Multifamily Housing: More Accessible HUD Data Could Help Efforts to Preserve Housing for Low-Income Tenants
Published: 2004-01-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Housing and Urban Development (HUD) has subsidized the development of over 23,000 properties by offering owners favorable long-term mortgage financing or rental assistance payments in exchange for owners' commitment to house low-income tenants. When owners pay off mortgages--the mortgages "mature"--the subsidized financing ends, raising the possibility of rent increases. GAO was asked to determine the number of HUD mortgages that are scheduled to mature in the next 10 years, the potential impact on tenants, and what HUD and others can do to keep these properties affordable.
section_title: What GAO Found
paragraphs: Nationwide, the HUD mortgages on 2,328 properties--21 percent of the 11,267 subsidized properties with HUD mortgages--are scheduled to mature in the next 10 years, but among states this percentage varies significantly: from 7 percent in Alabama, to 53 percent in South Dakota. About three-quarters of these mortgages are scheduled to mature in the last 3 years of the 10-year period. A CD-ROM (GAO-04-210SP) that accompanies this report provides property-level data for subsidized properties with mortgages scheduled to mature. Impacts on tenants depend on tenant protections available under program statutes and regulations, as well as on property owners' decisions about their properties. While about 134,000, or 57 percent, of the rental units in the 2,328 properties are protected by rental assistance contracts, tenants in over 101,000 units without rental assistance are at risk of paying higher rents after mortgage maturity because no requirement exists to protect tenants when HUD mortgages mature. Absent specific requirements, property owners' decisions on whether to continue serving low-income tenants after their HUD mortgages mature depend on many factors, including neighborhood incomes, property conditions, and owners' missions. Of the 32 properties with HUD mortgages that matured during the past 10 years, 16 have rental assistance contracts that continue to subsidize at least some units, and 10 of the remaining 16 that GAO was able to contact offer rents that are affordable to tenants with incomes below 50 percent of area median income. HUD does not offer incentives to owners to keep properties affordable upon mortgage maturity. While many state and local agencies GAO surveyed offer incentives to preserve affordable housing, they have not directed them specifically at properties where HUD mortgages mature. Most of the agencies do not track HUD mortgage maturity dates for subsidized properties. In addition, although HUD's Web site contains detailed property-level data, some state and local agencies perceive that the information is not readily available. Refer to GAO-04-211SP for survey details.

section_title: Letter
paragraphs: Since the 1950s, the Department of Housing and Urban Development  (HUD) has subsidized about 1.7 million rental units in over 23,000 privately  owned properties that are generally affordable to low-income tenants— those with incomes 80 percent or less of area median income. HUD  supported the development of affordable housing by offering property  owners favorable mortgage financing, long-term rental assistance  contracts, or both in exchange for owners’ commitment to house low- income tenants for at least 20 years and, in some cases, up to 40 years.  However, many of these commitment periods will be completed in the next  10 years. Properties subsidized under these HUD programs represent a  significant source of housing that is currently affordable to low-income  households.
HUD programs that provide mortgage financing in subsidized properties to  private developers are known by the section of the act that authorized  them. We consider a property subsidized if HUD provided favorable  financing (below-market interest rate mortgages), rental assistance, or  both. They include the following programs:   Section 202 Elderly and Disabled Housing Direct Loan, which  provided below-market interest rates on up to 40-year mortgages to  developers of rental housing for low-income elderly and persons with  disabilities from 1959 to 1991. Congress changed Section 202 to a grant  program in 1990;  Section 221(d)(3) Below-Market Interest Rate (BMIR), which provided  subsidized financing on private 40-year mortgages to developers of  rental housing from 1961 to 1968;  Section 236, which provided monthly subsidies to effectively reduce  interest rates on private 40-year mortgages for rental housing from 1968  to 1973;  Sections 221(d)(3) and 221(d)(4), which insured private mortgages to  developers of rental housing from 1961; and  Section 231, which insured private mortgages to developers of rental  housing for the elderly from 1959.
Frequently, properties that benefited from HUD mortgages were coupled  with long-term rental assistance provided under various programs, such as  project-based Section 8, Rent Supplement, and Rental Assistance Payment  (RAP) programs. (The project-based Section 8 program also provides  rental assistance to owners of properties that were not financed with HUD  mortgages.) Rental subsidy was also provided through the Section 8  Moderate Rehabilitation program, which is administered by local housing  authorities and tied to rehabilitated units. Rental assistance programs  basically pay property owners a portion of the monthly rents for units  occupied by assisted low-income tenants. Subsidized financing, rental  assistance, or a combination of both allows property owners the  opportunity to earn financial returns while limiting the rents paid by low- income tenants to a fixed percentage of their household incomes.
Both mortgages and rental assistance contracts are for set periods of time,  and subject to specific program provisions, properties become eligible to  leave HUD programs when mortgages mature or when HUD or owners  elect not to renew expiring rental assistance contracts. HUD mortgages  subsidized under Section 202, Section 221(d)(3) BMIR, and Section 236  restrict how much rent an owner can charge. These restrictions are  generally effective until the mortgage is paid off. Mortgages financed under  Section 221(d)(3), Section 221(d)(4), and Section 231 do not have similar  requirements. In addition, certain properties are eligible to leave HUD  programs by paying off the mortgage prior to the maturity date.
As agreed with your offices, this report provides information on (1) the  numbers and selected characteristics of HUD-subsidized rental properties  scheduled to reach mortgage maturity over the next 10 years; (2) the  potential impact on tenants when mortgages reach maturity; and (3) the  tools and incentives that HUD, the states, and localities offer owners to  keep HUD properties affordable when mortgages mature. The 10 questions  contained in your December 10, 2002, letter and summary answers are  presented in appendix II.
