U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan unveiled details of a new initiative called Transforming Rental Assistance (TRA) before the House Financial Services Committee on Tuesday, telling the Representatives that providing rental assistance to America's most vulnerable families is "the most important thing we do at HUD." But, he said, "Unfortunately, for all of our progress, HUD's continued ability to serve families in need is at risk."

TRA will be a voluntary program, under the proposed Preservation, Enhancement, and Transformation of Rental Assistance Act of 2010 (PETRA) which will authorize the conversion of public and assisted housing properties to long-term property based rental assistance under Section 8 of the U.S. Housing Act.  TRA is part of the Administration's proposed 2011 budget and grew out of meetings with 1,500 internal and external stakeholders, including state and local agency administrators, residents, developers, property owners, lenders, and advocates, and the input of thousands of others over the Internet.

The Secretary said it does not take a housing expert to see that HUD's programs need simplification.  The Department administers thirteen different programs, each with its own rules and managed by three separately staffed divisions.  In the past programs have been added without any thought to the overall system, he said.  "This unwieldy structure fails to serve the Department, our government and private sector partners, and-most importantly-the people who live in HUD-supported housing.

He said that his years in dealing with affordable housing "have drilled home two key lessons. First, it is far more costly to build new units than to preserve existing affordable housing. And, second, an affordable housing project can limp along for some time with piecemeal, ad hoc strategies to address its accumulating capital backlog, but eventually the building will reach a "tipping point" where its deterioration becomes rapid, increasingly expensive to remedy, and often irreversible."

It is time, he said for a crucial federal investment to leverage other financial resources to the task of maintaining the number of safe, decent public and assisted housing units available to our nation's poor families-an objective that, if we don't begin to act now, will end up costing the taxpayer substantially more to achieve by other means.

In addition to the complexity and inefficiency of the current rental housing programs, there are two other major problems
.  The stock is aging and deteriorating, and public housing agencies (PHA) have been driven to look for ways to raise the capital that properties need that is not available through current programs.  Because the system lacks a viable preservation strategy, it has lost 150,000 units though demolition or sale over the last 15 years.  Given the deficit and the current challenges in housing and the economy, it is clear, Donovan said, that the federal government alone will not be able to provide the money to bring properties up to date and preserve them for the future.  HUD will need partners to supply the capital needed.

HUD tenants also need the option to pursue opportunities in other neighborhoods and communities without losing their housing subsidies, and the seamless connection that should exist between HUD's largest assistance programs and the Housing Choice Voucher program is missing.  Thus families not only lack mobility, in many cases and especially in this economy, they lack opportunity and choice.

The Secretary said TRA is designed to address these issues guided by five fundamental principles.

  1. Streamline and Simplify HUD's Programs: TRA is intended to move properties assisted under various programs toward a more unified funding approach taking into account the requirements of existing federal, state, local, and private sector financing streams
  2. Change the Funding Structure to Leverage Capital : Donovan said that the current federal capital and operating funding structure exists in a parallel universe to the rest of the housing finance world.  In order to meet the capital needs of HUD's public housing portfolio, this must be changed to a federal project-based subsidy that lenders understand and which can be used to leverage public and private capital.  This, he said, can be done without risking the loss of assisted units.
  3. Bring in the Market: Bringing in market investment will also bring in market discipline that drives fundamental reforms, "Only when our programs are truly open to private capital will we be able to attract the mix of incomes and uses and stakeholders necessary to create sustainable, vibrant communities.
  4. Encourage Resident Choice: Donovan said that HUD must combine the best features of the tenant-based and project-based programs to support resident choice and mobility.  TRA reflects HUD's commitment both to allowing choice and to providing the benefits that reliable property-based programs can have for neighborhood revitalization and as a platform for delivering social services.
  5. Target the Neediest Families:  Lastly, HUD must continue to target its rental assistance resources on the neediest families. TRA maintains the targeting and affordability requirements embedded in programs under the U.S. Housing Act.

