Multifamily Housing: More Accessible HUD Data Could Help Efforts 
to Preserve Housing for Low-Income Tenants (23-JAN-04,		 
GAO-04-20).							 
                                                                 
The Department of Housing and Urban Development (HUD) has	 
subsidized the development of over 23,000 properties by offering 
owners favorable long-term mortgage financing or rental 	 
assistance payments in exchange for owners' commitment to house  
low-income tenants. When owners pay off mortgages--the mortgages 
"mature"--the subsidized financing ends, raising the possibility 
of rent increases. GAO was asked to determine the number of HUD  
mortgages that are scheduled to mature in the next 10 years, the 
potential impact on tenants, and what HUD and others can do to	 
keep these properties affordable.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-20						        
    ACCNO:   A09137						        
  TITLE:     Multifamily Housing: More Accessible HUD Data Could Help 
Efforts to Preserve Housing for Low-Income Tenants		 
     DATE:   01/23/2004 
  SUBJECT:   Federal aid for housing				 
	     Loan interest rates				 
	     Low income housing 				 
	     Rent subsidies					 
	     Rental housing					 
	     Mortgage programs					 
	     Rental rates					 
	     HUD Below Market Interest Rate Program		 

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GAO-04-20

United States General Accounting Office

GAO

Report to the Committee on Financial

                       Services, House of Representatives

January 2004

MULTIFAMILY HOUSING

 More Accessible HUD Data Could Help Efforts to Preserve Housing for Low-Income
                                    Tenants

                                       a

GAO-04-20

Highlights of GAO-04-20, a report to the Committee on Financial Services,
House of Representatives

The Department of Housing and Urban Development (HUD) has subsidized the
development of over 23,000 properties by offering owners favorable
long-term mortgage financing or rental assistance payments in exchange for
owners' commitment to house low-income tenants. When owners pay off
mortgages-the mortgages "mature"-the subsidized financing ends, raising
the possibility of rent increases. GAO was asked to determine the number
of HUD mortgages that are scheduled to mature in the next 10 years, the
potential impact on tenants, and what HUD and others can do to keep these
properties affordable.

To help state and local housing agencies track properties with maturing
mortgages, we recommend that the Secretary of HUD solicit the views of
state and local housing agencies to determine what information on
HUD-subsidized properties is needed and the most effective format to
convey this information.

GAO provided a draft of this report to HUD for comment. HUD agreed with
the report's conclusions and recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-20.

To view the full product, including the scope and methodology, click on
the link above.

To view the survey results (GAO-04-211SP), click on the following link
www.gao.gov/cgibin/getrpt?GAO-04-211SP. To place an order for a copy of
the CD-ROM (GAO-04-210SP) with property-level data, click on the following
link www.gao.gov/cgi-bin/ordtab.pl.

For more information, contact David G. Wood at (202) 512-8678 or
[email protected].

January 2004

MULTIFAMILY HOUSING

More Accessible HUD Data Could Help Efforts to Preserve Housing for Low-Income
Tenants

Nationwide, the HUD mortgages on 2,328 properties-21 percent of the 11,267
subsidized properties with HUD mortgages-are scheduled to mature in the
next 10 years, but among states this percentage varies significantly: from
7 percent in Alabama, to 53 percent in South Dakota. About threequarters
of these mortgages are scheduled to mature in the last 3 years of the
10-year period. A CD-ROM (GAO-04-210SP) that accompanies this report
provides property-level data for subsidized properties with mortgages
scheduled to mature.

Impacts on tenants depend on tenant protections available under program
statutes and regulations, as well as on property owners' decisions about
their properties. While about 134,000, or 57 percent, of the rental units
in the 2,328 properties are protected by rental assistance contracts,
tenants in over 101,000 units without rental assistance are at risk of
paying higher rents after mortgage maturity because no requirement exists
to protect tenants when HUD mortgages mature. Absent specific
requirements, property owners' decisions on whether to continue serving
low-income tenants after their HUD mortgages mature depend on many
factors, including neighborhood incomes, property conditions, and owners'
missions. Of the 32 properties with HUD mortgages that matured during the
past 10 years, 16 have rental assistance contracts that continue to
subsidize at least some units, and 10 of the remaining 16 that GAO was
able to contact offer rents that are affordable to tenants with incomes
below 50 percent of area median income.

HUD does not offer incentives to owners to keep properties affordable upon
mortgage maturity. While many state and local agencies GAO surveyed offer
incentives to preserve affordable housing, they have not directed them
specifically at properties where HUD mortgages mature. Most of the
agencies do not track HUD mortgage maturity dates for subsidized
properties. In addition, although HUD's Web site contains detailed
property-level data, some state and local agencies perceive that the
information is not readily available.

State and Local Agencies' Efforts to Identify and Track Properties that
May Leave HUD Programs

Does your agency identify For which circumstances does your and track when
properties agency track when properties are eligible are eligible to leave
HUD's to leave HUD's housing programs? housing programs?

                                  Source: GAO.

Contents

  Letter

Results in Brief
Background
About One-Fifth of HUD's Mortgages Are Scheduled to Mature

through 2013 Tenant Impacts Depend on Protections and Property Owners'
Decisions

Tools and Incentives Are Available to Help Keep Properties Affordable, but
Are Not Specifically Designed to Deal with HUD Mortgage Maturity

Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1 3 5

8

15

22 27 27 28

Appendixes

Appendix I:

Appendix II:

Appendix III:

Appendix IV:

Scope and Methodology

Questions from December 10, 2002, Letter from the House Committee on
Financial Services

Comments from the Department of Housing and Urban Development

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

29

33

40

43 43 43

Tables     Table 1: Subsidized Properties with HUD Mortgages by Program 
                          Scheduled to Mature through 2013                  9 
            Table 2: Subsidized Properties with HUD Mortgages Scheduled to 
                         Mature through 2013, by Rental Assistance Program 16 
            Table 3: Data for 16 Properties with Matured HUD Mortgages and 
                         without Project-Based Rental Assistance Contracts 21 
Figures Figure 1: Universe of Subsidized Properties, 2003 Figure 2: HUD  4 
                            Mortgages Scheduled to Mature Annually through 
                                        2013                                9 
           Figure 3: Subsidized Properties with HUD Mortgages Scheduled to 
                            Mature through 2013, by State                  11 
              Figure 4: Percentage of HUD-Subsidized Mortgages within Each 
                       State Scheduled to Mature through 2013              12 

Contents

Figure 5:	Expiring Rental Assistance Contracts, 2003 through 2013 13

Figure 6:	Properties with Mortgages Scheduled to Mature and/or Expiring
Long-Term Rental Assistance Contracts, 2003 through 2013 14

Figure 7:	Assisted Units in Properties with Mortgages Scheduled to Mature
and/or Expiring Long-Term Rental Assistance Contracts, 2003 through 2013
15

Figure 8: HUD Mortgages Scheduled to Mature on Properties without Rental
Assistance 18 Figure 9: State and Local Agencies' Efforts to Identify and
Track Properties That May Leave HUD Programs 26

Abbreviations

BMIR below-market interest rate
CDBG Community Development Block Grant
COSCDA Council of State Community Development Agencies
FHA Federal Housing Administration
HUD Department of Housing and Urban Development
NALHFA National Association of Local Housing Finance Agencies
NCDA National Community Development Association
NCSHA National Council of State Housing Agencies
OMHAR Office of Multifamily Housing and Restructuring
RAP Rental Assistance Payment program
REAC Real Estate Assessment Center
REMS Real Estate Management System
TRACS Tenant Rental Assistance Certification System

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

January 23, 2004

The Honorable Michael G. Oxley
Chairman
The Honorable Barney Frank
Ranking Minority Member
Committee on Financial Services
House of Representatives

Since the 1950s, the Department of Housing and Urban Development
(HUD) has subsidized about 1.7 million rental units in over 23,000
privately
owned properties that are generally affordable to low-income tenants-
those with incomes 80 percent or less of area median income. HUD
supported the development of affordable housing by offering property
owners favorable mortgage financing, long-term rental assistance
contracts, or both in exchange for owners' commitment to house low
income tenants for at least 20 years and, in some cases, up to 40 years.
However, many of these commitment periods will be completed in the next
10 years. Properties subsidized under these HUD programs represent a
significant source of housing that is currently affordable to low-income
households.

