Those three pieces give us what we need to have the stability that residents are entitled to.

    Mrs. KELLY. Thank you very much.

    Thank you very much Chairman Lazio.

    Mr. FRANK. Mr. Chairman, if I might, I am going to explain my——

    Chairman LAZIO. The gentleman is recognized.

    Mr. FRANK. Judiciary is marking up a bankruptcy bill, so I will be back and forth, and I apologize to the witnesses and to the other Members. So, we are well represented, and so I will be going back and forth.

    Chairman LAZIO. Thank you very much.

    Mrs. KELLY. Mr. Chairman, one more thing, may I ask unanimous consent to put my opening statement in the record, please?

    Chairman LAZIO. You can, and without objection it is so ordered.

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    [The prepared statement of Hon. Sue W. Kelly can be found on page 45 in the appendix.]

    Chairman LAZIO. I think it is Mr. Vento actually who is next.

    Mr. VENTO. Thank you, Mr. Chairman. I guess we are going in the order of arrival, so I will have my colleagues after. I appreciate your doing that, Mr. Chairman.

    Mr. Bodaken, I appreciate your testimony for a comprehensive approach, recognizing enhanced vouchers that are in the Chairman's mark on the bill that we have introduced, H.R. 425.

    Do you think it is, for instance—just in terms of getting up and getting going with this, we have had this circumstance where HUD has had the ability to market different properties. In the example, Mr. Apgar is going to testify that about a million properties are—I don't know, it is $1 billion that we are paying over—above fair market rents too much.

    Mr. BODAKEN. Right.

    Mr. VENTO. And that there is about $600 to $800 million that we are not paying enough. So now, if you do that, that would be a pretty good balance in terms of the equation, but you know, between the rarified air of this particular room and the implementation of those things on the ground you see sitting here beside you, to property managers that get some beef with that, those that were lowered are unhappy and they are opting out, and those that didn't get the increase quick enough, because there is no money coming out of this particular equation, are also opting out.
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    Mr. BODAKEN. Is there a question?

    Mr. VENTO. There is a little problem here.

    Mr. BODAKEN. Is there a question pending?

    Mr. VENTO. But my concern is that, isn't this—in other words, it is unrealistic. It was a good idea, but it isn't producing the dollars. So hadn't we better do something to move more quickly since we are losing 2,500 to 3,000 units a month?

    Mr. BODAKEN. Well, I think the short answer—and I know we will hear more from Mr. Apgar about what we believe to be the four-month fix that HUD will introduce hopefully very soon for the rest of this fiscal year: It seems to me that that short-term fix, which will allow them to target properties that are in danger of opting out up to a certain number, will give owners a notion that maybe we should at least stick with it for a while and see whether or not this is something that we should do.

    Right now, there was no option provided to Mr. Roseliep. There was no option provided to Mr. Lenhoff. That wasn't available before. So that is my short-term fix.

    Long term, though—long term I think you need to have, and again, without an inordinate expenditure of Federal dollars—as you point out, you are going to pay it one way or the other. If they opt out, you are going to pay for the enhanced voucher, which is one piece of change. If, in fact, you prevent them from opting out and instead mark their rents to market, or very nearly to market, you have kept the housing affordable, you have protected the resident, and you have spent the same amount of money. And I think that is the key concept.
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    It is not only for the residents who live there now, but for future generations, so that we don't have to revisit this issue again.

    Mr. VENTO. And of course, my concern is that this just doesn't affect Section 8; it might affect other low income. In other words, if our whole goal is preservation of properties, why wouldn't we engage the States to do this for other projects?

    Mr. BODAKEN. And that, of course, is the essence of H.R. 425, which encourages State and local governments to get involved.

    Something that H.R. 425 does do is, I believe it encourages them. Essentially, H.R. 425 would provide a match, a Federal match, for those States and localities who decide by themselves that they want to preserve this housing. It seems to me, A, that you have a good decisionmaker, it is at a local level; and B, it essentially makes the Federal commitment less than it would otherwise might have to be.

    So it seems to me some solution that might need to be part of——

    Mr. VENTO. You think that would be welcome, because obviously the national programs are good, I support them, but I mean, getting the local and State governments involved is good.

    Minnesota's preservation program has a series of guidelines for prioritizing buildings for preservation. This includes the risk of loss of housing, a cost-benefit analysis, the impact on residents, the physical condition of the housing, the quality of ownership and management, and the location of the property.
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    Do you think that HUD has—does HUD have similar types of criteria ready to go on line to implement?

    Mr. BODAKEN. You will have to ask HUD that. I don't think they have. I have never seen criteria like that.

    Mr. VENTO. Are we likely to end up with some lawsuits as a result of who gets this money and who doesn't, for instance, on this issue as we go down the road, Mr. Bodaken?

    Mr. BODAKEN. Well, I am a recovering lawyer so—my judgment is that I don't believe we will—I think we are more likely to get lawsuits where people essentially are forced from their homes or essentially not given places to live. I think that is a more likely outcome.

    Mr. VENTO. I think one of the concerns raised here about the anxiety of tenants, such as Mrs. Henke, is that she is going to get notices every year based on the existing model unless we get beyond the one year; and I take it that both the managers here are nodding their heads, which doesn't show up in the record, but that is exactly the position that they are put in to explain the legal rights that they are exercising in order to get the best deal they can.

    So I think it is really time to start playing the game of cat and mouse, face up to this, get some long-term commitments so then we take these people out of the hotbox that they are in, and especially for the elderly and disabled. I understand my Chairman's sentiments in terms of trying to deal with that, but frankly, the 90 percent solution that he has proposed—and I don't know what the basis for that is—would in fact cause us to lose more housing in my judgment and, I think, according to most of the testimony here today. So I hope we will revisit that.
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    I have yet to hear all of his explanations, so I am going to reserve judgment, but I appreciate his positive efforts in holding this hearing.

    Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you.

    Are there Members wishing to ask questions?

    Mr. Terry.

    Mr. TERRY. Thank you, Mr. Chairman.

    Mr. Lenhoff, you and I have discussed this issue at length over probably about the last 10 months, and I appreciate your help and assistance.

    And by the way, Mr. Chairman, Mr. Lenhoff has been good enough to notify our office whenever these notices are received by their tenants, because we are likely the next source that they call when they feel that they are likely or are possibly going to lose their home. So I appreciate that level of communication.

    Fortunately, though, you must be doing a good enough job communicating with your tenants, because we have only had really very few calls.

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    So why don't you tell us what type of burden is placed on you then to communicate the likelihood of losing? And also, has any of the property that your company either owns or manages opted out and impacted some folks?

    Mr. LENHOFF. In answer to your two questions, what we do when we send out notices, we immediately have a meeting with the residents, and either myself or someone from the corporate office goes out and meets with the residents, and we set that within a day or two of them getting the notice. We try to allay their fears, explain to them the process and—it is difficult, though. There are many residents who, especially in the elderly and handicapped buildings, who really don't understand it and are very upset by the notices, but it seems to relieve their fears when we go out and meet with them; and I must admit there has been more than once where I have had an elderly resident say to me they are depending on me to make sure they have a place to live. So that does give you moment to pause and some feeling that you need to do some things, and I guess my commitment to them is always to do the very best we can to protect them, and so that is very important.

    Mr. TERRY. Well, I am going to—my last question for you then goes back to your opening statement and what Mr. Frank was also referring to, your comment about the HUD budget and a comment that Mr. Bodaken had mentioned, that there are some properties where they receive more than fair market value and then some that are under. And I guess, on average, it comes out all right, but it is kind of an old joke.

    What is your experience in working? Is this an issue of funding for them or is it just the way they operate? What ideas can you propose to us to streamline that, so we have real fair market value as opposed to some over, some under and, on average, they are all right?
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    Mr. LENHOFF. Well, I think, you know, without going into the history of the Section 8 programming, going back twenty years, which I think most people here have probably heard more than once, there are at times properties that come up that are slightly over market. We had one that I mentioned in my testimony.

