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    PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Government Reform. Additional material pertinent to this transcript may be found on the web site of the committee at [http://www.house.gov/reform]. Complete hearing records are available for review at the committee offices and also may be purchased at the U.S. Government Printing Office.

59–984 CC



before the





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MARCH 23, 1999

Serial No. 106–34

Printed for the use of the Committee on Government Reform

Available via the World Wide Web: http://www.house.gov/reform

DAN BURTON, Indiana, Chairman
STEPHEN HORN, California
JOHN L. MICA, Florida
BOB BARR, Georgia
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LEE TERRY, Nebraska
DOUG OSE, California
PAUL RYAN, Wisconsin
HENRY A. WAXMAN, California
TOM LANTOS, California
ROBERT E. WISE, Jr., West Virginia
PAUL E. KANJORSKI, Pennsylvania
CHAKA FATTAH, Pennsylvania
DANNY K. DAVIS, Illinois
JOHN F. TIERNEY, Massachusetts
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HAROLD E. FORD, Jr., Tennessee
BERNARD SANDERS, Vermont (Independent)

KEVIN BINGER, Staff Director
DANIEL R. MOLL, Deputy Staff Director
DAVID A. KASS, Deputy Counsel and Parliamentarian
CARLA J. MARTIN, Chief Clerk
PHIL SCHILIRO, Minority Staff Director

    Hearing held on March 23, 1999
Statement of:
Apgar, William, Assistant Secretary for Housing, Federal Housing Commissioner, U.S. Department of Housing and Urban Development
Cincotta, Gale, executive director, National Training and Information Center, Chicago; Grace Jackson, volunteer, Roseland Neighborhood Housing Services, Chicago; Carl Edwards, president, Organization for a New Eastside, Indianapolis; Brian Davis, director, Northeast Ohio Coalition for the Homeless; and Stanley Czerwinski, Associate Director, Resources, Community, and Economic Development Division, U.S. General Accounting Office
Cooper, Nancy H., District Inspector General, Southeast/Caribbean District, U.S. Department of Housing and Urban Development
Letters, statements, etc., submitted for the record by:
Apgar, William, Assistant Secretary for Housing, Federal Housing Commissioner, U.S. Department of Housing and Urban Development:
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25Information concerning factual errors
Letter dated September 9, 1999
Prepared statement of
Biggert, Hon. Judy, a Representative in Congress from the State of Illinois, prepared statement of
Burton, Hon. Dan, a Representative in Congress from the State of Indiana, letter dated March 9, 1999
Chenoweth, Hon. Helen, a Representative in Congress from the State of Idaho:
Additional questions for the record
Prepared statement of
Cincotta, Gale, executive director, National Training and Information Center, Chicago, prepared statement of
Cooper, Nancy H., District Inspector General, Southeast/Caribbean District, U.S. Department of Housing and Urban Development, prepared statement of
Czerwinski, Stanley, Associate Director, Resources, Community, and Economic Development Division, U.S. General Accounting Office, prepared statement of
Davis, Brian, director, Northeast Ohio Coalition for the Homeless, prepared statement of
Edwards, Carl, president, Organization for a New Eastside, Indianapolis, prepared statement of
Gilman, Hon. Benjamin A., a Representative in Congress from the State of New York, HUD Single Family Property Disposition Program report
Jackson, Grace, volunteer, Roseland Neighborhood Housing Services, Chicago, prepared statement of
Sanders, Hon. Bernard, a Representative in Congress from the State of Vermont, prepared statement of
Waxman, Hon. Henry A., a Representative in Congress from the State of California, chart concerning mutual mortgage insurance fund

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House of Representatives,
Committee on Government Reform,
Washington, DC.
    The committee met, pursuant to notice, at 12:15 p.m., in room 2154, Rayburn House Office Building, Hon. Dan Burton (chairman of the committee) presiding.
    Present: Representatives Burton, Gilman, Morella, Mica, Terry, Biggert, Ose, Chenoweth, Waxman, Kanjorski, Mink, Norton, Cummings, Kucinich, Tierney, Allen, and Schakowsky.
    Staff present: Kevin Binger, staff director; Daniel R. Moll, deputy staff director; Barbara Comstock, chief counsel; David A. Kass, deputy counsel and parliamentarian; Jane Cobb, professional staff member; Mark Corallo, director of communications; John Williams, deputy communications director; Carla J. Martin, chief clerk; Lisa Smith-Arafune, deputy chief clerk; Corinne Zaccagnini, systems administrator; Jacqueline Moran, legislative aide; Maria Tamburri, staff assistant; Phil Schiliro, minority staff director; Phil Barnett, minority chief counsel; Cherri Branson and Michael Yeager, minority counsels; Ellen Rayner, minority chief clerk; Jean Gosa, minority staff assistant; and Barbara Wentworth, minority research assistant.
    Mr. BURTON. The committee will come to order.
    A quorum being present, we will proceed.
    Several weeks ago, this committee held a hearing about Federal programs that are wasting billions of taxpayer dollars every year. These programs are on GAO's high risk list, because mismanagement and internal weaknesses make them very vulnerable to waste, fraud and abuse. Today's hearing is the second in a series of full committee hearings that will examine these high risk areas.
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    During the February 10th hearing, I promised to try to work with our appropriators to hold agencies accountable for addressing the high risk areas. Since then, I co-signed a letter with Chairman Bill Young of the Appropriations Committee to every major agency. It puts them on alert that we want to see serious efforts to resolve these problems, starting with specific, measurable performance goals and their annual Results Act plans.
    Without objection, I would like to enter this letter into the record at this time. This is the letter we sent to all the agencies from Chairman Young and myself. Without objection, so ordered.
    [The information referred to follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. I plan to share what we learn here today with the Appropriations Committee, and I'm going to work with them to do whatever is necessary to get the agencies to turn these problems around. What Chairman Young and I wanted to stress to all of the agencies about the Results Act is that there has been an attitude of, well, maybe we'll comply and maybe we won't.
    A number of the agencies that are supposed to comply with the Results Act have done almost nothing. Some have done minimal things. And some have tried a little bit harder. But the fact is, the Results Act is the law and it needs to be complied with.
    One of the things I said to Chairman Young that I think is very important is that the Results Act did not appear to have any teeth in it. The way to make sure there were teeth in it was to have the Appropriations Committee, as well as myself, let them know that there were penalties to be imposed if each agency did not comply with the Results Act, which means very simply that there will be a very hard look taken at their budgets and their expenditures. If they don't comply with the Results Act, then we find ways that they should have complied. There may be some substantial cuts. We think that's something they ought to understand.
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    Our hearing today will focus on the Department of Housing and Urban Development. It would have been helpful if we had HUD's performance plan by now. Every other major agency has submitted a performance plan at this point. But HUD has not. If we had it, we would have been able to see how specifically HUD plans to address some of the problems that we will look at today.
    I sincerely hope we're going to see that plan soon. In the meantime, I expect FHA Commissioner Apgar to tell the committee his specific goals and measures for resolving the high risk problems as I requested in the invitation letter to him. I've talked to Secretary Cuomo a number of times. He's a very nice fellow and I think he has the best interests of the Department of HUD at heart, and I think he wants to do the right thing. But evidently, he needs more help from his assistants to make sure they have a plan and they get on with it.
    Today the high risk program we will examine is HUD's Federal Housing Administration [FHA]. FHA is the home mortgage insurer for many people who wouldn't ordinarily qualify for a home loan in the private marketplace. For example, first time home buyers and people with not so perfect credit histories. Every year, thousands of these mortgages go into default, and the FHA is responsible for reselling these homes.
    This is where the problems start. HUD is sitting on a huge backlog of repossessed properties, and the list is growing every year. A lot of these properties sit in HUD's inventory for months, some even for years. Some abandoned properties have been in HUD's inventory for more than 8 years.
    HUD's contractors are so poorly managed that the properties have become run-down and vandalized. The value of the properties is plummeting and hurting the whole neighborhood. The management of this process is such a fiasco that HUD is losing over $1 million every single day.
    This is not a new problem. It's been going on for years. They've been on GAO's high risk list since 1994.
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    Just as significant as the cost to the taxpayer is the cost to individuals and neighborhoods. Management failures and staffing shortages have resulted in lax oversight of the contractors responsible for maintaining these properties. One HUD office in Florida was so shortstaffed that they did not visit their contractor handling these properties in 3 years. In another case, the contractor performed the work, inspected the work and approved the payment to himself with no oversight.
    As you can see from the pictures on these easels that we have over here to the left, some taken as recently as this month, the lack of proper attention to these properties exposes them to vandalism, maintenance problems and safety hazards. How would you like to live in that one on the left?
    The longer they sit in these conditions, the more the value deteriorates and the more money HUD loses and the more the neighborhood suffers, and the more everybody that lives in the neighborhood complains.
    One of HUD's primary missions is expanding home ownership. But evidence and testimony you will hear today indicates this program is not achieving this mission. Home ownership is clearly a problem when the rate of FHA foreclosures is rising.
    Look at the recent trends. In fiscal year 1996, there were just under 61,000 foreclosures. In fiscal year 1997, the number was 71,000 foreclosures. For fiscal year 1998, it was 76,000 foreclosures. Why is the number of FHA insured families defaulting on their loans increasing in an economy that's growing like ours is? How long can neighbors living next to blighted HUD properties expect to wait for HUD reforms while their property values continue to go into the tank?
    HUD's mission is not to drive down communities, its mission is to make communities better. Communities do not deserve this from their Government, and the tax dollars that support it.
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    Three of our witnesses testified before Congress 1 year ago almost to the day. At that time, they talked about the condition of many of the HUD homes in their neighborhoods, and what these poor conditions do to them and to the surrounding community and the property values. One witness even had the personal experience of foreclosure on his FHA mortgage.
    I've asked these witnesses to return today to give us a status report. I want to ask them if the situation over the past year has improved at all.
    In fairness to HUD, this agency has been troubled for many years. I'm sure this administration inherited more than its share of problems when it took the helm 6 1/2 years ago. HUD will testify today that FHA's property disposition program is in transition. We'll hear about the enormous undertaking to contract out all the responsibilities for reselling these homes.
    How long do HUD officials expect the transition to these new contracts to take? And what will HUD's oversight of the new contracts look like?
    Poor contractor oversight has been a serious problem for this program in the past. If the FHA couldn't manage these contractors in the past, and now they're going to give them even more responsibility. Is it going to work any better?
    I'd also like to know when HUD expects the trends I mentioned earlier to take a positive turn. Even though the population that FHA serves is considered more risky than that of the private sector mortgage industry, it seems to go against all reason to see foreclosure rates going up and up during this good economy. It's not what is happening in the private mortgage industry.
    Our witnesses today will help us understand the present state of affairs with this program. I hope we'll get some answers from HUD on what their reforms are and when we can expect them to be realized.
    As part of my opening statement, I want to show a segment of the NBC Nightly News called Fleecing of America that aired several weeks ago about HUD's FHA properties. But first, I want to say something to HUD. My understanding is that in the days prior to NBC's original piece, HUD led an all-out offensive against NBC not to show it. It has also come to my attention that HUD has gone on an offensive against the General Accounting Office.
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    I know there was heavy lobbying going on leading up to the release of the high risk list. I also have a copy of a letter dated March 12, 1999 that HUD Deputy Secretary Saul Ramirez sent to Comptroller General David Walker that personally attacks him because HUD is on GAO's high risk list.
    Also, the battles HUD has engaged in with its Inspector General are no secret, and we had a manifestation of that when the IG spoke here just a couple of weeks ago.
    I know that HUD has taken its share of knocks over the years, but not without reason. The management problems at HUD exist now. They are affecting communities and families today. HUD officials need to understand that shooting the messenger is not going to solve their problems. More than ever, HUD needs to focus its resources on solving problems and not fighting the messenger, such as the IG or the GAO. So let's move forward, recognize the problems where they exist, try to find solutions and give the American public the accountability that they deserve.
    Now I'd like to have this piece shown from ''Fleecing of America.''
    [Video shown.]
    Mr. BURTON. Let me just say before I turn to my colleague from California, Mr. Waxman, that evidently one house, not all of them, but one house in that piece was characterized as one of the homes that was controlled by HUD, and evidently there was some question about that. So NBC made a mistake, but that was only one of them. All the rest of the homes shown in that piece were actually HUD controlled properties.
    With that, Mr. Waxman.
    Mr. WAXMAN. Thank you, Mr. Chairman.
    While we have an obligation to scrutinize HUD, we also have an obligation to bring balance and fairness to our scrutiny. Unfortunately, that's not always the case, as is clear, I think, by the video you just showed us. Paul Harvey used to say, and now here's the rest of the case.
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    What bothers me about this broadcast we just saw is that the filthy, run-down house NBC featured as exhibit A against HUD isn't even a HUD property. HUD had no responsibility for maintaining that house, and they shouldn't be blamed for its condition.
    The chairman just acknowledged the fact that NBC doesn't dispute this. They even ran a retraction on March 19th, making it clear that this dilapidated property is not in HUD's inventory. You say, well, that was only one of the houses in that video. That was the house that this story was all about. And it wasn't even a HUD building.
    I'm also bothered by the story's emphasis on a 1998 GAO report that ignores a more comprehensive evaluation by Arthur Andersen Consulting that reaches a markedly different conclusion. I'm bothered by the misleading and inaccurate allegation that HUD is losing $1 million a day. I noticed that the chairman is even using that statistic as fact.
    But as we'll see by the end of this hearing, HUD isn't losing $365 million a year on the FHA program. Instead, the FHA program is actually responsible for a net gain of $1.5 billion in 1998, and is projecting a net gain of over $2 billion in 1999. There's no evidence of any demonstrable waste, fraud or abuse in the program.
    Indignation must never be a substitute for fact. I'm sure if NBC were a bit more careful, it could have found an actual HUD property in abysmal condition. They do exist. But I suspect they are exceptions.
    While it's probably inevitable that some problems will arise in a small number of HUD's 40,000 properties, our goal must be to continue to have every property in the best condition possible.
    The chairman said HUD was trying to intimidate NBC before they ran this broadcast. I don't know anything about that. Maybe HUD was trying to tell NBC that they were featuring a house that wasn't even under HUD's control.
    Mr. Chairman, ensuring that all Americans have access to safe housing is one of our Nation's highest priorities. So I welcome this opportunity today to evaluate HUD's performance. The scandals and mismanagement that has plagued HUD in the 1980's has recently given way to a new approach and a strong commitment to improve Government service.
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    GAO, which has been critical of HUD in the past, has recognized these reforms, and recently noted that ''HUD continues to make credible progress in overhauling its operations to correct its management deficiencies.'' While further improvements are still needed, I want to commend Secretary Cuomo for the significant accomplishments he and the Department have already achieved.
    I think he's a nice guy, too, as the chairman pointed out. But that has nothing to do with anything. If he's doing the job he's supposed to do, he should be commended. If he's doing things he shouldn't be doing, he should be corrected. But simply to use a hearing to beat up on HUD, without substantial evidence to back it up, is not a responsible oversight.
    We have to scrutinize HUD. We also have an obligation to bring balance and fairness to our scrutiny. The FHA program is a lifeline for home ownership to thousands of families across our country. Over 75 percent of first-time homeowners have FHA approved mortgages. FHA insures more mortgages for African-Americans and Hispanics than any other insurer. And 93 percent of FHA mortgages have no problems, and do not result in default.
    Now, that's a significant figure, because 93 percent of the loans are fine, but 7 percent do end up in default. That's higher than other lenders who have a lower rate of default. But the loans of FHA are to people who wouldn't be able to otherwise get these loans to buy a home. That's why the Federal Government established the FHA program.
    I look forward to today's testimony and our testimony that we're going to receive. But I was taken by surprise when the chairman talked about, why are we having more homes foreclosed when our economy is doing so well.
    Well, in 1993, there were 918,700 bankruptcy cases in the United States. In 1997, we had 1,317,000 bankruptcies in the United States. Our economy is doing very well for most people, we're all grateful for that fact. But we are seeing many of our people not holding up well under these circumstances, and we see more and more people going into bankruptcy as a result. Not all of the bankruptcy cases involve HUD, but they are an illustration of the fact that some people cannot sustain themselves, some people do go into default on their loans. And some of those loans are HUD loans, some are not. And when they are HUD loans, the properties are to be maintained properly, and we want to make sure HUD is doing their job.
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    I thank you, Mr. Chairman, for this opportunity to make this opening statement, and I yield back the balance of my time.
    Mr. BURTON. Mr. Gilman.
    Mr. GILMAN. Thank you, Mr. Chairman.
    I want to commend Chairman Burton for moving forward with today's hearing. I think it's important for this committee to examine any waste, fraud or abuse, wherever it may be. It's important that we in the Congress, and more specifically, those of us on the Government Reform Committee, hold our Federal agencies accountable for the funds we provide to them.
    As the chairman mentioned, HUD has been on GAO's high risk list of Federal programs that are vulnerable to waste, fraud and abuse since 1994, which has cost our budget millions of dollars a day. I find that more appalling when we consider that today, I'll be meeting later on with housing authority directors from my own congressional district who undoubtedly will be asking for increased funding for Section 8 funding in the appropriation process.
    While I have and will continue to insist on adequate availability of Federal housing vouchers and subsidies to those who are in need for such housing, I want to make certain HUD is not wasting these funds that we in the Congress have appropriated.
    So again, Mr. Chairman, I want to thank you for bringing this issue to the attention of the Congress. I'd be pleased to yield to the gentleman.
    Mr. BURTON. Let me just say that although the piece that we just saw did have a piece of property that was not technically under the control of HUD, I have been in HUD projects myself, personally. I have walked through some of them. The stench was terrible. And it wasn't that long ago that I was going through those.
    As a matter of fact, I want to cite one multi-housing project in Indianapolis that was built, this was several years ago, called Rivers Point. There were two high rise buildings. They were so poorly managed by HUD and so poorly watched that they were completely destroyed. The elevators didn't work, this was within 4 or 5 years after their construction.
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    People had defecated in the bathtubs, there were rats, it was just an absolute disaster.
    They sold those for about a nickel on the dollar, or 10 cents on the dollar to a private contractor. He went in and cleaned them up, fixed them up, and now they are high rise apartments, some are even luxury apartments.
    That's just tragic, the billions of dollars that are wasted, the millions of dollars that were wasted on that one project.
    Now people can say, well, this isn't the case, this one piece of property is not really, it's the exception rather than the rule. I want to tell you, I've been through these houses. I was in the real estate business. That was my business, I was a realtor before I came to Congress. My brother still is a realtor.
    We have been through these houses, a lot of them, in Indianapolis, one of the cities that was mentioned. And I want to tell you, there's a lot of improvement that can be made and HUD needs to do it.
    I thank the gentleman for yielding.
    Do any other Members wish to be heard? The gentlelady from Hawaii.
    Mrs. MINK. Thank you, Mr. Chairman.
    I yield to the ranking minority member.
    Mr. WAXMAN. Thank you for yielding. I'm sort of taken aback by the chairman's statement of his own personal experience. I don't doubt that he experienced what he claimed. But public housing is different than houses that were under discussion where there's a loan to a purchaser for a single family dwelling. A lot of these multi-family residences are public housing, sometimes run by the local people with some Federal dollars, sometimes they are run by private owners who have received help from tenants that have Section 8 vouchers.
    So I think we ought to be indignant whenever we see any abuse or fraud. But because we see some abuse or fraud doesn't mean that everything is abused and fraud is the norm rather than the exception.
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    I point out the high number of bankruptcies, I just want to say that I pulled off the Web this statistic, more Americans filed for bankruptcy in 1998 than ever before. That's pretty startling, when we recognize we've had such a good economy for most people. But for a lot of people, it wasn't a very good economy and they weren't able to hold onto their homes, weren't able to pay their bills, had to go into bankruptcy as a consequence.
    I thank you for yielding, and I just raise this doubt in my own mind whether we're not comparing apples and oranges, and whether HUD had the responsibility for the public housing the chairman walked into or whether they didn't. Let's hear from the witnesses and maybe we'll be able to sort through these different claims as we go through a scrutiny, which is appropriate for our committee, and I commend the chairman for calling an oversight hearing, so that we can look into the HUD activities.
    Mr. BURTON. Our first panel will be Ms. Nancy Cooper. Excuse me, did you wish to speak? The gentlelady is recognized for 5 minutes.
    Mrs. BIGGERT. Mr. Chairman, I would like to enter a statement into the record.
    [The prepared statement of Hon. Judy Biggert follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. Would you yield to me for just one moment?
    Let me just say in response to my colleague, before we have our first panel, real estate was my business. Single family dwellings were part of my business. I know of what I am speaking. I know who was financing them and who was controlling the properties that I went into. There's no question about it.
    So I just want to make sure the gentleman from California understands that I know these were properties managed by HUD that were FHA financed that weren't properly taken care of. There's just no question about it.
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    Mr. WAXMAN. When was that, Mr. Chairman?
    Mr. BURTON. I went out with my brother in Indianapolis probably 6 months ago. My brother is still a realtor, and vice president of a company in Indianapolis.
    [The prepared statements of Hon. Helen Chenoweth and Hon. Bernard Sanders follow:]
    [The official committee record contains additional material here.]

    Mr. BURTON. We will now bring forward Ms. Nancy Cooper.
    [Witness sworn.]
    Mr. BURTON. Ms. Cooper is the District Inspector General for Audit in HUD's Office of Inspector General. Her office is responsible for ongoing work in the field regarding FHA's single family program. She will testify regarding the current status of the single family property disposition program.
    She is up here today from Atlanta and we welcome her and thank her for her responsiveness under the heavy time constraints the committee has put her team under.
    Ms. Cooper.

