TURNING A BIG SHIP IN ROUGH WATERS.

HUD Transforms Itself into an Empowerment Agency

The United States Department of Housing and Urban Development (HUD) has always faced challenge and change. This year, fundamental, perhaps revolutionary, change will roll through the department as Secretary Andrew M. Cuomo attempts to remake HUD's functions, departments, and philosophy--all at the same time. These changes are designed to mold the department to both the administration's and the congressional view of today's housing and economic development needs given severe budget constraints.

While much has been made of the effects of these budget constraints--downsizing, structural changes, funding problems--the philosophy supporting the changes is new and broad and deserves attention. Understanding this new viewpoint will be critical for multifamily players who already work with HUD or would like to in the future.

Programs influenced by this new philosophical base include Fair Housing, FHA mortgage insurance, and the Section 8 restructuring process. For those in the multifamily community who want to use HUD's programs, the good news is that these reforms will delegate responsibility out of HUD central and into its field offices and the offices of FHA mortgagees.

The bad news is that restoring HUD's credibility on Capitol Hill will require showing that it can handle a multitude of responsibilities while aggressively pursuing operators, lenders, and brokers who have not honored their obligations. Secretary Cuomo has brought a great deal of attention to internal waste, fraud, and abuse. High-profile arrests and plans to establish an "Enforcement Authority" for all programs underscore Cuomo's commitment to accountably managing the compliance risks of HUD programs. Only by first restoring its credibility will the department be in the position to seek new funding for community development and housing needs. In the short run, multi-family housing is symbolically a political liability, whether in the Fair Housing arena, the Section 8 restructuring portfolio, or as the alternative to politically favored single-family home ownership.

To avoid being marked as a long-term liability, the multifamily industry has to find ways to work within HUD's new paradigm, in which holistic community development supersedes the simple creation of stand-alone housing opportunities. Non-profit multifamily providers are capable of integrating service delivery and social programming into their communities, which leverages an investment in housing into social policy as well. For-profit owners, developers, and managers wishing to maintain a competitive position in the HUD-financed affordable housing arena would do well to consider how to integrate community development into their bricks-and-mortar thinking.

Ironically, the Republican revolution is nearing fruition within HUD with a Democratic administration. Efficiency, leveraging, devolution, downsizing, and delegation are no longer just buzz words; they are the operating principles under which a too-large, ill-managed HUD hopes to make its programs more widely felt in the marketplace. It will do that by harnessing the energies of outside interests and the private markets themselves and breaking down traditional operating fiefdoms to allow holistic strategies using cross-disciplinary tools to flourish, purportedly free from the grip of the HUD beauracracy.

HUD'S MISSION GOING FORWARD

Going forward, HUD's traditional missions of providing a decent home for every American family and developing viable urban communities will remain the same, but the burden of responsibility will be further shifted to local communities and the private sector.

HUD's new mission lays out the challenge to:

* Empower communities and their residents, particularly the poor and disadvantaged so that together with HUD, they can develop viable urban communities, provide decent housing and suitable living environment for all citizens, without discrimination, so they may improve themselves as individuals and as a community to succeed in today's time of transition; and

* Restore the public trust by achieving and demonstrating competence.

This empowerment mission is a significant departure from previous statements of purpose that have emphasized HUD's direct responsibility for housing first, and the more amorphous idea of communities second. Congress has criticized this mission as too broad and not reflective of the department's programs and operations. While that may be true, the statement highlights that HUD is truly in transition, and it may find its new role partly by trial and error and through its interactions with its partners and constituents, rather than imposing it upon them.

For now, HUD's primary role will be to create and maintain its regulatory and enforcement functions, the market incentives, and the information infrastructure necessary to ensure that local community development players meet the housing needs of the poorest citizens. HUD will attempt to assist and maintain fair and free markets while adapting its programs to use the efficiencies of the private market to achieve public ends.

The HOPE VI grant program for public housing is a prime example. HOPE VI is a grant program in which public housing authorities (PHAs) compete for funding that allows them to demolish some of their worst units and rebuild lower-density communities. The PHAs form partnerships with private and non-profit firms to perform the construction work and manage the property and the community on a long-term basis. In discussing HOPE VI, President Clinton said: "HUD's HOPE VI grants are a step towards achieving my administration's goal of helping people help themselves to improve their lives and their communities through hard work. By providing job training and improving the quality, management, and safety of public housing [with non-governmental firms], we are giving hope to communities that have previously known despair."

This shift from HUD acting as a direct federal investor and one-size-fits-all policy formulator to a facilitator and coordinator is an important one because it means that private multifamily operators can expect:

* Expansion of privatization opportunities in all areas of national housing policy, including public housing;

* An emphasis on local or regional control, design, support, and approval of projects;

* Less HUD scrutiny and oversight on well-managed assisted properties;

* Greater emphasis on enforcement and swift punishment where necessary as regulatory efforts are increasingly seen as an avenue ensuring fairness of markets and help maintain housing access for those who need it;

* A focus on the housing requirements of the most needy; and

* A continuing emphasis on single-family home ownership.

