Report to Congressional Committees

United States General Accounting Office

GAO

July 2001 MULTIFAMILY

HOUSING

Issues Related to

Mark-to-Market

Program

Reauthorization

GAO-01-800
Page i GAO-01-800 Multifamily Housing

Letter 1

Results in Brief 2

Background 4

Completed Restructurings Have Resulted in Savings 8

Factors Cited as Slowing Mark-to-Market Implementation and

Actions OMHAR Has Taken to Address Them 15

Expiration of the Program Would Increase the Likelihood of

Section 8 Defaults, and Loss of Dedicated Office to Administer

the Program Could Cause Additional Delays 22

Program Stakeholders Identified a Number of Actions That May

Improve Program Implementation 27

Conclusions 30

Matters for Congressional Consideration 31

Recommendation for Executive Action 32

Agency Comments and Our Evaluation 32

Appendix I Overview of the Mark-to-Market Process 35

Appendix II Actions Suggested By Program Stakeholders to

Improve Mark-to-Market Implementation 38

Appendix III Comments From the Department of Housing and

Urban Development 41

Appendix IV Objectives, Scope, and Methodology 44

Appendix V Panel Participants 47

Figures

Figure 1: Status of Rent Restructurings in the Mark-to-Market

Pipeline as of June 15, 2001 9

Figure 2: Status of Full Mortgage Restructurings in the Mark-toMarket Pipeline as of June 15, 2001 10

Contents
Page ii GAO-01-800 Multifamily Housing

Figure 3: Average Number of Days to Process Full Mortgage

Restructurings and Rent Restructurings 11

Figure 4: Estimated Mark-to-Market Program Savings by Type of

Completed Restructuring Over 20 years (Net Present

Value) 13

Figure 5: Timeline of Mark-to-Market Implementation 16

Figure 6: Cumulative Number of Completed Full Mortgage

Restructurings and Rent Restructurings by Quarter 21

Figure 7: Estimated Number of Above-Market Rent Properties with

Section 8 Contracts Expiring in Fiscal Year 2002 and

Beyond 23

Abbreviations

FHA Federal Housing Administration

HUD Department of Housing and Urban Development

OMHAR Office of Multifamily Housing Assistance Restructuring
Page 1 GAO-01-800 Multifamily Housing

July 11, 2001

Congressional Committees

The Office of Multifamily Housing Assistance Restructuring (OMHAR) was

established within the Department of Housing and Urban Development

(HUD) by the Multifamily Assisted Housing Reform and Affordability Act

of 1997.1

 The Office was created to administer the “mark-to-market”

program, also authorized by the act. The mark-to-market program is aimed

at preserving the affordability of low-income rental housing, while

reducing the cost of rental assistance subsidies provided to low-income

households. More specifically, the program provides the framework for

HUD to restructure insured Section 8 multifamily housing projects by

lowering their rents to market levels when their current Section 8

contracts expire and reducing mortgage debt if such action is necessary

for the properties to continue to have a positive cash flow.2

 Without

restructuring, rents for many of the 8,500 properties in HUD’s insured

Section 8 multifamily housing portfolio substantially exceed market levels,

resulting in higher federal subsidies under the Section 8 program. HUD

received $4.2 billion in budget authority for Section 8 project-based

subsidies in fiscal year 1999 and $4.1 billion in fiscal year 2000.3

Legislative authorization for both the mark-to-market program and

OMHAR is scheduled to terminate on September 30, 2001. At that time,

HUD would still be required to renew Section 8 contract rents at market

levels, but the tools established by the act for restructuring mortgages

would no longer be available. OMHAR’s authority would also terminate

 1

Referred to in this report as the act. The act was enacted as title V of the Departments of

Veterans Affairs and Housing and Urban Development, and Independent Agencies

Appropriations Act, 1998 (P.L. 105-65, Oct. 27, 1997).

2

Insured multifamily housing projects are those with mortgages insured by the Federal

Housing Administration (FHA), an office within HUD. FHA mortgage insurance protects

lenders from financial losses stemming from borrowers’ defaults on mortgage loans. In

addition to mortgage insurance, many of these properties receive some form of subsidy

from HUD. For instance, HUD’s Section 8 program provides rental subsidies for lowincome families. These subsidies are linked to either the apartment (project-based) or the

resident (tenant-based). The mark-to-market program applies to multifamily housing

properties with FHA mortgage insurance and project-based Section 8 assistance.

3

Budget authority is the authority provided by law to enter into financial obligations that

will result in immediate or future outlays involving federal funds.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-800 Multifamily Housing

and any outstanding mark-to-market responsibilities would be transferred

to HUD’s Secretary.

The act requires us to review OMHAR’s implementation of the mark-tomarket program within 18 months of the effective date of final regulations,

which were issued on March 22, 2000. As agreed with the responsible

subcommittees of the Senate Committee on Banking, Housing, and Urban

Affairs, the House Committee on Financial Services, and the House and

Senate Appropriations Committees, this report focuses on (1) the status of

properties in the mark-to-market program; (2) factors that have affected

the pace of program implementation and the actions OMHAR has taken to

address these factors; (3) the advantages and disadvantages to the federal

government of extending the program past its statutory termination date

of September 30, 2001, and of transferring program responsibilities to HUD

or keeping them with OMHAR; and (4) possible actions for strengthening

program implementation.

To meet these objectives, among other things, we analyzed data relating to

OMHAR’s implementation of the program and interviewed representatives

from a variety of program stakeholders, including 15 entities that OMHAR

has contracted with to carry out property restructurings (referred to as

participating administrative entities). We also convened an expert panel

composed of a cross section of program stakeholders representing

OMHAR, HUD, participating administrative entities, lending institutions,

tenant associations, Section 8 property owners, and nonprofit

organizations to discuss the issues that we agreed to address. The 10 panel

members met for 1 day to discuss questions that we provided to them in

advance of the meeting. We conducted our review from July 2000 to May

2001 in accordance with generally accepted government auditing

standards. See appendix IV for a more detailed discussion of our scope

and methodology.

As of June 15, 2001, 1,558 properties had entered OMHAR’s mark-tomarket program. About 62 percent of these properties are to have their

mortgages restructured before their rents are reduced to market levels,

and the other 38 percent will have their rents reduced to market without

the property receiving a mortgage restructuring. OMHAR has completed

actions for 14 percent of the properties that require a mortgage

restructuring and 85 percent of the properties that only require rent

reductions. OMHAR estimated that the federal government would realize

about $563 million in savings over a 20-year period from the restructurings

that it has completed thus far. However, for some properties that have not

Results in Brief
Page 3 GAO-01-800 Multifamily Housing

successfully completed the restructuring process, the requirement to

reduce rents to market has decreased the properties’ cash flows, thus,

increasing the likelihood that the properties will develop physical and

financial problems.

Various factors have affected the pace at which the program has been

implemented. It took almost 2 years to establish the program’s

infrastructure and for OMHAR to begin assigning a large volume of

properties to the entities that would carry out restructuring actions. In

addition, some program stakeholders believed that other factors have

slowed the restructuring process. These factors include OMHAR’s process

for reviewing and approving restructuring transactions, the detailed

requirements contained in the program’s operating procedures guide, and

the unwillingness of many Section 8 property owners to participate in the

program. OMHAR has taken action to address these factors by eliminating

some elements of its review, streamlining the requirements in the

operating procedures guide, and developing incentives to encourage

owner participation in the program. Most members of our expert panel

believed that these actions have been positive and that the pace of the

program has improved. In addition, most members of our expert panel

believed that OMHAR’s progress in implementing the program has been

reasonable given the program’s complexity and the number of tasks that

needed to be accomplished.

Extending the mark-to-market program past its scheduled termination

date would, in our view, be more advantageous to the federal government

than ending the program. OMHAR estimated that over 1,300 properties

with rents above market have Section 8 contracts that would not expire

until after the program is scheduled to sunset. If rents for these properties

must be marked down to market levels without provisions for mortgage

restructuring, it is likely that many of the properties would default on their

mortgages, resulting in large claims against the Federal Housing

Administration insurance fund. For this and other reasons, expert

panelists were unanimous in their opinion that the program should be

extended beyond September 30, 2001.

Most members of our expert panel were concerned that transferring

responsibility for administering the program from OMHAR to other parts

of HUD without dedicated mark-to-market staff could disrupt program

momentum and leave HUD without the capacity and expertise it needs to

administer the program effectively. Accordingly, 9 of the 10 expert

panelists favored extending OMHAR’s authority for administering the

program. The other panelist favored moving program administration to
Page 4 GAO-01-800 Multifamily Housing

HUD’s Office of Housing because he believed such action could streamline

program decisionmaking. We share the concerns expressed by most panel

members and agree with them that administration of the mark-to-market

program should continue to reside in an office dedicated to the program’s

implementation. Likewise, we believe that the office should have the

resources and expertise needed to administer the program and to oversee

restructuring transactions. However, we believe that it would be workable

to place the office under HUD’s Office of Housing so long as such action

does not disrupt program momentum, diminish HUD’s capacity for

administering the program, or weaken program oversight.

While some program stakeholders, including members of our expert panel,

were concerned that wholesale changes to the mark-to-market program

could disrupt the momentum that has been recently achieved, the

stakeholders identified a number of actions that they believed could

improve program implementation. These actions included having HUD

provide rehabilitation grants that could reduce the number of

restructuring transactions that must be discontinued because there is

insufficient funding available to address property rehabilitation needs;

taking actions to improve owner and tenant participation in the program;

and ensuring that all properties with above-market rents are sent to

OMHAR for restructuring. While these actions could facilitate OMHAR’s

ability to complete restructurings, some of them could also increase

program costs.

This report includes matters for congressional consideration on the

extension of Subtitle A of the Multifamily Assisted Housing Reform and

Affordability Act beyond September 30, 2001, to permit continued

mortgage restructuring of Section 8 properties with above-market rents,

and on the extension of legislative requirements placing the mark-tomarket program under an office within HUD that has sole responsibility

and dedicated staff to administer the program. The report also makes a

recommendation to the Secretary of HUD designed to ensure that

appropriate actions are taken to address problems that may occur at

properties that have not successfully completed the restructuring process.