    We agreed to mark-to-market. I understand the concept of mark-to-market, and if we have an expiring contract and we can get a rent that is comparable to what we can get in the marketplace, we will keep our properties in, and that is what we are asking for. But we are not asking 90 percent of market; we are asking for market.

    It is the same deal, and I think that is fair, and if you do that across the board, I can live with that, and I know the owners I represent can live with that also. As long as we have fair, well-thought-out policies going forward, why we will keep our properties in.

    So it is a very simple process as I see it.

    Mr. TERRY. All right. Chairman Lazio was asking you some questions about the housing market in Wahoo. If your building—I can't remember the name of it.

    Mrs. HENKE. Westview.

    Mr. TERRY. Westview would opt out, what other options are there, even in Wahoo?
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    Mrs. HENKE. There is no other options. I mean, they have got other apartments, but their apartments and everything are so expensive—$500-$600 a month—and there is no way we could pay that, any of us.

    Mr. TERRY. OK. One of the points that I would like to make, as I have the yellow light here, is simply that a lot of my colleagues here in this subcommittee are from New York and Cleveland and Boston. But it is not a big-city issue; it is big-city and it is small-town America. It is the Wahoos, as well as the Omahas and the Clevelands.

    So if one point is made today I think that is, it is our senior citizens, no matter where they live, that need our assistance and help. So I appreciate that you took the time to come and communicate that important point.

    Mrs. HENKE. Thank you.

    Chairman LAZIO. Mr. Capuano.

    Mr. CAPUANO. Thank you, Mr. Chairman. I appreciate that. Mr. Chairman, I just have a couple of questions, first of Mr. Bodaken.

    I presume—obviously you are aware of the announcement that was made the other day of the temporary fix, and I presume you support that?

    Mr. BODAKEN. Very much so, and I believe that together forms the basis of what should be considered in H.R. 1336 if I understand it correctly, and I think I do.
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    Mr. CAPUANO. Thank you. I am sure you understand it better than I do.

    Mr. Seldin, I have just been sitting here doing some math, and I might be completely off the board—I am sorry, Mr. Lenhoff, I apologize. I am sitting here, I am seeing Seldin at the top of the page, your name is on the first page.

    Mr. LENHOFF. I understand.

    Mr. CAPUANO. As I read it, you are saying—I am going to go for the two-bedroom just to make it simple—the two-bedroom you are talking this year you expect to be able to have a market around $651?

    Mr. LENHOFF. That is correct.

    Mr. CAPUANO. And I am sure that is an average you—for the 1,000-odd units that you have, 1,800 units you have?

    Mr. LENHOFF. Right.

    Mr. CAPUANO. Of that $651, I mean again maybe I am wrong, but 90 percent of that is $586.

    Mr. LENHOFF. Right.
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    Mr. CAPUANO. You are currently getting $613.

    Mr. LENHOFF. I won't do that.

    Mr. CAPUANO. Won't do what?

    Mr. LENHOFF. I won't stay in and take a rent cut when the market is above that.

    Mr. CAPUANO. As I understand the proposed bill, you wouldn't be getting a cut, you would be able to stay at $613.

    Mr. LENHOFF. I would still have to seriously consider opting the property out. You can't afford to leave $50 or $60 per unit per month on the table.

    Mr. CAPUANO. I just want to make sure that I am understanding.

    So you are not testifying in favor of the bill as written, you are testifying on the concept?

    Mr. LENHOFF. Well, yes. First off, let me say, if there are going to be opt-outs, I think the residents absolutely should be protected, and so H.R. 1336 does that in opt-outs. But if you are going to stay in, I think that you should be treated equally, because I would like to keep our properties in, if we can, and that is our desire. But we can't afford to stay in if we are going to have to take 10 percent less rent for staying in the program.
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    Mr. CAPUANO. I just wanted to make sure I understood it, because I wasn't clear, but then again, I was doing some math while you were testifying.

    Mr. LENHOFF. I understand.

    Mr. CAPUANO. I am just saying, why would anybody do that? I mean, I understand the good nature and you sound like a great landlord, but nonetheless, profit is profit.

    I guess the other question I have for you as I am looking at your statistics at the end is, it appears to me, if my math is right, that some—a little bit less than 40 percent of your total units are family units.

    Mr. LENHOFF. That would probably be correct, yes.

    Mr. CAPUANO. Seven hundred five is the number I came up with out of 1,822.

    Mr. LENHOFF. Yes.

    Mr. CAPUANO. You do realize that this bill does not address family units?

    Mr. LENHOFF. I understand that, also.
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    Mr. CAPUANO. I presume that the same situation occurs for those 705 family units as it occurs for the elderly and handicapped?

    Mr. LENHOFF. That is true. It does.

    Mr. CAPUANO. And my presumption is, you would face the same financial issues, and I guess—let me ask a question. Again, I am going to presume the answer.

    My presumption is that your family units are similar to family units in my district, that most of the tenants are, more than likely, a single head of household with one or two children?

    Mr. LENHOFF. That is correct.

    Mr. CAPUANO. Yes, that is a generalization, but probably a pretty accurate one. It is pretty common across the country.

    So, therefore, I guess I want to ask your opinion, would you support extending these provisions at 100 percent, because I happen to agree with you at 100 percent, not 90, would you support extending the family units or would you oppose that?

    Mr. LENHOFF. Absolutely, I would support it.

    Mr. CAPUANO. I am just trying to make it clear, because I don't quite understand why someone who lives in affordable housing, who is not a senior citizen, would not be qualified as a senior citizen.
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    Chairman LAZIO. Would the gentleman yield for just 15 seconds?

    Mr. CAPUANO. Certainly, Mr. Chair.

    Mr. LAZIO. Just for the purpose of clarification. Actually, 1336 does provide discretion to HUD to extend to family units.

    Mr. CAPUANO. I respect and understand that, but I actually like the idea of requiring HUD to do certain things, and if we are going to require it to do for senior citizens and handicapped, I would like to see them require it for family units as well, for lots of different reasons.

    I guess the other question I would like to ask you, I have no idea—although my good freshman colleague comes from Nebraska, I have only been there once or twice, passing through.

    Mr. LENHOFF. A lot of people do that.

    Mr. TERRY. Some stay.

    Mr. LENHOFF. That is true.

    Mr. CAPUANO. Could you give me a general idea what the vacancy rate is in your region?
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    Mr. LENHOFF. Well, it changes from community to community, obviously, but Omaha, the largest market in the State, the vacancy is running between 4.5 and 5 percent right now, and I would say that is typical for the State.

    Mr. CAPUANO. OK. The vacancy rate in my district is around 1 percent.

    Mr. LENHOFF. Yeah, tight market.

    Mr. CAPUANO. Thank you very much, Mr. Lenhoff.

    Mrs. Henke, I just want to—on behalf of now a Government official, not the whole Government—first of all, apologize. I think it is unconscionable that people who live in units such as yours have to go through this every year.

    I have about 3,500 units remaining. We have already lost a bunch of units in my district, and I am embarrassed every year that this has happened. As a public official and human being, I want to apologize, number one.

    Number two, I want to tell you that my mother lives in subsidized housing, as well, and she is older than you, I think, I presume.

    Let me just ask a question. If your son were in Congress and your son was faced with a situation of voting to support these kinds of programs or voting for, let's say, a capital gains tax cut, what would you want your son to do?
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    Mrs. HENKE. That is a hard question.

    Mr. CAPUANO. I asked it. It is an easy question.

    Mrs. HENKE. I would probably just ask him to make sure he makes a right choice.

    Chairman LAZIO. The gentleman's time has expired.

    Mr. Sweeney.

    Mr. SWEENEY. Thank you, Mr. Chairman.

    Chairman LAZIO. There is a place for you, Mrs. Henke, in this panel.

    Mr. SWEENEY. In my communications office, I think, Mr. Chairman. I thank you for conducting this hearing and taking this important step, and I would like to briefly address some questions to the panel, and I want to congratulate them and thank them for the fine presentations.

