TYPE: COMMITTEE HEARING

LENGTH: 19623 words

COMMITTEE: HOUSING AND URBAN DEVELOPMENT SUBCOMMITTEE

SUBCOMMITTEE: SENATE BANKING

HEADLINE: U.S. SENATOR PAUL SARBANES (D-MD) HOLDS HEARING ON FY 2003 BUDGET: HUD

SPEAKER:
U.S. SENATOR PAUL SARBANES (D-MD), CHAIRMAN

LOCATION: WASHINGTON, D.C.

WITNESSES:

MEL MARTINEZ, U.S. SECRETARY OF HOUSING AND URBAN DEVELOPMENT
TOM JONES, MANAGING DIRECTOR, HABITAT FOR HUMANITY INTERNATIONAL
SHEILA CROWLEY, PRESIDENT, NATIONAL LOW INCOME HOUSING COALITION

BODY:

 
U.S. SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
HOLDS A HEARING ON FY '03 BUDGET REQUEST OF THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
 
FEBRUARY 13, 2002
 
SPEAKERS:
U.S. SENATOR PAUL S. SARBANES (D-MD)
CHAIRMAN
U.S. SENATOR CHRISTOPHER J. DODD (D-CT)
U.S. SENATOR TIM JOHNSON (D-SD)
U.S. SENATOR JACK REED (D-RI)
U.S. SENATOR CHARLES SCHUMER (D-NY)
U.S. SENATOR EVAN BAYH (D-IN)
U.S. SENATOR ZELL MILLER (D-GA)
U.S. SENATOR THOMAS CARPER (D-DE)
U.S. SENATOR DEBBIE STABENOW (D-MI)
U.S. SENATOR JON CORZINE (D-NJ)
U.S. SENATOR DANIEL AKAKA (D-HI)
 
U.S. SENATOR PHIL GRAMM (R-TX)
RANKING MEMBER
U.S. SENATOR RICHARD C. SHELBY (R-AL)
U.S. SENATOR ROBERT F. BENNETT (R-UT)
U.S. SENATOR WAYNE ALLARD (R-CO)
U.S. SENATOR MICHAEL ENZI (R-WY)
U.S. SENATOR CHARLES HAGEL (R-NE)
U.S. SENATOR RICK SANTORUM (R-PA)
U.S. SENATOR JIM BUNNING (R-KY)
U.S. SENATOR MICHAEL CRAPO (R-ID)
U.S. SENATOR JOHN ENSIGN (R-NV)
 


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SARBANES: The committee will come to order. There was a series of votes, that why we delayed the hearing, the start of the hearing. And we maybe interrupted. No, I can ignore those particular lights.

Pavlov should have done his experiments here in the Congress; he could of used real live humans you know. Secretary Martinez, we're pleased to welcome you back before the committee. We very much appreciate your willingness to be here with us this morning. I know that you have a previously scheduled meeting with a House subcommittee on housing this afternoon.

So, we're very mindful of that. And I want to express my appreciation to the panel that's going to follow on the secretary for their patience in staying with us.

Hearing that we held last year showed that the need for affordable housing in America continues to grow. Nearly 5 million low-income American families pay over half their income in rent each month. A situation, which HUD itself describes as a worst case housing need. This, undoubtedly will grow as unemployment rises.

Actually, there are more and more working families that are confronted with this problem. We've seen a decline in the number of affordable rental units and decreasing vacancy rates. And, there's some very helpful material in the testimony we're going to hear later in the morning from the low-income housing coalition about the extent and depth of the low-income housing shortage in the country.

They estimate that there about 14 million very poor households with serious housing problems, comprising over 13 percent of all households in the country. And, of course, we're using this housing wage concept to measure unaffordability and indicate the severity of the housing problem. This is the hourly wage that one must earn to be able to afford modest rental housing if one works full-time, 40 hours a week, 52 weeks a year that pays no more than 30 percent of income for housing. In making this calculation, the Low Income House Coalition points out they use HUD's fair market rent as the proxy for rental housing costs, that's standard by jurisdiction.

SARBANES: And, it also represents what HUD says is the necessary rent to be paid to afford housing that is decent and safe. In most places that is the 40th percentile of rental housing costs. In any event, the housing wage ranges from $8.50 an hour in West Virginia to $18.33 an hour in California. In other words, you have to earn that hourly wage in order to afford this housing standard.

So, we can see there's a gap between what people earn and what housing costs them. And, obviously, it puts them in tremendous squeeze and that's one of the reasons this disparity between income and housing costs that the committee has been so concerned about this matter.

Mr. Secretary, I'm not going to take the time to go through the specifics of the budget, we'll do that in the question period. We are supportive of your efforts stated efforts to expand minority home ownership. I think that's a very important objective. I might note, however, that the NAACP and LARASA (ph) have both written -- and the National Hispanic Housing Counsel have written to you about the yield spread premium problem. And how the impact of the yield spread premium really runs counter to our announced intentions to try to aid minority home ownership.

Finally, let me say, and we will need to discuss this later, there's something of a problem that seems to have developed in terms of consultation and effective interchange between staff at HUD and staff of the committee. The relationship, of course, between the Department and the committee is a complex one.

On one level we discuss and debate the content of policy positions, budgets, legislative proposals, nominations and the like, and, you know, often we're in agreement. We try hard to see -- to maximize that, sometimes we're in disagreement.

But, in addition, of course, the committee has a responsibility for maintaining oversight over HUD's operations and to see that the department carries out its programs and policies in an efficient and effective manner. In order to discharge that function, we really need a good interchange between committee staff and HUD staff.

And, we've encountered some difficulties in this regard. And I just wanted to raise it to your level. I'm not sure it's had this kind of visibility at the Secretary's level that it desires. I can do chapter and verse with you some other time. I won't take the time to do that now. But, we really need a commitment by the department to make senior staff available to the committee staff on a regular basis so we can follow up.

Because sometimes we're fining out about major changes down in HUD through the grapevine, or outside parties or so forth and so on. And, I don't really think the system ought to work that way. It's not a healthy way to proceed.

Finally, in closing, let me just note that the U.S. conference of mayors has just passed a resolution supporting the establishment of a housing production program, which is, of course, not present in this budget and we'll probably address that. Also supporting increased preservation of the existing affordable housing and national strategy to meet the needs to the homeless. And I know you have proposal on that. We look forward to hearing about that.

But, we're pleased to have you back before the committee. I know a number of my colleagues are intending to join us, but they may actually be waiting for the final vote to take place. I thought we'd better get started given that you have to go over on the House side and we want to honor that commitment.

We'd be very pleased to hear from you.

MARTINEZ: Mr. Chairman, thank you very much. It's always good to be back with you and I assure that before going into my remarks on the budget, that the staff issues you brought to my attention are very important to me and I wish to deal with them forcefully and energetically. And I think the kind of bipartisan cooperation that you and I have had during this past year and I think it's truly very important to the success of HUD and to the success of the work that we do, which I always find to be something that we all ought to come together on.

So, while we may differ on specifics on an issue, we always should be doing our best to keep you informed and make sure that we have the kind of cooperative partnership that this designed to exist.

But, I thank you for the opportunity to join you this morning to talk about the fiscal year 2003 budget for the Department of Housing and Urban Development. The 31.5 billion HUD budget represents a funding level increase of 7 percent over 2002 levels.

While helping Americans reach the dream of home ownership, ensuring affordable housing opportunities for those who rent. Strengthening and renewing communities and preserving a safety net for the most vulnerable, this budget will enable HUD to make a tremendous difference in the lives of millions of Americans.

The housing market in 2001 was extremely vigorous and we entered a new year with a home ownership rate at a record high. Because we know that home ownership gives families a stake in their communities and creates wealth, the HUD budget makes owning a home a viable option for even more Americans.

In his State of the Union address the president acknowledged our commitment to expanding home ownership, particularly among minority families. And, as a first step, we have quadrupled the American dream down payment for under $200 million. This presidential initiative will help an estimated 40,000 first time home buyers overcome the high cost of down payments and closing costs that are a significant obstacle to home ownership.

A tax credit for developers of single family affordable housing will promote home ownership opportunities among low-income households by supporting the rehabilitation of new construction of homes in low- income urban neighborhoods, as well as in rural America.

We're triple funding the self-help home ownership opportunity program, SHHOP, to 65 million as committed by the president last spring. That, and a lot of sweat equity will make possible a construction of an additional 3,800 homes for disadvantaged Americans. SHHOP is an excellent example of government maximizing its resources by working with private sector partners like Habitat for Humanity.

Another exciting home ownership initiative targeted at low-income families will allow them to put up to a year's worth of their Section 8 rental vouchers towards a down payment on a home. And because we consider it an invaluable tool for perspective home buyers and renters we have proposed making housing counseling a separate program.

The increase in sub prime lending has made financial literacy more important than ever. Armed with the facts, a consumer is far less likely to be victimized by predatory lending. We're funding the counseling program at 35 million, which represents a 15 million increase over the previous fiscal year.

We consider home ownership to be an important goal. We recognize that it is not an option for everyone. Therefore, our budget preserves HUD's commitment to expanding the availability of affordable housing for the millions of Americans that rent their homes.

The Section 8 tenant based program today assists nearly 2 million American families and our budget provides an additional 34,000 housing vouchers. The budget also dedicates 16.9 billion to protect current residents by renewing all expiring Section 8 contracts.

To encourage the production of moderate-income rental housing in under-served areas, we plan to reduce the mortgage insurance premium for federal housing administration multi-family insurance. Three times over the last eight years HUD has been forced to shut down a multi-family mortgage insurance programs because of lack of credit subsidy.

But, last year, the shutdown stopped the construction of some 30,000 rental units throughout the country and clouded developers in uncertainty. We made a commitment at HUD to a comprehensive review of the credit subsidy program. We examined the statistical techniques that were used to analyze loan performance. We thoroughly updated and refined FHA's data and incorporated the major tax law changes in the 1980s that affected the profitability of multi-family housing.

Through our review, we were able to lower premiums, create a self-sustaining program, provide the industry with a stable financing at a much lower cost, and provide thousands of new opportunities for rental housing across the country.

In fact, the program made firm commitments to ensure a $1.25 billion worth of new rental housing in just the first four months of the fiscal year. Reducing the premiums in fiscal year 2003 will lower the cost of building over 50,000 affordable rental apartments each year.

The 2003 budget gives HUD new resources to further our mission of supporting the nation's most vulnerable. This includes low-income families homeless men and women, the elderly, individuals with HIV/AIDS, victims of predatory lending practices and families living in housing contaminated by lead based paint.

Let me highlight just a few of our proposals. To better coordinate the work of many federal agencies to reach out and provide a continuum of care to homeless men, women and families, the budget calls for doubling of HUD's funding for the newly and reactivated interagency counsel on the homeless. Additionally, converting three competitive homeless assistance programs into a consolidated grant will eliminate the workload and expense of administering three separate programs.

More importantly, it will give local jurisdictions new discretion on how those dollars are spent, and will enable our department to expedite the time when the money gets out the door from 18 months down to 90 days to 120 days.

