HD2 - Final Report: Review of the Virginia Housing Development Authority

Executive Summary:
The Virginia Housing Development Authority (VHDA) was established by the Virginia General Assembly in 1972 as the State's housing finance agency. The General Assembly created VHDA in order to address shortages of adequate housing for low and moderate income households in Virginia. According to VHDA's mission statement, its mission is "to help our fellow Virginians obtain safe, sound and decent housing otherwise unaffordable to them."

VHDA operates as an independent public authority. It does not rely on General Fund money to fund its operations and programs as a result of its ability to issue tax-exempt bonds created by the federal government and allocated to the State of Virginia. Instead, VHDA generates revenue through the sale of bonds and the issuance of mortgage loans.

House Joint Resolution 731, approved by the 1999 General Assembly, directs the Joint Legislative Audit and Review Commission (JLARC) to evaluate whether VHDA is addressing the housing needs of low and moderate income Virginians and is administering its programs in accordance with the statutory intent set forth in § 36-55.25 of the Code of Virginia. The resolution also expressly requests that JLARC examine VHDA's administration of the federal Section 8 program. This is the second of two reports that have been prepared to meet the study mandate. This report addresses the issues raised by the mandate. The interim report primarily provided organizational and financial background about VHDA.

Overall, VHDA's performance in terms of generating revenue and achieving financial strength has been excellent, but its performance in meeting its statutory mission (and its own mission statement) has not reflected the authority's full potential and needs improvement. Evidence contained in the report indicates that in each of its major programs, VHDA could do more to accomplish its statutory mission without compromising its ability to remain financially strong. VHDA's Board of Commissioners and executive leadership need to be willing to bring about more balance in the priorities that are given to the objectives of financial strength and the authority's statutory mission, and need to strive to achieve excellence in both regards. The current executive director has made greater efforts to involve stakeholders than has been done in the past, but VHDA needs to continue involving customers in planning and implementing its programs. Recommendations to address needed improvements in VHDA programs are included throughout the report.

VHDA Is Financially Strong and Well Managed

VHDA has impressive financial strength and is generally well managed. VHDA has achieved a strong financial position through its bond and loan management and currently is one of the top-rated housing finance agencies in the country, receiving AA+ and Aa1 general obligation bond ratings from Standard and Poor's and Moody's Investors Services, respectively. The authority generally has a professional and competent staff that effectively manages and implements its programs. Through the Section 8 and federal low income tax credit programs as well as other programs, VHDA has assisted many households in obtaining housing that otherwise would be unaffordable.

Single Family Programs Serve Households that Could Be Served by the Private Market and Could Do More to Assist Low and Moderate Income Households

The single family loan program is VHDA's largest program, and single family loans constitute approximately two-thirds of the total dollars financed by VHDA. However, VHDA could do more to meet its statutory mandate to assist households that cannot be served by the private market through its major single family programs. Neither the private lenders that originate VHDA loans nor VHDA staff make an effort to verify whether a borrower would qualify for a private market loan with reasonably equivalent terms before providing a VHDA loan. The figure on page II shows that 39 percent of the recipients of VHDA single family loans likely would have been eligible for loans through the private market.

VHDA appears to provide loans that are competitive with the private market in order to maximize the number of loans it provides, and gives less consideration to the amount of the assistance provided by the loan products. In addition, VHDA makes little effort to differentiate between low and moderate income borrowers and provides the same level of assistance to households in both income categories through its standard products.

The interest terms on VHDA loans are only slightly more attractive than private market rates and provide only small benefits to borrowers. For example, the interest rate for VHDA's standard 30-year fixed rate mortgage product is only one-half percent less than the average market rate, which results in a total savings over a seven-year loan period of only $2,800. According to VHDA's policy analyst, VHDA loan recipients typically stay in their homes approximately seven years, after which the loan is repaid in full. For this program, VHDA generally sets interest rates at the highest possible rate while still keeping its product attractive to first-time homebuyers. Likewise, VHDA's Step Rate program, which offers the borrower a substantially reduced interest rate for the first two years of the loan and an interest rate fixed at one-half percent more than the rate available for VHDA's standard insured product for the remainder of the 30-year loan period, does not offer significant advantages over a standard 30-year, fixed rate loan for most of the loan period.

VHDA needs to review its single family loan program to assess how the program can be improved to better meet VHDA's mission. In addition, VHDA should develop one or more loan products, targeted specifically to low income households, that provide substantially more assistance than financing provided by the private lending market.

VHDA Manages Its Multifamily Programs Well and Serves Low and Very Low Income Households, but Its Policies Do Not Adequately Promote Affordable Housing

VHDA has been successful at financing the development of safe and decent multifamily housing. Multifamily projects that receive financing from VHDA are subject to a rigorous underwriting process before a loan can be approved and then receive regular inspections from VHDA's asset management staff through the length of the loan. This has resulted in VHDA's ability to keep the number of properties on which it must foreclose to a minimum.

