Charles Wehrwein
Deputy Administrator
Multi-Family Housing
Rural Housing Service, USDA
Washington, D.C.
Addressing NAHB:
The first thing I want to cover is the Reforms; the Final Rule will be coming out — some of the changes in it came out of the comments. There were about five or six big policy issues that arose in the comment period — and there were some comments we could address without statutory changes. We also made some technical corrections.
On the number of Designated Places, the percentage of places is being increased to 10% from 5%. We’re providing Exception Authority for the Administrator to raise this to 20% if the funding increases. So, we’re doubling the number of places that can be designated compared to the Interim Final Rule; if funding increases, we’ll be able to increase it even more. We still have the ability to increase it based upon leverage and functional partnerships with State or local bodies. Hopefully, this is good news for everyone.
And, we’ll have the ability to expand it based on geographic diversity. One thing we didn’t get any comments on is the designation of geographic diversity. We will take a look at that for our Reinvention; any comments or thoughts on this will be welcome.
More flexibility in the Designation of Places — where there is a signed partnership or Memorandum of Understanding (MOU) with
a State or local governmental authority (or, possibly, private partnerships as well), but, where they bring other resources to the table (this could be in many different forms, including property tax relief, discounted loan funds or grants, or State RA) and we have a qualified MOU in place and approved in the National Office, basically what we will allow is for the RD State Office and the State Agency such as an HFA to determine what places are high need. They will have to continue to look at the elements and criteria that are set out in our statute, but they can consider other criteria that are important to the state. Obviously, the State Agencies are a little closer to it and have an idea of what they are looking for, and they try to be responsive to the Governor’s concerns. The only thing we will be doing within that range is to hold harmless the designated places which would have been present under the normal system.
New York and Partnership
An example may be helpful. In New York state, we have five times as much money that comes in from the State as from our program. Let’s say we gave the state an allocation of $2,000,000; the State partnership may bring in another $8,000,000; this is a total of $10 million in total benefits. Of that total, $2 million will have to go to Designated Places, as would be the case under our designation. The remaining $8 million (the combined benefits, including ours) can go to any places that the State and our State Office have approved as a high need areas within the state. No, this approach will not take legislation. This addresses the issue that the combined resources be used, rather than saying that our money goes here and your money can go to the rest of the places. Sometimes, it is the combination of the various resources that is beneficial to the state’s designated places as well. Rental Assistance is not often a state resource — it is much more beneficial to be able to put the RA in combination with other State resources in areas that need it. The total resources going into the Agency designated places remains the same with this approach, although all resources going in may not be ours. We’re not limiting our RA to just our designated places. This is the result of working in a partnership — when the partners bring money, they should have a say in where the money goes.
Let’s say tax relief was available only in a certain way, but in areas outside our Designated Places. There is no way those areas would get RHS funding without an agreement like this. Therefore, this approach is bringing resources to those areas; yes, there is a little give and take, which is the way it should be. And, this approach provides flexibility.
Tribal Lands and EZ/EC Communities are proposed to be automatically added as designated places. About 75% of EZ/EC Communities had a designated community in them; this is an Administration policy to make sure those areas are included.
Leverage
For purposes of Agency points for leverage, where Tax Credits or equity of any sort are coming in at a bargain rate (but, these must be in addition to the 5% equity contribution), they will be counted as leverage. Iowa had more equity than usual at a very low blended rate. Basically, we would look at that as leverage; whether it is the developer through the sale of Tax Credits or what have you, any party bringing in inexpensive money that has a positive effect of lowering rents over the long term, is bringing in leverage.
There were a few comments on the 250 household size that requested it be eliminated or that there be no minimum. We had, in the regulation, the option that the State Director could request an exception to that — and that is the way we are going to keep it.
Weights and Ranking
There were some requests that the factors and weights for ranking for the designation of places be modified, and that the elements we used for the weighting system be changed. We were looking at poverty, the 60% (because that fits with Tax Credits), substandard housing and rent overburden; we weighted them equally and on an absolute and relative basis. That is not a regulatory decision on the weighting — it is an administrative decision. I think we will keep the equal weighting the same until the three year designation runs out. I don’t think we have enough information to make the call about one element being more appropriate than another. We’ve heard from various states and folks in those states, and it has really been all over the map. One state says the census information is lousy or that the substandard housing data are inadequate, and another state says the data are correct. We’re going to leave the relative weighting the same and get a little more data on it as we go through. I think when the three year designation is up, if we see a need for a change, we’ll talk to the industry at that point and make a change.
We are going to make a change to the Poverty definition and go to 30%, rather than 60%, in designating places. This will not have an impact in some states; it will have an impact in other states. This will have the same impact as giving more weight to rent overburden. If anything, in some states, this may have us go toward higher income areas where people are more rent overburdened. This would be a more consistent government definition of poverty — which is not consistent with the Tax Credit definition. This doesn’t, of course, mean that projects won’t be built with Tax Credits and aimed at that particular segment. We’ve looked at our population, and this should be no surprise to you, but these are the people we’re serving anyway. Many of them are below the 30%.
