Statement of Jan E. Shadburn
Former Acting Administrator, Housing Programs
Before the Senate Subcommittee on Agriculture, Rural Development and Related Agencies
April 15, 1997
Mr. Chairman and members of the Committee, thank you for this opportunity to testify today on the President's Fiscal Year (FY) 1998 budget proposal and the accomplishments and goals of the Housing Programs.
The Housing Programs (Housing Programs), succeeding the Farmers Home Administration, provides opportunities to rural families which help them improve their standard of living, move out of poverty and build for the future. We enable rural communities to enhance the quality of life of their residents and to strengthen their economic competitiveness. We accomplish this mission by providing rural people and communities with: access to credit -- which, as you know, is often limited in rural areas; subsidized loans and rents; and technical assistance and support to complete their community development efforts.
Housing Programs operates several housing assistance programs that provide decent, safe and affordable rental and homeownership opportunities to a wide variety of rural Americans. Housing Programs also administers the community facilities direct and guaranteed loan and grant programs which provide funding for essential facilities such as health care centers, fire stations, municipal buildings and day care centers. These facilities allow rural communities to provide an improved quality of life for their citizens and remain competitive in attracting jobs and businesses. We deliver these programs and the necessary technical assistance through a network of state and local offices, many of which are or will be collocated with other Department of Agriculture (USDA) agencies in USDA Service Centers.
Too many times we talk about the number of housing units, the square footage or the payment with the associated subsidy cost. We lose touch with the final product in the blur of our daily work -- that product is a chance at the American dream for thousands of poor working families. That product is the result of the efforts of this Congress and USDA, which gave an opportunity to a family or a community. The investment has paid off thousands of times, both for the individuals and communities and for the Federal government. The rewards continue to grow.
While we have provided this assistance for many years, we now also focus on four goals:
I would like to update you on our efforts on these four goals and our modifications to the Section 515 rural rental housing program, but first I would like to share with you the impact of housing and community facilities programs on the broader range of issues which concern this Congress. These issues include moving individuals from welfare to work, containing health care costs, providing an adequate start to children to improve their opportunities in life and improving the competitiveness and stability of the rural American economy.
Although Housing Programs finances the physical construction or rehabilitation of housing and community facilities, the impact on the community and the individual goes far beyond the tens of thousands of construction and related jobs, the millions of dollars generated each year in building and associated trades, the more than $1 billion boost in state and local taxes and the actual physical shelter provided. Our assistance literally allows individuals, families and communities to turn their lives around and to start to become self sufficient. Let me just give you a few examples.
Some of the worst housing in the country is experienced by farmworkers. The horrendous housing conditions that some of these workers endure cause so many other problems, particularly for the children. I would like to share with you how one family near Madera, California credits Housing Programs's farm labor program with providing them the opportunity to have a decent life and a future.
Three years ago, a young farmworker and his family were sharing a substandard, one-bedroom house with another family. The father worked very hard in the fields, but the high cost of child care prevented the mother from finding a job. It seemed that the children in this family had dim prospects of a better life than that of their parents -- that is, until the family was able to move into the Housing Programs-funded la Casa de la Vina farm labor housing complex, located adjacent to the grape fields which the father helps to cultivate. The eldest child attends a nearby elementary school and the middle child attends the Head Start program located in the la Vina development. These children have stability, a decent home, and good educational opportunities, all of which seemed out of reach just three years ago. And the mother now feels sufficiently secure about her children's safety and her housing that she has started to work in a local produce- packing plant. This is just one example of the thousands of hardworking, low-income American families whose housing conditions -- and therefore quality of life -- have dramatically improved through participation in the Housing Programs Section 514/516 farm labor loan and grant program.
