Order Code RL30916
Report for Congress
Received through the CRS Web
Housing Issues in the 107th Congress
Updated July 19, 2002
E. Richard Bourdon
Analyst in Housing
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Housing Issues in the 107th Congress
Summary
The Administration presented its FY2003 budget for the Department of Housing
and Urban Development (HUD) on February 4, 2002 requesting $31.45 billion of
budget authority, up by $1.3 billion from FY2002. Most programs are proposed at
or near last year’s funding levels, but several proposed cuts are controversial. The
Public Housing Capital Fund would be reduced by $417 million and the Community
Development Block Grant program would be cut by $285 million.
S. 1248 and H.R. 2349, which call for the creation of a National Affordable
Housing Trust Fund to subsidize the production of affordable rental housing, have
more than 200 largely Democratic co-sponsors. The Administration favors more
market-based assistance, requesting 33,400 additional housing vouchers in FY2003.
Critics say that this is insignificant when compared with HUD data showing 4.9
million very low-income renters who pay more than 50% of their income for shelter
or live in substandard housing, but who receive no assistance. HUD Secretary
Martinez said in early May 2002 that he has learned from his travels that the shortage
of affordable housing ranges from a “serious problem to a horrible crisis” in many
communities (National Low Income Housing Coalition newsletter, 5/13/02).
H.R. 3995, the Housing Affordability for America Act of 2002, is an omnibus
housing bill that would make “mid-course corrections” to some duplicative and
underused programs, reauthorize programs, and make changes to the Section 8,
public housing, and FHA programs. The House Financial Services Committee
completed their mark-up of the bill on July 10, after voting narrowly to delete
authority for a National Housing Trust Fund, which had been approved earlier in the
mark-up. The national trust fund language was based on H.R. 2349, and was
subsequently replaced with a program of matching grants to state and local housing
trust funds, subject to appropriations.
The congressionally-mandated Millennial Housing Commission released its
report, Meeting Our Nation’s Housing Challenges, on May 30, 2002, saying that
“there simply is not enough affordable housing,” particularly for the very poor. Its
recommendations include capital subsidies for rental production for extremely low-
income households, restructuring the Federal Housing Administration (FHA), an
immediate end to the Mortgage Revenue Bond program’s “10-year rule,” a
homeownership tax credit, and work requirements for public housing residents.
Senator Sarbanes introduced the Predatory Lending Consumer Protection Act
of 2002, S. 2438, and more hearings were held. Senator Sarbanes also introduced S.
2721, the Housing Voucher Improvement Act of 2002. The “Ten Year Rule” that
limits the use of tax-exempt bonds used to help first-time homebuyers would be
removed by S. 677 / H.R. 951 (with 411cosponsors). Welfare reauthorization bills
that incorporate housing assistance, include S. 2116, S. 2524, H.R. 4090, H.R. 4700,
and H.R. 4737 (which passed the House May 16, 2002). House and Senate FY2002
supplemental appropriation bills (H.R. 4775/S. 2551) propose substantial rescissions
in several HUD programs and make an additional $750 million of Community
Development Block Grant funds available for New York City recovery efforts.

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Contents
Proposed HUD Budget for FY2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FY2002 HUD Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FY2002 Supplemental Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Millennial Housing Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Policy Issue: The Shortage of Affordable Rental Housing . . . . . . . . . . . . . . 7
A Brief History of Federal Housing Assistance . . . . . . . . . . . . . . . . . . . 8
Is There Available Housing at an Affordable Price? . . . . . . . . . . . . . . 10
Increasing the Supply of Affordable Housing . . . . . . . . . . . . . . . . . . . 11
The Housing Affordability For America Act of 2002 . . . . . . . . . . . . . . . . . 16
Title I. Section. 101. Home Investment Partnership Program . . . . . . 16
Title II. FHA Mortgage Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Title III. Supportive Housing for Elderly and Disabled Families . . . . 17
Title IV. Section 8 Rental Housing Assistance Program . . . . . . . . . . 18
Title V. Public Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Title VI. Homeless Housing Programs . . . . . . . . . . . . . . . . . . . . . . . . 18
Title VII. Native American Housing . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Title VIII. Housing Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Title IX. Other Housing Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
The Housing Voucher Improvement Act of 2002 . . . . . . . . . . . . . . . . . . . . 19
OMHAR/Mark-to-Market Reauthorization and Reform . . . . . . . . . . . . . . . 20
Provisions in Title VI of P.L. 107-116 . . . . . . . . . . . . . . . . . . . . . . . . . 20
Increasing Homeownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Administration Homeownership Proposals . . . . . . . . . . . . . . . . . . . . . 22
Other Homeowner Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
High FHA Delinquency Rates and Other Concerns . . . . . . . . . . . . . . 26
Low Income Housing Tax Credits and Private Activity Bonds . . . . . . . . . 28
Rental Housing Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Issues and Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
107th Congress Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Private Activity Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Predatory Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Oversight of Fannie Mae and Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . 34
Welfare Reform and Housing Assistance . . . . . . . . . . . . . . . . . . . . . . . . . 34
Management Reforms and the Oversight of HUD . . . . . . . . . . . . . . . . . . . . 35
List of Tables
Table 1. Department of Housing and Urban Development Appropriations . . . . . 4
Table 2. Homeownership Rates, Various Categories . . . . . . . . . . . . . . . . . . . . . 21
Table 3. Homeownership Rates, Various Areas . . . . . . . . . . . . . . . . . . . . . . . . . 22
Table 4. States with Highest and Lowest Homeownership Rates . . . . . . . . . . . . 23
Table 5. Homeownership Rates in Selected Metropolitan Areas . . . . . . . . . . . . 24

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Housing Issues in the 107th Congress
Proposed HUD Budget for FY2003
Highlights. Some of the highlights of the Administration’s proposed budget
include:
! Proposed FY2003 budget of $31.5 billion;
! All expiring Section 8 rental contracts renewed;
! Housing choice vouchers increased by 33,400;
! Public Housing Capital Fund cut by $417 million;
! Initiative to convert public housing units to Section 8 assistance;
! Community Development Block Grants cut by $285 million;
! HOME program set-aside of $200 million for downpayments;
! HUD plans to end acquiring foreclosed FHA single-family homes;
! Housing assistance for persons with AIDS increased to $292 million.
Summary. The Administration presented its FY2003 budget for the
Department of Housing and Urban Development (HUD) on February 4, 2002, the
first budget that fully reflects its own vision for the agency, and for federal policy on
housing and urban development. The proposal calls for $31.5 billion of discretionary
budget authority, about $1.3 billion more than the $30.15 billion enacted for
FY2002.1 This budget could generally be viewed as one which roughly maintains the
“status quo,” since an increase of $1.4 billion is necessary to renew all 2.9 million
expiring Section 8 contracts and to protect other tenants from losing their existing
rental assistance.
A proposal to add 33,400 vouchers, at a cost of $204 million, would not
significantly reduce the 4.9 million very low-income renter households who pay more
than 50% of their income for shelter or who live in substandard housing, but who
receive no federal assistance. Under the proposed budget, there would also be $260
million for 43,000 “tenant protection” vouchers for individuals who are currently
receiving rental assistance, but who are threatened with the loss of that assistance.
Examples include tenants in dilapidated public housing units being torn down or
renters in Section 8 projects whose owners are opting out of the program or being
terminated for cause.
The Public Housing Capital Fund, used to rehabilitate and modernize units,
would be cut by $417 million, from $2.843 billion in FY2002 to $2.426 billion. The
Public Housing Operating Fund would be increased by $35 million to $3.530 billion.
The Administration’s new Public Housing Reinvestment Initiative could use up to
$120 million of public housing capital funds and $130 million of operating funds to
1 The $30.15 billion excludes a $2 billion emergency supplemental appropriation made in
late 2001 for aid to New York City.

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convert some of the 1.25 million public housing units to Section 8 project-based
assistance. HUD claims that this would allow some Public Housing Authorities
(PHAs) to secure private financing to rehabilitate or replace aging properties by
pledging project-based revenue as collateral for loans for capital improvements.
The HOPE VI program, the purpose of which is to rehabilitate or tear down the
worst public housing units, would receive $574 million, the same as provided for
FY2002. HUD budget documents report that to date, 47,268 units have been
demolished under HOPE VI. The program is scheduled to expire at the end of
FY2002.
The Community Development Block Grant (CDBG) program would be cut by
$284.5 million, from $5.0 billion to $4.716 billion. Most of these funds, $4.43
billion in FY2003, would go to over 1,000 cities, urban counties, and states through
formula grants. HUD is proposing to change the formula to reduce grants to the
wealthiest 1% of communities, defined as those with per capita incomes two times
the national average. The estimated $16 million savings from this proposal would
be used to fund a regional initiative to increase the availability of affordable housing,
economic opportunity, and infrastructure in the “Colonia.” Colonias are
communities within 150 miles of the U.S. Mexican border that are often described
as having “third world” living conditions. HUD’s budget statement says that these
communities have greater needs and fewer resources, and are the appropriate targets
for such funds.
Also as part of the CDBG program, the Administration proposes to end funding
for what are variously called economic development initiatives, special purpose
grants, or “earmarks.” These grants received $294 million in FY2002, despite
opposition from the Administration. The Self-Help Homeownership Opportunity
Program (SHOP), a set-aside within CDBG used to support Habitat for Humanity and
similar community building efforts, would be increased from $22 million in FY2002
to $65 million.
The HOME block grant program would be increased by $238 million to $2.08
billion, with the set-aside for the homeowner Downpayment Assistance Initiative
increased from $50 million to $200 million. (Later in this report, Increasing
Homeownership discusses this and other Administration homeownership initiatives.)
HUD has a number of programs to protect vulnerable populations - the elderly,
persons with physical and mental disabilities, individuals with HIV/AIDS, and the
homeless. Funding for supportive services for elderly and disabled persons is
recommended at $1.02 billion, the same as in FY2002. These funds are awarded
through a competitive process to non-profit organizations to build new facilities for
low-income residents. HUD is proposing that $30 million of the funds for the elderly
be used to convert existing units for the elderly into assisted living facilities.
Housing for persons with AIDS would receive $292 million, up by $15 million.
Most of the grants are allocated by formula, based on the number of cases and highest
incidence of AIDS. HUD reports that since 1999, the number of formula grantees
has risen from 97 to an expected 111 in FY2003.

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HUD proposes to spend $1.13 billion on programs for the homeless, about level
with funding during the previous 2 years. Secretary Martinez says that ending
chronic homelessness in the next 10 years is a top priority. The budget proposes to
consolidate HUD’s three largest homeless programs into one. Some organizations
are concerned that HUD plans to change the current competitive grants process used
to award funds under these three programs into a “formula grant” process. But HUD
has not yet made this proposal. The Interagency Council on the Homeless would
receive $1 million to better coordinate the many programs in HUD, the Departments
of Health and Human Services, Veterans Affairs, and Labor, and other agencies.
HUD also is proposing to transfer the $153 million Emergency Food and Shelter
Program that is currently administered by FEMA to HUD in order to consolidate all
emergency shelter assistance.
After a “systematic re-analysis of the premium and credit subsidy,” HUD is
reversing its view of last year and recommending in its FY2003 budget proposal that
the FHA multifamily insurance premium be reduced from the current 0.8% to 0.57%.
It believes this will allow for an additional 50,000 new rental units to be produced,
“most of which will be affordable to moderate-income families, and most of which
will be located in underserved areas.” An appropriation of $15 million is also
recommended, the same as enacted for FY2002.
For more details on the proposed FY2003 HUD budget, see CRS Report
RL31304, Appropriations for FY2003: VA, HUD, and Independent Agencies.
FY2002 HUD Budget. On November 26, 2001, President Bush signed P.L.
107-73 providing HUD with $30.15 billion for FY2002 (H.R. 2620, H.Rept. 107-
272). This was $1.67 billion more than the FY2001 appropriation of $28.48 billion.
All Section 8 contracts were renewed, and $144 million was provided for an
additional 25,900 vouchers, $104 million of which are to be distributed on a fair
share basis only to public housing authorities with a voucher utilization rate of at
least 97%. Nearly $3.5 billion was approved for the Public Housing Operating Fund,
an increase of $253 million over the prior year to reflect the merger of Drug
Elimination Grants into this fund. (In FY2001, the Drug Elimination Grants program
was funded separately at $310 million.) The Public Housing Capital Fund received
$2.84 billion, a decrease of $157 million from the previous year. The HOPE VI
program received $574 million. Housing for people with AIDS was funded at $277
million, up by $19 million from FY2001. Housing for the elderly received $783
million, and housing for the disabled, at $241 million, was up $24 million. The
FY2002 budget provided $1.12 billion for Homeless Assistance Grants. While this
amount is about $98 million above the FY2001 level, it includes the Shelter Plus
Care Renewal program, which had its own line item in the FY2001 budget at $100
million.
Community Development Block Grants were funded at $5 billion, about $58
million less than in FY2001, and the HOME program received $1.85 billion, $46
million more than the FY2001 funding level. Empowerment Zones received $45
million, compared to $75 million in FY2001 and to the Administration’s request for
$150 million.

