Segment 1 Of 2     Next Hearing Segment(2)

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RURAL HOUSING IN AMERICA

Thursday, June 19, 2003
House of Representatives,
Subcommittee on Housing and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 2:45 p.m., in Room 2128, Rayburn House Office Building, Hon. Robert Ney [chairman of the subcommittee] presiding.
    Present: Representatives Ney, Tiberi, Renzi, Castle, Waters, Lee, Scott, and Davis.
    Mr. RENZI. [Presiding.] The Subcommittee on Housing will come to order. I would like to read an opening statement.
    Today, the subcommittee meets to discuss the importance of rural housing in America. I am pleased to announce that this is theubcommittee's first hearing on the subject in over a decade.
    Our goal is to review these programs and look at the ways to increase the proficiency and cost effectiveness. Rural areas are often plagued by poverty, high numbers of substandard homes, affordable housing shortages, costly development and inadequate access to mortgage loans.
    The Rural Housing Service funds its programs through an insurance fund which provides direct loans, guaranteed loans and grants to help families obtain and maintain affordable housing in rural areas. Today, it is estimated that rural housing programs help finance new or improved housing for 65,000 moderate low-and very low-income families each year.
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    However, questions have arisen in recent years about the effectiveness of rural economic development policies and creating new opportunities for rural residents, as agriculture and other resource-based economic sectors decline in their overall importance to most rural economies. A wide ranging set of often overlapping programs target rural areas and their special needs.
    But according to some critics, there remains little overall coordination of these various programs to produce a coherent rural policy. Over 88 programs administered by 16 different federal agencies target rural economic development.
    The U.S. Department of Agriculture administers the greatest number of rural development programs and has the highest average of program funds going directly to rural counties—approximately 50 percent. On a personal note, I was raised in southern Arizona and grew to understand that a safe and secure home is the foundation for the family unit.
    My belief in the importance of home ownership remains steadfast. It is of great importance to apply these fundamental values and rural experiences to help communities develop new economic vehicles that will enable them to grow and prosper.
    I look forward to hearing from all of our witnesses today to discuss the various ways I which home ownership can be strengthened for our rural communities and contribute to the overall quality of life for rural families.
    At this moment, I would like to recognize Ms. Waters from the great State of California.
    Ms. WATERS. Thank you very much. I know that Chairman Ney is tied up in a meeting and could not be here. But I am delighted that you are chairing this meeting. And I thank Mr. Ney for calling this hearing on an issue that really needs to be discussed and is central to the need for more affordable housing in our country.
    Usually, when we discuss poor people, the focus is on urban centers. However, there are poor people in rural America across this country who need our assistance to help improve the quality of their life.
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    The U.S. Department of Agriculture's rural development mission is to administer programs that are designed to meet the diverse needs of rural communities. The three principal program areas are Single Family Housing, multifamily housing and Community Facility programs.
    According to an American housing survey, with the assistance of the Housing Assistance Council, of the 200 poorest counties in America, all but 11 are non-metropolitan. There are 363 rural counties where the poverty rate has exceeded 20 percent.
    Since these figures started being collected in 1960, Title 5 of the Housing Act of 1949 authorized the Farmer's Home Administration to grant mortgages for the purchase or repair of rural single family houses. Second, it authorized financial assistance in rural areas to farmers, owners, developers and facilities, ensuring to them various loans and financial assistance for low rent housing for farm workers.
    One of the primary issues that needs to be addressed is the rental housing program. Section 515 of the Rural Housing Program provides direct loans to non-profit and for-profit developers for multifamily housing for very low-and low-to moderate-income families, elderly persons and persons with disabilities. It is important that when RHS approves an owner, who agrees not to displace residents from a development, that if an owner decides to convert the property to condominiums or luxury apartments, that residents are protected.
    That is why in 1987, the Emergency Low-Income Housing Preservation Act of 1987 was enacted after a number of owners of developments that were financed before 1979 were prepaying their loans and displacing elderly and other households from their homes. The RHS rental housing portfolio contains 450,000 rented apartments and Section 515 developments. The average annual tenant income is about $8,000, which is equal to only 30 percent of the nation's rural median household income.
    The General Accounting Office indicates that 100,000 families could be displaced if the Section 515 portfolio is deregulated. These families have limited means and will not be able to afford market rate rentals.
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    There are over 90,000 Section 515 households who do not receive rental assistance. I will be interested in hearing suggestions on ways to improve the program to ensure that the people who need it most will be served.
    Thank you very much. And I yield back the balance of my time.
    Mr. RENZI. I want to thank the gentlelady from California and ranking minority member, a true advocate for the families of limited means, a true fighter.
    I want to recognize my neighbor over in the Cannon Building, who has taken the time to teach me a lot as it relates to housing issues, the gentleman from Georgia, Congressman Scott.
    Mr. SCOTT. Thank you very much, Mr. Renzi. I appreciate your warm and kind remarks.
    My distinguished colleague from Arizona, I certainly appreciate your chairing this committee. I want to thank Chairman Ney and Ranking Member Waters for holding this important hearing today as well on this important subject of rural housing in America, especially given that it has been about 10 years since this committee has had a full hearing on this important subject, as Mr. Renzi pointed out.
    My district is very diverse. I represent urban, suburban and rural areas to the south and east and north of Atlanta, Georgia. The challenges of increasing home ownership and providing decent quality homes is different for each of these areas.
    And from time to time, Congress should ask if a particular policy is working and if it can be improved. I look forward to the testimony from our distinguished panel of witnesses about the effectiveness of rural housing programs. And I certainly want to thank you for taking the time to come up to Congress to share with us your expertise and thoughts.
    And I also want to mention an issue regarding manufactured housing, which is a large part of housing in rural America. I certainly hope that the industry and Fannie Mae can work out an assessment on available 30-year mortgages.
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    I do not think that rural Americans, especially the elderly, should be penalized for the past unscrupulous loan practices. There are some very serious questions I think we certainly need to take a look at and hopefully, we will get to today.
    For example, how would the hypothetical block granting of Section 8 programs, which are under attack now, affect rural housing authorities? I think that is very important for us to take a look at, as we look at this issue of moving Section 8 block granting it to the states, which we hope we have effectively stopped. But I think that question needs to be answered.
    Would this put a strain on other rural housing programs, for example? Also, I understand that the Farm Credit Administration provides rural housing loans.
    I think we need to examine the question as to: do you find that the Farm Credit Administration programs compete with other Federal programs? And do you believe that requiring a high down payment for manufactured housing mortgages will put a strain on rural housing opportunities?
    Some very serious questions. This is very timely. And I certainly appreciate the chairman and Ranking Member Waters for doing it and Mr. Renzi, for you doing a fine job of hosting this for us. Thank you very much.
    Mr. RENZI. I thank the gentleman. And his expertise is well noted. And I am sure the questions you will see today contain a lot of deep substance.
    I will now recognize the gentlelady from California, Ms. Lee.
    Ms. LEE. Thank you very much. And I wanted to also thank the chair, in his absence, and to our chair here today and to our ranking member for this hearing and to the panelists who have come to present this testimony.
    You know, oftentimes, we from urban centers—I am from Oakland, California—forget really that California actually has many, many rural communities. And that we sometimes forget also that in these rural communities, there are deplorable conditions, poor infrastructure. Many of the homes are unaffordable.
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    And so I think that it is a very important hearing today. And it is important for myself, being from an urban community, to really understand and learn and be reminded that what affects urban housing issues—in terms of affordability, in terms of home ownership, in terms of infrastructure, in terms of safety—also affects our rural communities. And we should have a comprehensive strategy in terms of providing for decent and affordable housing for everyone.
    And that should be part of our domestic agenda. And it should be a priority.
    So I just want to thank you again, Mr. Chairman, for this hearing and look forward to the testimony.
    Mr. RENZI. Thank the gentlelady from California for her insights.
    Move now to the gentleman from Alabama, the former prosecutor, Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Renzi, Mr. Acting Chairman, as it were.
    Let me welcome the members of both panels here today. And let me certainly thank, in his absence, Chairman Ney for calling this hearing.
    I noted as I was watching the television feed of this in my office, that Mr. Renzi opened by saying that this is the first rural housing hearing in 10 years. I am very much struck by that. I am very much struck by that.
    When Michael Harrington wrote in 1965 about the other America, he was talking about portions of our country that have been extraordinarily isolated. And he was talking about people whose needs sometimes get lost in this otherwise wonderful process of ours.
    And as we think about if Michael Harrington were to write that book today or if another Michael Harrington were to write that book today about the other America, I think he would be talking in very large measure about people who are living in rural America. My 7th District of Alabama happens to contain five of the poorest counties of the United States, according to the U.S. Census Bureau. And all five of those counties are extraordinarily rural.
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    And as we talk about moving this economy forward, I think a large part of that conversation has to involve connecting and closing the gap between rural America and suburban and urban America. So I am happy that we have this hearing. And I am happy that it gives us a chance to talk about this pressing issue.
    I will make one other point. When the administration's budget was announced several months ago, a lot of us on this side of the aisle had sticker shock.
    Normally, sticker shock is because things are higher than we expect them to be. Our sticker shock was based on the fact that the commitment was much less than we thought it would be.
    And as someone who represents a rural district and as someone who represents a district that is very much dependent on rural housing initiatives, two things caught my eye. The administration proposed to eliminate the RHED program, the rural housing part of HUD, and the USDA's Rural Community Development Institute, two programs that coincidentally—or maybe not so coincidentally—happen to be the only rural capacity building programs that really exist.
    A budget says something about our priorities. A budget says something about what we value and what we think is important.
    And what troubles so many of us on this side of the aisle and some like-minded folks on the other side of the aisle is that in so many areas but particularly when it comes to rural America, we are walking away from a very important commitment that we have made. So to the extent that this hearing gives us a chance to shine some light on that, to the extent that this hearing gives us a chance to hear some perspective on a forgotten part of America, then I very much welcome this process and yield back the balance of my time.
    Mr. Renzi?
    Mr. RENZI. I thank the gentleman for pointing out the contentious issues that were surrounding at least the original blueprint of that budget. And I agree with him.
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    I thank the gentleman from Alabama. We will move to our first witnesses. Two witnesses today on our first panel. Our first is Ms. Phyllis Fong, who was sworn in as Inspector General for the United States Department of Agriculture in December of 2002.
    She is responsible for conducting and supervising audits and evaluations, as well as investigations and law enforcement efforts relating to the USDA's programs and operations. Prior to her appointment at the USDA, Ms. Fong had been an Inspector General for the U.S. Small Business Administration. She is a career member of the Senior Executive Service.
    Welcome, Ms. Fong.
    Our second panelist and witness today is Mr. Bill Shear. And he is the Acting Director for Financial Markets and Community Investments at the U.S. General Accounting Office.
    He has directed studies and is addressing federal oversight of government sponsored enterprises, including current evaluations of empowerment zones, securitization of community development lending and Federal Home Loan Bank System's financial activities. Prior to joining GAO, Mr. Shear was a senior economist at Freddie Mac, where he analyzed home ownership decisions and HUD's geographic purchase goals for Fannie Mae and Freddie Mac.
    Welcome, Mr. Shear.
    I would remind the witnesses that your written statements will be included in the record. We ask that your oral testimony be limited to five minutes. We will begin with Ms. Fong. Ms. Fong?
STATEMENT OF PHYLLIS K. FONG, INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, DC
    Ms. FONG. Thank you, Mr. Chairman and members of the subcommittee. I am pleased to be here today to provide testimony about the Office of Inspector General's work at USDA's rural housing programs. With me today are Bob Young, Deputy Assistant IG for Audit, and John Novak, Acting Assitant IG for Investigations, who will help me respond to your questions.
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    I would like to summarize the highlights of my testimony for you at this time.
    As you know, the Rural Housing Service within USDA has three primary programs: Single Family Housing, multifamily housing and Community Facility programs. OIG oversight of these programs has focused on a number of different areas over the past decade.