JLARC staff found that most families served by these multifamily projects have incomes ranging from poverty level through low income, with the median income served by projects receiving federal low income tax credits at slightly below 50 percent of the area median family income. While VHDA effectively targets low and very low income households with its multifamily programs, it does not make any additional effort to encourage affordable rents for projects that it finances.

The Code of Virginia calls for VHDA to provide "residential housing at prices or rentals which persons and families of low and moderate income can afford." However, more than half of the residents of projects supported by VHDA loan financing that JLARC staff reviewed face a significant housing cost burden by having to pay rents over the generally accepted standard for housing affordability. According to this standard, housing costs, including either rent or mortgage payments as well as the cost of utilities, should not exceed 30 percent of a household's income. The majority of tenants in VHDA-financed projects pay over 30 percent of their incomes for rent and utility payments (see figure on page IV). Currently, VHDA does not provide incentives that would encourage developers of the projects it finances to lower rents to a level that would be affordable to more tenants.

VHDA should conduct a fundamental review of the processes by which rents are set for the projects it finances. VHDA also needs to evaluate how it could provide incentives to developers to offer more affordable rents.

Multifamily Financing Does Not Adequately Address State Housing Needs

According to JLARC staff analysis of Virginia Center for Housing Research data, more than one-fourth of all households in Virginia live in housing that is unsafe, indecent, or unaffordable. The housing needs faced by these households vary greatly among the different regions of the State. This is due to factors such as: the variance of land and development costs across the State, a significant diversity among the median incomes in Virginia's localities, and major differences in local culture and housing style preferences across Virginia localities.

While projects that have received financial support from VHDA are located in all regions of the State, VHDA has not proactively sought to match its financing to the sizeable and differing housing problems and needs that exist in each region of the State. VHDA has not conducted an analysis of what specific housing needs exist across the State or how it best can meet these needs through its multifamily programs. VHDA periodically should conduct a comprehensive analysis of the housing needs in all regions of the State. VHDA should use the results of this analysis to proactively design and administer programs that will address housing needs in each region. In addition, to ensure that VHDA pays greater attention to the housing needs of different areas of the State, the General Assembly may wish to consider amending § 36-55.28 of the Code of Virginia to require that the Governor appoint no more than two persons from anyone area of the State to the VHDA Board of Commissioners.

VHDA Has Not Fully Utilized Funds Allocated for Section 8

The Section 8 Certificate and Voucher program, administered by the United States Department of Housing and Urban Development (HUD), provides rental subsidies to reduce the rent burden of very low income and poverty level households. Since 1977, VHDA has had the primary responsibility for administering a major portion of the tenant-based Section 8 funds that are allocated by HUD to the State of Virginia. The $65 million in Section 8 funds that VHDA receives annually from HUD is allocated among 75 local administrative agents that administer programs in 89 localities. Some local housing authorities in Virginia also administer their own Section 8 contracts directly with HUD. VHDA's administration of this program has provided a valuable service to many localities that do not have the capacity to operate a Section 8 program independently.

In July 1995, HUD issued a policy directive changing the manner in which Section 8 budgets were to be managed by agencies that administered contracts with HUD. While most of the local housing authorities in Virginia that administer their own Section 8 contracts began complying with this policy directive well before VHDA, VHDA made a decision not to comply with this directive until FY 1999. This resulted in the loss of a large amount of federal Section 8 assistance to Virginia and the opportunity to house a significant number of additional families in the State. In fiscal years 1996 through 1998, VHDA did not use a total of $30 million of available funds to provide housing assistance. An expert retained by VHDA estimated that in FY 1998, VHDA could have funded 2,445 additional housing units had it complied with HUD's directive. In the future, VHDA should ensure that it maximizes the use of federal Section 8 funds provided to the State to help house very low income Virginians.

VHDA Needs to Ensure that Local Section 8 Administrative Agents Are Adequately Supported and Equitably Treated

The administration of the Section 8 program needs to be improved, in terms of the financial and technical support provided to local agents, as well as in terms of improving efficiency and reducing expenditures at the State level. Of the administrative fees VHDA receives from HUD to pay for the administration of the Section 8 program across the State, VHDA retains a percentage of the fee provided for each unit and allocates the remainder to the local administrative agent responsible for the unit. VHDA has complete discretion as to the percentage of the administrative fee that is allocated to each local agent, and in recent years has allocated these fees based on an informal fee negotiation process. As a result, administrative fees have not been allocated to local agents in either an appropriate or equitable manner.

There is often a wide range in the fee rates received by local agents within the same geographic area, although HUD pays the same per-unit fee to VHDA for units within these same geographic areas (see figure on page VI). In order to ensure a fair and equitable distribution of administrative fees, VHDA should discontinue its current process of verbal negotiation and should implement a formal policy that will ensure a fair and equitable distribution of these fees.

Along with the inequitable fee structure, there are other aspects of the Section 8 program that need improvement. VHDA lacks an automated Section 8 tenant data transmittal system, and instead hires personnel to handle extensive paper records and key data received from local agents. In addition, VHDA recently transferred in-house the system by which rent checks are written to landlords and tenants. This payment disbursal system is inadequate and has resulted in overpayments and underpayments to landlords, checks sent to incorrect addresses and wrong persons, and increased administrative expenses associated with the recovery of overpayments that should have been unnecessary.