HUD programs that provide mortgage financing in subsidized properties to
private developers are known by the section of the act that authorized
them.1 We consider a property subsidized if HUD provided favorable
financing (below-market interest rate mortgages), rental assistance, or
both. They include the following programs:

o 	Section 202 Elderly and Disabled Housing Direct Loan, which provided
below-market interest rates on up to 40-year mortgages to developers of
rental housing for low-income elderly and persons with disabilities from
1959 to 1991.2 Congress changed Section 202 to a grant program in 1990;

1We refer to mortgages made under these programs simply as "HUD
mortgages."

2The start year for the mortgage financing programs reflects the year of
authorization and not necessarily the year when the programs became
operational.

o 	Section 221(d)(3) Below-Market Interest Rate (BMIR), which provided
subsidized financing on private 40-year mortgages to developers of rental
housing from 1961 to 1968;

o 	Section 236, which provided monthly subsidies to effectively reduce
interest rates on private 40-year mortgages for rental housing from 1968
to 1973;

o 	Sections 221(d)(3) and 221(d)(4), which insured private mortgages to
developers of rental housing from 1961; and

o 	Section 231, which insured private mortgages to developers of rental
housing for the elderly from 1959.

Frequently, properties that benefited from HUD mortgages were coupled with
long-term rental assistance provided under various programs, such as
project-based Section 8, Rent Supplement, and Rental Assistance Payment
(RAP) programs. (The project-based Section 8 program also provides rental
assistance to owners of properties that were not financed with HUD
mortgages.) Rental subsidy was also provided through the Section 8
Moderate Rehabilitation program, which is administered by local housing
authorities and tied to rehabilitated units. Rental assistance programs
basically pay property owners a portion of the monthly rents for units
occupied by assisted low-income tenants. Subsidized financing, rental
assistance, or a combination of both allows property owners the
opportunity to earn financial returns while limiting the rents paid by
lowincome tenants to a fixed percentage of their household incomes.

Both mortgages and rental assistance contracts are for set periods of
time, and subject to specific program provisions, properties become
eligible to leave HUD programs when mortgages mature or when HUD or owners
elect not to renew expiring rental assistance contracts. HUD mortgages
subsidized under Section 202, Section 221(d)(3) BMIR, and Section 236
restrict how much rent an owner can charge. These restrictions are
generally effective until the mortgage is paid off. Mortgages financed
under Section 221(d)(3), Section 221(d)(4), and Section 231 do not have
similar requirements. In addition, certain properties are eligible to
leave HUD programs by paying off the mortgage prior to the maturity date.

As agreed with your offices, this report provides information on (1) the
numbers and selected characteristics of HUD-subsidized rental properties
scheduled to reach mortgage maturity over the next 10 years; (2) the

potential impact on tenants when mortgages reach maturity; and (3) the
tools and incentives that HUD, the states, and localities offer owners to
keep HUD properties affordable when mortgages mature. The 10 questions
contained in your December 10, 2002, letter and summary answers are
presented in appendix II.

To address these objectives, we analyzed HUD databases, including the Real
Estate Management System (as of April 2003), to identify the
characteristics of those properties with mortgages that have already
reached maturity as well as those scheduled to reach maturity by December
31, 2013.3 We also interviewed HUD and housing industry officials and
reviewed literature on the preservation of low-income housing. Because
nationwide data on tools and incentives that can be used to preserve
affordable housing do not exist, we used a Web-based questionnaire to
survey 327 state and local housing and community development agencies to
determine what tools and incentives they use to keep HUD-subsidized
properties affordable to low-income tenants and which of the tools and
incentives they believed to be effective. We received 226 usable
responses, for a response rate of 69 percent. We reviewed statutes and
regulations, interviewed HUD officials, and obtained relevant documents to
identify tenants' protections when mortgages mature in subsidized
properties. Additional details on our scope and methodology, including
information on our survey design and participants, are discussed in
appendix I. We performed our work from January through November 2003 in
accordance with generally accepted government auditing standards.

Results in Brief	Nationwide, 21 percent (2,328) of the 11,267 subsidized
properties with HUD mortgages are scheduled to reach mortgage maturity
through 2013 (see fig.1), but among states this percentage varies
significantly: from 7 percent in Alabama, to 53 percent in South Dakota.
Nearly all of these 2,328 properties were financed under the Section 236,
Section 221(d)(3) BMIR, and Section 221(d)(3) programs, and about
three-quarters of these mortgages are scheduled to mature in the last 3
years of the 10-year period.

3To have 10 full years of data, our analysis covered the period from April
15, 2003, through December 31, 2013.

Figure 1: Universe of Subsidized Properties, 2003

Subsidized properties

Units in subsidized properties

Properties (in thousands)

Units (in millions)

25 2.0

23.051

20

15

10

5

0

         All     Subsidized  Subsidized    Units in  Units in   Units in  
                                                all            
      subsidized             properties  subsidized subsidized subsidized 
                 properties     with                           
      properties  with HUD      HUD      properties properties properties 
                             mortgages                               with 
                             scheduled               with HUD         HUD 
                 mortgages                                      mortgages 
                             to mature               mortgages scheduled  
                            through 2013                       to mature  
                                                               through    
                                                               2013       

Source: GAO analysis of HUD data.

Impacts on tenants depend in part on tenant protections available under
program statutes and regulations, as well as on owners' decisions about
their properties. No statutory requirement exists to protect tenants from
increases in rent when HUD mortgages mature, absent the existence of
rental assistance contracts or other subsidies. Without tenant protection
requirements, tenants in over 101,000 units under the Section 202, Section
221(d)(3) BMIR, and Section 236 programs that do not receive rental
assistance may have to pay higher rents or move to other housing when the
HUD mortgages on these properties mature and rent restrictions are lifted.
Further, owners are not required to notify tenants when a property's
mortgage is about to mature. In contrast, owners are required to notify
tenants by up to 1 year in advance of their intent to prepay mortgages or
opt out of the rental assistance contracts. Property owners' decisions on
whether they continue to serve low-income tenants after their HUD
mortgages mature depend on many factors, such as neighborhood incomes,

the condition of their properties, and owners' missions. During the past
10 years, HUD-insured mortgages at 32 properties reached mortgage
maturity, and the majority of these properties are still serving
low-income tenants.

HUD does not offer any tool or incentive to keep properties affordable
after HUD mortgages mature, although it does offer incentives to keep
properties affordable under certain other circumstances, such as the
expiration of rental assistance contracts or prepayment of HUD mortgages.
According to officials from the four national housing and community
development organizations we contacted, because few HUD mortgages have
matured to date, their member state and local agencies have not
experienced the need to develop programs to deal with mortgage maturity
specifically.4 However, they noted that their member agencies could offer
tools and incentives, such as loans and grants, to keep properties
affordable after mortgage maturity. Yet, over 50 percent of the state and
local agencies that responded to our survey reported that they have no
system in place to identify and track properties that may leave HUD's
programs, and about three-quarters of them did not track the maturity
dates of HUD mortgages.5

This report contains recommendations to the Secretary of HUD intended to
help state and local housing agencies gain access to useful information on
HUD-subsidized properties, including mortgage maturity dates.