Agency Selection before LIHTC
These are the changes we’re going to make from the Interim Final Rule to the Final Rule for the Reform legislation. These will be in place for funding in FY 1998. We hope to have the changes come out concurrently with the NOFA. We hope to do this early in November this year rather than later. We will have flexible closing dates for the NOFA that will roughly correspond with the period of the state Tax Credit allocation cycles. We will close before a state’s allocation cycle closes; the borrowers will be able to come in with the presumption, assuming they get a positive indication from the Tax Credit Agency, that their leveraging will be scored on the assumption they will get those benefits. Our NOFA will close, the selections will be made and ranked, and if they don’t get the Tax Credit at the end of that cycle, the application will drop off and we will go to the next one. Someone has to go first here, and we decided to go as early as we can.
Obviously, everything that is in this regulation will be in the Reinvention regulation which will be out for comment later.
Section 538 Program
538 regulations are moving along pretty nicely. We expect to have a proposed rule out in November of this year. This will be out for full public comment. I would hope to have one or more Stakeholder type Meetings. We’re trying to get 538 right, but it is new for us, and I imagine we will have some growing pains. We are locked in to some statutory limitations that are some of the biggest issues. We have put together a legislative request for changes that includes the term, the rate adjustability, and transferability; that proposed legislation, signed off by the Secretary, did actually go to the Hill last week. That is a monumental feat — up until a couple of months ago, only one piece of RHS legislation, actually signed by the Secretary, had made it to the Hill since 1992. That is good news. We’re hopeful this legislation will be enacted. We’ve lowered the subsidy rate dramatically
We are pushing ahead. We’re on time to get this out as a proposed rule. We’ll have a comment period; we’ll pull it together, and we plan to issue a Final Rule in May 1998. We’ll plan to issue a NOFA concurrently with the Final Rule and have 90 days to receive applications.
Shared Risk
We are going to stay with a shared risk with the lenders. We’ve been told in strong terms by the Mortgage Bankers that this is clearly a bad thing — they want to see us, since we have authority, go to a 100% guarantee. We may have authority to do it, but that runs counter to the Administration’s direction in any new program. From a lender’s perspective, I think risk sharing is a good thing. I also think that if we get enough momentum out there, the secondary market can absorb anything.
We’re thinking of requiring some Affordability requirements that remain with the asset for the term of the original loan, but prepayment will be wide open. We may peg that at 100% of the median income. This will be in the Proposed Rule for comment. We aren’t sure of how the Agency could enforce this after prepayment.
We’re Reinventing (which means basically throwing out and starting over) all the regulations which govern multi-family programs, including Farm Labor Housing. We’re about a third of the way through. We’re taking bites of the apple and looking at various portions of the program. We’ve been pulling together all of the notes from the various Stakeholder Meetings over the last few years, and pulling in staff from around the country to help us with what works and what doesn’t work. Currently, these regulations are scheduled to be in Proposed Rule form for comment around April 1 next year. I’m hoping we could follow up with Stakeholder Meetings again to cover the issues. For the most part, we’ve been rather true to a lot of the issues that came up in the Stakeholder Meetings as well as the things we have been hearing about since those meetings.
Some Policy Calls
So far we have hit on some issues: origination, some management, some servicing, occupancy, rents in Farm Labor Housing. I’m highlighting the policy calls we have made; again, all these will be subject to comments when they come out.
Origination: We’re shooting for a more market oriented program in terms of design, amenities and facilities for the locales. We’ve been trying to give flexibility in different ways. Some states still are locked into the past. Basically, we’re going to allow what is common in those areas as long as Basic rents are within the affordable market rents for moderate income tenants in that community. We’re going to shoot for a lot more Basic rents equal to market at least at the time of underwriting. I don’t know how easy that is going to be. We really need to be looking out for our security more as the lender, and what happens in the event that RA might not be renewed.
Life Cycle Reserves
Participation loans: As long as there are no negative impacts on our RA. Reserve Accounts will be required and underwriting will be more in tune with project life-cycle costing. I hope you’ve seen a little more flexibility in most states on rental increases that are necessary to fund Reserve Accounts. It will be in the regulation going forward.
These regulations are going to be much more direct; the handbook will more detailed and more user friendly with examples. We will put them out in CD-ROM form and have Key Word referencing.
2% Withdrawals
Withdrawals: more flexible rules for withdrawal of the 2% Initial Operating Capital.
I don’t see the magic of two or five years. If someone misses a deadline and the project is doing fine, that they shouldn’t be able to get their money out doesn’t make any sense to me.