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For more details, see CRS Report RL31004, Appropriations for FY2002: VA,
HUD, and Independent Agencies (P.L. 107-73). For general background on housing
programs, see CRS Report RL30486, Housing the Poor: Federal Programs for Low-
Income Families.
FY2002 Supplemental Appropriations
The Administration’s request for FY2002 Emergency Supplemental funding
would provide an additional $750 million from HUD’s Community Development
Fund for assistance for properties and businesses damaged by, and for economic
revitalization directly related to, the terrorist attacks that occurred on September 11,
2001 in New York City. This amount is in addition to the $2 billion in emergency
supplemental funds that were enacted for the Community Development Fund in late
2001 for similar assistance (P.L. 107-38). The Administration’s request also contains
a $20 million rescission from the Rural Housing and Economic Development
program.
On May 24, 2002 , the House passed H.R. 4775, a supplemental appropriations
bill for FY2002 (H.Rept. 107-480). It would make $600 million of rescissions from
unobligated balances from two HUD programs to provide further recovery assistance
to New York City. This total includes $300 million from the Housing Certificate
fund (unobligated Section 8 funds appropriated for FY2002 and prior years), and
$300 million realized from the prepayment of Section 236 subsidized mortgages.
The Section 236 money had been intended for the rehabilitation of assisted
multifamily housing, and some housing organizations have criticized HUD for the
delay in the spending of these funds, thus leaving them open for rescission.
On June 7, 2002, the Senate passed S. 2551, that would rescind $300 million
in unobligated Section 8 funds and $50 million appropriated for downpayment
assistance within the HOME program. It does not contain the $300 million rescission
from the Section 236 mortgage prepayments in the House bill.
Table 1. Department of Housing and Urban
Development Appropriations
(budget authority in billions; net after rescissions)
FY1997
FY1998
FY1999
FY2000
FY2001
FY2002
$16.30
$21.44
$24.08
$25.92
$28.48
$30.15
Source: Budget levels remain uncertain until all program experience has been recorded, and any
supplemental appropriations or rescissions have been taken into consideration. FY1997-FY2001
figures are from budget submissions of subsequent years; the figure for FY2002 is from the
Congressional Budget Office. The FY2002 figure of $30.15 billion does not include $2 billion of
emergency supplemental authority approved in late 2002 for New York City to assist in recovery
efforts from the terrorists attacks of September 11, 2001.

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Millennial Housing Commission
A 22-member bipartisan Millennial Housing Commission (MHC), created by
Congress as part of the FY2000 appropriations legislation, released its 124-page
report, Meeting Our Nation’s Housing Challenges, on May 30, 2002. In a cover
letter to Congress, commission members said their report was based on several
fundamental precepts:
! “First, housing matters ... Housing is inextricably linked to access
to jobs and healthy communities and the social behavior of the
families who occupy it. The failure to achieve adequate housing
leads to significant societal costs.
! Second, there is simply not enough affordable housing. The
inadequacy of supply increases dramatically as one moves down the
ladder of family earnings. The challenge is most acute for rental
housing in high-cost areas, and the most egregious problem is for the
very poor.”
The letter went on to say that “The inexorable growth in the number of families,
of those working in the service sector, and of immigrants seeking to take part in the
American Dream – coupled with community opposition to high-density development,
the gentrification or abandonment and deterioration of an increasing percentage of
our housing stock, and the growing affordability gap between the haves and the have
nots – require that the Government of the United States seriously address the
question of how our society can produce and preserve more housing for more
American families in a more rational, thoughtful, and efficient way in the decade
ahead.” The MHC’s principal recommendations are summarized below. The full
report and a number of research papers can be found at the commission’s website at
[http://www.mhc.gov].
New “Tools” Recommended
! A state-administered homeownership tax credit modeled on the
successful Low-Income Housing Tax Credit for new or rehabilitated
rental housing in “qualified census tracts,” or for reduced-rate
mortgages to qualified buyers.
! Tax breaks for owners who wish to opt out of federal rental
programs and are willing to sell their buildings to organizations
committed to the preservation of existing affordability.
! Capital subsidies for the production of rental units for extremely
low-income households.
! Elimination of limits on states’ ability to issue more tax-exempt
bonds to produce rental housing with modest federal income
targeting.
! Allowing state and local governments to blend federal funding to
facilitate strategic community development. To encourage a more
“holistic development strategy,” one that coordinates affordable
housing activities with transportation, economic development,
employment, training, child care, and educational activities, the

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Commission recommends that governors be allowed to set aide up
to 15% of federal block grant funds for this purpose.
Major Reforms Recommended
! A gradual transition to a project-based approach that would enable
Public Housing Authorities (PHAs) to rehabilitate individual public
housing properties using funds borrowed in private markets.
! The restructuring of the Federal Housing Administration as a wholly
owned government corporation within HUD, to allow it to adapt its
programs to evolving markets without relying on Congress to
legislate each change.
! The elimination of chronic homelessness over a 10-year period by
the creation of additional units of permanent supportive housing and
the transfer of renewal funding for such units to HUD’s Housing
Certificate Fund.
! Several measures to move assisted families up and out of assisted
housing units, over time, through a combination of work
requirements and supportive services, enabling them to increase
their incomes and freeing up the housing units for other, currently
unassisted families.
Streamlining of Existing Programs
! Increased authority for local agencies to administer the voucher
program. The Commission asserts that the voucher program is
distinctly worthy of additional funding in substantial annual
increments.
! Reforms to the HOME and Low-Income Housing Tax Credit
(LIHTC) programs, and increased funding for HOME. The MHC
recommends the elimination of rules and programmatic complexities
that burden project developers and owners. The Commission
recommends substantially increased appropriations for the HOME
program.
! Improvements to the Mortgage Revenue Bond program, including
the immediate repeal of the “10-year rule” (explained and discussed
below in this CRS report) and the repeal of the program’s purchase
price limits, as well as restrictions that limit eligibility to first-time
buyers.
! Recategorize funding for rental assistance as “mandatory” federal
spending so that private-sector lenders will be more willing to
finance repairs.
Supporting Recommendations
The Commission also endorsed a number of supporting recommendations that
include: increased funding for housing assistance in rural areas; increased funding for
Native American housing; exempt housing bond purchasers from the Alternative
Minimum Tax; undertake a study of Davis-Bacon requirements; address regulatory
barriers that add to the cost of housing production; improve consumer education

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about home mortgage lending; affirm the importance of the Community
Reinvestment Act and the importance of government-sponsored enterprises.
Policy Issue: The Shortage of Affordable Rental Housing
Despite the fact that HUD now spends almost all of its budget – an average of
about $28 billion in recent years – to help low-income families with their housing
costs, the shortage of affordable rental housing continues to be the most important
housing issue before the Congress. (Housing that costs more than 30% of one’s
income is considered by the government to be excessively burdensome or
“unaffordable”.) In a February 5, 2002 conference held by the Urban Institute,
Preventing Homelessness: Meeting the Challenge, researchers found that the number
of homeless people in a number of large cities was increasing, and all attributed this
to a growing shortage of affordable housing. Others believe this shortage is reducing
the chances that welfare recipients will be able to achieve economic self-sufficiency.
As it becomes increasingly clear from the new fiscal realities that there will be no
large increases in spending for housing in the immediate years ahead, there is likely
to be an increasingly intense scrutiny of all existing federal resources devoted to
housing to assure that these funds are efficiently addressing the most pressing issues.
Including the effect upon federal revenues of residential real estate-related tax
provisions, and housing programs through HUD and the Department of Agriculture,
the federal government now spends more than $140 billion on housing assistance.
CBO estimates that nearly $55 billion of the mortgage interest and property tax
deductions or “tax expenditures” (spending through the tax code) in FY2002 will be
made for housing assistance to homeowners with annual incomes above $100,000.
In comparison, the requested budget for HUD for FY2003, at $31.5 billion, is
substantially less in real terms than was spent 2 decades ago.2
Since most of the HUD budget addresses the shortage of rental housing, and
because many mayors and governors and other elected officials believe the problem
has become serious, this report reviews this issue in some detail. The shortage of
affordable housing is a complex matter with many dimensions, including the often
overlooked but important role that local governments play, too often some say, as
part of the problem. There are many statistics available for advocates who argue that
more federal assistance is needed. HUD reported in 2001 that 1999 American
Housing Survey data from the U.S. Census Bureau showed 4.9 million “worst case”
households, those with incomes below 50% of the local area median (“very-low
incomes”) who pay more than 50% of their income for housing or live in substandard
housing, but who receive no assistance because of limited funding.3 These same data
showed that in 1999, 44% of extremely low-income renters, about 3.75 million
households, were in the worst case situation. To put these median incomes into more
meaningful perspective, on a national basis, those with very-low incomes would be
2 The HUD budget peaked at $33.5 billion in FY1981 (about $67.6 billion in 2002 dollars)
and declined to $14 billion in 1987.
3 Report On Worst Case Housing Needs In 1999: New Opportunity Amid Continuing
Challenges. Executive Summary. January 2001. U.S. Department of Housing and Urban
Development. Office of Policy Development and Research.

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households with recent incomes below about $21,000. Those with extremely low-
incomes had incomes below $13,000.
Those who support more federal efforts to help low-income households with
their housing costs generally want either more funds for housing vouchers or more
funds to encourage the construction of affordable rental housing, or both. HUD
Secretary Martinez says he favors housing vouchers over subsidized housing
production to address the affordability issue, pointing out that there are already
government programs that can and are being used to produce affordable rental
housing.
The agency does not have a long-term goal of increasing the number of worst-
case families who can be helped with housing assistance. In fact, some critics of
HUD programs say that because there is generally no shortage of units available in
most communities, the affordability issue is not a housing issue at all, but an income
issue. They argue that a better way to respond to worse-case renters is through
government efforts to help low-income households become more productive, which
could translate to higher incomes. Presumably this would mean they would not need
federal housing assistance, or not as much of it.
The Administration seems to favor this approach. The FY2003 budget says
“....HUD would fail in its mission if families were not moving towards eventual self-
sufficiency. An important measure of HUD’s success should be the number of
families that no longer need to reside in assisted housing because they have moved
to safe, decent, and affordable private housing.” The Administration (and the Clinton
Administration before it) has placed increasing emphasis on promoting
homeownership for lower-income families in the belief that this is an effective way
to move families towards self-sufficiency and wealth accumulation.
A Brief History of Federal Housing Assistance. In the Housing Act of
1949, Congress established a national goal of providing: “a decent home and suitable
living environment for every American family.” Much progress was made in the
next 2 decades in eliminating substandard housing as many of the nation’s worst
slums were torn down. But against the backdrop of the inner city riots of the 1960s
and the recommendations of the 1967 Douglas Commission, the 1968 Kaiser
Committee, and the 1968 Kerner Commission on Civil Disorders, Congress adopted
the Housing Act of 1968 which set a specific 10-year goal of building 6 million
housing units for low- and moderate-income families.
Federally-subsidized housing production increased from 91,000 in 1967 to
166,000 in 1968; 200,000 in 1969, 430,000 in each of 1970 and 1971, and 339,000
in 1972. During the 4 years from 1968-1972, there was also a total of about 200,000
units rehabilitated with federal subsidies and 2,200,000 mobile homes built, the latter
considered an important source of affordable housing for lower-income households.4
4 U.S. Department of Housing and Urban Development. Housing in the Seventies. A Report
of the National Housing Policy Review, 1974.