    Ms. COOPER. Good afternoon. Mr. Chairman and members of the committee, my name is Nancy Cooper. I'm District Inspector General for the Southeast/Caribbean District in the Department of Housing and Urban Development. With me are members of my district team, Mike Gill and Jerry Kirkland. I thank you for inviting us.
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    I'm speaking today about our ongoing audit of HUD's single family property management and disposition program, known as the real estate owned, or REO operation.
    When we began our work late last year, HUD was well into its HUD 2020 reform and had reduced its single family staff by over 50 percent. Plans to pipeline or privatize management and marketing of properties had not materialized.
    Our objective was to see what impact this was having on HUD's performance. We were concerned that poor property conditions and management inefficiencies reported by GAO in March 1998 might still exist and if there existed an increased risk of fraud.
    Our results show that conditions overall have not improved since GAO's report. Our findings mirror those of KPMG in its audit report issued just this month on FHA's financial statements. Simply put, HUD has not fulfilled its core mission. Here's why.
    HUD's ability to turn over its acquired properties declined. Inventory increased 70 percent over the last 2 1/2 years to over 42,000 properties, and homes held in inventory over 6 months increased 76 percent.
    Sales to homeowners went down, while sales to investors rose. HUD's ability to maximize returns to the mortgage insurance fund also declined. Average loss per property increased from $28,000 in fiscal year 1996 to over $31,000 in fiscal year 1998.
    The care of HUD properties is essential to protect the neighborhoods around them. Yet our own property inspection confirms what contract inspectors have been reporting to HUD, that the rate of non-compliance by the companies hired to manage our properties is unacceptable. At the committee's request, we brought a few pictures of our current inventory.
    This is a property in Rockford, IL, acquired in May 1998. It lists for $17,001, or $900 less than it was appraised. HUD's cost to date is $28,600, including $2,300 paid to maintain it. The inspector who took this picture last December also reported the kitchen and bathroom were filthy. Records show the asset manager visited regularly.
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    Next is a photo of the front of a property in Miami, acquired in November 1997. We took this picture a week ago. The back of the property is overgrown and littered with debris inside and out. In January, HUD inspectors reported significant vandalism. The asset manager did not visit regularly.
    HUD's cost is $79,690, a loss already over $45,000 based on list price.
    Next is the condition of a property in Los Angeles in September 1998. Our inspection showed debris outside and neglect by the asset manager. Here's the same property in mid-March 1999. The property continues to be neglected, with the lawn obviously not mowed for some time.
    These final photos are of another property in Los Angeles taken in September 1998. The roof is leaking and the asset manager was under contract to fix it. We took a picture of the ceiling again just a week ago. The roof wasn't repaired, and the ceiling has fallen in. Now it will be much more expensive or more likely the list price will have to be lowered.
    It would be unfair to criticize HUD's field staff for these conditions. Last October, we observed the Santa Ana staff barely keeping its head above water. The staff of 18 was expected to manage a portfolio of 16,000 properties.
    Around the country, workloads were shifted among offices when suddenly, no REO staff remained. Problems were so severe in Chicago, Birmingham, Jacksonville and Coral Gables that emergency contracts were let to handle many of the duties. These circumstances nearly paralyzed the monitoring efforts.
    Next month, HUD faces still more new challenges. Current operations will be replaced by 16 management and marketing contracts nationwide. These companies will handle nearly every aspect of HUD's multi-billion dollar real estate portfolio at a 5-year estimated cost of $900 million.
    I'd like to make one last point, important to the Department's future plans. Our preliminary data indicates HUD has not been effective or swift in dealing with non-performing contractors. We've seen no monetary sanctions, few contracts terminated, and no contingency plans when contractors fail. It is essential that HUD have a strong contract enforcement strategy if it expects to be successful in these future endeavors.
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    That concludes my opening remarks. Thank you.
    [The prepared statement of Ms. Cooper follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. Thank you, Ms. Cooper.
    Right now, what kinds of penalties are imposed on these contractors if they don't comply with their contractual obligation?
    Ms. COOPER. We see none.
    Mr. BURTON. Are there any regulations over at HUD that would impose any kind of financial penalties on them if they don't do their job properly? Do you know?
    Ms. COOPER. I do not know. I do know there are provisions within the contract that allows HUD to go against them to terminate the contract, for example. We've not seen them doing much of that, either.
    What normally happens is that HUD will send a warning letter to an asset manager saying, we've inspected your property, three of your properties, you're not keeping them up. Please tell us what you'll do to correct these problems. Generally, the asset manager will write back, show evidence of having corrected those conditions in those properties, and that will be the last of it.
    Mr. BURTON. The employees of HUD that oversee the contractors, do they go out and spot check to make sure the contractors are doing their job?
    Ms. COOPER. They do, yes. They're doing less and less of it, but they do.
    Mr. BURTON. If they're doing less and less of it, how do they know if the contractor is performing properly?
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    Ms. COOPER. They have contracts right now for inspectors to oversee the asset managers.
    Mr. BURTON. So they have separate contractors for inspectors, private inspectors to go out and spot check properties to see that they're being taken care of properly by the contractors?
    Ms. COOPER. That's correct. This is what HUD used to do. HUD no longer has the staff to do it, so they've hired companies to do it.
    Mr. BURTON. They're contracting.
    Ms. COOPER. Right.
    Mr. BURTON. In some of the statements I've seen, you had a contractor that not only did the inspection but also did the billing, the oversight and the collection, and was never even reviewed by anybody, independent contractor or staff member at HUD. Is this an unusual situation?
    Ms. COOPER. I believe it is unusual. I believe this was a situation involving one of the emergency contracts. I can check if you'll allow me.
    Mr. BURTON. I wish you would check and let me know.
    Ms. COOPER. One of the individual asset management companies was allowed to do this, but this was an unusual situation, and we're not sure why in this case.
    Mr. BURTON. The new contractual agreements, the new contracts that are going to be let by HUD, I guess there are going to be six contractors nationwide, is that correct?
    Ms. COOPER. I'm not sure of the number. There are 16 contracts, but something less.
    Mr. BURTON. My staff says there are going to be six contracts. The policing is going to be done, I guess, by independent contractors as well who are going to go out and double check and make sure the contractors are doing their job, is that correct?
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    Ms. COOPER. That's our understanding, yes.
    Mr. BURTON. Do the new contractual agreements impose any kind of financial penalties on the contractors if they do not do the job properly?
    Ms. COOPER. I can't answer that. As you know, we're in the middle of our audit. That's one of the areas we intend to look at, is how well those contracts are written. Right now, we've not done that field work and I can't talk about it.
    Mr. BURTON. What I wish you'd do for me, and we'll leave the record open, if you could send to me and my staff information about those contractual agreements and what they contain, it would be helpful. It seems to me there not only should be a severability clause in there, if they're not doing their job, they lose the contract, No. 1, but No. 2, if they're not doing the job and it's pretty prevalent among the work that they're performing, there ought to be substantial financial penalties imposed against them for not doing the job.
    In other words, financial penalties for not doing the job, No. 1, because they're taking the taxpayers' money and they're not doing the job, and they know they're not doing the job, so there ought to be financial penalties, No. 1. Then No. 2, if that doesn't get the job done, the cancellation of the contract in addition to the financial penalties that are imposed against them.
    Ms. COOPER. I couldn't agree with you more. We'll check for that information.
    Mr. BURTON. See if their contractual agreements do have those stipulations in them.
    Ms. COOPER. Certainly.
    Mr. BURTON. I yield back the balance of my time to Mr. Waxman.
    Mr. WAXMAN. Ms. Cooper, you just said you're in the middle of your audit?
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    Ms. COOPER. Yes, sir.
    Mr. WAXMAN. Why are you testifying now if you haven't completed your audit?
    Ms. COOPER. The committee asked me to.
    Mr. WAXMAN. It just strikes me it would be more sensible to talk to us about an audit that's completed rather than one that's incomplete.
    I want to ask you a couple of questions. Last year in December, the Washington Times reported that the Inspector General warned that HUD was losing $1 million every day by failing to dispose of the vacant properties in its inventory. Chairman Burton evidently agrees with that statement, because he was so alarmed that he named this hearing ''HUD Losing $1 Million Per Day, Promised Reforms Slow in Coming.'' That's a title for a fact-finding hearing. Sounds like a conclusion was reached before we ever heard from any witnesses.
    I'm sure you're familiar with that figure. My understanding is that HUD spends $1 million a day in managing its inventory of single family homes. Do you believe it's appropriate for HUD to spend money to manage its inventory?
    Ms. COOPER. Sure.
    Mr. WAXMAN. And I've read how this $1 million a day figure has been attributed to the Office of Inspector General. How did you arrive at that estimate?
    Ms. COOPER. I'll explain it to you. That estimate is based on the cost per day for HUD to manage its portfolio. The cost per day is $29 a day. That number is based on an inventory at the time that that statement was written of 41,000 properties.
    The point that we were attempting to make with the statement is that when HUD fails to turn over the properties, if they have 41,000 properties in their inventory, it costs $1 million a day.
    Mr. WAXMAN. My understanding was that figure was not just for the 41,000 properties that came through foreclosure, but it represents holding costs for more properties than that. Am I incorrect?
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    Ms. COOPER. I'm not sure of your question. My understanding is that $29 is the cost to HUD.
    Mr. WAXMAN. For each of the 41,000 foreclosed properties?
    Ms. COOPER. To manage any piece of property.
    Mr. WAXMAN. Any piece of property?
    Ms. COOPER. Any piece of property.
    Mr. WAXMAN. So it's not a net loss for these properties, it's the cost of maintaining the properties until they are sold. And when the properties are sold, HUD recoups these costs, doesn't it?
    Ms. COOPER. Not always, no, sir.
    Mr. WAXMAN. Well, not always, but sometimes?
    Ms. COOPER. Sure, sometimes it does, yes.
    Mr. WAXMAN. It's like saying Coca-Cola loses $1 million a day because they spend $1 million a day for sugar. But you forget about the fact that they turn around and sell Coca-Cola and make a profit on the sale of their product. We all know that we have costs of doing business. If Coca-Cola spends $1 million a day on sugar, it doesn't mean it loses it. We know they make a lot of money.
    I have here the yearly financial results of a mutual mortgage insurance fund. That's the pool of money funded by premiums paid by borrowers used to finance the operation and cost of the FHA single family insurance program. We can see from the chart that, it's right over there, to your right, we can see from that chart that all expenses, including the cost of maintaining property, totaled $2.87 billion in 1998.
    But we also see that their total receipts including sales of acquired properties, fees and premiums, totaled almost $4.43 billion. That's a net profit. In 1998, this fund actually netted $1.55 billion. I'm sure there are management challenges, but it seems to me we should really be thanking HUD, not only for keeping the opportunity available for middle class people in under-served communities to buy homes, but for writing us a check last year for $1.55 billion. And the net receipts estimate for fiscal year 1999 are even higher, $2.138 billion.
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    Do you disagree with my statement, when you look at it in that context?
    Ms. COOPER. Sir, I don't have any information about that chart that you're looking at, and I didn't do any computation, and my staff didn't do any computation on the fund.
    We are looking solely at the cost or profit of the property disposition portion of the HUD portfolio.
    Mr. WAXMAN. Well, you're only looking at one part of the equation. You're only looking at the cost, but you're not looking at the rest of the picture. And it's not very helpful for us for you to come up with a figure that's then used to criticize HUD for losing us $1 million a day, when in fact, that figure is an inaccurate figure if you look at the total amount of money that HUD not only spends but generates from their properties.
    Ms. COOPER. It's an important figure when HUD no longer is able to turn properties over according to their goal. Their goal is to get properties out of inventory in 6 months.
    When that number declines, then it starts costing the taxpayer, it starts costing the fund unnecessarily. That's merely the point we were trying to make.
    Mr. WAXMAN. Can you give us the breakdown of the 41,000 foreclosed homes, how many stayed off the market 6 months, how many were sold earlier? Wouldn't that be a more meaningful figure if we're being critical of HUD for not selling its property faster? Not how much it spends during the period of time it has to maintain that property and pay for costs.
    Ms. COOPER. Yes, sir, I would agree it would. And in my full testimony, we talk about the inventory of properties over 6 months old increasing 76 percent from 7,100 properties to 12,500 properties. That 12,500 properties is in inventory longer than they should be. That's costing. That's the point we were trying to make.
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    An efficient operation turns properties over within 6 months. An inefficient one doesn't.
    Mr. WAXMAN. I want to concede to you, as you've conceded to us on that million dollar figure, that that is an issue that is of concern. We want to look at that carefully. But obviously in the short time I have, maybe I'll have more opportunity, but others will want to ask questions, we can explore some of these inflammatory statements that seem to be coming out of an audit that isn't even complete, and for which a hearing has already been titled—this is the notice that went to all the press and the Members—HUD Losing $1 Million Per Day, Promised Reforms Slow in Coming.
    Mr. BURTON. The gentleman's time has expired.
    Mr. WAXMAN. Some fact-finding, some disinterested fact-finding oversight.
    Mr. BURTON. Mr. Gilman.
    Mr. GILMAN. Thank you, Mr. Chairman.
    Just a couple of questions. How many HUD field staff will be in charge of contractor oversight, and how did HUD arrive at the number you have?
    Ms. COOPER. The number we've seen is 70. And I'm not certain how HUD arrived at that number.
    Mr. GILMAN. Is 70 going to be enough to do the kind of work you need to do?
    Ms. COOPER. I can't answer that question. Once we take a look at HUD's new monitoring procedures, we may be in a position to try to predict whether or not that number of staff can do what needs to be done.
    We hope to try to do some of that assessment between now and the end of our field work.
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    Mr. GILMAN. Have you increased the number this year, or is that decreased? What's the situation with regard to the oversight?
    Ms. COOPER. With regard to the number of staff?
    Mr. GILMAN. Yes.
    Ms. COOPER. Let me see, I'll answer and if this isn't the answer to your question, you can ask me again. There are currently about 300 REO staff. The predictions are that with——
    Mr. GILMAN. 300 what kind of staff?
    Ms. COOPER. Pardon me; 300 HUD staff working on the real estate owned operations.
    Mr. GILMAN. OK.
    Ms. COOPER. Under these 16 new management marketing contracts, they will pare down that 300 staff to around 70. Those 70 staff will merely be contract monitors. They will monitor those 16 nationwide contracts to ensure they're complying with the terms.
    Mr. GILMAN. How did you arrive at the reduction from 300 to 70?
    Ms. COOPER. Sir, I didn't arrive at it, you'll have to ask HUD.
    Mr. GILMAN. From your oversight perspective, do you think this is a practical reduction? Is this going to affect the ability of the agency to do the oversight?
    Ms. COOPER. I wish I could tell you. And maybe I can tell you when we're finished.
    It depends on what exactly HUD has in mind for these 70 people to do. HUD may be sure of that. We're not real sure of it yet. We haven't read their documentation.
    Keep in mind also that HUD has plans, we understand, to let other contracts, besides just these 16 management and marketing contracts. We understand they still intend to have hired contractors to oversee those contractors. They'll have other contracts besides those 16, to help supplement the staff.
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    Mr. GILMAN. Has anyone made an analysis if these numbers are sufficient to do the kind of work that should be done?
    Ms. COOPER. HUD made the statement that they have made that analysis.
    Mr. GILMAN. Have you examined that?
    Ms. COOPER. We have not yet.
    Mr. GILMAN. Are you planning to do that?
    Ms. COOPER. We're going to look at it from the perspective of the real estate owned operation, yes, sir.
    Mr. GILMAN. When will you know that?
    Ms. COOPER. We're hoping to know that by July. We're hoping to complete our audit and issue the report by July.
    Mr. GILMAN. Would you notify this committee of your final audit, as to whether or not these people can provide the kind of oversight that's needed?
    Ms. COOPER. Yes, sir, we'll do that.
    Mr. GILMAN. Mr. Chairman, I'd like to request that a copy of that report when received be made part of this hearing.
    Mr. BURTON. Without objection.
    [The information referred to follows:]
    [The official committee record contains additional material here.]

