Reforming HUD - US Department of Housing and Urban Development

THE Department of Housing and Urban Development is not just part of the welfare state; it is an engine that intensifies the social pathologies engendered and sustained by the failed welfare system.

HUD does this by concentrating households headed by non-working single mothers in tight geographic locations where the moral norms of society are observed mostly in the breach and where the rule of law is an oxymoron. This maelstrom of social decay can infect surrounding neighborhoods, creating what one Democratic senator has aptly called ``zip codes of pathology.'' The congressional Republican leadership realizes that broad welfare reform must address the role of subsidized housing, and in late June it added the abolition of HUD to its welfare-reform agenda. HUD, the quintessential Great Society department, was created in 1965 with the best of intentions: to create decent housing for the poor.

Exactly the opposite has happened. Except for housing for the elderly and handicapped, subsidized housing is often the worst housing available. Subsidized housing has failed for several reasons. HUD's policies have increasingly segregated the poorest of the poor from working families and enhanced the financial benefits of not working. In fact, rental subsidies are often worth more than direct welfare payments. Furthermore, developers often fail to maintain their property so that they can eventually collect large subsidies for repairs. While the failures of public housing and subsidized housing have been recognized for decades, HUD's programs have gone forward unabated primarily because they have served Washington's entrenched political interests. The status quo has been vigorously supported by housing activists, private developers, and local public-housing officials. Liberals in Congress, like Barney Frank (D., Mass.), have led the battle to preserve all existing subsidized units, regardless of cost. This so-called ``preservation program'' pays developers huge sums to cover the difference between the property value in the free market and its value as subsidized housing restricted to very-low-income tenants -- a program the HUD inspector general has rightly called ``a ripoff.'' BUT the political climate has finally started to turn against HUD. Last summer, the National Academy of Public Administration, commissioned by the old Democratic Congress to study HUD's problems, recommended that HUD be radically reformed, and that if the reforms did not turn the department around within five years, it should be disbanded. After the Republican landslide in November, the Clinton Administration actually floated the idea of abolishing HUD entirely. But HUD Secretary Henry Cisneros, taking a cue from Al Gore's reinventing government initiative, persuaded the White House to support a plan to reinvent HUD instead. Cisneros's Reinvention Blueprint calls for the termination of all project-based subsidies (except those for the elderly and the disabled) and the conversion of these subsidies to tenant vouchers and certificates. This is a big step in the right direction. Tenants, free to live anywhere, could choose whether to stay in the project or move elsewhere. This would end the segregation of the poorest welfare families from the working poor, and help integrate them into the American mainstream, where social pressures could influence their behavior in a positive way. It would also force project developers to compete for tenants, thereby improving living conditions at the surviving projects. Housing activists have maintained for years that vouchers are too expensive. Yet, the most complete study of housing costs, done by the Office of Management and Budget in 1988, found that household-based assistance given to the tenants cost less than half what project-based assistance given to the landlords cost.

Vouchers, for example, cost $27,892 per household. Section 8 Housing, which gives subsidies to the developers based on the incomes of the tenants, costs $58,575 per household. Public housing, built and managed by public-housing authorities, cost $69,863 per household. While Cisneros's Reinvention Blueprint recognizes the major flaws in HUD, it falls short of what is really needed to reform public housing. As former HUD Secretary Jack Kemp puts it, ``The American people do not want to reinvent government, they want to reduce the role of government.'' The Republican plan incorporates Cisneros's idea of vouchers but places a five-year limit on their use. It gives states the option to run the voucher program and converts all other HUD programs into block grants. The proposal is sponsored in the House by Sam Brownback (Kan.) and Sue Myrick (N.C.). In the Senate, the key sponsors are Lauch Faircloth (N.C.) and Spence Abraham (Mich.). The plan recognizes that housing is first and foremost a local issue. As Representative Myrick, a former mayor of Charlotte, N.C., puts it, ``The age of centralized bureaucracies solving all problems for all the people is over.''

From her point of view, the war on poverty can be won only ``when we eliminate the federal structures that deprive people of self-sufficiency.'' The Republican leadership's HUD plan also gives states maximum flexibility to develop their own housing policies.