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During the 1970s, attention on housing issues changed from its previous focus
on the problem of too many substandard housing units, to the problem of housing
being too expensive for lower-income families to afford. In effect, the 1949 Housing
Act paved the way for the more elusive goal of making it possible for all families to
have a decent affordable home and suitable living environment.
The problem of substandard housing has not been entirely eliminated. Data
from 1999 show more than 2.5 million housing units lacked some or all plumbing
facilities, with nearly a million without a bathtub or shower, and over 900,000
without a flush toilet. Yet, the quality of the housing built in the past 25 years and
the level of amenities provided or required, such as off-street parking, wide sidewalks
and roads, air conditioning, landscaping, health, safety, and environmental
protections, had so upgraded housing and neighborhoods that many lower income
families could not afford it. The policy objective of improving the minimum
standard for housing began to conflict with the objective of increasing the availability
of affordable housing.
Reducing the size and level of amenities is only one of the many dimensions of
the affordability issue. Some point out that many of the recent immigrants to the
United States come from a culture of extended families, thus needing larger units, not
smaller. Some lower income households cope with high housing costs by sharing a
single-family home or apartment, sometimes two or three households in a unit meant
for one.
During the latter half of the 1970s, HUD began phasing out its involvement in
subsidizing new housing construction. By the early 1980s, this withdrawal was
nearly complete and the shift towards subsidizing existing units with housing
vouchers was well underway.
Since the 1980s, there has been no obvious consensus as to what should be done
to improve housing opportunities for those with difficulties finding adequate housing.
Beginning in 1982, the number of additional rental units receiving assistance under
HUD dropped sharply. In 1986, Congress replaced a number of existing rental
housing tax provisions that were thought to be poorly targeted, with the Low Income
Housing Tax Credit program, a tax incentive to encourage developers to build
apartments affordable to households with incomes no greater than 60% of the local
area median. After a slow start, the number of subsidized units built or rehabilitated
averaged about 50,000 to 60,000 a year during most of the 1990s.
During the 1990s (and continuing), there was also a small number of apartments
built or rehabilitated under HUD’s Section 202 program for the elderly and under the
HOME and Community Development Block Grant programs. Perhaps as many as
30,000 additional units were added each year during the 1990s by these other HUD
programs. But it is also important to remember that during each of the last 3 decades,
hundreds of thousands of older or obsolete rentals (many shabby but affordable),
including “trailer parks” in urban areas, and most of the remaining inner-city “single-
room-occupancy” “hotel” units (including many YMCA/YWCA facilities that
provided shelter to the near-homeless), were torn down.

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After a number of years in which no new housing vouchers were added,
Congress appropriated money for 50,000 additional vouchers in FY1999 and 60,000
in FY2000. The Clinton Administration recommended 120,000 additional vouchers
for FY2001, with 79,000 approved. The Bush Administration requested 34,000
additional vouchers for FY2002; 25,900 were funded. As noted, HUD is
recommending 33,400 additional vouchers for FY2003.
Is There Available Housing at an Affordable Price? With the exception
of some cities in the Northeast, West Coast, and a few other places, most areas have
an adequate supply of modern apartments - those with large kitchens and baths, high
ceilings, fireplaces, exercise facilities, enclosed balconies, covered parking, and other
amenities. But restrictive zoning, building codes, health and safety and
environmental regulations, and local opposition have made it difficult to construct
basic no-frills rental housing affordable to lower-income households. The smaller
apartment units built in the 1940s and 1950s with 500 square feet or less, with no
walk-in closets or in-unit washer-dryers, with small kitchens and baths, and with no
on-site parking, are much sought after in older cites because of their low rents, but
they cannot be built today under current laws.
The strong rental markets in middle-income and rehabilitated areas of cities
have not escaped the attention of Section 8 landlords whose buildings have been set
aside for lower-income families under long-term federal contracts. As more
profitable alternatives presented themselves during the prosperous 1990s, some
owners decided not to renew their expiring contracts. Older apartment buildings,
with their lower rents, continue to be torn down or renovated for a more upscale and
profitable market. Mobile home parks that provide relatively affordable housing
have largely disappeared from most large metropolitan areas. Since it is so difficult
to build new affordable rental housing, a first line of defense by housing advocates
is to try to preserve the affordable rental stock that currently exists. Nevertheless, a
significant number of these units are lost each year.
There is no shortage of statistics, reports, studies, and commissions
documenting the difficulties that lower-income people have in finding affordable
housing. The National Low Income Housing Coalition has done extensive research
showing the hourly wage a household would have to earn (with one wage earner or
more), to afford the rent on a “standard” apartment in major cities across the
country.5 Their research finds that in most major cities and counties, it is highly
unlikely that households earning near the minimum wage of $5.15 an hour or even
$6, $8, or $10 an hour, can find an affordable apartment. Waiting lists for rental
assistance in most major cities are so long that no others are allowed to be added.
The National Housing Conference (NHC) examined recent American Housing
Survey data, looking at households with low to moderate incomes, those with
incomes from 80% to 120% of the local area median income (nationally, about
$33,000 to $50,000). The NHC reported that the number of these households with
critical housing needs (paying more than 50% of their income for shelter) had sharply
5 Out of Reach 2001: America’s Growing Wage-Rent Disparity, can be found at
[http://www.nlihc.org].

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increased between 1997 and 1999. These households are much less likely to receive
government rental assistance than those with incomes below 50% of the local
median.
The NHC concluded that affordable housing problems had moved up the
income ladder. Police, teachers, fire fighters, and other public municipal employees,
who have been cited in the media as having problems affording housing, generally
fall into this 80% to 120% median income category. (Although two-earner families,
for example, a police officer and teacher, can often reach securely into the middle-
class.) The NHC concluded that simply having a full-time job does not guarantee a
family a decent place to live at an affordable cost. Among its findings: “More than
220,000 teachers, police, and public safety officers across the country spend more
than half their income for housing, and the problem is growing worse.”6
Local governments are often reluctant to adopt policy approaches that may
attract low-income households, the mentally and physically handicapped, ex-felons,
many of the estimated 8 to 10 million illegal aliens, and others – partly, some say,
because of their negative fiscal impact. Many of these households would pay much
less in local taxes than the cost of providing schools, police, fire and rescue, trash
collection, and other social services.
Many homeowners may believe that affordable rental units built near their
homes would lower their property values, and resist local government efforts to
increase the supply of low-income housing in their neighborhoods. The result is that
very-low-income households or even those not quite so poor, are heavily
concentrated in particular neighborhoods, and local officials in these areas often find
it necessary to look the other way as many apartments are shared by two or three
families in violation of local laws.
Increasing the Supply of Affordable Housing. Aside from the issue of
how much additional money could or should be spent to address the housing
affordability problem, the question remains of how funds could best be spent towards
achieving the 1949 national housing goal. Housing analysts inside and outside of
HUD, elected officials, and others have been debating for decades the relative
advantages and disadvantages of “tenant-based” rental assistance and “project-based”
assistance. In simple terms, this usually means whether to use housing vouchers to
assist individual households, or to subsidize the construction (or rehabilitation) of
more housing. Knowing when each type of assistance is most appropriate requires
a knowledge of local housing market conditions. The discussion that follows reviews
this on-going debate.
Voucher utilization rates. In the past few years, there has been growing
concern that not all of the housing vouchers awarded to local public housing
authorities have been put to use. Some households with vouchers have found it
difficult or impossible to find an apartment within the time period for which the
6 The Center for Housing Policy (a research affiliate of the National Housing Conference),
Housing America’s Working Families, New Century Housing, Washington, D.C., June 2000.
p. 2.

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CRS-12
voucher is approved. An increasing number of vouchers have been returned unused
(although these vouchers are often given to someone else who does succeed in
finding appropriate housing).
In recent years, arguments have surfaced in Congress that because not all
vouchers are used, there is less reason to increase the number of vouchers. Both
HUD and the VA-HUD appropriation committees expressed concern ( H.Rept. 107-
159) that the average utilization of vouchers has fallen from 96.7% in FY1999, to an
estimated 92.4% in FY2001. (However, HUD documents claim that the utilization
rate for 2000-2001 was 96%.)
The 33,400 additional vouchers that HUD is proposing for FY2003 would only
be awarded to PHAs with a voucher utilization rate of 97% or greater. Some PHAs
with lower voucher utilization rates have tried, with limited success, to better inform
landlords about the voucher program, and to encourage more to participate in it by
offering various incentives. Some voucher holders have been provided transportation
to assist them with their search, and help with security deposits. Nevertheless, where
vacancy rates are very low, it may have become prohibitively expensive on a per-unit
basis for PHAs to try to locate additional units for voucher holders.
Rental Vacancy Rates. In one of the many paradoxes of housing policy, the
national vacancy rate for rental housing reached a record high of 9.1% in the 1st
quarter of 2002, jumping from 8.2% in the 1st quarter of 2001, while statistics show
a serious shortage of affordable rental housing in many metropolitan areas. A
vacancy rate above 5% is often considered adequate for a marketplace to function
without difficulty. Vacancy rates for 2001 varied widely across the country: Atlanta,
11.9%; Louisville, 10.8%; Houston, 11.1%; West Palm Beach, 18.0%, New York,
3.6%; Boston, 2.9%; Los Angeles, 3.4%, San Francisco, 3.4%; and Jacksonville,
4.6%. As noted, low vacancy rates make it more difficult to use a voucher. Many
landlords who have a choice of tenants will not pick very low-income families, with
(or without) vouchers.
Some landlords are unwilling to accept vouchers because they want to avoid the
bureaucratic “red tape” of the program, or because they believe, rightly or not, that
low-income families will cause problems. A few local governments have recently
adopted laws requiring landlords to accept renters with vouchers, although landlords
can often reject a voucher holder because of bad credit, lack of references, and for
other reasons. Reports also continue to show that discrimination in rental housing
on the basis of race and against households with children is still common, which
makes the use of vouchers more difficult.
But as this review has suggested, vacancy rates tell only part of the story about
the shortage of affordable housing. A higher vacancy rate may not help a very low-
income household if the available units are too expensive. Furthermore, statistics on
vacancies can be misleading. Many large cities have tens of thousands of boarded-up
rental units. For example, Philadelphia lists more than 14,000 housing units as
abandoned.
Many vacant units are or were owned by landlords who could not charge their
very low-income renters enough to pay the cost of operating the units. Other

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CRS-13
landlords struggle to survive, letting their buildings deteriorate over time. Among
the policy questions this raises – Would more housing vouchers, if made available
to very low-income renters in marginally profitable buildings, help landlords to
continue operating often shabby but affordable units? With increased rent revenue,
some of these units that may have housing code violations, could be brought up to
code. A related policy issue is the advisability of new federally-subsidized apartment
buildings being built near these struggling landlords. Some think this could make it
even more difficult for marginally profitable landlords to compete and stay in
business.
Increasing the Number Receiving Assistance by Adding Vouchers.
The HUD Secretary is now on record as not being in support of a new HUD program
to subsidize the construction of affordable rental housing. He instead favors housing
vouchers because of the freedom of mobility they offer to low-income renters. In
theory at least, a family with a voucher can move out of a poorly maintained building
or a dangerous neighborhood and go to a safer one with better schools and more job
opportunities. However, as the above discussion has indicated, the freedom of a
voucher holder can be quite limited. Those who do not have automobiles are also
very limited in where they can live. Most of the $31.5 billion proposed for HUD in
FY2003 would continue housing assistance for the approximately 5.5 million
housing renters now receiving federal rental assistance – through the Section 8,
public housing, HOME, and CDBG programs, and several others.
At a recent congressional hearing on the FY2003 budget, some concern was
expressed at the increasing cost of the Section 8 program. It will cost almost $1.4
billion more in FY2003 just to renew all 2.9 million Section 8 contracts and protect
some vulnerable groups from losing their current rental assistance. The proposed
$17.5 billion for the Housing Certificate Fund (largely Section 8 ) will account for
well over half of the total HUD budget. There are a number of reasons why Section
8 costs continue to increase rapidly, the main one being that rents have increased
significantly.
Last year, in 39 tight rental markets, HUD began permitting the allowable rent
level (Fair Market Rents) for units eligible for vouchers to be based on the 50th
percentile for the local rental housing market rather than the previous 40th percentile.
Since voucher holders generally pay 30% of their income towards the rent, with the
government paying the rest, allowing units with higher rents to be eligible means a
higher cost to the government. Also, major housing legislation passed several years
ago (P.L. 105-276, The Quality Housing and Responsibility Act of 1998), requires
that 75% of all new households getting vouchers have to have incomes below 30%
of the local area median. More voucher holders with even lower incomes than
previously means that these new households will require a larger rental subsidy. The
cost of an average voucher is now about $6,000 a year. Just for illustrative purposes,
one million additional vouchers would cost $6 billion a year.
Increasing Rental Housing Production. The difficulty of using vouchers
in some areas has led to legislative proposals for a new HUD program devoted solely
to the development of rental housing for extremely low-income households.
Referring to the limited value of vouchers in many tight rental markets, the Senate
Appropriations Committee expressed its concerns in 2001 that “families with

