U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

48–536 PDF 2009

S. HRG. 109–1052 

EXTENSION OF HUD’S MARK-TO-MARKET 

PROGRAM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

ON 

EXTENDING HUD’S MARK-TO-MARKET PROGRAM AN ADDITIONAL 5 

YEARS TO CONTINUE REDUCING SECTION 8 COSTS WHILE PRESERVING THE AFFORDABILITY AND AVAILABILITY OF LOW-INCOME 

RENTAL HOUSING ON THE MARKET 

JUNE 14, 2006 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

PAUL S. SARBANES, Maryland 

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey 

KATHLEEN L. CASEY, Staff Director and Counsel 

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor 

SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

WAYNE ALLARD, Colorado, Chairman 

JACK REED, Rhode Island, Ranking Member 

RICK SANTORUM, Pennsylvania 

ELIZABETH DOLE, North Carolina 

MICHAEL B. ENZI, Wyoming 

ROBERT F. BENNETT, Utah 

MEL MARTINEZ, Florida 

RICHARD C. SHELBY, Alabama 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey 

CHRISTOPHER J. DODD, Connecticut 

THOMAS R. CARPER, Delaware 

CHARLES E. SCHUMER, New York 

TEWANA WILKERSON, Staff Director 

MARK CALABRIA, Senior Professional Staff Member 

KARA STEIN, Legislative Assistant 

JONATHAN MILLER, Democratic Professional Staff 

(II)

C O N T E N T S 

WEDNESDAY, JUNE 14, 2006 

Page 

Opening statement of Senator Allard .................................................................... 1 

Opening statements, comments, or prepared statements of: 

Senator Reed ..................................................................................................... 3 

WITNESSES 

Theodore K. Toon, Deputy Assistant Secretary, Office of Affordable Housing 

Preservation, U.S. Department of Housing and Urban Development ............. 3 

Prepared statement .......................................................................................... 14 

Chris Foster, President, National Leased Housing Association .......................... 5 

Prepared statement .......................................................................................... 17 

Scott Kline, Vice President and Development Director, National Housing 

Trust ...................................................................................................................... 6 

Prepared statement .......................................................................................... 20 

(III)

(1) 

EXTENSION OF HUD’S MARK-TO-MARKET 

PROGRAM 

WEDNESDAY, JUNE 14, 2006 

U.S. SENATE, 

SUBCOMMITTEE ON HOUSING AND TRANSPORTATION, 

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS

Washington, DC. 

The Committee met, pursuant to notice, at 2:42 p.m., in Room 

SD–538, Dirksen Senate Office Building, Hon. Wayne Allard 

(Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. I call the Subcommittee on Housing and Transportation to order. 

Congress created the Mark-to-Market program in 1997 to reduce 

Section 8 costs while preserving the affordability and availability 

of low-income rental housing. The purpose of the program is to reduce the property rents to market level while simultaneously reducing property debt levels and owner costs through a number of 

tools authorized through legislation. Studies seem to show that the 

program has been an overwhelming success. 

Nearly 250,000 units of affordable housing have been preserved 

due to the Mark-to-Market program. This is affordable housing 

that would have been permanently lost as affordable otherwise, according to an ABT Associates study for HUD. As of July 30, 2003, 

the program had produced a net savings to taxpayers of about $831 

million, using moderate assumptions of future portfolio performance. 

The original legislation authorized the Mark-to-Market program 

for 4 years, which was subsequently extended for 5 additional 

years. Therefore, the Mark-to-Market program authority will expire 

on September 30 of this year, in 2006. When the program was extended in 2001, it appeared that 5 years additional would be sufficient time for nearly all eligible properties to complete the Markto-Market process. However, more recent projections show that 

nearly 78,000 properties will face rent reductions over the next 5 

years. 

It is important to note that even though the program will expire, 

these Section 8 properties with above-market rates will still be required to have their rents reduced to market levels. Without the 

proper tools to also restructure the debt, many owners will lack 

sufficient funds for property maintenance or mortgage payments. 

Because many Section 8 properties are also FHA-insured, this will 

2 

result in a significant number of claims against FHA, in addition 

to many tenant displacements. 

Clearly, no one finds this a desirable scenario. Failure to extend 

the Mark-to-Market program would be bad for tenants and bad for 

taxpayers. Thus, I am pleased to join with Senator Reed in introducing Senate Bill 3511, The Mark-to-Market Extension Act of 

2006. Our bill would extend the program for 5 additional years to 

allow the remaining properties to go through the Mark-to-Market 

process. Frankly, I can see no down side to extending the program. 

After all, it maintains affordable housing for less money. 

In addition to our witnesses here today representing the National 

Housing Trust and the National Leased Housing Association, a 

broad coalition of groups has signed letters indicating their support 

for extension of the Mark-to-Market program, including the National Housing Conference, National Affordable Housing Management Association, Low-Income Housing Coalition, National Housing Law Project, Stewards of Affordable Housing for the Future, 

Enterprise Community Partners, Local Initiative Support Corporation, California Housing Partnership Corporation, the Chicago 

Community Development Corporation, American Association of 

Homes and Services for the Aging, Council for Affordable and 

Rural Housing, Institute for Real Estate Management, Institute for 

Responsible Housing Preservation, Mortgage Bankers Association, 

National Affordable Housing Management Association, the National Apartment Association, National Association of Affordable 

Housing Lenders, National Association of Home Builders, National 

Association of Realtors, National Multi-Level Housing Council, National Council of State Housing Agencies. 

I am pleased to work with the groups and with my colleagues to 

see that this very worthwhile program is extended for an additional 

5 years. I also would like to thank today’s witnesses for their support of our efforts. They are all well respected in affordable housing 

circles, and their testimony will be helpful. First, I would like to 

welcome Mr. Ted Toon, who is the Deputy Assistant Secretary for 

the Office of Affordable Housing Preservation, referred to as 

OAHP, O-A-H-P. This is the office within HUD that administers 

the Mark-to-Market program. 

Next, I would like to welcome Mr. Chris Foster, President of the 

National Leased Housing Association. Mr. Foster’s organization has 

been at the forefront of the efforts to extend the Mark-to-Market 

program. In particular, I would like to acknowledge the efforts of 

Denise Muha, who has worked tirelessly to form the coalition in 

support of the extension. 

Finally, I would like to thank Mr. Scott Kline of the National 

Housing Trust for appearing before the Subcommittee today. The 

National Housing Trust has also been extremely active in their 

campaign to reauthorize the Mark-to-Market program. They have 

been working quietly behind the scenes now for quite some time, 

and their expertise has been helpful. 

Again, thank you to all of our witnesses for being here today, and 

I look forward to your testimony. Now, I would like to call on my 

partner and helper here on the Committee, the head of the minority side on this Subcommittee, Senator Reed from Rhode Island. 

3 

STATEMENT OF SENATOR JACK REED 

Senator REED. Well, thank you very much, Mr. Chairman, and 

thank you, gentlemen, for being here today. 

I would first like to thank Senator Allard for scheduling this 

hearing on the extension of HUD’s Mark-to-Market program. The 

original Mark-to-Market program was created in 1997 to address 

two key problems: the increasing cost of renewing project-based 

Section 8 rental contracts and the potential loss of tens of thousands of affordable rental properties threatened by the expiration 

of these contracts. 

And there was a further complication, because, in fact, many of 

the Section 8 contracts that had 20-year terms were in buildings 

with 40-year FHA-insured mortgages. In most cases, the contract 

rents in these buildings, the FHA buildings and Section 8 buildings, were higher than local market rents, which were often not 

sufficient to allow the owners to pay their mortgages. In other 

words, without the Section 8 rents, these buildings would go into 

foreclosure and potentially cost the FHA hundreds of thousands of 

dollars. 

In fact, according to an August 2004 evaluation of the program 

prepared by ABT Associates for HUD, the present value of net savings generated by the Mark-to-Market program is $831 million as 

of July 2003. The program has preserved about 200,000 units of 

housing. There are very few programs that can claim almost $800 

million of savings and also maintaining such a prodigious number 

of affordable housing units. So it is a successful program, and I 

think Senator Allard and I want to follow up in ensuring its success and its continuity. 