Over 800,000 units in approximately 8,500 multifamily projects have been

financed with mortgages insured by the Federal Housing Administration

(FHA) and supported by project-based Section 8 housing assistance

payments contracts. The residents of housing units that receive projectbased assistance are required to pay a portion of their income for rent

(generally 30 percent), while HUD pays the balance.

Background
Page 5 GAO-01-800 Multifamily Housing

Many of these properties’ rents are higher than the market rents of

comparable unassisted properties. OMHAR has estimated that 48 percent

of the projects with Section 8 contracts expiring between October 1998

and September 2001 had above-market rents, while 66 percent of the

projects expiring after that time will have above-market rents. A main

cause of the higher rents is the fact that the government originally

supported the development of these properties by establishing rents above

market levels and raising the rents regularly through the application of set

formulas that, according to HUD, tended to be generous to encourage the

production of new affordable housing. Because HUD makes up the

difference between residents’ contributions and the project rents, these

higher rent levels increase the costs of the Section 8 program to the

federal government. HUD estimated that, if no action was taken, by 2007

the annual cost of renewing project-based Section 8 contracts would rise

to approximately $7 billion, or about one-third of HUD’s total budget. On

the other hand, if the Section 8 assistance were simply reduced or

eliminated, many of the FHA-insured properties could lack sufficient

revenues to cover operating expenses and payments on their existing

mortgages. As a result, the owners of many properties would likely default

on their mortgage payments, resulting in substantial claims to FHA and

possibly leaving tenants without adequate affordable housing.4

In October 1997, to address the increasing costs to the federal government

of insured Section 8 housing, the Congress created the mark-to-market

program for properties with above-market rents and project-based Section

8 contracts expiring on or after October 1998.5

 The program’s goals include

preserving the affordability and the availability of low-income rental

housing while reducing the long-term costs of Section 8 project-based

assistance, resolving the problems affecting financially and physically

troubled projects, and correcting management and ownership deficiencies.

The restructuring tools provided in the act include (1) reducing property

debt levels by approving partial or full payments of FHA insurance claims

without an owner default, (2) approving exception rents in excess of local

market rents in order to preserve affordable housing in specific markets,

(3) exempting FHA mortgage insurance credit subsidy limitations and

limitations on risk sharing commitments, and (4) using public and

 4

When a default occurs on an insured loan, a lender may “assign” the mortgage to HUD and

receive payment from FHA for an insurance claim.

5

Subtitle A of the act contains the FHA-Insured Multifamily Housing Mortgage and Housing

Assistance Restructuring Program.
Page 6 GAO-01-800 Multifamily Housing

nonpublic participating administrative entities to complete restructuring

actions. The October 1997 act also established OMHAR within HUD to

administer the program. In addition, OMHAR was delegated certain

authorities of HUD’s Office of Housing related to administering the

program. However, Housing retained Section 8 contract administration

responsibilities, so OMHAR and Housing must coordinate their actions. As

required by the act, OMHAR is under the management of a director who

reports directly to the Secretary of HUD. OMHAR’s Director was

nominated by the President on September 29, 1998, and confirmed by the

Senate on October 21, 1998.6

The mark-to-market process begins when a property’s current Section 8

contract is about to expire. Approximately 4 months prior to contract

expiration, if the property owner wishes to continue in the Section 8

program, the owner is required to submit to the Office of Housing’s local

field offices a request for contract renewal and a rent comparability study.7

Rent comparability studies are prepared by state-certified appraisers to

compare the unit rents for the subject property to the fair market rents

charged for comparable units that are not receiving Section 8 subsidies.

The rent comparability study is sent to the local HUD offices for review to

determine if the property’s current rents are at, above, or below market

rates. If rents are at or below market rates, HUD field office staff will make

adjustments where necessary and execute a new Section 8 contract. If

rents are above market, HUD staff are to renew the current contract (at

above-market rents) for up to 1 year and forward the owner’s submission

to OMHAR for a mark-to-market restructuring.8

 Upon receipt from HUD

field offices, OMHAR assigns properties to participating administrative

 6

We have issued two previous reports discussing OMHAR’s efforts to implement the markto-market program: Multifamily Housing: Progress Made in Establishing HUD’s Office

of Multifamily Housing Assistance Restructuring (GAO/RCED-99-5, Oct. 27, 1998);

Multifamily Housing: HUD’s Restructuring Office’s Actions to Implement the Mark-toMarket Program (GAO/RCED-00-21, Jan. 20, 2000)

7

For cases in which the owner knows that the contract rents exceed comparable market

rents, the owner can choose to have the contract referred to OMHAR for a mortgage

restructuring and/or a reduction of the rents to market without completing a rent

comparability study.

8

According to 24 CFR 401.600, owners may receive a Section 8 contract extension at

current rents for the shortest reasonable period needed for the participating administrative

entities to complete a restructuring plan for the project. Any extension of a contract

beyond 1 year pending closing on the restructuring plan would be at comparable market

rents or exception rents. Extension of the contract rents at the current above market level

may only be done with a waiver.
Page 7 GAO-01-800 Multifamily Housing

entities to carry out restructurings under the mark-to-market program on

behalf of the federal government. As of June 15, 2001, OMHAR had

contracts with 33 participating administrative entities, including 24 public

agencies (state and local housing finance agencies) and 9 nonpublic

entities.9

 Among other things, the responsibilities of the participating

administrative entities include determining appropriate rent levels,

restructuring mortgage loans, underwriting new or modified loans, and

managing the closing process. OMHAR developed an Internet-based

tracking system to monitor the actions taken by the participating

administrative entities in carrying out mark-to-market activities.

There are two types of restructurings. Full mortgage restructurings

generally involve resetting rents to market levels and reducing mortgage

debt to permit a positive cash flow. For this type of restructuring, the

participating administrative entities develop restructuring plans that

address both rents and debt and submit the plans to OMHAR for review

and approval. The restructuring plans require the owner to maintain

restrictions aimed at preserving the property as affordable housing for at

least 30 years, and Section 8 contracts are typically being renewed for 20

years. For the second type of restructurings, which OMHAR refers to as

rent restructurings, the participating administrative entities also develop

restructuring plans that must be approved by OMHAR; but, the plans only

reduce the rents, not the mortgage debt, since the property should be

physically and financially sound enough to continue with reduced rental

income. There are no affordability and use restrictions on properties that

receive a rent restructuring, and the Section 8 contracts are usually

renewed for 5 years.10 Appendix I describes the mark-to-market process in

more detail.

The participating administrative entities are required to use their best

efforts to seek the cooperation of Section 8 property owners in the

development of the restructuring plan. Owners must agree with the final

plan and, among other requirements, contribute 20 percent of the total

cost of the property’s rehabilitation. Participating administrative entities

are also required to ensure that tenants affected by the restructuring of a

 9

OMHAR originally had contracts with 42 public participating administrative entities. Of

those, 7 entities withdrew from the program, and 11 entities’ contracts were not renewed.

10If a property is potentially troubled, HUD will renew the Section 8 contract for only 1

year.
Page 8 GAO-01-800 Multifamily Housing

project are kept informed and given the opportunity to provide comments

at crucial stages of the process.

As of June 15, 2001, approximately 3 1⁄2 years after the mark-to-market

legislation was enacted, OMHAR had completed restructurings for about

41 percent of the 1,558 properties that had entered the mark-to-market

program. While OMHAR had completed restructurings for only 138 of the

properties requiring full mortgage restructuring, it had completed

restructurings for 500 of the properties requiring only a reduction in rents.

OMHAR estimated that the federal government would realize about

$563 million in savings over a 20-year period from these completed

restructurings. However, the legislative requirement that rents be reduced

to market has increased the risk that some properties will experience

physical and financial problems.

As of June 15, 2001, 1,558 properties had entered the mark-to-market

program. OMHAR had assigned 1,491 of these properties to the

participating administrative entities for restructuring. OMHAR estimated

that 62 percent of the portfolio would ultimately receive full mortgage

restructurings and the remaining 38 percent would receive rent

restructurings only. While OMHAR and its participating administrative

entities have made substantial progress in completing rent restructurings,

they have completed fewer full mortgage restructurings. As shown in

figure 1, OMHAR has completed rent restructurings for 500 properties, or

86 percent of all assigned and working properties in this category.

Completed

Restructurings Have

Resulted in Savings

Restructuring Actions

Have Been Completed for

41 Percent of OMHAR’s

Portfolio
Page 9 GAO-01-800 Multifamily Housing

Figure 1: Status of Rent Restructurings in the Mark-to-Market Pipeline as of June

15, 2001

Source: GAO analysis of OMHAR’s database.

The 500 completed rent restructurings include 75 transactions that

OMHAR has closed but that did not result in Section 8 savings. Most of

these cases involve properties for which OMHAR determined that property

rents were already below market. In addition, as discussed in the next

section, the 500 rent restructurings include transactions for 75 properties

that did not meet OMHAR’s underwriting criteria to be processed as rent

restructurings.

As shown in figure 2, OMHAR has been less successful in completing full

mortgage restructurings. As of June 15, 2001, OMHAR had completed

restructurings for 138 properties, or 15 percent of all assigned and working

properties of this type.11 However, as of June 15, 2001, OMHAR had

approved restructuring plans for 562 properties (including the 138

completed restructurings), or about 62 percent of the properties accepted

by participating administrative entities for restructuring.

 11OMHAR considers the participating administrative entity’s “plan approval date” as the

completion of the rent restructuring process while the “closing” date marks the completion

for full mortgage restructurings.
Page 10 GAO-01-800 Multifamily Housing

Figure 2: Status of Full Mortgage Restructurings in the Mark-to-Market Pipeline as

of June 15, 2001

Source: GAO analysis of OMHAR’s database.

The number of closed full mortgage restructurings does not include 78

restructurings for which OMHAR reduced property rents without

restructuring the properties’ mortgages. These cases include properties

whose owners have refused to execute a restructuring commitment, have

been uncooperative, or have been barred from participating in the markto-market program. They also include properties for which OMHAR has

determined that a restructuring plan is financially not viable because of

the property’s poor physical condition.