To address these objectives, we analyzed HUD databases, including the  Real Estate Management System (as of April 2003), to identify the  characteristics of those properties with mortgages that have already  reached maturity as well as those scheduled to reach maturity by  December 31, 2013. We also interviewed HUD and housing industry  officials and reviewed literature on the preservation of low-income  housing. Because nationwide data on tools and incentives that can be used  to preserve affordable housing do not exist, we used a Web-based  questionnaire to survey 327 state and local housing and community  development agencies to determine what tools and incentives they use to  keep HUD-subsidized properties affordable to low-income tenants and  which of the tools and incentives they believed to be effective. We received  226 usable responses, for a response rate of 69 percent. We reviewed  statutes and regulations, interviewed HUD officials, and obtained relevant  documents to identify tenants’ protections when mortgages mature in  subsidized properties. Additional details on our scope and methodology,  including information on our survey design and participants, are discussed  in appendix I. We performed our work from January through November  2003 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Prior to the early 1970s, the federal government provided affordable  multifamily housing to low- and moderate-income households by  subsidizing the production of either privately owned housing or  government-owned public housing. Under the production programs, the  subsidy is tied to the unit (project-based), and tenants benefit from reduced  rents while living in the subsidized unit. These programs include Section  202, Section 221(d)(3) BMIR, and Section 236. A portion of the units in  properties developed under these production programs received rental  assistance under programs such as Rent Supplement, Rental Assistance  Payments (RAP), and project-based Section 8 in order to reach lower- income tenants.
In the early 1970s, questions were raised about the production programs’  effectiveness: many moderate-income tenants benefited from federal  assistance, while lower-income families did not; federal costs of producing  housing exceeded the private-sector costs to produce the same services;  and allegations of waste surfaced. Interest in a more cost-effective  approach led Congress to explore options for using existing housing to  shelter low-income tenants. The Housing and Community Development Act  of 1974, a major overhaul of housing laws, included both approaches—a  project-based new construction and substantial rehabilitation program and  a tenant-based rent certificate program for use in existing housing  (currently named the Housing Choice Voucher program)—all referred to as  Section 8 housing. Project-based and tenant-based Section 8 assistance is  targeted to tenants with incomes no greater than 80 percent of area median  income, and tenants generally pay rent equal to 30 percent of adjusted  household income.
Beginning in the late 1980s, owners of some subsidized properties began to  be eligible to leave HUD programs by prepaying their mortgages or opting  out of their project-based Section 8 rental assistance contracts. Once these  owners removed their properties from HUD programs, they were no longer  obligated to maintain low rents or accept rental assistance payments. In  response, in 1996, among other things, Congress created a special type of  voucher, known as an enhanced voucher, to protect tenants from rent  increases in these properties. Enhanced vouchers differ from regular  tenant-based housing vouchers in two ways. Enhanced vouchers may  provide a greater subsidy (that is, be used to rent more expensive units)  and give tenants a right to remain in their unit after conversion to market  rent, thus creating an obligation for the owner to accept the voucher. So  long as the rent remains reasonable, the tenant’s portion of the rent should  not increase. If the tenant elects to move, the voucher becomes a “regular”  housing voucher and is subject to the program’s standard rent limits.
Not all property owners repay mortgages as originally scheduled. For  example, an owner may refinance the mortgage to pay for improvements to  the property. Other owners may experience financial difficulties and  default on their mortgages. From January 1993 through December 2002, for  example, HUD data show that the agency terminated the insurance on 231  mortgages. About 14 percent were due to mortgages that matured; other  reasons included owners’ prepayment of the mortgage (37 percent) and  foreclosure (22 percent).
Funds provided by other federal programs can be used by states and  localities to subsidize housing for low-income tenants. The CDBG program,  authorized by the Housing and Community Development Act of 1974,  distributes grants to local and state governments for community  development activities. Rehabilitation and other housing activities now  consistently represent the largest single use of CDBG funds. Other funds  for housing production have been made available through the HOME  program, authorized by the Cranston-Gonzalez National Affordable  Housing Act of 1990, which awards block grants to state and local  governments primarily for the development of affordable housing. Under  the Low-Income Housing Tax Credit Program, authorized by the Tax  Reform Act of 1986, state housing finance agencies provide tax incentives  to private investors to develop housing affordable to low-income tenants.
In addition to using their HOME and CDBG allocations as well as tax  credits, some states and localities have established housing trust funds and  other financial mechanisms, which have helped organizations acquire  subsidized properties that may leave HUD’s programs. Further, the states  and localities may use other tools and incentives, such as offering property  tax relief, to encourage owners to keep serving low-income tenants.
section_title: About One-Fifth of HUD’s Mortgages Are Scheduled to Mature through 2013
paragraphs: Nationwide, 21 percent (2,328) of the 11,267 subsidized properties with  HUD mortgages are scheduled to mature through 2013. The percentage  varies significantly by state: from 7 percent in Alabama, to 53 percent in  South Dakota. Nearly all of these 2,328 properties were financed under the  Section 236, Section 221(d)(3) BMIR, and Section 221(d)(3) programs, and  about three-quarters of these mortgages are scheduled to mature in the last  3 years of the 10-year period. The remaining 79 percent of HUD’s  outstanding mortgages in subsidized properties are scheduled to mature  after 2013.
subsections: section_title: Scheduled Mortgage Maturities through 2013 Vary by Year and Program
paragraphs: Of the 11,267 subsidized properties (containing 914,441 units) with HUD  mortgages, 21 percent (2,328 properties) have mortgages that are  scheduled to mature through 2013. The remaining 79 percent of these  mortgages are scheduled to reach maturity outside of the 10-year period.  Additionally, the bulk of these mortgages (about 75 percent) are scheduled  to mature in the latter 3 years of the 10-year period (see fig. 2). This  concentration in the latter part of the 10-year period is attributable to the  40-year Section 221(d)(3) BMIR and Section 236 mortgages that HUD  helped finance in the late 1960s and 1970s, respectively.
As table 1 shows, about 57 percent of the properties with mortgages  scheduled to mature in the 10-year period were financed under Section 236,  22 percent under Section 221(d)(3) BMIR, and 19 percent under Section  221(d)(3). Section 202, Section 221(d)(4), and Section 231 accounted for  only 3 percent of these properties.
section_title: Number of Mortgages Scheduled to Mature through 2013 Also Varies by State
paragraphs: The number of mortgages scheduled to mature through 2013 varies greatly  by state (see fig. 3). Although the average is 46 per state (including the  District of Columbia), the number ranges from a high of 273 maturing  mortgages in California, to 3 in Vermont.