HUD's lead hazard control program is a central element of the president's effort to eradicate childhood lead poisoning in 10 years or less. The HUD budget will fund the program at $126 million, a substantial increase over the previous year. The budget also proposes spending $251 million under HUD's Section 8 11 program to improve access to affordable housing for persons with disabilities.

And, many of the additional 34,000 Section 8 vouchers will aid non-elderly disabled individuals. In addition to addressing the nation's critical housing needs, programs such as the home investment partnership program and the community development block grant program stimulate economic development and job growth. Combined, these two programs will distribute an additional $200 million in formula funding to state and local governments.

We have proposed changing the distribution of CDBG formula funds by reducing the size of grants going to the wealthiest communities. This will help bring dollars into those areas where they can do the most good. We're excited about a brand new concept to address the large backlog of repair and modernization projects in public housing.

The public housing reinvestment initiative represents a new way to leverage the value of public housing by allowing public housing authorities to borrow funds to make needed capital improvements. This project unlocks the value of public housing assets by allowing PHA's to convert public housing units to project based vouchers. The PHA's can obtain loans by borrowing against individual properties similar to private sector real estate financing.

Innovative thinking like this represents a departure from the way things were done so often in the past but being effective does not have to mean spending more money. Government works best when government serves as a steward and facilitator and measures success through results. By facilitating the involvement of new local partners, the public housing reinvestment initiative will breathe new life into public housing communities.

I'm proud of our budget and the way it reflects HUD's renewed commitment to efficiency, accountability and the principles of excellence expressed with the president's management scorecard. When government spends efficiently the funds go much further. We reach more citizens, we help to change more lives.

The people of HUD know that the American dream is not some unattainable goal because we see it achieved every day. So often by families who never imagined owning their own home or reaching economic self-sufficiency. I'm confident that through our budget and the continued commitment of President Bush, HUD will continue to better be able to serve citizens and give them the tools that they need in order to improve their lives, strengthen their communities and their country.

I'd like to thank, Mr. Chairman, your committee for your support of our efforts. And I welcome your continued guidance as we attempt to work together to bring the American dream of home ownership and a suitable place to live to all Americans. Thank you.

SARBANES: Well, thank you very much, Mr. Secretary. First I want to comment on the credit subsidy program. We were quite concerned when HUD took that up to 80 basis points. It was at 50 when you did that. And I understand you've now brought it back down to 57 basis points. And that seems to have provided some stability in the program. And, I gather that those who work with the program across the country are -- feel they can move ahead now on the basis of that.

SARBANES: As you recall, we expressed considerable concern when you took that up and I'm pleased that subsequent reexamination has led to this result. Now, there are a couple of other programs I want to get in right at the outset, that I'm very anxious to ask about.

Late last year HUD said that there was an Anti-Deficiency Act violation with respect to the outreach and training grant program and the intermediary training grant program that provide technical assistance to residence in assisted housing properties, including those undergoing restructuring.

At that time, funding to the non-profits, which operate the technical assistance programs ceased leading the layoffs in many small, non-profit technical assistance providers around the country. Now, at the end of the session, Congress fixed that program by giving HUD $11 million to fund the contracts that may have created the anti- deficiency.

Actually, I'm now told that the HUD IG has tentatively concluded that there is no anti-deficiency violation in the first place. Yet, HUD has not released this funding. Now, the low-income Housing Coalition in their statement, which we will hear later in the morning, and I just want to quote it because it's very strong.

"We cannot stress strongly enough the urgency of this problem. Many community-based non-profit organizations have not been paid for their work and the consequences to these organizations are dire. Several have laid off staff and others have gone into debt to maintain services in anticipation of receipt of money owed. These are small organizations that are at risk of going out of business if HUD does not pay them immediately."

Now, I don't understand why we haven't been able to get that money out to these non-profits so they're not operating under this tremendous pressure, which is, obviously, impacting their ability to carry on their activities. Now, this is -- apparently now where the IG's opinion, as I understand it, we need not have gone through all of this. But, having gone through it, having gotten the $11 million from the Congress to deal with the anti-deficiency problem, you having gotten your budget now for a number of months, why isn't that money out there?

MARTINEZ: Senator, first let me say that I think it is very sad and unfortunate that a lot of organizations, who have absolutely no blame in any of this have been impacted tremendously and my heart goes out to them because I know that these are people that, you know, are doing good work and are in our communities and deserve and need our support.

SARBANES: We want your pocketbook, as well as your heart to go out to them.

MARTINEZ: Well, I think it is important to let you know that we do understand the pain and we care about that and that we are concerned about that. OMB has not yet apportioned the funds that the department had appropriated. But, let me go back a step, because I think it serves -- I mean your question is excellent and the issue needs some explaining.

OMAR (ph) was an entity operating outside and independent of HUD. Sometime back the Congress saw fit to put their -- to take away their ability to distribute funds and put them under HUD and now they're completely under HUD.

So, as we go forward in the future it will make it much easier for HUD to manage how something like this could ever happen. But, the fact is that we have been able -- first of all, we took very seriously the issue of a potential anti-deficient act.

We had no access to OMAR's (ph) and finally had to have the help of the IG to obtain the records, which sometimes had to be obtained from the grantees themselves. We couldn't get them from OMAR. We finally obtained all the records and the IG -- the acting IG, by the way, because the IG is -- the permanent IG is pending confirmation, but the acting IG has been diligently working to get us the total picture.

It now appears that there wasn't an Anti-deficiency Act violation in the first place, which is great news, but it doesn't help the people who are out there suffering because of this whole problem which didn't need to suffer in the first place.

The good news, I can tell you is, that we have been assured now that by the 25th of February we will be able to put out $550,000. We have a total of $1,290,000 in vouchers that have been requested. By the 25th of February we will pay $550,000 of them. The remainder we believe we can pay by the first week in March the balance of those.

So, I think that we're now in a position where in the very, very near future we'll be a position to do that. This will be paid from the funds -- the IG report is expected on Thursday. The preliminary report, assuming that nothing changes in the IG's evaluation of this situation from what we've been led to believe, which is the same of you, this should happen on that schedule.

So, help is on the way. We should, by February 25, begin to deal with the problem and then have all the vouchers that have been presented fully paid by the first week in March.

SARBANES: Well, I don't quite understand what you're trying to get from the IG because we gave you the $11 million to make up the deficiency, if there was a deficiency. So, I don't know why -- I don't think we have to await them to determine whether or not there was a deficiency.

MARTINEZ: If we take...

SARBANES: If not, OMB told us with respect to these funds that they're waiting for HUD to ask for the money.

MARTINEZ: Our understanding -- well, normally my understanding is that OMB it takes about a month to apportion funds once appropriated. But, the problem was, and the reason that delay occurred even after the appropriation is that our folks, in the bundles of caution in a situation, by the way, where people, you know, if you do under deficiency violation we didn't want to compound if there was one by continuing to issue funds.

So, the delay was caused by the need for the IG to clearly tell us who had gotten what funds. In other words, the funding problem comes by funds that are allocated for a given year and whether the funds have been spent for that year or not. So, in order not to compound the violation of Anti-deficiency Act, we needed to know, or it was believed that we needed to know, exactly where, if any, violation had occurred. How much had been paid to each grantee and how much was owed to each grantee.

So, they were presenting vouchers. We needed to be able to verify and validate those. And, we were having to reconstruct OMAR's (ph) records while doing it, which the IG has done a tremendous good job of pulling together. But, which, as you can see, has taken some time to get done.

SARBANES: Well, I see my times expired, but we're going to have to pursue this because if there was no anti-deficiency violation and these people were run through the wringer for no reasons. Now, even if there were, the Congress sought to correct it by providing you the $11 million that had been -- that we had been told constituted the anti-deficiency violation.

So, we gave you the $11 million as part of the appropriation. Now, your appropriation bill was signed into law when?

MARTINEZ: January 11 and on the 12 we requested the funds from OMB. So, if OMB has told you that they have not received the request from HUD that's in error. On January the 12 we requested the funds from OMB. And, they are then to be apportioned and we've not received the apportionment.

The payments we're going to make, in fact, to further complicate something that's complicated already, are not going to be made from the apportioned funds. They're going to be made from existing funds anyway because the apportioned funds have not been received yet.

So, the bottom line is to these people who have been suffering too long through no fault of their own, that we believe by February the 27th we will have payments to them, and the completed payments by the first week in March.

SARBANES: Well, I just want to make this final point. It's not just the providers and the people who work for them who are suffering as it were personally or individually, but the whole infrastructure that we have built up to try to deal with affordable issues is going to take a hit if these organizations go under.

I mean we've worked very hard to get this infrastructure into place and you have as much a vested interest, I would think, in its working and continuing to function as anyone. And, they're under extreme pressure and that infrastructure is going to start breaking down if we don't get the money out to these organizations to really pay them for work they've already done and to allow them to continue their activities.

Senator Allard?

ALLARD: Mr. Chairman, thank you. I would ask unanimous consent that my full statement be made a part of the record.

SARBANES: It will be included in the record.

ALLARD: And, I apologize for being tied up and not being here to hear Secretary's Martinez's opening comments. But, I am pleased with the number of initiatives that you have in the budget. But, you know success is measured about the number of people that we helped achieved self-sufficiency, not necessarily by how much the money is we appropriate. But, I think you've made a conscientious effort to meet the demands of your department with a very responsible budget, and I commend you for that.

Also, I noted that you've combined some programs in order to bring efficiency and also increased flexibility. I think that's desirable. And, I'm particularly pleased with what you're doing in the way of SHHOP, in other words these are self-help type programs, which I strong support. I believe that you do too, Secretary Martinez.

So, let me just go ahead and move forward with some questions that I have. The administration proposed consolidation of three of the homeless assistance programs there; can you elaborate on this proposal?

MARTINEZ: Yes, sir. The proposal for a consolidated formula of funding is something that we believe will serve communities in a better way. It's an allocation amount for cities, counties and state governments, using a formula approach where there would be no automatic entitlement to the funds by any unit of government. Each eligible recipient will be required to evidence of their performance in spending these funds met the strongest performances standards that HUD would lay out before a grant would be given to them.

And, so, we'd be looking at the timeframe that funds get out to the recipients or the needed people that are involved, the evidence of objective programs in reducing the number of chronically homeless people in the communities. In other words, we're making that a goal, so we're enacted that goal by asking the communities to look at how well they do at that.

Evidence on performance and creating permanent support of housing units targeted to homeless people, objective progress in creating all component of a true continuum of care system, and objective performance in developing and implementing community-wide and statewide homeless management information systems.

So, these are some of the things that we're incorporating into that grant program, which we hope is going to be a new and improved way of doing things. We look forward to a discussion on this. This is an idea that we believe will work. We want the input of the Congress on it as to how you view it and the community of people who help people that are homeless.

ALLARD: I commend you for trying to bring some innovation. Now, whenever we visited and probably many times when you will appear before this committee I will have a question on the Government Performance and Results Act. I think this is very important. And I'm curious to know after you've finished, this is actually your first budget, kind of anxious to hear your comments as to how you think that that provision may -- has impacted this budget and how you anticipate to impact future budgets?

