oversight

Housing and Urban Development: Potential Implications of Legislation Proposing to Dismantle HUD

Published by the Government Accountability Office on 1997-02-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




February 1997
                 HOUSING AND URBAN
                 DEVELOPMENT
                 Potential Implications of
                 Legislation Proposing to
                 Dismantle HUD




GAO/RCED-97-36
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-275718

      February 21, 1997

      The Honorable Alfonse D’Amato
      Chairman, Committee on Banking,
        Housing, and Urban Affairs
      United States Senate

      The Honorable Connie Mack
      Chairman, Subcommittee on Housing
        Opportunity and Community Development
      Committee on Banking, Housing,
        and Urban Affairs
      United States Senate

      The Honorable Lauch Faircloth
      United States Senate

      This report responds to your request that we examine the implications of one of the proposals
      to dismantle HUD—S. 1145, the Housing Opportunities and Empowerment Act. Specifically, the
      report (1) examines the bill’s proposed changes in housing assistance, community development,
      and housing finance and the potential impact of these changes on the customers of these
      programs and (2) discusses the capacity of the states and other federal agencies to assume
      HUD’s functions and the tasks to be accomplished in dismantling HUD within the 5 years specified
      in the bill.

      We are sending copies of this report to the Secretaries of Housing and Urban Development,
      Health and Human Services, Agriculture, and the Treasury; the Directors of the Offices of
      Management and Budget and Personnel Management; the Attorney General; the Chairmen of
      the Federal Reserve Board and the Federal Trade Commission; the Administrator of the
      Environmental Protection Agency; the Chief Executive Officer of the Federal Home Loan
      Mortgage Corporation; and the President of the Federal National Mortgage Association. We will
      make copies available to others on request.

      Please call me at (202) 512-7631 if you or your staff have any questions. Major contributors to
      this report are listed in appendix X.




      Judy A. England-Joseph
      Director, Housing and Community
        Development Issues
Executive Summary


             Efforts to balance the federal budget by early in the next century will
Purpose      impose difficult choices about discretionary spending for the Department
             of Housing and Urban Development (HUD) and other federal departments
             and agencies. Most balanced budget plans include a freeze in discretionary
             spending at current levels to help reduce the deficit. Under such a freeze,
             spending would be nearly 20 percent lower by the year 2002 than if current
             levels were allowed to increase with inflation. Although budget constraints
             will test and challenge many agencies and programs, they can also prompt
             reforms of long-standing problems in programs’ management and design.

             HUD  spent about $29 billion in fiscal year 1995 to, among other things,
             make rental housing affordable, revitalize communities, and support
             homeownership. However, in recent years, several organizations,
             including GAO, have identified significant deficiencies in the Department’s
             internal controls, information and financial management systems,
             organizational structure, and mix of staff and skills. Recognizing the need
             to address these concerns as well as to reduce discretionary spending, the
             administration, the Congress, and others have offered proposals to
             restructure HUD, privatize or transfer some of its functions, or dismantle
             the agency.

             The Chairs of the Senate Committee on Banking, Housing, and Urban
             Affairs and its Subcommittee on Housing Opportunity and Community
             Development and Senator Faircloth asked GAO to examine the implications
             of one of the proposals introduced in the 104th Congress to dismantle
             HUD—S. 1145, the Housing Opportunities and Empowerment Act. This
             report (1) examines the bill’s proposed changes in housing assistance,
             community development, and housing finance and the potential impact of
             these changes on the customers of these programs and (2) discusses the
             capacity of the states and other federal agencies to assume HUD’s functions
             and the tasks to be accomplished in dismantling HUD within the 5 years
             specified in the bill. Projections of the bill’s impact on the federal budget,
             developed by the Congressional Budget Office (CBO), will be published in a
             separate report. As agreed with the requesters’ offices, this report assumes
             that the bill would cover the 5-year period from 1997 to 2002, rather than
             the period from 1995 to 2000 that is specified in S. 1145. To obtain
             information on these issues, GAO, among other things, visited six states and
             11 federal agencies and surveyed representatives of 44 state community
             development agencies.




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                   Executive Summary




                   Since HUD was created in 1965, it has grown to include some 240 programs
Background         and activities and hundreds of billions of dollars in financial commitments.
                   Through its multiple social and financial roles, it directly or indirectly
                   affects most Americans through its functions, which fall into four
                   categories—housing assistance, community development, housing finance,
                   and regulation. S. 1145 (and an identical bill, H.R. 2198) would dismantle
                   HUD, transferring some of its functions to other federal agencies, the states,
                   or the private sector and eliminating other functions altogether. To
                   manage the transition, the bill would redesignate HUD as the Housing and
                   Urban Development Programs Resolution Agency and make this
                   temporary agency responsible for administering and concluding HUD’s
                   affairs within 5 years.

                   Under S. 1145, HUD’s public housing and other rental housing assistance
                   programs that provide subsidies for specific projects, referred to as
                   project-based assistance, would be phased out and replaced with a flexible
                   voucher system that would allow tenants to choose where they live.
                   Tenants could use their vouchers to either rent or purchase any unit they
                   could afford, but a household’s receipt of vouchers would generally be
                   limited to a lifetime maximum of 5 years. The program would be
                   administered by the Department of Health and Human Services (HHS), but
                   the states could choose to receive a block grant allocation to administer
                   the vouchers on HHS’ behalf or develop their own housing assistance
                   programs. The funding for HUD’s community development grants, as well
                   as many of the Department’s grant programs for housing and assistance to
                   the homeless and people with special needs, would be combined—and
                   greatly reduced—to form a grant program that would be administered by a
                   new, independent agency. A shared-risk insurance program administered
                   by the Department of the Treasury would replace the Federal Housing
                   Administration’s (FHA) single-family mortgage insurance program. Several
                   other programs, including FHA’s multifamily insurance program, would be
                   terminated, as would the federal government’s direct participation in the
                   secondary mortgage market. Various other regulatory and enforcement
                   activities would be transferred to other federal departments.


                   The recent proposal to dismantle HUD—S. 1145—couples reduced federal
Results in Brief   funding with fundamental changes to the federal role in housing and
                   community development. If enacted, such a bill could have far-reaching
                   effects on renters, communities, and would-be home buyers. While the
                   bill’s plan to institute a voucher system to allow tenants to choose their
                   residence could expand housing choices for renters in some areas, its



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Executive Summary




phaseout of assistance for specific projects could reduce the supply of
affordable housing—and housing choices—in other areas, according to
HUD and state officials. Nonetheless, rising costs make current levels of
housing assistance increasingly difficult for the nation to afford in an era
of declining federal discretionary budgets. Accordingly, budgetary
constraints may well reduce federal housing programs and services,
whether these programs are reformed or not. The bill’s creation of a block
grant for community development would give the states and localities
more choice in spending federal funds, but the total federal funding for
community development programs would be cut by about 40 percent. The
current beneficiaries of federal programs targeted to their needs, such as
the homeless, might receive less assistance in an open competition for
funds at the local level. Also, small cities would see a significant reduction
in the federal funding for their projects. Although some of the bill’s other
provisions are designed to reduce the federal government’s risk in insuring
loans and guaranteeing mortgage-backed securities, these same provisions
would make purchasing a home more difficult, especially for low-income
and first-time buyers.

Both the states and the federal agencies that would receive HUD’s functions
generally believed that they could assume additional programmatic and
administrative responsibilities if they also received additional resources.
However, several of the federal agencies cautioned that they did not seek
to assume HUD’s functions. HUD maintained that transferring its functions
to other agencies would break up the network it has developed to
implement its programs, would adversely affect the delivery of services to
its clients, and would eliminate the focus on housing and community
development it has provided as a cabinet-level department. The priority
that other agencies would give to some of HUD’s functions remains an open
question. Finally, the bill’s implementation would depend on the resolution
agency’s ability to transfer functions and administer—and in some cases
resolve—complex financial commitments within the required 5-year
period. Lessons learned from previous experiences in eliminating
agencies, especially in dissolving the Resolution Trust Corporation, could
assist the resolution agency.




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                             Executive Summary




Principal Findings

Bill Could Increase Choice   Replacing a mixed project-based and tenant-based housing assistance
in Housing and Community     program with a voucher-only system could give renters more choice in
Development, but Aid to      deciding where they would live. The extent of their choice would,
                             however, depend on a number of factors, including the amount of their
Some Vulnerable              rental subsidy compared with the costs of housing in any given market.
Populations Might Be         Under S. 1145, currently assisted properties—1.3 million units of public
Reduced                      housing and 1.4 million units of housing receiving section 8 project-based
                             assistance—would be required to compete in the marketplace. During a
                             5-year transition period, the resolution agency would settle expiring
                             long-term commitments to provide rental assistance through a process
                             comparable to one that HUD has considered for reducing the government’s
                             expenditures for these commitments. The resolution agency would also
                             administer a block grant to operate and improve those public housing
                             properties with an approved plan for becoming more competitive. But
                             some of the public housing and other assisted properties might not
                             become competitive. If tenants chose not to remain or if rental income
                             was otherwise insufficient to cover operating costs, the properties might
                             not remain viable, and their loss could decrease the supply of affordable
                             housing. Any such loss could decrease the opportunities for recipients of
                             voucher assistance to exercise choice in some housing markets, including
                             tight markets such as those in San Francisco and New York City. However,
                             for most households, according to both HUD and CBO, affordability is the
                             main problem, not a shortage of housing. Additionally, under a
                             tenant-based system, landlords would know that tenants could move and
                             would, in principle, have more incentive to maintain their projects.

                             Combining the funding for HUD’s community development
                             programs—currently about $8 billion—into a block grant to be funded at
                             $5 billion in the first year, distributing it to the states and large
                             metropolitan areas, and allowing these entities to decide how they would
                             spend the funds—within federal guidelines—would give these entities
                             more choice. But studies on local development issues have shown that
                             communities often choose to invest in projects benefiting broad-based
                             constituencies and reduce the funding targeted to low-income groups. For
                             example, populations such as the homeless, who are guaranteed a
                             measure of assistance under HUD’s McKinney Act programs, might not fare
                             as well under a block grant that did not target some funds directly to them.
                             Also, the bill’s reductions of almost 60 percent during the first year in the




                             Page 5                                 GAO/RCED-97-36 Proposal to Dismantle HUD
                          Executive Summary




                          grants to 3,000 small cities would mean that these cities would either
                          receive smaller grants or fewer of them would receive grants. Either way,
                          these communities might have to cut or scale back their community
                          development activities.


Bill Would Reduce the     Under S. 1145, the federal government would provide partial mortgage
Federal Role in Housing   insurance only for single family homes and would no longer insure
Finance                   multifamily dwellings. Borrowers would have to make a larger down
                          payment to buy a home, and mortgage credit would be less readily
                          available for some multifamily projects. The bill could reduce the federal
                          government’s exposure to loss (1) by lowering the percentage of a home
                          mortgage loan that the federal government could insure from the current
                          level of 100 percent to no more than 35 percent and (2) by no longer
                          guaranteeing mortgage-backed securities. The federal government’s actual
                          losses would depend upon risk-sharing agreements negotiated between
                          the Department of the Treasury and state housing finance agencies and/or
                          private mortgage insurers. However, these changes, combined with a new
                          provision limiting a loan to no more than 97 percent of the value of a
                          home, might result in loan terms similar to those now offered by the
                          private market. Consequently, some low-income families and first-time
                          home buyers who would formerly have qualified for a federally insured
                          loan might not do so under the bill’s provisions. As a result, some
                          would-be home buyers might have to delay purchasing a home while
                          accumulating additional cash, purchase a home of lesser value, or in some
                          cases never become homeowners. Eliminating FHA as a source of
                          insurance for multifamily mortgages would eliminate a relatively small, but
                          in some instances important, source of credit enhancement for developers
                          of projects for lower-income renters, as well as for hospitals and nursing
                          homes in certain locations.


States and Receiving      Officials in the six states GAO visited believed that their state could take on
Agencies Say They Would   most of the bill’s proposed responsibilities. In the housing assistance area,
Need Resources to         most officials said they would need funding for additional staff or
                          automated systems to accomplish the tasks that this proposal would
Implement Transferred     transfer to the states. However, almost 80 percent of the respondents to a
Functions and Could       GAO survey of state community development officials said their state could
Experience Some           easily assume the community development responsibilities by dividing the
Difficulties              grant among state agencies. State housing finance agencies, according to
                          their association and one bond-rating agency, do not have the capital to
                          participate in risk-sharing arrangements to insure single-family mortgages.



                          Page 6                                  GAO/RCED-97-36 Proposal to Dismantle HUD
                      Executive Summary




                      Most state and local officials GAO contacted said their state would be
                      unlikely to supplement the federal funding provided in S. 1145, but the
                      state’s actual response might differ, depending on its resources and
                      priorities. The states vary in their experience with programs such as those
                      they might administer under S. 1145. Thirty-three states currently
                      administer some federal tenant-based assistance, according to a 1994
                      housing industry survey. Forty-eight states share in administering HUD’s
                      Community Development Block Grant program, which somewhat
                      resembles the bill’s proposed block grant. Eight states currently provide
                      single-family mortgage insurance.

                      Most of the federal agencies slated to receive responsibilities from HUD
                      generally agreed that their missions were compatible with the new
                      functions and that they could assume the responsibilities if they also
                      received the necessary resources, but some agencies indicated that
                      implementation might pose problems. HUD cited differences in missions,
                      organizations, and operating procedures that it believed would impede the
                      delivery of services to its clients and eliminate the advocacy for housing
                      and community development issues provided by a cabinet-level
                      department. The departments of Health and Human Services and Justice
                      agreed with HUD that they do not have the appropriate field
                      organizations—and, in the case of Justice—the investigative staff to carry
                      out the fair housing program effectively. Treasury and the Environmental
                      Protection Agency acknowledged that they are not experienced in dealing
                      with HUD’s traditional clients. HUD believes that the transfers could
                      considerably weaken the impact of the programs. However, S. 1145 does
                      allow for the transfer of some HUD program staff and resources to the
                      receiving agencies. Given the complexity and uncertainty of the issues
                      associated with transferring functions, GAO did not determine how many
                      HUD staff might be transferred to receiving agencies.



Proposed Resolution   Dismantling HUD and restructuring, transferring, or eliminating its
Agency Would Face     programs would place significant responsibilities on the proposed
Difficult Tasks       resolution agency. During its 5-year term, the agency would need to
                      administer—and in some cases resolve—over $400 billion in loan
                      insurance and approximately $464 billion in mortgage-backed security
                      guarantees. These commitments generally extend well beyond 5 years. In
                      addition, the agency would need to administer nearly $100 billion in
                      section 8 project-based rental assistance contracts, the majority of which
                      will expire during the next 5 years. Dismantling a department as large as
                      HUD would be a significant undertaking. Lessons learned, particularly in




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                  Executive Summary




                  dissolving the Resolution Trust Corporation and in reorganizing smaller
                  agencies, could be applicable if S. 1145 were enacted. For example, in
                  previous work on dismantling and reorganizing agencies, GAO has found
                  that useful actions include establishing an interagency task force to help
                  transfer assets, personnel, and operations; developing a comprehensive
                  strategy for addressing all financial commitments; and reviewing internal
                  controls and information systems. These actions could facilitate the
                  transition if it occurs. For example, reviewing internal controls and
                  information systems could identify areas that require careful monitoring to
                  prevent waste, fraud, and abuse in resolving HUD’s financial commitments.


                  GAO requested comments on a draft of this report from HUD, HHS, and the
Agency Comments   Office of Management and Budget (OMB). GAO also provided excerpts of the
                  draft report pertaining to the proposed transfers of HUD functions to the
                  departments of Agriculture, Justice, and the Treasury; the Environmental
                  Protection Agency; the Federal Reserve Board; the Federal Trade
                  Commission; the Office of Personnel Management; Freddie Mac; and
                  Fannie Mae for their comments. HUD, HHS, the departments of Justice and
                  of the Treasury, and OMB expressed their strong disagreement with S. 1145,
                  and several of these agencies cited the need for a cabinet-level department
                  to provide a focus for housing and community development issues. HUD
                  also said that the report was deeply flawed in its methodology, content,
                  and conclusions because it does not fully discuss (1) the harm to HUD’s
                  customers that HUD believes would result from dismantling the
                  department, (2) the loss of a national housing and community
                  development policy, and (3) the difficulties involved in transferring HUD’s
                  functions to other agencies and to other levels of government. After
                  reviewing HUD’s comments, GAO added information to the report to
                  recognize possible additional consequences for home buyers and
                  homeowners of the proposed changes to FHA. However, it is not possible to
                  predict the exact impact of the bill on HUD’s customers because the bill
                  gives states and localities increased flexibility in making spending
                  decisions. Neither GAO nor HUD can assess with any certainty what
                  spending choices states and communities would make. GAO also added
                  several references to HUD’s position on the difficulties involved in
                  transferring the Department’s functions and the loss of a national housing
                  and community development policy. The continued need for a
                  cabinet-level department to address housing and community development
                  issues is a policy question for the Congress and the administration to
                  decide.




                  Page 8                                GAO/RCED-97-36 Proposal to Dismantle HUD
Executive Summary




OMB  said that issues related to the reorganization and administration of
HUD’s  functions should be evaluated on their own merits, not as a strategy
for reducing the deficit. OMB said that the administration believes that
assigning HUD’s functions to other agencies would counteract its
reinvention goals. HHS said the proposal was not well advised and the
planned transfers might result in little or no cost savings to the federal
government. This report provides information on the potential positive
and negative implications of S. 1145 and, as such, does not take a position
on the bill. Projections of the bill’s impact on the federal budget will be
developed and published by CBO in a separate report. The Department of
Justice stressed the extreme burden that transferring HUD’s fair housing
responsibilities would impose on it, especially the drain of resources from
its primary mission of fair housing enforcement. Six of the remaining
seven agencies provided clarifying language for the portions of the report
that discuss their agency. GAO incorporated the comments, as appropriate,
throughout the report. The agencies’ written comments and GAO’s detailed
responses appear in appendixes III through IX. Additionally, GAO’s
responses to the agencies’ broader comments are summarized at the end
of chapters 1 through 4.




Page 9                                GAO/RCED-97-36 Proposal to Dismantle HUD
Contents



Executive Summary                                                                               2


Chapter 1                                                                                      14
                      HUD’s Missions Have Evolved                                              14
Introduction          Despite Accomplishments, Problems Impede Efficiency and                  16
                         Effectiveness
                      The Administration, the Congress, and Others Have Proposed               17
                         Changes
                      S. 1145 Would Introduce Sweeping Changes                                 18
                      Objectives, Scope, and Methodology                                       22
                      Agency Comments and Our Evaluation                                       23

Chapter 2                                                                                      25
                      Impact of Proposed Changes in Rental Assistance, Would Depend            25
S. 1145 Could           on a Number of Factors
Increase Choice in    Block Grants Would Give Some Communities More Choice but                 34
                        Could Decrease Aid for Vulnerable Populations
Housing and           Agency Comments and Our Evaluation                                       40
Community
Development, but
Some Vulnerable
Populations Might
Receive Less
Assistance
Chapter 3                                                                                      41
                      HUD Insures Mortgages and Provides Liquidity to Lenders                  41
The Federal Role in   Federal Support for Housing Finance Would Be Reduced                     45
Housing Finance       Home Mortgages Would Be Harder to Obtain for Some Home                   47
                        Buyers Under the Bill’s Provisions
Would Be Reduced      Agency Comments and Our Evaluation                                       52




                      Page 10                             GAO/RCED-97-36 Proposal to Dismantle HUD
                       Contents




Chapter 4                                                                                        53
                       States Are Willing to Assume a Greater Role but Have Varied               53
States Have Varied       Administrative and Fiscal Capacity
Capacity and           Missions of Some Receiving Agencies May Be Compatible, but                59
                         Program Delivery May Differ
Receiving Agencies     Agency Comments and Our Evaluation                                        63
Generally Have
Compatible Missions,
but Implementation
Could Pose
Difficulties
Chapter 5                                                                                        65
                       Resolution Agency Would Manage Transition for All Major                   65
The Proposed             Functions
Resolution Agency      Lessons Learned From Prior Efforts to Abolish, Reorganize, or             71
                         Transfer Federal Programs Could Ease Transition
Would Face Difficult   Conclusions                                                               74
Tasks
Appendixes             Appendix I: Implications of S. 1145 on the Receiving Agencies             76
                       Appendix II: Financial Commitments Inherited by the Resolution            92
                         Agency
                       Appendix III: Comments From the Department of Housing and                 99
                         Urban Development
                       Appendix IV: Comments From the Department of Health and                  107
                         Human Services
                       Appendix V: Comments From the Office of Management and                   109
                         Budget
                       Appendix VI: Comments From the Department of the Treasury                112
                       Appendix VII: Comments From the Environmental Protection                 114
                         Agency
                       Appendix VIII: Comments From the Federal Reserve Board                   119
                       Appendix IX: Comments From the Department of Agriculture                 120
                       Appendix X: Major Contributors to This Report                            122

Related GAO Products                                                                            125




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          Contents




Tables    Table 1.1: Shifts in Responsibility From HUD to Other Agencies            21
            Under S. 1145
          Table 5.1: HUD’s Financial Commitments as of Fiscal Year 1995             68

Figures   Figure 2.1: Distribution of HUD-Assisted Housing Units                    26
          Figure 2.2: Provision of Rental Assistance Under S. 1145                  29
          Figure 2.3: Fiscal Year 1997 Public Housing Funding Compared              32
            With the Funding Proposed in S. 1145
          Figure 2.4: Provision of Community Development Assistance                 36
            Under S. 1145
          Figure 2.5: Comparison of Current Funding for Programs to Be              37
            Consolidated Under the Block Grant With Funding Under S. 1145
            for Fiscal Years 1998-2002
          Figure 3.1: Share of Single-Family Mortgages—Home Purchase                43
            and Refinancings—Made During 1995
          Figure 3.2: Share of Single-Family and Multifamily                        45
            Mortgage-Backed Securities Insured or Guaranteed as of
            September 30, 1995
          Figure 5.1: Responsibilities of the Resolution Agency Under S.            66
            1145 for Housing Assistance, Community Development, Housing
            Finance, and Regulatory Functions




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Contents




Abbreviations

CDBG       Community Development Block Grant
EPA        Environmental Protection Agency
FDIC       Federal Deposit Insurance Corporation
FHA        Federal Housing Administration
FHMIFA     Federal Home Mortgage Insurance Fund Administration
FTC        Federal Trade Commission
GAO        General Accounting Office
HFA        Housing Finance Agency
HHS        Department of Health and Human Services
HMDA       Home Mortgage Disclosure Act
HUD        Department of Housing and Urban Development
NAPA       National Academy of Public Administration
OFHEO      Office of Federal Housing Enterprise Oversight
OMB        Office of Management and Budget
PHA        Public Housing Authority
RESPA      Real Estate Settlement Procedure Act
RHS        Rural Housing Service
RTC        Resolution Trust Corporation
USDA       Department of Agriculture
VA         Department of Veterans Affairs
VPA        Veterans Preference Act


Page 13                            GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 1

Introduction


                      Created in 1965, the Department of Housing and Urban Development (HUD)
                      carries out the federal government’s missions, policies, and programs in
                      housing and community development. Its activities are designed to
                      implement a broad range of statutory mandates, from making housing
                      affordable, to helping revitalize communities, to supporting
                      homeownership. Since 1965, HUD has grown to include some 240 programs
                      and activities and hundreds of billions of dollars in financial commitments.
                      Its annual outlays for fiscal year 1995 were about $29 billion. Studies
                      performed by HUD’s Office of Inspector General, the National Academy of
                      Public Administration (NAPA), GAO, and others have documented
                      inefficiencies in organization and deficiencies in management that impede
                      the effectiveness of HUD’s programs. Leaders in the administration and the
                      Congress agree that HUD must, at a minimum, be restructured to better
                      meet the nation’s housing and community development needs. Some
                      policymakers believe that HUD’s problems are so great that they can be
                      cured only by dismantling the agency and transferring or eliminating its
                      functions. This report focuses on the two most recent proposals to
                      dismantle HUD—S. 1145 and H.R. 2198. For convenience, we refer to both
                      bills, which are identical, as S. 1145.1


                      As a new cabinet-level department, HUD took over most, though not all, of
HUD’s Missions Have   the federal housing and community development functions that had been
Evolved               located in independent agencies. Its focus, as defined in the legislation that
                      created it, was primarily urban—”. . . the sound development of the
                      Nation’s communities and metropolitan areas.” HUD took over the rental
                      assistance and low-income housing production functions of the Public
                      Housing Administration and the Housing and Home Finance Agency, the
                      mortgage insurance functions of the Federal Housing Administration
                      (FHA), and the secondary market functions for government-insured and
                      guaranteed loans. HUD did not, however, take over the housing programs
                      administered by the Veterans Administration (VA) and the Rural Housing
                      Service2 or the economic development programs operated by the
                      Department of Commerce. In addition, HUD does not control the tax
                      policies that affect housing, such as the homeowner’s deductions for
                      mortgage interest and property taxes, and it does not oversee all of the
                      financial institutions, such as banks, savings and loans, and mortgage
                      companies, that participate in the nation’s mortgage markets.



                      1
                       S. 1145 is cited as the Housing Opportunities and Empowerment Act.
                      2
                       Formerly called the Farmers Home Administration.



                      Page 14                                             GAO/RCED-97-36 Proposal to Dismantle HUD
    Chapter 1
    Introduction




    Even though HUD has not assumed all of the nation’s housing functions, it
    has primary responsibilities for programs in four areas—housing
    assistance, community development, housing finance, and regulatory
    issues.

•   Housing Assistance: HUD provides (1) public housing assistance through
    allocations to public housing authorities and (2) private-market housing
    assistance through rental subsidies for properties, referred to as
    project-based assistance, or for tenants, known as tenant-based assistance.
    In contrast to entitlement programs, which provide benefits to all who
    qualify, the benefits of HUD’s housing assistance programs are limited by
    budgetary constraints to only about one-fourth of those who are eligible.
•   Community Development: Primarily through grants to states, large
    metropolitan areas called entitlement areas, small cities, towns, and
    counties, HUD provides funds for local economic development, housing
    development, and assistance to the homeless. The funding for some
    programs, such as those for the homeless, may also be distributed directly
    to nonprofit groups and organizations.
•   Housing Finance: FHA insures lenders—including mortgage banks,
    commercial banks, savings banks, and savings and loan
    associations—against losses on mortgages for single-family properties,
    multifamily projects, and other facilities. The Government National
    Mortgage Association (Ginnie Mae), a government-owned corporation
    within HUD, guarantees investors the timely payment of principal and
    interest on securities issued by lenders of FHA-insured and VA- and Rural
    Housing Service-guaranteed loans.
•   Regulatory Issues: HUD is responsible for regulating interstate land sales,
    home mortgage settlement services, manufactured housing, lead-based
    paint abatement, and home mortgage disclosures. The Office of Federal
    Housing Enterprise Oversight, an independent office within HUD, is
    responsible for regulating the safety and soundness of Fannie Mae and
    Freddie Mac. HUD also supports fair housing programs and is partially
    responsible for enforcing federal fair housing laws.

