Project-Based Rental Assistance: HUD Should Streamline Its Processes to Ensure Timely Housing Assistance Payments
Published: 2007-10-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Housing and Urban Development (HUD) provides subsidies, known as housing assistance payments, under contracts with privately owned, multifamily projects so that they are affordable to low-income households. Project owners have expressed concern that HUD has chronically made late housing assistance payments in recent years, potentially compromising owners' ability to pay operating expenses, make mortgage payments, or set aside funds for repairs. This testimony, based primarily on a report issued in 2005, discusses the timeliness of HUD's monthly housing assistance payments, the factors that affected payment timeliness, and the effects of delayed payments on project owners.
section_title: What GAO Found
paragraphs: From fiscal years 1995 through 2004, HUD disbursed three-fourths of its monthly housing assistance payments on time, but thousands of payments were late each year, affecting many property owners. Over the 10-year period, 8 percent of payments were delayed by 2 weeks or more. Payments were somewhat more likely to be timely in more recent years. The process for renewing HUD's subsidy contracts with owners can affect the timeliness of housing assistance payments, according to many owners, HUD officials, and contract administrators that HUD hires to work with owners. HUD's renewal process is largely a manual, hard-copy paper process that requires multiple staff to complete. Problems with this cumbersome, paper-intensive process may delay contract renewals and cause late payments. Also, a lack of systematic internal processes for HUD staff to better estimate the amounts that HUD needed to obligate to contracts each year and monitor contract funding levels on an ongoing basis can contribute to delays in housing assistance payments. Although HUD allows owners to borrow from reserve accounts to lessen the effect of delayed housing assistance payments, 3 of 16 project owners told GAO that they had to make late payments on their mortgages or other bills--such as utilities, telephone service, or pest control--as a result of HUD's payment delays. Owners who are heavily reliant on HUD's subsidy to operate their properties are likely to be more severely affected by payment delays than other, more financially independent, owners. Owners reported receiving no warning from HUD when payments would be delayed, and several told GAO that such notification would allow them to mitigate a delay. Nonetheless, project owners, industry group officials, and HUD officials generally agreed that late housing assistance payments by themselves would be unlikely to cause an owner to leave HUD's housing assistance programs, because such a decision is generally driven primarily by local market factors.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss the timeliness of  subsidies paid by the Department of Housing and Urban Development  (HUD) to owners of multifamily properties. Under contracts with HUD,  project owners provide affordable rental housing to approximately 1.6  million low-income households. Owners rely on these subsidies from  HUD, often to a great extent, to pay for operating expenses, such as staff  salaries and maintenance, as well as to make their monthly mortgage  payments and set aside funds for contingencies and major repairs.  Although HUD’s subsidy payments to owners are not subject to a statutory  or regulatory standard for timeliness, HUD’s goal, with some exceptions, is  to provide the payments by the first business day of the month.
My statement today is based primarily on our 2005 report concerning the  timeliness of HUD’s subsidy payments, along with relevant portions of our  2007 report on HUD’s efforts to encourage project owners’ continued  participation in the subsidy programs.  Specifically, my statement  discusses (1) the extent to which HUD made monthly housing assistance  payments in a timely manner during the 10-year period from 1995 through  2004, (2) the factors that affected the timeliness of those payments, and (3)  the effects of payment delays on project owners and their willingness to  continue providing affordable housing.
In preparing the 2005 report, we analyzed trends in HUD’s monthly  payment data to determine whether payment timeliness had changed over  time and whether there were differences in payment timeliness depending  upon the type of contract  administrator (i.e., whether HUD staff or  contractors processed monthly payment vouchers). To determine the  factors that affect the timeliness of housing assistance payments, we  analyzed the portion of HUD’s monthly payment data (generally, payments  made from fiscal years 2002 through 2004) that captured the reasons  particular payments were delayed, and supplemented our analyses by  interviewing HUD officials from headquarters and eight field offices,  contract administrators, project owners, and industry group officials. To  assess the effects of payment delays on project owners and their  willingness to continue providing affordable housing, we compared  available HUD data on projects that opted out of HUD’s programs with  monthly payment timeliness data to determine whether these projects  experienced more payment delays than projects that were currently  receiving assistance from HUD at the time of our review.   We also  interviewed project owners and contract administrators at HUD field  office locations we visited, and we met with officials from eight industry  associations representing property owners. In preparing the 2007 report,  among other things we conducted standardized interviews with both for- profit and nonprofit owners of subsidized properties, housing industry  organizations, state housing finance agencies, and other stakeholders in  five localities. Collectively, we conducted this work between October 2004  and April 2007 in Baltimore, Maryland; Boston, Massachusetts; Chicago,  Illinois; Columbus, Ohio; Des Moines, Iowa; Houston, Texas; Kansas City,  Kansas; Kansas City, Missouri; Los Angeles, California; New York, New  York; Manchester, New Hampshire; Seattle, Washington; and Washington,  D.C. in accordance with generally accepted government auditing  standards.
