[House Hearing, 108 Congress] [From the U.S. Government Publishing Office] RURAL HOUSING IN AMERICA ======================================================================= HEARINGS BEFORE THE SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION __________ JUNE 19, JULY 8, 2003 __________ Printed for the use of the Committee on Financial Services Serial No. 108-41 91-225 PDF For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania RICHARD H. BAKER, Louisiana MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana RON PAUL, Texas BRAD SHERMAN, California PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York JIM RYUN, Kansas BARBARA LEE, California STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas Carolina MICHAEL E. CAPUANO, Massachusetts DOUG OSE, California HAROLD E. FORD, Jr., Tennessee JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas MARK GREEN, Wisconsin KEN LUCAS, Kentucky PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York VITO FOSSELLA, New York MIKE ROSS, Arkansas GARY G. MILLER, California CAROLYN McCARTHY, New York MELISSA A. HART, Pennsylvania JOE BACA, California SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama TOM FEENEY, Florida RAHM EMANUEL, Illinois JEB HENSARLING, Texas BRAD MILLER, North Carolina SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia TIM MURPHY, Pennsylvania GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont J. GRESHAM BARRETT, South Carolina KATHERINE HARRIS, Florida RICK RENZI, Arizona Robert U. Foster, III, Staff Director Subcommittee on Housing and Community Opportunity ROBERT W. NEY, Ohio, Chairman MARK GREEN, Wisconsin, Vice MAXINE WATERS, California Chairman NYDIA M. VELAZQUEZ, New York DOUG BEREUTER, Nebraska JULIA CARSON, Indiana RICHARD H. BAKER, Louisiana BARBARA LEE, California PETER T. KING, New York MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont Carolina MELVIN L. WATT, North Carolina DOUG OSE, California WILLIAM LACY CLAY, Missouri PATRICK J. TOOMEY, Pennsylvania STEPHEN F. LYNCH, Massachusetts CHRISTOPHER SHAYS, Connecticut BRAD MILLER, North Carolina GARY G. MILLER, California DAVID SCOTT, Georgia MELISSA A. HART, Pennsylvania ARTUR DAVIS, Alabama PATRICK J. TIBERI, Ohio KATHERINE HARRIS, Florida RICK RENZI, Arizona C O N T E N T S ---------- Page Hearings held on: June 19, 2003................................................ 1 July 8, 2003................................................. 43 Appendix: June 19, 2003................................................ 63 July 8, 2003................................................. 195 WITNESSES Thursday, June 19, 2003 Anders, Gideon, Executive Director, National Housing Law Project, Oakland, CA.................................................... 20 Bridges, Betty, President, Council for Affordable and Rural Housing, Washington, DC........................................ 22 Fong, Phyllis K., Inspector General, U.S. Department of Agriculture, Washington, DC.................................... 6 Griffiths, Patty, Housing Director, Community Action Commission of Fayette County, Ohio appearing on behalf of the Housing Assistance Council............................................. 24 Jones, Jack, Vice President, Chase Manhattan Mortgage Corporation Deerfield Beach, Florida on behalf of the Mortgage Bankers Association of America......................................... 27 Miller, Madeline, Executive Director, Wil-Low Nonprofit Housing, Inc., Hayneville, AL........................................... 29 Myer, Joe L., Executive Director, National Council on Agriculture Life and Labor Research, Inc., Dover, DE, Executive Committee Member, National Rural Housing Coalition....................... 31 Rayburn, James R., Jackson, MI, First Vice President, National Association of Homebuilders.................................... 32 Shear, William B., Acting Director, Financial Markets and Community Investments, U.S. General Accounting Office, Washington, DC................................................. 8 APPENDIX Prepared statements: Ney, Hon. Robert W........................................... 64 Anders, Gideon............................................... 66 Bridges, Betty............................................... 76 Fong, Phyllis K.............................................. 85 Griffiths, Patty............................................. 104 Jones, Jack.................................................. 112 Miller, Madeline............................................. 119 Myer, Joe L.................................................. 126 Rayburn, James R............................................. 134 Shear, William B............................................. 142 Additional Material Submitted for the Record Bridges, Betty: Written response to questions from Hon. Barney Frank......... 157 Position Paper by the Council for Affordable and Rural Housing on the Aging Section 515 Rural Housing Portfolio... 159 Miller, Madeline: Written response to questions from Hon. Barney Frank......... 194 WITNESS Tuesday, July 8, 2003 Dorr, Thomas C., Under Secretary for Rural Development, U.S. Department of Agriculture, Washington, DC...................... 45 APPENDIX Prepared statements: Dorr, Thomas C............................................... 196 Additional Material Submitted for the Record Dorr, Thomas C.: Written response to follow up questions...................... 206 RURAL HOUSING IN AMERICA ---------- Thursday, June 19, 2003 House of Representatives, Subcommittee on Housing and Community Opportunity, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to call, at 2:45 p.m., in Room 2128, Rayburn House Office Building, Hon. Robert Ney [chairman of the subcommittee] presiding. Present: Representatives Ney, Tiberi, Renzi, Castle, Waters, Lee, Scott, and Davis. Mr. Renzi. [Presiding.] The Subcommittee on Housing will come to order. I would like to read an opening statement. Today, the subcommittee meets to discuss the importance of rural housing in America. I am pleased to announce that this is theubcommittee's first hearing on the subject in over a decade. Our goal is to review these programs and look at the ways to increase the proficiency and cost effectiveness. Rural areas are often plagued by poverty, high numbers of substandard homes, affordable housing shortages, costly development and inadequate access to mortgage loans. The Rural Housing Service funds its programs through an insurance fund which provides direct loans, guaranteed loans and grants to help families obtain and maintain affordable housing in rural areas. Today, it is estimated that rural housing programs help finance new or improved housing for 65,000 moderate low-and very low-income families each year. However, questions have arisen in recent years about the effectiveness of rural economic development policies and creating new opportunities for rural residents, as agriculture and other resource-based economic sectors decline in their overall importance to most rural economies. A wide ranging set of often overlapping programs target rural areas and their special needs. But according to some critics, there remains little overall coordination of these various programs to produce a coherent rural policy. Over 88 programs administered by 16 different federal agencies target rural economic development. The U.S. Department of Agriculture administers the greatest number of rural development programs and has the highest average of program funds going directly to rural counties-- approximately 50 percent. On a personal note, I was raised in southern Arizona and grew to understand that a safe and secure home is the foundation for the family unit. My belief in the importance of home ownership remains steadfast. It is of great importance to apply these fundamental values and rural experiences to help communities develop new economic vehicles that will enable them to grow and prosper. I look forward to hearing from all of our witnesses today to discuss the various ways I which home ownership can be strengthened for our rural communities and contribute to the overall quality of life for rural families. At this moment, I would like to recognize Ms. Waters from the great State of California. Ms. Waters. Thank you very much. I know that Chairman Ney is tied up in a meeting and could not be here. But I am delighted that you are chairing this meeting. And I thank Mr. Ney for calling this hearing on an issue that really needs to be discussed and is central to the need for more affordable housing in our country. Usually, when we discuss poor people, the focus is on urban centers. However, there are poor people in rural America across this country who need our assistance to help improve the quality of their life. The U.S. Department of Agriculture's rural development mission is to administer programs that are designed to meet the diverse needs of rural communities. The three principal program areas are Single Family Housing, multifamily housing and Community Facility programs. According to an American housing survey, with the assistance of the Housing Assistance Council, of the 200 poorest counties in America, all but 11 are non-metropolitan. There are 363 rural counties where the poverty rate has exceeded 20 percent. Since these figures started being collected in 1960, Title 5 of the Housing Act of 1949 authorized the Farmer's Home Administration to grant mortgages for the purchase or repair of rural single family houses. Second, it authorized financial assistance in rural areas to farmers, owners, developers and facilities, ensuring to them various loans and financial assistance for low rent housing for farm workers. One of the primary issues that needs to be addressed is the rental housing program. Section 515 of the Rural Housing Program provides direct loans to non-profit and for-profit developers for multifamily housing for very low-and low-to moderate-income families, elderly persons and persons with disabilities. It is important that when RHS approves an owner, who agrees not to displace residents from a development, that if an owner decides to convert the property to condominiums or luxury apartments, that residents are protected. That is why in 1987, the Emergency Low-Income Housing Preservation Act of 1987 was enacted after a number of owners of developments that were financed before 1979 were prepaying their loans and displacing elderly and other households from their homes. The RHS rental housing portfolio contains 450,000 rented apartments and Section 515 developments. The average annual tenant income is about $8,000, which is equal to only 30 percent of the nation's rural median household income. The General Accounting Office indicates that 100,000 families could be displaced if the Section 515 portfolio is deregulated. These families have limited means and will not be able to afford market rate rentals. There are over 90,000 Section 515 households who do not receive rental assistance. I will be interested in hearing suggestions on ways to improve the program to ensure that the people who need it most will be served. Thank you very much. And I yield back the balance of my time. Mr. Renzi. I want to thank the gentlelady from California and ranking minority member, a true advocate for the families of limited means, a true fighter. I want to recognize my neighbor over in the Cannon Building, who has taken the time to teach me a lot as it relates to housing issues, the gentleman from Georgia, Congressman Scott. Mr. Scott. Thank you very much, Mr. Renzi. I appreciate your warm and kind remarks. My distinguished colleague from Arizona, I certainly appreciate your chairing this committee. I want to thank Chairman Ney and Ranking Member Waters for holding this important hearing today as well on this important subject of rural housing in America, especially given that it has been about 10 years since this committee has had a full hearing on this important subject, as Mr. Renzi pointed out. My district is very diverse. I represent urban, suburban and rural areas to the south and east and north of Atlanta, Georgia. The challenges of increasing home ownership and providing decent quality homes is different for each of these areas. And from time to time, Congress should ask if a particular policy is working and if it can be improved. I look forward to the testimony from our distinguished panel of witnesses about the effectiveness of rural housing programs. And I certainly want to thank you for taking the time to come up to Congress to share with us your expertise and thoughts. And I also want to mention an issue regarding manufactured housing, which is a large part of housing in rural America. I certainly hope that the industry and Fannie Mae can work out an assessment on available 30-year mortgages. I do not think that rural Americans, especially the elderly, should be penalized for the past unscrupulous loan practices. There are some very serious questions I think we certainly need to take a look at and hopefully, we will get to today. For example, how would the hypothetical block granting of Section 8 programs, which are under attack now, affect rural housing authorities? I think that is very important for us to take a look at, as we look at this issue of moving Section 8 block granting it to the states, which we hope we have effectively stopped. But I think that question needs to be answered. Would this put a strain on other rural housing programs, for example? Also, I understand that the Farm Credit Administration provides rural housing loans. I think we need to examine the question as to: do you find that the Farm Credit Administration programs compete with other Federal programs? And do you believe that requiring a high down payment for manufactured housing mortgages will put a strain on rural housing opportunities? Some very serious questions. This is very timely. And I certainly appreciate the chairman and Ranking Member Waters for doing it and Mr. Renzi, for you doing a fine job of hosting this for us. Thank you very much. Mr. Renzi. I thank the gentleman. And his expertise is well noted. And I am sure the questions you will see today contain a lot of deep substance. I will now recognize the gentlelady from California, Ms. Lee. Ms. Lee. Thank you very much. And I wanted to also thank the chair, in his absence, and to our chair here today and to our ranking member for this hearing and to the panelists who have come to present this testimony. You know, oftentimes, we from urban centers--I am from Oakland, California--forget really that California actually has many, many rural communities. And that we sometimes forget also that in these rural communities, there are deplorable conditions, poor infrastructure. Many of the homes are unaffordable. And so I think that it is a very important hearing today. And it is important for myself, being from an urban community, to really understand and learn and be reminded that what affects urban housing issues--in terms of affordability, in terms of home ownership, in terms of infrastructure, in terms of safety--also affects our rural communities. And we should have a comprehensive strategy in terms of providing for decent and affordable housing for everyone. And that should be part of our domestic agenda. And it should be a priority. So I just want to thank you again, Mr. Chairman, for this hearing and look forward to the testimony. Mr. Renzi. Thank the gentlelady from California for her insights. Move now to the gentleman from Alabama, the former prosecutor, Mr. Davis. Mr. Davis. Thank you, Mr. Renzi, Mr. Acting Chairman, as it were. Let me welcome the members of both panels here today. And let me certainly thank, in his absence, Chairman Ney for calling this hearing. I noted as I was watching the television feed of this in my office, that Mr. Renzi opened by saying that this is the first rural housing hearing in 10 years. I am very much struck by that. I am very much struck by that. When Michael Harrington wrote in 1965 about the other America, he was talking about portions of our country that have been extraordinarily isolated. And he was talking about people whose needs sometimes get lost in this otherwise wonderful process of ours. And as we think about if Michael Harrington were to write that book today or if another Michael Harrington were to write that book today about the other America, I think he would be talking in very large measure about people who are living in rural America. My 7th District of Alabama happens to contain five of the poorest counties of the United States, according to the U.S. Census Bureau. And all five of those counties are extraordinarily rural. And as we talk about moving this economy forward, I think a large part of that conversation has to involve connecting and closing the gap between rural America and suburban and urban America. So I am happy that we have this hearing. And I am happy that it gives us a chance to talk about this pressing issue. I will make one other point. When the administration's budget was announced several months ago, a lot of us on this side of the aisle had sticker shock. Normally, sticker shock is because things are higher than we expect them to be. Our sticker shock was based on the fact that the commitment was much less than we thought it would be. And as someone who represents a rural district and as someone who represents a district that is very much dependent on rural housing initiatives, two things caught my eye. The administration proposed to eliminate the RHED program, the rural housing part of HUD, and the USDA's Rural Community Development Institute, two programs that coincidentally--or maybe not so coincidentally--happen to be the only rural capacity building programs that really exist. A budget says something about our priorities. A budget says something about what we value and what we think is important. And what troubles so many of us on this side of the aisle and some like-minded folks on the other side of the aisle is that in so many areas but particularly when it comes to rural America, we are walking away from a very important commitment that we have made. So to the extent that this hearing gives us a chance to shine some light on that, to the extent that this hearing gives us a chance to hear some perspective on a forgotten part of America, then I very much welcome this process and yield back the balance of my time. Mr. Renzi? Mr. Renzi. I thank the gentleman for pointing out the contentious issues that were surrounding at least the original blueprint of that budget. And I agree with him. I thank the gentleman from Alabama. We will move to our first witnesses. Two witnesses today on our first panel. Our first is Ms. Phyllis Fong, who was sworn in as Inspector General for the United States Department of Agriculture in December of 2002. She is responsible for conducting and supervising audits and evaluations, as well as investigations and law enforcement efforts relating to the USDA's programs and operations. Prior to her appointment at the USDA, Ms. Fong had been an Inspector General for the U.S. Small Business Administration. She is a career member of the Senior Executive Service. Welcome, Ms. Fong. Our second panelist and witness today is Mr. Bill Shear. And he is the Acting Director for Financial Markets and Community Investments at the U.S. General Accounting Office. He has directed studies and is addressing federal oversight of government sponsored enterprises, including current evaluations of empowerment zones, securitization of community development lending and Federal Home Loan Bank System's financial activities. Prior to joining GAO, Mr. Shear was a senior economist at Freddie Mac, where he analyzed home ownership decisions and HUD's geographic purchase goals for Fannie Mae and Freddie Mac. Welcome, Mr. Shear. I would remind the witnesses that your written statements will be included in the record. We ask that your oral testimony be limited to five minutes. We will begin with Ms. Fong. Ms. Fong? STATEMENT OF PHYLLIS K. FONG, INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, DC Ms. Fong. Thank you, Mr. Chairman and members of the subcommittee. I am pleased to be here today to provide testimony about the Office of Inspector General's work at USDA's rural housing programs. With me today are Bob Young, Deputy Assistant IG for Audit, and John Novak, Acting Assitant IG for Investigations, who will help me respond to your questions. I would like to summarize the highlights of my testimony for you at this time. As you know, the Rural Housing Service within USDA has three primary programs: Single Family Housing, multifamily housing and Community Facility programs. OIG oversight of these programs has focused on a number of different areas over the past decade. During the 1990's, we conducted audit work in the RHS program of multifamily housing and single family housing. Over the past several years, our audits have focused on more specific and narrowly targeted issues, most often in response to congressional and other requests. Two of these audits have led us to identify areas where we need to provide broader audit coverage. These would include insurance coverage in multifamily housing projects and the issue of eligibility for rental assistance. In addition to our formal audit work, our desk officers continually assess program activities. Our investigation side of the house receives and pursues allegations of fraud in RHS programs. Based on our work in these areas, we have identified six major challenges for RHS management. These challenges include: portfolio management; unallowable and excessive expenses charged to RRH projects; RRH projects leaving the program; rental assistance; allocation of funds to rural areas; and performance measures. My prepared statement discusses all six of these challenges in some detail. So today, I would just like to focus on the two most significant issues, in our view. And those two issues are unallowable and excessive expenses and performance measures. RRH programs can be vulnerable to fraud and abuse because of the large cashflows involved. We have worked with RHS to address these problems and to stop those who abuse the program from participating in the program. In 1999, we issued a comprehensive report on program fraud and threats to tenant health and safety, which described the results of a nationwide review of these issues. Financial records that we reviewed revealed over $4.2 million in misused funds at apartment complexes, operated by 18 owners and apartment managers. We identified 145 complexes that showed serious physical deterioration. Problems included leaky roofs, worn exterior siding, unsafe balconies and similar kinds of problems. In response to these issues, RHS has been working with the owners and management agents to resolve these health and safety issues. We have found, through our audit and investigative work, that there are several kinds of common schemes used by owners and management agencies to improperly withdraw funds from complex accounts. One such