    During the 1990's, we conducted audit work in the RHS program of multifamily housing and single family housing. Over the past several years, our audits have focused on more specific and narrowly targeted issues, most often in response to congressional and other requests.
    Two of these audits have led us to identify areas where we need to provide broader audit coverage. These would include insurance coverage in multifamily housing projects and the issue of eligibility for rental assistance. In addition to our formal audit work, our desk officers continually assess program activities. Our investigation side of the house receives and pursues allegations of fraud in RHS programs.
    Based on our work in these areas, we have identified six major challenges for RHS management. These challenges include: portfolio management; unallowable and excessive expenses charged to RRH projects; RRH projects leaving the program; rental assistance; allocation of funds to rural areas; and performance measures.
    My prepared statement discusses all six of these challenges in some detail. So today, I would just like to focus on the two most significant issues, in our view. And those two issues are unallowable and excessive expenses and performance measures.
    RRH programs can be vulnerable to fraud and abuse because of the large cashflows involved. We have worked with RHS to address these problems and to stop those who abuse the program from participating in the program.
    In 1999, we issued a comprehensive report on program fraud and threats to tenant health and safety, which described the results of a nationwide review of these issues. Financial records that we reviewed revealed over $4.2 million in misused funds at apartment complexes, operated by 18 owners and apartment managers.
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    We identified 145 complexes that showed serious physical deterioration. Problems included leaky roofs, worn exterior siding, unsafe balconies and similar kinds of problems.
    In response to these issues, RHS has been working with the owners and management agents to resolve these health and safety issues. We have found, through our audit and investigative work, that there are several kinds of common schemes used by owners and management agencies to improperly withdraw funds from complex accounts.
    One such scheme involves double charging apartment complexes for management-related expenses. Another scheme involves the owner or management agent charging complexes for personal expenses.
    A third type of scheme involves unallowable charges made by identity-of-interest companies. These in particular are very complex schemes. And they result from program vulnerabilities, which raise a lot of concerns.
    RHS, in response to these issues, has developed some proposed program regulations to address these problems. Our assessment of the regulations as they are currently drafted has concluded that the proposal has satisfactorily addressed 4 of our 19 audit recommendations. We believe that additional work needs to be done on the remaining 15 recommendations.
    On the investigative side of the house, we have run a significant number of investigations of multifamily housing programs, which have led to 25 convictions and $8 million in recoveries. And in the single family housing program, we have had 30 convictions and $2.3 million in investigative recoveries. So we do continue to see a large number of investigative allegations and referrals coming to our office.
    Next, I would like to address the issue of performance measures. As you know, managers need accurate performance data to assess how effective their programs are in accomplishing their mission.
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    We did a review in 2001 to evaluate RD's performance data and results. And we found that in many cases the data that were included in RD's report were inaccurate or unsupported. And as a result, we found that the report was of little utility.
    We believe these problems are caused primarily by RD's lack of guidelines for collecting, validating and reporting its performance results and documenting its data collection. We also found, in some cases, that the items being measured were not directly related to the program mission and that in other cases, the performance measures were not supported.
    You may wonder: why is this important? Well, we reported an example of the consequences of inaccurate data in this program.
    In 2001, we did an audit of the Rural Housing Service and found that RHS reported it had built over 6,500 units, when in fact it had built only 222. As a result of this inaccuracy in data and reporting, $122 million out of the total $153 million allotted to the program was not used for program purposes. Had RHS had accurate data, perhaps this money could have been directed to program purposes.
    We also believe that it is important for the program to develop internal controls that are accurate and that help the program to manage its program. We did a report in 2002 that reported on some vulnerabilities in the material weakness process within RD.
    So in conclusion, we believe that RHS faces a number of management challenges in its efforts to deliver safe and affordable rural housing programs. RHS itself has acknowledged these challenges. And we are working with them to develop an audit program for next year that will help them to address these issues.
    Thank you.
    [The prepared statement of Phyllis K. Fong can be found on page 85 in the appendix.]
    Mr. RENZI. Ms. Fong, thank you so much for your insights and your statement.
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    Mr. William Shear?
STATEMENT OF WILLIAM B. SHEAR, ACTING DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, U.S. GAO, WASHINGTON, DC
    Mr. SHEAR. Mr. Chairman, members of the committee, I am pleased to be here this afternoon to discuss opportunities GAO has identified to improve management at the Rural Housing Service. My testimony today is based on two reports addressed to this committee: first, our September 2000 report on rural housing options; and second, our May 2002 report on multifamily project prepayment and rehabilitation issues.
    To summarize, we have found that while the Rural Housing Service has helped many rural Americans achieve home ownership and has improved the Rural Rental Housing stock, it has been slow to adapt to changes in the rural housing environment. Also, the Service has failed to adopt the tools that could help it manage its housing portfolio more efficiently.
    In particular, our work on rural housing options focused on the dramatic changes in the rural housing environment since rural housing programs were first created. These changes raise questions as to why the separately operated rural housing programs are still the best way to ensure the availability of decent, affordable rural housing.
    Overlap in the products and services offered by the Rural Housing Service, HUD and other agencies has created opportunities for merging programs for sharing the best features of each program. For example, the Service's single family loan guarantee program plans to introduce its automated underwriting capabilities through technology that FHA has already developed and has agreed to share with the Rural Housing Service.
    Also, even without merging programs or sharing the best features of the programs of others, the Rural Housing Service could increase its productivity and lower its overall costs by centralizing its rural delivery structure. Here I will note that a number of states, including the State of Ohio, have made steps to consolidate the number of district offices within their states.
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    In addition, servicing of single family loans is now conducted centrally at the St. Louis Servicing Center. However, for the most part, the Service's delivery structure remains largely decentralized.
    In addition, shifts in program funds, such as those from direct loan programs to loan guarantee programs, have contributed to challenges posed by the decentralized rural delivery structure.
    I will now turn to our work on multifamily issues. Here we found that the Rural Housing Service does not have a mechanism to prioritize the long-term rehabilitation needs of its multifamily housing portfolio.
    As a result, the Service cannot be sure it is spending limited rehabilitation funds as effectively as possible. It also cannot tell Congress how much funding it will need in the future.
    How they deal with the long-term needs of an aging multifamily portfolio is the overriding issue for the Section 515 multifamily properties. About 70 percent of the portfolio is more than 15 years old and in need of repair.
    The Service's state level personnel annually inspect the exterior condition of each property and conduct more detailed inspections every 3 years. However, the inspection process is not designed to determine and quantify the long-term rehabilitation needs of the individual properties.
    To better ensure that limited funds are being spent as cost effectively as possible, we recommended that USDA undertake a comprehensive assessment of the Section 515 portfolio's long-term capital and rehabilitation needs. It is our understanding that, in response, the Service plans to develop an inspection and rehabilitation protocol by February 2004. The protocol will be based on an evaluation of a sample of properties.
    Mr. Chairman, that concludes my oral statement. I would be happy to answer any questions.
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    [The prepared statement of William B. Shear can be found on page 142 in the appendix.]
    Mr. RENZI. Thank you, Mr. Shear. Both your statements are absolutely eye opening. And I am sure we have got many questions here.
    Let me, for those who might be wondering, make sure we get into the record today that Under Secretary Dorr of the USDA will be attending a second day of hearings that we will be conducting on the subject matter in July, in case we are wondering about that.
    Before we move on to questions, I recognize Chairman Ney is here in the room. And so we were going to finish up some questions. And then we will turn it back over to the real chairman, okay?
    Let me recognize the gentleman from Alabama, Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Renzi. Let me, if I can, pick up on something that both of you alluded to in your written statements.
    One of the anomalies that is striking to some of us is that the actual rate of home ownership is frankly very high in rural America. I think it is around 76 percent.
    At the same time that it is very high, there is significant problem with the quality of housing stock. And because of the problem with the quality of housing stock, often the homes that people own are not typically leverageable as collateral. And they cannot be used in the kinds of wealth creating manner that homes are used by some people who own homes.
    Can both of you address that particular problem and what RHS can do to get a better handle on that issue? Because the problem strikes me as not necessarily the conventional one of increasing and promoting a higher rate of home ownership, as opposed to rental status, but making better use of the home ownership rate that we have got in rural America.
    Mr. SHEAR. I will go first on that. Many of the problems of inadequate ability to use home ownership as a vehicle to gain wealth for those who are near the bottom, low-income people, is a very large challenge. Much of it has to do with market forces that, to a large degree, the Rural Housing Service does not have that much control over.
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    Nonetheless, the Rural Housing Service does deal with a number of partners to try to encourage community development in rural areas, dealing with a number of programs such as self-help housing and other programs. It might be that some of those programs may offer the best hope in terms of making sure that those low-income rural residents who are homeowners have the ability, through the community development in the communities that they live in and through self-help programs, in terms of using sweat equity and other means to try to develop more equity in their homes.
    Mr. DAVIS. Ms. Fong, do you have a different perspective or an answer on that?
    Ms. FONG. Based on my understanding of the work that our office has done, we have not done much in that area. And so I do not have any basis to give you an assessment at this time.
    Mr. DAVIS. Let me turn to a slightly broader question that both of you touched on in your written testimony as well, and it is the utility of Rural Housing Services existing as a separate entity or the feasibility of integrating the entity into HUD. As you know from the conversations we have had about Section 8 and conversations we have had about a variety of programs, there is kind of a wholesale consideration and evaluation going on in this House of what the relative role ought to be between, say, the states and particular programs, the Federal government and particular programs and the whole structure and contours of a lot of these programs.
    I want both of you to talk a little bit about the arguments for keeping RHS separate from HUD. And I will kind of give you the backdrop for these questions.
    When we had the Secretary of HUD here several months ago to talk about housing, he was not—you know, one of the things that he said that kind of caught my attention and probably the attention of a lot of people in the room, was when I asked him about several rural housing programs that were being eliminated or cut, after struggling with the answers, he finally stated, you know, ''I do not know a lot about rural housing.''
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    I am not sure that is the ideal perspective I would want a HUD secretary to have. And in light of that, what is going to be the future of RHS if it is put in a different home, if it is put under HUD?
    Do both of you have confidence that the program is going to be administered in the way that we want, given HUD's relative unfamiliarity with RHS and the principles behind it?
    Mr. SHEAR. Since it was one of the reports which I summarized in my written statement that addresses the issue of options, I would address it in this way. The areas where it seems to make the most sense to us to have a seperate service, where the Rural Housing Service really plays a unique role and has expertise and experience, is in dealing with many of the poorest rural areas in America—Appalachia, Mississippi Delta, Colonias and Indian trust lands. I am sure I could include the areas that you alluded to in your opening remarks, as far as some of the districts in the State of Alabama.
    I think that if the programs of the Rural Housing Service that are targeted particularly to those areas would move to another agency, being it HUD or some other way consolidated with the programs of another agency, that the challenges would be pretty enormous. And that is where we say, in terms of the options, that would be the hardest area.
    It is in the areas where we start seeing where the Rural Housing Service is providing housing assistance that is not largely distinguishable, in terms of the areas it is serving, when it starts getting into urban sprawl, into more suburban areas and things like that, where it is harder for us to say: why would you want a separate structure?
    Mr. DAVIS. So if you will just yield me an additional 30 seconds or so, Mr. Chairman, the perspective that you are expressing is that for the really acute rural housing problems—because we know in this country, rural has different meanings. There is the rural that I have got in my district, which is very poor. And there is the rural that lies outside the suburbs that can be very wealthy.
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    For acutely impoverished areas, your perspective is that RHS has a unique, distinct function that it can serve and that that mission may not be performed as effectively or as well if it is absorbed within HUD.
    Mr. SHEAR. We would have more concerns about the ability to integrate the programs that reach into the most acutely poor areas in terms of those parts of the Rural Housing Service.