    Mr. GILMAN. Thank you, Mr. Chairman.
    Do you have requirements or guidelines for how much time HUD employees should spend actually looking at HUD-held properties, and how many site visits they should conduct? Do you understand my question?
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    Ms. COOPER. I do understand your question, but it's not an easy answer, so I'm trying to decide how to answer it.
    HUD staff right now are contract monitors. They're not going to be property inspectors any more. The guidelines for the time that we've been looking at the REO operations——
    Mr. GILMAN. You keep saying REO. What is REO?
    Ms. COOPER. Real estate owned. The property disposition program.
    Mr. GILMAN. What does REO stand for?
    Ms. COOPER. Real estate owned. It's my southern accent. I'm saying real estate owned [REO]. I'm sorry, I was told not to use acronyms here.
    I'll try to say property disposition program. Now I've lost track of what it was you asked me.
    Mr. GILMAN. Let me repeat what I'm asking. Do you have any requirements or guidelines for how much time HUD employees should spend in actually looking at HUD-held properties and how many site visits they should conduct? I think that's a basic question to see whether or not they are able to do the job.
    Ms. COOPER. For the last 1 1/2 years, the contract monitors, the contractors who have been doing the property inspection, have had a requirement to do an initial inspection of every property that comes in under their responsibility. After that, they are required to do 10 percent of their portfolio every month.
    I'm assuming that was probably the same criteria that HUD used when HUD did property inspection and had the staff to do it. They imposed that same requirement on the contractors.
    Mr. GILMAN. Have you reviewed this to see if that's an adequate performance by HUD employees?
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    Ms. COOPER. Actually, the problems that we are going to be addressing are not with the number of inspections, necessarily. It would be more with the action that's taken once that inspection is done. They can inspect all day long, all week long, all year long. But if nothing is done with the results of the inspection, then it doesn't do much good, which is why I was hoping to get across the point that there needs to be some enforcement, if a contractor is operating properly.
    Mr. GILMAN. I think we would agree on enforcement, but we also want to know, are there sufficient number of inspections before you get to enforcement? Do you feel there are a sufficient number of inspections by these number of employees who will be doing the inspection to make a proper determination as to whether or not HUD is performing properly?
    Ms. COOPER. No. The answer is no.
    Mr. BURTON. Thank you, Mr. Gilman.
    The gentlelady from Hawaii.
    Mrs. MINK. Thank you, Mr. Chairman.
    I want to continue in the discussion that was started by our ranking minority member. I'm very much confused with the title of the hearing today, HUD losing $1 million per day.
    I think that from your testimony and the chairman's opening remarks, one of the important responsibilities that HUD has or indeed any homeowner has is to maintain the property, to preserve the value of the asset. That has to be a major requirement.
    So on the sad occasion of a foreclosure, where the Federal Government resumes ownership of the property because of failure of the previous owner to make payments, then it is a very important responsibility that the Federal Government assume the cost of maintenance and repair and general upkeep. Would you not concur that that's a major obligation that HUD assumes when it takes over a foreclosure?
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    Ms. COOPER. I agree.
    Mrs. MINK. If that is a responsibility of the new owner, in this case HUD, then it would seem to me that the expenditures to maintain the value of the property is a legitimate expenditure, wouldn't you say that?
    Ms. COOPER. I would agree.
    Mrs. MINK. Then really, in line with the videos that we saw, perhaps the Department can be accused for not spending enough rather than spending too little. Because indeed, what we saw, and I have no idea what the rest of the properties are, but if they're typical, then what needs to happen is that HUD should have authority to hire more employees, and have greater sums of money accessible to it for maintenance and upkeep.
    Isn't that a fairly logical conclusion?
    Ms. COOPER. That could certainly be a valid point.
    Mrs. MINK. Well, then, let me go to the point of the very large, substantial increase in properties in the HUD inventory, from 24,000 in October 1996 to almost double, 42,000, as you testified, the last of February of this year. Given their own goal of 6 months disposition, and their efforts to dispose resulted in 12,000 plus properties remaining in their inventory in excess of 6 months, I believe that's what you said?
    Ms. COOPER. Yes, ma'am.
    Mrs. MINK. Then if we're going to criticize that HUD has not energized itself to dispose of properties within a short period of time, its own target of 6 months, then isn't it more appropriate to say that the $29 you assess as being ''wasted'' because they fail to dispose of the property to be legitimately charged to the 12,000 properties and not the 42,000? In which case then, it could be said that HUD unwisely spent $300,000 per day because of its failure to dispose of properties in a timely fashion?
    Ms. COOPER. At the time the IG made that statement, HUD had also promised that it would pipeline all the properties that were in its, that came into its portfolio. In effect, HUD was already behind in removing all properties from the inventory, as it has promised it would do.
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    Mrs. MINK. But you see, the whole discussion is absolutely faulty. Because on the one hand you admit that it is a legitimate expense on the part of the Government to maintain the value of these assets, and therefore, moneys have to be expended. Second, you talk about the disposal of the properties on the market, and making sure that the Government gets value for the properties that it has now obtained ownership for.
    If it is true that only 12,000 properties remained after 6 months, and if we're going to talk about excess expenditures, it seems to me it's absurd to talk about $1 million a day. We ought to talk about 12,000 properties costing the Government $29 a day, when those properties could have been sold.
    One final comment I want to say, that in my jurisdiction, which is having a terrible time in its economy, thousands of properties are being foreclosed, not necessarily to HUD, but to the banks and so forth. These properties were acquired at a time when the values of the properties were extremely high. Their failure to pay up their mortgages resulted in a foreclosure.
    So there is a huge windfall for the institutions as well as the Federal Government for assets they are now acquiring that are extremely valuable. Those are asset values. But the other side of that coin is that our economy is so bad out there, there are very few people who can afford to buy these properties. So they are held extraordinarily long.
    I was just talking to someone in my office a moment ago who had to leave for a new job opportunity. His house has remained unsold on the market for 18 months. Now, that private owner, I am sure, has been doing everything he can do, standing on the sidewalks trying to dispose of his property and not being able to do so.
    So in some cases, I'm sure that HUD has found the community and State circumstances such that it is impossible to move these properties. So I think it's unfair to load upon HUD all of these situations without critical evidence to point specifically to the areas and properties and concerns that might generate legitimate oversight responsibilities on their part.
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    Otherwise, I think this is an enormous waste of time. I yield back the balance of my time.
    Mr. WAXMAN. Will you yield to me?
    Mrs. MINK. I yield to my ranking member.
    Mr. WAXMAN. It just strikes me, your point was so well taken, that we're talking about 12,000, which is out of 41,000, less than a third of the properties under foreclosure. That's because they haven't met a self-imposed 6 month deadline.
    But isn't it accurate that at least 2 of those 6 months are by statute time when HUD can't dispose of the properties, because they have to give the owner a chance to come back and cure it or have some public interest group come in? Isn't that accurate, Ms. Cooper? Isn't that the policy they have at HUD?
    Ms. COOPER. I need to consult with my staff, please.
    Mr. WAXMAN. I understand that's their current policy, but they're talking about changing that policy.
    Ms. COOPER. My staff is telling me that when HUD forecloses, or when the lender forecloses, that the owner of that property does not have an opportunity to buy back.
    Mr. WAXMAN. As I understood it, they have a policy where they give them time, they hold off for a couple of months. So they have this built-in restraint that they've built in. But also, these are hard to sell properties in inner city neighborhoods. I would think anybody would have a hard time selling some of those properties.
    That's not to justify it, it's just to give some balance to the fact that we're talking about less than a third of their inventory and the difficulty in selling it.
    I thank the gentlelady for yielding.
    Mr. BURTON. The gentlelady's time has expired.
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    Mrs. Morella.
    Mrs. MORELLA. Thanks, Mr. Chairman. I think this is a very interesting hearing.
    I note that one of the witnesses coming up, I think in the third panel, is going to state that HUD has become less and not more responsive to HUD related neighborhood issues. I just wonder if you would walk me through the process. I am a homeowner. Next door to me is a neglected HUD property. What do I do? Do I report it? How do I go through this process in order to get some resolution?
    Ms. COOPER. You'd have to be able to identify the asset manager who is overseeing that property. All of these properties are doled out to local real estate companies to maintain them and to secure them and to preserve them and to ready them for market. Then to market those products as well.
    You would have to know who that real estate company was.
    Mrs. MORELLA. Could I find that out easily?
    Ms. COOPER. You should be able to find out if there is a HUD sign posted.
    Mrs. MORELLA. And if there isn't?
    Ms. COOPER. You call HUD, I suppose.
    Mrs. MORELLA. So I can find this out, I call HUD and get that information. Then do I call that entity, that real estate firm?
    Ms. COOPER. I'm assuming you're asking, if there was a problem at the house, or if you wanted to inquire about buying it?
    Mrs. MORELLA. No, I just want to eradicate the problem.
    Ms. COOPER. You would find out who that asset manager was, and you would complain to them, or you would complain to HUD. If you complained to HUD, it would be HUD staff responsibility to contact that asset manager to tell them they've had a complaint and to have them go out and correct whatever the problem is.
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    They're getting paid good money to maintain those properties.
    Mrs. MORELLA. That's what I was also going to ask, is how long does it take, too, for this process?
    Ms. COOPER. That's why we look at the average. There are extremes, there are some properties that get out of inventory in 30 days. There are some properties that do stay in inventory for a year or a year and a half.
    So the measure of how efficient things are operating is the average. The average is 6 months. It takes 6 months to get them out of inventory.
    Mrs. MORELLA. Have you heard of problems, of the fact that HUD is not responsive to neighborhood issues, or is becoming less responsive to neighborhood issues?
    Ms. COOPER. We didn't look at that.
    Mrs. MORELLA. It might be something to look at, too, as one of the criteria that you evaluate. And how they are rectified or resolved.
    Let me ask you a very parochial question. Do you have any kind of a listing of properties that HUD owns that have not yet been sold in my area, or in any congressional district? Do you have an inventory of that?
    Ms. COOPER. HUD maintains a computer system that lists all properties in its inventory. I can't imagine that couldn't sort that by neighborhood. I would say yes.
    Mrs. MORELLA. By congressional district?
    Ms. COOPER. Right. In fact, I know they do, because we did it to select our samples.
    Mrs. MORELLA. What information would it give me?
    Ms. COOPER. I haven't personally looked at the list. I can ask.
    Mrs. MORELLA. I would be interested whether it tells me how long it's been on the market, whether there are inspections made.
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    Ms. COOPER. Apparently there are several reports that can be generated through this system. It will not tell you information about inspections. HUD doesn't record that.
    But it will tell you when the property came into inventory, how much it currently lists, how much HUD has, how much it has cost HUD in payments to the asset manager or perhaps payoff of the lender's claim. It will tell you information like that.
    Mrs. MORELLA. The reason I ask that is, I feel as a good legislator this would be an important thing for me to find out more about if I want to make sure that HUD is making money, that the neighborhoods are looking good, that we have things in order so there is personal oversight. Wouldn't you agree that is a good idea for a Member of Congress? It helps you out as Inspector General.
    Ms. COOPER. I would agree.
    Mrs. MORELLA. Thank you, Mr. Chairman. I yield back.
    Mr. BURTON. The gentlelady yields back the balance of her time. Is there further discussion?
    Mr. Kucinich.
    Mr. KUCINICH. Thank you, Mr. Chairman. I want to thank you for calling this hearing.
    My questions and remarks will be more germane to the next panel, so I'm going to yield my time to Mr. Waxman.
    Mr. WAXMAN. I thank you very much for yielding.
    It just strikes me as perplexing why we're holding this hearing today. You're in the middle of an audit, you haven't completed it. HUD has proposed some changes, isn't that correct?
    Ms. COOPER. Yes.
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    Mr. WAXMAN. That's supposed to go into effect on March 29th.
    I just don't know how constructive this is. The chairman says we want to show how they're not doing their job, losing $1 million a day of taxpayers' money so he can go to the Appropriations Committee and cut their budget. Do you think that would be helpful, if we had smaller appropriations for HUD?
    Ms. COOPER. That's a decision for all of you, not me.
    Mr. WAXMAN. Well, it seems to me some of the problems you were indicating were that there is not enough personnel to supervise some of these buildings.
    Ms. COOPER. At the moment, there are not. That's correct.
    Mr. WAXMAN. Well, your office in September 1997 made several recommendations concerning real estate management contracts. I want to go through some of them so we can see whether HUD has taken measures to implement those recommendations.
    The IG recommended that HUD establish specialized positions for personnel responsible for contract oversight and monitoring to make them full time jobs with performance standards and training requirements. Has this been done?
    Ms. COOPER. That I don't know. That will be a part of what we have left to do, to see what positions HUD has for contract oversight.
    Mr. WAXMAN. Well, the IG previously testified that it has been done. So they haven't let you know in the office that your boss told us that it has been done.
    Ms. COOPER. Perhaps I should have asked my staff.
    Mr. WAXMAN. Well, the IG also recommended, your agency, that HUD integrate data systems and payment systems so that contract performance and contract payments will relate and be systemically monitored. Has this been done?
    Ms. COOPER. One moment.
    Mr. WAXMAN. Well, let me just tell you, the IG has already told us it has been done.
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    Ms. COOPER. My staff is telling me that they don't recognize those recommendations, it wasn't part of the scope of the work we're doing. If it's something we should——
    Mr. WAXMAN. Let's see if they recognize this one. The IG recommended that HUD establish a threshold dollar amount for review of contract proposals by the Chief Financial Officer prior to contract awards.
    Ms. COOPER. You're reading from——
    Mr. WAXMAN. This is September 1997.
    Ms. COOPER [continuing]. Our audit of contracting, is that correct?
    Mr. WAXMAN. That's right.
    Ms. COOPER. OK. This is work we have yet to do. This is what I was trying to explain. We have not yet looked at what HUD has proposed to do. We've been looking at what HUD's been doing over the last year and a half.
    Mr. WAXMAN. Well, shouldn't you look to see whether they're improving?
    Ms. COOPER. Yes, sir. That's exactly where we're headed next. We're looking at how those contracts read and how those contracts will be monitored to see whether or not there are strategies in the Department to properly oversee those contracts.
    So if you ask me that question again in 3 months, I should be able to answer it.
    Mr. WAXMAN. Let me point out that these are recommendations, your staff doesn't even remember it, but these are recommendations made in September 1997 by the Office of Inspector General. And as I understand it, these recommendations have been followed by HUD, including the next recommendation that HUD take steps to integrate and update its information technology systems. And there are others I want to go through.
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    But you and your staff don't even seem to be familiar with your own recommendations. Second, you haven't completed your audit to see whether the recommendations have been followed, if you could remember what they were. And third, you're here to be critical of HUD for not doing things in the past and you don't know whether they've changed.
    So I just don't know how helpful this hearing is for us as policymakers to evaluate whether things are getting better.
    For example, I'll just tell you, GAO was very critical of HUD's management problems in its high risk series major management challenges and program risks. But GAO also gave credit where credit was due, concluding that ''HUD continues to make credible progress in overhauling its operations to correct its management deficiencies.''
    Do you agree with that HUD statement? If you do, how could you when you don't even know what they're doing, whether they made changes or not? Do you agree with GAO?
    Ms. COOPER. The report you're referring to was an audit, nationwide audit overall of HUD's——
    Mr. WAXMAN. Which report is that?
    Ms. COOPER. The report with the recommendations you're referring to.
    Mr. WAXMAN. But I'm asking about GAO's statement, which I just quoted. GAO did a written, what they call high risk series, they looked at HUD. They said, HUD continues to make credible progress in overhauling its operations to correct its management deficiencies. Do you agree with GAO?
    Ms. COOPER. We have looked at the property disposition activities since January 1997 to today. My answer in that perspective would be no, they have not.
    Mr. WAXMAN. Let me point out for the record and for your information, I read to you recommendations that were made by the IG office in September 1997. The IG testified in a subcommittee of this committee in a hearing in June 1998. So in June 1998, the IG testified that some of these reforms had in fact been accomplished, because she had made the recommendations and they were being followed.
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    You don't seem to know about that.
    Ms. COOPER. With respect to the property disposition activity?
    Mr. WAXMAN. With respect to the way they're contracted.
    Ms. COOPER. The contracting issue has been outside of the scope of this audit. The contracting issue is HUD's ability to, as an organization, nationwide, to implement contract activities. It didn't simply apply to the property disposition activities, it applied to everything. It applied to automation of the Department, it applied to contracts for closing agents, it applied to numerous things.
    Mr. WAXMAN. Did it apply to contracting people to manage the properties?
    Ms. COOPER. It would, yes.
    Mr. BURTON. The gentleman's time has expired.
    Mr. WAXMAN. Isn't that what we're talking about here?
    Mr. BURTON. The gentleman's time has expired.
    Mr. WAXMAN. You might want to let her finish.
    Mr. BURTON. Did you have something you want to add?
    Ms. COOPER. I simply wanted to say once again, this is an area that we intend to look at, but we have not yet looked at it. It is a part of the scope of our audit. So we will address that contracting oversight ability by the time we finish the work and issue our audit report.
    Mr. BURTON. Mrs. Biggert.
    Mrs. BIGGERT. Thank you, Mr. Chairman.
    Ms. Cooper, I don't have the institutional memory that a lot of our members have, since I haven't been here until this year. But just so I can have the information, right now, HUD is in the transition, is that correct?
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    Ms. COOPER. That's correct.
    Mrs. BIGGERT. Was this at the recommendation of the GAO, or was this something that they just decided to cut down on the numbers, and go to fewer offices, or to have the four major offices, rather than smaller offices across the country?
    Ms. COOPER. I believe it actually started with recommendations from the NPR. HUD hired consultants to help them design a system that would work more like private industry works. The conclusion of the study was that they would go to these four centralized home ownership centers to process their property disposition and all other aspects of FHA.
    Mrs. BIGGERT. So in the middle of this, then, you're doing an audit. Were they to be finished with that transition prior to this time, or is this just the time that it takes?
    Ms. COOPER. They were to have been finished with this. One of the reasons that we're doing, that we've undertaken the review we have is that GAO reported problems. We didn't want to wait. And after GAO reported those problems, we didn't see the transition coming, we didn't see HUD making much progress toward what it was ultimately going for, which was the private contracts.
    We were afraid we would get caught, as the IG, when Congress called and said, HUD hasn't accomplished what it intended to accomplish, where have you been. We wanted to be in a position when you asked to be able to tell you the state of HUD's activities.
    Mrs. BIGGERT. Was there any definite date, then, for when this was to be accomplished, or not?
    Ms. COOPER. There was. Let me see if my staff remembers the date.
    Originally, it was August or September 1998.
    Mrs. BIGGERT. So do you expect that you'll complete your audit by July of this year?
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    Ms. COOPER. Yes.
    Mrs. BIGGERT. Do you expect that they will be then having finished the transition and be privatized, so to speak, or having the private contractors take over?
    Ms. COOPER. They will. Those contracts have already been signed. As of March 29th, all properties will be turned over to those new contractors. So they are now transitioning, as we speak.
    Mrs. BIGGERT. So you would expect that your audit will also include the results from March 29th to July and how that's operating? Or will you end just as of March 29th?
    Ms. COOPER. What we'll try to do, it's going to be a little difficult for us to assess new contracts that have started up over that short a period of time. So what we will do is study the monitoring procedures by HUD, and we will review very carefully those contract terms.
    We will try to make some recommendations to HUD where we see risks. If for example, the contracts don't have any provision for monetary penalties or HUD does not have contingency plans, we will make recommendations such as those. If HUD's monitoring has holes in it from our reading and our perspective, based on our historical knowledge, we'll make recommendations about that.
    We will probably wait for about 6 months to a year to look at, and we'll go back and look at those contracts.
    Mrs. BIGGERT. So will your specific recommendations include reducing the holding times, or the costs, as well as specifics for the contract, such as penalties?
    Ms. COOPER. I expect our recommendations will address that. One of the things we think would be important for HUD to do is to be able to measure the cost of the new contracts and compare it, compare that with alterative ways of handling the property disposition.
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    Mrs. BIGGERT. Thank you very much. Thank you, Mr. Chairman.
    Mr. BURTON. The gentleman from Massachusetts.
    Mr. TIERNEY. Thank you, Mr. Chairman.
    Ms. Cooper, is it your practice, or do you generally testify prior to completion of an audit, or before you've issued your recommendations?
    Ms. COOPER. Not mine. No, sir.
    Mr. TIERNEY. So you're telling me it wasn't your initiative to come here and testify prematurely today?
    Ms. COOPER. Part of the mission of the Inspector General is to keep Congress fully informed. When Congress asks for information, far be it from me to deny them that information.
    Normally, we like to finish an audit before we make the results of the audit public. It's not so much to Members of Congress, but it is to the press. We don't do that.
    The reason we don't do that is because as an organization, we're held to well recognized standards which means that when we come forward with an audit report, by gosh, everything in it, all the T's have been crossed and the I's have been dotted. So we like to go through that full process before we issue an audit report.
    We also like to give the auditee, in this case, HUD, an opportunity to respond to the results of our work, in all fairness. So we get those comments, we allow those comments to be in our report, and then the report gets issued.
    So generally we do.
    Mr. TIERNEY. So you didn't initiate this visit here today, I take it?
    Ms. COOPER. No, sir, I did not.
    Mr. TIERNEY. I think your visit is premature, for all the reasons you've stated. I can't for the life of me imagine, other than for the press or some other motive what we're doing here today.
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    I'll give Mr. Waxman the balance of my time.
    Mr. WAXMAN. Thank you for yielding.
    I appreciate that it's the policy of your office to give Members of Congress information, so that we'll have it available to us. I wrote to Ms. Gaffney, who's the Inspector General, and asked her to respond to a report that was prepared by Mr. Donald Bucklin, who used to be the staff for Senator Thompson on campaign finance investigation. He was very critical of the Inspector General, he said things like that tensions exist between Ms. Gaffney and other HUD officials, and she has not provided credible evidence supporting many of her challenges to HUD actions.
    In fact, he went on and said many of Ms. Gaffney's statements ''[reveal] petty, nitpicking arguments based upon misrepresentations, distortion of events, remarks taken out of context and arguments that defy logic and reason.''
    Now, that's pretty troubling, when someone makes that statement who was hired by HUD to do an independent evaluation of the IG. But I didn't get a response from Ms. Gaffney. I'm not critical of you. But if it's your policy to give Members of Congress information, which I thought would have been helpful for me to have prior to this hearing, I just want to put on the record, I never got a response from her prior to this hearing. I was informed a few minutes ago that she's been out of the country, that she'll try and get me an answer by March 26th. But that's after this hearing.
    Ms. COOPER. May I respond?
    Mr. WAXMAN. Sure.
    Ms. COOPER. It's not the office policy to give information to Congress, it's the law.
    Mr. WAXMAN. Well, tell Ms. Gaffney she may be breaking the law if she doesn't get this information to me, although I doubt she'll be prosecuted.
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    Ms. COOPER. That's why we're here.
    Mr. WAXMAN. She's your boss, isn't she?
    Ms. COOPER. Yes, she is.
    Mr. WAXMAN. I hope she'll give me the answers to my questions, because those charges are pretty damning.
    Now, I want to examine this HUD issue in comparison to the private sector. You would think that based on the criticisms that HUD was performing leagues below private firms that dispose of foreclosed property. But I don't know that that's the case at all.
    Are you familiar with an industry benchmarking and best practices report by Andersen Consulting in March 1997?
    Ms. COOPER. I'm not. No, we are not.
    Mr. WAXMAN. Well, one critical success factor considered by the Andersen firm was HUD's ability to maximize return on sales. I don't know if you're aware that sales revenue for private industry averaged 96 to 105 percent or more of value. HUD's single family property disposition performance was comparable at 98 percent.
    Another critical success factor recognized by Andersen Consulting was minimizing the cost of sale. Chairman Burton apparently believes that HUD is losing $1 million a day. But Andersen thinks HUD is doing as well as the private sector.
    Are you aware that the industry standard for cost of sale was 12 to 18 percent of market value and that HUD's costs averaged 17 percent?
    Ms. COOPER. I was aware that HUD's costs—no, that HUD's loss per property based on its acquisition costs, had increased from $28,202 in fiscal year 1996 to $31,728 in fiscal year 1998. I was aware of that. I'm not sure I was aware of the statistics that you——
    Mr. WAXMAN. You weren't aware of the Andersen Consulting report?
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    Ms. COOPER. No.
    Mr. WAXMAN. What is your job at the Inspector General's office?
    Ms. COOPER. Pardon me?
    Mr. WAXMAN. What do you do at the IG office?
    Ms. COOPER. I'm the District Inspector General for the Southeast/Caribbean District. I am the audit manager in charge of the eight southeastern States and Puerto Rico. Overseeing internal and external audits of the Department.
    Mr. WAXMAN. In that region?
    Ms. COOPER. Or nationwide, which is what this is. But yes, sir, in that region, too, the external audits in that region.
    Mr. WAXMAN. Thank you, Mr. Chairman.
    Mr. BURTON. Mr. Ose.
    Mr. OSE. Thank you, Mr. Chairman.
    I share the chairman's background in real estate, and I have some personal direct experience in acquiring HUD properties that have been foreclosed upon. I want to make sure that my memory is accurate in terms of what I recall from the transactions I've done.
    The point of your visit here is to brief us on your progress, if you will, an interim report. And you've referenced the KPMG report of March 12, 1999, and suggested that your preliminary results mirror those conclusions.
    I think the point I'd like to make, and I want to hear feedback from you very briefly, is in terms of property, REO property that HUD ends up owning, in terms of the REO stuff that HUD has, typically HUD takes possession after a number of months. In California, for instance, I think it's 3 months, 92 days or something, in terms of filing the notice of default and getting to a foreclosure and taking possession.
    Oftentimes in that period of time, the person in whom title is vested will vacate the property. You end up with a property that has disconnected utilities, no maintenance, no occupant, no insurance. In some areas you'll get people who move into the property, then you have a squatters problem, et cetera.
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    I appreciate how you have pointed out here the cost of that delay that is incumbent to HUD when that delay takes place. You have talked about an average disposition time of around 6 months, suggesting there are some that go 12 months. But that ignores that first 45 days before you ever even have possession, if I understand correctly.
    Ms. COOPER. That's correct.
    Mr. OSE. In California, with the temperature variations we get, and the condensation we get, if we have an unoccupied property without heating or air conditioning, we'll get significant deterioration, as you showed in these pictures. For instance, in drywall, paint, what have you, flooring. We'll have people come in and steal the equipment, microwaves, utility, garbage disposal and the like.
    Is it your point that we are failing in disposing of these properties in a timely manner?
    Ms. COOPER. HUD's statistics support that we are failing in disposing of them in a timely manner, yes.
    Mr. OSE. Is it your purpose in coming here today to suggest that your interim audit confirms that?
    Ms. COOPER. That's correct.
    Mr. OSE. As does the KPMG audit of last week?
    Ms. COOPER. Yes.
    Mr. OSE. I want to shift to this chart over here. Mr. Chairman, has that been entered into the official record?
    Mr. BURTON. I think Mr. Waxman asked that it be entered into the record. I presume it was.
    We'll put it in the record, without objection.
    [The chart follows:]
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    [The official committee record contains additional material here.]

