Multifamily Housing: More Accessible HUD Data Could Help Efforts to Preserve Housing for Low-Income Tenants
Published: 2004-07-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Housing and Urban Development (HUD) has subsidized the development of about 1.7 million rental units in over 23,000 privately owned properties by offering owners favorable long-term mortgage financing, rental assistance payments, or both 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. Based on a report issued in January 2004, this testimony discusses (1) the number and selected characteristics of HUD-subsidized rental properties with mortgages scheduled to mature in the next 10 years, (2) the potential impact on tenants upon mortgage maturity, and (3) the tools and incentives that HUD, the states, and localities offer owners to keep HUD properties affordable upon mortgage maturity.
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. As part of our analysis, we developed a searchable database available on a CD-ROM, showing property-level data for each of HUD's subsidized rental properties scheduled to mature in the next 10 years. Impacts on tenants depend on tenant protections available under program statutes and regulations, as well as on property owners' decisions about their properties. No statutory requirement exists to protect tenants from increases in rent when HUD mortgages mature, absent the existence of rental assistance contracts or other subsidies. Without tenant protection requirements, tenants in over 101,000 units that do not receive rental assistance may have to pay higher rents or move when the HUD mortgages on these properties mature and rent restrictions are lifted. During the past 10 years, HUD-insured mortgages at 32 properties reached mortgage maturity, and the majority of these properties are still serving low-income tenants. HUD does not offer incentives to owners to keep properties affordable upon mortgage maturity. While many state and local agencies GAO surveyed offered 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.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss our report to you  on properties with mortgage financing provided through the Department  of Housing and Urban Development (HUD). Since the 1950s, 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 as the HUD  mortgages reach their scheduled maturity dates and long-term rental  assistance contracts expire. These subsidized properties represent a  significant source of housing that is affordable to low-income households.
My statement today, which is based on our January 2004 report, discusses  (1) the numbers and selected characteristics of HUD-subsidized rental  properties that are scheduled to reach mortgage maturity through 2013— roughly 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. In preparing the report, we analyzed HUD  databases to identify the characteristics of those properties with  mortgages that have already reached maturity as well as those that are  scheduled to reach maturity by December 31, 2013. We surveyed 327 state  and local housing and community development agencies to obtain  information on what tools and incentives they use to keep HUD-subsidized  properties affordable to low-income tenants. In addition, we reviewed  statutes and regulations and interviewed HUD officials to identify tenants’  protections when mortgages on subsidized properties mature. We  performed our work from January through November 2003 in accordance  with generally accepted government auditing standards.
Nationwide, 21 percent or 2,328 of the 11,267 subsidized properties with  HUD mortgages are scheduled to reach mortgage maturity through 2013,  but among states this percentage varies significantly: from 7 percent in  Alabama, to 53 percent in South Dakota. These properties contain 236,650  units. Nearly all of these 2,328 properties were financed under three  specific HUD programs, two of which operated only between 1961 and  1973. About three-quarters of the mortgages are scheduled to mature in the  last three years of the 10-year period.
Impacts on tenants depend in part on tenant protections available under  program regulations and statutes, as well as on owners’ decisions about  their properties. No statutory requirement exists to protect tenants from  increases in rent when HUD mortgages mature, absent the existence of  rental assistance contracts or other subsidies. Without tenant protection  requirements, tenants in over 101,000 units that do not receive rental  assistance may have to pay higher rents or move when the HUD mortgages  on these properties mature and rent restrictions are lifted. Further, owners  are not required to notify tenants when a property’s mortgage is about to  mature. In contrast, owners are required to notify tenants up to 1 year in  advance of their intent to prepay mortgages or decline renewal of rental  assistance contracts. Property owners’ decisions on whether they continue  to serve low-income tenants after their HUD mortgages mature depend on  many factors, such as neighborhood incomes, the condition of their  properties, and owners’ missions. During the past 10 years, HUD-insured  mortgages at 32 properties reached mortgage maturity, and the majority of  these properties are still serving low-income tenants.
HUD does not offer any tool or incentive to keep properties affordable  after HUD mortgages mature, although it does offer incentives to keep  properties affordable under certain other circumstances, such as the  expiration of rental assistance contracts or prepayment of HUD  mortgages. 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 specifically. They noted that their member agencies could offer  tools and incentives, such as loans and grants, to keep properties  affordable after mortgage maturity. However, over 50 percent of the state  and local agencies that responded to our survey reported that they have no  system in place to identify and track properties that may leave HUD’s  programs, and about three-quarters of them did not track the maturity  dates of HUD mortgages.
Based on our findings, we recommended that HUD provide more widely  available and useful information for state and local agencies to track  subsidized properties that may leave HUD programs.
subsections: section_title: Background
paragraphs: Prior to the early 1970s, the federal government provided affordable  multifamily housing for low- and moderate-income households by  subsidizing the production of either privately owned housing or  government-owned public housing. Under production programs, the  subsidy is tied to the unit (project-based), and tenants benefit from  reduced rents while living in the subsidized unit. HUD’s mortgage  financing programs include:    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.
Section 231, which insured private mortgages to developers of rental  housing for the elderly from 1959.
