The Top 10 Ways to Improve HUD| Housing Finance Magazine

There are dozens of steps that need to be taken to improve HUD, but AHF has boiled them down to a list of ten, focused primarily on overall operations and multifamily programs. It goes without saying that higher Congressional appropriations would help improve the agency’s capabilities in many areas, but AHF has focused on improvements which have little or not budgetary impact. Many of them could be implemented by a HUD secretary with strong leadership and management skills, but some would require Congressional action. Help us refine this agenda for the new president and HUD secretary who will take office in 2009. Send your reactions and ideas to AHF at [email protected]

1. Install new leadership.

The next president should appoint a secretary and senior leaders who are knowledgeable and accomplished in housing and community development and are strong managers. He or she should choose them based on their leadership ability, not their race, ethnicity or personal or political loyalty. The president should direct them to reinvigorate HUD from the top down and should hold them accountable for bringing HUD up to the standards of performance one would expect of an organization with a $33.6 billion-per-year budget. The president should insist that HUD emulate the best practices of the nation’s most successful state governments and set goals for performance and output in all the department’s areas of responsibility, not just the one or two areas that have potential for political gain, like homeownership.

The new leadership should make the best use of existing staff by trying to bridge the gap between political appointees in top management jobs and career civil servants who do most of the actual work of the agency. As it is, if civil servants are not supportive of a policy dictated by political appointees, they drag their heels in implementing it, and simply wait for those political appointees to leave their posts.

2. Empower field staff to make decisions.

To get the most out of its existing workforce, HUD must cultivate a new culture that says results are more important than process. One former official said HUD would not need lots of new staff if current employees were encouraged to make decisions and start treating agencies and developers as customers, not adversaries.

“The number one organizational change that will make HUD more effective is to return to the previous regional structure that includes a Regional Administrator with program authority,” said Federoff.

For a time under former HUD secretary Henry Cisneros, regional administrators had a great deal of decision-making power, but it was taken away under Cuomo, said Federoff. Current HUD Secretary Alphonso Jackson has restored some authority to the field, but not much, she said. HUD’s multifamily directors in the field still report to a deputy assistant secretary in Washington who has little time to respond to any of them unless it’s a crisis.

Headquarters staff think in broad strokes and long-term planning, while field staff have a sense of urgency that comes from interacting with program users, Federoff said.

Federoff confirmed the widely held perception that HUD staff would rather do nothing than make a decision that could get them in trouble. “It's far safer to keep your head down, fly below the radar screen, and hope HQ never really knows what you're doing.”

Mid-level staff at headquarters are reluctant to take any unusual requests to the top levels empowered to approve them, she added. This all reflects a corporate culture that provides no rewards for risk-taking, decisiveness, or productivity.

3. Hire more staff with good skills, train them, and match people with the jobs appropriate for their skills.

A steep reduction in HUD staff from a peak of 17,000 to about half of that number today has hampered the agency’s effectiveness. In addition, HUD employees say the quality and skill of the remaining staff is also declining.

With the job cuts has come an increased reliance on contractors to handle basic housing program functions, a practice that is described as inefficient at best and, in the case of some contracts, potentially corrupt and fraudulent. (See AHF June, page 36)

The agency is facing a “brain drain” as experienced executives retire. It often does not replace them until after they have left the agency, so they are unable to pass on institutional knowledge to their replacements.

Training is ineffective, according to a former field office executive. Field offices are told to spend time devising training plans but they plans are not implemented completely because field offices do not get budget authority to undertake training until late in the fiscal year, when they are too busy to allow staff to spend much time in training.

Because of its staffing problems, HUD often asks people to make decisions they are not qualified to make, sources said.

4. Rethink the operations and structure of FHA

Some policy analysts think the best way to make FHA more viable is to split it off from HUD, but that is unlikely to happen. FHA is the part of HUD that has the most real estate capacity and know-how, and if it was taken out of the agency, there would not be much left.

In 2001, the Millennial Housing Commission (MHC) proposed restructuring FHA as a wholly owned government corporation within HUD. Within statutory mortgage limits that focus FHA’s mission on affordability, FHA should have freedom to create or alter specific insurance programs without Congressional direction, the report said.

The MHC report says that FHA should be able to vary the terms of its multifamily insurance programs, giving it the flexibility to react to market changes. Multifamily mortgage limits should be indexed to a construction cost index, according to the report.