scheme involves double charging apartment complexes for management-related expenses. Another scheme involves the owner or management agent charging complexes for personal expenses. A third type of scheme involves unallowable charges made by identity-of-interest companies. These in particular are very complex schemes. And they result from program vulnerabilities, which raise a lot of concerns. RHS, in response to these issues, has developed some proposed program regulations to address these problems. Our assessment of the regulations as they are currently drafted has concluded that the proposal has satisfactorily addressed 4 of our 19 audit recommendations. We believe that additional work needs to be done on the remaining 15 recommendations. On the investigative side of the house, we have run a significant number of investigations of multifamily housing programs, which have led to 25 convictions and $8 million in recoveries. And in the single family housing program, we have had 30 convictions and $2.3 million in investigative recoveries. So we do continue to see a large number of investigative allegations and referrals coming to our office. Next, I would like to address the issue of performance measures. As you know, managers need accurate performance data to assess how effective their programs are in accomplishing their mission. We did a review in 2001 to evaluate RD's performance data and results. And we found that in many cases the data that were included in RD's report were inaccurate or unsupported. And as a result, we found that the report was of little utility. We believe these problems are caused primarily by RD's lack of guidelines for collecting, validating and reporting its performance results and documenting its data collection. We also found, in some cases, that the items being measured were not directly related to the program mission and that in other cases, the performance measures were not supported. You may wonder: why is this important? Well, we reported an example of the consequences of inaccurate data in this program. In 2001, we did an audit of the Rural Housing Service and found that RHS reported it had built over 6,500 units, when in fact it had built only 222. As a result of this inaccuracy in data and reporting, $122 million out of the total $153 million allotted to the program was not used for program purposes. Had RHS had accurate data, perhaps this money could have been directed to program purposes. We also believe that it is important for the program to develop internal controls that are accurate and that help the program to manage its program. We did a report in 2002 that reported on some vulnerabilities in the material weakness process within RD. So in conclusion, we believe that RHS faces a number of management challenges in its efforts to deliver safe and affordable rural housing programs. RHS itself has acknowledged these challenges. And we are working with them to develop an audit program for next year that will help them to address these issues. Thank you. [The prepared statement of Phyllis K. Fong can be found on page 85 in the appendix.] Mr. Renzi. Ms. Fong, thank you so much for your insights and your statement. Mr. William Shear? STATEMENT OF WILLIAM B. SHEAR, ACTING DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, U.S. GAO, WASHINGTON, DC Mr. Shear. Mr. Chairman, members of the committee, I am pleased to be here this afternoon to discuss opportunities GAO has identified to improve management at the Rural Housing Service. My testimony today is based on two reports addressed to this committee: first, our September 2000 report on rural housing options; and second, our May 2002 report on multifamily project prepayment and rehabilitation issues. To summarize, we have found that while the Rural Housing Service has helped many rural Americans achieve home ownership and has improved the Rural Rental Housing stock, it has been slow to adapt to changes in the rural housing environment. Also, the Service has failed to adopt the tools that could help it manage its housing portfolio more efficiently. In particular, our work on rural housing options focused on the dramatic changes in the rural housing environment since rural housing programs were first created. These changes raise questions as to why the separately operated rural housing programs are still the best way to ensure the availability of decent, affordable rural housing. Overlap in the products and services offered by the Rural Housing Service, HUD and other agencies has created opportunities for merging programs for sharing the best features of each program. For example, the Service's single family loan guarantee program plans to introduce its automated underwriting capabilities through technology that FHA has already developed and has agreed to share with the Rural Housing Service. Also, even without merging programs or sharing the best features of the programs of others, the Rural Housing Service could increase its productivity and lower its overall costs by centralizing its rural delivery structure. Here I will note that a number of states, including the State of Ohio, have made steps to consolidate the number of district offices within their states. In addition, servicing of single family loans is now conducted centrally at the St. Louis Servicing Center. However, for the most part, the Service's delivery structure remains largely decentralized. In addition, shifts in program funds, such as those from direct loan programs to loan guarantee programs, have contributed to challenges posed by the decentralized rural delivery structure. I will now turn to our work on multifamily issues. Here we found that the Rural Housing Service does not have a mechanism to prioritize the long-term rehabilitation needs of its multifamily housing portfolio. As a result, the Service cannot be sure it is spending limited rehabilitation funds as effectively as possible. It also cannot tell Congress how much funding it will need in the future. How they deal with the long-term needs of an aging multifamily portfolio is the overriding issue for the Section 515 multifamily properties. About 70 percent of the portfolio is more than 15 years old and in need of repair. The Service's state level personnel annually inspect the exterior condition of each property and conduct more detailed inspections every 3 years. However, the inspection process is not designed to determine and quantify the long-term rehabilitation needs of the individual properties. To better ensure that limited funds are being spent as cost effectively as possible, we recommended that USDA undertake a comprehensive assessment of the Section 515 portfolio's long- term capital and rehabilitation needs. It is our understanding that, in response, the Service plans to develop an inspection and rehabilitation protocol by February 2004. The protocol will be based on an evaluation of a sample of properties. Mr. Chairman, that concludes my oral statement. I would be happy to answer any questions. [The prepared statement of William B. Shear can be found on page 142 in the appendix.] Mr. Renzi. Thank you, Mr. Shear. Both your statements are absolutely eye opening. And I am sure we have got many questions here. Let me, for those who might be wondering, make sure we get into the record today that Under Secretary Dorr of the USDA will be attending a second day of hearings that we will be conducting on the subject matter in July, in case we are wondering about that. Before we move on to questions, I recognize Chairman Ney is here in the room. And so we were going to finish up some questions. And then we will turn it back over to the real chairman, okay? Let me recognize the gentleman from Alabama, Mr. Davis. Mr. Davis. Thank you, Mr. Renzi. Let me, if I can, pick up on something that both of you alluded to in your written statements. One of the anomalies that is striking to some of us is that the actual rate of home ownership is frankly very high in rural America. I think it is around 76 percent. At the same time that it is very high, there is significant problem with the quality of housing stock. And because of the problem with the quality of housing stock, often the homes that people own are not typically leverageable as collateral. And they cannot be used in the kinds of wealth creating manner that homes are used by some people who own homes. Can both of you address that particular problem and what RHS can do to get a better handle on that issue? Because the problem strikes me as not necessarily the conventional one of increasing and promoting a higher rate of home ownership, as opposed to rental status, but making better use of the home ownership rate that we have got in rural America. Mr. Shear. I will go first on that. Many of the problems of inadequate ability to use home ownership as a vehicle to gain wealth for those who are near the bottom, low-income people, is a very large challenge. Much of it has to do with market forces that, to a large degree, the Rural Housing Service does not have that much control over. Nonetheless, the Rural Housing Service does deal with a number of partners to try to encourage community development in rural areas, dealing with a number of programs such as self- help housing and other programs. It might be that some of those programs may offer the best hope in terms of making sure that those low-income rural residents who are homeowners have the ability, through the community development in the communities that they live in and through self-help programs, in terms of using sweat equity and other means to try to develop more equity in their homes. Mr. Davis. Ms. Fong, do you have a different perspective or an answer on that? Ms. Fong. Based on my understanding of the work that our office has done, we have not done much in that area. And so I do not have any basis to give you an assessment at this time. Mr. Davis. Let me turn to a slightly broader question that both of you touched on in your written testimony as well, and it is the utility of Rural Housing Services existing as a separate entity or the feasibility of integrating the entity into HUD. As you know from the conversations we have had about Section 8 and conversations we have had about a variety of programs, there is kind of a wholesale consideration and evaluation going on in this House of what the relative role ought to be between, say, the states and particular programs, the Federal government and particular programs and the whole structure and contours of a lot of these programs. I want both of you to talk a little bit about the arguments for keeping RHS separate from HUD. And I will kind of give you the backdrop for these questions. When we had the Secretary of HUD here several months ago to talk about housing, he was not--you know, one of the things that he said that kind of caught my attention and probably the attention of a lot of people in the room, was when I asked him about several rural housing programs that were being eliminated or cut, after struggling with the answers, he finally stated, you know, ``I do not know a lot about rural housing.'' I am not sure that is the ideal perspective I would want a HUD secretary to have. And in light of that, what is going to be the future of RHS if it is put in a different home, if it is put under HUD? Do both of you have confidence that the program is going to be administered in the way that we want, given HUD's relative unfamiliarity with RHS and the principles behind it? Mr. Shear. Since it was one of the reports which I summarized in my written statement that addresses the issue of options, I would address it in this way. The areas where it seems to make the most sense to us to have a seperate service, where the Rural Housing Service really plays a unique role and has expertise and experience, is in dealing with many of the poorest rural areas in America--Appalachia, Mississippi Delta, Colonias and Indian trust lands. I am sure I could include the areas that you alluded to in your opening remarks, as far as some of the districts in the State of Alabama. I think that if the programs of the Rural Housing Service that are targeted particularly to those areas would move to another agency, being it HUD or some other way consolidated with the programs of another agency, that the challenges would be pretty enormous. And that is where we say, in terms of the options, that would be the hardest area. It is in the areas where we start seeing where the Rural Housing Service is providing housing assistance that is not largely distinguishable, in terms of the areas it is serving, when it starts getting into urban sprawl, into more suburban areas and things like that, where it is harder for us to say: why would you want a separate structure? Mr. Davis. So if you will just yield me an additional 30 seconds or so, Mr. Chairman, the perspective that you are expressing is that for the really acute rural housing problems--because we know in this country, rural has different meanings. There is the rural that I have got in my district, which is very poor. And there is the rural that lies outside the suburbs that can be very wealthy. For acutely impoverished areas, your perspective is that RHS has a unique, distinct function that it can serve and that that mission may not be performed as effectively or as well if it is absorbed within HUD. Mr. Shear. We would have more concerns about the ability to integrate the programs that reach into the most acutely poor areas in terms of those parts of the Rural Housing Service. Mr. Davis. Ms. Fong, can you give a very, very brief answer to that same question? Ms. Fong. We have not specifically addressed that issue. It really is more within GAO's purview to look at those kinds of cross-cutting Government issues. I would draw your attention to this: I think that Mr. Shear is absolutely right in identifying the issue of how do you define rural area versus urban area bedroom sprawl? I think that is an issue area for the policy makers to decide how do we define these programs? And I do not have a solution. Mr. Davis. Thank you, Mr. Chairman. Mr. Renzi. Thank you, Mr. Davis. I would like to recognize the gentlelady from the Golden Bear State of California, Ms. Waters. Ms. Waters. Thank you very much. I am sorry I had to leave the room for a moment for an urgent call. But I was very interested in what the Inspector General was describing as the audit and investigative work that has been done. What bothers me about the potential risk of a program like this is mismanagement. But oftentimes, that mismanagement is because we have not done enough in training and assisted those who are involved with the program enough so that they can avoid some of these management mistakes. The business of these managers who have secondary businesses, for example, who may have an electricity shop or a plumbing shop. And they turn out to be the same ones to supply the services, et cetera. It seems to me that that kind of stuff could be easily managed and dealt with. Certainly, it should be disclosed. But you know, these individuals should be vetted. They should be screened in some way, so as to know who they are and to avoid backing into those kinds of situations. Oftentimes, poor people are put at risk because the oversight and the training and the technical assistance that is needed to manage these programs is not built into the program. So what can you tell us about your recommendations? And what can you tell us about the severity of some of the things that you discovered or the lack of severity of some of the problems that you discovered? Ms. Fong. Well, I think you have put your finger on it, that in the area of overcharging, excessive charging to the Rural Rental Housing program, there are an awful lot of allegations of fraud and mismanagement. Much of it is due to activities by so-called identity-of-interest companies, where the project manager has a friend or a relative on the outside. They manage to equity-skim the project's accounts. We are very concerned about that. We have made a number of recommendations to address that. RHS is in the process of developing some regulations in response to our recommendations. Our current assessment is that we need to continue to work with RHS to tighten up those regulations because there should be a way to go after this. I also believe that in FY 2000, the Congress enacted some legislation that would have tightened up some of these restrictions, addressed some of these issues, and provided the Secretary with some authority to impose civil penalties. Once that program takes off and is implemented, that should help to address some of these issues. Ms. Waters. Okay. Let me raise a question about the apartments that roll off the program with prepayment. That is a problem, particularly when we have a housing market such as we have now, where the demand is so great. And if, in fact, the rising costs of maintaining those units is such that the owners, I guess, would be better off by prepaying them and getting out altogether, then I could understand why they would do that. What incentives do we offer to keep them in the program? Ms. Fong. That is one of the challenges that we have identified. Under the current situation, as the projects mature, it is frequently in the project owner's interest to prepay for a lot of reasons. And so as a result of that, there is an incentive payment that is being offered by RHS to project owners to enable them to stay in the program and to make it financially feasible for them to stay in the program. The payments would be equal to the equity value in the property at the time the prepayment is planned. Now we have not looked at how that program is being implemented. We would certainly want to look at that program or at least keep an eye on it, to make sure that these payments are being made appropriately and that, in fact, the project owners continue to be eligible to maintain the properties to provide safe and decent housing. Ms. Waters. Can they borrow money for the upkeep of these apartments at a very low or no interest rate? Ms. Fong. Yes. Ms. Waters. How low? Ms. Fong. I understand it is 1 percent. Ms. Waters. Cannot get much lower than that. Thank you very much. Mr. Renzi. Thank you, Ms. Waters. Recognize the gentlelady from California, Ms. Lee. Ms. Lee. Thank you very much. Let me just ask you, Mr. Shear--and I think Mr. Davis referred to it also with regard to home ownership rate is higher in rural communities. What is it? You say it is 76 percent, which is very high. But I am wondering, given that percentage and yet given the rates of poverty, one is--well, what is first of all the minority home ownership rate in rural America, in terms of the Latino and the African-American community? Do you have that broken down? Mr. Shear. I do not have it broken down here. We can provide a statement for the record on it. Ms. Lee. Yeah, I would be very interested to see that. Mr. Shear. It is definitely, when you go into the poorest areas of America, the rural home ownership rate is much lower than 76 percent. Among African-American and Hispanic communities, it is much lower. And we can provide those statistics for the record. I just do not have them right here. Mr. Davis. Ms. Lee, if you would yield for one second? I think it is 61 percent among minorities. Ms. Lee. Sixty-one percent? That is African-American and Latino? Okay. Thank you very much. Let me also ask, did you find and are you finding, in terms of the housing stock, that rural America significantly needs more housing stock? Or is it rehabilitation only that is a strategy that makes sense? Mr. Shear. For the record, according to the 2001 American Housing Survey, the homeownership rates for African-Americans and Hispanics in non-metropolitan areas was 61 and 59 percent, respectively. With respect to your broader question, I cannot answer directly what Congress's priorities should be in terms of spending and supporting the overall quality of the rural housing stock. With respect to the major multifamily program for the Rural Housing Service, which is the 515 program, what we observe here is that a very high percentage of the projects are around 20 years old. They are aging. They are in need of repair. Many of them, the use restrictions due to the original rent support contracts when those projects were built, are coming due. So our focus, in terms of one of the reports that I discussed, was in terms of the 515 stock and the need to assess and to prioritize the financial and the structural condition of that stock, in order to be able to prioritize where the Rural Housing Service could direct incentive payments and other resources to try to deal with the problem of keeping quality units in this 515 stock. Ms. Lee. Do we need more quality units in rural America? Mr. Shear. Based on our work, I would say we certainly find evidence, as others that you will hear during the second panel, of certain housing needs. There are housing needs in rural and urban areas. But certainly, in rural areas, there are many housing needs. We feel that, in terms of our analysis, we are trying to provide information and analysis that will help the Congress deal with basically how can we manage better, how can we take actions to have resources go further. What are our options in terms of policies? But I think the ultimate question--how much should be spent on the various activities, the various needs that this body faces--that is really your leadership. Ms. Lee. Right. But in terms of a policy option, I mean, a policy option is increasing the affordable housing stock. I mean, we do have a bill, the National Affordable Housing Trust Fund. It increases housing stock, urban and rural America. Would that be a recommendation from you to support, given what you have learned or what you know about rural America? Mr. Shear. In that we have not analyzed the particular program or other programs developed in terms of trying to strengthen the quality of rural housing, I am not in a position to really recommend that initiative versus others. Ms. Lee. But as a policy option, do we need to increase then just the stock of affordable housing in rural America? I know we do in urban America. I am trying to learn more about rural America. Mr. Shear. There certainly are very pressing housing needs in rural areas. And certainly, there are very pressing housing needs, particularly in areas where our work on the Rural Housing Service have really concentrated, to a great degree, on the poorest rural areas in America. And certainly, you have some very pressing housing needs. What I am saying here is that there are some value judgments involved here in terms of where priorities are. But you can certainly find many rural areas where you have housing conditions that are much further from providing adequate, safe and sanitary housing, compared with many of our urban areas. There are certainly a lot of pressing needs in rural areas. Ms. Lee. Okay, Mr. Chairman. So you are not prepared to say, as a policy option, we need to increase the stock of affordable housing as part of your recommendation. Mr. Shear. Basically, I think that that is the point where I just say there are some very pressing needs. But we have not assessed specific proposals. And some of those involve value judgments where we say that we go so far. But then you as a body, in terms of Congress, have to consider what other priorities---- Ms. Lee. Okay, thank you very much. Ms. Waters. Will the gentlewoman yield? Ms. Lee. Sure. Ms. Waters. Thank you. This line of questioning by my colleague from California is extremely interesting and important because we are still seeing on television and in magazines dilapidated dwellings that are falling down in rural America. We are still seeing places without indoor plumbing. And it was just a few years ago that we had Sugar Ditch down in Mississippi, where people had cardboard serving as siding for their homes. Now what do you know about this? Have you been into any of these areas? And if you have, why are you not sitting there just jumping up and down about the living conditions in some of these communities? Mr. Shear. In terms of the poorest areas, I would like to introduce Andy Finkel, if he could come up to the table, he has been the assistant director who has led our work on rural housing. He certainly has visited many of the areas in the poorest rural areas of America. And I think that he could give a better answer than I could. Ms. Waters. Okay. All right. Okay. Mr. Renzi. Mr. Finkel, you will state your full name please for the record? Mr. Finkel. Andrew Finkel. Mr. Renzi. Thank you. Proceed. Mr. Finkel. There are two pictures on the highlights page of our report. They are before and after pictures, actually. One is a shotgun house that a gentleman lived in for 46 years in northern Mississippi. And the next picture is the house that he moved into with a Rural Housing Service direct 502 loan, leveraged with Federal Home Loan Bank, state and local money. It is in a historically African-American neighborhood that they wanted to convert in northern Mississippi. And it took a lot of work with a lot of leveraging. But there were about a half dozen new houses like that built in the development. People moved into a nice neighborhood. We also saw was that in the immediate neighborhood around it people were fixing up their houses. To follow up on you point about people living in cardboard, we also visited the colonias on the border in Texas. And that is where we saw entire neighborhoods of homes without water, without electricity, without sewers. Mr. Renzi. Thank you. Ms. Waters. Just one more and I will not take much longer. Mr. Renzi. Yes, ma'am. Ms. Waters. Is there an assessment of this kind of housing in rural America? Where can we find the status and condition and a real report on the housing needs of rural America? Where is that information deposited? Mr. Finkel. There is a report that comes out on the status of rural american housing, I think it is the Housing Assistance Council that puts it out. Ms. Waters. It describes these shotgun and cardboard---- Mr. Finkel. Exactly. Ms. Waters.