Multifamily Housing: Issues Related to Mark-to-Market Program	 
Reauthorization (11-JUL-01, GAO-01-800).			 
								 
The Office of Multifamily Housing Assistance Restructuring	 
(OMHAR) administers the mark-to-market program, which was created
to preserve the affordability of low-income rental housing while 
reducing the long-term costs of Section 8 project-based 	 
assistance. Legislative authorization for both the mark-to-market
program and OMHAR is scheduled to terminate on September 30,	 
2001. If the legislative authority for the  mark-to-market	 
program provided for in Subtitle A of the Multifamily Assisted	 
Housing Reform and Affordability Act of 1997 is allowed to	 
expire, the Department of Housing and Urban Development (HUD)	 
estimates it will have to reduce the rents to market levels of	 
well over 1,000 properties without having the tools needed to	 
mitigate the potential effects of such reductions. If the reduced
rents do not provide sufficient revenues to cover the properties'
operating expenses, mortgage payments, and repair needs, owners  
may be forced to reduce expenditures for maintenance or other	 
operating expenses or may default on their mortgages. Such action
could result in deteriorating property conditions and substantial
claims against the Federal Housing Administration insurance fund,
which, in turn, could adversely affect property residents and	 
lead to a decrease in the supply of affordable housing. 	 
Transferring authority for the mark-to-market program to HUD's	 
Office of Housing could potentially help facilitate the handling 
of some mark-to-market related functions that have required	 
coordination between OMHAR and the Office of Housing. While the  
mark-to-market program has brought about successful		 
restructurings resulting in Section 8 savings at a number of	 
properties, at other properties the requirement that rents be	 
reduced to market has increased the risk of physical and	 
financial problems.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-800 					        
    ACCNO:   A01378						        
  TITLE:     Multifamily Housing: Issues Related to Mark-to-Market    
             Program Reauthorization                                          
     DATE:   07/11/2001 
  SUBJECT:   Authorization					 
	     Housing programs					 
	     Low income housing 				 
	     Rental housing					 
	     Cost control					 
	     HUD Mark to Market Program 			 
	     HUD Section 8 Rental Assistance Program		 

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GAO-01-800
     
Report to Congressional Committees

United States General Accounting Office

GAO

July 2001 MULTIFAMILY HOUSING

Issues Related to Mark- to- Market Program Reauthorization

GAO- 01- 800

Page i GAO- 01- 800 Multifamily Housing Letter 1

Results in Brief 2 Background 4 Completed Restructurings Have Resulted in
Savings 8 Factors Cited as Slowing Mark- to- Market Implementation and

Actions OMHAR Has Taken to Address Them 15 Expiration of the Program Would
Increase the Likelihood of

Section 8 Defaults, and Loss of Dedicated Office to Administer the Program
Could Cause Additional Delays 22 Program Stakeholders Identified a Number of
Actions That May

Improve Program Implementation 27 Conclusions 30 Matters for Congressional
Consideration 31 Recommendation for Executive Action 32 Agency Comments and
Our Evaluation 32

Appendix I Overview of the Mark- to- Market Process 35

Appendix II Actions Suggested By Program Stakeholders to Improve Mark- to-
Market Implementation 38

Appendix III Comments From the Department of Housing and Urban Development
41

Appendix IV Objectives, Scope, and Methodology 44

Appendix V Panel Participants 47

Figures

Figure 1: Status of Rent Restructurings in the Mark- to- Market Pipeline as
of June 15, 2001 9 Figure 2: Status of Full Mortgage Restructurings in the
Mark- toMarket Pipeline as of June 15, 2001 10 Contents

Page ii GAO- 01- 800 Multifamily Housing

Figure 3: Average Number of Days to Process Full Mortgage Restructurings and
Rent Restructurings 11 Figure 4: Estimated Mark- to- Market Program Savings
by Type of

Completed Restructuring Over 20 years (Net Present Value) 13 Figure 5:
Timeline of Mark- to- Market Implementation 16 Figure 6: Cumulative Number
of Completed Full Mortgage

Restructurings and Rent Restructurings by Quarter 21 Figure 7: Estimated
Number of Above- Market Rent Properties with

Section 8 Contracts Expiring in Fiscal Year 2002 and Beyond 23

Abbreviations

FHA Federal Housing Administration HUD Department of Housing and Urban
Development OMHAR Office of Multifamily Housing Assistance Restructuring

Page 1 GAO- 01- 800 Multifamily Housing

July 11, 2001 Congressional Committees The Office of Multifamily Housing
Assistance Restructuring (OMHAR) was established within the Department of
Housing and Urban Development (HUD) by the Multifamily Assisted Housing
Reform and Affordability Act of 1997. 1 The Office was created to administer
the ?mark- to- market? program, also authorized by the act. The mark- to-
market program is aimed at preserving the affordability of low- income
rental housing, while reducing the cost of rental assistance subsidies
provided to low- income households. More specifically, the program provides
the framework for HUD to restructure insured Section 8 multifamily housing
projects by lowering their rents to market levels when their current Section
8 contracts expire and reducing mortgage debt if such action is necessary
for the properties to continue to have a positive cash flow. 2 Without
restructuring, rents for many of the 8,500 properties in HUD?s insured
Section 8 multifamily housing portfolio substantially exceed market levels,
resulting in higher federal subsidies under the Section 8 program. HUD
received $4.2 billion in budget authority for Section 8 project- based
subsidies in fiscal year 1999 and $4.1 billion in fiscal year 2000. 3

Legislative authorization for both the mark- to- market program and OMHAR is
scheduled to terminate on September 30, 2001. At that time, HUD would still
be required to renew Section 8 contract rents at market levels, but the
tools established by the act for restructuring mortgages would no longer be
available. OMHAR?s authority would also terminate

1 Referred to in this report as the act. The act was enacted as title V of
the Departments of Veterans Affairs and Housing and Urban Development, and
Independent Agencies Appropriations Act, 1998 (P. L. 105- 65, Oct. 27,
1997).

2 Insured multifamily housing projects are those with mortgages insured by
the Federal Housing Administration (FHA), an office within HUD. FHA mortgage
insurance protects lenders from financial losses stemming from borrowers?
defaults on mortgage loans. In addition to mortgage insurance, many of these
properties receive some form of subsidy from HUD. For instance, HUD?s
Section 8 program provides rental subsidies for lowincome families. These
subsidies are linked to either the apartment (project- based) or the
resident (tenant- based). The mark- to- market program applies to
multifamily housing properties with FHA mortgage insurance and project-
based Section 8 assistance.

3 Budget authority is the authority provided by law to enter into financial
obligations that will result in immediate or future outlays involving
federal funds.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 800 Multifamily Housing

and any outstanding mark- to- market responsibilities would be transferred
to HUD?s Secretary.

The act requires us to review OMHAR?s implementation of the mark- tomarket
program within 18 months of the effective date of final regulations, which
were issued on March 22, 2000. As agreed with the responsible subcommittees
of the Senate Committee on Banking, Housing, and Urban Affairs, the House
Committee on Financial Services, and the House and Senate Appropriations
Committees, this report focuses on (1) the status of properties in the mark-
to- market program; (2) factors that have affected the pace of program
implementation and the actions OMHAR has taken to address these factors; (3)
the advantages and disadvantages to the federal government of extending the
program past its statutory termination date of September 30, 2001, and of
transferring program responsibilities to HUD or keeping them with OMHAR; and
(4) possible actions for strengthening program implementation.

To meet these objectives, among other things, we analyzed data relating to
OMHAR?s implementation of the program and interviewed representatives from a
variety of program stakeholders, including 15 entities that OMHAR has
contracted with to carry out property restructurings (referred to as
participating administrative entities). We also convened an expert panel
composed of a cross section of program stakeholders representing OMHAR, HUD,
participating administrative entities, lending institutions, tenant
associations, Section 8 property owners, and nonprofit organizations to
discuss the issues that we agreed to address. The 10 panel members met for 1
day to discuss questions that we provided to them in advance of the meeting.
We conducted our review from July 2000 to May 2001 in accordance with
generally accepted government auditing standards. See appendix IV for a more
detailed discussion of our scope and methodology.

As of June 15, 2001, 1,558 properties had entered OMHAR?s mark- tomarket
program. About 62 percent of these properties are to have their mortgages
restructured before their rents are reduced to market levels, and the other
38 percent will have their rents reduced to market without the property
receiving a mortgage restructuring. OMHAR has completed actions for 14
percent of the properties that require a mortgage restructuring and 85
percent of the properties that only require rent reductions. OMHAR estimated
that the federal government would realize about $563 million in savings over
a 20- year period from the restructurings that it has completed thus far.
However, for some properties that have not Results in Brief

Page 3 GAO- 01- 800 Multifamily Housing

successfully completed the restructuring process, the requirement to reduce
rents to market has decreased the properties? cash flows, thus, increasing
the likelihood that the properties will develop physical and financial
problems.

Various factors have affected the pace at which the program has been
implemented. It took almost 2 years to establish the program?s
infrastructure and for OMHAR to begin assigning a large volume of properties
to the entities that would carry out restructuring actions. In addition,
some program stakeholders believed that other factors have slowed the
restructuring process. These factors include OMHAR?s process for reviewing
and approving restructuring transactions, the detailed requirements
contained in the program?s operating procedures guide, and the unwillingness
of many Section 8 property owners to participate in the program. OMHAR has
taken action to address these factors by eliminating some elements of its
review, streamlining the requirements in the operating procedures guide, and
developing incentives to encourage owner participation in the program. Most
members of our expert panel believed that these actions have been positive
and that the pace of the program has improved. In addition, most members of
our expert panel believed that OMHAR?s progress in implementing the program
has been reasonable given the program?s complexity and the number of tasks
that needed to be accomplished.

Extending the mark- to- market program past its scheduled termination date
would, in our view, be more advantageous to the federal government than
ending the program. OMHAR estimated that over 1,300 properties with rents
above market have Section 8 contracts that would not expire until after the
program is scheduled to sunset. If rents for these properties must be marked
down to market levels without provisions for mortgage restructuring, it is
likely that many of the properties would default on their mortgages,
resulting in large claims against the Federal Housing Administration
insurance fund. For this and other reasons, expert panelists were unanimous
in their opinion that the program should be extended beyond September 30,
2001.

