Housing Renovation

hen President Bush named Mel Martinez his secretary of Housing and Urban Development, the first question asked in Washington was, "Who's Mel Martinez?" The answer: He was the top elected official for Orange County, Fla., and had chaired the Orlando Housing Authority. A Cuban native who arrived in America as a teen-age refugee speaking no English and without his family, Martinez had become a lawyer and community leader.

Although his saga was inspiring, many in Washington doubted Martinez' ability to succeed in the footsteps of his dramatic Democratic predecessor, Andrew Cuomo. No matter who's in the White House, HUD can be one of the most challenging Cabinet posts. Regarded by some as a government backwater, HUD has the fourth largest operating budget-$31.5 billion of all Cabinet agencies. HUD's actions are politically sensitive, since the real estate, home building and financial industries it works with are among the country's largest political campaign donors. Moreover, the local officials who get HUD's money for housing and community development projects are savvy political players.

The HUD secretary can count on being castigated by the department's inspector general and the General Accounting Office for poor controls over the distribution and disbursement of more than $39 billion annually in housing and community development funds. And he'll be lucky if he can escape more severe criticism for failing to halt the fraud and corruption that have bedeviled the department over the years. The secretary also inherits a legacy of poor program management.

Martinez is a friend of the president's brother, Florida Gov. Jeb Bush, and an appointee certain to please Hispanic voters. He has been active in Catholic Charities in the Orlando area and is enthusiastically moving to implement President Bush's policy of relying more on "faith-based organizations" to deliver social services. As Orange County chairman, he took unexpectedly bold steps to manage growth. But even after Congress approved his nomination, few knew much about his ability to head a Cabinet department.

Today, 20 months after Martinez moved into the 10th-floor secretary's office at HUD's Southwest Washington headquarters, little more is known about him. He gives few press interviews, and when he meets with official visitors or addresses industry groups, he sticks to such safe themes as the importance of homeownership or the need to simplify mortgage applications and procedures. However, the consensus among HUD watchers is that Martinez is a well-meaning man who might well have what it takes to keep the department on the right track. In view of the number of land mines lurking within the department's complex operations, few predict that he'll escape without some kind of scandal or major controversy. But they say he could be the rare HUD secretary who leaves the job with a better reputation than when he arrived, and with the department in better shape.

Cleaning House

Today the department is trying to improve the effectiveness and efficiency of its programs. It is using modern computer systems to determine rent subsidies and check on tenants' incomes and eligibility for housing aid. It has consolidated Federal Housing Administration processing of loans for commercial apartment buildings in four centers nationwide, rather than in dozens of local offices, so specialists can handle these complicated transactions. It is pushing its grantees to spend funds and report back promptly. Cuomo began some of the initiatives, but Martinez and his team are treating them as their own.

In an early departure from the norm, Martinez spent his first year resisting requests to propose new programs. Instead, he said, the department needed to do a better job of managing the programs it already had. "My first priority will be for HUD to continue to put its own house in order, so we have the institutional fortitude to provide the housing and community renewal opportunities needed by so many families and so many neighborhoods," he told the Senate Banking Committee at his confirmation hearing in January 2001. "There are a great many areas of institutional weakness that must be addressed," he added.

Indeed, HUD's operations long have been a favorite target of GAO and the department's inspector general. The department was singled out for special attention in President Bush's year-old management agenda, which consists of five governmentwide initiatives focused on performance improvement and nine targeted programs. The section on HUD says in part, "Subsidized families are sometimes trapped in substandard, poorly maintained housing; home buyers are exposed to fraudulent practices; and some families receive excessive subsidies that could have been used to aid others in need."

Several HUD programs were on GAO's list of "high-risk" federal activities for most of the 1990s, but last year, congressional auditors removed all but two from the list: the Federal Housing Administration's single-family mortgage insurance program and the department's rental housing assistance programs. In both cases, the department relies on outsiders to accept and process applications, inspect properties and carry out other program functions. HUD hasn't done enough to monitor the performance of these contractors or to ensure program quality and financial integrity, GAO reported again last year (GAO-01-248).

