Partners (Fall 2001)

Mark-to-Market Update

by Michael Milner

Michael Milner, Senior Community Investment Advisor, is in the Birmingham Branch and serves the state of Alabama.

HUD’s Mark-to-Market program is aimed at preserving the affordability of low-income rental housing while reducing costs to the federal government of rental assistance subsidies provided to low-income households.

The program provides a process of restructuring insured Section 8 properties by lowering their rents to market levels when their current Section 8 contracts expire, and reduces their mortgage debt if such action is necessary for the properties to continue to have a positive cash flow. Without restructuring rents for many of the approximately 8,500 properties in HUD’s portfolio that substantially exceed market levels, there would be higher federal subsidies under the Section 8 program.

Mark-to-Market Restructuring

The Office of Multifamily Housing Assistance Restructuring (OMHAR) contracted with public and nonpublic entities to carry out the mark-to- market restructurings on behalf of the federal government. These Participating Administrative Entities (PAEs) negotiate with the owners to perform two types of restructuring.

The first type of restructuring is referred to as a full mortgage restructure. In these cases, a property’s rents are adjusted to market levels and its mortgage debt is reduced by the amount needed to permit the property to achieve a positive cash flow. The second type of restructuring, referred to as rent restructuring, involves reducing the property’s rent to market levels, but not reducing its mortgage debt. This type of restructuring generally occurs when the property is physically and financially sound enough to continue operation at market-level rents with its existing mortgage.

Current Status of Program

As of May 2001, the GAO reports that approximately 1,500 properties have entered OMHAR’s mark-to-market program. About 60 percent of these properties are expected to receive full mortgage restructurings and the other 40 percent are expected to receive rent restructurings only. OMHAR estimates that the federal government will realize about $499 million in savings over a 20-year period from restructurings that it has completed thus far.

Loss of Affordable Housing Units Through Owners Opting Out

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 some time, contracts are renewed at present rent levels temporarily while the mortgage is being restructured.

The Mark-to-Market program was initially developed to target those Section 8 properties that had rent subsidies above market rates. No consideration, however, was given to property owners that had subsidies below Fair Market Rents (FMR). Consequently, HUD found that as contracts expired, a significant number of owners elected to opt out of the program.

According to the Florida Housing Coalition’s Housing News Network, the state of Florida had a 1,200 percent increase in the number of Section 8 units converted to market rents through the Opt-Out process within a 12-month period.

Mark-Up-to-Market Program

HUD estimated that in 1999, approximately one million subsidized units would be subject to contract expiration in the next five years. About half of these have contract rents below prevailing market rental rates for comparable units. Thus, HUD responded to this potential crisis with a “Mark-Up-to-Market” program, allowing owners to receive subsidy increases that would provide rents comparable to the market. This program is available only for property owners that believe their properties could attract at-market or above-market rents.

As Section 8 contracts expire, the owners of the property can either renew the contract with or without restructuring the mortgage, or ’opt out’ of the program. restructuring the mortgage debt, renew the contract and restructure the mortgage, or “opt out” of the Section 8 program.

Opt-Out Protections for Tenants

Although Congress intended to allow owners their prepayment right, it also wanted to minimize involuntary displacement of tenants. So, it enacted a series of post-prepayment resident protections. All current residents have a right to remain in the property so long as they pay the new market rent. To enable them to do so, HUD will grant special Section 8 Enhanced Vouchers to certain categories of residents provided the new rent requires a tenant payment greater than 30 percent of adjusted gross income and the rent increase takes effect within 12 months of the owner prepaying a HUD loan.

This enhanced voucher program is created specifically for the properties that are being prepaid and the eligible residents. These enhanced vouchers provide that the resident’s contribution to rent will remain at whatever it is today, but not below 30 percent of income. So long as the resident remains in the property, HUD will pay the Section 8 subsidy up to a total rent that is considered the reasonable post-prepayment rent for the property. If the resident moves out, the subsidy travels with the resident, but in turn the owner or purchaser is then free to rent the apartment to unassisted residents. In areas where the FMR is below-market rent for the property, the residents have an economic motivation to stay in the prepaying property.

Some properties have Section 8 Loan Management Set Aside (LMSA) contracts. These LMSA contracts do not automatically terminate on prepayment. HUD has established detailed notification procedures for terminating these contracts. Generally, when a Section 8 LMSA contract expires, the owner cannot simply decline to renew it; instead, the owner must give twelve months notice of termination and comply with Section 8’s statutory disclosure requirements. Failure to provide sufficient notice requires the owner to accept Section 8 LMSA renewal.


The efforts of HUD to decrease the number of Opt-Outs and to provide additional protections for tenants are notable and will no doubt help in the Section 8 affordable housing shortage. However, many are concerned about the long-term effect of the overall restructuring process. Is there enough financial incentive to keep the owners of these properties interested long term? What about the marginal properties that are not eligible for restructuring or Mark- Up-to-Market rents?

The reduction in HUD payments may force many owners to cut back on maintenance or default on their mortgages. The result would be deteriorating properties and substantial claims against the FHA insurance fund. Unless the government provides additional financial incentives to for-profit property owners, getting non-profits in the business of acquiring and managing Section 8 properties continues to be the most viable option if the appropriate capital funding is available and the necessary training is provided on managing the units.

HUD is aware of this market condition and provides incentives to property owners who intend to sell their property to non-profits. The more non-profits prepare for what many see as a significant opportunity to serve a tremendous community need, the better the future looks for older Section 8 properties.

For additional information on Mark-to-Market, Mark-Up-to-Market, or Enhanced Vouchers can be found in the Section 8 Renewal Guide at exp/s8renew.pdf



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