Reforming HUD - US Department of Housing and Urban Development

National Review, July 31, 1995 by Robert Stowe England

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

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

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

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