    To carry out its many responsibilities, HUD was staffed by about 10,500
    employees at the end of fiscal year 1996.




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                   Chapter 1
                   Introduction




                   Through its programs, HUD makes housing affordable for about 4.5 million
Despite            lower-income tenants, helps to revitalize over 4,000 communities, and has
Accomplishments,   insured mortgages for about 23 million homeowners. In addition, as a
Problems Impede    cabinet-level department, HUD has given visibility and priority to housing
                   and community development issues and has built up networks for
Efficiency and     implementing its programs. In some instances, HUD’s offices have
Effectiveness      pioneered the development of services. For example, FHA initiated home
                   mortgages with very small down payments and reverse mortgages.3

                   Despite these accomplishments, HUD has, over the years, developed both
                   administrative and programmatic problems. In 1994, GAO designated HUD as
                   a high-risk agency because of four long-standing management
                   deficiencies—weak internal controls; poorly integrated, ineffective, and
                   generally unreliable information and financial management systems; an
                   ineffective organization; and an insufficient mix of staff with the proper
                   skills. Internal control weaknesses, such as not having the necessary data
                   and management processes, contributed to the HUD scandals of 1989.
                   Deficient information and financial management systems have not
                   supported program managers’ needs or provided adequate control over
                   housing and community development programs. Organizational problems
                   have included overlapping and ill-defined responsibilities and authorities
                   between the Department’s headquarters and field organizations and a
                   fundamental lack of management accountability and responsibility. Not
                   having enough staff with the proper skills has hampered the monitoring
                   and oversight of programs and delayed the updating of procedures. While
                   HUD has formulated approaches and initiated actions to address its
                   departmentwide deficiencies, its efforts are far from reaching fruition and
                   problems continue.4

                   In response to legislation and other initiatives, programs were created
                   with missions that overlap or are linked only tangentially to primary
                   missions within HUD. In December 1994, HUD’s Inspector General
                   recommended eliminating, consolidating, or restructuring many of HUD’s
                   240 programs and activities, 91 of which, the Inspector General said, were
                   questionably related to the Department’s primary mission. We reported
                   that several of the larger programs on this list seemed to contribute




                   3
                    A reverse mortgage allows borrowers, who are 62 years of age and older, to convert the equity in their
                   homes into a monthly stream of income or a line of credit. These mortgages are purchased by Fannie
                   Mae.
                   4
                    See High Risk Series: Department of Housing and Urban Development (GAO/HR-97-12, Feb. 1997).



                   Page 16                                              GAO/RCED-97-36 Proposal to Dismantle HUD
                       Chapter 1
                       Introduction




                       directly to meeting the housing needs of low-income people.5 However, we
                       estimated that 27 programs listed by the Inspector General could be
                       reassessed to determine the need for them and their relative value in
                       achieving HUD’s mission. Other problems cited by the Inspector General
                       included disproportionately high administrative costs, inflexible program
                       requirements, and a multiplicity of programs with similar objectives that
                       promote separate federal and local bureaucracies. Until the problems that
                       we and the Inspector General identified are resolved, HUD’s programs are
                       likely to remain vulnerable to waste, fraud, and abuse.

                       Further exacerbating these concerns is the need to reduce discretionary
                       spending governmentwide over the next several years to balance the
                       budget by early in the next century. Most balanced budget plans include a
                       freeze in discretionary spending at current nominal levels, meaning that by
                       the year 2002, spending will be nearly 20 percent lower than it would be if
                       it were allowed to increase with inflation.


                       HUD’s problems have led to studies and proposals for change, including the
The Administration,    administration’s reinvention plans, the National Academy of Public
the Congress, and      Administration’s (NAPA) study,6 and several bills to reorganize or dismantle
Others Have Proposed   HUD. These proposals uniformly recognize the need to revise the delivery
                       of housing and community development services. They also recognize that
Changes                budgetary constraints dictate changes. However, the proposals differ in
                       the role they envision for the federal government.

                       The administration’s initial reinvention plans, introduced in
                       December 1994, assume the need for a cabinet-level housing and
                       community development agency and focus on restructuring and
                       consolidating programs. Initially, the plans proposed to (1) remove public
                       housing authorities from HUD’s subsidy programs and make them compete
                       in the private market; (2) consolidate 60 major categorical programs into
                       three flexible, performance-based funds; and (3) transform FHA into a
                       results-oriented, financially accountable credit-enhancement operation. In
                       1996, the administration updated its plans, retaining most of the provisions
                       but revising the proposal for public housing. Under the current plans, HUD
                       would continue to subsidize public housing but would consolidate and
                       streamline programs to improve its delivery of services to low-income
                       residents.

                       5
                       Housing and Urban Development: HUD’s Reinvention Blueprint Raises Budget Issues and
                       Opportunities (GAO/T-RCED-95-196, July 13, 1995).
                       6
                        Renewing HUD: A Long-Term Agenda for Effective Performance (July 1994).



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                     Introduction




                     The NAPA study, issued in July 1994, recommended that the Congress and
                     HUD restructure the agency to consolidate its programs and reform its
                     management. The study suggested that if HUD did not operate under a clear
                     mandate and in an effective manner in 5 years, its existence should be
                     reevaluated. In addition, the study recommended that HUD modify its
                     operations and work from the bottom up rather than from the top down,
                     supporting local initiatives consistent with its mission instead of imposing
                     its own strategies on localities. For most programs, the study proposed a
                     shift in decision-making authority from headquarters to the field and from
                     the federal government to the state or local level. Finally, the study
                     recommended that the Congress give HUD broad waiver and demonstration
                     authority to allow the states to experiment with changes in their housing
                     and community development programs.

                     Between February 1995 and August 1995, the 104th Congress introduced
                     five bills in the House and Senate to dismantle HUD.7 These bills would
                     move farther than the NAPA study in shifting power from the federal
                     government to the states, and they would transfer some governmental
                     responsibilities to the private sector. Furthermore, they would transfer the
                     remaining federal responsibilities to other federal agencies and terminate
                     HUD’s existence. The two most recent bills—S. 1145 and H.R. 2198—are the
                     subject of this report. For convenience, we refer to both bills, which are
                     identical, as S. 1145.


                     S. 1145 would dramatically change the federal role in housing and
S. 1145 Would        community development. To reduce the federal government’s spending for
Introduce Sweeping   housing and community development, the bill would shift many of HUD’s
Changes              operations to other federal agencies, provide block grants to the states,
                     and rely more on the private sector. The bill seeks to give the recipients of
                     housing assistance more choice in deciding where to live and communities
                     more choice in deciding how to spend their community development
                     funds; however, it would also reduce the federal funding for community
                     development. In addition, it would increase the influence of the private
                     market in federal housing assistance and housing finance. As the NAPA
                     study and the administration’s proposals recommended, the bill would
                     increase decision-making at the state and local levels, bringing the
                     administration of programs—and accountability for their results—closer
                     to the persons affected by the decisions. Overall, the bill seeks to reduce



                     7
                      S. 435, Feb. 16, 1995; H.R. 1098, Mar. 1, 1995; H.R. 1923, June 22, 1995; H.R. 2198, Aug. 4, 1995; and
                     S. 1145, Aug. 10, 1995.



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Introduction




federal spending for housing and community development activities by
consolidating and eliminating programs.

To accomplish its goals for housing assistance, S. 1145 would phase out
HUD’s public housing and rental housing assistance programs and replace
them with a flexible, tenant-based voucher system, to be administered by
the Department of Health and Human Services (HHS). Public housing
properties and properties that formerly received section 8 project-based
rental assistance would have to compete for tenants with other rental
properties in the marketplace. Tenants could use their vouchers to either
rent or purchase any unit they could afford, but a household’s receipt of
vouchers would generally be limited to a lifetime maximum of 5 years.8
The states could choose to receive a block grant allocation and administer
vouchers on behalf of HHS or develop their own housing assistance
program.

S. 1145 would consolidate HUD’s community development programs,
including many categorical ones, into a block grant for housing and
community development, of which $1 billion would be set aside for Indian
housing, the elderly, people with disabilities, and people with AIDS. The
grant would be administered by a new, independent agency, the Housing
and Community Opportunities Agency. This change would give
communities more choice in spending federal funds, but both large and
small communities would have less money to spend. Under the housing
and community development grant, entitlement areas would receive
80 percent of the total funding provided, while small cities would receive
20 percent. However, the total funding would be cut by about 40 percent
as soon as the bill’s provisions went into effect and would then be reduced
even further over time.

S. 1145 would restrict the federal government’s role in housing finance to
covering losses on single-family mortgages, at a substantially reduced
rate—down from 100 percent to a maximum of 35 percent. It would
transfer the responsibility for operating the single-family mortgage
insurance program to the Department of the Treasury, which would
negotiate agreements for sharing the risk of insuring single-family
mortgages with other mortgage insurers—the states and/or the private
sector. Additionally, it would eliminate federal loan insurance for
multifamily and certain other properties and terminate Ginnie Mae, leaving
these areas for the states and private sector to cover.

8
 Indian Housing Authority programs are not included because Indian tribes would receive a housing
block grant through another section of S. 1145.



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Introduction




Finally, S. 1145 would transfer HUD’s regulatory functions to other federal
agencies, designated in this report as receiving agencies. These agencies
include the departments of the Treasury and Justice, the Environmental
Protection Agency, and other independent agencies. To manage these
changes, the bill would redesignate HUD as the Housing and Urban
Development Programs Resolution Agency and make this agency
responsible for administering and concluding HUD’s affairs within 5 years.9
Among other things, the resolution agency would have to resolve, or
provide for resolving, hundreds of billions of dollars in financial
commitments and manage HUD’s shutdown. Table 1.1 summarizes the
organizational changes that would occur under S. 1145.




9
 S. 1145 was introduced on August 10, 1995, and calls for terminating the resolution agency on
September 30, 2000. However, in this report, we assume that the 5-year period begins in 1997 and ends
in 2002.



Page 20                                             GAO/RCED-97-36 Proposal to Dismantle HUD
                                      Chapter 1
                                      Introduction




Table 1.1: Shifts in Responsibility
From HUD to Other Agencies                                                    Proposed action
Under S. 1145                         Function                       Abolish      Change       Transfer     Receiving agency
                                      Housing assistance                          X            X            Federal Housing Voucher
                                                                                                            Agencya in HHS
                                      Community                                   X                         An independent Housing
                                      development                                                           and Community
                                                                                                            Opportunities Agencya
                                      Housing finance
                                      Secondary mortgage             X                                      Fannie Mae, Freddie Mac,
                                      market                                                                or other private secondary
                                                                                                            mortgage market entities
                                                                                                            may assume function
                                      Federal mortgage                            X            X            Federal Home Mortgage
                                      insurance—single-                                                     Insurance Fund
                                      family                                                                Administration,a Department
                                                                                                            of the Treasury
                                      Federal mortgage               X                                      No receiving agency
                                      insurance—multifamily                                                 contemplated in the bill
                                      Regulatory
                                      Fair housing                   Xb                        X            Department of Justice
                                      Interstate land sales                                    X            Federal Trade Commission
                                      Real estate settlement                                   X            Board of Governors of the
                                      procedures                                                            Federal Reserve System
                                      National manufactured                                    X            Department of Agriculture
                                      housing
                                      Lead-based paint                                         X            Environmental Protection
                                                                                                            Agency
                                      Home mortgage                                            X            Department of the Treasury
                                      disclosure
                                      Government-                    Xc                        X            Department of the Treasury
                                      sponsored enterprise
                                      oversight
                                      a
                                          These agencies would be created under S. 1145.
                                      b
                                          The Fair Housing Initiatives Program would be abolished.
                                      c
                                        The bill does not address all of HUD’s responsibilities under the Federal Housing Enterprises
                                      Financial Safety and Soundness Act of 1992. Specifically, the bill does not specify the disposition
                                      of HUD’s responsibilities for ensuring that Fannie Mae and Freddie Mac fulfill their public
                                      purposes and serve the housing needs of the country. Under S. 1145, programs that are not
                                      transformed, transferred, or continued would expire.



                                      The changes that would occur under S. 1145 in housing assistance,
                                      community development, and housing finance are discussed in more detail
                                      in chapters 2 and 3 of this report. Chapter 4 discusses the capacity of the




                                      Page 21                                              GAO/RCED-97-36 Proposal to Dismantle HUD
                     Chapter 1
                     Introduction




                     states and the receiving agencies to assume HUD’s former responsibilities.
                     Chapter 5 discusses the resolution agency’s responsibilities, including
                     resolving HUD’s financial commitments, and lessons learned from previous
                     efforts to dismantle or reorganize federal agencies. The Congressional
                     Budget Office (CBO) will provide its estimate of the bill’s impact on the
                     federal budget in a separate report. Appendixes I and II provide details on
                     the receiving agencies’ responsibilities and the resolution agency’s
                     financial commitments, respectively.


                     The Chairs of the Senate Committee on Banking, Housing, and Urban
Objectives, Scope,   Affairs and its Subcommittee on Housing Opportunity and Community
and Methodology      Development and Senator Faircloth asked GAO to examine the implications
                     of one of the proposals to dismantle HUD—S. 1145, the Housing
                     Opportunities and Empowerment Act. Specifically, the requesters asked
                     GAO to (1) examine the bill’s proposed changes in housing assistance,
                     community development, and housing finance and the potential impact of
                     these changes on the customers of these programs and (2) discuss the
                     capacity of the states and other federal agencies to assume HUD’s functions
                     and the tasks to be accomplished in dismantling HUD within the 5 years
                     specified in the bill. As agreed with the requesters’ offices, this report
                     assumes that the bill would cover the 5-year period from 1997 to 2002,
                     rather than the period from 1995 to 2000 specified in S. 1145. The
                     requesters also asked CBO to project the federal costs of implementing the
                     bill’s provisions. CBO’s projections will be published in a separate report.

                     To examine the proposed changes, we reviewed the bill’s provisions and
                     examined major administrative and other legislative proposals introduced
                     to change the federal role in housing and community development. We
                     conducted a literature search and discussed S. 1145 with officials from the
                     Office of Management and Budget (OMB), HUD, NAPA, interest groups and
                     associations, and think tanks. To assess the impact of the proposed
                     changes in housing assistance, community development, and housing
                     finance on HUD’s clients, we interviewed and gathered studies and position
                     papers from senior HUD officials, think tanks, and interest groups
                     representing HUD’s clients, including tenant organizations, public housing
                     authorities, lenders, major bond-rating agencies, government-sponsored
                     enterprises, private mortgage insurers, state agencies, and local
                     governments.

                     To examine the bill’s implications for entities outside the federal
                     government, we met with officials from national associations representing



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                     Introduction




                     state and local governments— including the National Governors’
                     Association, the National Council of State Housing Agencies, the Council
                     of State Community Development Agencies, and the U.S. Conference of
                     Mayors—and we conducted a survey of community development officials
                     from the 47 states represented by the Council of State Community
                     Development Agencies. We received responses to this survey from
                     officials in 44 states.10 We reviewed existing literature on states’ fiscal
                     capacity and visited officials in six states—Alabama, Illinois, Maryland,
                     Massachusetts, Texas, and Washington—that we had selected because
                     they differed from one another in their fiscal capacity, federal and state
                     funding for housing assistance, experience in administering section 8
                     programs, experience with troubled public housing authorities, political
                     philosophy, and geographic location. The findings resulting from our visits
                     are not projectable to all 50 states. Because S. 1145 would not directly
                     expand the role of local governments, we focused specifically on states’
                     capacity to take on expanded responsibilities. Changes in local
                     responsibilities would depend largely on the states’ decisions.

                     To examine the bill’s implications for the receiving agencies and the
                     resolution agency, we conducted interviews and collected documentation
                     and studies from the federal agencies designated to receive HUD’s
                     functions and from HUD. We also drew on our own prior and ongoing work
                     on HUD and on reorganizing federal agencies. Specifically, we interviewed
                     officials from OMB, the General Services Administration, and the Office of
                     Personnel Management to gather the current guidance on reorganizing
                     federal agencies. To better understand the functions that would be
                     transferred, we interviewed HUD officials and reviewed HUD documents on
                     the mission, staffing, and internal controls of each function. Using this
                     information, we interviewed officials from the receiving agencies to obtain
                     their views on the implications of transferring HUD’s functions to them. We
                     interviewed officials from the departments of Agriculture, Health and
                     Human Services, Justice, and the Treasury; the Environmental Protection
                     Agency; the Federal Reserve Board of Governors; the Federal Trade
                     Commission; the Federal National Mortgage Association (Fannie Mae);
                     and the Federal Home Loan Mortgage Corporation (Freddie Mac).


                     In commenting on a draft of the report, the Acting Secretary of HUD
Agency Comments      expressed concern that our methodology did not include adequate
and Our Evaluation   consultation with HUD’s customers. Over the course of this study, we


                     10
                      We did not obtain completed surveys from Alaska, Colorado, Hawaii, Kentucky, New York, and
                     Wyoming.



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Introduction




interviewed and/or collected documentation from organizations that
represent a wide range of HUD’s customers. Information obtained from this
work is included in chapters 2 and 3. We also revised the methodology
section of our report to reflect more clearly the range of organizations we
interviewed.




Page 24                               GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 2

S. 1145 Could Increase Choice in Housing
and Community Development, but Some
Vulnerable Populations Might Receive Less
Assistance
                         S. 1145 would dramatically reduce the federal role in housing and
                         community development and could have far-reaching effects on renters
                         and communities. The bill’s plan to institute a voucher system could
                         expand housing choices for renters in some areas, but its phaseout of
                         project-based assistance could reduce the supply of affordable
                         housing—and housing choices—in other areas. Similarly, the bill’s
                         creation of a single block grant for community development would give
                         the states and localities more choice in spending federal funds for projects
                         in their communities, but some of HUD’s current clients, especially the
                         homeless and very low-income families, might receive less assistance.


                         Replacing housing assistance with a voucher system would, in principle,
Impact of Proposed       give renters more choice in deciding where they would live. In fact, the
Changes in Rental        extent of their choice would depend, in large part, on the amount of the
Assistance, Would        subsidy provided compared with the cost of housing in the area. Under S.
                         1145, currently assisted properties would be required to compete in the
Depend on a Number       marketplace. During a transition period, the resolution agency would
of Factors               settle long-term commitments to provide rental assistance and provide
                         funds through a block grant to operate and improve public housing
                         properties with an approved plan for becoming more competitive.
                         However, if tenants chose not to remain and other renters were not
                         attracted to the properties or if rental income was otherwise insufficient to
                         cover operating costs, the properties would not remain viable, and their
                         loss would decrease the supply of affordable housing. Reductions in the
                         supply of affordable housing could decrease the opportunities for
                         recipients of voucher assistance to exercise choice, particularly in housing
                         markets where affordable housing was in short supply.


HUD Currently Provides   HUD provides two basic types of rental housing assistance: public housing
Public Housing and       and private-market housing assistance. Public housing is owned and
Private-Market Housing   operated by local government agencies known as public housing
                         authorities (PHA). HUD provides funds to these authorities primarily to
Assistance               operate and make capital improvements to public housing projects. The
                         private-market housing programs provide “project-based” and
                         “tenant-based” rental assistance to owners of private rental housing. For
                         project-based assistance,1 eligible lower-income households must live in
                         designated housing. HUD has contracted with the owners of this housing to
                         provide rental payments for units in those properties for a certain time

                         1
                          Project-based assistance programs include the rent supplement; section 221(d)(3) below-market
                         interest rate; section 202 elderly; section 236; and section 8 new construction, substantial
                         rehabilitation, and moderate rehabilitation programs and some smaller programs.



                         Page 25                                            GAO/RCED-97-36 Proposal to Dismantle HUD
                                           Chapter 2
                                           S. 1145 Could Increase Choice in Housing
                                           and Community Development, but Some
                                           Vulnerable Populations Might Receive Less
                                           Assistance




                                           period. For tenant-based assistance (the section 8 certificate and housing
                                           voucher programs), assisted households may live in rental units of their
                                           choice as long as the units meet HUD’s standards for rent and quality.
                                           Generally, HUD administers its private-market rental housing programs
                                           through housing owners or PHAs, depending on the program.

                                           HUD spent about $25 billion in fiscal year 1995 to provide rental housing
                                           assistance for about 4.5 million units. HUD targets rental assistance
                                           primarily toward households classified by law as having very low incomes.
                                           For households with four people, very low incomes are those that do not
                                           exceed 50 percent of the local area’s median income. Because of its high
                                           costs, the public housing program was sharply curtailed in 1983, and
                                           section 8 project-based rental assistance was discontinued for new
                                           construction or substantial rehabilitation. Nevertheless, because of the
                                           pattern of past funding, most people who receive federal rental aid today
                                           receive project-based subsidies. As shown in figure 2.1, of the 4.5 million
                                           units assisted by HUD, about 29 percent are in public housing, about
                                           40 percent receive project-based assistance, and about 31 percent receive
                                           tenant-based assistance, according to HUD.


Figure 2.1: Distribution of HUD-Assisted
Housing Units                                                                                 Project-based units




                                                                        29% •                 Public housing units
                                                 • 40%




                                                                   31% •                      Tenant-based units




                                           Source: HUD’s Office of Policy Development and Research (Mar. 1996).




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                            Chapter 2
                            S. 1145 Could Increase Choice in Housing
                            and Community Development, but Some
                            Vulnerable Populations Might Receive Less
                            Assistance




S. 1145 Would Replace       Under the bill, all existing public housing and project-based rental housing
Current Assistance With a   assistance would be phased out and replaced with a tenant-based voucher
Voucher System              system administered by the Department of Health and Human Services
                            (HHS). During the 5-year transition phase, the resolution agency would take
                            actions to ensure the continued viability of projects with project-based
                            section 8 contracts that expire during the period and provide operating
                            and capital grants to PHAs that have an approved plan for making their
                            housing competitive. The grants would also fund the demolition of units
                            that could not be made competitive. During the phaseout, tenants would
                            start to receive vouchers that they could use to stay in their current
                            apartment, move to another apartment, or purchase a home. Any section 8
                            assistance or public housing commitments still in effect at the termination
                            of the resolution agency would be transferred to the voucher
                            administrator in HHS. The bill limits the amount of assistance available
                            during the 5-year transition period and then permanently limits the
                            assistance to the amount necessary to (1) provide housing assistance to
                            the same number of families as received assistance under any section 8 or
                            public housing program during fiscal year 1997 and (2) cover
                            administrative fees.2 Under the bill, the subsidy is generally limited to the
                            difference between 30 percent of a household’s adjusted income and a rent
                            ceiling known as the fair market rent.3

                            As shown in figure 2.2, the states could choose to develop their own rental
                            assistance program, administer the federal program for their state, or
                            allow HHS to carry out the program in their state. If a state chose to
                            develop its own program, it would receive an annual grant and would have
                            latitude in determining how the funds could be used. For example, the
                            state could request to waive the requirement that the grants be used for
                            voucher assistance and could, with HHS’ approval, use the funds for
                            affordable housing activities—such as constructing or rehabilitating units
                            or providing homeownership assistance or housing counseling—as long as
                            these activities were consistent with those of the state’s general welfare
                            assistance program. If the state chose to operate the voucher program, it
                            could use the vouchers to assist low-income renters and homeowners. The
                            state would also be able to determine the duration of the assistance and
                            could assist individuals and families whose incomes did not exceed the
                            median income for the area—a higher income level than HUD now targets.
                            If HHS were to run the program for a state, it would enter into contracts

                            2
                             Indian Housing Authority programs are not included because Indian tribes would receive a housing
                            block grant through another section of S. 1145.
                            3
                             Under S. 1145, the fair market rent would be the dollar amount that reflects the rent for a
                            standard-quality unit of a particular size and type in a certain market area.



                            Page 27                                               GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 2
S. 1145 Could Increase Choice in Housing
and Community Development, but Some
Vulnerable Populations Might Receive Less
Assistance




with local voucher assistance agencies to administer the assistance. The
requirements would be similar to those of the state-run voucher program
except that the assistance would be limited to 5 years—for all but the
elderly and disabled—and monthly assistance payments would be limited
to the difference between 30 percent of the household’s adjusted income
and the fair market rent.




Page 28                                     GAO/RCED-97-36 Proposal to Dismantle HUD
                                  Chapter 2
                                  S. 1145 Could Increase Choice in Housing
                                  and Community Development, but Some
                                  Vulnerable Populations Might Receive Less
                                  Assistance




Figure 2.2: Provision of Rental
Assistance Under S. 1145

                                                      HHS' Office of Federal Voucher Assistance


                                             State elects to administer                   State does not elect to
                                                                                                administer




                                   State or political                                       Annual contribution
                                      subdivision,                  State obtains         contract developed with
                                  authorized public or                 waiver             authorized local voucher
                                     private entity                                         assistance agencies




                                                  Vouchers issued
                                                   to low-income
                                                       people




                                                                 Vouchers issued
                                                                and other types of
                                                                   assistance
                                                                    provided




Elimination of                    Under the bill, the over two-thirds of HUD’s assisted units that receive
Project-Based Assistance          either public housing or project-based assistance would become
Could Affect the Supply of        unsubsidized units competing in the market. Without a subsidy for every
                                  unit, some of this housing—including 1.4 million units of project-based
Affordable Housing                section 8 housing and 1.3 million units of public housing—might not
                                  remain viable.




                                  Page 29                                      GAO/RCED-97-36 Proposal to Dismantle HUD
                                Chapter 2
                                S. 1145 Could Increase Choice in Housing
                                and Community Development, but Some
                                Vulnerable Populations Might Receive Less
                                Assistance




Some Section 8 Properties       During the 5-year term of the resolution agency, section 8 contracts
Might Not Remain Viable at      covering almost 1 million units will expire, while most of the remaining
Market Rents                    contracts will expire by 2006. For about three-fourths of its properties
                                with project-based section 8 subsidies, HUD estimates that the rental
                                subsidies exceed the market rents for comparable properties. As the
                                contracts for the assisted projects expire and the tenants receive
                                vouchers, the rents charged by landlords could rise or fall, depending on
                                the local rental market. In general, the tenants could decide whether to
                                move elsewhere or to stay in their units.