    Mr. OSE. Thank you, sir.
    I have a question on the fees and premiums, the $2.4 billion, I sat on the board of an insurance company. It's my recollection from our operations that we tried to cover operating costs off fees and premiums and generated our profit on the basis of our portfolio growth. If I look at those numbers over there, these premiums of $2.4 billion are less than total expenditures or $2.87 billion, generating about a $450 million deficit, which is close to the million dollars a day costs that we're otherwise concerned about.
    I would appreciate having some further explanation as to what falls into that category that's described as total expenditures over there. I don't understand what's within the $2.87 billion. As a practitioner, and someone who has purchased HUD property, a year after HUD has taken possession under the REO, can you tell me or quantify for me roughly on a time line the loss in value that HUD suffers as you go from 6 to 9 to 12 months? Is it 10 to 20 to 30 percent?
    Ms. COOPER. I wouldn't have information to give it to you like that. I certainly can't tell you. What will go up, the lender's claim will be the same. What will go up is the cost to maintain the property by the asset manager, the repairs that are needed based on vandalism, weather, those kinds of things.
    The longer it sits without utilities, the more it deteriorates.
    Mr. OSE. My point in bringing these things up is that the money we spend on that kind of activity, of correcting those deficiencies, we cannot spend to take care of new housing demand.
    Mr. Chairman, I yield my time to you.
    Mr. BURTON. I think I'll let the gentleman keep his time, if he likes. I'll bring up my comments and questions at the next panel.
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    Mr. WAXMAN. Would the gentleman yield so I can ask a factual question?
    Mr. OSE. I would yield to my distinguished colleague.
    Mr. WAXMAN. Thank you. I misunderstood, I thought you made a statement to her and she didn't dispute it. You said the average time for disposition is 6 to 8 months. Is that your testimony? Because I understood your testimony was that you were focusing on and criticizing that property which turned out to be a third, less than a third of the 41,000 that took more than 6 months.
    But is it on average 6 months? Or are you critical or singling out for us those that took longer than 6 months?
    Ms. COOPER. We're actually trying to show the trends in the whole portfolio. We're doing several things. We have taken statistics from HUD's own data base to try to compare to what HUD's property disposition mission is. We're looking at whether or not——
    Mr. WAXMAN. Just specifically the 6 month figure. Is it inaccurate to say you're talking about an average, that it takes an average of 6 months or longer to sell property? Or did you single out that part of their portfolio that took longer than 6 months for which you were critical of the amount of money HUD had to spend?
    Ms. COOPER. We didn't single out. HUD's goal is 6 months. We looked to see whether properties were being turned over to the market within 6 months. We saw that in fact HUD was not maintaining that 6 months.
    Mr. OSE. May I reclaim, please?
    Mr. WAXMAN. Yes.
    Mr. OSE. I think the gentleman's point is well made about the houses that we hold in portfolio past 6 months. That is the area I'm concerned with, because that is the area we suffer the greatest declination in value. So I would like to reinforce your point, whether that 6 months is an average or not, my concern is focused on those houses that exceed that 6 months.
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    Mr. WAXMAN. I share your concern.
    Mr. OSE. It's a legitimate area for concern.
    Mr. BURTON. I thank Ms. Cooper very much. Unless we have further members wanting to speak, we'll have the next panel come up.
    Mr. Apgar.
    [Witness sworn.]
    Mr. BURTON. Mr. Apgar is the Assistant Secretary for Housing and also the Federal Housing Commissioner at the Department of Housing and Urban Development. He's in charge of the Federal Housing Authority. Mr. Apgar, you are recognized for 5 minutes.