----and dirt floors and tin roofs. Where can we get that information? Mr. Renzi. Maybe you can provide it to the gentlelady, please? Mr. Finkel. Yes, we will provide it for the record. Ms. Waters. Okay. Thank you very much. Mr. Renzi. Thank you, Ms. Waters. Let me finish because I want to make sure the chairman is able to get in here and get the next panel going. I was really taken, Ms. Fong, by the inaccuracy of the data that you all found out through the audit. I think your statement said that in one instance, RHS reported that they had built over 6,500 units--page 15--and in fact it had built only 222. This kind of an injustice, I mean, that kind of a severity of disparity of numbers in their audit almost rises or does rise to the verge of investigation type of injustices. So I am going to ask, first of all, that lack of management with the inability to access the proper data, what is your recommendation, first of all, to attack that specific issue? Ms. Fong. I think that RHS has to take a number of steps to deal with this. You are absolutely right. Until we can be sure that the data on program performance is accurate, it is very difficult to assess how well the program is performing. And I think that cuts across every area of the program. We have suggested to them that they look at their data collection instruments, the way that they report the data, their computer systems. There are a number of things that need to be addressed, as well as the very basic issue of how do we-- or how does RHS--define success in its program? What is the performance measure for success? And how do we measure that? And so there needs to be some very clear thinking about this from step one all the way through the end. Mr. Renzi. And general counsel reminds me, RHS is in a position now where the accuracy, from this point forward, will be there for us. Or what is the status? Ms. Fong. I believe this is a multiyear process. I do not know what the status is. Mr. Renzi. We are not there yet. Okay. We are not there yet. I want to follow up on a line of questioning with Mr. Davis. My district is 58,000 square miles, larger than the State of Pennsylvania, including the largest Native American Indian population in America. We lost several babies last year with a late snowfall because I have got Native Americans living in tin shacks, just similar to what Ms. Waters described. We have got frostbite conditions on babies' toes going on. In addition, I have got a situation where I go all the way down to the border of Mexico, where some of the conditions, dirt floors are common. So true poverty is still in the land of milk and honey here in America. And so I want to ask and go back along Mr. Davis' line of questioning. When you target severe rural areas, those with the most needy of areas, what program specifically is it that we can turn to, to help in the most needy and the most critical areas where we have these kind of effects? Mr. Shear. It would be the historic traditional programs of the Rural Housing Service. It would be the 502 single family program direct lending. It would be the 515 program in terms of direct lending for multifamily properties. It would be the Section 521 rental assistance. Mr. Renzi. Okay. I am with you. You have got a list of programs, okay? Mr. Shear. I would say those programs, the distinguishing feature of those programs is that they are very deep subsidy programs that are a fairly high cost per recipient. They do bring housing assistance to the poorest. Mr. Renzi. High cost to the recipient in what area? Down payments or where? Mr. Shear. High cost in terms of the Federal government's role, in terms of the budgetary impact of those programs are high. Mr. Renzi. Oh, okay. Mr. Shear. Yet they are programs that are targeted for the very poor. Mr. Renzi. And the poor's access to those programs is? Mr. Shear. I am sorry, what? Mr. Renzi. The access to those programs, the ability to get all that money out. If it is such a high-cost program, are we using it 100 percent? Mr. Shear. In terms of whether we are using it 100 percent, we have initiated some work which is looking at rental assistance payments and looking at the obligations that are made from that program. And we are looking at questions of what is happening to unliquidated balances and things of that nature. So there is a question of whether all the resources that Congress is providing is going to those uses. Mr. Renzi. Okay, well, unliquidated--that went over my head. Okay? And I realize I am a snot-nosed freshman, but we need to be sure that we are directing the assets, directing these high-cost monies right down at the level. Let me give you a little softball question here and we are going to finish up. The future of where we are going, as far as the research, the auditing, the development, where do you see us going as far as the review and oversight? And we will just finish with that. I apologize, Mr. Davis, we are going to get to the next panel. Mr. Shear. In terms of that, we serve the Congress and, as you know, the majority of our work is dictated by requests from committees. If I was going to point out areas you might want us to look at--and I think, Mr. Renzi, I think that is your question--we would look at, as far as a relatively new program, the Section 538 loan guarantee program for multifamily housing. I would look at the whole question, as the Service has shifted from more direct programs to guarantee programs, of the issues of what types of internal controls, what types of lender oversight when you use private sector lenders, are necessary. And I would also say that the self-help programs certainly look like they are having some very positive benefits in some areas. But we know there is variation. And there is a question of: are there any best practices that could be captured? Mr. Renzi. Thank you. We are now just scratching the surface obviously of an issue that we have grabbed on to, where many injustices exist. I look forward to Chairman Ney's leadership on this issue and his commitment to future hearings on this, as we begin to delve deeper. The chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to replace their responses in the record. I want to thank my colleagues for their questions and their insights. And thank both witnesses--all three witnesses. Thank you. Mr. Shear. Thank you very much. Ms. Fong. Thank you very much. Chairman Ney. [Presiding.] I want to thank Panel Two. To begin the introductions, we will defer to Congresswoman Barbara Lee to introduce Gideon Anders. Ms. Lee. Thank you, Mr. Chairman. Let me just say how delighted I am that one of our panelists here is actually from my district and is a real expert and an individual committed to the issues with regard to affordable housing, both in urban and especially in rural communities. Mr. Anders--Gideon Anders--is the executive director of the National Housing Law Project, which of course is headquartered in Oakland, California. Mr. Anders and the National Housing Law Project are the leading housing rights and justice organization for low-income individuals across the country. The National Housing Law Project's mission is to advance housing justice, increase and preserve the supply of housing, improve housing conditions, expand and enforce low-income tenants and homeowners' rights and challenge the ongoing housing discrimination that many people encounter in both urban and rural areas. I have had the opportunity to work with Mr. Anders and the National Housing Law Project on issues ranging from the need for a national housing trust fund to defending the rights of tenants under the current HUD ``One Strike'' policy. Mr. Anders certainly believes that housing should be a basic human right. And I am delighted that he is here to bring his wisdom and his knowledge and his insight to this subcommittee. And I just want to thank all of the panelists for being here today. And I want to thank our chairman and our ranking member for allowing us the opportunity to listen to someone who is such a leader in rural housing from Oakland, California, Mr. Gideon Anders. Thank you very much, Mr. Chairman. And I yield the balance of my time. Chairman Ney. I want to thank the gentlelady and the witness. And also we will call upon Mr. Castle, who will introduce Mr. Myer. Mr. Castle. Well, thank you, Mr. Chairman. I do want to introduce Joe Myer, who I have worked with for a number of years now. I see on this resume he came to Delaware in 1976. And we worked together on a lot of projects. He is the executive director of a Dover, Delaware--which is a small town which is the capital of Delaware with a rural area around it--based housing group called NCALL, which stands for the National Council on Agricultural Life and Labor Research Fund. He went to Elizabethtown College and then has a masters from Delaware State University. As I indicated, I have toured a number of sites with Joe. I have also talked to Joe on a number of occasions. He serves many different populations--the elderly, our migrant workers, seasonal farm workers--in all of our counties in Delaware. He has a very successful partnership with the U.S. Department of Agriculture to implement rural housing programs. He has been an active participant in many other rural housing organizations, including being the founding President of the Delaware Housing Coalition, chair of the Delaware Rural Housing Consortium and Past President of the National Rural Housing Coalition. He frankly has just been as involved with this subject as anybody possibly can be. I cannot imagine a better person to talk to us today about this. He has volunteered his time to come up and share with us. And we appreciate his being here. I may not be here because I have a conference call I have to do at 4:00. but I really appreciate Joe being here, as well as, by the way, all the other witnesses who, based on their resumes, seemed extremely qualified as well. And I yield back, Mr. Chairman. Chairman Ney. I want to thank you. And we will move to Mr. Davis to introduce Madeline Miller. Mr. Davis. Thank you, Mr. Chairman. Let me thank you for having this hearing today as well. I have the pleasure of introducing the lady who is third from the right, Madeline Miller. Ms. Miller, you are actually not technically in my district. But you are close enough. I am going to claim you for purposes of today anyway. Ms. Miller is a graduate of my mother's school, Alabama State University, and was born and raised in Pine Hill, Alabama. And she is here today because she is the executive director of Wil-Low Non-Profit Housing, a non-profit housing entity that serves Lowndes County and the county that is in my district, Wilcox County. It has done extraordinarily important work in terms of providing technical assistance to low-income and moderate- income families, to enable them in everything from housing reconstruction, to financing, to the purchase of a home. And it is particularly appropriate that you are here, Ms. Miller, because as you heard from listening to the last panel, we have an interesting phenomenon in America, that we have high ownership, high home ownership in rural America. But the quality of the homes is not what it should be. And your program has taken a very significant role in the Black Belt of Alabama, in rural Alabama, in trying to get a handle on that particular problem, so that we do not have a situation or a scenario in which people are technically homeowners but are living in conditions that are still offensive to so many of us in this room. Your organization has taken the lead in trying to do better in that area. And I want to thank you for being here today. Chairman Ney. I want to thank the members for introducing and welcome the panelists. And I will introduce Betty Bridges. Betty is President of the Council for Affordable Rural Housing, which represents the interests of over 300 members that include for-profit and non-profit entities, as well as local housing authorities and financial institutions. Ms. Bridges was an official with the Farmers Home Administration in her home State of North Carolina for nearly 30 years. Patty Griffiths is speaking today on behalf of the Housing Assistance Council, a national non-profit group working to create more affordable housing throughout rural America. She is the housing director of the Community Action Commission of Fayette County, a non-profit organization located in Washington Court House, Ohio. I share Ross County, a neighboring county, with Congressman Hobson. And I got a glowing recommendation on you for a half- hour today. I thought it would let you know that. So Congressman Hobson says, ``hello.'' And also, Jack Jones is Vice President in charge of the Rural Housing Channel for Chase Manhattan Mortgage Corporation, Deerfield Beach, Florida. He is speaking today on behalf of the Mortgage Bankers Association of America, which represents 2,600 companies involved in the real estate finance industry. James Rayburn is a homebuilder and developer from Jackson, Mississippi. He has built more than 3,000 homes and is a noted expert in creating public-private partnerships to build affordable housing. This year, he is serving as the First Vice President of the National Association of Homebuilders. And welcome to the committee. We will start with Mr. Anders. STATEMENT OF GIDEON ANDERS, EXECUTIVE DIRECTOR, NATIONAL HOUSING LAW PROJECT, OAKLAND, CA Mr. Anders. Thank you, Chairman Ney. I appreciate you inviting us to testify today. And also to Congressman Lee, I want to really thank you for the fine introduction, which saved me about 30 seconds in my delivery today. Thank you very much. It is a pleasure. We have restricted our testimony today to the prepayment issues with respect to the Rural Housing Service. We are concerned about several trends that we are seeing with respect to its administration of the Emergency Low-Income Housing Program or ELIHPA preservation program. In our view, the agency is not enforcing ELIHPA, and not preserving units that can and should be preserved. And it is failing to protect residents against displacement. Before we address our concerns, let me just briefly reaffirm our fundamental belief that there is an absolute and continuing need to maintain an effective Rural Rental Housing preservation program that protects residents against displacement and protects and ensures that there is adequate housing in rural areas. Frequently, Section 515 developments are the only available affordable rental housing in a community that is decent, safe and sanitary. The conversion of that housing deprives communities of a critical housing source and forces elderly, disabled and working households to relocate other communities that are tens of miles away from their current homes, jobs and families. We have four concerns with RHS' administration of the Rural Preservation Program. The first of these is that RHS does not have sufficient funding to operate an effective preservation program. RHS has represented to this and other congressional committees that it has sufficient funds to meet existing preservation needs. That is not true. For at least the past 9 years, RHS has not had sufficient money to fund equity loan commitments that it has made to owners who have agreed to remain in the Section 515 program if they were provided an equity loan. In the recent Federal Register, publication of proposed regulations seeking to alter the preservation program, the agency acknowledges that it does not have sufficient funds to meet all the equity funds that it has agreed to fund and claims to have unfounded agreements that were entered into as early as 1996. What is troubling about this picture is that it is a self- created problem. The RHS Section 515 appropriations do not specify how much money RHS should be using for preservation, for maintenance or new construction. Those decisions are made administratively by the agency after it receives the appropriations. We believe that the funding issue will become more significant over the next several years and that inadequate preservation funding may cripple the program. We urge that the committee to really look closely, as a result, at the needs of the agency in terms of preservation. The second concern that we have is that RHS is not preserving all the developments that it can. It has created several loopholes by which owners can and will circumvent the prepayment and preservation process. The most glaring example is RHS' unwillingness to extend use restrictions through the acceleration and foreclosure process. RHS takes the position that an owner who pays the balance due on a loan in response to an acceleration of the promissory note is not prepaying the loan and is free to use the property as it chooses after the loan is paid. RHS is also using the acceleration process to avoid dealing with troubled projects. It routinely forecloses on properties that it feels it cannot handle and then leaves it up to the private market to determine what should happen to them. We do not believe that RHS' position is justified. The third issue is RHS does not affirmatively enforce obligations to rent units to low-income residents. In a Missouri case in which we are involved, the PHA--the Public Housing Authority--is trying to prepay and demolish a 50-unit development some 19 years after it secured the RHS 40-year loan. When the authority began to systematically relocate residents and leave the units vacant, RHS did nothing. Even after the housing authority initiated a lawsuit challenging RHS' authority to enforce the Emergency Low-Income Housing Preservation Act, RHA did not take any action to force the housing authority to rent up the facility by completing it. As a consequence, 48 units of affordable housing have been standing empty for nearly 4 years. The fourth issue that we are concerned about relates to RHS' capacity to coordinate and control lawsuits in which owners are challenging the validity of ELIHPA prepayment restrictions or seeking damages for their imposition. Currently, there appears to be no concerted effort on the part of RHS or its counsel to ensure that ELIHPA, a federal law, is properly enforced. Basic arguments, such as the supremacy of federal laws over state laws, are not being advanced. And cases are being settled instead of appealed because certain legal arguments have not been made in the federal district courts where these cases are first heard. Moreover, RHS, or at least its counsel, appear intent on settling cases even before the agency's liability has been established. Potentially, these settlements may cost the government hundreds of millions of dollars that could have been better spent on preserving the housing in the first place. Ironically, in one case, the RHS settled instead of appealing an adverse decision. The residents have gone on to appeal the decision and have sought and secured a stay of the district court decision and sought and secured an injunction against the owners selling the development or terminating the tenants' RHS rights. It is indeed ironic that residents of a development and not RHS are appealing this case. Before I close my testimony, Mr. Chairman, I would like to just point out a couple of issues with respect to the new regulations that RHS has recently proposed and which is one of the questions which the subcommittee has asked questions about. The first provision that we are concerned about deals with RHS' proposal to finance future Section 515 developments with loans that are amortized over a 50-year term but which become due at the end of 30 years. In other words, the proposal would finance Section 515 loans over 50 years, but create a balloon payment at the end of 30. In our view, this proposal violates ELIHPA. And we urge the sub-committee to direct RHS not to implement that provision and, if necessary, prohibit it from doing so. The other provision which we have concern about is one that we