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). 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. 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. 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. 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. 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. 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.