Most members of our expert panel were concerned that transferring
responsibility for administering the program from OMHAR to other parts of
HUD without dedicated mark- to- market staff could disrupt program momentum
and leave HUD without the capacity and expertise it needs to administer the
program effectively. Accordingly, 9 of the 10 expert panelists favored
extending OMHAR?s authority for administering the program. The other
panelist favored moving program administration to

Page 4 GAO- 01- 800 Multifamily Housing

HUD?s Office of Housing because he believed such action could streamline
program decisionmaking. We share the concerns expressed by most panel
members and agree with them that administration of the mark- to- market
program should continue to reside in an office dedicated to the program?s
implementation. Likewise, we believe that the office should have the
resources and expertise needed to administer the program and to oversee
restructuring transactions. However, we believe that it would be workable to
place the office under HUD?s Office of Housing so long as such action does
not disrupt program momentum, diminish HUD?s capacity for administering the
program, or weaken program oversight.

While some program stakeholders, including members of our expert panel, were
concerned that wholesale changes to the mark- to- market program could
disrupt the momentum that has been recently achieved, the stakeholders
identified a number of actions that they believed could improve program
implementation. These actions included having HUD provide rehabilitation
grants that could reduce the number of restructuring transactions that must
be discontinued because there is insufficient funding available to address
property rehabilitation needs; taking actions to improve owner and tenant
participation in the program; and ensuring that all properties with above-
market rents are sent to OMHAR for restructuring. While these actions could
facilitate OMHAR?s ability to complete restructurings, some of them could
also increase program costs.

This report includes matters for congressional consideration on the
extension of Subtitle A of the Multifamily Assisted Housing Reform and
Affordability Act beyond September 30, 2001, to permit continued mortgage
restructuring of Section 8 properties with above- market rents, and on the
extension of legislative requirements placing the mark- tomarket program
under an office within HUD that has sole responsibility and dedicated staff
to administer the program. The report also makes a recommendation to the
Secretary of HUD designed to ensure that appropriate actions are taken to
address problems that may occur at properties that have not successfully
completed the restructuring process.

Over 800,000 units in approximately 8,500 multifamily projects have been
financed with mortgages insured by the Federal Housing Administration (FHA)
and supported by project- based Section 8 housing assistance payments
contracts. The residents of housing units that receive projectbased
assistance are required to pay a portion of their income for rent (generally
30 percent), while HUD pays the balance. Background

Page 5 GAO- 01- 800 Multifamily Housing

Many of these properties? rents are higher than the market rents of
comparable unassisted properties. OMHAR has estimated that 48 percent of the
projects with Section 8 contracts expiring between October 1998 and
September 2001 had above- market rents, while 66 percent of the projects
expiring after that time will have above- market rents. A main cause of the
higher rents is the fact that the government originally supported the
development of these properties by establishing rents above market levels
and raising the rents regularly through the application of set formulas
that, according to HUD, tended to be generous to encourage the production of
new affordable housing. Because HUD makes up the difference between
residents? contributions and the project rents, these higher rent levels
increase the costs of the Section 8 program to the federal government. HUD
estimated that, if no action was taken, by 2007 the annual cost of renewing
project- based Section 8 contracts would rise to approximately $7 billion,
or about one- third of HUD?s total budget. On the other hand, if the Section
8 assistance were simply reduced or eliminated, many of the FHA- insured
properties could lack sufficient revenues to cover operating expenses and
payments on their existing mortgages. As a result, the owners of many
properties would likely default on their mortgage payments, resulting in
substantial claims to FHA and possibly leaving tenants without adequate
affordable housing. 4

In October 1997, to address the increasing costs to the federal government
of insured Section 8 housing, the Congress created the mark- to- market
program for properties with above- market rents and project- based Section 8
contracts expiring on or after October 1998. 5 The program?s goals include
preserving the affordability and the availability of low- income rental
housing while reducing the long- term costs of Section 8 project- based
assistance, resolving the problems affecting financially and physically
troubled projects, and correcting management and ownership deficiencies. The
restructuring tools provided in the act include (1) reducing property debt
levels by approving partial or full payments of FHA insurance claims without
an owner default, (2) approving exception rents in excess of local market
rents in order to preserve affordable housing in specific markets, (3)
exempting FHA mortgage insurance credit subsidy limitations and limitations
on risk sharing commitments, and (4) using public and

4 When a default occurs on an insured loan, a lender may ?assign? the
mortgage to HUD and receive payment from FHA for an insurance claim. 5
Subtitle A of the act contains the FHA- Insured Multifamily Housing Mortgage
and Housing Assistance Restructuring Program.

Page 6 GAO- 01- 800 Multifamily Housing

nonpublic participating administrative entities to complete restructuring
actions. The October 1997 act also established OMHAR within HUD to
administer the program. In addition, OMHAR was delegated certain authorities
of HUD?s Office of Housing related to administering the program. However,
Housing retained Section 8 contract administration responsibilities, so
OMHAR and Housing must coordinate their actions. As required by the act,
OMHAR is under the management of a director who reports directly to the
Secretary of HUD. OMHAR?s Director was nominated by the President on
September 29, 1998, and confirmed by the Senate on October 21, 1998. 6

The mark- to- market process begins when a property?s current Section 8
contract is about to expire. Approximately 4 months prior to contract
expiration, if the property owner wishes to continue in the Section 8
program, the owner is required to submit to the Office of Housing?s local
field offices a request for contract renewal and a rent comparability study.
7 Rent comparability studies are prepared by state- certified appraisers to
compare the unit rents for the subject property to the fair market rents
charged for comparable units that are not receiving Section 8 subsidies. The
rent comparability study is sent to the local HUD offices for review to
determine if the property?s current rents are at, above, or below market
rates. If rents are at or below market rates, HUD field office staff will
make adjustments where necessary and execute a new Section 8 contract. If
rents are above market, HUD staff are to renew the current contract (at
above- market rents) for up to 1 year and forward the owner?s submission to
OMHAR for a mark- to- market restructuring. 8 Upon receipt from HUD field
offices, OMHAR assigns properties to participating administrative

6 We have issued two previous reports discussing OMHAR?s efforts to
implement the markto- market program: Multifamily Housing: Progress Made in
Establishing HUD?s Office of Multifamily Housing Assistance Restructuring
(GAO/ RCED- 99- 5, Oct. 27, 1998);

Multifamily Housing: HUD?s Restructuring Office?s Actions to Implement the
Mark- toMarket Program (GAO/ RCED- 00- 21, Jan. 20, 2000)

7 For cases in which the owner knows that the contract rents exceed
comparable market rents, the owner can choose to have the contract referred
to OMHAR for a mortgage restructuring and/ or a reduction of the rents to
market without completing a rent comparability study.

8 According to 24 CFR 401.600, owners may receive a Section 8 contract
extension at current rents for the shortest reasonable period needed for the
participating administrative entities to complete a restructuring plan for
the project. Any extension of a contract beyond 1 year pending closing on
the restructuring plan would be at comparable market rents or exception
rents. Extension of the contract rents at the current above market level may
only be done with a waiver.

Page 7 GAO- 01- 800 Multifamily Housing

entities to carry out restructurings under the mark- to- market program on
behalf of the federal government. As of June 15, 2001, OMHAR had contracts
with 33 participating administrative entities, including 24 public agencies
(state and local housing finance agencies) and 9 nonpublic entities. 9 Among
other things, the responsibilities of the participating administrative
entities include determining appropriate rent levels, restructuring mortgage
loans, underwriting new or modified loans, and managing the closing process.
OMHAR developed an Internet- based tracking system to monitor the actions
taken by the participating administrative entities in carrying out mark- to-
market activities.

There are two types of restructurings. Full mortgage restructurings
generally involve resetting rents to market levels and reducing mortgage
debt to permit a positive cash flow. For this type of restructuring, the
participating administrative entities develop restructuring plans that
address both rents and debt and submit the plans to OMHAR for review and
approval. The restructuring plans require the owner to maintain restrictions
aimed at preserving the property as affordable housing for at least 30
years, and Section 8 contracts are typically being renewed for 20 years. For
the second type of restructurings, which OMHAR refers to as rent
restructurings, the participating administrative entities also develop
restructuring plans that must be approved by OMHAR; but, the plans only
reduce the rents, not the mortgage debt, since the property should be
physically and financially sound enough to continue with reduced rental
income. There are no affordability and use restrictions on properties that
receive a rent restructuring, and the Section 8 contracts are usually
renewed for 5 years. 10 Appendix I describes the mark- to- market process in
more detail.

The participating administrative entities are required to use their best
efforts to seek the cooperation of Section 8 property owners in the
development of the restructuring plan. Owners must agree with the final plan
and, among other requirements, contribute 20 percent of the total cost of
the property?s rehabilitation. Participating administrative entities are
also required to ensure that tenants affected by the restructuring of a

9 OMHAR originally had contracts with 42 public participating administrative
entities. Of those, 7 entities withdrew from the program, and 11 entities?
contracts were not renewed. 10 If a property is potentially troubled, HUD
will renew the Section 8 contract for only 1 year.

Page 8 GAO- 01- 800 Multifamily Housing

project are kept informed and given the opportunity to provide comments at
crucial stages of the process.

As of June 15, 2001, approximately 3 ï¿½ years after the mark- to- market
legislation was enacted, OMHAR had completed restructurings for about 41
percent of the 1,558 properties that had entered the mark- to- market
program. While OMHAR had completed restructurings for only 138 of the
properties requiring full mortgage restructuring, it had completed
restructurings for 500 of the properties requiring only a reduction in
rents. OMHAR estimated that the federal government would realize about $563
million in savings over a 20- year period from these completed
restructurings. However, the legislative requirement that rents be reduced
to market has increased the risk that some properties will experience
physical and financial problems.

As of June 15, 2001, 1,558 properties had entered the mark- to- market
program. OMHAR had assigned 1,491 of these properties to the participating
administrative entities for restructuring. OMHAR estimated that 62 percent
of the portfolio would ultimately receive full mortgage restructurings and
the remaining 38 percent would receive rent restructurings only. While OMHAR
and its participating administrative entities have made substantial progress
in completing rent restructurings, they have completed fewer full mortgage
restructurings. As shown in figure 1, OMHAR has completed rent
restructurings for 500 properties, or 86 percent of all assigned and working
properties in this category. Completed

Restructurings Have Resulted in Savings

Restructuring Actions Have Been Completed for 41 Percent of OMHAR?s
Portfolio

Page 9 GAO- 01- 800 Multifamily Housing

Figure 1: Status of Rent Restructurings in the Mark- to- Market Pipeline as
of June 15, 2001

Source: GAO analysis of OMHAR?s database.