referenced earlier, which proposes to allow an owner to terminate its equity loan agreements if RHS does not fund the agreement within 15 months of the time that it was entered into. In our view, as long as RHS, and not Congress, determines the amount of funding that is made available for preservation, the choice of whether to fund incentive agreements lies with the agency and no one else. It must not, therefore, be allowed to make incentive offers to owners that it later chooses not to honor. Thank you. [The prepared statement of Gideon Anders can be found on page 66 in the appendix.] Chairman Ney. Thank you. Next witness? STATEMENT OF BETTY BRIDGES, PRESIDENT, COUNCIL FOR AFFORDABLE AND RURAL HOUSING, WASHINGTON, DC Ms. Bridges. Mr. Chairman and committee members, can you hear me? Chairman Ney. There you go. Ms. Bridges. I am very pleased to represent the Council for Affordable and Rural Housing, CARH. My personal experience, as was stated by the chairman, I was a former Farmers Home Administration official for almost 30 years and a private developer of affordable housing for 10 years. I will address the questions that were supplied by the committed and several additional points that we at CARH believe are vitally important to the future of rural housing. I have submitted separate written remarks. But I will summarize those. CARH members generally have a productive working relationship with RHS, the agency. But we experience a high degree of frustration at the lack of resources and the consistency from state to state. The agency is not fully able to meet its intended purpose and goals because it is organized in a manner that inhibits the sharing of information and training, thereby greatly adding to transaction cost and preventing many meritorious transactions. It is not adequately funded to either expand or maintain its housing stock and is unable to effectively coordinate with existing resources from other agencies. And its programs are subject to artificial statutory restrictions that limit development and preservation. All of these points are addressed in CARH's March 2003 position paper on the aging portfolio. And I respectfully request permission to have this inserted in the hearing record. Chairman Ney. Without objection. [The following information can be found on page 159 in the appendix.] Ms. Bridges. The rural housing finance market is experiencing a paradox in that tools and resources for financing affordable rural housing have become increasingly complex and sensitive to the national financial markets. Yet, at the same time, local market conditions remain local and isolated with dispersed housing and employment patterns. This affects both home ownership and rental housing patterns, which are both vitally important to meet rural housing needs. While home ownership is the American dream, rental housing is absolutely necessary for elderly and low- income Americans, which is the agency's client base. In the 515 program, the average tenant income is about $8,100 a year. Nearly 60 percent of the households are elderly or disabled. We understand that there are various discussions and contracts between HUD and USDA about home ownership programs. However, we believe that S. 198 and H.R. 1913 have the greatest likelihood of achieving real progress on this point. We understand that HUD instituted a Rural Housing Office several years ago. But we have not seen any material coordination in the field among multifamily or the voucher programs. We understand that there are various changes at the agency, such as their recently proposed 3560 regulation, which is an important step in streamlining and modernizing the regulations. Still, 3560 does not address certain basic problems with the program; namely, that the agency has an extremely onerous process for transferring properties within the 515 system and an even more difficult system for prepaying and refinancing outside the system. The result is what one industry commentator calls a toll road with no exits. We appreciate, Mr. Chairman, that you proposed an amendment last year to H.R. 3995 to restore contractual prepayment rights to owners of 515 properties, just like they were restored for owners of HUD properties. Prepayment restrictions that violate contract provisions are being successfully challenged in court. The Supreme Court's unanimous decision on a case last year characterized the statute restricting prepayment rights as a repudiation of the contract and is dishonoring an obligation. At CARH, we share the committee's interest in the 521 rental assistance--RA--perhaps the largest budget item for the agency. That program generally works well. But there is not enough funding. The RA program really can only be analyzed in conjunction with the 515 program. Since RA cannot exist without a corresponding 515 loans, 515 loans are serviced on a budget- based method so that State office rural development staff scrutinize operating expenses. In many places, this has resulted in significantly below market rents that do not pay for ongoing maintenance costs. We also note that other programmatic alternatives exist. The 538 program is an excellent idea. But the 538 statute makes implementation with other programs difficult. The agency staff has been excited about the 538 closings to date. While we support that enthusiasm, we have to note that only a handful of the 538 closings have been made and are well below industry expectations. The 538 program must be revised on a statutory level so that it is consistent with current commercial standards. And we urge further hearings on this point. We appreciate the hard work and the good intentions of this committee, as well as RHS and RD staffs. We have identified many areas where we feel that we can work together to make progress. Some of these points require a further federal financial commitment. But others only require structural changes to make transfers, prepayments and preservation easier. And we urge the committee to consider these changes. I have spent my entire career working in this industry. And I hope that you will think of me and my organization, CARH, as a valuable resource. Thank you. [The prepared statement of Betty Bridges can be found on page 76 in the appendix.] Chairman Ney. Thank you. Ms. Griffiths? STATEMENT OF PATTY GRIFFITHS, HOUSING DIRECTOR, COMMUNITY ACTION COMMISSION OF FAYETTE COUNTY, OHIO, APPEARING ON BEHALF OF THE HOUSING ASSISTANCE COUNCIL Ms. Griffiths. Thank you for the opportunity to submit testimony. Chairman Ney. Excuse me. I think you need to move it closer. Ms. Griffiths. Is that better? Okay. Thank you for the opportunity for me to submit testimony on rural housing today to your subcommittee. And thank you, Chairman Ney, for convening this very important hearing. My name is Patty Griffiths. I am the housing director for the Community Action Commission of Fayette County, known as CAC. We are a non-profit organization located in Washington Court House, Ohio. I also am speaking today on behalf of the Housing Assistance Council, a national Non-profit group working to create more affordable housing throughout rural America. Established in 1971, HAC provides financing, information and other services to non-profit, for-profit, public and other providers of rural housing. Our written testimony includes detailed responses to the questions posed by your subcommittee. But in this brief oral presentation, I wanted to focus broadly on needs and on what we are doing in Ohio with USDA Rural House Service programs. First of all, housing and poverty. Most housing policy is focused on urban concerns, which are of course substantial and deserve attention. But needs are often just as great in rural America. HAC's research shows that of the 200 poorest counties in the nation, all but 11 are non-metropolitan. There are 363 rural counties where the poverty rate has exceeded 20 percent since those figures were first collected in 1960. In housing for most of the 20th century, substandard quality was the primary rural problem. While quality is still a problem today, sharply higher housing costs have made affordability, rather than poor conditions, the major problem in rural housing, especially for low-income people. Among the 23 million non-metro households, approximately five million, or 22 percent, pay more than 30 percent of their monthly incomes for housing costs and are considered cost burdened. Of these non-metro cost burdened households, more than two million pay more than half their incomes toward housing costs. We see these conditions also in rural Ohio. The average person in a big city may not think of Ohio as a rural state. But in fact, Ohio has the fourth largest rural population among the 50 states, with over 2.1 million people. Of our 640,000 occupied rural housing units in Ohio, over 20 percent are occupied by families that are cost burdened. Now I would like to turn and speak briefly about our work in Ohio. Community Action, our agency, was founded in 1965. And we have been involved in housing for many years. We have done home weatherizations since 1967. We have developed and managed housing for the elderly, for disabled and homeless. We provide housing counseling. We have developed several rental projects using the Low-Income Housing Tax Credit. And we have used the major programs of the USDA Rural Housing Service, including Sections 502, 504 and 515. We also use some HUD programs. But since 1995, our agency has helped over 100 low-income families become homeowners through USDA's self-help housing program. Right now, we are the only USDA self-help housing builder in Ohio, although we are currently hoping to expand into Ross County and into Clinton County. Under this unique program, which is sometimes called a hand up, not a hand out, we organize groups of eight to 10 families. We help them qualify for USDA Section 502 single-family mortgages. We work with them as they put over 1,000 hours--that is per household--of sweat equity into the building of their own homes and their neighborhoods. No one moves into their homes until all the homes in the group are completed. A skilled construction supervisor from our staff works alongside these families. And they do 65 percent of the labor. Now these families do not just paint the walls; they actually build the walls. They put up the shingles. They put up the siding. They hang drywall. And they hang cabinets. In our self-help work, we also have benefited greatly from the Housing Assistance Council's HUD-funded Self-Help Homeownership Opportunity Program, which we refer to as the SHOP program. We have received $850,000 in SHOP funds from HAC and $800,000 in other HAC loans. The SHOP funding helps CAC buy the land and put in the infrastructure for our self-help homes. HAC and CAC want to thank this subcommittee for having created the SHOP program in 1996. I think our agency probably would have been out of the self-help business had it not been for the SHOP program. The commission has also used the USDA Section 504 home repair program. We have developed and now own and manage a 24- unit USDA Section 515 rural rental apartment project. Overall, we have had excellent success with the USDA rural housing programs. All of these Rural Housing Service resources have been vital to our ability to meet the needs in Fayette County, Ohio. Perhaps the best way for me to illustrate our work has been its impact on the clients that we work with. I would like to tell--and end--with a brief story about one of our clients, Julie Allen. She was a single pregnant mother who became homeless after leaving a domestic violence situation back in 1996. Our agency first housed Julie and her children in our homeless shelter. We then helped her through supportive housing. And then she became involved in our USDA self-help housing program. And she built her own home in one of our first sweat equity subdivisions in Bloomingburg, Ohio. Today, Julie is a homeowner. She has an excellent job. Her children are thriving. Last December, she was a featured speaker before 800 people at the opening session of HAC's National Rural Housing Conference, speaking about how self-help housing had changed her life. I might add, she got a standing ovation at that conference. HAC and CAC considered asking Julie to be speaking up here instead of me today, so you could hear from a person who is really receiving these services. But she is getting married Saturday and could not make it. When I consider Julie Allen and her life, I can think of no better reason to support, continue and expand the USDA Rural Housing Service programs. Yes, they may need some changes and improvements. They definitely need more funding. But they really have had an enormous impact on the lives of millions of rural people. Thank you very much. [The prepared statement of Patty Griffiths can be found on page 104 in the appendix.] Chairman Ney. I want to thank the witness for her testimony. And next, Mr. Jones? STATEMENT OF JACK JONES, VICE PRESIDENT, CHASE MANHATTAN MORTGAGE CORPORATION, DEERFIELD BEACH, FL, ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION OF AMERICA Mr. Jones. Good afternoon. And thank you, Mr. Chairman, for holding this hearing and inviting the Mortgage Bankers Association of America to state its views on the U.S. Department of Agriculture's Rural Housing Service programs. My name is Jack Jones. And I am the Vice President in charge of the Rural Housing Channel for Chase Manhattan Mortgage Corporation in Deerfield Beach, Florida. I am particularly pleased to be here today representing MBA on an issue to which I have devoted the last 11 years of my professional career--providing homeownership opportunities for rural families. MBA and Chase are strong supporters of the Rural Housing Service's mission to foster home ownership opportunities across rural America. Chase is the largest originator in the Rural Housing Service's Section 502 Guaranteed Single Family Housing Loan program, commonly called the GRH Program. In many rural communities, the Section 502 direct and guarantee programs are the only home ownership options available to low-and moderate-income families. Last year, Chase loaned just over $900 million, which provided 11,000 rural families the opportunity to become homeowners. Chase does this in partnership with over 2,500 community banks, mortgage bankers and mortgage brokers in all 50 states. Unfortunately, rural areas traditionally have lacked the financial resources for home financing. For this reason, the RHS programs are vital to increase the availability of safe, decent and affordable housing for low-and moderate-income rural home buyers and renters. RHS provides this important function for both single family and multifamily housing. In addition to the GRH program, RHS also offers the Section 538 program, which guarantees loans to developers of multifamily housing to build and/or renovate safe and decent rental units affordable to very low-, low-and moderate-income families. Both of these programs provide private capital, guaranteed by public funds, to promote adequate access to home financing capital for rural communities. MBA would like to recognize the good work that this administration, under the guidance of RHS Administrator Arthur Garcia, has undertaken in the last 2 years, making significant improvements to a program that was at risk of being neglected. MBA urges these favorable changes be built upon through the following initiatives: first, guidelines under the GRH program should be amended to allow the financing of the guarantee fee on top of the appraised value of the property. Second, the population limits under the GRH program should be raised. Third, the income limits should be raised for the GRH program and targeted in high-cost areas. Fourth, thermal standards on existing housing stock should be eliminated from the GRH program. And fifth, clarification of Ginnie Mae authority on Section 538 loans guaranteed by RHS is needed. MBA urges these changes for the following reasons: a key feature of the GRH program is the ability of the purchaser to borrow up to 100 percent of a property's appraised value. This feature allows the borrower to purchase a home with no down payment and finance some portion, if not all, of the costs related to closing a mortgage, including the RHS guarantee fee. The current law, however, limits the loan amount to the appraised value. MBA urges the financing of the guarantee fee on top of the appraisal for purchases. This change would mean a greater number of rural families would be able to overcome the down payment and closing cost obstacle to home ownership. This is especially true for first-time and minority homebuyers. Use of the GRH program is limited to communities with populations of either 10,000 or 20,000, depending on whether or not they are contained in an MSA. These definitions were created over 30 years ago and need to be updated. MBA supports aligning the GRH population requirements with other USDA programs or other statutory rule definitions. Currently, borrowers applying for the GRH Program are limited to a maximum household incomes of 115 percent of the area's median income, in all states except Alaska. This 115 percent limitation in 49 states does not take into account the varying levels of housing affordability across the United States. MBA urges the Secretary of Agriculture be granted discretion to raise the family median income limits in areas designated as targeted areas and in high-cost areas, allowing financing to be extended to families making up to 150 percent of the area's median income. Unique to the GRH program, existing homes are current required to exhibit thermal efficiencies that are contrary to the State of the housing stock in rural America. This requirement necessitates costly improvements that we believe have only nominal economic value. These thermal standards for existing homes cannot be found in any other conventional, FHA or VA home loan program and is a source of ongoing resistance to the use of the GRH program. MBA urges Congress to provide strong encouragement to the agency to eliminate this burdensome, costly and onerous regulation. Currently, loans made under RHS Section 538 Rural Rental Housing guaranteed program cannot be securitized by the Government National Mortgage Association, Ginnie Mae. Ginnie Mae's charter allows only the securitization of insured multifamily loans, but not guaranteed multifamily loans. MBA urges Congress to change the Ginnie Mae charter to allow the securitization of these guaranteed loans. This change will provide greater liquidity for these loans and ensure that rural communities are not disadvantaged due to lack of access to capital. [The prepared statement of Jack Jones can be found on page 112 in the appendix.] Chairman Ney. I need to interrupt you just to--the time has expired, but to also let the panel know what is going on. Unfortunately, there is a 15-minute vote in progress, a 10- minute debate, another 15-minute vote, another 15. It is basically 45 to 50 minutes' worth of votes. So what I would like to do is to go over, cast a vote. It will give a 15-minute window to be able to come back to get your testimony in of the three witnesses for the record because we would like to do that, to be able to do it. And then I do not know if any questions can be--any time for questions. But we will be able to at least submit questions if the members would like to. So if you could indulge us, we will be at recess for about seven minutes. Thank you. [Recess.] Chairman Ney. Sorry for this. It is hard to predict the votes. Let us proceed as briefly as possible as we can with the remaining witnesses. Thank you. STATEMENT OF MADELINE MILLER, EXECUTIVE DIRECTOR, WIL-LOW NONPROFIT HOUSING INC., HAYNEVILLE, AL Ms. Miller. Mr. Chairman and ranking members, good afternoon. I am Madeline Miller, executive director, Wil-Low Non-Profit Housing, which is a non-profit organization incorporated in 1971 in Lowndes County, Alabama when it was spun off another non-profit organization, Friend, Incorporated. Most of our work is conducted in Wilcox and Lowndes Counties. The organization was formed by citizens from Lowndes and Wilcox Counties who were concerned about the quality of their community housing. That year, Wil-Low hired its first executive director and received its first grant--$38,000 from the Rural Housing Alliance. The organization's mission then, as it remains today, is to provide technical assistance to very low-, low-, and moderate- income families and farm worker families so they can have the opportunity to acquire decent, safe, sanitary and affordable housing. Wil-Low helps families with new construction, rehabilitation of existing owner-occupied dwellings, rental housing and housing counseling. Today, Wil-Low still operates its housing programs, consisting of new construction, rehabilitation of owner-occupied dwellings, the purchase and rehabilitation of an existing dwelling, rental units and housing counseling. To date Wil-Low has constructed over 300 home units through both its self-help program and its contractor built home program. One hundred percent of the funding for these units was provided by Rural Housing, which means the families we work with all have incomes at or below 50 percent of the median income. Rural Housing has made available over $2 million in funds that enables families to own their homes. We also have used their rehabilitation program, the Rural Housing 533 Housing Preservation Grant and its 504 program. A total of over 300 homes have been rehabilitated. But there is a need for additional funds for the Rural Housing Service Rehabilitation Program, especially the Loan/ Grant Program, because the numbers of homeowner-occupied dwellings that are in need of rehabilitation keeps increasing. If these homes are not repaired, family members will be forced to move in with relatives or others, creating or increasing another problem--overcrowding. Wil-Low has successfully trained 50 on-the-job trainees in construction. In 1999, our dream became a reality. We broke ground to start construction on 20 rental units and a community building. Then, in May of 2000, the first resident moved in and today the complex is fully occupied. The one problem is that we were only able to build 20 units. And we have over 100 applications from families who are still in need of a decent and affordable place to live. The total cost of the project was $1,399,239, which included the entire infrastructure cost. We also operate a housing counseling program. But there are many challenges that Wil-Low Non-Profit Housing faces. Today, Wil-Low has had to overcome in the past and is still faced with today, in an attempt to operate a successful rural housing program: recruiting eligible families; resolving credit issues; funds to do site development work for subdivision approval; sufficient funds to leverage other money; locating suitable building sites; infrastructure; acquiring gap financing; understaffing; overcoming NIMBY-ism; improving the quality