                                Over time, affordable housing units may be lost as owners who cannot
                                operate at market rates default or as owners in tight housing markets raise
                                their rents to levels that certificate holders cannot afford. In either case,
                                tenants could be displaced. As a further complication, almost half of all
                                the properties with section 8 project-based subsidies have mortgages
                                insured by FHA, which would have to pay lenders’ claims if the owners
                                defaulted. Recognizing these possibilities, S. 1145 contains
                                “mark-to-market” provisions that would, for contracts expiring during the
                                5-year transition period, give the resolution agency broad authority to take
                                actions such as adjusting the FHA-insured mortgages to bring the
                                properties’ rental income and operating expenses into line and to decrease
                                the likelihood of defaults on FHA-insured mortgages. These goals are
                                similar to those proposed by HUD. The remaining section 8 properties,
                                whose mortgages are not insured by FHA, also present complications,
                                particularly for the states. Specifically, as the Republican Governors’
                                Housing Task Force cautioned, if the federal government were to
                                unilaterally not renew expiring section 8 contracts, it would jeopardize the
                                ability of the states to meet their financing obligations. Such an action
                                could have serious consequences for the states’ future financing capacity.
                                Consequently, the states believe they must be held harmless from the
                                effects of any mark-to-market action on uninsured section 8 projects.
                                According to HUD’s data, just over half of all section 8 projects are not
                                insured by FHA. Furthermore, over half of the units in uninsured section 8
                                projects are in projects whose contracts will expire after the year 2000.
                                The financial impact of the losses that the federal government could incur
                                are discussed in chapter 5.

Some Public Housing Might Not   In converting the 1.3 million units of public housing to compete in the
Be Competitive                  private market, the resolution agency, along with the PHAs, would face
                                difficult decisions about which assets could be made viable in 5 years and
                                which should be demolished. While the bill requires the planning to
                                determine which projects would likely be viable, many PHAs might have



                                Page 30                                     GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 2
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and Community Development, but Some
Vulnerable Populations Might Receive Less
Assistance




difficulty developing plans because public housing was not built to the
private market’s standards and its operation has not been guided by the
market’s forces, according to a recent HUD study.4 Thus, many PHAs might
find that they lacked the information to analyze their housing stock,
management practices, and local housing markets to determine the
viability of their housing, and they might need to have contractors perform
these studies. Since the bill does not provide funding specifically for the
studies, it would have to come from the operating funds or modernization
grants provided under the bill, potentially putting a further strain on PHAs’
budgets.

In addition, the physical condition of public housing has deteriorated over
time because operating subsidies and modernization funds have not kept
pace with needs. For example, for fiscal year 1996, about 90 percent of
public housing’s operating needs were covered by the appropriation,
leaving about 10 percent of the expenses unfunded by either subsidy or
rent. Because of such shortfalls, routine maintenance is typically deferred.
Since 1981, almost $29 billion has been provided for modernizing public
housing. However, a backlog estimated at between $10 billion and $20
billion still exists, and, despite recent progress in reducing the backlog,
needs continue to accrue. As shown in figure 2.3, the bill provides total
funding for operating subsidies and capital grants (modernization funds)
of $5.3 billion for fiscal year 1998, $3.3 billion for fiscal year 1999, $1.5
billion for fiscal year 2000, and $56 million for fiscal year 2001. In
comparison, for fiscal year 1997, a total of about $6 billion was
appropriated for public housing. Given this funding gap, the General
Counsel for the Council of Large Public Housing Authorities and the
President of the National Association of Housing and Redevelopment
Officials said that they do not believe that the appropriations in the
bill—even when considered in light of the proposed deregulation—would
be sufficient for the bulk of public housing to become competitive. As we
reported previously, the condition of the existing stock and its per-unit
operating costs vary tremendously.5 While some projects with high
operating costs would not be viable after renovation because their
expenses would exceed their rental income, other projects with low
operating expenses could, if they retained or attracted tenants, use their
rental revenues to pay for rehabilitation.



4
  Public Housing in a Competitive Market: An Example of How It Would Fare, HUD Office of Policy
Development and Research (Apr. 1996).
5
 Public Housing: Converting to Housing Certificates Raises Major Questions About Cost
(GAO/RCED-95-195, June 20, 1995).



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                                      Chapter 2
                                      S. 1145 Could Increase Choice in Housing
                                      and Community Development, but Some
                                      Vulnerable Populations Might Receive Less
                                      Assistance




Figure 2.3: Fiscal Year 1997 Public
Housing Funding Compared With the     8    Public housing funding (in billions)
Funding Proposed in S. 1145
                                      7


                                      6


                                      5


                                      4


                                      3


                                      2


                                      1


                                      0
                                                                                         00



                                                                                                        01
                                            97



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                                          Fiscal year




Renters Could Choose to               The impact of S. 1145 on tenants would depend on the local housing
Move If Affordable                    market. Where the supply of affordable housing was sufficient, the
Housing Were Available                vouchers could provide housing choice. To the extent that current
                                      residents exercised their choice by moving out of very poor
                                      neighborhoods, a basic goal asserted by those who favor tenant-based
                                      subsidies would be met. CBO observed that “recipients of tenant-based
                                      housing assistance—except the elderly—were less likely than recipients of
                                      project-based aid to report dissatisfaction with their neighborhood or
                                      housing unit.”6 Additionally, HUD’s Inspector General recommended that
                                      actions be taken to decouple project-based subsidies from insured
                                      projects because they insulate the owners of projects from normal market
                                      forces and result in inferior projects and services for tenants. With
                                      tenant-based subsidies, landlords would know that tenants could move
                                      and would have more incentive to maintain their projects, according to
                                      CBO. However, both housing and community development officials in the
                                      six states we visited and HUD officials told us that substituting vouchers for
                                      all project-based assistance and public housing could reduce the supply of
                                      affordable housing and hamper households’ ability to find affordable

                                      6
                                       The Challenges Facing Federal Rental Assistance Programs (Dec. 1994).



                                      Page 32                                                                GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 2
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and Community Development, but Some
Vulnerable Populations Might Receive Less
Assistance




housing in some localities. Officials from five states mentioned that
discontinuing project-based assistance would exacerbate the shortage of
affordable housing. HUD agrees that housing markets nationwide are
uneven, making an across-the-board approach to housing assistance
unworkable. In areas such as New York, San Francisco, and areas of
expanding growth where housing markets are tight, rebuilding units is the
only practical way to retain affordable units and avoid displacing
households, according to HUD.

However, CBO and HUD agree that the primary causes of severe housing
problems across the country are not shortages of housing but lagging
incomes and high housing costs. In fact, in 1993, about 6 million
unsubsidized households had “worst-case” needs, according to HUD,
meaning that they had incomes of less than 50 percent of their area’s
median income and paid more than 50 percent of their incomes for
housing or lived in substandard housing. For most of these households,
affordability was their only housing problem. HUD and others have argued
that certificates give low-income households the purchasing power they
need to afford the housing that is available in the private market. A 1994
study by Abt Associates, Inc., performed for HUD, found that nearly 9 out of
10 households (excluding New York City) in HUD’s mainstream section 8
voucher and certificate programs were able to find rental housing by using
their vouchers and certificates.7 As we reported previously,8 actual
housing choice depends on many factors, including the characteristics of
the current tenants and their inclination to move, the availability of
affordable housing, the willingness of private landlords to accept tenants
with housing certificates, and the extent to which laws prohibiting housing
discrimination are followed and enforced. In a case study of the Baltimore
housing authority, HUD found that massive movement out of public housing
following a change to tenant-based vouchers would be unlikely. The
president of the National Association of Housing and Redevelopment
Officials, who is also the executive director of the Richmond housing
authority, said he fears that 20 to 30 percent of the tenants in public
housing would move. He said that he and other PHA directors are
concerned that PHAs would be faced with partially occupied buildings and
dwindling resources. Another factor that would influence choice is the
level of subsidy to be provided through the certificate. The states that
operated their own program could determine the amount of the subsidy
for their state. In theory, if a state wanted to serve more clients, it could

7
 Section 8 Rental Voucher and Rental Certificate Utilization Study: Final Report (Oct. 1994).
8
 Public Housing: Converting to Housing Certificates Raises Major Questions About Cost
(GAO/RCED-95-195, June 20, 1995).



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                        Chapter 2
                        S. 1145 Could Increase Choice in Housing
                        and Community Development, but Some
                        Vulnerable Populations Might Receive Less
                        Assistance




                        provide smaller payments for each client. If it wanted to serve fewer
                        people or stimulate other movements, it could provide larger payments.


                        Combining the funding for HUD’s community development programs into a
Block Grants Would      single block grant, distributing it to the states and large metropolitan
Give Some               areas, and allowing these entities to decide how they would spend the
Communities More        funds—within federal guidelines—would give these entities more choice.
                        But studies have shown that communities often choose to invest in
Choice but Could        projects benefiting higher-income groups. Populations such as the
Decrease Aid for        homeless, who are guaranteed a measure of assistance under HUD’s
                        categorical McKinney Act programs, might not fare as well under a block
Vulnerable              grant that did not target some funds directly to them, according to these
Populations             studies.


HUD Currently Assists   Through a variety of programs, HUD provides flexible funding for local
Communities Through     economic development, housing development, and assistance for the
Many Grant Programs     homeless to and through the states; entitlement areas (mostly cities with
                        at least 50,000 people and urban counties); nonentitlement cities, towns,
                        and counties; and other jurisdictions. HUD’s primary community
                        development program is the Community Development Block Grant (CDBG)
                        program, for which $4.6 billion was appropriated in fiscal year 1997 for
                        grants to aid in the development of viable communities through activities
                        such as housing rehabilitation, public works, public services, and
                        economic development. Under CDBG, grants are distributed directly using a
                        statutory formula to entitlement areas and to the 48 states that manage the
                        program on behalf of nonentitlement communities (HUD manages the
                        program for Hawaii and New York). Another major grant program is the
                        HOME Investment Partnerships program, which was appropriated $1.4
                        billion in fiscal year 1997 to provide grants to states and localities for a
                        wide range of housing activities, including building or rehabilitating
                        affordable housing, assisting first-time home buyers, and offering
                        tenant-based rental assistance. HUD was appropriated $823 million in fiscal
                        year 1997 to assist the homeless through six McKinney Act
                        programs—Shelter Plus Care, Supportive Housing, Emergency Shelter
                        Grants, Section 8 Moderate Rehabilitation for Single-Room Occupancy
                        Projects, Rural Homeless Housing Assistance, and Safe Havens. Some
                        forms of assistance—such as that for the homeless—may go directly to
                        nonprofit groups and organizations without going through governmental
                        jurisdictions.




                        Page 34                                     GAO/RCED-97-36 Proposal to Dismantle HUD
                            Chapter 2
                            S. 1145 Could Increase Choice in Housing
                            and Community Development, but Some
                            Vulnerable Populations Might Receive Less
                            Assistance




S. 1145 Would Consolidate   As shown in figure 2.4, HUD’s multiple grant programs would be combined
and Reduce Grant Funding    to form a grant that would be administered by an independent
                            agency—the Housing and Community Opportunities Agency. S. 1145
                            would give the states and localities greater flexibility in determining the
                            types of activities to fund. The grant funds could be used for community or
                            neighborhood development, affordable housing, or relocation. The grant
                            would be allocated to the states and entitlement areas in much the same
                            way as CDBG funds are currently allocated. However, the entitlement areas
                            would receive 80 percent of the funding and the states 20 percent.
                            Currently, the split is 70 percent to the entitlement areas and 30 percent to
                            the states under CDBG and 60 percent to participating jurisdictions and 40
                            percent to the states under the HOME program. In addition, S. 1145 would
                            require that 90 percent of the funds be used annually to benefit
                            low-income families—defined by the bill as those with incomes that do not
                            exceed 80 percent of the area’s median income. The CDBG program
                            currently requires that 70 percent of the funds be used to benefit low- and
                            moderate- income families over a 1- to 3-year period. Each year, the bill
                            would set aside $1 billion for a grant for housing for special
                            populations—the elderly, people with disabilities, and people with AIDS.
                            The set-aside would be allocated to the states on the basis of need as
                            indicated by objective measures. Indian tribes would receive 1 percent of
                            the total block grant, and, in addition, Indian housing authorities would
                            receive an amount not to exceed the funding they received for housing in
                            fiscal year 1995.




                            Page 35                                     GAO/RCED-97-36 Proposal to Dismantle HUD
                                     Chapter 2
                                     S. 1145 Could Increase Choice in Housing
                                     and Community Development, but Some
                                     Vulnerable Populations Might Receive Less
                                     Assistance




Figure 2.4: Provision of Community
Development Assistance Under S.
1145
                                                                   Housing and Community
                                                                    Opportunities Agency
                                                 Block grants                                   Set-asides




                                      Entitlement States         Indian
                                      areas 80% 20%              tribes             Indian
                                                                                   housing                   States
                                                    via local 1% of the           authorities
                                                  government    total




                                                                                                          Affordable
                                             Various activities                   Affordable               housing
                                           benefiting low-income                   housing              activities for
                                                   families                        activities            low-income
                                                                                                      elderly, disabled,
                                                                                                      people with AIDS




                                     As figure 2.5 shows, federal funding for the single block grant for
                                     community development and special populations proposed under S. 1145
                                     would start at $5 billion for fiscal year 1998 and decline over 5 years to
                                     $3 billion, where it would be capped. The block grant would replace
                                     approximately $8 billion in fiscal year 1997 funding for various programs
                                     supporting community development, housing, and the homeless.




                                     Page 36                                     GAO/RCED-97-36 Proposal to Dismantle HUD
                                        Chapter 2
                                        S. 1145 Could Increase Choice in Housing
                                        and Community Development, but Some
                                        Vulnerable Populations Might Receive Less
                                        Assistance




Figure 2.5: Comparison of Current
Funding for Programs to Be              10    Funding (In billions)
Consolidated Under the Block Grant
With Funding Under S. 1145 for Fiscal
Years 1998-2002                          8




                                         6




                                         4




                                         2




                                         0
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                                             Fiscal year




                                        In addition, the new agency would inherit HUD’s outstanding commitments
                                        for loan guarantees made under the CDBG program. Under section 108 of
                                        the Housing and Community Development Act of 1974, communities and
                                        states that receive CDBG grants can apply for loans to obtain additional
                                        financing. HUD guarantees notes issued by grantees for up to five times
                                        their current year’s CDBG grant; current and future CDBG grant funds serve
                                        as the collateral for these loans. The proceeds from the notes can be used
                                        to finance community and economic development projects that are too
                                        large to be financed from the grantee’s annual grant. The financial impact
                                        of these guarantees is discussed in chapter 5.


States and Localities                   The consolidation of HUD’s programs for community development, housing
Would Have Greater                      development, and the homeless was supported, in general, by NAPA and by
Flexibility in Setting                  representatives from the Brookings Institution and the Hudson Institute,
                                        the National Association of Counties, the Association of Local Housing
Spending Priorities, but                Finance Agencies, the National Community Development Association, and
Service to the Poorest                  the U.S. Conference of Mayors. However, HUD, the organizations
Clients Might Decline

                                        Page 37                                                                      GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 2
S. 1145 Could Increase Choice in Housing
and Community Development, but Some
Vulnerable Populations Might Receive Less
Assistance




representing state and local governments, and housing officials generally
favored two or three block grants covering housing, community
development, and assistance for the homeless. For example, in its
reinvention plans, HUD has proposed to consolidate these programs into
three block grants. The Deputy Director of the Office of Executive
Services in the Community Planning and Development Division, who was
otherwise critical of S. 1145’s provisions, noted that a single block grant
would be less costly to administer than separate programs. However, the
president of the Progress and Freedom Foundation and a representative
from the Brookings Institution cited drawbacks to block grants, such as
difficulties in maintaining accountability for missions’ objectives and
funding and reductions in flexibility accompanying the addition of
set-asides and restrictions on or cuts in funding.9

HUD,  the National Council of State Housing Agencies, and program officials
in all six of the states we visited said that state and local decisions under a
consolidated block grant would result in less funding for affordable
housing and/or the homeless. According to HUD, because the bill contains
no specific requirements for serving either very low-income
persons—those with incomes that do not exceed 50 percent of their area’s
median income—or the homeless and because activities for these
populations do not enjoy wide support in some cities, consolidation could
result in sharp funding reductions for these populations. According to an
official from the U.S. Conference of Mayors, local governments face a
great deal of political pressure to fund their police departments and
environmental mandates, rather than housing, which has traditionally
been a federal responsibility. Some Maryland state officials thought that
few funds would be allocated for the homeless under a consolidated block
grant, particularly in entitlement areas. These officials were concerned
that without HUD’s emphasis on providing a continuum of care, some areas
would use their funds for emergency shelter rather than address the
multiple needs of the homeless. However, the stakeholders representing
state and local governments and housing officials expressed concern that
additional set-asides or other restrictions would be added to the block
grants, limiting state or local flexibility.

Several studies support the concern of some stakeholders that under a
consolidated block grant, states and localities would reduce the funding
targeted to very poor households. An analysis of the activities funded
through HUD’s HOME and CDBG programs in fiscal year 1992 by a sample of


9
 The Brookings Institution, the Hudson Institute, and the Progress and Freedom Foundation are
research and public policy organizations.



Page 38                                            GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 2
S. 1145 Could Increase Choice in Housing
and Community Development, but Some
Vulnerable Populations Might Receive Less
Assistance




cities indicated that the cities used their grants for purposes that were
more closely aligned with their nonfederal spending than they did with
other federal funding sources.10 According to the study, distributing more
funds through block grants would likely lead to greater expenditures to
benefit moderate- and middle-income households. Similarly, an analysis of
the transfer of the CDBG Small Cities program from HUD to the states found
that, overall, the states spent less money than the federal government on
housing and community development activities for low- and
moderate-income households and more on economic development and
public works projects.11 Finally, a Department of Agriculture bulletin on
how rural areas would be affected by block grants noted that the “states
have used block grants to spread development funds around to benefit
more rural communities” and, as a result, have allocated less money for
poor people and communities.12

Specific funding provisions in the bill, including the set-aside for housing
for special populations and the 10-percent increase in funding for
entitlement areas, could mean a further decline in the services provided
elsewhere, as the states and localities made difficult choices among
competing priorities. In our survey of community development officials,
98 percent (43 of the 44 state officials responding) believed the funding
decreases would significantly affect their residents. In addition, because of
the funding cuts and the increase in the proportion of funds for
entitlement communities, the 3,000 nonmetropolitan areas would either
receive smaller grants or fewer communities would receive grants.
According to HUD, the grants could become too small to have much impact.
In addition, HUD said that nonprofit organizations that rely on the CDBG and
HOME programs for partial funding might have to terminate or sharply
curtail their services. Nonprofit providers of assistance to the homeless
would be the most vulnerable, according to HUD, since they would no
longer have direct access to federal funds and the bill does not contain any
set-asides for the homeless.

Despite their desire for flexibility, some local officials are concerned about
creating additional block grants that flow through the states. According to
representatives from the U.S. Conference of Mayors, the National
Association for County Community and Economic Development, and the
Council of Large Public Housing Authorities, urban areas often suffer

10
 Edward G. Goetz, “Potential Effects of Federal Policy Devolution on Local Housing Expenditures,”
Publius: The Journal of Federalism, Vol. 25, No. 3 (Summer 1995).
11
 Edward T. Jennings, Jr., et al., From Nation to States: The Small Cities Community Development
Block Grant Program (Albany, NY: SUNY Press, 1986).
12
 Richard J. Reeder, “How Would Rural Areas Fare Under Block Grants?” Agriculture Information
Bulletin No. 724-03 (Apr. 1996).
Page 39                                            GAO/RCED-97-36 Proposal to Dismantle HUD
                     Chapter 2
                     S. 1145 Could Increase Choice in Housing
                     and Community Development, but Some
                     Vulnerable Populations Might Receive Less
                     Assistance




                     when the states are involved in administering programs. In Maryland, a
                     panel of local officials from municipalities near Washington, D.C.,
                     explained that the CDBG nonentitlement program was better run by HUD
                     than by the state, which took over the program’s administration in 1987.
                     Similarly, a representative of public housing authorities in Illinois told us
                     that he would prefer to work directly with the federal government in
                     operating housing assistance programs, rather than with the state
                     government. Reasons cited by these local officials for preferring to work
                     with the federal rather than the state government include (1) the influence
                     of state politics on programs’ administration and (2) the imposition of
                     burdensome bureaucratic requirements by the state. These officials would
                     prefer federal programs that channel funds directly to local areas.


                     HUD  said that our report does not fully discuss provisions of the bill that it
Agency Comments      believes would have harmful effects on the Department’s low- and
and Our Evaluation   moderate-income customers and their communities in rural, suburban,
                     and urban areas. The bill’s call for eliminating public housing and
                     replacing it with housing vouchers could have a significant impact on all
                     communities, according to HUD. HUD pointed out that in a previous report
                     we identified potential problems with a “one size fits all approach” to
                     providing housing assistance because costs differ among areas. In
                     addition, HUD noted that the impact on communities and on the poor of
                     consolidating and cutting—by 40 percent—the funding for the Community
                     Development Block Grant, the HOME program and the current programs
                     for the homeless—would also be devastating. Neither we nor HUD can
                     assess with any certainty what spending choices states and communities
                     would make. However, on the basis of our extensive interviews with
                     representatives of federal and state agencies and affected populations and
                     of our analysis of relevant studies, we believe that the information
                     presented in this chapter reasonably reflects the most likely effects of the
                     bill on those presently served by HUD and its programs.




                     Page 40                                     GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 3

The Federal Role in Housing Finance Would
Be Reduced

                        The federal role in housing finance would change dramatically under the
                        provisions of S. 1145. Specifically, the federal government would provide
                        partial mortgage insurance only for single-family homes, would no longer
                        insure multifamily mortgages, and would no longer provide liquidity to
                        certain lenders. Because of the limitations on the percentage of the value
                        of the home that could be financed and the percentage of the losses that
                        would be covered by insurance, some home buyers—particularly
                        lower-income and first-time buyers—who would have qualified for
                        federally insured loans without the changes envisioned in the bill could
                        have difficulty obtaining a home mortgage or might never become
                        homeowners. In addition, veterans and rural residents, as well as certain
                        lower-income home buyers benefiting from other affordable
                        homeownership programs—particularly those of state housing finance
                        agencies (HFA)—could have more difficulty obtaining—or could pay higher
                        costs to obtain—a home mortgage without FHA as a source of mortgage
                        insurance and Ginnie Mae as a source of liquidity to lenders. Eliminating
                        the federal role in insuring multifamily mortgages could particularly affect
                        the availability of mortgages for affordable rental housing, and, in New
                        York and New Jersey, for hospitals. Finally, risk-sharing as envisioned in
                        the bill could diminish the federal role in stabilizing housing markets.
                        Specifically, according to FHA, the loss of FHA’s ability to serve as a market
                        stabilizer in economic downturns could mean greater losses in home
                        equity value for low-and moderate-income homeowners and greater
                        volatility in the economy.

                        Both FHA’s principal single-family mortgage insurance program and Ginnie
                        Mae’s guarantee program have expected revenues that exceed their
                        expected costs. The resulting surplus lowers the federal deficit. The
                        budgetary implications of the bill’s housing finance proposals are
                        described in appendix II.


                        HUD supports housing finance principally through FHA’s mortgage
HUD Insures             insurance program and Ginnie Mae’s program for providing liquidity to
Mortgages and           lenders of government-insured loans.
Provides Liquidity to
Lenders
FHA Insures Mortgages   FHA was established under the National Housing Act of 1934 to improve
                        housing standards and conditions, to provide an adequate home financing
                        system by insuring home mortgages and providing credit, and to stabilize




                        Page 41                                 GAO/RCED-97-36 Proposal to Dismantle HUD
Chapter 3
The Federal Role in Housing Finance Would
Be Reduced




the mortgage market. FHA insures private lenders against losses on
mortgages financing homes, multifamily properties, and health care
facilities and against losses on loans for property improvements and
manufactured homes. In July 1996, FHA had insurance on 6,490,546
single-family loans totaling about $364 billion. It had insurance on an
additional 15,876 multifamily loans (totaling almost 2 million units) and
474,750 property improvement and manufactured housing loans, totaling
about $48 billion and $6 billion, respectively. FHA also held 126,467 notes
on properties with unpaid principal balances totaling $8.4 billion and held
26,531 single-family and multifamily properties acquired at a cost of
$2.1 billion. According to Price Waterhouse’s latest actuarial study, the
Mutual Mortgage Insurance Fund—the insurance fund supporting FHA’s
principal single-family insurance program—had an economic net worth of
over $7 billion as of September 30, 1995.1 That is, the current cash
available to the fund, plus the net present value of all future cash inflows
and outflows expected to result from outstanding mortgages in the fund, is
about $7 billion.

While serving a relatively small part of the entire single-family mortgage
market, FHA is an important resource for certain market segments.
Specifically, while FHA insured about 8 percent of the dollar amount of all
mortgages made in 1995—both home purchase mortgages and
refinancings—FHA-insured loans represented about 26 percent of the dollar
amount of all insured loans made that year. (See fig. 3.1.) Borrowers of
FHA-insured mortgages are more likely to have lower incomes, be first-time
home buyers, or be minorities than are borrowers of privately insured
loans. For example, while FHA insured about 15 percent of all mortgages
used to purchase homes in 1994, it insured 20 percent of all home
purchase mortgages made to low-income borrowers, 24 percent of those
made to minorities, and 21 percent of those made to first-time home
buyers. In addition, in 1994 FHA insured more home purchase mortgages in
nine states than did private mortgage insurers or the Department of
Veterans Affairs (VA).




1
 FHA has four insurance funds. The Mutual Mortgage Insurance (MMI) fund provides mortgage
insurance principally for 30-year fixed-rate single-family home mortgages and is required to be
actuarially sound. The General Insurance (GI) fund provides mortgage insurance for multifamily
properties, including nursing homes and hospitals, and is not required to be actuarially sound. The GI
fund is dependent on budget appropriations to sustain operations. The Cooperative Management
Housing Insurance (CMHI) fund and the Special Risk Insurance (SRI) fund have had very little activity
in recent years and, according to HUD’s Office of Inspector General, represent a comparatively small
exposure to additional losses.



Page 42                                             GAO/RCED-97-36 Proposal to Dismantle HUD
                                     Chapter 3
                                     The Federal Role in Housing Finance Would
                                     Be Reduced




Figure 3.1: Share of Single-Family
Mortgages—Home Purchase and                                                            Privately insured
Refinancings—Made During 1995
                                                                                       8%
                                                                                       FHA-insured

                                                                                       4%
                                                                                       VA-guaranteed




                                                       •
                                                  •



                                          • 17%



                                                                 71% •                 Not insured




                                     Source: U.S. Housing Market Conditions, HUD’s Office of Policy Development and Research
                                     (May 1996).




                                     In 1995, FHA’s mortgage insurance on loans for multifamily properties
                                     helped finance the construction of 17,113 new rental units; the purchase or
                                     refinancing of 32,383 existing rental units; and the construction,
                                     substantial rehabilitation, and purchase or refinancing of 12,888 units of
                                     group housing and health care facilities. Combined, these multifamily
                                     activities represented over $2.3 billion in mortgage insurance written in
                                     1995.