Further, while 21 percent of HUD mortgages on subsidized properties  nationwide are scheduled to mature through 2013, individual states have  significantly different shares of these mortgages. Figure 4 shows the  proportion of each state’s inventory of properties with HUD mortgages  scheduled to mature in the 10-year period. The percentage varies  significantly by state: from 7 percent in Alabama, to 53 percent in South  Dakota. The CD-ROM that accompanies this report provides detailed  property-level data that allows the users to perform similar analyses to  track mortgage maturity by state or other location (congressional district  or metropolitan area), as well as by other variables such as property  category or rental assistance program.
section_title: More HUD Mortgages Are Scheduled to Mature after 2013
paragraphs: Over 8,900 properties, containing almost 680,000 units, have outstanding  HUD mortgages scheduled to mature after 2013. Most of these mortgages  were financed under the Section 202, Section 221(d)(4), and Section 236  programs. About 85 percent of the 680,000 units receive rental assistance.  Many of these rental assistance contracts will be expiring through 2013.  Specifically, 8,166 properties with HUD mortgages have rental assistance  contracts expiring through 2013, affecting about 530,000 assisted units.  Thus, while mortgages are not scheduled to mature during the period, these  properties have tenants who could potentially face rent increases.
According to HUD data, in the next 10 years, rental assistance contract  expiration will affect a total of 18,048 properties—10,382 with HUD  mortgages and another 7,666 without HUD mortgages—containing almost  1.1 million assisted units. Most of these long-term contracts are set to  expire in the near future—before the end of 2007 (see fig. 5).
When long-term rental assistance contracts expire, HUD may renew them.  Currently, HUD generally renews expiring long-term contracts on an annual  basis but may go as long as 5 years, and in some cases, 20 years. According  to HUD, during the late 1990s, about 90 percent of the property owners  renewed their contracts, thereby continuing to provide affordable housing.  A 2001 publication by AARP reported that if past trends continue, 85 to 90  percent of contracts will be renewed. The extent to which the trend  continues will depend on the availability of program funding and housing  market conditions.
As shown in figure 6, mortgage maturity and rental assistance contract  expiration will affect a total of 18,553 properties through 2013:  505 properties will be affected by maturing mortgages only (480 of these  are not covered by rental assistance contracts, and the remaining 25  have rental assistance contracts that expire outside of our 10-year  window).  1,823 properties will be affected by both events (because they have  rental assistance contracts set to expire and HUD mortgages scheduled  to mature by 2013).  16,225 properties will be affected by expiring rental assistance contracts  only (8,166 of these have HUD mortgages, but the mortgages are not  scheduled to mature until after 2013).
There are about 1.1 million assisted units in those properties with  mortgages maturing or rental assistance expiring in the 10-year period.  These units make up nearly 81 percent of all assisted units in HUD’s  inventory. As figure 7 shows, about 48,000 units are in properties with  maturing mortgages only, about 951,400 assisted units are in properties that  have expiring rental assistance only, and about 132,600 assisted units (out  of the approximate 188,600 total units) are in properties with both  mortgages maturing and rental assistance expiring in the 10-year period.
section_title: Tenant Impacts Depend on Protections and Property Owners’ Decisions
paragraphs: Over the next 10 years, low-income tenants in over 101,000 units may have  to pay higher rents or move to more affordable housing when HUD- subsidized mortgages reach maturity. This is because no statutory  requirement exists to protect tenants from increases in rent when HUD  mortgages mature and rent restrictions are lifted. Over the next 10 years,  480 subsidized properties that do not have rental assistance contracts are  scheduled to reach mortgage maturity. Unassisted tenants in some of these  properties are at risk of not being able to afford their units if rents are  raised. The remaining 1,848 subsidized properties with HUD mortgages  scheduled to mature through 2013 have rental assistance contracts, and the  protections against rent increases offered under the rental assistance  programs will apply. However, not all units in these properties are covered  by the rental assistance contracts, thus limiting the number of tenants  protected. A number of factors may affect owners’ decisions regarding the  continued affordability of their properties after mortgages mature,  including neighborhood incomes, physical condition of the property, and  owners’ missions. While experience with mortgage maturity has been  limited, 16 of the 32 subsidized properties that reached mortgage maturity  in the past 10 years are still serving low-income tenants through project- based Section 8 rental assistance contracts. Additionally, at least 10 of the  remaining properties that reached mortgage maturity over the past 10 years  are still serving low-income tenants.
subsections: section_title: HUD Does Not Offer Protection for Unassisted Tenants in Properties with Maturing Mortgages
paragraphs: There is no statutory requirement for HUD to offer tenants special  protections, such as enhanced vouchers, when a HUD mortgage matures.  However, tenants who receive rental assistance in properties with maturing  mortgages would be eligible for enhanced vouchers under rental assistance  programs such as project-based Section 8.
Of the 2,328 subsidized properties with mortgages scheduled to mature  through 2013, 480—containing 45,011 units—do not have rental assistance  contracts (see table 2). While the remaining 1,848 properties are subsidized  with rental assistance, not all units within the properties are covered.  According to HUD data, about 30 percent of the units in these properties  are not covered—a total of 57,552 units with tenants who do not receive  rental assistance. Altogether then, the tenants in a total of 102,563 units are  not protected under the rental assistance programs. Of these, 101,730 units  under Section 202, Section 221(d)(3) BMIR, and Section 236 could face  higher rents after mortgage maturity when the rent restrictions under these  programs are lifted.
These unassisted tenants are mostly housed in properties financed under  Section 221(d)(3) BMIR and Section 236 (see fig. 8). According to a HUD  study, tenants in properties with mortgages under these programs have an  average household income somewhat greater than that for tenants who  receive rental assistance; thus, they may be somewhat more able to afford  higher rents. Properties financed under the Section 221(d)(3) BMIR  program allow tenants with incomes of up to 95 percent of area median  income; in comparison, project-based Section 8 does not serve tenants  earning more than 80 percent of area median income.
Tenants in units covered by a rental assistance program—there are 134,087  units in the properties with HUD mortgages scheduled to mature through  2013—will continue to benefit from affordable rents, regardless of when  the mortgage matures, as long as the rental assistance contract is in force.  If a rental assistance contract expires prior to mortgage maturity and the  owner opts not to renew it, assisted tenants would be eligible for enhanced  vouchers.