Management: We’re going to focus from a regulatory standpoint and try to steer our staff, through training, toward asset management and not doing project management. We’re going to put up clear objective standards for borrowers to meet rather than processes to perform. We’re going to change our servicing visit schedules to deal with the realities of where owners and borrowers are today. We’ll have an Annual Walkabout Inspection which is not currently required. We’ll require that our staff get to the assets at least once a year: get out of the car and take a look at it. That can be with or without notice. We’re going to keep out three year Supervisory Visits, but we’re going to separate them into three categories: physical, occupancy and management administration. It makes sense sometimes to go to a management company and look at all of the documents for 10 different complexes and then maybe do the physical inspection later when it works better for all of the parties involved. For the same project, all three of these things don’t have to be done at the same time.
Project Budgets
Project budgets: Reviews will be simplified and streamlined to assure a more timely turnaround on our part. From a documentary standpoint in general, we are going to go to a different concept:
— some things will need to be approved;
— some things will need to be signed off on;
— in the event things are not signed off on within a
timeframe, if they fall within a certain limitation,
they will be automatically approved;
— some things will need to be done a first time, but
not a second time;
and so forth.
A lot of this comes directly out of the Stakeholder comments. We’ve already gotten this one through the policy side.
Special engagement audits: Next week we’re having a meeting on this for larger complexes. We’re going to have some representation from the industry; OIG will be there. We’re going to try to get together on some process that works for everybody. We’re going to see if we can’t get something that is a little more workable — that works better for us and for OIG. And, maybe less expensive (or, not more expensive for the projects) that will satisfy the naysayers. This is for the larger projects; for smaller projects, we are considering what we can do.
I don’t know that a Compilation is worthwhile, but we’re still going to need some independent verification.
Management fees: We haven’t gone through this yet.
Welfare and Immigration Reform
Welfare and Immigration Reform: We’re better off than I thought we were going to be. I think the impacts are going to be less than we’d thought. Clearly, to the extent that some of our residents are losing Food Stamps or SSI, we all may have some impacts that we can’t presently see. The elderly are not going to be impacted very much, so where you have elderly complexes, you may not need to worry a lot. Where you have family complexes with high AFDC and Food Stamp benefits, those tenants may see a reduction in their real income. Therefore, we may have some problems. RA cannot be adjusted for Food Stamps because Food Stamps are not part of the income. We may be seeing some problems if those residents do not generate some other source of income. There is not much we can do to help out. That is the bad news. On the good news side, for all of the residents as of August 22, 1996 (or maybe as of the date we put out Final Rules to deal with this), you will have no issues of benefits. Definitely from August 22, 1996, you don’t have to worry about whether they were immigrants or non-immigrants; until this regulation comes out, you shouldn’t be checking anything for 515 complexes. When the regulation comes out, it will likely say that, as part of the annual certification and review, you will have to ask them or have them check off a box indicating if they are a citizen, qualified immigrant or a non-qualified immigrant. If they say they are a citizen, you don’t have to do anything else. You can do something else if you suspect something, but you don’t have to do something else. If they indicate they are a qualified immigrant, we (the Agency) will have to verify that with INS; we don’t yet know what sort of process INS is developing to verify this, or if it will cost any money, or how much time it will take. What I do think is that you cannot deny housing benefits to any qualified immigrant pending the research into that status. What happens if it comes back and they are not qualified is there are some checks and balances to give them time before they would lose assistance. If it is going to cost money, we will have to work with you to see where it will come from. We don’t have the budget for it; it is not going to come out of your Return to Owner. Is it going to come out of the project; is the tenant going to pay for it; can we charge fees? Currently, we can’t charge such fees. We don’t know yet; we have to see what INS comes up with. I hope INS will come up with a free system. Non-qualified immigrants are ineligible. This will cover applicants and tenants from the time the RHS regulation goes into effect.
Occupancy
Occupancy in general: we’re going to allow more flexibility on over- and under-housed tenants when no suitably sized units are available. We’re going to give clearer guidance on that. We’ve been hearing a lot about handicapped and disabled tenants in elderly complexes; we’re talking to the attorneys about what sort of flexibility we have. HUD is proposing legislation about drug users and chronic inebriates who qualify as disabled. We’re taking a look at what we can do outside legislation.
Tenant Certifications: we’re looking at a less onerous policy on tenant certifications between annual recertifications. This is something which has been quite an issue. When tenants are in up and down job markets, the regulations are requiring almost monthly recertifications; this is very burdensome to management.
RA
RA: we’re going to try to improve the usage of RA, and try to allow more movement of RA where it is not being used. Where an owner gives up RA where it is not being used and a tenant comes back, he should be held harmless.
Expiring Section 8 contracts: We have been trying to set up meetings with the IRS regarding the impact of converting to RA and Interest Credits. Since the Appropriations Bill did not include the proposed conversion of Section 8 to RA, it has not been as high a priority as before, but we are on it.
Identity of Interest: This will continue to be a focus of OIG and the Agency. We got a lot of interest from the Hill on Identity of Interest. It had been called out in the IG’s report. There is strong Hill support for strengthening the Agency stance on Identity of Interest. This is a big issue. We are going to want the ability to get information regarding an Identity of Interest, but I’m not sure we will require audited financial information.
Thank you for the opportunity to make these comments.