Last year, the General Accounting Office ranked the U.S. Department of Housing and Urban Development (HUD) as the second most effective and improved agency in the government. But despite this accomplishment, HUD Secretary Mel Martinez walked into an office that was riddled with inefficiencies and problems.
When Martinez was sworn in on Jan. 24, many people said things like, "Wow, good luck," and "You're taking on a difficult task," he recounts. "I know from my own experience in local government that doing business with HUD did not immediately bring to mind a vision of a well-oiled machine that was going to be timely, responsive and so forth. The first thing we're going to do is turn that around."
Martinez wants the industry's perception of HUD to change. "One thing I can guarantee is that we're listening and we want to hear from the private sector," says Martinez. While his 11 predecessors probably had similar ambitions, some might say that nothing but the carpet has changed at HUD. But, Martinez would like to stop that way of thinking. Not only is HUD faced with administrative problems, but about 50 percent of its work force is approaching retirement age. "It's a tremendous opportunity to bring in the work force of the 21st century," he says. "People who will have different training, different ideas, who will come from the electronic age and who will have new thoughts on how we [can] improve things here."
Currently, one of the biggest criticisms of HUD is that there is too much red tape and that it takes too long to get things done. To cut time and red tape, Martinez has lofty goals – for example, decentralizing HUD and working better with the private sector. But so far, none has been put into practice. While members of the multifamily housing community recognize that it's too soon to judge Martinez, because he has not had enough time to really put a plan into action, they do have several complaints and recommendations on what will make the agency more responsive to the needs of the multifamily housing industry.
Program Shortfalls One of the biggest complaints is the time it takes to get funding from the Federal Housing Administration (FHA) securitization program. When using this program, HUD requires all the equity upfront. However, when developers try to combine FHA financing with the Low-Income Housing Tax Credit (LIHTC) program, a considerable amount of equity goes into the project – but not all at once, explains Mark Beisler, COO at Red Capital Group. "HUD needs to get guidelines out that work with how the tax credit program works," he says.
However, Martinez points out that the FHA is very interested in making the mortgage insurance programs work better with the LIHTC program. "In considering any changes, we have to be certain that the FHA mortgagee is holding sufficient funds to complete the project and avoid a claim against the FHA insurance fund," he says. "Section 221(d)(4) insured loans with LIHTC currently don't require a credit subsidy appropriation and therefore were not affected by the mortgage insurance premium increase. We need to ensure that the programs remain in that risk category." A lot of the problems stem from the way the agency administers its programs – especially FHA insurance and the Section 8 program. "There is a tremendous amount of change that needs to occur with both of those programs to be much more market friendly to the conventional market," says Clarine Nardi Riddle, senior vice president for government affairs and general counsel at the National Multi Housing Council. "The department needs to get its arms around the concerns that the private sector has been saying about these programs."
Both programs are so time-consuming that they are not workable for many members of the private sector. For instance, the FHA multifamily housing insurance program takes an enormous amount of time before the loan is approved, says Nardi Riddle, also a member of the U.S. Millennium Housing Commission. The developers have so much capital on the line that many have made the decision that the risk-reward relationship is just not there.
"FHA is just completing the first year of multifamily accelerated processing (MAP), which dramatically improves processing times by delegating more responsibility to the private sector to allow the Department to focus on the final review and underwriting decision done by FHA field staff," says Martinez. So far, the reaction to MAP by the industry has been very positive, he adds.
Simpson Housing Solutions uses the 221(d)(4) and 221(d)(3) financing programs. "They are fantastic loan programs for permanent financing," says Michael Costa, president. "[They] are the best loans you can obtain. The problem has been the processing time," he says. "It takes a lot longer to get financing and sometimes it's prohibitive for us because we would like to use it with the LIHTC. However, the tax credit has critical deadlines that you have to meet. Often the HUD process is so long it puts you up against the deadline, and you end up losing your credits."
The delivery system for the FHA program was always the problem, according to Gary R. Eisenman, executive vice president at Related Capital Co. and former deputy federal housing commissioner. "HUD should continue to improve the availability of product to the marketplace and let the market determine whether it's being overused."
But, according to Marilyn Melkonian, president of Telesis Corp., the FHA has bigger problems than the bureaucracy surrounding the delivery of its funding. "There's no red tape, because there are no operating programs," she says.
Since April, no new FHA insurance deals have closed because of the reluctance of the secretary to seek additional subsidies, agrees Eisenman.