Background	Prior to the early 1970s, the federal government provided
affordable multifamily housing to low-and moderate-income households by
subsidizing the production of either privately owned housing or
government-owned public housing. Under the production programs, the
subsidy is tied to the unit (project-based), and tenants benefit from
reduced rents while living in the subsidized unit. These programs include
Section

4The organizations include the National Council of State Housing Agencies
(NCSHA), which represents state housing finance agencies; the Council of
State Community Development Agencies (COSCDA), which represents state
housing and community development agencies; the National Community
Development Association (NCDA), which represents local communities that
administer federally supported programs such as Community Development
Block Grant (CDBG) and HOME; and the National Association of Local Housing
Finance Agencies (NALHFA), which represents local housing finance
agencies.

5Additional details on the results of our survey are available on the
Internet at www.gao.gov/cgi-bin/getrpt? GAO-04-211SP.

202, Section 221(d)(3) BMIR, and Section 236. A portion of the units in
properties developed under these production programs received rental
assistance under programs such as Rent Supplement, Rental Assistance
Payments (RAP), and project-based Section 8 in order to reach lowerincome
tenants.6

In the early 1970s, questions were raised about the production programs'
effectiveness: many moderate-income tenants benefited from federal
assistance, while lower-income families did not; federal costs of
producing housing exceeded the private-sector costs to produce the same
services; and allegations of waste surfaced.7 Interest in a more
cost-effective approach led Congress to explore options for using existing
housing to shelter low-income tenants. The Housing and Community
Development Act of 1974, a major overhaul of housing laws, included both
approaches-a project-based new construction and substantial rehabilitation
program and a tenant-based rent certificate program for use in existing
housing (currently named the Housing Choice Voucher program)-all referred
to as Section 8 housing. Project-based and tenant-based Section 8
assistance is targeted to tenants with incomes no greater than 80 percent
of area median income, and tenants generally pay rent equal to 30 percent
of adjusted household income.

Beginning in the late 1980s, owners of some subsidized properties began to
be eligible to leave HUD programs by prepaying their mortgages or opting
out of their project-based Section 8 rental assistance contracts. Once
these owners removed their properties from HUD programs, they were no
longer obligated to maintain low rents or accept rental assistance
payments. In response, in 1996, among other things, Congress created a
special type of voucher, known as an enhanced voucher, to protect tenants
from rent increases in these properties. Enhanced vouchers differ from
regular tenant-based housing vouchers in two ways. Enhanced vouchers may
provide a greater subsidy (that is, be used to rent more expensive units)
and give tenants a right to remain in their unit after conversion to
market rent, thus creating an obligation for the owner to accept the
voucher. So long as the rent remains reasonable, the tenant's portion of
the rent should

6HUD has converted most of the original Rent Supplement and RAP contracts
to the projectbased Section 8 program.

7For example, see U.S. Department of Housing and Urban Development,
Housing in the Seventies: A Report of the National Housing Policy Review
(Washington, D.C.: 1974).

not increase.8 If the tenant elects to move, the voucher becomes a
"regular" housing voucher and is subject to the program's standard rent
limits.

Not all property owners repay mortgages as originally scheduled. For
example, an owner may refinance the mortgage to pay for improvements to
the property. Other owners may experience financial difficulties and
default on their mortgages. From January 1993 through December 2002, for
example, HUD data show that the agency terminated the insurance on 231
mortgages. About 14 percent were due to mortgages that matured; other
reasons included owners' prepayment of the mortgage (37 percent) and
foreclosure (22 percent).

Funds provided by other federal programs can be used by states and
localities to subsidize housing for low-income tenants. The CDBG program,
authorized by the Housing and Community Development Act of 1974,
distributes grants to local and state governments for community
development activities. Rehabilitation and other housing activities now
consistently represent the largest single use of CDBG funds. Other funds
for housing production have been made available through the HOME program,
authorized by the Cranston-Gonzalez National Affordable Housing Act of
1990, which awards block grants to state and local governments primarily
for the development of affordable housing. Under the Low-Income Housing
Tax Credit Program, authorized by the Tax Reform Act of 1986, state
housing finance agencies provide tax incentives to private investors to
develop housing affordable to low-income tenants.

In addition to using their HOME and CDBG allocations as well as tax
credits, some states and localities have established housing trust funds
and other financial mechanisms, which have helped organizations acquire
subsidized properties that may leave HUD's programs. Further, the states
and localities may use other tools and incentives, such as offering
property tax relief, to encourage owners to keep serving low-income
tenants.

8There are instances where tenants could encounter problems with the
issuance and use of enhanced vouchers. These include (1) tenants having to
pay a higher security deposit, (2) tenants undergoing a rescreening for
voucher eligibility under new selection criteria- thereby disqualifying
some tenants who previously received project-based subsidies, and (3)
owners electing not to rent the unit.

About One-Fifth of HUD's Mortgages Are Scheduled to Mature through 2013

Nationwide, 21 percent (2,328) of the 11,267 subsidized properties with
HUD mortgages are scheduled to mature through 2013. The percentage varies
significantly by state: from 7 percent in Alabama, to 53 percent in South
Dakota. Nearly all of these 2,328 properties were financed under the
Section 236, Section 221(d)(3) BMIR, and Section 221(d)(3) programs, and
about three-quarters of these mortgages are scheduled to mature in the
last 3 years of the 10-year period. The remaining 79 percent of HUD's
outstanding mortgages in subsidized properties are scheduled to mature
after 2013.

Scheduled Mortgage Maturities through 2013 Vary by Year and Program

Of the 11,267 subsidized properties (containing 914,441 units) with HUD
mortgages, 21 percent (2,328 properties) have mortgages that are scheduled
to mature through 2013. The remaining 79 percent of these mortgages are
scheduled to reach maturity outside of the 10-year period. Additionally,
the bulk of these mortgages (about 75 percent) are scheduled to mature in
the latter 3 years of the 10-year period (see fig. 2). This concentration
in the latter part of the 10-year period is attributable to the 40-year
Section 221(d)(3) BMIR and Section 236 mortgages that HUD helped finance
in the late 1960s and 1970s, respectively.

       Figure 2: HUD Mortgages Scheduled to Mature Annually through 2013

Number of mortgages

             2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

                       Source: GAO analysis of HUD data.

As table 1 shows, about 57 percent of the properties with mortgages
scheduled to mature in the 10-year period were financed under Section 236,
22 percent under Section 221(d)(3) BMIR, and 19 percent under Section
221(d)(3). Section 202, Section 221(d)(4), and Section 231 accounted for
only 3 percent of these properties.