Tenants could potentially be affected by the length of time given to them to  adjust to rent increases as well as by the amount of the increase. Property  owners are not required to notify tenants when they pay off their mortgage  at mortgage maturity. In contrast, property owners electing to prepay their  mortgage or opt out of their Section 8 contract are required to notify  tenants. For example, when owners opt out of the Section 8 project-based  program, they are required to notify tenants 1 year in advance of the  contract expiration. In cases where owners prepay their mortgages under  the Section 236 or Section 221(d)(3) BMIR programs, tenants must be given  notice at least 150, but not more than 270, days prior to prepayment. Some  locations have established even more stringent notification requirements.
section_title: A Number of Factors Influence an Owner’s Decision to Keep a Property Affordable upon Mortgage Maturity
paragraphs: Many factors can influence an owner’s decision to keep a property in the  affordable inventory or convert to market rate rents upon mortgage  maturity. For a profit-motivated owner, the decision may be influenced by  the condition of the property and the income levels in the surrounding  neighborhood. If the surrounding neighborhood has gentrified and if the  property can be upgraded at a reasonable cost, it may be more profitable to  turn the building into condominiums or rental units for higher income  tenants. If repair costs are substantial or if high-income residents are not  present in the surrounding area, it may be more profitable to leave the  property in the affordable inventory. Tools and incentives offered by state  and local agencies may also influence this decision. In addition, because  most of these owners have had the right to prepay their mortgages and opt  out of their Section 8 contracts for a number of years, the economic factors  that drive a decision to convert to market rate are not unique to mortgage  maturity.
HUD data show that nonprofit organizations own about 38 percent of the  properties with mortgages scheduled to mature in the next 10 years. For a  nonprofit owner, the decision would likely be motivated by cash flow  considerations since, in theory, these owners are not primarily motivated  by economic returns. Since mortgage maturity results in an improvement in  property cash flow, reaching mortgage maturity by itself would not  necessarily trigger removal from the affordable inventory. For example, at  1 of the 16 properties (nonprofit ownership) whose mortgages matured in  the past 10 years and that do not currently have project-based Section 8  assistance, the property manager told us that no longer having to pay the  mortgage left money for repairs needed to keep the units affordable for  their low-income senior tenants. Additionally, a nonprofit organization  would be more likely to keep the property affordable to low-income  tenants because to do otherwise could conflict with its basic mission of  providing affordable housing.
Another factor is the loss of the interest rate subsidy that occurs when the  mortgage matures. When interest rate subsidies were first paid to  properties built in the 1960s and 1970s, they represented substantial  assistance to property owners. Over time, inflation has substantially  reduced the value of this subsidy. For example, the average interest rate  subsidy payment for a Section 236 property with a mortgage maturing in  the next 10 years is $66 per unit per month. The level of prices has roughly  quadrupled since 1970, so to have the same purchasing power would  require about $260 in today’s dollars. Section 8 and similar project-based  rental assistance now provide the bulk of the assistance to these subsidized  properties—75 percent of the assistance versus about 25 percent that  derives from the Section 236 interest-rate subsidy. Furthermore, inflation  will continue to erode the value of the interest-rate subsidy until mortgage  maturity, while the rental assistance subsidy is adjusted annually to  account for increases in operating costs.
section_title: Most Properties with HUD Mortgages That Reached Maturity Are Offering Rent Affordable to Low-Income Tenants
paragraphs: Our review of HUD’s data showed that HUD-insured mortgages at 32  properties matured between January 1, 1993, and December 31, 2002.  Sixteen of the 32 properties are still serving low-income tenants through  project-based Section 8 rental assistance contracts. For 13 of these 16  properties, the rental assistance covers 100 percent of the units (799  assisted units), and for the remaining 3 properties, it covers 54 percent of  the units (174 assisted units).
Using HUD’s archived data for inactive properties, we attempted to contact  the property managers of the remaining 16 properties (consisting of 1,997  units) to determine if the properties currently offer rents affordable to low- income tenants. We were able to obtain rent information for 10 properties.  We found that all 10 (none of which have project-based rental assistance  contracts) are offering rents that are affordable to tenants with incomes  below 50 percent of area median income. According to HUD’s database,  only 2 of these properties ever had Section 8 project-based contracts, and  both expired in early 2000. We could not obtain actual tenant incomes since  property managers told us that they are not required to maintain such  information for properties without federal use restrictions. Using the  reported average rent for a 2-bedroom unit, we estimated the income  needed to afford the reported rent (that is, the income needed if no more  than 30 percent of gross income would be used for rent). We then  compared this estimated income to the area’s median household income  for 2003. The rent affordability percentages in table 3 express the estimated  income needed as a percentage of the area median income. Thus, numbers  less than 50 indicate that the unit is affordable to households with incomes  50 percent or less of the area median income. The available data for the 16  properties is summarized in table 3. Because of the variety of factors that  can influence owners’ decisions, however, these properties are not  necessarily indicative of what will happen to other properties as their HUD  mortgages mature.
Various property managers we contacted also provided information about  their efforts to keep their properties affordable. For example, a senior  complex (nonprofit ownership) continues to generally charge residents  about 30 percent of their income for rent as they did when they were in  HUD’s subsidized portfolio. According to the property manager of two of  the properties (for-profit ownership), he unsuccessfully sought incentives  from HUD in 2002 to keep the properties in the inventory when the  mortgages reached maturity, and both properties left HUD’s multifamily  portfolio. However, both properties are accepting tenant-based vouchers,  and the rents in both properties are affordable to very low-income tenants.
section_title: Tools and Incentives Are Available to Help Keep Properties Affordable, but Are Not Specifically Designed to Deal with HUD Mortgage Maturity
paragraphs: HUD does not offer any tools or incentives to keep properties affordable  after HUD mortgages mature, although it does offer incentives to maintain  affordability for properties that also have expiring rental assistance  contracts. According to officials from the four national housing and  community development organizations we contacted, because few HUD  mortgages have matured to date, their member state and local agencies  have not experienced the need to develop programs to deal with mortgage  maturity. They noted that their member agencies can offer tools and  incentives, such as loans and grants, that might be used by owners to keep  properties affordable after mortgage maturity. However, about three- quarters of the state and local agencies that responded to our survey  reported that they do not track the maturity dates on HUD mortgages, and  none provided examples of tools or incentives used to keep units  affordable after mortgage maturity.