HUD's largest endeavor is its housing voucher program, which accounts for about $18 billion a year of the agency's spending. This program, also known as Section 8, lets 2 million low-income families or individuals rent moderately priced apartments from private landlords. HUD pays the difference between the tenants' rent and 30 percent of their income. Excess tenant subsidies, which result when tenants' incomes are higher than what they've told HUD, may be costing taxpayers three-quarters of a billion dollars each year, GAO says. In addition, some private apartments rented to voucher holders are in substandard condition. For their part, landlords complain that inspections of these apartments, required before each Section 8 lease takes effect, can take weeks-a delay that discourages landlords from accepting Section 8 tenants. That, in turn, may be contributing to the difficulty tenants have in using scarce vouchers in tight rental markets, particularly in big cities. Because of budget limitations, only half the families eligible for vouchers can get them. Some families wait years for vouchers, only to have trouble finding an apartment once vouchers are available.

For all the problems with vouchers, they are regarded as generally successful. Many Republicans like them because they rely on the private sector to build and operate apartments and because voucher recipients choose where they will live. Democrats appreciate the flexibility of the voucher program and have been able to expand it slowly but steadily. It was budgeted at $11.4 billion in fiscal 2000; the administration is requesting $18.3 billion for fiscal 2003.

The Stigma of 'the Projects'

The general high regard for Section 8 is important in view of the unpopularity of public housing, the program that for years was HUD's mainstay. Public housing first was built in the Depression and expanded after World War II. The program served families, many of them with two parents-one a breadwinner-that were viewed as deserving help. Today's public housing is home to about 1.3 million low-income families and individuals, down at least 63,000 from the program's peak. The units were built with federal dollars and are operated by local government agencies called public housing authorities. The authorities get operations and capital improvement subsidies from HUD because rents, which average $229 a month, don't cover all costs. Public housing residents generally have lower incomes than Section 8 voucher holders.

Most public housing consists of low-rise apartments rather than the teeming inner-city high-rises that spring to mind when the term is mentioned. Some public housing is well maintained. But most of it is outdated and dilapidated, and too many projects were built close together in already unstable neighborhoods. Designs are poor, and construction was sometimes shoddy. Federal policies for many years kept rents down, provided too little maintenance and modernization money, and discouraged two-parent families. The result: a $20 billion modernization backlog. Local housing authorities also did a poor job of managing the federally constructed projects. Recent administrations have labeled public housing a failed program, and no public housing has been built for about two decades. Many units, particularly the infamous big-city high-rises, are being torn down and replaced by mixed-income developments built by public-private partnerships.

But public housing's stigma lingers. When the congressionally chartered Millennial Housing Commission reported in May that the government should at least stimulate the construction of more subsidized apartments, an incredulous reporter at the press conference asked: "Are you actually proposing the expansion of public housing in places like New York City, that new projects be built?"

The answer was yes, with some qualifications. But it's clear that the construction of public housing will be limited. Proposals for subsidized housing of almost any kind, including housing for the elderly, evoke opposition from neighbors who fear concentrations of crime, poverty, antisocial behavior and slum conditions. Recently, some communities have been objecting to construction of any apartments, subsidized or not.

Buyers, Not Renters

That's not all bad, in the view of President Bush, Secretary Martinez and other administration officials. They have made increasing home ownership their top priority. "Home ownership gives families a stake in their communities and creates wealth," Martinez told the Senate in February.

The administration's programs include help with down payments for first-time home buyers, tax credits for developers of afford-able single-family houses, a commitment to work with sweat-equity house-building programs, such as Habitat for Humanity, and a program that will allow Section 8 voucher holders to bank their rent toward a down payment. The administration also has pledged to crack down on predatory lenders who take advantage of novice homebuyers.

