March 16, 1995 | Backgrounder on Religion and Civil Society, Civil Society

Improving America's Housing by Shutting Down HUD


(Archived document, may contain errors)

1024 March 16, 1995 IMPROVING AMERICAS HOUSING BY SHUTTING DOWN HUD INTRODUCTION Members of the new Congress have begun to scrutinize the costly and counterpro ductive housing programs of the U.S. Department of Housing and Urban Developmen t HUD This careful examination is long overdue. Although HUD has been criticized for many years, Congress until now has shown little interest in conducting a bottom-up re view of the agency or in questioning the need for its continued existence.

Sensing t he commitment of the new Congress, HUD Secretary Henry Cisneros, Jr last December attempted to preempt the reform effort and control the process by issuing a Reinvention Blueprint, which offered both a stinging critique of HUD and a pledge to restructure i ts programs in the direction first taken by the Reagan Administration. But when Cisneross FY 1996 budget proposal was released on February 6, 1995, it bore lit tle resemblance to the rhetoric of December-the failed programs of the past would con tinue to receive generous funding for the foreseeable future, with promised reforms ap parently not scheduled until near the turn of the century.

The Administrations housing budget should be rejected, and Congress should proceed with its own plans for the fundamental overhaul of Americas housing policy. Central to this overhaul should be shutting down HUD.

Although there is some overlap, HUDs programs operate in four main functional ar eas : 1) Low-Income Housing Assistance, 2) Community Development Block Grants 3) Mortgage Insurance (the Federal Housing Administration and Government National Mortgage Association and 4) Fair Housing. Low-income housing assistance is the larg 1 William Raspberry, At HUD, Reinvention by Necessity. The Washington Post, January 4, 1995 , p. A15. est functional area and absorbs about 80 percent of HUDs budget through a variety of programs. Most of the remaining 20 percent of HUDs budget is spent on the Commu nity Development Block Grant program, which covers a variety of civic purposes, i nclud ing housing. The FHAs single-family mortgage insurance functions generally have been self-financing over the long term, while the budget for Fair Housing activities is just a small fraction of the first two.

To close down HUD, Congress should take th e following steps d Consolidate most low-income assistance programs within the new welfare block grant proposed for the states. The states would be encouraged to administer whatever portion of the grant they allocate to housing assistance in the form of h o us ing vouchers and certificates that permit eligible households to choose where they want to live. The states also would be encouraged to allow tenants and program bene ficiaries much more involvement in and control of the management and ownership of the government-owned projects in which they live. By establishing block grants and encouraging that funds be used primarily for household-based assistance rather than for the project-based assistance that now dominates HUD programs and is twice as costly per h ousehold served, government could provide higher quality assistance to more people at less cost. At the same time, by linking housing assistance to overall welfare reform, Congress can begin to move people to self-sufficiency and end the long-term depende n cy that characterizes so many of these programs d Terminate the Community Development Block Grant. The Community Develop ment Block Grant program, which has disbursed between $4 billion and $5 billion per year for a variety of purposes, including housing a ssistance, would be made re dundant by the proposed housing block grant and should be eliminated d Privatize the FHA. Single-family mortgage insurance programs of the Federal Hous ing Administration (FHA) should be reorganized into an independent governme nt corporation and its portfolio cleaned up in preparation for eventual privatization.

Many of the FHAs recent financial difficulties have been due largely to costly de faults and foreclosures of FHA-insured mortgages on subsidized, multi-family hous ing projects.

HUDs Office of Fair Housing, whose chief purpose should be to prevent housing discrimination, should be transferred to the Civil Rights Division of the Justice De partment where the issue can be pursued more effectively and efficiently within the context of general civil rights enforcement.

HUD should be dissolved for reasons far more important than any near-term budgetary d Transfer HUDs antidiscrimination functions to the Justice Department. savings or deficit reduction targets. With the vast m ajority of its programs focused on low- to moderate-income households, HUD is an integral part of the nations failed wel fare system. Any changes at HUD must be consistent with the overall welfare reform goals of ending long-term dependency and creating s t rong incentives for self-sufficiency 2 Of the many possible directions welfare reform could take, the most sensible would be to shift responsibility and necessary financial resources to the states in the form of block grants The housing assistance respons i bilities and resources that now belong to HUD and comprise about 80 percent of its budget should be part of these block grants. Legisla tion to be introduced by Senator Lauch Faircloth (R-NC) and Representative JamesTal ent (R-MO) would accomplish this ob jective.