subsections: section_title: In Brief
paragraphs: Most of HUD’s housing assistance payments were timely—HUD disbursed  by the due date 75 percent of the 3.2 million monthly payments for fiscal  years 1995 through 2004. However, 25 percent of its payments were late,  and 8 percent (averaging about 25,000 payments per year) were  significantly late—that is, they were delayed by 2 weeks or more, a time  frame in which some owners indicated the late payment could affect their  ability to pay their mortgages on time. HUD made payments on an average  of about 26,000 contracts per month. About one-third of these contracts  experienced at least one payment per year that was late by 2 weeks or  more. The timeliness of HUD’s monthly housing assistance payments  varied over the 10-year period, decreasing in 1998 shortly after HUD began  implementing the Multifamily Assisted Housing Reform and Affordability  Act of 1997, which contained new contract renewal and processing  requirements. Timeliness gradually improved after 2001, after HUD began  using performance-based contract administrators to administer a majority  of the contracts. In the 3-year period of fiscal years 2002 through 2004,  HUD disbursed 79 percent of payments by the due date, but 7 percent of  these payments were significantly late.
The primary factors affecting the timeliness of HUD’s housing assistance  payments were the process of renewing owners’ contracts; internal HUD  processes for funding contracts and monitoring how quickly each contract  uses its funding; and untimely, inaccurate, or incomplete submissions of  monthly vouchers by project owners. More specifically:    Monthly housing assistance payments were more likely to be late when  owners’ contracts to participate in HUD’s programs were not renewed  by their expiration dates. For example, our analysis of available HUD  data on the reasons that payments were 2 weeks or more late from  fiscal years 2002 through 2004 found that the most common reason was  the payment being withheld pending contract renewal. HUD officials  and contract administrators said that delays on HUD’s part—stemming  from a renewal process HUD officials agreed could be cumbersome  and paper intensive—could cause (or exacerbate) late payments that  resulted from the lack of a renewed contract. The timeliness, quality,  and completeness of owners’ renewal submissions also could cause  delays in contract renewals, particularly when an owner’s initial  contract expired and it had to be renewed for the first time.
HUD did not know exactly how much it would pay owners each year  because the amounts varied with tenant turnover, so HUD estimated  how much funding it would need to obligate, or commit, to each  contract and how quickly the contract would use these funds.  However, HUD often underestimated how much funding a contract  would need in a given year, and the agency lacked consistent processes  for field office staff to monitor contracts and allocate and obligate  additional funds when contracts used funds faster than anticipated.  Failure to allocate and obligate additional funds to contracts promptly  could cause payments to be late.
According to HUD officials and contract administrators, owners’  untimely, inaccurate, or incomplete monthly voucher submissions also  might cause late housing assistance payments. However, the contract  administrators with whom we spoke generally indicated they were able  to correct errors in owners’ submissions ahead of time to ensure timely  payments.
According to project owners with whom we met, delays in HUD’s housing  assistance payments had negative financial effects and may have  compromised owners’ ability to operate their properties, but the delays  were unlikely to cause owners to opt out of HUD’s programs or stop  providing affordable housing. Some owners said they incurred late fees on  their mortgages and other bills or experienced interruptions in services at  their properties because of delayed payments. Effects of delayed payments  could vary in severity, depending on the financial condition of the property  owner and the extent to which the operation of the property was  dependent on HUD’s subsidy. Further, owners said that HUD did not  notify them of when or for how long payments would be delayed, which  prevented them from taking steps to mitigate the effects of late payments.  The owners and industry group officials generally agreed that the negative  effects of delayed payments alone would not cause owners to opt out of  HUD’s programs, although they could be a contributing factor.