MARTINEZ: Well, I think Government Performance and Results Act is a very important tool. We take it very seriously. It kind of dovetails into a lot of the management agenda that the president has advanced and which we're taking very seriously in this administration, the tying the performance of programs to the funding and funding to performance, I think, is something that will lead us to a better understanding of what works and what doesn't work.

And, to insist on outcomes, I think is also very important. We're in this year's annual performance plan are including an interim adjustment of HUD's strategic plan that will better align the strategic plan with this administration's priority. And, this will form the basis for a broad series of consultations with the stakeholders and the Congress as we develop a new and strategic plan.

So, we look forward to working closely with the Congress as we develop that and I think you will have an opportunity as we put that in place of then seeing how performance squares with the hope and the funding.

ALLARD: The other thing I'd like to get your views on is the Congress, it was in 2000, I think, enacted the manufactured housing program. And the reforms that were in there have they been implemented and are we getting some implementation of that program as was passed?

MARTINEZ: I met recently with some representative of the industry who were in to see us and the implementation is moving forward. We have been a little delayed in the naming of a person to run the office. We've also had some discussions on the issues of the fees that would be paid in order to fund the new guidelines implementation.

The bottom line is that it has been slowly getting started, but we are moving forward and we are working closely in consultation with the industry who is so interested in seeing that this takes place.

There's a lot of issues tied to financing opportunities for people who chose this type of housing. And we want to make the system work. At this point, it's not all happened nearly as fast as I thought it would a year ago when we took the ranks. This is one of those areas where this progress has been rather slow.

ALLARD: Well, I encourage you to move it along as quickly as you can because I think it is one alternative out there for affordable housing. And with the passage of it, I think, there's assurance that there be some quality pre-manufactured homes out there.

MARTINEZ: Very, very good...

ALLARD: And I think some projects are just remarkable, I think.

MARTINEZ: It's a very good thing.

ALLARD: Yes. I see my times expired, Mr. Chairman. Thank you.

SARBANES: Thank you, Senator Allard.

Senator Miller?

MILLER: Thank you, Mr. Chairman, thank you, Mr. Secretary for being with us for being with us and thank you for the job that you do. I apologize I've got a question and I'm going to listen to the answer and then I've got to get back because we've got a farm bill up on the floor and you know how important that is.

MARTINEZ: I sure do, Mr. Senator.

MILLER: Here is my question, as you know, we've been trying to get some data on PHAs were not spending their capital funds in a timely manner. Where is the hang up in getting this information? Why is it so hard to get information on which PHAs had unexpended balances that were not spent within the regulated, their required timeframes and even the amount of those balances? Why can't we get that information?

MARTINEZ: Senator, I'm just being told from behind that that information has finally been put together and was delivered this morning. It is amazing how having a deadline of a hearing can make some things happen. And, so, I'm delighted we're able to tell you that today we were able to pull that together. And you should have it.

MILLER: Thank you very much.

MARTINEZ: Maybe over lunch you want to maybe go over it.

MILLER: Thank you very much. I call that good timing.

MARTINEZ: Yes, sir. Thank you very much.

SARBANES: Senator Carper?

CARPER: Thanks, Mr. Chairman. And, Mr. Secretary, welcome today.

MARTINEZ: Sure.

CARPER: Thank you very much for your testimony, I hope you're doing well.

MARTINEZ: Thank you. Yes, sir.

CARPER: I'd be doing better if this microphone -- in any event, first a question about the request for public housing capital funding. Could you just walk me through, it's a little confusing how -- my sense is that you want to reduce the amount of the money that would be budget for capital funds by allowing PHAs to, I think, to mortgage public housing facilities. And I just want to try to understand how that works and how that might work?

MARTINEZ: What we did is we took, instead of the funding level of last year at 2.8, we took it down to 2.4. And the point of that was not only to reduce, because there still is a backlog, a great backlog of unspent funds. But, just as importantly and really more importantly, the point was to try to come up with a new way in which public housing can get at this backlog of improvements that are needed to public housing.

By freeing up the market system by allowing them to privately finance. So, the concept is that they can now identify by unit the funding stream that comes. So, that then that unit and then, of course, a project can be, itself, the subject of private financing for the refurbishment and reconstruction. They can then pledge a Section 8 or it can become a project-based project and the stream of funding that comes to them can be a guarantee against the financing that they obtain.

We think this is going to free up housing authorities to improve projects and to do a far better job than they've done in the past of bringing to standards a lot of these projects that are in such bad condition.

MILLER: OK. What if it doesn't work?

MARTINEZ: If it doesn't work then we need to be there and continue to provide the funding. So, I would be very minimal to raising that back up to the level of where it's been in the past. It's no intended to be a cut, but an encouragement to those that voluntarily seek to do it after HUD approves the plan to make sure that its financially sound, to give them this option to improve their housing stock.

MILLER: I'm intrigue by the notion and I'm a person who likes to figure what works to solve our problems and not be doctrinarian about it. And, if this works and is helpful in meeting our capital needs of our housing authorities then we ought to give it a shot.

And, I want to go back to my question of what if it doesn't work. What if it doesn't work in 2003?

MARTINEZ: Well, it would be my assessment that the small reduction is not going to have an impact on any current year problems if there should be. But, if it doesn't work and if we really see a problem developing, I would be very willing to work with the Congress to see providing some additional assistance if that was to be necessary.

As I say, it's not intended to be a punitive thing. It's only intended to be an encouragement to move in this direction and see if we can make it work.

MILLER: My concern, and I appreciate what you just said, if it turns out, hopefully it will work. If it doesn't work in 2003, I don't want us to have to wait until 2004 to come back and fix it.

MARTINEZ: I would be willing to work with you mid-year to see. I don't think it's going to come to that because I think this will work. I think this is very exciting possibility for -- frankly, to go beyond the amounts that we would appropriate and give local housing authorities the flexibility of picking a project that they want to go fix and then go in and fixing it.

MILLER: In addition to the, I think, roughly $400 million that we're talking about here for capital funding, I understand that about 50, maybe $55 million in the capital fund is now to be used -- would be used for something called the resident opportunities and supported services program. A program that's traditionally been funded, I think, out of CDBG funds. I don't know if you're familiar with it, but it sounds like this could be another $55 million that would not be available to use for general capital, but would be used for resident opportunities and supportive services program.

MARTINEZ: This would be a transfer from CDBG funds. It wouldn't be from public housing funds. Well, a little confusion here. I guess it is being transferred out of the capital fund.

MILLER: So, historically it's been funded out of CDBG but as I understand it, it would be funded under your proposal, your budget proposal, out of the capital funds, which would mean the $417 million, would be more like $472 million. So, I just wanted to...

MARTINEZ: Yes.

MILLER: ... I wanted to put that on the table and say that as it caught my eye and it's a matter of some concern. The other thing I want to get into with respect to self-sufficiency and housing and welfare. In the State of Delaware during the time I was governor we decided to try an experiment by time limiting the amount of time that people could be in public housing, receive assisted housing. And we didn't do it to be mean or punitive. But, we felt that there's only so much housing stock for low-income housing and there's a lot of people on waiting list and the idea that people would move into public housing and stay there forever was not what the original intent was.

And, the idea is to help people through a period of time in their lives and then to make sure that they -- try to ensure that they have the skills and the earning power to go out and rent a house on their own or a place on their own or apartment on their own or buy something, hopefully.

And, we've been doing this experiment now for a couple of years. It's a demonstration model. We'll have an opportunity during the time that you serve as Secretary and the term I serve as the Senator find out how it's working and to learn lessons there and other housing authorities around the country where similar experiments are taking place.

So, this is something I've got a lot of interest in. And, we have a sense of ownership on the issue. My understanding, and somewhere in your budget the -- I know you're interested in encouraging people to move out of public housing and be self- sufficient.

Let's just take a couple of minutes and talk about what you're proposing and I just want to better understand it.

MARTINEZ: I think you're proposal is very, very intriguing and is one that I share your passion for. I think that any time you can bring someone into self-sufficiency we're doing a lot for them. And sometimes people need a push. I think that welfare to work and welfare reform proved that in a great way.

I remember being on the housing board of a local housing authority years ago and I thought it was sad that there'd be three generations of people who have been in public housing. And I think that sometimes, you know, that would not be a good way to have that kind of multi-generational issue.

But, I think we need to proceed carefully in this. I think it needs to be on a pilot basis. I'm intrigued by what Delaware's doing. I remember you brining this up to my attention during my conformation hearings. And, so it is a concept that Assistant Secretary Michael Lew (ph) who is our assistant secretary for public and Indian housing is very closely looking at it. And we're trying to find a way that we can do a control experiment with this ourselves, that we can pilot it in some communities and just how it goes.

I think, again, it's not out of mean spiritedness but it's out of the sense of compassion for those that are on waiting list looking to get into public housing that we really need to give people the encouragement to move into self-sufficiency and out of public housing.

It needs to be also applied, obviously, with great care to those that are disabled, to the elderly. It's not for everyone. And there are people for whom a safety is always going to have to be there. But, there are many who could be encouraged to move on and I think that -- so, I share you interest in this. And look forward to working with you on it.

MILLER: Thank you. My time has expired. Can I just make one last quick statement? I think one of the reasons why welfare reform has been, by most people's judgment, a terrific success, not for everybody, but for most people, a huge success. Caseloads are down by half and people who have gone to work are better off.

Under the old rules in welfare, people were better off when they stayed on welfare. And, the reason why people stayed on welfare in some cases for a long, long time is because that was the smart thing for them and their families. They were literally better off. And, what we've done is change the rules. All of states and here at the federal level as well, so that people are actually materially better off going to work and we provide the support and child care and transportation, finding jobs and to ensure earned income tax credit to ensure that they're actually better off when they go to work.

And, it's changed behavior in remarkable ways. We need similar kinds of approaches with respect to public housing, not to just throw people out, but to...

MARTINEZ: Right.

MILLER: ... change the incentives so that the people would be better off. And, one of the exciting things that we're doing in our state when somebody actually goes to school and gets a better job and their earning power goes up, instead of their rent payment going up, that money goes into an escrow account. And it builds up in an escrow account and it can be accessed later on so that when a person moves out of public housing, the monies are there in the escrow account to pay for a down deposit, a security deposit on an apartment or a down payment or closing costs on a house.

That's the kind of thing that we need to do.

MARTINEZ: Well, we're going to look at your experiment and see how it's fairing and what we can learn from it.

MILLER: Thank you. Mr. Chairman, I have a statement I'd asked unanimous consent that it be included in the record.

SARBANES: Without objection.

MILLER: Thanks so much.

SARBANES: Thank you very much.

REED: Welcome, Mr. Secretary, thank you for joining us today.

MARTINEZ: Senator Reed.

REED: Let me first deal with an issue that's outstanding. Last October I sent a letter along with my colleagues, Senator Allard, Congresswoman Roukema, and Congressman Frank with respect to the termination issues in Section 8 project-based contracts.

I understand from your office you did not receive the letter. That's subject to another hearing, Treasury Postal.

MILLER: I'm afraid it was an anthrax problem, Senator. The dog ate my homework excuse, I know. But, it's true.