The agencies indicated that funds available through HUD’s HOME and  CDBG programs and the Low-Income Housing Tax Credit program are  effective means for preserving the affordability of HUD-subsidized housing.  They also identified financial assistance to nonprofit organizations to aid  them in acquiring HUD-subsidized properties as an effective tool. However,  over 50 percent of the agencies reported that they have no tracking system  in place to systematically identify properties that could potentially leave  HUD’s affordable housing programs and thus might be candidates for  affordability preservation assistance.
subsections: section_title: HUD Does Not Offer Incentives to Keep Properties Affordable after Mortgage Maturity
paragraphs: HUD does not offer property owners any specific incentive to keep  properties affordable to low-income tenants after maturity of their HUD  mortgages. During the 1990s, HUD established incentive programs to deal  with the loss of affordable units because owners were prepaying their  mortgages and opting out of their Section 8 contracts. These incentives are  as follows:  Mark-up-to-Market allows owners to increase the rents for units  subsidized under the project-based Section 8 rental assistance program  up to market levels in exchange for keeping the units in the Section 8  inventory for a minimum of 5 years.
Section 236 Decoupling can be activated when the owner prepays a  Section 236 mortgage and obtains conventional financing. By agreeing  to keep the property affordable for at least another 5 years beyond the  original term of the mortgage, owners can keep the interest rate  reduction payments that they were receiving when they had a HUD- financed mortgage.
Section 202 Prepayments allow owners to prepay their HUD loans and  obtain other financing, but they must keep the affordability use  restriction until the maturity date of the original loan.
These incentives do not directly address the termination of the affordability  requirements resulting from mortgage maturity. Rather, they can extend,  under certain circumstances, the affordability period beyond the original  term of the mortgage, as in the Section 236 Decoupling incentive, or allow  property owners to be better positioned financially to continue providing  affordable housing, as in the case of Section 202 Prepayments and Mark-up- to-Market.
section_title: State and Local Agencies Identified Tools and Incentives to Preserve Affordable Housing, but Not Specifically for Covering Mortgage Maturity
paragraphs: The 226 state and local agencies that responded to our survey commented  on the effectiveness of 18 tools and incentives as a mean to preserve HUD’s  affordable rental housing. Of the 18, 6 were funded directly by the federal  government, while 12 were administered by state and local governments  and were not directly federally funded. However, there was no evidence  that they have been used to protect properties when HUD mortgages  mature. This may be because relatively few mortgages have matured to  date.
State and local tools and incentives include housing trust funds used to  make loans and grants, financial assistance to nonprofit organizations to  aid them in acquiring HUD-subsidized properties, and property tax relief to  owners of HUD-subsidized properties. These state and local agencies  identified several incentives that they believe are the most effective in  preserving the affordability of housing for low-income tenants. For  example, over 60 percent of the 62 state agencies that responded identified  the 4 percent tax credit and HOME programs as effective means for  preserving the affordability of HUD-subsidized properties. Of the 76 local  agencies that responded, over 70 percent identified HOME as effective, and  over 60 percent identified CDBG as effective.
section_title: Fewer Than Half of State and Local Agencies Identify and Track Properties That May Leave HUD Programs
paragraphs: Over 50 percent of the survey respondents reported that they have no  system in place to identify and track properties in their states or localities  that could leave HUD’s subsidized housing programs. Further, about three- quarters reported that they do not track the maturity dates of HUD  mortgages. Awareness of the potential for a HUD mortgage to mature or  rental assistance to end does not guarantee that state or local agencies will  take action to preserve the assisted units’ affordability to low-income  tenants. However, knowing when properties will be eligible to leave HUD’s  programs could better position state and local agencies to use available  tools and incentives at mortgage maturity. Several respondents to our  survey noted that it would be helpful to them if HUD could provide  information about properties that might leave HUD’s programs. Their  comments included the following:  “It would be helpful if HUD would provide local governments periodic  reports on the status of HUD properties in the locality.”   “I believe a lot of CDBG entitlement agencies would be willing to track  properties that could leave HUD’s affordable housing programs if HUD  would provide them with a listing of the properties.” “Communication between project-based property owners, HUD, and  local public housing authorities is not very effective.”
Of the 102 agencies that indicated they identified and tracked properties, 56  (55 percent) said that they monitored the scheduled maturity dates of HUD  mortgages on local properties (see fig. 9). More agencies (82 or 80 percent)  reported that they identified and tracked properties that might opt out of  HUD project-based rental assistance contracts.
HUD officials noted that they make property-level information available to  the public on HUD’s multifamily housing Web site. This Web site contains  detailed property-level data on active HUD-insured mortgages and expiring  rental assistance contracts. However, according to our survey, some state  and local agencies perceive that the information is not readily available.  One problem may be that these data are in a format that may not be  sufficiently “user-friendly” for these agencies. The data must be accessed  using database software, which requires users to be proficient in these  types of software.
HUD officials agreed that the agency could provide more “user friendly”  information because the data are not as accessible to state and local  agencies as they could be. They also noted that these agencies could  benefit from a “watch list” that identifies properties that may leave HUD  subsidy programs in their jurisdictions, such as upon mortgage maturity,  especially if such data were updated annually and readily available online  so that agencies would have the information needed to prioritize and fund  efforts to preserve low-income housing in their jurisdictions.
section_title: Conclusions
paragraphs: HUD’s rental housing programs have developed subsidized properties for  low- and moderate-income tenants that carry rent affordability  requirements for a fixed period. As a result, HUD has focused on keeping  these properties affordable for at least that period, and its tools and  incentives have mainly addressed mortgage prepayments and rental  assistance contract expiration, not mortgage maturity. While a share of the  properties with HUD mortgages are scheduled to reach maturity over the  next 10 years, it is uncertain how many of these properties will attempt to  convert to market-rate housing and raise rents, making the units in these  properties unaffordable for many tenants. While state and local agencies  might be able to play an important role in maintaining the affordability of  properties eligible to leave HUD programs because of mortgage maturity or  other reasons, these agencies need to know in advance which properties  are eligible to leave HUD’s programs, and when, in order to use tools and  incentives that can help keep the properties affordable. Even though HUD  makes property-level data available to the public on its Web site, state and  local agency responses to our survey suggest that HUD data may not be as  readily accessible, and therefore as useful, as they could be. HUD officials  responsible for maintaining the data on the subsidized properties agreed.