Ginnie Mae’s Guarantees              Ginnie Mae, a wholly owned government corporation, was established to
Raise Capital for Mortgage           expand affordable housing in America by providing liquidity to certain
Loans                                lenders through an efficient government-guaranteed secondary market for




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federally insured or guaranteed loans. Its programs facilitate the financing
of single-family, multifamily, and manufactured homes. Specifically,
Ginnie Mae guarantees the timely payment of principal and interest on
privately issued securities that are backed by pools of FHA-insured and VA-
and Rural Housing Service (RHS)-guaranteed mortgages. In fact, according
to Ginnie Mae, nearly all FHA-insured, VA-guaranteed, and RHS-guaranteed
mortgages are in Ginnie Mae pools.2 Ginnie Mae’s mortgage-backed
securities program provides a means of channeling funds from the nation’s
securities markets into local housing markets. According to Ginnie Mae,
the U.S. government’s full-faith-and-credit guaranty of these securities
makes them widely accepted in sectors of the capital markets that would
not otherwise be likely to supply funds to the mortgage market.
Approximately 70 percent of the funds used to purchase Ginnie
Mae-guaranteed securities come from nontraditional mortgage investors,
including pension and retirement funds, life insurance companies, and
individuals. The maturities on these guarantees are for up to 40 years. As
shown in figure 3.2, as of September 30, 1995, Ginnie Mae-guaranteed
securities represented 26 percent of all single-family and multifamily
mortgages held in mortgage pools. At the end of fiscal year 1995, Ginnie
Mae had outstanding guarantees of mortgage-backed securities totaling
$464 billion. Ginnie Mae’s programs had negative net outlays—or
profits—of $464 million in fiscal year 1995.




2
  Fannie Mae, in partnership with the RHS, developed the market for RHS-guaranteed loans. According
to Fannie Mae, it has provided more than $787 million in financing to over 13,000 families since the
beginning of this partnership.



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Figure 3.2: Share of Single-Family and
Multifamily Mortgage-Backed                                                                    Other sources
Securities Insured or Guaranteed as of
September 30, 1995


                                                     • 15%
                                                                       26% •                   Ginnie Mae



                                               28%
                                                 •


                                                                      31% •                    Fannie Mae




                                                                                               Freddie Mac




                                         Note: Excludes Rural Housing Service.

                                         Source: Federal Reserve Bulletin (Nov. 1996).



                                         Under S. 1145, HUD would no longer insure multifamily mortgages or
Federal Support for                      guarantee mortgage-backed securities, and the agency that would replace
Housing Finance                          FHA would be limited in how it could insure mortgages. Specifically, the

Would Be Reduced                         bill would abolish FHA and replace FHA’s single-family mortgage insurance
                                         program with a program in which risk would be shared between qualified
                                         mortgage insurers and a Federal Home Mortgage Insurance Fund operated
                                         by a new agency—the Federal Home Mortgage Insurance Fund
                                         Administration (FHMIFA)—within the Department of the Treasury. Unlike
                                         FHA’s mortgage insurance, this proposed new fund would not be backed by
                                         the full faith and credit of the United States. The new agency would be
                                         authorized to provide partial insurance on mortgages for families with
                                         incomes of 80 percent of their area’s median income (125 percent for
                                         first-time home buyers and for homes purchased in economically
                                         distressed areas) and for refinancing a mortgage previously insured under
                                         a risk-sharing agreement.3 It would not be authorized to insure
                                         single-family mortgages for other prospective buyers or multifamily

                                         3
                                          Refinancings would be limited to instances in which the amount of the original loan did not exceed
                                         150 percent of the outstanding principal of the mortgage being refinanced.



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mortgages. Furthermore, the federal government would no longer provide
liquidity to lenders, as Ginnie Mae does now. Finally, low-income
homeowners would be eligible to receive housing assistance vouchers for
up to 60 months—or for longer if a state chose to design its own program.4
 The bill also provides for the sale of FHA’s mortgage insurance interests
and for the termination of Ginnie Mae.

Under the bill’s provisions, initial capital of $100 million to $500 million for
the Federal Home Mortgage Insurance Fund would come from the sale of
FHA’s mortgage insurance interests.5 FHMIFA would set standards for
lenders and underwriting standards for borrowers. It would enter into
risk-sharing agreements with qualified mortgage insurers. To be qualified,
insurers would need a AA rating from a rating agency and could include
state and local housing and housing finance agencies or private mortgage
insurers in coordination with HFAs.6 Together, FHMIFA and a qualified
mortgage insurer would insure no more than 35 percent of a loan, a lender
would finance no more than 97 percent of a property’s value, and a
borrower’s income could not exceed 80 percent of the area’s median
income (or 125 percent of the median income for first-time home buyers or
properties located in economically distressed areas). Premiums would
remain at the levels currently authorized under FHA’s principal program for
single-family mortgages, and premiums and losses would be shared as
agreed between the fund and the qualified mortgage insurers.

Qualified mortgage insurers would underwrite loans and collect insurance
premiums—retaining a portion for administrative expenses and passing
the remainder on to the fund. An insurer would pay claims to lenders and
dispose of foreclosed properties conveyed to the insurer and collect
against borrowers assigned to the insurer. The resulting losses would be
shared between the insurer and the fund. The total amount of the losses
covered by the fund and the qualified mortgage insurer would be limited to
35 percent of the loan. Currently, FHA covers 100 percent of the losses on
loans that it insures, while the maximum coverage on privately insured
loans is 35 percent. According to the bill, FHMIFA and a qualified mortgage

4
 Upon the sale of a home for which the homeowner had received housing assistance vouchers, the
homeowner would be required to return any additional assistance received as a result of not
considering any amount of income imputed from the family’s equity in the house.
5
 FHA’s mortgage insurance interests include the assets, interests, debts, and obligations of the
resolution administrator attributable to the residential mortgage insurance provided by the resolution
administrator or the Secretary of HUD. These interests include rights to the payment of mortgage
insurance premiums and properties and mortgages held by the administrator or the Secretary of HUD.
6
 According to Moody’s, insurance companies rated AA offer excellent financial security. Together with
the AAA group, they constitute what are generally known as high-grade companies.



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                        insurer would negotiate an agreement on how the risk would be shared. In
                        addition, the qualified mortgage insurers and FHMIFA would agree on the
                        portion of the premiums that the insurer could retain and the amount that
                        the insurance fund would receive.

                        To provide liquidity to lenders of mortgages made under the proposed
                        risk-sharing arrangement, as well as mortgages guaranteed by VA and RHS,
                        the bill suggests that Fannie Mae, Freddie Mac, or private conduits might
                        provide a means of channeling capital. The bill does not specify the
                        conditions under which these entities would perform such a function.

                        The bill establishes transition provisions for selling FHA’s mortgage
                        insurance interests and administering any interests not sold, as well as for
                        winding up Ginnie Mae’s affairs. In essence, the bill would transfer these
                        commitments to the resolution agency for their orderly sale and/or
                        administration. Although the bill would transfer the administration of any
                        unsold mortgage insurance interests to FHMIFA, it does not specify how
                        Ginnie Mae’s guarantees of mortgage-backed securities—with maturities
                        of up to 40 years—would be administered beyond the 5-year term of the
                        resolution agency. The bill does, however, specify that the resolution
                        agency should provide the Congress with a plan for phasing out Ginnie
                        Mae’s guarantees. The specific tasks to be performed by the resolution
                        agency, the limits it faces in doing so, and the implications of resolving
                        these commitments are described in detail in chapter 5.


                        Given certain restrictions on the loans that could be insured under the
Home Mortgages          bill’s risk-sharing provisions and the elimination of Ginnie Mae, some
Would Be Harder to      home buyers would find it more difficult and, in some instances, more
Obtain for Some         costly to obtain home mortgages. Particularly hard hit would be
                        low-income and first-time home buyers. According to HUD, the bill’s
Home Buyers Under       provisions “would strike a devastating blow to potential home buyers.”
the Bill’s Provisions   HUD further notes that the proposal’s requirements for serving only
                        lower-income and first-time home buyers would freeze out many home
                        buyers who currently pay FHA’s higher premiums because they have no
                        conventional-market alternative. Finally, HUD believes that lenders would
                        be exposed to additional risk because of the reduction in coverage from
                        100 percent to 35 percent, which could result in credit rationing and higher
                        prices in interest and fees. Some home buyers who would have qualified
                        for FHA-insured loans might also qualify for mortgages offered by other
                        mortgage market entities.




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Some Borrowers Would   The bill’s provision limiting a loan to no more than 97 percent of a
Need More Cash to      property’s value would likely increase the cash required of a borrower. As
Purchase a Home        a result, some prospective borrowers would have to delay their purchase
                       of a home or might, in some cases, never purchase a home. We reported in
                       August 1996 that about 66 percent of the FHA-insured single-family loans
                       made for the purchase of a home in 1995 did not meet three important
                       guidelines used by private mortgage insurers.7 That is, about two-thirds of
                       these home buyers might not have qualified for private mortgage insurance
                       for the loan they received. An even greater proportion of first-time home
                       buyers and low-income home buyers might not have qualified for a
                       privately insured loan of the same amount. Specifically, about 77 percent
                       of the first-time home buyers and 86 percent of the low-income home
                       buyers who obtained FHA-insured mortgages in 1995 might not have
                       qualified for privately insured loans. The bill’s provision limiting a loan to
                       97 percent of a property’s value is equal to the most liberal percentage
                       allowed by private mortgage insurance companies today. On the basis of
                       this ratio alone, about one-third of the borrowers who obtained
                       FHA-insured mortgages in 1995 might not have qualified for private
                       mortgage insurance for the loans they received.8 That is, these borrowers
                       had loans for an amount that exceeded 97 percent of their property’s value
                       and, under the bill’s provisions, would need either to contribute more cash
                       toward the purchase of a home or purchase a home of lesser value.9 An
                       April 1995 study conducted for the Mortgage Bankers Association—which
                       represents most lenders of single-family mortgage loans—concluded that
                       the majority of the customers served under FHA’s principal single-family
                       mortgage insurance fund would probably not have sufficient financial
                       resources to qualify for private mortgage insurance if FHA were terminated.
                       Furthermore, according to the study, low-income individuals would have
                       particular difficulty in obtaining additional cash resources.10


                       7
                        These guidelines included the most liberal private-sector guidelines for the amount of the loan as a
                       percent of the property’s value—known as the loan-to-value ratio—and the amount of the borrower’s
                       monthly total debt and housing debt payments as a percent of the borrower’s monthly gross
                       income—known as the total debt-to-income and housing-expense-to-income ratios. See
                       Homeownership: FHA’s Role in Helping People Obtain Home Mortgages (GAO/RCED-95-123, Aug. 13,
                       1996).
                       8
                        This analysis excludes loans used for the purpose of refinancing an existing mortgage.
                       9
                        Some FHA borrowers whom we have identified as not being able to qualify for private mortgage
                       insurance on the loan they received might have been able to increase their down payment, thereby
                       lowering their loan-to-value and total-debt-to-income ratios and qualifying for private mortgage
                       insurance on a smaller loan.
                       10
                        William M. Isaac and James A. Marino, FHA Single-Family Mortgage Insurance: Its Relevance in
                       Today’s Market, The Secura Group, prepared for the Mortgage Bankers Association of America
                       (Apr. 25, 1995).



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                            According to FHA lenders who participated in an October 1995 focus group
                            sponsored by FHA, a reduction in FHA’s insurance coverage would cause
                            lenders to increase their prices to cover the perceived increase in risk.
                            According to these lenders,

                            “this increase [in risk] will lead to an overall decline in FHA volume, as high-risk borrowers
                            are either unable to meet stricter underwriting criteria imposed by lenders or are unable to
                            afford insurance, and as the higher price of FHA insurance induces lower risk borrowers to
                            choose conventional insurance, FHA will be less able to reach underserved areas and
                            borrowers, as well as geographic areas suffering from economic downturns or hit by
                            natural disasters, and the homeownership rate will fall.”


                            Also contributing to a likely increase in cost to borrowers would be the
                            loss of the full-faith-and-credit backing of the U.S. government.
                            Specifically, according to FHA, without this credit enhancement, investors
                            would provide capital to lenders at a higher cost, increasing the cost of
                            homeownership to borrowers. In addition, a more targeted insurance
                            program, as envisioned in the bill, could concentrate risk in the newly
                            envisioned fund, making it less able to survive economic downturns,
                            according to FHA.

                            Finally, the changes in housing finance envisioned in the bill would also
                            affect borrowers served through affordable housing programs who now
                            rely on FHA’s insurance. For example, FHA’s mortgage insurance helps state
                            HFAs raise capital for their single-family and multifamily mortgage
                            programs. The credit enhancement provided by this insurance, backed by
                            the full-faith-and-credit of the United States, makes the loans made by HFAs
                            less risky. Without this enhancement, investors in securities issued by
                            state HFAs would demand a higher return on their investments. These
                            additional costs would be passed on to borrowers. In 1994, FHA insured
                            over 55 percent of the loans made by state HFAs. With the added protection
                            of mortgage insurance, these HFAs may offer more flexible terms than they
                            could offer otherwise.



Capital for Some Mortgage   As mentioned earlier, the bill would eliminate Ginnie Mae—which today
Loans Might Be More         provides a channel for mortgage funds for nearly all government-insured
Difficult to Raise          and government-guaranteed loans. According to officials of Fannie Mae
                            and Freddie Mac—organizations specifically mentioned in the bill as
                            candidates for performing functions similar to those now performed by
                            Ginnie Mae—they would immediately be able to purchase any new loans




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that met their underwriting guidelines.11 However, their qualifying ratios,
particularly for total debt-to-income and loan-to-value, are the same as
those used by private mortgage insurance companies. Consequently, under
the bill’s provisions for risk-sharing, coupled with the elimination of
Ginnie Mae, only those borrowers who could meet the private-sector’s
existing qualifying ratios would be likely to obtain loans insured under the
bill’s provisions.12 That is, Fannie Mae and Freddie Mac would be likely to
immediately channel funds from the capital market to the housing market
for borrowers who could meet today’s standards for privately insured
loans. As mentioned above, on the basis of our analysis of home
purchasers who received FHA loans in 1995, up to two-thirds of the
borrowers with FHA-insured loans would not meet these standards, and
would, therefore, need to delay their purchase of a home, purchase a home
of lesser value, or make a greater initial investment in their home.13
According to officials of Mortgage Insurance Companies of America,
private mortgage insurers might be able to offer more flexible
underwriting for loans in which they shared the risks as envisioned in the
bill. Fannie Mae and Freddie Mac would, however, first need to better
understand the risks associated with any changes to their underwriting
and the price they would need to charge for purchasing such loans. For
some borrowers, the provision of vouchers might increase the
affordability of the home they currently owned or wished to purchase.

The loss of Ginnie Mae could also affect the availability of mortgages for
veterans and rural home buyers. Currently, lenders of loans guaranteed by
VA and the Rural Housing Service may retain 44 basis points (0.44 percent
of the loan amount) for servicing loans when they are pooled into
securities that are guaranteed by Ginnie Mae. But when these loans are
securitized by Fannie Mae or Freddie Mac, the lenders might retain fewer
basis points. This difference in servicing fees creates an incentive for
lenders that originate government-insured and government-guaranteed
loans to utilize Ginnie Mae’s services and explains why nearly all such
loans are held in securities guaranteed by Ginnie Mae. Consequently, some
veterans and moderate-income rural home buyers might find a home
mortgage more difficult to obtain. Ultimately, the terms of the mortgages
made under the risk-sharing provisions of the bill would need to be
established before the secondary market agencies could determine the
risk and pricing for purchasing and securitizing such loans.

11
  Many mortgages made to low- and moderate-income home buyers are purchased by Fannie Mae and
Freddie Mac. For 1997, 42 percent of Fannie Mae’s and Freddie Mac’s mortgage purchases are required
to be for mortgages issued to families with low and moderate incomes.
12
  Fannie Mae and Freddie Mac may purchase loans that exceed these guidelines.
13
  Both Fannie Mae and Freddie Mac have affordable loan programs and arrangements with certain
lenders under which some of these borrowers may qualify for a mortgage.
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Financing for Multifamily   FHA’s role in facilitating the financing of multifamily projects is more
Projects Would Be More      limited than it once was, but it is still significant for multifamily projects
Difficult to Obtain         for lower-income renters, as well as for hospitals and nursing homes in
                            certain locations. Eliminating FHA as a source of insurance for multifamily
                            mortgages would eliminate a relatively small, but in some instances
                            important, source of credit enhancement for developers of such projects.

                            FHA’s role in insuring mortgages for unassisted multifamily projects has
                            generally increased in the last few years, after a period of decline.
                            Specifically, FHA insured twice the dollar amount in mortgages for
                            constructing new rental units in 1995 as it did in 1992, as well as almost
                            twice the dollar amount in mortgages for congregate housing, nursing
                            homes, assisted living, and board-and-care facilities. The dollar amount of
                            the mortgages for purchasing or refinancing existing rental units has
                            fluctuated during the last few years but has exceeded the amount for 1992.
                            While the extent to which FHA’s share of the entire market has changed in
                            recent years is unclear, FHA’s Office of Multifamily Housing Programs
                            wrote in its Business Strategic Plan of October 1994 that FHA’s share of the
                            multifamily mortgage lending market had fallen from over 30 percent
                            during the early 1980s to 2.2 percent in 1992. However, the renters served
                            by projects financed with FHA-insured loans generally had lower incomes
                            than renters in general, according to FHA. Although FHA’s multifamily
                            insurance program for hospitals is concentrated in just two states—New
                            York and New Jersey—it may serve as a significant source of credit
                            enhancement for financing hospitals in these two states. Some of FHA’s
                            multifamily mortgage programs have been profitable. Specifically,
                            according to a May 1995 analysis prepared by Abt Associates, Inc., FHA’s
                            insurance on loans for hospitals and for refinancing multifamily loans had
                            a positive net cash flow for those loans endorsed between 1987 and 1994.
                            Finally, FHA sees its role in pioneering and providing credit enhancement
                            for multifamily mortgages serving the lower end of the market as critical,
                            and the agency is working to better meet the needs of underserved renters
                            and areas.

                            For multifamily projects as for single-family residences—but to a lesser
                            extent—some state HFAs—including those in Louisiana, Missouri, and
                            Ohio—rely on FHA’s mortgage insurance for financing. In addition, in
                            recent years some state HFAs have entered into risk-sharing arrangements
                            with FHA for financing multifamily projects. Without FHA, these HFAs would
                            need to seek another form of credit enhancement to finance such projects.




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                     HUD  believes that we do not give sufficient emphasis to the bill’s impact on
Agency Comments      homeownership. According to HUD, eliminating the federal backing for
and Our Evaluation   mortgage insurance would eliminate clients now served by FHA, but we
                     cannot say how many prospective borrowers would be unable to obtain a
                     home mortgage under the bill’s provisions. While our analysis of the types
                     of loans received by FHA borrowers recognizes the percentage of such
                     borrowers who did not meet the most liberal underwriting guidelines, we
                     cannot say with certainty that all of these borrowers could not qualify for
                     other mortgages. In addition, because the bill does not specify the terms
                     for sharing risk with qualified mortgage insurers, we cannot determine
                     how many borrowers would be affected. In this regard, we share HUD’s
                     concern that mortgages insured under the risk-sharing provisions might be
                     those products already offered on the private market. In fact, we recognize
                     in the report that the restriction on loan-to-value ratio alone replicates a
                     feature of products already offered by the private market. We have also
                     added information to the report, in response to HUD’s comments, to
                     recognize the impact on the cost to borrowers of the envisioned fund’s not
                     being backed by the full-faith-and-credit of the U.S. government, and we
                     have expanded our description of FHA’s role in the multifamily mortgage
                     market. Finally, in response to comments from Fannie Mae and Freddie
                     Mac that our report does not recognize the extent to which these agencies
                     serve low- and moderate-income families, we added information on their
                     efforts and noted that the agencies may purchase loans whose terms
                     exceed their underwriting guidelines.




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Chapter 4

States Have Varied Capacity and Receiving
Agencies Generally Have Compatible
Missions, but Implementation Could Pose
Difficulties
                              Many states already have some experience in administering housing and
                              community development programs. Most officials in the six states we
                              visited believed they could take on additional programmatic and
                              administrative responsibilities and welcomed the prospect of greater
                              involvement in deciding how to spend federal funds. Although the state
                              government officials responding to our survey generally indicated that
                              their state would not be likely to supplement the federal block grant, past
                              experience with block grants in the early 1980s showed that the states
                              used a variety of approaches to help offset federal funding reductions.
                              Similarly, a majority of the federal agencies that would receive HUD’s
                              functions generally indicated that they could assume the additional
                              responsibilities if they received adequate resources; however, they said
                              implementation would pose problems. S. 1145 does not explicitly expand
                              the role of localities in administering housing and community development
                              programs; rather, changes in the role of localities would depend largely on
                              the states.


                              The states vary in their experience with programs such as they might
States Are Willing to         administer under S. 1145. Officials responsible for current housing,
Assume a Greater              community development, and welfare programs in the six states that we
Role but Have Varied          visited generally believed that their state could develop the capacity to
                              take on most additional administrative responsibilities associated with an
Administrative and            increased role in these programs. In the housing assistance area, most said
Fiscal Capacity               that they would need funding for additional staff and automated systems.
                              However, 79 percent of the respondents to our survey of community
                              development officials in 47 states said their state could easily assume the
                              community development responsibilities by dividing the grant among state
                              agencies. The one area in which the states would not be able to fully
                              participate is risk-sharing to insure single-family mortgages, according to
                              the National Council of State Housing Agencies. Although studies show
                              that some states have greater fiscal capacity than others, most of the state
                              officials we contacted did not believe that their state government would be
                              likely to contribute additional funding for housing and community
                              development activities.


State Officials Have Varied   Many states have experience administering housing assistance through
Experience Administering      existing programs. In 1994, 33 states, the District of Columbia, and Puerto
Housing and Community         Rico had HFAs that administered tenant-based rental assistance through
                              either the section 8 certificate or voucher program or the HOME program,
Development Programs          according to a survey conducted by the National Council of State Housing



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Chapter 4
States Have Varied Capacity and Receiving
Agencies Generally Have Compatible
Missions, but Implementation Could Pose
Difficulties




Agencies. Some states—such as Massachusetts and Maryland—already
administer rental assistance programs that they designed and fund. In
addition, the states are generally already equipped with a network of local
public housing authorities (PHA) that operate public housing, many of
which also administer section 8 certificates and vouchers. However, the
PHAs currently receive their funding directly from the federal government
and are not supportive of proposals that involve the states, according to
three PHA associations. Also, the PHAs typically interact directly with HUD
and may have only a limited ongoing relationship with the state.

Officials responsible for housing, community development, and welfare
programs in five of the six states we visited indicated that if S. 1145 were
implemented, their state would probably opt for a state-designed program
that would include a tenant-based rental assistance component, such as
vouchers, and would use the existing PHA infrastructure along with other
local agencies for delivering rental assistance to residents. In the other
state, Illinois, officials from the governor’s office and the housing and
community development departments were uncertain whether the state
would want to administer the program. The officials said that they support
tenant-based assistance but have found, in administering approximately
400 rental units as HUD has shifted from project- to tenant-based
assistance, the state’s administrative costs have risen because the tenants
are more scattered and more travel is required to conduct inspections.
However, the state’s director of social services thought that his
department should design and administer the program so that the state
could use housing assistance as a tool to help welfare recipients become
self-sufficient.

Forty-eight states and Puerto Rico have experience working with the
existing CDBG program—a role somewhat similar to the one they would
play in administering the nonentitlement portion of the community
development and special populations block grant proposed in S. 1145.
However, the states vary in the number of years they have worked with the
CDBG program. In 1982, the states were given the chance to take over the
administration of the nonentitlement portion of the CDBG program. While
most states were eager to take over this role, Hawaii and New York
continue to rely on HUD to administer the program for their state. In 1994,
37 states and the Virgin Islands participated in the HOME program. Many
states also have experience administering programs for the homeless, the
elderly, and people with AIDS.




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                             Chapter 4
                             States Have Varied Capacity and Receiving
                             Agencies Generally Have Compatible
                             Missions, but Implementation Could Pose
                             Difficulties




                             Prior experience in administering housing and community development
                             programs or other block grants may help the states take on additional
                             responsibilities for administering block grants for housing and community
                             development. During a review of the nine block grants created by the
                             Omnibus Budget Reconciliation Act of 1981, we found that when a state
                             had operated categorical programs in a particular program area, the
                             transition to block grants in that area was smoother because the state
                             could rely on its existing management and service delivery systems.1 The
                             states also consolidated offices or took other steps to coordinate related
                             programs when assuming responsibility for the 1981 block grants. The
                             transition to new block grants was not as smooth in program areas that
                             had been funded almost entirely by the federal government.

                             Only eight states currently insure single-family mortgages—a
                             responsibility S. 1145 would make available to the states through
                             risk-sharing with the federal government. Most HFAs rely on FHA or the
                             private market to insure their loans. For example, officials at the Illinois
                             HFA said that their agency cannot insure its own mortgages because its
                             enabling legislation requires it to use private insurance on its mortgages.
                             Although few states currently insure mortgages, virtually all of them make
                             direct loans to first-time home buyers using the proceeds from tax exempt
                             bonds.


States Believed They Could   The states could take on additional housing responsibilities, according to
Take on Additional           the National Council of State Housing Agencies. Also, state officials
Housing and Community        responsible for housing, community development, and welfare in the six
                             states we visited believed that the strength of their housing and
Development                  community development departments, their capacity at the local level, and
Responsibilities, but        their interagency coordination would help them take on additional
Localities Said States       responsibilities for housing assistance. However, these officials believed
Lacked Experience in         they would need funds for additional staff and automated systems to
Housing                      assume the new responsibilities. Although state officials generally believed
                             they could handle the expanded administrative responsibilities that could
                             result from the implementation of S. 1145’s housing assistance provisions,
                             officials from localities in these states generally did not share this
                             confidence. Local PHA directors and associations representing local
                             governments in some of the states we visited did not believe that their
                             state government had the administrative capacity or the experience with
                             local housing problems needed to administer housing programs. In
                             addition, to the extent that S. 1145 resulted in the transfer of responsibility

                             1
                              Block Grants: Characteristics, Experiences, and Lessons Learned (GAO/HEHS-95-74, Feb. 9, 1995).



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                            for subsidized multifamily housing projects to the states, states with little
                            or no experience in administering multifamily housing would not be well
                            positioned to carry out these responsibilities, according to Moody’s
                            Investors’ Service—one of the two major bond-rating agencies.

                            Assuming responsibility for administering the block grant for community
                            development, affordable housing, and special populations by distributing
                            the grant funds among existing state departments would be easy,
                            according to 79 percent of those who responded to our survey of
                            community development officials. Conversely, only 5 percent said that
                            their state would be likely to create a new state agency to administer the
                            proposed block grant. Seventy-two percent thought that the state would be
                            unlikely to hire additional staff to administer the program. The states are
                            more likely to shift staff between departments or offices, according to the
                            officials surveyed.