REED: It's never happened in my office, Mr. Secretary, but, anyway, let me go on with the substance of the question, which is more important, and your response. And that is we've had some indications that landlords were not following proper notice provisions in terminating project-based contracts. And, as a result, we asked for your comments and your action with respect to this whole process of terminating a Section 8 project-based contract and giving enhanced vouchers in the process of that termination. Specifically I'm curious today whether HUD plans to publish regulations implementing the statutory provisions on Section 8 contract terminations and enhanced vouchers. This is required under Public Law 10674. Those regulations would be very helpful.

MARTINEZ: Senator, we're going to have to reply to your letter more formally. I'm afraid I'm not prepared today to tell you where we are on that. But, I apologize for the delay in response and we will get back to you very immediately on that.

REED: Thank you very much, Mr. Secretary. Mr. Secretary, let me turn now to the issue of homelessness. And, first, the goal of the administration to end homelessness in the United States in 10 years is a laudable one, certainly one we support. But, it seems that to do that we would need on the order of about 200,000 units of supportive housing. And, yet the funds, the renewal of existing permanent housing subsidies have been significantly diminished in this budget.

Furthermore, in addition to HUD, HHS has to provide resources for the supportive services. Now, I know you've revived the interagency council and that might be an appropriate coordination devise. But, the issue, I think, is one; do we have the resources to meet this great goal that we all share? Or, are we essentially when we talk about outcomes, setting up a lot of these programs for failure? You know, we can rearrange the shares on the deck and we can talk about streamlining, but if they don't have money to keep shelter operating, they're never going to be able to reduce homelessness.

And, it's a major concern that I have and I wonder if you'd comment upon them?

MARTINEZ: Let me clarify that, our goal is to look at chronic homelessness as the one that might be something we can end. Obviously, there's going to be always people who fall hard on their luck, who, as a result of circumstances will be homeless for a period of time. But the population that typically is burdened with additional problems, mental illness, addiction, those are people that if we find a way to treat and to get into supportive situations, we might be in a position to get them out of the cycle and that's what our goal is.

And, I know it's a lofty one, but I think in trying we might move the ball forward significantly, even if we don't achieve the complete goal in the end. I don't think it's a question of resources. I think it's a question of connectivity between the delivery of services.

I believe that there's a great need for people that are homeless to be able to access governmental services that now seem to not be available to them, whether it be veterans' services, whether it be just plain old welfare assistance, whether it be Medicare. These are things that oftentimes the homeless population, because of the nature of their lives they don't have an established address. They don't have a following forwarding number. There are things like this that can be a real hindrance on how they go about obtaining additional services.

It seems to me that what we can do best is to attempt, first of all, to realize the full potential of all the things that are being done for homeless Americans and then begin to think whether or not additional resources might be a part of the answer.

So, I think we need to take this step first. That's why reacting the interagency counsel, the president did this some months ago. We now have an executive director coming on board in March. And, I look forward to the work of this interagency task force -- interdepartmental task force to see what we can do to improve the condition now given the programs that we already have.

But, knowing full well that there's great duplication and there's also a tremendous lack of coordination, which has always been there. But, which we need to try to address before we throw in the towel and say the only answer is more money.

REED: Well, I don't think the only answer is more money, but the answer certainly involves money. And, let's take on particular aspect, that's the Shelter Plus Program, Shelter Plus Care Program, your budget proposal for this fiscal year 2003 under funds this program by my account about $93 million.

The budget would require homeless assistance providers are shot down existing permanent housing programs for as many as 15,000 people with severe disabilities. Now, you show a small increase, let me tell you, you show a small increase on paper for the program. But, the reason, I think, is because of the programs that are operating on the Shelter Plus Care receives five-year funding, which is several years ago.

All of that's coming due now, or much of that's coming due. So, that simply increasing last year's appropriation a bit is not going to cover these renewal contracts that are coming up. In fact, the burden is about $193 million if you're going to renew all existing programs and you've got $100 million in this line item.

And, so it seems to me, again, of course, you can coordinate better you be efficient. You can connect people to the VA. But, if you're going to go tell programs that are now funding housing that they don't have money, those housing units will evicts they'll evaporate.

MARTINEZ: I would agree with you. And the intent, I don't think is to cut the funding in those kinds of programs, but to, I think, maintain a fairly level funding level. I believe the emergency shelter program -- there's some confusion there in that the 2003 budget request doesn't contain any funds for renewal of Shelter Plus Care vouchers because the 2003 vouchers were forward funded and fully conveyed in 2002 appropriations.

So, there is no need in the 2003 budget to reflect what we understand was already funded in the 2002 budget. So, the question really will arise again in 2004 and in the 2004 budget we will take care of any funding needs for this program.

So, our intent was not to cut and I don't think that we have cut.

REED: So, there's $93 million that you already have available from the '02 budget, which you're prepared to commit to the Shelter Plus Programs.

MARTINEZ: That's correct.

REED: And the $100 million in this year's budget will cover all other contracts that will become renewable this year.

MARTINEZ: That's right.

REED: And that then will take your forward to '04.

MARTINEZ: To '04. And at that time we'll need to fund it again. But, 2002 funded for this year as well.

REED: Let me make the point there assuming that you're accurate and which I do, is that simply keeps us in the business of the present level of homeless shelter.

MARTINEZ: Correct.

REED: It doesn't address, or doesn't move the ball forward in terms of the thousands of other chronically homeless, which this administration has indicated they want to see in shelter within 10 years.

MARTINEZ: That is correct. We are not addressing any additional funding needs this year. We're first going to look at see where we are and what resources we have available that are not currently being utilized by the homeless population.

REED: Let me ask me ask one other question regarding this, Mr. Secretary, that is just so I'm sure, I know we funded units last year, but could you go back and see whether that money was used to discharge obligations that were incurred last year and not obligations that are upcoming, just that we're both sure of what we're...

MARTINEZ: I will be glad to give some clarification there, Senator, so that we can be on solid footing about that.

REED: Thank you. Now, let me turn to another issue, which was raised by Senator Carper's questions. That's the $417 million cut from the capital fund. The justification seems to be that PHA's in the future will be able to rely less on HUD funding, as a result of this initiative, your new approach to funding capital needs.

But, this is a program that might not be undertaken by all PHA's throughout the country. Yet, the PHA reductions in capital funding applies to every PHA in the country. So, I think we find ourselves in the situation where some might not avail themselves of this new innovative technique.

In addition, some PHA's might require 18 months to two years to become involved in this program. And, in the meantime there's been a significant emanation of resources for public house capital funds. And, it seems that that could be a real problem this year. It goes back to, I think what Senator Carper was saying, what happens this year when PHA's come to you and say we need money to capital funds. We're not involved in this new approach to funding. We don't have to be, give us the money. And, you say we don't have the money?

MARTINEZ: We believe that the availability of these funds from the private sector is going to actually improve the condition of public housing. I do understand your concern. I share your concern. And I think it's something that we just will have to keep a very close eye as the year progresses and I'm prepared to work with you and other members should we come into a situation where a shortfall exists.

REED: Let me ask another question, Mr. Secretary, I understand that in addition to the cut there's been $120 million from the capital fund earmarked for this new initiative. Is that correct?

MARTINEZ: It's available for the initiative. It's not earmarked, but it is available. That doesn't take it out of circulation, as you know.

REED: So, it can be used also for traditional...

MARTINEZ: That's correct.

REED: ... capital funding.

MARTINEZ: That's correct.

REED: Thank you, Mr. Secretary.

MARTINEZ: Yes.

REED: Let me just recognize Senator Corzine and if there's time available in your schedule and additional questions, we'll have a second round.

Senator Corzine?

MARTINEZ: Thank you.

CORZINE: Thank you, Senator Reed.

Welcome, Secretary Martinez, I apologize for being late. We had more hearings in one morning than I think is manageable and I don't want to cover ground that you've already covered. I suspect you would think I'll ask another question about drug elimination program and how the...

MARTINEZ: We went round and round on that.

(CROSSTALK)

CORZINE: ... that were supposedly allocated or at least available in other areas whether those have been used. I'd like to hear your response on that. I continued to be very troubled by the on the ground information that I get, feedback from some of the public housing authorities in New Jersey that were dependent on those and how they are feeling squeezed with regard to those needs.

And, two, I'd love to hear your comments with regard to empowerment zones and particularly second level grants which is going to hit hard at a number of communities in New Jersey that had expected some grants to flow on a continuous basis, made plans, brought businesses into, particularly Cumberland County, which is one of our poorer rural communities, Vineman (ph), Millville (ph) and Bridgeton are important communities that are struggling very high unemployment rates and were making real progress and zeroing out the grants is an extraordinarily troubling issue for those local communities.

I'm sure you're going to hear from Congressman LoBiondo on the House side and a number of other of my colleagues about this and I'd love to hear your comments on why we've taken this program in the direction we have. I'm, obviously, interested in the specifics but that may need to be communicated specifically but it's an extraordinarily important issue for us.

And, then I also find it uneasy that with the Congress in the business of reauthorizing TANF this year that there is no comment with regard housing issues and welfare to work needs that clearly will need to be addressed within that program. The subsidies that I think will -- that will be easy to make sure that people can fully utilize their welfare to work problems.

And, then whether you've looked at the family self-sufficiency program and some of the issues that are associated with that that would necessary be taken off the map.

I think that'll be enough for the moment.

MARTINEZ: Yes, sir. I appreciate the menu. Can I pick and choose?

Let me say on the empowerment zone issue, Senator, that as you know empowerment zone has had several rounds, the initial round was a series of tax credits and there are grants. And, those have all been happened and taken care of. It was then round two which created a series of direct grants.

It has been the experience that the grant program has not worked nearly as successfully as the programs involving tax credits and those types of business incentives. That's just the empirical evidence on the ground. But, the more interesting point...

CORZINE: I would certainly encourage you to come to Cumberland with me and you would see where those grants have been very effectively used and brought new jobs to a...

MARTINEZ: I don't know specifically the Cumberland County situation at this moment, and I'll be happy to discuss it with you once, you know, and I know that the members of Congress might also be interested in that.

But, as a whole, 80 percent of appropriated funds from these empowerment zones have not been utilized to date. We're more than half way through the program, so it stands to reason that if we still have 80 percent already appropriated funds remaining that in the balance of the time that the program will span out that the totality of the funds that are already available may never be spent anyway.

So, that is the approach we're taking. So, in other words, not funding additional dollars for a program where the currently appropriated dollars have not been utilized to the extent of 80 percent.

CORZINE: Right.

MARTINEZ: So, that is...

CORZINE: As you can well imagine as a former business person, though, that if you had bonded, if you had gone to the banks under the projections that you were going to receive grants and have been indicated that those were going to occur then for them not to. You leave individual communities that maybe have used those effectively high and dry.

MARTINEZ: But, Senator, I would have to you, not knowing the circumstances, but just again from my own business experience and yours that I would find it difficult to understand how private markets would fund and finance on the expectation of future appropriations. I have, in my experience in local government; I could never get bonding or financing for anything that depended on a future appropriation.

Typically, those, you know, streams of funds did not lend themselves to credit. So, I have to wonder how they might have done that. But, you know, the bottom line is that the real success in this program comes from the tax credit side of it, not from the grant side.

