[Senate Hearing 109-1052]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1052
EXTENSION OF HUD'S MARK-TO-MARKET PROGRAM
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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
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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
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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
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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\
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\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.
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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.
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\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.
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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.