OMHAR has made less progress in completing full mortgage restructurings

for various reasons. Typically, mortgage restructurings are more complex

and involve more steps to complete than rent restructurings. Also, as

discussed later in the report, many property owners have been reluctant to

agree to full mortgage restructurings. Average processing times have been

substantially longer for mortgage restructurings than rent restructurings,

as shown in figure 3. For example, the figure shows that participating

administrative entities required an average of 199 days to complete a rent

restructuring while they required an average of 432 days to complete a full

mortgage restructuring. The figure also shows that it has not only taken

longer, on average, for participating administrative entities to submit
Page 11 GAO-01-800 Multifamily Housing

mortgage restructuring plans to OMHAR (312 days versus 164 days), it has

taken OMHAR substantially longer to complete the mortgage

restructurings after the plans have been submitted (120 days versus 35

days).

Figure 3: Average Number of Days to Process Full Mortgage Restructurings and

Rent Restructurings

Source: GAO analysis of OMHAR’s database.
Page 12 GAO-01-800 Multifamily Housing

OMHAR estimated that restructurings completed as of June 15, 2001,

would generate approximately $563 million in savings (net present value)

over the next 20 years. These savings will result primarily from reductions

in the government’s Section 8 rental assistance payments after property

rents have been lowered to market levels. The savings estimate takes into

account costs that the government has incurred as a result of mortgage

write-downs, but it does not include OMHAR’s or participating

administrative entities’ administrative costs, which have totaled $53.9

million as of May 2001.12 Furthermore, the savings estimate assumes that

properties receiving rent restructurings will remain in the Section 8

program for 20 years, although those properties only receive up to 5-year

Section 8 contracts. The estimate includes 641 completed closings

covering over 53,000 assisted units. As shown in figure 4, 425 rent

restructurings account for $376 million in savings (an average of about

$885,000 per property) and 216 full mortgage restructurings account for

the remaining $187 million (about $865,000 per property).13

 12OMHAR determined the restructuring savings estimate by taking the difference between

pre and post mark-to-market rent levels on a property-level basis and then calculating

annual savings for Section 8 units within the property. OMHAR then projected gross

savings over a 20-year period for all restructured properties. For mortgage restructurings,

OMHAR subtracted the cost of claims against FHA’s insurance fund but added in expected

repayments by owners of the mortgage write-downs. Next, the Office computed the net

present value of the aggregate total savings amount using a 6.11 percent discount rate.

OMHAR’s savings calculation does not consider the associated administrative costs of

restructuring.

13The savings calculations for rent restructurings exclude 75 properties (out of the 500

completed rent restructurings) that did not result in Section 8 savings. The savings

calculations for mortgage restructurings include savings resulting from the 138

restructurings that OMHAR has closed and 78 restructurings for which OMHAR reduced

property rents but did not complete a mortgage restructuring.

The Federal Government

Has Realized Cost Savings

as a Result of the Program,

but Risk of Physical and

Financial Problems Has

Increased for Some

Properties
Page 13 GAO-01-800 Multifamily Housing

Figure 4: Estimated Mark-to-Market Program Savings by Type of Completed

Restructuring Over 20 years (Net Present Value)

Source: GAO analysis of OMHAR’s database.

While the mark-to-market program has resulted in Section 8 savings, the

legislative requirement that rents be reduced to market has increased the

risk of physical and financial problems for some properties. As discussed

earlier, 75 of the properties for which OMHAR has completed a rent

restructuring did not meet OMHAR’s underwriting criteria for such

transactions. More specifically, OMHAR’s analysis showed that the

properties’ income may not be sufficient to cover mortgage payments,

operating expenses, and ongoing repair needs after the properties’ rents

have been reduced to market. According to OMHAR officials, while many

of these properties should have been processed as full mortgage
Page 14 GAO-01-800 Multifamily Housing

restructurings, OMHAR lacked the legal authority to compel property

owners to accept such restructurings.14 Recognizing that, for such cases,

there is an increased risk of problems affecting the property’s physical and

financial condition and its residents, in a memorandum dated August 15,

2000, HUD’s Office of Housing established additional requirements for

HUD field offices to follow in monitoring these properties. In general, the

requirements call for the field offices to place the properties on a “watch

list.” HUD field offices classify such properties into one of three risk

categories (normal, potentially troubled, or troubled) depending on

various factors, including their physical and financial condition. The

higher risk properties are subject to increased monitoring. As of June 15,

2001, field offices had classified 15 of the 75 properties on the watch list as

troubled and 28 more as potentially troubled.

In addition, as noted earlier, for 78 properties that OMHAR has processed

as mortgage restructurings, OMHAR reduced the properties’ rents to

market without completing the restructuring of the properties’ mortgages.

OMHAR officials acknowledged that these properties also have an

increased risk of problems related to their physical and financial condition

that may affect the properties’ residents, and that they also should be

included on the Office of Housing’s watch list. However, the Office of

Housing’s August 15, 2000, memorandum does not specifically cover such

properties. OMHAR’s Director told us in May 2001 that after we brought

this issue to his attention, he met with Office of Housing officials to

discuss the matter. They agreed that the August 15 memorandum should

be revised to cover properties for which OMHAR has reduced rents to

market without a mortgage restructuring being completed. He told us that

he had also emphasized the need for such properties to be carefully

monitored in light of their increased risk for problems.

 14While OMHAR cannot compel an owner to accept full mortgage restructuring, the Office

is not obligated to renew a property’s Section 8 contract. According to section 524 of the

act, HUD is not required to renew a property’s contract if the property does not have an

approved restructuring plan that the Secretary has determined is necessary.
Page 15 GAO-01-800 Multifamily Housing

In the almost 2 years from the time the mark-to-market program was

created in 1997 until OMHAR was in a position to begin assigning a large

volume of properties for restructuring in July 1999, the Office completed

tasks necessary to implement the program. In addition to the time OMHAR

spent establishing program requirements, various factors, such as

OMHAR’s detailed review of the restructuring plans and uncooperative

property owners, may have slowed the implementation of the program.

Recognizing that some factors were slowing the completion of

restructuring transactions, OMHAR took action to address those factors.

Many program stakeholders we contacted believed the program has

gained momentum and that the pace at which restructurings were being

completed had improved over time. Furthermore, while implementation of

the mark-to-market program has taken longer than OMHAR originally

anticipated, most experts participating in our panel believed that the

program has proceeded at least as quickly as could be reasonably

expected.

While the act required the mark-to-market program to be implemented for

properties with Section 8 contracts expiring after October 1, 1998, the

Office did not assign a large volume of properties to the participating

administrative entities for restructuring until July 1999. Prior to assigning

properties to be restructured, OMHAR established the program’s

infrastructure by completing tasks such as soliciting and selecting the

participating administrative entities, entering into contractual agreements

with those entities, developing the program’s operating procedures guide,

and issuing regulations. While these tasks were completed behind

OMHAR’s original schedule, Office officials believed the delays were due,

in part, to the normal challenges associated with starting a new

organization. See figure 5 for a timeline of when key implementation tasks

were completed. For example, the timeline shows that OMHAR’s Director

was not appointed until a year after the Congress established OMHAR, and

the operating procedures guide was not issued until 18 months after the

act’s passage.

Factors Cited as

Slowing Mark-toMarket

Implementation and

Actions OMHAR Has

Taken to Address

Them

Implementing the Mark-toMarket Program Has Been

a Lengthy Process, With

Various Factors Cited as

Slowing Implementation
Page 16 GAO-01-800 Multifamily Housing

Figure 5: Timeline of Mark-to-Market Implementation

Source: GAO analysis of HUD data.

Program stakeholders identified various factors that may have slowed the

implementation of the program once program requirements had been

established. For example, one factor cited by some of the participating

administrative entities we contacted was the extensive requirements

contained in the program’s operating procedures guide. Of the 15

participating administrative entities we contacted, 7 said the program’s

guide has been a hindrance to completing the restructurings in a timely

manner. One member of our expert panel noted that the value the

participating administrative entities should be adding to the program is

their experience, judgment, and ability, and that they should not be forced

to complete the restructurings in the manner OMHAR prescribed in the
Page 17 GAO-01-800 Multifamily Housing

guide. However, the remaining eight participating administrative entities

we contacted said the operating procedures guide has not slowed the

restructuring process and was necessary to ensure consistency in the

program. Furthermore, 7 of our 10 expert panelists believed the operating

procedures guide has somewhat or greatly accelerated the processing of

restructuring transactions. Another factor cited by a number of the

participating administrative entities as slowing implementation was

OMHAR’s detailed review of the restructuring plans the entities submitted.

According to the entities, the level of review and oversight provided by the

OMHAR staff was excessive and often did not result in improvements to

the restructuring plans.

A third factor cited by the participating administrative entities and

members of our expert panel as slowing the program’s implementation

was the unwillingness of many Section 8 property owners to cooperate in

the restructuring process. Ten out of 15 participating administrative

entities we talked to said uncooperative owners slowed the process. For

example, one participating administrative entity told us that when owners

canceled meetings or did not return required documents to the entity in a

timely manner, the restructuring process was delayed. In addition, this

entity said that many property owners have been reluctant to agree to full

mortgage restructurings because of the cash they must contribute to

address the property’s rehabilitation needs and the long-term use

agreement that accompanies a full mortgage restructuring. Nine of our 10

expert panelists also believed uncooperative owners have had a moderate

or great effect on slowing the processing of restructuring transactions.

One panelist said there was a fundamental lack of incentive for owners to

participate in the program, which made the restructurings very difficult to

complete.