    Mr. APGAR. Good afternoon. On behalf of HUD Secretary Andrew Cuomo, I want to thank you for this opportunity to testify on behalf of the FHA.
    FHA is a real success story. By insuring low down payment loans for people with less than perfect credit, FHA has helped more than 27 million American families to become homeowners. Last year, FHA assisted over a million families.
    Perhaps more importantly, FHA does this at no cost to the taxpayers as the charts illustrate. Last year, we contributed $1.5 billion to the national deficit reduction effort.
    Building on this record of achievement, Secretary Cuomo has created new and effective ways for FHA to conduct business. Today's hearing focuses on just one area of that reform, our FHA property disposition efforts.
    As a mortgage insurer, FHA does take ownership of some properties. Last year, FHA took 70,000 properties, or approximately 1 percent of the more than 7 million loans outstanding. We are constantly looking for new ways of doing business. Over the last 2 years, we have developed, tested and now are implementing a new property disposition method, predicated on the belief that private sector real estate professionals can more efficiently manage and sell REO properties than HUD staff.
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    Before I go farther, to describe this new approach, I'd like to make a brief comment on the testimony provided by the HUD Office of Inspector General.
    As the NBC situation pointed out, it's really important to get the facts straight in this review. And I will submit a detailed accounting of the factual errors contained in the testimony you just heard from the IG.
    I'd like to briefly comment, though, on one prominent example of IG misstatement. This is the million dollar issue. The statement is provocative as you've heard here. In many ways it's misleading. What the Inspector General fails to recognize is that a vast majority of the costs discussed here today are not incremental costs associated with delay, but rather the basic costs of a sales operation.
    Contrary to the statement by the IG, there has been no slowdown in recent years in the time it takes to sell FHA property. Moreover, as we noted from the Andersen Consulting study, FHA's average property holding and sales costs are squarely in line with industry standards.
    Finally, it's noteworthy to reiterate that FHA does not cost taxpayers 1 penny, since the overall operation actually generates more than $1 1/2 billion of net revenues.
    Unfortunately, many HUD critics continue to focus on the past, rather than work with us to forge the new initiatives that are coming on line at HUD. By any objective standard, the new management and marketing approach is praiseworthy. First, we know this new contracting approach works. During more than 2 years of pilot testing at three sites, private contractors have proved able to sell properties faster and at a higher rate of return than HUD's own efforts.
    Next, we are well on the way to deploying this successful model nationwide. Last fall, we received more than 170 proposals in response to a national RFP. This was one of the most competitive HUD procurements in history.
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    And finally, the contract is incentive based, with the entire fee set as a percentage of the net return to FHA. And at the suggestion of HUD's Inspector General, the contract minimizes pass-through expenses to HUD, creating a strong incentive for the contractor to sell HUD properties fast.
    Our confidence in this report was bolstered by the recent assessment of the Office of the Comptroller General at the General Accounting Office. They concluded that the new approach would likely yield substantial benefits of cost savings and quality improvements. Over the last 8 months, we have worked with the management consulting company of Booz, Allen and Hamilton to develop a comprehensive set of management and financial systems controls. In combination with the new incentive based contract, this monitoring system will ensure the national program works as well as the pilots.
    Finally, I'd like to take a brief moment to comment on the testimony you'll hear from Gale Cincotta. While I disagree with many of Ms. Cincotta's solutions, I agree with her focus on foreclosure avoidance. That's why I urge Gale Cincotta and others to take a careful look at the steps that FHA has taken over the past year to reduce foreclosures.
    These strategies include our initiatives to foster greater use of FHA home buyer retention tools, to enhance FHA lender monitoring enforcement, and to create new appraisal monitoring systems that will provide consumers with the information they need to help them make good home buying decisions, and will enable FHA to better identify and sanction those lenders and appraisers who would abuse the system.
    Before concluding my remarks, I'd like to thank Congressman Kucinich for alerting the Department to his concerns about the impact of the HUD Reform Act on grant application review process. The HUD Reform Act is designed ''to preclude giving an unfair advantage to applicants who would receive information not available to other applicants.''
    However, as the Congressman has pointed out, applications sometimes are rejected for narrow technical errors, such as checking the wrong box on the form, which may seem to defy common sense. Mr. Kucinich has proposed an amendment to the Federal grants process, which would clarify the ability of applicants to correct these kinds of ministerial omissions or errors.
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    The Department will also take administrative action to provide clear guidance to applicants and HUD staff regarding notification of technical errors and applications for HUD grants. We believe these actions will address the concerns raised by Congressman Kucinich and others, and we are pledged to continue to work with the committee on this issue.
    So in conclusion, Mr. Chairman, I'd like to thank you for this opportunity to testify. I believe an honest and objective assessment of these and other HUD reform initiatives will demonstrate that under the leadership of Secretary Andrew Cuomo, HUD is moving in the right direction. And I'd be happy to take any questions you may have.
    [The prepared statement of Mr. Apgar follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. When a person buys a house on FHA, they buy the FHA mortgage insurance?
    Mr. APGAR. That's correct.
    Mr. BURTON. And the premiums that they pay go into the mortgage insurance fund?
    Mr. APGAR. That's correct.
    Mr. BURTON. If they default on their mortgage, the money comes out of that fund to pay for any loss that the mortgage fund incurs, it comes out of that fund?
    Mr. APGAR. That's correct.
    Mr. BURTON. And when the property is then sold, the money that's received from the sale of that property then goes back into the fund?
    Mr. APGAR. That's correct.
    Mr. BURTON. According to the previous panel, based upon the acquisition costs, they increased from $28,000 in fiscal year 1996 to $31,728 in fiscal year 1998. They say as a result, the loss to the mortgage insurance fund increased from about $1.5 billion in fiscal year 1996 to slightly over $2 billion in fiscal year 1998.
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    That money is not a direct loss to the taxpayer, but it is a direct loss to the fund. Now, when the fund loses money, that means that the people who are paying into the fund, the people who are buying that mortgage insurance, do not benefit from a profit in the fund, they lose because there's a loss in the fund.
    So the premiums that could go down to the millions of people who have FHA loans do not go down because of the loss in the fund, is that not correct?
    Mr. APGAR. First of all, the data you just cited are some of the factual errors that are contained in this report. We have no idea where they got the 7 percent increase in cost per sale. Our own estimates suggest that it hasn't increased, just as our own estimates suggest that there's no increase in the length of holding time.
    But you are correct to the extent to which we incur costs in selling homes, that results in a loss in money to the fund.
    Mr. BURTON. If a property, let's say a person moves out, and they have a mortgage of $50,000 on a property, and the property is worth $70,000, you've got a $20,000 profit there that's going to go back into the fund. But if the house sits there and deteriorates, as we've seen these other houses deteriorate, for 6 or 7 months, and then it's only sold for $55,000, instead of the $70,000 it would have gotten, that's a loss of $15,000 that could have gone into that fund, because it had to be held for that extra period of time, isn't that correct?
    Mr. APGAR. Typically, sir, if a property is worth more than the value of the outstanding mortgage insurance——
    Mr. BURTON. No, you're missing the point. My point is——
    Mr. APGAR. That property will never come to us, sir. If the market value of the property is more than the outstanding mortgage balance, the lender would repossess the home and sell it through their own mechanisms.
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    Mr. BURTON. Let's just say it's $45,000 and the property is worth $50,000. The lender is going to lose money. And it sits there. There's a $5,000 loss. If it sits there for 6 months and it deteriorates, it goes down to $25,000.
    So now you have, instead of a $5,000 loss, a $20,000 loss, and that is absorbed by the fund, right?
    Mr. APGAR. While the properties aren't being sold, the fund incurs costs, correct.
    Mr. BURTON. So the fund loses money. Now, who pays into that fund?
    Mr. APGAR. Who pays into the fund?
    Mr. BURTON. Yes.
    Mr. APGAR. The receipts come from the mortgage insurance premiums.
    Mr. BURTON. Which is paid by?
    Mr. APGAR. By the home buyers in the FHA system.
    Mr. BURTON. That's right. So if the people who are in the fund, who are buying a home, I want to buy an FHA home, and I have to pay a certain percentage into the mortgage fund for mortgage insurance in case I default on a loan.
    If the fund continues to go down by $1 billion or $1 1/2 billion or $1 million a day or whatever we're talking about, then what that means is the costs are going to be passed on to the consumer in the form of an increase in the premiums, or at the very least, not a decrease in the premiums that they could realize if the fund was making money.
    Mr. APGAR. Well, if that were the case, that would be true. But of course, the fund is strong, it's the most financially secure position we've been in over a decade. As a result of that, in the last several years, we've cut premiums in several significant ways. We've had a special first time buyer program cut, which for counseled buyers, we give them a discount off their property insurance as well as an inner city discount.
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    So in fact, we have been able to cut insurance premiums, because the scenario you described just isn't true.
    Mr. BURTON. If the IG is correct, and you're saying that it isn't correct, but if the IG is correct and it's losing $1 million a day, or $365 million a year, then that money is coming out of the fund, if they're correct. You're disputing that. But if they're correct, that money is coming out of the fund.
    And if there has been a reduction in premiums, as you've said, to the consumer when they get a loan, it could be greater if that figure is correct, the $365 million a year. I know that's a hypothetical figure to you and you don't agree with it. The fact is if money's coming in, I was an insurance man, too, as well as a real estate man.
    There is what's called the law of profit and loss in the law of large numbers. If you're losing money, what the insurance carrier does is they either increase the premium or they eliminate the risk by reducing that class of business so they don't have to insure it any more. But in any event, they're going to operate at a profit.
    Now, you don't have to operate at a profit, but you have to at least maintain some funds in that insurance fund. So the bottom line is, if you're losing money each year, because of excess properties being on the market, because maintenance of those properties is high, then that money comes out of the fund, and that money cannot be passed back onto the persons buying the insurance in the form of lower rates.
    That is correct, isn't it?
    Mr. APGAR. Right. If all the scenarios you say are true, then your final conclusion is true.
    Mr. BURTON. So the big difference we have, then, is whether or not you're correct or whether or not the IG is correct. If you're correct, there's no problem. If the IG is correct, we're losing $1 million a day out of the fund.
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    Granted, according to Mr. Waxman, this is not taxpayers' money. But it is the money of millions of people who have loans through the FHA mortgage loan program. So it might not be taxpayers' money, but it's the money of millions of people who have homes through the FHA plan that could realize a lower premium, therefore more money in their pockets, if there wasn't a problem. That's the premise that we're talking about.
    Mr. Waxman.
    Mr. WAXMAN. Before I begin my questions, I want to yield to Mr. Kucinich.
    Mr. KUCINICH. Thank you very much, Mr. Waxman, Mr. Chairman.
    I want to thank the Chair for holding this hearing, because one of the outcomes that we've seen, as demonstrated by the testimony of Mr. Apgar, is that HUD did recognize problems and demonstrated a willingness to take action and reevaluate their policies. I want to tell the Chair how much I appreciate your support, and I appreciate Mr. Waxman's support.
    All I'm saying is that the response that Mr. Apgar gave is in response to a recognition by HUD that there are problems. And they demonstrated a willingness to take action. That came about, I might add, because of the support of the Chair and also Mr. Waxman. So these hearings can be productive in some way. Thank you.
    I yield back to Mr. Waxman.
    Mr. WAXMAN. I thank you for pointing that out, because it does show that there is a responsiveness at HUD to a genuine criticism that all of us have. I thank you for being responsive.
    Let me go to the points that are before us today, that the chairman seemed to try to argue that when money is paid out of this fund that it raises premiums for others. So it's not taxpayers' money, but other people are going to pay more for their premiums.
    Are your premiums based exclusively on the loss, meaning money that was spent to maintain the property?
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    Mr. APGAR. No, they're based on the overall financial health of the fund. Which as I said is the strongest it's been in over a decade.
    In the 1980's, of course, the fund was very much mismanaged. We had a serious situation where the fund was net underwater. Since that time, we've rebuilt the capital base of the fund through prudent management to its highest level in over a decade.
    We just had the new audit by our Price Waterhouse. This audit again makes this point.
    Mr. WAXMAN. So it's not like if you have insurance and you pay off a loss—that's what insurance is all about—it doesn't mean your insurance companies have to immediately turn around and ask everybody to pay more for that loss.
    Mr. APGAR. We expect to take certain loss. That's part of our whole risk management strategy.
    Mr. WAXMAN. That's why you have the insurance.
    Mr. APGAR. That's right. We lend to people who, quite frankly, could not get a loan other ways. They are riskier borrowers. We anticipate a certain amount of losses as part of the calculation that goes into making those mortgages.
    And as was mentioned earlier, 93 out of every 100 of our borrowers go on to be homeowners, successful homeowners for life. When there are issues, and the property is foreclosed upon, that's what we're talking about today, the small number of cases, not the large number of successful cases.
    Mr. WAXMAN. I want to question you about how HUD is performing with these foreclosed properties compared to the private sector, because I think that's really the issue that's before us. But I want to just take a moment to point out to everybody what FHA means to people. FHA insured 585,000 people, or one-fourth of all first-time home buyers' in 1997. FHA is the primary insurer in urban areas and insures more mortgages of African-Americans and Latinos than any other insurer.
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    In fact, the 1996 Federal Reserve report concluded FHA bears approximately 66 percent of the aggregate credit risk for minority and low income borrowers and their neighborhoods, while private mortgage insurers bear only 6 to 8 percent. Of FHA insured home purchase loans, 15.4 percent were to Latinos, compared to 6.8 percent for home loans insured by private insurers in 1996.
    Of FHA insured loans, 13.2 percent went to African-Americans, compared to 5.3 percent of home loans in the private insurance market. Of FHA insured home purchase loans, 31 percent were to low income borrowers, compared to 14 percent for home loans insured by private insurers in 1996. In fact, almost 85 percent of FHA's loans to low income borrowers in 1995 would not have qualified within private insurance market guidelines to loan to value ratios. Which means these poor people wouldn't have been able to buy homes.
    Even serving all these needs, FHA performs generally on par with private mortgage insurers, isn't that right?
    Mr. APGAR. Yes. We did the Andersen benchmarking study because we wanted to know how we compared, where our areas of weakness might be as we began this new process of changing our property disposition activity.
    Mr. WAXMAN. Let me just ask you, regarding the Andersen benchmark study, are there a lot of different studies out about how well you and the private sector would be doing in this area of dealing with foreclosures and homes?
    Mr. APGAR. We wanted one that focused on our details. So this is the one we have. There are other studies that compare FHA activities. For example, in terms of our sales price information, there's a national study that says that our sales price relative to an estimate of market value is on a par with other private entities.
    Mr. WAXMAN. Can you imagine anybody in your field not having heard of the Andersen study?
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    Mr. APGAR. It was pretty widely discussed, it was a very important study for us, and it was a key to our restructuring our FHA operations.
    Mr. WAXMAN. I was shocked that the representative of the Inspector General seemed to never have heard of this, even though she was here commenting on this very area.
    Mr. APGAR. In our testimony before another committee last year, of course, we provided information on the Andersen study. This is no secret on our part. We've been using this information to try to refute these claims that FHA is a poor performer.
    Mr. WAXMAN. My time is up, and I'm hopeful I'll get more time, because Mr. Kucinich said he'd come back and yield me more time. I want to go into precisely how the private sector matches up to HUD in this very area for which HUD is being criticized.
    Thank you, Mr. Chairman.
    Mr. BURTON. Mr. Kanjorski is next.
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    Mr. Chairman, I come a little bit armed, because I not only have the opportunity to sit on this committee, but I have spent the last 14 years of my career on the Banking Committee. We're well aware of the history of HUD and the housing problems that have existed in the United States.
    I think the records show that in the second term of the Reagan administration and in the first and only term of the Bush administration, there was always great consternation in the Banking Committee about FHA. We thought there was some hidden vault down there in the Department building where all these records and all these properties were located, and no one really had a handle on it.
    Over the last 6 years, the Department has undertaken a massive approach to handling inventory, studying these problems and getting a handle on these problems. Consistent with any criticism of HUD or any other Federal agency, for that matter, there is always room for criticism and always room for tightening. It's evident that there are things here that we would like to have operate in a more effective manner.
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    To the Commissioner, I'd like to say that every report I'm getting back is that you have taken on a Herculean task and have significantly changed the processes and procedures. I'm wondering whether you could tell the committee for the record some of the things you've done on Internet with the advertisement of properties to make them readily available to average people, and also to the brokers, and private sales community.
    Mr. APGAR. Yes. Mrs. Morella asked the question about whether you can find out about HUD-held properties. Of course, all our properties are listed on the Internet. In fact, many of our home buyers come to us via that new technology. Certainly a lot of our broker partners use the Internet to learn about HUD properties for sale.
    As part of the new management and marketing contract, we're going to move more aggressively into the multiple listing services around the country. This should both widen our market and hopefully further shorten our sales time. But we've been aggressive users of new technology, both in terms of the operations of the program and also our outreach to consumers.
    Mr. KANJORSKI. Have you found that as a result of the use of the Internet and these new methodologies, the process of turnover of properties has increased and has decreased in cost of holding and handling?
    Mr. APGAR. Right. Unlike the IG, we see no degradation in our time of holding properties. It has remained constant at about 180 days. The reality here is, most of our properties sell quite quickly. It's difficult to sell properties that are a problem. And the example discussed earlier where a private homeowner couldn't sell their home in 18 months, we see that all the time.
    In Syracuse, for example, the estimate is it takes anywhere from 16 months to 20 months to sell a privately owned home. So in those instances, some of our homes quite frankly don't sell as quickly. We aggressively cut the price, we work with community based non-profits to sell the homes. So we do have efforts. But that's where our issues are.
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    Mr. KANJORSKI. If I could characterize your testimony, as I understand it, the premise of the hearing today was, HUD is wasting $1 million a day. But in reality, so that the taxpayers understand, the program that you administer and as administered by this administration under HUD is not only not costing $1 million a day, but something significantly less than that, and overall, FHA is returning to the Treasury $1.5 billion.
    So, this is one department or one branch of HUD and the Federal Government that's making a profit for the U.S. Government, is that correct?
    Mr. APGAR. Yes, we are a profit center with respect to deficit reduction efforts and overall health of the general funds.
    Mr. BURTON. Would the gentleman yield?
    Mr. KANJORSKI. Yes.
    Mr. BURTON. You're returning $1.5 billion to the general fund?
    Mr. APGAR. Actually, we have net returns of $1.5 billion. The funds actually stay in the FHA accounts.
    Mr. BURTON. They stay in the mortgage——
    Mr. APGAR. The mortgage insurance company, that's correct.
    Mr. BURTON. But it's not going back into the general Treasury.
    Mr. APGAR. But for purposes of calculating the deficit and expenditure estimates, they are listed that way, yes, sir.
    Mr. BURTON. Because of the unified budget?
    Mr. APGAR. That's correct, because of the unified budget.
    Mr. BURTON. But it's not going back into the general fund, in actuality.
    Mr. KANJORSKI. Reclaiming my time, so that the chairman understands, if he's not involved in accounting, it's a reserve fund that is showing a surplus of $1.5 billion. Any time we were to finalize the accounts and dissolve the U.S. Government, in fact, the Treasury would receive the surplus funds which amount to $1.5 billion a year.
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    Mr. APGAR. Right.
    Mr. KANJORSKI. So to attempt to mislead and say it's not going back to the Government would be a mistake. It's accounted for in the overall deficit as a plus. It is in fact a plus and the funds exist there presently to be re-used and to support the fund. Nevertheless, it operates at a profit to the U.S. Government, is that correct?
    Mr. APGAR. That's my understanding, sir.
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    Mr. BURTON. Thank you. The gentleman's time has expired. The gentlelady from Washington.
    Ms. NORTON. Mr. Chairman, I regret I was not able to be here for most of this hearing. I do want to say that the subject matter of this witness is of enormous interest to me. The District had a $5,000 home buyer credit that has had an enormously positive effect on home buying in the city.
    While our concern was particularly with middle income taxpayers who have bought in great numbers, what has been wonderful to see is the coming alive of home owning in the poorer sections of the District of Columbia, in wards 7 and 8. None of that could have occurred without HUD's help with these particular home buyers.
    I'd like to yield the balance of my time to the ranking member, who has been here.
    Mr. WAXMAN. Thank you very much for yielding.
    We, through technology, have seen pictures today of really dilapidated houses in what appear to be very bad shape. I could imagine, when we hear from people who live near these houses, they must be horrified at what it's doing to their neighborhoods.
    I want to know what HUD's responsibility is. First of all, was HUD responsible for the deterioration of the house immediately, or do they sometimes pick up these houses when the borrower has walked away from it?
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    Mr. APGAR. As was suggested earlier, the foreclosure process in many States can be lengthy, ranging from a couple of months up to 18 months or more. In many instances, by the time we get control of the properties, they are in very serious disrepair.
    That's why we requested and got authority from Congress just this last October to extend our reach in those difficult situations. So where there is a property languishing on the market during a foreclosure process, we can take control of that property through taking the note prior to foreclosure.
    This was the approach that we had proposed using in our April testimony. We awaited confirmation of Congress through the 1999 Appropriation Act that we had the legal authority to do that. So that will give us an additional capacity to attack that portion of the problem that we don't have control over now, which is what happens to the property after the homebuyer moves out and before HUD gets legal possession of the property through a foreclosure action.
    Mr. WAXMAN. So you have a buyer. The buyer is an irresponsible person who doesn't pay his or her debts and abuses the property, maybe just in the most horrible way. There are properties like that, aren't there?
    Mr. APGAR. Yes, occasionally there are borrowers like that. Even if the borrower is a responsible party, an unoccupied home in many of the neighborhoods that are in serious decline will depreciate quite rapidly.
    Mr. WAXMAN. So you get a property that's deteriorated in value, it's peeling, it falls apart, it smells, if a Congressman walked in with his brother, he would notice it, that it smelled. It could happen. It could also happen to private foreclosures, couldn't it?
    Mr. APGAR. Oh, for sure.
    Mr. WAXMAN. Now the question is, what do you do? Now you've foreclosed, you're trying to figure out how to get these properties foreclosed faster. Now you foreclose on them and the question is, what do you do to get rid of these properties? Resell them. Tell us about your activities there.
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    Mr. APGAR. We have a number of initiatives. In the District, for example, the Officer Next Door program is quite popular, where we give HUD homes at a discount to police officers to encourage them to live within the District. In fact, the 2,000th beneficiary of this program was a District police officer.
    We also work with community based non-profits. Under the new legislation that was passed in 1999, we have a program which will target hard to sell areas, working in cooperation with neighborhood groups and cities, again to put a focus on our efforts to secure, maintain and dispose of those properties in the difficult to sell areas.
    Mr. WAXMAN. Is it true that HUD takes a longer time, holds onto those properties longer than the private sector before they turn around and sell them?
    Mr. APGAR. According to the Andersen benchmarking study, the industry ranges between 120 and 180 days. HUD is now at 182 days, right within that bound. Under our new management and marketing contracts, we think the incentives that we've given the new contractors will bring our average down to 150 days or less.
    Mr. WAXMAN. Is it a fair statement that you have an average of 6 months before you dispose of these properties?
    Mr. APGAR. That's our overall average right now.
    Mr. WAXMAN. So it is 6 months on average?
    Mr. APGAR. The range is between 4 months and 6 months. We're at the high end of the range now.
    Mr. WAXMAN. You're at the high end of the range? Part of the reason for that is that you have a policy to promote owner occupants and other public policy interests?
    Mr. APGAR. That's correct. Early on, we have a period in which from 30 days to 45 days in which community based non-profits have right of first refusal to purchase our properties, as do governments.
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    Mr. WAXMAN. Is that by statute or by policy?
    Mr. APGAR. That's been our policy. Our new approach is going to continue to have that policy in effect, but streamline it so we're able to move quickly to make sure that if folks want to buy it through those special options, they can. But then we move it more quickly to the general market if they choose not to.
    Mr. WAXMAN. Could it be that the Inspector General for HUD doesn't know about this policy?
    Mr. APGAR. I don't know. It's in all our documents, it's in all our contracts. A key element of the new approach is to work out the handling of those setaside periods, to make sure it operates effectively.
    Mr. BURTON. The gentleman's time has expired. Mr. Ose.
    Mr. OSE. Thank you, Mr. Chairman.
    Mr. Apgar, on your testimony there is a comment in here about the industry norm for sales revenue between 96 and 105 percent of appraised value. And FHA sells properties at an average of 95 percent of market value. Is appraised value the same as market value in this lexicon?
    Mr. APGAR. No, the appraised value should be a best faith estimate of market value.
    Mr. OSE. How do you reconcile the 96 and 105 percent of appraised value with 95 percent of market value? It's apples and oranges.
    Mr. APGAR. It's the same thing. The estimate that is the 105 percent figure, many private sector companies do cosmetic repairs to boost the sales price a bit. So they're able to sell higher than the initial appraised value.
    We sell our properties generally as-is. So that's why we're on the low end of that spectrum.
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    Mr. OSE. Mr. Chairman, I need to jump shift here for a minute. I'm under the impression that the Chief Financial Officer for HUD resigned 2 weeks ago, is that correct?
    Mr. APGAR. Mr. Keevey did leave HUD, maybe a week ago, 2 weeks probably.
    Mr. OSE. What is the status of having a replacement named?
    Mr. APGAR. They have an active search underway for a new Chief Financial Officer. I don't know the details of that, but I know they're looking.
    Mr. OSE. Any idea on the timeframe for completion of the search?
    Mr. APGAR. My expectation is, given the importance of the job that's going to be moved forward quickly.
    Mr. OSE. I have a related concern. Deputy Assistant Secretary Smith fills a slot——
    Mr. APGAR. He's actually the Acting Assistant Secretary for Administration. Joseph Smith, that's correct.
    Mr. OSE. He has served in that capacity for more than a year without an appointment, consistent with current Federal statute?
    Mr. APGAR. Joseph Smith is a career HUD employee. He's been with the Department for close to 25 years. He's in the process of being nominated, a very unusual move, to nominate a long-time career staff person to such a critical political position. But Joe Smith has more than earned the respect of the leadership at HUD, and he's in the process of being nominated.
    Mr. OSE. I'm not questioning his degree of respect, I'm questioning whether or not he has served a year in a spot that is otherwise subject to the Federal Vacancies Act, that says you cannot serve in a temporary capacity for more than a year.
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    Mr. APGAR. You're going to have ask others about these matters in more detail. I know Mr. Smith's general role in the Department, I work with him every day. But in terms of the details of his appointment status, you'll have to get other information. I'd be happy to provide that for the record or get someone who could provide that for the record for you.
    Mr. OSE. Mr. Chairman, I'd appreciate an opportunity to enter that question into the record for further response. I yield my time to the chairman.
    Mr. BURTON. Thank you. Without objection, it will be so ordered.
    [The information referred to follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. First of all, 40 percent of the foreclosures or repossessions, where they leave the house, exceeds 6 months, 40 percent is what the IG said. Is that correct?
    Mr. APGAR. Forty percent? I'm sorry?
    Mr. BURTON. The vacancies, 40 percent exceed 6 months, is that correct?
    Mr. APGAR. No, I believe it's closer to 19, 20 percent.
    Mr. BURTON. Well, we need to once again check the IG.
    Mr. APGAR. Yes, and even their calculation was 7,000 over.
    Mr. BURTON. We'll check that. We did some calculating, and if the $1.5 billion per year is accurate—and the IG says $1.5 billion to $2 billion is accurate—if that money was returned in reduced premiums to the 7 million homeowners who pay mortgage insurance, it would amount to a $215 a year reduction in their insurance premiums. If you cut that in half, it would still be over $100.
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    So if those moneys were returned because the $1.5 billion to $2 billion wasn't wasted as the IG says, you would have a reduction in insurance premiums for those people of about $215 a year. Whether it's a tax reduction or a reduction in the insurance premiums, it's still quite a bit of money.
    Now, the Inspector General told us that contractors are not being overseen or watched correctly, is that correct?
    Mr. APGAR. No, I don't believe that's a correct statement. They identified some instances where they found that to be true, but that's not the general practice.
    Mr. BURTON. They said that one contractor was not visited by a HUD employee in over 3 years. Are you familiar with that case?
    Mr. APGAR. No. As we suggested, we only got their testimony yesterday. In a typical IG audit, we'd have a chance to read the testimony and review it.
    Mr. BURTON. Would you correct that for me and let me know?
    Mr. APGAR. I certainly will.
    Mr. BURTON. And we've been told that another contractor was auditing his own work and approving his own payments. Are you familiar with that?
    Mr. APGAR. That would be very unusual, and I'm not familiar with that particular case, other than having read it yesterday in the IG's testimony.
    Mr. BURTON. But you will check that for me as well?
    Mr. APGAR. I sure will.
    Mr. BURTON. And do you dispute that supervision of contractors was poor and the condition of HUD properties was deteriorating because the contractors were not being supervised properly?
    Mr. APGAR. I do not believe it's a fair statement that contractors weren't being supervised correctly. Again, there's no evidence that we're suffering any delay in sales of our homes. Our data suggests the opposite.
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    Mr. BURTON. If you would, after you review the report, give us a comment in writing, I'd really appreciate it.
    Mr. APGAR. And we wish to submit for the record a list of what we've identified already as being factual errors, clearly misstatements of fact that just spring right out at you when you read that testimony.
    [The information referred to follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. One other thing. I believe Mr. Kanjorski, I believe he was still here, said that you were returning $1.5 billion or thereabouts to the Treasury. The fact of the matter is, that money does not go back to the Treasury. Under the unified budget, as far as paper is concerned, just like the Social Security Trust Fund, Highway Trust Fund and so forth, that's included as an asset. But the fact is, you don't put any money out of the insurance fund back into the Treasury, do you?
    Mr. APGAR. I asked our budget people to explain this to me. They said the practical effect was that this was contributing to the overall balanced budget, and it was effectively the same as putting money in the Treasury. Technically, the money stays in the FHA fund, as was noted by Mr. Kanjorski.
    Mr. BURTON. The reason I bring that up is because if in fact the IG is correct, that there's a $1.5 billion to $2 billion shortfall in the fund because of these issues, and I know you disagree with that, but if that's the case, rather than saying that that money is in effect going back to the Treasury, when it isn't, because it really isn't, it's staying in the fund, wouldn't it be better to reduce the insurance rates to these 7 million policy holders who are mortgage holders, who have mortgages with the FHA, and save them $215 a year?
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    Mr. APGAR. Now that the fund is as strong as it's ever been, I think it's fair to look at the rate structure and decide whether or not we can prudently have a reduction.
    Mr. BURTON. Mr. Cuomo I've talked to a number of times. He seems to want to be cooperative. I've been very impressed with him. All I would say is I wish you would suggest that to him when you talk to him about these other issues.
    Mr. APGAR. Fair enough.
    Mr. BURTON. Thank you. Mr. Kucinich.
    Mr. KUCINICH. Thank you, Mr. Chairman.
    I yield my 5 minutes to Mr. Waxman.
    Mr. WAXMAN. Thank you very much, Mr. Kucinich, for yielding to me.
    The Arthur Andersen Consulting firm is not a fly by night operation, it's a very highly regarded organization, isn't that accurate?
    Mr. APGAR. Yes, they do very good work for us and many other Government agencies.
    Mr. WAXMAN. In fact, the new head of the General Accounting Office was a partner at Arthur Andersen. That was, I think, one of the reasons that many people thought he would do a good job. He had the credentials for assuming the GAO position.
    Mr. APGAR. That's true. They have good knowledge of Government practice, it makes an ideal person to move into Government service.
    Mr. WAXMAN. I'm concerned, and Mr. Ose expressed a concern, if properties stay too long before they're sold, that that's costing us money. It's costing HUD money, whatever this fund is.
    Mr. APGAR. Yes.
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    Mr. WAXMAN. Yet the Arthur Andersen Consulting firm said that the industry average standard, in terms of return on the appraised value, is 96 percent to 105 percent of the appraisal when they do sell property, whatever period of time it takes.
    Mr. APGAR. Yes.
    Mr. WAXMAN. And the performance, according to this study, is that HUD has achieved a 98 percent return on the appraised values. Sounds to me like that would indicate you're doing a reasonable job making sure we get the money back from these properties no matter how long it might take you to foreclose it and then turn around and sell it.
    Mr. APGAR. I think that's fair. The Government Performance Act, of course, focuses on results. That's why we look to these benchmarking studies. We think that measured in terms of results, our work stands up in terms of best practices, a comparison with industry benchmark standards.
    Mr. WAXMAN. That's the information we're getting from Andersen Consulting. I want to get more information about this issue to be sure it's true. I know that everybody would have a concern, especially people in the neighborhood, if there's a house that's not being cared for, and not being foreclosed on, not being turned around and sold, so that it can be maintained. So we don't want properties sitting out there for any length of time.
    Mr. APGAR. Fair statement. Nor do we.
    Mr. WAXMAN. In order to deal with these properties, however, you contract with people to maintain them, in the interim before you sell them, isn't that right?
    Mr. APGAR. That's correct.
    Mr. WAXMAN. Now, what I want to know is, are you taking all the appropriate actions to be sure that the contractors are doing their job? Do we have non-performing contractors? I understand you have contractors who are hired so to speak on an incentive based contract. Do you have any penalties against them if they're not doing their job?
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    Mr. APGAR. Well, of course the biggest penalty is that under the management and marketing contract, people only get paid for results. They get paid a fee relative to the sale price of the home. So there's a powerful incentive for them to perform, maintain the properties, and sell them for the best price.
    Mr. WAXMAN. I want to be sure that we're getting these people who have this responsibility under contract with HUD, to be sure they're doing their job.
    Mr. APGAR. So do we.
    Mr. WAXMAN. We ought to explore that even further. But I don't think the case has been made credibly, charges have been leveled, but I don't think the case has been made in any credible way, that you have failed miserably to get the money back for these properties when people default, or that you have large numbers of properties that are substandard and eyesore and often constitute hazards.
    The statement by the representative from the Inspector General was that they found 12,000 properties, I think she said that took too long to sell. Was that the testimony?
    Mr. APGAR. I believe that's correct, that was the number they used.
    Mr. WAXMAN. Is that an accurate statement?
    Mr. APGAR. We were checking that number, because it led her to make an inaccurate conclusion, which the time on the market of our properties has grown over the last 2 years. Our statistics suggest that's not true. So we're trying to figure out ourselves how she could make that statement, given her own data to suggest that the conclusion she came to was correct.
    Mr. WAXMAN. If it were true, what do 12,000 properties represent of your total portfolio?
    Mr. APGAR. We have 40,000 properties in inventory. So it's about 30 percent. We sold about 65,000 properties last year, that was the number of properties we sold.
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    Mr. WAXMAN. I appreciate the testimony you've given. I have somewhat defended HUD, because I think you've been unfairly criticized. But I do want to point out to you that I want to be sure you're doing the job that the American people expect of you.
    I thought it was ironic that you were criticized for not taking the money that you make and not giving it back to the taxpayers. But you would think from the title of the hearing today, ''HUD Losing $1 Million Per Day,'' it sounds like the Government is losing $1 million a day. They're funds that shouldn't be lost, whether they're Government funds or the premium payers.
    Mr. Chairman, let me ask unanimous consent for all Members' statements to be entered into the record. We didn't get to that earlier.
    Mr. OSE [presiding]. Without objection.
    Mr. WAXMAN. And I thank you for your forbearance.
    Mr. OSE. Our distinguished colleague from Illinois.
    Ms. SCHAKOWSKY. Thank you, Mr. Chairman.
    As a new Member of Congress, I come here with having been involved with community organizations in my district for many, many years. In particular, I want to ask you a process question. I want to be sure that you will make a commitment to me now, because Chicago has been particularly hard hit by FHA foreclosures, because we have many abandoned HUD buildings in Chicago, that you will meet with me when I ask, but also with me and representatives of organizations who have lots of experience and lots of data, to try and reconcile some of those differences on a regular basis, if I ask for those meetings.
    Mr. APGAR. We'd be happy to do that.
    Ms. SCHAKOWSKY. We're about to hear some testimony from these community organizations, who true to form are always sort of at the tail end of hearings. I know that there is the issue of inspections of FHA properties. I recently purchased a home, and the notion of purchasing a home without having an inspection first is absolutely unthinkable. Just unthinkable to me, and to my lender as well.
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    So I'd like you to comment on that. Let me get my other question in, too, and you can answer. The other issue is going to be on a particular piece of legislation, H.R. 595, which, if we really are seeking to decrease the number of foreclosures, it seems to me that we ought to be looking at ways to provide emergency assistance to people who, for no fault of their own, are finding it hard to meet payments.
    It seems like it may also be economically a wise thing to do, in the long run, to keep people who have an investment in those homes in those homes over a hump. So if you could comment on both those things, on the inspections and on the legislation, I would appreciate it.
    Mr. APGAR. Fair enough. You're exactly right, a home inspection is a very important element in the home buying process. The overwhelming large share of buyers get a home inspection.
    FHA prominently encourages, through its housing counseling system, people getting inspections. The issue where we differ with various proposed legislation is whether we should make that step mandatory. We're worried about whether or not a mandatory inspection at this time, given the fact that the home inspection industry is largely unregulated by the Federal and State governments, would in fact provide less benefit than meets the eye.
    What we are doing though, is that we're expanding our efforts to try to encourage folks to get a home inspection and to take note of the fact that that's a very important part of the home buying process.
    Relative to the legislation that you referenced, we agree, foreclosure avoidance is the most effective way of addressing this set of issues. We wouldn't be here today if we weren't moving ahead in our foreclosure efforts. My concern is that the particular form of legislation will make the same mistake that got us into part of this problem in the beginning. We had this activity in the past called the assignment program. That program has led to a mass of foreclosures and building up of debt that led to many of the problems with the FHA earlier in the decade.
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    We have foreclosure tools that were legislated and guided through legislation enacted in 1996. Those foreclosure avoidance tools are hitting their stride. We're doing more foreclosure avoidance work now than we ever did under the previous regime, and we think we're making significant progress in that arena. I think it's something like 1,500 foreclosures a month are being avoided, and over 1,200 of those are homeowners who are getting exactly the kind of benefit you're suggesting, of being able to have forgiveness on their loans or some extra benefit to keep them in their home and avoid the costly foreclosure process.
    Mr. OSE. Would the gentlelady yield for a moment?
    With respect to Ms. Schakowsky's question about home inspection, are there not States in the United States that actually already require that? For instance, in California. Do we have any evidence as to the differential default rate that might follow on accordingly? I'd be happy to take it in writing.
    Mr. APGAR. We could look at the State law as to whether they require inspections. Again, most States are silent on that matter. As a matter of fact, most States do almost no regulation of the home inspection industry. Our concern is whether you should mandate this, not whether it's a highly desirable activity.
    Again, the Banking Committee took this matter up last time. This proposal appeared in the Lazio Home Ownership bill, and it was removed, because again, the conclusion, at least of that committee at that time, was this was not an effective way to address the problem.
    Mr. OSE. The Chair would provide the distinguished gentlelady from Illinois a couple more minutes, having taken your time. I yield back.
    Ms. SCHAKOWSKY. I just have one comment, thank you, Mr. Chairman. It seems to me that the data does not bear out that there have been effective foreclosure avoidance measures. If we look at the foreclosure rate increase in 1997, for example, 15 percent, and in 1998, an additional 7 percent increase in FHA foreclosures. So it seems to me we certainly have some distance to go.
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    Mr. APGAR. Fair enough.
    Mr. OSE. The Chair recognizes the distinguished Member from Florida, Mr. Mica.
    Mr. MICA. Thank you, Mr. Chairman.
    I have a couple of questions. First of all, we're in a very good economy, I believe, last I checked. Dispute as to who gets credit for it. I think that as part of those that help come and balance the budget, make people work instead of being on the public dole.
    But in any event, I think most of us agree we're in a pretty good economy, right, sir?
    Mr. APGAR. Overall, the economy is doing very well, yes.
    Mr. MICA. In 1996, there were just under 61,000 foreclosures of your properties. In 1997, that grew by 10,000 to 71,000. In 1998, it was up another 5,000. It's gone up 15,000 in 2 years.
    To what do you attribute the dramatic rise in foreclosures in 2 years of basic prosperity?
    Mr. APGAR. As was suggested earlier, the foreclosures that are occurring today are often among properties that, despite the good economy, their current value isn't what the prices were when they were originally purchased. The largest increase in our foreclosures is coming out of California, which even though the California economy is beginning to improve, it hasn't improved enough to move houses out of this foreclosure problem.
    In addition, most of those foreclosures are coming out a particular HUD program, the adjustable rate mortgage program. There we have made significant changes to improve the overall quality of our underwriting of the adjustable rate mortgage program.
    Mr. MICA. Even with adjustable rate mortgages, the payments actually would have been going down in this economy, because the interest rates have been dropping. They've dropped to historic lows in that pattern, so people's payments, I know it takes a while for it to kick in.
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    Mr. APGAR. Yes. The point I was making there is, there was a significant increase in foreclosures in California, mostly linked to this ARMS program. We've made adjustments to improve the overall underwriting in that program. Again, the California economy was slow to recover.
    I'd just like to say one thing about the overall economy, because of course, in other budget discussions we've talked about this. This is really a two-tiered economy, in which many are doing very well, but the inner cities and our core areas are not all benefiting. We have the highest worst case needs housing situation in the Nation's history. We have significant under-utilized resources in terms of high unemployment in our inner cities.
    So while the economy is working for most, in the neighborhoods that we serve, the economic recovery is not nearly as strong as your question suggests.
    Mr. MICA. If you're having a fairly dramatic increase in the number of people who are being foreclosed upon, and you said you had pinpointed it to some of these California properties, is there anything, have you done anything, any kind of review or profile of the individuals who are defaulting?
    Mr. APGAR. We have statistics on the characteristics of our defaults, the characteristics of default rates by program type, by characteristics of the borrower and the like, yes.
    Mr. MICA. Is anything done to implement changes in lending practices? Have you instituted things to try to mitigate the number of folks who get into that situation?
    Mr. APGAR. Actually, in respect to the ARMS program, we did significantly change the underwriting of that program in February of last year. We're already seeing a substantial reduction in our ARMS business. We think that's good, we think some lenders may have been abusing that program. That's why we took that action.
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    Mr. MICA. Is that your loss mitigation program?
    Mr. APGAR. No, in terms of the loss mitigation program——
    Mr. MICA. Could you explain what loss mitigation is?
    Mr. APGAR. Essentially, loss mitigation is a term that says that trying to avoid the losses to a mortgage lender, it's a little cold and impersonal term. What we're really talking about is how we keep homeowners in their homes. That's the key. In many instances, it costs more money to everybody, certainly the homeowner and often the FDA, to foreclose.
    We had a series of legislation guided policies that we put in the books in 1996. In 1997, we did 5,000 cases of loss mitigation under that guidance. We did 10,000 last year. We're projecting we're doing 20,000 this year. Again, the vast majority of those cases are places where we're able to intercede with the property owner and the mortgage lender, restructure the mortgage, extend the term, write down the note rate, do any one of those things to make it so that that homeowner can stay put.
    Even though that costs the fund money, it saves us money by avoiding these costly foreclosure efforts.
    Mr. MICA. You said in California that there was a change in property values or you attributed some of the problems to the changes in property values. Is that also something that you've allowed for under any of these problems for adjustment, so that, again, the goal I think is to keep people in their property, avoid the cost of foreclosure, which is tremendous.
    Mr. APGAR. For sure.
    Mr. MICA. Plus the dislocation of the individuals.
    Mr. APGAR. There are many mortgages that are underwater in this sense, meaning that the value of the home is less than the outstanding mortgage balance. In those situations precisely is when you want to keep the homeowner there, because they can continue to use that home and benefit from it. As the economy and the prices improve in that area, they work their way out of this deficit situation.
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    Mr. MICA. I can't understand exactly how you get into a situation when the property is worth a little bit less, the payments are less and the people are being foreclosed upon.
    Mr. APGAR. Because they can't meet the payments. And they can't sell the home.
    Mr. MICA. Then the problem is they can't sell the home, and recover any of the equity, or, well, there's no equity. But actually a net loss.
    Mr. APGAR. That's what I'm saying. It's underwater. The outstanding mortgage balance is higher than what they can sell the home for.
    Mr. MICA. And do you have any way to again, specifically, to deal with that problem?
    Mr. APGAR. Yes, we can write the mortgage balance down. That's called a partial payment of claim, in which we pay off the lender for a share of the mortgage balance.
    Mr. MICA. Do you take a hit?
    Mr. APGAR. We take a hit on the fund to do that. We can restructure the mortgage by extending the term, changing the interest rate, or if there is mortgage debt owed, I mean, payments owed, we can forbear, i.e., we can forgive those payments and let the owner pick up fresh with where they are.
    Mr. MICA. Do you have any recourse if the property is sold later at an additional profit?
    Mr. APGAR. No. It's a transaction that benefits the home buyer, so we don't have any recovery mechanisms against the lender.
    Mr. MICA. Thank you.
    Mr. APGAR. We do? I'm sorry. We do place a second lien for that amount to secure our interests there. But it's not with the original lender, not related to the original lender, but an obligation of the homeowner to pay.
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    Mr. OSE. The Chair will entertain a second round of questions if the Members wish.
    Mr. KUCINICH. Again, Mr. Chairman, as I indicated earlier to Mr. Burton, HUD is demonstrating willingness to try to work to solve problems when they're given a definitive challenge. And I'm hopeful that the other areas that have been identified here, you'll also be given the opportunity to rise to the occasion, as you did on the homeless program.
    Mr. APGAR. Thank you. Our new management and marketing contract approach goes on line next week. We perceive that it will in fact improve on the record substantially.
    Again, we have evidence from the pilots that we ran that we can substantially reduce our time of holding the inventory and raise our yield. So we're very optimistic that this new approach will yield great benefits.
    Mr. OSE. The gentlelady is recognized.
    Ms. SCHAKOWSKY. Thank you. I have just one more quick question, Mr. Chairman.
    That is, I have been told that Secretary Cuomo has said to housing advocates that there are no inspectors, housing inspectors, in the United States. What could he possibly have meant by that?
    Mr. APGAR. I'm not sure, since he's so knowledgeable about the housing industry, that must be a misstatement. Because we meet with various groups, including various associations that represent home inspectors, all the time. So we understand that there are home inspectors working in our properties and elsewhere.
    Ms. SCHAKOWSKY. So your assumption is that was a misstatement?
    Mr. APGAR. Yes. It certainly is not factually correct. It would be hard to imagine that he would make that error.
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    Mr. MICA [presiding]. Mr. Apgar, just a quick question. Maybe you can refresh me, and you may have already given this information to the committee.
    You have 76,000 foreclosures. What percentage of foreclosures is that out of your total?
    Mr. APGAR. We have close to 7 million loans outstanding. So that's approximately 1 percent of all the loans that are outstanding in the FHA insured portfolio.
    Mr. MICA. How does that compare to conventional lenders?
    Mr. APGAR. In terms of our outstanding foreclosures?
    Mr. MICA. Yes.
    Mr. APGAR. We anticipate that our foreclosures are going to be a higher share. That's how the program was designed. We take risks on borrowers that the private sector wouldn't touch. If they are the kind of safe, less risky borrower, then they would in fact go to the private sector, they wouldn't foreclose as often and they're well served by the private sector.
    Mr. MICA. One of the problems that has arisen in the past is that you've had some serious difficulties with contractors. I'm interested in how HUD will ensure that contractors who performed poorly in the past, have poor performance records, will not be working as subcontractors under the M&M contracts.
    Mr. APGAR. First of all, the competitive bidding process that we had for the national contract had over 170 bidders. People that had poor records with us in the past, that was taken into account. And the largest share of the work will be done by these firms themselves. They already have opened 56 offices around the country, hired over 600 people. So the direct contractor will do much of the work. Subcontractor relationships will exist in some of the outlying areas. We will monitor those closely.
    With respect to contractor monitoring, again, this contract is a new vehicle that was created out of the pilots. The contracting mechanism of the pilot was carefully reviewed by the Inspector General. They gave us a list of recommended changes to the contract, and we embedded many of them in the new structure.
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    For example, the issue of pass-through costs, which is a very difficult monitoring area, where we had to decide whether costs coming through from the contractor was a legitimate cost. Under the new contracting mechanism, these costs are paid for out of the contractor's pocket. They only get paid, not for incurring costs of maintaining the properties, but only get paid to the extent to which they are able to sell the properties and return funds to the FHA.
    We think this will encourage them to sell the homes quickly and to maintain them to preserve the market value.
    Mr. MICA. Do you have contractors that are monitoring contractors?
    Mr. APGAR. Under the new setup, we will monitor through a variety of ways. Of all the records that the contractor retains, 10 percent will be reviewed, 10 percent of all the properties they have under inventory will be inspected. Those functions will be handled by a contractor.
    Again, these are not highly judgmental functions. We're asking people to go out and, relative to a standard checklist, identify whether the property meets certain standards or whether the files are in place.
    It's our job as HUD to review those monitoring reports and then take the action. So all the action steps will be taken by our HUD staff.
    Mr. MICA. And your HUD staff and your professional staff is monitoring monitors, so to speak, they're conducting the top level of oversight?
    Mr. APGAR. We do quality assurance on all levels of our contracting. There was a question made earlier about whether or not our HUD staff is adequate for the task, and where our staffing numbers came from. Again, this was the place where the IG's testimony was misleading. We estimate we will have in effect 143 people, full time equivalents, doing our monitoring work.
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    The estimate of how many we needed was the result of a careful workload assessment done by Booz, Allen and Hamilton. If anything, their early report suggests that we have too many people doing this job now. But because we want to be cautious, we've kept the fuller level of oversight.
    Recognize that the numbers that we have in the field today are doing a lot of functions which will be shifted to contractors under the new system.
    Mr. MICA. Your system to monitor the work of the contractors is important. And you've discussed how that would be in place. What's the progress for having those monitors in place as far as contracts? Are all of those positions filled, or those slots filled?
    Mr. APGAR. Yes, they are. That work will be done out of the home ownership centers.
    Mr. MICA. All the monitors and contractors?
    Mr. APGAR. They'll be supported by field staff which are located in field offices around the country, and again, those people are working today for us, but they'll be working in a new role starting Monday.
    Mr. MICA. It's my understanding that you testified to Mr. Burton or told him that in your previous testimony here that you weren't lax in overseeing contractors and contractor problems were very limited. However, you just told me that poor performing contractors were being precluded from new bids.
    Mr. APGAR. That's correct. There are some. We've taken sanctions against them in the past and will continue to take actions against them in the future.
    Mr. MICA. What percentage are we looking at of those that fall into that poor performing category?
    Mr. APGAR. I think last year we took action against 8 or 10 contracts, terminated their contracts. A larger number of them, we put them on notice for poor performance. I think last year we may have had as many as 150 contractors. The essence of the new approach is to have fewer folks to monitor. Again, we have a higher quality, I believe, of contracting agent now, because we're able to be more selective.
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    Mr. MICA. I have no additional questions at this time. Do any of the other Members?
    We want to thank you for your testimony and for working with our committee today. We have no further questions and excuse you at this time.
    [Additional questions for the record follow:]
    [The official committee record contains additional material here.]