But some housing activists say the emphasis on home ownership is misplaced. They believe the poorest Americans have the most severe housing problems, and the poorest people are unlikely to be able to buy and maintain houses. Rental housing serves these families better, in the view of the National Low Income Housing Coalition and others, and rental housing is where HUD should be concentrating its efforts if it is to achieve its mission of delivering "a decent, safe, and sanitary home and suitable living environment for every American."

What's more, the Washington-based National Apartment Association/National Multi Housing Council point out, there's evidence that families that can choose where to live increasingly are opting for apartments. One-third of all American households rent. The fastest-growing segment of this group is high-income renters, and some data suggests that they are squeezing lower-income families out of the market.

The nation's stock of subsidized rental housing has been declining. Because HUD's often-criticized information systems don't serve up reliable data and because states and charities build some affordable housing without HUD's help, no one knows for sure how many units are available nationwide. But there is widespread agreement that the supply is no match for the need, which appears to be growing. Among the lowest-paid workers, wages are not increasing, while rents and house prices are soaring beyond the rate of inflation in much of the United States.

Too Few Units

"There is simply not enough affordable housing," the Millennial Housing Commission reported in May. "The challenge is most acute for rental housing in high-cost areas, and the most egregious problem is for the very poor." The commission found there are "significant societal costs" when people can't find adequate housing.

Martinez does not seem interested in making fundamental changes to address the lack of affordable housing. He told the Conference of Mayors in May, "the solution to meeting this nation's affordable housing needs will not come out of Washington." Although the federal government has a "a role in helping to address housing affordability" through tax credits, block grants to states and localities, rental assistance, and insurance and guarantee programs, Martinez told the mayors that the Bush administration is committed to the philosophy that housing issues are primarily local issues.

Complex System

Whether the public understands such actions is questionable. The complexity of federal housing programs hampers public understanding and debate, in the view of observers such as Cushing Dolbeare, the dean of low-income housing activists in Washington and a member of the Millennial Housing Commission. Likewise, the authors of the president's management agenda wrote that "many overlapping, complicated and poorly designed programs burden HUD" in carrying out its mission.

HUD no longer builds housing, nor even pays for most construction. Instead, it helps out with the financing to reduce costs. The government also offers tax credits for the production of low-income housing. Most new housing for low-income people is built with the help of several relatively small subsidies from different federal and state programs that are layered atop one another. This complexity makes it difficult to measure the effect of any one program or to quantify the total impact of federal housing aid. It also leaves the door open to waste, fraud and abuse-ills to which HUD has been subject more than most departments. Each layer is managed by a different part of HUD or a partner agency, and only the few people in charge of the project know the big picture.

The complexity of its programs has meant that over the years, HUD has been slow to dispose of houses it came to own after foreclosures on FHA loans. The houses sat empty and deteriorating while costing money to board up and repair. Lately, the FHA has been selling its excess inventory more quickly. But that's been accompanied by a series of inspector general and GAO reports about sales that were fraudulent or didn't follow the rules. In June, HUD's IG reported that prospective owner-occupants who had not bought other HUD houses recently were supposed to be given a head start over investors in purchasing HUD-foreclosed dwellings. However, 29 percent of the sales under this program did not observe these rules. "These abuses likely . . . undermined the initiative's intent to increase home ownership," the IG's report said.

HUD has the difficult job of handling large amounts of credit, money and property. Historically, its information systems haven't been up to the task of supporting careful and efficient stewardship of its resources. Even with first-rate information systems, however, its stewardship job would be tough because it depends on a host of outside parties-real estate agents, lenders, state and local governments, inspectors, maintenance companies, and nonprofit organizations with varying levels of business savvy-to carry out its mission. These third parties maintain, inspect and sell HUD-owned houses, originate FHA loans, build and renovate houses, care for homeless people, operate public housing, and play other roles in housing and community development at the local level. The public housing and voucher programs are operated by 4,535 state, local and tribal agencies.

