Administration Sees a ‘Reinvented’ HUD : Government: Secretary Cisneros says aspects of agency are ‘indefensible.’ He endorses proposal to streamline budget, set up voucher program.

The Department of Housing and Urban Development was born nearly three decades ago out of a simple dream: every American, regardless of economic status, deserved a decent place to live at an affordable price.

The idea was to ensure housing for the urban poor and stimulate the housing industry by making home ownership easier for middle-income families. It amounted to a bold experiment in giving new life to the nation’s troubled cities, particularly after the devastation of the 1960s riots.

Instead, riddled by scandals and bureaucratic incompetence throughout its history, the department has never lived up to that lofty promise. On Monday, the Clinton Administration declared it a failure--but insisted that its mission is far from dead.

The department is one “that deals with some of the most troubling situations in American life--people who are very poor who live in our cities, problems of race and class in America’s most troubled neighborhoods--but it does not follow from that challenge that the department must function as it has,” said Housing Secretary Henry G. Cisneros, speaking with startling candor in a series of news conferences.

“Indeed, many aspects of this department are simply indefensible,” he added. “Change is necessary.”

The Administration is proposing a “reinvented” department that, officials said, would put more power in the hands of cities and states and the poor themselves.

The department’s $30-billion annual budget is to be cut by $800 million over a five-year period to help pay for President Clinton’s middle-class tax package. The cut amounts to only a small part of the $24 billion in total cuts expected to be imposed on five targeted federal agencies. Even so, the change in the way Housing and Urban Development does business would be vast, officials of the department predicted.

“HUD, for its part, has allowed itself to evolve into a bureaucracy far more attentive to process than to results, characterized by slavish loyalty to non-performing programs and insufficient trust in the initiatives of local leaders,” said a department statement. “These are undeniable truths.”

The plan, as outlined by Cisneros and other officials, would consolidate 60 existing public housing programs into eight new performance-based grant programs in 1996 and by 1998 would be compressed into just three programs.

One of those three would modify and greatly expand a system that provides poor people with housing vouchers.

“Individuals would have control over their destiny by having a voucher in their hands,” Cisneros said. “They will be able to make the choice as to whether they want to stay in places that are unacceptable or, in effect, vote with their feet and move to another location. We’re, in effect, changing HUD’s constituency from the bureaucratic entities of housing authorities . . . to the residents.”

Also, states would receive funds in the form of block grants to acquire or rehabilitate housing to be used for low-income residents.

And, finally, the Federal Housing Administration, which provides loans for low- and moderate-income Americans seeking to buy homes, would be transformed into a government-owned corporation, functioning as a private financial institution.

“FHA is a 60-year-old institution too frequently characterized by bureaucracy,” Cisneros said. In its place, the government would create a government-owned corporation that would “function in the marketplace as the modern, competitive insurance company that it is.”

“We’re convinced that this is the right way for the department to carry out its mission,” Cisneros said. “We have a big job before us.”

In Los Angeles, however, local housing officials said they were worried about the possible effect on low-income families.

The city’s Housing Authority, which owns and administers about 10,000 HUD-supported apartments, would do its best to compete for proposed block grants and to operate more like a a private landlord, said executive director Donald J. Smith.

But he said he is skeptical that new rental vouchers would provide enough to replace the $134 million that the agency received in federal subsidies for maintenance, modernization and other uses in 1994.

Smith speculated that federal support for public housing could be cut in half. “We expect them to underestimate the amount of modernization needed” at the projects, he said.

Gary W. Squier, general manager of the Los Angeles Housing Department, said he fears that people with special needs, such as the elderly, homeless and those afflicted with AIDS, might suffer if programs for them are merged into block grants. He also said that Los Angeles might lose a great deal of assistance if the state becomes the administrator and feels compelled to spread the money to other communities.

“The impact is unknown at this point but it’s going to be substantial,” said Squier, whose department this year channeled $95.4 million in HUD funds, mainly for low-interest loans for homeowners and developers.

Can the Clinton Administration’s proposals ultimately rescue the department? Some former officials think so.

“The first big grin I had was when I heard they were going to turn it over to the people closest to the problems,” said James T. Lynn, housing secretary in 1973-’74 during the Richard Nixon Administration. “That was what we tried to say, over and over.”

Times staff writer Larry Gordon contributed to this story from Los Angeles.