HUD Chief Looks To Simplify Home Rental Assistance Program

U.S. Department of Housing and Urban Development (HUD) Secretary ShaunDonovan unveiled details of a new initiative called Transforming RentalAssistance (TRA) before the House Financial Services Committee onTuesday, telling the Representatives that providing rental assistance torn America's most vulnerable families is “the most important thing we doat HUD.” But, he said, “Unfortunately, for all of our progress, HUD'scontinued 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)rn which will authorize the conversion of public and assisted housingproperties to long-term property based rental assistance under Section 8rn of the U.S. Housing Act.  TRA is part of the Administration's proposed2011 budget and grew out of meetings with 1,500 internal and externalstakeholders, including state and local agency administrators,residents, developers, property owners, lenders, and advocates, and theinput of thousands of others over the Internet.

The Secretary said it does not take a housing expert to see that HUD'sprograms need simplification.  The Department administers thirteen differentprograms, each with its own rules and managed by three separatelystaffed divisions.  In the past programs have been added without anythought to the overall system, he said.  “This unwieldy structure failsto 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 drilledhome two key lessons. First, it is far more costly to build new unitsthan to preserve existing affordable housing. And, second, an affordablern housing project can limp along for some time with piecemeal, ad hocstrategies to address its accumulating capital backlog, but eventuallythe building will reach a “tipping point” where its deteriorationbecomes rapid, increasingly expensive to remedy, and oftenirreversible.”

It is time, he said for a crucial federalinvestment to leverage other financial resources to the task ofmaintaining the number of safe, decent public and assisted housing unitsrn available to our nation's poor families-an objective that, if we don'tbegin to act now, will end up costing the taxpayer substantially more torn achieve by other means.

In addition to the complexity and inefficiency of the current rentalhousing programs, there are two other major problems.  The stock isaging and deteriorating, and public housing agencies (PHA) have beendriven to look for ways to raise the capital that properties need thatis not available through current programs.  Because the system lacks aviable preservation strategy, it has lost 150,000 units thoughdemolition or sale over the last 15 years.  Given the deficit and thecurrent challenges in housing and the economy, it is clear, Donovansaid, that the federal government alone will not be able to provide themoney 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 otherneighborhoods and communities without losing their housing subsidies,and the seamless connection that should exist between HUD's largestassistance programs and the Housing Choice Voucher program is missing. Thus families not only lack mobility, in many cases and especially inthis economy, they lack opportunity and choice.

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

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

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

Housing properties that convert to the new system will be subject to ause agreement for a minimum of 30 years.   A PHA cannot sell orotherwise transfer a converted public housing property without thepermission of HUD, which has the first option to purchase.  Prior toapplying to HUD to convert to a section 8 funding stream, a PHA would bern required to consult with residents of the property, the PHA's ResidentAdvisory Board, and the public.

HUD will establish priorities and criteria to select properties forconversion through notices in the Federal Register. This procedureallows HUD to adapt priorities based on the amount of funding madeavailable in appropriations acts and any requirements imposed by theappropriations bill.

A rent comparability study and “green” physical condition assessmentwill be required as part of the conversion process. Properties will beunderwritten to ensure their long-term physical and financialsustainability, including through the establishment of a capitalreplacement reserve that will enable owners to address repair andrehabilitation needs as they arise.  This will hopefully eliminate thecurrent capital needs backlog. HUD will be authorized to charge fees toowners for the costs of such studies and for the underwriting

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

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

By enabling public housing properties to tap their accumulated equityvalue to meet their capital needs, the long-term Section 8 rentalassistance contracts will make it more likely that properties willremain publicly owned and affordable to the lowest income households,bringing these properties into the mainstream, with the mixed incomesand uses that are so vital to creating sustainable communities. TheSecretary said HUD anticipates that many properties will be able to meetrn their capital needs without Low Income Housing Tax Credits, throughborrowing and possibly capital grants from other sources, and thus willeasily be able to remain publicly owned.

Donovan said that residents and others have expressed concern thatmortgaging properties to raise capital could create a risk offoreclosure, bankruptcy, and potential termination of rental assistancecontracts. To address this, HUD will augment the private sector assetmanagement that will accompany debt leveraging by requiring annualfinancial statements and will subject contractors to regular monitoringof their physical and financial condition.  The tenant organizationsrequired under the contracts will also be able to “blow the whistle” ifproperties are not being well managed or maintained.  If these measuresfail, the contract will require, as always, that tenant leases and theuse agreement remain in place or are transferred to another property.

TRA's proposed project-based voucher program will provide a policycombining place-based and people-based assistance. The project-basedvoucher program will allow an owner the security and capital leveragingof a long-term property-based contract while assuring that residents canrn choose to move with available tenant-based vouchers. This policyrepresents the future – and will apply to new development with HUDrental assistance. In programs initially developed under older programsthere will be a hybrid policy which will allow a household that hasresided for two years in a property that is converted to a project-basedrn contract to receive an available Housing Choice Voucher to move to alocation of their choice. The property-based rental assistance wouldremain with the unit.

Donovan said that the policies governing these long-term contracts aredesigned to preserve this largely irreplaceable public resource and atthe same time achieve the first three principles that guide the TRAinitiative: streamlining, changing the public housing operating andcapital funding structure to leverage capital, and bringing marketprinciples into the operation of the properties while allowing choiceand mobility to residents of converted properties. 

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