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.
- 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
- 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.
- 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.
- 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.
- 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.