There are very specific guidelines that each of these programs presented on how they would spend the funds. And, I mean, I would be pleased to work with you on the local situation to see what we can be of help with. But, do understand that there is still a substantial amount of money that is available to those empowerment zones through the already appropriated funds.

CORZINE: OK. Well, it might bite differently in different spots.

MARTINEZ: Right. We'll have to look at that.

CORZINE: And, I think that one needs to be careful that the general rule doesn't end up impacting something that is already been committed and will...

MARTINEZ: We should look at that with you and try to be of help where we can.

Regarding drug elimination, the Congress funded $250 million increase to the operating fund, which, in other words, we don't call the funding drug elimination grant dollars, we call them part of the operating fund. But, I believe between what we attempted to do to our budget and then Congress ultimately did that pretty much a dollar for dollar restoration of that program or of that funding is available to public housing authorities so that they could carry out any existing programs that were worth pursuing and that were worthwhile.

MARTINEZ: We're working in a variety of ways with other agencies of the federal government to take a very, very strong look at drug issues in public housing. As you know, the president has just announced a very strong national effort on the issue of drugs emphasizing the treatment options. And, so I think, in a cooperative way, we're going to find that there's going to be help available to public housing authorities in this area and in a way that I think is going to maybe be even more effective.

CORZINE: At some point, I would appreciate it if your staff could show me whether the funds that were allocated are still going to fund the same activities with regard to drug elimination activities and security in public housing authorities.

MARTINEZ: The unspent balances on those accounts and we can very specific of any housing authorities in your area will tell us that there's still probably funds available that they haven't already tapped that could continue the programs that they have existing.

CORZINE: As I suggested the last time, I'd love to take you up to New Jersey and visit some of these...

MARTINEZ: Well, we should do that.

CORZINE: ... public housings and we can go to Cumberland County at the same time.

MARTINEZ: I'm going to be New York tomorrow as a matter of fact, it's not too far to -- but I -- we should do that and I'll make it a point to maybe get with your office and find the time when we can meet you on your turf. And, then we can see some of these issues and try to deal with them on a very individual basis.

CORZINE: Thank you. And, the TANF reauthorization and the family self-sufficiency program?

MARTINEZ: Let me have a moment if I could.

CORZINE: Sure.

MARTINEZ: I'm told that we're working with OMB and whether that program and the programs can be expanded and enhanced so we're actively working on that.

CORZINE: Then we should follow up with your staff.

MARTINEZ: Yes, sir. If you would that would be...

CORZINE: We're going to be working very substantially in the TANF reauthorization efforts this year. And I think housing is such a key part of making sure that people who do go from welfare to work aren't impinged in their ability to continue to work.

MARTINEZ: Sure. We'll work with you on that, sir.

CORZINE: I have one second round question.

REED: Thank you, Senator Corzine.

Mr. Secretary, let me say first I agree with your observation that as a local elected official that no financial institution will lend to a public entity based upon appropriations going forward because of the uncertainty of the appropriations process. But isn't that essentially what your proposal for public housing capital fund is that these entities will go out to the financial markets, ask to borrow money to replace their capital expenditures?

Part of what these banks will look at is how much revenue will be coming in to these institutions and frankly looking at your budget, and not just this year, but looking ahead, I think most bankers would be very skeptical that the kind of revenues that would be falling from the federal government to public housing authority.

And, as a result, I think right now we can least look with a rather significant skepticism as your proposal to replace appropriated public housing capital funds with private lending.

MARTINEZ: Well, Senator, Section 8 has been a very dependable revenue stream. And I think the private financing sector is used to funding Section 8 projects. So, I think it's something they can relate to, something they can understand, and something that would lead -- I mean we're led to believe by the financial world that there is great interest in this and they will do that.

And, then don't forget you have still an asset, you know, that can be collateralized. I mean, in other words there is a unit there. And, so I believe that that will lend itself to an opportunity for -- I think you raise a good point.

REED: You do have an asset, Mr. Secretary, but I don't know how many financial institutions would like to foreclose and operate public housing with the kind of revenue streams that might be forthcoming from this administration and succeeding administrations.

MARTINEZ: I think there's been a very iron clad commitment to the Section 8 Program and to maintaining the vouchers and to not leaving anyone high and dry that has the opportunity for a voucher. So, I think from that standpoint that it should work. We hope it will.

REED: Let me just raise another issue, Mr. Secretary, and that is with respect to the independent appraisal review process for appraises. We've been informed that the independent appraises review process has been stopped by your administration? I understand that the FHA is doing its own reviews, but only in response to specific complaints.

Now, in the past because of the HUG IG and the GAO we have been persuaded that there is a need for independent review of these appraises. And can you tell us why this was halted?

MARTINEZ: Senator, the system was not identifying risky loans. FHA's default in claim rates were actually lower on the loans identified as risky by React (ph) then for FHA loans as a whole. The system was not cost effective and two years they identified 33 appraisers who were removed from FHA appraisers rosters. And in our field reviews, the FHA had identified 85.

So, we're satisfied with Reacts (ph) work in general in FHA multi-family projects and public housing. But, the appraisal system really was an exception. So, what we're doing is continuing to conduct appraisal and field reviews on an individual loan basis following up on complaints from homebuyers and members of Congress. And, that's how we came about identifying 85 appraisers that were removed from the rosters over the last two years.

We're also developing a new approach called appraiser watch. FHA will identify appraisers with high rates of default and foreclosure and will the monitor their performance. FHA may then remove these appraisers from the FHA roster if there isn't a good reason for why the high default rate. So, we're planning to issue an advance notice of proposed rulemaking to establish this appraisers watch and this is going to be somewhat parallel to the credit watch system, which has been very successful in monitoring lenders.

So, that's the approach we're taking and the reason for the change.

REED: Thank you, Mr. Secretary.

Senator Crapo?

CRAPO: Thank you, Mr. Chairman, I apologize for being late but was unavoidably detained and because I haven't been able to be here for the rest of hearing, I won't ask any questions at this point. Thank you.

REED: I see that Senator Corzine has departed. And, Mr. Secretary, I understand you have appointment over on the other side.

MARTINEZ: Yes, sir.

REED: Thank you very much for your testimony.

MARTINEZ: (inaudible). And, Senator I should point out that there is a significant funding increase for lead based paint. You didn't bring it up, but I wanted to bring it up with you.

REED: Mr. Secretary, I've learned a great deal from this hearing. I've learned, first, about appraisal, I've learned about, let me see, many things, but the most important thing, other than the increase in lead, is I've heard that a cut in the budget is not a reduction, but an encouragement.

And, that is something that I will treasure. But, let me -- and, Senator Sarbanes has returned. He might have additional questions. But, let me commend you for the increase in the lead program.

MARTINEZ: Thank you, Senator. I know it's important to you.

REED: And, say also that I appreciate very much the effort, but we both understand we've got still a long way to go to make sure we...

MARTINEZ: Yes, sir. It is a serious issue. It's still out there, yes, sir.

REED: Mr. Chairman?

SARBANES: Well, Mr. Secretary, I'm not going to detain you because I know you have to get across the Hill. I know you're still working on the yield spread premium issue.

MARTINEZ: RESPA (ph) reform. Yes, sir.

SARBANES: Well, we're very -- we held a hearing here in January, which I thought was very revealing. In fact, we sent the transcript of it down to you in the statements.

Subsequently, a number of groups have weighed in on that issue. As I indicated in my opening statement, both the Hispanic and the African American groups have pinpointed it in terms of what it does to potentially minority homeowners. So, we think the decisions that confront you are extremely important.

I mean it's very clear people are not to go to a higher -- be lured into a higher interest rate and then there be a payment made to the broker who steers them into the higher interest rates. I mean it seems to me that's intolerable and we have to get at it and I do think that you have to -- to having the availability of a private suits is an important discipline in this activity.

So, but anyhow, I just want you to know we're very much focused on that issue and keep in close touch with you about it.

MARTINEZ: Senator, I would be happy, at your pleasure, to discuss it more in detail either here or in private. And, I also would like to assure you that our process of RESPA (ph) reform is continuing aggressively. And, I believe frankly, that what we've done so far and what we planned to do will be considered about as pro- consumer and as transparent as this process has ever been in its history.

So, I'm looking forward to bringing that...

SARBANES: Are the consumer advocates involved with you in that process?

MARTINEZ: Yes, sir they are. They're invited to participate and we're taking their input and look forward.

SARBANES: All right. One of the things that concerns me is I think on this other issue, as I understood it, we were moving towards maybe getting some consensus resolution of it when HUD issued its clarification, which was...

MARTINEZ: If there had been any possibility of that occurring, Senator, I would not have. I mean I practiced law long enough that if the court doesn't have to rule, it doesn't. And, I was not looking forward to intervening. I only did it when I felt that it was necessary because there was no progress being made.

But, I believe that we're continuing to keep the consumer groups involvement, continue to look forward to their participation and what I believe will be very sweeping RESPA (ph) reform, which I think will be good for consumers.

SARBANES: Well...

MARTINEZ: Well beyond the issue of YSB, by the way...

SARBANES: ... it's predatory, this predatory lending issue has really gained a lot of salience, as you know, in fact, it's now even being covered on national television programs.

MARTINEZ: I know.

SARBANES: And it's certainly an issue this committee -- well, since I've taken the chairmanship has focused very intently on this issue and intends to continue to do so. And, we look forward to working with you in order to resolve the matter.

MARTINEZ: And, I'm very proud of the work we've done in that, Senator, and participating with the Baltimore Task Force and the work we've done there, I think has been very historic. And, we will continue to work closely with you and participate in any way we can.

And, I'd like to take the experience of Baltimore to the national scale because it is desperately needed. And, I think the statements that I have made and I know you have made as it relates to the industry and the need for the industry to pay close attention to their business practices, I think, is important.

And, so I am with you on that and I look forward to working with you closely on that issue.

SARBANES: I hope when we look at the hard text we're still together. Let's see how it goes.

MARTINEZ: I have faith we will.

SARBANES: Mr. Martinez, thank you very much for coming today.

MARTINEZ: Thank you.

SARBANES: And we wish you well as you go over to the House side.

MARTINEZ: Thank you. I need the help.

SARBANES: If the panel would come forward we'd be prepared to move on.

(RECESS)

SARBANES: The committee will come to order.

First we're very pleased to have this panel, and we very much appreciate their steadfastness and their patience in hanging with us. I think I'll introduce each person as they speak instead of doing them all once.

Tom, I understand you have another engagement.

JONES: Yes, I'm sorry.

SARBANES: That's all right. That's all right. We understand that. Is anyone else in a comparable situation?

Well, first we'll hear then from Tom Jones, who since now for a decade has served as managing director of the Washington Office of Habitat for Humanity International. He has served as pastor of a large Presbyterian congregations and here in Washington, in Louisville, and Orlando and Miami, Florida, and in the academic world has been vice president of a theological seminary faculty member of two seminaries. He's earned a Bachelor of Arts, Master of Divinity, Master of Theology, Doctor of Ministry Degrees. And, he's doing this wonderful work now with Habitat, and we're very pleased to have him here today.