The 500 completed rent restructurings include 75 transactions that OMHAR has
closed but that did not result in Section 8 savings. Most of these cases
involve properties for which OMHAR determined that property rents were
already below market. In addition, as discussed in the next section, the 500
rent restructurings include transactions for 75 properties that did not meet
OMHAR?s underwriting criteria to be processed as rent restructurings.

As shown in figure 2, OMHAR has been less successful in completing full
mortgage restructurings. As of June 15, 2001, OMHAR had completed
restructurings for 138 properties, or 15 percent of all assigned and working
properties of this type. 11 However, as of June 15, 2001, OMHAR had approved
restructuring plans for 562 properties (including the 138 completed
restructurings), or about 62 percent of the properties accepted by
participating administrative entities for restructuring.

11 OMHAR considers the participating administrative entity?s ?plan approval
date? as the completion of the rent restructuring process while the
?closing? date marks the completion for full mortgage restructurings.

Page 10 GAO- 01- 800 Multifamily Housing

Figure 2: Status of Full Mortgage Restructurings in the Mark- to- Market
Pipeline as of June 15, 2001

Source: GAO analysis of OMHAR?s database.

The number of closed full mortgage restructurings does not include 78
restructurings for which OMHAR reduced property rents without restructuring
the properties? mortgages. These cases include properties whose owners have
refused to execute a restructuring commitment, have been uncooperative, or
have been barred from participating in the markto- market program. They also
include properties for which OMHAR has determined that a restructuring plan
is financially not viable because of the property?s poor physical condition.

OMHAR has made less progress in completing full mortgage restructurings for
various reasons. Typically, mortgage restructurings are more complex and
involve more steps to complete than rent restructurings. Also, as discussed
later in the report, many property owners have been reluctant to agree to
full mortgage restructurings. Average processing times have been
substantially longer for mortgage restructurings than rent restructurings,
as shown in figure 3. For example, the figure shows that participating
administrative entities required an average of 199 days to complete a rent
restructuring while they required an average of 432 days to complete a full
mortgage restructuring. The figure also shows that it has not only taken
longer, on average, for participating administrative entities to submit

Page 11 GAO- 01- 800 Multifamily Housing

mortgage restructuring plans to OMHAR (312 days versus 164 days), it has
taken OMHAR substantially longer to complete the mortgage restructurings
after the plans have been submitted (120 days versus 35 days).

Figure 3: Average Number of Days to Process Full Mortgage Restructurings and
Rent Restructurings

Source: GAO analysis of OMHAR?s database.

Page 12 GAO- 01- 800 Multifamily Housing

OMHAR estimated that restructurings completed as of June 15, 2001, would
generate approximately $563 million in savings (net present value) over the
next 20 years. These savings will result primarily from reductions in the
government?s Section 8 rental assistance payments after property rents have
been lowered to market levels. The savings estimate takes into account costs
that the government has incurred as a result of mortgage write- downs, but
it does not include OMHAR?s or participating administrative entities?
administrative costs, which have totaled $53. 9 million as of May 2001. 12
Furthermore, the savings estimate assumes that properties receiving rent
restructurings will remain in the Section 8 program for 20 years, although
those properties only receive up to 5- year Section 8 contracts. The
estimate includes 641 completed closings covering over 53,000 assisted
units. As shown in figure 4, 425 rent restructurings account for $376
million in savings (an average of about $885,000 per property) and 216 full
mortgage restructurings account for the remaining $187 million (about
$865,000 per property). 13

12 OMHAR determined the restructuring savings estimate by taking the
difference between pre and post mark- to- market rent levels on a property-
level basis and then calculating annual savings for Section 8 units within
the property. OMHAR then projected gross savings over a 20- year period for
all restructured properties. For mortgage restructurings, OMHAR subtracted
the cost of claims against FHA?s insurance fund but added in expected
repayments by owners of the mortgage write- downs. Next, the Office computed
the net present value of the aggregate total savings amount using a 6.11
percent discount rate. OMHAR?s savings calculation does not consider the
associated administrative costs of restructuring.

13 The savings calculations for rent restructurings exclude 75 properties
(out of the 500 completed rent restructurings) that did not result in
Section 8 savings. The savings calculations for mortgage restructurings
include savings resulting from the 138 restructurings that OMHAR has closed
and 78 restructurings for which OMHAR reduced property rents but did not
complete a mortgage restructuring. The Federal Government

Has Realized Cost Savings as a Result of the Program, but Risk of Physical
and Financial Problems Has Increased for Some Properties

Page 13 GAO- 01- 800 Multifamily Housing

Figure 4: Estimated Mark- to- Market Program Savings by Type of Completed
Restructuring Over 20 years (Net Present Value)

Source: GAO analysis of OMHAR?s database.

While the mark- to- market program has resulted in Section 8 savings, the
legislative requirement that rents be reduced to market has increased the
risk of physical and financial problems for some properties. As discussed
earlier, 75 of the properties for which OMHAR has completed a rent
restructuring did not meet OMHAR?s underwriting criteria for such
transactions. More specifically, OMHAR?s analysis showed that the
properties? income may not be sufficient to cover mortgage payments,
operating expenses, and ongoing repair needs after the properties? rents
have been reduced to market. According to OMHAR officials, while many of
these properties should have been processed as full mortgage

Page 14 GAO- 01- 800 Multifamily Housing

restructurings, OMHAR lacked the legal authority to compel property owners
to accept such restructurings. 14 Recognizing that, for such cases, there is
an increased risk of problems affecting the property?s physical and
financial condition and its residents, in a memorandum dated August 15,
2000, HUD?s Office of Housing established additional requirements for HUD
field offices to follow in monitoring these properties. In general, the
requirements call for the field offices to place the properties on a ?watch

list.? HUD field offices classify such properties into one of three risk
categories (normal, potentially troubled, or troubled) depending on various
factors, including their physical and financial condition. The higher risk
properties are subject to increased monitoring. As of June 15, 2001, field
offices had classified 15 of the 75 properties on the watch list as troubled
and 28 more as potentially troubled.

In addition, as noted earlier, for 78 properties that OMHAR has processed as
mortgage restructurings, OMHAR reduced the properties? rents to market
without completing the restructuring of the properties? mortgages. OMHAR
officials acknowledged that these properties also have an increased risk of
problems related to their physical and financial condition that may affect
the properties? residents, and that they also should be included on the
Office of Housing?s watch list. However, the Office of Housing?s August 15,
2000, memorandum does not specifically cover such properties. OMHAR?s
Director told us in May 2001 that after we brought this issue to his
attention, he met with Office of Housing officials to discuss the matter.
They agreed that the August 15 memorandum should be revised to cover
properties for which OMHAR has reduced rents to market without a mortgage
restructuring being completed. He told us that he had also emphasized the
need for such properties to be carefully monitored in light of their
increased risk for problems.

14 While OMHAR cannot compel an owner to accept full mortgage restructuring,
the Office is not obligated to renew a property?s Section 8 contract.
According to section 524 of the act, HUD is not required to renew a
property?s contract if the property does not have an approved restructuring
plan that the Secretary has determined is necessary.

Page 15 GAO- 01- 800 Multifamily Housing

In the almost 2 years from the time the mark- to- market program was created
in 1997 until OMHAR was in a position to begin assigning a large volume of
properties for restructuring in July 1999, the Office completed tasks
necessary to implement the program. In addition to the time OMHAR spent
establishing program requirements, various factors, such as OMHAR?s detailed
review of the restructuring plans and uncooperative property owners, may
have slowed the implementation of the program. Recognizing that some factors
were slowing the completion of restructuring transactions, OMHAR took action
to address those factors. Many program stakeholders we contacted believed
the program has gained momentum and that the pace at which restructurings
were being completed had improved over time. Furthermore, while
implementation of the mark- to- market program has taken longer than OMHAR
originally anticipated, most experts participating in our panel believed
that the program has proceeded at least as quickly as could be reasonably
expected.

While the act required the mark- to- market program to be implemented for
properties with Section 8 contracts expiring after October 1, 1998, the
Office did not assign a large volume of properties to the participating
administrative entities for restructuring until July 1999. Prior to
assigning properties to be restructured, OMHAR established the program?s
infrastructure by completing tasks such as soliciting and selecting the
participating administrative entities, entering into contractual agreements
with those entities, developing the program?s operating procedures guide,
and issuing regulations. While these tasks were completed behind OMHAR?s
original schedule, Office officials believed the delays were due, in part,
to the normal challenges associated with starting a new organization. See
figure 5 for a timeline of when key implementation tasks were completed. For
example, the timeline shows that OMHAR?s Director was not appointed until a
year after the Congress established OMHAR, and the operating procedures
guide was not issued until 18 months after the act?s passage. Factors Cited
as

Slowing Mark- toMarket Implementation and Actions OMHAR Has Taken to Address
Them

Implementing the Mark- toMarket Program Has Been a Lengthy Process, With
Various Factors Cited as Slowing Implementation

Page 16 GAO- 01- 800 Multifamily Housing

Figure 5: Timeline of Mark- to- Market Implementation

Source: GAO analysis of HUD data.

Program stakeholders identified various factors that may have slowed the
implementation of the program once program requirements had been
established. For example, one factor cited by some of the participating
administrative entities we contacted was the extensive requirements
contained in the program?s operating procedures guide. Of the 15
participating administrative entities we contacted, 7 said the program?s
guide has been a hindrance to completing the restructurings in a timely
manner. One member of our expert panel noted that the value the
participating administrative entities should be adding to the program is
their experience, judgment, and ability, and that they should not be forced
to complete the restructurings in the manner OMHAR prescribed in the

Page 17 GAO- 01- 800 Multifamily Housing

guide. However, the remaining eight participating administrative entities we
contacted said the operating procedures guide has not slowed the
restructuring process and was necessary to ensure consistency in the
program. Furthermore, 7 of our 10 expert panelists believed the operating
procedures guide has somewhat or greatly accelerated the processing of
restructuring transactions. Another factor cited by a number of the
participating administrative entities as slowing implementation was OMHAR?s
detailed review of the restructuring plans the entities submitted. According
to the entities, the level of review and oversight provided by the OMHAR
staff was excessive and often did not result in improvements to the
restructuring plans.