In order to reach lower-income tenants, a portion of the units in many  properties developed under these production programs were further  subsidized by provision of rental assistance, under programs such as Rent  Supplement, Rental Assistance Payments (RAP), and project-based  Section 8.
In the early 1970s, questions about the production programs’ effectiveness  led the Congress to explore options for using existing housing to shelter  low-income tenants. The Housing and Community Development Act of  1974 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. The project- based Section 8 program also provides rental assistance to owners of  properties that were not financed with HUD mortgages.
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, Congress created a special type of  voucher, known as an enhanced voucher, to protect tenants from rent  increases in these properties.
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,  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’ mortgage prepayment (37 percent) and  foreclosure (22 percent).
section_title: About One-Fifth of HUD’s Mortgages Are Scheduled to Mature through 2013
paragraphs: Nationwide, 21 percent of subsidized properties with HUD mortgages have  mortgages that are scheduled to mature from 2003 through 2013, but the  percentage varies significantly by state. Nearly all of these properties were  financed under the Section 236, Section 221(d)(3) BMIR, and Section  221(d)(3) programs.
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 containing 236,650 units) have  mortgages that are scheduled to mature from 2003 through 2013. The  remaining 79 percent of these mortgages (on over 8,900 properties) 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 three years of the 10-year period (see fig. 1). 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.
No mortgage was scheduled to mature in this period.
Less than 1 percent.
Since properties with noninsured rent supplement do not carry a HUD mortgage, HUD does not track  mortgage-level data on these properties.
section_title: Number of Mortgages Scheduled to Mature by 2013 Also Varies by State
paragraphs: The number of mortgages scheduled to mature through 2013 varies greatly  by state (see fig. 2). Although the average is 46 mortgages per state  (including the District of Columbia), the number ranges from a high of 273  maturing mortgages in California to 3 in Vermont.
The states also vary considerably in terms of the percentage of their  respective HUD mortgages on subsidized properties that are scheduled to  mature through 2013, ranging from 7 percent in Alabama to 53 percent in  South Dakota.
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 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. 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.
subsections: section_title: HUD Does Not Offer Protection for Unassisted Tenants in Properties with Maturing Mortgages
paragraphs: There is no statutory authority that requires 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, the tenants in a total of 102,563  units are not protected under the rental assistance programs. Of these,  101,730 units—most of them in properties with mortgages under the  Section 221(d)(3) BMIR and Section 236 programs—could face higher  rents after mortgage maturity when the rent restrictions under these  programs are lifted.
Table 2. Subsidized Properties with HUD Mortgages Scheduled to Mature through  2013, by Rental Assistance Program  Section 221(d)(3)  BMIR  Section 221(d)(3)
Section 221(d)(4)
3% <1% Since properties with noninsured rent supplement do not carry a HUD mortgage, HUD does not track  mortgage-level data on these properties.
According to a HUD study, tenants in properties with mortgages under the  Section 221(d)(3) BMIR and Section 236 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 about  134,087 such 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. 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. The extent to which the trend  continues will depend on the availability of program funding and housing  market conditions. 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  opt out of the Section 8 project-based program must notify tenants 1 year  in advance of the contract expiration. Owners electing to prepay their  mortgages under the Section 236 or Section 221(d)(3) BMIR programs  must notify tenants at least 150, but not more than 270, days prior to  prepayment.
section_title: A Number of Factors Influence An Owner’s Decision to Keep a Property Affordable Upon Mortgage Maturity
paragraphs: Many factors could 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 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,  the property manager at one of the 16 properties (nonprofit ownership)  whose mortgage matured in the past 10 years and who does not currently  have project-based Section 8 assistance 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 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. Price levels have 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 Offer Rents 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 three properties it covers 54 percent  of the units (174 assisted units).
Using HUD’s archived data for inactive properties, we were able to obtain  rent information for 10 of the remaining 16 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. 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 could offer tools and  incentives, such as loans and grants, which 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.
subsections: section_title: HUD Does Not Offer Incentives to Keep Properties Affordable after Mortgage Maturity
paragraphs: 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, but 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 or allow property owners to be better positioned financially to  continue providing affordable housing.
section_title: State and Local Agencies Identified Tools and Incentives to Preserve Affordable Housing, but Not Specifically for Covering Mortgage Maturity
paragraphs: The state and local agencies we surveyed identified 18 different tools and  incentives used to preserve affordable housing. Of the 18, 6 were funded  directly by the federal government, while 12 were administered by state  and local governments and 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. 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.
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. 3). 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.
While 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,  such knowledge could better position state and local agencies to use  available tools and incentives. Accordingly, we recommended that HUD  take steps to provide more widely available and useful information. Using  HUD’s data that we obtained to respond to your request, we also  developed a prototype searchable database, available in CD-ROM format,  showing property-level data for each of HUD’s subsidized rental properties  scheduled to mature in the next 10 years.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions at this time.
section_title: Contacts and Acknowledgements
paragraphs: For further information on this testimony, please contact David G. Wood  at (202) 512-8678, or Andy Finkel at (202) 512-6765. Individuals making key  contributions to this testimony included Mark Egger, Daniel Garcia-Diaz,  Rich LaMore, and John McGrail.
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