Table 1: Subsidized Properties with HUD Mortgages by Program Scheduled to
Mature through 2013

                               Financing program

Number of properties

Percentage of properties

                                  Total units

                                 Units assisted with project-based Section 8a

                            HUD subsidized mortgage

                        Section 236   1,333        57%     139,769     78,139 
                            Insured   1,333        57%     139,769     78,139 
                        Noninsuredb     0           0%      0               0 
             Section 221(d)(3) BMIR    502         22%      56,573     18,810 
                        Section 202     41          2%    3,208           871 

                         (Continued From Previous Page)

                                                          Units assisted with
                                     Number of Percentage Total project-based
                  Financing program properties of properties units Section 8a

                           HUD unsubsidized mortgage

             Section 221(d)(3)        431       19%       35,263       34,711 
             Section 221(d)(4)         14         c    1,239            1,146 
                   Section 231          7         c     598      
               Noninsured rent          d         d      d                  d 
                    supplement                                   
                         Total   2,328         100%      236,650      134,087 

Source: GAO analysis of HUD data.

aAlso included are units that receive RAP or Rent Supplement.
Project-based Section 8, however, is the dominant form of rental
assistance across all financing programs. The Section 8 Moderate
Rehabilitation program is not included in this table because HUD's
multifamily database does not track this program.

bNo mortgage was scheduled to mature in this period.

cLess than 1 percent.

dSince properties with noninsured rent supplement do not carry a HUD
mortgage, HUD does not track mortgage-level data on these properties.

Number of Mortgages The number of mortgages scheduled to mature through
2013 varies greatly Scheduled to Mature by state (see fig. 3). Although
the average is 46 per state (including the through 2013 Also Varies by
District of Columbia), the number ranges from a high of 273 maturing State
mortgages in California, to 3 in Vermont.

mortgages and another 7,666 without HUD mortgages-containing almost 1.1
million assisted units. Most of these long-term contracts are set to
expire in the near future-before the end of 2007 (see fig. 5).

Figure 5: Expiring Rental Assistance Contracts, 2003 through 2013

Number of units

300,000

250,000

200,000

150,000

100,000

50,000

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: GAO analysis of HUD data.

Note: The data only reflect long-term contract expirations and not
expected annual renewals of these contracts.

When long-term rental assistance contracts expire, HUD may renew them.
Currently, HUD generally renews expiring long-term contracts on an annual
basis but may go as long as 5 years, and in some cases, 20 years.
According to HUD, during the late 1990s, about 90 percent of the property
owners renewed their contracts, thereby continuing to provide affordable
housing. A 2001 publication by AARP reported that if past trends continue,
85 to 90 percent of contracts will be renewed.9 The extent to which the
trend continues will depend on the availability of program funding and
housing market conditions.

9AARP Public Policy Institute, Section 8 Project-Based Rental Assistance:
The Potential Loss of Affordable Federally Subsidized Housing Stock
(Washington, D.C.: February 2001).

As shown in figure 6, mortgage maturity and rental assistance contract
expiration will affect a total of 18,553 properties through 2013:

o 	505 properties will be affected by maturing mortgages only (480 of
these are not covered by rental assistance contracts, and the remaining 25
have rental assistance contracts that expire outside of our 10-year
window).

o 	1,823 properties will be affected by both events (because they have
rental assistance contracts set to expire and HUD mortgages scheduled to
mature by 2013).

o 	16,225 properties will be affected by expiring rental assistance
contracts only (8,166 of these have HUD mortgages, but the mortgages are
not scheduled to mature until after 2013).

Figure 6: Properties with Mortgages Scheduled to Mature and/or Expiring
Long-

Term Rental Assistance Contracts, 2003 through 2013

505 Maturing
HUD mortgage
only 505

Maturing HUD
mortgage and
expiring rental
assistance 1,823

Expiring rental
assistance only 16,225

18,553

2,328 (with mortgage maturity)

18,048 (with expiring rental assistance)

Note: The 18,553 properties represent about 81 percent of the 23,051
HUD-subsidized properties.

There are about 1.1 million assisted units in those properties with
mortgages maturing or rental assistance expiring in the 10-year period.
These units make up nearly 81 percent of all assisted units in HUD's
inventory. As figure 7 shows, about 48,000 units are in properties with
maturing mortgages only, about 951,400 assisted units are in properties
that

have expiring rental assistance only, and about 132,600 assisted units
(out of the approximate 188,600 total units) are in properties with both
mortgages maturing and rental assistance expiring in the 10-year period.

Figure 7: Assisted Units in Properties with Mortgages Scheduled to Mature
and/or Expiring Long-Term Rental Assistance Contracts, 2003 through 2013

48,045 Maturing
HUD mortgage
only 48,045

Maturing HUD
mortgage and
expiring rental
assistance 132,574

Expiring rental
assistance
only 951,401

1,132,020

Note: 48,045 units with maturing HUD mortgages only are not assisted.

180,619 (with mortgage maturity)

1,083,975 (with expiring rental assistance)

Tenant Impacts Depend on Protections and Property Owners' Decisions

Over the next 10 years, low-income tenants in over 101,000 units may have
to pay higher rents or move to more affordable housing when HUDsubsidized
mortgages reach maturity. This is because no statutory requirement exists
to protect tenants from increases in rent when HUD mortgages mature and
rent restrictions are lifted. Over the next 10 years, 480 subsidized
properties that do not have rental assistance contracts are scheduled to
reach mortgage maturity. Unassisted tenants in some of these properties
are at risk of not being able to afford their units if rents are raised.
The remaining 1,848 subsidized properties with HUD mortgages scheduled to
mature through 2013 have rental assistance contracts, and the protections
against rent increases offered under the rental assistance programs will
apply. However, not all units in these properties are covered by the
rental assistance contracts, thus limiting the number of tenants
protected. A number of factors may affect owners' decisions regarding the
continued affordability of their properties after mortgages mature,
including neighborhood incomes, physical condition of the property, and

owners' missions. While experience with mortgage maturity has been
limited, 16 of the 32 subsidized properties that reached mortgage maturity
in the past 10 years are still serving low-income tenants through
projectbased Section 8 rental assistance contracts. Additionally, at least
10 of the remaining properties that reached mortgage maturity over the
past 10 years are still serving low-income tenants.

HUD Does Not Offer Protection for Unassisted Tenants in Properties with
Maturing Mortgages

There is no statutory requirement for HUD to offer tenants special
protections, such as enhanced vouchers, when a HUD mortgage matures.
However, tenants who receive rental assistance in properties with maturing
mortgages would be eligible for enhanced vouchers under rental assistance
programs such as project-based Section 8.

Of the 2,328 subsidized properties with mortgages scheduled to mature
through 2013, 480-containing 45,011 units-do not have rental assistance
contracts (see table 2). While the remaining 1,848 properties are
subsidized with rental assistance, not all units within the properties are
covered. According to HUD data, about 30 percent of the units in these
properties are not covered-a total of 57,552 units with tenants who do not
receive rental assistance. Altogether then, the tenants in a total of
102,563 units are not protected under the rental assistance programs. Of
these, 101,730 units under Section 202, Section 221(d)(3) BMIR, and
Section 236 could face higher rents after mortgage maturity when the rent
restrictions under these programs are lifted.

Table 2: Subsidized Properties with HUD Mortgages Scheduled to Mature
through 2013, by Rental Assistance Program

                              Number of properties

               Rental assistance programa Financing program None

                                                       Projectbased Section 8

Rent Supplement Otherb Total

                            HUD subsidized mortgage

                         Section 236   166     1,123     40     4       1,333 
                             Insured   166     1,123     40     4       1,333 
                         Noninsuredc       0     0       0      0           0 
              Section 221(d)(3) BMIR   294      206      2      0         502 
                         Section 202      20    14       5      2          41 

(Continued From Previous Page)

Number of properties

                           Rental assistance programa

Projectbased Rent Financing program None Section 8 Supplement Otherb Total

                           HUD unsubsidized mortgage

              Section 221(d)(3)        0    403          28    0          431 
              Section 221(d)(4)        0     14           0    0    
                    Section 231        0     6            1    0    
                Noninsured rent        d     d            d       d         d 
                     supplement                                     
                          Total      480   1,766         76    6        2,328 
               Percent of total      21%    76%       3%      <1%        100% 

Source: GAO analysis of HUD data.

