National Housing Law Project Housing Law Bulletin

Recently we reviewed the status of the comprehensive proposals to restructure the huge inventory of properties with HUD-insured mortgages and "above-market" Section 8 project-based assistance.¹ Since that time, Congress and HUD have taken a number of actions affecting both this major portion of the inventory and other segments as well. This article reviews these recent developments.

Funding for Section 8 Renewals

After reaching the balanced budget agreement with the Administration -- agreement that reportedly contained a commitment to fully fund renewal of all expiring Section 8 contracts, Congress then proceeded to adopt a Budget Resolution for Fiscal Year 1998 that provides up to $9.2 billion in budget authority and resulting outlays for this next fiscal year.² Working within the framework of the Budget Resolution, both the House and Senate appropriations bills for FY 1998 also provide funds for this need, with the House bill providing $9.2 billion³ and the Senate version's $8.67 billion.⁴ The lower Senate amount presumably results from an assumed $500 million in "savings" from enactment of the portfolio restructuring provisions in the same bill, permitting the reduction of currently over-market subsidies for project-based Section 8 contracts expiring in FY 1998. In September, the appropriations conference committee will set the final renewal funding level and any policy changes necessary to fit within that amount.

Required Notice to Tenants of Impending Section 8 Expirations

Since 1988, tenants of units faced with contract expiration have been entitled to receive a 12-month notice prior to the scheduled expiration date, including a statement that the owner and HUD may subsequently agree to a renewal. HUD had implemented this with a form letter notice that did little to clarify the real risks facing tenants from an upcoming expiration.⁵ In the Emergency Supplemental Appropriations bill for flood relief, Congress recently reduced that minimum notice period to 180 days, without changing the required content.⁶ As of August 27, HUD has not taken any steps to inform tenants and owners of this new requirement, nor revised its form letter. This reduced notice period is permanent, lasting beyond FY 1997, unless Congress subsequently changes it. HUD will probably soon issue a Notice informing its field offices, and Section 8 project owners and managers of this new reduced time period, but this will do little to clarify the situation for tenants.

Section 8 Restructuring Policy

In June, after the Senate inserted its restructuring proposal into the Senate reconciliation package that subsequently passed the Senate floor,⁷ many advocates of the Senate approach were disappointed by the House's failure to include any similar proposal and by its refusal to accept the Senate provisions in the reconciliation conference committee. Reportedly this intransigence was driven by the position of the House Banking Committee and Housing Subcommittee leaders who seek a policy emphasizing far more vouchers after restructuring, as well as the formation of a non-public institution along the lines of the Resolution Trust Corporation to handle the restructurings. The House's inaction resulted in the Senate's proposal being dropped from the reconciliation process.

The Senate Banking Committee then obtained the consent of HUD Appropriations Subcommittee Chair Christopher Bond (R-MO) to place all of the restructuring provisions into the Senate's version of the FY 1998 appropriations bill. This was done, and that bill passed the Senate floor in late July.⁸

Since that time, to secure the Administration's support, the Senate staff has been negotiating some compromises with HUD on two key issues: the degree of voucherization permitted after restructuring and the extent of private participation in administering the restructuring process. Reportedly the Senate and HUD negotiators are close to an agreement on acceptable language that would allow administrative agencies performing restructurings to approve the conversion of project-based assistance to vouchers upon meeting certain criteria, including market adequacy, focusing tenant-based subsidies and so forth. The agreement would also permit greater privatization of the restructuring process, ostensibly to fill in gaps of public agency capacity. No draft legislative language has yet been released concerning this significant reported revision.

The Senate appropriations funding level depends on approval of the restructuring of renewal subsidies to actual market rates, counting as "savings" $500 million in FY 1998. Failure to enact restructuring would result in insufficient resources for any kind of proactive policy, resulting in the non-renewal of some expiring units with above-market rents or renewals at market rents that would produce widespread defaults and foreclosures on HUD-insured multifamily loans, or further cuts in other HUD programs.

Since the House version of the appropriations measure again has no restructuring provisions, the fate of restructuring policy this year will be determined by the appropriations conference committee. A critical factor in whether or not the conference committee moves to enact a policy this year will be the size of the allocation permitted for the entire HUD spending bill -- the smaller the final allocation (compared to the House version), the greater the need to have some restructuring policy on the "over-market" expiring contracts. The House housing leadership reportedly seeks to defer action on any comprehensive policy this year, ostensibly to allow the full authorizing process to take up the issue in next year's session. This would require an extension and expansion of the slow-starting demonstration program established in the FY 1997 appropriations act.⁹ Reducing the renewal threshold to 100 percent from its FY 1997 level of 120 percent to create savings of discretionary Section 8 spending would require many more projects to be restructured and would create higher needs for FHA credit subsidy resources.

