Obediah Baker, Sr.
Director,
Multi-Family Housing Processing Division
Rural Housing Service, USDA
Washington, D.C.Addressing the National Association of Home Builders:
To date, we’ve obligated $26,211,056. About $4.4 million of this amount has gone for new construction. At this point we are urging our State Offices to accelerate the processing of their Health and Safety and repair rehab loans in order for those States with very few cases of repair and rehab situations to correct to be in a position to obligate some new construction money prior to the end of the fiscal year.
Set-asides for Under Served Areas
You may have seen the Public Notice in the May 1 Federal Register indicating that the Housing Opportunity Extension Act extended the provisions of the Cranston Gonzalez Affordable Housing Act of 1990. I am speaking of the provision in the 1990 Act that authorized certain set-asides for under served areas and for non-profit organizations. In December, we issued 1940-L, which was published in the Federal Register, basically having a set-aside program for targeted areas (under served areas) and having a set-aside for non-profits. That was a take-off on what was actually in place or spelled out in the Act. But, that provision expired in 1994. The law that was passed on March 28 actually extended those provisions. So what we had to do, the program that we had out there, we had to issue a Public Notice that basically expanded the participation of participants in the targeted set-aside program, for example, under the strategy that we had built in the December announcement. The 100 most needy counties as specified in the 1990 Act weren’t really addressed. The amendment as of March 28 made those 100 eligible counties eligible. What we did in order to comply with the law, we had to, on targeted reserves, we added an additional $4.5 million in targeted funds in order to enable State Offices to submit applications that may very well fall within the list of targeted counties. Those reserve fund requests must be forwarded to the National Office by our State Offices by July 3. If, on July 3, these dollars are not utilized, then, in fact, they will go into a general reserve and be used for new construction. What that does, the $4.5 million was added to the $12 million originally set-aside for targeted reserves, so it actually boosts that amount up to $16.5 million. Now, we’re going to have a lottery. You may be familiar with the lottery. Some of of you may be fortunate that some of your proposals were selected from the States. The lottery in January actually selected 12 States for $1 million each. We’ll have a subsequent lottery to address the $4.5 million in transactions that we expect on or after July 3 as to the successful States or successful proposals as having been selected by the random computerized lottery. Just a word about the non-profit set-aside, that same Act extended the provision of the non-profit set-aside of the 1990 Act. Basically, what the amendment does, it allows for co-venturing. It allows for a proposal whereby you have non-profits and you have a Limited Partnership forming an entity. That entity could be a Limited Partnership. Co-venturing entities would be eligible to compete on a first come-first served basis for the $2.4 million. Here again, we expect those proposals to be in by July 3.
Funds — FY 96 & FY 97
For our funding outlook for FY 1997, right now, I could not give you an accurate prediction. What I could share with you is our gut feeling right now. And, that is we expect the funding levels to be about the same. To say there’d be any increase or decrease, I’m not in a position at this point to be definitive about that.
As this year, next year we anticipate a priority for funding Health and Safety and your repair/rehab proposals first. That priority will in fact remain intact.
Just a note on equity loans, to date we’ve obligated $1.2 million. We have a total set-aside of $2.5 million. So, right now, we’ve obligated $1.2 million. So we have a little over $1.2 million left to be obligated yet.
1944-E
As indicated earlier, we do have 1944-E. We issued a proposed rule that was published January 17. Basically, it was addressing the point system. Now, we’re addressing the point system to the extent that the law will allow us; to the extent of the Administrator’s administrative latitude, we’re looking at different ways, for example, for determining income as it relates to the point system. We’re also providing guidelines for transactions involving participation loans — Leveraging. We do appreciate your candid comments regarding the provisions of this regulation and they are in fact appreciated. At this particular juncture, we are working very closely with the Administrator’s office to clarify certain policies that we do have in fact in that proposed rule certain policies that we had to rethink, to take a second look at as a result of your comments to the proposed rule. We do, however, expect to have that regulation out within the next 30 to 45 days in a Final Rule making.
QUESTION: On the Reforms, it is my understanding that the USDA OIG proposed a set of reforms and actually transmitted that to the Hill. What is the Agency’s position toward the OIG reforms?