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CRS-14
vouchers often have little choice in their rental decisions, leaving them often in low-
income and very low-income neighborhoods and living in substandard housing.”
A number of bills have been introduced in the 107th Congress that would
subsidize the production of additional “affordable” rental housing: S. 1248, H.R.
2349, H.R. 1990/S. 940 (Title VII). H.R. 2349 and S. 1248 have over 200 largely
Democratic co-sponsors. Several of these bills are summarized immediately below.
In addition, the House Financial Services Committee has approved H.R. 3995, which
is discussed in a following section.
! S. 1248, the National Affordable Housing Trust Fund Act of 2001,
introduced by Senator Kerry, has a goal of producing 1.5 million
homes for low-income families by 2010. It would be financed by
“excess reserves” of the FHA program that are above what is
necessary to maintain a 3% “capital ratio”. The capital ratio is the
value of the reserves divided by the amount of mortgage insurance
in force. A 2% ratio is now required by law. (The excess reserves
are what some call the surplus or profits from HUD’s FHA mortgage
insurance business. Since the reserves have become an integral part
of rental housing production proposals, this controversial matter is
discussed in detail immediately below.) At least 75% of the trust
funds would have to be used for the construction of rental housing
and rental housing subsidies in the same manner as voucher
assistance under Section 8. States would have to provide $0.25 of
non-federal resources for every $1 of federal assistance. No less
than 75% of trust funds used for rental activities would have to be
used for extremely low-income families (income below 30% of the
local area median). Three-quarters of money from the trust fund
would be given as matching grants to states through a formula based
on the need for housing; the remainder would be awarded by HUD
through a national competition to non-profit intermediaries.
Assisted housing would have to remain affordable for 40 years.
States would have to distribute funds to grantees, giving preference
based on 1) the degree to which the development is mixed-income;
2) whether the housing is located in a census tract in which the
poverty rate is less than 20%; and 3) the accessibility of jobs to the
project.
! H.R. 2349, the National Affordable Housing Trust Fund Act of
2001, introduced by Representatives Sanders, Lee, and McHugh,
would use FHA reserves in excess of that necessary to maintain the
capital ratio of 2%. There would be the same state matching
requirements as in S. 1248. Forty-five percent of the funds for
affordable rental housing would be targeted to families with incomes
less than 30% of the area median income; 30% would go to families
with incomes equivalent to the federal or state full-time minimum
wage, whichever is higher; and 25% would be for the development,
preservation, or rehabilitation of existing affordable housing for
rental or homeownership for families with incomes below 80% of
the area median income. All of the funds would be distributed to the
states under a formula that considers the percent of families in

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CRS-15
substandard housing, the percent that pay more than 50% of their
income for rent, the percent below the poverty line, counties with
vacancy rates below 2%, and the age of the housing stock.
Using mortgage insurance reserves to fund additional rental
construction. As noted, several bills (H.R. 2349, S. 1248, S. 652) introduced in the
107th Congress seek to influence the production of rental housing, by stimulating
construction through a “trust fund” financed by what some believe to be “excess”
reserves of a mortgage insurance premium pool. Others point out that the so-called
excess reserves are not idle pools of unutilized capital, but federal funds booked for
insurance purposes, and treated like other federal revenue. Thus, these excess
reserves cannot be used as if the reserves were unspent resources.
A simplified explanation of this funding dispute is as follows. HUD operates
a successful mortgage insurance business under the Federal Housing Administration
(FHA) program. During the strong economy of the 1990s, this insurance business
was very profitable for HUD – the premiums were much larger than the expenses
from defaults on loans. A serious economic downturn, with increased
unemployment, would increase the number of mortgage defaults. Then, more of the
reserves would have to be used to pay off the loans held by lenders, and also be used
by HUD to fix up properties and to pay real estate agents to sell these homes. Each
default could cost the FHA tens of thousands of dollars. Thus, because of the
uncertainties of the economy in the years ahead, the insurance program must keep a
certain amount of the profits as rainy day “reserves”.
Supporters of using the measurable growth in the trust fund believe the reserves
are more than required by law and more then enough to cover future needs and, as
noted, they want to tap some of the “excess reserves” for a housing trust fund.
However, these reserves are already being used to support both the HUD and the
federal budget. HUD budget figures show that $2.3 billion of “negative subsidy”
from FHA insurance program income has been used to offset appropriation levels
that would otherwise have been required to maintain the same level of program
expenditures in FY2002, and $2.8 billion is proposed to be used in FY2003. The
FHA program is, in effect, providing spending authority represented by these reserves
to the rest of HUD.
The debate over the reserves is largely academic. Both sides agree that if
Congress were to redirect part of the FHA reserves into a housing trust fund, there
would have to be additional appropriations to make up for the reserves already built
into the budget.
There is another view that instead of using the growing FHA reserves for rental
housing production, the insurance premiums should be lowered to more closely
approximate the estimate of future needs. S.607 would do this. Even some who
support efforts to increase the production of affordable rental housing are uneasy
about using the FHA reserves since these reserves come from charging higher than
necessary insurance premiums that are paid largely by low- and moderate-income
households, including many minority families. To some, this would constitute a
regressive method of funding a rental production program.

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Are there other options for obtaining more affordable rental housing? Some
point to the Congressional Budget Office report of February 2001, Budget Options:
Restrict Itemized Deductions, Credits, And Exclusions Under the Income Tax. One
of the options identified by CBO to increase federal revenues is: limit the mortgage
principal on which interest can be deducted to $300,000. Taxpayers may now deduct
interest on up to $1 million of mortgage debt used to buy and improve a first and
second home. CBO says that reducing the eligible amount of debt for the mortgage
interest deduction from $1 million to $300,000 would trim deductions for 1.2 million
taxpayers with large mortgages and increase revenues by $55.8 billion over the 2002-
2011 period. Some argue that this would be a less regressive option to fund a rental
housing production program for extremely low-income families. Limiting
deductions to the interest on not more than $300,000 of mortgage debt would affect
high-cost areas such as San Francisco, Los Angeles, New York, and Boston. It is
probably no coincidence that these are the areas that have some of the lowest rental
vacancy rates in the country, and the most severe shortages of affordable rental
housing.
Another option for addressing the shortage of affordable rental housing is to
encourage more local governments to use “inclusionary zoning,” which requires
home builders to construct and set-aside a minimum percentage of new units in a
specific residential development that are affordable to a particular income level. (See
Inclusionary Zoning: A Viable Solution to the Affordable Housing Crisis? The
Center for Housing Policy. October 2000, for the pros and cons of this approach and
how it has worked in Montgomery County, Maryland.)
The Housing Affordability For America Act of 2002
H.R. 3995 is a wide-ranging omnibus bill introduced by Representative
Roukema. The House Financial Services Subcommittee on Housing and Community
Opportunity held a series of hearings on H.R. 3995 in April 2002. The
Subcommittee approved a significantly modified version of the original bill on June
18. The full committee completed its mark-up on July 10 and this version of the bill
is summarized below.
Title I. Section. 101. Home Investment Partnership Program. The
most contentious part of the full Committee mark-up occurred over competing
proposals to establish either a national housing trust fund (“the Sanders amendment”)
or to fund state and local housing trust funds (“the Kelly amendment”). On June 20,
the Committee adopted the Sanders amendment on a party-line vote. This
amendment would create a National Affordable Housing Trust Fund as a modified
version of H.R. 2349 (the original bill is summarized on pages 14 and 15 in this
report). The modified version made four changes to the original H.R. 2349: 1)
funds would be the distributed to cities and states, instead of states only, 2)
cooperatives would be an eligible activity, 3) all rehabilitation, not just substantial
rehabilitation, would be an eligible activity, and 4) Davis-Bacon prevailing wage
laws would be applicable.
However, on July 10, the Committee reversed itself and approved the Kelly
amendment by a vote of 35-34 to replace the Sanders amendment. As ordered
reported by the Committee, the bill would create a HUD program that would provide

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dollar for dollar matching grants to distinct affordable housing trust funds established
by states and units of general local government for the production, preservation, and
rehabilitation of affordable housing. Most of the federal match, 75%, would have to
be used for rental housing made available to extremely low-income families. The
other 25% would have to be used for either rental or homeownership housing for
low-income families. Eligible forms of assistance include capital grants, noninterest
bearing or low-interest loans or advances, deferred payment loans and loan
guarantees. To be eligible for grants, a trust fund must have an allocation plan
approved by HUD that includes the activities to be conducted, rents to be charged,
the availability of units to voucher holders, and providing that housing units will
remain affordable for a period of 40 years. Criteria for allocating grants to eligible
entities would include the existence of extremely low vacancy rates, the extent that
employment and other economic opportunities would be created for low-income
families, and the extent to which the applicant has worked to address issues of siting
and exclusionary zoning and other barriers to affordable housing. Appropriations
of “sums as may be necessary” would be authorized for FY2003 and each fiscal year
thereafter. (Note: Although the new program of grants to state and local trust funds
would be part of the HOME program, the new program would require a separate
appropriation.)
Title I also includes the following provisions: a downpayment assistance
initiative for first-time homebuyers of grants to participating jurisdictions with
allocations based on the jurisdiction’s need for and prior commitment to assist
homebuyers, and an amendment to the HOME program to allow certain municipal
employees, including policemen, firemen, maintenance workers, and teachers whose
income does not exceed 115% of the area median, to qualify for downpayment
assistance, help with closing costs, and discounted mortgage interest rates under the
HOME program.
Title II. FHA Mortgage Insurance. FHA multifamily mortgage limits
would be adjusted based on annual construction cost indexes; the FHA downpayment
simplification calculation for single-family housing would be made permanent; and
the cap on FHA adjustable-rate mortgages would be eliminated. The HUD Secretary
would be provided with authority to reduce downpayment requirements to at least 1%
of the loan amount for FHA insured mortgages for teachers and public safety officers.
The HUD Secretary could discount HUD-held single-family properties by 50% to
qualified teachers and public safety officers. A 3-year pilot program would be
authorized for no-downpayment FHA insured loans to qualified public safety officers
who purchase homes in designated high-crime activity areas.
Title III. Supportive Housing for Elderly and Disabled Families. This
title would authorize grants for capital repairs for modernization to nonprofit owners
of federally assisted housing for the elderly which is being converted to assisted
living facilities; the provision of service coordinators for supportive housing for
elderly and disabled residents in federally assisted housing; a demonstration program
for elderly housing for intergenerational families; and a provision that requires that
occupancy by elderly families with maximum set incomes continue in Section 202
projects that have undergone foreclosure.

