Carl Grate
Chief — Servicing Branch
Multi-Family Housing Portfolio Management Division
Rural Housing Service, USDA
Washington, D.C.
Addressing the Council for Affordable and Rural Housing Seminar:
We’re very happy to have Chuck as our Deputy Administrator. We’re pleased to know he will bring some new insights to the job, and a lot of experience. He is committed to trying to get us some resources, namely bodies — something we need desperately in managing this portfolio. I’m sure, as a lot of you know, particularly at the National level, we’re trying to continue to manage the assets and provide services to you and to our field offices. It is a real challenge for us as we plot new directions in how we manage our Multi-family housing portfolio.
I will keep my remarks on the area of what we are trying to do at the National level to assist you and our field offices as we try to go in new directions, and as we try to adjust our delivery systems, our regulations, and as we provide new guidance to our field offices.
We like to think, from where we sit, that we set out pretty standard policies, pretty standard guidance. But, each of you can give us stories where from one office to another, you get different interpretations. We understand that is happening, and I don’t know just how we can get to the bottom of that. We have individuals with different ideas, different interpretations of the regulations, and so forth. We try real hard to train at the national level; again, the states are having problems in terms of resources. We had what we thought was a real good session back in June 1996 in Washington, D.C. with all the Multi-family staff on the state level and a few state directors. We find that the messages really have not gotten out to the area offices. For a number of reasons, the states don’t have the resources to get back and do the training and deliver it to the area office staff. Hopefully, we will do what we can under Chuck’s leadership to get some consistency in the program.
New Approaches
At the national level, we are very concerned about program delivery in the area of servicing. We are trying to provide the same level of servicing as in the past with fewer staff. Reorganizations are taking place in the field offices; not only are we trying to maintain the same level of servicing, but we are doing it with a lot fewer people in the field offices, and with a somewhat less experienced work force. When the transition took place under the reorganization, a lot of our more experienced staff went to other jobs. We really have some less experienced staff, and that might be the cause of some of the problems you are experiencing; I hear this from people like yourselves when they call in and we discuss the issues.
Generally, our focus is to continue to provide that same level of service that we’ve been able to in the past. We’re going to try to streamline our regulations; the focus has been to get away from "micro-managing" these projects. We hope to write the regulations, set the policies out, in a very small set of regulations. The bulk of the stuff that we want out we want to do in a handbook. You’ll have that, too; you’ll understand the how-to versus the why. Hopefully, we’ll have a much better set of regulations to understand. We’re hoping to do this with some professional writers that can get rid of some of the bureaucratic language in the regulations. We’re looking forward to this effort.
[Wehrwein: We’re committed to getting these in place by FY 1998.]
As you know, the regulation process is not quick; it takes some time to get them out for comment and so on. This project may involve Stakeholders again; we had the three Stakeholder sessions over the last year. You will actually have hands-on input; our staff in the field will also participate.
I think it is called the "negotiated regulation process" where the public actually gets the chance to be involved in the construction of the regulation. This is an opportunity for all of us to have a better understanding of how we are going to manage the program.
We plan to get away from "micro-management" and use results-oriented efforts on your part in the project’s operation. This is Borrower accountability and means monitoring more than hands on. Hopefully, all of this means a better partnership between the government and the Stakeholder.
Servicing Issues
As servicing officials, we are too often seen only in an adversarial role. Actually, we really give more in a servicing capacity to someone who tries to help solve our unpleasant situations when they arise or to people who may fall into some unpleasant situations by identifying problems early before they begin to intensify. One of the ways we do that is through our Supervisory Visits. Sometimes it is not a very good project that we go through; we hope to really improve on that.
What we’re seeing is that for a lot of staff, the Supervisory Visit had become a routine and mundane process prior to 1994; in 1994, we did the nationwide survey of all projects for Health and Safety issues. We think that the Supervisory Visit process, if used properly with Owners and USDA staff, in a more cooperative spirit, will, over time, probably prevent some of the problems we found in the 1994 survey. With enough time, we can develop an understanding and an agreement on how we can correct the problems and follow up.
I don’t think our staff were following up on the issues as well as they could have and things began to slip through the cracks. We found ourselves, rather than having short term problems, with more long term problems. And, then, we started to get into a Workout Plan mode.
Workout Plans
Workout Plans are a very key tool for us. I think we are all going to have to begin to understand the process a lot more. It is somewhat new to us and to our staff. Our staff will have to begin to understand Workouts and the different interpretations of regulations and so forth.