We made several recommendations to HUD designed to improve the  timeliness of these subsidy payments, with which the agency concurred.  My statement incorporates information on the status of HUD’s actions in  response to these recommendations.
section_title: Background
paragraphs: HUD operates a variety of project-based rental assistance programs  through which it pays subsidies, or housing assistance payments, to  private owners of multifamily housing that help make this housing  affordable for lower-income households. HUD entered into long-term  contracts, often 20 to 40 years, committing it and the property owners to  providing long-term affordable housing. Under these contracts, tenants  generally pay 30 percent of their adjusted income toward their rents, with  the HUD subsidy equal to the difference between what the tenants pay and  the contract rents that HUD and the owners negotiate in advance.
In the mid- to late-1990s, Congress and HUD made several important  changes to the duration of housing assistance contract terms (and the  budgeting for them), the contract rents owners would receive relative to  local market conditions, and the manner in which HUD administers its  ongoing project-based housing assistance contracts. Specifically:    Because of budgetary constraints, HUD shortened the terms of  subsequent renewals, after the initial 20- to 40-year terms began  expiring in the mid-1990s. HUD reduced the contract terms to 1 or 5  years, with the funding renewed annually subject to appropriations.
Second, in 1997, Congress passed the Multifamily Assisted Housing  Reform and Affordability Act (MAHRA), as amended, in an effort to  ensure that the rents HUD subsidizes remained comparable with  market rents. Over the course of the initial longer-term agreements  with owners, contract rents in some cases came to substantially exceed  local market rents. MAHRA required an assessment of each project  when it neared the end of its original contract term to determine  whether the contract rents were comparable to current market rents  and whether the project had sufficient cash flow to meet its debt as  well as daily and long-term operating expenses. If the expiring contract  rents were below market rates, HUD could increase the contract rents  to market rates upon renewal (i.e., “mark up to market”). Conversely,  HUD could decrease the contract rents upon renewal if they were  higher than market rents (i.e., “mark down to market”).
Finally, in 1999, because of staffing constraints (primarily in HUD’s  field offices) and the workload involved in renewing the increasing  numbers of rental assistance contracts reaching the end of their initial  terms, HUD began an initiative to contract out the oversight and  administration of most of its project-based contracts. The entities that  HUD hired—typically public housing authorities or state housing  finance agencies—are responsible for conducting on-site management  reviews of assisted properties; adjusting contract rents; reviewing,  processing, and paying monthly vouchers submitted by owners;  renewing contracts with property owners; and responding to health  and safety issues at the properties. As of fiscal year 2004, these  performance-based contract administrators (PBCA) administered the  majority of contracts—more than 13,000 of approximately 23,000  contracts. HUD also has two other types of contract administrators.  “Traditional” contract administrators (typically local public housing  authorities) were responsible for administering approximately 5,000  contracts until they expired; at which time, these contracts would be  assigned to the PBCAs. Finally, HUD itself also administered a small  number of contracts under specific types of project-based programs.
To receive their monthly housing assistance payments, owners must  submit monthly vouchers to account for changes in occupancy and  tenants’ incomes that affect the actual amount of subsidy due. However,  the manner in which the owners submit these vouchers and the process by  which they get paid varies depending on which of the three types of  contract administrators handles their contract. For HUD-administered  contracts, the owner submits a monthly voucher to HUD for verification,  and HUD in turn pays the owner based on the amount in the voucher. For  PBCA-administered contracts, the owner submits a monthly voucher to  the PBCA, which verifies the voucher and forwards it to HUD for payment.  HUD then transfers the amount verified on the voucher to the PBCA,  which in turn pays the owner. In contrast, for traditionally administered  contracts, HUD and the contract administrator develop a yearly budget,  and HUD pays the contract administrator set monthly payments. The  owner submits monthly vouchers to the contract administrator for  verification, and the contract administrator pays the amount approved on  the voucher. At the end of the year, HUD and the contract administrator  reconcile the payments HUD made to the contract administrator with the  amounts the contract administrator paid to the owner, exchanging  payment as necessary to settle any difference.
section_title: From Fiscal Years 1995 through 2004, HUD Made Three- fourths of Its Housing Assistance Payments on Time
paragraphs: Overall, from fiscal years 1995 through 2004, HUD disbursed by the due  date 75 percent of the 3.2 million monthly housing assistance payments on  all types of contracts (see fig. 1). However, 8 percent of payments,  averaging 25,000 per year, were significantly late—that is, they were  delayed by 2 weeks or more and therefore could have had negative effects  on owners who relied on HUD’s subsidy to pay their mortgages. During  this period, 6 percent of the total payments (averaging 18,000 per year)  were 4 weeks or more late, including about 10,000 payments per year that  were 8 weeks or more late.
