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Prepayments of HUD-Subsidized Mortgages

A primary method of terminating federal low-income rent and use restrictions contained in the federal regulations and the Regulatory Agreement is an owner's prepayment of the mortgage. Although federal law restricted prepayments of federally subsidized properties from 1988 through 1995, Congress first authorized unrestricted prepayment of many such mortgages in 1996, with a more permanent statute enacted in 1998. To protect most affected residents, Congress has also provided "enhanced vouchers" through annual appropriations Acts and general authority enacted in 1999.

Prepayments are currently governed by two federal statutes:

• For most HUD-subsidized properties, owners must only serve a notice in compliance with Pub. L. No. 105-276 (1998), requiring at least 150 but not more than 270 days' advance written notice to tenants, HUD and local government. Properties subject to this notice requirement must qualify as “eligible low-income housing,” i.e., they must be eligible for prepayment without HUD approval anytime after 20 years of restricted use.

Note that Congress enacted a federal preservation program in 1990, the Title VI Low-Income Housing Preservation and Resident Homeownership Act (LIHPRHA," 12 U.S.C. Secs. 4101 et seq.). It was designed to preserve federally assisted housing by providing financial incentives to owners to remain in the federal program and by financing purchases by nonprofits and tenant organizations. Although this program was never repealed, Congress refused to fund the program beginning in FY 1998, and has provided no funding since then. Its restrictions have been effectively superseded by the 150-to-270 days’ notice and enhanced voucher scheme.

• Some other mortgages cannot be prepaid without HUD approval, and HUD and owners must follow the standards and procedures required by Section 250 of the National Housing Act, 12 U.S.C. Sec. 1715z-15.

For more information, see Challenging Conversions of Federally Assisted Housing and NHLP, HUD Housing Programs: Tenants’ Rights (4th ed. 2012), Sec. 12.3.1.

Articles

Archived List of Other Articles on HUD-Subsidized Prepayments

NHLP has compiled a list of other articles that may be useful for advocates doing background research.

California Court Upholds State Preservation Law in Preemption Challenge

This NHLP Housing Law Bulletin article from Feb.-Mar. 2004 describes a case in which a California state court rejected an owner’s claim that federal law expressly preempts a state law requiring specified notice prior to an assisted housing owner's withdrawal from federal subsidy programs. In the case of College Gardens Preservation Committee v. Eugene Burger Management Corp., the court concluded that Congress did not intend LIHPRHA’s preemption provision to displace state or local requirements. The decision is especially notable because the court disagreed with or distinguished the reasoning of two federal appellate panels on a question of federal law. It thus supports the authority of many state and local governments to regulate those HUD-subsidized mortgage prepayments currently occurring outside of LIHPRHA, as well as other federal assisted housing conversions.

Congress Considers Overdue Preservation Agenda

This NHLP Housing Law Bulletin article appeared in March 2008. In order to address the increasing shortage of affordable housing, Congress must enact stronger legislative policies to preserve hundreds of thousands of units of existing privately owned federally assisted affordable housing. Because the current policy framework allows many owners to convert to market-rate and the costs of acquisition and rehabilitation are substantial, major changes to existing budget and policy decisions are needed. The National Preservation Working Group has developed a package of legislative proposals that would address many of the obstacles to preserving affordable housing. These proposals are being considered by both the House and the Senate as their housing leadership drafts a comprehensive preservation bill to be introduced in Congress later this year. This article briefly reviews the major components of the NPWG preservation proposals.

Fair Housing Litigation to Prevent the Loss of Federally Assisted Housing: The Duties of PHA's & Project Owners (Part One)

This NHLP Housing Law Bulletin article from April 2001 is part one of two articles and examines Federal Fair Housing law. The article covers the erosion of the federally assisted affordable housing stock and its effect on families of color; the legal mechanisms permitting demolitions, dispositions, and conversions in the federally assisted housing stock; an overview of the legal framework of discriminatory effect under Title VIII of the Civil Rights Act of 1968; and affirmative fair housing duties and Title VIII discriminatory effect claims.

Fair Housing Litigation to Prevent the Loss of Federally Assisted Housing: The Duties of PHA's and Project Owners (Part Two)

This NHLP Housing Law Bulletin article from Jul.-Aug. 2001 is part two of two articles and is an extension of an article on the fair housing duties of HUD regarding the loss of federally assisted housing. This article outlines the sources of demographic statistical data and other related information available on the Internet to support claims, describes how to approach the formulation of discriminatory effect theories in situations involving the loss of public housing and federally assisted multifamily housing, and discusses the anticipated objections to the imposition of discriminatory effect liability against PHAs and project owners.

