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has been the Section 8 program which benefits low-income families whose income does exceed 80 percent of area median. From 1975 through fiscal year 1981 Section 8 contract authority permitted gross reservations of 1.922 million rental units, 924 thousand of which were newly constructed or substantially rehabilitated. About 70 percent of the completed newly constructed units have been assigned to the elderly. Both the elderly and nonelderly tenants of Section 8 are overwhelmingly very low-income people with incomes less than 50 percent of median in their communities and mostly below the official poverty line.

While Section 8 housing has been accepted in virtually all large cities and in many small communities, in rural areas as well as metropolitan, high and rising costs per family served have made the new and substantial rehabilitation component of the program targets of criticism. In 1978, the amount of annual contract authority reserved for each family in privately developed Section 8 new construction was $4,100. By 1981, the last year the Sec. 8 new construction program was fully operational, the annual amount of contract reservation per unit had risen to $5,300 and was estimated to rise to over $6,000 per unit in fiscal year 1982. Projecting out over the 20 or 30 year life of an assistance contract, could mean each unit would need $80,000 to $120,000 in Section 8 budget authority. The long-term costs of these contracts are shown as budget authority and thus appear as especially large and vulnerable components in one-year federal budget documents.

Given the mounting concern over rapidly rising Federal Government outlays and the reluctance of many to accept the hard fact that residential construction (whether subsidized or not) has become very expensive, the Committee determined that a less costly alternative to the Section 8 program must be found to house our low-income families and to respond to the rental housing crisis that is affecting all families who cannot afford or do not choose to buy a home.

New multifamily construction stimulus program

The Committee bill authorizes $1.3 billion for fiscal year 1984 to subsidize the cost of new construction or rehabilitation of multifamily housing in areas of the country that have a severe shortage of affordable rental housing. This amount will assist approximately 80,000 to 100,000 units, of which at least 20 percent would be affordable by families with incomes below 80 percent of the area median income. Hearings held by the Housing Subcommittee elicited overwhelming support for this proposal from an unprecedented spectrum of groups who are concerned about the need for an adequate supply of rental housing: the National Governors' Association, the Conference of Mayors, the League of Cities, the National Low-Income Housing Coalition, the Mortgage Bankers Association, the National Association of Housing Redevelopment Officials, the Council of State Housing Agencies, the National Housing Conference, the National Association of Housing Cooperatives, the National Leased Housing Association, the National Hispanic Housing Coalition, the AFL-CIO, and a number of church-related organiza

tions.

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Under this program, States units of local government, areawide planning agencies and Indian tribes would apply for assistance which would be used to encourage the construction or substantial rehabilitation or rehabilitation of multifamily rental housing (including mutual housing) or cooperative projects in areas experiencing severe shortages of decent and affordable rental housing opportunities, as determined by objectively measureable indices. Eligible areas would be determined by the HUD Secretary after taking into account the extent and change in the amount and level of poverty, the extent to which housing units are overcrowded, the amount and duration of single and multifamily rental housing vacancies, the amount of substandard rental housing, the extent of the lag between estimated need for rental housing and its production, and any other objectively measurable conditions specified by the HUD Secretary which would assist in determining whether an area is experiencing a severe shortage of affordable and decent rental housing for families without reasonable and affordable alternatives in the area. By working with the private sector, including for-profit and nonprofit developers, qualified governmental entities would have broad flexibility in determining what type of financial assistance would be the most cost-effective and useful to respond to prevailing local housing, financial and economic conditions. For example, the governmental entity could use the assistance provided in the form of a capital grant, a loan, as interest reduction payments, as land purchase grants or in any comparable form which is designed to reduce project development and operating costs.