of housing; and increasing outreach services to migrant and seasonal farm workers. To help alleviate some of the substandard housing units and overcrowded living conditions, Wil-Low has the following goals outlined: single family house purchase of a 10-acre tract of land in Wilcox County, Alabama; construct 18 single-family units; also, multifamily units, 20; and also to rehabilitate 50 units; a housing counseling program to counsel approximately 300 and this would include predatory lending. To sum this up, the only way that Wil-Low can achieve these goals and its overall goal of providing decent housing in rural Alabama is to coordinate our effort with those of other groups and organizations, such as Rural Housing. Also, for a rural housing program to be successful, we must continue to make our communities aware of the programs and services offered by Wil- Low. Because our communities are changing, part of that awareness involves providing outreach services to migrant and seasonal farm worker families. To be a rural housing non-profit requires more than building or rehabilitating units, it also requires providing a whole host of services from jobs to counseling. Thank you for allowing me the opportunity to speak on behalf of Wil-Low Non-Profit Housing Corporation and other non- profit organizations that are struggling to survive in order to continue providing the housing-related activities that are needed in order to improve the living conditions of residents in this county and in America. Thank you. [The prepared statement of Madeline Miller can be found on page 119 in the appendix.] Chairman Ney. Thank you. Mr. Myer? I should also note that if any witnesses have transportation problems or difficulties and unfortunately need to leave because of these votes, the members will be able to put questions to you in writing. We do appreciate your time today on the Hill. And I am sorry again for the unknown factor of the votes. Mr. Myer? STATEMENT OF JOE L. MYER, EXECUTIVE DIRECTOR, NATIONAL COUNCIL ON AGRICULTURE LIFE AND LABOR RESEARCH, INC., DOVER, DE Mr. Myer. Mr. Chairman, my name is Joe Myer. I am executive director of NCALL Research, a non-profit rural housing technical assistance provider based in the great State of Delaware, represented by Congressman and former Governor Mike Castle. I am also President--Past President and current Executive Committee Member of the National Rural Housing Coalition. And RHC is a national organization that advocates on rural housing policies and programs. And we appreciate the opportunity to testify today. Regarding need, the 2002 Millennial Housing Commission Report states that rural communities were bypassed and left behind in the economic good times and now face rates of poverty, substandard housing, unemployment and rent burdens similar to the nation's big cities. There are 7.8 million of non-metro population that is poor. One-quarter face cost overburden. And 1.6 million housing units are substandard. USDA's research shows 4 million or 17 percent of non-metro households experience housing poverty. Renters in rural areas are the worst housed with 33 percent cost burdened, one million suffering from multiple housing problems and paying exorbitant portions of income for housing. In Delaware, our rural counties and small towns have higher rates of poverty and substandard housing than the State national average. Poultry processing has fostered a dramatic increase in the Hispanic population in some of our smaller communities, like Georgetown, whose population increased from two percent Hispanic in 1990 to 32 percent in the 2000 census. This increase unfortunately took place without any appreciable increase in housing stock. I must indicate the importance of the rural housing programs. It is the only option for decent, affordable housing for many rural families. If we look at Section 502, single family direct, at least 40 percent of these loans go to families below 50 percent of median. It has very attractive rates. It is an excellent program. Average income of households assisted is $18,500. The current loan level will provide financing for about 15,000 units. There is an unprecedented demand for Section 502, which totals several billion dollars. We are very pleased with the 2004 budget request of $1.366 billion. We think it is a bargain to the government because each housing unit costs $10,000 a unit to the government. Self-help housing has been discussed by Patty. Families trade labor and determination for housing resources. They recruit groups through non-profit organizations of six to eight families who apply for 502 loans. The families receive home ownership counseling, construction training. And they work together to build their homes and neighborhoods, much like the church and barn raisings of the past. The family labor saves an average of more than $15,000 over the cost of a similar cost. That is an average. Sweat equity provides the opportunity for home ownership, while saving the government millions in reduced mortgage costs. Self-help families arguably are the lowest income mortgage borrowers with the best payment record. Section 515, rental housing program, seemingly forgotten in many ways. A portfolio of 450,000 apartments with only a 1.6 percent delinquency rate, an average tenant income of $7,900 and more than half the tenants elderly or disabled. [The prepared statement of Joe L. Myer can be found on page 126 in the appendix.] Chairman Ney. I am sorry to interrupt. I am watching the clock ticking. If we could move on to Mr. Rayburn, just to get a few minutes in. And then if we have it, we can come back, if you do not mind. STATEMENT OF JAMES R. RAYBURN, JACKSON, MI, FIRST VICE PRESIDENT, NATIONAL ASSOCIATION OF HOMEBUILDERS Mr. Rayburn. Thank you, Mr. Chairman. My name is Bobby Rayburn. And I am a homebuilder from Jackson, Mississippi. I am the First Vice President also of the National Association of HomeBuilders. And I am pleased to represent the views of some 211,000 members. NAHB and its members place a high priority on providing safe, affordable, high quality housing for rural Americans. While progress has been made in improving housing in rural America, considerable unmet needs remain, particularly for very-low and low-income rural households. Specifically, there is a significant need for new production of affordable housing units. And existing rental stock is aging and requires extensive rehabilitation. And access to competitively priced credit for potential home buyers, as well as builders, remains a problem in many rural areas. Remedies are urgently needed. While there are many possible approaches to meeting the need for the production of new units and preservation of the existing housing stock, there are two common elements that are crucial to success: more resources must be committed and a range of interests beyond the Department of Agriculture must join in the effort. Some success in providing affordable home ownership and rental housing opportunities has been achieved through the Home Investment Partnership Program and the Community Development Block Grant programs in States were efforts have been given in sufficient priority. NAHB strongly supports both of these programs, which distribute HUD funds to States and local jurisdictions through block grants. And we believe additional appropriations would be available and effective in addressing unmet housing needs in rural areas. Other federal efforts to address rural housing needs are currently undertaken through the Department of Agriculture's Rural Housing Service. I understand that we are before the authorizing and not the appropriations committee. But RHS programs have been severely hampered by inadequate funding, with the appropriation shortfalls most severe in Section 515, direct loan program for multifamily housing. The administration's fiscal year 2004 budget proposal includes no money for Section 515, new multifamily production projects. Currently, there are no alternatives to the Section 515 for producing housing affordable for very low-income households in rural areas. So the absence of a new production money is a major setback. The problems at RHS go beyond inadequate funding, however. Inconsistencies in how the projects are monitored occur from state to state. Management fees have wide variations. And it seems to be difficult to remove bad property managers and owners. Chairman Ney. If I could interrupt. I am going to need to leave to make the--I missed the one vote because I needed to stay here. And I am going to make the final passage. And then I will be--anybody who has to leave, please feel free. I will also be more than happy to come back and listen to the last testimony, if you would like. Mr. Rayburn. Yes, sir. Chairman Ney. I will do that. And if I can cast the final passage vote, I will return. Anybody who would like to stay. If you cannot stay, we fully understand that. I will return. The committee will be in recess. [Recess.] Chairman Ney. If I could keep this up for a couple of weeks, I might be able to get back into my suit I wore to my homecoming senior year. [Laughter.] So I want to thank you for that in the House. And we will continue. How about we continue with the last witness and then we will go back to Mr. Myer. Mr. Rayburn. Thank you, Mr. Chairman. I will just continue where I left off, if that is all right. In addition to RHS staff can present roadblocks to potential purchasers of existing properties who plan to improve the properties. This is the result of slow decision making and requirements that add unnecessary cost. RHS needs a viable management and preservation strategy, which must include the ability to respond more decisively and effectively. NAHB understands that some of these issues are addressed in RHS' recently proposed regulatory changes to its multifamily programs, which are intended to streamline and consolidate 13 regulations into one, as well as address concerns raised by the Office of the Inspector General. NAHB supports such efforts and encourages RHS to move towards simplifying its regulations in as much as possible, as well as strengthening its ability to address the portfolio responsibilities. Even with more funding, RHS cannot do the job alone. Addressing rural housing needs is far too important to be left exclusively to one small sub-cabinet agency. Limited coordination of partnerships efforts are underway to improve rural home ownership opportunities. Such initiatives should be greatly expanded and extended to the production of affordable rental housing. The housing GSEs--Fannie Mae, Freddie Mac and the Federal Home Loan Banks--State housing finance agencies, the farm credit system and HUD all have responsibilities and resources to take a far more aggressive role in addressing the housing problems of the nation's rural communities. Fannie Mae and Freddie Mac are required by law to meet annual housing goals established by HUD. Several upward provisions in these goals had little, if any, impact to improving the availability of housing credit in rural areas. In the 2000 revision of the goals, the underserved areas goal was increased from 24 to 31 percent. But there was only a limited increase in the role of Fannie Mae and Freddie Mac in rural housing finance. During development of the 2000 rule, NAHB commented that HUD should encourage increased participation in rural areas by Fannie Mae and Freddie Mac through the use of bonus points or double credit for purchases of loans in rural areas. HUD did not include this recommendation in the final rule. But we plan to revisit this issue during the revision to the goals in 2004. In conclusion, Mr. Chairman, NAHB thanks you for bringing this to attention and supporting the cause of rural housing. NAHB stands ready to work with this committee, RHS, HUD, the GSEs and all other supporters of rural housing to improve the programs and to develop creative solutions to maximize the use of scarce resources in addressing these critical housing needs. Thank you, Mr. Chairman. [The prepared statement of James R. Rayburn can be found on page 134 in the appendix.] Chairman Ney. Thank you. Mr. Myer? Mr. Myer. And I will just continue on as well. In Delaware, the 515 program is the rental backbone of our communities, providing a great community asset. Waiting lists are long. Recently, more than 200 applicants showed up to rent a 24-unit Acorn Acres complex in Georgetown, Delaware. That gives you an idea of the need. The President's budget cuts 515 to $71 million, the first time in more than 30 years that the Federal government will not provide any new rental units for rural America. Prepayment of Section 515 properties is a threat to two- thirds of the portfolio over the next 7 years because it results in displacement of tenants and loss of low-income housing stock. Owners' incentives and resources to preserve this stock are important. In 1994, Section 515 was funded at $540 million. It has been cut an unconscionable 73 percent and not replaced with anything. This is a great program that seems to be biting the dust. 514/516 farm labor housing is the only program that serves our nation's migrant and seasonal farm workers. The last national study done indicated there was a shortage of 800,000 units for farm workers. Fifty-two percent of farm workers live below poverty. Seventy-five percent of all migrant farm workers live in poverty. Yet, few farm workers can qualify for normal subsidized housing. Current funding totals $37 million, which provides 700 units of housing. We are appreciative of the $37 million. But it is far less than what is needed. We ask for your support of the Rural Rental Housing Act of 2003. This creates a new Federal program to alleviate cost burdened substandard conditions. It would create a $250 million rental development fund, administered by USDA. Money would be allocated to States based on need for the purposes of acquisition, rehabilitation and construction of low-income rental housing. Federal funding will be matched, dollar for dollar, by participants. USDA will make funding available to entities with a record of accomplishment in housing development. And finally, the act will be administered at state levels most familiar with local needs. This new resource, if enacted, could finance up to 5,000 rental units a year. We also encourage the refunding of Rural Community Development Initiative, RCDI, to support the rural non-profit delivery system. There was more than $80 million in applications for the $6 million that was available in 2000. This is a valuable program. And it is also at risk in the Federal budget. Mr. Chairman, thank you for this opportunity. Chairman Ney. I want to thank you. And thank all the panel. I have a question for Mr. Jones. As I understand it, the Appropriations Committee last year inserted a provision for no- year funding. That is for the Section 502 guarantee program. And my understanding is the intent of this provision was by making this change, it would provide stability in the budget process for consumers, the bankers and realtors who participate in the program. The continuous operation of the program without delay or interruption of the funding also was a factor. There was a concern by the Appropriations Committee when the administration lowered the fee for the new guaranteed loans. And the refinancing of existing loans, there would be an additional cost to that program. The Appropriations Committee rescinded approximately $11 million from one account and transferred the funds to the Section 502 guarantee program to make up for the anticipated additional costs. And that would be so that the program funds would not be depleted before the end of the fiscal year. So is the current level of funding for this fiscal year sufficient for the demand? The President's proposed fiscal year 2004 budget requests a program level of $2.8 billion for this program. So do you believe that the level of funding is adequate and will be sufficient for the demand? Mr. Jones. My belief is that that level of funding will indeed be insufficient. Chairman Ney. Please pull the microphone. Thank you. Mr. Jones. With the decrease in the guarantee fee and other initiatives from the agency, we have seen tremendous momentum build for the Guaranteed Rural Housing Program. As a result, we will more than likely exceed the $2.75 billion this year, which is unfortunate because for the first time, we do have the opportunity for the no-year funds provision but will actually not have any funds carried forward. We have yet to ever experience a 12-month program. Typically, the private sector knows as we begin each fiscal year---- Chairman Ney. I am sorry. You have never experienced a 12- month program? Mr. Jones. Because funds come to us typically very late in October or early November, either through the CR process or at the time the actual appropriations bill is funded. Chairman Ney. So because they are late, you cannot then gear up? Mr. Jones. We never have a full year to actually see what we can do with 12 consecutive months of consistent funding. I believe this year we are going to exhaust the allocation, the $2.75 billion the agency has, which really means we will not have funds carry into the next fiscal year. And I believe the proposed fiscal year 2004 will be insufficient. Chairman Ney. The gentlelady from California? Ms. Waters. Mr. Chairman, I would like to thank all of the panelists for the time that you have spent here this afternoon to share this very, very valuable information with us. I think I am coming to some conclusions about rural housing needs. And I sincerely believe that there needs to be a lot more advocacy here by members of Congress who represent all of these areas that perhaps we are not hearing enough from. Obviously, there is a need for more money. I think this multiple family units and all of the issues with I guess the 515 program, we really do need to take a very deep and serious look at, to see what we can do. As one urban legislator, I am absolutely committed to the proposition that the urban and rural legislators should work together for rural housing and for urban housing. I think that we could do a better job combining our efforts to make sure that we have adequate housing and housing resources in certainly the rural community. I guess I have a lot of questions. I am going to hold them in reserve because I am going to review all of the testimony and interact with my chairman on it and other members of this committee. But let me just raise this question of, I guess, Mr. Myer. I know that we have laws that allow for migrant farm workers to work, I guess, in this country. Maybe for particular seasons or a designated period of time, I do not know. But do we coordinate the laws that encourage migrant farm workers to come and work with the housing resources that should be available to them if they are here working? Is there any coordination between that? Mr. Myer. Well, I think there is some coordination. There is always room for more coordination. But the fact is that local farm workers, their only access to housing is this 514/516 program. And then migrant farm workers that migrate to a certain area to support agriculture, their only option appears to be the 514/516 program. It is the only program that is dedicated to serving farm workers. And again, there is an 800,000 unit need for farm workers. I am not fully sure that I answered your question. Ms. Waters. Well, that gives me some idea. If the need is 800,000, then it appears that what we are doing is we have laws that allow for migrant workers, but we do not match the resources for housing with the number of migrant workers who are performing the services. Mr. Myer. The program is funded at $37 million, which provides about 700 units a year. Ms. Waters. Okay. That is helpful. Thank you very much, Mr. Chairman. Chairman Ney. Another question I had--and anyone that would like to, please feel free to answer this. And then we will go to Mr. Davis for a question. What are your general impressions and overview of the Rural Housing Service and whether the agency within the U.S. Department of Agriculture is meeting its intended purpose and goals? Any reflection on RHS? Feel free to speak out or raise your hand or whatever you would like to do. Mr. Anders. If we have an hour, sure. Chairman Ney. I have got some time, maybe not an hour, but close to it. Mr. Anders. I mean, in many ways, the agency is doing an excellent job. I mean, the agency has been around since 1949. Actually in some respects it has been around longer than that. And it has been doing a very credible job in certain areas of doing single family homes and doing multifamily housing and in doing some of the rehab loans, what you are talking about the 502, the 504 and the 515 programs, as well as the Farm Labor Housing Program. The problem has been in the last 10 years that the agency has suffered substantial cuts in funding. And they have had to consolidate their staff. Some of the support and infrastructure which needs to be dealt with, in terms of longevity of some of the housing programs, particularly the Rural Rental Housing Program, which we heard about earlier, there are some significant issues in terms of maintenance of the portfolio. The agency is short on staff to deal with it. And so it is a cost issue. But I think that, by and large, the agency is doing a very good job and is meeting its purposes. Chairman Ney. Are RHS--we are going to hear from them July 8th. But I just thought I would get anybody's observation. Ms. Bridges. Even with the problems that were cited by the investigative panel earlier, the RHS is absolutely the best delivery vehicle for affordable housing in the rural areas. We have no other vehicle to deliver it. The tax credit program, as good as it is, is not sufficient in the rural areas to meet the needs of the very low-income people. The biggest problem that we have had in the past few years is the lack of funding. At the time that we were having $500 million to $900 million allocation, we were doing great. And these problems that are addressed are a minor amount of problems. They are not large. We have many, many, many other owners and managers that are doing an excellent job and serving thousands and thousands of families. So I strongly encourage the committee to look at the funding that could be possibly available and maybe another way of delivering the program. There are ways. As the previous witness said, I will not repeat him, but they have lost some of their staff because of funding cuts. However, we do not need to be micromanaged in the field. We do not need that. There are a lot of honest developers and managers out there that would do a good job if we had the funds available. Chairman Ney. Thank you. Mr. Jones? Mr. Jones. I would echo the sentiments of my colleagues. I believe this agency has done a very effective job. Most recently, I would note that this administration has been willing to listen to the private sector and the needs of the private sector to