And we look forward to hearing from you.

JONES: Mr. Chairman, thank you.

I do apologize. At 2 o'clock we are doing a signing of MOU with EPA about ways that we might reclaim some brownfields to build some Habitat and other low-income housing. So, we're going to do that over in Northern Virginia.

SARBANES: Good.

JONES: Mr. Chairman, on behalf of Habitat for Humanity International, again, I want to express appreciation to you and to your other distinguished colleagues for the vital part that you play and for the commitment you have for working together toward our goal that every person have a decent place to sleep every night.

And especially we want to thank you and your colleagues for the ways you demonstrate your support for self-help housing as a way for persons to achieve the American dream of home ownership regardless of economic standing.

Thank you for the way you not only support that in your leadership, but for what you and your colleagues are actually doing as witnessed in the program that the Senate approved called the Houses the Senate Built. I was thinking, as I sat here earlier, that today, as a result of what all of you Senators did last year in building two habitat houses in Capital Heights, two families, the Spencers and the Williams, now live in those houses, own those houses. Last night their kids did their homework in their own bedrooms. They got up this morning, had breakfast together in their own homes as a result of this way that you and your colleagues are leading.

And today I'm glad to say that 60 United States senators have now agreed and formally made relationships with Habitat affiliates across the country to build Habitat houses this year as a continuing part as the Houses that the Senate Built.

Mr. Chairman, in addition to your personal commitment, I'm glad to report that every member of your housing subcommittee has agreed to do this and four other members of your parent committee already are on board and are doing The Houses that the Senate Built this year. And, I know your strong influence will prevail.

And you will have all of your colleagues before long, not only on this committee, but in the whole Senate, lined up to do this.

And I must do, if I may, have a personal privilege, which is the way we Presbyterian clergies do it to say thank you to you for training Amy Randall (ph) and sending her to us and for the great job she's doing in serving our whole society right now.

It is an honor to appear in the same hearing with Secretary Martinez and with our other colleagues here who are involved in our attempt to provide opportunities for everyone to have a decent place to live. Truly, Secretary Martinez, and the administration he represents has focused attention on a commitment to home ownership, particularly to narrow the gap for minorities and low-income persons.

And, like you, they too have walked their talk by building Habitat houses with Habitat homeowner partners in various parts of the country in this past year. And we are appreciative.

Mr. Chairman, Habitat for Humanity is now starting its 26th year. It took us the first 24 years to build the first 100,000 houses worldwide. At that time we took a commitment to build the second 100,000 houses in five years. That is a huge commitment and we will be -- which will be achieved only as all of the sectors, the public, the private, organized labor, the non-profit, work together.

And, so far this is happening. At the present time, Habitat for Humanity is now building a house someplace in the world about every 26 minutes. In the United States there are 1,628 Habitat affiliates in all 50 states. The average Habitat homeowner in the United States is in the below 50 percent of median income. 71.8 percent of all Habitat homeowners in this country are minorities, African American, Hispanic and Native American backgrounds.

Habitat for Humanity still houses are still built by volunteers primarily, sold at no profit, and, with a no interest long-term mortgage that each family can afford. But, the recent huge success of Habitat in this country has roots in two very important federal programs. Once called SHHOP, Self-Help Homeownership Opportunity Program, and one called Capacity Building for Habitat for Humanity.

As you know, I've believe Habitat does not use government funds to build houses, but we do depend upon and appreciate very much the partnership with government through which we do what we call setting the stage, land and infrastructure and capacity building because when the stage is set we found that then that motivates the private sector to raise the funds and the resources people and other resources to build the houses.

The SHHOP Program is important in ways that my words cannot completely describe. SHHOP was enacted by you, the Congress, in 1996. These funds can be used only for land and infrastructure. They are available only to national and regional non-profits who can reach a certain threshold. They are there in order that non-profits might do more of what they do well.

JONES: There is a complete accountability to the Congress through HUD by the national and regional group. This does not then increase government bureaucracy.

The government funds are used as seed funds, and all of the houses built must include the self-help component, or what we call sweat equity. Up until now, for every $10,000, a house has to be produced. Both HAC, Housing Assistance Council, and Habitat, the two biggest users of SHHOP, have realized from experience that we do need to raise that perhaps to $15,000 and hopefully with a waiver that the HUD secretary could make for very, very high cost places. Land and infrastructure costs are going up. The average of both HAC and Habitat now is about $22,000 per unit.

When the mandated deadlines for Habitat for FY01 are met -- and they will be -- Habitat, through its use of SHHOP funds, will have resulted in the building of 7,382 homes, all for home ownership, serving over 26,000 persons, almost 17,000 of whom are children, now achieving the American dream, living in their own home. And we strongly support and appreciate the administration's significant increase for SHHOP.

Our Habitat experience each year since its inception is that when we make the first announcement about the SHHOP funds, we have over 40 percent more Habitat affiliated requesting funds than we have funds to grant. And we have not been able to meet the needs of some affiliates because of the large cost of land in some places. So raising the threshold from $10,000 to $15,000 and doing the waiver, we are confident these funds will be used, they'll be used efficiently and effectively, and they will result in more Habitat and other homes for home ownership for persons who perhaps in no other way could own their own homes.

Mr. Chairman, every time that we do this, that we put a family in their own home for home ownership, they are taken permanently off your annual worry list to provide housing in other ways.

Many Habitat affiliates need land and infrastructure to set the stage. Many need other forms of capacity building, and thus there is the program called Capacity Building for Habitat for Humanity. We support the administration's request for the $5 million, and it honestly can greatly increase production if even more could be made available.

In our written testimony, there is some information about the proposed tax credit for home ownership. We have huge hope for this. It's supported by the administration. It's supported by many of our colleagues in both the private and public sectors.

We think it will really revolutionize productivity for Habitat, at least, because of the experience we've had in Florida, where they've had a corporate tax credit which can be used for low income housing. As a result of the combination of that and the SHHOP program, some affiliates in Florida are our largest producers. The Jacksonville affiliate recently built 200 houses in one year and will by the year 2005 be building 500 houses a year by the combination of these two programs.

Mr. Chairman, in many ways, a home is the cornerstone of life, of what we call sustainable development. And home ownership is still the dream for most families regardless of economic standing.

Together, we can and we will make it possible for more and more persons to achieve that dream with all of its benefits of self-worth and dignity and equity-building and the like. Together, we will persevere until we have eliminated substandard housing from the face of the Earth. And all of us will do it together, because it is right.

Thank you, Mr. Chairman.

SARBANES: Thank you very much. I'm going to ask a couple of questions, and then I think we'd better excuse you so you can get to your EPA meeting since this brownfield transfer, presumably, will help to address one of the problems you've specified here in terms of acquiring land at some reasonable cost.

This committee has been focusing at lot of attention on predatory lending, as I think you're aware, and not just yield spread premiums -- that's our current focus. We held a hearing earlier this year back in the summer and went over a number of the abuses that were taking place and so forth.

What does Habitat run into in this regard? I know Habitat homeowners get a zero percent mortgage, don't they, generally speaking?

JONES: Yes, always.

SARBANES: Always. But I've heard reports of Habitat homeowners being refinanced out of their zero percent mortgages into high rate mortgages, in the end, maybe even resulting in foreclosures. Could you touch on that a little bit?

JONES: Yes, sir. As you can imagine, Habitat homeowners, in many cases, are very vulnerable. These are persons -- when a less than moral person comes to them with cash in hand, it is -- so we have taken several steps. One is we have supported and tried to support the kind of leadership that you and your committee have given in terms of any legislation that we can support for this.

We also have taken other steps. We have 1,628 affiliates. Each has its own 501-c-3 nonprofit status, it's own locally elected board. So we don't have legal control over these local affiliates.

But we have urged them and worked with them through our legal office. And we've come to the point now where most of these affiliates are doing what we call second mortgages. These are second mortgages which are paid off in longevity. So the second mortgages have to be handled before any predatory lender can begin to deal with them.

We've also attempted to work with our affiliates and the affiliate boards. What happens in Habitat is that you develop a relationship when you build this house. As the homeowner does sweat equity, you get to know them. And, usually, they don't let each other down, and you really put that relationship in concrete, so to speak, when they sign this 15 or 20 or 25-year mortgage with the local Habitat board.

So we're encouraging them to do more and more of counseling about this, even before they become homeowners. But, legally, the second mortgage is -- where this is not, we are doing everything we can to work in terms of supporting legislation, supporting everything we can, because Habitat homeowners would naturally be vulnerable.

SARBANES: I know you wrote to the Fed when they were considering the HOPA (ph) regulations...

JONES: We did.

SARBANES: ... urging a provision whereby a lender could not refinance a mortgage with a subsidized interest rate without demonstrating that such refinancing would be in the best interest of the borrower. Unfortunately, the Fed said they wanted to consider that provision further and did not include...

JONES: It was not in the final rule.

SARBANES: It wasn't in the final rule. But that would certainly address the situation that you run into, would it not?

JONES: It would, it would. And we support that, not only from the standpoint of Habitat, but from all other of our colleagues who work with low income persons.

SARBANES: Right. Well, thank you very much, and we appreciate your testimony.

JONES: Thank you, sir. And, again, I apologize for needing to leave.

SARBANES: No, no. You're going to do good work. I guess I should say the Lord's work in your situation. Thank you very much.

JONES: Thank you, sir.

SARBANES: We'll turn to Sheila Crowley, another former staff member of this committee, along with Amy Randall (ph), who's now working with Habitat and, as Tom said, doing a very fine job for them. Sheila actually worked with this committee in '96 and '97 as a social work congressional fellow.

She's now the president of the National Low Income Housing Coalition. She's on the board of the National Housing Trust, of the Technical Assistance Collaborative. She has a Ph.D. from Virginia Commonwealth University, and we're very pleased to have her back with the committee, and we'll be happy to hear from her.

CROWLEY: Thank you very much, Senator Sarbanes, and it is an honor to be invited here today, and especially wonderful to be invited by you as the chairman. So thank you for having me.

SARBANES: I quoted good parts of your statement. I don't even have to quote them again.

CROWLEY: I noticed that.

SARBANES: We will include the full statements in the record for you and Mr. Reilly and Mr. Jones, of course. So if you could go ahead and summarize it, we'd appreciate it.

CROWLEY: I will. Many parts of the HUD budget I made specific references to in my written testimony. I'm not going to use this time to go over those. But there are several issues that we urge the committee to take a careful look at.

I do want to start by thanking you for your attention to the problem of the OTAG grantees. Many of our affiliates at the state level and local level are in the position of really being in pretty bad shape right now. So I thank you on their behalf for your pressing on that.

An assessment of the 2003 HUD budget proposal is only meaningful if we ask, "in comparison to what?" Compared to what many of us feared with the return of the federal budget deficit, the president's proposal is a relief. Compared to the 2002 HUD appropriations bill, the president's proposal is remarkably similar. Compared to the HUD budget in the last year of the Ford Administration, the 2003 HUD budget proposal is a shadow of its former self.

Compared to the housing needs of extremely low income Americans, the proposal is wholly inadequate. And compared to what the federal government could afford to invest in low income housing, if addressing critical housing problems were a real and not a rhetorical priority, the president's 2003 HUD budget proposal is unacceptable.