VHDA needs to take measures to improve efficiency and reduce excess expenditures. VHDA should make the development of a Section 8 automated data transmittal system, and an effective payment disbursal system, high priorities and commit the necessary resources to develop these systems.

VHDA also needs to accurately assess the funds needed to administer the Section 8 program efficiently and maximize the proportion of the administrative fees provided to local agents. A majority of local agents have indicated that they feel they receive insufficient administrative fees and have reported operating deficits for FY 1999. Since assuming the position in June 1999, the current executive director of VHDA appears to have recognized many of the concerns identified in this review of the Section 8 program and is taking some steps to address them. One of the steps taken by the director has been to hire a consultant to review the program.

VHDA Has Financial Strength that Should Be Better Utilized

While VHDA enjoys a strong financial position, this review indicates that the authority could do more to fulfill its mission to help households obtain safe and sanitary housing that otherwise would be unaffordable. Instead, VHDA's highest priority appears to be maintaining a strong financial position and impressive bond ratings. VHDA has developed sizeable fund balances because it annually generates more income from mortgages and investments than it has expenditures. These fund balances appear to exceed the level needed for a housing finance agency to maintain ''top tier" financial status. In fact, a financial consultant retained by JLARC found that as of December 31, 1999, the authority's fund balance exceeded the minimum threshold for Standard & Poor's top tier rating by $737 million.

VHDA has used less than its full financial strength to provide assistance to low and very low income households that could most benefit from the authority's assistance. VHDA targets households at the lower income levels which are not currently being served by VHDA's traditional programs with the Virginia Housing Fund (VHF). A portion of the excess funds raised from the profits of VHDA's traditional single family and multifamily programs are transferred to the authority's general fund and then to the VHF to provide lower interest rate loans for mortgages and projects that otherwise would not be funded. However, only a portion of VHDA's profits from its traditional programs are reflected in the amount of funds that VHDA contributes to the VHF each year. The total amount of VHF money loaned in single family mortgages during the past 13 years in which the VHF has been in existence is equal to only one-fourth of the amount loaned in traditional single family mortgages in 1999. Likewise, the total amount of VHF money used for multifamily loans during the past 13 years is less than one-third of the amount loaned in fiscal year 1999 for traditional multifamily loans.

VHDA contributes $20 million annually to the VHF. VHDA derives the amount of its annual contribution from the periodic retention of a financial consultant to evaluate how much the authority can contribute to the VHF without adversely impacting its financial strength. A financial consultant retained by JLARC reviewed these conclusions and found that VHDA could allocate a substantially higher annual amount to the VHF, an annual contribution which would exceed $34 million. In addition, although VHDA's financial consultant expected that interest generated by VHF loans and investments would remain in the VHF and would be separate from the recommended annual contribution to the VHF, VHDA annually has included its interest contribution as part of the $20 million it allocates to the VHF each year. In 1999, this resulted in an effective reduction of VHDA's net contribution to the VHF from $20 million to about $12 million.

The JLARC staff review of VHDA found that there is unmet need for housing for the low and very low income populations that the VHF targets, and that there is a strong demand for VHF loan dollars. VHDA should take these and other relevant factors into consideration and should modify its current process for determining the amount of funds that should be allocated to the VHF. In addition, VHDA should leave all interest generated from VHF investments and mortgages in the VHF. VHDA should contribute the maximum amount feasible annually to the VHF without having an undue adverse impact on VHDA's financial strength.

Executive Salaries Are Comparatively High

VHDA's executive salaries are based almost exclusively on a comparison to private financial market salaries. As a result, while VHDA staff salaries overall appear in line with salaries for comparable positions in other agencies, VHDA executive base salaries are high in comparison to other independent agencies in the State, as well as to housing finance authorities in other states. While VHDA compares itself to the private market for purposes of setting salaries, the authority models other benefits provided on the public sector, and executive level staff turnover has been extremely low. However, due to continuing concerns about the competitiveness of salaries at VHDA, the authority recently retained a consultant to evaluate its salary structure. As a result of this consultant's recommendations, VHDA recently has implemented new higher salary ranges for some positions.

VHDA Could Better Fulfill Its Mission and Needs Some Legislative Oversight

While VHDA is financially strong and generally well managed, based on this review of VHDA programs, it is apparent that VHDA could use more of this financial strength to further its mission. Generating revenue and maintaining impressive financial strength appears to be a higher priority for the authority than fulfilling its statutory mission to help provide housing to those otherwise unable to afford it. The authority could use more of its financial strength to lower interest rates in its single-family program, encourage lower rents in its multifamily program, and contribute more to the Virginia Housing Fund. VHDA needs to examine its current philosophy and programs and make modifications that will better balance its emphasis on financial strength with its public mission.

Establishing some additional oversight and accountability to the General Assembly will help to ensure that VHDA is adequately focused on fulfilling its mission. The General Assembly may wish to consider directing the Housing Study Commission to play an oversight role in VHDA's financial analysis and in administration of the Section 8 program.