    Mr. DAVIS. Ms. Fong, can you give a very, very brief answer to that same question?
    Ms. FONG. We have not specifically addressed that issue. It really is more within GAO's purview to look at those kinds of cross-cutting Government issues.
    I would draw your attention to this: I think that Mr. Shear is absolutely right in identifying the issue of how do you define rural area versus urban area bedroom sprawl? I think that is an issue area for the policy makers to decide how do we define these programs? And I do not have a solution.
    Mr. DAVIS. Thank you, Mr. Chairman.
    Mr. RENZI. Thank you, Mr. Davis.
    I would like to recognize the gentlelady from the Golden Bear State of California, Ms. Waters.
    Ms. WATERS. Thank you very much. I am sorry I had to leave the room for a moment for an urgent call. But I was very interested in what the Inspector General was describing as the audit and investigative work that has been done.
    What bothers me about the potential risk of a program like this is mismanagement. But oftentimes, that mismanagement is because we have not done enough in training and assisted those who are involved with the program enough so that they can avoid some of these management mistakes.
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    The business of these managers who have secondary businesses, for example, who may have an electricity shop or a plumbing shop. And they turn out to be the same ones to supply the services, et cetera. It seems to me that that kind of stuff could be easily managed and dealt with.
    Certainly, it should be disclosed. But you know, these individuals should be vetted. They should be screened in some way, so as to know who they are and to avoid backing into those kinds of situations.
    Oftentimes, poor people are put at risk because the oversight and the training and the technical assistance that is needed to manage these programs is not built into the program. So what can you tell us about your recommendations? And what can you tell us about the severity of some of the things that you discovered or the lack of severity of some of the problems that you discovered?
    Ms. FONG. Well, I think you have put your finger on it, that in the area of overcharging, excessive charging to the Rural Rental Housing program, there are an awful lot of allegations of fraud and mismanagement. Much of it is due to activities by so-called identity-of-interest companies, where the project manager has a friend or a relative on the outside. They manage to equity-skim the project's accounts.
    We are very concerned about that. We have made a number of recommendations to address that.
    RHS is in the process of developing some regulations in response to our recommendations. Our current assessment is that we need to continue to work with RHS to tighten up those regulations because there should be a way to go after this.
    I also believe that in FY 2000, the Congress enacted some legislation that would have tightened up some of these restrictions, addressed some of these issues, and provided the Secretary with some authority to impose civil penalties. Once that program takes off and is implemented, that should help to address some of these issues.
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    Ms. WATERS. Okay. Let me raise a question about the apartments that roll off the program with prepayment. That is a problem, particularly when we have a housing market such as we have now, where the demand is so great.
    And if, in fact, the rising costs of maintaining those units is such that the owners, I guess, would be better off by prepaying them and getting out altogether, then I could understand why they would do that. What incentives do we offer to keep them in the program?
    Ms. FONG. That is one of the challenges that we have identified. Under the current situation, as the projects mature, it is frequently in the project owner's interest to prepay for a lot of reasons.
    And so as a result of that, there is an incentive payment that is being offered by RHS to project owners to enable them to stay in the program and to make it financially feasible for them to stay in the program. The payments would be equal to the equity value in the property at the time the prepayment is planned.
    Now we have not looked at how that program is being implemented. We would certainly want to look at that program or at least keep an eye on it, to make sure that these payments are being made appropriately and that, in fact, the project owners continue to be eligible to maintain the properties to provide safe and decent housing.
    Ms. WATERS. Can they borrow money for the upkeep of these apartments at a very low or no interest rate?
    Ms. FONG. Yes.
    Ms. WATERS. How low?
    Ms. FONG. I understand it is 1 percent.
    Ms. WATERS. Cannot get much lower than that. Thank you very much.
    Mr. RENZI. Thank you, Ms. Waters.
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    Recognize the gentlelady from California, Ms. Lee.
    Ms. LEE. Thank you very much. Let me just ask you, Mr. Shear—and I think Mr. Davis referred to it also with regard to home ownership rate is higher in rural communities. What is it? You say it is 76 percent, which is very high.
    But I am wondering, given that percentage and yet given the rates of poverty, one is—well, what is first of all the minority home ownership rate in rural America, in terms of the Latino and the African-American community? Do you have that broken down?
    Mr. SHEAR. I do not have it broken down here. We can provide a statement for the record on it.
    Ms. LEE. Yeah, I would be very interested to see that.
    Mr. SHEAR. It is definitely, when you go into the poorest areas of America, the rural home ownership rate is much lower than 76 percent. Among African-American and Hispanic communities, it is much lower. And we can provide those statistics for the record. I just do not have them right here.
    Mr. DAVIS. Ms. Lee, if you would yield for one second? I think it is 61 percent among minorities.
    Ms. LEE. Sixty-one percent? That is African-American and Latino? Okay. Thank you very much.
    Let me also ask, did you find and are you finding, in terms of the housing stock, that rural America significantly needs more housing stock? Or is it rehabilitation only that is a strategy that makes sense?
    Mr. SHEAR. For the record, according to the 2001 American Housing Survey, the homeownership rates for African-Americans and Hispanics in non-metropolitan areas was 61 and 59 percent, respectively. With respect to your broader question, I cannot answer directly what Congress's priorities should be in terms of spending and supporting the overall quality of the rural housing stock.
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    With respect to the major multifamily program for the Rural Housing Service, which is the 515 program, what we observe here is that a very high percentage of the projects are around 20 years old. They are aging. They are in need of repair.
    Many of them, the use restrictions due to the original rent support contracts when those projects were built, are coming due. So our focus, in terms of one of the reports that I discussed, was in terms of the 515 stock and the need to assess and to prioritize the financial and the structural condition of that stock, in order to be able to prioritize where the Rural Housing Service could direct incentive payments and other resources to try to deal with the problem of keeping quality units in this 515 stock.
    Ms. LEE. Do we need more quality units in rural America?
    Mr. SHEAR. Based on our work, I would say we certainly find evidence, as others that you will hear during the second panel, of certain housing needs. There are housing needs in rural and urban areas.
    But certainly, in rural areas, there are many housing needs. We feel that, in terms of our analysis, we are trying to provide information and analysis that will help the Congress deal with basically how can we manage better, how can we take actions to have resources go further. What are our options in terms of policies?
    But I think the ultimate question—how much should be spent on the various activities, the various needs that this body faces—that is really your leadership.
    Ms. LEE. Right. But in terms of a policy option, I mean, a policy option is increasing the affordable housing stock. I mean, we do have a bill, the National Affordable Housing Trust Fund. It increases housing stock, urban and rural America.
    Would that be a recommendation from you to support, given what you have learned or what you know about rural America?
    Mr. SHEAR. In that we have not analyzed the particular program or other programs developed in terms of trying to strengthen the quality of rural housing, I am not in a position to really recommend that initiative versus others.
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    Ms. LEE. But as a policy option, do we need to increase then just the stock of affordable housing in rural America? I know we do in urban America. I am trying to learn more about rural America.
    Mr. SHEAR. There certainly are very pressing housing needs in rural areas. And certainly, there are very pressing housing needs, particularly in areas where our work on the Rural Housing Service have really concentrated, to a great degree, on the poorest rural areas in America. And certainly, you have some very pressing housing needs.
    What I am saying here is that there are some value judgments involved here in terms of where priorities are. But you can certainly find many rural areas where you have housing conditions that are much further from providing adequate, safe and sanitary housing, compared with many of our urban areas. There are certainly a lot of pressing needs in rural areas.
    Ms. LEE. Okay, Mr. Chairman. So you are not prepared to say, as a policy option, we need to increase the stock of affordable housing as part of your recommendation.
    Mr. SHEAR. Basically, I think that that is the point where I just say there are some very pressing needs. But we have not assessed specific proposals. And some of those involve value judgments where we say that we go so far. But then you as a body, in terms of Congress, have to consider what other priorities——
    Ms. LEE. Okay, thank you very much.
    Ms. WATERS. Will the gentlewoman yield?
    Ms. LEE. Sure.
    Ms. WATERS. Thank you. This line of questioning by my colleague from California is extremely interesting and important because we are still seeing on television and in magazines dilapidated dwellings that are falling down in rural America. We are still seeing places without indoor plumbing. And it was just a few years ago that we had Sugar Ditch down in Mississippi, where people had cardboard serving as siding for their homes.
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    Now what do you know about this? Have you been into any of these areas? And if you have, why are you not sitting there just jumping up and down about the living conditions in some of these communities?
    Mr. SHEAR. In terms of the poorest areas, I would like to introduce Andy Finkel, if he could come up to the table, he has been the assistant director who has led our work on rural housing. He certainly has visited many of the areas in the poorest rural areas of America. And I think that he could give a better answer than I could.
    Ms. WATERS. Okay. All right. Okay.
    Mr. RENZI. Mr. Finkel, you will state your full name please for the record?
    Mr. FINKEL. Andrew Finkel.
    Mr. RENZI. Thank you. Proceed.
    Mr. FINKEL. There are two pictures on the highlights page of our report. They are before and after pictures, actually. One is a shotgun house that a gentleman lived in for 46 years in northern Mississippi.
    And the next picture is the house that he moved into with a Rural Housing Service direct 502 loan, leveraged with Federal Home Loan Bank, state and local money.
    It is in a historically African-American neighborhood that they wanted to convert in northern Mississippi. And it took a lot of work with a lot of leveraging.
    But there were about a half dozen new houses like that built in the development. People moved into a nice neighborhood. We also saw was that in the immediate neighborhood around it people were fixing up their houses.
    To follow up on you point about people living in cardboard, we also visited the colonias on the border in Texas. And that is where we saw entire neighborhoods of homes without water, without electricity, without sewers.
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    Mr. RENZI. Thank you.
    Ms. WATERS. Just one more and I will not take much longer.
    Mr. RENZI. Yes, ma'am.
    Ms. WATERS. Is there an assessment of this kind of housing in rural America? Where can we find the status and condition and a real report on the housing needs of rural America? Where is that information deposited?
    Mr. FINKEL. There is a report that comes out on the status of rural american housing, I think it is the Housing Assistance Council that puts it out.
    Ms. WATERS. It describes these shotgun and cardboard——
    Mr. FINKEL. Exactly.
    Ms. WATERS.——and dirt floors and tin roofs. Where can we get that information?
    Mr. RENZI. Maybe you can provide it to the gentlelady, please?
    Mr. FINKEL. Yes, we will provide it for the record.
    Ms. WATERS. Okay. Thank you very much.
    Mr. RENZI. Thank you, Ms. Waters.
    Let me finish because I want to make sure the chairman is able to get in here and get the next panel going. I was really taken, Ms. Fong, by the inaccuracy of the data that you all found out through the audit. I think your statement said that in one instance, RHS reported that they had built over 6,500 units—page 15—and in fact it had built only 222.
    This kind of an injustice, I mean, that kind of a severity of disparity of numbers in their audit almost rises or does rise to the verge of investigation type of injustices. So I am going to ask, first of all, that lack of management with the inability to access the proper data, what is your recommendation, first of all, to attack that specific issue?
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    Ms. FONG. I think that RHS has to take a number of steps to deal with this. You are absolutely right. Until we can be sure that the data on program performance is accurate, it is very difficult to assess how well the program is performing. And I think that cuts across every area of the program.
    We have suggested to them that they look at their data collection instruments, the way that they report the data, their computer systems. There are a number of things that need to be addressed, as well as the very basic issue of how do we—or how does RHS—define success in its program?
    What is the performance measure for success? And how do we measure that?
    And so there needs to be some very clear thinking about this from step one all the way through the end.
    Mr. RENZI. And general counsel reminds me, RHS is in a position now where the accuracy, from this point forward, will be there for us. Or what is the status?
    Ms. FONG. I believe this is a multiyear process. I do not know what the status is.
    Mr. RENZI. We are not there yet. Okay. We are not there yet.