really promote this program. Without question, the GRH borrower is best served by this loan. It provides 100 percent financing, meaning no cash contribution from the applicant. And because of their low-and moderate-income status, no mortgage insurance. But the program is only going to work if we can get the private sector interest in delivering it. And I was very much moved by Congresswoman Waters' comments regarding affordability. Let's face it. This administration just cut the guarantee fee, making it affordable. The agency is focusing now, as part of a greater concern, on addressing minority home ownership rates, which consistently lag behind white homeowners in rural America. The things that we talked about today--financing of the guarantee fee--allows the applicant to take full advantage of the appraisal, to finance all the closing costs without wasting one dime on the guarantee fee, which is typically put on the loan amount with HUD, VA and even in the refinance program. All of these things are going to knock down the barriers of affordable home ownership, which I believe are everyone's objectives today. Chairman Ney. Do I read you correctly then, you are not saying it is as much money as it is private sector involvement? Mr. Jones. Certainly, for the guaranteed program, the private sector is critical. The private sector is actually originating, processing and servicing these loans, in lieu of RHS staff. And whatever we can do to induce the private sector to contribute its efforts to gear up to deliver this program is going to get us the most home ownership opportunities for these applicants that simply make too much money and cannot be served by the direct or other RHS loan programs, but do not have any other options. Chairman Ney. Thank you. Mr. Rayburn, did you? Mr. Rayburn. Mr. Chairman, I would like to remind this committee that in addition to being a builder and very involved with the National Association of Homebuilders, that I am from Mississippi. And several of the questions that were directed to certain earlier panel members about places in Mississippi. I know very well where those places are. I know very well where cardboard shacks were in many cases because our company has helped to solve some of those problems. Are there a lot of them still out there? There surely are. We could not solve those problems with Rural Housing Service dollars and staff. We had to go elsewhere in order to do that. Because part of Rural Housing Service is doing a very good job. The better job is done on the single family side, probably for the most part around the country. On the multifamily side, it is not. They need to come into this century and use good, sound business practices. We probably do not have the time. But if you would like to, I would be glad to provide in written comments a couple of specific instances whereby our company was going to bring in outside, fresh, new, non-federal dollars into a couple of 515 developments, multifamily rental developments. And because of the cumbersome, outdated requirements that the staff was putting on us, we were not able to do that, even though we had a half a million dollars funded from the Federal Home Loan Bank AHP program in the form of a grant. We were told that was fine on the front end. On the back end, they came up with another $300,000 that needed to be done to the development. So the project is still in its deplorable condition today, with sewer running on the ground, with cabinet doors nailed shut that will not work because the management company was getting exorbitant management fees. And things like that needs to be stopped. Chairman Ney. We would like, if you could, to give us detail after this---- Mr. Rayburn. Be glad to, surely. Chairman Ney.----on at least the two and anything else you would have. Mr. Davis? Mr. Davis. Thank you, Mr. Chairman. Let me thank the panel and chair for their patience. I know it is late in the day. Let me give you all a number--let me give the panel a number--that puts some of this in a great deal of perspective from my standpoint. The 1994 fiscal year, the combination of Section 502 loans and Section 515 loans was $530 million or so. Actually, I think it was around $663 million total subsidy cost spent on rural housing programs in fiscal year 1994. Less than $200 million in subsidy on Section 502 and Section 515 in the current fiscal year. That is a drop from $660 million down to $200 million. Now I am not much of a math major. But that is certainly a significant drop. Has the housing crisis in rural America abated over the last 10 years? Has it somehow gotten better than it was in 1994? Does anyone think that the housing crisis is somehow less acute now than it was in 1994? Mr. Rayburn. If I could answer, no. Mr. Davis. In fact, it is worse in a lot of ways. Mr. Rayburn. It is worse. It is worse in so many cases because of the lack of infrastructure in so many communities, the lack of infrastructure that has to be gone in and put the streets, the water, the sewer in to so many different areas, causing additional increases in prices, tied back to that homeowner that you are trying to serve, and many times in the low-and very low-income category. Mr. Davis. So we are making less of an investment to address a problem that is becoming more acute? Is that right? All of you are nodding your heads. Ms. Miller? Mr. Rayburn. Yes, sir. Ms. Miller. Yes, that is right, Congressman Davis, because take for example in Wilcox County, when it comes to sewage, infrastructure system, then you only have just two towns that have actually a sewer system. You have Camden and Pine Hill. But then if you look at the other area, there is a great need in the whole country for housing. And now that most of those counties, if the land does not perk, then you have to go into expensive, what you call, a raised bed septic tank. And that can cost anywhere from $6,000 to $10,000. And that fee would have to be added into the cost of the family loan because they are not able to make a down payment. And well, most of the families--but you are familiar with that. I do not have to go into detail on that, how they can qualify. Mr. Davis. Let me give you all another statistic that my colleagues from California alluded to earlier. We talked about what is a very real paradox, the fact that a large percentage of people in rural America own their homes, but the homes that they own are absolutely substandard. They are houses, really, and not homes, to be very blunt about it. Another statistic, doing some quick math here, 31 percent of the housing units surveyed for the American Housing Survey in rural America, 31 percent of those occupied rental units were substandard in some way, ranging from inadequate heating to inadequate physical infrastructure, to water leakage; 31 percent of them had some very particular problem. So once again, I think we ought to recognize that when we are talking about people having a high rate of what we would call home ownership--again, they are not living in homes. They are living in physical structures called ``houses'' that are not in the condition that they need to be to raise a family. Do a lot of you agree that is a regular problem? Let me direct another question to all of you. We have heard a lot of talk in all of these hearings about the Federal government taking less of a role, whether it is as a function of devolving responsibilities on the states or devolving them on the private sector. Let me ask some of you to comment on what you think the government can be doing right now that it is not doing. What can the government do if we, for whatever reason, end up with an administration one of these days that is committed to addressing these issues and wants to be proactive? What can the government do now that it is not doing? Yes, ma'am? Ms. Miller. I think one thing that the government can do is make more funding available and can lessen some of the regulations when it comes to the rural because the regulation is steep. And then the money is not there for the rural to pay. The housing standards are very high. Just to give you an example, if a qualifying applicant lives on a rural gravel road, they must include in their loan adequate funds to construct a concrete driveway to the gravel road. These rules apply to qualifying applicants' whether they own a car or not. This could add between $2,000 to $3,000 to an applicant loan amount, so there is a number of rules in the regulations that can be minimized, depending on each individual situation, and the applicant still could get a well constructed, quality built dwelling. So there is a lot of things the regulations can be minimized, but still remain at a good standard home can be built. Mr. Davis. And do all of you agree that we cannot address the housing problem, particularly in rural America, without a sustained focus on job training, without a sustained focus on economic development? It is impossible to get a handle on the housing issue without looking at all the problems that accompany the issue. Do all of you agree with that? Ms. Miller. I agree with that. Mr. Davis. All right. Thank you, Mr. Chairman. Chairman Ney. I want to thank you. And I appreciate the panelists for your testimony on this important issue. I just want to echo some comments made earlier. And I come from obviously a very rural Appalachian area. And I think that in Congress, we have a large, great, diverse country. And we have to be sensitive to the concerns of urban centers, which are different, and the concerns of rural, take care of everybody we can in the sense of listening to individuals and also to try to get affordable and available housing, no matter what size of a city or a town. I do think that we can focus more here in Congress-that is what we are trying to do--on rural. I am not sure that it has been focused enough on. I have also told all the advocacy groups to speak up a little bit more or scream a little bit more or come around the halls. And that is no reflection on anybody here. I am just saying, I have told everybody, let's energize this issue and get it going a bit. I give you a lot of credit for working out in the trenches to make sure people have some support and some help. And with that--did you have--and with that, I want to thank the panelists. The chair notes some members may have additional questions for the panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these questions and to place their response in the record. I want to thank the members of the committee and the panelists. The committee is adjourned. [Whereupon, at 5:36 p.m., the subcommittee was adjourned.] RURAL HOUSING IN AMERICA ---------- Tuesday, July 8, 2003 U.S. House of Representatives, Subcommittee on Housing and Community Opportunity, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to call, at 10:07 a.m., in Room 2127, Rayburn House Office Building, Hon. Robert W. Ney [chairman of the subcommittee] presiding. Present: Representatives Ney, Bereuter, Renzi, Waters, and Davis. Also Present: Representative Frank. Chairman Ney. Today's subcommittee holds its second hearing to discuss the importance of rural housing in America. Two weeks ago we heard from multiple witnesses, including the Department of Agriculture's Inspector General and the General Accounting Office, concerning the Rural Housing Program, RHS. My goal is to continue to review Rural Development's programs to look into ways to increase their proficiency and cost effectiveness. I have said this to quite a few groups involved with rural housing: I think we need to energize it and get the tone level up and get people involved, and we need to do it in urban areas, we need to do it in general housing, minority housing. There is a lot of work that we need to work together on. From our previous hearing it was evident that RHS faces a number of management challenges to carry out its mission. It is critical that USDA's Rural Development programs have access to accurate, relevant performance data and measures to assess program efficiency and effectiveness. Without timely and precise information, Rural Development will be unable to determine how well it is accomplishing its mission of delivering safe and affordable rural housing programs. However, questions have risen in recent years about the effectiveness of rural economic development policies in creating new opportunities for rural residents as agriculture and other resource-based economic sectors decline in overall importance to most rural communities. A wide-ranging set of often overlapping programs target rural areas and their special needs, but according to some critics there remains little overall coordination of these various programs to produce a coherent rural policy. Over 88 programs administered by 16 different Federal agencies target rural economic development. The U.S. Department of Agriculture administers the greatest number of Rural Development programs and has the highest average of program funds going directly to rural counties. That is approximately 50 percent. I look forward to hearing from our sole witness today, Under Secretary Dorr. We appreciate you coming to the Hill to discuss the various ways in which home ownership can strengthen our rural communities and contribute to the overall quality of life for rural families. So thank you for appearing before the subcommittee this morning. We look forward to working with you. I do want to mention, too, in closing my statement that things have changed in the rural areas and so we have to adapt with that change. I was recently in Los Angeles. And I mean, I have been in the Congress 9 years. I have dealt with housing in the State legislature. But until you go out and you actually hear some of the things--I mean, there are some amazing challenges in the urban centers, absolutely amazing, and in rural, too. So there is a lot of work to be done, but we do appreciate you coming to the Hill. Chairman Ney. I now recognize the gentlewoman from California. Ms. Waters. Thank you very much, Mr. Chairman. I am just anxious to hear from our witness today. We have received quite a bit of information about Rural Housing Services and we want to know more about their preservation of multifamily housing efforts. I am a little bit concerned about the Inspector General's report. I am anxious to hear about the management of the 521 Rental Assistance program. If we have unspent money there, why do we have it when we know that the needs are so great? I come from an urban community and I, of course, I have spent all of my time, most of my time dealing with the housing crisis as it impacts Los Angeles and urban areas. But I have come to understand that we need to do a lot more to ensure that we have adequate housing in rural communities. And if we have some administration problems or oversight or management problems, we need to get on with straightening those problems out so that we can provide more housing assistance in the rural community. So with that, I am anxious to hear from you today and thank you for coming. Chairman Ney. I want to thank the gentlelady for her statement. And the gentleman from Arizona. I thought I was rural, but I am New York and Los Angeles compared to some parts of your district. We appreciate you also chairing this for us the previous time. Mr. Renzi. Thank you, Mr. Chairman. I am grateful. I am especially grateful for the fact that here we are again, in just less than 2 weeks, in the second in a series of rural housing hearings. And I represent about 58 percent of the land mass of the State of Arizona, and in particular I represent probably the fifth poorest county in America and one of the poorest regions, the sovereign State of the Navaho Nation, which parts of it compare to a Third World country. In addition, I am privileged to represent some of the barrio regions, poor Hispanic regions of Casa Grande, Arizona. So I deal in particular with needs of the families, the basic necessities of life where we have many of our rural homes that are during the wintertime--even though Arizona is warm most of the time during the wintertime--we have had some tough situations where our children have been frostbitten, particularly this year I think. I have complained in the past, some of the tragedies that our children have gone through. So I am very interested in particular in the housing program as it relates to the 523, the Mutual Self-Help program. I look forward to your testimony also, Mr. Dorr. Thank you for coming today. Thank you, Mr. Chairman. Chairman Ney. I want to thank both of our members. Mr. Dorr, welcome. STATEMENT OF THOMAS C. DORR, UNDER SECRETARY, RURAL DEVELOPMENT Mr. Dorr. Thank you, Mr. Chairman, members of the committee. I do appreciate the opportunity to come before this committee to share with you an update of USDA Rural Development and its related programs. I look forward to answering the questions from your July 1 correspondence both in today's testimony and by follow-up written response. Rural Development in my view is the venture capitalist for rural America. It is with this vision in mind that we carry out our mission of, first, increasing economic opportunity and, secondly, improving the quality of life for all rural residents through programs that are administered by the Rural Housing Service, the Rural business Cooperative Service, and the Rural Utility Service. The Rural Housing Service serves as a foundation for helping rural families build wealth through home ownership and by providing safe, decent, and affordable rental housing. Working with oversight agencies we are implementing a number of improvements to build a stronger housing program. I appreciate the opportunity to share a few of those with you today. Last month we celebrated National Homeownership Month by hosting the first housing summit at the Press Club here in Washington. Rural Housing Services has undertaken a major consolidation of 13 Rural Development regulations, which was published in the Federal Register on June 2nd of 2003. The goal of this proposed rule is to make the multifamily housing programs more customer friendly, streamline the process, reduce cost to the taxpayers and increase the Agency's level of customer service. The Rural Housing Service Section 515 Program, used in conjunction with the Section 521 Rental Assistance Program, provides a source of funding for the construction, repair and rehabilitation of affordable housing to families who need it most. The section 515 program helps to avert homelessness and operates with an extremely low delinquency rate of 1.7 percent. With regard to the 514/516 Farm Labor Housing Programs, the Agency has committed a total of $46 million to fund 27 proposals in fiscal year 2003 and we will produce 925 units. Of these units, 696 are off-farm which receive nearly 100 percent rental assistance. The Multifamily Guaranteed Loan Program, which is known as Section 538, serves moderate-income families that typically do not qualify for very low-income rental housing, but still they cannot afford the expense of home ownership. It should be noted that 80 percent of the Section 538 projects contain tax credits, which means that the housing serves people making less than 60 percent of the area's median income. A proposed rule was published on June 10th to allow the Rural Housing Service to buy back guaranteed loans from the investor as well as to reduce the minimum level of rehabilitation work from $15,000 per unit to $6,500 per unit on loans for acquisition and rehabilitation. In March of this year, we began the formation of a multifamily housing advisory group to oversee completion of a comprehensive assessment of our multifamily housing portfolio. The study will provide data and analysis for evaluation of the entire portfolio. Prepayments continue to challenge Rural Housing's ability to retain needed affordable housing in rural America. Over 64 percent of our borrowers are eligible to prepay their loans because of expiring use restrictions. We continue to look for creative solutions to address limitations that have resulted in litigation from borrowers who wish to exit the program. The capital assessment will assist us in determining the likelihood of a property to be prepaid based on market data analysis. Rural Development has also taken significant steps toward automating its multifamily portfolio information as well as modernizing the forecasting of rental assistance usage. Rural Housing Service has formed a working group to seek improvements to the rental assistance forecasting process. We plan to implement this improved process by November 1st of this year. Rural Development continues to work closely with GAO and other oversight agencies to improve program delivery. Many of the issues raised in oversight reviews will be addressed through issuance of the final rule 3560 and the implementation of the rental assistance forecasting tool. I want to make this point: Rural Development is uniquely qualified to meet the housing needs of rural America through our network of nearly 800 field offices across the United States and by incorporating cross-cutting programs offered by the Rural Housing Service, the Rural Utility Service, as well as the Rural Business Service. It is our intent to make significant progress on the administration and servicing of multifamily housing programs, thus enabling us to run a strong, viable housing program. With your continued support, Rural Housing Service looks forward to working with Congress to provide decent, affordable housing to low- and moderate-income rural Americans. Mr. Chairman, this now concludes my oral testimony. We would like to submit a lengthier testimony for the record. I look forward to answering any questions you or the committee may have. Chairman Ney. Without objection, the complete written statement will be submitted for the record. [The prepared statement of Thomas C. Dorr can be found on page 196 in the appendix.] Chairman Ney. I would also note that, as usual procedure, members may have certain questions and we will keep the record open for 30 days for members to ask questions to be submitted in writing and also returned by the witness. I will have some questions that we will submit for the record to you. I wanted to ask about--there was just two areas it has shown, I think it was 1981, which would have been 3 years after the program began--trying to remember which program it was--but one of the programs that began in 1981, and it showed that really the portfolio wasn't being assessed correctly way back at that time, rental assistance. And so it was kind of getting off to a nonaccurate, calculated start 3 years after its inception. Do you have any comments on that, on that program? Mr. Dorr. We have two major issues that we have to deal with in this multifamily housing Program. One of them is the rental assistance issue, and the other is what we generically term our ``capital needs assessment,'' which essentially is to determine the housing stock that we have available, and, in the rental programs, where