[Senate Hearing 109-1052]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1052
 
               EXTENSION OF HUD'S MARK-TO-MARKET PROGRAM

=======================================================================



                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

    EXTENDING HUD'S MARK-TO-MARKET PROGRAM AN ADDITIONAL 5 YEARS TO 
 CONTINUE REDUCING SECTION 8 COSTS WHILE PRESERVING THE AFFORDABILITY 
      AND AVAILABILITY OF LOW-INCOME RENTAL HOUSING ON THE MARKET

                               __________

                             JUNE 14, 2006

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html




                   U.S. GOVERNMENT PRINTING OFFICE
48-536 PDF                  WASHINGTON : 2007
----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, 
Washington, DC 20402-0001



            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

               Subcommittee on Housing and Transportation

                    WAYNE ALLARD, Colorado, Chairman

                JACK REED, Rhode Island, Ranking Member

RICK SANTORUM, Pennsylvania          DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MICHAEL B. ENZI, Wyoming             CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
MEL MARTINEZ, Florida                CHARLES E. SCHUMER, New York
RICHARD C. SHELBY, Alabama

                    Tewana Wilkerson, Staff Director

            Mark Calabria, Senior Professional Staff Member

                   Kara Stein, Legislative Assistant

             Jonathan Miller, Democratic Professional Staff

                                  (ii)



                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JUNE 14, 2006

                                                                   Page

Opening statement of Senator Allard..............................     1

Opening statements, comments, or prepared statements of:
    Senator Reed.................................................     3

                               WITNESSES

Theodore K. Toon, Deputy Assistant Secretary, Office of 
  Affordable Housing Preservation, U.S. Department of Housing and 
  Urban Development..............................................     3
    Prepared statement...........................................    14
Chris Foster, President, National Leased Housing Association.....     5
    Prepared statement...........................................    17
Scott Kline, Vice President and Development Director, National 
  Housing Trust..................................................     6
    Prepared statement...........................................    20

                                 (iii)



               EXTENSION OF HUD'S MARK-TO-MARKET PROGRAM

                              ----------                              


                        WEDNESDAY, JUNE 14, 2006

                                       U.S. Senate,
  Subcommittee on Housing and Transportation, Committee on 
                         Banking, Housing and Urban Affairs
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:42 p.m., in 
Room SD-538, Dirksen Senate Office Building, Hon. Wayne Allard 
(Chairman of the Subcommittee) presiding.

           OPENING STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. I call the Subcommittee on Housing and 
Transportation to order.
    Congress created the Mark-to-Market program in 1997 to 
reduce Section 8 costs while preserving the affordability and 
availability of low-income rental housing. The purpose of the 
program is to reduce the property rents to market level while 
simultaneously reducing property debt levels and owner costs 
through a number of tools authorized through legislation. 
Studies seem to show that the program has been an overwhelming 
success.
    Nearly 250,000 units of affordable housing have been 
preserved due to the Mark-to-Market program. This is affordable 
housing that would have been permanently lost as affordable 
otherwise, according to an ABT Associates study for HUD. As of 
July 30, 2003, the program had produced a net savings to 
taxpayers of about $831 million, using moderate assumptions of 
future portfolio performance.
    The original legislation authorized the Mark-to-Market 
program for 4 years, which was subsequently extended for 5 
additional years. Therefore, the Mark-to-Market program 
authority will expire on September 30 of this year, in 2006. 
When the program was extended in 2001, it appeared that 5 years 
additional would be sufficient time for nearly all eligible 
properties to complete the Mark-to-Market process. However, 
more recent projections show that nearly 78,000 properties will 
face rent reductions over the next 5 years.
    It is important to note that even though the program will 
expire, these Section 8 properties with above-market rates will 
still be required to have their rents reduced to market levels. 
Without the proper tools to also restructure the debt, many 
owners will lack sufficient funds for property maintenance or 
mortgage payments. Because many Section 8 properties are also 
FHA-insured, this will result in a significant number of claims 
against FHA, in addition to many tenant displacements.
    Clearly, no one finds this a desirable scenario. Failure to 
extend the Mark-to-Market program would be bad for tenants and 
bad for taxpayers. Thus, I am pleased to join with Senator Reed 
in introducing Senate Bill 3511, The Mark-to-Market Extension 
Act of 2006. Our bill would extend the program for 5 additional 
years to allow the remaining properties to go through the Mark-
to-Market process. Frankly, I can see no down side to extending 
the program. After all, it maintains affordable housing for 
less money.
    In addition to our witnesses here today representing the 
National Housing Trust and the National Leased Housing 
Association, a broad coalition of groups has signed letters 
indicating their support for extension of the Mark-to-Market 
program, including the National Housing Conference, National 
Affordable Housing Management Association, Low-Income Housing 
Coalition, National Housing Law Project, Stewards of Affordable 
Housing for the Future, Enterprise Community Partners, Local 
Initiative Support Corporation, California Housing Partnership 
Corporation, the Chicago Community Development Corporation, 
American Association of Homes and Services for the Aging, 
Council for Affordable and Rural Housing, Institute for Real 
Estate Management, Institute for Responsible Housing 
Preservation, Mortgage Bankers Association, National Affordable 
Housing Management Association, the National Apartment 
Association, National Association of Affordable Housing 
Lenders, National Association of Home Builders, National 
Association of Realtors, National Multi-Level Housing Council, 
National Council of State Housing Agencies.
    I am pleased to work with the groups and with my colleagues 
to see that this very worthwhile program is extended for an 
additional 5 years. I also would like to thank today's 
witnesses for their support of our efforts. They are all well 
respected in affordable housing circles, and their testimony 
will be helpful. First, I would like to welcome Mr. Ted Toon, 
who is the Deputy Assistant Secretary for the Office of 
Affordable Housing Preservation, referred to as OAHP, O-A-H-P. 
This is the office within HUD that administers the Mark-to-
Market program.
    Next, I would like to welcome Mr. Chris Foster, President 
of the National Leased Housing Association. Mr. Foster's 
organization has been at the forefront of the efforts to extend 
the Mark-to-Market program. In particular, I would like to 
acknowledge the efforts of Denise Muha, who has worked 
tirelessly to form the coalition in support of the extension.
    Finally, I would like to thank Mr. Scott Kline of the 
National Housing Trust for appearing before the Subcommittee 
today. The National Housing Trust has also been extremely 
active in their campaign to reauthorize the Mark-to-Market 
program. They have been working quietly behind the scenes now 
for quite some time, and their expertise has been helpful.
    Again, thank you to all of our witnesses for being here 
today, and I look forward to your testimony. Now, I would like 
to call on my partner and helper here on the Committee, the 
head of the minority side on this Subcommittee, Senator Reed 
from Rhode Island.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, gentlemen, for being here today.
    I would first like to thank Senator Allard for scheduling 
this hearing on the extension of HUD's Mark-to-Market program. 
The original Mark-to-Market program was created in 1997 to 
address two key problems: the increasing cost of renewing 
project-based Section 8 rental contracts and the potential loss 
of tens of thousands of affordable rental properties threatened 
by the expiration of these contracts.
    And there was a further complication, because, in fact, 
many of the Section 8 contracts that had 20-year terms were in 
buildings with 40-year FHA-insured mortgages. In most cases, 
the contract rents in these buildings, the FHA buildings and 
Section 8 buildings, were higher than local market rents, which 
were often not sufficient to allow the owners to pay their 
mortgages. In other words, without the Section 8 rents, these 
buildings would go into foreclosure and potentially cost the 
FHA hundreds of thousands of dollars.
    In fact, according to an August 2004 evaluation of the 
program prepared by ABT Associates for HUD, the present value 
of net savings generated by the Mark-to-Market program is $831 
million as of July 2003. The program has preserved about 
200,000 units of housing. There are very few programs that can 
claim almost $800 million of savings and also maintaining such 
a prodigious number of affordable housing units. So it is a 
successful program, and I think Senator Allard and I want to 
follow up in ensuring its success and its continuity.
    And because of that reason, I am pleased to join Senator 
Allard as a cosponsor of S. 3511, the legislation to extend the 
Mark-to-Market program. Since circulating the bill, we have had 
some comments from interested parties that suggest a few more 
changes, and I look forward to working cooperatively with the 
Chairman to see if we can incorporate these changes. But this 
is a program that works; it is a program that is necessary, and 
it is a program that I hope we can very quickly extend.
    Thank you very much, Mr. Chairman.
    Senator Allard. Thank you very much, Senator Reed.
    Now, I thought we would start on my left, your right, and 
start with Mr. Toon, then Mr. Foster, and Mr. Kline, and we 
allow 5 minutes for testimony.