It is clear that, despite the more than $5.5 trillion spent on means-tested assistance by HUD and other federal agencies since 1965, Americas urban problems are worse and the volume of dysfunctional low-income households has grown.3 And the neighb orhoods for which HUD is responsible are far more dangerous and despairing. It is time to close down HUD and radically reform the nations housing policies REFORMING LOW-INCOME HOUSING ASSISTANCE Since the early 1970s, much of the debate over housing polic y has been between the advocates of project-based assistance and those who favor household-based assistance.

Arguing that housing problems-such things as substandard housing, overcrowding, and high rent payments compared with income-are in fact income prob lems, advocates of household-based assistance believe the most efficient way to improve conditions is to give eligible households the financial wherewithal to acquire better housing. To ensure that this assistance is spent on housing, the household receiv es a cash equivalent in the form of a voucher or certificate that can be used to pay the rent (or some portion of it) on suitable apartments provided by private-sector landlords or other entities.

By and large, a housing voucher program of this sort conforms to the process and pur pose of most other government assistance programs, such as food stamps, student loans Medicare, and Medicaid. In each of these programs, government gives the eligible ind i vidual the means to acquire the product or service, which generally is provided by the pri vate sector, by nonprofit institutions, or by state and local governments.

The alternative to household-based assistance is project-based assistance in which gov e rnment, through a variety of mechanisms, subsidizes the construction, renovation, acqui sition, and/or operation of multi-family housing projects where some or all of the units are reserved for low-income households. At present, approximately 70 percent o f those who are assisted through HUD are in project-based programs, while the other 30 percent are in household-based programs such as vouchers and certificates. 4 2 3 4 Robert Rector, The Heritage Foundation, Four Themes of Welfare Reform, testimony befor e the committee on Economic and Educational Opportunities, U.S. House of Representatives, January 18, 1995.

Robert Rector, The Heritage Foundation, Ihe Scope of the Welfare State, testimony before the Committee on Governmental Affairs, U.S. Senate, January 25, 1995, pp. 2-3.

Congressional Budget Office, me Challenges Facing Federal Rental Assistance Programs, December 1994, p. xiii hereafter cited as CBO Study 3 The advantages of household-based programs fall into two broad types.

LOWER COSTS. Household-b ased assistance is about half the cost of project-based fi nancing? The table below, compiled by the Office of Management and Budget for President Reagans Commission on Privatization, provides the twenty-year costs per household assisted for several of th e major housing programs. The first two are household based, while the next four are project-based and include an Agricul ture Department pro gram for qualified resi dents of rural areas.

It should be noted that HUD housing assistance programs are not enti tlements. They operate on a first-come, first-served basis which leaves many eligible low-income households unassisted, so any reform which im proves program efficiency also increases the number of beneficiaries for the same total costs or less are portab l e and allow the recipient some choice in finding suitable rental housing. As sisted households can integrate themselves into the larger community according to their own interests and needs. For example, vouchers permit a family with young children to make neighborhood choices with regard to schools or an elderly individual to make choices with regard to family and friends? Project-based assistance concentrates the as sisted, and thus largely the poor, in segregated settings that often are unsafe and far fr o m job opportunities and good schools. According to a recent CBO study 6 PORTABILITY. The second major benefit of household-based programs is that vouchers Tlhe evidence presented in this analysis suggests that with the exception of the elderly, recipients of household-based aid are less likely than recipients of project-based aid to be dissatisfied with their housing units or the condition of their neighborhoods. That pattern is apparent even though the incidence of substandard or crowded units is rou hly t he same for both types of aid among households of the same type. fi 5 6 CBO study, p. xiii 7 Privatization: Toward More Effective Government, Report of the Residents Commission on Privatization, March 1988 p. 11 While many see this outcome as an advantage of vouchers, this view is not universal among housing analysts. In the Januaryfiebruary 1995 issue of The New Democrat, Howard Husock of the John F. Kennedy School of Government at Harvard University writes that Rent subsidies, which now go to more than o n e million households, aim at dispersing poor families rather than concentrating them. In practice. this has often meant injecting the problems of public housing into previously stable neighborhoods. 8 CBO study, p. xix 4 Efforts to integrate project-based assistance into better parts of the community usually meet with intense resistance because of fear that such a large number of poor concen trated in one or two buildings would destabilize the neighborhood.