                            Most state HFAs could not participate in risk-sharing because they would
                            be unable to supply the capital needed to meet the rating requirement the
                            proposal would establish for qualified mortgage insurers, according to
                            officials from the National Council of State Housing Agencies and
                            Moody’s. Officials from the National Council said that some older HFAs—in
                            New York, Florida, and Massachusetts, for example—do have significant
                            reserves that they have been able to build over time. However, the newer
                            HFAs have not had the time to develop reserves and the reserves that they
                            do have are pledged against bond issues. In addition, the bond issues have
                            come under tighter restrictions over time, which have restricted HFAs in
                            building reserves.


States Said They Would Be   None of the officials we surveyed indicated that their state would be likely
Unlikely to Supplement      to provide additional funds for community development to compensate for
Federal Funds               the bill’s proposed reductions. Almost all of these officials believed that
                            their state would not provide additional funds because of its (1) inability
                            or unwillingness to increase state tax rates and/or (2) balanced budget
                            requirement. According to the Center for the Study of the States, the states
                            are unlikely to raise their own taxes much to offset federal cutbacks, and
                            the revenue from the existing taxes of most states will not grow enough to
                            enable the states to make up for large reductions in federal aid.2 For
                            example, officials in Washington State said that because the state has a
                            balanced budget requirement and an initiative that limits state spending

                            2
                             Steven D. Gold, “The ABCs of Block Grants,” State Fiscal Brief of the Center for the Study of the
                            States, Nelson A. Rockefeller Institute of Government, No. 28 (Mar. 1995).



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increases, the state would be precluded from providing additional funding
for housing or community development. Balanced budget requirements
exist in 49 states, according to the National Conference of State
Legislatures.

Other limitations on the states’ ability to provide additional funds cited by
survey respondents included competition for state funds and the impact of
other federal spending cuts. The Center for the Study of the States
calculated that state spending for activities such as economic development
and housing was cut back sharply during the early 1990s. According to
1996 testimony by a senior fellow at the Urban Institute before the House
Budget Committee, if cutbacks in federal aid cause fiscal stress for states,
programs that received a small share of the states’ funds in the early 1990s
would continue to lose out to spending for other activities, such as
prisons.3 Federal spending cuts in areas such as welfare, job training, and
education were cited by almost half of the survey respondents as
moderately or greatly influencing their state’s decision not to provide
additional funds for community development.4 For example, officials in
Massachusetts said they would have to wait and see how their state fared
with welfare reform before determining how much more they could spend
for housing and community development. However, this state differed
from others we visited because officials believed that strong pressure from
housing advocacy groups within the state could result in increased
funding.

Although the state government officials responding to our survey generally
indicated that their state would not be likely to supplement the federal
block grant, the actual fiscal capacity of state governments appears to be
more varied than the responses would suggest. Several recent studies
indicate that while some states are weak in terms of their fiscal capacity,
others are fairly strong. We reported in 1993, for instance, that the
widespread disparities among the levels of public services that the states
could afford reflected differences in their fiscal capacity.5 The six states
we visited had varied levels of fiscal capacity, according to the 1993
report’s ranking of states. Maryland and Massachusetts were ranked in the


3
 Steven D. Gold, “The Potential Impacts of Devolution on State Government Programs and Finances,”
The Urban Institute (Mar. 5, 1996).
4
 Only respondents who estimated that their state would probably or definitely not provide additional
funds were asked this question. Those that were uncertain were not asked about the influence of the
various factors on the state’s decision.
5
 State and Local Finances: Some Jurisdictions Confronted by Short- and Long-Term Problems
(GAO/HRD-94-1, Oct. 6, 1993).



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top (strongest) quartile, Washington was in the second quartile, Illinois
was in the third quartile, and Alabama and Texas were in the bottom
(weakest) quartile. Furthermore, according to the National Governors’
Association and the National Association of State Budget Officers, the
states’ revenues for 1995 exceeded projected levels. About half of the
states enacted tax cuts in part because of moderate economic growth.6 In
addition, experience with block grants in the early 1980s showed that the
states used a variety of approaches to help offset federal funding
reductions. For example, after nine block grants were created in the early
1980s, the states used carry-over funds from categorical programs, added
state revenues, and transferred funds among programs to help make up for
much of the reductions in federal funding.7 An April 1995 study on block
grants concluded that “. . . critics who had predicted that states would be
unable and/or unwilling to use their own funds to offset federal cuts were
proven wrong.”8 The study noted that spending for social services, which
had seemed especially vulnerable, received surprisingly strong support.

However, some observers do not believe that the states would be willing
or able to offset the reductions. The Center for the Study of the States
concluded that even though fiscal conditions have improved in recent
years, the states have limited financial reserves available. If the federal
government sharply reduces its aid to the states, according to the Center,
it should not be under the illusion that the states can easily afford to
replace the lost funds.9 The Center’s study on block grants noted that

“. . . the anti-tax mood reflected currently in Washington is also prevalent in the states. If
massive reductions in federal aid occur, many states would probably respond by increasing
taxes somewhat, but not nearly . . . [enough] to replace the federal funding cuts.”




6
  The Fiscal Survey of States, National Governors’ Association and the National Association of State
Budget Officers (Oct. 1995).
7
 See Block Grants: Characteristics, Experience, and Lessons Learned (GAO/HEHS-95-74, Feb. 9, 1995).
8
Cheryl D. Hayes, Rethinking Block Grants: Toward Improved Intergovernmental Financing for
Education and Other Children’s Services, The Finance Project (Apr. 1995).
9
Steven D. Gold, “The Impact of New Federal Policies on State Governments,” State Fiscal Brief of the
Center for the Study of the States, Nelson A. Rockefeller Institute of Government, No. 26 (Jan. 1995).
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                            Officials from the federal agencies that would receive functions
Missions of Some            transferred under S. 1145 generally believed that their missions were
Receiving Agencies          compatible with those of the transferring functions; however, they
May Be Compatible,          expressed some concerns about whether their organizational structures,
                            resources, and staff skills would meet the requirements of the transferring
but Program Delivery        functions. HUD, in contrast, maintained that transferring its functions to
May Differ                  other agencies would break up the network it has developed to implement
                            its programs and could adversely affect the delivery of services to its
                            clients. The priority that other agencies would give to some of HUD’s
                            regulatory functions is also unclear.


While Most Agencies See     Most of the designated receiving agencies considered their missions to be
Their Missions as Broadly   very similar to HUD’s, while HUD did not generally believe that its mission in
Compatible, Some            each area was compatible with that of the respective receiving agency.
                            Officials from the agencies that would receive seven of the nine functions
Agencies Said the           to be transferred did not see compatibility of mission as a significant issue
Transfers Would Create      for their respective agency. HUD officials, however, considered only two
Difficulties                missions—overseeing home mortgage disclosures and overseeing housing
                            finance entities—to be compatible with the respective receiving agency’s
                            mission.

                            HHS considers its mission very similar to HUD’s because both agencies are
                            attempting to move people to self-sufficiency. HHS administers several
                            programs primarily focused on providing services and assistance to
                            low-income, needy children and families. About 20 percent of the
                            beneficiaries of these programs also depend on HUD’s housing assistance
                            programs. Conversely, in HUD’s view, HHS’ entitlement programs differ
                            fundamentally from HUD’s housing assistance programs. HUD also disagreed
                            that many of the same clients are served by both agencies, indicating that
                            67 percent of those in public housing obtain their income from sources
                            other than public assistance.

                            Both the Department of the Treasury—slated to administer the mortgage
                            insurance function—and HUD consider the proposed transfer a difficult fit.
                            Treasury sees itself as the formulator and manager of the federal
                            government’s domestic and international tax and financial policies, while
                            it sees HUD as a program agency primarily responsible for developing
                            housing policy. Within HUD, FHA is responsible for improving housing
                            standards, providing an adequate home financing system through its
                            mortgage insurance program, and stabilizing the mortgage market.
                            Although FHA’s mortgage insurance program is a credit-related program,



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                             FHA’s core mission as a mortgage insurer is unrelated to Treasury’s
                             operation, according to both HUD and Treasury officials. Furthermore, both
                             HUD and Treasury believe that the transfer would considerably weaken the
                             influence of the program on its constituents because Treasury is not
                             experienced in dealing with FHA’s traditional clients: home buyers, tenants,
                             mortgage lenders, realtors, builders, nonprofit developers, and state and
                             local governments.

                             While both HUD and the Department of Justice see their roles in enforcing
                             the Fair Housing Act as complementary, they believe that the act would be
                             undermined if both their functions were combined under a single agency.
                             Under the act, HUD is responsible for carrying out all of the functions
                             relating to administrative enforcement of the act. Accordingly, HUD
                             investigates, conciliates, or otherwise oversees the disposition of nearly
                             10,000 individual complaints annually. Justice’s role is to litigate cases in
                             federal court either when a case is referred from HUD after a formal charge
                             has been issued and one of the parties elects to have the case heard in
                             federal court or when Justice initiates a case of broader national
                             significance. According to both Justice and HUD, this separation of duties
                             between HUD and Justice currently works well, and both agencies were
                             opposed to a previous proposal to transfer HUD’s fair housing functions to
                             Justice. HUD also expressed concern that its broader role in affirmatively
                             furthering fair housing across other HUD programs and activities would be
                             lost. Justice officials said they believe that even with a complete transfer
                             of funding and personnel, the federal fair housing enforcement effort
                             would suffer because the cost and disruption of the transfer would be
                             significant and would drain resources away from Justice’s mission of fair
                             housing enforcement. Furthermore, both HUD and Justice believe the Fair
                             Housing Assistance Program—a program through which HUD certifies
                             states to resolve fair housing disputes—would not fit well at Justice
                             because Justice is primarily an enforcement rather than an administrative
                             agency.


Agencies Said That Lack of   Although many receiving agencies thought that they could integrate the
Organizational Structure,    transferred functions, they generally believed that the task would not be
Resources, and Housing       easy because they lack either an organizational structure or the resources
                             needed for implementation. For example, HHS indicated that it carries out
Expertise Could Hamper       its functional responsibilities predominantly through grants-in-aid, which
Integration of HUD’s         are administered in partnership with state and local governments, tribes,
Functions                    and private-sector grantees. HHS believes that in order to administer the
                             voucher program, it might need to develop an extensive field structure,



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because HUD’s structure includes 52 state and 29 area offices, in contrast to
HHS’ 10 regional offices. Treasury believes that it would need staff with
appropriate skills and experience with the housing industry to provide
oversight and structure for the single-family insurance program. Treasury
said that it does not have staff with similar types of knowledge, skills, or
abilities—technical or otherwise—to continue the operations of a
reconfigured FHA. Justice officials and HUD agreed that Justice—which is
primarily a headquarters organization—would have trouble assimilating a
field structure into its organization and carrying out HUD’s administrative
activities. According to the Attorney General’s undated response to a
similar proposal,

“The [Justice] Department does not have a comparable field office structure, and has no
current capacity to handle the nearly 10,000 complaints received annually. . . . In order to
carry out administrative responsibilities currently handled by HUD; the Department of
Justice would have to duplicate the existing structure at HUD, with related disruption and
start-up costs attached.”


S. 1145 would make some resources available to the receiving agencies.
However, the level and location of the resources that would be made
available is not certain. HUD had about 10,500 employees in its
headquarters and field offices as of September 30, 1996. As discussed
above, S. 1145, if enacted, would change many of the functions these
employees currently perform. It would also affect the size of the
workforce needed to carry out these functions. Efforts to assess this effect
and its consequences for HUD need to consider the requirements of the
current federal law. The Veterans Preference Act of 1944 (VPA) gives
certain federal employees reemployment rights in some instances when
functions are transferred from one federal agency to another or one
federal agency is replaced by another. The act’s provisions would appear
to apply to the transfer of programs under S. 1145.10 If S. 1145 were
enacted and VPA’s provisions were found to be applicable, assessments
would have to determine which existing HUD functions had been
transferred elsewhere and whether the functions of particular HUD
employees had been transferred.

Some functions, such as the administration of public housing, would at
some point be discontinued, since public housing would be phased out
under S. 1145. Other functions, such as the guarantee of home mortgages
under FHA, would continue to be performed under S. 1145, but in a much


10
 See National Council of CSA Locals, American Federation of Government Employees (AFGE)
AFL-CIO v. Schweiker, 526 F. Supp. 861.



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different and more limited way. State governments and the private sector
would have a much larger role under S. 1145 in administering a number of
the restructured housing and community development programs and the
federal government would have a smaller one. Under these circumstances,
fewer federal employees would be needed to operate the programs. Even
when S. 1145 would clearly transfer a function without change from HUD to
another agency, the receiving agency might decide that it did not need as
many employees to perform the function as HUD currently employs.

Given the complexity and uncertainty of the issues associated with
transferring functions, we did not attempt to determine the impact of S.
1145 on the future employment of HUD’s current workforce. If S. 1145 were
not exempted from VPA’s provisions, HUD’s current functions would have to
be compared with the restructured functions that other agencies would
perform under the bill. Such an analysis was beyond the scope of this
report. Appendix I provides more details on the functions to be
transferred, as well as the agencies’ missions, organizational compatibility,
and staffing.

Primary concerns of HUD about the impact of transferring its functions to
different agencies were the less extensive housing expertise at the new
agencies and the disruption of networks that HUD has built up to help
implement its programs. For example, HUD said that if HHS took over the
housing assistance function, the linkages that HUD has created between
housing and community development activities would end. In addition,
HUD and EPA officials believe that if HUD’s lead-based paint abatement
functions were transferred to EPA, the nature of the relationships between
the program’s customers and clients would change because EPA does not
manage housing and EPA’s contacts are not as well developed as HUD’s.
Similarly, HUD noted that its responsibilities for enforcing the Real Estate
Settlement Procedures Act involve traditional HUD constituents—home
buyers, state regulatory agencies, and consumer trade groups. If these
responsibilities were transferred to the Federal Reserve, new relationships
would have to be established to maintain the same level of service. In
addition, HUD said that under the Fair Housing Program, it receives many
calls involving housing issues other than discrimination that it can
effectively refer to other HUD offices or local networks. According to HUD,
Justice has neither the familiarity with housing programs nor the
knowledge of local communities and personalities that makes HUD’s
referral system effective.




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                     Additionally, several federal, state, and local officials—including HUD
                     officials—expressed concern that if HUD were abolished and its functions
                     were transferred to other federal, state, and possibly local agencies, the
                     federal focus on housing policy would be lost. Some of them indicated that
                     the loss of a cabinet-level advocate for housing and community
                     development issues—an advocate with a sole focus on these areas—could
                     mean that these areas would not get adequate federal funding in the
                     future. In previous testimony, we suggested that elevating the
                     Environmental Protection Agency to the cabinet—“would affirm the
                     prominence and permanence of the federal role in environmental
                     protection.”11 Conversely, dismantling HUD could diminish the “prominence
                     and permanence” of the federal role in housing and community
                     development.


                     HUD, HHS, Justice, OMB, and Treasury expressed their strong disagreement
Agency Comments      with S. 1145 and several of these agencies cited the need for a cabinet-level
and Our Evaluation   department to provide a focus for housing and community development
                     issues. HUD also said that the report is deeply flawed because it does not
                     fully discuss either the difficulties involved in transferring HUD’s functions
                     to other agencies and to other levels of government or the loss of a
                     national housing and community development policy. We added several
                     references to HUD’s position on the difficulties involved in transferring its
                     functions and the loss of a national housing and community development
                     policy. However, the continued need for a cabinet-level department to
                     address housing and community development issues is a policy question
                     for the Congress and the administration to decide.

                     OMB  stated that “issues related to the reorganization and administration of
                     HUD’s  functions should be evaluated on their own merits, not as a strategy
                     for reducing the deficit by seemingly arbitrary reductions in spending.”
                     OMB said that the administration believes that assigning HUD’s functions to
                     other agencies would be counterproductive relative to its reinvention
                     goals. HHS said that the proposal is not well advised and the planned
                     transfers might result in little or no cost savings to the federal government.
                     This report provides information on the potential positive and negative
                     implications of S. 1145 and, as such, does not take a position on the bill.
                     Projections of the bill’s impact on the federal budget will be developed and
                     published by CBO in a separate report. Justice stressed the extreme burden
                     that transferring HUD’s Fair Housing Act responsibilities would create for
                     their department, especially the drain of resources from its primary

                     11
                       Creation of a Department of the Environment, (GAO/T-RCED-93-6, Feb. 18, 1993).



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mission of fair housing enforcement. The remaining six agencies provided
clarifying language for the portions of the report that discuss their
agencies. We incorporated the comments, as appropriate, throughout the
report.




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The Proposed Resolution Agency Would
Face Difficult Tasks

                     The proposed HUD Programs Resolution Agency, as envisioned by S. 1145,
                     would face a difficult task in restructuring, transferring, or eliminating
                     HUD’s programs. Over a 5-year period, the agency would need to address
                     hundreds of millions of outstanding financial commitments, transfer nine
                     HUD functions to receiving agencies and one function to a newly created
                     agency, and terminate several programs. In carrying out these
                     responsibilities, the resolution agency could learn from previous federal
                     efforts to abolish, reorganize, or transfer federal programs and dispose of
                     assets.


                     S. 1145 directs the resolution agency to perform all of HUD’s
Resolution Agency    functions—excluding those abolished or transferred to other agencies by
Would Manage         the bill—for a 5-year period. For the functions that would be abolished or
Transition for All   transferred, the agency would oversee their transition. Thus, S. 1145
                     mandates that the resolution agency conduct a vast range of activities,
Major Functions      such as distributing block grants, closing down entire programs,
                     establishing a new agency, and transferring a number of programs to other
                     agencies. More specifically, the agency’s responsibilities would range from
                     providing housing assistance through administering a block grant for
                     public housing and settling expiring section 8 contracts to selling $429
                     billion in mortgage insurance interests to raise at least $100 million in
                     capital within 3 years for an insurance fund.

                     Additionally, the bill imposes various planning requirements on the
                     resolution agency, including developing an overall plan for winding up the
                     affairs of the agency within 5 years and more specific plans for (1) settling
                     the affairs of Ginnie Mae, (2) providing for the transition of assistance for
                     public housing to voucher assistance, and (3) immediately marketing and
                     selling FHA’s mortgage insurance interests. The required planning would
                     serve an important role in communicating to the Congress and the public
                     how the resolution agency would interpret its mandates and how it would
                     operate. Figure 5.1 details the responsibilities of the agency as mandated
                     by S. 1145.




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Figure 5.1: Responsibilities of the Resolution Agency Under S. 1145 for Housing Assistance, Community Development,
Housing Finance, and Regulatory Functions


                                                       Resolution Agency
                                                          (5-year life)




    Housing assistance                   Community                     Housing finance                    Regulatory functions
                                        development


    Administer a block grant       Close out categorical             Sell portion of $429 billion in    Relocate fair housing
    for public housing by          programs                          mortgage insurance interests       to Justice
    approving strategic                                              within 3 years to capitalize
    plans and distributing                                           $100 million loan fund
    grant funds                     Help establish Housing                                              Relocate interstate
                                    and Community                                                       land sales to Federal
                                    Opportunities Agency             Plan for winding up                Trade Commission
    Assist PHAs in                                                   Ginnie Mae's affairs
    shutting down                                                    ($464 billion in
                                    Consolidate and                                                     Relocate settlement
    nonviable assisted                                               guarantees of
                                    transfer HUD's grant                                                procedures to Federal
    housing                                                          mortgage-backed
                                    programs to new                                                     Reserve Board
                                                                     securities) within first
                                    agency                           year of bill's enactment
    Close out $97 billion                                                                               Relocate national
    in section 8 contracts                                                                              manufactured
                                    Transfer responsibility          Transfer unsold
                                                                                                        housing to USDA
                                    for $678 million in              mortgage interests
    Transfer voucher                CDBG section 108                 to Treasury
    program to HHS                  loan guarantees to                                                  Relocate lead-based
                                    new agency                                                          paint abatement to
                                                                     Provide for covering               EPA
    Assist HHS in                                                    losses on both sold
    establishing voucher                                             and unsold loans
                                    Provide for collecting                                              Relocate home mortgage
    assistance office
                                    $131.4 million in                                                   disclosure to Treasury
                                    outstanding section              Close out FHA and
                                    108 notes                        Ginnie Mae




                                           As part of its 5-year effort to close out terminated programs and oversee
                                           the transition of other functions, the resolution agency would be
                                           responsible for ensuring that federal commitments made prior to the bill’s
                                           enactment were maintained. In some cases, the resolution agency might
                                           need to plan for the administration of some of the commitments beyond its



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own 5-year term. The commitments include contractual obligations,
outstanding mortgage guarantees and insurance, and loans and properties
held by HUD, as well as borrowings. Specifically, the commitments include
over $418 billion in loan insurance, approximately $464 billion in
mortgage-backed security guarantees, almost $100 billion in section 8
project-based rental assistance contracts, over $10 billion in notes and
properties held by HUD, $678 million in section 108 loan guarantees,
$46 billion in other contracted commitments, and $15 billion in
borrowings.

While most of the section 8 project-based assistance contracts will expire
during the life of the resolution agency, most of the insurance, guarantees,
and borrowings will outlive the term of the agency and would be
transferred to other agencies. For example, the bill would transfer the
administration of outstanding mortgage insurance obligations to
Treasury’s Federal Home Mortgage Insurance Fund. Likewise, the bill
would transfer section 8 contracts whose terms extend beyond the life of
the resolution agency to HHS. Finally, the bill does not specify how
long-term guarantees of section 108 loans and of Ginnie Mae’s
mortgage-backed securities would be administered beyond the term of the
resolution agency. The bill does, however, direct the resolution agency to
provide the Congress with a plan for phasing out Ginnie Mae’s guarantees.

Table 5.1 lists HUD’s financial commitments as of the end of fiscal year
1995, as well as the agency that would receive responsibility for the
commitments that outlive the resolution agency. For more detailed
explanations of HUD’s functions that involve financial commitments for the
resolution agency, see appendix II.




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Table 5.1: HUD’s Financial
Commitments as of Fiscal Year 1995   Dollars in millions
                                                                                                                             Receiving
                                     Title                                                          Amount                    agencya
                                     FHA single-family insured portfoliob                          $364,323c                      Treasury
                                                                           b                                   c
                                     FHA multifamily insured portfolio                               $48,162                      Treasury
                                     FHA title I insured portfoliob                                   $5,957c                     Treasury
                                                                       b                                       c
                                     FHA single-family note portfolio                                 $3,721                      Treasury
                                     FHA multifamily note portfoliob                                  $4,125c                     Treasury
                                                                   b                                           c
                                     FHA title I note portfolio                                         $503                      Treasury
                                     FHA single-family property portfoliob                            $1,830d                     Treasury
                                                                               b                              d
                                     FHA multifamily property portfolio                                 $312                      Treasury
                                     Ginnie Mae guarantee of                                       $464,000e                             f

                                     mortgage-backed securities
                                     Section 8 contracts                                             $96,958                         HHS
                                                                                                                                         g
                                     CDBG, section 108 loan guarantees                                  $678
                                                                                                               h                         g
                                     Section 235/236 and other contracted                            $45,876
                                     commitments
                                                                                                                                         g
                                     Borrowings (governmental and                                    $15,271
                                     intragovernmental)
                                     Total                                                       $1,051,716
                                     a
                                      Agency responsible for the financial commitment after the resolution agency’s 5-year term
                                     expires.
                                     b
                                         As of July 1996.
                                     c
                                         Unpaid principal balance.
                                     d
                                         Acquisition cost.
                                     e
                                         This figure is approximate.
                                     f
                                     To be determined.
                                     g
                                         Not specified.
                                     h
                                       Does not include CDBG contractual commitments, since the CDBG program would be
                                     transferred to a newly created Housing and Community Opportunities Agency.

                                     Source: U.S. Department of Housing and Urban Development Report on Fiscal Year 1995
                                     Financial Statements, HUD Office of Inspector General (96-FO-177-0003, Aug. 16, 1996), and
                                     Portfolio and Production Report, FHA Housing Comptroller (July 1996).



                                     The resolution agency would face certain legal constraints on how it could
                                     settle HUD’s commitments. For example, the bill recognizes that selling
                                     FHA’s mortgage insurance interests or terminating Ginnie Mae would not
                                     relieve the federal government of commitments backed by the full faith




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and credit of the United States. Generally, the bill provides that all grants,
loans, contracts, agreements, and other obligations that have been issued
before the transfer of functions shall continue in effect according to their
terms until modified, terminated, superseded, set aside, or revoked in
accordance with law. Consequently, because of the nature of some
commitments, the federal government might continue to have a contingent
liability regardless of how these commitments were resolved. For
example, if the purchaser of an FHA mortgage insurance interest were
required to pay claims but was ultimately unable to do so, the federal
government would be responsible for meeting its original commitment to
the holders of the affected FHA-insured mortgages.

In addition to the constraints described above, the federal government
could be subject to unexpected losses, depending on how its commitments
were resolved. For example, selling only the most profitable of FHA’s
mortgage insurance interests might have the net result of lowering the
overall value of FHA’s mortgage insurance interests. That is, even the most
profitable insurance interest would likely be sold at a discount because
private purchaser’s—unlike FHA—need a return on their investment
sufficient to cover any risk of default as well as tax expenses and a return
to shareholders. The federal government might be left with only the
unprofitable part of the insurance portfolio, supported by capital
that—because of the discount at which insurance interests might be
sold—would likely be valued at something less than its value before such a
sale. For example, we estimate that for the single-family portfolio, loans
originated before 1984 would have net positive cash flows for 1998 and the
remaining years of the mortgage; therefore, only these loans would have
value for potential investors unless the government gave these investors a
portion of the up-front premium.1 The remaining single-family
portfolio—which we estimate to have net negative cash flows for 1998 and
later years—would likely remain with the federal government. Even if the
sale of FHA’s single-family mortgage insurance interests included
provisions that ensured that the federal government had no responsibility
for covering lenders’ losses, to the extent that these lenders experienced
dramatic losses affecting their ability to pay investors in their Ginnie
Mae-guaranteed securities, some or all of the loan losses could fall to the

1
 These loans have net positive cash flows for 1998 and the remaining years because the expected
annual premiums plus the proceeds from the sale of properties exceed the expected claims and
administrative expenses. We assume that the mortgage insurance interest to be sold is the future
stream of premium payments and that the purchaser would not be responsible for any partial refunds
of up-front premiums that are due upon the prepayment of a mortgage. Loans insured between
October 1984 and June 1991 do not have annual premiums. Also, in 1998, loans insured during fiscal
years 1993, 1994, and 1995 would not have aged enough for the premiums plus the proceeds from the
sale of properties to exceed the expected claims and administrative expenses.



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                           federal government as it honored its full-faith-and-credit commitments on
                           Ginnie Mae-guaranteed securities. Finally, while the section 108 loan
                           guarantees are covered by future CDBG grants, the decline in funding for
                           grantees specified in the bill would limit the ability of these grantees to
                           repay lenders, potentially resulting in greater claims against the resolution
                           agency or the agency designated to assume HUD’s responsibility for
                           guaranteeing these loans.