    I want to follow up on a line of questioning with Mr. Davis. My district is 58,000 square miles, larger than the State of Pennsylvania, including the largest Native American Indian population in America. We lost several babies last year with a late snowfall because I have got Native Americans living in tin shacks, just similar to what Ms. Waters described. We have got frostbite conditions on babies' toes going on.
    In addition, I have got a situation where I go all the way down to the border of Mexico, where some of the conditions, dirt floors are common. So true poverty is still in the land of milk and honey here in America.
    And so I want to ask and go back along Mr. Davis' line of questioning. When you target severe rural areas, those with the most needy of areas, what program specifically is it that we can turn to, to help in the most needy and the most critical areas where we have these kind of effects?
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    Mr. SHEAR. It would be the historic traditional programs of the Rural Housing Service. It would be the 502 single family program direct lending. It would be the 515 program in terms of direct lending for multifamily properties. It would be the Section 521 rental assistance.
    Mr. RENZI. Okay. I am with you. You have got a list of programs, okay?
    Mr. SHEAR. I would say those programs, the distinguishing feature of those programs is that they are very deep subsidy programs that are a fairly high cost per recipient. They do bring housing assistance to the poorest.
    Mr. RENZI. High cost to the recipient in what area? Down payments or where?
    Mr. SHEAR. High cost in terms of the Federal government's role, in terms of the budgetary impact of those programs are high.
    Mr. RENZI. Oh, okay.
    Mr. SHEAR. Yet they are programs that are targeted for the very poor.
    Mr. RENZI. And the poor's access to those programs is?
    Mr. SHEAR. I am sorry, what?
    Mr. RENZI. The access to those programs, the ability to get all that money out. If it is such a high-cost program, are we using it 100 percent?
    Mr. SHEAR. In terms of whether we are using it 100 percent, we have initiated some work which is looking at rental assistance payments and looking at the obligations that are made from that program. And we are looking at questions of what is happening to unliquidated balances and things of that nature.
    So there is a question of whether all the resources that Congress is providing is going to those uses.
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    Mr. RENZI. Okay, well, unliquidated—that went over my head. Okay? And I realize I am a snot-nosed freshman, but we need to be sure that we are directing the assets, directing these high-cost monies right down at the level.
    Let me give you a little softball question here and we are going to finish up. The future of where we are going, as far as the research, the auditing, the development, where do you see us going as far as the review and oversight? And we will just finish with that.
    I apologize, Mr. Davis, we are going to get to the next panel.
    Mr. SHEAR. In terms of that, we serve the Congress and, as you know, the majority of our work is dictated by requests from committees. If I was going to point out areas you might want us to look at—and I think, Mr. Renzi, I think that is your question—we would look at, as far as a relatively new program, the Section 538 loan guarantee program for multifamily housing.
    I would look at the whole question, as the Service has shifted from more direct programs to guarantee programs, of the issues of what types of internal controls, what types of lender oversight when you use private sector lenders, are necessary. And I would also say that the self-help programs certainly look like they are having some very positive benefits in some areas. But we know there is variation. And there is a question of: are there any best practices that could be captured?
    Mr. RENZI. Thank you. We are now just scratching the surface obviously of an issue that we have grabbed on to, where many injustices exist. I look forward to Chairman Ney's leadership on this issue and his commitment to future hearings on this, as we begin to delve deeper.
    The chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to replace their responses in the record.
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    I want to thank my colleagues for their questions and their insights. And thank both witnesses—all three witnesses. Thank you.
    Mr. SHEAR. Thank you very much.
    Ms. FONG. Thank you very much.
    Chairman NEY. [Presiding.] I want to thank Panel Two. To begin the introductions, we will defer to Congresswoman Barbara Lee to introduce Gideon Anders.
    Ms. LEE. Thank you, Mr. Chairman. Let me just say how delighted I am that one of our panelists here is actually from my district and is a real expert and an individual committed to the issues with regard to affordable housing, both in urban and especially in rural communities.
    Mr. Anders—Gideon Anders—is the executive director of the National Housing Law Project, which of course is headquartered in Oakland, California. Mr. Anders and the National Housing Law Project are the leading housing rights and justice organization for low-income individuals across the country.
    The National Housing Law Project's mission is to advance housing justice, increase and preserve the supply of housing, improve housing conditions, expand and enforce low-income tenants and homeowners' rights and challenge the ongoing housing discrimination that many people encounter in both urban and rural areas.
    I have had the opportunity to work with Mr. Anders and the National Housing Law Project on issues ranging from the need for a national housing trust fund to defending the rights of tenants under the current HUD ''One Strike'' policy. Mr. Anders certainly believes that housing should be a basic human right.
    And I am delighted that he is here to bring his wisdom and his knowledge and his insight to this subcommittee. And I just want to thank all of the panelists for being here today. And I want to thank our chairman and our ranking member for allowing us the opportunity to listen to someone who is such a leader in rural housing from Oakland, California, Mr. Gideon Anders.
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    Thank you very much, Mr. Chairman. And I yield the balance of my time.
    Chairman NEY. I want to thank the gentlelady and the witness. And also we will call upon Mr. Castle, who will introduce Mr. Myer.
    Mr. CASTLE. Well, thank you, Mr. Chairman. I do want to introduce Joe Myer, who I have worked with for a number of years now. I see on this resume he came to Delaware in 1976. And we worked together on a lot of projects.
    He is the executive director of a Dover, Delaware—which is a small town which is the capital of Delaware with a rural area around it—based housing group called NCALL, which stands for the National Council on Agricultural Life and Labor Research Fund. He went to Elizabethtown College and then has a masters from Delaware State University.
    As I indicated, I have toured a number of sites with Joe. I have also talked to Joe on a number of occasions.
    He serves many different populations—the elderly, our migrant workers, seasonal farm workers—in all of our counties in Delaware. He has a very successful partnership with the U.S. Department of Agriculture to implement rural housing programs.
    He has been an active participant in many other rural housing organizations, including being the founding President of the Delaware Housing Coalition, chair of the Delaware Rural Housing Consortium and Past President of the National Rural Housing Coalition. He frankly has just been as involved with this subject as anybody possibly can be.
    I cannot imagine a better person to talk to us today about this. He has volunteered his time to come up and share with us. And we appreciate his being here.
    I may not be here because I have a conference call I have to do at 4:00. but I really appreciate Joe being here, as well as, by the way, all the other witnesses who, based on their resumes, seemed extremely qualified as well. And I yield back, Mr. Chairman.
    Chairman NEY. I want to thank you. And we will move to Mr. Davis to introduce Madeline Miller.
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    Mr. DAVIS. Thank you, Mr. Chairman. Let me thank you for having this hearing today as well. I have the pleasure of introducing the lady who is third from the right, Madeline Miller. Ms. Miller, you are actually not technically in my district. But you are close enough. I am going to claim you for purposes of today anyway.
    Ms. Miller is a graduate of my mother's school, Alabama State University, and was born and raised in Pine Hill, Alabama. And she is here today because she is the executive director of Wil-Low Non-Profit Housing, a non-profit housing entity that serves Lowndes County and the county that is in my district, Wilcox County.
    It has done extraordinarily important work in terms of providing technical assistance to low-income and moderate-income families, to enable them in everything from housing reconstruction, to financing, to the purchase of a home. And it is particularly appropriate that you are here, Ms. Miller, because as you heard from listening to the last panel, we have an interesting phenomenon in America, that we have high ownership, high home ownership in rural America.
    But the quality of the homes is not what it should be. And your program has taken a very significant role in the Black Belt of Alabama, in rural Alabama, in trying to get a handle on that particular problem, so that we do not have a situation or a scenario in which people are technically homeowners but are living in conditions that are still offensive to so many of us in this room.
    Your organization has taken the lead in trying to do better in that area. And I want to thank you for being here today.
    Chairman NEY. I want to thank the members for introducing and welcome the panelists. And I will introduce Betty Bridges.
    Betty is President of the Council for Affordable Rural Housing, which represents the interests of over 300 members that include for-profit and non-profit entities, as well as local housing authorities and financial institutions. Ms. Bridges was an official with the Farmers Home Administration in her home State of North Carolina for nearly 30 years.
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    Patty Griffiths is speaking today on behalf of the Housing Assistance Council, a national non-profit group working to create more affordable housing throughout rural America. She is the housing director of the Community Action Commission of Fayette County, a non-profit organization located in Washington Court House, Ohio.
    I share Ross County, a neighboring county, with Congressman Hobson. And I got a glowing recommendation on you for a half-hour today. I thought it would let you know that. So Congressman Hobson says, ''hello.''
    And also, Jack Jones is Vice President in charge of the Rural Housing Channel for Chase Manhattan Mortgage Corporation, Deerfield Beach, Florida. He is speaking today on behalf of the Mortgage Bankers Association of America, which represents 2,600 companies involved in the real estate finance industry.
    James Rayburn is a homebuilder and developer from Jackson, Mississippi. He has built more than 3,000 homes and is a noted expert in creating public-private partnerships to build affordable housing. This year, he is serving as the First Vice President of the National Association of Homebuilders.
    And welcome to the committee. We will start with Mr. Anders.
STATEMENT OF GIDEON ANDERS, EXECUTIVE DIRECTOR, NATIONAL HOUSING LAW PROJECT, OAKLAND, CA
    Mr. ANDERS. Thank you, Chairman Ney. I appreciate you inviting us to testify today. And also to Congressman Lee, I want to really thank you for the fine introduction, which saved me about 30 seconds in my delivery today.
    Thank you very much. It is a pleasure.
    We have restricted our testimony today to the prepayment issues with respect to the Rural Housing Service. We are concerned about several trends that we are seeing with respect to its administration of the Emergency Low-Income Housing Program or ELIHPA preservation program.
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    In our view, the agency is not enforcing ELIHPA, and not preserving units that can and should be preserved. And it is failing to protect residents against displacement.
    Before we address our concerns, let me just briefly reaffirm our fundamental belief that there is an absolute and continuing need to maintain an effective Rural Rental Housing preservation program that protects residents against displacement and protects and ensures that there is adequate housing in rural areas.
    Frequently, Section 515 developments are the only available affordable rental housing in a community that is decent, safe and sanitary. The conversion of that housing deprives communities of a critical housing source and forces elderly, disabled and working households to relocate other communities that are tens of miles away from their current homes, jobs and families.
    We have four concerns with RHS' administration of the Rural Preservation Program. The first of these is that RHS does not have sufficient funding to operate an effective preservation program.
    RHS has represented to this and other congressional committees that it has sufficient funds to meet existing preservation needs. That is not true.
    For at least the past 9 years, RHS has not had sufficient money to fund equity loan commitments that it has made to owners who have agreed to remain in the Section 515 program if they were provided an equity loan.
    In the recent Federal Register, publication of proposed regulations seeking to alter the preservation program, the agency acknowledges that it does not have sufficient funds to meet all the equity funds that it has agreed to fund and claims to have unfounded agreements that were entered into as early as 1996.
    What is troubling about this picture is that it is a self-created problem. The RHS Section 515 appropriations do not specify how much money RHS should be using for preservation, for maintenance or new construction. Those decisions are made administratively by the agency after it receives the appropriations.
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    We believe that the funding issue will become more significant over the next several years and that inadequate preservation funding may cripple the program. We urge that the committee to really look closely, as a result, at the needs of the agency in terms of preservation.
    The second concern that we have is that RHS is not preserving all the developments that it can. It has created several loopholes by which owners can and will circumvent the prepayment and preservation process.
    The most glaring example is RHS' unwillingness to extend use restrictions through the acceleration and foreclosure process. RHS takes the position that an owner who pays the balance due on a loan in response to an acceleration of the promissory note is not prepaying the loan and is free to use the property as it chooses after the loan is paid.
    RHS is also using the acceleration process to avoid dealing with troubled projects. It routinely forecloses on properties that it feels it cannot handle and then leaves it up to the private market to determine what should happen to them.