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Title IV. Section 8 Rental Housing Assistance Program. A project-
based voucher demonstration program would be established to be used in conjunction
with new construction or substantial rehabilitation for use exclusively by extremely
low-income families. This voucher could be used with other capital subsidy
programs such as HOME, CDBG, or Low-Income Housing Tax Credits.
Appropriations would be authorized for FY2003 and 2004 in the amount necessary
to provide a total of 5,000 such incremental vouchers. To assist hard-to-house
families, PHAs would be permitted, beginning with funding for FY2003, to use up
to 2% of any amounts allocated to the agency for counseling, downpayment
assistance, security deposits, and other activities that will help families find suitable
housing.
Other Title IV provisions include ensuring the ability of families to use
enhanced vouchers in the case of owners prepaying mortgages or opting-out of the
program; an extension of project-based Section 8 contract renewals; the escrow of
tenant rent in cases of owner failure to maintain the unit; increased payment
standards up to 120% of the fair market rent for certain PHAs without HUD
approval; modifications in project-based vouchers; expanded use of enhanced
vouchers; a demonstration program for rental assistance for grandparent-headed or
relative-headed families; and protection of innocent tenants (in both Section 8 and
public housing) who are victims of domestic violence, from the “one strike and out”
provision (upheld by a recent Supreme Court decision).
Title V. Public Housing. The HUD Secretary would be directed to develop
a third-party assessment system for evaluating the performance of public housing
agencies. Other provisions include: the exemption of certain small public housing
authorities from submitting annual agency plans for FY2003 through FY2005;
authorization of appropriations for capital repair grants for non-profit owned,
federally-assisted elderly housing; a demonstration program for HUD to make grants
to PHAs to cover the capital costs of converting public housing primarily occupied
by elderly persons to assisted living facilities; authority for HOPE VI grants for
assisting affordable housing through “main street” projects; and reauthorization of
the HOPE VI program through FY2004.
Title VI. Homeless Housing Programs. A number of programs would
be reauthorized through FY2004: the Supportive Housing for the Homeless program,
Shelter Plus Care, the Emergency Shelter Grants program, the Interagency Council
on the Homeless, and the Federal Emergency Management Food and Shelter
program. Under the Supportive Housing program, renewals from FY2003 forward
would be funded through Section 8 appropriations, and a set-aside for permanent
housing would be added by requiring that at least 30% of funds for homeless
assistance (except for contract renewals) be used for permanent housing.
Appropriations would be authorized for housing assistance to victims of domestic
violence, stalking, or sexual assault when it has been determined that relocation
would assist in avoiding future incidents. The McKinney-Vento Homeless Assistance
Act would be amended to state that Congress declares a national goal of ending
homelessness within 10 years after enactment of H.R. 3995.
Title VII. Native American Housing. The Native American Housing and
Self Determination Act of 1996 would be reauthorized for FY2003-FY2007, and

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amended to permit recipients to use a percentage of their block grants for
comprehensive housing and community development planning activities.
Title VIII. Housing Impact Analysis. This title would require federal
agencies, with some exceptions, to certify (with documentation) in the Federal
Register and to the HUD Secretary that any proposed or final rule would not have a
significant impact on housing affordability.
Title IX. Other Housing Programs. Some of the 18 sections in this title
include: repeal of the scheduled increase to nine basis points in the Government
National Mortgage Association guarantee fee; establishment of a single office in
HUD designated to administer and coordinate all housing counseling programs;
increases in allowed average assistance per unit under the SHOP program to $15,000;
use of CDBG funds for construction of tornado-safe shelter for manufactured housing
parks; a clarification of the subsidy layering review responsibilities for low income
housing tax credit projects; correction of inequities in the second round of
empowerment zone funding; expansion of income eligibility of CDBG
homeownership programs for municipal employees; sense of Congress that HUD
appoint a permanent director of the Office of Disability Policy; transfer of rural
multifamily housing projects to nonprofits and local housing authorities; sense of
Congress regarding consumer protection and home warranties; sense of Congress that
HUD should implement a program to give incentives to builders to provide 10-year
home warranties.
The Housing Voucher Improvement Act of 2002
S. 2721, introduced by Senator Sarbanes on July 11, 2002 seeks to improve the
voucher rental assistance program through a number of provisions. The bill would:
! authorize thrifty vouchers (TV) to make additional housing
affordable to extremely low-income families. PHAs could issue
TVs out of their existing allocation of vouchers or Congress could
appropriate additional incremental assistance;
! create a voucher success fund with $50 million for untroubled PHAs
that do not have unused funds;
! allow more flexibility in the inspection process to prevent units
being lost to voucher holders due to delayed inspections;
! allow certain PHAs to raise their payment standards to 120% of Fair
Market Rents without HUD approval;
! require that HUD ensure that PHAs have a list of Low-Income
Housing Tax Credit and HOME developments to give to voucher
holders;
! allow people who live in project-based Section 8 housing to be
eligible for Family Self-Sufficiency activities;
! authorize Welfare to Work Vouchers;
! allow Resident Opportunities and Self-Sufficiency (ROSS) funds to
be used to serve Section 8 families;
! provide incentives to low-income families to increase earnings;
! allow PHAs to use electronic fund transfers for rental payments; and

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! clarify that tenants cannot be required to go through the application
process again to receive an enhanced voucher.
OMHAR/Mark-to-Market Reauthorization and Reform
The Office of Multifamily Housing Assistance Restructuring (OMHAR) was
created within HUD by the Multifamily Assisted Housing Reform and Affordability
Act of 1997. Authority for OMHAR, which administers the Section 8 restructuring
program known as “mark-to-market,” was set to expire on September 30, 2001.
Several continuing resolutions extended the program until it was finally reauthorized
through FY2006 under Title VI of the Labor, Health and Human Services, Education,
and Related Agencies Appropriations Act for FY 2002 (P.L. 107-116), and signed
into law on January 10, 2002.
More than 800,000 units in approximately 8,500 Section 8 project-based rental
complexes have mortgages that are insured by FHA. Once these projects reach their
20th year of use as government-assisted low-income housing, the owners have the
right to “opt out” or leave the program – either by converting the buildings to market-
rate use, or by selling to another owner (who may or may not keep the building in the
Section 8 program). The main purpose of the 1997 legislation was to preserve these
projects as affordable housing as the long-term contracts expire, and to lower the
rental assistance cost to the government by reducing above-market rents, often
requiring, in return, a reduction in the owner’s mortgage debt. About 66% of the
projects with contracts expiring after September 2001 have above-market rents. The
process of restructuring rents and mortgage levels requires complex negotiations with
landlords on a project-by-project basis. OMHAR was slow in getting started and had
contentious relations with some of the involved parties. As of June 6, 2002, 2,159
projects had been entered into the mark-to-market restructuring program, and 1,383
of these had reached completion. At one point, OMHAR estimated that the
government will save hundreds of millions of dollars over the next 20 years on the
restructurings that have been completed thus far, but now prefers not to provide a
figure on expected savings because of the many factors involved.
Provisions in Title VI of P.L. 107-116. Under this law, OMHAR will no
longer be limited to an annual budget of $10 million. The HUD Secretary could
make available up to $10 million annually, but would also be allowed to carry over
unspent money from previous years. The head of OMHAR will now report to the
FHA commissioner rather than to the HUD Secretary, giving the commissioner
oversight authority of OMHAR. Among the purposes of Title VI are to ensure that
properties that undergo mortgage restructuring are rehabilitated to a standard, and
with reserves set at levels, that allows the properties to meet their long-term
affordability requirements. If significant additional features (such as air conditioning
or an elevator) are required in a restructuring agreement, the owner, at HUD’s
discretion, can be required to pay up to 25% of the rehabilitation cost. This would
apply only to mortgage restructuring plans approved after enactment of OMHAR
extension legislation. HUD would be required to carefully track the condition of
restructured properties on an ongoing basis.
Title VI amends the current law to give grants to tenant-groups, tenant-endorsed
community-based nonprofits, and public entities to provide tenant services in projects
undergoing restructuring. The HUD Secretary is required to ensure that the amounts

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determined by the various rent standards for the same dwelling units (under enhanced
vouchers, mark-to-market restructuring, and contract renewals) are reasonably
consistent and reflect rents for comparable unassisted units in the same area.
Refinancing of mortgages held by HUD would be permitted under a restructuring
plan, even for existing mortgages not FHA-insured. Tenants in buildings whose
owner rejects a restructuring plan must be notified of this decision at the time of the
rejection, not only by the owner as previously required, but also by OMHAR or the
participating administrative entity. Project owners may request, and the HUD
Secretary may consider, mortgage restructuring and rental assistance plans to
facilitate sales or transfers of properties to other owners who agree to participate in
the Section 8 program. OMHAR’s authority to operate ends on October 1, 2004.
The Mark-To-Market program is to be repealed on October 1, 2006.
For more information, See CRS Report RL31182, Assisted Housing: Section
8 Mark-to-Market Restructuring.
Increasing Homeownership
In the last half dozen years there has been bipartisan support for efforts to
increase the homeownership rate among lower income and minority households, with
the prevailing view that this is an effective way for these households to become
economically self-sufficient and to accumulate wealth. More vigorous enforcement
of federal fair lending laws and an easing of mortgage underwriting standards haves
helped raise the rate for moderate-income and minority households, as has, until
recently, the strong economy and growth in jobs. Congress passed several pieces of
legislation in late 2000 to help low- and moderate-income and first-time homebuyers.
P.L. 106-554 allowed states to increase their sale of tax-exempt bonds that are used
to lower mortgage rates for first-time homebuyers (the Mortgage Revenue Bond
program). Under the American Homeownership and Economic Opportunity Act,
H.R. 5640, signed into law on December 27, 2000 (P.L. 106-569), qualifying
households can use up to 1 year of Section 8 rental assistance as a downpayment on
the purchase of a home. The new law also provides for a 3-year pilot program to
demonstrate the use of Section 8 vouchers by the disabled to become homeowners.
Table 2. Homeownership Rates, Various Categories
(in percent, 1st Quarter 2002)
White, non-Hispanic
74.3%
Black
48.0%
Hispanic
47.6%
Households with family incomes greater than or equal to the median family income
82.1%
Households with family incomes less than the median family income
52.3%
Married Couples (annual, 2001)
82.9%
Single Person Households (annual, 2001) 54.4%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.

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While the homeownership rate increased substantially over the period 1990-
2002, from 63.9% to 67.8% (1st quarter, 2002), Table 2 shows that there is a sizable
gap between the rate for whites and that for minorities. Table 2 also shows the large
differences in rates by income level and by marital status. Table 3 highlights the
large differences in rates between central cities and suburbs, along with the
significant differences between regions of the country – the Northeast and West with
their much lower homeownership rates compared to the Midwest and South. It is
difficult to discern a patten in the rates among states (Table 4) except that some of
the states with the largest populations have the lowest homeownership rates - New
York, California, and Texas. Similarly, there are no distinct patterns among cities
(Table 5) except that the Northeast cities of New York and Boston, and the two
largest cities in California, San Francisco and Los Angeles, have notably low rates.
It is difficult to generalize, but some of the metropolitan areas with the lowest rates
have relatively high incomes, large immigrant populations, and are coastal cities
bounded by an ocean which limits the amount of land available for new housing
construction.
Another reason why lower income and minority households may have lower
ownership rates that do not show up in these tables is that the main homeownership
tax incentives – the mortgage and property tax deductions – provide substantial
financial benefits to upper-middle income homeowners, but are of little use to those
in the bottom half of the income distribution. Similarly, while discrimination in
mortgage lending was reduced during the 1990s, it is still considered a significant
factor affecting minorities.
Table 3. Homeownership Rates, Various Areas
(In percent, 1st Quarter, 2002)
U.S.
67.8%
Inside metropolitan Areas
66.0%
In central cities
51.5%
Suburbs
74.6%
Outside metropolitan areas
75.5%
Northeast
63.9%
Midwest
73.1%
South
69.9%
West
62.2%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.
Administration Homeownership Proposals. The Administration’s
FY2003 HUD budget contains several homeownership proposals. One would set
aside $200 million within the existing HOME program for the “American Dream