The obvious benefits of vouchers have not been lo st on officials at HUD, and previous Secretaries from both parties have attempted to shift resources from project-based pro grams to those that are household-based for all of the reasons cited above. Unfortunately past Congresses, often influenced by spec i al interests in the housing industry and within local public housing authorities, have directed the bulk of HUD spending toward costly and inefficient subsidized housing project 1 Why a Block Grant Is Needed While a voucher system could be operated from W a shington as it is today, it makes far more sense to transfer funds to the states and permit them to provide vouchers or other forms of assistance within a new welfare block grant. Perhaps the most important reason to do this is to make sure that all housi n g assistance is coordinated with other forms of welfare assistance so that the overriding welfare reform goals encouraging work, re ducing illegitimacy, limiting time on assistance, and controlling costs are met. Other wise, some individuals could jump fr om one program to another to avoid work and other requirements designed to move them toward self-sufficiency.

Another important reason is to enhance program flexibility so that the program can be adjusted to meet unique local and regional requirements, in contrast to the typical one size-fits-all, top-down Washington mandates that can be adjusted only through lengthy bureaucratic procedures. Reducing program overhead costs is another reason for combin ing all welfare programs into a single block grant. At p resent, vast bureaucracies at HUD, the Agriculture Department, and Health and Human Services and their state and lo cal counterparts administer different aspects of the federal welfare program. Money saved by reducing this overhead could be used better to assist the poor What To Do About Existing Public Housing About 70 percent of HUD-assisted households are assisted through project-based pro grams, the oldest and most troubled of which are the locally owned and managed, but federally funded, public housin g projects which originated in the 1930s during the Great Depression. These projects are expensive to build and maintain, and the federal govern 9 Last years Senate appropriation bill illustrates the extent to which the bulk of HUDs resources were directed by Congress to programs already judged costly failures. The bill allocates 598 million to public housing development 300 million to Indian housing 3.8 billion to the renovation and modernization of public housing 1.7 billion to project-based housing for t h e elderly and disabled 250 million to preservation 555 million to property disposition costs 500 million to the project-based Neighborhood LIFT program 3.7 billion to expiring Section 8 contracts (a majority of which are project-based 2.9 billion to publi c housing operating subsidies 500 million to severely distressed public housing 1.5 billion to the HOME Investment Partnerships Program (also largely a project-based program and $350 million in grants to eliminate drugs and crime from public housing. The l a st item indicates just how deeply HLJD has been sucked into sustaining costly failures; spending for basic law enforcement purposes absorbs funds that otherwise would have provided housing assistance to another 70,000 needy households. What is left over f o r household-based assistance is a fraction of this, largely comprised of the $2.1 billion for incremental housing assistance and some minor portion of the $3.7 billion for expiring Section 8 contracts 5 ment has been trying to extract itself from this pro g ram since the early 1970s. But Con gress keeps funding the projects in response to intense lobbying from local public hous ing authorities and managers. The CBO estimates the unfunded backlog of needed re pairs to public housing at between $10.5 billion a nd $20.7 billion.

While some public housing projects are attractive and cost-effective, particularly for the elderly and the disabled, many of these government-run, inner-city housing projects are financial and social disasters that condemn their residents to environments of crime and squalor. The situation is so bad that this year Congress has had to appropriate $315 million to HUD for crime-control programs. Thus, by perpetuating the failed public hous ing program, HUD is forced into the law enforcement business, and money that other wise would have assisted 70,000 additional households is diverted to crime fighting.

Public housing has become HUDs most glaring failure, with many projects now crime-infested neighborhoods of desolation and despair. Vouchers are one way to deal with the worst of these projects. Besides their cost advantage, they give eligible house holds the chance to move, thereby helping resolve the question of what to do about the 70 percent of assisted households living in public housing or subsidized projects. In his Reinvention Blueprint Secretary Cisneros proposes to shift away from direct financial support to the owners and managers of public housing and provide it indirectly by giving portable vouchers to the tenants of public housin g projects. Tenants could move else where if they are not satisfied with the way their project is managed, and public housing authorities would be forced to improve services to maintain funding through rent collec tions rather than direct federal subsidies Congress should go a step further by giving tenants several more choices. One would be to use their vouchers to manage or even own the project where they live, a process that has proven successful in dozens of public housing projects throughout the countr y.

Initiated during the Reagan Administration and pursued aggressively during the Bush Ad ministration by HUD Secretary Jack Kemp, tenant management and ownership has been a major success and has led to the transformation of decaying, drug-ridden, crime-in fested projects into safe and livable communities.

Experience has shown that with management or ownership in the hands of residents and with tenants empowered to shape the outcome of events and bear the consequences of their mistakes or inaction, the qua lity of life and service in these projects improves dra matically, regardless of how bad the situation was at the start. Kenilworth-Parkside in Washington, D.C Bromley-Heath in Boston, individual buildings in Chicagos infa mous Cabrini-Green project, Loui svilles College Court, and the Cochran Gardens in St.

Louis represent just a few of the tenant management successes in otherwise hostile envi ronments. 11 10 CBO Study, p. 9, Table 1 11 For more details on tenant ownership and management of public housing, see Carl F. Horowitz. Jack Kemps Perestroika: A Choice Plan for Public Housing Tenants, Heritage Foundation Backgrounder No. 888, March 26,1992 and The Misplaced Assault on Resident Ownership of Public Housing, Heritage Foundation Backgrounder No. 916 Oc t ober 2, 1992 6 Despite this record of success, and despite the opportunity to turn adversaries into part ners, the Clinton Administration has done nothing to advance tenant ownership and man agement. With the encouragement of past Congresses, the Administ r ation that talks so much about empowerment instead has substantially reduced the funding available for ten ant ownership planning and implementation grants. During the last budget cycle, HUD received more than a hundred bonafide requests from public housi ng tenant associa tions, in partnership with their local PHAs, for grants to implement homeownership plans but only eleven could be awarded because of severe funding limits.

This neglect could be rectified under welfare block grants by encouraging governors and mayors to use some portion of the funds to pursue tenant-based solutions to persist ent public housing problems. Inasmuch as public housing projects are owned by state and local governments, block grants get federal bureaucrats out of the loop and allow for more effective locally based solutions TERMINATING COMMUNITY DEVELOPMENT BLOCK GRANTS After assisted housing, which is scheduled to cost $26 billion in FY 1995, the next largest component of the HUD budget is the Community Development Block Grant CDBG) program. In FY 1995, Congress appropriated $4.6 billion for this program.

These grants, allocated directly to communities and states, are spent according to local prior ities on such things as the acquisition and disposition of real property, construction of public facilities, rehabilitation of housing, and the provision of a number of permitted public services. At least 70 percent of the funds received by a grantee must benefit indi viduals of low and moderate incomes.

As in the case of the housing programs discussed above, CDBG grants largely are pro ject-oriented and subject to all of the criticisms associated with project finance. Worse still, CDBG has evolved into a major pork-barrel program. Many projects appear to be of questionable value, secured through the lobbying of powerful lawmakers. One recent re port noted that a list of critical and ready to go projects compiled by big city mayors in cluded $1.2 million f o r an arts center in San Francisco 250,000 for a central compost facility in Kalamazoo, Michigan; $400,000 for carousel renovations in Providence Rhode Island 360,000 for a swimming pool in Columbia, South Carolina; and 200,000 for a sports complex and his t oric mill in Central Falls, Rhode Island frivolous purposes or not, is the presumption that communities can spend their way to prosperity and that the only impediment to economic development is the absence of a few more infrastructure projects to attract jobs, technology, and investment capital.

America long since has stopped believing this about foreign aid and now should extend the same skepticism to such domestic bricks-and-mortar initiatives as the Community De velopment Block Grants, the Economic Deve lopment Administration, the Appalachian Regional Commission, and Washington, D.C.s Pennsylvania Avenue Development Cor poration. Compared with other ways to foster economic development, such as cutting I But this waste is only part of the problem. Implici t in such grants, whether they are for 12 Thomas Humbert, Liberating the Poor From HUDs House of Privilege, Alexis deTocqueville Institution, July 26, 1993 7 taxes and red tape, reducing crime, and improving public education, development grants have a dism al track record.

Fortunately, in the last few years a new class of local leaders has emerged who recog nize that cities often have been their own worst enemies and that the high cost of low quality municipal services has been one of the main reasons why bu sinesses and middle class families have fled. Mayors in such cities as Charlotte, Cleveland, Indianapolis, Jer sey City, Los Angeles, Milwaukee, New York, and Philadelphia, like governors in such states as Massachusetts, Michigan, New Jersey, and Wisconsi n , have come to recognize that the key to their own development is not millions of dollars in federally funded pro jects, but tax relief for their productive citizens, secure property rights through less crime, more efficient government that delivers quali ty services at the lowest price, wel fare reform that ends long-term dependency, and a functioning school system.

These initiatives can be implemented only by local leaders. Indeed, to the extent that Washingtons money temporarily can paper over problems o r pretend to address needs there is less incentive for local leaders to make the tough decisions needed to solve their problems. The CDBG program should be terminated in favor of locally based reforms to create an environment that encourages business and p roductive citizens to remain in, or return to, the cities PRIVATIZING THE FEDERAL HOUSING ADMINISTRATION The Federal Housing Administration (FHA) was created in the 1930s to promote the then-innovative long-term, fixed-rate, level payment, fully amortized mortgage and to fill the mortgage insurance gap created by the Depression-induced collapse of the private mortgage insurance industry.

Designed to be self-sufficient, the FHA insures mortgages against loss from default or foreclosure and collects a premiu m from every borrower to build insurance reserves and cover actual losses. Implicitly confined to the lower end of the market because of con gressionally established maximum limits on the size of mortgages that it may insure, the FHA competes with many pr i vate, taxpaying mortgage insurers for the profitable busi ness of insuring mortgages on single-family residences. For most of its history the single family portion of FHA has been financially healthy, but significant losses were incurred in the 1980s as t he real estate market declined in some regions of the country. Since then as a result of an improved real estate market and program reforms. financial solvenc has returned, and the single-family programs net worth is estimated at over $4 billion.

The FHA a lso insures multi-family residential mortgages used to finance low-to-mod erate-income subsidized housing projects constructed under various HUD programs in cooperation with nonprofit and for-profit developers. In recent years, many poorly con ceived and m ismanaged multi-family housing projects have gone into foreclosure, leav ing FHA and HUD with multi-billion-dollar losses 11 13 U.S. General Accounting Office, Mortgage Financing: Financial Health of FHAs Home Mortgage Insurance Program Has Improved, Repo r t to the Chairman, Subcommittee on Housing and Community Development, Committee on Banking Finance. and Urban Affairs, U.S. House of Representatives, October 1994, p. 4 8 The FHA should be restructured and privatized according to a two-part strategy nearl y sixty years of existence, its single-family mortgage insurance programs have demonstrated that with proper underwriting they can be financially self-sufficient, if not profitable, even when concentrated primarily on creditworthy borrowers with mod erate i ncomes. This portion of the business should be separated from the other mort gage insurance programs and reorganized temporarily as a self-sufficient, independent government corporation. This coporation would exist as an independent entity until such time as its operations can be brought up to private-sector standards and a thor ough analysis of its portfolio and its obligations can be conducted.

Most government credit and insurance programs suffer from lax reporting, account ing standards, and financial c ontrols, and these must be rectified prior to sale in order to enhance value. Otherwise, prospective buyers will assume the risk is greater than it really is and price the business accordingly. This is the model used for the U.S. Enrich ment Corporation-f o rmerly a part of the U.S. Department of Energy-when it was organized as a government corporation in 1993 and scheduled for privatization in 1996 at a projected sale price of $400 million 8 The remaining risky, unsound insured multi-family mortgages should be placed in a separate liquidating facility and the insurance obligation on these multi family loans transferred directly to the federal government. If this is not done, the ongoing risk of these multi-family mortgages either would eliminate any private- s ector interest in acquiring FHA or diminish its price. There is precedent within HUD for such asset and obligation transfers to enhance the attractiveness of enterprises slated for privatization. In the late 1960s, when the Federal National Mortgage Assoc iation FNMA then a part of HUD, was scheduled for privatization, its risky, subsidized multi-family mortgages were transferred to a newly created entity within HUD, the Government National Mortgage Association (GNMA), for orderly liquidation.

Opponents of this two-part strategy would argue that the FHA is the key to provid ing mortgages to creditworthy but moderate-income households that otherwise might not be of interest to private mortgage insurers. They argue further that promoting home ownership is sti l l a national goal and that, to the extent the FHA can help accomplish this at no cost to the taxpayer and without offering unfair competition to private in surers, it should remain within the government. If it were privatized, they maintain, the FHA would turn away creditworthy households of modest means.

Insofar as this claim has any validity, a reconstituted FHA could be chartered as an independent government corporation (similar to FNMA) with no claim on the U.S.

Treasury, required to be self-funded, a nd limited to households and houses that other wise might be neglected by the private sector. l4 Alternatively, a fully privatized FHA could be encouraged to insure the mortgages of moderate-income buyers by allowing it to charge a higher premium for loan s that fall below certain well-specified underwrit ing standards 0 The financially sound (single-family) portion should be privatized. In FHAs 14 See Privatiwtion: Toward More Effective Government, pp. 30-32, for a more detailed discussion and proposal for an FHA better targeted toward buyers of moderate incomes 9 Whether it is private or an independent government corporation, a reformed FHA must be free of day-to-day government meddling. Otherwise, it will continue to be exposed to the claims of the same s p ecial interests who, acting through previous Congresses and Ad ministrations, induced FHA to insure risky, high loan-to-value mortgages, vacation homes, private investment properties, and risky, subsidized multi-family projects TRANSFERRING THE OFFICE OF F AIR HOUSING HUDs Fair Housing program is tasked with enforcing the nations fair housing laws and objectives, particularly as they relate to the ongoing problem of racial discrimina tion. Notwithstanding the considerable progress made in this effort since the enactment of civil rights legislation in the 1960s, the problem persists, and government has an obli gation to enforce the law and encourage landlords, builders, and real estate agents to obey it.

Unfortunately, in attempting to meet this goal, HUD bureaucrats have trivialized the objective and, in their pursuit of subliminal violations, have subjected the goal of non-dis crimination to open ridicule.

How silly is HUDs effort? Consider the following. In response to HUDs directives the Virginia Association of Realtors urged its member agents to use caution in using such words and phrases as desirable neighborhood, handyman s dream, near country club (al t hough near golf course is deemed acceptable prestigious, quality neighbor hood, secure, and within walking distance. Listed as unacceptable are such expressions as able-bodied, bachelor pad, empty nesters, mature couple, mature individuals, near church, a n d, of course, quiet tenants ing laws to the Civil Rights Division of the Justice Department. This would allow fair housing laws to be handled more professionally within the context of comprehensive civil rights enforcement 15 It is time for Congress to tr a nsfer the responsibility for enforcing the nations fair hous The Rural Housing Programs of Other Departments Although most of Americas urban and suburban housing assistance is provided through programs administered by HUD, some special-purpose housing pro grams are ad ministered by other departments, including Defense, Veterans Affairs, and Interior. Most rural housing programs are provided by the Department of Agriculture through the Farm ers Home Administration.

Rural housing programs are markedly differe nt from the suburban and urban programs of HUD, in part reflecting the destruction during the Depression of large segments of ru ral Americas financial system. Whereas the FHA was created to insure privately provided mortgages for urban and suburban home b uyers, the Farmers Home Administration 15 Perhaps recognizing that the debate within Congress on terminating HUD was serious and that the public ridicule induced by the antics of the Fair Housing staff offered one more reason why the Department should go, HUD in January 1995 issued a clarification which, among other changes, again will permit housing ads to use such terms as master bedroom great view, Santa Claus, St. Valentines Day, and family room, among others 10 (FmHA dating from 1937, actually provide s the loan, usually with a significant interest rate subsidy. In addition, whereas multi-family rental assistance programs are the pre dominant form of housing assistance provided by HUD to low- and moderate-income ur ban and suburban households, the FmHA largely provides homeownership assistance to rural low- and moderate-income households by way of deeply subsidized interest rates in the belief that rental units were not always available in rural settings.

While the emphasis on single-family housing has l argely freed it from the major finan cial fiascoes periodically associated with HUDs multi-family programs, FmHA bleeds from a thousand minor wounds. As GAO studies point out, FmHA programs consistently suffer from high loss and delinquency rates, as well as from poor management. Loan servicing by FmHA is costly, ineffective, and deficient in timely and accurate informa tion. Recent experience with private servicing of FmHA loans indicates that improved servicing of $18 billion in loans yielded five-year s avings of $1.2 billion in servicing costs alone. Moreover, better private-sector management led to a halving of the delin quency rate and an 80 percent decline in foreclosures.

With the passing of the Depression and the re-emergence of private financial in stitu tions in rural America, the low-income assistance responsibilities now attempted by the FmHA should be folded into the new housing block grant program. Home ownership pro grams, whether by direct loans or guaranteed loans, should be terminated and r eplaced by the same FHA programs available to urban and suburban buyers.

The $49 billion in previously made rural loans now held by the federal government should be sold to private-sector investors and servicers as part of the orderly liquidation of this p rogram. As noted above, such a sale will save billions of dollars in servicing costs and in reduced losses from foreclosure SITION ISSUES Any major shift in HUDs responsibilities and programs must be coupled with an or derly withdrawal from the many long- t erm commitments and contracts HUD has made directly with housing assistance providers-such as developers, nonprofits, local hous ing authorities-and assisted households. Most of its project-based programs involve some form of long-term contractual commitm ent by the federal government requiring HUD to subsidize some facet of the project, such as the interest rate on the mortgage or the rents paid by tenants. In other cases, like public housing, the commitment is informal.

Many public housing projects have become dependent on HUD operating subsidies and modernization grants, the swift withdrawal of which would have its harshest effect on those least able to bear it-the low-income residents of these projects.

As noted earlier, the uncertainty confronting publ ic housing residents can be overcome by providing them with vouchers that allow them to move to better accommodations and force the public housing authority to compete with private landlords for the rent money of assisted households. With HUD dissolved, t his would become the responsibility of the states and funded from the block grant they would receive.

Tenants in other types of subsidized projects whose contracts are expiring-such as those in Section 8 new construction and renovation-would receive vouche rs that they could use to remain in the project or to look elsewhere. The same would be true for other 11 types of projects, including subsidized multi-family projects whose owners are threaten ing to default on their FHA-insured loans: tenants, not owner s , would be the direct bene ficiaries CONCLUSION Many of Secretary Cisneross proposals are commendable and, if enacted and imple mented aggressively, would constitute some of the most significant reforms ever at tempted at HUD. As a result, it is tempting f or some HUD critics to declare victory speed up the implementation, and give HUD a second chance. Congress should resist this temptation for two important reasons First, from a budget efficiency standpoint, any reforms enacted today can easily be un done i n the future by another Congress indebted to other housing interests. Housing con struction and investment interests dominated housing policy for decades and can be ex pected to do so again. Continuing to maintain a reformed HUD with most of its project b a sed programs intact, albeit at much more modest levels of activity, means the seeds of future expansion remain and would be difficult to stop in a different political environ ment. But with HUD dissolved and its decisionmaking and operations transferred t o the state level, it would be much more difficult, if not impossible, to expand and revive these costly and wasteful programs.

Second, and more important, consolidating HUDs resources into a block grant is CN cial to any comprehensive welfare reform progr am designed to move people into produc tive self-sufficiency, in part by ending segregated large-scale custodial programs for poor households. With most of its programs purportedly targeted to low- and moderate-in come households, HUD is an integral part of todays failed welfare system. Closing down HUD must be an integral part of reforming that system.

Ronald D. Utt, Ph. D.

Visiting Fellow 12

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