    We do not believe that RHS' position is justified.
    The third issue is RHS does not affirmatively enforce obligations to rent units to low-income residents. In a Missouri case in which we are involved, the PHA—the Public Housing Authority—is trying to prepay and demolish a 50-unit development some 19 years after it secured the RHS 40-year loan.
    When the authority began to systematically relocate residents and leave the units vacant, RHS did nothing. Even after the housing authority initiated a lawsuit challenging RHS' authority to enforce the Emergency Low-Income Housing Preservation Act, RHA did not take any action to force the housing authority to rent up the facility by completing it. As a consequence, 48 units of affordable housing have been standing empty for nearly 4 years.
    The fourth issue that we are concerned about relates to RHS' capacity to coordinate and control lawsuits in which owners are challenging the validity of ELIHPA prepayment restrictions or seeking damages for their imposition. Currently, there appears to be no concerted effort on the part of RHS or its counsel to ensure that ELIHPA, a federal law, is properly enforced. Basic arguments, such as the supremacy of federal laws over state laws, are not being advanced. And cases are being settled instead of appealed because certain legal arguments have not been made in the federal district courts where these cases are first heard.
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    Moreover, RHS, or at least its counsel, appear intent on settling cases even before the agency's liability has been established. Potentially, these settlements may cost the government hundreds of millions of dollars that could have been better spent on preserving the housing in the first place.
    Ironically, in one case, the RHS settled instead of appealing an adverse decision. The residents have gone on to appeal the decision and have sought and secured a stay of the district court decision and sought and secured an injunction against the owners selling the development or terminating the tenants' RHS rights. It is indeed ironic that residents of a development and not RHS are appealing this case.
    Before I close my testimony, Mr. Chairman, I would like to just point out a couple of issues with respect to the new regulations that RHS has recently proposed and which is one of the questions which the subcommittee has asked questions about.
    The first provision that we are concerned about deals with RHS' proposal to finance future Section 515 developments with loans that are amortized over a 50-year term but which become due at the end of 30 years. In other words, the proposal would finance Section 515 loans over 50 years, but create a balloon payment at the end of 30.
    In our view, this proposal violates ELIHPA. And we urge the sub-committee to direct RHS not to implement that provision and, if necessary, prohibit it from doing so.
    The other provision which we have concern about is one that we referenced earlier, which proposes to allow an owner to terminate its equity loan agreements if RHS does not fund the agreement within 15 months of the time that it was entered into. In our view, as long as RHS, and not Congress, determines the amount of funding that is made available for preservation, the choice of whether to fund incentive agreements lies with the agency and no one else. It must not, therefore, be allowed to make incentive offers to owners that it later chooses not to honor.
    Thank you.
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    [The prepared statement of Gideon Anders can be found on page 66 in the appendix.]
    Chairman NEY. Thank you.
    Next witness?
STATEMENT OF BETTY BRIDGES, PRESIDENT, COUNCIL FOR AFFORDABLE AND RURAL HOUSING, WASHINGTON, DC
    Ms. BRIDGES. Mr. Chairman and committee members, can you hear me?
    Chairman NEY. There you go.
    Ms. BRIDGES. I am very pleased to represent the Council for Affordable and Rural Housing, CARH. My personal experience, as was stated by the chairman, I was a former Farmers Home Administration official for almost 30 years and a private developer of affordable housing for 10 years.
    I will address the questions that were supplied by the committed and several additional points that we at CARH believe are vitally important to the future of rural housing.
    I have submitted separate written remarks. But I will summarize those.
    CARH members generally have a productive working relationship with RHS, the agency. But we experience a high degree of frustration at the lack of resources and the consistency from state to state. The agency is not fully able to meet its intended purpose and goals because it is organized in a manner that inhibits the sharing of information and training, thereby greatly adding to transaction cost and preventing many meritorious transactions.
    It is not adequately funded to either expand or maintain its housing stock and is unable to effectively coordinate with existing resources from other agencies. And its programs are subject to artificial statutory restrictions that limit development and preservation.
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    All of these points are addressed in CARH's March 2003 position paper on the aging portfolio. And I respectfully request permission to have this inserted in the hearing record.
    Chairman NEY. Without objection.
    [The following information can be found on page 159 in the appendix.]
    Ms. BRIDGES. The rural housing finance market is experiencing a paradox in that tools and resources for financing affordable rural housing have become increasingly complex and sensitive to the national financial markets. Yet, at the same time, local market conditions remain local and isolated with dispersed housing and employment patterns.
    This affects both home ownership and rental housing patterns, which are both vitally important to meet rural housing needs. While home ownership is the American dream, rental housing is absolutely necessary for elderly and low-income Americans, which is the agency's client base.
    In the 515 program, the average tenant income is about $8,100 a year. Nearly 60 percent of the households are elderly or disabled. We understand that there are various discussions and contracts between HUD and USDA about home ownership programs. However, we believe that S. 198 and H.R. 1913 have the greatest likelihood of achieving real progress on this point.
    We understand that HUD instituted a Rural Housing Office several years ago. But we have not seen any material coordination in the field among multifamily or the voucher programs.
    We understand that there are various changes at the agency, such as their recently proposed 3560 regulation, which is an important step in streamlining and modernizing the regulations.
    Still, 3560 does not address certain basic problems with the program; namely, that the agency has an extremely onerous process for transferring properties within the 515 system and an even more difficult system for prepaying and refinancing outside the system. The result is what one industry commentator calls a toll road with no exits.
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    We appreciate, Mr. Chairman, that you proposed an amendment last year to H.R. 3995 to restore contractual prepayment rights to owners of 515 properties, just like they were restored for owners of HUD properties. Prepayment restrictions that violate contract provisions are being successfully challenged in court.
    The Supreme Court's unanimous decision on a case last year characterized the statute restricting prepayment rights as a repudiation of the contract and is dishonoring an obligation. At CARH, we share the committee's interest in the 521 rental assistance—RA—perhaps the largest budget item for the agency. That program generally works well. But there is not enough funding.
    The RA program really can only be analyzed in conjunction with the 515 program. Since RA cannot exist without a corresponding 515 loans, 515 loans are serviced on a budget-based method so that State office rural development staff scrutinize operating expenses. In many places, this has resulted in significantly below market rents that do not pay for ongoing maintenance costs.
    We also note that other programmatic alternatives exist. The 538 program is an excellent idea. But the 538 statute makes implementation with other programs difficult.
    The agency staff has been excited about the 538 closings to date. While we support that enthusiasm, we have to note that only a handful of the 538 closings have been made and are well below industry expectations.
    The 538 program must be revised on a statutory level so that it is consistent with current commercial standards. And we urge further hearings on this point.
    We appreciate the hard work and the good intentions of this committee, as well as RHS and RD staffs. We have identified many areas where we feel that we can work together to make progress.
    Some of these points require a further federal financial commitment. But others only require structural changes to make transfers, prepayments and preservation easier.
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    And we urge the committee to consider these changes. I have spent my entire career working in this industry. And I hope that you will think of me and my organization, CARH, as a valuable resource.
    Thank you.
    [The prepared statement of Betty Bridges can be found on page 76 in the appendix.]
    Chairman NEY. Thank you.
    Ms. Griffiths?
STATEMENT OF PATTY GRIFFITHS, HOUSING DIRECTOR, COMMUNITY ACTION COMMISSION OF FAYETTE COUNTY, OHIO, APPEARING ON BEHALF OF THE HOUSING ASSISTANCE COUNCIL
    Ms. GRIFFITHS. Thank you for the opportunity to submit testimony.
    Chairman NEY. Excuse me. I think you need to move it closer.
    Ms. GRIFFITHS. Is that better? Okay. Thank you for the opportunity for me to submit testimony on rural housing today to your subcommittee. And thank you, Chairman Ney, for convening this very important hearing.
    My name is Patty Griffiths. I am the housing director for the Community Action Commission of Fayette County, known as CAC. We are a non-profit organization located in Washington Court House, Ohio.
    I also am speaking today on behalf of the Housing Assistance Council, a national Non-profit group working to create more affordable housing throughout rural America. Established in 1971, HAC provides financing, information and other services to non-profit, for-profit, public and other providers of rural housing.
    Our written testimony includes detailed responses to the questions posed by your subcommittee. But in this brief oral presentation, I wanted to focus broadly on needs and on what we are doing in Ohio with USDA Rural House Service programs.
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    First of all, housing and poverty. Most housing policy is focused on urban concerns, which are of course substantial and deserve attention. But needs are often just as great in rural America.
    HAC's research shows that of the 200 poorest counties in the nation, all but 11 are non-metropolitan. There are 363 rural counties where the poverty rate has exceeded 20 percent since those figures were first collected in 1960.
    In housing for most of the 20th century, substandard quality was the primary rural problem. While quality is still a problem today, sharply higher housing costs have made affordability, rather than poor conditions, the major problem in rural housing, especially for low-income people.
    Among the 23 million non-metro households, approximately five million, or 22 percent, pay more than 30 percent of their monthly incomes for housing costs and are considered cost burdened. Of these non-metro cost burdened households, more than two million pay more than half their incomes toward housing costs.
    We see these conditions also in rural Ohio. The average person in a big city may not think of Ohio as a rural state.
    But in fact, Ohio has the fourth largest rural population among the 50 states, with over 2.1 million people. Of our 640,000 occupied rural housing units in Ohio, over 20 percent are occupied by families that are cost burdened.
    Now I would like to turn and speak briefly about our work in Ohio. Community Action, our agency, was founded in 1965. And we have been involved in housing for many years.
    We have done home weatherizations since 1967. We have developed and managed housing for the elderly, for disabled and homeless.
    We provide housing counseling. We have developed several rental projects using the Low-Income Housing Tax Credit.
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    And we have used the major programs of the USDA Rural Housing Service, including Sections 502, 504 and 515. We also use some HUD programs.
    But since 1995, our agency has helped over 100 low-income families become homeowners through USDA's self-help housing program. Right now, we are the only USDA self-help housing builder in Ohio, although we are currently hoping to expand into Ross County and into Clinton County.
    Under this unique program, which is sometimes called a hand up, not a hand out, we organize groups of eight to 10 families. We help them qualify for USDA Section 502 single-family mortgages. We work with them as they put over 1,000 hours—that is per household—of sweat equity into the building of their own homes and their neighborhoods. No one moves into their homes until all the homes in the group are completed.
    A skilled construction supervisor from our staff works alongside these families. And they do 65 percent of the labor.
    Now these families do not just paint the walls; they actually build the walls. They put up the shingles. They put up the siding. They hang drywall. And they hang cabinets.
    In our self-help work, we also have benefited greatly from the Housing Assistance Council's HUD-funded Self-Help Homeownership Opportunity Program, which we refer to as the SHOP program. We have received $850,000 in SHOP funds from HAC and $800,000 in other HAC loans.
    The SHOP funding helps CAC buy the land and put in the infrastructure for our self-help homes. HAC and CAC want to thank this subcommittee for having created the SHOP program in 1996. I think our agency probably would have been out of the self-help business had it not been for the SHOP program.
    The commission has also used the USDA Section 504 home repair program. We have developed and now own and manage a 24-unit USDA Section 515 rural rental apartment project.
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    Overall, we have had excellent success with the USDA rural housing programs. All of these Rural Housing Service resources have been vital to our ability to meet the needs in Fayette County, Ohio.
    Perhaps the best way for me to illustrate our work has been its impact on the clients that we work with. I would like to tell—and end—with a brief story about one of our clients, Julie Allen.
    She was a single pregnant mother who became homeless after leaving a domestic violence situation back in 1996. Our agency first housed Julie and her children in our homeless shelter.
    We then helped her through supportive housing. And then she became involved in our USDA self-help housing program. And she built her own home in one of our first sweat equity subdivisions in Bloomingburg, Ohio.
