SPEAKERS CONTENTS INSERTS
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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
2000
HUD LOSING $1 MILLION PER DAY—PROMISED ''REFORMS'' SLOW IN COMING
HEARING
before the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
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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
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York
CONSTANCE A. MORELLA, Maryland
CHRISTOPHER SHAYS, Connecticut
ILEANA ROS-LEHTINEN, Florida
JOHN M. MCHUGH, New York
STEPHEN HORN, California
JOHN L. MICA, Florida
THOMAS M. DAVIS, Virginia
DAVID M. MCINTOSH, Indiana
MARK E. SOUDER, Indiana
JOE SCARBOROUGH, Florida
STEVEN C. LATOURETTE, Ohio
MARSHALL ''MARK'' SANFORD, South Carolina
BOB BARR, Georgia
DAN MILLER, Florida
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ASA HUTCHINSON, Arkansas
LEE TERRY, Nebraska
JUDY BIGGERT, Illinois
GREG WALDEN, Oregon
DOUG OSE, California
PAUL RYAN, Wisconsin
JOHN T. DOOLITTLE, California
HELEN CHENOWETH, Idaho
HENRY A. WAXMAN, California
TOM LANTOS, California
ROBERT E. WISE, Jr., West Virginia
MAJOR R. OWENS, New York
EDOLPHUS TOWNS, New York
PAUL E. KANJORSKI, Pennsylvania
PATSY T. MINK, Hawaii
CAROLYN B. MALONEY, New York
ELEANOR HOLMES NORTON, Washington, DC
CHAKA FATTAH, Pennsylvania
ELIJAH E. CUMMINGS, Maryland
DENNIS J. KUCINICH, Ohio
ROD R. BLAGOJEVICH, Illinois
DANNY K. DAVIS, Illinois
JOHN F. TIERNEY, Massachusetts
JIM TURNER, Texas
THOMAS H. ALLEN, Maine
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HAROLD E. FORD, Jr., Tennessee
JANICE D. SCHAKOWSKY, Illinois
———
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
C O N T E N T S
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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HUD LOSING $1 MILLION PER DAY—PROMISED ''REFORMS'' SLOW IN COMING
TUESDAY, MARCH 23, 1999
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:]
INSERT OFFSET FOLIOS 1 TO 2 HERE
[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:]
INSERT OFFSET FOLIOS 3 HERE
[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:]
INSERT OFFSET FOLIOS 4 TO 7 HERE
[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.
STATEMENT OF NANCY H. COOPER, DISTRICT INSPECTOR GENERAL, SOUTHEAST/CARIBBEAN DISTRICT, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
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:]
INSERT OFFSET FOLIOS 8 TO 16 HERE
[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:]
INSERT OFFSET FOLIOS 17 TO 76 HERE
[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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INSERT OFFSET FOLIOS 116 HERE
[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.
STATEMENT OF WILLIAM APGAR, ASSISTANT SECRETARY FOR HOUSING, FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
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:]
INSERT OFFSET FOLIOS 77 TO 88 HERE
[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.