    Mr. MICA. I'd like to call now the third and final panel. If I may, I'd like to introduce witnesses as they come froward.
    On our third panel, we have Ms. Gale Cincotta, co-founder and executive director of the National Training and Information Center, also known as NTIC, in Chicago. The NTIC is a national resource center on urban issues. Over the past 20 years, Ms. Cincotta has received numerous achievement awards for outstanding work on such issues as human rights, poverty and community revitalization.
    Accompanying her on the panel is Grace Jackson, who is from the Chicago area. She is a board member and past president of the Roseland Home Ownership Center of Roseland Neighborhood Housing Services. Throughout the 1970's and 1980's, Ms. Jackson was a neighborhood leader for the Greater Roseland organization, and played an important role in the fight against insurance redlining and FHA lending abuses. We welcome you to the panel and look forward to your testimony.
    We also are pleased to have Mr. Carl Edwards, a fellow Hoosier of the chairman's, with us today. Mr. Edwards was born in Indianapolis, where he's lived for the past 26 years. He volunteers his time as president of the Fletcher-Lipincott Neighborhood organization. He's also a member of the Brookside Park advisory committee and serves on the board of the Near Eastside community organization. I'd like to thank you, Mr. Edwards, for coming, and our other panelists for being with us today. We look forward to your testimony.
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    These particular witnesses testified 1 year ago on April 1st, 1998, before the Banking Subcommittee on Housing chaired by Mr. Lazio. It's my understanding that you came before this panel a year ago. In essence, this group testified that FHA property disposition problems were contributing to, rather than alleviating, urban blight and deterioration. They have been asked to provide our committee with an update today on the status of issues that they raised at that time, almost 1 year ago.
    We also have Mr. Stanley Czerwinski from the General Accounting Office who is going to join us for the panel in testimony. He is the Associate Director of the Division on Resources, Community and Economic Development at the General Accounting Office. I'd like to welcome him and thank him for his participation.
    It's part of the responsibility of this committee of Congress to swear in our witnesses, which I'll do in a moment. I understand we have one additional witness, who has been involved in homeless area programs. We have Mr. Brian Davis, director of the Northeast Ohio Coalition for the Homeless. He's going to testify about problems that he's experienced in dealing with that problem.
    I think that completes this third and final panel. I'd like to welcome each of you. This is an investigative committee of Congress, and it is our custom and practice and also requirement that we swear in our witnesses.
    [Witnesses sworn.]
    Mr. MICA. Welcome to our panel today. I'm pleased to recognize Ms. Gale Cincotta, co-founder and executive director of the National Training and Information Center from Chicago for your testimony and opening statement.
    Also I might tell all of the panelists, if you have a lengthy statement that is written or prepared, and you'd like it submitted as part of the record, we will do so at request by unanimous consent of the committee.
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    Ms. Cincotta, you are recognized now, and you will see the little light go on here for 5 minutes. You'll get a little warning there in red.
    Thank you.

    Ms. CINCOTTA. I have testimony I've submitted, and I'm also submitting other material for the record.
    Mr. MICA. Without objection, your full testimony will be made part of the record.
    Ms. CINCOTTA. While Mr. Apgar is still in the room, he should remember September 9th, I had Ira Peppercorn from his office and Charles Gardner from the regional office in our office at NTIC in Chicago, where they said, and he has said in his office, there are no inspectors in the United States. We have to then therefore maybe get appraisers to do the inspections.
    They came with a thick thing like this of paper saying, now, this is what the appraisers would have to do. I know that after they left their office, and there were NHS people, myself, our staff, et cetera, that they took it to some lenders. The lenders called me the next day and told me, and even showed me exactly what they had left in our office.
    So he is lying to you under oath that they have not tried to get appraisers to do inspections. And he is either lying to me or lying to you when he says there are enough inspectors in the country.
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    What bothered me today was how much time they spent trying to trash a story that was on television, on one building out of the thousands of vacant buildings——
    Mr. KUCINICH. Excuse me, Mr. Chairman.
    Mr. MICA. Yes?
    Mr. KUCINICH. I'm a little bit concerned about a statement the witness made. I know her, I respect her, I worked with her years ago when she was working with Monsignor Boroni. But when somebody makes a charge in front of a committee like that, I'm kind of uneasy about hearing those charges made.
    Mr. MICA. Well, the witness is free to express herself.
    Ms. CINCOTTA. I'm under oath and he's here. Bill, didn't you tell us that, or are you going to sit there and lie?
    Mr. MICA. Ma'am, we don't want to get into an exchange, but you're welcome to testify and comment as best you can in your own words. And we do appreciate that.
    Ms. CINCOTTA. But it's hard to sit that long, having been involved with this, and again, to go after something that was on television on one building out of 76,000. And on that building, again, the loan was insured by FHA, the tax bill was billed to them. The home was foreclosed on, and now it's part of an FHA program. Nobody's been in that building since September.
    But they take any criticism and try and find something to get you, rather than, that is a problem. This is a list, and I want to submit this, of over 800 foreclosed buildings, FHA buildings in Chicago that we got recently. They found out we had this when another city, I think it was Carl's city, asked for the same thing. They didn't give it to them, and they have shut it down for us getting it in Chicago. There are over 800 homes in Chicago that they have on this thing, addresses, et cetera.
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    So what I'm trying to say, the frustration of your own Government, that you expect to do good for you and do better, lies through their teeth, hides the facts, and instead of working to solve the problem, wants to pretend there is no problem, wants to ignore this. And what we've been facing for years upon years, of fighting once to get FHA in, we didn't get FHA originally in any of the cities, because it was started as a new construction program.
    Then ever since then, fighting to clean it up so it would function well. It led us to try and get the Community Reinvestment Act passed, that our older neighborhoods, they need mortgages, they need the Government to protect them, they need the Community Reinvestment Act. They don't need hundreds upon hundreds of people being put out, promised the American dream and being put out of their home over and over and over again.
    Seventy-six thousand foreclosures, if you look up on it, it's the history of my life, it starts around 1972 when NPA was formed. There were 63,000 foreclosures in 1973. One of the things that worked, and when the numbers went down was when Senator Proxmire was head of the Banking Committee. There was something that was put in called 518 (b) and (d), that any home, older existing home, sold on an FHA mortgage, if within the first year anything went wrong with the systems or roofs or porches, there could be reimbursement.
    That worked excellent, because you needed something like that. They needed the inspections before that. But you can see I'm looking at this, at that time in history, that worked.
    It's not a new home with a warranty. There have to be different things, a new home has a warranty, I guess with the new construction, 10 years. An older, existing home should have a full inspection and a warranty. I know you don't like to spend money, but I think you spend money in the long run after the fact.
    The other thing, there's something pending called H.R. 595, Mortgage Assistance Program, where if people have a chance, within 1 year and get some assistance, the majority of them will be able to keep their homes.
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    If you want to house American citizens in existing construction and older buildings, you have to figure out a way to protect them. You can't do like Mr. Apgar and Mr. Cuomo, shuck and jive, lie through their teeth, change the story, do this, do that. Why don't they bite the bullet and do what's right? It won't cost that much, in the long run, it will be cheaper.
    But they're really happy when they tweak you and try and make you look bad. But I think we're talking about families that we see every day in our neighborhoods that shouldn't be offended by their own Government. They trust their Government.
    I did bring a list, I thought we were going to be able to put it up, of all the foreclosures in Chicago, so that maybe by seeing the addresses, address by address by address, it could give some urgency to what's happening. And if you get those folks back here to testify, why don't they come up with solutions rather than trying to hide the problem over and over and over again?
    If you don't do anything, they smirk at you behind your back, at me, et cetera. Nothing happens good for the citizens.
    [The prepared statement of Ms. Cincotta follows:]
    [The official committee record contains additional material here.]