While the specified governmental entities may apply to HUD directly for assistance, the bill also permits HUD to contract with a State or State agency, such as a State housing finance agency, to administer the program. This dual process is presently used very effectively in the administration of the Section 8 program. State housing finance agencies have played a major role in the production of federally-assisted rental housing. Reasonable levels of funding should be provided to State agencies in recognition of their important function and in order to take advantage of a well-established delivery mechanism. However, funds provided to States through this process are not to be considered a State housing block grant nor does the Committee intend that a majority of these funds be distributed through the States. It should be clear that funds administered through the State agencies are to be used according to the same area eligibility criteria, project selection criteria, assistance requirements and other conditions that govern assistance provided directly from HUD. Any application for assistance which is submitted to a State agency must be approved by the unit of general local government where the project is to be located. Even where a State is administering a program under this section, a unit of general local government in that State may apply directly to HUD on behalf of a separate project that is receiving an alternative form of assistance from the State such as financing through a State mortgage revenue bond.

Selection criteria

Projects are to be selected for assistance on a competitive basis, taking into account five primary criteria. First is the extent of the

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severity of the shortage of decent and affordable rental housing for families who have no other reasonable and affordable alternatives, such as homeownership, in the area. Second, is the extent of nonFederal public and private financial assistance or other contributions such as land or tax abatements which reduce the amount of assistance needed. This principle of using federal funds to leverage private and alternative public contributions has been very effective in the UDAG program and the Committee expects it to be used effectively in this program. In fact, the key to the whole program is the extent to which cost-effective mechanisms are developed through creative partnerships between developers, project owners, local government entities and HUD. There is enough flexibility in the program to permit the creation of innovative approaches. Another selection criteria is the extent to which the project contributes to neighborhood development and mitigates displacement. A fourth criteria is the extent to which an applicant has established a satisfactory performance in meeting assisted housing needs. For those communities that have developed Housing Assistance Plans (HAPS) pursuant to their involvement in the Community Development Block Grant program, progress in meeting identified needs may be assessed by reviewing such plans and their implementation. The Committee expects the Department to establish other objective means of assessing achievement of this criteria. A final consideration is the extent to which assistance from this program will stimulate the construction or rehabilitation of the maximum number of housing units for the least cost, taking into consideration cost differences among areas, among financing alternatives and among types of projects and tenant being served.

From among the projects selected by the Secretary based on these criteria, the Secretary shall give priority for assistance to projects that will provide more than 20 percent of their units for occupancy by low income families.

The Committee recognizes that construction and land costs may be substantially higher in one area of the country than another or that a moderately rehabilitated project could cost substantially less than a newly constructed project. In addition, a project designed to house handicapped persons and a greater number of low income families than the 20 percent minimum could be more costly than a project for families. The intention is not to pit against each other projects that differ so radically. However, in comparing projects that are located in the same area, or that are designed to serve the same type tenant, or that have similar financing available, care should be taken to assure the most cost-effective proposals are selected.

Allocation of funds

The bill requires the Secretary to develop a system for allocating funds in a reasonable manner among various geographic regions, between urban and rural areas, between States and local governments, keeping in mind the purpose of assisting those areas that have the most severe shortage of affordable and decent rental housing. If areas with the greatest need coincide with areas with the highest construction cost, a reasonable distribution system should take those factors into account. The distribution of assistance

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among newly constructed, substantially rehabilitated, and moderately rehabilitated projects should not be driven by a policy preference imposed by the agency but should be determined by local housing needs and local market conditions identified in the application for assistance.

Amount of assistance

The amount of assistance for each project would be the least amount required to provide affordable and modestly designed housing for families without other reasonable and affordable alternatives in the private market. In addition, the amount of assistance would be sufficient to provide that at least 20 percent of the units in any project must be affordable to low income families whose income does not exceed 80 percent of area median. Any cooperative project assisted under this program should have a mechanism to insure affordability over time for low-income persons who are expected to occupy at least 20 percent of the units. This can generally be accomplished through a limitation on the price of membership resales for such units.