  STATEMENT OF THEODORE K. TOON, DEPUTY ASSISTANT SECRETARY, 
 OFFICE OF AFFORDABLE HOUSING PRESERVATION, U.S. DEPARTMENT OF 
            HOUSING AND URBAN            DEVELOPMENT

    Mr. Toon. Thank you. Good afternoon. Thank you, Chairman 
Allard, Ranking Member Reed, for inviting me here today to 
testify on the proposed Mark-to-Market Extension Act. The 
preservation of affordable housing in our communities is a top 
priority for Secretary Jackson, Assistant Secretary Montgomery 
and the Department of Housing and Urban Development.
    The Mark-to-Market program, as you mentioned, was 
originally created in 1997, extended in 2001, and will expire 
in September 2006. And the bill that you have introduced will 
extend the program an additional 5 years. As you are aware, 
under Mark-to-Market, HUD has the mandate to reduce the rents 
to market levels, saving dollars on project-based Section 8 
expenditures. It also includes authorities that are essential 
to maintaining the physical and financial viability of these 
properties at the reduced rents.
    In Mark-to-Market, HUD analyzes the rents, the repair 
needs, the property viability, and if necessary, resizes the 
FHA-insured mortgages to a level that can be serviced by the 
reduced market rents. If the debt is resized, the owner enters 
into a new long-term use agreement, keeping the property 
affordable for the next 30 years.
    Over the past 9 years, HUD has been very successful at 
balancing the dual program goals of reducing the subsidy costs 
while preserving affordable housing. To date, we have preserved 
over 2,200 properties around the country, with 188,000 
affordable housing units, and in so doing, we have promoted the 
long-term physical and financial viability of this affordable 
housing. The program, as of this month, in fact, has surpassed 
$2 billion in net savings to HUD and the American taxpayers, 
and by preserving this housing, we have provided stability for 
the many low-income families and the communities where they 
live.
    In discussing an extension of the program, I think it is 
important to consider what has been achieved thus far. To date, 
the program has preserved properties in all 50 States and the 
District of Columbia; for example, Chairman Allard, in 
Colorado, HUD Has preserved 31 properties with 1,800 units of 
affordable housing; in Rhode Island, 12 properties with more 
than 1,000 units have been preserved, and another 21 properties 
with more than 2,000 units will become eligible under this 
proposed extension.
    But not every property can or will be preserved through 
Mark-to-Market. While preservation is a primary goal, Congress 
made it very clear that prudent use of limited resources was an 
equally important goal, and we have taken this charge 
seriously. There have been and will continue to be properties 
referred into the program that simply cannot be responsibly 
preserved. These properties may be too expensive or 
functionally obsolete. They might be located in markets that 
have ready availability of replacement housing, or the property 
ownership may simply be unable or unwilling to move forward 
with the transaction.
    According to our analysis of potential future referrals, if 
the program is extended as proposed, nearly 800 additional 
properties, or 78,000 units, as you cited, will meet the 
eligibility requirements for restructuring. This is the 
universe of properties that, absent extension of the 
restructuring authorities, will represent the most at-risk 
properties in HUD's insured mortgage portfolio, and this is 
because MAHRA will continue to require the markdown of the 
rents but will not allow the concurrent restructuring of the 
underlying mortgage. The reductions in rents to market levels 
will result in properties being unable to pay operating costs 
and mortgage payments. In addition to the lost opportunity to 
preserve additional 800 properties, the sunset will expose the 
FHA insurance fund to considerable default and foreclosure 
risk, estimated at about $400 million over the 5-year period.
    I want to conclude today by pointing out that Congress' 
intent in creating originally the Mark-to-Market program and 
then extending it was that the long-term costs had to be 
reduced and that it would be less expensive and more effective 
to proactively address the physical and financial challenges 
facing the properties than to wait for them to physically 
decline and financially fail, and this has been proven true by 
the successful restructuring of 188,000 units across the 
country and also helped improve the lives of thousands of low-
income families who call these units home.
    Thank you for inviting us here to testify today. On behalf 
of the entire Department, I look forward to continuing to work 
with you to ensure that we provide affordable housing in a 
cost-effective manner.
    Thank you.
    Senator Allard. Mr. Foster.

 STATEMENT OF CHRIS FOSTER, PRESIDENT, NATIONAL LEASED HOUSING 
                          ASSOCIATION

    Mr. Foster. Thank you very much, Mr. Chairman.
    Mr. Chairman and Senator Reed, thank you very much for 
having me today to testify on this legislation to extend HUD's 
Mark-to-Market restructuring program. As you said, my name is 
Chris Foster, and I am President of Hampstead Partners and 
outgoing President of the National Leased Housing Association 
at this time, NLHA, which is a trade association located here 
in Washington, D.C.
    NLHA strongly supports the extension of the Mark-to-Market 
program. It is a valuable tool that, as has been cited, has 
preserved approximately 200,000 affordable apartments. The 
Mark-to-Market program applies to properties insured by the 
FHA, with project-based assistance, primarily under Section 8 
of the 1937 Housing Act, with rents in excess of market in the 
area.
    Notwithstanding the fact that many of these properties had 
originally been built with rents which were set above market at 
the time, when the first wave of the 20-year Section 8 
contracts approached expiration in the mid-1990s, Congress was 
reluctant to authorize renewal of the contracts at above-market 
rents. Many of these projects could not operate and meet 
mortgage payments at market rents.
    This universe of projects lent themselves to a solution 
which, as has been indicated today, actually has a positive 
budget impact. In addition, needed rehabilitation and the 
replenishment of reserves is generally accomplished under the 
program and is necessary.
    Owners of projects that have been restructured must execute 
use agreements to accept Section 8 renewal offers and keep 
rents affordable with or without availability of Section 8 
assistance going forward for the next 30 years. We understand 
in the coming years, a significant number of Section 8 
contracts will be eligible for initial renewal and that many 
are attached to projects with HUD-insured mortgages. The 
Housing Trust, which is sitting next to me, has indicated that 
almost 1,000 properties will be eligible for the Market-to-
Market program in the next 5 years.
    The same factors that moved Congress to enact the program 
originally still exist today. We urge Congress to authorize the 
5-year extension and have attached for the record an industry 
letter signed by 15 national housing organizations that endorse 
the extension. My company, Hampstead Partners, has been 
involved in restructuring several hundred units under the 
program. The program has made it possible to both preserve and 
add tens of millions of dollars in additional non-FHA funds to 
these projects for rehab and preservation purposes. In fact, we 
are just now initiating the processing of several hundred more 
units in Baltimore.
    The bill proposes two changes to the Mark-to-Market program 
that we strongly support. The bill suggests increasing from 5 
percent to 9 percent the total number of units that can have 
exception rents. Exception rents are rents that exceed market 
and are used when no amount of debt restructuring can yield 
viable rents below market. The second change extends the period 
during which a nonprofit purchaser of a Mark-to-Market project 
can obtain debt relief on a second mortgage. Such a change is 
necessary in order to recognize the reality of the time it 
takes to process real estate transactions.
    We recommend adding a provision to the bill to give owners 
of properties that have undergone debt restructuring the right 
to request and receive budget-based rent increases. Such rent 
increases are authorized in the Mark-to-Market regulations but 
are discretionary with HUD, and the Department has determined 
not to entertain any requests for budget-based rent increases 
thus far, relying instead solely on annual operating cost 
adjustment factors, OCAFs.
    Over the 30-year life of the program, it is possible that 
for some properties, the OCAF adjustment will be insufficient 
to meet rising operating costs, which does not necessarily 
reflect additional operating cost increases, particularly 
because OCAFs are published on a Statewide basis.
    The bill also proposes one change in the authorizing 
statute that moves the program into new areas which we are not 
able to unequivocally support at this time. The bill, as 
drafted, would give HUD unilateral authority to require Section 
8 projects with HUD-insured mortgages but with below-market 
rents participate in the Mark-to-Market program. This is a 
major departure from the program. While this could be an 
excellent workout tool, we believe that participation in the 
program should and must be voluntary, as it is now. I have 
spoken with Mr. Toon earlier today, and he indicated at that 
time that he was in agreement the participation should be 
voluntary. I thank you very much for your time and 
consideration, and I will be happy to answer any questions.
    Thank you.
    Senator Allard. Thank you.
    Mr. Kline.