section_title: Recommendations for Executive Action
paragraphs: To help state and local housing agencies track HUD-subsidized properties  that may leave HUD’s programs upon mortgage maturity or for other  reasons, we recommend that the Secretary of HUD solicit the views of state  and local agencies to determine (1) the specific information concerning  HUD-subsidized properties that would be most useful to their affordability  preservation efforts and (2) the most effective format for making this  information available, and then use the results to modify the current means  of conveying the data on these properties to make the data more widely  available and useful.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to HUD for its review and comment. In a  letter from the Assistant Secretary for Housing (see app. III), HUD agreed  with the report’s findings, conclusions, and recommendations. HUD also  noted that while it believes that a wide array of public and private entities  concerned about preserving the affordable housing stock are using the  databases currently available through HUD’s Web site, it could improve the  format and modify the current means of conveying the data on these  properties to make the data more readily available. In its letter, HUD also  provided technical comments, which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to interested  Members of Congress and congressional committees. We also will send  copies to the Secretary of the Department of Housing and Urban  Development and the Director of the Office of Management and Budget and  make copies available to others upon request. The report will be available  at no charge on the GAO Web site at http://www.gao.gov. A CD-ROM (GAO- 04-210SP), which includes property-level data for subsidized properties  with mortgages scheduled to mature or expiring rental assistance  contracts, will accompany this report and can be ordered at  www.gao.gov/cgi-bin/ordtab.pl. The results of our survey of state and local  agencies (GAO-04-211SP) will also be available on the GAO Web site at  www.gao.gov/cgi-bin/getrpt?GAO-04-211SP.
Please contact me at (202) 512-8678, or Andy Finkel at (202) 512-6765, if  you or your staff have any questions concerning this report. Key  contributors to this report are listed in appendix IV.
section_title: Scope and Methodology
paragraphs: To develop a state-by-state inventory of multifamily properties with HUD  mortgages scheduled to mature and to identify the properties’  characteristics, we analyzed and combined information from several HUD  databases. We used data from HUD’s Real Estate Management System  (REMS), which contains information on active properties in Datamart, as  well as from the Tenant Rental Assistance Certification System (TRACS),  which contains information on Section 8 contracts. We also incorporated  data from HUD’s Real Estate Assessment Center (REAC) and—through the  Office of Multifamily Housing and Restructuring (OMHAR)—data from the  Annual Financial Statements submitted to HUD by property owners. To  ensure the HUD data were reliable, we performed internal checks to  determine (1) the extent to which the data were complete and accurate, (2)  the reasonableness of the values contained in the data fields, and (3)  whether any data limitations existed in the data we relied upon to do our  work. Based on our reliability assessment, we concluded that the data were  reliable for purposes of this report. The data obtained from HUD are as of  April 15, 2003. To have 10 full years of data, our analysis covered the period  from April 15, 2003, through December 31, 2013.
For the properties with existing HUD mortgages, we identified those that  also have project-based rental assistance contracts. We then separately  identified properties that do not have HUD mortgages, but have project- based rental assistance contracts that are also due to expire through 2013.  To obtain occupancy data relating to the individual properties, we used the  system containing the financial statements that are prepared and submitted  annually to HUD by property owners. For each property, we obtained the  following information:  metropolitan area,  total number of units,  total number of assisted units,  name of HUD financing program,  name of rental assistance program,   rental assistance expiration date,  number of rental assistance contracts,  rental assistance contract status,  type of client (tenant) served,  type of property ownership,  subsidy utilization rate, and  property inspection score (REAC score).
We also used HUD’s database to identify properties whose mortgages have  matured over the last 10 years. To determine how many properties are still  serving low-income tenants, we first identified those that are covered by  rental assistance contracts. For 14 of the 16 properties without current  rental assistance contracts, we obtained contact information from HUD’s  archived database (the database did not have sufficient complete  information on the other 2). We then contacted these properties via  telephone to determine if the management was still serving low-income  tenants.
We reviewed HUD regulations to determine the potential impact on tenants  when HUD mortgages mature. In particular, we reviewed the eligibility of  tenants to receive enhanced vouchers and other protections against  increases in rents when properties leave HUD’s programs. We discussed  these regulations with appropriate HUD officials and also requested that  HUD identify protections available to tenants under the various housing  programs.
To identify the incentives that HUD, the states, and localities could offer  owners under existing laws and regulations, we interviewed HUD, state,  and local officials and reviewed available literature. Because there are no  nationwide data available on the utilization of tools and incentives at the  state and local level and no single agency is responsible for administrating  the various incentives for any state, we surveyed state and local housing  and community development agencies via the Internet. We identified the  survey participants through lists provided by four national housing industry  organizations. Specifically, we surveyed members of the National Council  of State Housing Agencies (NCSHA), which represents state housing  finance agencies; the Council of State Community Development Agencies  (COSCDA), which represents state housing and community development  agencies; the National Community Development Association (NCDA),  which represents local communities that administer federally supported  programs such as CDBG and HOME; and the National Association of Local  Housing Finance Agencies (NALHFA), which represents local housing  finance agencies. The survey covered (1) their experiences in preserving  affordable housing, (2) the incentives used and their effectiveness, and (3)  the extent to which they identify and track properties that could leave  HUD’s programs.
