Sept/Oct 1996

Washington News & Views

From the National Housing Trust

Mark to Market Advances in HUD/VA Measure

By Michael Bodaken

With Section 8 contracts due to expire on over one million assisted and insured housing units during the next decade, Congress has proposed its second demonstration in two years concerning "mark to market" or "portfolio reengineering" of HUD-assisted properties. The program was incorporated in the recently adopted HUD/VA and Independent Agencies Appropriations Bill (HR 3666).

Originally, HUD proposed to eliminate project-based assistance as contracts expire; eliminate regulatory requirements governing the housing; pay mortgage claims triggered by the elimination of subsidy; provide some rehabilitation to a portion of the stock; and provide residents with Section 8 certificates administered by local public housing authorities. That proposal aroused a great deal of uncertainty and galvanized opposition from tenants, nonprofits, local and state housing agencies, and for-profit owners. In marked contrast, the latest legislation, focusing on projects with higher rents (i.e. where the government is paying the owner a Section 8 contract rent higher than the local Fair Market Rent, or FMR), represents a shift toward preservation using project-based Section 8.

The legislation sets limits on HUD's ability to "voucher out" Section 8-assisted and FHA-insured multifamily housing stock; requires the 20-year preservation of the housing; and encourages the sale, where an owner wants to sell, to tenant organizations, community-based nonprofits, and public entities. To enact this FY '97 demonstration, HUD must develop a host of procedures to further spell out how, in the current stingy federal budget climate, to save these properties serving very poor families and the elderly.

Demonstration Purpose and Goals

The demonstration's purpose is to gain information and "test various approaches for restructuring mortgages to reduce the financial risk to the FHA Insurance Fund while reducing the cost of section 8 subsidies." The "Goals" include maintaining habitable housing, minimizing involuntary displacement, encouraging responsible ownership, minimizing adverse income-tax impacts on owners, and minimizing adverse impacts on tenants and communities.

Eligible Demonstration Projects

The demonstration provides a "safe harbor" for properties with rent levels less than or equal to 120 percent of FMR. These properties may receive a one-year renewal of project-based Section 8. Eligible projects are principally those with expiring project-based Section 8 and rent levels exceeding 120 percent of FMR. Owners who have engaged in "adverse financial or managerial actions" won't have their Section 8 contracts renewed.

As a condition of participation, an owner must also agree to accept Section 8 for 20 years, subject to year to year appropriations, and agree to unspecified affordability terms for the same time span.

Demonstration Actions

The demonstration may be carried out by HUD, or HUD may enter into "participation arrangements" with selected "designees" (state housing finance agencies, "housing agencies," or nonprofits). HUD or its designee must either restructure the mortgage, forgive debt, or provide the owner with budget-based rents where operating costs exceed comparable market rents. Among other activities, HUD or its designee may: remove affordability restrictions or limits on income distribution (affordable housing advocates need to monitor this loophole); require owners to apply accumulated residual receipts to assist the restructuring; make grants to cover rehabilitation; make FHA insurance available (not more than 25 percent of the units with expiring contracts may be restructured without FHA insurance); and/or make tenant-based assistance available – with the owner's agreement and after consultation with the project's tenants – for up to 10 percent of the units with underlying mortgages that are restructured. Prior to providing such assistance, HUD must assure that tenants will be able to use the voucher or certificate "successfully."

If the owner disagrees with HUD's offer, HUD (or its designee) has 30 days to provide a "final offer." If that offer isn't acceptable to the owner, the project-based Section 8 contract will be terminated and tenants will receive one-year vouchers.

Transfer of Property

Congress ultimately opted, at the suggestion of the National Housing Trust and others, to instruct HUD to establish procedures for the sale or transfer of projects to tenant organizations, tenant-endorsed community-based nonprofits, or public agency purchasers. Unfortunately, the legislation sets aside no funds for tenant organizing or predevelopment expenses associated with transfer from a present owner to a tenant organization or nonprofit.

The Trust welcomes this attempt to wrestle with the policy and financial challenges of HUD-assisted and -insured housing. Nevertheless, the legislation fails to include two basic elements necessary to assure that this unique housing resource is preserved: (1) funds for Section 8 tenants to organize or to help tenant groups or nonprofit organizations purchase these buildings (which, over the long haul, will help assure the continued affordability of this housing); and (2) details on how tenants and communities will have a voice in the restructuring plans that determine how this housing survives over the next 20 years.

Every quarter, HUD must submit a report to Congress describing the status of projects in the demonstration program. HUD is also required to develop procedures for tenant and community input into the restructuring, including notice and access to relevant information. HUD is to provide these details over the next few months. Stay tuned.

Copyright 1996

Michael Bodaken is president of the National Housing Trust, a national nonprofit organization dedicated to the preservation of existing affordable housing. The Trust provides information and technical assistance to nonprofits, residents, and state and local housing entities throughout the U.S. NHT, 1101 30th St., NW, Ste. 400, Washington, DC 20007; 202-333-8931

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