   STATEMENT OF SCOTT KLINE, VICE PRESIDENT AND DEVELOPMENT 
                DIRECTOR, NATIONAL HOUSING TRUST

    Mr. Kline. Thank you, Chairman Allard, Ranking Member Reed, 
and Members of the Subcommittee. Thank you for inviting the 
National Housing Trust to participate in the hearing today. We 
appreciate the opportunity to comment on the bill, as 
introduced by Senator Allard, to extend the Mark-to-Market 
program of the Department of HUD.
    My name is Scott Kline. I am Vice President of the National 
Housing Trust, a national nonprofit organization formed in 1986 
dedicated exclusively to the preservation and improvement of 
affordable, federally assisted and insured housing. The Trust 
was deeply involved in the introduction of the Mark-to-Market 
legislation nearly a decade ago, and we continue to view the 
program as an essential tool for preserving affordable housing 
today.
    I also serve as the head of NHT Enterprise Preservation 
Corporation, a housing development corporation that has used 
the Mark-to-Market program to successfully save affordable 
housing. NHT Enterprise owns and operates nearly 3,000 
affordable apartments in Illinois, Texas, Florida, South 
Carolina, North Carolina, Virginia, and the District of 
Columbia.
    Mark-to-Market reauthorization is urgently needed, and NHT 
strongly supports the bill introduced by Senator Allard. The 
National Housing Trust has joined more than a dozen national 
housing groups in signing a letter of support supporting 
reauthorization. The Mark-to-Market program preserves and 
improves affordable HUD-subsidized housing through a 
restructuring of debt and lowering of Section 8 contract rents. 
The program places HUD-subsidized properties on a steadier 
financial platform from which they can be soundly operated with 
renewed long-term affordability.
    Currently, an estimated 92,000 units in more than 1,000 
FHA-insured properties have above-market rents. Most of these 
properties, however, have contracts that will expire after 
Mark-to-Market is scheduled to sunset. No one disputes that the 
program has saved affordable subsidized housing. As of February 
2006, according to HUD, the program had saved over 220,000 
affordable apartments. Nor is there any real dispute that it 
saved taxpayers money. In April 2006, the GAO issued a report 
that describes Mark-to-Market as one of the steps HUD and the 
Congress have taken to limit cost of growth of the Section 8 
program, and as both of you mentioned in your opening remarks, 
the program is estimated to have saved up to $833 million in 
savings since it was authorized in 1997.
    The HUD finding of $833 million in savings is consistent 
with historical Mark-to-Market cost estimates. In 2001, the CBO 
found that the cost of restructuring mortgage debt is less 
expensive than the cost of default by about $1 million per 
project. Exception rents are also a vital preservation tool, 
and this is something I want to emphasize. The Senate bill 
lifts the exception rent cap up to 9 percent of the properties 
closed under the program in any given year. NHT Enterprise was 
recently involved in a transaction that could not have occurred 
without exception rents. In June 2005, NHT Enterprise closed on 
the financing of a 67-unit, 100 percent Section 8 scattered-
site property located in the South Shore neighborhood of 
Chicago. The properties, known as the O'Keefe portfolio, were 
acquired and renovated using financing and pursuant to the 
program requirements of Mark-to-Market.
    The South Shore neighborhood is a middle-class 
neighborhood. The portfolio includes vintage 1920s brick 
multifamily neighborhood buildings, and there is a strong 
conversion market for these types of walkup buildings. Absent 
the program and its allowed use of exception rents, these 67 
affordable apartments could have been converted to market-rate 
housing. Rehabilitation and repair work financed under the 
Mark-to-Market restructuring included both interior and 
exterior repairs necessary to ensure a decent, safe, and 
quality living environment, and we also added a computer lab 
for residents to use.
    The Trust also supports the provision that extends the 
period of eligibility for nonprofits to receive debt relief 
when acquiring a Mark-to-Market property. The original Mark-to-
Market bill encouraged transfers to qualified nonprofit 
organizations. There is mounting nonprofit interest in ability 
to purchase individual properties in the portfolio of 
restructured properties. Nonprofit sponsors accessing programs 
such as Home CDBG, tax-exempt financing, and Low Income Housing 
Tax Credits annually produce or preserve over 30,000 units of 
affordable housing. HUD limits the time a nonprofit may secure 
debt relief or assignment of debt on a Mark-to-Market property 
to 3 years after the property closed under the program.
    However, the Mark-to-Market program is nearly 10-years old. 
With each passing year, qualified nonprofits are prevented from 
pursuing the elimination of debt in more and more properties 
that have previously gone through Mark-to-Market. Without debt 
relief or assignment, these transactions are infeasible. This 
3-year rule significantly limits the options of private owners. 
Many owners are willing to transfer the properties, but they 
are blocked from receiving a fair market bid by the 3-year 
limit.
    The current 3-year limit on these nonprofit purchase 
incentives is arbitrary. If the best outcome of the sale is 
transfer to a nonprofit purchaser, then, the Secretary should 
have maximum flexibility to support that outcome. The Senate 
bill appropriately addresses this policy flaw, permitting 
nonprofits to purchase a Mark-to-Market property on or before 
the latter of 5 years after recordation of the affordability 
agreement or 2 years after enactment of the bill.
    Again, thank you for providing us with the opportunity to 
comment on this very important bill.
    Senator Allard. I want to thank you all for your testimony. 
It has been very helpful. My first question, and I direct this 
to all of the witnesses, and I think you addressed this in your 
testimony, but I just want a straightforward answer for you for 
the record: which will save more money in the end, extending 
the Mark-to-Market program or allowing it to expire? And I will 
let you, Mr. Toon, start that out, and then, if Mr. Foster and 
Mr. Kline respond.
    Mr. Toon. As Mr. Kline mentioned, the cost of a default and 
foreclosure is considerably more expensive by somewhere in the 
neighborhood of $1 million a project more expensive than doing 
a restructuring.
    Senator Allard. Mr. Foster.
    Mr. Foster. Well, no question; I agree with Mr. Toon on 
that, and moreover, I would like to say the cost to the 
families of not preserving these projects is perhaps even 
worse.
    Senator Allard. Good point.
    Mr. Kline.
    Mr. Kline. We agree, of course, with everything. It is a 
financial savings as well as a social savings.
    Senator Allard. Now, Mr. Toon, in your testimony, I note 
with interest your commitment that you had made to previous 
Congresses that you would administer the program in a way in 
which you respected the integrity of the budget. I do not 
recall your exact words on that. And I assume that we will have 
that same commitment on this particular piece of legislation 
that will continue through for the next 5 years?
    Mr. Toon. Absolutely.
    Senator Allard. Mr. Foster, you wanted to allow the 
operators of the units that went into Mark-to-Market to have 
the authority to adjust those rentals to the rate without going 
back to HUD and getting approval. How can HUD and particularly 
the administrators of the Mark-to-Market program keep their 
commitment to the Congress if we just give this to the property 
owner to do this unilaterally?
    Mr. Foster. What we want is the right to request a budget-
based rent increase in some cases rather than using OCAFs, 
which we believe, in some select markets, may not be applicable 
to the long-term, and sufficiently recognize cost increases. We 
believe that OAHP will still have the authority to make the 
judgments as to when those types of adjustments will be 
applicable and will do so responsibly.
    Senator Allard. I think you see my concern, and I think 
that we will continue to keep your thoughts in mind as we 
continue to work through this legislation, but I certainly do 
want to be sure that we keep this program, you know, 
historically sound, and that is what has made it easy for us to 
get this renewed year after year, because the Members of the 
Congress and everything, I think, agree with the testimony that 
we have heard here today as a general rule, that it is working, 
and it is working well, and it is saving taxpayer dollars, and 
it is providing housing where otherwise it would not be 
available for people who need it.
    So that is the point that I wanted to make as we move 
forward on here.
    Mr. Foster. Could I point out, Senator?
    Senator Allard. Yes, go ahead, Mr. Foster.
    Mr. Foster. Just to point out that the same conditions 
would exist a year or 2 or 5 from now, that default would be 
more expensive than fixing the problem going forward. So those 
same issues----
    Senator Allard. Well, my only point is that we need to have 
some oversight, and I think we have to have fairly rigorous 
oversight so the program does not get out of control, and that 
is the point I am trying to make, and I think we can reach 
that. We want to make sure that it continues to be successful.
    The other question: which will provide more affordable 
housing, extending the Mark-to-Market program or allowing it to 
expire? And I would like to have each of the three of you 
answer that one. The previous question I had was which will 
save more money in the end. And then, this one here, what will 