Predictable Future? According to Martinez, he inherited a credit subsidy program that was $12.5 million in the hole at the beginning of the year. "It's no surprise that the program ran out of money in the very first part of this year," he says. "The problem then ... was whether the Administration would declare a national housing emergency which then would have triggered a $40 million emergency fund. I was unwilling to make that recommendation to the President because I do not consider the multifamily housing situation in America today to be [in] a crisis or an emergency in the same way an unforeseen natural disaster may be. I thought it was an urgent problem and a reasonably important problem to deal with, but not something that I could go to the President in good faith and say, 'we have a housing crisis in America.' So, we opted to do something different about it."
HUD did go to Congress to ask for a different supplemental appropriation of $40 million. However, Martinez wants to avoid stopping the program every time it runs out of money. Therefore, HUD also is seeking a change in the premium amount to allow the 221(d)(4) program to operate on a pay-as-you-go basis, which will allow this program to pay for itself.
"As a businessperson, I would prefer a process where there was a more predictable source of funding, and that can come about with a very modest increase in the premium cost," says Martinez. "Obviously, some [in the industry] don't like any increase in cost. I think it's a small price to pay for the continuity of the program and the availability of the program without having to go to Congress every year to seek a subsidy. In addition to that, this is a program that should not be subsidized. I just think it's a matter of philosophy. There are things that government should subsidize, but this is probably not one."
However, Eisenman disagrees with Martinez. HUD's budget this year was $29.5 billion, and next year it will be $31.5 billion. Not asking for the initial money, "calls into question what HUD's policies are going to be," says Eisenman. "This administration talks about compassionate conservatism. I think that is great. Housing is a place where the compassion should be emphasized. But, to say that failing to process multifamily insurance for FHA for half of the year is not a crisis seems to be inconsistent with that. If that's not a crisis, I'm not sure what is."
HUD's own report – The Crisis Continues: The 1997 Report to Congress on Worst Case Housing Needs – found that more than 5 million families are under-housed in the country. "There is no question that Martinez should have gotten that $40 million supplemental money," adds Eisenman. "The money was sought and obtained last year [during the Clinton Administration], and it was available to be used by the new administration. The money was put into the budget by a Republican-controlled House and Senate. It was a bipartisan issue to make sure the money was there."
In addition, many affordable housing developers disagree with Martinez's philosophy that the FHA should not be subsidized and they are unhappy with the 30-point increase in the premium, says Nardi Riddle. "There are some deals that will not get done because of the increase," adds Eisenman.
But, Martinez points out that the way the program is set up, the subsidies are never enough. "If I had released the $40 million emergency amount, we would still have been about $70 million short of what was needed to complete what was anticipated to come about this year," he says. "So, it's just clear that it's a program we need to encourage. But when it requires going into subsidy, it's almost like a bottomless pit. The fact is that these are programs that the private sector can administer. I think it's a benefit to have the FHA securitization in the projects that are appropriate. But the fact of the matter is that I think it's not necessary."
Decentralization While the debate over how the FHA should be administered is ongoing, Martinez sees the solution to the problem as bringing about a partnership between the government and the private sector.
"We want to know what is working and what isn't working. We want to know how HUD, is at times, a bad partner and how we can make the agency a more appropriate partner," says Martinez.
"I am a great believer that the ingenuity of the private sector, with enough assistance and partnership from the government, can provide the answers that we need in our country to meet this issue of affordable housing," says Martinez. "The government can try to peel away regulations and unnecessary costs, and facilitate the permitting process."
While Martinez was the chair of an affordable housing task force for the mayor of Orlando, Fla., he realized how much goes into the cost of housing – single-family or multifamily – because of the things government imposes upon that system. He thinks the process can be streamlined.
"I think the deregulation or reviews at the local level that [focused on] bringing back more affordability in housing, along with a lot of partnerships and creative thinking, can come from the private sector." Martinez says that HUD would be more responsive if it was less centralized. "I think any time a local HUD office has to check with some other region of the country or with Washington, before a pencil can be moved, that it's a delay and that's an impediment to progress," he says.
"I want to see our regional offices become more of decision-making offices. If we can shift the decision-making power out to the field offices, they will have more flexibility to react to local situations, which will make them a more appealing partner."
While there is a lot of talk about decentralization, the industry seems to be confused on what that means because the multifamily programs are largely decentralized already, says David Goodman, CEO of Red Capital.
HUD already has decentralization in respect to the HUD offices, agrees Eisenman. There is not much room to go further, unless HUD plans to make the local offices autonomous. However, Eisenman thinks that is a terrible idea. "It's the U.S. Department of Housing and Urban Development, not an individual state department of housing. If he disconnects the field offices from the leadership in Washington, you will have as many policies in the field as you have offices," he explains.