    I am confused. I used to be an administrator or a regulator at the State level, and Mr. Bodaken, you mentioned that lack of action will force us to spend more. I think those were your words.
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    Mr. BODAKEN. That is right.

    Mr. SWEENEY. And the time is now, and you also said in response to a question from Chairman Lazio that you and your colleagues have been telling HUD for about a year-and-a-half or more that this problem was on the horizon, that it was going to occur, and that during that year-and-a-half time we have had the problems we have had and we have had the atrophy that we have had. So I have a couple of questions directed in that vein.

    And my first is, do you believe the Administration, HUD, would have responded as they have now responded had it not been for the legislative response of the Chairman and other legislators here?

    Mr. BODAKEN. I believe it was a combination of things. I really do.

    Mr. SWEENEY. So then answer the question.

    Mr. BODAKEN. Let me be brief. I believe it was a combination of both legislative pressure, media and press events that occurred, notification to certain media that caused the Office of Management and Budget—and I do believe that Mr. Frank was right that the changing of the head of the Office of Management and Budget also helped in this situation.

    But I don't believe—I think that all of those things were contributors to the change that occurred, very important contributors. I don't know that any one thing changed it.
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    Mr. SWEENEY. And I will direct this toward you and any of the other panelists who might want to feel free to comment. HUD has 9,500 employees. I am assuming you would agree with me that it is probably not a human resources problem that HUD has had such a difficult time, for example, in administering other parts of this program like establishing the FMRs or anything else. So, in your opinion, what do you think the problem is?

    Mr. BODAKEN. I think there is a reluctance—there is a judgment required in these situations in underwriting multifamily housing and determining numbers that are different than the grant programs, the public housing programs, that requires a certain level of ability and skill and that a lot of the people at HUD who understood how to do that have frankly either left or are no longer being utilized in that category.

    And I agree generally with the owners that I have seen that capacity of HUD undermined. It needs to be rebuilt back up, and they are starting, but they are not there yet.

    So I very much appreciate some kind of a cruise control mechanism that gives people some kind of stability, because I think otherwise we will get bogged down again.

    Mr. SWEENEY. Mr. Lenhoff.

    Mr. LENHOFF. Yeah. I just wanted to add that I realize there are 9,500 employees now, but I think there were 12,000 to 13,000 employees just a few years ago, and I got the new handbook on the legislation that was passed last year, and it came out last week. That handbook is 397 pages long, just that one handbook on that one program.
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    Every year we legislate new programs and we print new handbooks, but it is very difficult to keep up with the programs. I mean, we need some fair, consistent policy on housing, and we need to do it pretty soon. You know, we have got to switching programs every third year.

    Mr. SWEENEY. I yield back the rest of my time.

    Chairman LAZIO. Thank you. Thank you, gentlemen.

    Mrs. Jones.

    Mrs. JONES. Thank you, Mr. Chairman, and to the witnesses here this afternoon, thank you for coming to testify.

    I am flipping through, Mr. Bodaken, your statement and looking at page 2 of Section 2 that you say that in nineteen States, eleven or more prepayments have occurred. I am from the 11th Congressional District of Ohio, and I am looking at thirteen projects, some 1,163 units. Are you able to determine of the thirteen projects, or 1,163 units, what percentage of the Section 8 homes in Ohio that is? Is that in here somewhere? I haven't gotten to it.

    Mr. BODAKEN. State by State?

    Mrs. JONES. Right.

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    Mr. BODAKEN. Attached to the testimony is an analysis, and district by district is analysis of what has occurred, whether it is prepaid or not. We have lost 100,000 apartments, and that is by congressional district, and we can provide that to the subcommittee, and we have given you summary details of all those units that are at risk—in other words, what do we have ahead of us—and we tried to sort that out also by State for the subcommittee.

    We are happy to provide more detailed data.

    In short, I don't have the particular data that you were talking about at hand, but basically, whatever is shown there for Ohio or for your district, yes, I would say any property that is in your district that is less than 110 percent of fair market rent, which is cheapo, normal proxy, is at risk if it is coming up in the next five years, and we need to deal with that issue now.

    Now, I want to address something that was asked earlier that I didn't respond to precisely, which is about the expenditure issue. The point here about undue expenditures is that if you don't respond, if you don't deal with it, there is going to be—something is going to have to be done because you are hopefully not going to throw old people out in the street. So you are going to have give enhanced vouchers to——

    Mrs. JONES. Let's be clear, I am not going to throw anybody out. Somebody else here might, but I am not going to.

    Mr. BODAKEN. No, you are not going to, but it is going to cost more to do that—you are always supposed to do that to protect the housing itself, and what you can do is target and figure out which of these owners are more likely to opt out.
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    Mr. Lenhoff will probably tell you that there are some projects that he has—or maybe he won't tell you, but there probably are some projects that are below market where he won't opt out because the market rents aren't necessarily so far above where his rents are that it is really worth it for him to do that, and there are some properties that he has that are just on the margins.

    So you don't have to mark up every property all the way. You don't necessarily have to do that. What you can do is have a targeted program that targets people like occupants, people who are elderly, people who are disabled, people who are way below market. You can do the tight housing markets, set criteria. You can set match criteria, all those criteria.

    And my judgment is that HUD is correct, that it costs maybe $30 million this year to do four months. So you take $30 million times 4 and that is $120 million. That is a rounding error in the Section 8 account. The Section 8 account is $14 billion this year in the HUD appropriations bill.

    So I think we need to just start to think about what it is we are trying to do and do it appropriately; and if we do, there is no question in my mind you can protect the people and the housing and do it in a way that I think makes sense.

    Mrs. JONES. A question for any member of the panel: We are in a boom, the market is over 12,000 or working over 11,000 right now. Suppose we weren't in this great economic rush that we are in right now. This issue would not be before us?

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    Mr. BODAKEN. It would be, but it wouldn't be at the magnitude. It is being fueled by three things. It is being fueled by very low interest rates. It is being fueled by very attractive real estate markets, and it is being fueled in part because there are no other options for owners, so they are taking the vouchers and opting out.

    Mrs. JONES. Let's talk long term then.

    Assume—I am not Alan Greenspan, so I can't predict what is going to happen to the market. What can we do long term, one of these is called the Emergency Resident Protection Act and the other has a number to it.

    Mr. BODAKEN. 425.

    Mrs. JONES. 425, but if we are talking about a bigger-picture solution, what could we do—HUD, you and I—as we talk about these areas down the line to keep ourselves from being in this dilemma situation in terms of planning, or can we not plan ourselves out of this dilemma?

    Either of the other members of the panel?

    Mr. LENHOFF. Well, I think it gets back again to what we were talking about earlier that, I think, one-year fixes are not going to take care of it. I think there has been some talk about five-year commitments, maybe one year of funding, something like that, where we have some time to deal with the problems, and we don't have to send the notices out to the residents each year, which, as I mentioned earlier, frightens them.
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    So I don't think we are that far apart. I think it still comes down to mark-to-market, and then coming up with some commitments so that we know that we don't have to send those notices out every year; and we have some idea, what is going to happen over the next three to five years, and we can plan for it.

    Mrs. JONES. Mr. Chairman, if I might have just another, maybe a minute.

    Chairman LAZIO. The gentlelady is making a unanimous consent request and, without objection, it is ordered. One minute is given to the gentlelady.

    Mrs. JONES. Thank you.

    What would be the incentive for landlords and owners of buildings to keep their properties' accessory in place if you were given a more than a year in your contract with HUD?

    Mr. LENHOFF. Well, I don't——

    Mrs. JONES. Because historically, that is part of the reason it was a one-year contract, at least that is my understanding, historically that was part of the reason, in order to maintain.

    Mr. LENHOFF. It would make my life a lot easier for—one thing is, I wouldn't have to send notices and go out and meet with my residents once a year or twice a year because I am giving them notices.
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    As soon as I get a one-year renewal, I have to send my residents a notice. I say, make an announcement, ''Good news, folks, we got a renewal; here is the bad news, here is your one-year notice that a year from now you may be out again.'' So you can imagine the reaction that might have.