With the aging portfolio, the Workout Plan is one of the ways we can begin to get a better handle and protect our aging projects and our assets, which I like to refer to as mature assets.
Workout Plans are a good servicing tool for the Agency to use cooperatively with Owners to identify issues and resolve problems, particularly when Owners are acting in good faith, and to more realistically bring about corrective actions. We think they can be used in a number of ways; a few examples are correcting temporary marketing conditions which may be short-lived; management deficiencies that we need to correct; deferred maintenance; correct cash flow deficiencies. The Workout Plan is not intended by the Agency to be used when there is an intentional misappropriation of funds or actual fraud.
We are beginning to try to understand that maybe the project is no longer economically feasible in the community. Obviously, we would have to look at that real close because we don’t particularly want displacement, but we have run into some situations where projects are no longer needed. The government has the option, or the right, to get out of the business. The message is that we’re not talking about dragging out the problem for a long period of time through a Workout, but to take a hard nosed stance in some cases.
Workouts Not Appealable
There has been some confusion on appealing a Workout Plan. Actually, it is not appealable. You can appeal some of the issues that might be associated with a Workout such as denial of rent increase; but, the Workout Plan itself is not appealable. The Workout is a tool for the Agency to use to resolve the issues, but anything associated with an adverse decision on an entitlement to the Owner would be appealable such as when an account is accelerated, denial of budget, and things of that nature.
The other issue, too, that I hear about with Workout Plans is that somewhere down the road, they aren’t working. Some staff take a hard stand and say: "That’s it, you have to live with the Workout Plan." If conditions change, obviously, we should look at it. If they are beyond the Owner’s control, for example you budgeted and planned to correct something in three years, and taxes increase $10,000, we need to revisit the Workout Plan. We are trying to impress on our staff that a good, sound Workout Plan in the beginning, one that we and the Owner believe in, that will make the project whole again, to be realistic and try to get that documented and in the Plan as much as you can up front. It really should be understood that a Plan is to avoid liquidation, to avoid the adversarial relationship that could develop somewhere down the line.
Failure to comply with the Plan does void the Plan and leads to continuance of loan servicing actions. As all of you know, the Plan may be crafted to resolve a single issue or multiple issues. There are a number of servicing tools such as budgeting and correcting cash flow problems. Health and Safety issues are different, but depending upon the circumstances, could be part of a Workout; normally, they are not because Health and Safety is a more serious situation and does not involve normal non-compliance. Workout Plans can be used for considering changes in management or General Partner — either immediately or when a certain point is reached during or at the end of the Plan. Or, it may be that the only way to correct some of the deficiencies is a transfer of the ownership. Or, the Plan may include subsequent loans, additional Servicing RA, or restructured loan or Reserve payments.
I believe Workout Plans are one of the great tools we have for the aging portfolio, but we believe they must be timely; effective servicing must be implemented before projects and management deteriorate to an unacceptable level. Let’s start avoiding things by setting up a good system up front such as effective Supervisory Visits. We’re presently on a three year cycle, and in the rewrite of the regulations, we’re probably going to look at that again and put Visits on a more frequent basis than three years.
Most of our projects are in good shape; most of you do good jobs — they are well managed, they are well maintained. We are very proud of our portfolio. Even the Health and Safety issues, depending upon the states you looked at, were 9 to 13 percent in those states. We’ve come a long way in correcting those; we’ve got a little more work to do, but as Chuck has said, it’s really time to move on from that to deal with deferred maintenance issues.
Deferred maintenance issues
A lot of those, we think, come from cash flow problems; we may have been a little conservative in setting the rent structures in some areas that caused cash flow to be a little low, and consequently, we get the deferred maintenance issues cropping up all over the place. Obviously, that can turn into a more serious problem if we don’t have the cash there to correct the problem.
I don’t know how we can deal with some of the problems of running the program. Our staff work hard and do a great job; we have some very dedicated staff in the field offices. I think that, sometimes, we do personalize our jobs and we may not always have consistency in administering the regulations and program. I’m not sure we’ll ever get rid of that. We do our best at the National level and at the State level. States try to set policies in their state to be consistent throughout; occasionally, the states have to go out to get a district or area office or employee in line with the state. I’m not sure we will ever have a full handle on that.
The key is we want to get away from micro-management of the program. We have some systems we are trying to get in place; the systems should provide use some data to make some decisions. The Industry Interface will be up and on line pretty soon; I have heard we are having a little bit of a problem with hardware and software. We may have to sit back a little bit on that: I don’t have all of the details on that, but the latest I’ve heard is that we are having some problems with that.