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Downpayment Fund” and has been introduced as H.R. 4446/S. 2584. The fund
would provide a $3-for-$1 match, up to a maximum of $1,500 when third parties
contribute up to $500 to help low-income families finance the purchase of a first
home. HUD estimates that this would help 40,000 additional families to buy a home.
Last year, the Administration made the same request for a $200 million set-aside
within HOME. This proposal was criticized because HOME money can already be
used to help families buy a first home and no new money was being added to the
HOME program to pay for this new initiative. It was argued that this proposal would
create a federal mandate that could take away funds that some communities might
prefer to use for affordable rental housing (National Association of Counties, U.S.
Conference of Mayors, testimony before the House Subcommittee on Housing and
Community Opportunity, May 22, 2001). The FY2002 VA/HUD Appropriation
conferees agreed to provide $50 million for this initiative within the HOME program
subject to enactment of authorizing legislation by June 30, 2002. Without the
authorizing legislation, provided by H.R. 4446/S. 2584, the $50 million approved
would simply become additional resources for the HOME program. As noted, for
FY2003, the Administration is again requesting a $200 million set-aside for the
downpayment assistance program, but is also requesting an increase in the HOME
program of $238 million. As noted above, the Senate-passed version of the FY 2002
emergency supplemental bill, S. 2551, would rescind the $50 million for
downpayment assistance fund approved in FY2002.
The Administration is proposing for FY2003 to triple the set-aside in the
Community Development Block Grant program to fund the Self-Help
Homeownership Opportunity Program (SHOP) - from $22 million in FY2002 to $65
million in FY2003. Under SHOP, grants are made to national and regional non-
profit organizations such as Habitat for Humanity. Homebuyers must contribute
significant amounts of volunteer labor to the construction or rehabilitation of the
property. (H.R. 4446 would also reauthorize the Self-Help Housing Program at $65
million for FY2003 and FY2004.)
Table 4. States with Highest and Lowest Homeownership Rates
(in percent, 2001)
Highest
Lowest
Michigan
77.1%
New York
53.9%
Iowa
76.6%
Hawaii
55.5%
W. Virginia
76.4%
California
58.2%
S. Carolina
76.1%
Rhode Island
60.1%
Minnesota
76.1%
Massachusetts
60.6%
Maine
75.5%
Texas
63.9%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U. S.
Census Bureau.

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Another Bush homeownership initiative, requested in both its FY2002 and
FY2003 budget proposals, is not part of the HUD budget. It is a proposed incentive
in the tax code that would provide an estimated $1.7 billion of tax credits over 5
years to homebuilders to encourage the rehabilitation of existing properties (such as
abandoned housing in central cities) or new construction of 100,000 affordable
single-family homes in urban or rural areas. The proposal is modeled after the Low
Income Housing Tax Credit for rental housing (which has raised some concerns
among supporters of the rental program – see the section below on the Low Income
Housing Tax Credit). Credits would be allocated to state housing credit agencies on
the basis of population ($1.75 per capita in the first year and indexed to inflation
thereafter). State agencies would award first-year credits to single-family housing
units in a project located in a census tract with median income equal to 80% or less
of the area median income. Credit would be awarded as a fixed amount for
individual units comprising a project. The present value of credits, determined on
the date of a qualifying sale, could not be more than 50% of the cost of constructing
a new home or rehabilitating an existing property. The taxpayer (developer or
investor partnership) owning the housing unit immediately prior to the sale to a
qualifying buyer would be eligible to claim credits over a 5-year period beginning on
the date of the sale. Eligible homebuyers would be required to have incomes equal
to 80% or less of the area median income.

The Administration is also proposing a tax credit to financial institutions that
match private Individual Development Accounts to save for a first home, start a
business, or pay for education. (See CRS Report RS20534, Temporary Assistance
for Needy Families and Individual Development Accounts.)
Table 5. Homeownership Rates in Selected Metropolitan Areas
(in percent, 2001)
Highest
Lowest
Nassau, NY
82.6%
New York
33.4%
Richmond, VA
76.2%
San Francisco
48.6%
Detroit
76.1%
Los Angeles
50.1%
Buffalo
75.1%
Honolulu
55.4%
Salt Lake City
72.9%
Houston
55.9%
Tampa/St. Petersburg,
70.7%
Boston
59.0%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.
Other Homeowner Proposals. There are at least another 18
homeownership bills that have been introduced in the 107th Congress: H.R. 421, H.R.
858, H.R. 859, H.R. 1221, H.R. 1773, H.R. 2022, H.R. 2033, H.R. 2308, H.R. 3191,
H.R. 3358, H.R. 3661, H.R. 3719, H.R. 3767, H.R. 3774, H.R. 4446, S. 1081, S.
1396, S. 2230, S. 2239, and S. 2584. A sample of bills are summarized below.

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Purchase of FHA Owned Homes. Several bills (H.R. 1221, H.R. 3191,
H.R. 3995) would add firefighters and rescue personnel to existing programs or
modify existing programs that sell FHA-owned homes to police and teachers at 50%
of the appraised value. The Officer Next Door program was created in 1997 and the
Teacher Next Door program started in 2000. According to HUD, about 6,000
officers and teachers have bought homes under these programs. HUD suspended the
Officer/Teacher Next Door Program in April 2001 for 120 days to review the
program and take corrective measures to prevent fraud that had occurred by a small
number of participants. Indictments have been brought against 15 officers thus far,
with nine convictions for defrauding the program – some for failure to live in the
purchased homes as required. Other officers who were not licensed to carry fire
arms, as required by the program, purchased homes in violation of the regulations.
Safeguards have been added and the programs resumed in August, 2001.
! H.R. 1221 would expand the Officer Next Door and Teacher Next
Door Initiatives of HUD to include fire fighters and rescue
personnel.
! H.R. 3191 would provide for the sale of HUD-owned properties at
reduced prices, reduced downpayments, and reduced mortgage
insurance premiums to certain teachers and public safety officers.
Homes could be purchased with downpayments of as little as 1% of
the appraised value by certain part- or full-time teachers in public or
private schools, or by public safety officers, who have not owned a
home in the previous 12-month period in certain specified
jurisdictions. Certain properties sold during FY2002-FY2006 would
be available to teachers and public safety officers for 50% of the
appraised value, but the homes would have to remain the purchaser’s
primary residence for at least 3 years or there would be some
recapture of gains from the resale. There would also be a 3-year
pilot program to encourage public safety officers (including those
serving a public agency of the federal government) to purchase
homes, with no downpayments, in locally designated high-crime
areas.
Other FHA-Related Bills. H.R. 858 would simplify downpayment
requirements for FHA insurance for single-family homebuyers. H.R. 859, would
reduce the downpayment amount that a first time homebuyer is required to pay if
purchasing a home insured by the FHA. (See CRS Report RS20661, The
Streamlined FHA Downpayment Program.)
The existing Officer/Teacher Next Door programs (and the proposed expansions
cited above) depend for their inventory on the number of homes FHA takes back in
foreclosures. HUD sold 66,415 single-family homes in FY2001. However, HUD
said that as of March 2002, the inventory of HUD-owned homes was 28,270, the
lowest level since 1996. In addition, HUD’s proposed budget for FY2003 says “In
2003, FHA will begin to move out of the single-family property management
business and accelerate the claims process by taking mortgage notes rather than
requiring lenders to foreclose and transfer single-family properties to FHA. FHA
will sell defaulted notes to the private sector for servicing and or disposition, thereby
eliminating most of the real property that FHA currently acquires.” This would

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presumably reduce the supply of FHA-owned homes for sale to targeted groups such
as officers and teachers.
Mortgage Revenue Bond Program Reforms. H.R. 951/S. 677, the
Housing Bond and Credit Modernization and Fairness Act, has 359 bipartisan co-
sponsors. It would modify several provisions in the existing Mortgage Revenue
Bond (MRB) first-time homebuyer program. The MRB program is a provision in the
tax code that provides reduced rate mortgages to first-time homebuyers with incomes
up to 115% of the local area median. States raise funds for the program by selling
tax-exempt bonds. Investors who buy these bonds do not have to include the interest
income they earn when they pay their federal income tax, so they are willing to lend
to states at lower interest rates. At issue is the repeal of what is called the “Ten Year
Rule,” an obscure provision now said to be preventing tens of thousands of qualified
lower income first-time buyers each year from getting an affordable MRB-financed
mortgage. The rule, enacted in 1988 (P.L. 100-647) before the MRB program was
made permanent in 1993, requires states to use the mortgage payments received from
homeowners to pay off the bond once the bond has been outstanding for 10 years,
rather than using (or recycling) these mortgage payments to make other loans to other
first-time buyers. When homeowners sell their home and pay off their mortgage, or
refinance their loan, these funds must also be used to pay down the bond principal.
The 1988 Ten Year Rule started having an impact in 1998. H.R. 951/S. 677
would repeal the rule. Repealing the rule would allow a recycling of funds and thus
allow a larger volume of tax-exempt bonds to remain outstanding for a longer period
of time. This change is supported by the National Council of State Housing Agencies
and the National Governors Association. The Joint Committee on Taxation has
estimated that the repeal would cost $770 million over 5 years, and $2.4 billion over
10 years.
A second provision in H.R. 951/S. 677 would change the way the home
purchase price limits are set under the MRB program. Under current law, the price
limit on homes purchased with MRB-financed bonds is 90% of the average area
home price. The IRS is supposed to provide “safe-harbor” price limits. However,
the IRS does not have access to reliable and comprehensive sales price data, so it has
not updated price limits since 1994. Since house prices have risen about 30% since
then, supporters of the MRB program say it cannot work in parts of many states
because qualified buyers cannot find homes priced below the outdated limits. H.R.
951/S. 677 would allow states to use another way to set house price limits. The
house price limits could be set at three and a half times the program’s homebuyer
qualifying income, a more readily available measure.
High FHA Delinquency Rates and Other Concerns. Easier lending
requirements have made it possible for more lower income households to buy a first
home in recent years with very little downpayment. However, many who have
bought under the FHA program have little or no savings available for the inevitable
financial setbacks, making these new owners particularly vulnerable to losing their
home in a foreclosure. A slower economy with increased unemployment during the
recent past is part of the explanation for increased mortgage delinquencies and
foreclosures. High energy costs, increases in the cost of homeowner insurance, and
high levels of consumer debt have also played a role, as has predatory lending. Data

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from the quarterly survey of mortgage delinquencies by the Mortgage Bankers
Association of America show that the percentage of homeowners with FHA-insured
mortgages who are 30 days or more behind in their payments went above 11% for the
first time ever in the third quarter of 2001 (to 11.36%). This is a higher delinquency
rate than during the recessions of the early 1980s and early 1990s. The rate fell to
10.97% in the fourth quarter of 2001, but is still historically high. The percentage of
FHA-insured loans in the process of foreclosure stood at 2.17% at the end of the
fourth quarter of 2001, up from 1.94% in the third quarter. When foreclosures are
concentrated in certain areas, as FHA-insured homes often are, they can pull property
values down and do other damage to these neighborhoods.
The National People’s Action (NPA), a Chicago-based coalition of community
groups, released a study on May 21, 2002 7 criticizing the FHA for high default rates
in 22 U.S. cities, particularly in minority and poor neighborhoods, and for its failure
to take stronger action against lenders, realtors, and appraisers with the worst records.
The study found a national default rate (90 days delinquent or in foreclosure) of 6.4%
in FHA loans made from 1996 to 2000, more than six times the rate for loans not
insured by the government. FHA has established a “Credit Watch” program that
looks at lenders with default rates at least three times an area’s average, but NPA
wants the threshold reduced to two times that rate. NPA says the high default rates
result in too many abandoned homes and ruined neighborhoods. FHA commissioner
John Weicher responded to the study by saying that foreclosure rates had fallen and
that the agency is trying to keep families in their homes.
The current Administration, the previous Administration, and some in Congress
believe that homeownership is an effective way for lower-income households to
accumulate wealth. However, little research has been done to verify the claims. For
example, not all neighborhoods participated in the economically successful 1990s.
Along with certain inner cities, a number of older suburbs are fiscally and
economically distressed. (For example, see, Why California Is Generating Large-
Scale Slums, Anthony Downs, Senior Fellow, The Brookings Institution, June 7,
2000.) Therefore, it would be important to know where FHA buyers are purchasing
homes. Also, as discussed above, some believe that FHA homeowners are paying
higher mortgage insurance premiums than necessary. Research also shows that
lower-income and minority buyers are more likely to receive “subprime” mortgages
with higher interest rates and higher fees, often higher than can be justified by
standard underwriting guidelines.8 Predatory lending has hurt lower-income and
minority homeowners most, often stripping away home equity accumulated over a
lifetime. Furthermore, the tax benefits of mortgage interest and property tax
deductions are worth much less, if anything, to low-income homeowners than to
7 Families HUD Abandoned: An Analysis of the Federal Housing Administration’s Loan
Default Activity and Lender Performance in 22 U.S. Cities, 1996-2000. Study done by
National Training and Information Center for the National People’s Action. Chicago,
Illinois. May 21, 2002.
8 Risk or Race? Racial Disparities and the Subprime Refinance Market - A Report of the
Center for Community Change. Published in the May 1, 2002 Congressional Record, pp.
S3630-31.

