Saving HUD Multifamily Homes
Throughout the history of HUD, there have been programs that either lack the funding or the adequate affordability protections to ensure that they remain affordable. NHLP has played a key role through advocacy, litigation and technical assistance in preserving HUD properties.
Prepayment of HUD-Subsidized Mortgages
What is the risk?
In the 1960s, HUD began providing federally guaranteed loans to private owners through a mortgage and regulatory agreement with terms and conditions for specified lengths of time (i.e. 40 years). A mortgage prepayment occurs when an owner repays the federally guaranteed loan in full before the mortgage’s originally scheduled end date. A mortgage prepayment can create significant challenges for tenants because the prepayment terminates the rent and occupancy restrictions contained in the regulatory agreement. This means that the property will lose its affordability restrictions and the owner can increase tenants’ rent to the market rate which in most cases low-income families cannot afford. 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.
What can be done about it?
For most HUD-subsidized properties, owners must provide at least 150 but not more than 270 days’ advance written notice to tenants, HUD, and the local government. 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. State laws may require additional notice to tenants and others.To protect residents, Congress also provided “enhanced vouchers” through annual appropriations and general authority enacted in 1999. Enhanced vouchers have two key features that supplement the regular housing choice voucher program. First, enhanced vouchers may exceed the public housing authority’s ordinary payment standard (used for regular Housing Choice Vouchers), allowing payment of any rent which is determined “reasonable” by the housing authority, as determined in comparison with market comparables. So long as the rent remains “reasonable,” in most cases, the tenant’s portion of the rent should not increase. Second, an enhanced voucher provides the tenant with a right to remain in the unit after conversion to market rents, thus creating an obligation for the owner to accept the enhanced voucher. If the tenant elects to move, the voucher loses its enhancements and becomes a regular Housing Choice Voucher.Since federal laws don’t guarantee preservation of federally supported affordable housing facing conversion, states and localities have enacted further protections for these properties through supplemental laws and policies, such as additional notice requirements and purchase opportunities . Occasionally, properties facing prepayment may have other restrictions constraining their use. These restrictions typically come from additional federal, state, or local subsidies provided to a property, or from local zoning or land use requirements. Additional state and local incentives can include property tax relief, or preferential access to state or locally controlled financing.For more information, see NHLP’s Challenging Conversions of Federally Assisted Housing and Chapter 12 of NHLP’s Greenbook.
Responding to HUD-Subsidized Maturing Mortgages
What is the risk?
When a HUD mortgage reaches its originally scheduled end date, the mortgage “matures.” Most HUD mortgages are for a 40-year term, although some are for a 30-year term. When a loan is fully repaid according to its original amortization schedule, the mortgage and accompanying regulatory agreement are extinguished. This means that the property loses its affordability restrictions and the owner can raise tenants’ rents to the market rate, which in most cases is unaffordable to low-income tenants. If there are no other contractual restrictions or applicable legislation, the owner is free to convert the property to market-rate use.
What can be done about it?
Unlike the situation posed by mortgage prepayments or Section 8 opt-outs, federal law does not guarantee any prior notice for unassisted tenants when the associated restrictions expire. Some unassisted tenants may have limited protections under state or local notice or rent control laws.Until recently, there were no special tools to preserve the affordability of these properties. In late 2011, Congress provided up to $10 million of the Voucher renewal account’s tenant protection funds as replacement assistance to unassisted tenants of properties with expiring mortgages, use restrictions, or rental assistance. Under this authority, HUD may provide tenant protection assistance, through tenant protection vouchers or enhanced vouchers, to tenants residing in expiring properties located in low-vacancy areas who face rents greater than 30% of household income. Tenants in three types of HUD-assisted housing are eligible for these protections, including those residing in properties with: 1) maturing HUD-insured, HUD-held, or Section 202 mortgages that require HUD permission to prepay; 2) expiring rental assistance contracts for which tenants are not eligible for tenant protection assistance under existing law; or 3) expiring affordability restrictions accompanying a HUD mortgage or preservation program. There are some challenges with the distribution of these funds, including that the property owner must apply to HUD for the tenants to receive this assistance.For more information, see NHLP’s Challenging Conversions of Federally Assisted Housing and Chapter 12 of NHLP’s Greenbook.
Avoiding Project-Based Section 8 Contract Renewals and Opt-Outs
What’s the risk?
In addition to federally insured mortgages, HUD also provides housing subsidies through “project-based Section 8” contracts with private owners. Most project-based Section 8 contracts executed prior to the early 1990s ran for a fixed period of time, usually between five and 20 years. Starting in the mid-1990s, Congress reduced the funding for renewal contracts to one year, so upon expiration most owners renewed only for one-year terms. At each expiration, the owner has a choice whether to renew its participation in the program or to “opt-out.” Congress and HUD have established rules and policies governing the rent level of the government’s contract renewal offer.
What can be done about it?
If the building is in acceptable condition (i.e., not a “troubled” property), there are four primary ways of renewing the contract, depending mostly on a comparison of the Section 8 rent level under the expiring contract with the true market rent level: straight renewal, Mark Up to Market, restructuring/ Mark to Market, and Mark to Market “lite.s” HUD’s Section 8 Renewal Policy Guide describes these options in detail.There are certain notice requirements that must occur. Federal law (42 U.S.C. 1437f(c)(8)) requires an owner to give a 1-year written notice to both tenants and HUD of its intention either to renew or to “opt-out” of the contract. Owners failing to give proper notice may either renew the contract for up to one year, or permit tenants to remain while paying their former rent contributions until one year after proper notice is served. Where project-based assistance is not renewed, most tenants will receive enhanced vouchers, intended to enable them to remain in their homes.For more information, see NHLP’s Challenging Conversions of Federally Assisted Housing and Chapter 12 of NHLP’s Greenbook.
Avoiding Project-Based Section 8 Contract Terminations and Abatement
What is the risk?
If a HUD-subsidized property is in poor physical condition or the owner has seriously violated the project-based Section 8 contract with HUD, properties may also be at risk of a conversion to market rate use if HUD decides to terminate the project-based Section 8 contract or the owner decides to demolish the property. For properties with a Section 8 contract, this risk may occur at or around the time that the project-based Section 8 contract is expiring, or during the contract term.
What can be done?
This foreclosure chat outlines the process after an owner of a HUD-insured property defaults on its mortgage. Since 1995, Congress has also given HUD “flexible” authority, which HUD has typically used to quickly sell the property with few, if any, use restrictions or subsidies to preserve it, in order to reduce its obligation to subsidize and regulate these properties. Starting in 2005, with perennial enactment of the Schumer Amendment, Congress now requires HUD to maintain any project-based Section 8 contract at foreclosure or disposition sale, unless “infeasible.”Federal law requires HUD to develop procedures to facilitate the transfer of such properties preferably to tenant-endorsed nonprofit or public owners, with a renewal of the Section 8 contract. However, HUD’s rule requires little more than a notice from an owner who is facing imminent disqualification and intends to sell the property (24 C.F.R. § 401.480). In the event of disqualification, tenants will usually receive a short-term notice from HUD or a PHA that the building is being disqualified and they must move, and that they should come in for a voucher certification appointment. Disqualification or termination from the Section 8 program will often come before a default and foreclosure on any HUD-insured mortgage. The conditions of the building and its impact on the community will rarely be solved by a disqualification alone, so additional local and federal advocacy will be needed to address issues at the property in order to preserve it.For more information, see NHLP’s Challenging Conversions of Federally Assisted Housing and Chapter 12 of NHLP’s Greenbook.