In developing the survey, we met with officials at the four national  organizations to gain a better understanding of the issues and modified our  questions based on their comments. We then pretested with several state  and local agencies throughout the country, such as the Department of  Community Development in Amarillo, Texas; the Department of  Neighborhood Development in Boston, Massachusetts; and the Ohio  Housing Finance Agency. During these pretests, we observed the officials  as they filled out the survey over the Internet. After completing the pretest  survey, we interviewed the respondents to ensure that (1) the questions  were clear and unambiguous, (2) the terms we used were precise, (3) the  survey did not place an undue burden on the agency officials completing it,  and (4) the survey was independent and unbiased. On the basis of the  feedback from the pretests, we modified the questions as appropriate.  Information about accessing the survey was provided to a contact person  at each of 327 state and local housing and community development  agencies in 50 states, the District of Columbia, and Puerto Rico. The survey  was activated on May 12, 2003; it was available until September 5, 2003. To  ensure security and data integrity, we provided each agency with a  password to access and complete the survey.
We originally included 373 potential respondents in our survey, but  eliminated 46 for various reasons, including those agencies having no  authority over affordable housing and those with no HUD properties in  their jurisdictions. As a result, 327 potential respondents remained—46  from NCSHA, 65 from COSCDA, 130 from NCDA, and 86 from NALHFA.  From the 327, we obtained 226 usable responses—38 from NCSHA, 47 from  COSCDA, 83 from NCDA, and 58 from NALHFA—for an overall response  rate of 69 percent.
section_title: Questions from December 10, 2002, Letter from the House Committee on Financial Services
paragraphs: We would like the following questions answered in this General  Accounting Office report: 1. This letter includes a list of the privately owned, publicly assisted  multifamily housing mortgage programs.
221(d)(3)
Market rate with rent supplement  Below Market Rate Interest Rates (BMIR) with rent supplement or   Rental Assistance Projects (RAP)  221(d)(4) with all or partial Section 8  202s with rent supplement or Section 8  Section 8 moderate rehabilitation (not funded through HUD, maybe  PHA)
Noninsured rent supplement projects (12 projects only in NY and  Minnesota)
Please update the list if there are other programs that should have  been included and include any omitted programs in your answers to  the other questions requested in this report.
We did not identify any programs to add to the list. The report encompasses  all of these programs with the following exceptions: (1) HUD does not  collect mortgage information on noninsured rent supplement properties  because the properties do not use HUD financing. HUD does have data on  the rent supplement contracts alone, which we included in the CD-ROM;  (2) Section 8 Moderate Rehabilitation properties are excluded because  HUD does not track these properties in its multifamily database and  maintains no aggregate data on properties in the program.  2. What is the potential impact on the renewal of those Section 8  contracts in projects where FHA mortgages mature, the principal is  paid off entirely, and the affordability restrictions attendant to the  mortgages expire?
The impact of a matured HUD mortgage, by itself, on an owner’s decision to  renew a Section 8 contract is uncertain because there are a number of  other factors that can affect the decision. For a profit-motivated owner, the  decision to renew would likely be influenced by the condition of the  property and the income levels in the surrounding neighborhood. If the  surrounding neighborhood has gentrified and if the property can be  upgraded at a reasonable cost, it may be more profitable to turn the  building into condominiums or rental units for higher income tenants. If  repair costs are substantial or if high-income residents are not living in the  surrounding area, it may be more profitable to keep the property in the  affordable inventory by renewing the Section 8 contract. Tools and  incentives offered by HUD, state, and local agencies may also influence  these decisions.
For a nonprofit owner, the decision would likely be motivated largely by  cash flow considerations since, in theory, these owners are not primarily  motivated by economic returns. HUD data show that nonprofit  organizations own about 36 percent of the properties with mortgages  scheduled to mature in the next 10 years. Since mortgage maturity results  in an improvement in property cash flow, reaching mortgage maturity  would not by itself necessarily trigger removal from the affordable  inventory. Additionally, a nonprofit organization would be more likely to  keep the property affordable to low-income tenants because to do  otherwise would conflict with its basic mission of providing affordable  housing. Thus, nonprofit owners would likely continue to renew Section 8  contracts. 3. We request an inventory, in chart form, of all the units that will reach  maturity in the next 10 years. The inventory should include:  Property name, city, and state  Property MSA (metropolitan statistical area)
Month and year of mortgage maturity  Type of multifamily program for each development  Number of units for each development  Expiration date of Section 8 contract for each development (if any)
Contract status of Section 8 contract for each development (if any)
Number of section 8 units for each development (if any)
Total number of units covered under each of the programs and their   Total number of units for all developments  Total number of units that are occupied  Total number of section 8 units  Type of families housed, i.e. families, elderly, etc.
Whether the unit is owned by a profit or nonprofit organization All the data elements cited above are included in the CD-ROM that  accompanies this report. Data on property inspection scores, subsidy  utilization rates, street addresses, and the congressional district in which  the property is located are also included. 4. What will happen to the units and hence the families occupying the  units once the mortgages expire?  What rights, if any, do these  tenants have regarding their rent costs subsequent to the expiration  of the mortgage term and pay off of the entire mortgage principal?
Provided there is no other subsidy, owners of properties whose HUD- subsidized mortgages have matured are generally no longer required to  charge reduced rents to tenants that meet HUD’s income limits, and the  tenants do not have any rights or protections. Depending on the owner’s  decision, tenants could face higher rents and, if they were unable to afford  them, would have to move. However, if the units are covered by a rental  assistance contract, the tenants would not be affected by the mortgage  maturity. As long as the rental assistance is in force, these tenants would  continue to benefit from subsidized rents.  5. Under existing laws and regulations, are there Federal government  incentives that HUD could offer the owners of the multifamily  housing developments to keep properties affordable upon maturity of  the FHA mortgage and pay off the principal?  Under existing law and  regulations, what types of incentives are available for each state and  the District of Columbia that could be made available to the owners of  the multifamily housing developments?  Have they been successful?
HUD does not offer property owners any specific incentive to keep  properties affordable to low-income tenants after maturity of their HUD  mortgage. During the 1990s, HUD established incentive programs to deal  with the loss of affordable units because owners were prepaying their  mortgages and opting out of their Section 8 contracts.  These incentives  include the Mark-up-to-Market program, Section 236 Decoupling, and  Section 202 Prepayments. These incentives do not directly address the  termination of the affordability requirements resulting from mortgage  maturity. Rather, they can extend, under certain circumstances, the  affordability period beyond the original term of the mortgage, as in the  Section 236 Decoupling incentive, or allow property owners to be better  positioned financially to continue providing affordable housing, as in the  case of Section 202 Prepayments and Mark-up-to-Market.
