WASHINGTON -- Housing industry officials yesterday sharply criticized a HUD proposal that would require state and local governments to guarantee a portion of federal loans made to public housing agencies for replacement of dilapidated public housing.

The officials, who testified at a Senate Banking subcommittee hearing, said the Housing and Urban Development Department's proposal is unworkable because many jurisdictions are financially troubled and cannot afford to back the loans.

"The question must be asked: Where would be local resources come from?" Albert Eisenberg, the vice chairman of the Arlington, Va., county board, told the Senate subcommittee on housing and urban affairs. He was representing the National League of Cities, the U.S. Conference of Mayors, and the National Association of Countries.

"Many jurisdictions continue to struggle with the matching requirements of already existing housing programs," Eisenberg said. "Changing the public housing modernization program by throwing some of the financial responsibility to local government is clearly not the answer."

HUD's loan proposal is part of a plan to revamp the department's public housing modernization program, which allocates money to public housing authorities each year for rehabilitation of deteriorated housing. The plan, contained in the HUD housing reauthorization bill, would permit the authorities to use modernization funds to replace the old units with new housing.

The proposal would also permit the authorities to obtain a large, upfront block of money for large-scale replacement activities by borrowing from the federal government. Under an earlier version of the proposal, the authorities would have been permitted to issue tax-exempt bonds backed by the annual modernization allocations.

But top Clinton Administration officials scrapped that plan, and instead devised the federal direct-loan concept. It would permit modernization funds to be used to repay the loans, but would also require state and local governments to back a portion of the loans by putting up collateral for them.

Housing lobbyists said HUD's description of the proposal is vague and does not make clear how the collateralization of the loans would work. But they said they believe states and localities are being required to guarantee the loans, and would be left holding the bag in any year in which Congress failed to appropriate sufficient modernization funds to repay the loans.

Richard C. Grose, the executive director of the Missouri Housing Development Commission, told the subcommittee that the "cost and risk of maintaining the public housing stock is a federal responsibility which should not be passed on to the states and localities." Grose was representing the National Council of State Housing Agencies.

Marina Carrott, the commissioner of the Chicago department of housing, told the subcommittee that the proposal "could be problematic for local governments" because many of them "are financially strapped and do not have the ability to fund additional activities."

Carrott said she was also concerned that in some states, the collateral put up by a local government to back the modernization loans "could be considered as debt and count against the total debt limit allowed" in those states.

Carrott was representing the Association of Local Housing Finance Agencies and the National Community Development Association.

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