    Today, Julie is a homeowner. She has an excellent job. Her children are thriving.
    Last December, she was a featured speaker before 800 people at the opening session of HAC's National Rural Housing Conference, speaking about how self-help housing had changed her life. I might add, she got a standing ovation at that conference.
    HAC and CAC considered asking Julie to be speaking up here instead of me today, so you could hear from a person who is really receiving these services. But she is getting married Saturday and could not make it.
    When I consider Julie Allen and her life, I can think of no better reason to support, continue and expand the USDA Rural Housing Service programs. Yes, they may need some changes and improvements. They definitely need more funding. But they really have had an enormous impact on the lives of millions of rural people.
    Thank you very much.
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    [The prepared statement of Patty Griffiths can be found on page 104 in the appendix.]
    Chairman NEY. I want to thank the witness for her testimony.
    And next, Mr. Jones?
STATEMENT OF JACK JONES, VICE PRESIDENT, CHASE MANHATTAN MORTGAGE CORPORATION, DEERFIELD BEACH, FL, ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION OF AMERICA
    Mr. JONES. Good afternoon. And thank you, Mr. Chairman, for holding this hearing and inviting the Mortgage Bankers Association of America to state its views on the U.S. Department of Agriculture's Rural Housing Service programs.
    My name is Jack Jones. And I am the Vice President in charge of the Rural Housing Channel for Chase Manhattan Mortgage Corporation in Deerfield Beach, Florida. I am particularly pleased to be here today representing MBA on an issue to which I have devoted the last 11 years of my professional career—providing homeownership opportunities for rural families.
    MBA and Chase are strong supporters of the Rural Housing Service's mission to foster home ownership opportunities across rural America. Chase is the largest originator in the Rural Housing Service's Section 502 Guaranteed Single Family Housing Loan program, commonly called the GRH Program.
    In many rural communities, the Section 502 direct and guarantee programs are the only home ownership options available to low-and moderate-income families. Last year, Chase loaned just over $900 million, which provided 11,000 rural families the opportunity to become homeowners.
    Chase does this in partnership with over 2,500 community banks, mortgage bankers and mortgage brokers in all 50 states.
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    Unfortunately, rural areas traditionally have lacked the financial resources for home financing. For this reason, the RHS programs are vital to increase the availability of safe, decent and affordable housing for low-and moderate-income rural home buyers and renters.
    RHS provides this important function for both single family and multifamily housing. In addition to the GRH program, RHS also offers the Section 538 program, which guarantees loans to developers of multifamily housing to build and/or renovate safe and decent rental units affordable to very low-, low-and moderate-income families.
    Both of these programs provide private capital, guaranteed by public funds, to promote adequate access to home financing capital for rural communities.
    MBA would like to recognize the good work that this administration, under the guidance of RHS Administrator Arthur Garcia, has undertaken in the last 2 years, making significant improvements to a program that was at risk of being neglected.
    MBA urges these favorable changes be built upon through the following initiatives: first, guidelines under the GRH program should be amended to allow the financing of the guarantee fee on top of the appraised value of the property. Second, the population limits under the GRH program should be raised.
    Third, the income limits should be raised for the GRH program and targeted in high-cost areas. Fourth, thermal standards on existing housing stock should be eliminated from the GRH program.
    And fifth, clarification of Ginnie Mae authority on Section 538 loans guaranteed by RHS is needed.
    MBA urges these changes for the following reasons: a key feature of the GRH program is the ability of the purchaser to borrow up to 100 percent of a property's appraised value. This feature allows the borrower to purchase a home with no down payment and finance some portion, if not all, of the costs related to closing a mortgage, including the RHS guarantee fee. The current law, however, limits the loan amount to the appraised value.
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    MBA urges the financing of the guarantee fee on top of the appraisal for purchases. This change would mean a greater number of rural families would be able to overcome the down payment and closing cost obstacle to home ownership. This is especially true for first-time and minority homebuyers.
    Use of the GRH program is limited to communities with populations of either 10,000 or 20,000, depending on whether or not they are contained in an MSA. These definitions were created over 30 years ago and need to be updated.
    MBA supports aligning the GRH population requirements with other USDA programs or other statutory rule definitions.
    Currently, borrowers applying for the GRH Program are limited to a maximum household incomes of 115 percent of the area's median income, in all states except Alaska. This 115 percent limitation in 49 states does not take into account the varying levels of housing affordability across the United States.
    MBA urges the Secretary of Agriculture be granted discretion to raise the family median income limits in areas designated as targeted areas and in high-cost areas, allowing financing to be extended to families making up to 150 percent of the area's median income.
    Unique to the GRH program, existing homes are current required to exhibit thermal efficiencies that are contrary to the State of the housing stock in rural America. This requirement necessitates costly improvements that we believe have only nominal economic value. These thermal standards for existing homes cannot be found in any other conventional, FHA or VA home loan program and is a source of ongoing resistance to the use of the GRH program.
    MBA urges Congress to provide strong encouragement to the agency to eliminate this burdensome, costly and onerous regulation.
    Currently, loans made under RHS Section 538 Rural Rental Housing guaranteed program cannot be securitized by the Government National Mortgage Association, Ginnie Mae. Ginnie Mae's charter allows only the securitization of insured multifamily loans, but not guaranteed multifamily loans.
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    MBA urges Congress to change the Ginnie Mae charter to allow the securitization of these guaranteed loans. This change will provide greater liquidity for these loans and ensure that rural communities are not disadvantaged due to lack of access to capital.
    [The prepared statement of Jack Jones can be found on page 112 in the appendix.]
    Chairman NEY. I need to interrupt you just to—the time has expired, but to also let the panel know what is going on. Unfortunately, there is a 15-minute vote in progress, a 10-minute debate, another 15-minute vote, another 15. It is basically 45 to 50 minutes' worth of votes.
    So what I would like to do is to go over, cast a vote. It will give a 15-minute window to be able to come back to get your testimony in of the three witnesses for the record because we would like to do that, to be able to do it.
    And then I do not know if any questions can be—any time for questions. But we will be able to at least submit questions if the members would like to. So if you could indulge us, we will be at recess for about seven minutes.
    Thank you.
    [Recess.]
    Chairman NEY. Sorry for this. It is hard to predict the votes. Let us proceed as briefly as possible as we can with the remaining witnesses. Thank you.
STATEMENT OF MADELINE MILLER, EXECUTIVE DIRECTOR, WIL-LOW NONPROFIT HOUSING INC., HAYNEVILLE, AL
    Ms. MILLER. Mr. Chairman and ranking members, good afternoon. I am Madeline Miller, executive director, Wil-Low Non-Profit Housing, which is a non-profit organization incorporated in 1971 in Lowndes County, Alabama when it was spun off another non-profit organization, Friend, Incorporated.
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    Most of our work is conducted in Wilcox and Lowndes Counties. The organization was formed by citizens from Lowndes and Wilcox Counties who were concerned about the quality of their community housing.
    That year, Wil-Low hired its first executive director and received its first grant—$38,000 from the Rural Housing Alliance.
    The organization's mission then, as it remains today, is to provide technical assistance to very low-, low-, and moderate-income families and farm worker families so they can have the opportunity to acquire decent, safe, sanitary and affordable housing.
    Wil-Low helps families with new construction, rehabilitation of existing owner-occupied dwellings, rental housing and housing counseling. Today, Wil-Low still operates its housing programs, consisting of new construction, rehabilitation of owner-occupied dwellings, the purchase and rehabilitation of an existing dwelling, rental units and housing counseling.
    To date Wil-Low has constructed over 300 home units through both its self-help program and its contractor built home program. One hundred percent of the funding for these units was provided by Rural Housing, which means the families we work with all have incomes at or below 50 percent of the median income.
    Rural Housing has made available over $2 million in funds that enables families to own their homes. We also have used their rehabilitation program, the Rural Housing 533 Housing Preservation Grant and its 504 program. A total of over 300 homes have been rehabilitated.
    But there is a need for additional funds for the Rural Housing Service Rehabilitation Program, especially the Loan/Grant Program, because the numbers of homeowner-occupied dwellings that are in need of rehabilitation keeps increasing. If these homes are not repaired, family members will be forced to move in with relatives or others, creating or increasing another problem—overcrowding.
    Wil-Low has successfully trained 50 on-the-job trainees in construction. In 1999, our dream became a reality. We broke ground to start construction on 20 rental units and a community building. Then, in May of 2000, the first resident moved in and today the complex is fully occupied.
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    The one problem is that we were only able to build 20 units. And we have over 100 applications from families who are still in need of a decent and affordable place to live.
    The total cost of the project was $1,399,239, which included the entire infrastructure cost. We also operate a housing counseling program.
    But there are many challenges that Wil-Low Non-Profit Housing faces. Today, Wil-Low has had to overcome in the past and is still faced with today, in an attempt to operate a successful rural housing program: recruiting eligible families; resolving credit issues; funds to do site development work for subdivision approval; sufficient funds to leverage other money; locating suitable building sites; infrastructure; acquiring gap financing; understaffing; overcoming NIMBY-ism; improving the quality of housing; and increasing outreach services to migrant and seasonal farm workers.
    To help alleviate some of the substandard housing units and overcrowded living conditions, Wil-Low has the following goals outlined: single family house purchase of a 10-acre tract of land in Wilcox County, Alabama; construct 18 single-family units; also, multifamily units, 20; and also to rehabilitate 50 units; a housing counseling program to counsel approximately 300 and this would include predatory lending.
    To sum this up, the only way that Wil-Low can achieve these goals and its overall goal of providing decent housing in rural Alabama is to coordinate our effort with those of other groups and organizations, such as Rural Housing. Also, for a rural housing program to be successful, we must continue to make our communities aware of the programs and services offered by Wil-Low.
    Because our communities are changing, part of that awareness involves providing outreach services to migrant and seasonal farm worker families. To be a rural housing non-profit requires more than building or rehabilitating units, it also requires providing a whole host of services from jobs to counseling.
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    Thank you for allowing me the opportunity to speak on behalf of Wil-Low Non-Profit Housing Corporation and other non-profit organizations that are struggling to survive in order to continue providing the housing-related activities that are needed in order to improve the living conditions of residents in this county and in America.
    Thank you.
    [The prepared statement of Madeline Miller can be found on page 119 in the appendix.]
    Chairman NEY. Thank you.
    Mr. Myer? I should also note that if any witnesses have transportation problems or difficulties and unfortunately need to leave because of these votes, the members will be able to put questions to you in writing. We do appreciate your time today on the Hill. And I am sorry again for the unknown factor of the votes.
    Mr. Myer?
STATEMENT OF JOE L. MYER, EXECUTIVE DIRECTOR, NATIONAL COUNCIL ON AGRICULTURE LIFE AND LABOR RESEARCH, INC., DOVER, DE
    Mr. MYER. Mr. Chairman, my name is Joe Myer. I am executive director of NCALL Research, a non-profit rural housing technical assistance provider based in the great State of Delaware, represented by Congressman and former Governor Mike Castle.
    I am also President—Past President and current Executive Committee Member of the National Rural Housing Coalition. And RHC is a national organization that advocates on rural housing policies and programs. And we appreciate the opportunity to testify today.
    Regarding need, the 2002 Millennial Housing Commission Report states that rural communities were bypassed and left behind in the economic good times and now face rates of poverty, substandard housing, unemployment and rent burdens similar to the nation's big cities.
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    There are 7.8 million of non-metro population that is poor. One-quarter face cost overburden. And 1.6 million housing units are substandard.
    USDA's research shows 4 million or 17 percent of non-metro households experience housing poverty. Renters in rural areas are the worst housed with 33 percent cost burdened, one million suffering from multiple housing problems and paying exorbitant portions of income for housing.
    In Delaware, our rural counties and small towns have higher rates of poverty and substandard housing than the State national average. Poultry processing has fostered a dramatic increase in the Hispanic population in some of our smaller communities, like Georgetown, whose population increased from two percent Hispanic in 1990 to 32 percent in the 2000 census. This increase unfortunately took place without any appreciable increase in housing stock.