One of the issues not yet addressed by the current version of the Senate's proposed restructuring policy is the issue of targeting -- which families would be able to benefit from the subsidized housing remaining after completion of the restructuring process. One of the pending bills that would substantially revise the public housing and Section 8 tenant-based subsidy programs (S. 462) contains a provision that would apply the same targeting requirements of the revised public housing program to the project-based Section 8 program. Under that proposal, owners of project-based Section 8 developments could rent 40 percent of the units becoming available in any year to households at or below 30 percent of area median, and 75 percent to households at or below 60 percent of median.¹⁰ These targeting levels, if passed, would permit much more of Section 8 project-based resources to benefit relatively higher income households.

Section 8 Renewal and Rejection Policies

For projects with contracts expiring in FY 1997, Congress authorized renewals of most contracts for up to one year at current rent levels at the owner's option, not to exceed 120 percent of the published local Fair Market Rent (FMR) paid for the tenant-based subsidy programs.¹¹ HUD has since clarified that, for Section 8 Loan Management Set-Aside properties, renewal rent levels may exceed 120 percent of FMR where Section 236 basic rents exceed that amount.¹²

In June, HUD issued an "urgent" Notice stating that, because the FY 1997 law prohibits renewal in certain circumstances relating to owner performance and housing quality, and because HUD had not yet completed review of its expiring contract portfolio to determine which owners and properties should be denied renewal offers, the Department was making available renewals for only a 60-day term.¹³ Responding to the concerns of Congress, tenants and owner groups, HUD then issued another Notice addressing the terms of HUD's renewals and the criteria and procedures applicable in cases of a proposed nonrenewal.¹⁴

In this latest Notice 97-50, HUD states that all projects with contracts expiring during FY 1997 must be renewed for a total renewal period of one year, except for those which require closer scrutiny, now called "Notice Projects." HUD estimates that there are about 450 of these properties nationwide, determined apparently by HUD records, indicating noncompliance with HUD requirements of housing quality. Each field office is being notified by Headquarters of affected Notice Projects. Each field office must then notify the project owner by form letter and commence a review of project files to determine whether to recommend a nonrenewal to Headquarters. Field office reviews were to have been completed by the end of August. Recommendations and supporting memoranda must be provided by the field office to Headquarters in the case of nonrenewal. If contracts are scheduled to expire prior to completion of the review, then HUD is to renew the contract for four months, giving the Department time to complete its review. Other properties not on the Headquarter's "notice list" may also warrant this treatment.

Criteria for nonrenewal. The standard for nonrenewal is whether the owner has committed a material adverse financial or managerial action or omission. Notice 97-50 defines these as "any actions which could result in an owner default under an FHA-insured mortgage (monetary or technical), or a documented material violation of one or more of the obligations under the project's Regulatory Agreement or [Section 8] Contract." These include, but are not limited to:

Procedures for nonrenewal. For Notice projects with expiring contracts, the following procedure applies. Apparently, this procedure follows the file review and recommendation submitted by the field office to Headquarters. Headquarters first notifies the field office of the proposed nonrenewal decision. The field office then notifies the owner by letter, outlining the specific conditions supporting the decision. The owner then has 60 days to remedy the violation (apparently assuming that a cure is possible). If the field office's site visit finds no correction, then the contract expires without renewal. Nowhere does HUD's Notice state anything about notice to the residents or their participation in this decision.

On termination for HQS violations, HUD must provide tenant-based assistance to eligible families on or before the date that the contract expires.¹⁶ However, because of the long processing time to accomplish the conversion and commence the flow of tenant-based assistance, most tenants will experience direct financial exposure during the conversion. Once HUD and the public housing authority finish the funding and recertification process, tenants will have to find a new unit meeting the HQS in order to use their tenant-based assistance and, according to HUD, must give their current landlord 30 days' notice of termination.¹⁷ This will rarely be possible if the review and disqualification process alone consumes most of the four-month temporary renewal period.

HUD also has done nothing to implement its statutory duty to encourage the transfer of properties otherwise eligible for the FY 1997 restructuring demonstration (rents above 120 percent of FMR), where contracts with the current owner are not renewed, with a renewal of the contract available to the new owner.¹⁸ Nor is there any stated policy to pursue abatement remedies and other strategies to bring into compliance those units susceptible to repair. Hopefully, Congress will take steps to correct HUD's effort to convert these units to vouchers without addressing the underlying problems of the property or the needs of its tenants.