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middle- or upper-class households. All of these factors work against lower-income
homebuyers accumulating wealth.
Low Income Housing Tax Credits and Private Activity Bonds
Rental Housing Tax Credits. The Low Income Housing Tax Credit
(LIHTC), a 1986 provision in the federal tax code, has become the major engine for
subsidizing the production of privately owned rental housing affordable to lower
income households. Although there are no hard numbers, more than 900,000 new
and rehabilitated units have probably received support over the program’s 15-year
history. Apartment owners receiving tax credits under this program must set aside
the units for at least 30 years, and sometimes longer, for households with incomes no
greater than 60% of the local area median. Many of these units also receive funds
from HUD programs, including Section 8 housing vouchers, and are thus able to
serve households with incomes significantly below the program’s 60% maximum.
With the robust economy of the 1990s reducing vacancy rates in buildings with
lower rents, and pushing rents higher, housing tax credits have been increasingly used
to help prevent the loss of the existing stock of federally-assisted rental units, rather
than to increase the overall supply of affordable rental units. An increasing number
of tax credits are being used to encourage Section 8 landlords with expiring contracts
not to leave the program. And more tax credits are being used with HUD’s HOPE
VI program which is tearing down some of the worst big city high rise public housing
projects, and replacing them with lower-density mixed income apartment complexes.
These new uses for housing tax credits, along with reports about the difficulties
tenants are having using housing vouchers in tight rental markets, help explain the
strong congressional support for increasing the annual supply of tax credits.
Provisions to increase the LIHTC were attached to a number of bills moving through
the 106th Congress, including a tax bill, H.R. 5662, that was added to a broader
appropriation package, H.R. 4577. The President signed H.R. 4577 on December 21,
2000 (P.L. 106-554). Under this law, the tax credit formula that determines the
amount of tax credits that state agencies may allocate each year was increased to
$1.50 per capita as of January 1, 2001 and to $1.75 in 2002. After 2002, the cap will
be indexed to the inflation rate. The new law also established a $2 million minimum
beginning in 2001 for small states who would get less than this under the per capita
formula. These changes in the law are expected to subsidize the construction and
rehabilitation of an additional 180,000 affordable rental units over the next 5 years.
The new law also made programmatic changes to the LIHTC. Added to the
criteria that state agencies must consider in allocating housing tax credits among the
competing projects of developers were tenant populations with special housing
needs, public housing waiting lists, tenant populations of individuals with children,
and projects intended for eventual tenant ownership. Housing finance agencies will
also have to conduct a comprehensive market study of the housing needs of low-
income individuals in the area to be served by the project before the credit allocation
is made. More regular site visits will be required to monitor existing projects for
owner compliance with habitability standards.

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Issues and Concerns. In terms of apartments produced, the LIHTC has
been quite successful, as builders and investors have responded to this tax incentive,
although the extent, if any, to which these units would have been produced in the
absence of the tax credit, is not known. There has been some criticism that the tax
credits are poorly targeted, being allocated on the basis of population rather than on
some index of need such as the shortage of affordable units to very low income
households. Some housing advocacy groups point out that many of the units are not
affordable to extremely low income households without additional rent subsidies.
Some observers also worry that some of the more unfortunate results of past housing
programs, such as inadequate reserve funds and inadequate maintenance, could
surface later in this program as units age.
There is also concern that some of the early tax credit projects will be converted
to market-rate units after their 15th year of service, as the law allows under certain
conditions, creating an issue similar to landlords who decide to “opt out” of HUD’s
Section 8 assisted rental program. A report by the Joint Center for Housing Studies
of Harvard University and the Neighborhood Reinvestment Corporation, Expiring
Affordability of Low-Income Housing Tax Credit Properties: The Next Era in
Preservation, estimates that 15-year affordability restrictions will end for the first
23,000 tax credit units in 2002. The report concludes: “Lack of monitoring or
insufficient funds for property repair or purchase will place even properties for which
there is interest in preserving affordability at risk of market conversion, reduced
income-targeting, or disinvestment and decline” (p. 37).
Report on Chicago Tax Credit Projects. A recent study was conducted
of tax credit projects in Chicago.9 As is the case across the country, very little is
known about Chicago’s estimated 16,000 tax credit units. The Chicago Rehab
Network examined the 1998 audits of projects containing 8,704 tax credit units,
about 60% of the city’s total units. The study found that only 6.5% of the projects
were located in neighborhoods that are predominately white; nearly 60% were in
minority neighborhoods, with the remaining in racially mixed areas. The vast
majority were found in neighborhoods where median incomes are 40%-80% of the
area median income. Twelve percent of the potential rents were lost to vacancy and
another 5% to bad debt or unpaid rents. Seventy-three percent of projects had no
operating reserves and 44% had no replacement reserves. About one fourth of
projects had severe difficulties where expenses and debt service amounted to 115%
of effective gross income, or higher. Projects that were straining to meet costs were
also failing to make deposits to their reserve account, or were withdrawing funds
from these accounts. The report says that this “seems to promise a future of deferred
maintenance, rising vacancies and ever deepening budget shortfalls.”
GAO Report on the Cost of Tax Credit Projects. There are also
questions about whether the cost of producing tax credit rental units is reasonable,
relative to alternative ways of helping low-income households with their housing
needs. In July 2001, the GAO released a study, Costs and Characteristics of Federal
Housing Assistance (GA0-01-901R), that compared the total per-unit cost of five
9 Present Realities, Future Prospects: Chicago’s Low Income Housing Tax Credit Portfolio.
Summary Report 2002. Chicago Rehab Network.

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production programs, including housing tax credits and housing vouchers. The GAO
found that the federal cost of housing tax credit units, as a percentage of the federal
cost of a unit from a housing voucher, was 150% in the first year, and 119% when
costs were averaged out over a 30-year life cycle. However, the GAO said a number
of other factors must be weighed against the lower cost of vouchers. For example,
there are the additional services that can more readily be provided for special
populations, such as the frail elderly, with project-based assistance (tax credits,
HOPE VI, Section 202, 811, and 515) than with tenant-based assistance (vouchers).
In addition, tax credits and other production programs can be used as part of
strategies to revitalize distressed communities.
Compliance with IRS Regulations. But others wonder about how well
developers, investors, and state allocating agencies are following the complex
requirements of the LIHTC program. The IRS is concerned about noncompliance
among early tax credit projects that have now passed the 10-year credit period (by
which time all awarded tax credits have been claimed by the investor) and may no
longer feel compelled to abide by program rules. While the IRS considers overall
compliance with program requirements to be good, there has been a significant
increase in the number of violations reported by IRS field agents. In 2000, the
agency began conducting a broad criminal investigation of low-income housing tax
credit projects suspected of illegal activities.
107th Congress Legislation. There are a number of bills pending that
would make changes to the Low Income Housing Tax Credit program: H.R.
951/S.677, H.R. 2539, H.R. 3000, H.R. 3324, H.R. 3701, H.R. 4194, H.R. 4712, S.
1554, S. 2006, and S. 2479. Not all are described below.
! H.R. 951/S. 677 would allow the income eligibility for renters in
LIHTC projects to be based on the higher of the statewide median
income or the local area median income. Under current law, only
the local area median income is used. Supporters of the change
argue that the local area incomes in some rural communities are too
low to interest developers (since the incomes determine the rents that
developers can charge). They believe that adding the choice of the
statewide median would help in some situations. Some oppose this
change because it would allow renters with higher incomes to be
eligible for the program. They think the current income maximum
of 60% of the local area median is already higher than they would
like since they believe the greatest need for affordable rental housing
is for people with incomes of 30% or less of the area median
income.
! H.R. 2539 would repeal the Low Income Housing Tax Credit
disqualification for moderate rehabilitation projects.
! H.R. 3324 and S. 2006 would clarify the eligibility of certain
expenses in determining the size of the Low Income Housing Tax
Credit to developers.
! H.R. 3701 would provide a temporary low income tax credit that
would encourage the provision of housing, job training, and other
services to ex-offenders.

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! S. 1554 would provide for an increased LIHTC for property located
immediately adjacent to qualified census tracts.
The Administration’s proposed homeowner tax credit, described in the
homeownership section earlier in this report, worries some LIHTC advocates because
they fear there would be competition in the sale of these tax credits to a limited pool
of investors. Another concern is that, in an effort to keep the cost of the proposal
down, a single cap might be combined for both the homeowner and rental programs
(at less than the sum of the individual caps) and that state agencies might have to
decide how much they wanted to use for each program.
Private Activity Bonds. For years, housing tax credit supporters have also
urged passage of companion legislation that would increase the allowed annual state
sale of tax-exempt private activity bonds. Some of the proceeds from the sale of
these bonds are used in conjunction with the LIHTC program. (Businesses and
individuals who buy these bonds in effect lend money at below-market interest rates
because they do not have to pay federal income tax on the interest they earn on these
bonds.) The same law that increased the LIHTC cap (P.L. 106-554), increased the
bond cap as of January 1, 2001, to the greater of $62.50 per state resident or $187.5
million, and to $75 per resident or $225 million in 2002. (A provision in H.R. 951/S.
677 that would repeal the “Ten-Year Rule” applicable to tax-exempt bonds used to
help first-time homebuyers, is discussed above under “Increasing Homeownership”.)
The Millennial Housing Commission has called for an immediate repeal of the Ten-
Year Rule.
Predatory Lending
Predatory lending involves home mortgages, mortgage refinancing, home equity
loans, and home repair loans with unjustifiably high interest rates, excessive fees,
balloon payments, prepayment penalties, and the imposition of other unreasonable
and sometimes fraudulent, terms. These loans are said to have grown rapidly in
minority neighborhoods, often stripping away wealth that may have taken owners
decades or a lifetime to accumulate. The number of predatory loans increased
sharply 3 or 4 years ago when Wall Street firms began buying “subprime” loans
(risky loans with high interest rates and fees made to those with poor credit records).
A number of government agencies have become involved in addressing various
aspects of the predatory lending issue, which suggests to some that additional
legislation may not be necessary. Others disagree. The Federal Trade Commission
won a large settlement against the defunct First Alliance Mortgage Company in
March 2002, that could result in payments of as much as $60 million to about 18,000
mortgage borrowers. The FTC said the First Alliance used high-pressure
telemarketing sales techniques and misled borrowers about increases in interest rates
and monthly payments on adjustable rate mortgages. In January 2002, the Federal
Reserve tightened lending rules under the 1994 Home Ownership and Equity
Protection Act to reduce abusive lending practices. In the past year, HUD has used
the city of Baltimore as a national laboratory to develop tactics against predatory
practices in its FHA mortgage insurance program - with 40 indictments against
lenders, resulting in 27 successful prosecutions thus far and 66 FHA disbarments of
lenders from the FHA program.