    Mrs. JONES. My question is, what is the incentive to maintain your properties such that the people who were living in the properties if you have a greater than a one-year contract?

    Mr. LENHOFF. You mean, what is the incentive from the owner's standpoint?

    Mrs. JONES. Yes.

    Mr. LENHOFF. I think that you would have to ask the owners. There are probably some owners that want more than that, the owners I represent.

    Mrs. JONES. You are an owner, right?

    Mr. LENHOFF. I represent owners.

    Mrs. JONES. OK.

    I am done, Mr. Chairman. You didn't give me your answer.
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    Chairman LAZIO. Thank you.

    Mr. Hill.

    Mr. HILL. Thank you, Mr. Chairman.

    Mr. Bodaken, I think I understand what you were saying earlier is that in not all projects do we have the fair market's rent out of whack with what the real marketplace is.

    I guess the first question I have is, what are the circumstances that create that situation when it does occur? Is it evolution of the neighborhood? Is it supply and demand of apartments in that marketplace? Or is it the capital cost of new apartment buildings?

    Mr. BODAKEN. In my judgment, it is three different things. The first is that fair market rents for places that are in wide rural areas—I am from Iowa, and I know in Iowa basically there are essentially one or two fair market rents for the whole State or for quadrants of the whole State, and that is because of the capturing they need for the data, they think, to set fair market rents. Well, by definition, the fair market rents in Storm Lake, Iowa, are not going to necessarily be the same as the fair market rents in Decorah, Iowa, and that is essentially what is being done now. So you have that particular problem with the data gathering.

    The second is that Congress and HUD have begun to lower and ration down what fair market rent is. It was, when I came to Washington some five or six years ago, I think, the 45th percentile of the rents that they basically tried to set. Today it is the 40th percentile in a budget-saving measure. So, by definition, as someone said, fair markets are neither fair nor market in a lot of places because you are setting there a lower and lower number.
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    And the third is that markets change, and markets do change and they are very dynamic, and some markets are very dynamic, and so you will find some markets in some places in Massachusetts which are much different than places that are right next door, and that is an essential fact.

    So those three I think are the chief problems. What you have really brought up, which needs to be done, is rethinking how we set fair market rents which is a very appropriate thing for us to do as we also proceed down this, because in the future I think we will be using that, for good or for ill, as a benchmark for deciding what to mark up or down.

    Mr. HILL. But obviously in some situations, as you described, the owners are opting out when they can get from the marketplace higher rents than they can get from HUD.

    Mr. BODAKEN. Right.

    Mr. HILL. The question that I am leading up to is that is it potentially a strategy to replace the units where owners are opting out with new Section 8 projects? Is that feasible?

    Mr. BODAKEN. There is no money in the budget essentially for new project-based Section 8 housing being built. So I don't believe that is an intention of what—I don't believe that that is essentially going on in any marketplace I know of. I don't know of any new Section 8 housing that is being built.
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    Mr. HILL. I am just asking whether or not that is feasible to do if Congress decided they want to do that.

    Mr. BODAKEN. If Congress wanted to allot the funds to do new Section 8 housing, I would be at the head of the parade. I very much think we should be thinking about trying to subsidize a new production program for lower-income people.

    Mr. HILL. I am arguing simply replacement. The question is, what is the most——

    Mr. BODAKEN. If you are talking replacement, let me just say that replacement of this housing is at almost $100,000 a unit because of the incomes of the people who live there. The incomes of the people who live there are around $12,000 a year. So to provide housing at this level for these people, the free market can't possibly do it. So you are basically going to have throw a significant amount of money into a new production program to replace it.

    Mr. HILL. Now, most of these projects had tax incentives. I mean, that was part of what made them feasible in the beginning, tax credits and accelerated depreciation; is that correct?

    Mr. BODAKEN. Depreciation, right.

    Mr. HILL. And are there any penalties, I mean, for the people that are opting out? Are there any tax consequences of opting out?
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    Mr. LENHOFF. No.

    Mr. HILL. No. And there is no tax benefit of staying in; is that correct?

    Mr. LENHOFF. No, there is not.

    Mr. BODAKEN. That is a nice point which—that there are tax reforms that could be undertaken to encourage owners to maintain these properties, including capital gains tax reforms and other tax reforms that my organization and other organizations have discussed, and Secretary Cuomo actually brought up a couple of years ago, but they never went anywhere.

    Mr. HILL. Mr. Lenhoff, were you the original developer, or did you represent the original developer in any of the projects that you are now involved with?

    Mr. LENHOFF. The properties, no, I did not.

    Mr. HILL. I guess the reason I ask that question is, going back to what I originally suggested, obviously if we have an opting-out situation, we should be looking at the most economically feasible method of keeping people in. I mean, obviously vouchers is one thing, but I want to go back.

    Should we be authorizing new Section 8 projects for those projects as they are coming out with replacement projects, and is that feasible?
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    Mr. LENHOFF. Well, I think your cost—in our part of the country, I developed some conventional apartments last year, and they ran about $65,000 a unit. So you do the math, it is going to be pretty expensive. It is going to run you at least that amount in our part of the country, and many parts of the country are more expensive.

    You know, I can't see where that is a feasible way to go at this point. I think it would be a lot less expensive to maintain the inventory that we have than to try and replace it.

    Mr. HILL. Thank you.

    Thank you very much, Mr. Chairman.

    Mr. VENTO. On that point, if the gentleman would yield.

    Chairman LAZIO. The gentleman's time has expired.

    Mr. VENTO. Just on that point, though.

    Chairman LAZIO. The gentleman is recognized for 30 seconds.

    Mr. VENTO. I was just going to say, if you were to reconstruct the apartments, wouldn't you be back in the same problem because you would still have the same fair market rent?
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    Mr. LENHOFF. Yes. The fair market rents are a problem in our part of the country, if that was aimed at me.

    Mr. VENTO. If that was the reason for the opting out, then you would be right back and some of these loans are 236 and FHA loans, too.

    Mr. HILL. Would the gentleman yield?

    My point simply is, there are certain instances where people are opting out simply because the market conditions are driving the rents higher just as a supply-and-demand proposition, as opposed to what the capital costs might be associated with replacing that unit; and that was the point I was trying to——

    Mr. VENTO. No, I understood, but I mean——

    Chairman LAZIO. The gentleman's time has expired. Let's see if we can keep order on this if we can.

    I want to thank the panel for their testimony—oh, I am sorry. I want to recognize Mrs. Jones for the purpose of a unanimous consent request.

    Mrs. JONES. Mr. Chairman, when I stepped outside just for a moment, I was approached by Mr. Cleo Busby, who is from the National Alliance of HUD tenants. Mr. Busby, do you want to stand up so the other Members of the subcommittee can see you? And Members of the subcommittee, what I am requesting is that we have a unanimous consent in order to be able to give Mr. Busby five days to submit a statement to the subcommittee with regard to this particular issue.
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    [The information referred to can be found on page 187 in the appendix.]

    Chairman LAZIO. What we are going to do, Mrs. Jones, if you don't mind amending that, is we will give you five days to submit and you can attach anything you want to that; and I say, without objection, that is so ordered.

    Mr. Bodaken, I just want to note that you gave the Appropriations staff a heart attack when you talked about $120 million being a rounding error, but with that—but let me just thank the panelists for their excellent testimony, for giving some texture to a very difficult problem. And we will be in close contact as we continue to refine this legislation and move toward a solution with a lasting impact.

    Thank you.

    Mr. BODAKEN. Thank you for your steps. Thank you.

    Mr. LENHOFF. Thank you.

    Chairman LAZIO. Secretary, welcome. I want to thank you for being here and ask for a little order, if I can, please, in this room as we clear out. Move out quietly if you are going to leave the room.