it is needed, the quality of it, and whether or not there are things we can and should do to make sure they are properly placed. On the rental assistance side of the issue, my understanding is that in 1982, up and through 1982, new construction rental assistance projects were automatically authorized a 20-year rental assistance contract. There was a formula developed determining how many of the units in a project would qualify for rental assistance. There was a commitment made for rental assistance for up to 20 years. On renewed projects, the contracts were 5 years. It has taken some time to essentially try to ascertain what has gone on in that, but the short of it is that after a fair amount of digging-- which let me make one other very quick point--when I was appointed last August, the No. 1 priority on my list was to get a handle on these multifamily programs. So we have been working aggressively, trying to answer these questions since last September. But the bottom line is that we determined that there was a large amount of unliquidated obligated rental assistance to a number of projects. I will give you an example. On March 15th of this year, if my memory serves me correctly, we still had approximately 111 months of unliquidated rental assistance on contracts that were written in 1978 for 20 years. Five-year contracts that were written in 1999, also that would expire September 30th of this year, on March 15th still had 21 months of unliquidated rental assistance. What I determined was that our systems were not fully automated and our algorithms and calculations to determine how much rental assistance should be obligated to these projects, quite frankly, weren't as accurate as they should be. We have determined as a result, that we have $700- plus million of obligated unliquidated rental assistance, of which about 500 million plus is tied to these 20-year-old plus contracts. We are in the process now of trying to ascertain a fix to that because there are contracts which these are tied to, and there is a lot of difficulty to rework those contracts to fix the issue. Chairman Ney. Thank you. The gentlelady from California. Ms. Waters. I will yield to the gentleman from Alabama so that he will have more time to deal with the rural housing concerns in his area. Mr. Davis. Thank you, Ms. Waters. Thank you for yielding. Mr. Dorr, let me thank you for being here today. Let me, if I can, turn to something that you said was I believe your priority of the section 515 multifamily housing units. As I understand the section 515 units, their primary purpose I suppose is to rehabilitate and to renovate a lot of the housing stock that exists right now in rural housing areas. Is that essentially correct? Mr. Dorr. The 515 program essentially was a construction program, started out years ago. And we built affordable housing for low income households, or those that had diminished resources in rural America, frequently dealing with single family parents or the elderly, or young couples who quite frankly didn't have the resources either. Over the years that program has grown, and projects were built. And to that were tied rental assistance contracts. Rental assistance contracts have become quite onerous and they have become a large portion of our budget. At this point, although I think we are this year building something in the neighborhood of $24 or $25 million worth of new 515 projects in the 2004 budget, we are simply focusing on trying to spend funds for rehabilitation and repair so that we can maintain and keep these projects in the program. Mr. Davis. Let me tell you one thing that I have noticed regarding the funding for the program. Obviously I am not going to try to compare the current budget climate with 1994, but there have been some significant decreases over a period of time. For example, in fiscal year 1994 there was a 540 million appropriation under this program. It is down to 115 million in the last fiscal year. I think there is a marginal increase to 116.5 or something for the current fiscal year. I understand a lot of the conceptual problems that you have outlined regarding the way this program functions; but as a general rule, would you agree that the mission of this program has been compromised by some of the funding cutbacks over the last 10 years; it would be easier to do your job if you had more money instead of less money? Mr. Dorr. It is always easier to run any household or any program if have you more money than less money. I think one of the dilemmas with this program was that rental assistance grew so expansively that people were, generally speaking, looking to the source of resources to keep the new construction side going as well. My feeling is that we are on the threshold of determining a better tool to project rental assistance that should mitigate some of this growth in rental assistance requirements. That leaves everyone involved some flexibility to determine how they wish to handle the new construction or the rehabilitation preservation issues. This administration is very committed to the preservation of this housing stock in rural America. We understand the critical need for it. And so I would not suggest that we couldn't use more money, but I would also suggest that we are getting a handle on certain management issues that may make things more clear when we get finished. Mr. Davis. Let me ask you a fairly basic question. What do you consider the main thrust of section 515 to be right now? If you had to delineate what are the one or two most important goals, what would they be? Give me some indication consistent with that of exactly how this appropriation of 116 million is going to be apportioned between those goals. Mr. Dorr. Number one, we are very sensitive to the needs of those who need housing in rural America. Number two, we are very focused on stewardship and management issues. As a result, we hope to be able to develop the kind of efficiencies and administrative efforts that make the program viable, strengthen it, and keep it doing what it is supposed to be doing over a long period of time. I don't see that that would change. Mr. Davis. How much input--and my time is about to run out, but let me ask you one final question. One of the criticisms that I often hear of this program, a lot of the other various rural housing programs around the country, is that there is not a lot of effort to integrate the opinion or to solicit inputs from a lot of the people who do local housing work on the ground, people who are connected with various housing advocacy organizations, people who run the various public housing units in a lot of rural areas. Can you talk with me about whether you think that is a problem--if the Chair would indulge me enough to finish my question and you can answer it--can you tell me if you would agree that that is a problem, not getting adequate input from people on the ground, and what your Department is doing to address that concern? Mr. Dorr. Well, that is a great segue. I just happened to be in your district last week. I was at EPS with Ralph Paige down at the Federation of Southern Co-ops facility. We went over to one of our projects, Windy Hills. Mr. Davis. You didn't give me a call. I am disappointed. Mr. Dorr. This was an effort that Reverend Paige and I put together over a period of months. It was not designed to be anything other than to get-to-know-one-another and look at the issues. I am from a rural area. Until 2 years ago I spent all my life in rural Iowa in a small town of 1,200 people. I know what housing is all about in these rural areas. I have had some direct involvement with my own with folks in my local community. I was very impressed with Windy Hills. There is no question that they could always use more resources, but in the case of Windy Hills and a number of others, we are spending a lot of time putting together task forces of State directors, multifamily directors, to get direct input from them on how better to handle and manage these programs in ways that make them not only effective but sensitive to the families and the folks that live in these communities. I don't know what it has been like in the past. My sense is that there were probably some management issues that should and could have been dealt with. But I can truthfully say that our team under Mr. Garcia and the folks at Rural Housing and the folks at USDA Rural Development are very, very interested in making sure these programs work and work effectively. At our Rural Housing Summit we inked an MOU with HUD to specifically work with the four corners area of the Colonias to make sure we collaborate effectively in areas where we have programs that overlap or we know of folks that have other needs. It is a long-winded answer and I apologize, but we are in fact very serious about getting on-ground input and doing it on a regular basis. Mr. Davis. Thank you, Mr. Chairman. Chairman Ney. Thank you. Mr. Renzi. Mr. Renzi. Thank you, Mr. Chairman. Mr. Dorr, thank you for your testimony. I was real fortunate, I grew up in southern Arizona, along the Mexican border. Came from a family where we were taught ``never rent,'' whether we had the money or not. I didn't come from the lap of luxury, but we were taught not to rent. Do whatever you can to buy a house, hang on to the house even if you are house poor, borrow from the equity in the house, and then eventually use that equity either to have your own business or whatever to prosper and grow a family. I got a family of 12 children so I needed to borrow a lot of equity in order to pay grocery bills. But I want to segue into Congressman Davis's thoughts. That mentality that I was taught at a young age in my family and that economic model of owning a home, having an appraiser come out and appraise the home, borrowing against the equity, trying to move myself up, is that the kind of model you are seeing? I know you have been around and seen a lot in your travels. Is that same mentality shared particularly in the regions that we are talking about? GAO came out and said that Mississippi Delta, Appalachia, the Colonias on the Mexican border, and Native American trust lands--I have got two of the four in the worst rural and most severe rural housing quality programs in our country, those four regions. I know Congressman Davis shares one of those regions, too. So could you tell me, that mindset that I just described with you, are you seeing that around the country? Mr. Dorr. Well, that is an interesting question. And I think generally speaking, yes, there is a mindset that home ownership and equity in a home goes a long way toward building communities, building and securing strong families and strong family relationships. I will tell you my experience with the minority community coming from Iowa was fairly minimal until I got in this position. And I think the one thing that I have observed is that the minority community, generally speaking, probably have been disadvantaged because of a lot of historical reasons. You know, I have some observations on that, but I think it is an issue that needs to be resolved. I think we need to be more aggressive in making sure that minorities have the same opportunities of home ownership and equity building, just like those of us that had the opportunity to do it. The Section 523 Self-Help Program is one of the most interesting and effective programs we have. And we are doing everything we can to run that program long and hard; because through grant programs working with nonprofits, it enables young couples, single parents, families and singles, to actually expend sweat equity and ultimately move into their own home and move into it with an equity position. I concur with your observation. Mr. Renzi. When you look at some of the travels that you have had in the South, in particular what kind of impediments are you seeing when we talk--I think you have got some good research as far as the appraisals. I grew up in a small community, I played football with the local boy who is the appraiser. I know he is going to come over and give me a fair shake on my appraisal. If I can get him in a headlock, I will get a couple more bucks out of him. What are you seeing particularly in the South on that? Mr. Dorr. Let me go back to my visit last week with Mr. Paige. At the Federation of Southern Co-ops they are running a number of informational and training programs that will result in the development of new business opportunities. A number of credit union initiatives are underway, a lot of training and people development as well. Much to my surprise, when they were talking about their credit union initiative, I think in the neighborhood of 20 credit unions that he put together, they had slightly more than $20 million in assets. As they were going around the table discussing their various programs, one of the things that came up was that issue. So I looked at them and said, ``Explain something to me. How many dollars do you think are under pillows or buried in backyards; that is, aren't in banks or credit unions?'' Ralph looked at me and smiled and said, ``There is a lot.'' So then it moved on down the table to another young woman who was running a land development program. She talked about the inability to aggregate quantities of agricultural real estate, which essentially was impeding their ability to have an asset base to grow. I finally looked at them and I said, ``If I am hearing what I think you are telling me, answer this question. How many black surveyors are there? How many black title companies, black-owned title companies are there out here?'' The gentleman down the table looked at me and said, ``I can't find any.'' He said, ``I have looked in North Carolina, South Carolina, Arkansas, Alabama, Mississippi,'' I don't know if he mentioned Louisiana, ``I can't find a black-owned surveying company.'' Mr. Renzi. No African American surveyors, no African American appraisers; am I right? So if you are African American in the South and you do have the ability to own a home, and then you are trying to borrow against that, your ability to possibly--or your worry, I am sure, of trying to get a fair shake on the appraisal--I mean, you got to be--. Mr. Dorr. The ability to secure the property, to get a fair title, to get an appraisal, all of those issues are mitigated. As a matter of fact, I suggested to Ralph we need to sit down and work out a training program just in that exact area. Quite frankly, folks have to have trust in the people that they are dealing with and they have to have trust that the property is properly titled. That would go a long way toward mitigating a number of these home ownership issues. Ms. Waters. Would the gentleman yield? Mr. Renzi. Yes, ma'am. Ms. Waters. Where did you get your information that leads you to conclude that minorities don't aspire to home ownership in the same way as whites? Mr. Dorr. If I gave that impression, it was wrong. I think they absolutely aspire to it. Ms. Waters. I am sorry. What did you say? Mr. Dorr. What I intended to say was that their ability to think they can aspire to it, based on their experience, is probably diminished relative to whites or to the majority race, simply because of the experiences that they have had, as we have discussed concerning their lack of trust in the system that will enable them to acquire homes and property. Ms. Waters. Well, I am not sure what you are trying to say, but let me just give you a bit of my experience with the desire for home ownership, the desire for land ownership, and the desire for farmland ownership, all of those issues. You are from USDA. As you know, it was just less than 2 years ago that there was a class action lawsuit brought by African American farmers because of the discrimination in the Department of Agriculture. And that has been the most horrendous experience that I have ever had in trying to straighten out a problem of unfairness. And we still have farmers, for example, who are struggling with the way that they have been treated by USDA and the Department of Justice. I point that out to you because if what you are trying to say--and I think as you explained it a little bit better, what you may be trying to say is because of lack of opportunity, because of discrimination, because of redlining, all of these issues that some of us have been fighting for years, it has limited the ability of minorities to be able to own homes and property and farms in the way that they should have been able to had there not been the kind of discrimination that is documented through the actions like the class action lawsuit. And let me say this to you: Even today as we sit here and we talk about the Mississippi delta, it is shameful what still happens in the Mississippi delta. There are still shacks without running water, without partitions. Why do we continue to have those kinds of situations? Given what I am looking at now, all these programs and all the opportunities that we are supposed to have, why do we still have such substandard housing in places like the Mississippi delta? Mr. Dorr. Well, I think you have framed my observations very well. It is a limited ability due to discrimination and due to the lack of capability relative to the system giving them the opportunity that everyone else has. So you are right. You are absolutely correct. Now, in defense of USDA--and I am not defending their past actions and a number of the issues that have been clearly outlined--but I would draw your attention to what I think is a stellar example of positive action that we have just completed at USDA's Rural Development. I don't know if you are familiar with a community called Bay View, Virginia. Bay View, Virginia is on the eastern shore of Virginia, just across the Chesapeake Bay Bridge from Norfolk. Last week, Deputy Secretary Mosley attended an open house there. Bay View is a minority community that had ramshackle houses with no running water and no sewer system. The water systems that they had were next to septic tanks. This occurred before I got there. But somehow residents connected with the folks at Rural Development. Within Rural Development we have three agencies: Rural Utility Service, Rural Housing Service, and Rural Business Service. The first entity that they engaged was Rural Utility Service. We have subsequently been involved and drilled wells, put in water and waste systems, so that they have water, waste, and livable conditions. Then last week our Rural Housing Service completed the opening of 35 brand new multifamily housing units in that community, and there are now on the drawing board a number of single family housing units. That is all tied to a farming operation of which I quite frankly don't know all the details. So we are mitigating these issues where we have the resources, where we have the opportunity, and where we can engineer things of this sort to happen. Ms. Waters. Well, I appreciate your example. And I would hope that under your watch you will expand that. I don't have a rural community, but I go to Selma and down through Alabama every year as we commemorate the March across the Edmonds Pettis Bridge. I am still appalled at some of what I see. I go down in the delta with Benny Thompson who invites us down from time to time for various reasons. I am still appalled at what I see. I listen to my chairman of this committee talk about communities that don't have water. And I am still appalled at some of what is happening in Appalachia. So we got a lot of work to do. And while I appreciate what you are telling me, some of the images of rural housing, the lack of rural housing, still appear on television from time to time as stories come out in various ways, and the camera is panning shacks where people are sitting on broken-down porches and the mention of no running water, et cetera. So it seems to me that there is a lot of support in this Congress for rural housing. And I don't know what is going on with all of the programs, which I am going to try and pay a lot more attention to. But I think that those images that we constantly see, and I have been seeing practically all my life, we are just a few years beyond Sugar Ditch in Mississippi, these have to be gotten rid of. This administration can't afford to talk about housing in Afghanistan and Iraq until it gets something done in Mississippi and Alabama and Appalachia. So I am one person that is going to be pretty persistent in trying to pursue the opportunities for the rural poor, because I am not simply concerned about the urban poor, I am concerned about the rural poor as well. Chairman Ney. Thank the gentlelady. Mr. Renzi. Mr. Renzi. Reclaiming my time, I wanted to--. Chairman Ney. Your time has expired, therefore--. Mr. Renzi. I want to thank you. I think you did an excellent job of calling out some of the impediments that you observed during your trip to the South. Do you see within the community, within the leaders that you met down there, the ability for the African American community to now put in place in their training programs new programs that will bring about more appraisers, more land surveyors, so that won't be an impediment, is I think what you described? Mr. Dorr. It clearly now on the table of issues that we need to address through the number of programs that we are involved in. I would intend to do that. I frankly am appalled by the fact that there aren't black appraisers, surveyors, abstract companies, et cetera. Maybe there are someplace; we just haven't found them. Mr. Renzi. I am sure with Congressman Davis's knowledge of this now, he will also be a leader on it. If I could move real quick, I think we will do a second round of questioning, to the Mutual Self-Help Housing Program. In southern Arizona along the border, we have got a great amount of labor. We have got a lot of Hispanics who have been involved in the construction industry. We have the Navaho, the Apache, the Hopi, all of which I represent and am fortunate to represent. Represent the largest Native American Indian population in America. So we have plenty of labor, plenty of people out of work. We have plenty of timber, if it is not burning in our forests out there. And I like this idea of being able to take the labor that we have available, take the materials, the building materials that we have available, these natural resources, and being able to use this 523 Mutual Self-Help Program. And I would like you to just expand in the remaining time that I have on the 523 program and in particular the amount of money that is available that was used--that is not used. And I will finish with that question. Thank you, sir. Mr. Dorr. In our Self-Help 523 Program, we have an appropriation of $35 million. That is budget authority that is used to make grants to nonprofits or other housing assistance councils or authorities that are collaborators who work with Rural Development to bring together, usually in tranches of 8 or maybe 16 potential homeowners, provide them guidance, construction oversight and assistance in building, through the