S. 1145 Does Not Address   While S. 1145 generally addresses the major responsibilities within
Some Programs              HUD—housing assistance, community development, and housing
                           finance—certain programs within these areas would be terminated
                           because the bill does not provide for their transformation or continuation.
                           For example, within the community development area, because the bill
                           does not address the Urban Empowerment Zones and Enterprise
                           Communities program, HUD’s involvement with the program would be
                           terminated, leaving the resolution agency to close out technical assistance
                           contracts and determine who would oversee the remainder of the urban
                           part of this program. This program benefits communities by providing
                           local governments and private nonprofit organizations with increased
                           flexibility in meeting federal laws and regulations that might otherwise
                           hinder their ability to implement comprehensive local plans for addressing
                           the housing and economic problems of distressed neighborhoods. The loss
                           of HUD’s oversight of the urban portion of this program would diminish the
                           federal role in helping localities initiate and maintain a comprehensive
                           approach to revitalizing distressed neighborhoods. Other agencies
                           involved in administering this program could continue it. Within the area
                           of housing assistance, the Fair Housing Initiatives Program (section 561 of
                           the Housing and Community Development Act of 1987) is not included as
                           one of similar housing assistance functions to be transferred to the
                           Department of Justice. This program funds public and private
                           organizations for activities such as education outreach, enforcement
                           activities, and the legal expenses incurred in prosecuting fair housing
                           cases. Unlike the programs discussed above, these programs do not
                           contain commitments that would need to be addressed by the resolution
                           agency.

                           In the housing finance area, the bill does not address all of HUD’s
                           responsibilities under the Federal Housing Enterprises Financial Safety
                           and Soundness Act of 1992. Specifically, while S. 1145 does provide for
                           transferring the responsibilities for regulating the safety and soundness of
                           Fannie Mae and Freddie Mac now performed by HUD’s Office of Federal



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                        Housing Enterprise Oversight, it does not specify the disposition of HUD’s
                        responsibilities for ensuring that Fannie Mae and Freddie Mac fulfill their
                        public purposes and serve the housing needs of the country. Among these
                        responsibilities are establishing, monitoring, and enforcing goals for
                        Fannie Mae’s and Freddie Mac’s purchase of mortgages financing housing
                        for low-and moderate-income families; housing located in central cities,
                        rural areas, and other underserved areas; and affordable housing for
                        specially targeted families. According to HUD, assigning these
                        responsibilities to the resolution agency would reduce their importance
                        for Fannie Mae and Freddie Mac and signal the probable elimination of
                        these agencies’ public purpose goals. Ultimately, Fannie Mae and Freddie
                        Mac would devote fewer resources and innovative products to these
                        activities, according to HUD. Furthermore, if S. 1145 were implemented,
                        HUD officials believe that this function should continue and be transferred
                        to a cabinet-level agency.


                        The proposed resolution agency could benefit from certain lessons learned
Lessons Learned         from past efforts to abolish or reorganize federal agencies, transfer their
From Prior Efforts to   programs, or dispose of their assets. While the previous efforts do not
Abolish, Reorganize,    perfectly parallel the current plans for dismantling HUD, they do involve
                        some of the same activities—such as transferring functions to other
or Transfer Federal     agencies and disposing of assets—and, thus, some of the lessons learned
Programs Could Ease     in the past might be applicable.2 For example, we previously stressed the
                        importance of creating an interagency transition task force to provide
Transition              overall guidance on the transfer of assets, personnel, and operations to
                        receiving agencies. We also highlighted the importance of establishing
                        internal controls and developing an asset disposition plan when resolving
                        financial commitments. Applying these lessons in consolidating,
                        eliminating, and transferring federal housing and community development
                        programs might help not only to reduce the risk of mismanagement, waste,
                        fraud, and abuse within the programs but also to save money for the
                        federal government by increasing the efficiency of the transition.
                        Additionally, a number of officials we interviewed noted some special

                        2
                         We previously examined a number of efforts to abolish, reorganize, or transfer federal programs and
                        dispose of assets, including a proposal to abolish the Department of Commerce; efforts to reorganize
                        and transfer programs at the Department of Energy, Federal Emergency Management Agency, Equal
                        Employment Opportunity Commission, Federal Labor Relations Authority, International Development
                        Cooperation Agency, Merit Systems Protection Board, and Office of the Special Counsel; and the
                        disposition of assets by the Resolution Trust Corporation. See Commerce Dismantlement:
                        Observations on Proposed Implementation Mechanism (GAO/T-GGD-95-233, Sept. 6, 1995),
                        Department of Energy: Observations on the Future of DOE (GAO/T-RCED-96-224, July 23, 1996),
                        Implementation: The Missing Link in Planning Reorganizations (GAO/GGD-81-57, Mar. 20, 1981), and
                        Resolution Trust Corporation: Management Improvements Reduce Risks but Transition Challenges
                        Remain (GAO/T-GGD-95-163, May 16, 1995).



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                             considerations in abolishing HUD, including the possible elimination of
                             staff positions and the wide dispersal of programs in the field with
                             established support networks.


Resolution Agency Could      A number of lessons learned from previous reorganizations would be
Use Interagency Transition   applicable to the resolution agency’s mandates to transfer some of HUD’s
Task Force in Transferring   personnel and programs and dispose of HUD’s outstanding obligations. For
                             example, as noted in our prior work, on the Resolution Trust Corporation
Functions Between            Completion Act,3 the Congress required the establishment of an
Agencies                     interagency transition task force to help transfer the Resolution Trust
                             Corporation’s (RTC) assets, personnel, and operations to the Federal
                             Deposit Insurance Corporation (FDIC). The act assigned the task
                             force—which included representatives of RTC and FDIC—specific duties,
                             including examining both corporations’ operations, evaluating their
                             differences, recommending which of RTC’s systems should be preserved
                             for FDIC’s use, and reporting its findings to the Congress. Some key
                             elements for planning the transition included (1) “best practice reviews”
                             conducted jointly by RTC and FDIC to identify differences in their respective
                             operations and recommend practices for adoption by FDIC after RTC’s
                             dissolution, (2) information system reviews to assist the Secretary of the
                             Treasury in recommending which of RTC’s systems should be adopted by
                             FDIC, and (3) implementation plans to identify the appropriate staffing and
                             organizational structure for RTC’s functions after their absorption by FDIC.4
                             The corporations also reviewed the legal and policy issues involved in
                             transferring RTC’s responsibilities and operations to FDIC and reviewed
                             internal controls to ensure that vulnerabilities to waste, fraud, and abuse
                             were minimized during and after the transition. Office of Management and
                             Budget and Office of Personnel Management officials we interviewed
                             emphasized the importance of incorporating some of these elements in the
                             transfer of HUD’s functions. They suggested that an interagency group
                             should be established, that the receiving agencies would need to revise
                             their organizational structures before the new programs were transferred,
                             and that the entities should schedule at least 6 months for planning the
                             transfers.




                             3
                              GAO/T-GGD-95-163, May 16, 1995.
                             4
                              While S. 1145 does not specifically recommend the establishment of an interagency transition task
                             force or the use of best practice or information system reviews, it does mandate that the resolution
                             administrator consult with officials from RTC, FDIC, and other federal agencies about selling FHA’s
                             assets.



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Establishing Internal     Additional lessons can be gathered from the shutdown of RTC, which was
Controls and an Asset     tasked with disposing of about $443 billion in financial assets, real estate,
Disposition Plan Could    and other assets after the failure of numerous saving and loan institutions.
                          Most importantly, internal controls were in place to monitor the
Provide for the Orderly   disposition of assets. We previously testified that a successful transition
Resolution of Financial   between entities would include ensuring that sufficient controls were in
Commitments               place over the assets that would be sold during the remaining life of RTC, as
                          well as over the assets transferred from RTC to FDIC.5 Since the resolution
                          agency would also need to dispose of the assets received in the course of
                          abolishing a program within HUD, it would need to develop an asset
                          disposition plan with specific strategies. Currently, although S. 1145
                          specifies that the resolution agency should develop plans for disposing of
                          some of HUD’s assets—such as a plan for marketing and selling FHA’s
                          mortgage insurance interests—it does not recommend that the agency
                          develop an overall strategy for inventorying, assessing, and disposing of all
                          of HUD’s assets. In our previous testimony on a proposal to dismantle the
                          Department of Commerce, we noted a similar concern—that although the
                          proposal contained a planning requirement, it did not specify a strategy for
                          disposing of assets.6

                          We also previously reported on the importance of developing and
                          managing credible information systems to maximize revenues from the
                          sale of assets. We reported on a number of problems with RTC’s
                          information systems, including inaccurate and incomplete data, which
                          contributed to our prior designation of RTC as a high-risk area.7 As
                          discussed in chapter 1, HUD also has generally unreliable information and
                          financial management systems. Dismantling and transferring HUD’s
                          programs without—at a minimum—reviewing and addressing, where
                          possible, the current inadequacies within these systems and developing
                          asset disposition plans could increase the risks of fraud, waste, and abuse
                          in the management, transfer, and sale of HUD’s assets.

                          Finally, lessons learned about closing out contracts following the transfer
                          of agencies’ functions could be applicable. We previously stressed the
                          importance of ensuring the adequate management and oversight of asset
                          management contracts continuing at FDIC after RTC’s shutdown. We
                          suggested that FDIC might benefit by evaluating its own contracts in
                          conjunction with RTC’s contracts to explore opportunities for combining,

                          5
                           GAO/T-GGD-95-163, May 16, 1995.
                          6
                           GAO/T-GGD-95-233, Sept. 6, 1995.
                          7
                           High-Risk Series: Resolution Trust Corporation (GAO/HR-93-4, Dec. 1992).



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                       canceling, or extending them. This same approach could be applied to any
                       HUD contracts transferred to other agencies, such as the Housing and
                       Community Opportunities Agency, whose creation is mandated by S. 1145.


HUD Presents Special   Officials from two organizations with prior experience in abolishing
Considerations         agencies or transferring functions between agencies—the Office of
                       Personnel Management and the National Academy of Public
                       Administration—observed that the proposal to dismantle HUD differs from
                       previous efforts to abolish other federal agencies. For example, several
                       officials stated that dismantling HUD would be more complicated because
                       the Department has approximately 10,500 staff—many more than the two
                       other federal agencies that were recently abolished, the Interstate
                       Commerce Commission and the Bureau of Mines. While some of HUD’s
                       staff would probably be transferred to receiving agencies, the staffing for
                       programs scheduled to be phased out or terminated would be reduced
                       over time. Thus, some of HUD’s positions would eventually be eliminated.
                       Addressing the needs of HUD’s staff in these positions would create
                       additional administrative responsibilities for the resolution agency,
                       including the processing of employees’ grievances and appeals.


                       Some lessons learned in dismantling or reorganizing other federal agencies
Conclusions            could benefit the proposed resolution agency in overseeing the dissolution
                       of HUD and the transfer of some of its functions. The creation of an
                       interagency task force, the development of an asset disposition strategy,
                       and the review of agencies’ functions and contracts to identify
                       opportunities for integration have proved valuable in the past and could
                       facilitate the actions proposed in S. 1145. Finally, a review of HUD’s internal
                       controls and information systems could identify areas requiring especially
                       careful monitoring to prevent waste, fraud, and abuse, particularly in
                       resolving HUD’s huge financial commitments.




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Appendix I

Implications of S. 1145 on the Receiving
Agencies

                  S. 1145 proposes actions involving 12 of the Department of Housing and
                  Urban Development’s (HUD) functions. Of these, nine would be transferred
                  to other federal agencies, one would be transferred to a newly created
                  agency, and two would be abolished. Of the 10 functions to be transferred,
                  the following 4 would be changed significantly:

              •   Housing assistance programs, including both tenant-based and
                  project-based rental assistance and public housing programs would be
                  replaced by a voucher assistance program that would be administered by
                  the Department of Health and Human Services (HHS).
              •   Community and special population assistance programs would be
                  combined to form block grants to states and localities, which would be
                  administered by a newly created, independent Housing and Community
                  Opportunities Agency.
              •   The federal housing mortgage insurance authority of the Federal Housing
                  Administration would be repealed and a Federal Home Mortgage
                  Insurance Fund administered by a Federal Home Mortgage Insurance
                  Fund Administration within the Department of the Treasury would be
                  created.
              •   The Office of Federal Housing Enterprise Oversight, a regulatory function,
                  would be transferred to Treasury and would become responsible for
                  monitoring the safety and soundness of the Federal Home Mortgage
                  Insurance Fund as well as for continuing to oversee housing finance
                  institutions.

                  In addition, HUD’s remaining regulatory functions would be transferred to
                  other federal agencies but would remain essentially unchanged: Fair
                  housing would be transferred to the Department of Justice; interstate land
                  sales to the Federal Trade Commission (FTC); real estate settlement
                  procedures to the Federal Reserve Board; national manufactured housing
                  to the Department of Agriculture (USDA); lead-based paint abatement to the
                  Environmental Protection Agency (EPA); and home mortgage disclosure to
                  Treasury. Finally, the Government National Mortgage Association (Ginnie
                  Mae) would be abolished and the resolution administrator would establish
                  a plan for winding up its affairs. According to the bill, this plan may
                  provide for Freddie Mac and Fannie Mae or other private secondary
                  mortgage market entities to assume Ginnie Mae’s secondary market
                  functions.




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                            The housing assistance function, which is administered by HUD’s Office of
Housing Assistance          Public and Indian Housing, has two primary goals. The first is to provide
Function Would              decent and safe shelter for low-income residents at rents they can afford.
Become a Voucher            The second is to revitalize communities through reductions in the number
                            of distressed public housing units, recovery partnerships with the
Program                     worst-performing housing authorities, and the promotion of mixed-income
Administered by HHS         developments. The community revitalization goal takes into account the
                            large federal investment in the nation’s public housing inventory, as well
                            as the uneven nature of housing markets across the country. Since 1937,
                            the federal government has invested some $90 billion in the public housing
                            inventory. Currently, a total of 3,225 housing authorities manage
                            1.3 million units.

                            Under S. 1145, the housing assistance function would be converted to a
                            voucher program administered by HHS. HUD’s Office of Public and Indian
                            Housing, which currently has over 1,300 staff, would be abolished. With
                            one exception—employees who develop fair market rents for the Section
                            8 Housing Assistance Program—S. 1145 does not specify that personnel
                            currently assigned to the housing assistance function would be transferred
                            to HHS. However, the bill would authorize the personnel connected with
                            any transferred function be made available to the head of the receiving
                            agency as directed by the Office of Management and Budget (OMB).


HHS Sees Housing            HHS officials believe that HHS’ mission is similar to HUD’s in that HHS is
Assistance Function as      attempting to move people to self-sufficiency. In addition, while HHS
Being Compatible With Its   primarily provides services and assistance to low-income, needy children
                            and families, many of these same individuals depend on public housing
Mission, While HUD Does     assistance. Approximately 8 percent of the families assisted by HHS reside
Not                         in public housing, 12 percent receive rental subsidies from HUD, and over
                            2 percent receive rental subsidies from other sources.

                            HUD  believes that HHS should not receive the housing assistance function
                            because HHS traditionally administers entitlement programs intended to
                            provide income assistance to individuals and families.1 The public housing
                            program is a nonentitlement program developed to provide transitional
                            housing for people needing decent, safe, and affordable shelter while
                            working to improve their economic condition. Approximately 40 percent
                            of the households residing in public housing remain there for 3 years or
                            less, and 67 percent obtain their primary income from sources other than

                            1
                             Welfare assistance was changed from an entitlement program to a nonentitlement block grant
                            program under the recently enacted Personal Responsibility and Work Opportunity Act of 1996.



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                            public assistance. Hence, the populations served by HUD and HHS are not
                            the same.

                            In addition, HUD believes that the housing assistance function, as
                            envisioned under S. 1145, would focus exclusively on providing housing;
                            the community revitalization element of the federal government’s work
                            would be lost, as well as the large federal investment in the nation’s public
                            housing inventory. HUD believes that an across-the-board approach to
                            housing assistance would be doomed to failure because housing markets
                            nationwide are uneven. In some locations, such as New York, San
                            Francisco, and areas of expanding growth, housing markets are so tight
                            that rebuilding units would be the only practical means of ensuring
                            housing for residents.


HHS Believes an Extensive   HHS’ organizational structure might not be compatible with HUD’s. Whereas
Field Structure Might Be    HUD  relies on an extensive field structure to deliver housing assistance, HHS
Necessary                   does not have such a field structure. Instead, HHS administers its income
                            assistance programs through grants administered in partnership with state
                            and local governments, tribes, and private-sector grantees. HHS believes
                            that to administer the voucher program, it might need to develop an
                            extensive field structure. However, the flexibility provided to the states
                            under the Personal Responsibility and Work Opportunity Reconciliation
                            Act of 1996, commonly known as welfare reform, would allow the states to
                            coordinate the delivery of both kinds of assistance.


                            HUD’s  community development function is administered by the
Community                   Department’s Office of Community Planning and Development, which has
Development                 about 850 employees. The goal of HUD’s community development programs
Function Would Be           is to improve the lives of low-income Americans by providing decent and
                            affordable housing, revitalizing neighborhoods and communities,
Transferred to Newly        stimulating economic growth, providing economic opportunities, and
Created Agency              delivering needed services. This summary goal is broken down into a
                            number of subsidiary goals, such as reducing the isolation of income
                            groups within communities and geographical areas and making housing
                            more affordable for very low-income families through the use of
                            tenant-based rental assistance.

                            According to HUD, the sole purpose of the block grant proposed under
                            section 202 of S. 1145 is to provide assistance to eligible states, entitlement
                            areas, and Indian tribes to be used as they determine appropriate for



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                          meeting their community and economic development and their affordable
                          housing needs. According to HUD, although the bill stipulates that not less
                          than 90 percent of the total assistance provided shall be used to support
                          eligible activities benefiting low-income families, HUD believes that serving
                          low- and moderate-income persons is no longer a central stated purpose of
                          the legislation. Furthermore, according to HUD, most of the subsidiary
                          goals established in the existing legislation, such as serving the homeless
                          and very low-income persons, are not covered by the proposed block
                          grant.

                          Under S. 1145, the administration of the proposed block grant program
                          would be the sole function of the new Housing and Community
                          Opportunities Agency. While the bill does not provide for transferring any
                          HUD staff to this new agency, it gives the agency’s director the authority to
                          transfer program and support staff from HUD to fill positions established by
                          the director. But fewer staff would be needed, presumably, to administer a
                          single grant—especially one whose funding was decreasing. The major
                          disadvantage of the proposed reorganization, according to HUD, is that it
                          would impede the development of a comprehensive approach to urban
                          revitalization, since the rest of HUD’s programs would be dispersed among
                          different agencies. HUD’s experience shows that a fragmented approach to
                          the development of cities is ineffective. The proposed block grant program
                          would be isolated. Lacking a common plan, cities would have no incentive
                          to coordinate urban development activities. HUD believes that although a
                          number of programs that currently require a consolidated plan have been
                          folded into the single block grant program, the consolidated plan would no
                          longer be a unifying element for urban programs.

                          HUD  officials do support some consolidation. In its reinvention plans, HUD
                          has already proposed consolidating many of its programs into three
                          flexible performance-based funds.


                          HUD is responsible for three functions related to housing finance: providing
Housing Finance           mortgage insurance, providing liquidity to lenders, and overseeing the
Functions Would Be        secondary mortgage market.
Changed Substantially
Federal Mortgage          The Federal Housing Administration (FHA) was established under the
Insurance Would Be        National Housing Act of 1934 to improve housing standards and
Transferred to Treasury   conditions, to provide an adequate home financing system by insuring
                          home mortgages and extending credit, and to stabilize the mortgage



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                              market. FHA insures private lenders against losses on mortgages financing
                              homes, multifamily projects, and health care facilities and against losses
                              on loans for property improvements and manufactured homes. FHA’s
                              overall goal is to help expand homeownership and make housing
                              affordable for all Americans. FHA serves home buyers—particularly
                              first-time and low-income, provides affordable rental housing to low- and
                              moderate-income renters, and provides financing for a variety of
                              health-care facilities needed by communities.

                              S. 1145 would abolish FHA and replace FHA’s single-family insurance
                              program with a Federal Home Mortgage Insurance Fund operated by the
                              Federal Home Mortgage Insurance Fund Administration within Treasury.
                              FHA’s multifamily program would be terminated.


Treasury and HUD Do Not See   Treasury does not believe that its mission is consistent with FHA’s.
Missions as Compatible        Treasury sees its role as the formulator and manager of the federal
                              government’s domestic and international tax and financial policies.
                              Components of this role include formulating domestic and international
                              economic and tax policy; setting fiscal policy; governing the fiscal
                              operations of the government; maintaining foreign assets control;
                              managing the public debt; performing certain law enforcement functions;
                              managing the development of financial policy; and representing the United
                              States on international monetary, trade, and investment issues.

                              In contrast, Treasury believes that HUD is principally a program agency
                              with the primary role of developing housing policy. Moreover, Treasury
                              believes that transferring the mortgage insurance function to Treasury
                              would, at the very least, result in a difficult transition, since Treasury is not
                              experienced in dealing with FHA’s traditional clientele, and might even
                              have a negative impact on homeownership. Treasury recognizes that the
                              reconfigured mortgage insurance program would rely on private mortgage
                              insurers to underwrite and service mortgage loans, but administering this
                              program would require staff with the appropriate skills and experience in
                              housing to provide oversight and structure. Treasury assumes that the
                              private mortgage insurance industry would not be able to provide
                              underwriting and other necessary services without close oversight and
                              corrections from a sophisticated staff. Treasury believes that it does not
                              have staff experienced in these areas, and S. 1145 does not provide for the
                              direct transfer of FHA’s approximately 5,000 employees. Treasury said that
                              it does not have staff with similar types of knowledge, skills, or
                              abilities—technical or otherwise—to continue the operations of a
                              reconfigured FHA. Treasury also finds unclear how much cross-support is



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                           presently provided among FHA’s five components: single-family housing,
                           multifamily housing, operations, comptroller (financial control), and
                           hospital insurance.

                           HUD   believes that a significant narrowing of FHA’s purposes and goals
                           would occur if S. 1145 were enacted. The newly created Federal Home
                           Mortgage Insurance Fund in Treasury would not be supported by the full
                           faith and credit of the U.S. government, and FHA’s multifamily and health
                           care programs would be eliminated altogether. According to HUD, “this
                           new structure would strike a devastating blow to potential home buyers.
                           Serving only below-median, first-time home buyers would freeze out many
                           FHA-insured home buyers who pay FHA’s higher premiums because they
                           have no conventional market alternative.”2 Finally, lenders would be
                           exposed to additional risk because the federal government would reduce
                           its insurance coverage from 100 percent to 35 percent, resulting in credit
                           rationing and higher interest rates and origination fees.

                           HUD further contends that except in so far as FHA’s core mission as a
                           mortgage insurer is credit related, that mission is unrelated to Treasury’s
                           operation. To the extent that the Low-Income Housing Tax Credit program
                           has brought Treasury into the arena of providing affordable housing, HUD
                           concedes that some experience may be claimed. However, that program is
                           administered by the states, applies to multifamily housing only, and is
                           overseen by Treasury only in terms of the credit’s tax treatment.
                           Furthermore, HUD believes that the influence on the program’s
                           constituents would be weakened considerably. Treasury is not
                           experienced in dealing with FHA’s traditional clients: home buyers, tenants,
                           mortgage lenders, realtors, builders, nonprofit developers, and state and
                           local governments.


HUD’s Secondary            Ginnie Mae, a wholly owned government corporation, was established to
Mortgage Market Function   support expanded affordable housing in America by providing an efficient,
Would Be Abolished         government-guaranteed secondary market for federally insured or
                           guaranteed loans. Ginnie Mae is responsible for providing federal
                           subsidies to borrowers to make housing more affordable and for
                           implementing a mortgage-backed securities program primarily for
                           mortgages insured by FHA and the Department of Veterans Affairs (VA). Its
                           programs help provide financing for single-family, multifamily, and
                           manufactured homes.

                           2
                            S.1145 provides partial insurance on mortgages for families with incomes of 80 percent of their area’s
                           median income (125 percent for first-time home buyers and for homes purchased in economically
                           distressed areas).



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                     S. 1145 would terminate Ginnie Mae and provide for Fannie Mae or
                     Freddie Mac or other private secondary mortgage market entities
                     approved by the Secretary of HUD to assume Ginnie Mae’s secondary
                     market functions. S. 1145 does not provide for transferring Ginnie Mae’s
                     personnel. Currently, Ginnie Mae has 72 employees, all of whom are
                     located in Washington, D.C.

                     Ginnie Mae, Fannie Mae, and Freddie Mac agreed that they share missions
                     in that the purpose of all three is to attract capital to the housing market.
                     But they also agreed that their operations differ because Ginnie Mae’s
                     securities are backed by the full-faith-and-credit of the federal
                     government, while Fannie Mae’s and Freddie Mac’s are not. In addition,
                     according to Fannie Mae and Freddie Mac officials, neither could
                     securitize all FHA mortgages at the price currently charged by Ginnie Mae.
                     Ginnie Mae believes that its termination would weaken the government’s
                     ability to serve low- and moderate-income home buyers, especially FHA’s
                     and VA’s customers. Ginnie Mae also believes that Fannie Mae and Freddie
                     Mac principally serve the conventional market and thus the low- and
                     moderate-income segment would, if pursued, be a small part of their
                     business and would logically occupy less of their focus or mission.
                     However, many home buyers whose loans are purchased or securitized by
                     Fannie Mae and Freddie Mac have low or moderate incomes. Fannie Mae,
                     for example, expects to meet or exceed its 1996 goal for purchasing loans
                     made to low- and moderate-income families. For 1996, that goal is
                     40 percent, and for 1997, it is 42 percent (for both Fannie Mae and Freddie
                     Mac).

                     Both Fannie Mae and Freddie Mac officials said that they would not
                     expect a major change in their operations if Ginnie Mae were abolished,
                     and both were unsure how much of Ginnie Mae’s business they could
                     absorb, but they agreed that their fees would likely be higher than those
                     Ginnie Mae currently charges.



HUD’s Regulatory
Functions Would Be
Transferred

Fair Housing         The Fair Housing Act prohibits discrimination in any housing activities
                     relating to the sale or rental of dwellings, in the availability of residential



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                              Implications of S. 1145 on the Receiving
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                              real estate-related transactions, or in the provision of services in
                              connection with such transactions because of race, color, religion, sex,
                              handicap, familial status, or national origin. The act makes the Secretary of
                              HUD responsible for investigating complaints and ensuring compliance
                              with fair housing practices. The Fair Housing Assistance Program provides
                              financial and technical support to state and local fair housing agencies that
                              administer laws certified by HUD as being “substantially equivalent” to the
                              federal Fair Housing Act.