provide more affordable housing?
    Mr. Toon. Again, a restructuring clearly will provide more 
affordable housing. Allowing the contracts to expire opens the 
options to owners that opting out of the program, for example, 
and taking their properties to market rate and out of the 
affordable stock is a risk that we have seen. And having this 
program, which provides market-oriented business incentives for 
them and for those properties ensures that they stay in the 
affordable portfolio.
    Senator Allard. Mr. Foster?
    Mr. Foster. I will not comment necessarily on the way that 
OAHP might deal with the issues, but I will just say in general 
it has been my experience as a developer that it costs 
somewhere around $70,000 on average to save and preserve a 
unit, and it costs well over $100,000 to build a new unit. So I 
would think it would be much more affordable.
    Senator Allard. More affordable housing.
    Mr. Foster. More affordable.
    Senator Allard. Mr. Kline.
    Mr. Kline. We agree that continuing of the Mark-to-Market 
program would retain more affordable housing. It is more likely 
that more owners will opt out without the possibility of having 
a restructuring opportunity.
    Senator Allard. Now, having made those comments, can any of 
you think of any down side to extending the Mark-to-Market 
program?
    Let the record reflect no; is that right?
    [Laughter.]
    Senator Allard. Okay; very good.
    Now, let me go ahead and call on my esteemed colleague, 
Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, gentlemen, for your testimony.
    Mr. Toon, there is always a tension between programmatic 
initiatives and budget possibilities. We understand that. But 
your office is the one that is charged more than anyone else 
with preserving affordable housing. And I will state the 
obvious: in every community in this country, that is one of the 
biggest crises that we have, and it is not just at the low 
level; I think both Senator Allard and I have been visited by 
doctors all this week, and one of the concerns they have in 
terms of practicing in different communities, in some places, 
it is too expensive for them to have the kind of house that 
they can get elsewhere. So this is a huge problem.
    Having said that, you mention the successes in Rhode 
Island, but there are at least two units, Colony and Medina 
Village, that both the PAE, the participating administrative 
entity, and the local HUD office recommended to you, your 
office, not you personally, your office, to make an exemption, 
exception for the rents, and you had turned down. And that 
seems to me, knowing the market up there is not the most 
proactive posture to preserve affordable housing. In addition, 
we have another unit, Barbara Jordan, which you are probably 
aware of, which the State is struggling to maintain the Section 
8.
    I would like you to sort of commit that not only on these 
issues but generally speaking, your office is going to be the 
real advocate, the one that will go the furthest to preserve 
Section 8 housing. Is that something you can say?
    Mr. Toon. It is, and I believe, in fact, that we have done 
so. The flip side of that, as Chairman Allard suggested, is 
that we are also ultimately charged with the fiscal 
responsibility, and at some point, some properties, 
unfortunately, are simply too expensive. And at that point, we 
can look at other options, such as moving those contracts to 
other properties in the same market, so there is no net loss of 
units. But we have been the most responsible with the limited 
resources we have.
    Senator Reed. Well, I will take up the point that Mr. 
Foster made is that there might not be any net loss in terms of 
units, but there are certainly disruptions in the lives and the 
families and then the communities, really, and I think also, 
too, it is this notion that it might be too expensive, again; 
ultimately, if these projects fail, you go back to the logic 
underlying the Mark-to-Market program. The cost of default on 
the mortgage, the cost of just the disrepair and everything 
else usually is much more. So I would urge you to be much more 
aggressive, although there is always a budget.
    Let me turn to another issue which I think is important, 
which is Section 514, the Mark-to-Market statute. It requires 
the Secretary to spend up to $10 million annually for the 
provision of technical assistance to tenants in buildings where 
the Section 8 contracts are expiring. I am informed that HUD 
has obligated none of these funds for the past 4 years. Now, 
this is, as I understand it, a requirement to do so, and you 
are not doing it, and then, in cases where you have done it, 
almost retroactively, these funds have been sort of taken away 
from these purposes, even though there are people in good faith 
who thought they had a grant for 3 or 4 years.
    Congress has already twice directed HUD to spend 514 funds 
in all expiring Section 8 contract buildings. Why have you not 
implemented Section 514 as the law requires and as Congress has 
insisted?
    Mr. Toon. First, I would like to say that we absolutely 
support tenant involvement and input in the restructuring 
process. I believe it is a cornerstone of the program. Tenants 
often know the physical issues facing a property. They know the 
management issues. They are our best ally and our best partner 
in going through the restructuring process. And in fact, as you 
have said, the law requires tenant participation, and we have 
taken that seriously.
    Section 514, in fact, says that the Secretary shall spend 
up to $10 million, so there is a discretionary component to it. 
For the last 4 years, the funds for that program, in fact, have 
not been appropriated, so there has been no funding to fund 
those programs.
    There also were some issues with the earlier grants under 
514. While certainly, there were some success stories there, 
and I think they really filled a gap in terms of getting tenant 
involvement, during that time, we have also charged our PAEs 
and our staff with a much higher degree of requirement in terms 
of getting tenant involvement. There are strict tenant notice 
requirements. Tenant meetings are required to be held at each 
property at least twice through the restructuring process to 
get support. Before we will approve a deal within our office, 
we ensure that the tenant comments, in fact, have been 
incorporated in the final plan. So there are a number of 
controls in place that ensure that tenant input is considered 
in the final plans that we are developing.
    So we really feel that through the PAE structure, we are 
more than adequately including the tenant concerns, including 
tenant involvement, and ultimately making that a part of the 
restructuring.
    Senator Reed. Just as a follow-up, have you requested 
funding? Have you put it in your budget, the Section 514?
    Mr. Toon. I am not aware of that, but I can get back to you 
for the record.
    Senator Reed. Please. I think that is important. I mean, as 
you can see, that is part of this legislation, and I think you 
indicated that tenant involvement is important, and it has to 
be something more than rhetorical; it has to be real, and I 
find usually, when you provide resources, it becomes less 
rhetorical, more practical, more real.
    Let me, if I can, ask one question for Mr. Foster and Mr. 
Kline. My time is expiring. You have both, I think, in your 
testimony supported the notion of budget-based rent increases, 
and we have had a dialogue with the Chairman. I presume that 
the same logic underlying the budget-based is the logic that is 
in the overall program, which is this ends up saving money and 
saving units. Is that correct, Mr. Foster?
    Mr. Foster. That is my point, yes, sir.
    Senator Reed. And Mr. Kline.
    Mr. Kline. Yes, we feel the same way. There are 
circumstances over a 30-year period where expenses may rise to 
such an extent that OCAF just does not cover what is necessary 
to rent and operate a property, and going back to some of the 
other studies that we made reference to in our testimony, 
keeping the property affordable and retaining it is cheaper 
than foreclosure.
    Senator Reed. And final question if I may, Mr. Chairman. I 
think there is a disagreement of opinion between Mr. Foster and 
Mr. Kline about below-market rates, being able to deal with 
properties below-market rates. Might you just a quick thought, 
Mr. Kline and Mr. Foster, about this approach?
    Mr. Kline. We feel that there might be circumstances that 
arise where the current Section 8 rents are below market, but 
in order to support the debt necessary to fund repairs, the 
rents might need to be hiked up above-market rents and that 
Mark-to-Market should be an available resource to do that.
    Senator Reed. And again, the logic is, and I presume you 
could show project by project that it saves units and would 
preserve affordable housing.
    Mr. Kline. Yes, sir, because otherwise, without the 
rehabilitation, the units are left to deteriorate, or the 
owners are going to have to opt out due to their inability to 
make REAC inspections.
    Senator Reed. Mr. Foster, you have a divergent opinion?
    Mr. Foster.  Actually, no, sir; we think it is attendant 
upon the Department to find that it would save money 
ultimately, or else, they cannot do it to begin with. But 
secondly, generally, we are not in disagreement that we could 
not have--that they should not have that tool. We are simply 
saying that it needs to be voluntary. In other words, the 
owners need to agree that they are going to come into the 
program----
    Senator Reed. Okay.
    Mr. Foster.----as well as OAHP saying that they should come 
into the program, and we are willing to work with OAHP to come 
up with some language, and we just think that the language 
needs to be thoroughly vetted.