I would also like to tell you about what a difference in people's lives our Mutual Self Help Housing program has made. This program, in conjunction with our Section 502 direct loan program, allows groups of 6 to 10 families to build homes for themselves by contributing sweat equity. Each family works on every other family's house until every house is done. Only then may the families move into their new homes. The process lasts about a year, and it's easy to see how by the end, the families have built not only their homes but also a tight community. Billy and Debra Blackmon offer a compelling example of how these programs have brought prosperity and a sense of togetherness to the people in one rural Florida town. In 1986, Mr. Blackmon was working hard at his $6 an hour job, but he never seemed to get ahead. Today, he is a certified electrician with his own successful business, and he credits his participation in the Self Help program with enabling him to achieve that goal. Mr. Blackmon is giving back some of the opportunity the government gave him: today he hires young men from the local area to work in his business. He teaches them electrical skills and he mentors them, encouraging them to complete their education and to participate in society. Some of his employees who were considering dropping out of school are now on the honor roll. Mrs. Blackmon is giving back as well: she started her own day care program, thereby raising the income of her family and providing quality, affordable day care to her neighbors, who in turn are now able to return to work. As you can see, in the process of moving themselves out of poverty, the Blackmons have become community leaders and role models. Just 10 years ago, they were living in a one- bedroom structure that got soaked every time it rained. Now, they and their children live in a lovely home they built with their own hands. Thanks to the Self Help Housing program, their kids have opportunities that were unimaginable a decade ago, and their community is turning around.
As you are aware, the effort to move families off of welfare and into work requires the availability of affordable quality day care, which is often more limited in rural America. This can present a real barrier to a family who is trying to move out of poverty. Housing Programs's community facilities programs can be used to finance both adult and child day care and Housing Programs is working hard to ensure that communities can utilize this resource. I would like to share with you how Housing Programs's financing of the "Time for Tots" child care facility in Harlan, Iowa, has impacted so many residents' lives and supports your efforts to move families from welfare to work.
Time for Tots, financed by a direct community facility loan, opened in 1993 with a license to care for 113 children. According to Nancy Gessmann, general manager of Communications Data Service, Time for Tots benefits her business because "...workers are more dependable and absenteeism is reduced by as much as 50 percent." Harlan resident Mary Marco stated that "my entire life has blossomed as a result of Time for Tots." Ms. Marco, a single working mother of four, always struggled to provide her children with a safe and stable day care environment. But before Time for Tots, there was no affordable day care in Harlan, and Ms. Marco had no alternative but to move her children from sitter to sitter and relative to relative. And still she sometimes had to stay home from work to look after them. Of course, Ms. Marco's absenteeism prevented her from moving ahead in her job. She worried that she would have to go on welfare to make ends meet. But after Ms. Marco enrolled her three youngest daughters in Time for Tots, her income stabilized, and with a loan from our agency, she was able to move her family from a rented, two-bedroom apartment into her own three-bedroom home. Because of Time for Tots, Ms. Marco and her children have a better future. They and other Harlan families are able to stay off welfare, and Time for Tots's affordable, high quality child care has given many families the resources they need to move from welfare to work.
Rural America has seen tremendous progress from these investments. As a result, many of these communities are more competitive and stable, additionally many more families are contributing to the local tax base. Child care facilities and self help housing communities are pulled together by grass roots efforts of the local people. Children are healthier, doing better in school, gaining self esteem by having the pride of showing a friend where they live. This is the real story. However, we must recognize the task still to be done. Rural areas continue to have high poverty rates and over 2.3 million substandard homes. Many communities lack essential community facilities such as child care centers, fire stations and access to health care that not only impact the quality of life but also make it more difficult to attract and retain businesses. And we cannot expect a community or a family to become self sufficient if the economy is not thriving. However, we also cannot expect a family to be able to hold down a job and stay off of welfare if they do not have a decent and stable place to live. A permanent address and a decent place to live provide the stability that a worker needs to obtain and maintain a job and that a child needs to be successful at school.
Over the last two years, we have outlined our reinvention and partnership efforts to this committee. I would like to review those efforts and lay out our plans for the future to help achieve our four goals: reinvention, partnerships and leveraging opportunities, budget savings and expanding access.
Let me first discuss reinvention. As rural America changes, so does the Housing Programs. Our reinvention efforts in the single family 502 direct loan program, under the leadership of the Vice President's National Performance Review, are a great success and have set the standard for future efforts. We recognize that as we work together to balance the budget, we must use automation and modern technology to increase our efficiency, improve our customer service and cut costs.
