RHS Administrator answers questions from House subcommittee and from HAC
USDA Rural Housing Service Administrator Russ Davis appeared before the House of Representatives Subcommittee on Housing and Community Opportunity on March 10, 2005. His testimony described the Administration’s multifamily housing revitalization initiative and other plans under its FY 2006 budget request.
For a transcript of the hearing, click here.
Davis was also interviewed by HAC staff in February. The conversation covered several subjects, including the new multifamily initiative. An edited version of the interview follows.
HAC: What would you emphasize about the budget proposed for 2006?
Russ Davis: The President’s proposal includes a very large new multifamily revitalization initiative. We’re looking not just at rental housing preservation, but at revitalization, which is preservation plus the future. For 2006 the initiative is initially concentrating on creating a tenant protection program for situations where owners do prepay their mortgages and leave the Section 515 program. Over the last couple of years, legal challenges have been chipping away at the prepayment restrictions, so the tenants are increasingly at risk and we have to help them.
The budget proposes $214 million for the revitalization initiative. That money will be primarily for vouchers to protect tenants. We don’t know what those vouchers will look like yet, though we know there’s a lot of speculation in the industry about how portable they will be, who will administer them, and things like that. Internally we’re working hard to develop those policies, and they will be in a legislative package that will be proposed to carry out the revitalization initiative. We also hope that vouchers may serve as a bridge to keep a project affordable after prepayment. They could be structured to convert units to homeownership opportunities through cooperative ownership structures. They also might attract other affordable housing programs such as LIHTC to the property.
There are really two issues in preservation. That’s explained in the Comprehensive Property Assessment performed for USDA by a team of consultants. One issue is protecting tenants from displacement due to prepayment. Another is protecting tenants from property deterioration, and that one is a long-term problem. Even if you wanted to throw money at it in 2006 you couldn’t get very far. Logistically, it takes a long time to repair a property and to restructure its financing to ensure that the money for ongoing capital needs will be available.
What we can do is what the CPA calls simple restructures – initial deals that can be done quickly and don’t require new money. We’ve created a demonstration program to do those; we issued Administrative Notice 4036 looking for appropriate properties, and we’ve gotten a very positive response. We’ll use those deals to create templates, documents, and best practices, to get owners and investors comfortable with the terms of these deals, and to bring in third party sources of funding. It’s good to see how far we can go in getting third party money. We have much healthier properties when a lot of entities have money at stake.
That’s why the budget proposal says it is anticipated that the cost of financing repairs and rehabilitation will be reflected in the 2007 budget. We’re going to use 2005 and 2006 as a preparation period doing just the deals that don’t require new funding from Rural Development.
In short, the multifamily revitalization initiative is intended to revitalize the Section 515 portfolio by protecting the tenants and essentially re-upping the properties for another 20 years by allowing many of them through a restructuring program over the next 10 years. It’s very positive for the properties themselves and for the tenants. We’re looking forward to working with the industry to flesh out the details.
Q: Is there a Plan B in case Congress doesn’t adopt the legislative package?
A: For tenant protections, Plan B is very limited. Currently the statutory authority for the Section 542 voucher program allows only 5,000 vouchers, but if we lose a lawsuit a lot of owners could be allowed to prepay. So we want to be sure we’re able to handle a disaster. But those things take time to work out. We believe that the revitalization initiative we’re proposing is the best arrangement for the tenants and the owners, as well as cost effective. The CPA looked at many different options, and this was the fastest and most cost effective. There are a lot of needs in the government to be prioritized, and that’s part of a process that’s much bigger than us. We believe that this gives us plenty to work with in 2006.
Q: Is there a target date for introducing the legislation for the revitalization program?
A: That’s a departmental decision; we’re hoping for this spring.
Q: The 2006 budget proposes $650 million for Rental Assistance. Will that cover renewals, new Farm Labor Housing construction, and other uses?
A: Yes, RA for all uses always appears in one line item in the budget, to give the Rural Development flexibility to move the funds as needed. The $650 million – which is an increase of $63 million – is sufficient for renewals and other purposes. We’re fully committed to the Farm Labor Housing program. The budget provides $42 million of loan authority for FLH and we’ll need RA for at least some of those units.
Q: How does the $214 million for revitalization break down between actual vouchers and other uses?
A: A small portion of it will have to be used for salaries and expenses for the revitalization program. The exact wording will be in the proposed legislation.
Q: The CPA suggested that all tenants could be charged some minimum monthly rent. Will that be included in the legislative package?
A: At this point that’s still being looked at. I will say there is no desire to finance the program on the backs of the tenants. This is not a fundraising issue.