Consider the three following examples to gauge the impact of the change to an empowerment agency.

FAIR HOUSING ENFORCEMENT

In early November, President Clinton and Secretary Cuomo announced the "Make `em Pay" campaign to punish hate crimes on residential properties. President Clinton proclaimed, "Our message to those of you who violate this law is simple: If you try to take this right [fair housing] away, we will make you pay with higher frees and stepped-up enforcement" This followed a HUD victory in a particularly ugly fair housing case in which William Craig and Gloria Smith--an African American couple--filed a fair housing complaint with the West Virginia Human Rights Commission. HUD later investigated the case and fried civil charities on the Smith's behalf to recover damages from the neighboring John Hobbs family in Belle, West Virginia, and to obtain civil frees from the Hobbs

The Smiths said members of the Hobbs family barricaded the path leading to the Smith's land; threatened the black family with a gun; threatened the Smiths with a knife; and intimidated them by hanging black plastic ducks from a cross. Under the current guidelines, the Hobbs family members can be fined a maximum of $11,000 by an administrative law judge. Under the new guidelines, they could be fined $11,000 for each incident of proven housing discrimination.

While this initiative is unlikely to affect the mainstream multifamily industry, it highlights that HUD is willing to make a public point. By aggressively pursuing fair housing complaints, the department intends to create housing opportunities. Expanding the market to create greater availability of homes and ensuring a level private market is consistent with HUD's new mission. Winning high-profile enforcement actions will almost certainly have the intended chilling effect on discrimination, while creating the image of HUD as a tougher enforcer and custodian of the public trust.

Multifamily housing providers must be aware, however, that the political gain from targeting "rich landlords" is a powerful incentive to actively engage the industry on the fair housing battleground. The overall gains from a high-profile enforcement action may weigh heavily against the factual merits of individual cases.

Don't count on HUD acquiescing anytime soon. Cuomo and Clinton have promised to double the total number of fair housing enforcement actions taken over the next four years.

In 1998, apartment owners and managers should expect HUD and its non-profit testers to examine rental properties for compliance with the fair housing accessibility guidelines, as well as in more traditional areas, including race-based discrimination cases, steering, and familial status complaints. Scott Belcher, vice president of property management, and Ron Nickson, vice president of building codes on the Joint Legislative Staff of the National Apartment Association (NAA)/National Multi Housing Council (NMHC) both spoke at a seminar at NAA's recent Assembly of Delegates meeting in Cincinnati, Ohio, on the confusing thicket of regulations, and the responsibilities of the industry under the Fair Housing Act and the Americans With Disabilities Act (ADA).

"Accessibility is not just a developer's issue. It's also a property management issue," says Belcher. "Last year there were more than 160 accessibility complaints fried with HUD. Compliance with the accessibility requirements is clearly a hot enforcement area for which all multifamily professionals need to be prepared. A strong continuing education program for all property management and leasing staff is essential, coupled with vigilant oversight. A large number of complaints that are brought are the result of improperly trained property management or leasing staff, and are cases in which an individual is treated in a manner that, though benign, is inconsistent with the law."

One development to watch in 1998 is a request to HUD by the Conference of American Building Officials, an industry coalition that includes NAA/NMHC's Nickson. Nickson and the coalition requested that the Office of Program Compliance and Disability Rights review the model building codes for compliance with ADA. While HUD will not endorse any building code, it has agreed to review the codes for appropriateness tot compliance purposes.

SECTION 8 PORTFOLIO RE-ENGINEERING

Consider a hypothetical Section 8 owner going into 1998. He knows firsthand about the changes at the department--in fact, he's one of the primary intended targets. Accelerating payments to Section 8 owners threatened the entire HUD budget, forcing the hand of Congress and the department to create legislation restructuring the outstanding Section 8 debt.

In October 1997, Congress passed the VA, HUD, and Independent Agencies act of 1997 that provides much of the basic framework of this cost-restructuring program, known as" Portfolio Re-engineering," or "Mark-to-Market." Title V of this act, which takes effect in Fiscal Year 1999, provides a broad framework in which FHA-insured projects whose rents exceed 120 percent of Fair Market Rent will have their remaining mortgages bifurcated, and the first mortgage reduced to a level that can be supported by rents comparable to the private market.

For the Section 8 owner used to dealing with HUD's field offices and HUD central, the Mark-to-Market process will be a novel experience. Despite being on the hook financially, HUD will not perform the bulk of the restructuring work. That task falls to the state housing finance agencies (HFAs). Except for final approvals, the Owner may have no contact with HUD at all.