    I want to introduce, if I can, William Apgar who is the Assistant Secretary for Housing and Federal Housing Commissioner for the U.S. Department of Housing and Urban Development. He has been with HUD since 1997, and I have to say, Mr. Apgar, from a number of Members on both sides of the aisle, I have heard compliments about your willingness to sit down and work through problems with Members, and I want to express on behalf of the entire committee and the Membership of the whole House how much I appreciate that inclination.
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    Mr. APGAR. Thank you.

    Chairman LAZIO. I want to thank you for being here and you are on.


    Mr. APGAR. Well, I am pleased to be here today. You know, today a Section 8 program stands at a crossroads. Without reform, it has been heard, the program risks losing the best of its inventory, displacing thousands of low-income families and seniors and, alternately, spending too much money on this important housing function.

    I recently released a HUD report entitled, ''Opting In: Details, The Sobering Facts.'' Expirations are increasing. During the next five years two-thirds of the project-based Section 8 contracts will expire, 14,000 properties, over a million units of subsidized housing.

    Contracts are expiring everywhere. This is not just the problem of a few States. Every State has more than a thousand units that will expire in the next five years.

    One-year renewals, as we heard, compound the problem of current budget constraints of limited contract renewals to a year, multiplying the number of contracts that face expiration each year and magnifying tenant concern over the security of their housing.
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    As the Chairman knows, expirations are a cause for concern because expirations lead to the loss of project-based Section 8 housing. Most properties, of course, remain in the inventory, but the latest evidence shows that about 10 percent of the units that expire opt out of the program altogether.

    Opt-outs threaten the best affordable housing. The latest data show that 90 percent of those owners of units who say they are likely to opt out are located in low poverty neighborhoods where the housing brings better opportunity, more jobs, better schools, less crime.

    And opt-outs are occurring everywhere, as we noted. Latest data show that opt-outs have occurred in the recent past in over 47 States. Clearly, reform is needed, and to guide this reform, HUD proposes three simple policy principles.

    Principle one, only subsidize good housing. Under HUD 2020 reform, this year, the new Real Estate Assessment Center will inspect all 44,000 HUD-assisted properties. These scores must guide HUD's renewal policy.

    Principle two, pay a fair price. HUD should not pay more than an owner can get on the open market, but neither should HUD expect owners of good housing to accept less than a fair price.

    Principle three, preservation is not enough. No matter what HUD does to preserve the best project-based housing, there will always be some properties that leave the program by choice of the owner or by HUD. In these cases, residents using vouchers are faced with a choice of substantial increases in their portion of the rent or moving to housing they cannot afford. This can be avoided by allowing the payment standard for the voucher to rise to the market rent for as long as the resident remains in a unit. Currently, HUD can offer these so-called enhanced or sticky vouchers only in limited cases. By broadening this authority, Congress can avoid resident displacement, ensure that vouchers are an effective tool in all neighborhoods.
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    And finally, with the Nation facing an affordable housing crisis, Section 8 needs more than reform. It must also grow. With a record high of 5.3 million families in need of assistance, only by expanding the number of new vouchers each year can Congress and HUD fulfill the Nation's commitments to its neediest citizens.

    We propose a two-step plan for action. First, HUD will use its current authority and resources to prevent opt-outs. This portion of the strategy will offer market rents to a targeted group of properties that have substantial financial incentives to opt out.

    Elements of this targeting include properties in good condition. HUD will mark up to market only properties with good or excellent scores on HUD's new physical inspection system.

    Two, properties in strong markets: Opt-outs lead to the loss of project-based housing in neighborhoods with the lowest poverty rates and the highest rents. These are the same neighborhoods where housing vouchers do not always shield residents from significant increases in the rental payments. HUD will focus on properties with market rents higher than 110 percent of the area payment standard. To ensure that subsidies are reasonable, rents offered will be capped at 150 percent of FMR.

    And finally, HUD will target properties most likely to opt out. For-profit-owned buildings that have the financial incentives to opt out will be selected, and a five-year commitment to accept the project-based renewals will be required in return, and we are going to try to focus on those that are most likely to opt out, but give the owners some significant incentive for staying in.
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    The second part of the strategy calls on the Administration and Congress to work together to reach a comprehensive legislative strategy to protect residents and preserve the best of project-based Section 8 housing.

    Highlights of this strategy include market rents for certain properties. The Administration and Congress should build on HUD's immediate actions by creating a permanent mark-to-market program. The Administration proposes to spend up to $100 million for this purpose in fiscal year 2000.

    Improved Section 8 renewals: Recent changes in renewal policy have led to greater insecurity of residents and owners through frequent resident notifications and changing rules. The Administration and Congress should explore a way to reduce insecurity by streamlining the annual contract renewals.

    And finally, more effective resident protection. In many cases, HUD can protect residents better by offering enhanced vouchers that allow them to remain in their homes without substantial rent increases when opt-out occurs. The Administration and Congress should craft legislation to expand this authority.

    This concludes my formal statement, and I am happy to take any questions you may have.

    [The prepared statement of Hon. William C. Apgar can be found on page 175 in the appendix.]
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    Chairman LAZIO. Thank you, Mr. Secretary, for your testimony, and it will be included in full in the record and anything you have not orally testified to.

    Let me ask you again, because you were actually in the audience when we were asking about this effort to try and get HUD and the Administration to be engaged in this issue earlier, and that these last 18 months have been sort of inability to move. We provided—I say ''we''—Congress provided HUD the authority to address the opt-out issue in October of 1997 with the mark-to-market legislation, but during that time period about—from the period of time from the authorization to this time you have lost about 30,000 units.

    So my question is, if HUD's recent plan is mostly administrative in nature, focusing on short-term, really stopgap solutions—and I think there is testimony earlier that there is enough money in the HUD budget to deal with this for at least this current fiscal year, why wasn't it that we could have moved much earlier? If there was enough money and there was authority, why has it taken so long to actually address this issue?

    Mr. APGAR. Well, of course, we have been acting. We have been working with owners in opt-out situations across the country. The gentlemen who were here earlier, we worked with them to make sure, as best we could, we could keep the projects in the inventory.

    In addition, of course, we have efforts to allow properties to move up the budget-based rents. In other words, we often can stabilize the unit, and in many cases, we have literally cases in States across the country where, through HUD intervention, we have been able to avoid opt-outs.
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    The problem has been growing, as we know, because we have seen this recent surge in rents. This year was the first year in which rent increases exceeded the pace of inflation. In fact, rents have been basically unmoved in many market areas.

    Chairman LAZIO. Let me, if I can, because my question is, why hasn't the administrative plan that you are addressing right now with your list of principles, why wasn't that done a year ago or eighteen months ago?

    Mr. APGAR. Well, actually the money that we are using this year was money that was placed in HUD budget in the fiscal year 1998–99 Appropriations Act. So that is our funding base. Additional funding has been requested in the year 2000 budget for this issue.

    We were wrestling, as I am sure you will be, with the difficult issue of targeting. Quite simply, if our estimate suggested that if all the units were marked up to market, say if we actually went with the 100 percent to market markups that the folks in the earlier panel urged on this subcommittee, that could cost anywhere between $600 and $800 million. We didn't have those kind of resources available for us to do it.

    What we have been doing instead is crafting a targeted policy that within the resources we had at hand and the resources we felt comfortable to committing to for the long term, could address this problem.

    Chairman LAZIO. Could you tell me—notice, I take it, has not been issued yet for these administrative policies?
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    Mr. APGAR. We have alerted the field today as to the change in policy. It is our intention to begin immediately to finalize that notice with the field. It is our expectation that developments that are up for renewal as of May 1st can participate in this program, and we are working to make sure that all the owners who are up for renewal from May 1st on are eligible.

    Chairman LAZIO. Can you give me sort of an estimated date when the notice will be issued?

    Mr. APGAR. We will have the final notice to field out in two weeks.

    Chairman LAZIO. Thank you.

    Mr. APGAR. Yeah.

    Chairman LAZIO. Let me ask you also about this issue involving rural areas versus urban areas; targeting issues, targeting seniors and disabled relative to family units. Could you speak to that and where the Administration comes out on that?