The reinvention of the Section 502 single family direct loan program includes three components:
The Agency purchased a commercial off-the-shelf software system directly from the private sector with modifications to meet unique program requirements. Our borrowers will experience the best of both worlds by receiving the finest servicing the private industry has to offer today while still participating in Congressionally mandated "supervised credit" services delivered locally by our field staff. These services, unique to the 502 program, offer lower payments based on income (payment assistance), moratoriums and work-out agreements which allow our borrowers to preserve their homes through economic or financial difficulties. The automation and centralization efficiencies, the reduction in staff and the improved servicing of the portfolio will result in a savings to the taxpayer of $250 million over five years (1996-2000) and $100 million a year thereafter.
The Administration laid out a plan three years ago which stated that we would complete conversion to a centralized system by the end of FY 1997. On October 25, 1996, Secretary Glickman traveled to St. Louis, Missouri, to kick off the CSC, to announce that this goal has been achieved and to present Vice President Gore's Hammer Award to the staff who have worked on this initiative. We are proud of our staff and our efforts. This is truly a reinvention of our business. The conversion of the portfolio is proceeding in 7 phases and will be completed on schedule by September 1997.
This year, we continue to build on our reinvention efforts by focusing on our multifamily housing program. We are streamlining regulations and increasing automation. We hope to create a dramatically reduced, common- sense, non-bureaucratic set of regulations that eases the burden on our borrowers and our staff. We are confident that the result will be better administration of our programs and protection of our aging portfolio.
We are also working hard to maximize our use of technology. For example, we are now posting those community facilities direct loans that are eligible for refinancing with private sector credit on the Internet so that private financial institutions can discuss refinancing opportunities with these borrowers.
I would also like to share with you our efforts to increase and build partnerships and leveraging opportunities which expand our limited resources, ensure that as many dollars as possible are directed into rural communities, and build private, non-profit and other public sector participation in local rural development efforts, increasing their likelihood of success.
The goal of the President's National Partnership for Homeownership is to provide homeownership to an additional 8 million Americans by the year 2000. In support of the President's initiative, we have increased our efforts to cultivate partnerships throughout the states. Three of these new partnerships have been especially successful, and I will tell you about them now.
First, we formed the Rural Home Loan Partnership in June of 1996. Housing Programs joined the Rural Local Initiatives Support Corporation (Rural LISC) and the Federal Home Loan Bank System to create and deliver a new single family mortgage product to enable families below 80 percent of area median income to achieve homeownership. Housing Programs provides a fixed-rate, subsidized mortgage to cover a portion of the cost of a house, while a local bank provides financing for the remaining portion. Private non-profit community development corporations (CDCs) identify and counsel eligible borrowers and aid in the development of affordable housing opportunities. This counseling is often critical to the long term success of the homeowner. This partnership brings a new player -- The Federal Home Loan Banks -- into leveraging with the 502 direct loan program. Housing Programs's partnership with the community development corporations helps direct resources to very needy areas, leverages technical assistance and builds a long lasting partnership to accomplish other rural development initiatives. This product was demonstrated in 9 states, and 8 new partnerships are being formed this year. The states involved in this partnership include Alabama, California, Florida, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New York, Ohio, Pennsylvania, Texas, Washington, and Wisconsin.
Second, Housing Programs is also partnering to ensure homeownership education is available in rural America. Housing Programs is working with Fannie Mae, Freddie Mac, the Housing Assistance Council and Rural LISC to help build a rural network and support for homeownership education which typically involves a series of classes to instruct potential homeowners on credit, budgeting, savings, home maintenance and the basic ABCs of owning a home. Numerous indicators have shown that homeownership education reduces delinquencies and increases the long term success of the borrower. However, as with so many other support services and assistance, rural residents are often at a disadvantage in accessing these resources.
In addition to these new initiatives, one of our most successful partnerships, the Mutual Self Help program, also supports the President's homeownership goals. The Self Help program provides grants to non-profit organizations and municipalities to organize and provide technical assistance to groups of families who work cooperatively together to help build their own homes. The sweat equity built up by the borrowers means these families -- and the Federal government -- can get more house for less debt. The families are able to achieve the American dream of homeownership and start out with significant equity and greater commitment to their neighborhoods. Activity and interest in this program has increased tremendously in the last few years. In turning around borrowers' lives, the Self Help program brings together not only the contributions of the borrowers but also those of Federal, state, local, private, and non-profit organizations, all of which are committed to the goal of making homeownership a reality for low-income Americans.
