HUD's Budget Proposal Calls for Changes and Cuts

WASHINGTON, DC-The Obama Administration’s unveiling of the proposed budget for fiscal year 2011 last week was received with both praise and criticism. Soon after but to less fanfare, individual government agencies broke down their own budgets, including the Department of Housing and Urban Development. While Congress has yet to approve the Obama proposal, some of HUD’s plans for 2011 may spell good news for developers looking to capitalize on the Administration’s goals of recovery and reinvestment.

Reflecting overall budget cuts, HUD, which received $43.6 billion in funding for fiscal year 2010, has requested $41.6 billion for FY2011, a 5% decrease. That capital will be supplemented with an expected $6.9 billion in FHA and Ginnie Mae receipts, resulting in a total 2011 budget of $48.5 billion, up by $1.6 billion in FY2010.

With a focus on fiscal discipline, reform and job creation, the HUD budget seeks to build on its goal of streamlining the department’s housing and community development programs. On the multifamily front, spending for some programs was reduced, while others were cut altogether. (See HUD’s full Fiscal Year 2011 Proposed Budget.)

“After a year of progress, we no longer confront an economy or a department in crisis,” HUD Secretary Sean Donovan stated. “But much work remains, in much-changed fiscal circumstances. Now that the economic crisis has begun to recede, President Obama has committed to reducing the federal deficit. HUD’s fiscal year 2011 budget reflects that fiscal discipline.”

The main point Donovan stressed was HUD’s primary mission of making “targeted investments in people and places,” rather than programs and policies. This, according to the department, will support its mission while holding it accountable to taxpayers. “With the Recovery Act and fiscal year 2010 funding having stabilized HUD’s programs after years of slow starvation, the time has come to begin transforming them,” he said.

Amid the terminated programs is the Multifamily Housing Revitalization Demonstration Program, part of the Department of Agriculture’s Rural Housing Service. While the department proposes to eliminate the program, it’s planning to increase the multifamily housing direct loan program from $70 million to $95 million so housing opportunities in rural areas can be met.

Funding has been reduced (by 10% YOY to $1.65 billion) for the HOME Investment Partnerships Program, a formula block grant program whose funds help increase the supply of affordable housing for low-income families. Current fiscal constraints and the program’s scalability were the main reasons behind the decision. Additional affordable housing needs could be met through other programs, including the Neighborhood Stabilization Program through the Housing and Economic Recovery Act of 2008, American Recovery and Reinvestment Act of 2009 and Affordable Housing Trust Fund.

The Administration also proposes to reduce funding for the Section 202 Housing for the Elderly program and the Section 811 Housing for Persons with Disabilities program, which funds the new construction of housing for those groups. These programs will be reassessed to make future projects more cost effective and well targeted. Fiscal responsibility for the Section 811 program would be shifted to the Tenant-Based Rental Assistance Program.

Despite the spending cutbacks, the agency believes targeted investments will allow the department to provide housing and assistance to almost 5.5 million households, an increase of more than 200,000 over last year, and create and retain over 112,000 jobs through its community development investments.

Among HUD’s major goals relating to the multifamily sector are to increase funding for the Housing Choice Voucher Program. As such, it has allotted $19.6 billion, an 8% increase from FY2010, for the program to provide rental assistance to in excess of two million extremely low- to low-income households so they can live in neighborhoods of their choice. All existing mainstream vouchers would continue to receive funding, and the program would have the flexibility to support both new vouchers that were leased and $85 million in special-purpose vouchers for homeless and at-risk-of-homelessness families with children and disabled persons.

Some $9.4 billion would go toward preserving affordable rental housing through the Section 8 Project-Based Rental Assistance program, a 9% increase over the prior year’s budget. Increased funding for contracts with private multifamily owners would preserve 1.3 million affordable units.

HUD has allocated $350 million to fund the first phase of proposed “long-term fundamental reforms” that include a new initiative, Transforming Rental Assistance, intended to modernize its rental assistance program. Namely, the multi-year effort would convert public housing to project-based vouchers and regionalize the housing choice voucher program. The goals are to improve the physical condition and management of public housing stock by enabling its owners to address the current and future capital needs of their properties and to streamline HUD oversight of its 13 separate rental assistance programs. The allocation would help preserve some 300,000 units of public and assisted housing.

In one of the biggest funding increases, HUD would infuse the Choice Neighborhoods program with $250 million, up from a $65-million allocation in 2010. While its primary aim is to fund the preservation, rehabilitation and transformation of public and HUD-assisted housing, the department also hopes to continue to make a variety of “transformative” investments, such as improved transportation, services and job opportunities, in distressed communities—high-poverty neighborhoods with concentrations of public and assisted housing. The Choice Neighborhoods Initiative would also replace the HOPE VI program, which was funded at $200 million in FY2010. Entities that would receive grants include public housing authorities, local governments, nonprofits and for-profit developers.

HUD is maintaining its funding of the Community Development Block Grant ($3.99 billion in FY2011), but as part of reforming such programs, it has proposed allocating an additional $150 million to the new Catalytic Investment Competition Grants program. Under the auspices of the CDBG, the new program would provide capital to innovative economic development projects in targeted neighborhoods. The grants are meant to supplement the Choice Neighborhoods Initiative, Promise Neighborhoods, HOPE VI, Sustainable Communities or other place-based strategies.

The budget proposal also calls for the extension of the Housing Credit Exchange program for another year. If approved by Congress, the program would allow states to exchange their unused 2009 housing credit ceiling; credits returned in 2010; up to 40% of the state’s 2010 per-capita authority; and up to 40% of their share of the 2010 national pool allocation. The program applies only to 9% LIHTCs, not 4% or disaster credits. Assistance can come in the form of a grant or a loan, and projects can include non-tax-credit developments that meet LIHTC income, rent and use requirements.

For the second year of its Sustainable Communities Initiative (a partnership between HUD, the Department of Transportation and the Environmental Protection Agency), the department intends to use $150 million to encourage regional and community planning efforts around transit-oriented, environmentally sound projects.

The department also outlined some high-priority performance goals for itself to achieve over the next two years, primarily to increase efficiency and sustainability, and to meet the ever-increasing need for affordable rental homes. The HUD budget seeks $20 million in capital to be able to implement the proposed changes. It once again requested that up to 1% of program funding be funneled into the Transformation Initiative Fund, for research, evaluation and program metrics; program demonstrations; information and technology; and technical assistance and capacity building. HUD is also requesting $1 billion in mandatory spending to capitalize the Housing Trust Fund.

Congress has yet to approve these proposals, but already the HUD budget has attracted some criticism. For one, the Administration is seeking to increase the Federal Housing Administration annual mortgage insurance premium for single-family housing, but no clues have been given as to the potential implications for multifamily. And a major factor of note is the lack of attention given to the GSEs. Though the Administration has stated repeatedly that it would unveil a plan for Fannie Mae, Freddie Mac and other housing GSEs with its 2011 budget, any reform measures were conspicuously absent. Government officials say they continue to monitor the GSE situation, and Secretary Donovan indicated that reform proposals will come soon, but no further information was provided.