A factor cited by OMHAR as slowing implementation was the lack of

timely and quality submittals of restructuring plans by some participating

administrative entities to OMHAR for approval. According to OMHAR

officials, the skills, expertise and seniority at both a staffing and

organizational level were considerably lower than anticipated for a

number of the participating administrative entities, and the capacity of

some entities proved to be significantly less than indicated in their original

proposals. OMHAR also noted that some participating administrative

entities did not have enough staff dedicated to the restructuring process

and that the staff assigned to work on mark-to-market had a number of

competing priorities. In addition to skill and capacity issues, OMHAR

officials said processing delays resulted from the fact that OMHAR initially

assigned a large volume of properties to the entities for restructuring.
Page 18 GAO-01-800 Multifamily Housing

More specifically, OMHAR said that during the time-consuming process of

OMHAR’s contract negotiations with some public participating

administrative entities, a significant number of properties entered into the

mark-to-market program. Consequently, the Office had a large volume of

properties to assign to the entities at one time, which resulted in

processing delays and the need for Section 8 contract extensions at abovemarket rents for a large number of the properties. As of March 31, 2001,

OMHAR had extended the contracts for 716 properties at above-market

rents that had been delayed in various stages of the mark-to-market

process. OMHAR estimated the cost of these contract extensions at

approximately $40 million.

In an effort to increase the program’s production, OMHAR took action to

address the factors cited as slowing the process. For example, OMHAR

streamlined the policies and procedures found in the operating procedures

guide, issuing a complete revision in January 2001.15 According to OMHAR,

the new guide simplifies the process, makes clear OMHAR’s reliance on

good judgment and quality restructuring by the participating

administrative entities, and notes OMHAR’s willingness to consider

alternative approaches that reach the goals of the program. OMHAR said

the new guide reduces the documentation requirement placed on

participating administrative entities by combining the restructuring plan

submission with the credit file requirement. Among other things, the

revised guide contains new statements of work for appraisal and physical

inspections that conform to HUD’s new initiatives in rent comparability

assessment. OMHAR believed this change would produce greater

consistency when HUD and the participating administrative entities are

both obtaining rental determinations in the same area and reduce

controversy that can occur when owners believe that different approaches

have led to disparate results.

To address concerns that OMHAR staff were providing overly detailed

reviews of the restructuring plans submitted by participating

administrative entities, the Office conducted a seminar with the OMHAR

staff who review the restructuring plans to emphasize OMHAR’s

commitment to production, discuss review requirements, and solicit input

 15Although the complete operating procedures guide was not issued until January 2001,

OMHAR said much of the revised guide was posted on OMHAR’s web page between

September and November 2000.

OMHAR Has Taken Action

to Address the Factors

Adversely Affecting

Implementation
Page 19 GAO-01-800 Multifamily Housing

on simplifying the process. The OMHAR staff were instructed to ensure

the reasonableness of the participating administrative entities’

underwriting and compliance with regulations rather than to spend time

reunderwriting the restructuring plan. Seven of our 10 expert panelists

believed OMHAR has been somewhat or very successful in eliminating any

unnecessary elements of its review during the restructuring process.

However, 11 out of 15 participating administrative entities we contacted

said OMHAR had not eliminated unnecessary elements of its review. Some

of these entities expressed concern that OMHAR staff continued to

inconsistently review their restructuring plans, often commenting on the

plans based on the staffs’ own personal underwriting preferences.

In September 2000, OMHAR also took action to address delays caused by

uncooperative Section 8 property owners by introducing several initiatives

to make participation in the program more attractive for owners. This

incentive package allows owners to receive monthly capital recovery

payments designed to provide a reasonable return on the investment the

owners must make to cover their portion of required rehabilitation and

transaction costs. The incentive package also allows owners to receive a

performance fee of up to 3 percent of effective gross income if the owner

demonstrates sound management practices, and it allows owners to

finance 100 percent of the initial deposit to a property’s replacement

reserve and 80 percent of certain reasonable acquisition transactions

costs. All 10 expert panelists believed the incentives OMHAR developed to

encourage owner participation in the program somewhat or greatly

increased participation. According to one panelist, the increased number

of properties entering the program requesting full mortgage restructuring

after the incentives were introduced has demonstrated the effectiveness of

the owner initiatives. Furthermore, 11 out of 15 participating

administrative entities we contacted said the incentives helped to make

the owners more cooperative during the restructuring process.

To address delays associated with the performance of participating

administrative entities, the Office organized special teams of OMHAR and

contractor staff to assist the entities in the completion of restructuring

transactions. For example, if a participating administrative entity was not

completing a restructuring in a timely manner, OMHAR dispatched a team

of experienced underwriters to assist in the restructuring. Also, OMHAR

established a transaction center where OMHAR staff would complete the

underwriting for cases not being actively worked on by the participating

administrative entity and for cases where the participating administrative

entity was struggling with a difficult restructuring. Furthermore, OMHAR

officials said they continued to provide specialized training for the
Page 20 GAO-01-800 Multifamily Housing

participating administrative entities at their request or as deemed

necessary by the OMHAR regional offices.

OMHAR and others believed the program has gained momentum and that

the pace for completing restructurings has improved. For example, six out

of eight expert panelists believed that the time required to complete the

restructurings has decreased to some or a great extent.16 One panelist said

that the program’s performance has improved significantly in the previous

6 to 8 months and that restructuring transactions were progressing much

more quickly. Eight of the 15 participating administrative entities we

contacted also believed that the time required to complete the

restructurings has decreased. For example, one participating

administrative entity said that while full mortgage restructurings

previously took them between 10 to 15 months to close, more recently

these transactions have been completed in 5 to 7 months. OMHAR officials

believed that participating administrative entities were also doing a better

job of submitting restructuring plans within the expected time frames.

According to OMHAR data, both the number and percentage of

restructuring plans that OMHAR considered late decreased between

September 2000 and May 2001.17 Figure 6 shows the cumulative number of

completed full mortgage restructurings and rent restructurings by quarter.

 16When asked if they believed the time required to complete the restructurings has

increased, decreased, or stayed the same over time, two panelists did not provide usable

responses.

17The percentage of full mortgage restructuring plans that OMHAR considered to be late

decreased from 24 percent to 18 percent and the percentage of rent restructuring plans

decreased from 70 percent to 19 percent. However, during this period, OMHAR increased

the amount of time that participating administrative entities have for submitting full

mortgage restructuring plans from 8 to 9 months before considering them to be late.

The Pace for Completing

Restructuring Transactions

Has Improved Over Time,

and Most Expert Panelists

Believe the Pace Has Been

Reasonable
Page 21 GAO-01-800 Multifamily Housing

Figure 6: Cumulative Number of Completed Full Mortgage Restructurings and Rent

Restructurings by Quarter

Source: GAO analysis of OMHAR’s database.

Most experts who participated in our panel believed OMHAR’ s overall

progress in implementing the mark-to-market program has been

reasonable. While implementation of the program has taken considerable

time, panelists noted that the program was more complex than originally

anticipated, involved a considerable number of stakeholders, and provided

few incentives to encourage owner participation. One panelist noted that

the length of time to establish the program was not surprising given the

program’s complexity and that the quality of the outcome is what matters,

not the speed at which the outcome is achieved or pursued. When asked

specifically how OMHAR has progressed in implementing the mark-tomarket program compared to what could reasonably be expected, 7 out of

10 expert panelists said program progress has been as expected or greater

than expected.
Page 22 GAO-01-800 Multifamily Housing

While authority for the mark-to-market program and OMHAR sunsets on

September 30, 2001, OMHAR estimated that over 1,300 properties with

above-market rents would have Section 8 contracts expiring after fiscal

year 2002. According to HUD, owners with above-market rents who have

their rents reduced to market levels after the program sunsets will be

placing themselves and HUD at risk of financial losses if market rents are

insufficient to cover debt service, reserves, and operating costs. All

members of our expert panel believed that termination of the program

would result in increased property defaults from Section 8 property

owners and that the program should be extended beyond September 30,

2001. Furthermore, 9 out of 10 expert panelists indicated that the authority

for an office such as OMHAR should be extended, citing such reasons as

the disruption in the momentum, lack of HUD capacity, and the loss of

expertise that would result if an office dedicated to administering the

program was not maintained. Conversely, one expert panelist indicated

that program responsibility should be transferred to HUD’s Office of

Housing, noting that having a single office administer the program would

streamline the mark-to-market decisionmaking process and the execution

of policies.

Section 579 of the act repeals Subtitle A of the legislation on September

30, 2001, thereby ending the statutory authority to restructure properties’

mortgages. After that time, Section 8 properties with above-market rents

that have not entered into a binding commitment with OMHAR will have

their rents reduced to comparable market levels without the restructuring

tools available in the program when their current Section 8 contract

expires.18 OMHAR estimated that over 1,300 properties with above-market

rents would have Section 8 contracts expiring after the scheduled

termination of the program. Figure 7 shows the estimated number of

above-market rent properties with expiring contracts in fiscal year 2002

and beyond.

 18Section 524(b) of the act provides that owners of certain classes of properties receiving

project-based Section 8 assistance may renew expiring assistance contracts at the lesser of

existing rents, rents adjusted by an operating cost adjustment factor, or rents that provide

sufficient income to support the properties (budget-based rents). These categories include

multifamily housing projects that are not covered by the act or are exempt from mortgage

restructuring under the act, such as projects financed by state or local governments.

Expiration of the

Program Would

Increase the

Likelihood of Section

8 Defaults, and Loss

of Dedicated Office to

Administer the

Program Could Cause

Additional Delays

Authority to Restructure

Section 8 Properties

Expires on September 30,

2001
Page 23 GAO-01-800 Multifamily Housing

Figure 7: Estimated Number of Above-Market Rent Properties with Section 8

Contracts Expiring in Fiscal Year 2002 and Beyond

Source: OMHAR.

According to HUD, if mark-to-market program authority is not extended,

owners will be placing themselves and HUD at risk of financial losses if

their property’s rents are insufficient to pay for debt service, reserves, and

operating costs. HUD also indicated that owners of properties who are

unable to operate efficiently at market rents will be forced to decrease

expenditures for maintenance and other operating costs in order to remain

current with mortgage payments, thereby placing tenants at risk of

residing in substandard housing, or they may default on their FHA secured

loans. Furthermore, HUD noted that the FHA insurance fund would be

adversely affected if property owners that are unable to meet their

financial obligations eventually fail because proper restructuring tools are

not available.