The Mortgage Bankers Association (MBA) would like to see FHA operate more independently of the regular HUD chain of command with much more flexibility than it has now, but it does not call for its privatization.

MBA called for Congress to provide broader program authority, to allow FHA to use funds in its reserves for service improvements and to exempt FHA from current civil service hiring and compensation requirements.

FHA should give authority for reviewing applications for mortgage insurance to a chief underwriter who looks at the entire transaction and makes a decision rather than by four different specialists, each focusing on their own narrow review, the group said. Finally, MBA wants HUD’s top brass to encourage staff to take some “prudent risks” and do less second-guessing of lenders in the interest of production and preservation of multifamily housing.

HUD also needs to get the Multifamily Accelerated Processing (MAP) program back on track. As it was intended to operate, FHA delegated to lenders much of the processing of multifamily transactions, and the field offices, for the most part, simply reviewed the lenders’ work.

However, MBA added, “HUD Headquarters’ commitment to the MAP program and focus on production has waned and as field offices have lost key staff, field offices have begun to deviate from the MAP Guide and timeframes are no longer met.”

An FHA lender told AHF that HUD offices nitpick each deal and that each office uses different interpretations of program guidance. He said HUD staff are very quick to reject applications and cite errors, but are very unlikely to help fix problems.

“Deals take forever to process, borrowers get angry at lenders and lenders get angry at their third party firms, and everyone is mad and disappointed with HUD. This wastes countless hours of time for all involved,” he said.

5. Collaborate with state and local housing agencies

State housing agency directors don’t like to talk about their feelings about HUD for the record, but there’s no silencing John McEvoy, who was executive director of the National Council of State Housing Agencies from 1989 to 2001.

“Congress long ago gave up on HUD’s scandal-pocked multi-family programs and made the states responsible for virtually all low income housing creation. HUD should embrace the demonstrated competence of the states in true partnerships,” said McEvoy.

When he was at NCSHA McEvoy argued that states should have a key role in running the Sec. 8 Mark-to-Market program, but that proposal met with stiff resistance from then-Secretary Andrew Cuomo. “I read it as Cuomo’s unwillingness to cede any power and more of HUD's rule-ridden approach and antipathy toward the states,” he said.

“I got the sense that they did not want to be our partner,” said the former head of a state housing agency. “They want to trip you up—I always got that sense in recent years. They wanted to play ‘Gotcha’ rather than ‘I want to work with you to solve these problems.’”

NCSHA minimizes the conflict between HUD and housing finance agencies (HFAs), but Rieman said “HUD/HFA partnerships might be strengthened if HUD viewed its partners' successes as its own. That is the way most of us view it: if HUD allows us to achieve more, those successes will be to HUD's benefit as well as ours.”

NCSHA would like to see HUD give HFAs and other state and local housing agencies more flexibility to try innovative approaches and exercise their judgment about regulatory waivers and administrative procedures. “The emphasis should be on achieving positive results, not following bureaucratic rules,” said Rieman.

A good example of such collaboration is HUD’s recent decision to contract with state agencies to handle the administration of contracts with private owners receiving project-based Sec. 8 assistance, said NCSHA.

6. Move away from heavily regulated, categorical programs and embrace the market.

Congress needs to make HUD’s programs more streamlined and allow more flexibility. For example, because of the categorical nature of the FHA programs, it is virtually impossible to finance a continuum of care facility for the elderly, according to the MBA. “Each part of the facility—independent living, assisted living, and skilled nursing sections of the property—would have to be processed under a separate mortgage using different underwriting criteria,” said the group. “With a more general statute, changing real estate markets and tenant needs could be accommodated, and FHA would be able to provide affordable rental housing and healthcare more efficiently and effectively.”

AHF sources said the most successful HUD programs are those that have the fewest rules, the least HUD staff involvement, and the greatest amount of decision-making by local grantees—specifically the Community Development Block Grant program and the HOME program. They are allocated by formula, not by review of specific projects, and HUD exercises general oversight over local decision-making.

Long-time HUD program users say agency staff are badly out of touch with the realities of private real estate markets—the world in which all of the projects HUD finances actually exist. They have a theoretical perspective, and do not understand the pressures of deadlines, the realities of markets, and the risks and costs of actually buying land, moving dirt, and putting up walls, developers said.

“HUD programs are intensively regulation-driven and archaic, and have little do with real-world, market-driven real estate transactions,” said a senior staffer at a nonprofit housing development organization in California.