You did go over the numbers that I provided about the extent and depth of the affordable housing crisis. The National Low Income Housing Coalition's analysis of the American Housing Survey data ultimately boils down to what we see as about 14 million households that are extremely low income.

Some are renters, some are homeowners, some are homeless. They are all people with incomes under the 30 percent of their area income, and they have severe housing problems. They pay over half of their income for their housing.

And just to make sure we have some perspective on that, 30 percent of the area median income in the District of Columbia is $18,390 a year. So these are the people who work in hotels. These are cashiers. These are daycare workers. These are the people that we depend upon to do their jobs so that we can do our jobs.

The affordable housing crisis can be invisible, because so many of these people are holding on by their fingertips, and their plight only becomes visible if they lose their grip and they slip into homelessness.

The disparity between income and housing costs has serious implications for a whole range of other social policy objectives. I was glad to hear Senator Corzine ask the secretary about what they were doing on welfare reform.

To quote a Hudson Institute report about welfare reform in Wisconsin, "It is no longer the case that success in the labor market guarantees success and stability in the housing market." Unfortunately, the proposed HUD budget makes no mention of the role of housing in welfare reform, nor does the proposed HHS budget address housing in its plans for TANF reauthorization this year.

It is an absolute certainty that housing stability is essential to family stability. It is the bedrock upon which families thrive, and failure to address the lack of affordable housing we see as anti- family.

Some of us can remember before there was contemporary homelessness, when there were lots of poor people in 1970, but there was a small surplus of housing that they could afford. Today, there is a severe shortage.

Between 1991 and 1999, we lost a million units of housing affordable to extremely low income Americans, a 14 percent decline. The sharp federal disinvestment in low income housing assistance began in the late 1970s. Had we continued to fund low income housing assistance at the level authorized in the 1970s, it is safe to say that we could have prevented much of the homelessness in the '80s and the '90s, and the housing shortage we are experiencing today would not be as severe.

So in light of these data, the proposed 2003 HUD budget has serious shortcomings. Most of the increase that is called for will simply allow housing programs to stay current. There is not a real expansion of programs.

The president does propose to expand housing vouchers by 34,000. We appreciate the emphasis on home ownership and the programs that he is offering to that goal. The goal to end long-term homelessness is laudable, but is an empty promise, because there are no resources in this budget to actually house people.

CROWLEY: Solving the affordable housing crisis is well within the capacity of American ingenuity and resolve. We know what needs to be done. We have to improve people's incomes. We have to expand vouchers. We have to preserve the current assisted and public housing.

And, finally, we must build new housing. But what is most disappointing about the president's 2003 HUD budget is its failure to address housing production in the face of such overwhelming need.

Let me close by talking about the National Low Income Housing Coalition and our partner organizations, some 1,900 of them now across the country, who are calling for the establishment of a national housing trust fund.

And, Mr. Chairman, I would like to enter this list of endorsers of a national housing trust fund into the record.

SARBANES: It will be included in the record. Thank you.

CROWLEY: The national housing trust fund should be capitalized with dedicated sources of revenue sufficient to produce and preserve 1.5 million homes for the lowest income households in the next 10 years. We look forward to a debate on S. 1248, the National Affordable Housing Trust Fund Act, in the Banking Committee this year.

Thank you again, Senator Sarbanes, for the opportunity to represent the members of the National Low Income Housing Coalition at this important hearing.

SARBANES: Thank you very much.

Next, we'll hear from Joseph Reilly. Mr. Reilly has been with J.P. Morgan Chase Community Development Corporation since 1989. The group provides financing for affordable housing and other community development projects in a number of states, New York, New Jersey, Connecticut, Delaware, Maryland, Pennsylvania, here in Washington, Texas as well, as I understand it.

Prior to joining Chase, Mr. Reilly held several positions with the New York City Department of Housing Preservation and Development, including two years as the director of its Vacant Building Program, New York City's largest public-private initiative designed to finance the rehabilitation of the city's vacant housing stock. Currently, he serves on the boards of the Low Income Housing Firm, the Community Development Trust, and the Enterprise Social Investment Corporation.

Mr. Reilly, we're pleased you're here. We'd be happy to hear from you.

REILLY: Thank you, Mr. Chairman.

During the 24 years I've been involved in affordable housing and community development, I have seen the issues from a variety of perspectives. As you mentioned, I spent six years working for a faith-based organization, the Northwest Bronx Community and Clergy Coalition; another six years working for New York City's Department of Housing Preservation and Development; and for the past 12 years, I've worked for J.P. Morgan Chase, where I currently manage a staff of 40 professionals who finance affordable housing and commercial real estate projects in areas served by our bank.

Over the past five years, J.P. Morgan Chase has provided over $2.6 billion in community development financing. We continue to seek new and innovative ways to provide financing which will strengthen the communities we serve.

While much has been done to solve the problems American families are facing in finding decent, affordable housing, much remains to be done. Many high cost areas like New York suffer from a profound shortage of both rental housing and home ownership opportunities, not only for very low income families but also for low and moderate income families. We have a growing crisis that requires the ongoing attention of policymakers and both short-term and long-term measures to achieve our national goal of a decent home in a suitable living environment for all Americans.

The good news is that during the past decade, our industry has experienced a significant strengthening in learning how to produce decent, affordable housing for low- and moderate-income families and communities. For-profit and non-profit developers, lenders, investors, community leaders, and government at all levels have learned to collaborate as partners in devising new solutions and creative financing strategies for producing affordable housing in thousands of communities.

We have built the infrastructure necessary to have a major impact on housing needs and coped with the often conflicting requirements of the many federal, state, and local subsidies we need to do our work. We have learned over the years how to do it right, how to build affordable housing for rent and home ownership that contains a mix of incomes, housing that is built with the discipline of the private market and leverages public resources responsibly, housing that is of high quality and lasting value, housing that stays affordable over the long run, housing that people are proud to call home.

Insured depository institutions like J.P. Morgan Chase are an important part of this infrastructure. The U.S. Treasury documented that from 1993 to 1998, the amount of mortgage lending to low and moderate income communities and borrowers by CRA covered lenders rose 80 percent. In 1998 alone, Treasury reported at least $135 billion in mortgages to these borrowers, made by insured depository institutions.

As good as these solutions are, they come nowhere near meeting the need. The public, non-profit, and for-profit organizations that have mobilized and partnered to provide affordable housing face three major constraints in our ability to deliver more decent, affordable units.

First, federal funds are often encumbered by well-meant legislative and regulatory constraints that impair needed flexibility to meet community needs. Sometimes, something gets lost in the translation of housing policy when it is regulated into practice. And inevitably, the more tightly the subsidies are targeted to those most in need, the greater the financing gap and the harder it is to make the deal economically viable.

Second, we could finance more affordable housing if we had more resources. The past decade has confirmed that there is no magic to the provision of affordable rental housing. Affordable housing can only be built if public subsidies fill the gap that exists between what families can afford to pay and the costs associated with the construction, operation, and maintenance of decent, affordable housing.

Federal programs such as HOME, CDBG, and the Low Income Housing Credit have played valuable roles in helping to fill that gap, but rarely do it alone. For example, many housing credit deals in low income communities require additional subsidies to fill financing gaps. But funding levels for all federal programs have failed to keep pace with rapidly growing need, and these programs come with complex requirements that slow or even discourage development of new units.

Unfortunately, over the past decade, the focus at the federal level has shifted to demand side subsidies, which do not increase the supply of affordable units. In addition, there is an aging housing stock of affordable units that needs new roofs, new mechanicals, and new systems to remain viable.

Third, in some states there is a scarcity of permanent financing for multifamily affordable housing. Affordable housing developments often involve subordinated debt and low income housing tax credits that make multifamily mortgages non-conforming for sale to the secondary market. Smaller projects also have difficulty attracting the required permanent financing.

In the short run, the more we can simplify the regulations, processes, and paperwork of federal assistance, the more we will increase the efficiency of the programs and private sector participation. Simple, flexible funding sources that have had real impact with maximum efficiency include the Affordable Housing Program of the Federal Home Loan Banks and the Community Development Financial Institution fund. A streamlined, permanent loan product, which made non-conforming affordable housing loans more attractive to investors would also be extremely helpful.

In the long run, the federal government can be a catalyst for attracting more private capital to affordable housing by providing a stable, predictable source of capital that would not be subject to the annual appropriations process, in keeping with the long-term nature of community development.

It is also clear that home ownership opportunities for low income families and communities are not keeping pace with the rapidly growing need. The president's budget proposes a tax credit for developing affordable homes that builds on the success of the Low Income Housing Credit and would do much to alleviate the shortage of affordable home ownership opportunities in our neediest communities. NAAHL has endorsed this single family tax credit and asks Congress to enact it as soon as possible.

Similarly, the proposed quadrupling of the American Dream Downpayment Fund will help many low income homebuyers achieve their own home, while the proposed increase in housing counseling funds will help those struggling to keep their homes.

I want to thank you very much for the opportunity to be here today.

SARBANES: Thank you very much, sir, for a very strong statement. I would start by two things you said, and I just want to underscore them.

One is that we have built an infrastructure, a public-private partnership infrastructure, and, as you put it here, we have learned over the years how to do it right, how to build affordable housing for rent and home ownership that contains a mix of incomes, that is built with the discipline of the private market and leverages public resources responsibly, that is of high quality and lasting value, that stays affordable over the long run, and that people are proud to call home.

I think that's extremely important. That's one of the reasons I had that perhaps sharp exchange with the secretary about the OTAG and the ITAG funding for these community-based non-profit organizations, because they're a part of this infrastructure. It's hard to get them up and going, and it's very easy for them to fall down and, in effect, go by the wayside. So we're extremely concerned about that.

But I do think your point is well taken, that we have this structure in place, we have the vessels, and we need to figure out how to put more liquid, more resources, into them. That's why I think the housing trust idea holds a lot of prospects. We're going to have to examine that.

What's your own view on the housing trust idea?

REILLY: I think that a long-term, sustainable source of financing to encourage the development of affordable housing is an important thing to have. I think it would probably be best that there are sources that address the needs at various levels of income, because there are shortages at very low, low, and moderate income levels.

SARBANES: You mentioned the CRA. How important a player do you think that is in this picture?

REILLY: I think that CRA has encouraged lenders to be more active in community development activities.

SARBANES: Well, my understanding is it's made some lenders finally aware of the fact that, actually, they can do well by doing good, that there is, in effect, a market there that is profitable if they can get into it. And some of the financial institutions -- and yours is one of them -- have been pretty active in that field. Is that not the case?

REILLY: We feel that we are one of the national leaders in community development, in financing community development projects, both residential and commercial. We feel very strongly that we're a leader in that field.

SARBANES: Ms. Crowley, I'd like you to take just a couple of minutes and walk us through this housing wage.

CROWLEY: Sure.

SARBANES: I did a little bit of it with the secretary this morning, but you've spelled it out well in your statement, and I think we really ought to get it on the record. So, if you would, just take us through it step by step, the concepts, how they came about, and then give us some of the figures. I think that would be helpful.