A third factor cited by the participating administrative entities and
members of our expert panel as slowing the program?s implementation was the
unwillingness of many Section 8 property owners to cooperate in the
restructuring process. Ten out of 15 participating administrative entities
we talked to said uncooperative owners slowed the process. For example, one
participating administrative entity told us that when owners canceled
meetings or did not return required documents to the entity in a timely
manner, the restructuring process was delayed. In addition, this entity said
that many property owners have been reluctant to agree to full mortgage
restructurings because of the cash they must contribute to address the
property?s rehabilitation needs and the long- term use agreement that
accompanies a full mortgage restructuring. Nine of our 10 expert panelists
also believed uncooperative owners have had a moderate or great effect on
slowing the processing of restructuring transactions. One panelist said
there was a fundamental lack of incentive for owners to participate in the
program, which made the restructurings very difficult to complete.

A factor cited by OMHAR as slowing implementation was the lack of timely and
quality submittals of restructuring plans by some participating
administrative entities to OMHAR for approval. According to OMHAR officials,
the skills, expertise and seniority at both a staffing and organizational
level were considerably lower than anticipated for a number of the
participating administrative entities, and the capacity of some entities
proved to be significantly less than indicated in their original proposals.
OMHAR also noted that some participating administrative entities did not
have enough staff dedicated to the restructuring process and that the staff
assigned to work on mark- to- market had a number of competing priorities.
In addition to skill and capacity issues, OMHAR officials said processing
delays resulted from the fact that OMHAR initially assigned a large volume
of properties to the entities for restructuring.

Page 18 GAO- 01- 800 Multifamily Housing

More specifically, OMHAR said that during the time- consuming process of
OMHAR?s contract negotiations with some public participating administrative
entities, a significant number of properties entered into the mark- to-
market program. Consequently, the Office had a large volume of properties to
assign to the entities at one time, which resulted in processing delays and
the need for Section 8 contract extensions at abovemarket rents for a large
number of the properties. As of March 31, 2001, OMHAR had extended the
contracts for 716 properties at above- market rents that had been delayed in
various stages of the mark- to- market process. OMHAR estimated the cost of
these contract extensions at approximately $40 million.

In an effort to increase the program?s production, OMHAR took action to
address the factors cited as slowing the process. For example, OMHAR
streamlined the policies and procedures found in the operating procedures
guide, issuing a complete revision in January 2001. 15 According to OMHAR,
the new guide simplifies the process, makes clear OMHAR?s reliance on good
judgment and quality restructuring by the participating administrative
entities, and notes OMHAR?s willingness to consider alternative approaches
that reach the goals of the program. OMHAR said the new guide reduces the
documentation requirement placed on participating administrative entities by
combining the restructuring plan submission with the credit file
requirement. Among other things, the revised guide contains new statements
of work for appraisal and physical inspections that conform to HUD?s new
initiatives in rent comparability assessment. OMHAR believed this change
would produce greater consistency when HUD and the participating
administrative entities are both obtaining rental determinations in the same
area and reduce controversy that can occur when owners believe that
different approaches have led to disparate results.

To address concerns that OMHAR staff were providing overly detailed reviews
of the restructuring plans submitted by participating administrative
entities, the Office conducted a seminar with the OMHAR staff who review the
restructuring plans to emphasize OMHAR?s commitment to production, discuss
review requirements, and solicit input

15 Although the complete operating procedures guide was not issued until
January 2001, OMHAR said much of the revised guide was posted on OMHAR?s web
page between September and November 2000. OMHAR Has Taken Action

to Address the Factors Adversely Affecting Implementation

Page 19 GAO- 01- 800 Multifamily Housing

on simplifying the process. The OMHAR staff were instructed to ensure the
reasonableness of the participating administrative entities? underwriting
and compliance with regulations rather than to spend time reunderwriting the
restructuring plan. Seven of our 10 expert panelists believed OMHAR has been
somewhat or very successful in eliminating any unnecessary elements of its
review during the restructuring process. However, 11 out of 15 participating
administrative entities we contacted said OMHAR had not eliminated
unnecessary elements of its review. Some of these entities expressed concern
that OMHAR staff continued to inconsistently review their restructuring
plans, often commenting on the plans based on the staffs? own personal
underwriting preferences.

In September 2000, OMHAR also took action to address delays caused by
uncooperative Section 8 property owners by introducing several initiatives
to make participation in the program more attractive for owners. This
incentive package allows owners to receive monthly capital recovery payments
designed to provide a reasonable return on the investment the owners must
make to cover their portion of required rehabilitation and transaction
costs. The incentive package also allows owners to receive a performance fee
of up to 3 percent of effective gross income if the owner demonstrates sound
management practices, and it allows owners to finance 100 percent of the
initial deposit to a property?s replacement reserve and 80 percent of
certain reasonable acquisition transactions costs. All 10 expert panelists
believed the incentives OMHAR developed to encourage owner participation in
the program somewhat or greatly increased participation. According to one
panelist, the increased number of properties entering the program requesting
full mortgage restructuring after the incentives were introduced has
demonstrated the effectiveness of the owner initiatives. Furthermore, 11 out
of 15 participating administrative entities we contacted said the incentives
helped to make the owners more cooperative during the restructuring process.

To address delays associated with the performance of participating
administrative entities, the Office organized special teams of OMHAR and
contractor staff to assist the entities in the completion of restructuring
transactions. For example, if a participating administrative entity was not
completing a restructuring in a timely manner, OMHAR dispatched a team of
experienced underwriters to assist in the restructuring. Also, OMHAR
established a transaction center where OMHAR staff would complete the
underwriting for cases not being actively worked on by the participating
administrative entity and for cases where the participating administrative
entity was struggling with a difficult restructuring. Furthermore, OMHAR
officials said they continued to provide specialized training for the

Page 20 GAO- 01- 800 Multifamily Housing

participating administrative entities at their request or as deemed
necessary by the OMHAR regional offices.

OMHAR and others believed the program has gained momentum and that the pace
for completing restructurings has improved. For example, six out of eight
expert panelists believed that the time required to complete the
restructurings has decreased to some or a great extent. 16 One panelist said
that the program?s performance has improved significantly in the previous 6
to 8 months and that restructuring transactions were progressing much more
quickly. Eight of the 15 participating administrative entities we contacted
also believed that the time required to complete the restructurings has
decreased. For example, one participating administrative entity said that
while full mortgage restructurings previously took them between 10 to 15
months to close, more recently these transactions have been completed in 5
to 7 months. OMHAR officials believed that participating administrative
entities were also doing a better job of submitting restructuring plans
within the expected time frames. According to OMHAR data, both the number
and percentage of restructuring plans that OMHAR considered late decreased
between September 2000 and May 2001. 17 Figure 6 shows the cumulative number
of completed full mortgage restructurings and rent restructurings by
quarter.

16 When asked if they believed the time required to complete the
restructurings has increased, decreased, or stayed the same over time, two
panelists did not provide usable responses.

17 The percentage of full mortgage restructuring plans that OMHAR considered
to be late decreased from 24 percent to 18 percent and the percentage of
rent restructuring plans decreased from 70 percent to 19 percent. However,
during this period, OMHAR increased the amount of time that participating
administrative entities have for submitting full mortgage restructuring
plans from 8 to 9 months before considering them to be late. The Pace for
Completing

Restructuring Transactions Has Improved Over Time, and Most Expert Panelists
Believe the Pace Has Been Reasonable

Page 21 GAO- 01- 800 Multifamily Housing

Figure 6: Cumulative Number of Completed Full Mortgage Restructurings and
Rent Restructurings by Quarter

Source: GAO analysis of OMHAR?s database.

Most experts who participated in our panel believed OMHAR? s overall
progress in implementing the mark- to- market program has been reasonable.
While implementation of the program has taken considerable time, panelists
noted that the program was more complex than originally anticipated,
involved a considerable number of stakeholders, and provided few incentives
to encourage owner participation. One panelist noted that the length of time
to establish the program was not surprising given the program?s complexity
and that the quality of the outcome is what matters, not the speed at which
the outcome is achieved or pursued. When asked specifically how OMHAR has
progressed in implementing the mark- tomarket program compared to what could
reasonably be expected, 7 out of 10 expert panelists said program progress
has been as expected or greater than expected.

Page 22 GAO- 01- 800 Multifamily Housing

While authority for the mark- to- market program and OMHAR sunsets on
September 30, 2001, OMHAR estimated that over 1,300 properties with above-
market rents would have Section 8 contracts expiring after fiscal year 2002.
According to HUD, owners with above- market rents who have their rents
reduced to market levels after the program sunsets will be placing
themselves and HUD at risk of financial losses if market rents are
insufficient to cover debt service, reserves, and operating costs. All
members of our expert panel believed that termination of the program would
result in increased property defaults from Section 8 property owners and
that the program should be extended beyond September 30, 2001. Furthermore,
9 out of 10 expert panelists indicated that the authority for an office such
as OMHAR should be extended, citing such reasons as the disruption in the
momentum, lack of HUD capacity, and the loss of expertise that would result
if an office dedicated to administering the program was not maintained.
Conversely, one expert panelist indicated that program responsibility should
be transferred to HUD?s Office of Housing, noting that having a single
office administer the program would streamline the mark- to- market
decisionmaking process and the execution of policies.

Section 579 of the act repeals Subtitle A of the legislation on September
30, 2001, thereby ending the statutory authority to restructure properties?
mortgages. After that time, Section 8 properties with above- market rents
that have not entered into a binding commitment with OMHAR will have their
rents reduced to comparable market levels without the restructuring tools
available in the program when their current Section 8 contract expires. 18
OMHAR estimated that over 1,300 properties with above- market rents would
have Section 8 contracts expiring after the scheduled termination of the
program. Figure 7 shows the estimated number of above- market rent
properties with expiring contracts in fiscal year 2002 and beyond.

