RD Nitty Gritty Russell Davis
Administrator
Rural Housing Service
Washington, D.C.
I would like to give you a brief update on major items that are going on in Washington.
Six items — quickly.
First, I want to give you an update on our Voucher program. You’ll remember that the Appropriators gave us money for Vouchers for the first time in the Agency’s history. This year we have started putting them out. We have a program in place; we are using HUD’s regulations rather than spending 18 months writing our own regulations. We essentially made an agreement with HUD to use theirs; we gave them the money — they gave us a stack of Section 8 Vouchers and we whited out HUD and wrote in USDA. That’s effectively what we’re using for Vouchers. If what we call the Big Bill passes, this is H.R. 5039 which provides for permanent Vouchers, then we will be writing our own regulations and developing a program that will be designed to work specifically with these properties.
The bottom line is that any in property that has prepaid since last October 1, the residents are eligible for our tenant-based Vouchers. We are trying to contact as many of those properties and tenants as we can; if you have any of those properties, we ask that you check with your local office. Make sure they can go out and meet with your tenants. Maybe you could help them track down any tenants that have left — they are eligible for a Voucher.
We have in the Budget $75 million for Vouchers for the coming Fiscal Year. Under current pipeline projections, we would not need that actual amount of money. In fact we would probably need more on the order of $15 million or so. The reason we asked for so much more is that we are preparing, and having a contingency, in case ELIPHA is lost one way or the other: either through passage of H.R. 5039 or through something that might happen in the Courts. We felt it was not prudent to go through a year without having a mechanism and money to provide for tenants should there be a sudden outflow of properties from the program. This amount of money provides for 15,000 Vouchers per year.
Second issue that some of you might be involved in is the Multi-Family Housing Restructuring Demonstration. This is a deal whereby we will offer certain financial incentives for rehabilitation and restructuring the property. This, again, is a one year Demonstration that was given to us by the Appropriators. We expect to restructure about 120 properties or so this Fiscal Year. By the end of September, we will at least have identified the properties for further processing. We had 4,000 properties apply. We thank you all for applying.
The purpose of this Demonstration is not, as it would normally be, to find the neediest properties or the people who most need subsidies or help; the purpose of this Demonstration is to get a good enough statistical sampling that we can score the cost of doing these restructurings for the portfolio as a whole. In order to do these studies we need get certain samplings of types of properties — some that need a lot of work, some that need only a little bit of work, some that are in the Northeast, some that are in Southwest, those sorts of things. It’s not going to be the normal beauty contest type of selection process and underwriting process; this is something that we are working on to get a broad idea of what the costs are. I think that will be something that’s also very useful to the industry as a whole. As we get our engineering reports in, and as we get results from these transactions, it will tell the industry a lot more about the health of the portfolio in different parts of the country.
Third. The major item in Congress right now as far as we’re concerned is H.R. 5039, which has come out of Subcommittee and is being worked on by the full Committee. The Administration supports this Bill. There is one provision, though, that we believe is a real problem: that is a provision that’s called a “Maximum Rent Provision” that when a property is restructured, that essentially all unsubsidized units would become subsidized at the expense of the property, or the owner, or the other tenants, or the government — it is not made clear who would be on the hook for that extra subsidy. So you can imagine that if you restructure a property that is, say, half RA and half unsubsidized, there are very few people that could take the contingent liability of having to subsidize those unsubsidized units. So we believe this provision will essentially make it very difficult for people to enter into these types of restructuring arrangements. We hope an amendment or some change could get in that would make this more workable.
There is one major item that bears watching in the Appropriations discussions and that is both the House and Senate are looking at making Rental Assistance term one year plus a buffer of a couple of months in case there is a Continuing Resolution. Current term is four years. This is going to have one side effect that isn’t apparent at first — when Congress goes every year to look at the reduced numbers, they will really have only two variables to work with: number of units, or the cost per unit. Because the Administration and Congress are historically are very loathe to cut unit numbers, they are going to start looking at what ways they might monkey with the dollars per unit. That means they are going to start looking through the RA Contracts, and start asking questions about insurance, taxes, operating costs, management fees — a lot of things that have never been on their radar before will be. When we have a four year contract all the ups and down of the Budget were really just invitations to scrutinize Janet Stouder’s work. Until now, any problems in the Budget, they would go ask her if she had made a mistake or if she could tweak a number, or something. Now we’re going to be actually looking at consolidated expenses of the properties in the portfolio. And that’s going to bring more pressures there on costs.
