National Housing Law Project Housing Law Bulletin

According to recent HUD data compiled by the National Housing Trust, key components of the nation’s affordable housing stock have eroded significantly over the past several years, and that trend is accelerating. Owners of thousands of units previously subsidized under HUD’s mortgage interest subsidy programs (e.g., Section 236) or assisted under the project-based Section 8 program have terminated their participation in the federal programs. Typically, this choice results from a conscious federal policy to shortchange owners that have market-conversion options by offering inadequate current below-market rent levels. Both mortgage prepayments and Section 8 terminations have occurred in dramatic numbers, and this trend shows no sign of abating without deliberate federal intervention.

Prepayments were first authorized by Congress in 1996 when it refused to provide adequate funds to operate the Title VI preservation program (the Low-Income Housing Preservation and Resident Homeownership Act, or "LIHPRHA") that was enacted in 1990./1/ Section 8 terminations began in earnest following Congress’ enactment of the "Mark to Market" program in the fall of 1997./2/ HUD’s implementation policy has so far refused to provide any rent increases not justified by operating costs to owners of expiring Section 8 properties with below-market subsidy levels and higher real values. HUD has also begun to implement Congress’ "disqualification" policy to deny continued participation to owners and units that violate program rules.

Prepayment losses. Mortgage prepayment is the means by which an owner may terminate the rent and use restrictions contained in a project’s regulatory agreement and thereby convert the property to market-rate use. For most HUD-subsidized properties, prepayment may occur at any time after a project’s 20^th anniversary, under authorization first provided by Congress in 1996 and re-established in the FY 1999 HUD appropriations bill./3/ So far, the data shows that the nation has lost more than 59,670 units to prepayments from April of 1996 to December 1998. Significantly, prepayment losses are now occurring at an accelerating rate, increasing by a rate of 135 percent nationally in the last eight months of 1998 over the previous two-year monthly average. (See Table 1.)

Prepayment activity is concentrated in certain states with stronger housing markets: 11 or more prepayments have occurred in each of 19 states, representing more than 49,000 units, 82 percent of the total. Among the states, California leads the pack with 118 properties prepaid, more than 9,000 units. (See Table 2.)

Rent increases in these prepaid properties average 57 percent. While HUD and Congress have provided temporary "enhanced vouchers" to cushion the short-term economic impact of these market conversions on existing residents of affected properties,/6/ these replacement subsidies do not protect against any future rent increases, and must be renewed by Congress on an annual basis. Future tenants will have to have much higher incomes to afford these housing units.

Section 8 terminations. In addition, the supply of project-based Section 8 units is beginning to contract: almost 38,000 additional units have been lost either because owners terminated their participation in the Section 8 program upon contract expiration ("opt-outs") or because HUD terminated the contract due to program violations ("disqualifications"). Of these units, about two-thirds consist of owner opt-outs and the remaining one-third are apparently HUD disqualifications. Terminations are also concentrated in certain states, 11 states having witnessed 10 or more terminations, and the activity in these states represents about two-thirds of the overall total. Texas, Michigan and Ohio lead the states in numbers of units lost from the Section 8 program. (See Table 3.)

Where a Section 8 contract is terminated by HUD or the owner, affected tenants generally receive a replacement voucher whose value is determined by the local housing authority’s ordinary voucher payment standard. In the case of an owner opt-out, there is no requirement that the owner accept this subsidy on the tenant’s behalf to avoid displacement, and the value of the subsidy itself may not be adequate to cover the new market rent levels for the property. One major exception to this policy of "regular vouchers" for opt-outs is where the opt-out follows on the heels of a subsidized mortgage prepayment. In that case, the replacement subsidy is an "enhanced voucher" (identical to that provided upon prepayment), providing temporary protection against displacement with its higher value and owner acceptance requirements. In the case of a HUD disqualification, a replacement voucher may not be used at the property, so displacement is virtually guaranteed.

New policy responses. While Congress provided HUD with the authority in the "Mark to Market" legislation to increase rents upon expiration on these below-market properties up to comparable market rent levels,/8/ HUD has so far declined to exercise this authority, variously citing an alleged lack of authority and an alleged lack of funding, along with various administrative objections. Fortunately, in response to a drumbeat of concern from tenants, preservation advocates, and key Congressmembers, new HUD staff have taken a fresh look at this problem during the past year, concluding that some policy response beyond replacement vouchers is warranted. Thus, for the first time, HUD’s annual report on worst-case housing needs/9/ specifically cited the loss of HUD multifamily housing stock as a contributing factor in the growing gap between the nation’s needs and available units. The report also stated that preserving "project-based housing will be in important challenge for this year’s Congress."