18 Section 524( b) of the act provides that owners of certain classes of
properties receiving project- based Section 8 assistance may renew expiring
assistance contracts at the lesser of existing rents, rents adjusted by an
operating cost adjustment factor, or rents that provide sufficient income to
support the properties (budget- based rents). These categories include
multifamily housing projects that are not covered by the act or are exempt
from mortgage restructuring under the act, such as projects financed by
state or local governments. Expiration of the

Program Would Increase the Likelihood of Section 8 Defaults, and Loss of
Dedicated Office to Administer the Program Could Cause Additional Delays

Authority to Restructure Section 8 Properties Expires on September 30, 2001

Page 23 GAO- 01- 800 Multifamily Housing

Figure 7: Estimated Number of Above- Market Rent Properties with Section 8
Contracts Expiring in Fiscal Year 2002 and Beyond

Source: OMHAR.

According to HUD, if mark- to- market program authority is not extended,
owners will be placing themselves and HUD at risk of financial losses if
their property?s rents are insufficient to pay for debt service, reserves,
and operating costs. HUD also indicated that owners of properties who are
unable to operate efficiently at market rents will be forced to decrease
expenditures for maintenance and other operating costs in order to remain
current with mortgage payments, thereby placing tenants at risk of residing
in substandard housing, or they may default on their FHA secured loans.
Furthermore, HUD noted that the FHA insurance fund would be adversely
affected if property owners that are unable to meet their financial
obligations eventually fail because proper restructuring tools are not
available.

Program stakeholders who participated in our expert panel were unanimous in
their opinion that the program should be extended. The panelists were also
in full agreement that allowing the program to expire would increase the
likelihood of Section 8 property defaults and large claims against the FHA
insurance fund. Panelists did have different views on how long the program
should be extended, although there was general consensus that an extension
of at least 3 years was warranted. While three Expiration of Program

Would Increase the Likelihood of Defaults by Section 8 Property Owners

Page 24 GAO- 01- 800 Multifamily Housing

panelists indicated that a 3 to 5 year extension of the program would be
adequate, three others believed that an indefinite extension would make
sense. For example, a panelist noted that if there is a legal requirement to
reduce the rents to market, there should always be a corresponding authority
to restructure the debt. Several panelists also commented that a decision on
extending program authority is needed as soon as possible. One panelist said
that the sooner a decision is made to extend the program, owners would
realize that they are not benefiting by holding off from entering the
program. All 15 participating administrative entities we contacted believed
that the program should be extended.

Section 579 of the act repeals Subtitle D of the legislation on September
30, 2001, thereby terminating OMHAR?s authority and transferring its
authority and responsibilities to HUD?s Secretary. In September 2000, the
Senate Appropriations Committee directed OMHAR and HUD to begin planning for
the transition of program responsibilities by developing a plan to detail
how the mark- to- market program functions would be transferred from OMHAR
to HUD?s Office of Multifamily Housing within HUD?s Office of Housing. 19 In
October 2000, HUD and OMHAR formed a transition team. The preliminary
transition plan provided to the Congress in December 2000 sets out three
options for the transfer of OMHAR?s responsibilities to HUD:

 HUD could maintain an organization resembling the current structure at
OMHAR;

 HUD could create an organization resembling a reduced OMHAR in HUD?s
Office of Multifamily Housing; and

 HUD could merge restructuring responsibilities into HUD?s 18 Multifamily
Hubs.

The preliminary plan also recommends extension of the restructuring tools in
Subtitle A of the act beyond the scheduled termination date of September 30,
2001.

19 Senate Appropriations Committee Report 106- 410 (Sept. 13, 2000). OMHAR?s
Authority to

Administer the Mark- toMarket Program Expires on September 30, 2001

Page 25 GAO- 01- 800 Multifamily Housing

Nine out of 10 expert panel members and 8 of out 15 participating
administrative entities indicated that OMHAR should be allowed to continue
administering the program. These parties cited a number of problems that
could arise if the program were transferred to HUD?s Office of Multifamily
Housing and, particularly, if the responsibility were assigned to HUD?s
Multifamily Hubs. 20

One of the concerns raised by three panelists and four participating
administrative entities was that transferring the responsibilities to
another location in HUD without dedicated staff to administer the program
could disrupt momentum. For example one panelist noted that the program was
now stabilized and has momentum and said, ?We?re finally at the point where
we?re ready to effectuate what we all set out to do, so let?s not upset the
apple cart.?

Another concern raised by four panelists and three participating
administrative entities was that HUD?s Office of Multifamily Housing may
lack the capacity to effectively administer the program if OMHAR staff are
not retained and responsibility for the program is shifted to HUD
Multifamily field offices. For example, a panelist noted that his firm deals
with 12 HUD field offices, and none of those offices have adequate staffing.
An official from HUD?s Office of Housing agreed that field office personnel
do not have the capacity or inclination to give the program the attention it
deserves.

A survey that we conducted of HUD field office managers in September and
October 2000 also strongly indicates that HUD field offices are likely to
lack the capacity to administer the mark- to- market program effectively.
This survey found that 71 percent of the HUD field office managers believed
that their offices do not have sufficient staff to carry out existing
programs and activities. 21 The report also noted that insufficient staffing
and the need to increase training continue to affect HUD?s ability to carry
out its mission efficiently and effectively.

This lack of capacity could, in our view, also affect HUD?s ability to
ensure that the program is being carried out in accordance with legislative

20 HUD?s 18 Multifamily Hubs and their associated 33 program centers
comprise HUD?s field offices. The field offices report to HUD?s Office of
Multifamily Housing. 21 Major Management Challenges and Program Risks:
Department of Housing and Urban Development (GAO- 01- 248, Jan., 2001) Loss
of a Dedicated Office

to Administer the Program Could Affect Momentum and Contribute to Additional
Delays

Page 26 GAO- 01- 800 Multifamily Housing

requirements and that the federal government?s interests are adequately
protected. In our October 1998 report on the mark- to- market program, we
stressed the importance of HUD?s oversight of the program. 22 More
specifically, we stated that because many program functions were to be
carried out by participating administrative entities rather than by HUD, it
was particularly important for HUD to establish procedures to ensure that
all parties involved carried out their responsibilities in ways that met the
program?s objectives and were in compliance with program requirements. The
program?s complexity and the amount of resources involved make such
oversight even more important.

Some expert panelists and participating administrative entities also
expressed concern about the loss of expertise that could occur if OMHAR
staff are not retained. According to OMHAR, 57 percent of the 89 staff
currently employed with OMHAR have limited terms and do not have
reemployment rights with HUD. OMHAR said most of the staff with limited
terms (about 75 percent) are those with production experience. According to
OMHAR?s Director, if OMHAR is not extended it would be necessary for HUD to
obtain approval from the Office of Personnel Management to extend OMHAR
staffs? terms. Furthermore, the act allows OMHAR staff to receive higher pay
than comparable HUD employees. Accordingly, OMHAR believed that unless the
provisions allowing higher pay are extended, a substantial number of the
remaining staff might choose to leave. There was also concern that even if
OMHAR staff transferred to HUD?s Office of Housing, unless the staff were
assigned to a specific office focused on the mark- to- market program, they
could be dispersed to work on other HUD multifamily programs.

On the other hand, 1 expert panelist and 7 out of 15 participating
administrative entities believed that OMHAR?s authority of the program
should be allowed to expire. The expert panelist commented that integration
of the program into HUD could be beneficial. The panelist noted that
consolidating the program within HUD?s Office of Housing would improve
program efficiency by streamlining the mark- to- market decision- making
process and execution of policies since one office would be administering
all aspects of Section 8 properties entering the program. The panelist also
believed that integrating the program into HUD would improve communication
and coordination between the participating

22 Multifamily Housing: Progress Made in Establishing HUD?s Office of
Multifamily Housing Assistance Restructuring (GAO/ RCED- 99- 5; Oct. 27,
1998)

Page 27 GAO- 01- 800 Multifamily Housing

administrative entities and HUD. A participating administrative entity said
that OMHAR should be allowed to expire because its oversight is too
prescriptive and heavy- handed. This entity believed that the HUD field
offices would be better suited to provide program oversight since the HUD
field staff are more knowledgeable about the local rental markets and are
more familiar with the Section 8 properties located in their jurisdictions.
Another participating administrative entity indicated that if OMHAR were
extended, it would make better sense to have the office report to the HUD
Assistant Secretary for Housing instead of the HUD Secretary, as it does
currently, since the Assistant Secretary would be more aware of events
taking place at OMHAR and HUD field offices and could better facilitate
coordination between the offices.

Program stakeholders noted a number of actions that they believed would
strengthen mark- to- market program implementation and help ensure that the
remaining restructurings are carried out as efficiently and economically as
possible. However, all of the options have advantages and disadvantages.

The options the stakeholders identified include having HUD provide
rehabilitation grants to facilitate restructuring of properties in poor
physical condition, taking actions to improve owner and tenant participation
in the program, and ensuring that all properties with abovemarket rents are
sent to OMHAR for restructuring. There was a general consensus among panel
experts that it is too late in the program?s cycle to make changes that
would disrupt the momentum that the program has finally established.
Accordingly, stakeholders focused on program changes that could be made in
tandem with program implementation. A table containing the following options
and others is located in appendix II.

Most expert panelists believed that OMHAR needs additional tools to help
restructure properties in poor physical condition. In particular, several
stakeholders recommended that HUD provide rehabilitation grants to
facilitate restructuring of Section 8 properties in poor physical condition
for which adequate funding was otherwise not available to cover
rehabilitation needs identified in the properties? restructuring plans. As
of April 2001, OMHAR had identified 17 properties that required a full
mortgage restructuring but for which the responsible participating
administrative entities could not complete the restructurings due to the
excessively poor physical condition of the property and/ or the owner?s
inability to meet the required cash contribution to address the property?s
rehabilitation needs. Program Stakeholders

Identified a Number of Actions That May Improve Program Implementation

Page 28 GAO- 01- 800 Multifamily Housing

According to OMHAR, rehabilitation grants could help lower the owner?s costs
of restructuring and reduce the number of transactions that are discontinued
due to a lack of funds needed to address rehabilitation requirements. One
stakeholder we spoke with said such grants are particularly important for
troubled localities that are trying to preserve their affordable housing.
OMHAR also believed providing funding for rehabilitation needs at the
beginning of the process could save participating administrative entities?
and owners? time spent locating sources of funding and therefore shorten the
restructuring process. This in turn could save the government from having to
extend above- market rent contracts until restructurings are complete and
could in some cases reduce the need for OMHAR to approve above- market
exception rents. 23

However, OMHAR cautioned that any new financial incentive for owners would
result in processing delays since some owners would be likely to delay
restructuring in order to take advantage of the new incentive. A
participating administrative entity that supported the idea advised that the
grants would have to be administered in such a way to ensure that they did
not benefit owners who had allowed their properties to decline, thus
rewarding them for their neglect. Finally, stakeholders noted that providing
rehabilitation grants could increase overall costs to the government, but it
could promote the preservation of affordable housing. 24

Another possible improvement cited by program stakeholders is to ensure that
tenants have access to information on their property?s restructuring. Tenant
representatives told us that there are problems with tenant access to
information in the mark- to- market process. According to the regulations
and as outlined in the operating procedures guide, property residents and
interested community groups must be provided the opportunity for meaningful
participation in the restructuring process. The participating administrative
entities are required to notify and consult with tenants through two tenant
meetings, notices of plan progress, and by providing

23 Exception rents are rents that are greater than comparable market rents.
These rents are available only for properties undergoing a full
restructuring and only if a property?s net operating income is insufficient
to support operating costs and other expenses and the participating
administrative entity has determined that the loss of the project would
seriously and adversely impact the tenants and community.