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On May 15, 2001, the Neighborhood Reinvestment Corporation (NRC) testified
before the House VA/HUD Appropriations Subcommittee on its efforts to research
and address the impact of predatory lending. The NRC said that predatory lending
threatens to undo the work of many nonprofits that have worked with lenders and
local governments to improve distressed neighborhoods. They are working with
Freddie Mac to develop a loan product for families that now have predatory loans.
Freddie Mac has expanded its pilot program against predatory lending, “Don’t
Borrow Trouble,” which uses advertising and consumer education to make borrowers
aware of certain dangers, including excessive fees and deceitful lending practices.
During Senate Banking Committee hearings on predatory lending on July 26
and 27, 2001, some financial organizations said more emphasis should be on
enforcing existing laws. As one said, predatory lending is mortgage fraud, something
that has been illegal for years. Others thought there should be more consumer
education initiatives to increase financial literacy. One consumer advocacy group
said that predatory lending is “so hard to fight because so many people are making
so much money,” and that only comprehensive legislation could stem the problem.
The mortgage lending industry acknowledges that a small number of lenders on the
fringe give their industry a black mark, and say they are working to address the worst
abuses. However, they caution about an overreaction, with excessive regulations that
could increase the costs of borrowing and make it more difficult for those with
impaired credit records to get needed loans. On the other hand, some industry groups
are concerned that states are passing their own predatory lending laws, including
California, North Carolina, and Georgia, and that some are so severe that reasonable
federal preemptive legislation may be welcomed.
While HUD, Fannie Mae, the Federal Reserve, the FTC and the Department of
Justice and the mortgage lending industry have taken some measures to address these
concerns, a coalition of consumer groups continues to press for more safeguards and
enforcement mechanisms. HUD convened a national task force in the spring of 2000
that held hearings in Washington, Atlanta, Los Angeles, New York, and Baltimore.
A joint report by HUD and the Treasury Department, issued June 21, 2000, Curbing
Predatory Home Mortgage Lending, urged Congress to adopt legislation that would
restrict abusive terms and conditions on high-cost loans, prohibit harmful sales
practices in mortgage markets, improve consumer literacy and disclosures, and
prohibit government-sponsored enterprises from purchasing loans with predatory
features and establishing predatory lending as a factor in CRA evaluations. Most
recently, a new study by the Center for Community Change, Risk or Race? Racial
Disparities and the Subprime Refinance Market (the executive summary is in the
May 1, 2002 Congressional Record at page S3629) analyzed the lending patterns of
all 331 metropolitan statistical areas of the country. It found a geographic
concentration of subprime lending in minority neighborhoods and to borrowers of
color at all income levels. This is of concern because other research has shown that
predatory lending is concentrated in the subprime market.
Predatory lending bills in the 107th Congress include the following:
! H.R. 1051 (LaFalce), the Predatory Lending Consumer Protection
Act of 2001, would amend the Home Ownership and Equity
Protection Act (HOEPA) of 1994 and other sections of the Truth in

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Lending Act to expand consumer protections against predatory
lending in connection with high-cost mortgage transactions, and to
strengthen the civil remedies available to consumers under existing
law. It would amend HOEPA to lower interest rate and total fee
“triggers” so that the Act would cover more high cost mortgage
refinancings, home equity loans and home improvement loans.
HOEPA would be expanded to restrict practices that facilitate
mortgage “flipping” and equity “stripping” — restricting the
financing of fees and points, prepayment penalties, single-premium
credit insurance, balloon payments and call provisions. It would be
revised to prevent lenders from making loans without regard to the
borrower’s ability to repay the debt, encourage credit and debt
counseling and require new consumer warnings on the risk of high-
cost secured borrowing.
! H.R. 1053 ( LaFalce) would amend sections of the Equal Credit
Opportunity Act and the Home Mortgage Disclosure Act. It would
be made unlawful for a lender to fail to make loans on the most
favorable credit terms for which the applicant qualifies. It would
also become illegal to target applicants for high-cost mortgages
based on the applicant’s race, color, religion, national origin, sex,
age, or marital status. H.R. 2531 would amend the Truth in Lending
Act, the Revised Statutes of the United States, the Home Mortgage
Disclosure Act of 1975, and the amendments made by HOEPA. Part
of H.R. 865 would amend the Community Reinvestment Act (CRA)
so that loans deemed to be predatory lending, that negatively impact
the community or neighborhood, would not count toward
determining whether the institution is meeting the credit needs of the
entire community.
! H.R. 4818 (LaFalce), the Mortgage Loan Consumer Protection Act,
would improve and update the Real Estate Settlement Procedures
Act of 1974 (RESPA) by simplifying and improving the accuracy of
mortgage disclosures; expanding protections against junk fees and
unearned closing costs; enhancing escrow account protections; and
creating enforcement provisions for existing RESPA requirements.
! S. 2438 (Sarbanes), the Predatory Lending Consumer Protection Act
of 2002, builds upon and is similar to consumer safeguards found in
H.R. 1051. For example, it would prevent prepayment penalty
provisions for any payment made after the end of the 24th month of
loan payments; prohibit all balloon payments; and prevent the
requirement of an advance collection for single premium credit
insurance for any credit life, credit disability, credit unemployment,
credit property insurance, or any analogous products. It would limit
the amount of points and fees that could be financed, and require
additional consumer counseling before certain loans are made. The
bill increases the amount of civil money penalties for certain
violations of law and extends the statute of limitations to 3 years
from the date of the occurrence of the violation.
Other Readings. See CRS Report RL30885, Predatory Lending:
Background on the Issue and Overview of Legislation in the 106th Congress.

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Oversight of Fannie Mae and Freddie Mac
Representative Richard Baker, chairman of the House Financial Services
Subcommittee on Capital Markets, Insurance, and Government-Sponsored
Enterprises (GSEs), introduced H.R. 1409, that would tighten the government’s
financial oversight of Fannie Mae and Freddie Mac. This legislation would move the
current oversight function from the Office of Federal Housing Enterprise Oversight
at HUD to the Federal Reserve Board in the belief that this would provide more
resources for the review and be more independent of political decisions. HUD’s
FY2003 budget proposal says that the agency will be more aggressive in its oversight
of GSE activities.
Recent corporate accounting scandals have focused attention on the exemption
that the GSEs have from registration and disclosure requirements of the Securities
and Exchange Commission (SEC). H.R. 4071 would require that Fannie Mae and
Freddie Mac register their securities issuances with the SEC and make certain
mandatory disclosures about those securities in their offering statements, as other
publicly held corporations (including bank and financial services holding companies)
must now do. On July 12, the GSEs announced that they would voluntarily register
and file their annual and quarterly investor reports with the SEC and meet disclosure
standards for the companies. They will not, however, register their debt and
mortgage-backed securities. Hearings were held by the House Financial Services
Subcommittee on Capital Markets on July 16, 2002, at which representatives of the
Treasury Department indicated that further study of liquidity issues was needed
before requiring SEC-style disclosures of GSE securities.
The Capital Markets Subcommittee held hearings on May 23, 2001, and heard
the Congressional Budget Office (CBO) present their study, Federal Subsidies and
the Housing GSEs, on the activities of Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks. The CBO estimated that these three entities received $13.6
billion in subsidies in 2000 (through the increased value of their securities) as a result
of investors’ perception of an implicit government guarantee (that the federal
government would come to their rescue if they got into serious financial difficulty)
and from tax and regulatory exemptions. Of the $13.6 billion in benefits, CBO
estimated that $7 billion was passed on to borrowers through lower mortgage rates.
Fannie Mae disputes these findings and has published its own competing analysis,
claiming that they and Freddie Mac deliver a net benefit to homeowners of between
$5.6 billion and $9.7 billion and do not retain any subsidy.”
In one of the Millennial Housing Commission’s supporting recommendations,
it “affirms the importance of the government-sponsored enterprises.”
Welfare Reform and Housing Assistance

Housing advocacy groups and others were dismayed that the original 1996
welfare reform legislation made no mention of the obstacles that high housing costs
often play in efforts to get and keep a job, and they have lobbied to change this in the
welfare reform reauthorization bills. S. 2116, the Welfare Reform and Housing Act,
would amend the program of block grants to states for Temporary Assistance for

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Needy Families (TANF) to help states address the importance of affordable housing
in family efforts to achieve economic self-sufficiency. On May 1, 2002, the Senate
Banking Subcommittee on Housing and Transportation held oversight hearings on
TANF reauthorization and federal housing policy. Housing advocates say many
welfare families are the proverbial one paycheck away from not being able to pay
their rent and this can easily jeopardize their continued employment. High housing
costs can leave little income for child care, food, transportation, and other basic
necessities.
Under S. 2116, TANF-funded housing subsidies provided for more than 4
months would be considered “non-assistance” instead of “assistance”, and therefore
not subject to time limits. The bill would require states to address housing-related
problems of welfare recipients and former welfare recipients in their state plan, and
to describe methods adopted by the state to address housing-related barriers to work.
States would also be required to address recipients’ housing-related work barriers in
developing their individual responsibility plans. The bill would direct HHS to work
with HUD to gather increased and improved data on the housing status of families
receiving TANF and the location of places of employment in relation to families’
housing. The legislation would encourage cooperation among welfare agencies and
agencies that administer federal housing subsidies. S. 2116 would authorize HHS
and HUD to conduct joint demonstrations to explore the effectiveness of a variety of
service-enriched and supportive housing models for TANF families with multiple
barriers to work, including homeless families, and would appropriate $50 million in
FY2003 for these grants. A similar demonstration was approved on June 26 by the
Senate Finance Committee, in its markup of welfare reform legislation. The
Committee also approved provisions, similar to S. 2116, that would treat
supplemental housing benefits provided with TANF funds as “nonassistance.”
S. 2524 also includes provisions similar to S. 2116 designed to improve states’
ability to address housing issues through TANF.
On May 16, 2002, the House passed a welfare reauthorization bill, H.R. 4737,
that would give states new powers to integrate specified programs, including housing,
through a “superwaiver” provision that would allow governors and local officials to
request cabinet secretaries to waive certain program requirements, including those
governing public housing and housing assistance for homeless people. This has
some housing advocates concerned that certain protections for public housing
residents and others could be lost. (See “Superwaiver” Prospects in Current Welfare
Reform Debate, CRS Report RS21219.)
Management Reforms and the Oversight of HUD
HUD — the agency and its programs — have continued to come under the
scrutiny of the 107th Congress. HUD Secretary Martinez promised an ambitious first
year largely devoted to putting HUD in order and getting a clean bill of health from
the General Accounting Office. Secretary Martinez promised to examine the more
than 300 HUD programs, up from about 240 since 1994, to see which work and
which do not. GAO has removed HUD’s designation as a “high-risk” agency (first
assigned in 1994), noting HUD’s substantial overall improvements. However,

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despite the efforts and partial successes of the past three HUD Secretaries (Kemp,
Cisneros, and Cuomo) to improve the management of HUD programs and to
modernize financial and information systems, about 70% of the agency’s programs
are still classified by the GAO as at high-risk for waste, fraud, and abuse.
Weaknesses continue in HUD’s single-family mortgage insurance and rental housing
assistance programs.
For many years, a top priority for HUD has been improve information systems
that have often prevented the Congress, and HUD itself, from monitoring the
progress of programs and the use of funds. There are indications that the lack of
timely and comprehensive information continues to be a problem. The Secretary also
promised to reduce the delays in getting funds out to communities, something that
continues to cause frustration for state and local governments and nonprofit
organizations.
Several congressional committees recently complained to the HUD Secretary
about the difficulty of getting requested data and the lack of cooperation from HUD
staff. At a February 13, 2002 hearing of the Senate Banking Committee, Chairman
Sarbanes spoke about this lack of cooperation. Secretary Martinez said
communications would improve. When HUD Secretary Martinez appeared before
the House VA-HUD Appropriations Committee on March 19, 2002, Chairman
Walsh listed more than $50 billion in unspent money in various HUD programs and
about the difficulty of getting explanations for this from HUD. Martinez
acknowledged the unspent money: “it’s a very serious and startling problem,” but
said part of the problem lies with mayors and other local officials.
On May 16, 2002, the Mercatus Center at George Mason University released its
Third Annual Performance Report Scorecard: Which Federal Agencies Inform the
Public? The report analyzed the annual performance reports of twenty four federal
agencies required by Congress under the 1993 Government Performance Results Act
(GPRA). HUD rated 11th of the 24 agencies, down from 10th the year before.
Findings for HUD included the following:
! “Through goals and measures are good and the Secretary’s letter
indicates leadership, HUD fails to demonstrate clearly how it will
achieve its goals or how it has done so in the past.”
! “Through challenges are identified and corrective actions cited, no
timetable for resolution suggest weak commitment.”
! There is “No clear plan to improve performance at department or
strategic levels, and in some cases, indicators that reveal problems
are left completely unaddressed.”

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