To its credit, during the fall of 1998, in the initial budget negotiations within the Administration for FY 2000, HUD requested additional funding from OMB in the amount of $100 million, a request rejected by OMB initially and again after an appeal. Despite this failure, Secretary Cuomo and the HUD Office of Housing have continued to advocate for permission to pursue such a "mark-up" policy from OMB, using existing Section 8 funds within the overall Housing Certificate Fund that supports both renewals of all expiring contracts and replacement subsidies. These resources could come from either the existing "tenant protection" set-aside within the Fund or other surpluses that result from slight inaccuracies in estimating renewal costs for the more than two million Section 8 project- based and tenant-based units expiring in FY 1999 or from newly discovered additional program reserves.

Reportedly, HUD and OMB are nearing agreement about the content of an acceptable policy initiative that may be announced imminently. [News Flash: Secretary Cuomo has scheduled a news converence for April 29, reportedly to announce the new policy. Details in the next Bulletin.] Also reportedly, HUD’s initiative will seek to target "mark-up" resources on those buildings whose owners would otherwise opt out of the Section 8 program and that are located in tight markets where vouchers may not provide appropriate housing options or are occupied by elderly and disabled tenants and large families for whom vouchers provide inadequate housing options. If adopted, this initiative would mark an important turning point in HUD’s recent historical position that a preservation policy is unnecessary because vouchers alone represent an acceptable replacement housing policy for all situations.

Since it is unlikely that HUD will make available enough funds to cover all preservation needs, advocates generally support additional targeting of these funds. In addition, any more funds provided to owners should be conditioned on their commitment to remain in the program for a fixed period of time, e.g., 10 to 15 years, with HUD providing formula rent increases during that period.

In addition to HUD’s initiative, some in Congress have also begun to take notice of the need for an adequate policy response to these conversion problems. As previously reported, Congressmen Vento and Ramstad have introduced legislation (H.R. 425) that would establish a federal matching preservation grant program to leverage public resources targeted to the preservation of existing HUD multifamily affordable housing./10/ Several dozen co-sponsors have now joined in support of H.R. 425. Moreover, in the wake of several widely publicized opt-outs by a Section 8 owner in rural Iowa that threatens hundreds of elderly and disabled tenants with displacement, the House Republican housing leadership has recently introduced another bill, H.R. 1336, that would provide "enhanced vouchers" to elderly and disabled tenants facing opt-outs and would clarify certain limited HUD authority to "mark-up" below-market Section 8 project rents (to 90 percent of true market value) in order to encourage continued owner participation. Although H.R. 1336 requires some important revisions to provide an acceptable policy response, it indicates a strong and growing interest on Congress’ part to address these issues.

Future Bulletins will provide further news of these promising developments that can help stem the tide of conversions and protect some of America’s best affordable housing resources.

Notes

1    Pub. L. No. 104-120, § 2(b), 110 Stat. 836 (1996); Pub. L. No. 104-134, § 101(e), Title II (paragraph entitled "Annual Contributions for Assisted Housing," 110 Stat. 1321 (Apr. 26, 1996), codified at 12 U.S.C.A. §§ 4101 et seq. (West Supp. 1998).

2    Pub. L. No. 105-65, Title V, codified at 42 U.S.C.A. § 1437f note (West Supp. 1998).

3    Pub. L. No. 105-276 , § 219, 112 Stat. 2461 (Oct. 21, 1998).

4    Data compiled by the National Housing Trust (reprinted with permission).

5    Data compiled by the National Housing Trust (reprinted with permission).

6    See, eg., Pub. L. No. 104-204, 110 Stat. 2874 (Sept. 26, 1996) (proviso re preservation tenant-based assistance); HUD Notice 99-16 (Mar. 12, 1999).

7    Data compiled by the National Housing Trust (reprinted with permission). Approximately 37% of these properties were vouchered out due to termination of Section 8 or property disposition.

8    Pub. L. No. 105-65, §524(a)(1) (Oct. 27, 1997).

9    HUD, "Waiting in Vain: An Update on America’s Housing Crisis" (Mar. 1997), available from HUD’s website at <http://www.hud.gov/houscris.html>.

10    See New Preservation Proposal Introduced in Congress, 29 HOUS. L. BULL. 52 (Mar. 1999).

Back to this issue's Table of Contents.
Back to the Article List.
Back to the NHLP Home Page.