Charles Wehrwein
Deputy Administrator, Multi-Family Housing
Rural Housing Service, USDA
Washington, D.C.
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The other day, I was meeting with Jan and managers and staff and I was saying to Jan, “How’s it going?” And he asked me how it was going. I said I think there have been some shifts and there may be a glimmer of light at the end of the tunnel. And one of the staff spoke up and said, “Chuck, that’s not just a glimmer of light. That’s a freight train coming our way.”
You may feel the same way. But we think things are beginning to move in the right direction. The train analogy isn’t a bad one for me. Coming from the private sector into the Federal government is like trying to slow a train and get it turned around. It takes a little while and a little work. To a certain extent, that’s what we have ahead of us and what we have under way.
I want to talk about where our program is and the changes that are taking place.
Reform Legislation
The Reform legislation that Congress passed last August clearly was a dramatic input to our program. We really had to stop everything we were doing to focus on getting these Reforms promulgated in regulations. As you know, the funding for the 515 new construction has been held up pending promulgation of these regulations. The Reforms dealt with six different issues. Four of them being very directive such as doing away with the Occupancy Surcharge and providing Anti-skimming legislation such as at HUD. But there were two that were less directive and more suggestive pieces of legislation that effectively held us up. These related to the Prioritization of Assistance and the amount of necessary assistance for a given project, commonly termed subsidy-layering.
Our challenge was to put together regulations in a time that heretofore been unheard of in the Federal government. We got the full support of the Secretary, the Under Secretary, and the Administration for going forth with emergency rule regulations. We hope to have these rules in place by about April 1. Although we still have our work cut out for us as part of the clearance process, through the support of the Administration and the hard work of some very dedicated staff that spent evenings and weekends for the last three or four months straight working on this, as well as the persons that participated in the Stakeholder’s process, right now we are on schedule to meet that deadline. Our regulations are, as we speak, in the clearance process.
Reform Process
To recap the Reform process a little bit, the Legislation requested a negotiated rulemaking within 60 days. If you aren’t familiar with negotiated rulemaking, I wasn’t until this Legislation was passed, when we looked into it, we found out that negotiated rulemaking, believe it or not, takes about twice as long as regular rulemaking. So it was impossible to do that, but in the spirit of that negotiated process, as well as the hard held belief by Jan that the only way to do business is to hold a series of Stakeholder meetings, and more specific task force meetings so that we can gather the real input and real experiences from folks in the field.
Beginning in late October and continuing less formally until literally last week, we have been performing this Stakeholder process. These meetings were attended by the leadership and members of organizations such as CARH, NAHB, NCSHA, Hill staffers, RHS State staff, advocacy groups. In these meetings, and the drafting of the regulations that followed, we dealt with some very tough issues. We attempted to balance the very divergent interests in an up front manner while still meeting the letter and spirit of the law. The result, I think, is an incredibly informed set of rules and processes as well as the greater mutual respect among the Stakeholders for the work that each of us does. As of now, we still expect to issue these regulations on time in interim final form around the first of April. Therefore we could start using the new construction money in late Spring and throughout the summer in 1997.
These new regulations, as well as the overall reinvention that Jan alluded to, that we’ve undertaken, will make it much easier for you, for us, and for our State staff to to interpret how this program is to be managed. I know I’ve heard from a lot of quarters about consistency issues, and frankly I don’t doubt that they’re out there. I think a more simplified regulation with some very direct, very realistic examples for them will go a long way toward helping our State and District staff implement this program in a very consistent manner.
A great deal of work on these reinventions, which has been going along at a parallel but slower pace than these Reforms, has already been done and many of you have participated in that process. Over the last 12 months, our Portfolio Management and Servicing group has held a series of Stakeholder meetings, and the information that came out of those meetings basically formed the changes that will be made for the Portfolio and Servicing side of these regulations — 1930-C and 1965-B.
Additional Stakeholder Meetings
We also, as part of these reinventions, plan to hold additional Stakeholder meetings to discuss issues that have not been covered such as prepayment. These meetings are tentatively scheduled for mid- to late-April, and we’re trying to put together a plan for those right now. We’ll probably have three different meetings in three different locations across the country. We will get the information out as soon as we firm these up. We’re going to try to piggy-back off of some training we will have going on on the Reforms, so I’m sure a lot of folks will be interested in hearing about that as well.
On the 538 side, I’d like to talk a little bit about some legislative ideas we are currently working with. As you know, the 538 program has not been authorized for Fiscal Year 1997, although money has been appropriated by Congress. As it stands right now, we need both authorization from Congress and new regulations promulgated before we can spend the money. The regulation side of this issue is a tough one. It is very hard for us to take care of these Reforms, reinvention, and wrap up 538 all at the same time. We’re working very hard to get those done, and I expect that the soonest we can get those regulations out in final form, we cannot go on emergency rule authority for the 538 program, will be in mid- to late July. So we’ll be looking at a National NOFA, much like last year’s, with about the same level of funding that would go out late in the year.
538 Authorization
I understand that Congressman Bereuter [R-Nebraska] introduced on the first day of this Session permanent authorization for the 538 program. I understand that there was fairly positive feedback about the program and there was the suggestion that a five year authorization might be possible. These are all subject to change.
