National Housing Law Project Housing Law Bulletin

Status of HUD’s "Mark-to-Market" Proposal
Remains Uncertain

As of this writing, congressional reception of "Mark to Market" remains uncertain. There is substantial consensus about the need to reduce project-based subsidy costs and to develop more effective enforcement and remedial strategies for project-based subsidized housing, but HUD's proposal to advance these goals via wholesale conversion of its stock to vouchers remains controversial, for both cost and policy reasons. Congress must do something this year, since contracts on a few Section 8 New Construction/Substantial Rehabilitation developments expire during this next fiscal year (FY 1996) and either must be renewed for some term or replaced with tenant-based substitutes. Even though Section 8 Loan Management Set-Aside (LMSA) contracts on about 100,000 units are due to expire during this fiscal year, these present a lesser crisis, since they could simply be renewed as project-based on a short-term basis and are generally less expensive than a tenant-based alternative.

Whether this legislative action will take the form of an comprehensive new program, as HUD proposes, or just a small pilot, and whether it will emerge from the currently dormant authorizing process or from the appropriators, remains unclear. The most likely result this late in the year is for the appropriations process to develop some demonstration program or to provide limited authority to deal with those projects expiring this year.

The House appropriations bill that already passed the floor at the end of July³ included a limited number of vouchers to replace Section 8 contracts that were terminated or not renewed, as well as funds to renew expiring Section 8 LMSA contracts for two-year terms (while giving HUD the discretion to convert these units to vouchers).⁴ However, the House bill failed to provide any comprehensive policy for the problems addressed by HUD's "Mark to Market" proposal.

Mark to Market: Developments Covered

Under HUD's current proposal, HUD-subsidized and -assisted developments would be divided into two categories: (1) those that have both HUD insurance (not SHFA or Section 202 financing) and project-based Section 8 contracts, and (2) those that do not. Those in the first category would be "marked to market"; those in the second category would, at least for the time being, continue to operate under existing program rules, subject to any changes that Congress decides to make.

Mark to Market: How It Would Work?

At expiration of an existing project-based Section 8 contract, HUD would terminate the contract. The rents and debt on the project would be restructured to true market levels, not by individual project evaluations, as was originally proposed, but by transferring to the private sector the authority to negotiate resolutions prior to default. Depending on the public purposes Congress seeks to achieve via the restructuring, public agency or nonprofit joint venture partners might be necessary parties to the effort. This restructuring would occur at some time prior to actual Section 8 contract expiration, and be scheduled to become effective at expiration, in order to avoid default on the current loan. Effectively, this would amount to a sale of the mortgage at unrestricted market value without further HUD insurance or regulation. Section 8 tenants would receive vouchers under HUD's concurrently proposed Housing Certificate Fund.

Until covered developments reach the point of contract expiration, they would continue to operate under the current Section 8 program rules, subject to any changes made by Congress. Possible areas for imminent revision include federal preferences for admission, tenant rent contributions (including minimum rents), and annual rent adjustments.⁵

Mark-to-Market Costs

For those projects with Section 8 contract rents in excess of true market rental values and published Fair Market Rents (most of the Section 8 New Construction and Substantial Rehabilitation stock), HUD's Mark to Market would save discretionary Section 8 funds by converting the renewals to vouchers subsidized with payment standards at approximately local Fair Market Rent levels. For those projects that currently have below-market Section 8 contract rents (usually budget-based rents under the Section 236 or 221(d)(3) BMIR programs with Section 8 LMSA subsidies), HUD justifies the higher costs of converting to vouchers by pointing to the need to attract market capital for rehabilitation, the alleged superior performance of market forces in providing quality housing, and the expanded choice provided to voucher holders.

Mark to Market would require substantial mandatory spending to cover the costs of claims on the FHA insurance fund. Estimates range from $6 to $12 billion.

Mark to Market: Future Ownership

Whenever debt would have to be reduced as a result of reducing rents to market level, ownership of developments after mortgage sale would effectively be under the control of the purchasing mortgagee. That is, since the new lender could foreclose on any owner who could not meet the terms of the original note and mortgage purchased at auction, it could effectively dictate the identity and operations of ownership and management. Since many existing owners could not meet the original loan terms in the absence of subsidies, this provision is of enormous concern to them. They could be divested quickly, even though they were in full compliance with all HUD rules prior to the subsidy contract expiration. Of course, owners of developments whose subsidized rents are currently below market levels do not face a similar threat to their position.

Mark to Market: Conversion to Tenant-Based Assistance

HUD's current proposal would immediately convert the subsidies for tenants currently benefitting from project-based units to tenant-based vouchers under the proposed Housing Certificate Fund (HCF) if the new "market" rents would cause them to pay rents in excess of 30 percent of income. Elderly tenants or those with disabilities would receive higher voucher payments, if necessary, for them to afford to stay in higher value projects where true market rents are higher than the payment standard used to determine HCF funding.

HUD's earlier proposals had permitted discretionary project-based Section 8 at the new, lower contract rents for a maximum two-year transition period, but HUD now appears to be retreating from any transitional project-based assistance.

Mark to Market: No Future Use Restrictions

"Mark to Market" proposes essentially no federal controls on units or owners after mortgage restructuring. The only continuing regulation would be good cause eviction protections for existing tenants who can afford to stay with their HCF subsidies,⁶ and (if any federal assistance such as mortgage insurance continues) a vague obligation to rent a reasonable portion (around 20 percent) of the units to voucher holders.⁷ Recently HUD has also mentioned the possibility of requiring owners to rent units only to those with incomes within the limits for the original program (e.g., 80 or 95 percent of area median), but this would be of little actual benefit to families within the very low-income range (below 50 percent of area median).