Program stakeholders who participated in our expert panel were

unanimous in their opinion that the program should be extended. The

panelists were also in full agreement that allowing the program to expire

would increase the likelihood of Section 8 property defaults and large

claims against the FHA insurance fund. Panelists did have different views

on how long the program should be extended, although there was general

consensus that an extension of at least 3 years was warranted. While three

Expiration of Program

Would Increase the

Likelihood of Defaults by

Section 8 Property Owners
Page 24 GAO-01-800 Multifamily Housing

panelists indicated that a 3 to 5 year extension of the program would be

adequate, three others believed that an indefinite extension would make

sense. For example, a panelist noted that if there is a legal requirement to

reduce the rents to market, there should always be a corresponding

authority to restructure the debt. Several panelists also commented that a

decision on extending program authority is needed as soon as possible.

One panelist said that the sooner a decision is made to extend the

program, owners would realize that they are not benefiting by holding off

from entering the program. All 15 participating administrative entities we

contacted believed that the program should be extended.

Section 579 of the act repeals Subtitle D of the legislation on September

30, 2001, thereby terminating OMHAR’s authority and transferring its

authority and responsibilities to HUD’s Secretary. In September 2000, the

Senate Appropriations Committee directed OMHAR and HUD to begin

planning for the transition of program responsibilities by developing a plan

to detail how the mark-to-market program functions would be transferred

from OMHAR to HUD’s Office of Multifamily Housing within HUD’s Office

of Housing.19 In October 2000, HUD and OMHAR formed a transition team.

The preliminary transition plan provided to the Congress in December

2000 sets out three options for the transfer of OMHAR’s responsibilities to

HUD:

• HUD could maintain an organization resembling the current structure at

OMHAR;

• HUD could create an organization resembling a reduced OMHAR in HUD’s

Office of Multifamily Housing; and

• HUD could merge restructuring responsibilities into HUD’s 18 Multifamily

Hubs.

The preliminary plan also recommends extension of the restructuring

tools in Subtitle A of the act beyond the scheduled termination date of

September 30, 2001.

 19Senate Appropriations Committee Report 106-410 (Sept. 13, 2000).

OMHAR’s Authority to

Administer the Mark-toMarket Program Expires

on September 30, 2001
Page 25 GAO-01-800 Multifamily Housing

Nine out of 10 expert panel members and 8 of out 15 participating

administrative entities indicated that OMHAR should be allowed to

continue administering the program. These parties cited a number of

problems that could arise if the program were transferred to HUD’s Office

of Multifamily Housing and, particularly, if the responsibility were

assigned to HUD’s Multifamily Hubs.20

One of the concerns raised by three panelists and four participating

administrative entities was that transferring the responsibilities to another

location in HUD without dedicated staff to administer the program could

disrupt momentum. For example one panelist noted that the program was

now stabilized and has momentum and said, “We’re finally at the point

where we’re ready to effectuate what we all set out to do, so let’s not upset

the apple cart.”

Another concern raised by four panelists and three participating

administrative entities was that HUD’s Office of Multifamily Housing may

lack the capacity to effectively administer the program if OMHAR staff are

not retained and responsibility for the program is shifted to HUD

Multifamily field offices. For example, a panelist noted that his firm deals

with 12 HUD field offices, and none of those offices have adequate

staffing. An official from HUD’s Office of Housing agreed that field office

personnel do not have the capacity or inclination to give the program the

attention it deserves.

A survey that we conducted of HUD field office managers in September

and October 2000 also strongly indicates that HUD field offices are likely

to lack the capacity to administer the mark-to-market program effectively.

This survey found that 71 percent of the HUD field office managers

believed that their offices do not have sufficient staff to carry out existing

programs and activities.21 The report also noted that insufficient staffing

and the need to increase training continue to affect HUD’s ability to carry

out its mission efficiently and effectively.

This lack of capacity could, in our view, also affect HUD’s ability to ensure

that the program is being carried out in accordance with legislative

 20HUD’s 18 Multifamily Hubs and their associated 33 program centers comprise HUD’s field

offices. The field offices report to HUD’s Office of Multifamily Housing.

21Major Management Challenges and Program Risks: Department of Housing and Urban

Development (GAO-01-248, Jan., 2001)

Loss of a Dedicated Office

to Administer the Program

Could Affect Momentum

and Contribute to

Additional Delays
Page 26 GAO-01-800 Multifamily Housing

requirements and that the federal government’s interests are adequately

protected. In our October 1998 report on the mark-to-market program, we

stressed the importance of HUD’s oversight of the program.22 More

specifically, we stated that because many program functions were to be

carried out by participating administrative entities rather than by HUD, it

was particularly important for HUD to establish procedures to ensure that

all parties involved carried out their responsibilities in ways that met the

program’s objectives and were in compliance with program requirements.

The program’s complexity and the amount of resources involved make

such oversight even more important.

Some expert panelists and participating administrative entities also

expressed concern about the loss of expertise that could occur if OMHAR

staff are not retained. According to OMHAR, 57 percent of the 89 staff

currently employed with OMHAR have limited terms and do not have

reemployment rights with HUD. OMHAR said most of the staff with limited

terms (about 75 percent) are those with production experience. According

to OMHAR’s Director, if OMHAR is not extended it would be necessary for

HUD to obtain approval from the Office of Personnel Management to

extend OMHAR staffs’ terms. Furthermore, the act allows OMHAR staff to

receive higher pay than comparable HUD employees. Accordingly,

OMHAR believed that unless the provisions allowing higher pay are

extended, a substantial number of the remaining staff might choose to

leave. There was also concern that even if OMHAR staff transferred to

HUD’s Office of Housing, unless the staff were assigned to a specific office

focused on the mark-to-market program, they could be dispersed to work

on other HUD multifamily programs.

On the other hand, 1 expert panelist and 7 out of 15 participating

administrative entities believed that OMHAR’s authority of the program

should be allowed to expire. The expert panelist commented that

integration of the program into HUD could be beneficial. The panelist

noted that consolidating the program within HUD’s Office of Housing

would improve program efficiency by streamlining the mark-to-market

decision-making process and execution of policies since one office would

be administering all aspects of Section 8 properties entering the program.

The panelist also believed that integrating the program into HUD would

improve communication and coordination between the participating

 22Multifamily Housing: Progress Made in Establishing HUD’s Office of Multifamily

Housing Assistance Restructuring (GAO/RCED-99-5; Oct. 27, 1998)
Page 27 GAO-01-800 Multifamily Housing

administrative entities and HUD. A participating administrative entity said

that OMHAR should be allowed to expire because its oversight is too

prescriptive and heavy-handed. This entity believed that the HUD field

offices would be better suited to provide program oversight since the HUD

field staff are more knowledgeable about the local rental markets and are

more familiar with the Section 8 properties located in their jurisdictions.

Another participating administrative entity indicated that if OMHAR were

extended, it would make better sense to have the office report to the HUD

Assistant Secretary for Housing instead of the HUD Secretary, as it does

currently, since the Assistant Secretary would be more aware of events

taking place at OMHAR and HUD field offices and could better facilitate

coordination between the offices.

Program stakeholders noted a number of actions that they believed would

strengthen mark-to-market program implementation and help ensure that

the remaining restructurings are carried out as efficiently and

economically as possible. However, all of the options have advantages and

disadvantages.

The options the stakeholders identified include having HUD provide

rehabilitation grants to facilitate restructuring of properties in poor

physical condition, taking actions to improve owner and tenant

participation in the program, and ensuring that all properties with abovemarket rents are sent to OMHAR for restructuring. There was a general

consensus among panel experts that it is too late in the program’s cycle to

make changes that would disrupt the momentum that the program has

finally established. Accordingly, stakeholders focused on program changes

that could be made in tandem with program implementation. A table

containing the following options and others is located in appendix II.

Most expert panelists believed that OMHAR needs additional tools to help

restructure properties in poor physical condition. In particular, several

stakeholders recommended that HUD provide rehabilitation grants to

facilitate restructuring of Section 8 properties in poor physical condition

for which adequate funding was otherwise not available to cover

rehabilitation needs identified in the properties’ restructuring plans. As of

April 2001, OMHAR had identified 17 properties that required a full

mortgage restructuring but for which the responsible participating

administrative entities could not complete the restructurings due to the

excessively poor physical condition of the property and/or the owner’s

inability to meet the required cash contribution to address the property’s

rehabilitation needs.

Program Stakeholders

Identified a Number

of Actions That May

Improve Program

Implementation
Page 28 GAO-01-800 Multifamily Housing

According to OMHAR, rehabilitation grants could help lower the owner’s

costs of restructuring and reduce the number of transactions that are

discontinued due to a lack of funds needed to address rehabilitation

requirements. One stakeholder we spoke with said such grants are

particularly important for troubled localities that are trying to preserve

their affordable housing. OMHAR also believed providing funding for

rehabilitation needs at the beginning of the process could save

participating administrative entities’ and owners’ time spent locating

sources of funding and therefore shorten the restructuring process. This in

turn could save the government from having to extend above-market rent

contracts until restructurings are complete and could in some cases

reduce the need for OMHAR to approve above-market exception rents.23

However, OMHAR cautioned that any new financial incentive for owners

would result in processing delays since some owners would be likely to

delay restructuring in order to take advantage of the new incentive. A

participating administrative entity that supported the idea advised that the

grants would have to be administered in such a way to ensure that they did

not benefit owners who had allowed their properties to decline, thus

rewarding them for their neglect. Finally, stakeholders noted that

providing rehabilitation grants could increase overall costs to the

government, but it could promote the preservation of affordable housing.24

Another possible improvement cited by program stakeholders is to ensure

that tenants have access to information on their property’s restructuring.

Tenant representatives told us that there are problems with tenant access

to information in the mark-to-market process. According to the regulations

and as outlined in the operating procedures guide, property residents and

interested community groups must be provided the opportunity for

meaningful participation in the restructuring process. The participating

administrative entities are required to notify and consult with tenants

through two tenant meetings, notices of plan progress, and by providing

 23Exception rents are rents that are greater than comparable market rents. These rents are

available only for properties undergoing a full restructuring and only if a property’s net

operating income is insufficient to support operating costs and other expenses and the

participating administrative entity has determined that the loss of the project would

seriously and adversely impact the tenants and community.