                              S. 1145 would transfer the fair housing function and the Fair Housing
                              Assistance Program to the Department of Justice. Justice officials believe
                              that transferring all fair housing enforcement activities to it would have
                              legal ramifications. The Fair Housing Amendments Act of 1988
                              distinguishes between the roles of Justice and HUD in fair housing
                              enforcement. The act gave HUD the authority to quickly resolve fair
                              housing disputes by closing them through conciliation and administrative
                              hearings presided over by administrative law judges. According to Justice,
                              the act intended to have an efficient and cost-effective process in place at
                              HUD and recognizes the close ties that HUD should maintain with the
                              housing community. In contrast, the act foresees Justice’s role in
                              enforcement actions involving individual fair housing claims as the
                              litigator of those cases formally charged by HUD after conciliation has
                              failed and only after either party to the charge elects to have the case
                              heard in federal court. According to Justice and HUD officials, this
                              separation of duties between HUD and Justice currently works well. Both
                              agencies are opposed to both a previous proposal and this proposal to
                              transfer HUD’s fair housing functions to Justice.

                              HUD believes that transferring the fair housing function to Justice would
                              compromise the Congress’ intent to ensure that fair housing would be an
                              integral part of federal housing policy. Also, the transfer would contravene
                              decades of legal precedent ordering the Secretary of HUD to integrate fair
                              housing concerns into the administration of HUD’s programs.

Transfer Would Pose           The Fair Housing Act and the Fair Housing Assistance Program are
Organizational and Staffing   administered by 265 HUD employees.3 Of this total, 233 are located in HUD’s
Issues                        field offices. Most of the day-to-day intake, investigation, and conciliation,
                              as well as the ongoing community-based technical assistance and
                              customer service, occurs in these offices.

                              3
                               According to HUD, the Office of Fair Housing and Equal Opportunity has 664 staff. About 265 of those
                              staff handle complaint-related matters and the Fair Housing Assistance Program. The other staff are
                              devoted to ensuring fair housing in all HUD-funded programs. These figures do not count the staff
                              assigned by the Office of General Counsel or the Office of Administrative Law Judges.



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                        Justice believes that it has neither the field organization nor the
                        investigative staff to carry out the fair housing program effectively. One
                        official told us that Justice is an agency of litigators, not investigators. To
                        the extent that Justice is an investigative agency, its investigative function
                        is, by and large, carried out by the Federal Bureau of Investigation.
                        According to the Justice official, investigating every fair housing
                        complaint, regardless of merit, as the act requires would not make
                        productive use of the Bureau’s scarce resources. Moreover, Justice has
                        always focused on litigating large cases with a high impact, not on
                        investigating and conciliating individual complaints. In addition, several
                        officials cited general problems that arise when a litigating agency picks
                        up an administrative agency’s responsibilities. For example, under the Fair
                        Housing Assistance Program, HUD monitors the state and local fair housing
                        agencies that receive funds, certifies participating states, and revokes
                        certifications when agencies are not performing adequately. Justice,
                        according to some of its officials, is not set up to administer such
                        programs.

                        HUD  believes that Justice is neither familiar with housing programs, which
                        generate large numbers of inquiries, nor well acquainted with local
                        communities and key players, as is necessary for a referral system to
                        function effectively. Furthermore, changes in this area would adversely
                        affect recent improvements in customer service. Other customers of HUD’s
                        fair housing operation are state and local agencies enforcing state and
                        local laws. Relationships with these entities have developed over several
                        years and provide an important basis for sharing skills, knowledge, and
                        resources.

                        HUD  further contends that, depending on how Justice implemented the
                        functions, a transfer could produce subtle differences as well. HUD’s staff
                        are carefully trained in intake and interview skills, frequently have skills in
                        analyzing and handling difficult people, and are accustomed to handling
                        many challenging inquiries. Justice, by contrast, has more lawyers
                        handling the same functions, and to some inquirers, lawyers might be
                        more intimidating than HUD’s staff. Justice officials told us that if HUD’s
                        staff were transferred, the investigators would be difficult to place
                        because their grade structure is higher than that of Justice’s investigative
                        staff.


Interstate Land Sales   HUD’sfunction under the Interstate Land Sales Full Disclosure Act is to
                        ensure that certain developers of subdivisions (1) provide adequate



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                                disclosure to purchasers through the registration of their properties and
                                (2) do not engage in any fraudulent or deceitful transaction, practice, or
                                course of business in the sale of lots in their subdivisions. S. 1145 would
                                transfer this function to FTC.

                                The mission of both HUD and FTC is to protect consumers; therefore, both
                                agencies believe their missions are complementary. However, according to
                                FTC staff, the methods and type of personnel used by the two agencies to
                                handle consumer disclosure and fraud differ significantly. According to an
                                FTC official, FTC does not (1) administer registrations of this type, (2) have
                                an organization to handle individual complaints, or (3) have criminal
                                enforcement authority. Furthermore, HUD believes that developers might
                                not comply with the act unless steps were taken to ensure compliance
                                through adequate reviews of registration and exemption requests.

A Small Staff in Headquarters   Within HUD, the Interstate Land Sales and Real Estate Settlement
Currently Administers the       Procedures Act (RESPA) Division of the Office of Consumer and Regulatory
Program                         Affairs carries out the Department’s responsibilities under the Interstate
                                Land Sales Full Disclosure Act. Employees are directly assigned to the
                                program, and no field staff enforce the act.

                                FTC officials said that if this function were transferred to FTC, it would
                                probably be located in the Bureau of Consumer Protection, Division of
                                Enforcement. However, FTC has undergone significant downsizing and is
                                currently level-funded. FTC staff emphasized that the agency could not
                                effectively perform the function unless the legislation transferring the
                                program specifically allocated enough funds and full-time employees to
                                cover the program’s direct (e.g., salary costs for the transferred
                                employees) and indirect costs (e.g., increased overhead and administrative
                                costs that would be incurred in collecting and administering the fees and
                                maintaining the registration files.) Section 144 of S. 1145 would allow (but
                                would not require) OMB to make available to the receiving agency funds
                                that were available to HUD in connection with the transferred function.


Real Estate Settlement          RESPA  requires lenders to provide applicants for home mortgages with
Procedures                      timely good-faith estimates of the closing costs they will be expected to
                                pay upon settlement. The purpose of RESPA is to eliminate the payment of
                                unearned fees in connection with settlement services provided in
                                mortgage transactions. Section 8 of RESPA prohibits kickbacks and referral
                                fee arrangements. Specifically, it prohibits the giving or accepting of any
                                fee, kickback, or thing of value for referrals of real estate settlement



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                              service business involving mortgage loans. S. 1145 would transfer HUD’s
                              RESPA responsibilities to the Federal Reserve Board.


                              A Federal Reserve Board official indicated that S. 1145 does not represent
                              the first attempt to transfer HUD’s RESPA functions to the Board. Bills from
                              both houses of Congress dealing with regulatory relief previously called
                              for the transfer of HUD’s regulatory requirements under RESPA to the Board.4
                               According to this official, the Federal Reserve Chairman spoke in
                              opposition to the transfer, particularly of RESPA’s section 8 provision.

                              According to HUD officials, the intended goal of RESPA might change if it
                              were transferred to the Federal Reserve Board. The Board’s focus is on the
                              financial responsibilities of a central bank, not on mortgage settlement
                              services. In addition, unlike the Board, RESPA covers not only financial
                              institutions but also other lenders and other settlement providers, such as
                              real estate agents and brokers, title agents and underwriters, and
                              credit-reporting companies. The customers and clients of RESPA are among
                              HUD’s traditional constituents. New relationships and networks would have
                              to be established by the Federal Reserve Board in order to continue the
                              same level of service.

Minimal Number of HUD         According to an associate division director of the Federal Reserve Board,
Employees Currently Perform   the RESPA function, if transferred, would most likely be placed in the
in the Function               Board’s Division of Consumer and Community Affairs. This division could
                              accept the transfer, but it would have to request additional capacity from
                              the Board. In addition, this official believed that a complete transfer of the
                              function might not be the Board’s preference; the Board might want to
                              integrate the function into its current operations rather than administer
                              the function as HUD currently does.

                              According to HUD, five employees are assigned to the RESPA function. In
                              addition, six staff from HUD’s Office of General Counsel spend at least
                              50 percent of their time on RESPA issues. Under section 144 of S. 1145, OMB
                              can make available to the receiving agency funds that were available to
                              HUD in connection with the transferred function.




                              4
                               On March 30, 1995, H.R. 1362, the Financial Institutions Regulatory Relief Act of 1995, was introduced.
                              Under this bill, rule-writing authority for all provisions of RESPA would have been transferred to the
                              Board. Also on March 30, 1995, S. 650, the Economic Growth and Regulatory Paperwork Reduction Act
                              of 1995, was introduced. As under the House bill, rule-writing authority for all provisions of RESPA
                              would have been transferred to the Board.



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National Manufactured     The manufactured home (a dwelling that is not site-built) industry is the
Housing                   only segment of the American housing industry that is regulated by a
                          national building code and a federally controlled enforcement system. The
                          National Manufactured Housing Construction and Safety Standards Act of
                          1974 defines various criteria that HUD is to employ in establishing
                          standards for activities such as conducting research and testing and
                          evaluating relevant data on the construction and safety of manufactured
                          homes. HUD’s standards are considered mandatory and preemptive of all
                          state laws. The standards cover such topics as fire safety, body/frame
                          construction requirements, plumbing systems, and heating, cooling, and
                          fuel-burning systems. S. 1145 would transfer HUD’s manufactured housing
                          function to USDA.

                          USDA officials said the manufactured housing program complements the
                          core mission and objectives of the Department’s Rural Housing Service
                          (RHS), but USDA does not finance many manufactured homes. (Most
                          housing assistance involves homes with foundations.) In the few instances
                          when USDA is involved with manufactured housing, it follows HUD’s
                          building standards. Currently, USDA does not have the resources to set its
                          own standards.

                          HUD believes that the influence of the program on its constituents
                          (producers and home buyers) would probably diminish under USDA
                          because RHS lacks technical expertise in manufactured housing. In
                          addition, USDA might not be able to regulate manufactured housing in
                          urban and suburban developments, where its use has recently increased.
                          For example, Los Angeles changed its zoning laws to allow the use of
                          manufactured housing to promote affordable homeownership and help
                          stabilize troubled neighborhoods.

HUD Program Has Outside   According to HUD, 18 full-time permanent employees are assigned to its
Support                   Manufactured Housing and Standards Division, which has the principal
                          responsibility for administering the act’s requirements. The staff include
                          structural, electrical, and mechanical engineers, as well as management
                          staff with relevant academic backgrounds. In addition, the program
                          receives administrative support from the National Conference of States on
                          Building Codes and Standards, as well as 36 state administering agencies
                          and 25 private engineering and inspection agencies. State agencies, which
                          currently share HUD’s responsibility for enforcing this program’s
                          requirements, are predominantly located within housing-oriented
                          departments within their state governments and their missions are,
                          therefore, more likely to be compatible with HUD’s than with USDA’s.



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                   RHS currently has about 130 staff in headquarters and 5,056 staff in its field
                   offices. The staff are typically loan specialists who process and service
                   loans and guarantees for residential housing and for community and
                   business programs. RHS officials said that assuming the manufactured
                   housing function’s broad enforcement powers, such as the powers to issue
                   subpoenas and use injunctive relief, should not be a problem for RHS. RHS
                   employees are accustomed to ensuring that requirements are being met for
                   their respective programs.


Lead-Based Paint   HUD  is charged with providing safe and affordable housing and is focused
Abatement          on reducing childhood lead poisoning without disrupting the housing
                   market. HUD provides technical guidance to housing authorities and health
                   departments on detecting and controlling lead-based paint hazards in
                   housing, provides grants to local governments to adopt housing-based
                   strategies, and works to establish consensus among various housing
                   interests. For example, according to HUD, it has worked to develop sound
                   working relationships with the local housing and health departments that
                   administer HUD’s lead-based paint grant program and with the housing
                   industry in general.

                   S. 1145 would transfer any portion of HUD’s lead-based paint function that
                   was not repealed by the bill to EPA. EPA’s stated goal is to reduce lead
                   exposures to the fullest extent practicable and to avoid high blood lead
                   levels. The agency is particularly interested in reducing the risk of
                   exposure to children. While EPA officials believe that EPA’s and HUD’s
                   missions are complementary and that the agencies work closely together
                   to help reduce childhood lead poisoning, they find HUD’s mission to be
                   broader. Whereas HUD performs risk assessments and oversees the
                   management (i.e., abatement, interim controls) of lead-based paint in
                   public housing, EPA does not believe it has the expertise, experience, or
                   willingness to undertake these activities. However, EPA believes that it
                   could easily assimilate other activities that the bill proposes to transfer,
                   such as administering grants into its current structure.

                   Conversely, HUD said the mission of its lead-based paint program is not
                   congruent with EPA’s core mission. According to HUD, EPA is charged with
                   setting standards for lead levels in paint, dust, and soil; conducting
                   training; and accrediting laboratories. HUD also said that it has issued
                   proposed regulations to incorporate lead-based paint requirements across
                   all federally assisted housing programs at HUD. Without authority over the
                   housing programs, EPA would be unable to effectively monitor these



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                              requirements, according to HUD. In addition, HUD questioned the level of
                              priority that lead-based paint issues would receive at EPA.

A Transfer Would Pose         HUD’s  Office of Lead-Based Paint Abatement and Poisoning Prevention
Organizational and Staffing   relies primarily on its 25 full-time headquarters employees to operate the
Issues                        program. No field staff are assigned directly to the program. According to
                              EPA officials, if HUD’s lead-based paint program were transferred to EPA, the
                              likely recipient would be the Chemical Management Division (CMD)
                              within the Office of Pollution Prevention and Toxics. This division
                              currently has 58 staff, the majority of whom work on lead and asbestos
                              issues. If the entire function were transferred to EPA (with the 25 staff), the
                              division would have to reorganize to accept HUD’s staff. In addition,
                              accepting and integrating HUD’s Senior Executive Service and grade 15
                              positions into the division would be very difficult, given the division’s
                              grade structure.


Home Mortgage Disclosure      The Home Mortgage Disclosure Act (HMDA) was enacted to provide the
                              public with information for determining whether financial institutions are
                              serving the housing needs of their communities. Additionally, information
                              collected under the act is used to assist regulatory agencies in identifying
                              possible discriminatory lending patterns and enforcing antidiscrimination
                              statutes. HUD’s responsibilities under HMDA involve compiling submissions
                              from mortgage companies on the applications these companies receive
                              and on the home purchase and home improvement loans they originate or
                              purchase. S. 1145 would transfer this function to Treasury.

                              Treasury currently collects HMDA data from national banks and thrifts.
                              Specifically, the Office of the Comptroller of the Currency and the Office
                              of Thrift Supervision collect and apply HMDA information in the context of
                              compliance with the Community Reinvestment Act, the Equal Credit
                              Opportunity Act, and the Fair Housing Act. However, Treasury does not
                              regulate mortgage companies and lacks experience in the application of
                              HMDA data for such entities. Accordingly, Treasury believes that
                              transferring HUD’s data collection responsibilities under HMDA to Treasury
                              would be inconsistent with Treasury’s existing mission. Treasury said it
                              cannot predict what impact a transfer would have on the current users of
                              HMDA data or on the affordable housing market. Treasury assumes that
                              separating the collection from the application of the data for affordable
                              housing purposes could have a significant adverse impact on low- and
                              moderate-income home buyers and renters.




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                            Conversely, according to the HUD official overseeing HUD’s HMDA
                            responsibilities, the goal of the function would complement Treasury’s
                            mission. He pointed out that Treasury already oversees the act’s reporting
                            requirements for other agencies that regulate financial institutions,
                            including the Office of the Comptroller of the Currency and the Office of
                            Thrift Supervision. He added that the transfer should have no effect on the
                            program’s customers.

                            HUD’sresponsibilities under HMDA are generally carried out by five contract
                            employees who process the data submissions from about 1,000 lenders
                            annually. The HMDA function is highly automated. Two HUD employees
                            implement the Department’s HMDA responsibilities part-time.


Oversight of Fannie Mae,    Title XIII of the Housing and Community Development Act of 1992, known
Freddie Mac, and the Fund   as the Federal Housing Enterprises Financial Safety and Soundness Act of
Would Be Transferred to     1992, established the Office of Federal Housing Enterprise Oversight
                            (OFHEO) as an independent office within HUD. The primary function of
Treasury                    OFHEO is to ensure the financial safety and soundness and the capital
                            adequacy of Fannie Mae and Freddie Mac.

                            Under S. 1145, OFHEO would be transferred to Treasury, and the Director of
                            OFHEO would monitor the safety and soundness of the newly created
                            Federal Home Mortgage Insurance Fund. OFHEO believes that its program
                            goal complements Treasury’s core mission in that Treasury is broadly
                            concerned with minimizing the federal government’s borrowing needs and
                            with maintaining the smooth functioning of the nation’s financial markets.

                            Treasury’s Office of the Comptroller of the Currency and Office of Thrift
                            Supervision are the safety and soundness regulators for national banks
                            and savings and loan associations. To the extent that OFHEO’s mission is to
                            oversee the safety and soundness of Fannie Mae and Freddie Mac,
                            Treasury believes that this mission is consistent with one of its own roles.

                            However, OFHEO believes that the significant synergies created by its
                            current relationship with other parts of HUD would be lost, while no
                            important compensating benefits would be gained. HUD would save no
                            money from OFHEO’s departure; OFHEO is fully funded by assessments from
                            its enterprises and reimburses HUD for any services it uses. OFHEO believes
                            that it needs to be familiar and involved with broader national housing
                            policy issues. Fannie Mae and Freddie Mac have a dominant influence on
                            most aspects of housing finance. To properly evaluate the impact of safety



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and soundness regulations on the broader issues, as well as the impact of
other policy decisions on safety and soundness, OFHEO believes that it
should remain a part of the department making these decisions.

In addition, OFHEO believes that its goal could conflict with Treasury’s core
mission if appropriate safety and soundness actions for Fannie Mae,
Freddie Mac, or the federal home mortgage insurance fund were viewed,
at certain times, as having an undesirable effect on the performance of the
economy’s housing sector, the economy as a whole, or other depository
institutions.

According to OFHEO, S. 1145 does not require Treasury to make any
significant organizational changes because OFHEO would retain its
independent authority for internal management, budget, regulations,
examinations, and enforcement actions. Treasury agrees. In addition, S.
1145 would transfer all 64 of OFHEO’s permanent full-time employees to
Treasury. However, if its mission were expanded to monitor the safety and
soundness of the insurance fund as well as of Fannie Mae and Freddie
Mac, OFHEO believes it would likely have to hire additional staff.




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Appendix II

Financial Commitments Inherited by the
Resolution Agency

                 FHA  administers about 40 mortgage insurance programs, including
FHA’s Mortgage   programs for insuring single-family and multifamily mortgages, as well as
Insurance        loans for property improvements, cooperatives, condominiums, housing
                 for the elderly and the handicapped, and hospitals. In July 1996, FHA had
                 insurance on 6,490,546 single-family loans totaling about $364 billion. It
                 had insurance on an additional 15,876 multifamily loans and 474,750
                 property improvement and manufactured housing loans, totaling about
                 $48 billion and $6 billion, respectively. FHA also held 126,467 notes with an
                 unpaid principal balance totaling about $8.3 billion and held 26,531
                 properties acquired at a cost of about $2.1 billion. Overall, according to
                 FHA’s fiscal year 1995 financial statement, liabilities exceed assets by
                 $3.3 billion. According to Price Waterhouse’s latest actuarial study, the
                 Mutual Mortgage Insurance Fund—FHA’s principal insurance fund for
                 single-family housing—had an economic net worth of over $7 billion as of
                 September 30, 1995.1 That is, the cash available to the fund, plus the net
                 present value of all future cash inflows and outflows expected to result
                 from the outstanding mortgages in the fund, was over $7 billion.

                 The bill would require the resolution agency to sell FHA’s mortgage
                 insurance interests so that by the end of its third year, the agency would
                 realize at least $100 million—to be used to capitalize a newly created
                 insurance fund in Treasury. These actions must be done in accordance
                 with a plan to be prepared by the resolution agency within 6 months of the
                 bill’s enactment and submitted to the Office of Management and Budget
                 (OMB) and the Congress. OMB must, in turn, certify that the portion of the
                 plan concerning the sale of FHA’s mortgage insurance interests will result
                 in no net cost to the federal government. The resolution agency faces
                 important limitations in accomplishing this sale, and the bill recognizes
                 that the sale of FHA’s insurance interests would not relieve the federal
                 government of its original commitment of the full faith and credit of the
                 United States to cover 100 percent of any losses that lenders might sustain
                 from these loans. In addition, the bill would allow the resolution agency to
                 target the most valuable or marketable insurance interests for sale during
                 the first 3 years and would require the resolution agency to maximize the
                 net present value return from the sale of these interests without incurring
                 any net cost to the federal government. The bill would also require the

                 1
                  FHA has four insurance funds—the Mutual Mortgage Insurance (MMI), General Insurance (GI),
                 Cooperative Management Housing Insurance (CMHI), and Special Risk Insurance (SRI) funds. The
                 MMI fund provides mortgage insurance principally for 30-year fixed rate single-family home mortgages
                 and is required to be actuarially sound. The GI fund provides mortgage insurance for multifamily
                 properties, including nursing homes and hospitals, and is not required to be actuarially sound. In fact,
                 the GI fund is dependent on budgetary appropriations to sustain operations. The CMHI and SRI funds
                 have had very little activity in recent years and, according to HUD’s Inspector General, represent a
                 comparatively small exposure to additional losses.



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resolution agency to protect investors in and lenders for mortgages
insured by FHA and to minimize the risk of loss to the federal government
(including Ginnie Mae) resulting from the nonpayment of insurance claims
on defaulted mortgages insured by FHA.

While the single-family loans insured by FHA are backed by reserves and
FHA’s single-family portfolio has a positive net economic value, in total FHA
had a negative net worth as of September 30, 1995. According to FHA
officials, the resolution agency would be unlikely to realize the minimum
$100 million in initial capitalization from the sale of FHA’s mortgage
insurance interests. Such a sale would reduce the capital reserves of the
existing fund without proportionally reducing the federal government’s
exposure to losses, according to FHA. Therefore, FHA might not be able to
sell its mortgage insurance interests without incurring a net cost to the
federal government. In contrast, officials from the Mortgage Insurance
Companies of America believe that $100 million could be realized from the
sale of FHA’s mortgage insurance interests. They note that potential
customers include the reinsurance market, mortgage insurance
companies, and other investors and syndicates. The value to purchasers
would depend on the model they would use for estimating the value of the
portfolio. Furthermore, the sale of FHA’s insurance portfolio might allow
some private mortgage insurers to better diversify their risk. Our analysis
shows that the FHA-insured single-family mortgages made in 1983 and in
earlier years would have net positive cash flows from 1998 through the
end of their terms and would, therefore, be likely candidates for purchase
by the private sector. While the present value of the net cash flows from
this part of FHA’s portfolio exceeds $100 million, any private investor
would likely require a discount in purchasing these cash flows because
private investors—unlike FHA—need to earn profits sufficient to cover tax
expenses and shareholders’ returns while maintaining sufficient capital
reserves.

Selling FHA’s mortgage insurance interests would not relieve the federal
government of its initial commitment to cover 100 percent of any losses
sustained by lenders holding FHA-insured loans. As noted, FHA-insured
single-family loans originated in 1983 and earlier would be likely
candidates for sale if a purchaser were required to pay anticipated claims.
However, if a purchaser were also required to refund any up-front
premiums for prepaid loans,2 FHA would likely need to pay the purchaser a
fee to cover a portion of the up-front premium. The remaining years on the

2
 Loans insured between October 1984 through June 1991 do not have annual premiums. In 1998, loans
insured during fiscal years 1993, 1994, and 1995 will not have aged to the point where annual premiums
plus proceeds from the sale of properties exceed expected claims and administrative expenses.



Page 93                                             GAO/RCED-97-36 Proposal to Dismantle HUD
                  Appendix II
                  Financial Commitments Inherited by the
                  Resolution Agency




                  insured single-family portfolio extend beyond the life of the resolution
                  agency. The unpaid principal balance on the FHA-insured single-family
                  loans originated in 1983 and earlier represents only about 5 percent of the
                  entire single-family insured portfolio. The unsold portfolio would be
                  transferred to Treasury. Yet any lender that held an FHA-insured mortgage
                  would need to be protected, even when the loan’s mortgage insurance
                  interests had been sold. That is, the federal government would remain
                  liable for any claims by a lender holding an FHA-insured loan if the entity
                  that purchased the mortgage insurance interest proved unable to pay the
                  claim. In effect, the sale of mortgage insurance interests might not relieve
                  the federal government of all liability for future claims. To protect itself
                  against the possibility of a purchaser’s being unable to pay claims, the
                  federal government could require that the purchaser meet certain
                  conditions, including having a AAA rating and establishing an escrow
                  account, according to officials of the Mortgage Insurance Companies of
                  America.


                  The Government National Mortgage Association (Ginnie Mae) guarantees
Guarantees of     the timely payment of principal and interest on privately issued securities
Mortgage-Backed   that are backed by pools of FHA-insured and VA- and Rural Housing Service
Securities        (RHS)-guaranteed mortgages. In fact, nearly all FHA-insured, VA-guaranteed,
                  and RHS-guaranteed mortgages are in Ginnie Mae pools. The maturities on
                  these guarantees are for up to 40 years. At the end of fiscal year 1995,
                  Ginnie Mae had outstanding guarantees of mortgage-backed securities
                  totaling $464 billion. The program had negative net outlays of $464 million
                  in fiscal year 1995. The Mortgage-Backed Securities Program provides a
                  means for channeling funds from the nation’s securities markets into the
                  housing market. The federal government’s full-faith-and-credit guaranty of
                  these securities makes them widely accepted in sectors of the capital
                  markets that otherwise would not be likely to supply funds to the
                  mortgage market. Approximately 70 percent of the funds used to purchase
                  Ginnie Mae-guaranteed securities come from nontraditional mortgage
                  investors, including pension and retirement funds, life insurance
                  companies, and individuals.

                  The bill would terminate Ginnie Mae and require the resolution agency to
                  establish a plan for winding up its affairs. Specifically, the bill would
                  transfer Ginnie Mae’s authority to the resolution agency, but only to the
                  extent necessary to fulfill the outstanding obligations and settle the
                  business of Ginnie Mae. According to the bill, the resolution agency’s plan
                  for winding up Ginnie Mae’s affairs might provide for Fannie Mae, Freddie



                  Page 94                                  GAO/RCED-97-36 Proposal to Dismantle HUD
                      Appendix II
                      Financial Commitments Inherited by the
                      Resolution Agency




                      Mac, or other private secondary mortgage market entities to assume
                      Ginnie Mae’s secondary market functions. The bill also specifies that the
                      plan should include any recommendations for legislation that might be
                      needed for terminating Ginnie Mae and should be submitted to the
                      Congress within the first year of the bill’s enactment.