Note: Percentages may not add due to rounding.

aThe Section 8 Moderate Rehabilitation program is not included in this
table because HUD's multifamily database does not track this program.

bIncludes contracts for service coordinators.

cNo mortgage was scheduled to mature in this period.

dSince properties with noninsured rent supplement do not carry a HUD
mortgage, HUD does not track mortgage-level data on these properties.

These unassisted tenants are mostly housed in properties financed under
Section 221(d)(3) BMIR and Section 236 (see fig. 8). According to a HUD
study, tenants in properties with mortgages under these programs have an
average household income somewhat greater than that for tenants who
receive rental assistance; thus, they may be somewhat more able to afford
higher rents.10 Properties financed under the Section 221(d)(3) BMIR
program allow tenants with incomes of up to 95 percent of area median
income; in comparison, project-based Section 8 does not serve tenants
earning more than 80 percent of area median income.

10In a 1998 HUD study, tenants in Section 221(d)(3) BMIR units without
rental assistance had an average household income that was 83 percent
greater than that for tenants in Section 221(d)(3) BMIR units with rental
assistance. Households in Section 236 units without rental assistance had
an average household income that was 30 percent greater than that for
tenants in Section 236 units with rental assistance.

Figure 8: HUD Mortgages Scheduled to Mature on Properties without Rental
Assistance

5% Other

Section 236

Section 221(d)(3) BMIR Source: GAO analysis of HUD data.

Note: Total of 480 subsidized properties.

Tenants in units covered by a rental assistance program-there are 134,087
units in the properties with HUD mortgages scheduled to mature through
2013-will continue to benefit from affordable rents, regardless of when
the mortgage matures, as long as the rental assistance contract is in
force. If a rental assistance contract expires prior to mortgage maturity
and the owner opts not to renew it, assisted tenants would be eligible for
enhanced vouchers.

Tenants could potentially be affected by the length of time given to them
to adjust to rent increases as well as by the amount of the increase.
Property owners are not required to notify tenants when they pay off their
mortgage at mortgage maturity. In contrast, property owners electing to
prepay their mortgage or opt out of their Section 8 contract are required
to notify tenants. For example, when owners opt out of the Section 8
project-based program, they are required to notify tenants 1 year in
advance of the contract expiration. In cases where owners prepay their
mortgages under the Section 236 or Section 221(d)(3) BMIR programs,
tenants must be given notice at least 150, but not more than 270, days
prior to prepayment. Some locations have established even more stringent
notification requirements.

A Number of Factors Influence an Owner's Decision to Keep a Property
Affordable upon Mortgage Maturity

Many factors can influence an owner's decision to keep a property in the
affordable inventory or convert to market rate rents upon mortgage
maturity. For a profit-motivated owner, the decision may be influenced by
the condition of the property and the income levels in the surrounding
neighborhood. If the surrounding neighborhood has gentrified and if the
property can be upgraded at a reasonable cost, it may be more profitable
to turn the building into condominiums or rental units for higher income
tenants. If repair costs are substantial or if high-income residents are
not present in the surrounding area, it may be more profitable to leave
the property in the affordable inventory. Tools and incentives offered by
state and local agencies may also influence this decision. In addition,
because most of these owners have had the right to prepay their mortgages
and opt out of their Section 8 contracts for a number of years, the
economic factors that drive a decision to convert to market rate are not
unique to mortgage maturity.

HUD data show that nonprofit organizations own about 38 percent of the
properties with mortgages scheduled to mature in the next 10 years.11 For
a nonprofit owner, the decision would likely be motivated by cash flow
considerations since, in theory, these owners are not primarily motivated
by economic returns. Since mortgage maturity results in an improvement in
property cash flow, reaching mortgage maturity by itself would not
necessarily trigger removal from the affordable inventory. For example, at
1 of the 16 properties (nonprofit ownership) whose mortgages matured in
the past 10 years and that do not currently have project-based Section 8
assistance, the property manager told us that no longer having to pay the
mortgage left money for repairs needed to keep the units affordable for
their low-income senior tenants. Additionally, a nonprofit organization
would be more likely to keep the property affordable to low-income tenants
because to do otherwise could conflict with its basic mission of providing
affordable housing.

Another factor is the loss of the interest rate subsidy that occurs when
the mortgage matures. When interest rate subsidies were first paid to
properties built in the 1960s and 1970s, they represented substantial
assistance to property owners. Over time, inflation has substantially
reduced the value of this subsidy. For example, the average interest rate

11This is based on information in HUD's database for 2,237 of the 2,328
properties. For the remaining 91 properties (4 percent of the total),
HUD's database did not indicate the ownership type.

subsidy payment for a Section 236 property with a mortgage maturing in the
next 10 years is $66 per unit per month. The level of prices has roughly
quadrupled since 1970, so to have the same purchasing power would require
about $260 in today's dollars. Section 8 and similar project-based rental
assistance now provide the bulk of the assistance to these subsidized
properties-75 percent of the assistance versus about 25 percent that
derives from the Section 236 interest-rate subsidy. Furthermore, inflation
will continue to erode the value of the interest-rate subsidy until
mortgage maturity, while the rental assistance subsidy is adjusted
annually to account for increases in operating costs.

Most Properties with HUD Mortgages That Reached Maturity Are Offering Rent
Affordable to Low-Income Tenants

Our review of HUD's data showed that HUD-insured mortgages at 32
properties matured between January 1, 1993, and December 31, 2002.12
Sixteen of the 32 properties are still serving low-income tenants through
project-based Section 8 rental assistance contracts. For 13 of these 16
properties, the rental assistance covers 100 percent of the units (799
assisted units), and for the remaining 3 properties, it covers 54 percent
of the units (174 assisted units).

Using HUD's archived data for inactive properties, we attempted to contact
the property managers of the remaining 16 properties (consisting of 1,997
units) to determine if the properties currently offer rents affordable to
lowincome tenants. We were able to obtain rent information for 10
properties.13 We found that all 10 (none of which have project-based
rental assistance contracts) are offering rents that are affordable to
tenants with incomes below 50 percent of area median income.14 According
to HUD's database, only 2 of these properties ever had Section 8
project-based contracts, and both expired in early 2000. We could not
obtain actual tenant incomes since property managers told us that they are
not required to maintain such

12In addition, we examined the properties with mortgage insurance that
originated from 1959 through 1962. The mortgage maturity dates for these
properties had passed, but we found that only 8, or 11 percent of the 76
properties, had reached mortgage maturity.

13Of the remaining 6 properties, we did not include 2 because they are
skilled nursing facilities and do not charge traditional rents. We could
not obtain information on the others because there was insufficient
contact information in HUD's archived database with which to locate
current owners or managers, or the owners or managers who were not
required to provide us with information did not respond.

14Rent is generally considered affordable if it does not exceed 30 percent
of tenant's gross income.

information for properties without federal use restrictions. Using the
reported average rent for a 2-bedroom unit, we estimated the income needed
to afford the reported rent (that is, the income needed if no more than 30
percent of gross income would be used for rent). We then compared this
estimated income to the area's median household income for 2003. The rent
affordability percentages in table 3 express the estimated income needed
as a percentage of the area median income. Thus, numbers less than 50
indicate that the unit is affordable to households with incomes 50 percent
or less of the area median income. The available data for the 16
properties is summarized in table 3. Because of the variety of factors
that can influence owners' decisions, however, these properties are not
necessarily indicative of what will happen to other properties as their
HUD mortgages mature.