The process of obtaining final approval will put the owner into a role as a community participant that may be unfamiliar to some. Local input from the residents, community groups, and local governments will all be part of the FHA's evaluation of whether the project should have project-based assistance renewed, or whether resident-based assistance should be provided. Resident-based assistance provides HUD with greater flexibility in citing residents and gives residents greater choices (empowerment) that subject the affordable housing market to the same pressures as the conventional market, and hence brings better quality and discipline to the market, according to theory.

Denise Muha, executive director of the Leased Housing Association, reports that 1998 will be a transition year in which," Section 8 owners will be forced to take stock of their property and their financial position and figure out whether they want to stay in the program. Owners should be looking at properties and asking what opportunities they will have to refinance or convert to market-rate housing. Going forward, staying in the program will be much more difficult."

One example of this is that owners of eligible properties for Mark-to-Market will face the uncertainty of the tax consequences of the mortgage restructuring. The Internal Revenue Service has declined to provide any written guidance, though there are indicators that given a test case, the IRS would rule that the second mortgage debt created in a restructuring would not qualify as debt, and thus the cancellation of first mortgage indebtedness will be treated as current taxable income.

For owners and managers who have begun looking at Mark-to-Market, all options are on the table. "I tell my people who ask that we'll have to look at each project individually," says Jack Murray, senior vice president of Insignia Management Group. "We'll look at opting out, but we just don't have a good look at the whole thing yet. We don't have enough data to know whether we'll be better off without Section 8. As written, this legislation created problems almost every way you turn. We'll need to see what regs come out."

Property owners in 1998 will also face the prospect that properties eligible for restructuring will automatically have their rents reduced to market levels in 1999, whether or not the mortgage restructuring has actually been completed. Muha states, "Until the mortgage restructuring is completed, these projects may operate at a loss." One byproduct of difficulties such as these is that while owners with properties in good physical condition may be thinking of opting out of the program, state and local governments are beginning to consider measures to force Section 8 owners to stay in the program and maintain this scarce supply of low-income housing. In a few jurisdictions, the issue of requiring the acceptance of resident-based Section 8 vouchers is on the table for the same reason.

Returning to the enforcement theme, the Mark-to-Market legislation contains significant new penalties for HUD to use as punitive tools against "bad" owners. This legislation expands the restructuring projects whose owners (or affiliates) control projects (including other projects) if the owner (or affiliate) had "engaged in material adverse financial of managerial actions or omissions."

Title V of the act also provides for new and higher civil monetary penalties against owners and affiliates (including employees) of FHA-insured, Section 8 assisted, or other HUD multifamily stock for any number of HUD violations, including poor management, failure to maintain premises, and refusing access to financial records. In keeping with the mission to restore the public trust, these stiff new provisions give HUD stronger authority over its housing provider partners, while at the same time, delegating more responsibility to them.

FEDERAL HOUSING ADMINISTRATION (FHA)

FHA--HUD's credit enhancement arm--will be hardest hit by the changes coming next year. Approximately 1,000 employees are retiring or being forced out of FHA, just as it completely reorganizes. The large drop in staff is predicated on HUD reaching a staffing level of 7,500, a number which was "pulled out of the air" according to one congressional source. Assistant Secretary for Housing Nic Retsinas minimizes concerns about the reorganization and staff reduction, saying, "Management in a time of transition is always an issue, but we have a core of professional staff that will get us through this period."

HUD's management reform plan contemplates submerging the identity of FHA and its programs into a multifamily "cylinder" in which all multifamily programs are managed. Held offices would be consolidated into 18 jurisdictional hubs, and the headquarters staff would have reduced responsibility for multifamily insurance commitments. The burden of application review will shift to the hub offices and be delegated more fully to the mortgage bankers who originate the mortgages.

Two of HUD's largest multifamily originators see opportunity in the changes at FHA. Reduced staffing puts more of the burden on FHA mortgagees to perform the necessary work to underwrite a loan package. John Sweazey, president of TRI Capital Corporation, San Francisco, thinks that the coming changes will be great. He anticipates that, "the Small Projects Processing option is a precursor to a direct endorsement approach in the broader 221 (d)4 program in which lenders do all of the work, putting together complete packages that require reviews, not full underwriting by HUD staff." This would probably mean a faster turnaround.

Shekar Narasimhan, president of the WMF Group, Vienna, Virginia, sees the same possibilities for mortgage originators, but questions whether there will be sufficient HUD staff in place to take advantage of this additional responsibility and bring faster processing to their clients.

Many FHA observers concur with a high-profile investment banker, who says: "The success of this transition will rest on the shoulders of its principal architect, Nic Retsinas. The success of the last few years is directly attributable to his excellent management, and his strategic use of the mortgage bankers and competent FHA staff scattered around the nation." Unfortunately for FHA, at a time of dramatic structuring changes, rumors persist that Retsinas will resign in the upcoming months. Retsinas avers that he continues to be challenged by the work ahead, but the industry is worried. Sweazey said, "If Nic goes, there will be a vacuum there that's tough to fill."