Housing Programs's loan guarantee programs have brought increased numbers of financial institutions into partnership with the Agency. Over 1,600 partners now participate in the Section 502 guarantee loan program. This program serves low and moderate-income residents that fall under 80 percent of the median income. Additionally, in FY 1996, the agency implemented a demonstration of the Section 538 multifamily guarantee program. We plan to approve approximately $13 million in new loans for FY 1997.
In the Section 502 direct program, we have encouraged leveraging, which utilizes our direct loan funds in partnership with another lender's funds. We take the second lien on the property, with the private sector lender or housing finance agency in first position. The states have been creative in establishing a wide variety of partners across the country. In FY 1996 we leveraged almost 15 percent of our low-income 502 funds to increase homeownership opportunities to almost 1,600 families who would not have been served without this effort.
In the 515 multifamily housing program, we increasingly employ partnerships with state housing finance agencies, CDBG and HOME funds, the private sector and local community organizations. This has allowed Housing Programs to reach larger numbers of low-income tenants with limited budget authority.
In the community facilities programs, Housing Programs has leveraged over 50 percent of its funds with state, local and private partners. Housing Programs is developing a new partnership with HHS and Rural LISC to expand the number of child care centers in rural America and demonstrate a variety of financing models.
Housing Programs's third goal is to ensure access to our programs by all eligible residents and communities across rural America. Under Secretary Glickman's leadership, Housing Programs is continuing its outreach to underserved communities and populations and its efforts to comply with both the letter and spirit of the civil rights and fair housing laws. Let me give you a few examples of our activities in this arena.
Native Americans are among the poorest housed groups in America and mortgage financing has not been widely available on Tribal lands. In 1995, USDA and HUD jointly conducted a series of homeownership conferences to enhance opportunities for lending on Native American lands. One result of these conferences is a comprehensive guide for Rural Development staff called "Lending on Native American Lands." In addition, Housing Programs is working closely with Fannie Mae and several Tribal councils to better serve Native Americans' housing needs. Fannie Mae has agreed to a pilot program in which Fannie Mae will purchase Housing Programs guaranteed loans made on tribal lands.
Housing Programs has also improved the quality of life on tribal lands by expanding the use of the community facilities programs by Native American communities. For example, using a combination $825,000 direct community facility loan and a $675,000 guaranteed community facility loan, the Navajo Nation and the Foundation for Hospital Improvements were able to improve the medical compound at Ganado by building a new surgical wing, replacing the obsolete natural gas service line, making necessary repairs, and building housing for medical personnel.
Housing Programs has worked hard to ensure that all of our borrowers and staff follow the Fair Housing Laws. We incorporated a significant Fair Housing training component at all national housing training meetings last year. We are finalizing a Memorandum of Understanding with HUD on how to manage Fair Housing complaints. We have also significantly improved our annual Congressional Report on Fair Housing and Housing Programs Beneficiaries by using more meaningful indicators of our progress.
Housing Programs has been promoting outreach activities to historically underserved customers. This activity includes homeownership among women by participating in the Homeownership Opportunities for Women (HOW) partnership, one of 58 national partners in the President's Homeownership initiative. HOW is undertaking an initiative to bring national homeownership rates for women to the same level as those for men.
Doing more with Less: Housing Programs has accomplished a great deal in reinventing government, in creating and expanding partnerships and in expanding access to our programs, and we have also made a significant commitment to help balance the budget. In FY 1996, Housing Programs cut the cost of the single family direct housing loan program by over 30 percent. Our centralized servicing and DLOS initiative is saving the taxpayers $250 million dollars over five years (1996-2000). Housing Programs has proposed a legislative change to the Section 515 program. This change will reduce the subsidy rate by approximately 8 percent. Even though there is a significant demand across rural America, we have held our request for rental assistance constant, increasing it only to take on the added responsibility of converting some rural area Section 8 units to USDA rental units. Finally, Housing Programs's servicing initiative has reaped tremendous savings for the government. Our single family housing delinquency has fallen by over 3 percent from FY 1996 and is at the lowest rate in over twenty years.
