HUD Testimony

Chairman Reed, Ranking Member Allard, distinguished Members of the Subcommittee, thank you for inviting me to testify on the impending expiration of the Office of Multifamily Housing Assistance Restructuring. As you know, the restructuring authority and the authorization for OMHAR expires on September 30, as part of "The Multifamily Assisted Housing Reform and Affordability Act." I am here this morning to discuss the Administration's position concerning the future of OMHAR and its legislative authorities.

Before I begin, let me express my appreciation to this Committee for its support of my confirmation as Assistant Secretary for Housing-FHA Commissioner. It is an honor to appear before you today.

I am reminded that the first question from Senator Sarbanes at my confirmation hearing concerned the "mark-to-market" program. Chairman Reed also raised the issue of mark-to-market during the hearing. So it is fitting that my first hearing before this Subcommittee should be on the same subject.

Mr. Chairman, the challenges of HUD's multifamily assisted inventory involve some of the most complex issues that the Department has had to address. I first became involved in this subject 15 years ago as a member of the Hills-Reuss task force. Congress passed legislation in 1987 and again in 1990, but the problems remained unresolved. During the mid-1990s, Congress wrestled for three years with the mark-to-market concept before finally passing "The Multifamily Assisted Housing Reform and Affordability Act" in 1997. The process for dealing with these properties has taken longer than originally anticipated, for a variety of reasons, so we now need to revisit this issue yet again.

Since assuming the position of Commissioner, I have discussed with Secretary Martinez the future of these authorities and the implications for public policy, particularly with regard to the residents of these properties. Discussions within the Administration are still ongoing, and will necessarily involve the Office of Management and Budget, among others, before a final recommendation is made. However, HUD's FY2002 budget proposal submitted to Congress in April acknowledged the Administration's intention to seek an extension of the debt restructuring authority. In his testimony before the Senate Appropriations Subcommittee last week, Secretary Martinez stated that there continues to be a need for this program, and that HUD would be seeking an extension of the restructuring tools.

There appears to be general support for an extension of the restructuring authority beyond the current scheduled expiration date. The Administration will be submitting legislative recommendations on how best to proceed with that extension.

OMHAR estimates that over 2,500 Section 8 properties have contracts that expire after this fiscal year; approximately 1,300 are estimated by OMHAR to be above market. There is a continuing statutory requirement to mark down rents to market levels. Without the mortgage restructuring tools, it seems likely that many of these properties would default on the mortgages. This would expose FHA to significant claims and place the housing of thousands of families in jeopardy.

The future of the OMHAR office itself has generated a greater level of discussion than the extension of the restructuring authorities. The first few years of OMHAR were less productive than had been hoped for a variety of reasons. In large part, the first two years were spent establishing program infrastructure and assigning the properties to the participating administrative entities (PAEs) for restructuring actions.

OMHAR did not complete any restructurings until the fourth quarter of 1999, some two years after it was created. These first completions were rent restructurings, without any changes in the mortgage amount. The first full mortgage restructuring did not occur until the second quarter of 2000.

Since then, however, there has been significant progress. OMHAR completed 423 rent restructurings by the end of 2000 and has completed another 63 through May of this year. More importantly, the pace of full mortgage restructurings has picked up sharply this year. There were 30 full mortgage restructurings in 2000, and another 77 so far in 2001. Further, I understand that an additional 75 full restructurings are scheduled for closing in the next 60 days. Since full mortgage restructurings are more complicated, this is encouraging. But clearly more needs to be done, and we want to ensure that this important work is allowed to continue.

In his Appropriations Subcommittee testimony last week, Secretary Martinez also discussed the future organizational structure of OMHAR. He stated that the Department expects to request a three-year extension for OMHAR with two changes: 1) that the office would no longer be headed by a Presidential appointee, 2) and that OMHAR would fall under the authority of the Office of Housing.

Accordingly, we may recommend to Congress the continuation of a separate OMHAR office dedicated to this work, but under the authority of the FHA Commissioner, rather than maintaining its current position as an independent office. This move would simplify issues of jurisdiction and coordination. At present, the Office of Housing is responsible for subsidy payments and the management of insurance contracts, while at the same time OMHAR is responsible for restructuring them for the future. The same projects are under the jurisdiction of two separate, equal offices, each reporting to the Secretary simultaneously. With OMHAR under the authority of the Commissioner, this anomalous situation would no longer exist. In addition, this proposed structure would facilitate coordination between OMHAR and the 18 Multifamily Hubs, which are located throughout the country and have detailed information and knowledge on any particular property in the field. We believe the completion of OMHAR's work would be expedited by a simpler administrative structure.

At the same time, we certainly recognize the critical nature of the work under OMHAR, and would have every expectation that the Office would be fully dedicated to that work and only that work. Having come halfway through the mark-to-market process, we intend to see it through to completion.

In addition, since OMHAR would be an entity reporting to the Commissioner, we do not expect to recommend reauthorization of the position of OMHAR Director as one requiring appointment by the President and confirmation by the Senate. This would avoid a circumstance where one Presidential appointee reports to another Presidential appointee of equivalent rank.

We understand that the bulk - almost two thirds - of the 1,300 anticipated properties subject to debt restructuring have contracts that expire in the next two fiscal years. With an average processing time of approximately 13 months following contract expiration, we believe an extension of three years beyond FY2001 is appropriate. By 2004, we should all be able to judge whether any further extension is needed, or whether the small remaining workload can be handled within FHA.

Mr. Chairman, OMHAR and the authority it exercises were enacted to strike a balance between the preservation of affordable rental housing and the rising costs of renewing expiring Section 8 contracts. If Congress had not intervened, project-based Section 8 renewal needs would have reached $7 billion annually by 2007. Recently, encouraging progress had been made in preserving the viability of many of these properties. But much work remains to be done. For Secretary Martinez, and for me, the continuation of this work is one of our highest priorities. We look forward to working with Congress and this Committee in the coming weeks on this important issue.

Thank you.