And because of that reason, I am pleased to join Senator Allard 

as a cosponsor of S. 3511, the legislation to extend the Mark-toMarket program. Since circulating the bill, we have had some comments from interested parties that suggest a few more changes, 

and I look forward to working cooperatively with the Chairman to 

see if we can incorporate these changes. But this is a program that 

works; it is a program that is necessary, and it is a program that 

I hope we can very quickly extend. 

Thank you very much, Mr. Chairman. 

Senator ALLARD. Thank you very much, Senator Reed. 

Now, I thought we would start on my left, your right, and start 

with Mr. Toon, then Mr. Foster, and Mr. Kline, and we allow 5 

minutes for testimony. 

STATEMENT OF THEODORE K. TOON, DEPUTY ASSISTANT SECRETARY, OFFICE OF AFFORDABLE HOUSING PRESERVATION, U.S. DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT 

Mr. TOON. Thank you. Good afternoon. Thank you, Chairman Allard, Ranking Member Reed, for inviting me here today to testify 

on the proposed Mark-to-Market Extension Act. The preservation 

of affordable housing in our communities is a top priority for Secretary Jackson, Assistant Secretary Montgomery and the Department of Housing and Urban Development. 

The Mark-to-Market program, as you mentioned, was originally 

created in 1997, extended in 2001, and will expire in September 

4 

2006. And the bill that you have introduced will extend the program an additional 5 years. As you are aware, under Mark-to-Market, HUD has the mandate to reduce the rents to market levels, 

saving dollars on project-based Section 8 expenditures. It also includes authorities that are essential to maintaining the physical 

and financial viability of these properties at the reduced rents. 

In Mark-to-Market, HUD analyzes the rents, the repair needs, 

the property viability, and if necessary, resizes the FHA-insured 

mortgages to a level that can be serviced by the reduced market 

rents. If the debt is resized, the owner enters into a new long-term 

use agreement, keeping the property affordable for the next 30 

years. 

Over the past 9 years, HUD has been very successful at balancing the dual program goals of reducing the subsidy costs while 

preserving affordable housing. To date, we have preserved over 

2,200 properties around the country, with 188,000 affordable housing units, and in so doing, we have promoted the long-term physical and financial viability of this affordable housing. The program, 

as of this month, in fact, has surpassed $2 billion in net savings 

to HUD and the American taxpayers, and by preserving this housing, we have provided stability for the many low-income families 

and the communities where they live. 

In discussing an extension of the program, I think it is important 

to consider what has been achieved thus far. To date, the program 

has preserved properties in all 50 States and the District of Columbia; for example, Chairman Allard, in Colorado, HUD Has preserved 31 properties with 1,800 units of affordable housing; in 

Rhode Island, 12 properties with more than 1,000 units have been 

preserved, and another 21 properties with more than 2,000 units 

will become eligible under this proposed extension. 

But not every property can or will be preserved through Markto-Market. While preservation is a primary goal, Congress made it 

very clear that prudent use of limited resources was an equally important goal, and we have taken this charge seriously. There have 

been and will continue to be properties referred into the program 

that simply cannot be responsibly preserved. These properties may 

be too expensive or functionally obsolete. They might be located in 

markets that have ready availability of replacement housing, or the 

property ownership may simply be unable or unwilling to move forward with the transaction. 

According to our analysis of potential future referrals, if the program is extended as proposed, nearly 800 additional properties, or 

78,000 units, as you cited, will meet the eligibility requirements for 

restructuring. This is the universe of properties that, absent extension of the restructuring authorities, will represent the most at-risk 

properties in HUD’s insured mortgage portfolio, and this is because 

MAHRA will continue to require the markdown of the rents but 

will not allow the concurrent restructuring of the underlying mortgage. The reductions in rents to market levels will result in properties being unable to pay operating costs and mortgage payments. 

In addition to the lost opportunity to preserve additional 800 properties, the sunset will expose the FHA insurance fund to considerable default and foreclosure risk, estimated at about $400 million 

over the 5-year period. 

5 

I want to conclude today by pointing out that Congress’ intent in 

creating originally the Mark-to-Market program and then extending it was that the long-term costs had to be reduced and that it 

would be less expensive and more effective to proactively address 

the physical and financial challenges facing the properties than to 

wait for them to physically decline and financially fail, and this has 

been proven true by the successful restructuring of 188,000 units 

across the country and also helped improve the lives of thousands 

of low-income families who call these units home. 

Thank you for inviting us here to testify today. On behalf of the 

entire Department, I look forward to continuing to work with you 

to ensure that we provide affordable housing in a cost-effective 

manner. 

Thank you. 

Senator ALLARD. Mr. Foster. 

STATEMENT OF CHRIS FOSTER, PRESIDENT, NATIONAL 

LEASED HOUSING ASSOCIATION 

Mr. FOSTER. Thank you very much, Mr. Chairman. 

Mr. Chairman and Senator Reed, thank you very much for having me today to testify on this legislation to extend HUD’s Markto-Market restructuring program. As you said, my name is Chris 

Foster, and I am President of Hampstead Partners and outgoing 

President of the National Leased Housing Association at this time, 

NLHA, which is a trade association located here in Washington, 

D.C. 

NLHA strongly supports the extension of the Mark-to-Market 

program. It is a valuable tool that, as has been cited, has preserved 

approximately 200,000 affordable apartments. The Mark-to-Market 

program applies to properties insured by the FHA, with projectbased assistance, primarily under Section 8 of the 1937 Housing 

Act, with rents in excess of market in the area. 

Notwithstanding the fact that many of these properties had originally been built with rents which were set above market at the 

time, when the first wave of the 20-year Section 8 contracts approached expiration in the mid-1990s, Congress was reluctant to 

authorize renewal of the contracts at above-market rents. Many of 

these projects could not operate and meet mortgage payments at 

market rents. 

This universe of projects lent themselves to a solution which, as 

has been indicated today, actually has a positive budget impact. In 

addition, needed rehabilitation and the replenishment of reserves 

is generally accomplished under the program and is necessary. 

Owners of projects that have been restructured must execute use 

agreements to accept Section 8 renewal offers and keep rents affordable with or without availability of Section 8 assistance going 

forward for the next 30 years. We understand in the coming years, 

a significant number of Section 8 contracts will be eligible for initial renewal and that many are attached to projects with HUD-insured mortgages. The Housing Trust, which is sitting next to me, 

has indicated that almost 1,000 properties will be eligible for the 

Market-to-Market program in the next 5 years. 

The same factors that moved Congress to enact the program 

originally still exist today. We urge Congress to authorize the 5- 

6 

year extension and have attached for the record an industry letter 

signed by 15 national housing organizations that endorse the extension. My company, Hampstead Partners, has been involved in 

restructuring several hundred units under the program. The program has made it possible to both preserve and add tens of millions 

of dollars in additional non-FHA funds to these projects for rehab 

and preservation purposes. In fact, we are just now initiating the 

processing of several hundred more units in Baltimore. 

The bill proposes two changes to the Mark-to-Market program 

that we strongly support. The bill suggests increasing from 5 percent to 9 percent the total number of units that can have exception 

rents. Exception rents are rents that exceed market and are used 

when no amount of debt restructuring can yield viable rents below 

market. The second change extends the period during which a nonprofit purchaser of a Mark-to-Market project can obtain debt relief 

on a second mortgage. Such a change is necessary in order to recognize the reality of the time it takes to process real estate transactions. 

We recommend adding a provision to the bill to give owners of 

properties that have undergone debt restructuring the right to request and receive budget-based rent increases. Such rent increases 

are authorized in the Mark-to-Market regulations but are discretionary with HUD, and the Department has determined not to entertain any requests for budget-based rent increases thus far, relying instead solely on annual operating cost adjustment factors, 

OCAFs. 

Over the 30-year life of the program, it is possible that for some 

properties, the OCAF adjustment will be insufficient to meet rising 

operating costs, which does not necessarily reflect additional operating cost increases, particularly because OCAFs are published on 

a Statewide basis. 