CROWLEY: Sure. I'd be happy to do that. The housing wage is a measure that was developed by Cushing Dolbeare, who is the founder of the National Low Income Housing Coalition, and the coalition has been issuing reports based on this for about 10 years now.

The housing wage is very simply what you have to earn on an hourly basis if you work full time at 40 hours a week, 52 weeks a year, and you pay no more than 30 percent of your income for your housing in order to be able to afford the fair market rent. And the fair market rent is the hourly measure of rental housing cost that is available on a jurisdiction by jurisdiction basis across the country. So using the fair market rent allows us to really analyze this problem in a very specific way, down to the jurisdiction level.

The fair market rent is the figure that HUD generates that is used to determine what is a fair price to pay for the rental housing that HUD subsidizes. And at the moment, for most jurisdictions, the fair market rent is at the 40th percentile of rental housing costs.

So for any given community, 40 percent of the rental housing will be less than the fair market rent, and 60 percent will be greater than the fair market rent. Essentially, that means that we're talking about some modest rental housing, and it has to meet certain quality standards, so we're talking about what it costs to get decent housing.

So that's why we use those measures and those variables. And when you work that out, and you begin to aggregate that up to the state and national level, what you see is an enormous gap between what the housing wage is and what real wages are.

SARBANES: Let me ask this question. Where does the 30 percent of income for housing figure come from? You've explained the fair market rent, so you would have a price geared to 40 percent of the rental housing cost. Where do we get the figure that the reasonable percentage of your income to devote to rent would be 30 percent?

CROWLEY: It is a generally accepted standard in the housing industry. When you calculate what it is you could afford for a mortgage or for rent, that's what the standard is.

It's codified in the percentage of income that we charge to people who are receiving housing assistance. And so through the Section 8 (ph) program and public housing, et cetera, what we say is that 30 percent is the standard of affordability, and then we subsidize up to what the fair market rent is.

It's important, I think, to note that at the beginning of this effort of doing housing subsidies, in fact, we determined that 25 percent of your income was the reasonable percent to pay for your housing, and, over time, that has been allowed to go up.

SARBANES: To 30 percent.

CROWLEY: Yes.

SARBANES: OK. Now, why don't we carry through the wage figures. I'm trying to see how much income you would have to earn so that 30 percent of that income would give you enough money to have a house at the fair market rent. Is that right -- I mean, not a house, but to rent at the fair market rent.

CROWLEY: When you aggregate it up on a national basis, it's $13.87 an hour. It ranges from $8.50 an hour in West Virginia to $18.33 an hour in California. In some jurisdictions, San Francisco being the most severe problem, it goes up to $33 an hour.

This map, which we appreciate the committee using to illustrate the extent of the housing crisis -- we developed this map this year, mostly because we were told that there was an opinion within the administration that if you had two minimum wage earners in a household, then you could afford to pay rent anyplace in the country.

So when we did our analysis, we looked at that, and the red states are those states where, even if you have two full time minimum wage earners in your household at the prevailing minimum wage in that state -- some states have a higher minimum wage than the federal minimum wage -- even if you have two of them, you cannot afford to pay the housing wage.

There are three states -- New York, New Jersey and Hawaii -- where three full-time minimum wage jobs are insufficient to pay the housing wage.

SARBANES: And that's a range from $8.50 in West Virginia to $18.33 an hour in California.

CROWLEY: That's right.

SARBANES: In California, you could have two workers at the minimum wage and still be way, way below what you need in order to afford the fair market rent.

CROWLEY: I was in California recently visiting my daughter who's a renter in San Diego, and it's really astounding what the housing market is like out there and how extraordinarily difficult it is for people to find just a reasonable place to live and not have to pay very, very high percentages of their income for their housing. And, consequently, they have lots and lots of people doubled up in garages and things like that.

SARBANES: I want to very quickly run through some of these program comments you have toward the close of your statement. And, Mr. Reilly, if you want to, at any point, come in on these, we'd be happy to hear from you.

Combining the three competitive programs in HUD's McKinney-Vento Homeless Assistance Program -- what do you think about that?

CROWLEY: I think that the evolution of the McKinney Homeless Assistance Programs over time at HUD means that it makes sense at this point to put that out as one source of funding for communities to make some decisions about how best to spend them. We have to maintain the expectation that they will focus that on permanent housing, as the Congress has directed in the last year that 30 percent has to go into permanent housing.

Our concern about this proposal and listening to the secretary's discussion about it makes it sound a lot like a block granting of the McKinney funds, which, as you know, has been something that people have had very strong feelings about for many years. So we would want to guard against that.

It is the opinion of the National Low Income Housing Coalition and many of our colleagues who are doing low income housing development as well as homeless service delivery that maintaining a federal responsibility and a federal oversight over homeless service delivery is essential, and that devolving that to the community level in many ways accepts homelessness as a permanent condition, which we don't think it should be.

SARBANES: We also have this continuum of care concept. We don't want to lose that in any way, do we? Isn't that an important aspect of dealing with the homeless?

CROWLEY: Actually, I think it is, and I do think that getting rid of the normal compliance of the categorical precedents would help make the continuum care work better. I've sat on local continuum care decision making boards, and they spend a lot of time trying to fit square pegs into round holes. It will allow the program to be more tailored.

SARBANES: I wanted to actually have an exchange with the secretary on the capital funds for public housing, which has been reduced again in this budget. And they're now floating the idea of allowing the housing authorities, in effect, to take mortgages out on the public housing, which, presumably, would raise capital with which they could upgrade the public housing.

So on the surface, it looks like a way to draw in additional capital. But what would happen if -- how would you service the mortgage? You'd have to build the cost of servicing the mortgage either into the rents, or you'd have to get some sort of grant year by year from the federal government in order to service the mortgage. Wouldn't that be the case?

CROWLEY: As far as I understand it, but I don't begin to understand precisely what it is that they are proposing. My concern about the proposal is -- and I think we should experiment with things. We shouldn't always keep things the same. We should experiment with them. And I think that those are really important questions that have to be answered.

I think that cutting the capital fund in anticipation of something that may or may not pan out seems rather premature to me. And another thing is the backlog on repairs and modernization of public housing is much greater than what the capital fund has been funded for anyway. So I think that if Congress wants to consider allowing HUD to try this, we should look at that carefully and figure out what the ramifications are, but it shouldn't be in lieu of funding the capital fund at the level that is required.

SARBANES: Well, I understood that part of the proposal was to allow -- you could voucher someone out of public housing, and then make the unit available for unassisted housing. Do you understand that that's part of their proposal?

CROWLEY: That they would make public housing available for...

SARBANES: In other words, you could say to someone, "All right. We'll give you a voucher. You can go somewhere else." And once that was done, since their housing need has been met, the unit would become available to be given to someone who doesn't need assisted housing -- I mean, rent it to someone who doesn't need assisted housing.

Of course, if that's the case, it would be a way of, in effect, over time, doing away with the public housing stock, particularly in the more -- well, upscale may be too far -- particularly in the better neighborhoods, wouldn't it, which, you know, would in many ways perhaps have an appeal to be converted over from public housing into unassisted housing.

CROWLEY: Well, my reaction to that is that there are -- most public housing authorities have waiting lists for people looking for housing assistance. So to then go into something that is going to make very scarce resources available to people who don't need housing assistance seems to me to be not really meeting what their mission is. And I do think, as you point out, it has the potential of ultimately the loss of public housing stock.

SARBANES: What kind of production programs do you think we most need?

CROWLEY: We most need a production program that's going to provide rental housing for extremely low income people. There are all sorts of other rationales for doing a production program for other kinds of housing and other segments of the eligible population.

But the data are very stark that over the last 10 years, the loss of housing that is affordable to extremely low income people has been precipitous, while at the same time we have, in fact, seen an increase in the number of units that are affordable to people in the upper tier of the eligible group. So if we are making decisions about where the most serious priorities are, then we think that's where it should be directed.

There is certainly room for doing a variety of other things if you decide to put sufficient funding into that. But our position and the position of the National Housing Trust Fund Campaign is that that is where the most serious unmet need is.

SARBANES: Can you get at that need through a kind of hand-me- down process in housing, or doesn't that work? In other words, if for one reason or another, you can't provide the additional production at that level, you would provide it at a level somewhat higher, but then the housing that those people are in gets passed down and becomes more available.

CROWLEY: The traditional filtering down concept -- we've actually begun to talk about a filtering up process, and that if you build more housing that -- there is so much housing that is occupied by people who cannot afford that housing. But if you simply build more housing that is affordable to people in that income range, you are going to ease the gap for people at that level, but you're not going to do anything to solve the problem for people at the lowest end. So we really think that if you begin to build housing at the lowest end, then, in fact, what will happen is that you'll free up housing for people higher up.

REILLY: I think you also have to be concerned about the quality of the housing that filters down, and I think that we need to be very conscious of the quality of housing that -- I mean, if you just sort of say whatever's left over will be the lowest income housing, I think that we should be concerned about what the quality of that is, which is going to leave you with a financing gap then as well, which is that that housing which filters down needs to be brought up to a certain standard.

CROWLEY: Right.

REILLY: And in order to do that -- you know, I look at this map and I see -- you know, here's how you demonstrate -- here's how you quantify what the gap is. The next map, the overlay here, should be -- at some point, here's what the housing cost is in that area, or what it costs to build in that area, and here's how many units you need. You put it all together and you figure out what the gap is.

REILLY: But if the lowest income housing is going to be whatever is sort of left over, to bring it up to some certain standard, you're going to have to finance that anyway. And people, based on their incomes, are not going to be able to afford that anyway, so you're going to have to subsidize it from that perspective, I think.

CROWLEY: What we hear from the non-profit development world -- and I'll defer to Mr. Reilly on his assessment of this -- is that developing housing for the extremely low income people is something that they can't do because they don't have the resources to be able to do that. And so the other programs that are available target the Low Income Housing Tax Credit eligible group, the HOME group, and those folks.

So the whole idea behind the housing trust fund is to create not a new program, but a new source of capital that will be specifically dedicated to the production of housing for those people for whom there are no resources at this point, and those resources would be coupled with the other resources so that you can create a full range of mixed income housing in any given community.

SARBANES: Well, you've been very helpful, and we appreciate the obvious work and care that has gone into your statements. We'll stay in close touch with you as we proceed to work on this budget.

Thank you all very much. The committee stands adjourned.

END

NOTES:
[????] - Indicates Speaker Unknown
   [--] - Indicates could not make out what was being said.[off mike] - Indicates could not make out what was being said.

PERSON:  PAUL S SARBANES (94%); TIM JOHNSON (57%); JACK REED (56%); CHARLES SCHUMER (56%); ZELL MILLER (55%); CRAIG THOMAS (55%); EVAN BAYH (55%); DANIEL K AKAKA (54%); DEBBIE STABENOW (54%); JON CORZINE (54%); PHIL GRAMM (53%); A WAYNE ALLARD (52%); MICHAEL B ENZI (52%); MICHAEL CRAPO (51%); JIM BUNNING (51%); JOHN ENSIGN (50%); 

LOAD-DATE: February 19, 2002