States can adopt voucher programs or let the Federal Government run the program for their state from a new Office of Federal Housing Voucher Assistance at the Department of Health and Human Services.

Project-based housing assistance for the elderly, disabled, and people with AIDS would be combined into a block-grant program and turned over to the states. THE Republican plan will dramatically scale back the role of government mortgage insurance as well. The Federal Housing Administration will be removed from the multifamily insurance business entirely, and old unsound mortgages, foreclosed properties, and existing obligations will be transferred to a new HUD Programs Resolution Agency. FHA's single-family mortgage-insurance program will also be radically altered. The government will, in effect, cease to insure single-family housing, but will provide a loan-loss reserve for private mortgage insurers for low-income and first-time homebuyers. The $500-million fund will be capitalized through the sale (or reinsurance) of some FHA assets. The Federal Government will be backing only a portion of each mortgage that qualifies for this program instead of the 100 per cent guarantee it now offers. Lenders, private mortgage insurers, and borrowers will all have a stake in each mortgage and will be liable for losses in the event of a default. This essentially privatizes the whole FHA single-family insurance program, while maintaining a federal role to encourage first-time home buyers. THIS change recognizes the reality that the FHA's market niche is shrinking in the face of vigorous competition for the low-income and first-time homebuyer by private mortgage-insurance companies and by innovative programs supported by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac), both government-sponsored enterprises, which buy mortgages and pool them to sell into the secondary market. Private mortgage insurers, which typically don't insure mortgages with down payments of less than 20 per cent, have been able to insure mortgages with 3 per cent down on a trial basis. The privatization of the FHA will address other problems that have been highlighted by Stephen Moore of the Cato Institute. Moore claims that the FHA is taking on too much risk and is headed for a savings-and-loan - style crisis. He also points out that in inner cities FHA default rates run as high as 42 per cent.

This leads to a lot of empty houses when the FHA forecloses, and this, in turn, contributes to the decline of inner-city neighborhoods. Although Newt Gingrich and Bob Dole support the plan to abolish HUD and privatize the FHA, not all Republicans are behind it. For example, Senator Christopher Bond (R., Mo.) wants to keep a substantially downsized HUD in Washington to oversee programs such as housing for the elderly and disabled, and to administer vouchers for housing for the poor. Other Republicans want to continue FHA multifamily insurance in some form. However, if a nucleus of the old programs is retained, a future Congress could easily reconstitute old, failed policies. For example, since any restructuring plan is likely to retain some project-based assistance beyond the assistance for the elderly and disabled, a future Congress could easily use this as a wedge to reinvigorate the whole HUD enterprise. This is much less likely if HUD is completely dissolved and its operations are transferred to the states. There's another reason to terminate HUD: it's a ticking financial time bomb. For years Congress has been concealing the potential losses to the FHA's multifamily insurance fund by raising subsidies to projects in order to prevent their default. These subsidies are so high that in 75 per cent of the multifamily properties subsidized by HUD the rents charged for apartments occupied by Section 8 tenants are higher than the rents charged in the private housing market. For 23 per cent of HUD-subsidized multifamily properties, the rents are a stunning 175 per cent of market-level rents. As vouchers are introduced and project-based assistance is ended, and as rents in housing projects fall to market levels, the long overdue bill for defaults will come due.

HUD last year estimated that it may need $10.3 billion to cover the claims against FHA insurance for multifamily housing over the next five years. The potential exposure if HUD is abolished -- the entire portfolio of mortgages for project-based housing for the poor -- could be as high as $32 billion. Thus, the fact that the Republican leadership's plan to abolish HUD does not lose money in the short term ($17 billion will be saved in the first five years, according to Representative Brownback) is a considerable accomplishment. The HUD proposal could, nevertheless, use a little more of what Jack Kemp calls ``empowerment.'' Congress should provide funds to implement tenant management and ownership, or encourage the states to do so. This would preserve salvageable housing that might otherwise default. As Kemp suggests, Congress could also promote enterprise zones in neighborhoods where public housing is dominant, thereby bringing in business activity and jobs. Thus, while taxpayers would also gain from this plan, its prime beneficiaries would be those currently trapped in poverty in the projects.

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