    Senator Reed. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Allard. Thank you. Finally, I just have one 
question. Do you have any more questions?
    Senator Reed. No, I do not.
    Senator Allard. I just have one question, and this is to 
Mr. Toon of HUD.
    Would you not agree that there is a very real and 
quantifiable down side to not extending the program?
    Mr. Toon. There is. The most important and obvious is the 
default and foreclosure risks to the FHA insurance fund, which 
our risk analysis office has estimated at $400 million over 5 
years.
    Senator Allard. Okay; and then, you reminded us that it is 
$400 million.
    Mr. Toon. $400 million, with an M.
    Senator Allard. And what would $400 million in default mean 
to FHA?
    Mr. Toon. It would be devastating.
    Senator Allard. Okay; any other questions? If not, we will 
call the hearing to a close. Oh, I have got some more questions 
here. Let me do it this way: we have got quite a few questions 
here, and we could spin this out for quite a length of time. 
What I would like to do is I would like to write these out to 
you, and we will send them to you.
    Mr. Toon. Certainly.
    Senator Allard. And then, can you all respond back within 
10 days?
    Mr. Foster. Yes, sir.
    Mr. Kline. Yes, sir.
    Senator Allard. We would appreciate it if you could, and 
then, we can get the legislation moving.
    Mr. Kline. Absolutely; yes sir.
    Senator Allard. Okay; thank you very much. The hearing is 
adjourned.
    [Whereupon, at 3:20 p.m., the hearing adjourned.]
    [Prepared statements supplied for the record follow:]
                 PREPARED STATEMENT OF THEODORE K. TOON
 Deputy Assistant Secretary, Office of Affordable Housing Preservation
            U.S. Department of Housing and Urban Development
                             June 14, 2006
    Thank you Chairman Allard, Ranking Member Reed, and members of the 
Subcommittee for inviting me here today to testify on the proposed 
Mark-to-Market Extension Act. The preservation of affordable housing in 
our communities continues to be a top priority for Secretary Jackson, 
Assistant Secretary Montgomery and the Department of Housing and Urban 
Development (HUD).
    The Mark-to-Market program, originally created by Congress in 1997 
(the Multifamily Assisted Housing Reform and Affordability Act 
(MAHRA)), and extended in 2001 (the Mark-to-Market Extension Act), 
reduces rents to market levels upon Section 8 contract expiration and 
renewal. HUD contracts with private owners of rental units to help 
ensure a certain number of units for occupancy by low-income residents. 
When those contracts expire and are renewed, if the contract rents are 
found to be above comparable market rents for similar units in the same 
area, the Mark-to-Market program reduces the new contract rent for 
those units to market levels. By bringing above-market Section 8 rental 
rents in line with market levels, HUD controls costs of the Section 8 
program and maximizes the number of families that can be helped by such 
housing assistance. The Mark-to-Market authorities will sunset 
September 30, 2006. The bill that you have introduced, Mr. Chairman, 
proposes a 5-year extension of the existing Mark-to-Market 
restructuring authorities, administered by HUD.
    As you are aware, under Mark-to-Market, HUD has the mandate to 
reduce rents to market levels, saving dollars on project-based Section 
8 expenditures. Mark-to-Market also includes authorities essential to 
maintaining the physical and financial viability of the properties with 
reduced rents. In Mark-to-Market, HUD staff oversees a network of 
public and private entities to analyze property viability, recommend 
repairs and other preservation activities, and, if necessary, re-size 
the FHA-insured debt to a level that can be serviced by the reduced 
rents. If debt is re-sized, the owner enters into a long-term use 
agreement through which the property is preserved as affordable housing 
for at least 30 years. To be sure, this is a significant tool in HUD's 
preservation toolbox. Unfortunately, HUD's mandate to reduce rents will 
continue beyond September 30, 2006, but the Mark-to-Market authorities 
will not.
    Over the past 9 years, HUD has been very successful at balancing 
the dual Mark-to-Market program goals of reducing long-term Section 8 
subsidy costs while preserving affordable housing. To date, HUD has 
preserved 2,200 properties around the country comprising over 188,000 
affordable housing units, and in so doing we have promoted the long-
term physical and financial viability of these properties. The program 
has generated net savings totaling $2 billion to HUD and the American 
taxpayers. And by preserving affordable housing, we have provided 
stability for many low-income families and the communities where they 
live.
    In discussing reauthorization of Mark-to-Market, I think it's 
important to consider what has been achieved thus far. To date, this 
program has preserved properties in all 50 states and the District of 
Columbia. For example, Chairman Allard, in Colorado, HUD has preserved 
31 properties with 1,800 units of affordable housing. In Rhode Island, 
Senator Reed, 12 properties with more than 1,000 housing units have 
been preserved, and another 21 properties with more than 2,000 units 
will become eligible under this proposed extension. (Attachment A shows 
the number of properties and units preserved through and active in 
Mark-to-Market, and the potential referrals over the next 5 years.) 
Once restructured, these properties are physically improved and on 
solid financial footing. That is a ``win-win'' situation for the 
tenants and the community.
    Not every property can or will be preserved through Mark-to-Market. 
While preservation is a primary goal of the program, Congress has made 
it very clear that prudent use of limited resources is an equally 
important goal. HUD has taken this charge seriously. There have been, 
and will continue to be, properties referred into Mark-to-Market that 
simply cannot be responsibly preserved. These projects may be too 
expensive, functionally obsolete, or located in markets with ready 
availability of replacement housing.
    In other situations, properties that in the Department's opinion 
require restructuring do not receive the benefits of the program 
because the owners refuse to accept the terms of the restructuring. In 
these cases, HUD makes the determination that the project is infeasible 
for restructuring. These are difficult decisions, made with 
consideration of the needs of the affected residents and communities, 
and with cooperation from both our office and the HUD field offices. 
Properties that need restructuring but don't accomplish it are closely 
monitored by HUD to allow early intervention if the property 
deteriorates. The analysis done while in Mark-to-Market informs and 
shapes the Department's decisions on other management options for the 
properties thereafter.
    Now, let us turn to the discussion before us today, which is the 
proposed reauthorization of Mark-to-Market. According to the 
Department's analysis of potential referrals, if Mark-to-Market is 
extended as proposed in this bill, over 5 years (FY 2007-11) nearly 800 
properties with 78,000 affordable units will meet the eligibility 
requirements for Mark-to-Market restructuring. These are project-based 
Section 8 properties with expiring Section 8 contracts, FHA-insured 
mortgages, and contract rents above Fair Market Rents. This is the 
universe of properties that, absent extension of restructuring 
authorities, will represent the most at-risk properties in HUD's 
insured mortgage portfolio because of the required reductions in rents.
    In addition to the lost opportunity to preserve another 800 
properties, or 78,000 units of affordable housing, the sunset of Mark-
to-Market may also expose the FHA Insurance Fund to considerable risk. 
This is because MAHRA, the legislation that created Mark-to-Market, 
will continue to require that contract rents on subsidized FHA-insured 
properties get marked down to market levels upon contract renewal, 
regardless of whether the program is extended. Reductions in rents to 
market levels will result in many properties being unable to pay their 
operating costs and/or their mortgage payments. As we see with other 
properties in negative cash flow positions, these property owners and 
managers will be faced with the decision of paying for utilities and 
routine maintenance, or making their mortgage payments.
    It is important to keep in mind that FHA insures the underlying 
mortgages on these properties. Not only will we see physical 
deterioration of the projects, which will negatively impact residents, 
and the overall communities, but the mortgages on these projects also 
represent real, quantifiable default and foreclosure risk to the FHA 
Insurance Fund--risk that is estimated to total more than $400 million 
over the next 5 years.
    In conclusion, I want to thank you for affording our Department the 
opportunity to testify on this legislation. Congress' intent in 
creating and then extending Mark-to-Market was that long-term costs had 
to be reduced, and that it would be less expensive and more effective 
to proactively address the physical, financial, and managerial 
challenges facing our affordable housing portfolio than to wait for the 
properties to physically decline and financially fail. This belief has 
been proven true by the successful restructuring of 188,000 apartment 
units across the country, which has also helped improve the lives of 
thousands of low-income families who call these units home.
    On behalf of the entire Department, I look forward to working with 
you to ensure that we continue to provide affordable housing in a cost-
effective manner.