HUD hands out nearly $5 billion in Community Development Block Grants to state and local governments each year for housing and community development projects. Many kinds of expenditures are permitted, including housing loans, services for the homeless, jobs programs and improvements to public facilities and parks, but more than two-thirds of the spending must benefit low-income people. HUD requires governments receiving the grants to prepare elaborate plans for spending the money and to submit accounts of the actual spending, but few people believe HUD employees review all these reports carefully. The department relies instead on local activists and other interested parties to check for irregularities and blow the whistle when necessary.

Not Enough People

An official of the HUD Council of the American Federation of Government Employees confirms that staffing is too thin to allow for monitoring of each grant, contract and transaction. "We don't have the people to check on" homebuyers and other recipients of HUD money or property, says Irene Facha, an attorney in HUD's Philadelphia regional office. Facha says that AFGE members are disheartened because they had hoped for more improvement when Martinez and his team took over. Martinez' official biography mentions his commitment to high ethical standards, and the secretary often mentions ethics when discussing how to improve HUD's credibility.

Facha acknowledges there have been some improvements. "They [HUD managers] are trying to address some of the problems with contracting out," she says. But Facha is critical of what she calls the department's failure to prosecute or punish employees involved in episodes of fraud and conflict of interest. "It's going to take forever to correct the problem if people think they can continue to get away with what they are doing," she says. Facha says Martinez means well but he should back up his statements about ethics by cracking down on ethical lapses. "There's the sense that there is no accountability," she complains. "You can beat your chest about accountability, but actions speak louder than words."

In another case where the depth of HUD's commitment has been questioned, advocates for homeless people were disappointed by the president's 2003 budget. Although the administration called for an end to "chronic" homelessness in 10 years, it didn't propose any new or expanded shelters, supportive housing, or other assistance. Instead, Martinez said, HUD would make more efficient use of existing resources in its own budget as well as those of other departments, such as Health and Human Services. The budget, not yet approved by either house of Congress, calls instead for combining existing programs serving the homeless and increasing the program coordination staff.

But many observers say the lack of housing is a major cause of homelessness. The bipartisan Millennial Housing Commission is among those calling for creation of a substantial amount of new "supportive housing"-housing with support services-for the nation's 2 million homeless people. The commission called for increasing supportive housing units nationwide from today's 50,000 units to 200,000 over the next decade.

Although HUD and Office of Management and Budget officials had issued unmistakable hints that HUD's 2003 budget would be flat at best, given the need to fight terrorism and pay for wars, HUD's bottom line in the president's fiscal 2003 budget proposal actually grew by 7 percent, more than most other domestic spending. Martinez is proud of getting the increase, but some analysts say the budget remains essentially flat, paying for only tiny increases in programs and services.

That it is growing at all indicates that the drive to abolish HUD, part of the conservative agenda a decade ago, is all but dead. One HUD critic, Howard Husak, a research associate with the John F. Kennedy School of Government at Harvard University, still says, "I don't particularly like the idea of subsidized housing programs," but acknowledges, "I do think that they've made progress" in management, beginning with the Clinton administration and continuing today. His opinion is echoed by others. Martinez "is focused on trying to make the place work better," says low-income housing advocate Dolbeare. FHA loan processing is working more smoothly than in the past, says Mortgage Bankers Association Vice President Stephen O'Connor. "There's no doubt that they're improving," says Christine Pelosi, a HUD General Counsel staffer during the Clinton administration who now works on Capitol Hill.

But some people continue to question whether simply smoothing out program operations and reducing abuses are all that's expected of a Cabinet secretary. When, they ask, will HUD propose some bold solutions to the very visible problems of inner-city decay, homelessness, and high housing costs?

Given Martinez' insistence that housing problems are local problems that should be solved locally, it's not likely that major new programs are being hatched on HUD's 10th floor. If good management and program execution succeed in restoring HUD's reputation, Martinez will have pulled off a difficult balancing act and could be in a position to take on a more satisfying or visible job. There are predictions that he will run for Florida governor, seeking to succeed Jeb Bush, or even get a slot on a national Republican presidential ticket-not bad for a man whose first housing in the United States was in a refugee camp.