Finally, I would like to provide an update on our Section 515 Direct Multifamily Rental Housing Program. The Section 515 rural rental housing loan program is a vital program that provides decent and affordable housing to families, disabled and elderly individuals whose annual income averages about $7,300. No other Federal program reaches into remote rural areas to provide affordable, safe and decent rental housing. We have made great strides in strengthening our management and oversight responsibilities in our Section 515 program. We have made over 100 administrative changes to improve performance and reduce fraud, waste and abuse. Changes include the establishment of a loan classification system which will enable us to improve our management and monitoring of the portfolio and reduce costs by improving the focus of our servicing. In addition, we have continued over the last four years to strengthen our debarment activities against developers and management companies which have abused the program.
These management improvements complement the reforms to the Section 515 program initiated by the Committee and passed by Congress in the 1997 Appropriations Act. The Department has worked diligently since the law was enacted to expedite the implementation of these reforms. Housing Programs has worked extensively with stakeholders representing for-profit and non-profit developers as well as housing advocacy groups, state housing finance agencies and other interested parties to develop the regulation.
We believe we have a regulation which is workable and meets the intent of the law. The regulation is now in final clearance, and the Department is planning to publish an Interim Final Rule in the Federal Register on March 31, 1997 to implement these legislative reforms. As a result of the Congress' and the Administration's efforts to improve the 515 program, we have a healthier and safer portfolio today. The tenants' and government's interest are protected.
Before we provide the specifics of the budget request, let me reiterate the importance of Housing Programs's housing and community facilities programs in creating strong rural economies and enabling rural families and individuals to have a decent quality of life and a fair shot at the American dream. Now I would like to highlight the following points from the 1998 Budget proposal.
For Section 502 direct single family housing loans in 1998, we are requesting a loan level of $1 billion. This is the same level as was authorized in the 1997 Appropriation Act. However, after the Act was signed into law interest rates were higher than projected so $83 million in budget authority only supported $585 million in loans. The budget authority increase from $83 million to $128 million is necessary to maintain a $1 billion loan level for FY 1998. For the Section 502 guaranteed loans, we are requesting a loan level of $3 billion. This level is $300 million more the 1997 level but only costs $690,000 more in budget authority over FY 1997.
We have also proposed legislation to permit the use of Federal guarantees to help graduate current direct loan borrowers to private credit. Housing Programs is aggressively encouraging our direct Section 502 borrowers to "graduate" to private sector credit, particularly in this low interest rate environment. However, many of the borrowers do not have sufficient equity to graduate and qualify for conventional credit. Further, they are statutorily prohibited from graduating to our guaranteed program. The President's 1998 Budget requests an authorization of a $100 million for graduating direct loan borrowers into the guaranteed program, at an appropriated subsidy cost of only $20,000. The Department will also submit a legislative proposal to remove the statutory prohibition.
In the Section 515 multifamily housing loans, a loan level of $150 million is requested for 1998. The loan level request for housing repair loans (Section 504) is $30 million. For domestic farm labor housing loans we are requesting $15 million. These and the two smaller loan programs for housing site development are requested at about their current 1997 levels.
The budget authority appropriation requested for the housing loan programs is $225 million, about $34 million higher than in the 1997 appropriation.
An increase of $16.8 million to $540.9 million is requested for rural rental assistance in 1998. In addition, Housing Programs is requesting an increase of $52 million to assume HUD's expiring Section 8 contracts in Housing Programs financed projects. These contracts, which service Section 515 developments, can be more economically managed in the Section 521 Rental Assistance program, creating savings for the taxpayer.
The housing grant programs are being requested for 1998 under the Rural Housing Assistance Grants Program. Within this program, our requests include $10 million for farm labor grants, $24.9 million for housing repair grants, $26 million for mutual and self-help housing grants, and $10 million for housing preservation grants. The supervisory and technical assistance grant program and the compensation for construction defects grant program will continue to operate in 1998 with small amounts of carry-over funds which will be available.
The community facility program request is included in the proposed Rural Community Advancement Program. Within that overall program, we project that $209 million will be available for direct community facility loans and that another $209 million will be available in the guaranteed loan program. About $9 million is proposed for community facility grants. The appropriation requested within RCAP to support the community facility programs is $28 million for 1998. This is $9 million more than is available for 1997.
For administrative expenses, the Budget requests $413.6 million. This is a $13.3 million reduction from 1997 which reflects the centralization of single-family housing loan servicing.
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