HUD does not have an overall timeliness standard, by which it makes  payments to owners or its contract administrators, that is based in statute,  regulation, or HUD guidance. However, HUD contractually requires the  PBCAs (which administer the majority of contracts) to pay owners no  later than the first business day of the month. HUD officials said that they  also used this standard informally to determine the timeliness of payments  on HUD-administered and traditionally administered contracts. Therefore,  we considered payments to be timely if they were disbursed by the first  business day of the month. Based on our discussions with project owners  who reported that they relied on HUD’s assistance to pay their mortgages  before they incurred late fees (generally, after the 15th day of the month),  we determined that a payment delay of 2 weeks or more was significant.
The timeliness of housing assistance payments varied over the 10-year  period (see fig. 2). The percentage of payments that were significantly late  increased in 1998, which HUD and PBCA officials indicated likely had to  do with HUD’s initial implementation of MAHRA and new contract  renewal procedures and processing requirements for project owners.  Timeliness gradually improved after 2001, shortly after HUD first began  using the PBCAs to administer contracts.
The percentage of contracts experiencing at least one significantly late  payment over the course of the year showed a similar variation over the  10-year period, rising to 43 percent in fiscal year 1998 and decreasing to 30  percent in fiscal year 2004 (see fig. 3). As with the percentage of late  payments, the percentage of contracts with late payments increased in  fiscal year 1998 when HUD implemented requirements pursuant to  MAHRA. Over the 10-year period, about one-third of approximately 26,000  contracts experienced at least one payment per year that was delayed by 2  weeks or more.
Payments on HUD-administered contracts were more likely to be delayed  than those on contracts administered by the PBCAs and traditional  contract administrators, based on HUD’s fiscal year 2004 payment data  (see fig. 4). Further, HUD-administered contracts were more likely to have  chronically late payments. In fiscal year 2004, 9 percent of HUD- administered contracts experienced chronic late payments, while 3  percent of PBCA-administered contracts and 1 percent of the traditionally  administered contracts had chronic late payments.
section_title: Contract Renewals, HUD Funding and Monitoring Issues, and Problems with Some Owners’ Vouchers Contributed to Payment Delays
paragraphs: Late monthly voucher payments were more likely to occur when a  contract had not been renewed by its expiration date, according to many  of the HUD officials, contract administrators, and property owners with  whom we spoke. HUD’s accounting systems require that an active contract  be in place with funding obligated to it before it can release payments for  that contract. Therefore, an owner cannot receive a monthly voucher  payment on a contract that HUD has not renewed.
Our analysis of HUD data from fiscal years 2002 through 2004 showed that  60 percent of the payments that were 2 weeks or more late was associated  with pending contract renewals, among late payments on PBCA-and HUD- administered contracts for which HUD recorded the reason for the delay  (see fig. 5).
A contract renewal might be “pending” when one or more parties involved  in the process—HUD, the PBCA, or the owner—had not completed the  necessary steps to finalize the renewal. Based on our interviews with HUD  officials, contract administrators, and owners, pending contract renewals  might result from owners’ failing to submit their renewal packages on  time. Often the delay occurred when owners had to submit a study of  market rents, completed by a certified appraiser, to determine the market  rent levels. However, late payments associated with contract renewals  also might occur because HUD had not completed its required processing.  For example, according to a HUD official, at one field office we visited,  contract renewals were delayed because HUD field staff were behind in  updating necessary information, such as the new rent schedules  associated with the renewals and the contract execution dates in HUD  payment systems.
HUD’s contract renewal process was largely manual and paper driven and  required multiple staff in the PBCAs and HUD to complete (see fig. 6).  Upon receipt of renewal packages from owners, the PBCAs then prepared  and forwarded signed contracts (in hard copy) to HUD field offices, which  executed the contracts; in turn, the field offices sent hard copies of  contracts to a HUD accounting center, which activated contract funding.  To allow sufficient time to complete the necessary processing, HUD’s  policy required owners to submit a renewal package to their PBCAs 120  days before a contract expires, and gives the PBCAs 30 days to forward  the renewal package to HUD for completion (leaving HUD 90 days for  processing). However, some owners told us that their contract renewals  had not been completed by the contract expiration dates, even though  they had submitted their renewal packages on time.