                                 ______
                                 
                   PREPARED STATEMENT OF CHRIS FOSTER
             President, National Leased Housing Association
                             June 14, 2006
    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to testify on legislation to extend HUD's Mark-to-Market 
restructuring program from its current expiration date of October 1, 
2006. My name is Chris Foster and I am President of Hampstead Partners. 
I am testifying today on behalf of the National Leased Housing 
Association, a trade association located in Washington, D.C., which for 
over 35 years has represented owners, managers, investors, lenders and 
public agencies involved in developing and preserving affordable 
multifamily housing primarily assisted under housing programs 
administered by HUD.
    We strongly support the extension of the Mark-to-Market program. It 
is a valuable tool that has resulted in the preservation of over 
200,000 affordable rental apartments as well as resulted in significant 
savings to the Federal Government. The Mark-to-Market program applies 
to properties, insured by the Federal Housing Administration (FHA) with 
project-based assistance primarily under Section 8 of the United States 
Housing Act of 1937, and with rents in excess of rents for comparable 
unassisted units in the area. Notwithstanding the fact that many of 
these properties had originally been built with rents which were set 
above market, when the first wave of 20-year Section 8 contracts 
approached expiration in the mid 1990s, Congress was reluctant to 
authorize renewal of the contracts at above-market rents. Many of these 
projects could not operate and meet mortgage payments at market rents. 
A large number of these projects were financed with HUD-insured 
mortgages. This universe of projects lent themselves to a solution with 
a positive budget impact, restructuring of the HUD-insured mortgage by 
a full or partial payment of insurance claims, thereby lowering debt-
service to a level that was sustainable at market rents. In addition, 
needed rehabilitation and the replenishment of reserves is generally 
accomplished under the program through further reductions in existing 
debt to permit new debt to be increased to cover these costs which are 
necessary to ensure continued operations. Owners of projects that have 
been restructured must execute use agreements to accept Section 8 
renewal offers and to keep rents affordable, with or without the 
availability of Section 8 assistance, for 30 years.
    We understand that in the coming years a significant number of 
Section 8 contracts will be eligible for initial renewal and that many 
are attached to projects with HUD-insured mortgages.
    The same factors that moved Congress to enact the Mark-to-Market 
program in 1997 and to extend it in 2001 exist today and warrant a 
further extension. We urge Congress to authorize a 5-year extension of 
HUD's restructuring authority and have attached for the record an 
industry letter signed by 15 national housing organizations that 
endorse such an extension.
    The bill proposes two changes to the Mark-to-Market program that we 
strongly support. The Mark-to-Market Extension Act increases from 5 
percent to 9 percent the total number of units that can have exception 
rents in excess of 120 percent of the fair market rent for the area. 
Exception rents are budget-based rents that exceed market rent and are 
used when no amount of debt restructuring can yield viable rents that 
are below market. The 5 percent limit was basically an educated guess 
when it was enacted in 1997 and HUD's experience with that limit over 
the years should be acknowledged. A second revision included in the 
bill would extend the 3-year period during which a nonprofit purchaser 
of a Mark-to-Market project can obtain relief from a second mortgage on 
the project to 5 years from the date of recordation of the 
affordability agreement or 2 years from the date of enactment of the 
bill. A longer time frame is necessary to recognize the reality of real 
estate acquisition timeframes and will encourage major recapitalization 
of the properties.
    We recommend adding a provision to the bill to give owners of 
properties that have undergone debt restructuring the right to request 
and receive budget-based rent increases. Such rent adjustments are 
authorized in the Mark-to-Market regulations but discretionary and HUD 
has determined not to entertain any request for budget-based rent 
adjustments, relying instead solely on an annual Operating Cost 
Adjustment Factor (OCAF). Over the 30-year life of the program, it is 
possible that for some properties the OCAF adjustment will be 
insufficient to meet rising operating costs which does not necessarily 
reflect actual operating expense increases particularly because OCAFs 
are published on a state-wide basis. This flexibility is also 
particularly important as it relates to properties that were 
underwritten before March of 2002 when HUD amended its underwriting 
criteria to allow a sufficient cushion for operating cost increases. In 
order to maintain project viability, owners should have the option of a 
budget-based review of rents in those circumstances. Further, there 
also may be situations that will require additional restructuring of 
such projects.
    The bill also proposes one change to the authorizing statute that 
moves the program into new areas and which we are not able to endorse 
at this time. Section 6 of the bill as drafted would give HUD the 
unilateral authority to require Section 8 projects with HUD-insured 
loans, but with below-market rents, to participate in the Mark-to-
Market program or lose their Section 8 assistance. This is a major 
departure from the current program and we are not aware of any 
compelling evidence to justify such a change. Any proposal that makes a 
fundamental change to current law and practice should not be included 
as an amendment to an extension bill and should be thoroughly vetted as 
part of a separate legislative initiative. For nearly 9 years we have 
had stable and predictable rules for Section 8 renewals that work well. 
An extension of theMark-to-Market program beyond its original scope can 
cause confusion and is overreaching, potentially leading to an 
increased number of owners opting out of the Section 8 program.
    Properties with rents below comparable market rents have options to 
address rehabilitation needs and we prefer the use of existing tools 
rather than change the framework of the current Mark-to-Market program. 
In fact, we encourage the Department to review its existing tools 
including the ability to include new debt service in budget-based rent 
adjustments (not to exceed comparable market rent) as part of 
transactions that will accomplish significant rehabilitation to ensure 
long-term viability and preservation. Further, NLHA recommends that HUD 
assign nonMark-to-Market preservation transactions (property 
disposition, 236 decouplings, loan work-outs, etc.) to the Office of 
Affordable Housing Preservation (OAHP) which now administers the Mark-
to-Market program. Due to its responsibilities related to mortgage 
restructuring, the OAHP office is staffed by sophisticated real estate 
professionals who understand the intricacies of preservation 
restructurings and would be well suited to process other complex 
transactions.
    Thank you for your time and consideration. I will be glad to answer 
any questions.
                                                     April 19, 2006
Hon. Wayne Allard, 
U.S. Senate
521 Senate Dirksen Office Building
Washington, DC.

Dear Senator Allard:

    We are writing to express support for legislation that will further 
efforts to preserve the assisted housing inventory by extending the 
authority of the Department of Housing and Urban Development (HUD) to 
restructure FHA-insured mortgages under the ``Mark-to-Market Program.'' 
This program was authorized in 1997 under the Multifamily Assisted 
Housing Reform and Affordability Act (MAHRA) as part of an effort to 
address the expiration of rental subsidy contracts under the Section 8 
project-based programs. The legislation resulted in a program that 
allowed for the restructuring of mortgages on projects with above-
market rents, to reduce such rents in exchange for an extended 
affordability term of 30 years. HUD has preserved over 3,000 projects 
as part of this program.
    The authority for HUD to restructure such mortgages expires on 
September 30, 2006. We urge Congress to provide for a 5-year extension 
of the contract in order to preserve an additional 1,000 properties 
that are expected to be eligible for the debt restructuring program 
during that timeframe. We believe such an extension will not result in 
any increased costs to the Federal Government and, in fact, may result 
in Section 8 rent savings in the future.
    Thank you for your interest and commitment to preserving the 
affordable housing stock. We stand ready to work with you to ensure the 
extension of the September 30, 2006 deadline. Please contact Denise B. 
Muha at NLHA with any questions or for more information (202-785-8888).