But, Simpson Housing's Costa believes Martinez's decentralization program would help give more authority to people in the field, which will help speed the decision process. "I think it would give HUD a shot in the arm," he says. "HUD offers great programs. The only problem is the time it takes to get through the underwriting process."
The bottom line is that you've got to make or streamline the existing programs to make it easier to work with HUD and to prevent obstacles in creating housing, says Herb Collins, ex-chairman of Boston Capital and a member of the Millennium Housing Commission. And, he says, decentralization can help accomplish that.
Mixed Views While Martinez is still trying to put his plans for HUD in motion, one of his top priorities is to bring more homeownership opportunities to more American families. This translates into a concentration on single-family housing production.
"We are concerned that the department has not been advocating a balanced housing policy," says Nardi Riddle. "It seems they are promoting homeownership as the way to go for everybody."
She also would like the secretary to talk about multifamily housing and the fact that renters are good citizens who need quality housing. "We haven't heard [from him] that multifamily plays a critical role in the housing policy, that it's a valid choice and that there also is a sizable population that prefers it," she says.
"You've got to learn how to crawl before you can walk," says Collins. The same holds true with housing. "You have to learn to be a good renter before you can own. Rental properties are the stepping stones needed to allow people to move up to homeownership."
Collins believes that Martinez is very sensitive to the needs of multifamily production. "He has put a lot of emphasis on single-family homes because there is a void there. But, he's open to suggestions and sensitive to the needs of the renter community."
Collins also says that Martinez is on the right track. "I'm very impressed with him and his background," he says. "He has more than just bricks and mortar knowledge; he has experience that recognizes and recommends plans that integrates housing with community needs."
When Martinez initially took office, he spoke to a number of groups about regional and smart growth, says Melkonian of Telesis. "I thought that was an encouraging sign that he was interested in those issues and speaking about them. I look forward to hearing more about that and HUD's role in a 21st Century context," she says.
In addition to decentralizing HUD and making the multifamily programs easier to use, the industry also would like to see HUD's reputation change.
"This is a new HUD. Give HUD a second chance ... but when you come to us, be creative, be aggressive and be innovative and you're going to find a very responsive partner here," says Martinez. "I think if HUD is viewed as a more responsive, well-managed agency, if the stigma that HUD has today is changed or eroded to a more positive one, then I think that would be a huge measure of success."
Business First Not a lot of industry leaders have had the opportunity to sit down and talk about the multifamily housing industry with the U.S. Department of Housing and Urban Development (HUD) Secretary Mel Martinez. It was clear from the moment that I shook hands with him that he is a straight-shooter who wants to get down to the details. "The job at HUD has a vertical learning curve," explains Gary R. Eisenman, executive vice president at Related Capital Co. and former deputy federal housing commissioner. "In order to get things done, [you] have to understand substance, history and the political process you need to go through to make changes."
When Martinez took office, he spent his first several months at HUD listening and learning all the intricacies of the department's programs. "Rather than going on speaking tours in his first several months in office, Martinez decided to stay in-house and get a feel for what HUD is all about," says Judd S. Levy, president of the Community Development Trust.
"That is encouraging," says Levy. "I [would] rather wait six to nine months and have a well thought out plan then have him announce his policies in the first nine weeks."
Waiting seems to be the general consensus in the industry. People are looking forward to what the secretary has to say, and are waiting to hear more of his policies before they judge him.
"Everything I heard about him is that he is smart and genuinely interested in problems and issues affecting the industry," says Marilyn Melkonian, president of Telesis Corp. "He has the background to appreciate housing as a place-based way for families to prosper in America and that doesn't mean just single-family."
Martinez came to this country in 1962, when he was 16 years old, with 14,000 other children who fled Cuba as part of a Catholic humanitarian effort called Operation Pedro Pan. He lived in two youth facilities and with two foster families before being reunited with his family in 1966.
Martinez's experience includes working on the Florida Govenor's Growth Management Study Commission, and chairing the Orlando Housing Authority. In addition, he was the chairman of Orange County, Fla., president of the Orlando Utilities Commission and was on the board of directors of a community bank.
"I think his experience is certainly sufficient to run HUD," says Eisenman. "I've never met him, but everyone who has, has come away impressed with him as being knowledgeable and capable of handling the job well. Martinez has approached [the job] intelligently. He's done nothing to date but run the place and deal with the issues as they come up. I think that is smart."