use of sweat equity, their own homes. This is a marvelous program because it uses local supplies, and local labor. When we get all done, these young people have homes of their own with equity usually when they walk in the door. It is a program that we intend to push and push aggressively, because it doesn't use a lot of government resources. Mr. Renzi. How much left over from the 35 million? Mr. Dorr. Last year I believe we had 16 million left over. There is a reason for that, quite frankly. Mr. Davis. If I could ask a quick question--will you permit a second round of questions? Chairman Ney. We will go to Mr. Bereuter and then start a second round. Mr. Bereuter. Thank you, Mr. Chairman. Mr. Dorr, welcome to the subcommittee. Mr. Dorr. Thank you. Mr. Bereuter. With the help of my colleagues, I am the person that took the initiative in developing the 502 program and the 538 Guaranteed Loan Programs authorized initially. So I am very interested in these two programs and their successor programs. I would like to go to the 538 Multifamily Loan Guarantee Program first. I understand that a rule was published on June 10th which would hopefully make two changes to improve the program's secondary market participation. But mortgage bankers came before this subcommittee lately--let's see, I think I actually have the date--and they suggested that we need statutory language to make it clear that Ginnie Mae could ensure--could securitize loans under the 538 program. I checked with a Nebraska USDA rural office in my home State and found that there were none of the 538 properties in Nebraska involving the Ginnie Mae program. I did make an inquiry of your Agency with respect to the 502 Single Family Loan Guarantee Program. I understand that your response was that the 502 program can be securitized under Ginnie Mae. Do you have any feelings about whether or not this subcommittee should advance legislation which would make Ginnie Mae an eligible securitizer for the 538 Multifamily Loan Guarantee Program? Mr. Dorr. We are in the process of working to get Ginnie Mae as a securitized underwriter of this 538 program. If it takes statutory language, that is something that we would obviously have to run by our counsel, et cetera, to determine where we are at on that. But anything that would make the program more liquid and more effective would make sense. Mr. Bereuter. I think that is one of the problems now. I am inclined to introduce legislation to make it clear that they have the authority to proceed in that area. Can you give me some idea as to whether or not the appropriations in recent years have been sufficient to meet the demand for the 538 program? Mr. Dorr. Well, in a cursory overview, it appears that it has up to this point. It is because of the lack of liquidity and some of the underwriting issues that I think it has been slower to take off than perhaps one would have hoped. By the same token, we are in the process right now, among other things, of engaging a couple of folks with very, very substantial background in the multifamily area; It is my hope they will help us understand better how to operate this program in a way that makes it function as it was designed by the statute. Mr. Bereuter. Without the ability to securitize loans, it has been very difficult. We have had to be very innovative in the few projects we have made work in Nebraska. The 502 program, do you have any idea how many families have been provided housing either by purchasing an existing home or building a new home, or a 502 program nationwide? Mr. Dorr. Last year we were able to work with right at 44,000 homeowners. Mr. Bereuter. Got any overall figures since the first pilot program in 1991? Mr. Dorr. Yeah, I do. It is quite substantial. Mr. Bereuter. I think it has been substantial. I think it has a successful program. Mr. Dorr. I believe to date the 502 guarenteed program has assisted over 260,000 rural families with homeownership. Mr. Bereuter. Most of that I think is in the guaranteed program. Mr. Dorr. Actually, the majority of our portfolio is still in the direct, although the guaranteed portfolio is growing rather substantially. Mr. Bereuter. I see. All right. The difference, it seems to me, as to whether low- and low/moderate-income people take advantage of this program oftentimes comes down to whether or not there is an aggressive local banker that works the program. I want to congratulate you on keeping the program simple to use at this point. In fact, most bankers and other financial institutions cannot believe how easy it is compared to some of the loan guarantee programs related to agriculture. So they are reluctant to even look at it. When they do, they can really make a go, make it work. Some of the smaller banks are some of the most successful in using it. That has been my experience at least. Now, in fiscal year 2003, I think the ceiling was set at 4.528 billion. And because of the low default rate, the low administrative cost, you were able to operate, I gather, meeting demand with only 32.6 million budget authority. The current administration request for fiscal year 2004 is down dramatically, only 2.5 billion, but the budget authority level is suggested at 39 million there. Why was it so low in fiscal year 03 compared to 04? Has there been a recalculation of risk? Or what is the difference, if you can help me with that question? Mr. Dorr. Are you talk talking about the direct or--. Mr. Bereuter. Talking about the loan guarantee program. Mr. Dorr. The loan guarantee program. I don't have a precise answer on that for you. We requested a 32 percent increase in our direct 502 program appropriations. I can get you an answer on what caused the guaranteed program BA requirement to change in 2004. Mr. Bereuter. If you have a budget authority level of 39 million, will you be able to meet the demand for the 502 Loan Guarantee Program for fiscal year 04? Mr. Dorr. It may be difficult, but I think we will. Mr. Bereuter. Very difficult. Were you able to meet this thus far in 2003? Do you expect to be able to meet it in 2003? Mr. Dorr. Yes, we hope to. It is going to be tight. We were able to move 11 million of carryover from the Section 523 Program into our direct program with the appropriation last February. That gave us an additional 900 million in single family guaranteed authority, gave us about over 10,000 homes. So that is clearly what kept us running. Mr. Bereuter. Why do we use the direct program when we have such a larger payoff, so to speak, from the loan guarantee program? Why does there continue to be the demand on the direct program when we can leverage so dramatically the Federal funds involved by the loan guarantee program? Mr. Dorr. Essentially the direct program addresses the needs of a tranche, of lower income families which we think merit an opportunity to acquire a home. If we can do that, we think that is worthwhile. Mr. Bereuter. So these would be people largely below 50 percent of the average income level in the region? Mr. Dorr. Yes. Mr. Bereuter. Whereas we designed the loan guarantee program for 85 percent. Mr. Dorr. 80 percent of average median income. Mr. Bereuter. Sixty, I should say. Mr. Dorr. I am sorry; it is up to 115 percent of median income. Mr. Bereuter. We had 100 at one time, and it was moved to 115 as I recall. The multifamily housing Program, the 538 program, the budget includes $100 million--excuse me--proposes to build 2,700 units. Without some changes, some changes coming through the rules changes, perhaps by getting Ginnie Mae authorization you will be able perhaps to build more. Will you be able to come up to the 2,700-unit level for the next fiscal year? Do you have any thoughts about that? Mr. Dorr. There has been some misunderstanding in terms of the funds obligated and ultimately used in this program over the last several years. I think the key to it is what you identified early on, and that is the ability to securitize and make these projects liquid. If we can resolve that issue, we could use these funds in their entirety. But the speed of the resolution of that issue I think will drive it. Mr. Bereuter. Just for your information, Mr. Dorr, I go to the Appropriations subcommittee each year and ask for more funds for the loan guarantee programs, the 538 and 5902 program. And while the staff there probably understands this program rather well, I find that members are intrigued to learn about the program, even though it has been ongoing for a number of years, and about its potential and about its growth in number of houses that are being made available to low- and moderate-income Americans. So I encourage you to have even more contact within your Agency with the appropriators in both houses on this issue and give them some of the charts that I have provided from your Agency to them this time to show them the growth in the programs. That is my suggestion to you. Thank you very much for your response. Chairman Ney. Thank you. Mr. Davis. Mr. Davis. Thank you, Mr. Chairman. Let me try to globalize this discussion a little bit, Mr. Dorr. One of the things that is evident to me, if I can follow up on my colleague from Nebraska's observations, is not just that few Members of Congress are relatively acquainted with the various 528s, 538s, whatever the various numbers are. Much more importantly in my experience, a very, very thin fraction of the people that these programs are meant to serve know anything about them. That I think is a very significant gap that speaks to some extent to Ms. Waters' questions earlier about why, despite the existence of all of these programs, despite the funding for all of these programs, which at one point was at a fairly respectable level though it is not now, there has still been this persistent housing crisis that is concentrated in parts of the country, the areas Mr. Renzi represents and the Mississippi Delta, Alabama Black Belt area. Do you agree that that's a significant problem, making the potential clientele for these programs aware of them and what, if anything, is USDA doing to aggressively go, not just to the Ralph Paiges of the world, but to the people who are living in these counties in addition to Mr. Page, the people who actually are going to benefit from these programs? What is being done to go into the local communities to make people aware of these various benefits? Because I'd make an observation to you. My colleague from Nebraska mentioned the necessity of the banks implementing a lot of these programs, the guaranteed loan programs. I will represent to you that in major parts of the area that you represented last week, there is a very small banking presence. I think in the whole of Sumter County, there may be all of about two banks, maybe really one bank that is really capitalized in a significant degree. You can go through major portions of my district that you represented last week, and you don't run into any banking presence, and maybe even more pernicious than that, when you run into banks, when the people in those communities run into banks, the banks are not a friendly face to them. The banks are the people who keep them from getting loans in their perspectives. The banks are the people who are not friendly to them when they come in needing money to get some new agricultural equipment. The banks do not have a great reputation in lot of these communities. So given the fact that the banks are not going to be the best purveyor of information, what do you suggest, I mean, what do you suggest to get these programs into the heart of the people who would benefit from them? Mr. Dorr. That is a tough question. People have looked at it for a long time. Naively, perhaps, I would make a couple of observations. First of all, these credit unions, between them had I think $20 or $22 million. You could convert that $20 or $22 million into black-owned banks that would have an asset base of a billion dollars. With proper security and the types of securitization possibilities, there would be a lending base there. We have entered into an MOU with the National Association of Credit Unions to try to work more closely with them to market our programs, as well as to use their ability to help provide home ownership loans and that sort of thing. When you are dealing with a credit union with a million dollars and a lot of volunteer staff, the sale of a home loan into a secondary market involves complex and sometimes more involved issues than the staffs sometimes have. We, at Rural Development, have to do a better job of marketing. Statutorily there are some limitations in our ability to go out and quote/unquote market government services. But I think a more effective marketing effort must be made. We are in the process of taking a very close look at what we can do within the framework of our authority to make sure that we are doing a better job. We have also initiated, a year ago, something called the Five-Star Initiative, which is part of a Rural Development effort in conjunction with a Credit Education Program through the FDIC. Our Five-Star Initiative essentially amounts to an enhanced marketing strategy to bring minority homeownership more front and center in ways that involve marketing, education, and an aggressive attempt to increase minority homeownership within our programs by 10 percent in the near future. We are doing a number of things. There are a lot of issues that have to be dealt with. Are they all right? Are they all the most effective? I am not sure that I know, but we are sensitive. Mr. Davis. Let me just close on this observation that follows up on Mr. Renzi's observations earlier about the absence of minority participation in a lot of aspects of the rural housing market. One thing that is always striking to me, Mr. Dorr, that if you look at the largest banks in my district, and we have a number, and if you look at the next tier of banks in my district, we have a number of those, to my knowledge, not counting the one or two minority-owned banks, at the majority- owned banks in my district, there are about six or seven of them, there is a combined total of one African American who sits on the board of directors of all six or seven of those institutions. I am sure if I am wrong, I will hear about it by the end of the day. But I think that that number is about right. That is a significant problem that I think all of us, certainly on this committee, should recognize. You do not have a significant amount of participation by individuals in the minority community or a significant amount of participation by folks who even have relatives who live in some of these areas, frankly, until we get a handle on that phenomenon. Because I would describe the phenomenon this way. It is the perspective of people whose economic interests are primarily directed outside of the community still making the bulk of the economic decisions about the distressed communities. That is certainly the perception of the people on the ground in these areas. And I think until we get a handle on that problem, until we find some way to inject more of a feeling of participation because whatever the reality, if a given community feels that its needs are ignored and neglected, that will certainly weaken their ability to take advantage of the programs that do exist. So I will close on that note and certainly thank the Chair for calling this hearing. And thank Ms. Waters for her engagement in this issue. She has been, despite the absence of a rural presence in her district, she has been way before I got here, a persistent voice on these kinds of issues, and we need more urban voices engaging this question. Thank you. Mr. Dorr. Thank you. Chairman Ney. Thank you. Mr. Renzi. Mr. Renzi. Thank you, Mr. Chairman. I want to jump on the coattails of my colleague, Mr. Davis. In southern Arizona, we have been somewhat successful, not great success, but somewhat successful in using the Section 523 Program. And one of the ways we were able to get the word out was the 523 Program. For 60, 65 percent of the labor that you put into the home, we were using the Catholic churches, and I know your network of African-American churches in the South is as strong if not stronger, but the idea that we have got $18 million left in the 523 Program, a program where you can use local materials--and I was a homebuilder before I came here-- use local materials and local labor to build your own home, and when you walk into this you have equity, and if we can get the local churches to get behind that kind of a program, there is-- I am going to overreach here, but I can't see any reason to rent. Why is it that we had $18 million left over? And I know I am looking here at underqualified supervision. Is that a State- licensed GC, or is there a Federal qualification? Mr. Dorr. Mr. Garcia says it is a State-licensed--. Mr. Renzi. GC? Mr. Dorr. Right. Mr. Renzi. So it has got to be a GC? Mr. Dorr. Right. Mr. Renzi. Okay. Mr. Dorr. Seventy percent of the folks that go into our self-help program are minorities. That is a market tranche that we are very heavily engaged with. Secondly though, to have the kind of oversight necessary to make sure these projects succeed. I mean the worst thing that can happen is somebody goes to work for five or six months, in addition to maintaining a 45- or 50-hour-a-week job, they spend another 30 hours a week building a home, and they have poor oversight quality because these folks don't have backgrounds in building skills and buying materials and that sort of thing, and then to get four or five months into it and have the project fail because of some lack of oversight, and we have had a couple of those. Mr. Renzi. I would--I hope you have failure rates through the roof, because you have got $18 million left over, my friend. And I know most people out there with good supervision, as you know--and I am preaching to the choir here--can put together a home. It is not that--I mean if I could do it anybody could do it. Mr. Dorr. Well, that may or may not be the case, but I understand what you are saying. And the simple fact of the matter is that what we are not trying to mitigate all failure. I understand that. And I have identified a number of organizations around the country who can help. I intend to put them in touch with some of these folks that I met last week that can come in and provide the training and provide the support and the background to get these houses up and running. That's the kind of marketing we need to be more forceful on, and we intend to do that. Mr. Renzi. I am with you. There it is, the training aspect of it. The idea that maybe to train some of these supervisors and get the program out. Again, just real quick and I will wind up. The $18 million that we have left over was primarily why? Mr. Dorr. Why? Because we just didn't have enough demand for it, based on our ability to market the program and to make sure that those that were interested in this had the ability to make sure these projects would likely succeed. Mr. Renzi. Thank you, Mr. Dorr. It was great having you today. Appreciate it. Mr. Dorr. Thank you. Chairman Ney. Thank you. Any other members would like to ask a question? Just in kind of a summary, would you like to say anything about the vision you have, you know, in a nutshell and how you would like to carry it out through some changes you need to make? Mr. Dorr. Well, if there is a take-away vision of what Rural Development and this administration would like to be viewed as number one, I want to make it most clear that this administration is very sensitive to the housing needs of rural Americans. Second, it is in that vein that we are trying to administer these programs effectively and to get our hands around them in a way that provides the stewardship of the resources that we are given in ways to make this program work. And thirdly, if we administer and implement these programs effectively because of good stewardship, and our sensitivity to the needs, I would like the committee to also understand that we are going to need some management flexibility relative to how we deal with rental assistance, securitization issues, and a number of the issues concerning the 523 Program. We do have these tools, but we need flexibility in how we implement them. If we can do that, then our vision of Rural Development being the venture capitalist for rural America with the goals of increasing economic opportunities and improving the quality of life will, in fact, bear fruit. We are well-positioned to do that, and with your help and cooperation, I would like to think we can attain those goals. Chairman Ney. What I would suggest, as we try to get to where we want to be in the vision, if you have the ideas of what you need to do legislatively, you know, bring it here to the committee, and we can take a look at it and see how we could work together if there needs to be legislative changes. I know some of it is internal management, some of it is getting out the word of what's there, maybe some of the things that are there are not working so--but I just think we need to, like I said, beef the level up all the way around to get the issue out there. And I will still say it, downpayment is a problem. I mean when we talk about the housing downpayment as a problem. We have talked about it, and people can work and pay that monthly payment but the downpayment always tends to be a problem. Mr. Dorr. Well, thank you; I want to take this opportunity to make a point about downpayment. We have a Rural Development program, right now, where we have State directors and single- family employees working with employers who are providing the downpayment on 5-year forgivable loans in conjunction with Fannie Mae buying the paper and us originating the loan. There are many of these opportunities out there. We are trying to corral them all, and when we do that, it does make housing much more affordable and available in ways that I think would satisfy everyone. Chairman Ney. It makes a huge difference. We have talked about it with the FHA; I have talked to the ranking member. It makes a huge difference. If a person sits and it literally takes 10 years for the downpayment, I don't note what that shows about their credit worthiness in the sense of the child was in third grade, now the child is out of high school, they could have been in that house to have a better place to study, et cetera. I mean, we all know you can't maybe prove all these things with calculations, but we know it works. So some way--I am glad to hear that is happening. Any other way I think we can directly tackle that is going to help people. The sooner people get into housing, the better off they are going to be, their families and their whole way of life. I want to thank all the members. If there is no further questions that concludes the hearing. Thank you. [Whereupon, at 11:17 p.m., the subcommittee was adjourned.] A P P E N D I X June 19, 2003 [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] A P P E N D I X July 8, 2003 [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED]