Multifamily Housing: More Accessible HUD Data Could Help Efforts to Preserve Housing for Low-Income Tenants
Released: 2004-02-23T00:00:00

Letter

Background

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.

About One-Fifth of HUD’s Mortgages Are Scheduled to Mature through 2013

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.

Scheduled Mortgage Maturities through 2013 Vary by Year and Program

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.

Number of Mortgages Scheduled to Mature through 2013 Also Varies by State

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.

More HUD Mortgages Are Scheduled to Mature after 2013

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.

Tenant Impacts Depend on Protections and Property Owners’ Decisions

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.

HUD Does Not Offer Protection for Unassisted Tenants in Properties with Maturing Mortgages

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.

A Number of Factors Influence an Owner’s Decision to Keep a Property Affordable upon Mortgage Maturity

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.

Most Properties with HUD Mortgages That Reached Maturity Are Offering Rent Affordable to Low-Income Tenants

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.

Tools and Incentives Are Available to Help Keep Properties Affordable, but Are Not Specifically Designed to Deal with HUD Mortgage Maturity

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.

HUD Does Not Offer Incentives to Keep Properties Affordable after Mortgage Maturity

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.

State and Local Agencies Identified Tools and Incentives to Preserve Affordable Housing, but Not Specifically for Covering Mortgage Maturity

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.

Fewer Than Half of State and Local Agencies Identify and Track Properties That May Leave HUD Programs

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Scope and Methodology

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.

Questions from December 10, 2002, Letter from the House Committee on Financial Services

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.

Comments from the Department of Housing and Urban Development

GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

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.

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