The bill also proposes one change in the authorizing statute that 

moves the program into new areas which we are not able to unequivocally support at this time. The bill, as drafted, would give 

HUD unilateral authority to require Section 8 projects with HUDinsured mortgages but with below-market rents participate in the 

Mark-to-Market program. This is a major departure from the program. While this could be an excellent workout tool, we believe 

that participation in the program should and must be voluntary, as 

it is now. I have spoken with Mr. Toon earlier today, and he indicated at that time that he was in agreement the participation 

should be voluntary. I thank you very much for your time and consideration, and I will be happy to answer any questions. 

Thank you. 

Senator ALLARD. Thank you. 

Mr. Kline. 

STATEMENT OF SCOTT KLINE, VICE PRESIDENT AND 

DEVELOPMENT DIRECTOR, NATIONAL HOUSING TRUST 

Mr. KLINE. Thank you, Chairman Allard, Ranking Member Reed, 

and Members of the Subcommittee. Thank you for inviting the National Housing Trust to participate in the hearing today. We appreciate the opportunity to comment on the bill, as introduced by SenVerDate Aug 31 2005 14:10 Apr 09, 2009 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\DOCS\48536.TXT SHERYL
7 

ator Allard, to extend the Mark-to-Market program of the Department of HUD. 

My name is Scott Kline. I am Vice President of the National 

Housing Trust, a national nonprofit organization formed in 1986 

dedicated exclusively to the preservation and improvement of affordable, federally assisted and insured housing. The Trust was 

deeply involved in the introduction of the Mark-to-Market legislation nearly a decade ago, and we continue to view the program as 

an essential tool for preserving affordable housing today. 

I also serve as the head of NHT Enterprise Preservation Corporation, a housing development corporation that has used the 

Mark-to-Market program to successfully save affordable housing. 

NHT Enterprise owns and operates nearly 3,000 affordable apartments in Illinois, Texas, Florida, South Carolina, North Carolina, 

Virginia, and the District of Columbia. 

Mark-to-Market reauthorization is urgently needed, and NHT 

strongly supports the bill introduced by Senator Allard. The National Housing Trust has joined more than a dozen national housing groups in signing a letter of support supporting reauthorization. The Mark-to-Market program preserves and improves affordable HUD-subsidized housing through a restructuring of debt and 

lowering of Section 8 contract rents. The program places HUD-subsidized properties on a steadier financial platform from which they 

can be soundly operated with renewed long-term affordability. 

Currently, an estimated 92,000 units in more than 1,000 FHAinsured properties have above-market rents. Most of these properties, however, have contracts that will expire after Mark-to-Market is scheduled to sunset. No one disputes that the program has 

saved affordable subsidized housing. As of February 2006, according to HUD, the program had saved over 220,000 affordable apartments. Nor is there any real dispute that it saved taxpayers 

money. In April 2006, the GAO issued a report that describes 

Mark-to-Market as one of the steps HUD and the Congress have 

taken to limit cost of growth of the Section 8 program, and as both 

of you mentioned in your opening remarks, the program is estimated to have saved up to $833 million in savings since it was authorized in 1997. 

The HUD finding of $833 million in savings is consistent with 

historical Mark-to-Market cost estimates. In 2001, the CBO found 

that the cost of restructuring mortgage debt is less expensive than 

the cost of default by about $1 million per project. Exception rents 

are also a vital preservation tool, and this is something I want to 

emphasize. The Senate bill lifts the exception rent cap up to 9 percent of the properties closed under the program in any given year. 

NHT Enterprise was recently involved in a transaction that could 

not have occurred without exception rents. In June 2005, NHT Enterprise closed on the financing of a 67-unit, 100 percent Section 

8 scattered-site property located in the South Shore neighborhood 

of Chicago. The properties, known as the O’Keefe portfolio, were acquired and renovated using financing and pursuant to the program 

requirements of Mark-to-Market. 

The South Shore neighborhood is a middle-class neighborhood. 

The portfolio includes vintage 1920s brick multifamily neighborhood buildings, and there is a strong conversion market for these 

8 

types of walkup buildings. Absent the program and its allowed use 

of exception rents, these 67 affordable apartments could have been 

converted to market-rate housing. Rehabilitation and repair work 

financed under the Mark-to-Market restructuring included both interior and exterior repairs necessary to ensure a decent, safe, and 

quality living environment, and we also added a computer lab for 

residents to use. 

The Trust also supports the provision that extends the period of 

eligibility for nonprofits to receive debt relief when acquiring a 

Mark-to-Market property. The original Mark-to-Market bill encouraged transfers to qualified nonprofit organizations. There is mounting nonprofit interest in ability to purchase individual properties in 

the portfolio of restructured properties. Nonprofit sponsors accessing programs such as Home CDBG, tax-exempt financing, and Low 

Income Housing Tax Credits annually produce or preserve over 

30,000 units of affordable housing. HUD limits the time a nonprofit 

may secure debt relief or assignment of debt on a Mark-to-Market 

property to 3 years after the property closed under the program. 

However, the Mark-to-Market program is nearly 10-years old. 

With each passing year, qualified nonprofits are prevented from 

pursuing the elimination of debt in more and more properties that 

have previously gone through Mark-to-Market. Without debt relief 

or assignment, these transactions are infeasible. This 3-year rule 

significantly limits the options of private owners. Many owners are 

willing to transfer the properties, but they are blocked from receiving a fair market bid by the 3-year limit. 

The current 3-year limit on these nonprofit purchase incentives 

is arbitrary. If the best outcome of the sale is transfer to a nonprofit purchaser, then, the Secretary should have maximum flexibility to support that outcome. The Senate bill appropriately addresses this policy flaw, permitting nonprofits to purchase a Markto-Market property on or before the latter of 5 years after recordation of the affordability agreement or 2 years after enactment of 

the bill. 

Again, thank you for providing us with the opportunity to comment on this very important bill. 

Senator ALLARD. I want to thank you all for your testimony. It 

has been very helpful. My first question, and I direct this to all of 

the witnesses, and I think you addressed this in your testimony, 

but I just want a straightforward answer for you for the record: 

which will save more money in the end, extending the Mark-toMarket program or allowing it to expire? And I will let you, Mr. 

Toon, start that out, and then, if Mr. Foster and Mr. Kline respond. 

Mr. TOON. As Mr. Kline mentioned, the cost of a default and 

foreclosure is considerably more expensive by somewhere in the 

neighborhood of $1 million a project more expensive than doing a 

restructuring. 

Senator ALLARD. Mr. Foster. 

Mr. FOSTER. Well, no question; I agree with Mr. Toon on that, 

and moreover, I would like to say the cost to the families of not 

preserving these projects is perhaps even worse. 

Senator ALLARD. Good point. 

Mr. Kline. 

9 

Mr. KLINE. We agree, of course, with everything. It is a financial 

savings as well as a social savings. 

Senator ALLARD. Now, Mr. Toon, in your testimony, I note with 

interest your commitment that you had made to previous Congresses that you would administer the program in a way in which 

you respected the integrity of the budget. I do not recall your exact 

words on that. And I assume that we will have that same commitment on this particular piece of legislation that will continue 

through for the next 5 years? 

Mr. TOON. Absolutely. 

Senator ALLARD. Mr. Foster, you wanted to allow the operators 

of the units that went into Mark-to-Market to have the authority 

to adjust those rentals to the rate without going back to HUD and 

getting approval. How can HUD and particularly the administrators of the Mark-to-Market program keep their commitment to the 

Congress if we just give this to the property owner to do this unilaterally? 

Mr. FOSTER. What we want is the right to request a budgetbased rent increase in some cases rather than using OCAFs, which 

we believe, in some select markets, may not be applicable to the 

long-term, and sufficiently recognize cost increases. We believe that 

OAHP will still have the authority to make the judgments as to 

when those types of adjustments will be applicable and will do so 

responsibly. 

Senator ALLARD. I think you see my concern, and I think that 

we will continue to keep your thoughts in mind as we continue to 

work through this legislation, but I certainly do want to be sure 

that we keep this program, you know, historically sound, and that 

is what has made it easy for us to get this renewed year after year, 

because the Members of the Congress and everything, I think, 

agree with the testimony that we have heard here today as a general rule, that it is working, and it is working well, and it is saving 

taxpayer dollars, and it is providing housing where otherwise it 

would not be available for people who need it. 