        Sincerely,
  American Association of Homes and Services for the Aging 
    (AAHSA) Council for Affordable and Rural Housing (CARH)
                 Institute of Real Estate Management (IREM)
      Institute for Responsible Housing Preservation (IRHP)
                         Mortgage Bankers Association (MBA)
National Affordable Housing Management Association (NAHMA) 
                       National Apartment Association (NAA)
National Association of Affordable Housing Lenders (NAAHL) 
                National Association of Homebuilders (NAHB)
                     National Association of Realtors (NAR)
                          National Housing Conference (NHC)
                               National Housing Trust (NHT)
                 National Leased Housing Association (NLHA)
              National Low Income Housing Coalition (NLIHC)
                      National Multi Housing Council (NMHC)
         Steward of Affordable Housing in the Future (SAHF)
                                 ______
                                 
                   PREPARED STATEMENT OF SCOTT KLINE
    Vice President and Development Director, National Housing Trust
                             June 14, 2006
    Chairman Allard, Ranking Member Reed, members of the Subcommittee, 
thank you for inviting the National Housing Trust to participate in 
this hearing today. The National Housing Trust appreciates the 
opportunity to comment on the bill introduced by Senator Allard to 
extend the Mark-to-Market program of the Department of Housing and 
Urban Development.
    My name is Scott Kline, and I am Vice President of the National 
Housing Trust, a national nonprofit organization formed in 1986, 
dedicated exclusively to the preservation and improvement of 
affordable, federally assisted and insured housing. Our board of 
directors includes representatives of all major interests in the field, 
including owners and managers, state housing finance agencies, national 
and regional nonprofit intermediaries, housing scholars and other 
housing professionals who care deeply about protecting this 
irreplaceable resource. The Trust was deeply involved in the 
introduction of the Mark-to-Market legislation nearly a decade ago and 
continues to view the program as an essential tool in the ongoing 
efforts to preserve existing affordable housing for working families 
and elderly people in all parts of this country.
    The National Housing Trust serves as an informational clearinghouse 
on developments for the public and private sector. In addition to its 
public policy and program monitoring role, the Trust provides technical 
assistance to nonprofits on sale transactions of federally assisted and 
insured developments.
    I also serve as the head of NHT/Enterprise Preservation 
Corporation, a housing development corporation that has used the Mark-
to-Market program to successfully save affordable housing. NHT/
Enterprise Preservation Corporation owns and operates nearly 3,000 
affordable apartments in Illinois, Texas, Florida, South Carolina, 
North Carolina, Virginia, and the District of Columbia. NHT/Enterprise 
is a collaboration of the National Housing Trust and Enterprise 
Community Partners. The John D. and Catherine T. MacArthur Foundation 
provides NHT/Enterprise and the Nation Housing Trust general operating 
support and low-cost capital for housing development as part of its 
major national housing preservation initiative, Window of Opportunity.
    As you know, the Mark-to-Market program was somewhat slow to get 
off the ground but, as I will make clear today, the program is 
currently a viable, mature, Federal housing preservation program--one 
that both saves housing and taxpayer dollars. According to the June 
2006 version of HUD Research Works, depending on how one calculates the 
savings, the net present value of savings from the program range up to 
$883 million. See Exhibit A. For this reason alone, we strongly support 
the Senate bill.
Mark-to-Market Reauthorization Is Urgently Needed
    On September 30, 2006, legislative authority for HUD's Mark-to-
Market mortgage restructuring program expires. Without action by 
Congress to extend the program, apartments with HUD-approved rents that 
exceed comparable market rents face an uncertain fate. The National 
Housing Trust has joined more than a dozen housing groups in signing a 
letter supporting reauthorization (See Exhibit B).
    The Mark-to-Market program preserves and improves affordable, HUD 
subsidized housing. Through a restructuring of debt and lowering of 
Section 8 contract rents, the Mark-to-Market program places HUD 
subsidized properties on a steadier financial platform from which they 
can be soundly operated with renewed, long-term affordability. 
Currently, an estimated 92,000 units in more than 1,000 FHA-insured 
properties have above-market rents.* Most of these properties, however, 
have contracts expiring after Mark-to-Market is scheduled to sunset. 
The problem: even if HUD's ability to restructure these properties' 
loans to supportable levels is not extended, HUD is obligated by law to 
lower above-market Section 8 rents. If this comes to pass, many 
property owners won't have sufficient revenue to cover operating costs 
and mortgage payments after their rental assistance is cut. The result: 
loss of affordable housing due to property deterioration and 
foreclosures.
---------------------------------------------------------------------------
    * Based on NHT's analysis of HUD data. Above-market status was 
determined by the FMR ratio (the ratio of the contract's rent gross 
amount to the FMR gross amount). For the purposes of this analysis, a 
contract with an FMR ratio greater than 105 was considered to have 
contract rents above-market. 


Why Preserve Federally Assisted Housing Stock?
    The nation's market supply of affordable housing does not currently 
meet the demand for that product. There is virtually no dispute that 
affordable housing is a precious and endangered resource. According to 
a recent report by the Joint Center for Housing Studies at Harvard 
University, the national goal of decent and affordable housing for all 
Americans remains out of reach for certain Americans because poverty 
persists and the Nation is losing low-cost rental units from the 
conventional housing inventory. The nation's low-cost housing stock 
declined by 2 million units between 1993-2003.\1\ Thus, how HUD handles 
restructuring and continued affordability for the people who reside in 
the hundreds of thousands of apartments subsidized by HUD is a key 
concern for those of us concerned about the well being of low-income 
families.
---------------------------------------------------------------------------
    \1\ America's Rental Housing: Homes for a Diverse Nation, p.1, 
Joint Center for Housing Studies (2006).
---------------------------------------------------------------------------
    No one disputes that the Mark-to-Market program has saved 
affordable subsidized housing. As of February 2006, the program had 
saved over 220,000 affordable apartments. Moreover, the program lowers 
the ongoing cost of keeping that housing affordable. In April 2006, the 
GAO issued a report titled ``Policy Decisions and Market Factors 
Explain Changes in Cost of the Section 8 Programs.'' The report 
describes Mark-to-Market as one of the steps Congress and HUD have 
taken to limit costs (GAO Report, April, 2006: ``Policy Decisions and 
Market Factors Explain Changes in Cost of the Section 8 Programs''):

        Congress and HUD have taken steps to limit further growth in 
        the budgetary costs of the Section 8 programs . . . for the 
        project-based program, Congress and HUD continued steps begun 
        in 1997 to reduce above-market rents at some properties and to 
        limit annual rent increases. (See Exhibit C).

By already preserving over 220,000 affordable apartments, the Mark-to-
Market program has helped save an otherwise irreplaceable housing 
resource at an acceptable cost to the American taxpayer.
The Senate Bill Helps the Nation Resolve an Affordable Housing Dilemma 
        at an Affordable Cost
    According to a recent study conducted by HUD's Office of Policy, 
Development, and Research, 220,000 affordable housing units have been 
preserved since the program was first authorized in 1997, and rent 
reductions have resulted in up to $883 million in savings to the 
taxpayer. More than 2,800 properties have completed the Mark-to-Market 
process as of February 15, 2006. (Supra, Exhibit A.).
    The HUD finding is consistent with historical Mark-to-Market cost 
estimates. In 2001, the Government Accountability Office (GAO) 
conducted an analysis to determine if the Mark-to-Market program should 
be extended past an earlier expiration date. The GAO conclusion: 
extending the program was more advantageous to the Federal Government 
than ending it. The reasons: cost savings in the Section 8 program, 
minimized loss claims on the FHA insurance fund, and preservation of 
the affordable housing stock.\2\ That same year, the CBO found that 
``the cost of restructuring mortgage debt is less expensive than the 
cost of default by about $1 million per project, on average.'' \3\
---------------------------------------------------------------------------
    \2\ GAO Report: Issues Related to Mark-to-Market Program 
Reauthorization (July 2001).
    \3\ CBO Cost Estimate, H.R. 2589, Office of Multifamily Housing 
Restructuring Act, 2001.
---------------------------------------------------------------------------
Outline of the Proposed Bill
    The Senate bill provides certainty to the marketplace that the 
Mark-to-Market program will continue. Extension of the program helps 
resolve a major housing dilemma for the households who live in 
properties where the Section 8 contract rent is higher than market. 
Moreover, the Senate legislation both identifies and helps resolve key 
issues of concern to those of us committed to affordable housing 
preservation. Specifically, the legislation:

    Continues the current program, which permits HUD properties 
        to receive property-based assistance, albeit at lower levels 
        than the current assistance.
    Recognizes that some properties may not be able to meet 
        operating expenses at the post restructured market rent and 
        permits rents to be set at a budget-based ``exception rent'' 
        for up to 9 percent of the projects;
    Permits HUD, at its discretion, to use the Mark-to-Market 
        restructuring authority on projects with at or below market 
        rents;
    Provides for the preservation and rehabilitation of 
        properties damaged by hurricanes or other natural disasters; 
        and
    Extends the period during which a qualified nonprofit may 
        purchase a Mark-to-Market property.