We have a major item on the production side, and that is our continued emphasis of the Section 538 guaranteed insurance for Multi-Family. The basic model here is the 538 loan acts as kind of a middle-tier loan, usually the property has Tax Credits, maybe some Vouchers. We have been increasing the amount of money available every year for 538; the demand has been increasing, also. It may be that next year is the first year we’ll have to start scoring projects, but for now it has been essentially first-come, first-served. What I think is interesting about the 538 program is when the program was young, the easy deals to do were the large deals, 100 units, 120 units in the outer suburbs, relatively high income people, though still at moderate levels. What’s happened over the years, mostly because of competition for the Tax Credits and the other money that gets put into these properties, is they have gotten smaller. We have gone from an average of over 100 units to an average of under 50 units per property. They have gotten more rural, people are moving farther out into the country. There are a lot of scoring systems that award points for a rural character.
They are going lower income because more and more get units get state setasides for very low and extremely low income people; I see that a fifth of our units in 538 now are going to people making under $12,000 a year, which is essentially the 515 portfolio demographic. So there is a movement in 538 toward the demographic that 515 has historically served. It does not have its own rental assistance component yet, but this is something that we might want to start thinking how there might be something that fits in the gap between 538 and 515. We’d be happy to take suggestions on that.
Finally, I just want to mention the management fee. I thank you for all the input you’ve given us on management fee issues. We were talking about this with some of you and I do want to say I sympathize. I know for a lot of you this is your bread and butter, this is really what you work for. I would just ask for a little patience on two counts. First of all we do have a culture at Rural Development of giving a lot of decision making leeway to our State Directors; our State Directors are politically appointed; we give them a lot of power. It takes a lot for us to ever overrule anything that they decide. That has a lot of powerful benefits for you — it gives the industry a lot of strength in Congress; a lot of ability to get high level people involved. But, it does mean sometimes decisions are inconsistent around the country. We will try to sort out where there are factual problems or just outright glaring unfairness; obviously it costs us more to do something in Alaska than in Georgia. So we want you to take those things into account, but understand the National Office does not go in and just trample all over the State Directors. We really want to keep a lot of that flexibility out there. Understand also in that regard we have only eight people in Multi-Family Servicing in the National Office. We are working to get more staff into that area, but because of the Budget situation we are under a hiring freeze that is making that difficult. Those people keep busy doing a lot of things at once and they are really working to keep some of the important issues in the portfolio watched; at the same time they are trying to answer questions and deal with individual problems in individual states. I just ask that you have a little patience and we will try to catch up on our worki and get back to you as soon as possible.
If there’s something that is of large concern that I haven’t mentioned, I’ll be happy to let you know what I do know. I guess I’m open to questions at this point.
Statement / Question: A couple things that we did talk about, that we’ve talked recently with Russ about, I just want to make a couple of comments as far as one of them. I don’t like the comment about eight people in Servicing in the National Office; that should register fully with this group. That’s what Russ is working with. He told me a month ago a more poignant story; he asked if I’d seen the testimony that he gave in front of the Appropriations Subcommittee and I said I had read it because it was on the internet almost immediately. He asked how it sounded, I said it sounded fine; and he said that was testimony he’d typed out the night before on his Blackberry. I thought to myself, short staff? That’s really short staff. What Russ has explained about what is going on in the National Office is that he doesn’t have enough people; it is something we at CARH are going to get more involved in letting the Appropriators know that maybe we’re at some point where there has to be some relief because you’ve got people in the National Office doing so many tasks at so many levels. I think Russ would love to work on policy issues and bigger issues such as how you preserve this portfolio. How really do you preserve this portfolio? All the stuff I heard in the meetings yesterday was that we have problems preserving this portfolio.
So that leads into the next thing. Some of the issues that we talked about yesterday were Capital Needs Assessments (CNAs). We talked about some of the issues with Audits: what are going to be the requirements for the CPAs and how that’s going to affect costs and also the way Audits are done. I wanted to say to Russ, and I think I know Russ’s response so it is a little bit of a rhetorical question: we have asked the Agency to work with us at a technical level so we can give the Agency a lot of feedback on what’s going to work and isn’t going to work in the Field, and figure out ways there can be common solutions. I would like to hear from you, Russ, the Agency’s commitment to be able to do that with us so that you can be the beneficiary of our experience, and also we can be the beneficiary of the kind of constraints you’re working under. I just think you need people at the National Office.