    Mr. MICA. Thank you for your testimony.
    I'd like to recognize Mr. Edwards, who's president of the New Eastside, Indianapolis.
    Mr. EDWARDS. Thank you.
    First of all, I'd like to thank you, Mr. Chairman, and the other members of this committee, for holding this hearing today, because it gives me the opportunity to let you know my perspective on how things are going.
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    I've heard a lot of talk today about statistics and numbers, and they're very shallow and very cold. This is a face that's been affected directly by how FHA and HUD is affecting our communities.
    Nine years ago, I was a very young man. I purchased a home. It was an FHA insured loan. I dealt with a realtor that obviously didn't have my best interests in mind. I was under the impression the home that I had purchased had an inspection done on it. It was actually termed an appraisal.
    FHA appraisals are fairly thorough. It was done by an inspection service. I didn't know any better, like many people in this country who buy their first home, didn't know any better.
    I bought this house, and it turned up to have several mechanical problems, such as heating and cooling and plumbing and hot water heater and a leaky roof. I heard a lot of talk today about the economy is good and the bankruptcy rates are high, and the segment that FHA is serving, which is me, they're high risk people.
    Well, I'm one of those people who was 18 years old and had his own business and had his life together, but had his life destroyed by a faulty program. Had there been a mandatory inspection in place, had there been this inspection in place, I may not have bought this home, or I would have gone into this purchase knowing full well what was ahead of me.
    But that wasn't given to me. I bought a house that I thought had a Federal stamp of approval on it, and lo and behold, 2 years later, I was homeless. Has anyone been homeless in this room? Does anyone know what it feels like to actually lose your home? It's not a very pleasant feeling, is it.
    We had the opportunity to bring Charles Gardner from HUD in last year. He's the Regional Director for HUD in our area. We had a large public meeting with over 100 in attendance. We told some stories about properties and nightmares that were in our community, one of them being a house that had been vacant for several years that had eventually, after several things happening to it, caught on fire.
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    Mrs. Debbie Thompson of Indianapolis got up and gave a very emotional testimony, with tears in her eyes, spoke of how she woke up at 4 a.m., to the smell of smoke, not knowing if it was her house, wondering if her children were OK, and talking about the lasting emotional effects that this has had on her family.
    Charles Gardner and the other officials from HUD listened to her testimony. Toward the end of her testimony, she held a picture up and showed the audience and Mr. Gardner and the others a picture that her 8 year old daughter had drawn of a house, a two story house with flames coming out of it, teeth and arms. She made the comment that, my daughter drew this for me before I came here today and said, Mommy, I want you to show these people what this house has done to our lives. Consequently, their house was damaged by smoke and water, not to mention the emotional effects to their family.
    One of the things we asked Mr. Gardner and the other people from HUD that day was, will they process the claim to have this house, to have this claim expedited. Mr. Gardner agreed to do that. It's 9 months later, and they've not seen 1 penny toward this claim.
    You know, people in the community are on the front line day in and day out. We have to deal with what is going on in our own backyard. I've seen the effects of abandoned houses in my community. You see it, it's classic, I don't care what city you're in, you see one abandoned house, in my example, one abandoned HUD house. Three people that live in that community for over 20 years got fed up with dealing with this particular house that I spoke of that caught on fire. As I said earlier, it sat vacant for almost, I would say almost 3 years before it caught on fire, attracted children, attracted vandalism, attracted drugs.
    Several homeowners got fed up with dealing with that, got fed up with dealing with fighting the system, and moved, as so many people do. I've been in my community for almost 26 years, I've lived in Indianapolis all of my life. I like where I live, but I too am getting tired and fed up. I traveled to Washington last year and testified, hoping that my experience would have a positive effect on HUD, and here I am again today.
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    That really about sums up my testimony. I just have one other comment I'd like to make. I'd like to know, is it going to take an act of Congress to get this check processed for the Thompson family? That would be a good thing to know.
    Thank you.
    [The prepared statement of Mr. Edwards follows:]
    [The official committee record contains additional material here.]

    Mr. MICA. Thank you, Mr. Edwards. That's why we're here, to pass acts of Congress, to try to get things done. Sometimes it's very frustrating.
    I'd like to recognize now Grace Jackson, who's a volunteer with the Roseland Neighborhood Housing Services in Chicago. You're recognized, ma'am, and welcome.
    Ms. JACKSON. Thank you for having us here. My name is Grace Jackson, and I've lived in the Roseland area of Chicago almost 30 years.
    But there's something that I'd like to say before I do my testimony, if it's all right. I heard some gobbledy-gook about HUD keeping the houses 60 days and 6 months and 30 days and 45 days before they're sold. There's a house by me that has been vacant and people have been put out of it nine times. It's still sitting by me.
    But in the meantime, it has been rehabbed now and will be sold. But for 3 years, HUD had it under this real estate company who was supposed to take care of it, cut the grass, shovel the snow, make sure that the windows and doors were boarded up. Nobody, in all this time that I took care of this house, for the whole 3 years, I think that's about 36 months, came out and did not one mumbling thing. So let nobody tell you that they take care of vacant property, unless they started it yesterday. Because it has not been done.
    On my block now there are five vacant houses. In a two block radius, they do nothing. We, as the block club members, get out and make sure it stays boarded, make sure the grass stays cut, because who wants all these weeds. So if your insurance man happens to come by, and you happen to get a letter, and he tells you your insurance has been canceled, we can't have that. Most of us who are getting to be senior adults, we can't afford it. So we need our insurance that we have.
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    They don't take care of the property.
    I also heard something, please give me enough time, he lost some of his, I'll take his, about this foreclosure. I've heard a lot of excuses on that, why this and why that and why some people are foreclosed. We do have some people probably that do not take care, because they still have that mentality that ''I'm a renter.'' You might have that.
    I'm not going there. I'm going here. When people buy that home, and there's not a mandatory inspection, and they try as hard as they can, when you've got a furnace to replace and you've got a roof to replace, and you've got electrical to replace, you cannot, on what you make, and I've heard this said, I didn't like it, but I listened, because it's true, African-Americans and Hispanics, some of them make pretty good, but some of them don't.
    I got an FHA loan, so I'm not fighting this, it's needed for a whole bunch of homeowners, if you ever want to have that American dream. But don't tell me that you can have the American dream and pay for all the rotten things that are in the house, when you're trying to pay a house note, you're trying to pay a gas bill, you're trying to pay for the furnace, trying to get the windows fixed, trying to pay for the roof. That's another reason why we have a lot of foreclosure.
    When I was here last year, I told you all that at one time, we had the distinction of being on the list that we had more foreclosures than anybody. And I said, well, I'm not bragging, I said, take that back, we're back on the road to having the distinction of having more foreclosures again. I know this is the reason why this is about.
    I'd like to share two stories with you how FHA has failed families in Roseland. Mrs. P, she's a working mother of four, she bought a home with an FHA insured mortgage in Roseland. A few weeks after moving, she was told by a Chicago policeman that the building she had just bought was supposed to be demolished. The building had previously been foreclosed in June 1995, and HUD paid the lender $85,000. HUD then sold the house 3 years later for $26,000, which means the property was vacated for 3 years and represented a loss of a good deal of money to the Government.
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    The realtor then sold the house to Mrs. P. for $122,000. Mrs. P. and her four children were living in the home when the water actually came pouring through the roof, a leak when it rains. Only 30 percent of the electric is working, and all the major systems are not working. Mrs. P. and her children are ill, and she will likely lose this home. I would have given it back to them in the first place.
    Once again, the neighbors will be looking at an open and abandoned HUD home.
    Then we had another one. Mr. S. purchased a home with an FHA loan from a realtor. The family moved in but the house was falling down. He could not afford all the repairs, so he used an extension cord to go get him some heat from next door.
    Everybody on the block is dismayed that the Federal Government would insure a loan on such a house. Houses such as these are a bad investment for the Government and put the health and finances of the family and children in danger.
    I understand that March 29th, HUD will begin having a private company taking care of that abandoned property. While we appreciate this effort on the part of HUD, I have two questions for Secretary Andrew Cuomo. How does privatizing the management of abandoned property keep the building from becoming abandoned in the first place? The best way to address the issue of abandoned HUD homes is to prevent FHA foreclosure in the first place.
    We need to make inspection mandatory on all homes sold on FHA loans and reform the way in which FHA appraisals are done. They'll come by and look at your house up and down the street and say, oh, this house is fine. I've seen this done. And they go around the back and come back around and get in their car and tell somebody, and you know what happens, they go right ahead. These are unscrupulous, it's not HUD, now, and it's not FHA, I didn't say that. This is the unscrupulous realtors and mortgage companies. They'll take you around the corner, around the house and say, this is fine. Then you move in and you turn the heat on in September, your furnace is out.
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    I thank you all for having us, and I hope and pray this is the last time we have to be fussing with HUD. We're tired of the problems, and you all as Congressmen and we as grass roots citizens ought to be able somewhere to sit down in a room and come up with a solution.
    Thank you.
    [The prepared statement of Ms. Jackson follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON [presiding]. Thank you, Ms. Jackson, for your very informative testimony.
    Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Chairman.
    I would like to thank the House Government Reform Committee chairman, Dan Burton, for convening this hearing today that includes a panel on the effectiveness of HUD's programs, especially as its relates in my case to homeless persons.
    It is a pleasure for me to testify in front of the committee that includes Congressman Dennis Kucinich, who has been a tireless advocate on behalf of homeless persons, and the organizations that provide services to them in my community.
    Today I would like to discuss the status of the local continuum of care system for homeless persons in Cleveland, OH, and the surrounding Cuyahoga County. In this context, I will cite a particular problem we have had with the way the Department of Housing and Urban Development has handled a program operated by the Salvation Army, and give a number of recommendations on how this process can be improved.
    The Salvation Army PASS program is one of the most effective programs in Cleveland, and is ranked as the highest priority for renewal funding in the 1998 community supportive housing grant. But because someone checked the wrong box on their application, they were denied funding.
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    As you know, the supportive housing grant is intended to help homeless people move into some degree of stability. It is not an emergency service, it is longer term stability. We have recently learned that HUD is reviewing the Cleveland appeal, and there should be some resolution of this decision in the next few weeks.
    HUD is a valuable caretaker of the appropriations from Congress. But we're just asking that they be more sensitive to the priorities in our community. The Federal dollars extended to PASS and other organizations allowed 200 people over the last 2 years to move into some degree of stability. We recommend a few changes to the HUD funding process which would maintain community oversight of the funding and allow HUD to act as an independent adjudicator to keep some of the local community from over-politicizing the process, or strain from the goal of moving homeless people into stable living arrangements.
    In Cuyahoga County, we currently see about 22,000 homeless people on the streets every year. That's about 3,000 to 5,000 every night. In 1998, according to the U.S. Conference of Mayors report, we saw a 15 percent increase in requests for shelter attributed to the changes in the welfare system and the lack of a livable wage job in the city.
    My agency, which does not receive HUD funding, but represents the interests of homeless people in the funding process, has seen a number of problems with the current process. One of our biggest problems is that the funding for projects that are seeking a renewal of their HUD grant require a greater amount of local community allocation every year, which is stifling our ability to fill some of the gaps in services. In this last year, we have, if we just renewed all the projects that have been funded in the past, it would total about $11.1 million, and we have a pro rata share of the allocation of about $9.3 million.
    There are minor administrative problems with an application that has caused HUD to skip some projects. Many high priority, worthy projects in Cleveland have had to wait 1 or 2 years because of an error in their application. The local community cannot receive technical assistance from HUD on a direct basis. If HUD is a partner in the continuum, then this blackout period is a hardship to the local community.
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    There need to be modest changes in the HUD homeless assistance grant, but we do not believe that H.R. 1073, the HUD block grant proposal, is the answer. We do recommend that renewal funding for programs that support people in permanent housing such as shelter plus care be funded for mainstream housing programs for low income individuals, and not the Stewart B. McKinney funds.
    We also urge you to create a separate NOFA, or urge HUD to create a separate NOFA for renewal applications and a separate one for new and expanding programs. And we urge some modification of Section 103 of the HUD Reform Act to allow better communication between HUD and the municipality in order to improve the application.
    We have a daunting task ahead of us, to assist those families who cannot successfully make the transition from welfare to work, and those who are trying to find housing for low income individuals in an environment of fewer affordable housing opportunities in our cities. HUD must be a partner in this undertaking by creating housing opportunities for homeless people, and should not be relegated to checking to see if boxes were correctly checked on a form.
    Because I probably won't get another chance, I'd like to thank the Members of Congress for the AmeriCorps VISTA program, which we take advantage of. That has had a tremendous impact on our agency and our community.
    Thank you.
    [The prepared statement of Mr. Davis follows:]
    [The official committee record contains additional material here.]

    Mr. BURTON. Thank you, Mr. Davis. We appreciate your being here with us.
    Mr. Czerwinski. Before you speak, the gentleman who spoke earlier from FHA, at the conclusion of our hearing, Mr. Apgar, I wonder if we might be able to have you either come back and say a few words in response to what they've said, or else meet with us back in the lounge. I'd like to have some of these questions answered that they raised. Would you do that?
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    Mr. APGAR. Yes.
    Mr. BURTON. Thank you.
    Mr. Czerwinski.
    Mr. CZERWINSKI. Thank you, Mr. Chairman.
    It's been a long hearing, so I promise to keep my comments very brief.
    Mr. Chairman and members of the committee, we are here today to provide information on GAO's work on homelessness. Up to 600,000 people may be homeless on any given night. The homeless population, once primarily transient males, now includes women, families with children, the mentally ill, and those dependent on drugs and alcohol.
    As a result, addressing the needs of the homeless has grown to a challenge that far exceeds the ability of State, local and private organizations. Recently, several Members of Congress, including you, Mr. Chairman, and you, Mr. Kucinich, have asked GAO to look into how well the Federal Government is helping these State, local and private entities address this need.
    At your request, we've initiated a body of work that I'd like to briefly summarize today. Last month, we completed a study that identified key Federal programs that can potentially serve homeless people. Our findings were 50 programs administered by 8 Federal agencies can serve the homeless. These include programs that are specifically targeted at the homeless, and those that are generally available to low income populations which include the homeless.
    Over $1.2 billion was spent in 1997 on programs that serve the homeless. About $215 billion went to general programs that include the homeless in the types of services they provide. The types of services they provide include housing, but it's much more than housing, it's health care, training, et cetera.
    We concluded that coordination is needed if these 50 programs are to work effectively to achieve what they're supposed to. We also found there's a need for better program evaluation, especially common outcome measures among the eight Federal agencies.
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    Finally, we believe that Federal agencies can make better use of the framework the Government Performance and Results Act provides for cross-cutting coordination and evaluation.
    Before I conclude my statement, Mr. Chairman, I'd like to spend a couple of minutes summarizing reviews we have planned or ongoing. First, this summer we plan to issue a report that complements the study I've just described of Federal programs. This report will provide case studies on some of the more successful efforts of States and localities. Specifically, we'll focus on how they coordinate their programs with one another and the Federal Government, and the use of outcome measures to improve their management of programs.
    Also this summer we plan to issue a report on HUD's Supportive Housing Program. This program recognizes that in addition to housing, many homeless people need services such as mental health, substance abuse, and employment assistance. Our review of over 1,200 providers will, among other things, show the types of housing and other services provided, the types of sources of funding—Federal and non-Federal—and the importance that the providers at the grass roots level place on Supportive Housing Programs from HUD.
    I'd like to close by talking about a study that I know has a special interest to you, Mr. Chairman, and Mr. Kucinich. As I've just described, there's a myriad of Federal programs that are supposed to partner with the State, local and private providers.
    Many of the grass roots providers are very dependent on Federal funds. At your request, later this year we plan to study how well the Federal, State, local and private priorities mesh, and how closely the Federal funding matches the priorities that are set at the grass roots level.
    This concludes my statement. We'll be pleased to answer any questions you may have.
    [The prepared statement of Mr. Czerwinski follows:]
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    [The official committee record contains additional material here.]