HUD’s world view is directly at odds with that of the tax credit program, which takes a very market-driven approach, relying on investors and developers to do good deals and manage them well to protect their own self-interest with only very light government oversight.

7. Eliminate conflicts between programs, increase information sharing

HUD needs to learn to love the low-income housing tax credit program. Enacted in 1986, it has been successful precisely because it is not run by HUD and does not follow the same model as most HUD programs. It is run by state housing agencies with post-development oversight by the Internal Revenue Service, and relies heavily on private market forces to make deals happen and to keep them in compliance.

HUD programs and HUD methodology do not mesh will with tax credit deals, and it is obvious to developers who try to use both programs that HUD is not at all motivated to try to change that.

The House Ways and Means Committee is already on working a bill to make changes to the tax credit program and make it work better with HUD programs. (See story on p. x)

There are also numerous cases where developers must sort out conflicting or duplicative requirements of HUD’s programs and other government agencies. Because projects involve multiple layers of funds, they must comply with multiple sets of rules.

One of the biggest problems is that developers must also go through multiple inspections and reviews by various agencies, which often involve different standards. A new HUD leader should spearhead an effort to achieve greater consistency among agencies, and should encourage agencies to consolidate and share property inspection and compliance information, a move that would simplify the burden on owners and cut costs.

8. Update and improve Information technology (IT) systems

HUD has spent hundreds of millions on IT but results have been mixed, and for many programs, the agency’s databases appear to be shockingly bad, or in some cases, nonexistent.

The agency should develop a useful FHA project database. It’s hard to imagine that an organization which has been insuring apartment loans for 70 years does not have a good database of project and loan performance information, but that’s the case, according to MBA. It wants HUD to “improve FHA’s technology to interface with partners and develop a reliable and useful database.”

9. Work on streamlining and continuity in funding and rules.

With government programs, some degree of uncertainty is inevitable. Shifts in political power lead to budget cuts and policy change. However, federal housing efforts are severely hampered by federal budget laws inhibit HUD from entering contracts requiring more than one year’s funding. HUD can’t offer owners of apartments multi-year contracts for rental assistance, which hurts their ability to get financing on the best terms.

In addition, program users would love to see more consistency in how HUD runs it programs. For example, many owners are incensed by the lack of consistency in how inspectors in HUD’s Real Estate Assessment Center evaluate the physical condition of properties. They told AHF that the items inspectors cite them for vary radically from inspection to inspection.

10. Get serious about preservation

The next HUD secretary needs to conduct a comprehensive review of policy and procedures for preserving the thousands of older projects subsidized by HUD, including public housing and privately owned housing.

HUD has done a reasonably good job of restructuring Sec. 8 projects with rents above market though its mark-to-market program. But that’s largely because Congress directed that the program be set up and run by an independent entity, the Office of Mulitifamily Housing Assistance Restructuring (OMHAR). Congress also decided that OMHAR would have a limited lifespan and that its functions would be folded back into HUD, which has occurred.

The bad news is that the operation is now getting mired in the same red tape and regulatory minutiae that hamper other HUD programs, said one developer who is active in the preservation of HUD properties. The good news is that the office of Affordable Housing Preservation (OAHP) is staffed with transaction-oriented professionals. If HUD were smart, it could get them involved in other aspects of preservation, including property disposition, Sec. 236 decouplings, and other preservation transactions, as well as 202 development.

One of the obstacles to preservation of older assisted housing is HUD’s policy of severely limiting the ability of nonprofit project owners to realize any financial gain on the sale of a HUD-assisted property. “This has stopped non-profit sales in their tracks,” said Laura E. Burns, President or Eagle Point Enterprises LLC, and The Signal Group.

The future of HUD's public housing and assisted housing stock lies in recapitalizing the stock with bonds and tax credits delivered by state and local housing agencies, said Michael Bodaken, president, National Housing Trust. “HUD should emphasize organizing affordable multifamily and public housing operations around the Mark-to-Market model, i.e., hiring outside contractors or employees who have tax credit and other lending expertise to handle complicated housing transactions, who are in turn given the responsibility to bring transactions to a reasonably expeditious close,” Bodaken stated.

What's Working at HUD

The Department of Housing and Urban Development has 10 regional offices and 71 field offices, and in many of those offices, AFFORDABLE HOUSING FINANACE readers said there are determined employees who manage to get deals done despite problems with the organization as a whole. In a strictly unscientific survey, AHF magazine asked its readers to name offices they think are doing a good job, and these are the ones they listed: