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Title: Housing and Community Development Issues
Subtitle:
Report No.: GAO/OCG-93-22TR Date: December 1992
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Author: United States General Accounting Office
Office of the Comptroller General
Addressee: Transition Series
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CONTENTS
Housing and Community Development Issues
Providing Affordable Housing for the Nation's Poor
- Preserving Private Low-Income Housing
- Modernizing Public Housing
- Stimulating Investment Through Mortgage Credit Enhancements
- Rent Subsidies Becoming Increasingly Costly
Strengthening HUD's Management
- HUD Management Deficiencies Unresolved
Controlling Increasing Cost Exposure
- Limiting FHA's Insurance Losses
- Facing Lead-Based Paint Abatement Liability
Promoting Community Development
- Curing Urban Ills
- Impact of Small Business Loans Unclear
- Minority Business Development Problems
Reexamining Strategies for Responding to Disasters
Related GAO Products
- Low-Income Housing
- Managing HUD
- Increasing Exposure to Costs
- Economic Support and Developing Communities
- Disaster Assistance
- General
Transition Series
- Economics
- Management
- Program Areas
Office of the Comptroller General
Washington, DC 20548
December 1992
The Speaker of the House of Representatives
The Majority Leader of the Senate
In response to your request, this transition series report discusses major
policy, management, and program issues facing the Congress and the new
administration in the area of housing and community development. The issues
include (1) providing affordable housing for the nation's poor, (2)
strengthening the Department of Housing and Urban Development's management,
(3) controlling housing loan and lead-based paint cost exposure, (4) promoting
community development, and (5) reexamining strategies for responding to
disasters.
The GAO products upon which this report is based are listed at the end of the
report.
We are also sending copies of this report to the President-elect, the
Republican leadership of the Congress, the appropriate congressional
committees, and the designated heads of the appropriate agencies.
HOUSING AND COMMUNITY DEVELOPMENT ISSUES
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Three conditions frame today's debate on housing and community development
issues. These conditions are (1) the increasing gap between the demand for and
the available supply of decent and affordable rental housing for low-income
families, (2) the increasing need for investment in our communities, and (3)
the shrinking federal resources for dealing with these problems.
For decades, federal legislation has reaffirmed a commitment to decent, safe,
and affordable housing for every American family. However, as we reported in
1988, federal housing efforts have not met the needs of many Americans. Today,
the supply of affordable rental housing for low-income people continues to
decline while the need for such housing continues to grow. Rising costs,
declining real wages, and a decreasing number of affordable homes have put a
decent place to live beyond the reach of millions of families.
At the same time, the federal government is facing large real and potential
cost exposure in several areas. For example, the nation's public housing
stock, valued at over $70 billion, has fallen into serious disrepair. The cost
to meet existing needs is estimated at over $20 billion, and modernization
needs continue to accrue. Moreover, the cost to renew expiring contracts that
provide rental subsidies to lower-income families is expected to more than
double over the next 5 years--rising from an estimated $7.5 billion in fiscal
year 1993 to about $17.1 billion in fiscal year 1997.
Regarding potential cost exposure, the Federal Housing Administration's (FHA)
single-family home ownership insurance program has lost an average of almost
$900 million a year from fiscal years 1979 to 1990 and has an economic value
of negative $2.7 billion. If these losses continue, the Treasury may be called
upon to fund the program for the first time in FHA's 50-year history. Finally,
the federal government faces billions of dollars in costs to clean up
lead-based paint from its housing inventories, such as public housing.
Estimates of these costs range from $6 billion to $16 billion. Resolving these
issues will likely require significant funds at a time when federal budget
choices are becoming increasingly limited.
Finally, other economic and social problems are putting tremendous strains on
communities. Opportunities to provide additional funds are sharply constrained
because of the federal budget deficit and the relatively limited capacity of
federal, state, and local governments for dealing with these problems. Under
these circumstances, reinvigorating our communities will require careful
leveraging of our investments in both the physical and human resources that
communities provide. New partnerships and creative solutions will be needed.
PROVIDING AFFORDABLE HOUSING FOR THE NATION'S POOR
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The federal government has invested tens of billions of dollars in rental
housing assistance to provide decent and affordable housing for low-income
families. Nevertheless, an increasing share of our poor families are living in
inadequate and unaffordable housing. In addition, much of the past federal
investment is in danger of being lost--a condition that will only worsen an
already dismal situation.
The gap is widening between the number of decent, affordable rental units and
the demand for these units. In the early 1980s, demand and supply were in
relative equilibrium. Since then, demand has been outstripping supply (see
fig. 1). The gap is expected to grow over the next 10 years, when nearly one
of every two low-income families may not be able to find affordable rental
housing. Furthermore, it should be emphasized that this analysis understates
the housing problems of low-income families, since the analysis is not
adjusted for factors such as the location of available housing and household
size.
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Figure 1: Number of Low-rent Housing Units Available and Households Needing
These Units, 1974-2003
The following table represents the data for this chart in the printed version
of the report. The actual figure appears in the printed report.
(Number of units (in millions))
Units Households needing
Year available low-rent units
1974 14.0 8.9
1983 12.9 11.9
1993 10.6 14.3
2003 9.4 17.2
Source: Neighborhood Reinvestment Corporation, _At Risk of Loss: The
Endangered Future of Low-Income Rental Housing Resources_.
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To address the growing housing shortage, we will need to preserve private
sector low-income units, modernize the public housing stock, obtain sufficient
permanent financing for affordable multifamily units, and continue to provide
rent subsidies to poor families in private housing.
During the 1960s and 1970s, the federal government provided mortgage
insurance, loans at below-market rates, and direct subsidies to stimulate the
private sector's production of low-income housing. Within the coming 5 years,
about 3,000 properties containing over 350,000 units could be withdrawn from
the low-income rental market as restrictions limiting their use to low-income
rental expire. The National Affordable Housing Act of 1990 provides financial
incentives from the federal government, such as rent subsidies, to retain this
inventory as a low-income housing resource. However, providing these
incentives to preserve this stock for low-income use could cost the federal
government hundreds of millions of dollars a year.
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Modernizing Public Housing
Too much of the public housing stock, particularly in urban areas, has fallen
into serious disrepair. Home to many of the nation's poorest households, the
public housing stock consists of approximately 1.4 million units whose value
exceeds $70 billion. Modernization costs to meet existing capital improvement
needs are estimated at over $20 billion. These needs, coupled with new repair
needs, would require annual appropriations over the next 20 years estimated at
$3.4 billion--about $600 million per year more than the average annual
appropriation of $2.8 billion for this purpose in fiscal years 1991 to 1993.
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Stimulating Investment Through Mortgage Credit Enhancements
Changes in government policies and regulations during the 1980s, along with
the poor performance of inadequately managed multifamily housing loans insured
by FHA and other loans purchased by the Federal Home Loan Mortgage
Corporation, led to a steep decline in mortgage funds available for affordable
rental housing. A variety of participants representing a cross section of the
financial market believe that significant barriers exist in accessing capital
for rental housing targeted to low-income and very low-income rental
households.
In this climate, the secondary market for multifamily housing mortgages
(buyers and sellers of mortgage loans) has taken on increased importance.
However, such a market has not evolved for several reasons, including the
risk--both real and perceived--associated with affordable housing and the
reluctance of FHA and key secondary market institutions to expand their
support for financing this housing as they attempt to balance support for
affordable housing with the safety and soundness of their operations. New
forms of federal credit enhancement--such as insurance on individual loans and
pools of loans--recently authorized by the Congress can help to address this
problem if the enhancements get support from FHA and the secondary market
institutions charged with carrying out the new law. We expect to issue a
comprehensive report discussing these issues in spring 1993.
Rent subsidies--provided through certificates, vouchers, and project-based
assistance--are a mainstay in federal efforts to enable low-income families to
live in decent and affordable privately owned rental housing. Currently, about
2.7 million families receive this assistance through HUD's contracts with
private owners and local housing agencies, such as public housing agencies.
Yet contracts covering assistance to an estimated 1.6 million families are
expected to expire in the next 5 years, and the cost to renew these contracts
will grow, in current dollars, from an estimated $7.5 billion in fiscal year
1993 to an estimated $17.1 billion in fiscal year 1997.
This increase is due primarily to the larger number of contracts expected to
expire in the next few years than in the recent past. The Congress and HUD
have pursued a policy of renewing all expiring contracts so that low-income
families can continue to live in affordable and decent housing. Yet the cost
to continue this policy will more than double within the next 5 years,
creating increasing pressures on an already strained federal budget.
Since the publicizing of scandals at HUD in 1989, a great deal of attention
and energy has focused on improving the Department's management. However,
while HUD has undertaken a series of reform measures, many fundamental
management problems remain unresolved. Solutions are needed so that HUD can
shift more of its attention to program results.
In April 1989, a series of major, well-publicized problems began unfolding at
HUD, involving widespread fraud, waste, abuse, and mismanagement. The full
array of problems became widely known as the "HUD scandal." Some of these
problems were departmentwide; others were confined to individual programs.
Some of the most notable problems included influence-peddling, theft by
private real estate agents of millions of dollars in HUD funds, inadequate
enforcement of requirements designed to minimize defaults on HUD-backed
mortgages, and poorly designed programs and controls that made it relatively
easy for developers and lenders to exploit the program--at billions of dollars
in costs to the government.
Although the Congress and HUD made major efforts to address these management
and program design problems, the underlying causes of HUD's long-standing
management deficiencies remain largely unresolved. These deficiencies include
inadequate information and financial management systems, weak internal
controls, an inappropriate organizational structure leading to ill-defined
responsibilities and authority, and insufficient staff resources to perform
necessary functions, such as monitoring and enforcing program requirements.
These problems leave HUD's multibillion-dollar programs open to fraud, waste,
abuse, and mismanagement. In fact, a recent report by the HUD Office of
Inspector General cautioned that unless the Department acquires sufficient
resources, another HUD scandal is a distinct possibility.
Although HUD has implemented many program-specific corrective actions, it is
only beginning to resolve the underlying, departmentwide deficiencies. Until
corrective actions for these departmentwide problems are implemented, actions
focused on individual programs, no matter how extensive, cannot fully
guarantee that the earlier abuses will not recur.
For these reasons, it is important to continue to review HUD's progress to
ensure that HUD sustains its efforts to rectify problems, that corrective
actions become an integral part of program operations, and that actions have a
lasting effect. Only continued support and oversight can assure the public
that HUD's resources are being efficiently used to serve the intended
beneficiaries.
Substantial losses from federal insurance programs and costs to be incurred to
abate lead-based paint in the government's housing inventory have
substantially increased the federal government's cost exposure.
FHA's home ownership assistance program is the largest source of mortgage
financing for low- and moderate-income Americans. As of the end of fiscal year
1990, $303 billion in federally insured mortgage loans were outstanding under
the program, which encourages home ownership by providing more liberal credit
terms than private sector lenders would offer. Unlike private sector mortgage
lending, FHA's program is to strike a balance among certain social and
financial goals--to help relatively risky borrowers with mortgage financing
while remaining actuarially sound. As such, FHA's program is inherently more
risky than private sector programs.
Over the past 12 years, the economic value of FHA's largest program--the
single-family home ownership program--has been decreasing by an average of
about $891 million a year, dropping from $8 billion in fiscal year 1979 to a
negative $2.7 billion in fiscal year 1990. This has occurred because of rising
foreclosures in economically stressed regions during the 1980s, particularly
the Rocky Mountain and Southwest regions of the country, poor HUD management,
and lax HUD monitoring. More recently, the economic recession and the
slower-than-expected recovery have increased claims. If these conditions
continue to play out, the Treasury may be called upon to fund the program for
the first time in FHA's 50-year history. While there is no way to predict how
much this remedy could cost, it could be substantial. In dealing with this
issue, policymakers must balance the desire to assist home buyers against the
federal government's potential financial risk and the possible need for
assistance from the Treasury.
The federal government also faces billions of dollars in costs to clean up
lead-based paint from its housing inventories. Lead poisoning--mostly caused
by lead-based paint--is, according to the Centers for Disease Control, the
most common and socially devastating environmental disease of young children.
Estimates of the cost to abate lead-based paint in public housing units range
from $6 billion to $16 billion. In addition, federal agencies that sell
foreclosed residential housing to the public--HUD, the Farmers Home
Administration, and the Department of Veterans Affairs--must comply with
certain testing and abatement requirements that will probably cost the
government hundreds of millions of dollars. The federal government's exposure
to these large costs could result in substantial outlays.
PROMOTING COMMUNITY DEVELOPMENT
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How best to revitalize our communities is a question central to today's public
policy debates. While much of this question has focused, appropriately, on the
problems of inner cities, other important economic and community development
issues warrant increased attention, such as the effectiveness of federal
efforts to develop small businesses, particularly for minority groups.
For decades the nation has attempted to address the problems of inner-city,
urban America. However, the recent unrest in Los Angeles has demonstrated that
we have made only slight progress at best. Residents of low-income
neighborhoods commonly face difficulties finding jobs and attaining a
reasonable standard of living. Similarly, neighborhood businesses confront a
variety of barriers in creating and expanding job opportunities for inner-city
residents.
Federal efforts have been limited to formulating and designing programs to
address specific problems. Overall, these efforts have been piecemeal, and
more attention has been paid to symptoms than to the underlying need to
develop human resources. The price the country pays for these continuing urban
problems is tremendous--both in social and economic terms.
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Impact of Small Business Loans Unclear
A critical element in developing and maintaining the economic well-being of
communities--rural, urban, and suburban--is small business. There are over 20
million businesses in the United States. All but about 200,000 of them are
small businesses. Within the federal government, the Small Business
Administration (SBA) is charged with developing and nurturing small business
by providing financial, technical, and other assistance, giving particular
attention to small minority businesses. SBA is to provide this support while
protecting the taxpayers' interests.
There has been no recent assessment of what sector of small business, if any,
would receive financial assistance if SBA did not exist. Nor has there been a
recent assessment of the economic impact that has resulted from the billions
of dollars in federal guarantees that SBA has provided to small businesses.
Yet in fiscal year 1992, SBA almost doubled the value of the business loans
that it guaranteed--from $3.8 billion in fiscal year 1991 to $6.4 billion in
fiscal year 1992. Our work has shown that SBA's loss rate is greater than that
of private lenders and that SBA has not adequately overseen the operations of
lenders receiving government loan guarantees. Without adequate resources to
oversee its existing loan portfolio, SBA cannot ensure the quality of the new
loans that it guarantees and protect the government against loan losses. SBA's
impact on stimulating small business development also needs to be determined.
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Minority Business Development Problems
Our work and that of others has shown that SBA has been ineffective in
developing minority firms into viable, independent businesses. As far back as
1975, we reported that SBA's success at helping minority firms become
self-sufficient and competitive was minimal. In the 1980s, SBA's Office of
Inspector General, the National Academy of Public Administration, the Senate
Small Business Committee, and we found that SBA's management of the program
fell far short of requirements and expressed grave concerns about the lack of
progress in making the program a true business development program. Most
recently, we reported in 1992 that SBA has made little progress in
implementing the Congress' third major attempt to improve the program's
effectiveness. In addition, a 1992 Presidential Commission on Minority
Business Development reported that the federal government--specifically
SBA--has failed to develop the talents and creativity of minority businesses.
Our work on this program over the years, as well as the work of others, raises
serious concerns about SBA's overall commitment to the goals of the program.
Until problems with the minority business development program are corrected,
federal funds will continue to be spent ineffectively, and community
development will be hindered.
REEXAMINING STRATEGIES FOR RESPONDING TO DISASTERS
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Recent experience has called into question how well federal efforts assist
communities suffering the effects of natural disasters. Since 1989, when the
country experienced the back-to-back disasters of Hurricane Hugo in South
Carolina and the Loma Prieta earthquake in California, dissatisfaction with
the federal government's responsiveness to these kinds of devastating
occurrences has grown. Hurricane Andrew reinforced these concerns and raised
them to an even higher level on the Congress' agenda.
Basic questions are now being raised about whether the federal government is
properly organized to respond to major disasters. In this context, the roles
of the Department of Defense, Federal Emergency Management Agency, and federal
and state governments in responding to disasters are being reexamined.
Our work clearly indicates that substantial policy, organizational, and
operational changes are needed. We are continuing to study these issues and
plan to identify and report on a series of options for dealing with them by
spring 1993.