So that is the point that I wanted to make as we move forward 

on here. 

Mr. FOSTER. Could I point out, Senator? 

Senator ALLARD. Yes, go ahead, Mr. Foster. 

Mr. FOSTER. Just to point out that the same conditions would 

exist a year or 2 or 5 from now, that default would be more expensive than fixing the problem going forward. So those same 

issues—— 

Senator ALLARD. Well, my only point is that we need to have 

some oversight, and I think we have to have fairly rigorous oversight so the program does not get out of control, and that is the 

point I am trying to make, and I think we can reach that. We want 

to make sure that it continues to be successful. 

The other question: which will provide more affordable housing, 

extending the Mark-to-Market program or allowing it to expire? 

And I would like to have each of the three of you answer that one. 

The previous question I had was which will save more money in 

the end. And then, this one here, what will provide more affordable 

housing? 

10 

Mr. TOON. Again, a restructuring clearly will provide more affordable housing. Allowing the contracts to expire opens the options 

to owners that opting out of the program, for example, and taking 

their properties to market rate and out of the affordable stock is 

a risk that we have seen. And having this program, which provides 

market-oriented business incentives for them and for those properties ensures that they stay in the affordable portfolio. 

Senator ALLARD. Mr. Foster? 

Mr. FOSTER. I will not comment necessarily on the way that 

OAHP might deal with the issues, but I will just say in general it 

has been my experience as a developer that it costs somewhere 

around $70,000 on average to save and preserve a unit, and it costs 

well over $100,000 to build a new unit. So I would think it would 

be much more affordable. 

Senator ALLARD. More affordable housing. 

Mr. FOSTER. More affordable. 

Senator ALLARD. Mr. Kline. 

Mr. KLINE. We agree that continuing of the Mark-to-Market program would retain more affordable housing. It is more likely that 

more owners will opt out without the possibility of having a restructuring opportunity. 

Senator ALLARD. Now, having made those comments, can any of 

you think of any down side to extending the Mark-to-Market program? 

Let the record reflect no; is that right? 

[Laughter.] 

Senator ALLARD. Okay; very good. 

Now, let me go ahead and call on my esteemed colleague, Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

thank you, gentlemen, for your testimony. 

Mr. Toon, there is always a tension between programmatic initiatives and budget possibilities. We understand that. But your office 

is the one that is charged more than anyone else with preserving 

affordable housing. And I will state the obvious: in every community in this country, that is one of the biggest crises that we have, 

and it is not just at the low level; I think both Senator Allard and 

I have been visited by doctors all this week, and one of the concerns they have in terms of practicing in different communities, in 

some places, it is too expensive for them to have the kind of house 

that they can get elsewhere. So this is a huge problem. 

Having said that, you mention the successes in Rhode Island, but 

there are at least two units, Colony and Medina Village, that both 

the PAE, the participating administrative entity, and the local 

HUD office recommended to you, your office, not you personally, 

your office, to make an exemption, exception for the rents, and you 

had turned down. And that seems to me, knowing the market up 

there is not the most proactive posture to preserve affordable housing. In addition, we have another unit, Barbara Jordan, which you 

are probably aware of, which the State is struggling to maintain 

the Section 8. 

I would like you to sort of commit that not only on these issues 

but generally speaking, your office is going to be the real advocate, 

11 

the one that will go the furthest to preserve Section 8 housing. Is 

that something you can say? 

Mr. TOON. It is, and I believe, in fact, that we have done so. The 

flip side of that, as Chairman Allard suggested, is that we are also 

ultimately charged with the fiscal responsibility, and at some point, 

some properties, unfortunately, are simply too expensive. And at 

that point, we can look at other options, such as moving those contracts to other properties in the same market, so there is no net 

loss of units. But we have been the most responsible with the limited resources we have. 

Senator REED. Well, I will take up the point that Mr. Foster 

made is that there might not be any net loss in terms of units, but 

there are certainly disruptions in the lives and the families and 

then the communities, really, and I think also, too, it is this notion 

that it might be too expensive, again; ultimately, if these projects 

fail, you go back to the logic underlying the Mark-to-Market program. The cost of default on the mortgage, the cost of just the disrepair and everything else usually is much more. So I would urge 

you to be much more aggressive, although there is always a budget. 

Let me turn to another issue which I think is important, which 

is Section 514, the Mark-to-Market statute. It requires the Secretary to spend up to $10 million annually for the provision of technical assistance to tenants in buildings where the Section 8 contracts are expiring. I am informed that HUD has obligated none of 

these funds for the past 4 years. Now, this is, as I understand it, 

a requirement to do so, and you are not doing it, and then, in cases 

where you have done it, almost retroactively, these funds have 

been sort of taken away from these purposes, even though there 

are people in good faith who thought they had a grant for 3 or 4 

years. 

Congress has already twice directed HUD to spend 514 funds in 

all expiring Section 8 contract buildings. Why have you not implemented Section 514 as the law requires and as Congress has insisted? 

Mr. TOON. First, I would like to say that we absolutely support 

tenant involvement and input in the restructuring process. I believe it is a cornerstone of the program. Tenants often know the 

physical issues facing a property. They know the management 

issues. They are our best ally and our best partner in going 

through the restructuring process. And in fact, as you have said, 

the law requires tenant participation, and we have taken that seriously. 

Section 514, in fact, says that the Secretary shall spend up to $10 million, so there is a discretionary component to it. For the last 

4 years, the funds for that program, in fact, have not been appropriated, so there has been no funding to fund those programs. 

There also were some issues with the earlier grants under 514. 

While certainly, there were some success stories there, and I think 

they really filled a gap in terms of getting tenant involvement, during that time, we have also charged our PAEs and our staff with 

a much higher degree of requirement in terms of getting tenant involvement. There are strict tenant notice requirements. Tenant 

meetings are required to be held at each property at least twice 

through the restructuring process to get support. Before we will apVerDate Aug 31 2005 14:10 Apr 09, 2009 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 S:\DOCS\48536.TXT SHERYL
12 

prove a deal within our office, we ensure that the tenant comments, in fact, have been incorporated in the final plan. So there 

are a number of controls in place that ensure that tenant input is 

considered in the final plans that we are developing. 

So we really feel that through the PAE structure, we are more 

than adequately including the tenant concerns, including tenant involvement, and ultimately making that a part of the restructuring. 

Senator REED. Just as a follow-up, have you requested funding? 

Have you put it in your budget, the Section 514? 

Mr. TOON. I am not aware of that, but I can get back to you for 

the record. 

Senator REED. Please. I think that is important. I mean, as you 

can see, that is part of this legislation, and I think you indicated 

that tenant involvement is important, and it has to be something 

more than rhetorical; it has to be real, and I find usually, when you 

provide resources, it becomes less rhetorical, more practical, more 

real. 

Let me, if I can, ask one question for Mr. Foster and Mr. Kline. 

My time is expiring. You have both, I think, in your testimony supported the notion of budget-based rent increases, and we have had 

a dialogue with the Chairman. I presume that the same logic underlying the budget-based is the logic that is in the overall program, which is this ends up saving money and saving units. Is that 

correct, Mr. Foster? 

Mr. FOSTER. That is my point, yes, sir. 

Senator REED. And Mr. Kline. 

Mr. KLINE. Yes, we feel the same way. There are circumstances 

over a 30-year period where expenses may rise to such an extent 

that OCAF just does not cover what is necessary to rent and operate a property, and going back to some of the other studies that 

we made reference to in our testimony, keeping the property affordable and retaining it is cheaper than foreclosure. 

Senator REED. And final question if I may, Mr. Chairman. I 

think there is a disagreement of opinion between Mr. Foster and 

Mr. Kline about below-market rates, being able to deal with properties below-market rates. Might you just a quick thought, Mr. 

Kline and Mr. Foster, about this approach? 

Mr. KLINE. We feel that there might be circumstances that arise 

where the current Section 8 rents are below market, but in order 

to support the debt necessary to fund repairs, the rents might need 

to be hiked up above-market rents and that Mark-to-Market should 

be an available resource to do that. 

Senator REED. And again, the logic is, and I presume you could 

show project by project that it saves units and would preserve affordable housing. 