24The act authorized HUD to make grants for the capital costs of rehabilitation to owners of

certain HUD-insured Section 8 properties. HUD has not currently implemented this

authority. Another proposed measure would authorize HUD to make grants to states to

supplement state assistance for the preservation of affordable housing.
Page 29 GAO-01-800 Multifamily Housing

relevant documents for review. However, we heard from tenant

representatives that for some properties the participating administrative

entities have not provided information to tenants in a timely manner, if at

all. Problems cited by tenant representatives include inadequate notice of

tenant meetings; meetings held at inappropriate times or locations, such as

during the day when tenants are at work or in busy building lobbies; and

the lack of key restructuring documents provided in a timely manner.

These problems may result in fewer tenants participating in the mark-tomarket process.

At the time of our expert panel, OMHAR officials agreed to look into this

issue and meet with tenant representatives, as well as with a specific

participating administrative entity cited by the representatives for violating

tenant participation rules. According to OMHAR, these meetings occurred

shortly thereafter. Tenant representatives told us that OMHAR officials

have been responsive to their concerns with certain participating

administrative entities but that some problems with tenant access to

information persist. The tenant representatives recommended additional

training for participating administrative entities on tenant participation

requirements, at which tenant representatives could be present.

Alternately, the tenant representatives requested a joint meeting with

OMHAR and the participating administrative entities to discuss tenant

participation problems. In response to these concerns, on June 5, 2001,

OMHAR held a training session that focused on, among other things,

developing ways to remove barriers to effective tenant participation in the

mark-to-market program.

Another action that may improve program implementation is to ensure

that HUD field offices fulfill their responsibility to review rent

comparability studies and refer properties to OMHAR. Currently, HUD

field offices are to obtain and review rent comparability studies from

property owners when a property’s Section 8 contract is about to expire to

determine whether rents are above market, which would make the

property eligible for the mark-to-market program. However, there have

been concerns that some properties with rents above market are not being

submitted to OMHAR. For example, OMHAR estimated that 1,708

properties with Section 8 contracts expiring in fiscal year 2000 had rents

above market and were therefore eligible for the mark-to-market program.

However, only 546 properties (32 percent) were referred to OMHAR by

HUD field offices during that time. An official at the Office of Multifamily

Housing told us that the reasons the number of projects received by

OMHAR from the field offices do not total the number expected may

include changes in the economy and housing market, or problems in
Page 30 GAO-01-800 Multifamily Housing

training the field office staff on the proper procedures for conducting or

reviewing rent comparability studies.

The Office of Multifamily Housing and OMHAR have taken two actions to

address such problems and ensure that properties with above-market

rents are sent to OMHAR for restructuring. In June 2000 the Office of

Multifamily Housing issued a notice to change and clarify the procedures

for preparing, submitting, and reviewing rent comparability studies, which

one stakeholder noted had clarified many questions and

misunderstandings. OMHAR created a model that highlights properties

with above-market rents that are eligible for the mark-to-market program.

While this model was intended to correct problems with property referrals

to OMHAR, OMHAR believes that problems persist. OMHAR has suggested

that responsibility for preparing and reviewing rent comparisons be given

to an independent third party under contract to HUD rather than an

appraiser hired by the owner. OMHAR believes this action would improve

the accuracy of the studies and help ensure that eligible properties are

sent to OMHAR for restructuring. An owner representative we contacted

cautioned that property owners would be distrustful of HUD studies and

said that if HUD pursued such an option, owners should continue to be

allowed to do their own rent comparability studies as well. The two

studies could then be compared, with a process established to resolve any

differences between them.

If the legislative authority for the mark-to-market program provided for in

Subtitle A of the Multifamily Assisted Housing Reform and Affordability

Act of 1997 is allowed to expire on September 30, 2001, HUD estimates it

will have to reduce the rents to market levels of well over 1,000 properties

without having the tools needed to mitigate the potential effects of such

reductions. If the reduced rents do not provide sufficient revenues to

cover the properties’ operating expenses, mortgage payments, and repair

needs, owners may be forced to reduce expenditures for maintenance or

other operating expenses or may default on their mortgages. Such action

could result in deteriorating property conditions and substantial claims

against the FHA insurance fund, which, in turn, could adversely affect

property residents and lead to a decrease in the supply of affordable

housing. Extension of the program would permit Section 8 property

owners with above-market rents and unexpired Section 8 contracts to

benefit from the restructuring tools that are currently available and help

offset many of the effects that are likely to occur if the program is not

continued.

Conclusions
Page 31 GAO-01-800 Multifamily Housing

Transferring authority for the mark-to-market program to HUD’s Office of

Housing could potentially help facilitate the handling of some mark-tomarket related functions that have required coordination between OMHAR

and the Office of Housing. However, there are concerns that such a

transfer is also likely to result in the loss of a substantial number of

OMHAR staff unless the terms of existing staff are extended and staff are

allowed to continue receiving higher salaries than other HUD staff. A

substantial reduction in the number of OMHAR employees assigned to the

mark-to-market program could result in additional delays in program

implementation and substantially diminish institutional knowledge of

program requirements. Furthermore, concerns about the adequacy of

staffing in HUD’s field offices raise questions about whether HUD would

be able to provide comparable program oversight of the mark-to-market

program without straining its field office staffs’ ability to carry out existing

responsibilities.

While the mark-to-market program has brought about successful

restructurings resulting in Section 8 savings at a number of properties, at

other properties the requirement that rents be reduced to market has

increased the risk of physical and financial problems. Those at risk include

properties that have not received mortgage restructurings but for which

market rents may not provide sufficient income to cover existing mortgage

payments, operating expenses, and ongoing repair needs. HUD recognized

that these properties may become troubled, and the Office of Housing

developed guidance for its field offices to use in monitoring potentially

troubled mark-to-market properties. However, the guidance did not

explicitly cover all properties that may be at risk. HUD has acknowledged

that the guidance should be more inclusive and has plans to revise it. In

addition, it will be important for HUD’s field offices to strictly adhere to

the monitoring guidance and take appropriate actions to address any

problems that occur before the problems seriously affect the property’s

physical condition and the living conditions of its residents.

To permit continued restructuring of Section 8 properties with abovemarket rents, the Congress should extend Subtitle A of the Multifamily

Assisted Housing Reform and Affordability Act beyond September 30,

2001. To ensure that restructurings are completed expeditiously and in

accordance with legislative and regulatory requirements, and that the

federal government’s interests are protected, the Congress should also

extend legislative requirements placing the mark-to-market program under

a separate office headed by a director who is responsible for administering

the program. Regardless of whether program responsibility continues

Matters for

Congressional

Consideration
Page 32 GAO-01-800 Multifamily Housing

within OMHAR or is transferred to a separate office elsewhere in HUD, the

office should have a sufficient number of trained staff dedicated to

program administration.

To minimize the risks to properties and tenants’ living conditions

associated with reducing rents to market at those properties for which

mortgage restructurings are needed but have not been completed because

of owner resistance or other problems, we recommend that the Secretary

of HUD direct the Assistant Secretary, Office of Housing to revise the

guidance for monitoring potentially troubled mark-to-market properties to

specifically include all properties that may be at risk of physical and

financial problems.

We provided HUD with a draft of this report for its review and comment.

In its written comments, HUD said that our report accurately described

OMHAR’s experience in implementing the program and identified the

issues related to program reauthorization. HUD agreed with the report’s

conclusion that legislative authority for the mark-to-market program

should be extended past its current scheduled expiration date of

September 30, 2001. HUD said the Administration has sought extension of

the debt restructuring authority in its fiscal year 2002 budget proposal

submitted to the Congress, and that the HUD Secretary stated in

congressional testimony that the program is still needed.

Due to the critical nature of OMHAR’s work, HUD also agreed that the

program should be administered by a dedicated office and fully expects

that OMHAR and its trained staff would continue to work strictly on the

mark-to-market program. However, HUD believes OMHAR should be

placed under the authority of the Office of Housing to simplify OMHAR’s

administrative structure and facilitate coordination between OMHAR and

HUD’s 18 Multifamily Hubs, which HUD believes have detailed information

and knowledge on the Section 8 properties. HUD said that transferring

authority to the Office of Housing could potentially help facilitate the

handling of various functions that require coordination between OMHAR

and the Office and Housing and that the completion of OMHAR’s work

would be expedited by a simpler administrative structure. While we agree

with HUD that there are advantages to placing OMHAR under its Office of

Housing, we continue to believe that such a transfer should not diminish

the office’s focus on administering the mark-to-market program or inhibit

its ability to obtain the resources and expertise that it needs to carry out

Recommendation for

Executive Action

Agency Comments

and Our Evaluation
Page 33 GAO-01-800 Multifamily Housing

that task. HUD indicated in its comments that it recognizes these

concerns.

With regard to how long OMHAR and the program’s restructuring tools

should be extended, HUD believes a 3-year extension beyond fiscal year

2001 is appropriate. The Department said that by 2004 it could determine

whether any further extension is needed or if the remaining mark-tomarket workload could be handled within the Federal Housing

Administration.

The Department further agreed that some properties may face increased

risk of physical and financial problems as a result of the required rent

reductions. HUD noted that it had developed guidance for its field offices

to use in monitoring such properties, but it also agreed with our

recommendation that it make its existing guidance for monitoring at-risk

properties more inclusive to cover all potentially troubled properties. HUD

stated that it has made plans to revise the guidance accordingly. HUD also

noted its interest in the recommendations for program improvement cited

by our panel of experts and agreed to take them under advisement. Lastly,

HUD suggested minor clarifications to specific statements in the report,

which we incorporated as appropriate. The full text of HUD’s written

comments appears in appendix III.

We are sending copies of this report to the Secretary of Housing and

Urban Development and to the Director of the Office of Multifamily

Housing Assistance Restructuring. We will make copies available to others

on request. If you or your staff have any questions on this report, please

call me at (202) 512-2834. Key contributors to this report were Andy

Clinton, Mark Egger, Rick Hale, Brandon Haller, Barbara Johnson,

John McGrail, Sally Moino, Lynn Musser, Mark Stover, and Kathy Trimble.