While initial contract renewals (upon expiration of the owner’s initial long- term contract) often exceeded the 120-day processing time, subsequent  renewals were less time-consuming and resulted in fewer delays,  according to HUD officials, the PBCAs, and owners. Initial renewals could  be challenging for owners because they often involved HUD’s  reassessment of whether the contract rents were in line with market rents.  Additionally, the initial renewal represented the first time that owners had  to provide HUD with the extensive documentation required for contract  renewals to continue receiving housing assistance payments.
Further, in preparing our 2007 report, some property owners we contacted  raised concerns about the renewal process, particularly on the clarity of  the HUD policies and procedures and the way the policies were applied.   Specifically, these owners were concerned that the contract renewal guide  that was published in 1999 had not been updated despite many changes to  HUD’s policies and procedures, which has led to confusion among some  owners.
To improve the timeliness of housing assistance payments, we  recommended in our 2005 report that HUD streamline and automate the  contract renewal process to prevent processing errors and delays and  eliminate paper/hard-copy requirements to the extent practicable. In its  response, HUD agreed with our recommendation and commented that  streamlining and automating the renewal process would be accomplished  through its Business Process Reengineering (BPR) effort. As we noted in  our 2005 report, HUD launched this initiative in 2004 to develop plans to  improve what it characterized as “inefficient or redundant processes” and  integrate data systems. However, according to HUD, the agency has not  received funding sufficient to implement the BPR initiative. As a result,  HUD has been pursuing other solutions aimed at streamlining and  simplifying the contract renewal process. According to HUD, the agency is  planning to implement a Web-based contract renewal process that would  be paperless, which it expects to complete in fiscal year 2010. HUD also  told us that although it does not have funding in place to fully develop this  automated renewal process, it has been implementing this new process in  phases, as funding becomes available.
subsections: section_title: HUD’s Difficulties in Assessing Rate of Funding Use and Monitoring Funding Levels
paragraphs: The methods HUD used to estimate the amount of funds needed for the  term of each of its project-based assistance contracts and the way it  monitored the funding levels on those contracts also affected the  timeliness of housing assistance payments. When HUD renews a contract,  and when it obligates additional funding for each year of contracts with 5- year terms, it obligates an estimate of the actual subsidy payments to  which the owner will be entitled over the course of a year. However,  those estimates were often too low, according to HUD headquarters and  field office officials and contract administrators. For example, an  underestimate of rent increases or utility costs or a change in household  demographics or incomes at a property would affect the rate at which a  contract exhausted its funds, potentially causing the contract to need  additional funds obligated to it before the end of the year. If HUD  underestimated the subsidy payments, the department needed to allocate  more funds to the contract and adjust its obligation upwards to make all of  the monthly payments.
Throughout the year, HUD headquarters used a “burn-rate calculation” to  monitor the rate at which a contract exhausted or “burned” the obligated  funds and identify those contracts that may have had too little (or too  much) funding. According to some HUD field office and PBCA officials,  they also proactively monitored contract fund levels. Based on the rate at  which a contract exhausted its funds, HUD obligated more funds if  needed.
However, based on our analysis of available HUD data and our discussions  with HUD field office officials, owners, and contract administrators,  payments on some contracts were still delayed because they needed to  have additional funds allocated and obligated before a payment could be  made. As shown in figure 5, our analysis of HUD’s payment data showed  that, where the reasons for delayed payments on PBCA-and HUD- administered contracts were available, 11 percent of delays of 2 weeks or  more were due to contracts needing additional funds obligated. That is,  those payments were delayed because, at the time the owners’ vouchers  were processed, HUD had not allocated and obligated enough funding to  the contracts to cover the payments.
One potential factor that likely contributed to payment delays related to  obligating contract funding was staff at some HUD field offices—unlike  their counterparts in other field offices and staff at some of the PBCAs— lacking access to data systems or not being trained to use them to monitor  funding levels. At some of the field offices we visited, officials reported  that they did not have access to the HUD data systems that would allow  them to adequately monitor contract funding levels. HUD field offices  reported, and headquarters confirmed, that some field officials had not  received training to carry out some functions critical to monitoring the  burn rate. A HUD headquarters official reported that changes in the  agency’s workforce demographics posed challenges because not all of the  field offices had staff with an optimal mix of skill and experience.