    I must indicate the importance of the rural housing programs. It is the only option for decent, affordable housing for many rural families.
    If we look at Section 502, single family direct, at least 40 percent of these loans go to families below 50 percent of median. It has very attractive rates. It is an excellent program.
    Average income of households assisted is $18,500. The current loan level will provide financing for about 15,000 units. There is an unprecedented demand for Section 502, which totals several billion dollars.
    We are very pleased with the 2004 budget request of $1.366 billion. We think it is a bargain to the government because each housing unit costs $10,000 a unit to the government.
    Self-help housing has been discussed by Patty. Families trade labor and determination for housing resources. They recruit groups through non-profit organizations of six to eight families who apply for 502 loans. The families receive home ownership counseling, construction training. And they work together to build their homes and neighborhoods, much like the church and barn raisings of the past.
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    The family labor saves an average of more than $15,000 over the cost of a similar cost. That is an average. Sweat equity provides the opportunity for home ownership, while saving the government millions in reduced mortgage costs. Self-help families arguably are the lowest income mortgage borrowers with the best payment record.
    Section 515, rental housing program, seemingly forgotten in many ways. A portfolio of 450,000 apartments with only a 1.6 percent delinquency rate, an average tenant income of $7,900 and more than half the tenants elderly or disabled.
    [The prepared statement of Joe L. Myer can be found on page 126 in the appendix.]
    Chairman NEY. I am sorry to interrupt. I am watching the clock ticking. If we could move on to Mr. Rayburn, just to get a few minutes in. And then if we have it, we can come back, if you do not mind.
STATEMENT OF JAMES R. RAYBURN, JACKSON, MI, FIRST VICE PRESIDENT, NATIONAL ASSOCIATION OF HOMEBUILDERS
    Mr. RAYBURN. Thank you, Mr. Chairman. My name is Bobby Rayburn. And I am a homebuilder from Jackson, Mississippi. I am the First Vice President also of the National Association of HomeBuilders. And I am pleased to represent the views of some 211,000 members.
    NAHB and its members place a high priority on providing safe, affordable, high quality housing for rural Americans. While progress has been made in improving housing in rural America, considerable unmet needs remain, particularly for very-low and low-income rural households.
    Specifically, there is a significant need for new production of affordable housing units. And existing rental stock is aging and requires extensive rehabilitation. And access to competitively priced credit for potential home buyers, as well as builders, remains a problem in many rural areas.
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    Remedies are urgently needed. While there are many possible approaches to meeting the need for the production of new units and preservation of the existing housing stock, there are two common elements that are crucial to success: more resources must be committed and a range of interests beyond the Department of Agriculture must join in the effort.
    Some success in providing affordable home ownership and rental housing opportunities has been achieved through the Home Investment Partnership Program and the Community Development Block Grant programs in States were efforts have been given in sufficient priority. NAHB strongly supports both of these programs, which distribute HUD funds to States and local jurisdictions through block grants. And we believe additional appropriations would be available and effective in addressing unmet housing needs in rural areas.
    Other federal efforts to address rural housing needs are currently undertaken through the Department of Agriculture's Rural Housing Service. I understand that we are before the authorizing and not the appropriations committee.
    But RHS programs have been severely hampered by inadequate funding, with the appropriation shortfalls most severe in Section 515, direct loan program for multifamily housing. The administration's fiscal year 2004 budget proposal includes no money for Section 515, new multifamily production projects.
    Currently, there are no alternatives to the Section 515 for producing housing affordable for very low-income households in rural areas. So the absence of a new production money is a major setback.
    The problems at RHS go beyond inadequate funding, however. Inconsistencies in how the projects are monitored occur from state to state. Management fees have wide variations. And it seems to be difficult to remove bad property managers and owners.
    Chairman NEY. If I could interrupt. I am going to need to leave to make the—I missed the one vote because I needed to stay here. And I am going to make the final passage. And then I will be—anybody who has to leave, please feel free. I will also be more than happy to come back and listen to the last testimony, if you would like.
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    Mr. RAYBURN. Yes, sir.
    Chairman NEY. I will do that. And if I can cast the final passage vote, I will return.
    Anybody who would like to stay. If you cannot stay, we fully understand that. I will return. The committee will be in recess.
    [Recess.]
    Chairman NEY. If I could keep this up for a couple of weeks, I might be able to get back into my suit I wore to my homecoming senior year.
    [Laughter.]
    So I want to thank you for that in the House. And we will continue. How about we continue with the last witness and then we will go back to Mr. Myer.
    Mr. RAYBURN. Thank you, Mr. Chairman. I will just continue where I left off, if that is all right.
    In addition to RHS staff can present roadblocks to potential purchasers of existing properties who plan to improve the properties. This is the result of slow decision making and requirements that add unnecessary cost.
    RHS needs a viable management and preservation strategy, which must include the ability to respond more decisively and effectively. NAHB understands that some of these issues are addressed in RHS' recently proposed regulatory changes to its multifamily programs, which are intended to streamline and consolidate 13 regulations into one, as well as address concerns raised by the Office of the Inspector General.
    NAHB supports such efforts and encourages RHS to move towards simplifying its regulations in as much as possible, as well as strengthening its ability to address the portfolio responsibilities. Even with more funding, RHS cannot do the job alone. Addressing rural housing needs is far too important to be left exclusively to one small sub-cabinet agency.
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    Limited coordination of partnerships efforts are underway to improve rural home ownership opportunities. Such initiatives should be greatly expanded and extended to the production of affordable rental housing.
    The housing GSEs—Fannie Mae, Freddie Mac and the Federal Home Loan Banks—State housing finance agencies, the farm credit system and HUD all have responsibilities and resources to take a far more aggressive role in addressing the housing problems of the nation's rural communities. Fannie Mae and Freddie Mac are required by law to meet annual housing goals established by HUD.
    Several upward provisions in these goals had little, if any, impact to improving the availability of housing credit in rural areas. In the 2000 revision of the goals, the underserved areas goal was increased from 24 to 31 percent. But there was only a limited increase in the role of Fannie Mae and Freddie Mac in rural housing finance.
    During development of the 2000 rule, NAHB commented that HUD should encourage increased participation in rural areas by Fannie Mae and Freddie Mac through the use of bonus points or double credit for purchases of loans in rural areas. HUD did not include this recommendation in the final rule. But we plan to revisit this issue during the revision to the goals in 2004.
    In conclusion, Mr. Chairman, NAHB thanks you for bringing this to attention and supporting the cause of rural housing. NAHB stands ready to work with this committee, RHS, HUD, the GSEs and all other supporters of rural housing to improve the programs and to develop creative solutions to maximize the use of scarce resources in addressing these critical housing needs.
    Thank you, Mr. Chairman.
    [The prepared statement of James R. Rayburn can be found on page 134 in the appendix.]
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    Chairman NEY. Thank you.
    Mr. Myer?
    Mr. MYER. And I will just continue on as well. In Delaware, the 515 program is the rental backbone of our communities, providing a great community asset. Waiting lists are long. Recently, more than 200 applicants showed up to rent a 24-unit Acorn Acres complex in Georgetown, Delaware. That gives you an idea of the need.
    The President's budget cuts 515 to $71 million, the first time in more than 30 years that the Federal government will not provide any new rental units for rural America.
    Prepayment of Section 515 properties is a threat to two-thirds of the portfolio over the next 7 years because it results in displacement of tenants and loss of low-income housing stock. Owners' incentives and resources to preserve this stock are important.
    In 1994, Section 515 was funded at $540 million. It has been cut an unconscionable 73 percent and not replaced with anything. This is a great program that seems to be biting the dust.
    514/516 farm labor housing is the only program that serves our nation's migrant and seasonal farm workers. The last national study done indicated there was a shortage of 800,000 units for farm workers.
    Fifty-two percent of farm workers live below poverty. Seventy-five percent of all migrant farm workers live in poverty. Yet, few farm workers can qualify for normal subsidized housing.
    Current funding totals $37 million, which provides 700 units of housing. We are appreciative of the $37 million. But it is far less than what is needed.
    We ask for your support of the Rural Rental Housing Act of 2003. This creates a new Federal program to alleviate cost burdened substandard conditions. It would create a $250 million rental development fund, administered by USDA.
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    Money would be allocated to States based on need for the purposes of acquisition, rehabilitation and construction of low-income rental housing. Federal funding will be matched, dollar for dollar, by participants. USDA will make funding available to entities with a record of accomplishment in housing development.
    And finally, the act will be administered at state levels most familiar with local needs. This new resource, if enacted, could finance up to 5,000 rental units a year.
    We also encourage the refunding of Rural Community Development Initiative, RCDI, to support the rural non-profit delivery system. There was more than $80 million in applications for the $6 million that was available in 2000.
    This is a valuable program. And it is also at risk in the Federal budget.
    Mr. Chairman, thank you for this opportunity.
    Chairman NEY. I want to thank you. And thank all the panel.
    I have a question for Mr. Jones. As I understand it, the Appropriations Committee last year inserted a provision for no-year funding. That is for the Section 502 guarantee program.
    And my understanding is the intent of this provision was by making this change, it would provide stability in the budget process for consumers, the bankers and realtors who participate in the program. The continuous operation of the program without delay or interruption of the funding also was a factor.
    There was a concern by the Appropriations Committee when the administration lowered the fee for the new guaranteed loans. And the refinancing of existing loans, there would be an additional cost to that program.
    The Appropriations Committee rescinded approximately $11 million from one account and transferred the funds to the Section 502 guarantee program to make up for the anticipated additional costs. And that would be so that the program funds would not be depleted before the end of the fiscal year.
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    So is the current level of funding for this fiscal year sufficient for the demand? The President's proposed fiscal year 2004 budget requests a program level of $2.8 billion for this program. So do you believe that the level of funding is adequate and will be sufficient for the demand?
    Mr. JONES. My belief is that that level of funding will indeed be insufficient.
    Chairman NEY. Please pull the microphone. Thank you.
    Mr. JONES. With the decrease in the guarantee fee and other initiatives from the agency, we have seen tremendous momentum build for the Guaranteed Rural Housing Program. As a result, we will more than likely exceed the $2.75 billion this year, which is unfortunate because for the first time, we do have the opportunity for the no-year funds provision but will actually not have any funds carried forward.
    We have yet to ever experience a 12-month program. Typically, the private sector knows as we begin each fiscal year——
    Chairman NEY. I am sorry. You have never experienced a 12-month program?
    Mr. JONES. Because funds come to us typically very late in October or early November, either through the CR process or at the time the actual appropriations bill is funded.
    Chairman NEY. So because they are late, you cannot then gear up?
    Mr. JONES. We never have a full year to actually see what we can do with 12 consecutive months of consistent funding. I believe this year we are going to exhaust the allocation, the $2.75 billion the agency has, which really means we will not have funds carry into the next fiscal year. And I believe the proposed fiscal year 2004 will be insufficient.
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    Chairman NEY. The gentlelady from California?
    Ms. WATERS. Mr. Chairman, I would like to thank all of the panelists for the time that you have spent here this afternoon to share this very, very valuable information with us. I think I am coming to some conclusions about rural housing needs. And I sincerely believe that there needs to be a lot more advocacy here by members of Congress who represent all of these areas that perhaps we are not hearing enough from.
    Obviously, there is a need for more money. I think this multiple family units and all of the issues with I guess the 515 program, we really do need to take a very deep and serious look at, to see what we can do. As one urban legislator, I am absolutely committed to the proposition that the urban and rural legislators should work together for rural housing and for urban housing.
    I think that we could do a better job combining our efforts to make sure that we have adequate housing and housing resources in certainly the rural community.
    I guess I have a lot of questions. I am going to hold them in reserve because I am going to review all of the testimony and interact with my chairman on it and other members of this committee.