Peter Guerrero,

Director, Physical Infrastructure Team
Page 34 GAO-01-800 Multifamily Housing

List of Committees

The Honorable Jack Reed

Chairman

The Honorable Wayne Allard

Ranking Minority Member

Subcommittee on Housing and Transportation

Committee on Banking, Housing,

 and Urban Affairs

United States Senate

The Honorable Barbara A. Mikulski

Chairwoman

The Honorable Christopher S. Bond

Ranking Minority Member

Subcommittee on VA, HUD, and

 Independent Agencies

Committee on Appropriations

United States Senate

The Honorable Marge Roukema

Chairwoman

The Honorable Barney Frank

Ranking Minority Member

Subcommittee on Housing and

 Community Opportunity

Committee on Financial Services

House of Representatives

The Honorable James T. Walsh

Chairman

The Honorable Alan B. Mollohan

Ranking Minority Member

Subcommittee on VA, HUD,

 and Independent Agencies

Committee on Appropriations

House of Representatives
Appendix I: Overview of the Mark-to-Market

Process

Page 35 GAO-01-800 Multifamily Housing

In general, the process to be followed under the mark-to-market program,

as outlined in OMHAR’s operating procedures guide, has 13 phases: (1)

project assignment to participating administrative entity, (2) kick-off

meeting, (3) notice of first restructure plan consultation meeting, (4)

tenant comments, (5) consultation meeting, (6) physical condition

assessment, (7) second tenant meeting, (8) underwriting process, (9)

submission of the draft restructuring plan, (10) restructuring plan

execution, (11) notice of completion of restructuring plan, (12) closing,

and (13) post-closing document distribution.25

1. Project Assignment to Participating Administrative Entity: The markto-market process is initiated when an owner of Section 8 housing

notifies the HUD Multifamily Hub or program center of the intent to

participate in the mark-to-market program.26 The Hub or program

center screens the owner and project to determine initial eligibility and

then forwards eligible projects to OMHAR headquarters for assignment

to a participating administrative entity. The participating

administrative entity is responsible for making a complete and ongoing

assessment of the eligibility of the owner and the project.

2. Kick-off Meeting: After headquarters assigns the project, the

participating administrative entity contacts the owner and provides

ground rules, forms, and other information. At this time, the

participating administrative entity also sets the date for the kick-off

meeting, which must be held within 15 days after providing the above

materials to the owner. At the meeting, the participating administrative

entity explains the restructuring process and distributes copies of all

closing documents, among other things.

3. Notice of First Restructure Plan Consultation Meeting: Immediately

following the kick-off meeting, the participating administrative entity

(or the owner on the administrative entity’s behalf) must send a Notice

of First Restructure Plan Consultation Meeting to tenants and other

interested parties. The notice states that the owner has elected to

participate in the mark-to-market program; when the project-based

Section 8 contract is scheduled to expire; how recipients can give

 25This 13-phase process applies only to full mortgage restructurings, under which both a

property’s rents and mortgage are restructured.

26HUD’s field office structure for delivering multifamily housing services consists of 18

jurisdictional Hubs with staff stationed in 33 program centers.

Appendix I: Overview of the Mark-to-Market

Process
Appendix I: Overview of the Mark-to-Market

Process

Page 36 GAO-01-800 Multifamily Housing

comments to the participating administrative entity regarding the

property’s physical condition and other matters; and the date, time,

and place of a public meeting to be held between 20 and 40 days after

the date of the notice.

4. Tenant Comments: After receiving the notice, tenants and other

interested parties can provide written comments to the participating

administrative entity on such matters as the property’s physical

condition, project management, and whether rental assistance should

be project-based or tenant-based.

5. Consultation Meeting: Between 20 and 40 days after the notice, the

participating administrative entity must conduct a meeting to hear oral

presentations and comments by the tenants and other affected parties

on the desired contents of a restructuring plan, on the owner’s

evaluation of the project’s physical condition, and on any proposed

transfer of the project to another owner.

6. Physical Condition Assessment: If the owner has not already submitted

an evaluation of the project’s physical condition, it should be

completed soon after the consultation meeting. The participating

administrative entity will work with a third-party inspector, who will

consider the owner’s evaluation as well as comments from the tenants

and the local community. The participating administrative entity’s

inspector must coordinate his or her analysis with the participating

administrative entity’s third-party appraiser.

7. Second Tenant Meeting: The participating administrative entity must

develop, in cooperation with the owner, a mortgage restructuring and

rental assistance sufficiency plan for each project. Among other

information, the plan provides conclusions on the project’s new

mortgage amount(s), rehabilitation needs, and financial return to the

owner. Ten days before the participating administrative entity submits

the draft restructuring plan to OMHAR for review, the participating

administrative entity must hold a follow-up meeting with the tenants

and other affected parties so that they can comment on the

development of the plan. The proposed plan should be available for

these parties to inspect at least 20 days before it is submitted to

OMHAR for review.

8. Underwriting Process: Generally, underwriting is completed within 105

days after the project is assigned to the participating administrative

entity. The participating administrative entity considers the project’s
Appendix I: Overview of the Mark-to-Market

Process

Page 37 GAO-01-800 Multifamily Housing

finances and completes a Rental Assistance Assessment Plan to

determine whether the Section 8 assistance should be renewed as

project-based assistance or converted to tenant-based assistance. The

participating administrative entity, the owner, and the lender discuss

mortgage options. The outcome of this process is the draft

restructuring plan mentioned above (phase 7).

9. Submission of the Draft Restructuring Plan: The participating

administrative entity submits the draft restructuring plan to OMHAR

for review. OMHAR determines whether to approve, reject, or return

the plan for modifications.

10. Restructuring Plan Execution: After OMHAR approves the plan, the

participating administrative entity sends the owner notification and a

restructuring plan commitment. The owner has 30 days after this

restructuring commitment is issued to execute it.

11. Notice of Completion of Restructuring Plan: Within 10 days after the

restructuring commitment is executed, the participating administrative

entity must send the project’s tenants and other interested parties a

notice describing the final restructuring plan and restructuring

commitment.

12. Closing: The owner, the lender, the participating administrative entity

and HUD sign and record all documents. Closing should be completed

within 60 days of executing the restructuring commitment.

13. Post-Closing Document Distribution: Closing dockets and other

supporting documents are distributed to HUD officials, loan servicers,

asset managers, and others.
Appendix II: Actions Suggested By Program

Stakeholders to Improve Mark-to-Market

Implementation

Page 38 GAO-01-800 Multifamily Housing

Stakeholder suggestions Background Advantages Disadvantages

Have HUD provide

rehabilitation grants to

owners of Section 8

properties in poor physical

condition that could not

otherwise fund the

rehabilitation needs

identified in the properties’

restructuring plans.

As of April 2001, OMHAR had

identified 17 properties that required

a full mortgage restructuring, but for

which the restructuring plan was not

feasible because the property was

in excessively poor condition and/or

the owner could not afford the

rehabilitation costs.

Nine out of 10 expert panelists

believed that additional tools were

needed to preserve properties in

poor physical and/or poor financial

condition.

Proponents believe rehabilitation

grants could reduce the number

of restructuring transactions that

are discontinued because

sufficient funds are not available

to address property rehabilitation

needs.

Providing funding for rehabilitation

needs at the beginning of the

process could save participating

administrative entities' and

owners' time spent locating

sources of funding and therefore

shorten the restructuring process.

This in turn could save the

government from having to extend

above-market rate contracts until

restructurings are complete.

Rehabilitation grants could result

in the preservation of additional

properties.

OMHAR cautioned that the

proposal of any new financial

incentive for owners would

impede progress as some

owners delay restructuring

decisions in order to take

advantage of the new

incentive.

Rehabilitation grants could

increase overall costs to the

government. Costs could be

reduced if the federal

government provided funding

to only match funds provided

from nonfederal sources.

Mark down rents in a more

timely manner at the end

of the initial 1-year contract

extension, as required by

the mark-to-market

regulations.

Owners may receive a Section 8

contract extension at current

(above-market) rents for up to 1

year while the participating

administrative entity completes and

closes a full mortgage restructuring.

Any extension of a contract beyond

1 year must be at comparable

market rents or exception rents.

Section 8 contracts frequently have

been extended at above-market

rents beyond 1 year when various

complications, such as lack of

owner cooperation, delay the

completion of a restructuring.

Proponents believe owners may

be less likely to delay the

restructuring process if faced with

reduced rents.

The government could realize

savings if contracts are not

extended at above-market rents

beyond the time allowed in the

regulations. As of March 31,

2001, HUD paid an additional $40

million in above-market rents due

to the extension of Section 8

contracts on 716 properties.

The complexity of some

restructuring actions, such as

when a transfer of ownership

is involved, makes it difficult

to complete all restructurings

within 1 year. Thus, enough

flexibility should be allowed

so that participating

administrative entities and

owners can find ways to

complete restructurings of

problematic properties.

Provide owners tax relief

upon the sale of HUDassisted properties to

purchasers committed to

affordable housing

preservation. One

proposal would involve

deferring or eliminating the

payment of taxes on

noncash capital gains

associated with the sale of

properties.

One factor inhibiting implementation

of the mark-to-market program has

been some owners’ reluctance to

participate in the restructuring

process. Proponents believe that it

would be beneficial to encourage

such owners to sell their properties

to new owners who agree to

preserve the properties as

affordable housing for the property’s

remaining useful life. However,

some owners may be disinclined to

sell their properties because they

Proponents believe tax relief

could help address the

disincentive for owners to sell or

transfer properties to purchasers

who agree to preserve the

properties as affordable housing.

The effect of such a change

on federal tax revenues

would need to be carefully

assessed. Assessments

would also need to be made

of the extent to which tax

relief would lead to an

increase in the sales of

properties to new owners,

and whether the benefits of

such relief would offset the

federal government’s costs.