We recommended in our 2005 report that HUD develop systematic means  to better estimate the amounts that should be allocated and obligated to  project-based housing assistance payment contracts each year, monitor  the ongoing funding needs of each contract, and ensure that additional  funds were promptly obligated to contracts when necessary to prevent  payment delays. HUD agreed that this recommendation would improve the  timeliness of payments, noting that it planned on achieving improvements  through training, data quality reviews, and data systems maintenance. To  determine how best to improve the current estimation/allocation system,  HUD stated that it had obtained a contractor to analyze current data  systems and make recommendations on improvements that would allow  better identification of emerging funding requirements as well as improved  allocation of available resources. As of October 2007, HUD reported that it  was in the process of verifying and correcting data critical to renewing  project-based rental assistance contracts in its data systems to produce a  “clean universe of contracts.” Based on its preliminary results, HUD  officials told us that the data appeared to be reasonably accurate for the  purposes of estimating renewal funding amounts. In addition, HUD has  evaluated the current methodology for estimating its budget requirements  for the project-based programs and developed a “budget calculator” to  estimate renewal funding amounts. HUD has been pursuing contracting  services to implement this “calculator” using the recently verified contract  data; however, HUD could not provide a specific date by which it expected  to complete these improvements.
section_title: Owners’ Untimely, Inaccurate, or Incomplete Submissions
paragraphs: The PBCAs with which we met estimated that 10 to 20 percent of owners  submitted late vouchers each month. For example, one PBCA reported  that about 20 percent of the payments it processed in 2004 were delayed  due to late owner submissions. However, the PBCAs also reported that  they generally could process vouchers in less than the allowable time—20  days—agreed to in their contracts with HUD and resolve any errors with  owners to prevent a payment delay. According to PBCA officials, they  often participated in several “back-and-forth” interactions with owners to  resolve errors or inaccuracies. Typical owner submission errors included  failing to account correctly for changes in the number of tenants or tenant  income levels, or failing to provide required documentation. Because  HUD’s data systems did not capture the back-and-forth interactions PBCA  officials described to us, we could not directly measure the extent to  which owners’ original voucher submissions may have been late,  inaccurate, or incomplete.
HUD officials and the PBCAs reported that owners had a learning curve  when contracts were transferred to the PBCAs because the PBCAs  reviewed monthly voucher submissions with greater scrutiny than HUD  had in the past. The timeliness of payments also might be affected by a  PBCA’s internal policies for addressing owner errors. For example, to  prevent payment delays, some of the PBCA officials with whom we spoke  told us that they often processed vouchers in advance of receiving  complete information on the owners’ vouchers. In contrast, at one of the  PBCAs we visited, officials told us that they would not process an owner’s  voucher for payment unless it fully met all of HUD’s requirements.
section_title: HUD’s Payment Delays Caused Difficulties for Project Owners, but Were Unlikely to Be a Significant Factor in Owners Opting Out of HUD Contracts
paragraphs: In preparing our 2005 report, some owners reported that they had not been  able to pay their mortgages or other bills on time as a result of HUD’s  payment delays. Three of the 16 owners with whom we spoke reported  having to pay their mortgages or other bills late as a result of HUD’s  payment delays. One owner reported that he was in danger of defaulting  on one of his properties as a direct result of late housing assistance  payments. Another owner was unable to provide full payments to vendors  (including utilities, telephone service, plumbers, landscapers, and pest  control services) during a 3-month delay in receiving housing assistance  payments. According to this owner, her telephone service was interrupted  during the delay and her relationship with some of her vendors suffered.  This owner also expressed concern about how the late and partial  payments to vendors would affect her credit rating.
If owners were unable to pay their vendors or their staff, services to the  property and the condition of the property could suffer. At one affordable  housing property for seniors that we visited, the utility services had been  interrupted because of the owner’s inability to make the payments. At the  same property, the owner told us that she could not purchase cleaning  supplies and had to borrow supplies from another property. One of the 16  owners with whom we spoke told us that they were getting ready to  furlough staff during the time that they were not receiving payments from  HUD. According to one HUD field office official, owners have complained  about not being able to pay for needed repairs or garbage removal while  they were waiting to receive a housing assistance payment. According to  one industry group official, payment delays could result in the gradual  decline of the condition of the properties in instances where owners were  unable to pay for needed repairs.