    Mr. BURTON. Thank you, Mr. Czerwinski.
    Mr. Edwards, I missed part of your testimony. You're from Indianapolis?
    Mr. EDWARDS. Yes, correct.
    Mr. BURTON. You said that a home that FHA had taken possession of sat vacant for a long time, then it caught fire and burned down?
    Mr. EDWARDS. Yes.
    Mr. BURTON. How long did it sit vacant?
    Mr. EDWARDS. It sat vacant, even after the fire, almost 3 years. It was a real mystery for almost the first year as to who owned the house. Several letters were written to the city of Indianapolis. I was very uneducated on how to go about finding it, there was no marking on the house, there was no information on the house. I had no clue who to contact.
    Mr. BURTON. Did you ever see anybody from HUD out there, or anybody from FHA?
    Mr. EDWARDS. No. I mean, I didn't watch the house continuously, but no, I didn't.
    Mr. BURTON. Did you ever see any contractor come by and do any work on the house?
    Mr. EDWARDS. Yes, after we sent several letters to the mayor of Indianapolis.
    Mr. BURTON. How long was that?
    Mr. EDWARDS. It took about 9 weeks, after a battery of letters went to Mayor Goldsmith.
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    Mr. BURTON. From all over the neighborhood?
    Mr. EDWARDS. Yes, and phone calls.
    Mr. BURTON. Mayor Goldsmith apparently got hold of FHA?
    Mr. EDWARDS. The city of Indianapolis claimed the property the first time.
    Mr. BURTON. So it wasn't FHA? It was the city of Indianapolis?
    Mr. EDWARDS. Correct.
    Mr. BURTON. But it was an FHA house?
    Mr. EDWARDS. Correct.
    Mr. BURTON. Where is this located?
    Mr. EDWARDS. On 16th Street, on the east side of Indianapolis.
    Mr. BURTON. How far east?
    Mr. EDWARDS. It's in the 2800 block.
    Mr. BURTON. That's not a bad area out there. I know where that is.
    Mr. EDWARDS. It's right behind me.
    Mr. BURTON. And it sat there for 9 weeks, you got the city of Indianapolis to help you do something, but FHA didn't do anything?
    Mr. EDWARDS. Correct. The neighbors pitched in together and mowed the yard after they cleaned the property up, for a whole year, because once again, had we not done that, we would have had grass that was waist high.
    Mr. BURTON. But it did sit vacant, even after the mayor got somebody out there?
    Mr. EDWARDS. Correct.
    Mr. BURTON. For how long?
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    Mr. EDWARDS. About a year and a half.
    Mr. BURTON. A year and a half?
    Mr. EDWARDS. Yes.
    Mr. BURTON. Did FHA ever come out, that you know?
    Mr. EDWARDS. They came out. We held a press conference last year, and shortly after we held that press conference, they paid some attention to the house at that point.
    Mr. BURTON. What did they do?
    Mr. EDWARDS. Boarded it up and secured it.
    Mr. BURTON. After a year and a half, they boarded it up?
    Mr. EDWARDS. Correct. The house had been boarded up prior, too, right after it became vacant, it had been boarded up.
    Mr. BURTON. By whom?
    Mr. EDWARDS. I'm not sure exactly whom. All I know is that there were boards in place. They had been removed, however. An abandoned property tends to draw the worst of our children and vandals, however.
    Mr. BURTON. But it sat a year and a half before it was re-boarded up by FHA?
    Mr. EDWARDS. Yes, longer than that, actually.
    Mr. BURTON. Did any other neighbors see FHA or that they had people out there?
    Mr. EDWARDS. To my knowledge, no.
    Mr. BURTON. Did the property improve in quality or did it deteriorate?
    Mr. EDWARDS. No, the house caught on fire. Actually, it was being used, we had made several complaints to our local police department about it being used in the middle of the night for people, we're not quite sure what they were doing. We were told that it was actually being used for squatters, I guess squatters, people that would go in in the middle of the night. It was cold, and they would start a fire in the middle of the room and do their drugs, because there was paraphernalia inside.
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    Mr. BURTON. After the property burned down, the claim has not yet been settled?
    Mr. EDWARDS. The claim of the damage of the property owners to each side of the house, particularly the house to the east side of the house, the houses are in very close proximity to the abandoned HUD house that caught on fire.
    Mr. BURTON. They were damaged by the fire, too?
    Mr. EDWARDS. Right. There was smoke damage and water damage to that property, as well as some exterior siding and water damage, that has to this day not been paid.
    Mr. BURTON. Has anybody made a claim against FHA or asked FHA about that?
    Mr. EDWARDS. I'm sorry, sir?
    Mr. BURTON. Has FHA been contacted?
    Mr. EDWARDS. Oh, yes, they have.
    Mr. BURTON. Have they responded?
    Mr. EDWARDS. To my knowledge they have responded on many occasions. They want, from my understanding, they want the homeowners to do the out of pocket expenses up front and they'll be reimbursed. That was one understanding of it. Another one was they should file on their own homeowners, which to me is ludicrous. That's a mark against your homeowners. Why should they have to take that? Why should their homeowners be responsible for something that HUD should be responsible for?
    Mr. BURTON. They would reimburse the insurance company, is what they're saying.
    Mr. EDWARDS. Right.
    Mr. BURTON. And how long has it gone unpaid?
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    Mr. EDWARDS. The fire happened November 1997.
    Mr. BURTON. In 1997?
    Mr. EDWARDS. Yes, 1997.
    Mr. BURTON. So it's been almost a year and a half.
    Mr. EDWARDS. Correct. We had Charles Gardner, the regional director of HUD, in Indianapolis in July, and got a commitment from him that he would personally process the claim. Still to this day we have not seen a penny.
    Mr. BURTON. Ms. Jackson, we're paying $29 a day to maintain these homes, and you and your neighbors have been doing the work?
    Ms. JACKSON. Right.
    Mr. BURTON. Who else has been helping maintain them? Has FHA helped?
    Ms. JACKSON. Please, sir, no, sir.
    Mr. BURTON. Have they been paying you $29 a day?
    Ms. JACKSON. Not a penny. We had a meeting at NTIC about 4 or 5 years ago and talked to the real estate. I said, you don't want to do it, you're not sending anybody out. My and my girlfriend, she uses the gas mower, I pick up the trash and sweep, I'm kind of senior, and I can't do that. She has the snowblower, and I do all that.
    We keep it clean. But I did all the nailing. So I told the real estate person who was taking care of it. That's when he told me he was getting $43 a day. I said, well, you can give me $15 a week and I'll still cut the grass and so on. So my girlfriend said, no, you give me the $15.
    Mr. BURTON. Was the real estate man that you're talking about, was he being paid by HUD?
    Ms. JACKSON. By HUD. You said $29, he said $43.
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    Mr. BURTON. And he didn't do anything?
    Ms. JACKSON. You weren't there, were you, sir?
    Mr. BURTON. No, I wasn't there. And how long was this, about 3 years?
    Ms. JACKSON. Three years.
    Mr. BURTON. You took care of it for nothing and he was getting $43 per day?
    Mr. BURTON. Per day. Sounds like a heck of a deal for him.
    Ms. JACKSON. Isn't that a kick in the foot.
    Mr. BURTON. That's a kick someplace else. Did anybody else ever come out there besides this fellow?
    Ms. JACKSON. No. You know when they finally came, we had a, HUD came in the neighborhood, one of the ladies, she came out and was looking at property. She came by and saw it, and I said, I need to buy this house, because it's nice, I keep it up for you. When you're getting ready to sell it, sell it to me. She said, well, see the real estate man. So I called him, he said, you don't qualify, so I said, OK. That took care of that.
    Mr. BURTON. Let me just ask you a couple more questions, then I'll yield to my friend Mr. Kucinich. I appreciate you inviting some of your constituents up here to talk about their problems.
    When Mayor Guiliani of New York came and testified, he talked about what he called the broken window theory. He said if one window is broken in a neighborhood and nobody fixes it, then other windows get broken out and eventually the entire neighborhood starts to run down. Did you folks find that to be the case?
    Ms. JACKSON. Sure. That's the reason, if you don't get up, I can say this, it's my problem, I don't have nothing to do with it. But, sir, I would be lying. Because it has something to do with me. It affects me.
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    Mr. BURTON. It affects everybody in the neighborhood.
    Ms. JACKSON. And if it affects me, it affects her and him and what have you. So we all have to go together.
    Mr. BURTON. Let me just say, Mr. Waxman, in one of his comments, disputed the initial findings of HUD's Inspectors General that the contractors are not doing the job. He was evidently saying that the contractors were doing the job. Everything you guys are telling us backs up what the IG said, that they weren't doing their job.
    Ms. JACKSON. I was almost to have a fit or something in this chair while he was talking. Because I was waiting on him. All of you up there so very nice, I was waiting on him. He's gone, but I had something for him, I'm sorry.
    Mr. BURTON. He's still here, I think.
    Ms. JACKSON. Well, bring him on. Bring him on.
    Mr. BURTON. Excuse me for laughing, Ms. Jackson. You inspire great humor in me.
    Anybody else have a comment? Ms. Cincotta.
    Ms. CINCOTTA. The difference, like when Grace was talking to you about the house next door to her in 20 years has had 9 FHA mortgages, all the people evicted, when she tried to buy it, they said, oh you can't, you own one, we only help homeowners. The only reason that building even existed enough that finally NHS of Chicago could get it and rehab it is because she took care of it.
    If you can imagine, nine FHA homeowners, we have helped home ownership. The frustration of the selling pitch that we're helping people, well, people, their lives, the community, are destroyed. We had a press conference about a year ago to dramatize what was happening. This one was one that HUD said they knew, at that time they had about an inch or so only. It was locked, the rest of the street was taken care of. We go to have the press conference.
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    An older woman poked me on the shoulder and said, I live across the alley, and I've got to tell you what happened last night. The back is wide open, as you know. Three guys grabbed a 12 year old there and raped her.
    You hear this every minute. Now, that was one they said they owned. They're paying somebody for it. And not only are they losing a great building, but the other things that happen in that building, like the rape of this young woman, like other things that happen over and over again. They want to pretend it's not their problem.
    The sad part is they represent us and we're paying their salaries. And they're still messing us over.
    Mr. BURTON. We're going to ask the gentleman from HUD to respond, Mr. Apgar, in just a minute.
    Mr. Kucinich.
    Mr. KUCINICH. Thank you very much, Mr. Chairman, and I again want to thank the Chair for calling this hearing. I think it would be important for the panelists to know that I served four terms in the Cleveland City Council, working at a neighborhood level. I'm very familiar with the problems people have to deal with on a day to day basis.
    Whether the problems are in connection with HUD or some other agency, I know how difficult it can be. I would sit there as a member of city council and take anywhere from 50 to 70 calls a day about concerns that people would have in a community. My purpose in this Congress is to try to keep the Congress focused on community based things.
    Ms. Cincotta, as I mentioned earlier, years ago when the Community Reinvestment Act first came out, I know your effort in that. You also remember Monsignor Boroni and the effort that was done then to try to improve housing for people. We worked together successfully on a project in Cleveland, which I'm proud to say stands today as one of the most successful senior citizen projects that's been built in our community.
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    I'm very sympathetic to the concerns that have been expressed here. I think some of the things that have been said, I'd like to point out, I think when Mr. Edwards testifies that HUD should be proactive and that HUD should listen to what people in the community have to say, I think it's very valuable. I just mention this to the representatives of HUD who are here.
    I think it's very valuable to open up lines of communication even better than they have been, not from a defensive posture. Because certainly, you're on the defensive, but it doesn't need to be that way. There needs to be cooperative communication here. I think that's what will make the system work better.
    I've seen the same problems that you speak of for many years. Ms. Jackson, you probably remember the Model Cities program back years ago that ended up being a disaster, despite the best intentions of the program.
    So I would like to point out that that testimony I felt was very important, as well as the citation of the concerns of Gale Cincotta about just what will the privatization function of management and maintenance of the single family inventory do or mean. Will it mean anything any better? That's something that remains to be seen, for sure.
    I know that as you say, it might be hard to imagine anyone doing a worse job. But we want to make sure that we don't promote structures that basically take it out of public access and control. I think we have to be impressed, Mr. Chairman, at this testimony, because it's the testimony of people who don't just live in the communities, they're the builders of the communities, they're the protectors of communities.
    But I also think that we need to shift the debate in the sense of this process here, admittedly here, is one which sets up kind of a contest between the people and HUD. We need to find a way to close that, we really do. HUD obviously has much work to do in improving its communication.
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    When you look at the size of any bureaucracy, any bureaucracy can have failings in that regard, any one of them. I've seen it here for the time I've been in Congress, I've seen it when I was at City Hall. But it's not adequate when you come here with these stories and talk about the difficulties you're having. That's not acceptable.
    Now, Mr. Davis, I had the good fortune of working with him on some homeless problems. Frankly, we were told for a while that we couldn't do anything about it. I'm a Member of Congress and I was told that. We worked very hard and kept pressing our case. Finally, we got the attention of HUD.
    The other thing that I'd like to point out to you is that I remember, as a member of city council, some of the other areas that we pursued to get help while we were trying to shake up the Federal Government. One was trying to make sure the City Hall itself kept an active list of the properties and kept inspecting them and issuing reports. I found that could be helpful at times.
    But I salute your efforts to try to keep neighborhoods clean, to try to keep them livable, to try to make sure that Government is responsive. Because if we can't assure that Government is responsive, we're not doing the right thing by the people in being here.
    So I take your participation here with the utmost gravity and seriousness, because this is the reason why I'm in the Congress, and I'm sure it's the same for the Chair. That's why I appreciated his effort in moving forward to get some answers.
    And going back to HUD, let's find some ways to improve this and talk to the people and look at the systemic things that are revealed by what they're saying. Because I really believe, one final comment, Ms. Cincotta, I really believe that no matter how bad things may appear here that we can make them better, that we can change them. But it's only with our efforts.
    So I thank you for being here, because your testimony is part of our necessary efforts to improve it.
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    Mr. BURTON. If the gentleman will yield, he's on the Democrat side, I'm on the Republican side. Let me just say that I think if we talk to Mr. Cuomo about the contracts that are going to be let to the contractors who will be overseeing these properties, if we could jointly talk to him about imposing not only stringent requirements on them, making sure they do their job, but also penalties if they don't do their job, in addition to losing their contracts, I think that might have a real positive impact.
    The communication you're talking about should be not just from the bureaucracy and the people that work over there, but it should be those contractors and those people that are supposed to be out there on the firing line taking care of these properties.
    Mr. KUCINICH. The chairman makes a good point. I think what we've heard here today, Mr. Chairman, in conclusion, is we have contractors who are not doing their job. We have plenty of testimony on that. And we have the Department attempting to defend itself saying, well, some contractors are doing their job.
    It's the job of this committee to try to make Government work better. That's our charge, that's our challenge as well. I look forward to continuing to work with the chairman so that we can make Government work better for you.
4Burton. We'll see if we can draft a joint letter to Mr. Cuomo.
    Mr. KUCINICH. I'd be glad to work with you, and also it would be good to have our ranking member involved, Mr. Waxman.
    Mr. BURTON. If I can ever talk to him.
    Mr. Ose.
    Ms. CINCOTTA. Send him to some of our neighborhoods and we'll show him around.
    Ms. JACKSON. That's it.
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    Ms. CINCOTTA. And maybe put him in the basement of one of these vacant buildings for a week and see how he comes out.
    Mr. KUCINICH. Wait, if the gentleman would yield, and the gentlelady would yield, just let me state something. I happen to believe there's not a finer Member of the U.S. Congress than Mr. Waxman. I'm not worthy to hold his briefing books, but I will tell you this. It's experience that you have shared that all of us are going to take back and talk about what we need to do. I think it's always good as we approach these things, and the Chair knows I really believe in this, never to personalize our observations. Because when we do that, we really fall short in the mark of trying to get things done.
    Ms. JACKSON. Please? May I say just one thing? I didn't mean to say that we wouldn't have gotten along. What we need to do is this, and I've had this work before, when we had one of the worst things in the world, when we were fighting everybody, because everybody was doing the neighborhoods and the communities bad. You've got to sit down with a clear head. You can't be mad all the time, and we can't always be ready to get one up on the other one.
    We've got to sit down and reason together. We don't need to always bring Congress in. We can have some of you all, and have some of us. We sit down and clear it up and have a good solution. Because we have to have a solution about this, this is 30 years old. Thank you.
    Mr. OSE. Thank you, Mr. Chairman. As with Mr. Kucinich, I too am privileged to serve on this committee. And as compared with Mr. Kucinich, I have the privilege on my side of working with the distinguished chairman from Indiana, Mr. Burton, whose briefing books I daresay I am probably not qualified to carry, either. But we do learn day by day and I appreciate the opportunity to be here.
    I'm especially interested in any of your experiences with respect to the base re-use and the homeless communities' involvement in that process. Have any of you been involved in that? Military bases that have been closed and subject for re-use, have any of you been involved in the process of utilizing all or a portion of those bases for homeless or neighborhood services or things of that nature?
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    Mr. DAVIS. We've been offered a base in northeast Ohio, but it was so distant from the community that it would have been impossible to transport individuals and get them to services. It was too remote.
    Mr. OSE. Absent the geographic distance, what feedback can you provide us in terms of the process by which bases scheduled for closing are being offered for use by organizations such as the four of you represent?
    Mr. DAVIS. Our only experience is the one official extending an invitation to buy a property, but it was so remote. We've had no other experience besides that.
    Mr. OSE. Mr. Czerwinski, how about you?
    Mr. CZERWINSKI. Mr. Ose, we haven't looked at that program.
    Mr. OSE. Ms. Cincotta.
    Ms. CINCOTTA. What we found, we work with a group, Coalition for the Homeless, in Chicago. A lot of the homeless are Vietnam vets. There had been a lot of veterans hospitals closed in the area, closed off even to be able to take care of them before they became homeless. It seems like that one area of folks, like Vietnam vets, nobody wanted to pretend we had a war in Vietnam. My husband and I had two kids over there.
    They closed hospitals that should be servicing them even before they get homeless. They could be servicing them close in, right now, and rehabilitate them. It's just, nobody cares.
    Mr. OSE. That's not a housing issue, that's a job training or medical services issue.
    Ms. CINCOTTA. But with the hospital, there's rooms, there's beds, there's meeting areas. There are ways to do a lot of things. It's just not—nobody cares.
    Mr. OSE. This is one of those unique circumstances where a Congressman doesn't have anything to say. Mr. Chairman, I yield back.
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    Mr. BURTON. That is rare.
    Mr. Allen, you are recognized.
    Mr. ALLEN. Thank you, Mr. Chairman, and I want to thank you for holding these hearings. This is a very important topic to millions of people across this country, and I am pleased to be part of this discussion.
    Most of my questions are probably for Mr. Czerwinski. But if others want to join in after he's had a chance to speak, that will be fine.
    Just a little bit of background—in Maine, we had applications in for the renewal of several homeless programs. At the end of the day, after an initial denial, some of those programs were renewed. But the Shelter Plus Care program for both the State and the city of Portland were not renewed.
    What's interesting is that there were different perspectives on this. My understanding is when you look back at the entire way this was done, HUD's scoring resulted in five of the six New England States receiving less funds in 1999 than 1998, while the eight western States each received more funds. Three of the largest funding decreases occurred in New England.
    It also showed that the 20 poorest States, with 27 percent of the population, received only 14 percent of the funds. If you look not in terms of poverty but in terms of how heavily populated a State is, the Nation's 20 least populated States—of which Maine is of course one—home to 10 percent of the country's population received only 5 percent of the homeless funding.
    In Maine, the applications for both the city of Portland and the State of Maine were done by the same person who had done them year after year. What was interesting is that suddenly, instead of being praised, we didn't even qualify for funding. So the question arises, is there a problem with consistency in scoring? As this program has become more competitive, are we evaluating the paper and not the program?
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    I understand the pressures on HUD, I understand—as the number of applications grows, and the funding doesn't keep pace—how applications that have been approved in the past might not be considered in the future.
    Here are some issues. First, three questions. Is there a way to assure more consistency in scoring year to year? Second, is there some way to recognize geographic need in this process, so that we don't have a purely competitive system, which can, as happened in Maine, suddenly leave a State without any funds at all? And third, I understand that a suggestion was made to perhaps consider separating renewal applications for homeless funding from new applications for homeless funding. Is this reasonable?
    Mr. Czerwinski, I'd be interested in your reaction to those three questions.
    Mr. CZERWINSKI. They're very good questions. Unfortunately, the answer to the homeless situation is not a simple one.
    What we are trying to do is first of all, just get a handle on the Federal programs that are out there, and then look at the interaction between the Federal Government and the State and locals. The kinds of issues you raise are some of those that are coming up quite a bit as anecdotes in our filed work. The local governments have their priorities, private organizations have theirs, but then there's a mismatch between what we're hearing from them and the Federal Government.
    What we're planning to do, at the request of Mr. Kucinich and Chairman Burton, is to actually go out and pull a sample of applications from the local areas. We will then match the priorities they have set with those set by the Federal Government. In that way we will try to come up with the answers to the very questions you asked. If Mr. Burton and Kucinich are willing, we would be quite glad to add you to that request and do that work for you.
    Mr. ALLEN. We would like to be added to that request list because Federal homeless funding has been critical for people. The State and city just fell off a cliff this year, suddenly there was no money where there had been money before.
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    I think whether it's a matter of regulations, whether it's a matter of legislation, it's an impact that we probably don't want to see. We want to maintain some competition, but we don't want people to fall off a cliff when they've been running a highly recommended program for years.
    Mr. CZERWINSKI. When you talk about competitive funding, you've touched on the paradox of the issue. That is, people want to have competitive funding for their projects, but then again, they want some consistency. They know they can get funding consistently from year to year with the formula grant programs.
    But the concern of the homeless advocates is that with formula grants, housing and other kinds of services to the homeless sometimes may fall right off the table. It's an all or none type of situation under two different scenarios. So what you're talking about is probably the most critical issue.
    Mr. ALLEN. Thank you, Mr. Chairman.
    Mr. BURTON. Thank you very much.
    Let me thank the panel very much for being here. You've been very informative. I wish I could have heard everything you had to say, unfortunately I had to go to another meeting temporarily. You've not only been informative and helpful, but you've been entertaining, Ms. Jackson. You could make it big as a standup comedienne. [Laughter.]
    I thank you very much, we're going to take everything that you say to heart, and I'd like to have Mr. Apgar come back to the table so I and my colleagues can briefly ask him some questions.
    Then we'll adjourn and let everybody go get a sandwich or something.
    Mr. Apgar, you're still under oath, as you know.
    Mr. APGAR. Yes.
    Mr. BURTON. First of all, Ms. Jackson said that she has taken care of an FHA house in Chicago for 3 years, and has never seen anyone from FHA go near the house. She's been out there taking care of the house. I think she said she saw a fellow come by that said he was getting $43 a day instead of the $29 a day.
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    Have you terminated the contracts of any contractors in Chicago?
    Mr. APGAR. Yes, we have.
    Mr. BURTON. You did?
    Mr. APGAR. Yes.
    Mr. BURTON. When did you do that?
    Mr. APGAR. Last year we terminated some. I'd have to get the exact time. But we have terminated some contracts, including in Chicago.
    Mr. BURTON. Do you know if one that you terminated was the gentleman that was in the neighborhood where she is?
    Mr. APGAR. I'm not sure of that. If he said to her that he was getting paid $43 a day, that has to be a misstatement on his part. Contractors under the current system are paid on a reimbursable basis. So he wouldn't have anything to reimburse against.
    In the new system, contractors are only paid for selling the properties, so that's what gives them the incentives to maintain and process the mortgages.
    Mr. BURTON. Could you do me a big favor and check and see if that gentleman is still a contractor for you in her neighborhood? I'd like to know.
    Mr. APGAR. OK.
    Mr. BURTON. Are you aware of any other problems with contractors in Chicago? You said you've fired a couple of them. Are there any others you have problems with?
    Mr. APGAR. Reviewing our contractors, I don't know of any other problems at this stage. We routinely tell contractors if they're not doing their job, if we get a citizen complaint, we'll notify the contractor and get them to go out and fix the problem.
    Mr. BURTON. If you could give me an update on the Chicago area and maybe Indianapolis as well, I'd really appreciate it. That would give us a chance to take those two as examples and spot check them.
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    Mr. Edwards said that an FHA house in Indianapolis sat vacant for a year and a half and then burned to the ground. He said they wrote letters, a lot of letters to the FHA, but the only ones who came out to look at the house was the city of Indianapolis. Do you know if the contractor in Indianapolis is still there and doing his job?
    Mr. APGAR. I don't know about that situation. I know that Mr. Edwards talked with our HUD staff about this matter last summer. And based on that, our HUD staff took action, including the items that Mr. Edwards mentioned, boarding up the property, securing it as best they could.
    Mr. BURTON. And it burned to the ground?
    Mr. APGAR. I don't believe they said it caught fire, they said they had to board it back up. So I believe from his testimony, I'm not familiar with the case, the property must be still standing.
    Mr. BURTON. It burned down, didn't it?
    Mr. EDWARDS. It did catch on fire, and it was deemed unsafe. I was told it was salvaged to some poor guy who couldn't fix it up, another nightmare.
    Mr. BURTON. So it's just a shell.
    Mr. EDWARDS. Yes.
    Mr. APGAR. Just a shell, yes.
    Mr. BURTON. What about the people next door there, and their compensation for the damages to their houses?
    Mr. APGAR. There was a discussion about that. It's my understanding we are processing that claim.
    Mr. BURTON. Would you check on that and let me know as well?
    Mr. APGAR. Sure.
    Mr. BURTON. And along with that last question I asked, I'd like to know why this claim since 1997 has not been paid. It's almost a year and a half later. So if you could give me an answer on that, too.
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    Ms. Cincotta said that a young girl was raped on a property that was vacant in her neighborhood. Have you yourself gone to any of these neighborhoods to see for yourself how bad the problem is?
    Mr. APGAR. I've been in HUD foreclosed properties, yes.
    Mr. BURTON. Well, I'd like to have a report on Ms. Cincotta's neighborhood and that house as well, where that girl was raped. I think that's important, if you could take a look at that.
    Let me ask you one final question, then I'll let you go and I'll go vote, because I've got a bunch of votes coming up. Suppose I'm a homeowner like Ms. Jackson, and I'm living next door to one of the neglected HUD properties. Can you walk me through the specific steps that I need to go through to get HUD to take action? These people who testified said they've called, they've written letters and everything else, and they had problems. Just tell me, what's the quickest way to get action from HUD when you have that kind of a problem?
    Mr. APGAR. They should call the HUD office in their area and get the name of the contractor. That's one approach. We have established in many neighborhoods neighborhood watch systems, in which cooperation between us and the police department, they're able to get immediate attention.
    In most instances, there are HUD signs up. I think the IG testified there were well over 90 percent of the properties have signs which identify who to call. And in this select group of communities where we're working cooperatively with the police officers, we have a hotline to the local police department where they can call.
    Mr. BURTON. I want to thank you very much, Mr. Apgar, for being with us. We'll be in touch with you and I appreciate the answers to the questions. Give my regards to Mr. Cuomo and tell him that we would like to work with you to make sure these problems are solved as quickly as possible. Toward that end, Mr. Kucinich and I will probably write a couple of notes over to you.
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    Mr. APGAR. Right. Well, obviously I stayed to hear the testimony because I think it is important to work with the community groups, as we have in the past. Quite frankly, here we have a significant disagreement with methods of addressing this problem, with the group from Chicago. They have repeatedly asked us to do things, which among other things, we've not been able to get congressional authority for.
    But in terms of the diagnosis of the problem, we appreciate the fact that quickly disposing of these properties is in everybody's interest.
    Mr. BURTON. I think one of the biggest problems, and if you could convey this back again to Mr. Cuomo, is it's extremely important that you have good contractors. If they're not doing the job when you spot check, fire them or fine them, whatever it takes, to make sure you get competent people on a job. I think if you did that, that would go a long way toward solving the problem.
    Mr. APGAR. Thank you.
    Mr. BURTON. Thank you, sir.
    We stand adjourned.
    [Whereupon, at 4:13 p.m., the committee was adjourned, to reconvene at the call of the Chair.]