Over 800,000 units in approximately 8,500 multifamily projects have been financed with mortgages insured by the Federal Housing Administration (FHA) and supported by project-based Section 8 housing assistance payments contracts. The residents of housing units that receive project- based assistance are required to pay a portion of their income for rent (generally 30 percent), while HUD pays the balance. Many of these properties’ rents are higher than the market rents of comparable unassisted properties. OMHAR has estimated that 48 percent of the projects with Section 8 contracts expiring between October 1998 and September 2001 had above-market rents, while 66 percent of the projects expiring after that time will have above-market rents. A main cause of the higher rents is the fact that the government originally supported the development of these properties by establishing rents above market levels and raising the rents regularly through the application of set formulas that, according to HUD, tended to be generous to encourage the production of new affordable housing. Because HUD makes up the difference between residents’ contributions and the project rents, these higher rent levels increase the costs of the Section 8 program to the federal government. HUD estimated that, if no action was taken, by 2007 the annual cost of renewing project-based Section 8 contracts would rise to approximately $7 billion, or about one-third of HUD’s total budget. On the other hand, if the Section 8 assistance were simply reduced or eliminated, many of the FHA-insured properties could lack sufficient revenues to cover operating expenses and payments on their existing mortgages. As a result, the owners of many properties would likely default on their mortgage payments, resulting in substantial claims to FHA and possibly leaving tenants without adequate affordable housing. In October 1997, to address the increasing costs to the federal government of insured Section 8 housing, the Congress created the mark-to-market program for properties with above-market rents and project-based Section 8 contracts expiring on or after October 1998. The program’s goals include preserving the affordability and the availability of low-income rental housing while reducing the long-term costs of Section 8 project-based assistance, resolving the problems affecting financially and physically troubled projects, and correcting management and ownership deficiencies. The restructuring tools provided in the act include (1) reducing property debt levels by approving partial or full payments of FHA insurance claims without an owner default, (2) approving exception rents in excess of local market rents in order to preserve affordable housing in specific markets, (3) exempting FHA mortgage insurance credit subsidy limitations and limitations on risk sharing commitments, and (4) using public and nonpublic participating administrative entities to complete restructuring actions. The October 1997 act also established OMHAR within HUD to administer the program. In addition, OMHAR was delegated certain authorities of HUD’s Office of Housing related to administering the program. However, Housing retained Section 8 contract administration responsibilities, so OMHAR and Housing must coordinate their actions. As required by the act, OMHAR is under the management of a director who reports directly to the Secretary of HUD. OMHAR’s Director was nominated by the President on September 29, 1998, and confirmed by the Senate on October 21, 1998. The mark-to-market process begins when a property’s current Section 8 contract is about to expire. Approximately 4 months prior to contract expiration, if the property owner wishes to continue in the Section 8 program, the owner is required to submit to the Office of Housing’s local field offices a request for contract renewal and a rent comparability study.Rent comparability studies are prepared by state-certified appraisers to compare the unit rents for the subject property to the fair market rents charged for comparable units that are not receiving Section 8 subsidies. The rent comparability study is sent to the local HUD offices for review to determine if the property’s current rents are at, above, or below market rates. If rents are at or below market rates, HUD field office staff will make adjustments where necessary and execute a new Section 8 contract. If rents are above market, HUD staff are to renew the current contract (at above-market rents) for up to 1 year and forward the owner’s submission to OMHAR for a mark-to-market restructuring. Upon receipt from HUD field offices, OMHAR assigns properties to participating administrative entities to carry out restructurings under the mark-to-market program on behalf of the federal government. As of June 15, 2001, OMHAR had contracts with 33 participating administrative entities, including 24 public agencies (state and local housing finance agencies) and 9 nonpublic entities. Among other things, the responsibilities of the participating administrative entities include determining appropriate rent levels, restructuring mortgage loans, underwriting new or modified loans, and managing the closing process. OMHAR developed an Internet-based tracking system to monitor the actions taken by the participating administrative entities in carrying out mark-to-market activities. There are two types of restructurings. Full mortgage restructurings generally involve resetting rents to market levels and reducing mortgage debt to permit a positive cash flow. For this type of restructuring, the participating administrative entities develop restructuring plans that address both rents and debt and submit the plans to OMHAR for review and approval. The restructuring plans require the owner to maintain restrictions aimed at preserving the property as affordable housing for at least 30 years, and Section 8 contracts are typically being renewed for 20 years. For the second type of restructurings, which OMHAR refers to as rent restructurings, the participating administrative entities also develop restructuring plans that must be approved by OMHAR; but, the plans only reduce the rents, not the mortgage debt, since the property should be physically and financially sound enough to continue with reduced rental income. There are no affordability and use restrictions on properties that receive a rent restructuring, and the Section 8 contracts are usually renewed for 5 years. Appendix I describes the mark-to-market process in more detail. The participating administrative entities are required to use their best efforts to seek the cooperation of Section 8 property owners in the development of the restructuring plan. Owners must agree with the final plan and, among other requirements, contribute 20 percent of the total cost of the property’s rehabilitation. Participating administrative entities are also required to ensure that tenants affected by the restructuring of a project are kept informed and given the opportunity to provide comments at crucial stages of the process. As of June 15, 2001, approximately 3 ½ years after the mark-to-market legislation was enacted, OMHAR had completed restructurings for about 41 percent of the 1,558 properties that had entered the mark-to-market program. While OMHAR had completed restructurings for only 138 of the properties requiring full mortgage restructuring, it had completed restructurings for 500 of the properties requiring only a reduction in rents. OMHAR estimated that the federal government would realize about $563 million in savings over a 20-year period from these completed restructurings. However, the legislative requirement that rents be reduced to market has increased the risk that some properties will experience physical and financial problems. As of June 15, 2001, 1,558 properties had entered the mark-to-market program. OMHAR had assigned 1,491 of these properties to the participating administrative entities for restructuring. OMHAR estimated that 62 percent of the portfolio would ultimately receive full mortgage restructurings and the remaining 38 percent would receive rent restructurings only. While OMHAR and its participating administrative entities have made substantial progress in completing rent restructurings, they have completed fewer full mortgage restructurings. As shown in figure 1, OMHAR has completed rent restructurings for 500 properties, or 86 percent of all assigned and working properties in this category. The 500 completed rent restructurings include 75 transactions that OMHAR has closed but that did not result in Section 8 savings. Most of these cases involve properties for which OMHAR determined that property rents were already below market. In addition, as discussed in the next section, the 500 rent restructurings include transactions for 75 properties that did not meet OMHAR’s underwriting criteria to be processed as rent restructurings. As shown in figure 2, OMHAR has been less successful in completing full mortgage restructurings. As of June 15, 2001, OMHAR had completed restructurings for 138 properties, or 15 percent of all assigned and working properties of this type. However, as of June 15, 2001, OMHAR had approved restructuring plans for 562 properties (including the 138 completed restructurings), or about 62 percent of the properties accepted by participating administrative entities for restructuring. The number of closed full mortgage restructurings does not include 78 restructurings for which OMHAR reduced property rents without restructuring the properties’ mortgages. These cases include properties whose owners have refused to execute a restructuring commitment, have been uncooperative, or have been barred from participating in the mark- to-market program. They also include properties for which OMHAR has determined that a restructuring plan is financially not viable because of the property’s poor physical condition. OMHAR has made less progress in completing full mortgage restructurings for various reasons. Typically, mortgage restructurings are more complex and involve more steps to complete than rent restructurings. Also, as discussed later in the report, many property owners have been reluctant to agree to full mortgage restructurings. Average processing times have been substantially longer for mortgage restructurings than rent restructurings, as shown in figure 3. For example, the figure shows that participating administrative entities required an average of 199 days to complete a rent restructuring while they required an average of 432 days to complete a full mortgage restructuring.