Answer: Thank you for the expression of support; I don’t want to sound like I’m whining. But we have 8 servicers, and they are superhuman. We have to keep the krytonite far away. There is an issue that every year our programs grow and we have more and more loans, more and more properties, and more and more problems. The staff shrinks every year just because of inflation, pay costs, grade increases; there are a lot of things that shrink the government agency over time, and we are having to deal with that. We are trying to automate as much as we can, but a big part of what we do is push things out to the States and local areas. If that work starts blowing back into the National Office, it will just get stuck even worse. I thank you for your help; as I keep saying we are not allowed to lobby Congress.
Question: First, thank you for your letter of May 12th responding to numerous issues we had brought before you. One of the promising things about that letter was clarification around, payroll fees and so forth, administrative costs that were previously site costs, current regs. Anyway, it is a very costly issue, and waiting for a final regulation may not be soon enough, at least for some of us suffering in the field. Can you speak to the possibility of a Notice or something soon?
Answer: The default position is that in the absence of guidance from us, the States can make their own decisions. Where that leads to inconsistencies, we have to have it brought to our attention. I’ll tell you there’s a good chance we would just send it back to the States if we can’t develop a policy nationwide right away. We don’t want to rush into something that would cause even more troubles down the road. I think the rolling procedure and the rolling decision making sometimes cause more trouble than the regulation itself. I think in that letter we had kicked the can down the road on a number of issues, but I think we can put in 60 day horizons or so on most of the areas.
Question: It’s going to be state by state. In the Northwest, some States are more purist in their viewpoint and are actually asking for fees back. After some discussion early on the Agency would say they’d hold back. The sooner the better in our opinion.
Davis: Is this a State with a lot of potatoes?
Response: Right next door.
Answer: We can talk about that. I understand there is an issue there. Again, our default position is that until they hear from us they are making their own decisions.
Question: Regarding the recapture of unused RA, I think you’re coming out with a clarification about a “turn-over” RA unit, whatever that means. Have you come to such a policy clarification?
Answer: We are. That is an issue that we would like to have our field offices get and digest policy on that before we talk about it in public. Janet Stouder, is there anything we can say publicly?
Janet Stouder: I believe the Procedure Notice (PN) is on your desk for signature. It should be posted by the end of the month.
Comment: We have also mentioned to Mr. Davis some of the reports I find disturbing regarding what’s happening with the Capital Needs Assessments (CNAs). We agreed to work on that and communicate with Rural Development about the issues.
Answer: You’ll remember we did a Comprehensive Needs Assessment for the portfolio as a whole two years ago by picking 300 properties statistically, randomly. We went out and did Needs studies on those 300 properties and applied that to the portfolio as a whole. That found that 40% of the properties were in the serious problems category. In fact, 10% of the portfolio was estimated to be economically obsolete within the next 10 years. We know there are going to be some expensive rehabilitations out there. What we are interested to see is if anything in these assessments are different than what was done in the study, it may be these are looking more carefully, or if the rules are set up so they are picking up more items. We’d definitely like to know if the implications for the larger portfolio are going to be important.
Question: I would like some clarification if management fees can be changed by the State before the National Office comes out with new ones.
Answer: Is this a legal question — are they allowed to?
Response: Can our State increase management fees on their own before the National Office puts out guidance?
Answer: I believe what they think they’re doing is interpreting the current regulations. Are you saying they are making up something new?
Response: We are being told we have to stay with what is currently published and it cannot be changed until there’s new published fees.
Answer: I’m going to have to lean on Janet.
Janet Stouder: Roughly, there is posted in 3560 Handbook 2 what the fees are for last year. We are coming out with the fees for this upcoming year. They should not be making any changes; we’re still in the transition period if you still have a Management Agreement that is in effect, you’re supposed to be going with that current rate. When your Management Agreement expires, then you get in line with the 3560 way of management fees. If your State is telling you to do something different, please let me know so that we can curtail that. That’s how it’s supposed to be. They are published; the base fee is what it is; you negotiate downward between the owner and the management because what’s published is the maximum amount. You do have add-ons if the property is eligible.
Question: On the CNA, it has taken roughly six months from the time the CNA was done until it was, perhaps, accepted by the Agency. We’ve been jerked around with all sorts of changes being proposed by the State Office even though the CNA provider is highly professional — when you add six months to any processing time, it just doesn’t do anyone good.
Answer: Thank you.
Next: 1. Capitol Hill Perspectives
Remarks by Fitzhugh Elder, IV