Partners (Spring 2000)

Mark-to-Market Initiatives Impact
Affordable Housing

By Michael Milner

Are we on the verge of a multifamily affordable housing crisis? Over the last three years, a growing trend of private multifamily rental property owners have decided not to continue their relationship with HUD and its Section 8 program. Even with new affordable housing being built, this still translates into a net loss of affordable units available to low-income renters. The shifting paradigm is largely attributed to changes in the program.

In the 1970s, HUD instituted a program to encourage the building of additional affordable rental housing by private owners. HUD offered high rental subsidies and entered into 20-year contracts with private owners. These agreements allowed automatic annual rent adjustments. Twenty years later, HUD was making rental subsidy payments to many of these property owners substantially above the level of market rents, creating quite a controversy on Capitol Hill. Significant Congressional debate ensued to determine a long-term solution to the problem of the high rents, realizing that simply cutting rents down to market levels could cause numerous foreclosures and defaults on FHA mortgages.

Finally in 1997, after much debate and some experimentation, Congress passed The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA). MAHRA was designed to reduce the cost of federal housing assistance, improve HUD’s administration of such assistance, and ensure the continued affordability of units in certain multifamily housing developments.

Specific Changes

Mark-to-Market Program (M2M)

MAHRA authorized a new M2M Program designed to preserve low-income rental housing affordability while reducing the long-term costs of federal rental assistance, including project-based assistance from HUD. This will be accomplished through the following objectives:

  • Reducing project rents to no more than comparable market rents (with some exceptions),
  • Restructuring the HUD-insured or HUD-held financing so that the monthly payments on the first mortgage can be paid from the reduced rental levels,
  • Performing any needed rehabilitation of the project,
  • Making sure there is competent management of the project.
The type properties affected by the Act are HUD-insured or HUD-held mortgages and contracts for project-based rental assistance from HUD, primarily through the Section 8 program, for which the average rents for assisted units exceed the rent of comparable properties.

When a Section 8 contract renewal request is made, the owners of the property can either renew the contract without restructuring the mortgage debt, renew the contract and restructure the mortgage, or “opt out” of the Section 8 program. The first option can be done with either below-market or above-market projects. Because the contract restructuring process may take sometime, contracts are renewed at present rent levels temporarily while the mortgage is being restructured.

Office of Multifamily Housing Assistance Restructuring (OMHAR)

The Act also established OMHAR within HUD to develop and manage the program. The program is running through a group of decentralized entities called Participating Administrative Entities (PAEs) that are appointed by OMHAR. PAEs are mostly Housing Finance Authorities, but there are non-profits and in some cases, for profit organizations. These PAEs negotiate with the owners of individual projects and develop what’s called “Restructuring Plans.”

Restructuring is being done on properties with expiring contracts where the subsidy exceeds the true market value and the property cannot cash flow its current debt service and operating expenses when the rent is reduced to the market level. For those with HUD-insured loans, restructuring will usually reduce the amount of the first mortgage to levels serviceable with Section 8 market rents, placing the non-serviceable portion of the prior loan into a deferred second mortgage. Where debt reduction fails to yield sufficient savings to operate at market rents, budget-based Section 8 rents, called “exceptional rents,” can be used to cover operating expenses.

Impact of the Changes

Nationwide, over 800,000 housing units in approximately 8,500 multifamily projects have been financed with FHA-insured mortgages and supported by project-based Section 8 housing assistance payment contracts. In response to the HUD changes, hundreds of property owners decided to discontinue their relationship with the HUD programs. Many of the 20-year expiring contract holders were choosing to “opt out” of the program. To add to this dilemma, a large number of property owners began paying off their mortgages well in advance of the maturity dates, which also gave them an opportunity to be released from their Section 8 responsibilities. Through the end of 1998, 929 properties totaling 97,568 units either “opted out” or prepaid their HUD loans.

It is reasonable to assume that the properties exiting the program first are those that had been receiving rent subsidies less than comparable rents in the market. Communities that have been affected the most seem to be those with significant population growth and increasing housing costs where the subsidies are not covering actual costs to the property owners.

“Opt out” and prepayment data give a better idea of the severity of the problem. As reflected in the chart, the Federal Reserve’s Sixth District states lost 30 properties totaling 4,030 units because of “Opt outs.” Prepayment data, however, reveal a more significant concern.

With prepayments, the high growth states of Florida and Georgia were hit the hardest, losing 4,370 units. The low growth states of Alabama and Mississippi were affected the least. According to Eric Strong, Jefferson County Housing Authority CEO (the HUD-appointed PAE for Alabama), “many Alabama rental markets don’t offer the necessary incentives for an owner to “opt out” of the Section 8 program.”