We support efforts in the Senate bill to address these important 
issues.
1. Exception Rents are a Vital Preservation Tool
    Nationwide, no more than 5 percent of the properties in the Mark-
to-Market program may have exception rents (defined as rents above 120 
percent of Fair Market Rent). This authority may be exercised only if 
the loss of the project would seriously impact the tenants and 
community and the net operating income of the project is insufficient 
to support reasonable expenses and operating reserves. The Senate bill 
lifts this exception rent cap up to 9 percent of the properties closed 
under the program in any given year. NHT/Enterprise was recently 
involved in a transaction that could not have occurred absent the 
provision of exception rents.
    In June, 2005, NHT/Enterprise closed on the financing of a 67-unit, 
100 percent Section 8, scattered-site property located in the South 
Shore neighborhood of Chicago. The properties, known as the ``O'Keefe 
Portfolio,'' were acquired and renovated using financing and pursuant 
to the program requirements of HUD's Mark-to-Market Program. The South 
Shore neighborhood is in a working class community. One of the 
properties has 20 townhouses. Others are vintage 1920's Chicago brick 
multifamily neighborhood buildings. There is a strong conversion market 
for these types of walk up buildings due to favorable real estate tax 
treatment that such buildings receive upon condominium conversion. 
Absent the Mark-to-Market Program and its allowed use of exception 
rents, these 67 affordable apartments could have been converted to 
market-rate housing. The families occupying the housing all earn less 
than 30 percent of median income.
    The O'Keefe Portfolio was preserved as affordable housing utilizing 
the Mark-to-Market program and exception rents.
    Under the restructuring, the new marked down rents were sized at 
110 percent of Fair Market Rent, an amount sufficient to pay operating 
expenses and service $1.1 million in debt. Rehabilitation and repair 
work financed under Mark-to-Market restructuring includes new windows, 
new roofs, lead based paint remediation, new or enhanced furnaces, 
porch repairs, concrete and asphalt repairs, masonry repairs, addition 
of a management office and computer lab for use by residents, and 
numerous interior improvements such as new kitchen cabinets, new 
appliances, new carpet/tile, plaster repair and paint, and new tub 
surrounds.
    Attached as Exhibit D is an example of how another national 
nonprofit organization, Volunteers of America, employed Exception Rents 
to save HUD-assisted housing. Permitting exception rents for up to 9 
percent of the properties that are restructured permits organizations 
like VOA and NHT/Enterprise to save more Mark-to-Market properties. We 
thank the Chair for inserting this key provision on exception rents and 
urge the Senate to adopt it.
    Separately, we recommend adding a provision to the Senate bill to 
give owners the right to request and receive budget-based rent 
increases. Such rent adjustments are authorized but discretionary with 
HUD. HUD has determined not to entertain any request for budget-based 
rent adjustments, relying instead solely on an annual Operating Cost 
Adjustment Factor (OCAF) adjustment. Over the 30-year life of the 
program, situations may arise where an OCAF adjustment is insufficient 
to meet rising operating costs, particularly for those properties that 
were underwritten before March 2002 when HUD amended its underwriting 
criteria to allow a sufficient cushion for operating cost increases. In 
order to maintain project viability, owners should have the option of a 
budget-based review of rents in those situations.
2. The Senate Wisely Includes the Provision Providing HUD the Authority 
        To Use the Restructuring Tool for Otherwise Eligible Projects 
        with At- or Below-Market Rents
    The Trust supports this provision. While the relationship of rents 
to debt is one factor in determining the need for a restructured 
mortgage, it is not the only factor. From time to time, the government 
could restructure debt to save a property where the rents were 
previously below market but where rehabilitation of the property would 
push the rents higher than market. Application of the MAHRA statute 
tools will support a property's extended viability and renewed 
affordability. In exchange, the property owner should commit to an 
extended affordability period.
3. The Senate Bill Properly Includes a Provision Providing HUD the 
        Authority To Use the Restructuring Tool for Otherwise Eligible 
        Projects With At- or Below-Market Rents
    While the relationship of rents to debt is one factor in 
determining the need for a restructured mortgage, it is not the only 
factor. From time to time, the government could restructure debt to 
save a property where the rents were previously below market but where 
rehabilitation of the property would push the rents higher than market. 
Application of the MAHRA statue tools will support a property's 
extended viability and renewed affordability. In exchange, the property 
owner should commit to an extended affordability period.
    This recommendation was first suggested to Congress by SAHF, 
Stewards of Affordable Housing for the Future (SAHF--say ``SAFE''). 
SAHF's positions on Mark-to-Market are attached at Exhibit E. NHT/
Enterprise is a member of SAHF. SAHF's remaining members include Mercy 
Housing, Inc., National Affordable Housing Trust, National Church 
Residences, Preservation of Affordable Housing, Inc., Retirement 
Housing Foundation, and Volunteers of America. Collectively, SAHF 
members own and operate over 800 affordable properties in 48 states, 
Puerto Rico, the U.S. Virgin Islands and the District of Columbia.
4. The Trust Supports Extending the Period of Eligibility for a 
        Nonprofit To Receive Debt Relief or Assignment When Acquiring a 
        Mark-to-Market Property
    The original Mark-to-Market bill encouraged transfers to qualified 
nonprofit organizations.\4\ There is mounting nonprofit interest and 
ability to purchase Mark-to-Market restructured properties. State and 
local governments have successfully utilized nonprofit organizations to 
preserve and produce housing with tax abatement and relief, tax-exempt 
financing, HOME, CDBG, and the low-income housing tax credit. Nonprofit 
sponsors annually produce or preserve over 30,000 units of affordable 
housing. Where local capacity isn't available, regional and national 
nonprofit organizations have acted as developers and purchasers.
---------------------------------------------------------------------------
    \4\ HUD strictly defined the term ``qualified.'' The Trust supports 
limiting debt relief to qualified organizations, as defined. See 
Appendix C to Mark-to-Market Operating Procedures Guide.
---------------------------------------------------------------------------
    HUD limits the time a nonprofit may secure debt relief or 
assignment of debt on a Mark-to-Market property to 3 years after the 
property closed under the program. However, the Mark-to-Market program 
is nearly 10-years old. With each passing year, qualified nonprofits 
are prevented from pursuing the elimination of debt in many properties 
that have previously passed through Mark-to-Market. Without nonprofit 
debt assignment or relief, these transactions are infeasible.
    The 3-year rule significantly limits the options of private owners 
of these properties. Many owners are willing to transfer the 
properties. However, they are blocked from receiving a fair-market bid 
by the arbitrary 3-year limit. The current 3-year limit on these 
nonprofit purchase incentives is arbitrary, bearing no relation to when 
an owner ultimately decides to sell. If the best outcome at the time of 
sale is transfer to a nonprofit purchaser, then the Secretary should 
have maximum flexibility to support that outcome.
    The Senate bill appropriately addresses this policy flaw, 
permitting nonprofits to purchase a Mark-to-Market property on or 
before the later of 5 years after recordation of the affordability 
agreement or 2 years after enactment of the bill.
    Again, thank you for providing the National Housing Trust an 
opportunity to provide comments on the Senate bill concerning the 
reauthorization of authority for restructuring of HUD-assisted and -
insured housing.




