In general, the future of the FHA is still a topic of debate. Multifamily participants are beginning to discuss reinvigorating earlier plans to remove FHA and the Government National Mortgage Association (Ginnie Mae) from HUD and make them independent corporations. They are not alone. A senate aide recently said, "HUD is under enormous pressure to reform, and all options are on the table, including moving FHA out of HUD" For 1998, FHA will remain where it is. Multifamily borrowers who use FHA should be prepared to participate in the broad discussion about FHA, and its role and configuration. One senior congressional staffer predicts that 1998 will be a year with, "a lot of hearings about HUD and its plans. Any changes like separating FHA will have to wait until the 106th Congress [1999]."

1998

Many of the changes at HUD will be most noticeable in grant programs, which are being consolidated from approximately 300 to 75. Niche programs are being eschewed in favor of broader categories of funding that permit community developers needed flexibility in targeting their needs. Along with traditional housing, HUD is working to integrate the dictates of welfare reform to help., provide an integrated service delivery package that includes shelter and the means to generate income.

To go along with this type of greater flexibility will be new super-agencies within HUD with responsibility for enforcement, real estate assessment, and the management of Section 8. Demonstrating the effectiveness of this flexibility, while rooting out waste, fraud, and abuse, will be the keystones of this second phase of the HUD management reform. HUD will seek housing partners that can help it succeed in its empowerment framework--developers who think like community planners to assist HUD in stretching scarce resources will be the most successful. Old models of working with HUD are being uprooted and cast out. As John Sweazey says, "Those who are effective with this type of work will do better in the new HUD. Part-timers will, however, be at a disadvantage."

Lefkovits is vice president of housing and finance with the NAA/NMHC Joint Legislative Staff, Washington, D.C.

4 BASIC TIPS FOR COMPLYING WITH THE ADA AND THE FAIR HOUSING ACT

* Get certifications from the architect of record that the facility design is compliant with the Fair Housing Act and ADA.

* Be vigilant in the continual training of property management and leasing staff regarding their responsibilities.

* Aggressively oversee the work of subcontractors who may not be familiar with the importance of individual design details that relate to compliance issues.

* If you are the subject of a complaint that is dismissed for lack of substantiation, notify the Assistant Secretary for Fair Housing and Equal Opportunity immediately.

Please contact the National Multi Housing Council's Industry Task Force on Accessibility with rulings in your cases and -with frivolous cases that were dismissed.

Scott Belcher Vice President of Property Management NAA/NMHC Joint Legislative Staff

PROJECT-BASED SECTION 8 [PB S8] AT A GLANCE

* Insured multifamily portfolio (unpaid principal balance): $38 billion

* Resident families: 1.6 million

* Approximate number of projects: 10,000

* Cost of renewing PB S8 in 1997: $1.2 billion

* Estimated cost of renewing PB S8 in 2006 without Mark-to-Market: $7.4 billion.

RELATED ARTICLE: HELP FROM HUD

HUD Secretary Andrew Cuomo recently awarded $ 36 million to housing authorities, cities, and non-profit groups around the nation to help public housing residents move from welfare to work. About 120,000 residents are expected to benefit from the HUD assistance.

"Public housing is filled with people who want jobs but can't get them," Cuomo said in a statement. "Many need job training, education, placement services, transportation, and child care before they can go to work. By providing these services, we can help people get jobs so they can climb out of poverty under their own power, build better lives from their families, and free themselves from welfare dependency. This is good for the residents, for our economy, and for taxpayers."

Some of the HUD assistance will also be used to help elderly and disabled public housing residents continue living in their present apartments instead of moving to more costly facilities such as nursing homes.

The three grants will go to public housing residents in 39 states and Puerto Rico.

Cuomo awarded these grants:

* $25.4 million to 113 public housing authorities under the Economic Development and Supportive Services

Program (EDSS);

* $8.1 million to 81 public housing resident councils, resident management corporations, and other resident organizations under the Public and Indian Housing Tenant Organization Program (TOP); and

* $2.5 million to six partnerships between public housing authorities and community development groups under the Community Partnerships for Resident Uplift and Economic Development Program.

Cuomo said that the three programs should help build strong partnerships between public housing residents, the private sector, local welfare agencies, housing authorities, and community development corporations.

Nationwide, the EDSS grants will help residents get jobs by funding activities such as job training and placement services, child care programs, transportation, education programs, and loans for residents to start small businesses.

The grants under the TOP program will support activities including job training, general equivalency diploma and literacy training programs, youth development workshops, and substance abuse counseling. The program encourages the creation of businesses by public housing residents.