Mark to Market: Housing Quality

The rehabilitation needs of the stock would supposedly be addressed through a Housing Resolution Fund or, for those units currently with below-market rents, by private financing obtained through rent increases permitted by deregulation. Whether Congress would appropriate rehabilitation funds for those developments on the verge of deregulation, when it has been unwilling to do so when the federal government had a clear regulatory responsibility to ensure habitable conditions, presents an enormous question mark. Moreover, HUD's belief that deregulation of rents and market incentives will bring rehabilitation to the older assisted stock seems more like wishful thinking in many markets where substandard conditions in private housing abound despite local codes.

Whither the Title VI Preservation Program?

In the case of subsidized developments (e.g., Section 236 projects) without Section 8 contracts, HUD's formal proposal is to maintain a very limited preservation program that would operate on a voluntary basis only, with severely limited eligibility and funding.⁸ Owners would have the option to prepay, and those tenants adversely affected would receive vouchers.

HUD officials have subsequently stated that even such a limited program would be inconsistent with "Mark to Market," and they would prefer to have no restriction on prepayment nor any separate preservation program, instead simply providing vouchers for tenants whose owners choose to convert. Under this view, developments now eligible for the Title VI program would be "marked up to market," on the hope that rental deregulation would provide capital for any necessary rehabilitation. Tenants would be protected with vouchers.

Some advocates, owners and members of Congress are considering revising the preservation program by providing capital grants or deferred loans rather than Section 8, which would reduce long-term program costs by using one-time funding to preserve the current rent structure.⁹ Owners, of course, would want this new program to be voluntary, permitting nonparticipants to prepay and convert. Advocates seek to maintain the mandatory framework of current Title VI. Twice, Congress has recently indicated its intention to tie program revisions to continued funding for preservation. Interest in "reformulation" or capital grants was stated in both the Conference Report accompanying the original Fiscal Year 1995 rescission bill (where the expenditure of remaining FY 1995 preservation funding was ostensibly deferred to FY 1996), and in the House Committee Report accompanying the House's proposed FY 1996 appropriation of $200 million for the program from unobligated balances in the assisted housing accounts.¹⁰ Because of diminishing prospects for an FY 1996 authorization bill, Congress will probably be forced to address these Title VI revisions when deciding funding levels through the remainder of the FY 1996 appropriations process.

Termination of Project-Based Section 8 and Troubled Projects

Some developments subsidized with project-based Section 8 contracts fail to meet HUD's Housing Quality Standards (HQS). The final version of the FY 1995 rescissions bill included a provision permitting HUD to terminate project-based Section 8 contracts for HQS violations, but to retain the funds and put them back out as tenant-based subsidies, or project-based where tenant-based is infeasible.¹¹

Under HUD's Mark-to-Market proposal, troubled HUD-insured projects that have Section 8 contract rents exceeding market value would be marked down to market, with project-based subsidies terminated and debt restructured. Some projects could then be rehabilitated with modest resources from the proposed Housing Resolution Fund. Others would not be viable because, even with no debt, their operating costs exceed market rents in the area. They would be demolished or sold with no assistance. Local governments would be forced to assume the financial burden of preserving these developments, or risk their further deterioration and community blight. Troubled developments with below-market rents would be deregulated in hopes of attracting necessary capital for rehabilitation.

The HUD Property Disposition Program

HUD's property disposition program faces a difficult future. Despite the substantial subsidy withdrawal and deregulation wrought by Congress' 1994 amended law,¹² the FY 1995 rescissions bill allows HUD unlimited discretion in managing or disposing of projects facing foreclosure or disposition sale.¹³ The House has apparently provided no FY 1996 funding for HUD's current property disposition program, which provides certificates to affected tenants or project-based assistance or grants when properties are sold or foreclosed.¹⁴ If upheld in the Senate, this would mark a total retreat from any federal responsibility for preservation, and the end of the line for hundreds of developments and communities.

1. See A Critique of HUD's Reinvention Blueprint, 25 HOUS. L. BULL. 29, 34 (Feb. 95).
2. HUD, "American Community Partnerships Act" (draft May, 1995).
3. H.R. 2099, 104th Cong., 1st Sess. (July 31, 1995).
4. H.R. 2099 (July 31, 1995).
5. See House Appropriations Subcommittee Approves Deep, Deep Cuts in Funding for HUD Programs as Well as Program-Gutting Reforms, 25 HOUS. L. BULL. 110 (June/July 1995), detailing the House's proposals for the public housing and Section 8 programs.
6. HUD's proposed American Community Partnerships Act (ACPA), § 186 (May 1995).
7. HUD, American Community Partnerships Act, Section-by-Section Explanation and Justification (May 1995 draft), at 201.
8. See Administration Proposes Gutting of Preservation Program, 25 HOUS. L. BULL. 37 (Feb. 1995). HUD's proposed ACPA, §§ 361 et seq., would establish authority for these revisions.
9. See Proposed Rescissions Threaten Preservation Program, 25 HOUS. L. BULL. 82 (col. 2) (Apr. 1995).
10. See, e.g., H.R. REP. NO. 201, 104th Cong., 1st Sess. (July 21, 1995), at 26.
11. Pub. L. No. 104-19, § 1003, 109 Stat. 236 (July 27, 1995), adding a new subsection (z) to Section 8 of the United States Housing Act of 1937.
12. See Brief Summary of New HUD Multifamily Property Disposition Law, 24 HOUS. L. BULL. 79 (Sept./Oct. 1994).
13. Pub. L. No. 104-19, 109 Stat. 233 (July 27, 1995), which allows HUD to ignore existing law in administering the FY 1995 rescission of $1.115 billion from the Annual Contributions for Assisted Housing account.
14. H.R. REP. NO. 201, 104th Cong., 1st Sess. (July 21, 1995), at 27 (table).