    Mr. APGAR. Well, it is our sentiment the issue is not family versus nonfamily. The issue is really one of the dislocation effects that moving can cause. In areas where the rents of the building are well above the area payment standards, sort of average rents in that area, there can be dislocation issues. Certainly the elderly face those dislocation problems, but so do larger families and others that are in the development.
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    Chairman LAZIO. Could you imagine not exercising the discretion, if you had the discretion, to include the families?

    Mr. APGAR. It is my understanding that the way the bill is written is discretion is allowable only in situations of tight markets. We do not think that tight markets is an appropriate—is measured by vacancy rates. We don't think that is an appropriate guideline to use. You can have situations where the rents are high and the dislocation effects can be great, but the vacancy indicators aren't tight, and other situations where the vacancy rates are.

    We think we need clearer guidelines on when you would use the enhanced vouchers, and our sense is that we should have enhanced vouchers, more or less, on an across-the-board basis.

    Chairman LAZIO. Let me ask you about tax policy. How do you think—one of the concerns we had as we were working through a mark-to-market was the tax implications and how it would affect owners in terms of choosing to opt out or continue in the program. Do you see that there are consequences to current tax policy, and might that be decisive for owners?

    Mr. APGAR. For the owners who are in the below market inventory?

    Chairman LAZIO. Yes.
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    Mr. APGAR. No.

    Chairman LAZIO. You think that is a nonissue?

    Mr. APGAR. Yes.

    Chairman LAZIO. All right.

    I want to thank you, Mr. Secretary.

    Mr. Vento.

    Mr. VENTO. Thanks, Mr. Chairman.

    Mr. Secretary, could you give us some—and obviously you go to a targeted markup in this new proposal, which I think is prudent, but it obviously puts it on the horns of a dilemma now.

    The proposal we have before us goes to 100 percent, and you pointed out that would be $600 to $800 million.

    Mr. APGAR. Yes. The issue is, in my mind, if you only mark up to 90 percent any property, you would still not necessarily avoid opt-outs. Virtually every case that we talk to, at the end of the day, it is coming down to $30, $40, $50 a month rent, which sounds like a small difference, except if you do what a property owner will do and multiply that. So that is the biggest difference in the world.
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    The next question is, if you are going to pay up the market to keep the buildings in, you want to target only those buildings that have a high chance of opting in.

    Mr. VENTO. You are going to lose some because you are going to make some mistakes and because some building owners want more than a one-year commitment. You are going to try to make more than a one-year commitment in any case, aren't you?

    Mr. APGAR. That is correct. We are going to work on—we are developing a five-year contract framework that will provide some surety of the property owner. Obviously, we can't assure that the funding will be there. That will be subject to the acts of the Appropriations Committee, but within this framework, we think we can calm folks down.

    We would like legislative relief. We would like not to have to tell the tenants every year that the building is going to opt out.

    Mr. VENTO. Have you found an easy way to do that?

    Mr. APGAR. What?

    Mr. VENTO. Have you found an easy way to do that?

    Mr. APGAR. No, I haven't. I think this whole issue of developing an appropriate tenant notification is very important. I think the one-year notification was well intentioned, but I think it is working out to be more harmful than good.
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    Mr. VENTO. Well, I tell you, I mean I just don't know a good way to explain to them that, you know, because of the contract and the opting-out provision—I mean, I have tried to explain it. If you find a good way to do it, I would like to know how to do that.

    Can you give us any type of indication of the factors that you would use to determine whether or not to mark-to-market property? You did talk about some of those factors, but—not that you would give them to us—do you have those in place yet?

    Mr. APGAR. Yeah. The basic factors are going to be——

    Mr. VENTO. I read your testimony, of course.

    Mr. APGAR. Those are the basic factors. We are looking for properties that are above the fair market rent standard. That is our indication of places where there is significant tenant dislocation.

    Mr. VENTO. Have you got staff in the field ready to do this, to make these determinations?

    Mr. APGAR. We went through the basic outline of the policy this morning in a field call.

    Mr. VENTO. I heard you say two weeks you are going to have——
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    Mr. APGAR. We will have written instructions for them, or written material to them, tomorrow and a formal field notice in two weeks.

    Mr. VENTO. So the point is, you are not—the idea obviously behind apparently some of this disparate treatment between, you know, elderly and disabled versus other units is an issue.

    You have the discretion right now, in fact, to go down to 90 percent for some units, don't you?

    Mr. APGAR. Yes. We would like to——

    Mr. VENTO. And you also have the option to go up, don't you?

    Mr. APGAR. We have the, we have the authority, we believe, to mark project-based Section 8 up to 100 percent of market rents.

    Mr. VENTO. It is a massive job, though, isn't it, in terms of doing this? That is one of the reasons it hasn't been done in these 16, 17 months, isn't it?

    Mr. APGAR. We wanted to develop clear guidelines that dealt with the difficult problems and the fact we only had the resources to address a portion of this issue. We want to focus our resources on the units that were most likely to opt out.

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    Mr. VENTO. What about the measure that I put together dealing with engaging the States and using some of their dollars? And it obviously also addresses the non-Section 8 elderly preservation issue.

    Mr. APGAR. Well, as I mentioned, it is one of the things we have been doing in the past is where there are State resources available, that can be enormously helpful to help, you know, encourage property owners to keep in; and we think part of a comprehensive solution should involve a State match. Ultimately, if these units are so vitally needed in the community, then the State should recognize it, as should the locality; and I think a State match is appropriate and warranted.

    Mr. VENTO. You don't mind sharing some of the responsibility with them for making these decisions, do you, Mr. Apgar?

    Mr. APGAR. No. We hear a lot of times owners and people say this is the most critical housing resource in our community—talked to many mayors about that. My sense is allowing them to have some participation in funding would be helpful.

    Mr. VENTO. What about staffing? Do you think that would help with your staffing?

    There was a suggestion that folks didn't come out. I know that in my case they just about invite the Member of Congress out to explain these one-year notifications.

    Mr. APGAR. Yeah. Our community builders, as well as our new groups of employees that do community relations, community outreach, many of them spend a substantial portion of their time going to tenant meetings, explaining to the residents the issues, trying to scope out whether the property owner is really for real about opting out or whether or not they are just, you know, issuing a formal notification.
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    So there is lots of work for HUD people to do.

    Mr. VENTO. Well, it is a very difficult thing when you are without housing.

    One of these issues, of course, is the issue of new construction, but that is simply not on the table. If you have got a fair market rent problem, even with new construction, you are likely to run into the same problem again, aren't you?

    Mr. APGAR. Well, in these areas, these so-called ''hot markets,'' the cost of new construction is very high, also. So it is an expensive proposition, housing of any form, in these market areas.

    Mr. VENTO. Well, we are going to lose some and obviously we ought to be an active player, and right now, you feel like you are behind the curve, I take it; that is why the action last week.

    Mr. APGAR. Well, with the rents increasing across the market because of the strong economy, with the number of owners expressing interest in opting out growing, we decided to move.

    Mr. VENTO. Thank you.

    Thank you.
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    Chairman LAZIO. Thank you, Mr. Vento.

    Mr. Ney.

    Mr. NEY. Thank you, Mr. Chairman.

    A lot of your field offices really don't have a lot of guidance as to how to carry out the reviews of the independent appraisers' work?

    Mr. APGAR. That is correct.

    Mr. NEY. And so that forces a situation in some cases for the owners to just give up and opt out.

    Have you looked at that issue within HUD of how to ensure that the reviews are done about the independent appraisers' work?

    Mr. APGAR. Yes. I mean, this is the first year of renewals where we are requiring the rent certification process. So we are just early into that stage. Quite frankly, many owners were confused as to how to do a rent certification. We held trainings across the country to inform them of how to do it well. Now, we are seeing the first wave of rent certifications coming in. In order to help our side of the ledger, we added contract resources so that we are able to give fair and full review of these rent assessments.