We’re looking at putting forward some changes to the 538 program to help make the program more efficient, less costly, and a little more user-friendly. Some of those elements include an annual fee that would dramatically lower the subsidy costs and therefore increase the program level that we might be able to do. That would also be fairly consistent with some of the guarantee programs that are out there. We’re looking at potentially allowing for longer amortizations as well as balloon payments. We’re looking at some other more administrative type changes that would allow the program to mirror more closely the 502 program as well as some of the other programs that are out there — Community Facilities and even Fannie and Freddie. I believe the outlook, despite some of these things that are swirling around, is very positive for the 538 program.
We are looking at a very strong demand for 538. For example, the Demonstration we had indicated initially that we made $25 million in loans; we got 49 applications in, totaling over $70 million in requests, all in a one month period. That’s phenomenal demand. A recent study that is nearly complete that we commissioned indicates that demand is much broader than that. The potential for the changes in the population size the program may operate under, could further increase the demand for the program. The need is out there; clearly, it is serving a different project size; where the standard 515 program is Low and Very-low, this tends toward Low and Moderate; and that’s what we found from our 10 applications that were accepted.
Portfolio Management
On the Portfolio Management side, I think we’ve made some significant strides toward fixing some of the problems. It’s not nearly enough; as a matter of fact, I’d say we’re just scratching the surface. But we’ve had dramatic improvements. A good deal of that is attributable to the hard work of the borrowers and managers in our 515 program.
A couple of issues that are relevant include the IRS rule. A successful ruling was obtained from the Treasury. The Administrator sent a letter to the Treasury in September of 1996 requesting clarification of the provision affecting those projects that had passive loss waivers in 1984 and 1985. We requested that the interpretation be granted according to the way you and we saw it. Treasury Ruling 97-4 was recently received from the IRS. The transfers and resyndications on those projects that had been held up can now go forward.
Section 8/515
RHS, HUD and OMB continue to work on a plan to convert expiring HUD project based Section 8 associated with 515 projects over to RHS Section 521 Rental Assistance. Approximately 45,000 units are involved. Under this plan worked out among the three agencies, RHS would fund this same number of Section 8 units with Section 521 five year contracts once they expire. There is an initial hit to the Federal Budget from a cash outflow standpoint, but the overall Budget savings to 2002 is fairly dramatic. We believe that this will go forward. We’ve got a letter put together that we expect to have signed by the two Secretaries and the Director agreeing. This is not final yet.
We are very close to rolling out our Industry Interface pilot on a national basis. Private software vendors are working on integrating the interface into their national software packages so that at the same time you will have available to you, in addition to the software you’re using, the ability to transfer financial data, budgets, and so forth in automated fashion. We’re hoping to save an awful lot of paperwork and time. We’ve had system problems back in Washington, but they are all fixed up and we now have some backups in place.
Multi-Family Servicing
On Multi-Family Housing servicing, we recently rolled out a new plan to our State and field staff that is requiring them to focus much harder on projects that had not had closure on certain issues. I know that is an issue that is near and dear to many. We are going to begin to focus and require that our staff bring elements to a more speedy conclusion and to make decisions in a more forthright manner. That is the essence of what we are trying to do. The results of this plan will, we hope, be continued reduction in the delinquency, inventory levels, and problem project levels in our portfolio. I am certain we will see some success over the long term, and that you will see better responses and more consistent approaches and application of servicing regulations. The multi-family housing delinquency continues to remain very low relative to the multi-family housing industry in general, especially when you consider the types of assets. At 2.4% for all loans that are 10 days or more delinquent, we are at one of the lowest levels we have seen in the last twenty years. Our method of looking at delinquency is fairly conservative, looking at projects that are 10 days or more. The delinquency rate is down 26.5% from where it was 12 months ago in absolute terms; the 180-days-plus projects are down 16.3% from last year; and the numbers of properties held in inventory are down nearly 30%. That’s dramatic. When you have a drop in delinquency and a reduction in the number of inventory projects, that shows that the asset quality is improving. I think that based on the time I’ve spent in the field so far, some of the rehab money that has gone out to the projects has clearly been money well spent.
RHS as Receiver
RHS was recently appointed as Receiver for a large nation-wide portfolio. Working with the Inspector General, IRS, FBI, and Department of Justice, we were appointed the Receiver of a large portfolio located in twenty states as a result of an ongoing investigation in fraud by a borrower. The appointment of RHS as Receiver is unprecedented in the multi-family Federal arena. I think it is an interesting process for us to go through. We have hired a large, national management company to act as our agent, for the Receiver, and is expected to handle the partnership syndication issues, and some of the other day to day issues of these projects. It is a good opportunity for us to see whether or not we can act more swiftly than might be otherwise, and whether or not we can be a lot more efficient. I think, although it might not be viewed positively by some, it allows us to deal with the myriad problems of the portfolio and help demonstrate to some of the detractors of the 515 program, improved ability on behalf of the Agency. I think that is a very big thing. I expect, although we’ve had some growing pains in learning about this process, to come through it very well.
Perceptions in DC
A lot of change is under way here as Rural Housing, and Multi-Family Housing more specifically, not all of which everyone agrees with. I’d like to ask, though, that we do continue to work together in these very vulnerable times; to work in concert with each other to move forward. There are perceptions out there, some of which may be well placed and some of which may not, but there are perceptions out there that we in the Agency have been hearing a lot about. Certainly, you’ve heard some of that as well. Congress’s perceptions, as far as I’m concerned, are real because I have to deal with the outcome of all the assertions. I think what we can do to help put this program back in good stead is to just go out and basically prove our case — to show these good results, put these Reforms in place, and begin to move forward again with a united voice.
Next: Remarks by Jeff H. Ecklund, Esq.