State and local agencies identified tools and incentives to preserve  affordable housing, but not specifically for addressing maturing HUD  mortgages. The 226 state and local agencies that responded to our survey  commented on the effectiveness of 18 tools and incentives as a mean to  preserve HUD’s affordable rental housing. Of the 18, 6 were funded directly  by the federal government, while 12 were administered by state and local  governments and were not directly federally funded. However, there was  no evidence that they have been used to protect properties when HUD  mortgages mature. This may be because relatively few mortgages have  matured to date. 6. What are the possible effects if the Section 8 contract maturity date is  shorter than the FHA mortgage maturity date?
The effects depend largely on the owner’s decision about the future use of  the property. As noted in our response to question 2, an owner’s decision to  renew a Section 8 contract can be influenced by a number of factors, such  as neighborhood incomes, the condition of the property, and owner’s  mission. Consideration of these factors would likely also apply to  properties where the Section 8 contract expiration date is earlier than the  scheduled maturity date on the HUD mortgage.
When mortgage maturity is imminent, an owner may also consider what the  impact of losing the interest rate subsidy as well as paying off the HUD  mortgage will be on the property’s cash flow. When interest rate subsidies  were first paid to properties built in the 1960s and 1970s, they represented  substantial assistance to property owners. Over time, inflation has  substantially reduced the value of this subsidy relative to the rental  assistance subsidy, which is adjusted annually to account for increases in  operating costs. Project-based rental assistance now provides the bulk of  the assistance to these subsidized properties. Therefore, it is possible that,  under certain circumstances, such as where a surrounding neighborhood  has gentrified and the property can be upgraded at a reasonable cost, a for- profit owner may decide to forgo the remaining interest rate subsidy  payments and prepay the mortgage at the time the project-based contract  expires. However, because most owners have had the right to prepay  mortgages and opt out of their Section 8 contracts for a number of years,  the economic factors that drive the decision to convert to market rate when  mortgages mature are no different than in the past.
From the tenant’s perspective, if the owner elects to enter into a new  Section 8 contract, the tenants in assisted units will be protected for the  duration of the contract. If the owner elects not to enter into a new Section  8 contract with or without prepaying the mortgage, the tenants in the units  that previously received rental assistance would receive enhanced  vouchers. Enhanced vouchers give the tenants the right to stay in their  units and generally protect them from rent increases in the properties after  the Section 8 contract expires, regardless of the maturity date of the HUD  mortgage. 7. For those mortgages that have reached mortgage maturity or are soon  to do so, what actions, if any, have been taken by state, local, or other  bodies to ensure that affordability has been maintained after the FHA  mortgages are extinguished or are about to be paid off in their  entirety?  Have the efforts been successful?
According to officials from the four national housing and community  development organizations we contacted, because relatively few HUD  mortgages have matured to date, their member state and local agencies  have not experienced the need to deal with mortgage maturity. They noted  that their member agencies can offer tools and incentives, such as loans  and grants, to owners to keep properties affordable after mortgage  maturity. However, about three-quarters of the state and local agencies that  responded to our survey reported that they do not track the maturity dates  on HUD mortgages, and none provided examples of tools or incentives  used specifically to keep units affordable after mortgage maturity. 8. Please provide data on how many units/developments have already  reached mortgage maturity, the current status of those  units/developments, and whether those units/developments are still  serving low-income families.
Our review of HUD’s data showed that HUD-insured mortgages at 32  properties matured between January 1, 1993, and December 31, 2002.  Sixteen of the 32 properties are still serving low-income tenants through  project-based Section 8 rental assistance contracts. For 13 of these 16  properties, the rental assistance covers 100 percent of the units (799  assisted units), and for the remaining 3 properties, it covers 54 percent of  the units (174 assisted units).
Using HUD’s archived data for inactive properties, we attempted to contact  the property managers of the remaining 16 properties (consisting of 1,997  units) to determine if the properties currently serve low-income tenants.  We were able to obtain rent information for 10 properties.  We found that  all 10 (none of which have project-based rental assistance contracts) are  still primarily serving low-income tenants and that the current rents are  affordable to tenants with incomes below 50 percent of area median  income. According to HUD’s database, only 2 of these properties ever had  Section 8 project-based contracts, and both expired in early 2000. We could  not obtain actual tenant incomes since property managers told us that they  are not required to maintain such information for properties without  federal use restrictions.  9. The provision of enhanced vouchers does not currently apply to  Section 236 or Section 221 (d) (3) mortgages that mature. What is the  impact on the current tenant population upon mortgage maturity?
There is no statutory requirement for HUD to offer tenants special  protections, such as enhanced vouchers, when a HUD mortgage matures.  However, tenants who receive rental assistance in properties with maturing  Section 236 or Section 221(d)(3) mortgages would be eligible for enhanced  vouchers under rental assistance programs, such as project-based Section  8. Depending on property owners’ decisions, tenants in these properties  who do not receive rental assistance could face higher, possibly  unaffordable, rents. 10. What recommendations does GAO propose to address or alleviate the  potential loss of affordable housing arising from FHA mortgage  maturations?
Awareness of the potential for a HUD mortgage to mature, while not a  guarantee of action, could help state or local agencies’ ability to use  available tools or incentives for preserving properties’ affordability to low- income tenants. Therefore, to help state and local housing agencies track  HUD-subsidized properties that may leave HUD’s programs upon mortgage  maturity or for other reasons, we are recommending that the Secretary of  HUD solicit the views of state and local agencies to determine (1) the  specific information concerning HUD-subsidized properties that would be  most useful to their affordability preservation efforts and (2) the most  effective format for making this information available, and then use the  results to modify the current means of conveying the data on these  properties to make the data more readily available.
section_title: Comments from the Department of Housing and Urban Development
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Mark Egger, Daniel Garcia-Diaz, Nadine  Garrick, Curtis Groves, Austin Kelly, John McDonough, John McGrail,  Luann Moy, Barbara Roesmann, William Sparling, Thomas Taydus, and  James Vitarello made key contributions to this report.
section_title: GAO’s Mission
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