Various property managers we contacted also provided information about
their efforts to keep their properties affordable. For example, a senior
complex (nonprofit ownership) continues to generally charge residents
about 30 percent of their income for rent as they did when they were in
HUD's subsidized portfolio. According to the property manager of two of
the properties (for-profit ownership), he unsuccessfully sought incentives
from HUD in 2002 to keep the properties in the inventory when the
mortgages reached maturity, and both properties left HUD's multifamily
portfolio. However, both properties are accepting tenant-based vouchers,
and the rents in both properties are affordable to very low-income
tenants.

Table 3: Data for 16 Properties with Matured HUD Mortgages and without
Project-Based Rental Assistance Contracts

                                              Average               
                                              rent                  
                       Mortgage       Number   for 2-               
                                      of                            
            Prior FHA  maturity Total voucher bedroom          Rent 
             mortgage                                               
Property  program     date   units holders    unit affordability Ownership 

1. Section 221(d)(3) BMIR July 1998a 16 3 $500 39% For-profit

2. Section 231 August 2001 73 0 $525b 39% Nonprofit

3. Section 221(d)(3) BMIR June 2002 82 N/A N/A N/A Nonprofit

4. Section 221(d)(3) October 2002 43 0 $185 c 15% Co-op

5. Section 221(d)(4) October 1999a 32 N/A N/A N/A Limited dividendd

6. Section 221(d)(3) BMIR February 2002 103 10 $695 39% For-profit

ee

7. Section 231 July 2000 76 0 Nonprofit

8. Section 221(d)(3) BMIR April 2000 114 3 $519 29% For-profit

9. Section 221(d)(3) BMIR May 1998 15 N/A N/A N/A N/A

(Continued From Previous Page)

                                              Average               
                                              rent                  
                       Mortgage       Number   for 2-               
                                      of                            
            Prior FHA  maturity Total voucher bedroom          Rent 
             mortgage                                               
Property  program     date   units holders    unit affordability Ownership 

10. Section 221(d)(3) BMIR May 2000 477 38 $550 44% Nonprofit

11. Section 221(d)(3) BMIR April 2002 70 10 $710 40% For-profit

12. Section 221(d)(3) BMIR May 2002 135 80 $565 45% For-profit

13. Section 231 April 2002 557 61 $340b 41% Nonprofit

ee

14. Section 231 January 2001 72 0 Nonprofit

             Section 221(d)(3) BMIR June 2002 80 0 $285c 11% Co-op

16. Section 221(d)(3) BMIR November 2000 52 N/A N/A N/A N/A

Source: GAO analysis of information from property managers and HUD.

Note: N/A means not available.

aBoth of these properties also had project-based Section 8 contracts that
opted-out in early 2000.

bAverage rents for these properties are for 1-bedroom units.

cSince these are cooperatives, the rents (monthly fees) only reflect
carrying charges, which include such expenses as real estate taxes and
insurances but not any individual mortgage payments that a co-op member
may have.

dFor limited dividend owners, the distributions of income are restricted
by state law or the Federal Housing Administration (FHA) Commissioner.

eThese properties are skilled nursing facilities and do not charge
traditional rents.

Tools and Incentives Are Available to Help Keep Properties Affordable, but
Are Not Specifically Designed to Deal with HUD Mortgage Maturity

HUD does not offer any tools or incentives to keep properties affordable
after HUD mortgages mature, although it does offer incentives to maintain
affordability for properties that also have expiring rental assistance
contracts. According to officials from the four national housing and
community development organizations we contacted, because few HUD
mortgages have matured to date, their member state and local agencies have
not experienced the need to develop programs to deal with mortgage
maturity. They noted that their member agencies can offer tools and
incentives, such as loans and grants, that might be used by owners to keep
properties affordable after mortgage maturity. However, about
threequarters of the state and local agencies that responded to our survey
reported that they do not track the maturity dates on HUD mortgages, and
none provided examples of tools or incentives used to keep units
affordable after mortgage maturity.

The agencies indicated that funds available through HUD's HOME and CDBG
programs and the Low-Income Housing Tax Credit program are effective means
for preserving the affordability of HUD-subsidized housing. They also
identified financial assistance to nonprofit organizations to aid

them in acquiring HUD-subsidized properties as an effective tool. However,
over 50 percent of the agencies reported that they have no tracking system
in place to systematically identify properties that could potentially
leave HUD's affordable housing programs and thus might be candidates for
affordability preservation assistance.

HUD Does Not Offer Incentives to Keep Properties Affordable after Mortgage
Maturity

HUD does not offer property owners any specific incentive to keep
properties affordable to low-income tenants after maturity of their HUD
mortgages. During the 1990s, HUD established incentive programs to deal
with the loss of affordable units because owners were prepaying their
mortgages and opting out of their Section 8 contracts. These incentives
are as follows:

o 	Mark-up-to-Market allows owners to increase the rents for units
subsidized under the project-based Section 8 rental assistance program up
to market levels in exchange for keeping the units in the Section 8
inventory for a minimum of 5 years.

o 	Section 236 Decoupling can be activated when the owner prepays a
Section 236 mortgage and obtains conventional financing. By agreeing to
keep the property affordable for at least another 5 years beyond the
original term of the mortgage, owners can keep the interest rate reduction
payments that they were receiving when they had a HUDfinanced mortgage.

o 	Section 202 Prepayments allow owners to prepay their HUD loans and
obtain other financing, but they must keep the affordability use
restriction until the maturity date of the original loan.

These incentives do not directly address the termination of the
affordability requirements resulting from mortgage maturity. Rather, they
can extend, under certain circumstances, the affordability period beyond
the original term of the mortgage, as in the Section 236 Decoupling
incentive, or allow property owners to be better positioned financially to
continue providing affordable housing, as in the case of Section 202
Prepayments and Mark-upto-Market.

State and Local Agencies Identified Tools and Incentives to Preserve
Affordable Housing, but Not Specifically for Covering Mortgage Maturity

The 226 state and local agencies that responded to our survey commented on
the effectiveness of 18 tools and incentives as a mean to preserve HUD's
affordable rental housing. Of the 18, 6 were funded directly by the
federal government, while 12 were administered by state and local
governments and were not directly federally funded. However, there was no
evidence that they have been used to protect properties when HUD mortgages
mature. This may be because relatively few mortgages have matured to date.

State and local tools and incentives include housing trust funds used to
make loans and grants, financial assistance to nonprofit organizations to
aid them in acquiring HUD-subsidized properties, and property tax relief
to owners of HUD-subsidized properties. These state and local agencies
identified several incentives that they believe are the most effective in
preserving the affordability of housing for low-income tenants. For
example, over 60 percent of the 62 state agencies that responded
identified the 4 percent tax credit and HOME programs as effective means
for preserving the affordability of HUD-subsidized properties. Of the 76
local agencies that responded, over 70 percent identified HOME as
effective, and over 60 percent identified CDBG as effective.15

Fewer Than Half of State and Local Agencies Identify and Track Properties
That May Leave HUD Programs

Over 50 percent of the survey respondents reported that they have no
system in place to identify and track properties in their states or
localities that could leave HUD's subsidized housing programs. Further,
about threequarters reported that they do not track the maturity dates of
HUD mortgages. Awareness of the potential for a HUD mortgage to mature or
rental assistance to end does not guarantee that state or local agencies
will take action to preserve the assisted units' affordability to
low-income tenants. However, knowing when properties will be eligible to
leave HUD's programs could better position state and local agencies to use
available tools and incentives at mortgage maturity. Several respondents
to our survey noted that it would be helpful to them if HUD could provide
information about properties that might leave HUD's programs. Their
comments included the following:

15Additional details on the results of our survey are available on the
Internet at www.gao.gov/cgi-bin/getrpt? GAO-04-211SP.

o 	"It would be helpful if HUD would provide local governments periodic
reports on the status of HUD properties in the locality."

o 	"I believe a lot of CDBG entitlement agencies would be willing to track
properties that could leave HUD's affordable housing programs if HUD would
provide them with a listing of the properties."16

o 	"Communication between project-based property owners, HUD, and local
public housing authorities is not very effective."