24 The act authorized HUD to make grants for the capital costs of
rehabilitation to owners of certain HUD- insured Section 8 properties. HUD
has not currently implemented this authority. Another proposed measure would
authorize HUD to make grants to states to supplement state assistance for
the preservation of affordable housing.

Page 29 GAO- 01- 800 Multifamily Housing

relevant documents for review. However, we heard from tenant representatives
that for some properties the participating administrative entities have not
provided information to tenants in a timely manner, if at all. Problems
cited by tenant representatives include inadequate notice of tenant
meetings; meetings held at inappropriate times or locations, such as during
the day when tenants are at work or in busy building lobbies; and the lack
of key restructuring documents provided in a timely manner. These problems
may result in fewer tenants participating in the mark- tomarket process.

At the time of our expert panel, OMHAR officials agreed to look into this
issue and meet with tenant representatives, as well as with a specific
participating administrative entity cited by the representatives for
violating tenant participation rules. According to OMHAR, these meetings
occurred shortly thereafter. Tenant representatives told us that OMHAR
officials have been responsive to their concerns with certain participating
administrative entities but that some problems with tenant access to
information persist. The tenant representatives recommended additional
training for participating administrative entities on tenant participation
requirements, at which tenant representatives could be present. Alternately,
the tenant representatives requested a joint meeting with OMHAR and the
participating administrative entities to discuss tenant participation
problems. In response to these concerns, on June 5, 2001, OMHAR held a
training session that focused on, among other things, developing ways to
remove barriers to effective tenant participation in the mark- to- market
program.

Another action that may improve program implementation is to ensure that HUD
field offices fulfill their responsibility to review rent comparability
studies and refer properties to OMHAR. Currently, HUD field offices are to
obtain and review rent comparability studies from property owners when a
property?s Section 8 contract is about to expire to determine whether rents
are above market, which would make the property eligible for the mark- to-
market program. However, there have been concerns that some properties with
rents above market are not being submitted to OMHAR. For example, OMHAR
estimated that 1,708 properties with Section 8 contracts expiring in fiscal
year 2000 had rents above market and were therefore eligible for the mark-
to- market program. However, only 546 properties (32 percent) were referred
to OMHAR by HUD field offices during that time. An official at the Office of
Multifamily Housing told us that the reasons the number of projects received
by OMHAR from the field offices do not total the number expected may include
changes in the economy and housing market, or problems in

Page 30 GAO- 01- 800 Multifamily Housing

training the field office staff on the proper procedures for conducting or
reviewing rent comparability studies.

The Office of Multifamily Housing and OMHAR have taken two actions to
address such problems and ensure that properties with above- market rents
are sent to OMHAR for restructuring. In June 2000 the Office of Multifamily
Housing issued a notice to change and clarify the procedures for preparing,
submitting, and reviewing rent comparability studies, which one stakeholder
noted had clarified many questions and misunderstandings. OMHAR created a
model that highlights properties with above- market rents that are eligible
for the mark- to- market program. While this model was intended to correct
problems with property referrals to OMHAR, OMHAR believes that problems
persist. OMHAR has suggested that responsibility for preparing and reviewing
rent comparisons be given to an independent third party under contract to
HUD rather than an appraiser hired by the owner. OMHAR believes this action
would improve the accuracy of the studies and help ensure that eligible
properties are sent to OMHAR for restructuring. An owner representative we
contacted cautioned that property owners would be distrustful of HUD studies
and said that if HUD pursued such an option, owners should continue to be
allowed to do their own rent comparability studies as well. The two studies
could then be compared, with a process established to resolve any
differences between them.

If the legislative authority for the mark- to- market program provided for
in Subtitle A of the Multifamily Assisted Housing Reform and Affordability
Act of 1997 is allowed to expire on September 30, 2001, HUD estimates it
will have to reduce the rents to market levels of well over 1, 000
properties without having the tools needed to mitigate the potential effects
of such reductions. If the reduced rents do not provide sufficient revenues
to cover the properties? operating expenses, mortgage payments, and repair
needs, owners may be forced to reduce expenditures for maintenance or other
operating expenses or may default on their mortgages. Such action could
result in deteriorating property conditions and substantial claims against
the FHA insurance fund, which, in turn, could adversely affect property
residents and lead to a decrease in the supply of affordable housing.
Extension of the program would permit Section 8 property owners with above-
market rents and unexpired Section 8 contracts to benefit from the
restructuring tools that are currently available and help offset many of the
effects that are likely to occur if the program is not continued.
Conclusions

Page 31 GAO- 01- 800 Multifamily Housing

Transferring authority for the mark- to- market program to HUD?s Office of
Housing could potentially help facilitate the handling of some mark-
tomarket related functions that have required coordination between OMHAR and
the Office of Housing. However, there are concerns that such a transfer is
also likely to result in the loss of a substantial number of OMHAR staff
unless the terms of existing staff are extended and staff are allowed to
continue receiving higher salaries than other HUD staff. A substantial
reduction in the number of OMHAR employees assigned to the mark- to- market
program could result in additional delays in program implementation and
substantially diminish institutional knowledge of program requirements.
Furthermore, concerns about the adequacy of staffing in HUD?s field offices
raise questions about whether HUD would be able to provide comparable
program oversight of the mark- to- market program without straining its
field office staffs? ability to carry out existing responsibilities.

While the mark- to- market program has brought about successful
restructurings resulting in Section 8 savings at a number of properties, at
other properties the requirement that rents be reduced to market has
increased the risk of physical and financial problems. Those at risk include
properties that have not received mortgage restructurings but for which
market rents may not provide sufficient income to cover existing mortgage
payments, operating expenses, and ongoing repair needs. HUD recognized that
these properties may become troubled, and the Office of Housing developed
guidance for its field offices to use in monitoring potentially troubled
mark- to- market properties. However, the guidance did not explicitly cover
all properties that may be at risk. HUD has acknowledged that the guidance
should be more inclusive and has plans to revise it. In addition, it will be
important for HUD?s field offices to strictly adhere to the monitoring
guidance and take appropriate actions to address any problems that occur
before the problems seriously affect the property?s physical condition and
the living conditions of its residents.

To permit continued restructuring of Section 8 properties with abovemarket
rents, the Congress should extend Subtitle A of the Multifamily Assisted
Housing Reform and Affordability Act beyond September 30, 2001. To ensure
that restructurings are completed expeditiously and in accordance with
legislative and regulatory requirements, and that the federal government?s
interests are protected, the Congress should also extend legislative
requirements placing the mark- to- market program under a separate office
headed by a director who is responsible for administering the program.
Regardless of whether program responsibility continues Matters for

Congressional Consideration

Page 32 GAO- 01- 800 Multifamily Housing

within OMHAR or is transferred to a separate office elsewhere in HUD, the
office should have a sufficient number of trained staff dedicated to program
administration.

To minimize the risks to properties and tenants? living conditions
associated with reducing rents to market at those properties for which
mortgage restructurings are needed but have not been completed because of
owner resistance or other problems, we recommend that the Secretary of HUD
direct the Assistant Secretary, Office of Housing to revise the guidance for
monitoring potentially troubled mark- to- market properties to specifically
include all properties that may be at risk of physical and financial
problems.

We provided HUD with a draft of this report for its review and comment. In
its written comments, HUD said that our report accurately described OMHAR?s
experience in implementing the program and identified the issues related to
program reauthorization. HUD agreed with the report?s conclusion that
legislative authority for the mark- to- market program should be extended
past its current scheduled expiration date of September 30, 2001. HUD said
the Administration has sought extension of the debt restructuring authority
in its fiscal year 2002 budget proposal submitted to the Congress, and that
the HUD Secretary stated in congressional testimony that the program is
still needed.

Due to the critical nature of OMHAR?s work, HUD also agreed that the program
should be administered by a dedicated office and fully expects that OMHAR
and its trained staff would continue to work strictly on the mark- to-
market program. However, HUD believes OMHAR should be placed under the
authority of the Office of Housing to simplify OMHAR?s administrative
structure and facilitate coordination between OMHAR and HUD?s 18 Multifamily
Hubs, which HUD believes have detailed information and knowledge on the
Section 8 properties. HUD said that transferring authority to the Office of
Housing could potentially help facilitate the handling of various functions
that require coordination between OMHAR and the Office and Housing and that
the completion of OMHAR?s work would be expedited by a simpler
administrative structure. While we agree with HUD that there are advantages
to placing OMHAR under its Office of Housing, we continue to believe that
such a transfer should not diminish the office?s focus on administering the
mark- to- market program or inhibit its ability to obtain the resources and
expertise that it needs to carry out Recommendation for

Executive Action Agency Comments and Our Evaluation

Page 33 GAO- 01- 800 Multifamily Housing

that task. HUD indicated in its comments that it recognizes these concerns.

With regard to how long OMHAR and the program?s restructuring tools should
be extended, HUD believes a 3- year extension beyond fiscal year 2001 is
appropriate. The Department said that by 2004 it could determine whether any
further extension is needed or if the remaining mark- tomarket workload
could be handled within the Federal Housing Administration.

The Department further agreed that some properties may face increased risk
of physical and financial problems as a result of the required rent
reductions. HUD noted that it had developed guidance for its field offices
to use in monitoring such properties, but it also agreed with our
recommendation that it make its existing guidance for monitoring at- risk
properties more inclusive to cover all potentially troubled properties. HUD
stated that it has made plans to revise the guidance accordingly. HUD also
noted its interest in the recommendations for program improvement cited by
our panel of experts and agreed to take them under advisement. Lastly, HUD
suggested minor clarifications to specific statements in the report, which
we incorporated as appropriate. The full text of HUD?s written comments
appears in appendix III.

We are sending copies of this report to the Secretary of Housing and Urban
Development and to the Director of the Office of Multifamily Housing
Assistance Restructuring. We will make copies available to others on
request. If you or your staff have any questions on this report, please call
me at (202) 512- 2834. Key contributors to this report were Andy Clinton,
Mark Egger, Rick Hale, Brandon Haller, Barbara Johnson, John McGrail, Sally
Moino, Lynn Musser, Mark Stover, and Kathy Trimble.

Peter Guerrero, Director, Physical Infrastructure Team

Page 34 GAO- 01- 800 Multifamily Housing List of Committees

The Honorable Jack Reed Chairman The Honorable Wayne Allard Ranking Minority
Member Subcommittee on Housing and Transportation Committee on Banking,
Housing,

and Urban Affairs United States Senate

The Honorable Barbara A. Mikulski Chairwoman The Honorable Christopher S.
Bond Ranking Minority Member Subcommittee on VA, HUD, and

Independent Agencies Committee on Appropriations United States Senate

The Honorable Marge Roukema Chairwoman The Honorable Barney Frank Ranking
Minority Member Subcommittee on Housing and

Community Opportunity Committee on Financial Services House of
Representatives

The Honorable James T. Walsh Chairman The Honorable Alan B. Mollohan Ranking
Minority Member Subcommittee on VA, HUD,

and Independent Agencies Committee on Appropriations House of
Representatives

Appendix I: Overview of the Mark- to- Market Process

Page 35 GAO- 01- 800 Multifamily Housing

In general, the process to be followed under the mark- to- market program,
as outlined in OMHAR?s operating procedures guide, has 13 phases: (1)
project assignment to participating administrative entity, (2) kick- off
meeting, (3) notice of first restructure plan consultation meeting, (4)
tenant comments, (5) consultation meeting, (6) physical condition
assessment, (7) second tenant meeting, (8) underwriting process, (9)
submission of the draft restructuring plan, (10) restructuring plan
execution, (11) notice of completion of restructuring plan, (12) closing,
and (13) post- closing document distribution. 25

1. Project Assignment to Participating Administrative Entity: The markto-
market process is initiated when an owner of Section 8 housing notifies the
HUD Multifamily Hub or program center of the intent to participate in the
mark- to- market program. 26 The Hub or program center screens the owner and
project to determine initial eligibility and then forwards eligible projects
to OMHAR headquarters for assignment to a participating administrative
entity. The participating administrative entity is responsible for making a
complete and ongoing assessment of the eligibility of the owner and the
project.

2. Kick- off Meeting: After headquarters assigns the project, the
participating administrative entity contacts the owner and provides ground
rules, forms, and other information. At this time, the participating
administrative entity also sets the date for the kick- off meeting, which
must be held within 15 days after providing the above materials to the
owner. At the meeting, the participating administrative entity explains the
restructuring process and distributes copies of all closing documents, among
other things.

3. Notice of First Restructure Plan Consultation Meeting: Immediately
following the kick- off meeting, the participating administrative entity (or
the owner on the administrative entity?s behalf) must send a Notice of First
Restructure Plan Consultation Meeting to tenants and other interested
parties. The notice states that the owner has elected to participate in the
mark- to- market program; when the project- based Section 8 contract is
scheduled to expire; how recipients can give

25 This 13- phase process applies only to full mortgage restructurings,
under which both a property?s rents and mortgage are restructured. 26 HUD?s
field office structure for delivering multifamily housing services consists
of 18 jurisdictional Hubs with staff stationed in 33 program centers.
Appendix I: Overview of the Mark- to- Market

Process

Appendix I: Overview of the Mark- to- Market Process

Page 36 GAO- 01- 800 Multifamily Housing

comments to the participating administrative entity regarding the property?s
physical condition and other matters; and the date, time, and place of a
public meeting to be held between 20 and 40 days after the date of the
notice.

4. Tenant Comments: After receiving the notice, tenants and other interested
parties can provide written comments to the participating administrative
entity on such matters as the property?s physical condition, project
management, and whether rental assistance should be project- based or
tenant- based.

5. Consultation Meeting: Between 20 and 40 days after the notice, the
participating administrative entity must conduct a meeting to hear oral
presentations and comments by the tenants and other affected parties on the
desired contents of a restructuring plan, on the owner?s evaluation of the
project?s physical condition, and on any proposed transfer of the project to
another owner.

6. Physical Condition Assessment: If the owner has not already submitted an
evaluation of the project?s physical condition, it should be completed soon
after the consultation meeting. The participating administrative entity will
work with a third- party inspector, who will consider the owner?s evaluation
as well as comments from the tenants and the local community. The
participating administrative entity?s inspector must coordinate his or her
analysis with the participating administrative entity?s third- party
appraiser.

7. Second Tenant Meeting: The participating administrative entity must
develop, in cooperation with the owner, a mortgage restructuring and rental
assistance sufficiency plan for each project. Among other information, the
plan provides conclusions on the project?s new mortgage amount( s),
rehabilitation needs, and financial return to the owner. Ten days before the
participating administrative entity submits the draft restructuring plan to
OMHAR for review, the participating administrative entity must hold a
follow- up meeting with the tenants and other affected parties so that they
can comment on the development of the plan. The proposed plan should be
available for these parties to inspect at least 20 days before it is
submitted to OMHAR for review.

8. Underwriting Process: Generally, underwriting is completed within 105
days after the project is assigned to the participating administrative
entity. The participating administrative entity considers the project?s

Appendix I: Overview of the Mark- to- Market Process

Page 37 GAO- 01- 800 Multifamily Housing

finances and completes a Rental Assistance Assessment Plan to determine
whether the Section 8 assistance should be renewed as project- based
assistance or converted to tenant- based assistance. The participating
administrative entity, the owner, and the lender discuss mortgage options.
The outcome of this process is the draft restructuring plan mentioned above
(phase 7).

9. Submission of the Draft Restructuring Plan: The participating
administrative entity submits the draft restructuring plan to OMHAR for
review. OMHAR determines whether to approve, reject, or return the plan for
modifications.

10. Restructuring Plan Execution: After OMHAR approves the plan, the
participating administrative entity sends the owner notification and a
restructuring plan commitment. The owner has 30 days after this
restructuring commitment is issued to execute it.

11. Notice of Completion of Restructuring Plan: Within 10 days after the
restructuring commitment is executed, the participating administrative
entity must send the project?s tenants and other interested parties a notice
describing the final restructuring plan and restructuring commitment.

12. Closing: The owner, the lender, the participating administrative entity
and HUD sign and record all documents. Closing should be completed within 60
days of executing the restructuring commitment.

13. Post- Closing Document Distribution: Closing dockets and other
supporting documents are distributed to HUD officials, loan servicers, asset
managers, and others.

Appendix II: Actions Suggested By Program Stakeholders to Improve Mark- to-
Market Implementation

Page 38 GAO- 01- 800 Multifamily Housing

Stakeholder suggestions Background Advantages Disadvantages

Have HUD provide rehabilitation grants to owners of Section 8 properties in
poor physical condition that could not otherwise fund the rehabilitation
needs identified in the properties? restructuring plans.

As of April 2001, OMHAR had identified 17 properties that required a full
mortgage restructuring, but for which the restructuring plan was not
feasible because the property was in excessively poor condition and/ or the
owner could not afford the rehabilitation costs.

Nine out of 10 expert panelists believed that additional tools were needed
to preserve properties in poor physical and/ or poor financial condition.

Proponents believe rehabilitation grants could reduce the number of
restructuring transactions that are discontinued because sufficient funds
are not available to address property rehabilitation needs.

Providing funding for rehabilitation needs at the beginning of the process
could save participating administrative entities' and owners' time spent
locating sources of funding and therefore shorten the restructuring process.
This in turn could save the government from having to extend above- market
rate contracts until restructurings are complete.

Rehabilitation grants could result in the preservation of additional
properties.

OMHAR cautioned that the proposal of any new financial incentive for owners
would impede progress as some owners delay restructuring decisions in order
to take advantage of the new incentive.

Rehabilitation grants could increase overall costs to the government. Costs
could be reduced if the federal government provided funding to only match
funds provided from nonfederal sources.

Mark down rents in a more timely manner at the end of the initial 1- year
contract extension, as required by the mark- to- market regulations.

Owners may receive a Section 8 contract extension at current (above- market)
rents for up to 1 year while the participating administrative entity
completes and closes a full mortgage restructuring. Any extension of a
contract beyond 1 year must be at comparable market rents or exception
rents.

Section 8 contracts frequently have been extended at above- market rents
beyond 1 year when various complications, such as lack of owner cooperation,
delay the completion of a restructuring.

Proponents believe owners may be less likely to delay the restructuring
process if faced with reduced rents.

The government could realize savings if contracts are not extended at above-
market rents beyond the time allowed in the regulations. As of March 31,
2001, HUD paid an additional $40 million in above- market rents due to the
extension of Section 8 contracts on 716 properties.

The complexity of some restructuring actions, such as when a transfer of
ownership is involved, makes it difficult to complete all restructurings
within 1 year. Thus, enough flexibility should be allowed so that
participating administrative entities and owners can find ways to complete
restructurings of problematic properties.

Provide owners tax relief upon the sale of HUDassisted properties to
purchasers committed to affordable housing preservation. One proposal would
involve deferring or eliminating the payment of taxes on noncash capital
gains associated with the sale of properties.

One factor inhibiting implementation of the mark- to- market program has
been some owners? reluctance to participate in the restructuring process.
Proponents believe that it would be beneficial to encourage such owners to
sell their properties to new owners who agree to preserve the properties as
affordable housing for the property?s remaining useful life. However, some
owners may be disinclined to sell their properties because they

Proponents believe tax relief could help address the disincentive for owners
to sell or transfer properties to purchasers who agree to preserve the
properties as affordable housing.