    But let me just raise this question of, I guess, Mr. Myer. I know that we have laws that allow for migrant farm workers to work, I guess, in this country. Maybe for particular seasons or a designated period of time, I do not know.
    But do we coordinate the laws that encourage migrant farm workers to come and work with the housing resources that should be available to them if they are here working? Is there any coordination between that?
    Mr. MYER. Well, I think there is some coordination. There is always room for more coordination.
    But the fact is that local farm workers, their only access to housing is this 514/516 program. And then migrant farm workers that migrate to a certain area to support agriculture, their only option appears to be the 514/516 program. It is the only program that is dedicated to serving farm workers.
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    And again, there is an 800,000 unit need for farm workers. I am not fully sure that I answered your question.
    Ms. WATERS. Well, that gives me some idea. If the need is 800,000, then it appears that what we are doing is we have laws that allow for migrant workers, but we do not match the resources for housing with the number of migrant workers who are performing the services.
    Mr. MYER. The program is funded at $37 million, which provides about 700 units a year.
    Ms. WATERS. Okay. That is helpful. Thank you very much, Mr. Chairman.
    Chairman NEY. Another question I had—and anyone that would like to, please feel free to answer this. And then we will go to Mr. Davis for a question.
    What are your general impressions and overview of the Rural Housing Service and whether the agency within the U.S. Department of Agriculture is meeting its intended purpose and goals? Any reflection on RHS?
    Feel free to speak out or raise your hand or whatever you would like to do.
    Mr. ANDERS. If we have an hour, sure.
    Chairman NEY. I have got some time, maybe not an hour, but close to it.
    Mr. ANDERS. I mean, in many ways, the agency is doing an excellent job. I mean, the agency has been around since 1949. Actually in some respects it has been around longer than that. And it has been doing a very credible job in certain areas of doing single family homes and doing multifamily housing and in doing some of the rehab loans, what you are talking about the 502, the 504 and the 515 programs, as well as the Farm Labor Housing Program.
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    The problem has been in the last 10 years that the agency has suffered substantial cuts in funding. And they have had to consolidate their staff.
    Some of the support and infrastructure which needs to be dealt with, in terms of longevity of some of the housing programs, particularly the Rural Rental Housing Program, which we heard about earlier, there are some significant issues in terms of maintenance of the portfolio. The agency is short on staff to deal with it.
    And so it is a cost issue. But I think that, by and large, the agency is doing a very good job and is meeting its purposes.
    Chairman NEY. Are RHS—we are going to hear from them July 8th. But I just thought I would get anybody's observation.
    Ms. BRIDGES. Even with the problems that were cited by the investigative panel earlier, the RHS is absolutely the best delivery vehicle for affordable housing in the rural areas. We have no other vehicle to deliver it. The tax credit program, as good as it is, is not sufficient in the rural areas to meet the needs of the very low-income people.
    The biggest problem that we have had in the past few years is the lack of funding. At the time that we were having $500 million to $900 million allocation, we were doing great. And these problems that are addressed are a minor amount of problems. They are not large.
    We have many, many, many other owners and managers that are doing an excellent job and serving thousands and thousands of families. So I strongly encourage the committee to look at the funding that could be possibly available and maybe another way of delivering the program. There are ways.
    As the previous witness said, I will not repeat him, but they have lost some of their staff because of funding cuts. However, we do not need to be micromanaged in the field. We do not need that.
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    There are a lot of honest developers and managers out there that would do a good job if we had the funds available.
    Chairman NEY. Thank you.
    Mr. Jones?
    Mr. JONES. I would echo the sentiments of my colleagues. I believe this agency has done a very effective job. Most recently, I would note that this administration has been willing to listen to the private sector and the needs of the private sector to really promote this program.
    Without question, the GRH borrower is best served by this loan. It provides 100 percent financing, meaning no cash contribution from the applicant. And because of their low-and moderate-income status, no mortgage insurance.
    But the program is only going to work if we can get the private sector interest in delivering it. And I was very much moved by Congresswoman Waters' comments regarding affordability.
    Let's face it. This administration just cut the guarantee fee, making it affordable.
    The agency is focusing now, as part of a greater concern, on addressing minority home ownership rates, which consistently lag behind white homeowners in rural America. The things that we talked about today—financing of the guarantee fee—allows the applicant to take full advantage of the appraisal, to finance all the closing costs without wasting one dime on the guarantee fee, which is typically put on the loan amount with HUD, VA and even in the refinance program.
    All of these things are going to knock down the barriers of affordable home ownership, which I believe are everyone's objectives today.
    Chairman NEY. Do I read you correctly then, you are not saying it is as much money as it is private sector involvement?
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    Mr. JONES. Certainly, for the guaranteed program, the private sector is critical. The private sector is actually originating, processing and servicing these loans, in lieu of RHS staff. And whatever we can do to induce the private sector to contribute its efforts to gear up to deliver this program is going to get us the most home ownership opportunities for these applicants that simply make too much money and cannot be served by the direct or other RHS loan programs, but do not have any other options.
    Chairman NEY. Thank you.
    Mr. Rayburn, did you?
    Mr. RAYBURN. Mr. Chairman, I would like to remind this committee that in addition to being a builder and very involved with the National Association of Homebuilders, that I am from Mississippi. And several of the questions that were directed to certain earlier panel members about places in Mississippi.
    I know very well where those places are. I know very well where cardboard shacks were in many cases because our company has helped to solve some of those problems.
    Are there a lot of them still out there? There surely are.
    We could not solve those problems with Rural Housing Service dollars and staff. We had to go elsewhere in order to do that. Because part of Rural Housing Service is doing a very good job. The better job is done on the single family side, probably for the most part around the country.
    On the multifamily side, it is not. They need to come into this century and use good, sound business practices.
    We probably do not have the time. But if you would like to, I would be glad to provide in written comments a couple of specific instances whereby our company was going to bring in outside, fresh, new, non-federal dollars into a couple of 515 developments, multifamily rental developments.
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    And because of the cumbersome, outdated requirements that the staff was putting on us, we were not able to do that, even though we had a half a million dollars funded from the Federal Home Loan Bank AHP program in the form of a grant. We were told that was fine on the front end.
    On the back end, they came up with another $300,000 that needed to be done to the development. So the project is still in its deplorable condition today, with sewer running on the ground, with cabinet doors nailed shut that will not work because the management company was getting exorbitant management fees. And things like that needs to be stopped.
    Chairman NEY. We would like, if you could, to give us detail after this——
    Mr. RAYBURN. Be glad to, surely.
    Chairman NEY.——on at least the two and anything else you would have.
    Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman. Let me thank the panel and chair for their patience. I know it is late in the day.
    Let me give you all a number—let me give the panel a number—that puts some of this in a great deal of perspective from my standpoint. The 1994 fiscal year, the combination of Section 502 loans and Section 515 loans was $530 million or so. Actually, I think it was around $663 million total subsidy cost spent on rural housing programs in fiscal year 1994.
    Less than $200 million in subsidy on Section 502 and Section 515 in the current fiscal year. That is a drop from $660 million down to $200 million.
    Now I am not much of a math major. But that is certainly a significant drop.
    Has the housing crisis in rural America abated over the last 10 years? Has it somehow gotten better than it was in 1994? Does anyone think that the housing crisis is somehow less acute now than it was in 1994?
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    Mr. RAYBURN. If I could answer, no.
    Mr. DAVIS. In fact, it is worse in a lot of ways.
    Mr. RAYBURN. It is worse. It is worse in so many cases because of the lack of infrastructure in so many communities, the lack of infrastructure that has to be gone in and put the streets, the water, the sewer in to so many different areas, causing additional increases in prices, tied back to that homeowner that you are trying to serve, and many times in the low-and very low-income category.
    Mr. DAVIS. So we are making less of an investment to address a problem that is becoming more acute? Is that right? All of you are nodding your heads.
    Ms. Miller?
    Mr. RAYBURN. Yes, sir.
    Ms. MILLER. Yes, that is right, Congressman Davis, because take for example in Wilcox County, when it comes to sewage, infrastructure system, then you only have just two towns that have actually a sewer system. You have Camden and Pine Hill.
    But then if you look at the other area, there is a great need in the whole country for housing. And now that most of those counties, if the land does not perk, then you have to go into expensive, what you call, a raised bed septic tank. And that can cost anywhere from $6,000 to $10,000.
    And that fee would have to be added into the cost of the family loan because they are not able to make a down payment. And well, most of the families—but you are familiar with that. I do not have to go into detail on that, how they can qualify.
    Mr. DAVIS. Let me give you all another statistic that my colleagues from California alluded to earlier. We talked about what is a very real paradox, the fact that a large percentage of people in rural America own their homes, but the homes that they own are absolutely substandard.
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    They are houses, really, and not homes, to be very blunt about it. Another statistic, doing some quick math here, 31 percent of the housing units surveyed for the American Housing Survey in rural America, 31 percent of those occupied rental units were substandard in some way, ranging from inadequate heating to inadequate physical infrastructure, to water leakage; 31 percent of them had some very particular problem.
    So once again, I think we ought to recognize that when we are talking about people having a high rate of what we would call home ownership—again, they are not living in homes. They are living in physical structures called ''houses'' that are not in the condition that they need to be to raise a family. Do a lot of you agree that is a regular problem?
    Let me direct another question to all of you. We have heard a lot of talk in all of these hearings about the Federal government taking less of a role, whether it is as a function of devolving responsibilities on the states or devolving them on the private sector.
    Let me ask some of you to comment on what you think the government can be doing right now that it is not doing. What can the government do if we, for whatever reason, end up with an administration one of these days that is committed to addressing these issues and wants to be proactive? What can the government do now that it is not doing?
    Yes, ma'am?
    Ms. MILLER. I think one thing that the government can do is make more funding available and can lessen some of the regulations when it comes to the rural because the regulation is steep. And then the money is not there for the rural to pay.
    The housing standards are very high. Just to give you an example, if a qualifying applicant lives on a rural gravel road, they must include in their loan adequate funds to construct a concrete driveway to the gravel road. These rules apply to qualifying applicants' whether they own a car or not.
    This could add between $2,000 to $3,000 to an applicant loan amount, so there is a number of rules in the regulations that can be minimized, depending on each individual situation, and the applicant still could get a well constructed, quality built dwelling.
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    So there is a lot of things the regulations can be minimized, but still remain at a good standard home can be built.
    Mr. DAVIS. And do all of you agree that we cannot address the housing problem, particularly in rural America, without a sustained focus on job training, without a sustained focus on economic development? It is impossible to get a handle on the housing issue without looking at all the problems that accompany the issue.
    Do all of you agree with that?
    Ms. MILLER. I agree with that.
    Mr. DAVIS. All right. Thank you, Mr. Chairman.
    Chairman NEY. I want to thank you. And I appreciate the panelists for your testimony on this important issue.
    I just want to echo some comments made earlier. And I come from obviously a very rural Appalachian area. And I think that in Congress, we have a large, great, diverse country. And we have to be sensitive to the concerns of urban centers, which are different, and the concerns of rural, take care of everybody we can in the sense of listening to individuals and also to try to get affordable and available housing, no matter what size of a city or a town.
    I do think that we can focus more here in Congress-that is what we are trying to do—on rural. I am not sure that it has been focused enough on.
    I have also told all the advocacy groups to speak up a little bit more or scream a little bit more or come around the halls. And that is no reflection on anybody here. I am just saying, I have told everybody, let's energize this issue and get it going a bit.
    I give you a lot of credit for working out in the trenches to make sure people have some support and some help. And with that—did you have—and with that, I want to thank the panelists.
    The chair notes some members may have additional questions for the panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these questions and to place their response in the record. I want to thank the members of the committee and the panelists.
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    The committee is adjourned.
    [Whereupon, at 5:36 p.m., the subcommittee was adjourned.]

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