Mr. KLINE. Yes, sir, because otherwise, without the rehabilitation, the units are left to deteriorate, or the owners are going to 

have to opt out due to their inability to make REAC inspections. 

Senator REED. Mr. Foster, you have a divergent opinion? 

Mr. FOSTER. Actually, no, sir; we think it is attendant upon the 

Department to find that it would save money ultimately, or else, 

they cannot do it to begin with. But secondly, generally, we are not 

in disagreement that we could not have—that they should not have 

that tool. We are simply saying that it needs to be voluntary. In 

13 

other words, the owners need to agree that they are going to come 

into the program—— 

Senator REED. Okay. 

Mr. FOSTER.——as well as OAHP saying that they should come 

into the program, and we are willing to work with OAHP to come 

up with some language, and we just think that the language needs 

to be thoroughly vetted. 

Senator REED. Thank you very much. 

Thank you, Mr. Chairman. 

Senator ALLARD. Thank you. Finally, I just have one question. 

Do you have any more questions? 

Senator REED. No, I do not. 

Senator ALLARD. I just have one question, and this is to Mr. Toon 

of HUD. 

Would you not agree that there is a very real and quantifiable 

down side to not extending the program? 

Mr. TOON. There is. The most important and obvious is the default and foreclosure risks to the FHA insurance fund, which our 

risk analysis office has estimated at $400 million over 5 years. 

Senator ALLARD. Okay; and then, you reminded us that it is $400 

million. 

Mr. TOON. $400 million, with an M. 

Senator ALLARD. And what would $400 million in default mean 

to FHA? 

Mr. TOON. It would be devastating. 

Senator ALLARD. Okay; any other questions? If not, we will call 

the hearing to a close. Oh, I have got some more questions here. 

Let me do it this way: we have got quite a few questions here, and 

we could spin this out for quite a length of time. What I would like 

to do is I would like to write these out to you, and we will send 

them to you. 

Mr. TOON. Certainly. 

Senator ALLARD. And then, can you all respond back within 10 

days? 

Mr. FOSTER. Yes, sir. 

Mr. KLINE. Yes, sir. 

Senator ALLARD. We would appreciate it if you could, and then, 

we can get the legislation moving. 

Mr. KLINE. Absolutely; yes sir. 

Senator ALLARD. Okay; thank you very much. The hearing is adjourned. 

[Whereupon, at 3:20 p.m., the hearing adjourned.] 

[Prepared statements supplied for the record follow:] 

14 

PREPARED STATEMENT OF THEODORE K. TOON 

DEPUTY ASSISTANT SECRETARY, OFFICE OF AFFORDABLE HOUSING PRESERVATION

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

JUNE 14, 2006 

Thank you Chairman Allard, Ranking Member Reed, and members of the Subcommittee for inviting me here today to testify on the proposed Mark-to-Market Extension Act. The preservation of affordable housing in our communities continues 

to be a top priority for Secretary Jackson, Assistant Secretary Montgomery and the 

Department of Housing and Urban Development (HUD). 

The Mark-to-Market program, originally created by Congress in 1997 (the Multifamily Assisted Housing Reform and Affordability Act (MAHRA)), and extended in 

2001 (the Mark-to-Market Extension Act), reduces rents to market levels upon Section 8 contract expiration and renewal. HUD contracts with private owners of rental 

units to help ensure a certain number of units for occupancy by low-income residents. When those contracts expire and are renewed, if the contract rents are found 

to be above comparable market rents for similar units in the same area, the Markto-Market program reduces the new contract rent for those units to market levels. 

By bringing above-market Section 8 rental rents in line with market levels, HUD 

controls costs of the Section 8 program and maximizes the number of families that 

can be helped by such housing assistance. The Mark-to-Market authorities will sunset September 30, 2006. The bill that you have introduced, Mr. Chairman, proposes 

a 5-year extension of the existing Mark-to-Market restructuring authorities, administered by HUD. 

As you are aware, under Mark-to-Market, HUD has the mandate to reduce rents 

to market levels, saving dollars on project-based Section 8 expenditures. Mark-toMarket also includes authorities essential to maintaining the physical and financial 

viability of the properties with reduced rents. In Mark-to-Market, HUD staff oversees a network of public and private entities to analyze property viability, recommend repairs and other preservation activities, and, if necessary, re-size the 

FHA-insured debt to a level that can be serviced by the reduced rents. If debt is 

re-sized, the owner enters into a long-term use agreement through which the property is preserved as affordable housing for at least 30 years. To be sure, this is a 

significant tool in HUD’s preservation toolbox. Unfortunately, HUD’s mandate to reduce rents will continue beyond September 30, 2006, but the Mark-to-Market authorities will not. 

Over the past 9 years, HUD has been very successful at balancing the dual Markto-Market program goals of reducing long-term Section 8 subsidy costs while preserving affordable housing. To date, HUD has preserved 2,200 properties around the 

country comprising over 188,000 affordable housing units, and in so doing we have 

promoted the long-term physical and financial viability of these properties. The program has generated net savings totaling $2 billion to HUD and the American taxpayers. And by preserving affordable housing, we have provided stability for many 

low-income families and the communities where they live. 

In discussing reauthorization of Mark-to-Market, I think it’s important to consider 

what has been achieved thus far. To date, this program has preserved properties 

in all 50 states and the District of Columbia. For example, Chairman Allard, in Colorado, HUD has preserved 31 properties with 1,800 units of affordable housing. In 

Rhode Island, Senator Reed, 12 properties with more than 1,000 housing units have 

been preserved, and another 21 properties with more than 2,000 units will become 

eligible under this proposed extension. (Attachment A shows the number of properties and units preserved through and active in Mark-to-Market, and the potential 

referrals over the next 5 years.) Once restructured, these properties are physically 

improved and on solid financial footing. That is a ‘‘win-win’’ situation for the tenants 

and the community. 

Not every property can or will be preserved through Mark-to-Market. While preservation is a primary goal of the program, Congress has made it very clear that prudent use of limited resources is an equally important goal. HUD has taken this 

charge seriously. There have been, and will continue to be, properties referred into 

Mark-to-Market that simply cannot be responsibly preserved. These projects may be 

too expensive, functionally obsolete, or located in markets with ready availability of 

replacement housing. 

In other situations, properties that in the Department’s opinion require restructuring do not receive the benefits of the program because the owners refuse to accept the terms of the restructuring. In these cases, HUD makes the determination 

that the project is infeasible for restructuring. These are difficult decisions, made 

with consideration of the needs of the affected residents and communities, and with 

15 

cooperation from both our office and the HUD field offices. Properties that need restructuring but don’t accomplish it are closely monitored by HUD to allow early 

intervention if the property deteriorates. The analysis done while in Mark-to-Market 

informs and shapes the Department’s decisions on other management options for 

the properties thereafter. 

Now, let us turn to the discussion before us today, which is the proposed reauthorization of Mark-to-Market. According to the Department’s analysis of potential 

referrals, if Mark-to-Market is extended as proposed in this bill, over 5 years (FY 

2007–11) nearly 800 properties with 78,000 affordable units will meet the eligibility 

requirements for Mark-to-Market restructuring. These are project-based Section 8 

properties with expiring Section 8 contracts, FHA-insured mortgages, and contract 

rents above Fair Market Rents. This is the universe of properties that, absent extension of restructuring authorities, will represent the most at-risk properties in HUD’s 

insured mortgage portfolio because of the required reductions in rents. 

In addition to the lost opportunity to preserve another 800 properties, or 78,000 

units of affordable housing, the sunset of Mark-to-Market may also expose the FHA 

Insurance Fund to considerable risk. This is because MAHRA, the legislation that 

created Mark-to-Market, will continue to require that contract rents on subsidized 

FHA-insured properties get marked down to market levels upon contract renewal, 

regardless of whether the program is extended. Reductions in rents to market levels 

will result in many properties being unable to pay their operating costs and/or their 

mortgage payments. As we see with other properties in negative cash flow positions, 

these property owners and managers will be faced with the decision of paying for 

utilities and routine maintenance, or making their mortgage payments. 

