As the new Congress contemplates a major overhaul of the costly and controversialhousing
programs managed by the Department of Housing and Urban Development (HUD),all parties
to this unfolding process should recognize the extent to which existingHUD policy and the
three-decade legacy of failed reforms have been driven by the business andbureaucratic
interests that benefit directly from HUD's $28 billion annual budget. AlthoughHUD Secretary
Henry Cisneros's proposals supposedly break with the past, they may do littleto reduce
taxpayer handouts to the housing industry. Some previous HUD Secretarieshave pressed hard
to end special- interest programs for the industry, only to be thwartedby the congressional
leadership. But the new Congress, elected with a mandate for real reform,has the opportunity
to free HUD from its industry shackles and forge a new housing policy bettersuited to the needs
of the poor and the interests of the taxpayer.

The essential tension within U.S. housing policy is between the more traditionalapproach,
called project-based assistance, where federal assistance is linked to aspecific building and
assistance to the poor first goes through developers and local housing authorities,and the
newer approach, called household-based assistance, which goes directly tothe tenants so that
they can afford better housing. In project-based assistance, the government,operating through
a local public housing authority or a non-profit organization, providesa specific housing unit to
an eligible household. The unit is usually part of a larger project thatwas constructed or
renovated with federal financial assistance: grants, low-cost loans, operatingsubsidies, or tax
breaks to investors. Examples of project-based assistance are public housing,Section 8 new
construction and substantial rehabilitation programs, and the Section 236program. Although
new commitments to these programs have been reduced since the reforms enactedunder the
Reagan Administration, more than 70 percent of HUD beneficiaries are stillin such programs.

Numerous studies over the past three decades indicate why reformers encounterintense
opposition from housing industry lobbyists whenever an attempt is made toshift money from
project-based programs to household- based assistance. These studies concludethat
project-based assistance is about twice as expensive as household-basedassistance per
household served. In addition to their high costs, project-based programsare less desirable
because they segregate and concentrate the poor in specific inner- cityneighborhoods, typically
with high crime rates and few job opportunities. Despite their sometimesstaggering costs and
enormous social problems, project-based programs are strongly supportedby the housing
industry and such organizations as the National Association of Housing andRedevelopment
Officials. The reason: these programs channel money directly to developers,rental
organizations, and housing authorities.

In contrast, HUD's household-based programs provide eligible householdswith a certificate or
voucher that can be applied to some or all of the rent fo the apartmentof their choice. Such
apartments must meet certain minimum quality standards and are availablethrough private
landlords. Household- based programs are substantially less costly per householdserved. One
reason for this is that landlords compete for subsidized tenants just asthey must for other
tenants -- by offering the best price. In project- based programs they mustlobby successfully for
inclusion in the program, and often favoritism rather than need is the decidingfactor.
Household- based programs also provide households with a much wider choiceof
neighborhoods and allow them to be integrated into the community at large.

Absent the intense industry pressure to maintain various forms of project-based assistance,
HUD probably long ago would have shifted the bulk of its resources and beneficiariestoward a
voucher and certificate-based program to reduce costs, improve the qualityof life for tenants,
and increase the number of households that could be assisted with the samemoney. But because
of industry pressure and pressure from lawmakers heavily supported by theindustry, HUD
continues to operate grossly inefficient project-based programs. SecretaryCisneros's
Reinvention Blueprint gives the appearance of moving toward more sensiblepolicies. But he,
too, is subject to the inexorable pull of special interests and flinchesfrom proposing a complete
reform, instead sitting on the fence.

Cisneros seems torn. Recognizing the manifest advantages of vouchers, theSecretary argues
correctly in his Blueprint that project-based aid is a costly and wastefulway to help the poor.
The Blueprint calls for an orderly withdrawal of federal support for publichousing. It also
proposes converting operating subsidies for public housing agencies to rentalassistance for
residents, who could stay where they were or move to apartments in the privaterental market.
Had this been the extent of the reinvention effort, Secretary Cisneros wouldbe remembered for
his major reform of HUD. Unfortunately, the remainder of the Blueprint islittle more than a
repackaging of the costly project-based programs and financing concessionsthat enrich the
housing industry.

For developers, builders, and non-profit organizations, Cisneros calls fora new Affordable
Housing Fund to provide federal financial assistance for the productionand rehabilitation of
housing. And for those in the industry who make their living in sales andfinance, there is to be a
new, supposedly more entrepreneurial Federal Housing Administration (FHA)"to make home
ownership affordable for more first time homebuyers, residents of inner-cities and other groups
and communities underserved by the private market." While the goalsounds lofty, similar
efforts to extend taxpayer dollars and credits to not-yet-ready-to-own householdsin the past
threw the once- venerable FHA into technical insolvency when it lost morethan $4 billion in one
year.

Indicative of the sorts of costly federal housing programs that membersof the housing industry
advocate, and their friends in Congress provide, are policies recently presentedin a major
housing trade association's campaign literature on behalf of one congressmanrunning for
reelection. According to the association, this congressman deserved reelectionin 1994 because he
favors reversing the tax code's passive loss restrictions on real estate,continuing tax-exempt
Mortgage Revenue Bonds, retaining tax credits for investors in low-incomehousing, and
increasing FHA loan limits and loan- to-value ratios. Each of these measuresdirectly benefits
Americans whose incomes are high enough to need tax shelters or who canafford higher-cost
homes.

Such industry-supported housing assistance programs provide direct benefitslargely to well-to-
do Americans in the hope that their actions will lead to indirect benefitsfor the poor. Such
trickle-down welfare programs are highly inefficient and wasteful becauseonly a fraction of the
taxpayers' money actually goes to the poor. The remainder goes to thosewho purport to help
the poor -- such as investors seeking tax shelters and developers.

The key to an effective and efficient housing program is to reduce the "wedge"driven between
what the program costs the taxpayer and what the intended beneficiary ultimatelyreceives. The
project-based programs favored by the housing industry lead to inefficientpolicies in which the
costs to taxpayers are substantially higher than the benefits ultimatelyreceived by assisted
households. It is time for Congress to enact real reform at HUD by endingprograms that make
the Department little more than a lottery for some real estate developers,builders, and agents.

Ronald D. Utt is a Visiting Fellow at The Heritage Foundation

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