Of the 102 agencies that indicated they identified and tracked properties,
56 (55 percent) said that they monitored the scheduled maturity dates of
HUD mortgages on local properties (see fig. 9). More agencies (82 or 80
percent) reported that they identified and tracked properties that might
opt out of HUD project-based rental assistance contracts.

16"Entitlement agencies" refers to agencies in entitlement communities
that are eligible to receive CDBG funding. These communities must meet
certain population thresholds and must develop their own programs and
plans, with priority given to low- and moderateincome persons.

  Figure 9: State and Local Agencies' Efforts to Identify and Track Properties
                          That May Leave HUD Programs

Source: GAO.

Note: "Extended use expiration" refers to the expiration of the
use-agreement period, when owners must continue to keep their tax credit
properties affordable to low-income tenants after the initial 15year
affordability period required by the Internal Revenue Code has ended. The
length of this extended period of affordability is 15 years or more,
depending on individual state requirements.

HUD officials noted that they make property-level information available to
the public on HUD's multifamily housing Web site.17 This Web site contains
detailed property-level data on active HUD-insured mortgages and expiring
rental assistance contracts.18 However, according to our survey, some
state and local agencies perceive that the information is not readily
available. One problem may be that these data are in a format that may not
be sufficiently "user-friendly" for these agencies. The data must be
accessed using database software, which requires users to be proficient in
these types of software.

HUD officials agreed that the agency could provide more "user friendly"
information because the data are not as accessible to state and local

17See www.hud.gov/offices/hsg/mfh/mfdata.cfm.

18Since only insured mortgages are included in this database, direct loans
under the Section 202 program are not included.

agencies as they could be. They also noted that these agencies could
benefit from a "watch list" that identifies properties that may leave HUD
subsidy programs in their jurisdictions, such as upon mortgage maturity,
especially if such data were updated annually and readily available online
so that agencies would have the information needed to prioritize and fund
efforts to preserve low-income housing in their jurisdictions.

Conclusions	HUD's rental housing programs have developed subsidized
properties for low- and moderate-income tenants that carry rent
affordability requirements for a fixed period. As a result, HUD has
focused on keeping these properties affordable for at least that period,
and its tools and incentives have mainly addressed mortgage prepayments
and rental assistance contract expiration, not mortgage maturity. While a
share of the properties with HUD mortgages are scheduled to reach maturity
over the next 10 years, it is uncertain how many of these properties will
attempt to convert to market-rate housing and raise rents, making the
units in these properties unaffordable for many tenants. While state and
local agencies might be able to play an important role in maintaining the
affordability of properties eligible to leave HUD programs because of
mortgage maturity or other reasons, these agencies need to know in advance
which properties are eligible to leave HUD's programs, and when, in order
to use tools and incentives that can help keep the properties affordable.
Even though HUD makes property-level data available to the public on its
Web site, state and local agency responses to our survey suggest that HUD
data may not be as readily accessible, and therefore as useful, as they
could be. HUD officials responsible for maintaining the data on the
subsidized properties agreed.

Recommendations for Executive Action

To help state and local housing agencies track HUD-subsidized properties
that may leave HUD's programs upon mortgage maturity or for other reasons,
we recommend that the Secretary of HUD solicit the views of state and
local agencies to determine (1) the specific information concerning
HUD-subsidized properties that would be most useful to their affordability
preservation efforts and (2) the most effective format for making this
information available, and then use the results to modify the current
means of conveying the data on these properties to make the data more
widely available and useful.

Agency Comments and Our Evaluation

We provided a draft of this report to HUD for its review and comment. In a
letter from the Assistant Secretary for Housing (see app. III), HUD agreed
with the report's findings, conclusions, and recommendations. HUD also
noted that while it believes that a wide array of public and private
entities concerned about preserving the affordable housing stock are using
the databases currently available through HUD's Web site, it could improve
the format and modify the current means of conveying the data on these
properties to make the data more readily available. In its letter, HUD
also provided technical comments, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the
report date. At that time, we will send copies of this report to
interested
Members of Congress and congressional committees. We also will send
copies to the Secretary of the Department of Housing and Urban
Development and the Director of the Office of Management and Budget and
make copies available to others upon request. The report will be available
at no charge on the GAO Web site at http://www.gao.gov. A CD-ROM (GAO
04-210SP), which includes property-level data for subsidized properties
with mortgages scheduled to mature or expiring rental assistance
contracts, will accompany this report and can be ordered at
www.gao.gov/cgi-bin/ordtab.pl. The results of our survey of state and
local
agencies (GAO-04-211SP) will also be available on the GAO Web site at
www.gao.gov/cgi-bin/getrpt?GAO-04-211SP.

Please contact me at (202) 512-8678, or Andy Finkel at (202) 512-6765, if
you or your staff have any questions concerning this report. Key
contributors to this report are listed in appendix IV.

David G. Wood
Director, Financial Markets and

Community Investment

Appendix I

Scope and Methodology

To develop a state-by-state inventory of multifamily properties with HUD
mortgages scheduled to mature and to identify the properties'
characteristics, we analyzed and combined information from several HUD
databases. We used data from HUD's Real Estate Management System (REMS),
which contains information on active properties in Datamart, as well as
from the Tenant Rental Assistance Certification System (TRACS), which
contains information on Section 8 contracts. We also incorporated data
from HUD's Real Estate Assessment Center (REAC) and-through the Office of
Multifamily Housing and Restructuring (OMHAR)-data from the Annual
Financial Statements submitted to HUD by property owners. To ensure the
HUD data were reliable, we performed internal checks to determine (1) the
extent to which the data were complete and accurate, (2) the
reasonableness of the values contained in the data fields, and (3) whether
any data limitations existed in the data we relied upon to do our work.
Based on our reliability assessment, we concluded that the data were
reliable for purposes of this report. The data obtained from HUD are as of
April 15, 2003. To have 10 full years of data, our analysis covered the
period from April 15, 2003, through December 31, 2013.

For the properties with existing HUD mortgages, we identified those that
also have project-based rental assistance contracts. We then separately
identified properties that do not have HUD mortgages, but have
projectbased rental assistance contracts that are also due to expire
through 2013. To obtain occupancy data relating to the individual
properties, we used the system containing the financial statements that
are prepared and submitted annually to HUD by property owners. For each
property, we obtained the following information:

o  property identification number,

o  property name,

o  address,

o city,

o  state,

o  zip code,

o  metropolitan area,

Appendix I
Scope and Methodology

o  congressional district,

o  total number of units,

o  total number of assisted units,

o  name of HUD financing program,

o  property category,

o  mortgage maturity date,

o  name of rental assistance program,

o  rental assistance expiration date,

o  number of rental assistance contracts,

o  rental assistance contract status,

o  type of client (tenant) served,

o  type of property ownership,

o  economic occupancy rate,

o  subsidy utilization rate, and

o  property inspection score (REAC score).