It is important to keep in mind that FHA insures the underlying mortgages on 

these properties. Not only will we see physical deterioration of the projects, which 

will negatively impact residents, and the overall communities, but the mortgages on 

these projects also represent real, quantifiable default and foreclosure risk to the 

FHA Insurance Fund—risk that is estimated to total more than $400 million over 

the next 5 years. 

In conclusion, I want to thank you for affording our Department the opportunity 

to testify on this legislation. Congress’ intent in creating and then extending Markto-Market was that long-term costs had to be reduced, and that it would be less expensive and more effective to proactively address the physical, financial, and managerial challenges facing our affordable housing portfolio than to wait for the properties to physically decline and financially fail. This belief has been proven true by 

the successful restructuring of 188,000 apartment units across the country, which 

has also helped improve the lives of thousands of low-income families who call these 

units home. 

On behalf of the entire Department, I look forward to working with you to ensure 

that we continue to provide affordable housing in a cost-effective manner. 

16 


614061.eps
17 

PREPARED STATEMENT OF CHRIS FOSTER 

PRESIDENT, NATIONAL LEASED HOUSING ASSOCIATION

JUNE 14, 2006 

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity 

to testify on legislation to extend HUD’s Mark-to-Market restructuring program 

from its current expiration date of October 1, 2006. My name is Chris Foster and 

I am President of Hampstead Partners. I am testifying today on behalf of the National Leased Housing Association, a trade association located in Washington, D.C., 

which for over 35 years has represented owners, managers, investors, lenders and 

public agencies involved in developing and preserving affordable multifamily housing primarily assisted under housing programs administered by HUD. 

We strongly support the extension of the Mark-to-Market program. It is a valuable tool that has resulted in the preservation of over 200,000 affordable rental 

apartments as well as resulted in significant savings to the Federal Government. 

The Mark-to-Market program applies to properties, insured by the Federal Housing 

Administration (FHA) with project-based assistance primarily under Section 8 of the 

United States Housing Act of 1937, and with rents in excess of rents for comparable 

unassisted units in the area. Notwithstanding the fact that many of these properties 

had originally been built with rents which were set above market, when the first 

wave of 20-year Section 8 contracts approached expiration in the mid 1990s, Congress was reluctant to authorize renewal of the contracts at above-market rents. 

Many of these projects could not operate and meet mortgage payments at market 

rents. A large number of these projects were financed with HUD-insured mortgages. 

This universe of projects lent themselves to a solution with a positive budget impact, 

restructuring of the HUD-insured mortgage by a full or partial payment of insurance claims, thereby lowering debt-service to a level that was sustainable at market 

rents. In addition, needed rehabilitation and the replenishment of reserves is generally accomplished under the program through further reductions in existing debt 

to permit new debt to be increased to cover these costs which are necessary to ensure continued operations. Owners of projects that have been restructured must execute use agreements to accept Section 8 renewal offers and to keep rents affordable, 

with or without the availability of Section 8 assistance, for 30 years. 

We understand that in the coming years a significant number of Section 8 contracts will be eligible for initial renewal and that many are attached to projects with 

HUD-insured mortgages. 

The same factors that moved Congress to enact the Mark-to-Market program in 

1997 and to extend it in 2001 exist today and warrant a further extension. We urge 

Congress to authorize a 5-year extension of HUD’s restructuring authority 

and have attached for the record an industry letter signed by 15 national 

housing organizations that endorse such an extension. 

The bill proposes two changes to the Mark-to-Market program that we strongly 

support. The Mark-to-Market Extension Act increases from 5 percent to 9 percent 

the total number of units that can have exception rents in excess of 120 percent of 

the fair market rent for the area. Exception rents are budget-based rents that exceed market rent and are used when no amount of debt restructuring can yield viable rents that are below market. The 5 percent limit was basically an educated 

guess when it was enacted in 1997 and HUD’s experience with that limit over the 

years should be acknowledged. A second revision included in the bill would extend 

the 3-year period during which a nonprofit purchaser of a Mark-to-Market project 

can obtain relief from a second mortgage on the project to 5 years from the date 

of recordation of the affordability agreement or 2 years from the date of enactment 

of the bill. A longer time frame is necessary to recognize the reality of real estate 

acquisition timeframes and will encourage major recapitalization of the properties. 

We recommend adding a provision to the bill to give owners of properties that 

have undergone debt restructuring the right to request and receive budget-based 

rent increases. Such rent adjustments are authorized in the Mark-to-Market regulations but discretionary and HUD has determined not to entertain any request for 

budget-based rent adjustments, relying instead solely on an annual Operating Cost 

Adjustment Factor (OCAF). Over the 30-year life of the program, it is possible that 

for some properties the OCAF adjustment will be insufficient to meet rising operating costs which does not necessarily reflect actual operating expense increases 

particularly because OCAFs are published on a state-wide basis. This flexibility is 

also particularly important as it relates to properties that were underwritten before 

March of 2002 when HUD amended its underwriting criteria to allow a sufficient 

cushion for operating cost increases. In order to maintain project viability, owners 

should have the option of a budget-based review of rents in those circumstances. 

18 

Further, there also may be situations that will require additional restructuring of 

such projects. 

The bill also proposes one change to the authorizing statute that moves the program into new areas and which we are not able to endorse at this time. Section 6 

of the bill as drafted would give HUD the unilateral authority to require Section 

8 projects with HUD-insured loans, but with below-market rents, to participate in 

the Mark-to-Market program or lose their Section 8 assistance. This is a major departure from the current program and we are not aware of any compelling evidence 

to justify such a change. Any proposal that makes a fundamental change to current 

law and practice should not be included as an amendment to an extension bill and 

should be thoroughly vetted as part of a separate legislative initiative. For nearly 

9 years we have had stable and predictable rules for Section 8 renewals that work 

well. An extension of theMark-to-Market program beyond its original scope can 

cause confusion and is overreaching, potentially leading to an increased number of 

owners opting out of the Section 8 program. 

Properties with rents below comparable market rents have options to address rehabilitation needs and we prefer the use of existing tools rather than change the 

framework of the current Mark-to-Market program. In fact, we encourage the Department to review its existing tools including the ability to include new debt service in budget-based rent adjustments (not to exceed comparable market rent) as part 

of transactions that will accomplish significant rehabilitation to ensure long-term viability and preservation. Further, NLHA recommends that HUD assign nonMarkto-Market preservation transactions (property disposition, 236 decouplings, loan 

work-outs, etc.) to the Office of Affordable Housing Preservation (OAHP) which now 

administers the Mark-to-Market program. Due to its responsibilities related to mortgage restructuring, the OAHP office is staffed by sophisticated real estate professionals who understand the intricacies of preservation restructurings and would be 

well suited to process other complex transactions. 

Thank you for your time and consideration. I will be glad to answer any questions. 

19 

April 19, 2006 

Hon. WAYNE ALLARD, 

U.S. Senate 

521 Senate Dirksen Office Building 

Washington, DC. 

Dear Senator Allard: 

We are writing to express support for legislation that will further efforts to preserve the assisted housing inventory by extending the authority of the Department 

of Housing and Urban Development (HUD) to restructure FHA-insured mortgages 

under the ‘‘Mark-to-Market Program.’’ This program was authorized in 1997 under 

the Multifamily Assisted Housing Reform and Affordability Act (MAHRA) as part 

of an effort to address the expiration of rental subsidy contracts under the Section 

8 project-based programs. The legislation resulted in a program that allowed for the 

restructuring of mortgages on projects with above-market rents, to reduce such 

rents in exchange for an extended affordability term of 30 years. HUD has preserved over 3,000 projects as part of this program. 

The authority for HUD to restructure such mortgages expires on September 30, 2006. We urge Congress to provide for a 5-year extension of the contract 

in order to preserve an additional 1,000 properties that are expected to be eligible 

for the debt restructuring program during that timeframe. We believe such an extension will not result in any increased costs to the Federal Government and, in 

fact, may result in Section 8 rent savings in the future. 

Thank you for your interest and commitment to preserving the affordable housing 

stock. We stand ready to work with you to ensure the extension of the September 

30, 2006 deadline. Please contact Denise B. Muha at NLHA with any questions or 

for more information (202–785–8888). 