According to owners as well as industry group and HUD officials, owners  who were heavily reliant on HUD’s subsidy to operate their properties  were more severely affected by payment delays than other owners.  Particularly, owners who owned only one or a few properties and whose  operations were completely or heavily reliant on HUD’s subsidies had the  most difficulty weathering a delay. For example:    Two of the 16 owners with whom we spoke reported that they could  not pay their bills and operate the properties during a payment delay.  These owners were nonprofits, each operating a single property  occupied by low-income seniors. In both cases, the amount of rent they  were receiving from the residents was insufficient to pay the mortgage  and other bills. Neither of these owners had additional sources of  revenue.  In contrast, owners with several properties and other sources of  revenue were less severely affected by HUD’s payment delays. Three of  the owners with whom we spoke reported that they were able to  borrow funds from their other properties or find other funding sources  to cover the mortgage payments and other bills. All three of these  owners had a mix of affordable and market-rate properties. According  to HUD and PBCA officials, owners who receive a mix of subsidized  and market rate rents from their properties would not be as severely  affected by a payment delay as owners with all subsidized units.
While HUD’s payment delays had negative financial effects on project  owners, the delays appeared unlikely to result in owners opting out of  HUD’s programs. Project owners, industry group officials, contract  administrators, and HUD officials we interviewed generally agreed that  market factors, not late payments, primarily drove an owner’s decision to  opt out of HUD programs. Owners generally opt out when they can receive  higher market rents or when it is financially advantageous to convert their  properties to condominiums. For profit-motivated owners, this decision  can be influenced by the condition of the property and the income levels  of the surrounding neighborhood. Owners were more likely to opt out if  they could upgrade their properties at a reasonable cost to convert them  to condominiums or rental units for higher-income tenants. In preparing  our 2007 report, we also found that although the majority of the owners  who opted out of the program did so for economic or market factors,  growing owner frustration over a variety of administrative issues,  including late payments, could upset the balance causing more owners to  consider opting out even when economic conditions could be overcome or  mitigated.  However, most of the owners with whom we spoke, including  some profit-motivated owners, reported that they would not opt out of  HUD programs because of their commitment to providing affordable  housing. Industry group officials also stated that most of their members  were “mission driven,” or committed to providing affordable housing.
HUD had no system for notifying owners when a payment delay would  occur or when it would be resolved, which industry associations  representing many owners as well as the owners with whom we met  indicated impeded their ability to adequately plan to cover expenses until  receiving the late payment. Most of the owners with whom we spoke  reported that they received no warning from HUD that their payments  would be delayed. Several of the owners told us that notification of the  delay and the length of the delay would give them the ability to decide how  to mitigate the effects of a late payment. For example, owners could then  immediately request access to reserve accounts if the delay were long  enough to prevent them from paying their mortgages or other bills on time.  Industry group officials with whom we met agreed that a notification of a  delayed payment would benefit their members.
To mitigate the effects on owners when payments were delayed, we  recommended in our 2005 report that HUD notify owners if their monthly  housing assistance payments would be late and include in such  notifications the date by which HUD expected to make the monthly  payment to the owner. HUD agreed with the recommendation and noted it  would examine the feasibility of notifying project owners if HUD  anticipated that there would be a significant delay in payment due to an  issue beyond the control of the owner.
Based on discussions with HUD, the agency does not appear to have made  significant progress in implementing this recommendation. HUD stated  that it had begun notifying owners regarding the amount of funding  available under their contracts, which would allow owners to judge when  their contracts are likely to experience shortfalls (and thus possibly  experience late payments).  However, the notification would not warn  owners that their payments would be delayed or advise them on the length  of the delay.  Without this information, it would be difficult for owners to  plan for such a contingency.
Madam Chairwoman, this concludes my prepared statement. I would be  happy to answer any questions at this time.
section_title: Contact and Acknowledgments
paragraphs: For further information on this testimony, please contact David G. Wood  at (202) 512-8678 or woodd@gao.gov. Individuals making key  contributions to this testimony included Andy Finkel, Daniel Garcia-Diaz,  Grace Haskins, Roberto Piñero, Linda Rego, and Rose Schuville.
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