The proposed legislation will allow HUD to enter into rental assistance contracts with PHAs that are similar to current project-based section 8 contracts.  Small or partially assisted projects will have the option of converting either to a PBC or a project-based voucher (PBV) subsidy.

Housing properties that convert to the new system will be subject to a use agreement for a minimum of 30 years.   A PHA cannot sell or otherwise transfer a converted public housing property without the permission of HUD, which has the first option to purchase.  Prior to applying to HUD to convert to a section 8 funding stream, a PHA would be required to consult with residents of the property, the PHA's Resident Advisory Board, and the public.

HUD will establish priorities and criteria to select properties for conversion through notices in the Federal Register. This procedure allows HUD to adapt priorities based on the amount of funding made available in appropriations acts and any requirements imposed by the appropriations bill.

A rent comparability study and "green" physical condition assessment will be required as part of the conversion process. Properties will be underwritten to ensure their long-term physical and financial sustainability, including through the establishment of a capital replacement reserve that will enable owners to address repair and rehabilitation needs as they arise.  This will hopefully eliminate the current capital needs backlog. HUD will be authorized to charge fees to owners for the costs of such studies and for the underwriting

Rents in the properties will be market-based.  Asking rents will be capped at the comparable market rent for similar assisted properties and up to 110 percent of the applicable area rental.

The capital that can be raised through a market-based rent policy will be sufficient to rehabilitate most properties, and HUD estimates that the shift to rental assistance contracts would leverage more than $25 billion in private capital which will result in both improved living conditions for residents and in increased employment opportunities.  Donovan said that some stakeholders have been surprised at the relatively low incremental cost of the proposed changes compared to the substantial leveraging potential. There are two basic reasons. First, the change to a single rental assistance funding stream that can leverage debt means that PHAs can borrow the funds needed to rehabilitate their properties, and can use most of the funding they otherwise would have received through the Capital Fund to make payments on the mortgage (minus the amount saved in a replacement reserve). Second, an additional $1,000 per year in funding available for debt payment leverages $13,500 in loan funds.15 Thus, with the $290 million requested for the supplemental cost of conversion in the 2011 budget, properties converted in phase one are expected to leverage approximately $7 billion.

By enabling public housing properties to tap their accumulated equity value to meet their capital needs, the long-term Section 8 rental assistance contracts will make it more likely that properties will remain publicly owned and affordable to the lowest income households, bringing these properties into the mainstream, with the mixed incomes and uses that are so vital to creating sustainable communities. The Secretary said HUD anticipates that many properties will be able to meet their capital needs without Low Income Housing Tax Credits, through borrowing and possibly capital grants from other sources, and thus will easily be able to remain publicly owned.

Donovan said that residents and others have expressed concern that mortgaging properties to raise capital could create a risk of foreclosure, bankruptcy, and potential termination of rental assistance contracts. To address this, HUD will augment the private sector asset management that will accompany debt leveraging by requiring annual financial statements and will subject contractors to regular monitoring of their physical and financial condition.  The tenant organizations required under the contracts will also be able to "blow the whistle" if properties are not being well managed or maintained.  If these measures fail, the contract will require, as always, that tenant leases and the use agreement remain in place or are transferred to another property.

TRA's proposed project-based voucher program will provide a policy combining place-based and people-based assistance. The project-based voucher program will allow an owner the security and capital leveraging of a long-term property-based contract while assuring that residents can choose to move with available tenant-based vouchers. This policy represents the future - and will apply to new development with HUD rental assistance. In programs initially developed under older programs there will be a hybrid policy which will allow a household that has resided for two years in a property that is converted to a project-based contract to receive an available Housing Choice Voucher to move to a location of their choice. The property-based rental assistance would remain with the unit.

Donovan said that the policies governing these long-term contracts are designed to preserve this largely irreplaceable public resource and at the same time achieve the first three principles that guide the TRA initiative: streamlining, changing the public housing operating and capital funding structure to leverage capital, and bringing market principles into the operation of the properties while allowing choice and mobility to residents of converted properties.