ANSWER: Eileen Fitzgerald: They have not formally transmitted them to the Hill; they have informally shared it on the Hill. So they haven’t formally submitted any legislative proposals. There are six proposals. They basically deal with civil and criminal issues that would parallel HUD statutes. The first three of those, we think are pretty easy to wrap into our reform package and we’re going to try to do that and get them through. The second set we basically are okay with in principle; the attorneys have raised a lot of issues. They’re not in legislative language; unfortunately, to get anything through our attorneys, the legislative language takes forever. So we’re going to hold those and put those as a second package. The one thing that we’ve been having some disagreements with the IG on is the Identity of Interest. I think we’re winning the battle. They are basically coming around to saying okay, maybe we’ll say we don’t necessarily agree with you, but we’re not going to disagree with you if you can show us you can manage Identity of Interest. The Administrator’s position is that Identity of Interest is not the problem; the problem is bad Identity of Interest situations, so let’s figure out a way to identify it and manage it and disclose it, but let’s not just throw the baby out with the bath water. So, I think the IG is slowly coming around to saying okay, maybe we’ll agree not to give you a hard time if you try that for a while.
ANSWER: Caroline Cooksie: We’ve had meetings with OIG where we sat down and agreed that we would all get along. In doing that, we were all going to sit down and come up with some legislative proposals. And, we did that; we agreed basically on five of them. The one we did not agree on was the Identity of Interest issue. So, for most of those legislative proposals, the language that you see in the proposal itself is language that came from us, that we sat down in tandem with OIG and came up with. So we absolutely have no problems with them except for identity of Interest. They don’t like it, but they’re going to try to live with it if we make some reforms in the regulation in how we put some cost data out there, in how we track it. So, I think they’re willing to do that now.
ANSWER: They dropped the provision about amending the IRS code. That’s the problem; they were sharing it with the world before they shared it with us. And, then they had a second set which they subsequently shared with everyone; they toned that one down. We’re always going to have issues; we backed them off from the ones that seemed downright. . . . The original report that they sent in July or August, we actually made formal comments on that. We were just very concerned that their methodology was not correct, it did not parallel industry practices, and we just kind of thought they were off base. I guess it was one of the first times we had submitted such a lengthy response to their charges and issues. They made broad statements in there such as on Identity of Interest that they’ve never audited a loan with FmHA that had an Identity where there wasn’t corrupt dealings or something. We have a new person in the IG’s office that we’re dealing with a lot who actually seems reasonable. She’s trying to learn how to focus on the big things and not get hung up on the small stuff. We’re trying and I think we’re making a little progress with them, particularly in getting them to back off a little on the Identity of Interest. Again, they’re not saying they totally agree with us, but, they’ve basically said we agree you should just go ahead and try to handle this in a management, regulatory fashion.
ANSWER: Obie Baker: There’s one other area that we’re working on — determining the necessary level of assistance in Tax Credit proposals. There is a conflict between the Section 515 statute versus the IRS code that deals with determining the necessary level of assistance going into a proposal. One, the Section 515, caps us as to the amount of equity infusion we can require versus the other, basically saying you process, you review, you coordinate with other agencies that are providing Federal benefits to the extent that no more subsidy would be provided in the proposal than is necessary. That’s one we’re really wrestling with.
QUESTION: Are you working on the new 538 guarantee program, and who will be served by the program — Low income? Moderate income? Will the guarantee program try to reach rural America? Some of the States are working on pilots themselves; are you considering selecting some State housing agencies?
ANSWER: Obie Baker: You hit on a key point — we really can’t tell you at this point where the program will work or won’t work. That’s one of the reasons we want to engage a demonstration — to have some sample transactions out there to determine geographics —where is the program feasible and not feasible? Section 538 actually mandates that the Agency contract with an independent organization to do a study to determine exactly what you’re saying. But, this is a different vehicle as opposed to 515. What we’re thinking right now is that the level of income that we’re unable to reach with 538 would in fact, be picked up as a result of the amenities and benefits of 515. You raise a very good point; however, to tell you that we can reach persons with incomes of $7,500 gross income with 538 in rural areas, I’m unable to tell you that. Not likely. That’s about as far as I can go with it.
ANSWER: Eileen Fitzgerald: We would have some kind of NOFA, and State agencies would be eligible to apply. I don’t think in the NOFA that we would specifically say any five States because there might be someone out there that we have not spoken to, and we don’t want to predetermine. This will have a very short turn-around, probably 30-40 days or something. I would imagine it would be quite competitive. Since it’s a demo, what we’ll be looking for is different kinds of proposals. Population limits — right now, the statute says in rural areas as prescribed by the Secretary. We’re having conversations with our OGC; the initial feeling is that it needs to parallel our current population limits which would be under 20,000. But, we have other programs within Rural Development, like B & I, which go up to 50,000. So, we’re still talking about that. That may also be something, if we feel like it doesn’t work under 20,000 under a demo, that we could go in to try to change. The authority was passed at the end of March; I feel we’ve done a really great job through a lot of staff work to get it to the point we have it now. Talking to Fannie Mae and Freddie was a big point; there’s no point in having it for the conventional market if we can’t sell it. So, that’s really worked out.