We have not performed such

Appendix II: Actions Suggested By Program

Stakeholders to Improve Mark-to-Market

Implementation
Appendix II: Actions Suggested By Program

Stakeholders to Improve Mark-to-Market

Implementation

Page 39 GAO-01-800 Multifamily Housing

Stakeholder suggestions Background Advantages Disadvantages

would be required to pay taxes that

had been deferred.

assessments.

OMHAR cautioned that once

owners become aware that a

change in tax relief is

seriously being considered,

some owners will delay

restructuring decisions in

hopes of getting the benefit of

any tax change.

It is unclear what actions

would be taken if purchasers

do not fulfill their

commitments to preserve

properties as affordable

housing.

Ensure that participating

administrative entities

provide information to

tenants affected by

property restructurings in a

timely manner.

Tenant representatives told us that

some participating administrative

entities have not provided

information to tenants as required

by program regulations.

OMHAR told us that it has

discussed this issue with tenant

representatives and directly with a

specific participating administrative

entity alleged to have violated the

regulations.

OMHAR maintains that residents

are receiving the relevant

information they need to participate

in the mark-to-market process.

However, tenant organizations

believe that the participating

administrative entities need to be

better trained on requirements

relating to tenant participation. In

response to these concerns, on

June 5, 2001, OMHAR held a

training session training session that

focused on, among other things,

developing ways to remove barriers

to effective tenant participation in

the mark-to-market program.

Proponents believe this action

would ensure that participating

administrative entities facilitate

tenant participation in the mark-tomarket process.

Would require additional

efforts by OMHAR to ensure

that participating

administrative entities are

aware of and comply with

tenant participation

requirements.

Provide property budget

information to tenants.

Tenant representatives told us that

by reviewing property budgets

tenants, based on their knowledge

of the buildings, may be able to

identify potential savings such as

opportunities for reducing property

Tenant access to property

budgets could lead to lower

restructuring costs if tenant

findings result in lower property

expenses or other savings.

Property budgets may

contain proprietary

information not normally

made available to the public.

Owner representatives
Appendix II: Actions Suggested By Program

Stakeholders to Improve Mark-to-Market

Implementation

Page 40 GAO-01-800 Multifamily Housing

Stakeholder suggestions Background Advantages Disadvantages

expenses.

Members of the expert panel were

evenly divided as to whether tenants

should be given access to

information on property budgets as

part of the mark-to-market process.

believe that budget

information could be

misinterpreted by tenants or

cause problems for the

owner.

Have HUD contract with

an independent third party

to conduct rent

comparability studies for

properties with expiring

Section 8 contracts.

HUD field offices review rent

comparability studies submitted by

property owners to determine if

rents are above market and eligible

for the mark-to-market program.

OMHAR estimates indicate that a

substantial number of properties

with rents above market are not

being sent to OMHAR by the field

offices for mark-to-market review

and restructuring.a

OMHAR staff, as well as some

participating administrative entities,

are concerned that field office staff

are not performing quality reviews of

rent comparability studies and in

some cases are renewing Section 8

contracts at above-market rents.

This action could provide

additional assurance that all

eligible properties with rents

above market are sent to OMHAR

for restructuring.

This action could yield additional

Section 8 savings by reducing

rents on properties eligible for the

mark-to-market program.

An owner representative

believed that property owners

would be distrustful of HUDcontracted studies. If such an

approach was adopted, it

was recommended that rent

comparability studies be

submitted by both the owner

and by a third party. The two

studies could be compared,

with a process established to

reconcile any differences.

a

For example, OMHAR estimated that 1,708 properties with Section 8 contracts expiring in fiscal year

2000 had rents above market and were therefore eligible for the mark-to-market program. However,

only 546 properties (32 percent) were referred to OMHAR by HUD field offices in fiscal year 2000.
Appendix III: Comments From the Department of Housing and Urban Development

Page 41 GAO-01-800 Multifamily Housing

Appendix III: Comments From the

Department of Housing and Urban

Development
Appendix III: Comments From the Department of Housing and Urban Development

Page 42 GAO-01-800 Multifamily Housing
Appendix III: Comments From the Department of Housing and Urban Development

Page 43 GAO-01-800 Multifamily Housing
Appendix IV: Objectives, Scope, and Methodology

Page 44 GAO-01-800 Multifamily Housing

Section 521 of the Departments of Veterans Affairs and Housing and Urban

Development, and Independent Agencies Appropriations Act, 1998 (P.L.

105-65) requires us to review the implementation of the mark-to-market

program. Our objectives were to determine (1) the status of properties in

the mark-to-market program; (2) factors that have affected the pace of

program implementation and the actions OMHAR has taken to address

these factors; (3) the advantages and disadvantages to the federal

government of extending the program past its statutory termination date

of September 30, 2001, and of transferring program responsibilities to HUD

or keeping them with OMHAR; and (4) possible actions for strengthening

program implementation.

To determine the status of the mark-to-market program, we obtained a

database extract from OMHAR’s Management Information System (MIS)

as of June 15, 2001. This extract contained information on over 1,500

properties that had entered OMHAR’s portfolio since late 1998. To

determine the status of these properties, we focused on several key stages

in OMHAR’s processing pipeline and summarized data for each milestone

and type of restructuring. Such milestones included the date a

participating administrative entity accepted assignment of the property,

when the participating administrative entity sent OMHAR a restructuring

plan, the date OMHAR approved a restructuring plan, and the completed

closing date. We also calculated the average amount of elapsed time

between the major processing milestones for both full mortgage

restructurings and rent restructurings and compared the cumulative

number of full mortgage restructurings that OMHAR had closed with the

cumulative number of approved rent restructurings for each quarter

beginning with the fourth quarter of 1999. To assess the reliability of

OMHAR’s data, we (1) performed electronic testing (specifically for

accuracy, reasonableness, and completeness); (2) reviewed related

documentation, including contractor audit reports on data verification,

and (3) worked closely with agency officials to identify any data problems.

When we found discrepancies (such as nonpopulated fields or data entry

errors) we brought them to OMHAR’s attention and worked with them to

correct the discrepancies before conducting our analyses. We determined

that the data were reliable enough for the purposes of our report.

To determine the estimated savings OMHAR believes the federal

government would realize from its restructuring actions over a 20-year

period, we analyzed an Excel file created by an OMHAR contractor that

calculated the savings estimate. This file reflected all closed full

restructurings and approved rent restructurings as of June 15, 2001. We

reviewed the methodology the contractor used to compute the savings

Appendix IV: Objectives, Scope, and

Methodology
Appendix IV: Objectives, Scope, and Methodology

Page 45 GAO-01-800 Multifamily Housing

estimate, including all financial formulas, and held discussions with

OMHAR officials. We also compared the information used in the savings

calculation with OMHAR’s source database to ensure that the data used in

the savings estimate were accurate and relevant and met with OMHAR

officials to discuss the reasons for including properties in the estimate and

the associated administrative costs of restructuring.

To obtain information on our remaining three objectives, we convened an

expert panel composed of a cross section of mark-to-market program

stakeholders representing HUD and OMHAR, participating administrative

entities, lending institutions, tenant associations, Section 8 property

owners, and nonprofit organizations. The names and organizational

affiliations of the panel members are listed in appendix V. During a

daylong meeting at our offices in Washington, D.C., the expert panelists

responded to eight questions that we provided in advance. The questions

presented to the panel covered issues related to (1) OMHAR’s actions to

implement the mark-to-market program in a timely manner, (2) advantages

and disadvantages of extending the mark-to-market program and OMHAR,

and (3) options for strengthening program implementation. After

discussing each issue, we asked the panelists to answer specific questions

on an anonymous ballot. These questions, for the most part, were closedended and allowed us to quantify the panelists’ opinions related to each

issue they had discussed. The meeting was recorded and transcribed to

ensure that we had accurately captured the panel members’ statements.

In addition to convening the expert panel, we interviewed and obtained

relevant documentation from OMHAR headquarters and regional office

staff, HUD, participating administrative entities, and other program

stakeholders such as the National Council of State Housing Agencies,

National Leased Housing Association, the National Housing Trust,

property owners, property builders, and nonprofit organizations.

Specifically, we obtained the views of 10 public and 5 nonpublic

participating administrative entities on factors they believed affected the

pace of program implementation. We interviewed OMHAR officials to

determine what actions the Office has taken to address the factors cited as

slowing implementation and reviewed the incentives OMHAR developed

to encourage owner participation in the program as well as the revisions

to the program’s operating procedures guide. We also asked program

stakeholders their opinions on the advantages and disadvantages of

extending the mark-to-market program and for transferring program

responsibilities to HUD. We reviewed the act that established the mark-tomarket program to determine legislative requirements for the termination

of the program and OMHAR. We also reviewed HUD and OMHAR’s draft
Appendix IV: Objectives, Scope, and Methodology

Page 46 GAO-01-800 Multifamily Housing

plan to transition OMHAR responsibilities to HUD when OMHAR’s

authority expires and examined OMHAR’s personnel information to

determine how many OMHAR staff would have transfer rights if program

authority moves to HUD. In determining actions for strengthening program

implementation, we identified possible actions based on discussions with

various program stakeholders and then obtained views of other

stakeholders on the actions presented. We also discussed a number of the

possible actions during our expert panel. Furthermore, we reviewed

relevant documentation such as HUD procedural notices relating to

Section 8 contract renewals and rent comparability studies.
Appendix V: Panel Participants

Page 47 GAO-01-800 Multifamily Housing

Michael Bodaken, President, National Housing Trust

Scott Chamberlain, Assistant Vice President, GMAC Commercial Mortgage

Shaun Donovan, Deputy Assistant Secretary for Multifamily Housing

Programs, U.S. Department of Housing and Urban Development

Isha Francis, President, Benchmark Management Corporation

Michael Kane, Executive Director, National Alliance of HUD Tenants

Denise Muha, Executive Director, National Leased Housing Association

Ira Peppercorn, Director, Office of Multifamily Housing Assistance

Restructuring

Garth Rieman, Director for Program Development, National Council of

State Housing Agencies

Cathy Vann, President, Ontra, Incorporated

Chuck Wehrwein, Vice President of Acquisitions, Mercy Housing

Appendix V: Panel Participants

(385864)

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