Opt-out and Prepayment of Four Section 8 Properties Preliminarily Enjoined

This NHLP Housing Law Bulletin article from Jul.-Aug. 2001 discusses how tenants in four HUD-insured and Project-based Section 8 assisted properties obtained a preliminary injunction that prevents the owners from selling the properties and terminating their Section 8 contracts. The injunction was issued by a federal district court on the grounds that the owners failed to comply with California law requiring notice to the tenants and others and failed to grant a right of first refusal to purchase the properties to specified public and private entities.

Persistent Tenants Win Challenge to Wrongful Mortgage Prepayment

This NHLP Housing Law Bulletin article from June 2004 details a case in which the United States District Court for the District of Massachusetts issued a decision invalidating HUD’s approval of a mortgage prepayment in 1986 as contrary to Section 250 of the National Housing Act. Granting summary judgment in favor of the tenants on the illegal prepayment claim, the court also awarded financial restitution under the Administrative Procedure Act to those tenants who were harmed more than 15 years later by the higher rents charged in the absence of the prepaid mortgage’s regulatory restrictions. The court also granted summary judgment in favor of HUD on the tenants’ disability discrimination claim.

State Court Hands Down Disappointing Preemption Ruling

This NHLP Housing Law Bulletin article from Nov-Dec. 2008 summarizes a case in which a New York state appellate court invalidated a New York City local preservation law that gives tenants the first right to purchase a building in which an owner is opting out of a project-based Section 8 contract. The court based its decision on an improper analysis of federal preemption law. While this decision sets back the New York City preservation law, its reach need not extend further than New York State and should be limited for reasons further discussed in the article.

Cases

Other cases

NHLP has compiled a list of other cases on prepayments of HUD-subsidized mortgages that may be useful for advocates developing their own pleadings.

Brighton Village v. Martinez

C.A. No. 00-CV-12311-GAO, sub nom. Brighton VIllage Nominee Trust v. Malyshev, 2004 WL 594974 (D.Mass. Mar. 23, 2004), an elderly and disabled project owner prepaid its HUD-held mortgage in 1986 and opted-out of Section 8 in 1995, when regular vouchers were issued. The owner sued the tenants in state court for nonpayment of rent when their vouchers did not cover the rents charged. The tenants filed a third-party complaint against HUD, which then removed the case to federal court, challenging the prepayment as contrary to Section 250 of the National Housing Act, and the opt-out as illegal under then-applicable 42 U.S.C. Sec. 1437f(c)(9).

College Gardens Pres. Comm. v. Eugene Burger Management

No. 03AM03563 (Cal. Super. Ct. Prelim. Inj., May 2003), motion to dissolve injunction denied (Jan. 9, 2004) In Sacramento, California, a tenant association and nonprofit affordable housing coalition brought suit to enforce state law that requires owners to give one year’s advance notice for prepayment of HUD Section 236 financing. State law also requires that the city be provided notice, and the city sought to intervene. The California Superior Court issued a preliminary injunction against prepayment until the owner complied with the requirements of state law, rejecting the owner's federal preemption arguments. Subsequently, after the federal appellate decisions in Forest Park II and Topa Equities, the owner moved to dissolve the injunction.

Kenneth Arms Tenant Association v. Martinez

2001 U.S. Dist. LEXIS 11470, No. Civ. S-01-832 LKK/JFM (E.D.Ca. order July 3, 2001)
Court preliminarily enjoined a proposed prepayment of 236 BMIR mortgages and termination of Section 8 project-based contract, based primarily on violation of state law, Cal. Gov't Code Secs. 65863.10 and 65863.11. The court found no federal preemption of state statute, determined HUD has no duty to enforce state law, and dismissed HUD. HUD filed a letter brief stating its position that LIHPRHA’s express preemption provision applies only to properties that executed a LIHPRHA plan of action.

Kukui Gardens Association v. Jackson

No. CV06-00534 SOM LEK (D. Hawaii, filed 2006) Residents of a Honolulu property and community organization sought to prevent the owner from prepaying its HUD-insured mortgage (where HUD approval was required) and selling the property to a private party. Plaintiffs sought declaratory and injunctive relief to challenge HUD’s prepayment policy and enjoin the application of the policy to the property under Section 250(a) of the National Housing Act (12 U.S.C. § 1715z-15), other provisions of the National Housing Act (12 U.S.C. § 1701t) and the Fair Housing Act (42 U.S.C. § 3608(3)(5)). Before a ruling was issued, the parties agreed to a settlement whereby approximately half of the units would be sold to a preservation purchaser.