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    We put a little bit of a strain in the short run on the appraisal resources, and many have had a hard time engaging a licensed appraiser, because they are otherwise engaged doing somebody else's rent certification; but we think we are now building a good body of information, and our field offices are getting into it.

    Mr. NEY. Are you having any particular problem in rural areas versus——

    Mr. APGAR. In rural areas poses a challenge because, quite frankly, the HUD building is the only and best unit of that type in the area. It is hard to compare it to single-family rentals or other lower-density stock. We have been using a variety of things, relying on judgment of appraisers to talk about the comparables that may not be in that immediate town, but in a similar-type metropolitan area in near proximity.

    Mr. NEY. I think you get a catch there, because the units might need, obviously, some work done on them, you know, in maybe twenty-some years, but you can hardly—it is tough to appraise it next to the current stocks that are there.

    Mr. APGAR. Yeah. But again, when we look at our inventory, especially elderly inventory, our assessment system that is under way now through our Real Estate Assessment Center indicates assessment of the best inventory in the HUD inventory. It is the family inventory that tends to have greater wear and tear, and so this inventory is in pretty good shape, but often there is not much to compare it to in these smaller town markets.

    Mr. NEY. Thank you.
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    Chairman LAZIO. Thank you.

    Mrs. Jones.

    Mrs. JONES. Thank you, Mr. Chairman.

    Good afternoon, sir. How are you?

    Mr. APGAR. Good.

    Mrs. JONES. Good. I am reviewing not only your report, but the report that was submitted by the gentleman from National Housing Trust.

    Mr. APGAR. Yes.

    Mrs. JONES. And I am a new Member of Congress. I am from Ohio and I am all of a sudden really being alarmed here.

    In the report from the Housing Trust it says in eleven States, ten or more opt-outs have occurred. The second highest State is Ohio with 35 projects, some 2,086 units. In your report, it says contracts are expiring everywhere, 69,000 in Ohio.

    Mr. Ney, my colleague, get alarmed with me, please.

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    And there was another page referencing Ohio.

    I am not asking you to answer this question for me this afternoon because that would be unfair, but I am asking that someone from HUD provide some information to me and Mr. Ney about what is happening in Ohio such that we are so high on that list.

    But what I really—for this afternoon, my question references—I asked one of the housing owners, what would be the incentive for them to maintain long-term or grant housing if we went to—we were in a twenty-year contract. We are now down to one.

    What would be, in your mind's eye, the best length of a contract with a housing unit for purposes of better housing?

    Mr. APGAR. OK. Just quickly on why so high. A lot of it has to do with timing. A State that was actively involved in the programs earlier on, their contracts tend to come up sooner. So it is just the fact that you were more aggressive in getting into the program that you hit this twenty-year renewal problem now.

    In terms of the interest of the owner in staying in the program and maintaining the units, we are actually proposing to develop a five-year framework which provides some guarantees for the owners in exchange for their willingness to stay in the program.

    How do we keep owners, making sure they do a fair and honest job for the taxpayer dollars that they earn? Our new Real Estate Assessment Center, our new financial management analysis, can evaluate owners. This is the first time we have been able to do this on a systematic basis, and so that portion of the inventory which was not in good repair is either being reviewed by the assessment center for possible violations or is having intensive management work done by our field office.
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    Right now, we have had the problem of treating all property owners alike. If you had the best facility in our inventory, we had you do the same stuff as if you had the worst building in our inventory. And what we are doing by rating and ranking the inventory, is focusing in on those property owners who are doing a good job for us and enforcing the agreements that they have committed to.

    Mrs. JONES. The testimony from the first panel was predominantly referencing rural districts. I recognize that there are some people from some urban districts seated in the audience right now.

    My question to you is, how do problems of residents in urban districts differ from the problems of the residents in the rural or suburban districts, if at all, with regard to this particular issue?

    Mr. APGAR. Well, in an urban area, it can be very similar. People get to know their neighborhood. They like to live there. It is their small town, even though it is in a big city, and if the rents in that area spike up so that the property owner has a strong incentive to drop out of the program, the dislocation effects for those residents can be quite substantial.

    In my neck of the woods, there is a town where the folks are really concerned that many——

    Mrs. JONES. What is your neck of the woods?
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    Mr. APGAR. Up in the Boston area, Waltham. So I am in a suburb that is undergoing substantial increase in rents. They are worried about losing their Section 8 base because, again, the folks there wouldn't be able to find other housing within Waltham. They would have to move either further out of the metropolitan area or back into the city.

    City neighborhood is the same thing. If a high, hot city market emerges, then those residents have to move out of their neighborhoods, maybe even out of the city. It can be substantial dislocation.

    Mrs. JONES. Mr. Chairman, since the yellow light is on, I am going to yield the balance of my time.

    Chairman LAZIO. Thank you, Mrs. Jones.

    Mr. Sweeney.

    Mr. SWEENEY. Thank you, Mr. Chairman.

    Secretary Apgar, welcome. I just have a couple of points of clarification on your testimony that I would like to ask about.

    You said in terms of the legislative response that we needed to consider that recent changes in renewal policy led to greater insecurity—we have heard testimony to that effect—and that you would like to see or explore ways to reduce that insecurity by streamlining annual contract renewals. The prior panel spoke in terms of providing a notice of 90 days prior to as a suggestion that we might consider, and the current statute requires a year.
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    What is your position and what is HUD's position on what you would recommend to us?

    Mr. APGAR. My sense, it is less about the time of the tenant notification than whether or not we can establish a framework which says that under these rules the property owner can have reasonable expectation, subject to appropriation, that that building will be renewed, and on that basis, they would be not required to notify the tenants every year.

    Mr. SWEENEY. And then a renewal would be triggered when?

    Mr. APGAR. Renewal would be triggered then at the end of the five-year period. By then we would be in the process of, you know, reupping them for another five years, doing another round of market studies and deciding what would be the appropriate pay to give them at that point, and if they decided at that point to opt out of the program, that would be an appropriate time to notify the residents.

    But our expectation is, if we pay a fair rent and we modify that rent periodically, that will be fair both to us and to the property owners.

    Mr. SWEENEY. Tell me how that would work in terms for the tenants?

    Mr. APGAR. Well, the resident would not be required notification after the first year because there would be no expectation that the property owner agreed not to opt out of the program other than in the case of failure of the Congress not to appropriate the funding of his contract. And that would be—the expectation is that would be a relatively rare event.
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    Mr. SWEENEY. You have also said that there needs to be—we need to look at an enhanced voucher process, and I just need a clarification. You said as well that you would like to see an across-the-board enhancement. Actually you are saying, if I am understanding what you are saying correctly, that the voucher process now covers less than 100 percent. And what I think you are saying, and clarify this for me, you would like to see the voucher process be able to cover 100 percent?

    Mr. APGAR. Currently HUD is authorized to issue these enhanced vouchers in a relatively limited number of cases. H.R. 1336 authorizes the use of enhanced vouchers in a wider range of cases. We would like to see it broadened and make the enhanced vouchers authorized in every case.

    Mr. SWEENEY. What is the HUD process for accurately determining market rent values? I know that there has been some criticism that there needs to be refinements, and, in fact, Mr. Lenhoff said it is neither fair nor market.

    Mr. APGAR. The fair market rents which are used to guide the Section 8 policy are established through market studies. We update those through so-called random digit dialing evaluations; call folks up and get their rents, estimate market changes using those studies and other factors.

    I think one of the confusions on this topic, of course, is that fair market rent is only said to be at the 40th percentile of rent, and so by definition it does not hit the median rent in that market area. That is one change. And that was done in order to shave off some of the expenses of the fair market rent.
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    In smaller areas and in rural areas where rents are a hodgepodge of really very low-quality single-family stock and higher-quality newer apartment stock, there is a lot of variation from town to outlying areas, and that can be an issue. We handle that as best we can now through a process called exception rents in which a local housing authority can designate that for this particular area, the vouchers can pay up to 20 percent higher, and so that is one mechanism to get around the variation. But there is going to be variations in the rent. It is not uncommon in Boston or any big city for the rents to vary 15, 20, 30 percent from just one section of town to another. To try to get one standard for all areas is the dilemma.