Additional Section 8 program properties will be lost through a disqualification process. According to HUD, more than 80% of HUD program properties are in good condition; however, some need substantial rehabilitation. The property may be disqualified from the benefits of the M2M program when the property is in poor condition or when the property owner has committed substantive program violations. HUD or the PAEs may find the rehab costs too expensive. However, HUD and the PAE have a lot of discretion on disqualifications and don’t anticipate the number of disqualifications to have a significant impact on the available units.

How much of a problem is the M2M program actually causing, now that many Section 8 recipients have vouchers and certificates allowing them to go to the place of their choice? Many experts anticipate the bulk of the remaining Section 8 housing will remain in service and will comply with the new rules because many of these property owners have no other choice. According to Eric Strong, “one of the primary goals of the PAE’s work is to make every effort to preserve existing affordable housing units while striving to reduce the financial burden to the Treasury.”

However, the issues are still significant, particularly for urban dwellers in high-growth areas. The loss of 98,000 units of Section 8 housing as of 1998 has put a significant burden on the existing conventional rental housing stock in this country. Also, additional financial pressures have been placed on the low-income housing community, with voucher recipients complaining of having to pay premium amounts above their voucher allocations to live in decent housing.

Housing Secretary Report

Housing Secretary Andrew Cuomo reported to Congress in March 2000 that a record number of low-income families need rental assistance but fail to get it. According to a recent HUD study, at least 5.4 million very-low-income households spend over half their earnings on rent without assistance or lived in substandard conditions as of 1997, the most recent data available. The higher number also represented an increase in percentage of total U.S. households compared with 1991: 5.4% versus 5.1%.

These low-income households make up one sixth of total renters and include 12.3 million individuals considered as poor to be one paycheck away from homelessness. This is despite the fact that the households are more likely than ever to include at least one full-time worker. Seventy percent of all households that receive federal housing assistance have incomes below 30% of area median income. The rent burden grew three times faster for working families than for any other category, HUD found. Minorities were another hard-hit group. Increases were especially steep for Hispanic households and for minority families with young children.

Besides the factor of the net loss of affordable housing units discussed above, another factor was the lack of federal spending to increase the number of Section 8 vouchers. Congress created no net increase in Section 8 vouchers between fiscal years 1995 and 1998. Cuomo said, “There was a four-year hiatus when we went out of the housing business. We’re now paying for that hiatus.”


In the 1970s, HUD brought in private ownership to increase the multifamily housing stock for the low-income community. Making the business of governmentally subsidized rental housing profitable for private owners was the key to the success of the program. In order to continue the availability of affordable private rental housing, HUD must continue to make it profitable for the property owners involved.

In 1999, there was a noticeable decline in property “opt outs” and prepayments. It is believed that the initial “opt outs” and pre-payments in 1998 were the ones most convertible to above-market rents. But many predict that there will be a second wave of “opt outs” in 2000 after the end of several automatic one-year extensions that were initiated at their existing rent levels. Many are predicting that a number of these units will be up for sale in 2000 and 2001 because they no longer will be profitable for existing private ownership.

A number of non-profits are attempting to prepare themselves for acquisition opportunities, and the increased involvement of non-profit housing organizations will be a welcomed addition to the ownership of Section 8 rental properties. Additional hope exists in the possible expansion of the government’s Section 8 voucher program. In order to address affordable housing problems appropriately, a long-term, detailed regional strategy will have to take into consideration the existing housing stock and the need for building new housing. This will require the involvement of government, for-profit, and non-profit concerns.

Economic Impacts of Tobacco Industry
The Federal Reserve Bank of Richmond recently produced a study on the economic impacts of the tobacco industry and its 1999 national litigation settlement. The study, prepared by Dr. Dixie Watts Reaves and published as one of FRB-Richmond’s Community Development Marketwise Reports, presents a balanced approach in considering the issue.

While the health risks of tobacco products are well established, and limitations are clearly needed, the implications for low-income rural counties in tobacco-producing regions are sometimes overlooked. Right or wrong, these very low-income counties in our Districts have relied on this government-supported industry for a long time, and change will not come easy for them.

The report cites many interesting statistics. For example, in 1998 alone, U.S. consumers spent $59 billion on tobacco products, generating income and employment in the wholesale and retail sectors, manufacturing, storage, sales and distribution, and tobacco farming. Another example of the report’s statistical data is the number of U.S. jobs that are directly related to tobacco production — over 500,000. Clearly, these jobs amount to significant economic impact to not only the workers themselves, but also the economy that feeds off of these jobs.

The report explains the government’s tobacco program, the tobacco settlement, and the trust fund to assist growers in offseting their potential loss in revenues. It also discusses the role of tobacco in local economies, the impacts of change, the potential economic effects if tobacco production decreases, strategies for addressing change, and suggested alternatives to tobacco farming. One thing for certain, there are no easy answers. If you would like to see the complete study, please refer to the internet site or contact the Federal Reserve Bank of Richmond’s Community Affairs Office.

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