Sincerely, 

AMERICAN ASSOCIATION OF HOMES AND SERVICES FOR THE AGING (AAHSA) 

COUNCIL FOR AFFORDABLE AND RURAL HOUSING (CARH) 

INSTITUTE OF REAL ESTATE MANAGEMENT (IREM) 

INSTITUTE FOR RESPONSIBLE HOUSING PRESERVATION (IRHP) 

MORTGAGE BANKERS ASSOCIATION (MBA) 

NATIONAL AFFORDABLE HOUSING MANAGEMENT ASSOCIATION (NAHMA) 

NATIONAL APARTMENT ASSOCIATION (NAA) 

NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS (NAAHL) 

NATIONAL ASSOCIATION OF HOMEBUILDERS (NAHB) 

NATIONAL ASSOCIATION OF REALTORS (NAR) 

NATIONAL HOUSING CONFERENCE (NHC) 

NATIONAL HOUSING TRUST (NHT) 

NATIONAL LEASED HOUSING ASSOCIATION (NLHA) 

NATIONAL LOW INCOME HOUSING COALITION (NLIHC) 

NATIONAL MULTI HOUSING COUNCIL (NMHC) 

STEWARD OF AFFORDABLE HOUSING IN THE FUTURE (SAHF) 

20 

* Based on NHT’s analysis of HUD data. Above-market status was determined by the FMR 

ratio (the ratio of the contract’s rent gross amount to the FMR gross amount). For the purposes 

of this analysis, a contract with an FMR ratio greater than 105 was considered to have contract 

rents above-market. 

PREPARED STATEMENT OF SCOTT KLINE 

VICE PRESIDENT AND DEVELOPMENT DIRECTOR, NATIONAL HOUSING TRUST

JUNE 14, 2006 

Chairman Allard, Ranking Member Reed, members of the Subcommittee, thank 

you for inviting the National Housing Trust to participate in this hearing today. The 

National Housing Trust appreciates the opportunity to comment on the bill introduced by Senator Allard to extend the Mark-to-Market program of the Department 

of Housing and Urban Development. 

My name is Scott Kline, and I am Vice President of the National Housing Trust, 

a national nonprofit organization formed in 1986, dedicated exclusively to the preservation and improvement of affordable, federally assisted and insured housing. Our 

board of directors includes representatives of all major interests in the field, including owners and managers, state housing finance agencies, national and regional 

nonprofit intermediaries, housing scholars and other housing professionals who care 

deeply about protecting this irreplaceable resource. The Trust was deeply involved 

in the introduction of the Mark-to-Market legislation nearly a decade ago and continues to view the program as an essential tool in the ongoing efforts to preserve 

existing affordable housing for working families and elderly people in all parts of 

this country. 

The National Housing Trust serves as an informational clearinghouse on developments for the public and private sector. In addition to its public policy and program 

monitoring role, the Trust provides technical assistance to nonprofits on sale transactions of federally assisted and insured developments. 

I also serve as the head of NHT/Enterprise Preservation Corporation, a housing 

development corporation that has used the Mark-to-Market program to successfully 

save affordable housing. NHT/Enterprise Preservation Corporation owns and operates nearly 3,000 affordable apartments in Illinois, Texas, Florida, South Carolina, 

North Carolina, Virginia, and the District of Columbia. NHT/Enterprise is a collaboration of the National Housing Trust and Enterprise Community Partners. The 

John D. and Catherine T. MacArthur Foundation provides NHT/Enterprise and the 

Nation Housing Trust general operating support and low-cost capital for housing development as part of its major national housing preservation initiative, Window of 

Opportunity. 

As you know, the Mark-to-Market program was somewhat slow to get off the 

ground but, as I will make clear today, the program is currently a viable, mature, 

Federal housing preservation program—one that both saves housing and taxpayer 

dollars. According to the June 2006 version of HUD Research Works, depending on 

how one calculates the savings, the net present value of savings from the program 

range up to $883 million. See Exhibit A. For this reason alone, we strongly support 

the Senate bill. 

Mark-to-Market Reauthorization Is Urgently Needed 

On September 30, 2006, legislative authority for HUD’s Mark-to-Market mortgage 

restructuring program expires. Without action by Congress to extend the program, 

apartments with HUD-approved rents that exceed comparable market rents face an 

uncertain fate. The National Housing Trust has joined more than a dozen housing 

groups in signing a letter supporting reauthorization (See Exhibit B). 

The Mark-to-Market program preserves and improves affordable, HUD subsidized 

housing. Through a restructuring of debt and lowering of Section 8 contract rents, 

the Mark-to-Market program places HUD subsidized properties on a steadier financial platform from which they can be soundly operated with renewed, long-term affordability. Currently, an estimated 92,000 units in more than 1,000 FHA-insured 

properties have above-market rents.* Most of these properties, however, have contracts expiring after Mark-to-Market is scheduled to sunset. The problem: even if 

HUD’s ability to restructure these properties’ loans to supportable levels is not extended, HUD is obligated by law to lower above-market Section 8 rents. If this 

comes to pass, many property owners won’t have sufficient revenue to cover operating costs and mortgage payments after their rental assistance is cut. The result: 

loss of affordable housing due to property deterioration and foreclosures. 

21 

1 America’s Rental Housing: Homes for a Diverse Nation, p.1, Joint Center for Housing Studies (2006). 

Why Preserve Federally Assisted Housing Stock? 

The nation’s market supply of affordable housing does not currently meet the demand for that product. There is virtually no dispute that affordable housing is a 

precious and endangered resource. According to a recent report by the Joint Center 

for Housing Studies at Harvard University, the national goal of decent and affordable housing for all Americans remains out of reach for certain Americans because 

poverty persists and the Nation is losing low-cost rental units from the conventional 

housing inventory. The nation’s low-cost housing stock declined by 2 million units 

between 1993–2003.1 Thus, how HUD handles restructuring and continued affordability for the people who reside in the hundreds of thousands of apartments subsidized by HUD is a key concern for those of us concerned about the well being of 

low-income families. 

No one disputes that the Mark-to-Market program has saved affordable subsidized housing. As of February 2006, the program had saved over 220,000 affordable apartments. Moreover, the program lowers the ongoing cost of keeping that 

housing affordable. In April 2006, the GAO issued a report titled ‘‘Policy Decisions 

and Market Factors Explain Changes in Cost of the Section 8 Programs.’’ The report 

describes Mark-to-Market as one of the steps Congress and HUD have taken to 

limit costs (GAO Report, April, 2006: ‘‘Policy Decisions and Market Factors Explain 

Changes in Cost of the Section 8 Programs’’): 

Congress and HUD have taken steps to limit further growth in the budgetary costs of the Section 8 programs . . . for the project-based program, 

Congress and HUD continued steps begun in 1997 to reduce above-market 

rents at some properties and to limit annual rent increases. (See Exhibit 

C). 

By already preserving over 220,000 affordable apartments, the Mark-to-Market program has helped save an otherwise irreplaceable housing resource at an acceptable 

cost to the American taxpayer. 

The Senate Bill Helps the Nation Resolve an Affordable Housing Dilemma 

at an Affordable Cost 

According to a recent study conducted by HUD’s Office of Policy, Development, 

and Research, 220,000 affordable housing units have been preserved since the program was first authorized in 1997, and rent reductions have resulted in up to $883 

million in savings to the taxpayer. More than 2,800 properties have completed the 

Mark-to-Market process as of February 15, 2006. (Supra, Exhibit A.). 


614062.eps
22 

2GAO Report: Issues Related to Mark-to-Market Program Reauthorization (July 2001). 