Q: What’s the role of the Section 538 guaranteed rental housing program? I believe Section 538 loans have not yet been used to refinance any Section 515 properties.
A: We do intend Section 538 to be a major vehicle for rehab debt on the 515 properties. When a deep subsidy is needed for rehab, it will have to come from something other than the debt. As the CPA suggested, it will have to come from writing down the 515 debt or from owner equity or tax credits or something else. There are ways to get that money in the property that are more efficient than doing another deep subsidy for rehab.
Q: Is that why the budget proposes to double the funding for Section 538 from $100 million this year to $200 million in 2006?
A: Yes. The 538 program is being streamlined and positioned so that it can do a lot of little loans, because that’s what’s going to be necessary.
Q: Under the budget as proposed, Section 538 would also be the only RHS funding for new construction of multifamily housing for the non-farmworker population.
A: We believe that 538 is a very good vehicle. It avoids a lot of the restrictions of 515. It works with the 9 percent Low Income Housing Tax Credit, it can be used in different geographic areas, it’s more flexible with other sources of money, and the owner doesn’t end up in the regulatory structure that 515 imposes. I believe 538 has a great future in new construction. What it doesn’t have is a big pile of money to put into the property. That’s what tax credits do. I understand that the industry would like deeper subsidies. But Section 538 is serving a segment of the population that no other program is. When tax credits are added, 538 reaches an even lower income level.
Q: Is there a way for 538 to serve people with incomes even lower than tax credit levels who would qualify for 515 units but can’t find them?
A: Section 538 makes it possible to leverage any other funding source, whether it’s tax credits or HOME or other funds. Deeper subsidies will come from those other sources.
Q: Data about the income levels of 538 tenants haven’t been available so far. Do you know if they will become available at some point?
A: I haven’t seen those numbers, but I have seen attempts to estimate them. Properties with 538 funding are often tax credit properties, so income levels would say more about the tax credit program than they would say about 538.
Q: Apparently last year Congress gave some consideration to reducing Rental Assistance contracts from four years to three years. Do you know if that proposal may come up again?
A: I think there was some discussion about the cost of three-year contracts, but not by the agency. I haven’t heard anything really strong about it, but I don’t know what the future is.
Q: Let’s talk about the single-family programs a bit.
A: The 2006 budget increases single-family program funds by $400 million.
Q: That increase, like the increase for the multifamily programs, is for guaranteed loans rather than direct loans. Those serve higher income levels.
A: We believe the increase in our commitment to single-family lending is generous. We’re committed to both direct and guaranteed loans, and we support both programs. Remember, we are Rural Development, and we need to develop all parts of the community. Like the 538 multi-family housing guaranteed loans, the 502 single-family housing guaranteed loans do meet a need. There is a segment of the population who would not get a loan were it not for guaranteed loans. There is very high minority participation in the guaranteed loan program. We’re reaching a group of people that the private sector isn’t going to reach. That’s a very important policy goal.
Q: What’s the status of RHS’s review of the payment assistance approach to subsidy in the direct 502 loans? Under payment assistance, the subsidy is based on the purchaser’s income as a percent of county median income, and that has been a problem when adjacent counties have very different median income levels, so people living in different counties aren’t eligible at the same income levels.
A: We have worked with HAC and other housing groups on this issue, and are preparing a proposal to address this subject. We anticipate that we will be able to formalize and open it to the public for comment this summer.
Q: The Government Accountability Office recently published a report suggesting Congress might want to consider some changes in the way “rural” is defined for purposes of determining what areas RHS serves.
A: I understand the GAO report will be the subject of discussions and questions at future hearings. The agency’s response to the report is currently under internal review and policy development.
Q: Is RHS still considering expanding the requirement for homeownership counseling beyond the self-help program to all single-family borrowers?
A: Yes, we are preparing a proposal to address this subject. We anticipate that we will be able to formalize and open it to the public for comment this summer.
Q: What do you hope to accomplish as the RHS Administrator?
A: I am a strong supporter of all of Rural Development’s housing programs. Currently, the moment belongs to the multifamily revitalization effort, which is President Bush’s major new initiative in this FY 06 budget. It is a historic change to gain another 20-30 years of healthy productive housing for a comparatively small amount of money. I look forward to achieving its goals, and the goals of the President’s homeownership initiative.
Russell T. Davis became Administrator of the U.S. Department of Agriculture’s Rural Housing Service in July 2004. He has 15 years of investment banking experience, specializing in public finance and economic development. Before coming to USDA, he was a Senior Policy Advisor at the Treasury Department.
Posted: March 10, 2005