    Mr. SWEENEY. Is there a process within HUD that you regularly review where your liabilities are, where your failures are and how you can correct them?

    Mr. APGAR. We regularly review fair market rents on a systematic basis. If individual communities believe that their fair market rents are out of whack, they can appeal to the HUD office and request a fair market rent review. We do those periodically, especially in hot market areas where the rents are moving quickly, otherwise the delay in waiting for the next annual adjustment factor may cause difficulties.

    Mr. SWEENEY. Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you.

    Mr. Frank.

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    Mr. FRANK. I apologize for having to leave. We were working on the Y2K bill in Judiciary.

    Mr. Apgar, you, before taking this job, were a very distinguished academic expert on housing and Government. Obviously we ought to look at the specifics, but we ought to not forget the context. Is it accurate to say that this whole issue arises because of the enormous success of this Government program; namely the public sector created a program twenty-plus years ago which so successfully provided housing for people that they could not otherwise afford that they are desperately eager to keep it. And I think in a time when it is fashionable to talk about Government failures, we ought to underline from the academic perspective, is this not an example of really the great success of the provision of a very important service to low-income people through a Government mechanism?.

    Mr. APGAR. It is pleasant to have a mayor call you and say they really want to keep the HUD housing that we work on in their neighborhood. It is a triumph. I think part of the lack of focus on this issue is many of the Section 8 buildings are so good, they are virtually invisible. Until the twenty-year contract expired, people did not know that they were at any risk or it was even a subsidized housing development. The contract has expired, and that brought on the attention.

    Mr. FRANK. I think that is important to stress. This is a very successful Government program, successful to the extent people have said, don't let this expire.

    I know we have in the greater Boston area a housing crunch. If this housing had never been created, didn't exist, how would things change? Sometimes people say the Government just mucks things up. Suppose we never had the program that led to this particular form of housing with the project-based Section 8? In your judgment, what would the state of the housing market be in greater Boston and comparable places?
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    Mr. APGAR. The Section 8 project base has a million-and-a-half families, and the vouchers another million-and-a-half; maybe three million more low-income people trying to get housing on the open market. That would be difficult for them, but they would bid up the price of housing across the board.

    Mr. FRANK. If we, in fact, allow these units to—if we talked only about tenant-based vouchers, what we are doing economically is adding to the demand in ways that are probably not going to be able to decrease the supply, and the price of commodity goes up.

    Mr. APGAR. Higher rents across the board. That affects not only low- and moderate-income folks, but anybody in the rental market.

    Mr. FRANK. Let me go on to another issue because part of the problem, and, again, there are some technical issues, and we have worked on them and have to work on them, but there is one nontechnical issue, and that is lack of money. I think people ought to understand. Those who think that Government spending is a bad thing and who are always for cutting Government spending, have to accept that this is Government spending. Government spending is this great abstraction to beat up, but it is the sum of the parts. This is one of the major parts. And it does seem to me, as I mentioned to the witnesses before, much of the criticism that is aimed at HUD in fact is not HUD's fault; it is the resource allocation that is being criticized, leading to understaffing by HUD.

    I note, for instance, Mr. Lenhoff talks about in 1997, they had an approved plan of action under Title VI, but it was never funded, so we had an opt-out. I would assume that it wasn't funded not because somebody in HUD said, ''Move out of your house,'' but because we had a budget crunch. You were not there in 1997, but the failure to fund an agreed-upon plan in 1997, I would assume, reflected a budgetary shortfall; is that correct?
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    Mr. APGAR. Yes.

    Mr. FRANK. Finally, yes, we want HUD to be as efficient as possible, but a lack of money is a cause of many of the problems.

    A final point, we should stress again if we did everything here, we would have preserved almost all of the units we now have, but we would do nothing about providing needed housing for how many people who would be similarly situated?

    Mr. APGAR. Our estimate suggested 5.3 million families who pay more than half of their income for rent. We think that we have to continue to grow the Section 8 program, and the way to do that is to expand the number of vouchers.

    Mr. FRANK. The fact that this program has been so successful that it has generated strong bipartisan support and demand that we preserve it, given that we have a need for other people, it would be very paradoxical for us to say that this is so important and successful you have to preserve it, but let's never do it again. And I think that we would want to build on this to try to expand the resources available for a similar-type program in the future. Thank you.

    Chairman LAZIO. Thank you, Mr. Frank.

    I would like to ask one question as a prerogative of the Chair, unrelated to this. I think we may have touched base with your office, Mr. Apgar, unrelated to this opt-out issue. It has to do with high cost adjustments on Section 202 properties.
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    There was a notice that was sent out earlier this year, I think in January of this year, which 202 sponsors were thrilled about because it allowed them to free up projects that were planned back in 1993, get them out of the pipeline. I am talking about senior housing desperately needed. And evidently HUD went back and modified that notice, and that has stopped up a number of units. I know that there are 24 in New York, and 1,508 units being stopped up. They cannot complete their processing and commencing construction. If I can just ask for you to respond in writing to that, that would be very helpful.

    Mr. APGAR. Fair enough.

    Mr. FRANK. Mr. Chairman, I endorse your request, and I would cite that is another example of too little governmental spending. We need to spend more money to get this housing built. I enthusiastically support this further example of the need for more Government spending in housing.

    Chairman LAZIO. This is one area where we do agree and one area in which we have to come back despite HUD's recommendations and the Administration's budget, and this Congress has come back repeatedly year after year to substantially increase the amount of spending for senior housing, as well as disabled housing through the 811 program.

    Mr. FRANK. At the expense of others. What we are dealing with here is a congressional decision signed by the President in 1997 which said we are not going to spend any more money on overall programs, and at some point you cannot keep expanding the parts unless the whole also gets a little bigger.
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    Chairman LAZIO. This was Congress overcoming the challenge placed by the Administration in terms of additional resources for the seniors and disabled people, who are the most vulnerable.

    Mr. FRANK. I would disagree that they are the most vulnerable. When you are talking about poor families and the homeless, for instance, I would give them a tie in the vulnerability sweepstakes. But the problem is with the budget caps we have to operate on, if you do more for one group, you have to do less for others. I would like to not have that choice.

    Chairman LAZIO. It is something that the Administration has chimed in on this time.

    Mr. VENTO. Mr. Chairman, an unrelated issue, I have the Housing Finance Agency report to the 1999 Minnesota Legislature. I would like to include that with the Governor's testimony.

    [The information referred to can be found on page 57 in the appendix.]

    Chairman LAZIO. Without objection, so ordered.

    Mr. VENTO. Just one comment to Mr. Apgar. Much of the criteria that we look at here talk about as if it were all cut and dry, but very often it depends on who the sponsor is of that particular Section 8 unit. If it is a nonprofit, religious or other organization, they are not apt then to opt out. If it is another sponsor, they are. So that is another issue that goes down here in terms of what is going on.
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    Chairman LAZIO. Just to complete that thought, even nonprofits need to be able to keep their programs afloat to make their mortgage payments and service their debt and to operate and maintain their buildings, and so that itself is very important, in my opinion, to ensure that we retain the affordable housing stock.

    Mr. VENTO. Mr. Chairman, I think it does make a qualitative difference in terms of what is happening in terms of the commitment. I agree that no one is going to ask for less money. I think that is one of the problems with the $1 billion versus the $600 or $700 million. That equation is not balancing right now.

    Mr. APGAR. With nonprofits and others, we can work to develop budget-based rents and other things to ensure that they have sufficient funds to operate. That does not necessarily require marking up to market. In many instances, just cost covering rent is what the nonprofit group is looking for.

    Chairman LAZIO. It is certainly within HUD's discretion to encourage the nonprofit sector to be more active as some of these properties are restructured.

    Thank you, Mr. Secretary.

    The hearing is now in adjourned.

    [Whereupon, at 4:15 p.m., the hearing was adjourned.]

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