3 CBO Cost Estimate, H.R. 2589, Office of Multifamily Housing Restructuring Act, 2001. 

The HUD finding is consistent with historical Mark-to-Market cost estimates. In 

2001, the Government Accountability Office (GAO) conducted an analysis to determine if the Mark-to-Market program should be extended past an earlier expiration 

date. The GAO conclusion: extending the program was more advantageous to the 

Federal Government than ending it. The reasons: cost savings in the Section 8 program, minimized loss claims on the FHA insurance fund, and preservation of the 

affordable housing stock.2 That same year, the CBO found that ‘‘the cost of restruc- turing mortgage debt is less expensive than the cost of default by about $1 million 

per project, on average.’’ 3

Outline of the Proposed Bill 

The Senate bill provides certainty to the marketplace that the Mark-to-Market 

program will continue. Extension of the program helps resolve a major housing dilemma for the households who live in properties where the Section 8 contract rent 

is higher than market. Moreover, the Senate legislation both identifies and helps 

resolve key issues of concern to those of us committed to affordable housing preservation. Specifically, the legislation: 

• Continues the current program, which permits HUD properties to receive property-based assistance, albeit at lower levels than the current assistance. • Recognizes that some properties may not be able to meet operating expenses at 

the post restructured market rent and permits rents to be set at a budget-based 

‘‘exception rent’’ for up to 9 percent of the projects; • Permits HUD, at its discretion, to use the Mark-to-Market restructuring authority on projects with at or below market rents; • Provides for the preservation and rehabilitation of properties damaged by hurricanes or other natural disasters; and • Extends the period during which a qualified nonprofit may purchase a Markto-Market property. 

We support efforts in the Senate bill to address these important issues. 

1. Exception Rents are a Vital Preservation Tool 

Nationwide, no more than 5 percent of the properties in the Mark-to-Market program may have exception rents (defined as rents above 120 percent of Fair Market 

Rent). This authority may be exercised only if the loss of the project would seriously 

impact the tenants and community and the net operating income of the project is 

insufficient to support reasonable expenses and operating reserves. The Senate bill 

lifts this exception rent cap up to 9 percent of the properties closed under the program in any given year. NHT/Enterprise was recently involved in a transaction that 

could not have occurred absent the provision of exception rents. 

In June, 2005, NHT/Enterprise closed on the financing of a 67-unit, 100 percent 

Section 8, scattered-site property located in the South Shore neighborhood of Chicago. The properties, known as the ‘‘O’Keefe Portfolio,’’ were acquired and renovated 

using financing and pursuant to the program requirements of HUD’s Mark-to-Market Program. The South Shore neighborhood is in a working class community. One 

of the properties has 20 townhouses. Others are vintage 1920’s Chicago brick multifamily neighborhood buildings. There is a strong conversion market for these types 

of walk up buildings due to favorable real estate tax treatment that such buildings 

receive upon condominium conversion. Absent the Mark-to-Market Program and its 

allowed use of exception rents, these 67 affordable apartments could have been converted to market-rate housing. The families occupying the housing all earn less than 

30 percent of median income. 

The O’Keefe Portfolio was preserved as affordable housing utilizing the Mark-toMarket program and exception rents. 

Under the restructuring, the new marked down rents were sized at 110 percent 

of Fair Market Rent, an amount sufficient to pay operating expenses and service 

$1.1 million in debt. Rehabilitation and repair work financed under Mark-to-Market 

restructuring includes new windows, new roofs, lead based paint remediation, new 

or enhanced furnaces, porch repairs, concrete and asphalt repairs, masonry repairs, 

addition of a management office and computer lab for use by residents, and numerous interior improvements such as new kitchen cabinets, new appliances, new carpet/tile, plaster repair and paint, and new tub surrounds. 

Attached as Exhibit D is an example of how another national nonprofit organization, Volunteers of America, employed Exception Rents to save HUD-assisted housing. Permitting exception rents for up to 9 percent of the properties that are restructured permits organizations like VOA and NHT/Enterprise to save more Mark-toVerDate Aug 31 2005 14:10 Apr 09, 2009 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 S:\DOCS\48536.TXT SHERYL
23 

4 HUD strictly defined the term ‘‘qualified.’’ The Trust supports limiting debt relief to qualified 

organizations, as defined. See Appendix C to Mark-to-Market Operating Procedures Guide. 

Market properties. We thank the Chair for inserting this key provision on exception 

rents and urge the Senate to adopt it. 

Separately, we recommend adding a provision to the Senate bill to give owners 

the right to request and receive budget-based rent increases. Such rent adjustments 

are authorized but discretionary with HUD. HUD has determined not to entertain 

any request for budget-based rent adjustments, relying instead solely on an annual 

Operating Cost Adjustment Factor (OCAF) adjustment. Over the 30-year life of the 

program, situations may arise where an OCAF adjustment is insufficient to meet 

rising operating costs, particularly for those properties that were underwritten before March 2002 when HUD amended its underwriting criteria to allow a sufficient 

cushion for operating cost increases. In order to maintain project viability, owners 

should have the option of a budget-based review of rents in those situations. 

2. The Senate Wisely Includes the Provision Providing HUD the Authority 

To Use the Restructuring Tool for Otherwise Eligible Projects with Ator Below-Market Rents 

The Trust supports this provision. While the relationship of rents to debt is one 

factor in determining the need for a restructured mortgage, it is not the only factor. 

From time to time, the government could restructure debt to save a property where 

the rents were previously below market but where rehabilitation of the property 

would push the rents higher than market. Application of the MAHRA statute tools 

will support a property’s extended viability and renewed affordability. In exchange, 

the property owner should commit to an extended affordability period. 

3. The Senate Bill Properly Includes a Provision Providing HUD the Authority To Use the Restructuring Tool for Otherwise Eligible Projects 

With At- or Below-Market Rents 

While the relationship of rents to debt is one factor in determining the need for 

a restructured mortgage, it is not the only factor. From time to time, the government could restructure debt to save a property where the rents were previously 

below market but where rehabilitation of the property would push the rents higher 

than market. Application of the MAHRA statue tools will support a property’s extended viability and renewed affordability. In exchange, the property owner should 

commit to an extended affordability period. 

This recommendation was first suggested to Congress by SAHF, Stewards of Affordable Housing for the Future (SAHF—say ‘‘SAFE’’). SAHF’s positions on Markto-Market are attached at Exhibit E. NHT/Enterprise is a member of SAHF. SAHF’s 

remaining members include Mercy Housing, Inc., National Affordable Housing 

Trust, National Church Residences, Preservation of Affordable Housing, Inc., Retirement Housing Foundation, and Volunteers of America. Collectively, SAHF members 

own and operate over 800 affordable properties in 48 states, Puerto Rico, the U.S. 

Virgin Islands and the District of Columbia. 

4. The Trust Supports Extending the Period of Eligibility for a Nonprofit 

To Receive Debt Relief or Assignment When Acquiring a Mark-to-Market Property 

The original Mark-to-Market bill encouraged transfers to qualified nonprofit organizations.4 There is mounting nonprofit interest and ability to purchase Mark-toMarket restructured properties. State and local governments have successfully utilized nonprofit organizations to preserve and produce housing with tax abatement 

and relief, tax-exempt financing, HOME, CDBG, and the low-income housing tax 

credit. Nonprofit sponsors annually produce or preserve over 30,000 units of affordable housing. Where local capacity isn’t available, regional and national nonprofit 

organizations have acted as developers and purchasers. 

HUD limits the time a nonprofit may secure debt relief or assignment of debt on 

a Mark-to-Market property to 3 years after the property closed under the program. 

However, the Mark-to-Market program is nearly 10-years old. With each passing 

year, qualified nonprofits are prevented from pursuing the elimination of debt in 

many properties that have previously passed through Mark-to-Market. Without nonprofit debt assignment or relief, these transactions are infeasible. 

The 3-year rule significantly limits the options of private owners of these properties. Many owners are willing to transfer the properties. However, they are 

blocked from receiving a fair-market bid by the arbitrary 3-year limit. The current 

3-year limit on these nonprofit purchase incentives is arbitrary, bearing no relation 

to when an owner ultimately decides to sell. If the best outcome at the time of sale 

24 

is transfer to a nonprofit purchaser, then the Secretary should have maximum flexibility to support that outcome. 

The Senate bill appropriately addresses this policy flaw, permitting nonprofits to 

purchase a Mark-to-Market property on or before the later of 5 years after recordation of the affordability agreement or 2 years after enactment of the bill. 

Again, thank you for providing the National Housing Trust an opportunity to provide comments on the Senate bill concerning the reauthorization of authority for restructuring of HUD-assisted and -insured housing. 

25 


614063.eps
26 


614064.eps
27 


614065.eps
28 


614066.eps
29 


614067.eps
30 


614068.eps
31 


614069.eps
32 


6140610.eps
33 


6140611.eps
34 


6140612.eps