In addition, at the time of approving applications for funding, the Secretary must determine that no assistnce will be provided to persons or families who could afford units in the project without such assistance. This provision is not intended to alter the basic market orientation of the program. It is intended to provide a standard for screening applications for funding, not individual families. The Committee does not intend the Secretary to impose income limits or a fixed rent-income ratio on the nonlower income tenants. Rather, the Secretary shall seek to ensure that the assistance provided under the program shall be used to reduce rents in the nonlower income units to a level which reflects the market rent in the neighborhood in which the project is located, and that will be affordable by families most likely to rent units in that neighborhood.

Since the rents charged the low-income tenants cannot exceed 25 percent of their adjusted income, the amount of assistance must be structured to take this requirement into account. Assuming a total development cost of $57,750 per unit, a mortgage of $52,000, operating expenses and utility costs averaging 5 percent per year and a pre-tax return of 6 percent on the owner's investment, the Congressional Budget Office has determined that if the assistance were provided in the form of an up-front capital grant it would take an average of approximately $12,000 in federal subsidy per unit to reduce the mortgage interest rate from a market rate of 11 percent to an effective mortgage interest rate of 8 percent. The cost of the subsidy would be somewhat less if it were provided in the form of a one-time up-front mortgage grant. At an effective interest rate of 8 percent, the amount of rent paid by tenants with incomes above 80 percent of the area median income would be maintained at an affordable level, yet would provide sufficient cross-subsidy to enable tenants with incomes below 80 percent of the area median income to pay no more than 25 percent of their income for rent. Moreover, these cost assumptions do not take into account any non-federal public or private contributions that could be leveraged to reduce project costs even further. since the Secretary of HUD has authori

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ty to review only the rents charged the low income tenants, it is expected the project developer will conduct a local market analysis for the other tenants who are expected to live in the buildings.

As a condition for receiving assistance, a project owner must agree to have at least 20 percent of the units occupied by low income tenants for 20 years. There is no maximum limitation on the percentage of low income tenants that may occupy the assisted building and a project could contain a substantially higher percentage where it makes social and economic sense given local conditions. As long as the rents established for the building are within the fair market rent levels established for the Section 8 existing program, tenants with those certificates could occupy the project. In fact the project owner must agree for 20 years not to discriminate against tenants on the basis of their eligibility for or receipt of a federal, state or local housing assistance or on the basis that they have children. The owner must also agree that for twenty years the owner, and his successor in interest, will pass on to all tenants any reduction in the debt service payments resulting from the assistance and that the rental or cooperative units will not be converted to condominiums. If these conditions and the agreements required by the Secretary to assure the financial feasibility of the project are violated, the owner or his successors in interest would be required to repay to the Secretary the assistance provided through this program plus the simple interest thereon.

In order to assure the modest design of the project, the maximum mortgage amount for the project may not exceed the amount insurable under Section 207 of the National Housing Act. The mortgage may be insured by FHA if it meets the FHA standards but that is not a requirement of the program. State and local bonds issued to finance eligible projects could qualify as Section 11(b) taxexempt bonds. Davis-Bacon wage standards will also apply to projects developed with assistance from this program.

TITLE IV-RURAL HOUSING

The Committee bill authorizes for rural low and moderate income housing essentially the same program level for Fiscal Year 1984 as that approved by the Congress for Fiscal Year 1983. The Committee recognizes that even these levels are far below that which is necessary to meet the level of need in the rural areas of the nation and are below the levels authorized in prior years. In recommending the levels included in this bill, the Committee disregards the Administration's call for dismantling the existing structure of the Farmers Home Administration and replacing it with an underfunded block grant approach. Such drastic reductions in housing assistance for the rural areas of the nation cannot be justified, in the opinion of the Committee, given the fact that rural areas contain a disproportionate amount of poor families and substandard housing, and are seriously lacking in conventional mortgage credit. Furthermore, the plight of rural communities with respect to their degree of distress and lack of mortgage credit was vividly made known to the Committee through its extensive hearings and field visits. The Committee received an overwhelmingly negative reaction from rural communities when the Administra

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