QUESTION: Is there a prohibition in using 538 to acquire existing housing? How about for preservation? How about for tax-exempt financing to get the lowest interest rate?
ANSWER: Eileen Fitzgerald: In the law there is no prohibition. That does not mean that we would have to allow that. I think we have a real concern about that, to be frank. To just not create any new units out there, I think, might make this very difficult to sell as a program to have Congress continue funding. I think we’d be interested in seeing a creative way to use this for preservation. The tax-exempt is still up in the air; right now, there’s an OMB/Treasury circular that prevents some Federal Agencies from guaranteeing tax-exempts. We have a totally unrelated issue with our Community Facilities program, and there was statutory language in the new Farm Bill that we think says we can guarantee tax-exempts. We’re trying to get this through OMB and Treasury; they’ve historically been opposed to it because they say you’re providing a double subsidy. It’s kind of inconsistent because we do that with Tax Credits. I’m not sure if we’re going to be able to have that problem solved in time for this demo, so we might not be allowed to do it for this. I think that we have a very good shot of having it solved by next year. It could take a little while.
QUESTION: What’s the proposed 538 guarantee level in the president’s Fiscal Year 1997 budget?
ANSWER: Eileen Fitzgerald: We haven’t put it in because when the President’s budget was submitted, the program didn’t exist. I don’t think that there would be any big problem in getting that added in. We’re still working on what the subsidy rate is. The subsidy rate all depends upon how you design the program. As you may know, there’s something in the program that talks about a minimum of 20% of the loans have to be made at the Applicable Federal Rate (AFR). You see that as a minimum or you can see that as a maximum. If you see it as a minimum, and you assume that 100% of the loans are going to be made at an AFR, that’s going to cost you a lot because that’s a subsidy the government is going to have to pay. If you say only 20 or 25% of your loans are going to be made at an AFR, the program’s going to be a lot cheaper. That’s one example of where you can make a really big difference in what the subsidy rate is. So, as we develop a program design in preparation for our Stakeholder’s meeting, we’re going to have our Budget folks look at a couple of scenarios and the what the subsidy costs. I think that we will also be talking to the appropriators to get it in there. If you were talking to your Members, I wouldn’t be surprised if you were looking for a least a $50 million initial program to get it started. Usually, guarantee programs start off between $35 and $75 million; that’s a very small cost. This was Congressman Bereuter’s program; it was a Republican issue. We’ve been trying to be very supportive of seeing how we can get this off the ground. I would expect they would be focused on getting it in there again.
QUESTION: What are the rates, terms, maximum loan amount, minimum number of units?
ANSWER: Eileen Fitzgerald: The term is 40 years by law, not to exceed 40. The rate, we’re assuming would be fixed, but to be determined. We might have a maximum rate. There would be some negotiation between the lender and Borrower not to exceed X. Again, that’s a policy decision we haven’t made yet. The law says that the loan amount can be up to 97% of value for non-profits, and 90% of value or development cost for profit-motivated Borrowers. The law says you can provide up to 100% guarantee; I’m not at all sure we would do that. We need to think that one through. The issue of a minimum number of units may be a viability issue. We’re assuming this would be toward the larger markets. Now, we have the population limit which we still have to figure out how to deal with. I think when Congress authorized the program they were definitely thinking of it more as a Moderate Income, larger rural area program. To the degree that you use it as an unsubsidized program, I think it would have to be outside your urban areas. Once you start combining it with Tax Credits, you have a little bit more flexibility. There’s a fair amount of things required in the statute, but not a huge amount; we have a lot of flexibility in how we can put this together. The rate could potentially be negotiated. But, we don’t have anything final.
QUESTION: The President’s budget proposed $220 million for 515. I understand you can’t do that with the current subsidy. What do you do to lower the subsidy cost?
ANSWER: Eileen Fitzgerald: We would do a 30 year term with a 50 year amortization. This is something that had been proposed on the Hill as a cost-cutting measure.
QUESTION: On new construction RA, do you assume every unit will receive RA? What percentage of new construction was planned to have RA?
ANSWER: Obie Baker: We projected the number of units that the 515 dollars would fund and from that we wanted to assure that we had enough RA to fund all of the units. So, yes, we took the worst case scenario: anticipating funding all of them.