The effect of such a change on federal tax revenues would need to be
carefully assessed. Assessments would also need to be made of the extent to
which tax relief would lead to an increase in the sales of properties to new
owners, and whether the benefits of such relief would offset the federal
government?s costs. We have not performed such

Appendix II: Actions Suggested By Program Stakeholders to Improve Mark- to-
Market Implementation

Appendix II: Actions Suggested By Program Stakeholders to Improve Mark- to-
Market Implementation

Page 39 GAO- 01- 800 Multifamily Housing

Stakeholder suggestions Background Advantages Disadvantages

would be required to pay taxes that had been deferred. assessments.

OMHAR cautioned that once owners become aware that a change in tax relief is
seriously being considered, some owners will delay restructuring decisions
in hopes of getting the benefit of any tax change.

It is unclear what actions would be taken if purchasers do not fulfill their
commitments to preserve properties as affordable housing. Ensure that
participating administrative entities provide information to tenants
affected by property restructurings in a timely manner.

Tenant representatives told us that some participating administrative
entities have not provided information to tenants as required by program
regulations.

OMHAR told us that it has discussed this issue with tenant representatives
and directly with a specific participating administrative entity alleged to
have violated the regulations.

OMHAR maintains that residents are receiving the relevant information they
need to participate in the mark- to- market process. However, tenant
organizations believe that the participating administrative entities need to
be better trained on requirements relating to tenant participation. In
response to these concerns, on June 5, 2001, OMHAR held a training session
training session that focused on, among other things, developing ways to
remove barriers to effective tenant participation in the mark- to- market
program.

Proponents believe this action would ensure that participating
administrative entities facilitate tenant participation in the mark-
tomarket process.

Would require additional efforts by OMHAR to ensure that participating
administrative entities are aware of and comply with tenant participation
requirements.

Provide property budget information to tenants. Tenant representatives told
us that

by reviewing property budgets tenants, based on their knowledge of the
buildings, may be able to identify potential savings such as opportunities
for reducing property

Tenant access to property budgets could lead to lower restructuring costs if
tenant findings result in lower property expenses or other savings.

Property budgets may contain proprietary information not normally made
available to the public.

Owner representatives

Appendix II: Actions Suggested By Program Stakeholders to Improve Mark- to-
Market Implementation

Page 40 GAO- 01- 800 Multifamily Housing

Stakeholder suggestions Background Advantages Disadvantages

expenses. Members of the expert panel were evenly divided as to whether
tenants should be given access to information on property budgets as part of
the mark- to- market process.

believe that budget information could be misinterpreted by tenants or cause
problems for the owner.

Have HUD contract with an independent third party to conduct rent
comparability studies for properties with expiring Section 8 contracts.

HUD field offices review rent comparability studies submitted by property
owners to determine if rents are above market and eligible for the mark- to-
market program.

OMHAR estimates indicate that a substantial number of properties with rents
above market are not being sent to OMHAR by the field offices for mark- to-
market review and restructuring. a

OMHAR staff, as well as some participating administrative entities, are
concerned that field office staff are not performing quality reviews of rent
comparability studies and in some cases are renewing Section 8 contracts at
above- market rents.

This action could provide additional assurance that all eligible properties
with rents above market are sent to OMHAR for restructuring.

This action could yield additional Section 8 savings by reducing rents on
properties eligible for the mark- to- market program.

An owner representative believed that property owners would be distrustful
of HUDcontracted studies. If such an approach was adopted, it was
recommended that rent comparability studies be submitted by both the owner
and by a third party. The two studies could be compared, with a process
established to reconcile any differences.

a For example, OMHAR estimated that 1,708 properties with Section 8
contracts expiring in fiscal year 2000 had rents above market and were
therefore eligible for the mark- to- market program. However, only 546
properties (32 percent) were referred to OMHAR by HUD field offices in
fiscal year 2000.

Appendix III: Comments From the Department of Housing and Urban Development
Page 41 GAO- 01- 800 Multifamily Housing

Appendix III: Comments From the Department of Housing and Urban Development

Appendix III: Comments From the Department of Housing and Urban Development
Page 42 GAO- 01- 800 Multifamily Housing

Appendix III: Comments From the Department of Housing and Urban Development
Page 43 GAO- 01- 800 Multifamily Housing

Appendix IV: Objectives, Scope, and Methodology Page 44 GAO- 01- 800
Multifamily Housing

Section 521 of the Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act, 1998 (P. L. 105-
65) requires us to review the implementation of the mark- to- market
program. Our objectives were to determine (1) the status of properties in
the mark- to- market program; (2) factors that have affected the pace of
program implementation and the actions OMHAR has taken to address these
factors; (3) the advantages and disadvantages to the federal government of
extending the program past its statutory termination date of September 30,
2001, and of transferring program responsibilities to HUD or keeping them
with OMHAR; and (4) possible actions for strengthening program
implementation.

To determine the status of the mark- to- market program, we obtained a
database extract from OMHAR?s Management Information System (MIS) as of June
15, 2001. This extract contained information on over 1,500 properties that
had entered OMHAR?s portfolio since late 1998. To determine the status of
these properties, we focused on several key stages in OMHAR?s processing
pipeline and summarized data for each milestone and type of restructuring.
Such milestones included the date a participating administrative entity
accepted assignment of the property, when the participating administrative
entity sent OMHAR a restructuring plan, the date OMHAR approved a
restructuring plan, and the completed closing date. We also calculated the
average amount of elapsed time between the major processing milestones for
both full mortgage restructurings and rent restructurings and compared the
cumulative number of full mortgage restructurings that OMHAR had closed with
the cumulative number of approved rent restructurings for each quarter
beginning with the fourth quarter of 1999. To assess the reliability of
OMHAR?s data, we (1) performed electronic testing (specifically for
accuracy, reasonableness, and completeness); (2) reviewed related
documentation, including contractor audit reports on data verification, and
(3) worked closely with agency officials to identify any data problems. When
we found discrepancies (such as nonpopulated fields or data entry errors) we
brought them to OMHAR?s attention and worked with them to correct the
discrepancies before conducting our analyses. We determined that the data
were reliable enough for the purposes of our report.

To determine the estimated savings OMHAR believes the federal government
would realize from its restructuring actions over a 20- year period, we
analyzed an Excel file created by an OMHAR contractor that calculated the
savings estimate. This file reflected all closed full restructurings and
approved rent restructurings as of June 15, 2001. We reviewed the
methodology the contractor used to compute the savings Appendix IV:
Objectives, Scope, and

Methodology

Appendix IV: Objectives, Scope, and Methodology Page 45 GAO- 01- 800
Multifamily Housing

estimate, including all financial formulas, and held discussions with OMHAR
officials. We also compared the information used in the savings calculation
with OMHAR?s source database to ensure that the data used in the savings
estimate were accurate and relevant and met with OMHAR officials to discuss
the reasons for including properties in the estimate and the associated
administrative costs of restructuring.

To obtain information on our remaining three objectives, we convened an
expert panel composed of a cross section of mark- to- market program
stakeholders representing HUD and OMHAR, participating administrative
entities, lending institutions, tenant associations, Section 8 property
owners, and nonprofit organizations. The names and organizational
affiliations of the panel members are listed in appendix V. During a daylong
meeting at our offices in Washington, D. C., the expert panelists responded
to eight questions that we provided in advance. The questions presented to
the panel covered issues related to (1) OMHAR?s actions to implement the
mark- to- market program in a timely manner, (2) advantages and
disadvantages of extending the mark- to- market program and OMHAR, and (3)
options for strengthening program implementation. After discussing each
issue, we asked the panelists to answer specific questions on an anonymous
ballot. These questions, for the most part, were closedended and allowed us
to quantify the panelists? opinions related to each issue they had
discussed. The meeting was recorded and transcribed to ensure that we had
accurately captured the panel members? statements.

In addition to convening the expert panel, we interviewed and obtained
relevant documentation from OMHAR headquarters and regional office staff,
HUD, participating administrative entities, and other program stakeholders
such as the National Council of State Housing Agencies, National Leased
Housing Association, the National Housing Trust, property owners, property
builders, and nonprofit organizations. Specifically, we obtained the views
of 10 public and 5 nonpublic participating administrative entities on
factors they believed affected the pace of program implementation. We
interviewed OMHAR officials to determine what actions the Office has taken
to address the factors cited as slowing implementation and reviewed the
incentives OMHAR developed to encourage owner participation in the program
as well as the revisions to the program?s operating procedures guide. We
also asked program stakeholders their opinions on the advantages and
disadvantages of extending the mark- to- market program and for transferring
program responsibilities to HUD. We reviewed the act that established the
mark- tomarket program to determine legislative requirements for the
termination of the program and OMHAR. We also reviewed HUD and OMHAR?s draft

Appendix IV: Objectives, Scope, and Methodology Page 46 GAO- 01- 800
Multifamily Housing

plan to transition OMHAR responsibilities to HUD when OMHAR?s authority
expires and examined OMHAR?s personnel information to determine how many
OMHAR staff would have transfer rights if program authority moves to HUD. In
determining actions for strengthening program implementation, we identified
possible actions based on discussions with various program stakeholders and
then obtained views of other stakeholders on the actions presented. We also
discussed a number of the possible actions during our expert panel.
Furthermore, we reviewed relevant documentation such as HUD procedural
notices relating to Section 8 contract renewals and rent comparability
studies.

Appendix V: Panel Participants Page 47 GAO- 01- 800 Multifamily Housing

Michael Bodaken, President, National Housing Trust Scott Chamberlain,
Assistant Vice President, GMAC Commercial Mortgage Shaun Donovan, Deputy
Assistant Secretary for Multifamily Housing Programs, U. S. Department of
Housing and Urban Development

Isha Francis, President, Benchmark Management Corporation Michael Kane,
Executive Director, National Alliance of HUD Tenants Denise Muha, Executive
Director, National Leased Housing Association Ira Peppercorn, Director,
Office of Multifamily Housing Assistance Restructuring

Garth Rieman, Director for Program Development, National Council of State
Housing Agencies

Cathy Vann, President, Ontra, Incorporated Chuck Wehrwein, Vice President of
Acquisitions, Mercy Housing Appendix V: Panel Participants

(385864)

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