Topa Equities v. City of Los Angeles

No. CV 00-10455 GHK (RNBx) (C.D. Ca. April 8, 2002) (Order on preemption issue), aff'd, 342 F.3d 1065 (9th Cir. 2003) Owner brought suit to challenge application of local rent control law to a former § 236 project that was prepaid, based on the federal preemption provision of 42 U.S.C. § 4122 (LIHPRHA § 232). Pleadings include review of legislative history. The District Court reviewed the legislative history and found neither express nor implied preemption of the local rent control law. The Ninth Circuit Court of Appeals affirmed, although using different reasoning. While finding LIHPRHA § 232 "extant," it ruled that the local law did not violate that provision because it did not "restrict or inhibit" prepayment and was a "law of general applicability" exempted by the terms of § 232.

Other Cases on Prepayments of HUD-Subsidized Mortgages

NHLP has compiled a list of other cases on prepayments of HUD-subsidized mortgages that may be useful for advocates developing their own pleadings.

Materials

HUD Letter to the District Court In Kenneth Arms

This document states that HUD’s position that LIHPRHA’s express preemption provision is limited to properties executing a plan of action under LIHPRHA.

Stemming the Tide: A Handbook on Preserving Subsidized Multifamily Housing (Sept. 2002)

By Emily Achtenberg & Local Initiatives Support Corporation

Statutes and Regulations

Section 8(t) of the United States Housing Act, codified at 42 U.S.C. § 1437f(t)

Enacted by Pub. L. No. 106-74, § 538, 113 Stat.1122 (Oct. 20, 1999).
Authority for enhanced vouchers, issued to eligible tenants after prepayment.

The Emergency Low-Income Housing Preservation Act of 1987

("ELIHPA" or "Title II"), Pub. L. No. 100-242 §§ 261-263, 101 Stat. 1877 (1988), as amended by Pub. L. No. 100-628, §§ 1021-1027, 102 Stat. 3270 (1988), codified at 12 U.S.C.A. § 1715l
Note that "Preservation of Low Income Housing" was replaced by LIHPRHA. The statute remains relevant because some owners executed preservation plans pursuant to its terms.

Older Statutes re Prepayments

Note: HUD has issued no formal regulations to implement either of the two currently applicable prepayment statutes described above -- Pub. L. No. 105-276, § 219, 112 Stat. 2461, 2487 (Oct. 21, 1998) or Section 250 of the National Housing Act, codified at 12 U.S.C. § 1715z-15.

HUD Handbook 4350.6

Processing Plans of Action Under the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (4/10/92, with changes through CHG-4 8/7/95)
See note above regarding LIHPRHA status. This handbook has no applicability beyond those properties that executed LIHPRHA preservation plans.

Note:

See Enhanced Voucher for notices related to administration of these vouchers for tenants after prepayment.

Since federal laws no longer guarantee preservation of federally supported affordable housing facing conversion, states and localities have enacted further protections for these properties through supplemental laws and policies.

Pub. L. No. 105-276, § 219, 112 Stat. 2461, 2487 (Oct. 21, 1998)

Authority for prepayments of "eligible low-income housing" upon giving HUD, tenants and local government at least 150 days, but no more than 270 days written notice.

Section 250 of the National Housing Act, codified at 12 U.S.C. § 1715z-15

Standards and procedures governing prepayments of other multifamily mortgages requiring HUD approval, usually those with other use restrictions.

Title VI Low-Income Housing Preservation and Resident Homeownership Act ("LIHPRHA", 12 U.S.C. Secs. 4101 et seq.)

Prior federal preservation program designed to preserve federally assisted housing by providing financial incentives to owners to remain in the federal program, and by financing purchases by nonprofits and tenant organizations. While LIHPRHA has not been repealed, Congress defunded the program in FY 1998, and has provided no funding since then. The statute remains relevant because many owners executed preservation plans pursuant to its terms.

24 C.F.R. Part 248, Subpart B

Provides guidance on prepayment limitations, required notice, appraisals, plans of action, criteria for HUD approval of prepayment, incentives to extend low-income use, assistance for displaced tenants, and other issues relating to prepayment under the Title VI Low-Income Housing Preservation and Resident Homeownership Act of 1990, "LIHPRHA", codified at 12 U.S.C. § 4101 et seq.). While these regulations remain unchanged, they are applicable only to properties that executed LIHPRHA preservation plans.

24 C.F.R. Part 248, Subparts A and C are generally no longer relevant, but do provide guidance on prepayments and plans of action for those few owners to whom the Emergency Low- Income Housing Preservation Act of 1987 applies.

HUD Notice H 2006-11

“Prepayments Subject to Section 250(a) of the National Housing Act” (Aug. 8, 2006)

HUD Notice H 2004-21

“Amendments to Notice H2002-16: Underwriting Guidelines for Refinancing of Section 202 and 202/8 Direct Loan Prepayments (Nov. 12, 2004)

HUD Notice H 2002-16

"Revised Prepayment of Direct Loans on Section 202 and 202/8 Projects with Inclusion of FHA Mortgage Insurance Guidelines" (Aug. 23, 2002)

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