Title VI Preservation Program

Neither the House nor the Senate versions of the FY 1998 appropriations bills that passed their respective chambers includes funding to continue preserving HUD-subsidized developments under the Low-Income Housing Preservation and Resident Homeownership Act (the Title VI Preservation program). However, due to the strong support demonstrated by a bipartisan sign-on letter from 23 Senators urging funding, the Senate bill contained a placeholder provision intended to provide an opportunity for the conferees to determine the funding level and rules for a revised preservation program.¹⁹

The Senate proposal would make several changes to the preservation program for expending any funds made available, most notably limiting grants to four times the local annual published Section 8 Fair Market Rent. It would also require a reordering of the existing queue of 275 unfunded properties so that each state would get one project before any state got two, with three projects per region, and some unstated priority given to areas with the lowest vacancy rates. The Senate proposal would also require reappraisal of properties for funding, and permit modest rent increases of up to 10 percent to help fill financing gaps created by the federal cuts. As was true last year, the program would primarily fund sales to nonprofits, along with a few other properties identified last year ("carve-outs"). The final rules and funding levels, if any, will be determined by the conference committee.

HUD Property Disposition Program

For most of FY 1997, HUD had followed a policy permitting purchasers of certain HUD-owned multifamily properties to obtain rehabilitation grants from the mortgage insurance fund (so-called "upfront rehab grants").²⁰ This resource is essential to providing solutions for these properties. In June, HUD's Office of General Counsel reportedly ruled that HUD lacked the authority to provide these grants, despite the fact that the FY 1997 appropriations law gives HUD extremely broad authority.²¹ The Senate appropriations bill includes a provision expressly authorizing these grants.²²

1. See Section 8 Expirations: Housing Resource Up for Grabs, 27 HOUS. L. BULL. 97 (July 1997).
2. H. Con. Res. 84, § 203, 105th Cong., 1st Sess. (June 5, 1997).
3. H.R. 2158, H. REP. NO. 53, 105th Cong., 1st Sess., as passed the House floor (July 16, 1997).
4. H.R. 2158 (formerly S. 1034), as passed the Senate floor (July 22, 1997).
5. HUD Notice 96-89, Attachment 6 (Oct. 15, 1996).
6. Pub. L. No 105-18, § 10002 (June 12, 1997).
7. Title II of S. 947 (passed Senate floor June 25, 1997).
8. S. 1034, amended into the Senate version of the bill numbered H.R. 2158, § 212, upon passing the Senate floor (July 22, 1997).
9. Portfolio Reengineering Demonstration Program, 62 Fed. Reg. 3,565 (Jan. 23, 1997). Authority for the demonstration program was Pub. L. No. 104-204, §§ 211 and 212, 110 Stat. 2874 (Sept. 26, 1996). For further details on its provisions, see Another One-Year Reprieve for Most Expiring Section 8 Housing, 26 HOUS. L. BULL. 133 (Oct. 1996). As of the end of July, 1997, HUD had approved only three state agency management plans to implement the program for projects within those jurisdictions.
10. S. 462, Public Housing Reform and Empowerment Act of 1997, § 114, as reported by the Senate Banking Committee (May 23, 1997). S.462 has not yet passed the Senate floor.
11. See Pub. L. No. 104-204, §§ 211, 110 Stat. 2874 (Sept. 26, 1996). For further details on its provisions, see Another One-Year Reprieve for Most Expiring Section 8 Housing, 26 HOUS. L. BULL. 133 (Oct. 1996), and HUD Notice Provides Limited Guidance on Section 8 Contract Renewals and Opt-outs, 27 HOUS. L. BULL. 51 (April 1997), reviewing HUD Notice 96-89 (Oct. 15, 1996).
12. HUD Notice H97-11 (Feb. 24, 1997) states that Section 405(c) of the Balanced Budget Downpayment Act, Pub. L. No. 104-99, 110 Stat. 26 (Jan. 26, 1996), provides authority for renewing Section 8 contracts at basic rents exceeding 120 percent of FMR.
13. HUD Notice H 97-38 (HUD) (June 27, 1997).
14. HUD Notice H 97-50 (Aug. 8, 1997).
15. The curious example given here is "failure to enforce tenant lease provisions," rather than noncompliance with leases, regulations and program contracts.
16. Pub. L. No. 104-204, §§ 211(b)(5), 110 Stat. 2874 (Sept. 26, 1996).
17. HUD Notice H 96-89 (Oct. 15, 1996).
18. Pub. L. No. 104-204, §§ 211(b)(4)(C), 110 Stat. 2874 (Sept. 26, 1996).
19. See the Senate version of H.R. 2158, incorporating S. 1034 ("Capital Grants/Capital Loans Preservation Account" and related provisos) as it passed the Senate floor on July 22, 1997, and S. REP. NO. 53, 105th Cong., 1st Sess. (July 17, 1997), at 33.
20. See Memorandum for All Multifamily Property Disposition Directors, et al., from Albert Sullivan, Re: Revised Guidance on the Use of Upfront Grants in Multifamily Property Disposition (Feb. 28, 1997).
21. Pub. L. No. 104-204, § 204 (Sept. 26, 1996).
22. See the Senate version of H.R. 2158, incorporating S. 1034, § 214, as it passed the Senate floor on July 22, 1997, and S. REP. NO. 53, 105th Cong., 1st Sess. (July 17, 1997), at 46.