                      Ginnie Mae’s pledge to back investments with the full faith and credit of
                      the United States would be an important restriction on any effort to
                      resolve Ginnie Mae’s outstanding guarantees. The bill recognizes these
                      commitments in section 143, which provides that all agreements in effect
                      prior to the transfer of a function shall continue in effect according to their
                      terms until modified, terminated, superseded, set aside, or revoked in
                      accordance with law. While the bill does not specify how these guarantees
                      should be resolved, the resolution agency would need to administer them
                      during its term and arrange for their continued administration beyond its
                      term. In planning to wind up Ginnie Mae’s functions, the resolution agency
                      would also need to consider the impact of Ginnie Mae’s termination on
                      veterans and rural home buyers whose loans would no longer be
                      securitized by Ginnie Mae.


                      To increase the supply of affordable housing, HUD provided contracts to
Section 8 Contracts   developers that guaranteed for a certain time period the payment to
                      landlords of a portion of the rent on units in those properties. These
                      contracts were important considerations for the lenders that provided
                      mortgages for the projects. In addition, many of the loans for these
                      projects were insured by FHA. According to HUD’s latest data, about
                      1.4 million units at about 20,400 multifamily properties receive section 8
                      project-based subsidies. Of these properties, 8,636 have FHA-insured
                      mortgages whose unpaid principal balances total nearly $18 billion. Over
                      time, these properties’ section 8 subsidies have increased dramatically,
                      and today many of the section 8 contracts are about to expire. According
                      to April 1996 data, contracts covering about 85 percent of the
                      project-based section 8 units in the insured section 8 portfolio will expire
                      by the end of 2002 and about 98 percent by the end of 2006. Without a
                      continuation of the subsidy, many of the projects would not be
                      economically viable. About half of the project-based section 8 units in the
                      uninsured section 8 portfolio will expire after 2002. For FHA-insured
                      properties with section 8 contracts, a reduction in the contract would lead
                      to defaults and claims against FHA’s insurance fund.




                      Page 95                                  GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix II
Financial Commitments Inherited by the
Resolution Agency




Recognizing that many properties could not cover expenses and
borrowers might eventually default on their mortgages if the properties
were forced to compete in the commercial market without their
project-based section 8 subsidies, in May 1995 HUD proposed restructuring
FHA-insured mortgages to bring income and expenses into line. This
proposal—called “mark-to-market”—has undergone some changes since,
and the fiscal year 1997 appropriation for HUD includes a demonstration
program covering properties with contract rents that exceed 120 percent
of their area’s fair market rents. Under this demonstration—for owners
who agree to participate—HUD has the flexibility to use tools such as
reinsurance, debt forgiveness, and second mortgages to decrease the
escalating costs of section 8 rental assistance, prevent mortgage defaults,
protect residents against dislocation, and resolve associated tax issues.
Owners of projects with rents exceeding 120 percent of their area’s fair
market rents who do not choose to participate in the demonstration would
have their contract rents reduced to 120 percent of the fair market rents.
Also, the appropriation requires HUD, if requested by the project owner, to
renew for 1 year contracts with rents below 120 percent of the fair market
rents.

As described in chapter 2, the bill envisions providing housing assistance
to individuals through a voucher program, rather than through public
housing, project-based assistance, and voucher and certificate programs,
as HUD does today. Moving to a voucher-only program would require the
resolution agency to resolve existing project-based section 8 contracts that
expire during the 5-year transition period. In fact, the bill includes
mark-to-market provisions that would authorize the resolution agency to
take the actions necessary to ensure the financial viability of multifamily
housing projects with project-based rental assistance contracts expiring
before the end of the resolution agency’s term. Specifically, the
mark-to-market provisions in the bill allow for remedies to make
economically viable projects with section 8 assistance
contracts—particularly those that have FHA-insured mortgages. The bill
would also protect the validity of the section 8 assistance commitments
made before the effective date of the bill; any section 8 assistance
commitments still in effect upon the termination of the resolution agency
would be transferred to the voucher administrator in HHS.

The resolution agency faces a challenge in reducing the costs of subsidies
for multifamily housing projects with project-based assistance contracts
while maintaining the federal government’s commitment to the projects’
owners. Furthermore, not renewing section 8 contracts or reducing the



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                   Appendix II
                   Financial Commitments Inherited by the
                   Resolution Agency




                   federal subsidy could have financial consequences for the state housing
                   finance agencies (HFA) that have provided financing for some of the
                   projects. In fact, the 1997 appropriation specifically exempts state HFAs
                   from the contract rent ceiling of 120 percent of the fair market rent. That
                   is, section 8 contracts for projects with financing or insurance from state
                   HFAs may be renewed at their current contract rents even if these rents
                   exceed 120 percent of the fair market rents. While not placing any of its
                   section 8 ratings under review, in July 1995 Moody’s Investors Service
                   disclosed to investors its concern that legislative proposals that negatively
                   affect revenue streams of section 8 projects could adversely affect the
                   financial feasibility of those projects. To induce projects’ owners to
                   voluntarily renegotiate their section 8 contracts, the resolution agency
                   would need to provide a financial incentive, including debt forgiveness as
                   well as a mechanism to offset or mitigate any tax consequences of debt
                   forgiveness. For any section 8 contracts that expire after the termination
                   of the resolution agency, the federal commitments would endure and be
                   administered by the voucher administrator.


                   The bill would merge HUD’s programs/grants for community revitalization,
CDBG Section 108   housing development, and assistance for the homeless into one block
Loan Guarantees    grant that would be administered by a newly created agency. The new
                   agency would inherit HUD’s outstanding commitments for loan guarantees
                   made under one of the programs to be merged—the Community
                   Development Block Grant (CDBG) program. Under CDBG, communities and
                   states that receive grants can, under section 108 of the Housing and
                   Community Development Act of 1974, apply for additional financing in the
                   form of loans. HUD guarantees notes issued by grantees for up to five times
                   their current year’s CDBG grant and treats future CDBG grant funds as
                   collateral for the loans. The proceeds from these notes can be used to
                   finance community and economic development projects that are too large
                   to be financed from the grantee’s annual grant.

                   The amount of the outstanding section 108 loan guarantees as of
                   September 30, 1995, was $678 million. The maximum repayment period for
                   these loans is 20 years. While the loan guarantees are covered by the
                   grantees’ future program funds, the decline in funding for CDBG entitlement
                   grantees envisioned in the bill would make repaying lenders more difficult
                   for these grantees, potentially resulting in greater claims against HUD,
                   which guarantees these loans.




                   Page 97                                  GAO/RCED-97-36 Proposal to Dismantle HUD
                  Appendix II
                  Financial Commitments Inherited by the
                  Resolution Agency




                  In addition, HUD’s role as a collection agent for $131.4 million in
                  outstanding notes from section 108 offerings would have to be transferred
                  to another agency. Financing for the section 108 program is currently
                  provided through the sale of guaranteed notes in periodic public offerings.
                  However, prior to July 1, 1986, the guaranteed notes were purchased by
                  the Federal Financing Bank, under the Department of the Treasury.
                  Although the notes are no longer sold to the Federal Financing Bank, HUD
                  continues to serve as a collection agent for the bank.


                  Several HUD programs have the authority to borrow funds for their
Other Funds       operations. During the 1960s, 1970s, and 1980s, public housing authorities
Borrowed by HUD   (PHA) and Indian housing authorities borrowed funds from the private
                  sector and from the Federal Financing Bank to finance the construction
                  and rehabilitation of low-rent housing. These funds are being repaid by
                  HUD on behalf of the PHAs. In addition, HUD borrows from Treasury to
                  finance section 202 loans, and FHA’s Mutual Mortgage Insurance fund
                  borrows to cover cash shortfalls. As of September 30, 1995, HUD projected
                  that its payments of principal on the borrowed funds would total
                  $15.3 billion. Additionally, HUD reported that during fiscal years 1994 and
                  1995, it paid $1.2 billion in interest on the borrowed funds.




                  Page 98                                  GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix III

Comments From the Department of Housing
and Urban Development

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2.




                             Page 99   GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix III
                 Comments From the Department of Housing
                 and Urban Development




See comment 3.




See comment 4.




See comment 5.




See comment 6.




See comment 7.




                 Page 100                                  GAO/RCED-97-36 Proposal to Dismantle HUD
                  Appendix III
                  Comments From the Department of Housing
                  and Urban Development




See comments 7
and 8.




See comment 9.




See comment 10.




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                  Appendix III
                  Comments From the Department of Housing
                  and Urban Development




See comment 10.




                  Page 102                                  GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix III
Comments From the Department of Housing
and Urban Development




Page 103                                  GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix III
                 Comments From the Department of Housing
                 and Urban Development




                 The following are GAO’s comments on the Department of Housing and
                 Urban Development’s letter dated January 24, 1997.


                 1. After reviewing HUD’s comments, we added information to the report to
GAO’s Comments   recognize additional consequences to HUD’s customers of the proposed
                 changes to FHA. HUD expressed concern that dismantlement would result in
                 the loss of a national housing and community development policy and
                 focus. This is a policy question appropriately decided by the Congress and
                 the administration. In response to HUD’s comments about the difficulties
                 involved in transferring HUD’s functions to other agencies or other levels of
                 government, we added several references to HUD’s position in the report.
                 All three issues are discussed in more detail in the comments that follow.

                 2. We believe that the report examines the bill’s potential impact on HUD’s
                 customers and discusses the capacity of the states and other federal
                 agencies to assume HUD’s functions and the tasks to be accomplished in
                 dismantling HUD within the 5 years specified in the bill. HUD’s principal
                 criticism of our analysis is that the report “. . . amounts to little more than
                 a six-state opinion poll. . .”. However, HUD does not recognize that our
                 visits to these states were but one method used to collect information.
                 Chapter 1 includes a description of the methodology we used in
                 completing our analysis. In addition to the visits—the results of which we
                 recognize may not be projected to all 50 states—we met with officials from
                 national associations representing state and local governments; surveyed
                 community development officials from the 47 states represented by the
                 Council of State Community Development Agencies; reviewed existing
                 literature on states’ capacity; discussed S. 1145 with officials from the
                 Office of Management and Budget (OMB), HUD, the National Academy of
                 Public Administration, interest groups and associations, and think tanks;
                 interviewed and gathered studies and position papers from senior HUD
                 officials, think tanks, and interest groups representing HUD’s clients,
                 including tenant organizations, public housing authorities, lenders, major
                 bond-rating agencies, government-sponsored enterprises, private mortgage
                 insurers, state agencies, and local governments; and conducted interviews
                 and collected documentation and studies from the federal agencies
                 designated to receive HUD’s functions and from HUD. We also drew on our
                 own prior and ongoing work on HUD and on reorganizing federal agencies.

                 3. The bill’s impact on low- and moderate-income customers and their
                 communities are described in chapters 2 and 3. While we recognize that
                 the bill could adversely affect the availability of mortgage capital, supply



                 Page 104                                  GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix III
Comments From the Department of Housing
and Urban Development




of affordable housing, and vulnerable populations—for example—we
cannot say with certainty to what degree these customers would be
adversely affected.

4. While HUD believes that eliminating the federal backing for mortgage
insurance would exclude clients now served, we believe the number of
prospective borrowers who would be unable to obtain a home mortgage
under the bill’s provisions is uncertain. While our analysis recognizes the
percentage of FHA borrowers who, on the basis of the loans they received,
did not meet the most liberal private-sector underwriting guidelines, we
cannot say with certainty that all of these borrowers could not qualify for
other mortgages. In addition, because the bill does not specify the terms
for sharing risk with qualified mortgage insurers, we cannot say with
certainty how many borrowers would be affected. In this regard, we share
HUD’s concern that mortgages insured under the risk-sharing provisions
might be those products already offered on the private market.
Specifically, we recognize in the report that the restriction on the
loan-to-value ratio alone replicates features of products already offered by
the private market.

5. We expanded our description in chapter 3 of FHA’s role in the
multifamily mortgage market to reflect this point.

6. Chapter 2 of the report mentions several impacts on communities,
including possible reductions in the supply of affordable housing. It also
notes the uneven nature of housing markets nationwide that makes
across-the-board approaches to housing assistance unworkable. In
addition, we cite the findings from our 1995 report that the condition of
the existing housing stock and its per-unit operating costs vary
tremendously.

7. Chapter 2 discusses the 40-percent cut in these programs and the
potential impact of consolidating these programs on vulnerable
populations. We specifically mention several studies that support the
concern of some stakeholders that under a consolidated block grant, the
states and localities would reduce the funding targeted to very poor
households. However, it is not possible to predict the exact impact of
these potential funding cuts because the bill gives states and localities
increased flexibility in making spending decisions. We have no way to
assess with any certainty the spending choices states and communities
might make.




Page 105                                  GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix III
Comments From the Department of Housing
and Urban Development




8. Chapter 3 discusses the impact on veterans and rural residents of
eliminating Ginnie Mae. We made no changes in response to HUD’s
comments.

9. Assessing the need for a single cabinet-level agency to provide
leadership, coordination, and focus on housing and community
development was outside the scope of this report, as agreed with our
requesters. However, both the executive summary and the body of the
report discuss HUD’s position that this bill would eliminate the focus on
housing and community development that it has provided as a
cabinet-level department.

10. Chapters 4 and 5 describe the difficulties of transferring HUD’s
functions. We assessed the compatibility of HUD’s missions with those of
the receiving agencies; differences in the agencies’ organizational
structures, staffing and expertise; and the limitations on resolving HUD’s
current commitments. However, we have made a number of changes in the
report to further clarify and emphasize HUD’s perspective on some of these
difficulties. Finally, as agreed with the requesters’ offices, we did not
estimate the costs of transferring these functions and creating new
agencies, as envisioned in the bill, because CBO plans to publish a cost
estimate in a separate report.




Page 106                                  GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix IV

Comments From the Department of Health
and Human Services

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2.




                             Page 107   GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix IV
                 Comments From the Department of Health
                 and Human Services




                 The following are GAO’s comments on the Department of Health and
                 Human Service’s letter dated January 23, 1997.


                 1. We added several references to HHS’ position in the report, noting the
GAO’s Comments   Department’s belief that the proposal to shift some of HUD’s programs to
                 HHS is not well advised and that the shift may provide little or no cost
                 savings to the federal government. However, the need for a cabinet-level
                 department to address housing and community development issues is a
                 policy question for the Congress and the administration to decide.
                 Additionally, in appendix I, we mention HHS’ concerns about the proposed
                 transfers of certain programs, including the concern that an extensive field
                 structure would be needed to administer some programs.

                 2. Projections of the bill’s impact on the federal budget will be developed
                 and published by CBO in a separate report. Chapter 2 points out that
                 although the states and localities would have greater flexibility in setting
                 priorities, the funding cuts envisioned in the bill and the increase in the
                 proportion of funds for entitlement communities would reduce either the
                 amounts of the grants to the 3,000 nonmetropolitan areas or the number of
                 communities receiving grants. We also note that service to the poorest
                 clients could decline, though the effects of the funding cuts are uncertain,
                 since the extent to which the states and localities would use their own
                 funds to offset the funding reductions is unknown.




                 Page 108                                 GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix V

Comments From the Office of Management
and Budget

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 109   GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix V
Comments From the Office of Management
and Budget




Page 110                                 GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix V
                 Comments From the Office of Management
                 and Budget




                 The following are GAO’s comments on the Office of Management and
                 Budget’s (OMB) letter dated January 6, 1997.


                 1. At the end of the report’s executive summary, we note that OMB strongly
GAO’s Comments   disagrees with the provisions of S. 1145 and believes that HUD’s “functions
                 should be evaluated on their own merits, not as a strategy for reducing the
                 deficit. . . .” OMB also observed that assigning HUD’s functions to other
                 agencies would be counterproductive relative to HUD’s reinvention goals.
                 We do not take a position on these issues because we believe they are
                 policy questions for the Congress and the administration to decide.




                 Page 111                                 GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix VI

Comments From the Department of the
Treasury

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment1.




                             Page 112   GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix VI
                 Comments From the Department of the
                 Treasury




                 The following are GAO’s comments on the Department of Treasury’s letter
                 dated January 14, 1997.


                 1. At the end of the report’s executive summary, we note that the
GAO’s Comments   Department of the Treasury disagrees with the provisions of S. 1145 and
                 supports a cabinet-level department to provide focus for housing and
                 community development issues. The need for a cabinet-level department
                 to address housing and community development issues is a policy
                 question for the Congress and administration to decide.




                 Page 113                              GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix VII

Comments From the Environmental
Protection Agency

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 114   GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix VII
                 Comments From the Environmental
                 Protection Agency




See comment 2.




See comment 2.




See comment 2.




See comment 3.




                 Page 115                          GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix VII
                 Comments From the Environmental
                 Protection Agency




See comment 4.




See comment 5.




See comment 1.




                 Page 116                          GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix VII
Comments From the Environmental
Protection Agency




Page 117                          GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix VII
                 Comments From the Environmental
                 Protection Agency




                 The following are GAO’s comments on the Environmental Protection
                 Agency’s (EPA) memorandum dated January 16, 1997, and letter dated
                 January 24, 1997.


                 1. In chapter 4, we note EPA’s concern about assuming a broad role in
GAO’s Comments   managing lead-based paint in public housing, and in appendix I we cite
                 EPA’s concern that the agency does not have the expertise, experience, or
                 willingness to manage public housing. However, appendix I also notes that
                 EPA could assimilate certain specific lead-based paint activities, such as
                 grants administration.

                 2. We revised the sentences to address EPA’s comments.

                 3. The paragraph cited by EPA discussed HUD’s assistance to housing
                 authorities and health departments in detecting and controlling lead-based
                 paint hazards in housing. This assistance is not limited to public housing,
                 as EPA suggests. HUD also oversees a grant program for controlling
                 lead-based paint in private low-income housing. Therefore, we did not
                 revise the paragraph.

                 4. The formal comments referenced by EPA are contained in its January 16,
                 1997, memorandum addressed earlier in this appendix.

                 5. Our report states that EPA and HUD work closely together to help reduce
                 childhood lead poisoning. However, appendix I also notes EPA’s concern
                 that although the agencies’ missions are complementary, HUD’s mission is
                 broader—HUD focuses on reducing childhood lead poisoning while still
                 managing housing so that the housing market is not disrupted.




                 Page 118                              GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix VIII

Comments From the Federal Reserve Board




                Page 119   GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix IX

Comments From the Department of
Agriculture

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 120   GAO/RCED-97-36 Proposal to Dismantle HUD
                 Appendix IX
                 Comments From the Department of
                 Agriculture




                 The following are GAO’s comments on the Department of Agriculture’s
                 letter dated January 8, 1997.


                 1. Appendix I notes that officials within Department of Agriculture’s Rural
GAO’s Comments   Housing Service (RHS) stated that assuming the manufactured housing
                 function’s broad enforcement powers, such as the powers to issue
                 subpoenas and use injunctive relief, should not be a problem for RHS.
                 Additionally, section 144 of S. 1145 states that transferred functions would
                 include the funds associated with the functions.




                 Page 121                               GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix X

Major Contributors to This Report


                       R. Tim Baden
Resources,             Susan Beekman
Community, and         Leslie Black-Plumeau
Economic               Erin Bozik
                       Larry Dyckman
Development Division   Bess Eisenstadt
                       Mathew Scire


                       Scott Derrick
General Government     Frank Minore
Division
                       Anne Olson
Atlanta Field Office   Paige Smith


                       Diana Gilman
Boston Field Office    Rich LaMore




                       Page 122               GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix X
Major Contributors to This Report




Page 123                            GAO/RCED-97-36 Proposal to Dismantle HUD
Appendix X
Major Contributors to This Report




Page 124                            GAO/RCED-97-36 Proposal to Dismantle HUD
Related GAO Products


              High-Risk Series: Department of Housing and Urban Development
              (GAO/HR-97-12, Feb. 1997).

              Multifamily Housing: Effects of HUD’s Portfolio Reengineering Proposal
              (GAO/RCED-97-7, Nov. 1, 1996)

              Homeownership: FHA’s Role in Helping People Obtain Home Mortgages
              (GAO/RCED-96-123, Aug. 13, 1996).

              Department of Energy: Observations on the Future of DOE
              (GAO/T-RCED-96-224, July 23, 1996).

              Housing Enterprises: Potential Impacts of Severing Government
              Sponsorship (GAO/GGD-96-120, May 13, 1996).

              FHA Hospital Mortgage Insurance Program: Health Care Trends and
              Portfolio Concentration Could Affect Program Stability (GAO/HEHS-96-29,
              Feb. 27, 1996).

              Homeownership: Mixed Results and High Costs Raise Concerns About
              HUD’s Mortgage Assignment Program (GAO/RCED-96-2, Oct. 18, 1995).


              Multifamily Housing: Issues and Options to Consider in Revising HUD’s
              Low-Income Housing Preservation Program (GAO/T-RCED-96-29, Oct. 17,
              1995).

              Housing and Urban Development: Public and Assisted Housing Reform
              (GAO/T-RCED-96-25, Oct. 13, 1995).

              Housing and Urban Development: Public and Assisted Housing Reform
              (GAO/T-RCED-96-22, Oct. 13, 1995).

              Commerce Dismantlement: Observations on Proposed Implementation
              Mechanism (GAO/T-GGD-95-233, Sept. 6, 1995).

              Block Grants: Issues in Designing Accountability Provisions
              (GAO/AIMD-95-226, Sept. 1, 1995).

              HUD Management: Greater Oversight Needed of FHA’s Nursing Home
              Insurance Program (GAO/RCED-95-214, Aug. 25, 1995).




              Page 125                              GAO/RCED-97-36 Proposal to Dismantle HUD
Related GAO Products




Property Disposition: Information on HUD’s Acquisition and Disposition of
Single-Family Properties (GAO/RCED-95-144FS, July 24, 1995).

Housing and Urban Development: HUD’s Reinvention Blueprint Raises
Budget Issues and Opportunities (GAO/T-RCED-95-196, July 13, 1995).

Public Housing: Converting to Housing Certificates Raises Major
Questions About Cost (GAO/RCED-95-195, June 20, 1995).

Purpose of, Funding for, and Views on Certain HUD Programs
(GAO/RCED-95-189R, June 20, 1995).

Multifamily Housing: HUD’s Mart-to-Market Proposal (GAO/T-RCED-95-230,
June 15, 1995).

Multifamily Housing: HUD’s Proposal to Restructure Its Portfolio
(GAO/T-RCED-95-226, June 13, 1995).

Government Restructuring: Identifying Potential Duplication in Federal
Missions and Approaches (GAO/T-AIMD-95-161, June 7, 1995).

HUD Management: FHA’s Multifamily Loan Loss Reserves and Default
Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995).

Program Consolidation: Budgetary Implications and Other Issues
(GAO/T-AIMD-95-145, May 23, 1995).

Government Reorganization: Issues and Principles (GAO/T-GGD/AIMD-95-166,
May 17, 1995).

Resolution Trust Corporation: Management Improvements Reduce Risks,
but Transition Challenges Remain (GAO/T-GGD-95-163, May 16, 1995).

Multifamily Housing: Better Direction and Oversight by HUD Needed for
Properties Sold With Rent Restrictions (GAO/RCED-95-72, Mar. 22, 1995).

Housing and Urban Development: Reforms at HUD and Issues for Its Future
(GAO/T-RCED-95-129, Mar. 14, 1995).

Housing and Urban Development: Reforms at HUD and Issues for Its Future
(GAO/RCED-95-108, Feb. 22, 1995).




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Related GAO Products




Housing and Urban Development: Reinvention and Budget Issues
(GAO/T-RCED-95-112, Feb. 22, 1995).

Block Grants: Characteristics, Experiences, and Lessons Learned
(GAO/HEHS-95-74, Feb. 9, 1995).

Community Development: Comprehensive Approaches Address Multiple
Needs but Are Challenging to Implement (GAO/RCED/HEHS-95-69, Feb. 8, 1995).

High-Risk Series: Department of Housing and Urban Development
(GAO/HR-95-11, Feb. 1995).

Housing and Urban Development: Major Management and Budget Issues
(GAO/T-RCED-95-89, Jan. 24, 1995 and GAO/T-RCED-95-86, Jan. 19, 1995).

Reengineering Organizations: Results of a GAO Symposium (GAO/NSIAD-95-34,
Dec. 13, 1994).

Federally Assisted Housing: Expanding HUD’s Options for Dealing With
Physically Distressed Properties (GAO/T-RCED-95-38, Oct. 6, 1994).

Rural Development: Patchwork of Federal Programs Needs to Be
Reappraised (GAO/RCED-94-165, July 28, 1994).

Federally Assisted Housing: Condition of Some Properties Receiving
Section 8 Project-Based Assistance Is Below Housing Quality Standards
(GAO/T-RCED-94-273, July 26, 1994, and Video, GAO/RCED-94-01VR).

Public Housing: Information on Backlogged Modernization Funds
(GAO/RCED-94-217FS, July 15, 1994).

Homelessness: McKinney Act Programs Provide Assistance but Are Not
Designed to Be the Solution (GAO/RCED-94-37, May 31, 1994).

Section 8 Rental Housing: Merging Assistance Programs Has Benefits but
Raises Implementation Issues (GAO/RCED-94-85, May 27, 1994).

Lead-Based Paint Poisoning: Children in Section 8 Tenant-Based Housing
Are Not Adequately Protected (GAO/RCED-94-137, May 13, 1994).

HUDInformation Resources: Strategic Focus and Improved Management
Controls Needed (GAO/AIMD-94-34, Apr. 14, 1994).



Page 127                              GAO/RCED-97-36 Proposal to Dismantle HUD
           Related GAO Products




           Multifamily Housing: Status of HUD’s Multifamily Loan Portfolios
           (GAO/RCED-94-173FS, Apr. 12, 1994).

           Community Development: Block Grant Economic Development Activities
           Reflect Local Priorities (GAO/RCED-94-108, Feb. 17, 1994).

           Multifamily Housing: Status of HUD’s Multifamily Loan Portfolios
           (GAO/RCED-94-3, Oct. 27, 1993).

           State and Local Finances: Some Jurisdictions Confronted by Short- and
           Long-Term Problems (GAO/HRD-94-1, Oct. 6, 1993).

           Government National Mortgage Association: Greater Staffing Flexibility
           Needed to Improve Management (GAO/RCED-93-100, June 30, 1993).

           Multifamily Housing: Impediments to Disposition of Properties Owned by
           the Department of Housing and Urban Development (GAO/T-RCED-93-37,
           May 12, 1993).

           HUDReforms: Progress Made Since the HUD Scandals but Much Work
           Remains (GAO/RCED-92-46, Jan. 31, 1992).




(385625)   Page 128                              GAO/RCED-97-36 Proposal to Dismantle HUD
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