We also used HUD's database to identify properties whose mortgages have
matured over the last 10 years. To determine how many properties are still
serving low-income tenants, we first identified those that are covered by
rental assistance contracts. For 14 of the 16 properties without current
rental assistance contracts, we obtained contact information from HUD's
archived database (the database did not have sufficient complete
information on the other 2). We then contacted these properties via
telephone to determine if the management was still serving low-income
tenants.

We reviewed HUD regulations to determine the potential impact on tenants
when HUD mortgages mature. In particular, we reviewed the eligibility of

Appendix I
Scope and Methodology

tenants to receive enhanced vouchers and other protections against
increases in rents when properties leave HUD's programs. We discussed
these regulations with appropriate HUD officials and also requested that
HUD identify protections available to tenants under the various housing
programs.

To identify the incentives that HUD, the states, and localities could
offer owners under existing laws and regulations, we interviewed HUD,
state, and local officials and reviewed available literature. Because
there are no nationwide data available on the utilization of tools and
incentives at the state and local level and no single agency is
responsible for administrating the various incentives for any state, we
surveyed state and local housing and community development agencies via
the Internet. We identified the survey participants through lists provided
by four national housing industry organizations. Specifically, we surveyed
members of the National Council of State Housing Agencies (NCSHA), which
represents state housing finance agencies; the Council of State Community
Development Agencies (COSCDA), which represents state housing and
community development agencies; the National Community Development
Association (NCDA), which represents local communities that administer
federally supported programs such as CDBG and HOME; and the National
Association of Local Housing Finance Agencies (NALHFA), which represents
local housing finance agencies. The survey covered (1) their experiences
in preserving affordable housing, (2) the incentives used and their
effectiveness, and (3) the extent to which they identify and track
properties that could leave HUD's programs.

In developing the survey, we met with officials at the four national
organizations to gain a better understanding of the issues and modified
our questions based on their comments. We then pretested with several
state and local agencies throughout the country, such as the Department of
Community Development in Amarillo, Texas; the Department of Neighborhood
Development in Boston, Massachusetts; and the Ohio Housing Finance Agency.
During these pretests, we observed the officials as they filled out the
survey over the Internet. After completing the pretest survey, we
interviewed the respondents to ensure that (1) the questions were clear
and unambiguous, (2) the terms we used were precise, (3) the survey did
not place an undue burden on the agency officials completing it, and (4)
the survey was independent and unbiased. On the basis of the feedback from
the pretests, we modified the questions as appropriate. Information about
accessing the survey was provided to a contact person at each of 327 state
and local housing and community development

Appendix I
Scope and Methodology

agencies in 50 states, the District of Columbia, and Puerto Rico. The
survey was activated on May 12, 2003; it was available until September 5,
2003. To ensure security and data integrity, we provided each agency with
a password to access and complete the survey.

We originally included 373 potential respondents in our survey, but
eliminated 46 for various reasons, including those agencies having no
authority over affordable housing and those with no HUD properties in
their jurisdictions. As a result, 327 potential respondents remained-46
from NCSHA, 65 from COSCDA, 130 from NCDA, and 86 from NALHFA. From the
327, we obtained 226 usable responses-38 from NCSHA, 47 from COSCDA, 83
from NCDA, and 58 from NALHFA-for an overall response rate of 69 percent.

Appendix II

Questions from December 10, 2002, Letter from the House Committee on
Financial Services

We would like the following questions answered in this General Accounting
Office report:

1.	This letter includes a list of the privately owned, publicly assisted
multifamily housing mortgage programs.

o  221(d)(3)

o  Market rate with rent supplement

o 	Below Market Rate Interest Rates (BMIR) with rent supplement or section
8

o  236:

o  Insured and Noninsured

o  Rental Assistance Projects (RAP)

o  Rent Supplement

o  Section 8

o  221(d)(4) with all or partial Section 8

o  202s with rent supplement or Section 8

o  231s with rent supplement

o 	Section 8 moderate rehabilitation (not funded through HUD, maybe PHA)

o 	Noninsured rent supplement projects (12 projects only in NY and
Minnesota)

Please update the list if there are other programs that should have been
included and include any omitted programs in your answers to the other
questions requested in this report.

We did not identify any programs to add to the list. The report
encompasses all of these programs with the following exceptions: (1) HUD
does not collect mortgage information on noninsured rent supplement
properties

Appendix II
Questions from December 10, 2002, Letter
from the House Committee on Financial
Services

because the properties do not use HUD financing. HUD does have data on the
rent supplement contracts alone, which we included in the CD-ROM; (2)
Section 8 Moderate Rehabilitation properties are excluded because HUD does
not track these properties in its multifamily database and maintains no
aggregate data on properties in the program.

2.	What is the potential impact on the renewal of those Section 8
contracts in projects where FHA mortgages mature, the principal is paid
off entirely, and the affordability restrictions attendant to the
mortgages expire?

The impact of a matured HUD mortgage, by itself, on an owner's decision to
renew a Section 8 contract is uncertain because there are a number of
other factors that can affect the decision. For a profit-motivated owner,
the decision to renew would likely be influenced by the condition of the
property and the income levels in the surrounding neighborhood. If the
surrounding neighborhood has gentrified and if the property can be
upgraded at a reasonable cost, it may be more profitable to turn the
building into condominiums or rental units for higher income tenants. If
repair costs are substantial or if high-income residents are not living in
the surrounding area, it may be more profitable to keep the property in
the affordable inventory by renewing the Section 8 contract. Tools and
incentives offered by HUD, state, and local agencies may also influence
these decisions.

For a nonprofit owner, the decision would likely be motivated largely by
cash flow considerations since, in theory, these owners are not primarily
motivated by economic returns. HUD data show that nonprofit organizations
own about 36 percent of the properties with mortgages scheduled to mature
in the next 10 years. Since mortgage maturity results in an improvement in
property cash flow, reaching mortgage maturity would not by itself
necessarily trigger removal from the affordable inventory. Additionally, a
nonprofit organization would be more likely to keep the property
affordable to low-income tenants because to do otherwise would conflict
with its basic mission of providing affordable housing. Thus, nonprofit
owners would likely continue to renew Section 8 contracts.

3.	We request an inventory, in chart form, of all the units that will
reach maturity in the next 10 years. The inventory should include:

o  Property name, city, and state

Appendix II
Questions from December 10, 2002, Letter
from the House Committee on Financial
Services

o  Property MSA (metropolitan statistical area)

o  Month and year of mortgage maturity

o  Type of multifamily program for each development

o  Number of units for each development

o  Expiration date of Section 8 contract for each development (if any)

o  Contract status of Section 8 contract for each development (if any)

o  Number of section 8 units for each development (if any)

o 	Total number of units covered under each of the programs and their
location by state

o  Total number of units for all developments

o  Total number of units that are occupied

o  Total number of section 8 units

o  Type of families housed, i.e. families, elderly, etc.

o  Whether the unit is owned by a profit or nonprofit organization

All the data elements cited above are included in the CD-ROM that
accompanies this report. Data on property inspection scores, subsidy
utilization rates, street addresses, and the congressional district in
which the property is located are also included.

4.	What will happen to the units and hence the families occupying the
units once the mortgages expire? What rights, if any, do these tenants
have regarding their rent costs subsequent to the expiration of the
mortgage term and pay off of the entire mortgage principal?

Provided there is no other subsidy, owners of properties whose
HUDsubsidized mortgages have matured are generally no longer required to
charge reduced rents to tenants that meet HUD's income limits, and the
tenants do not have any rights or protections. Depending on the owner's
decision, tenants could face higher rents and, if they were unable to
afford

Appendix II
Questions from December 10, 2002, Letter
from the House Committee on Financial
Services

them, would have to move. However, if the units are covered by a rental
assistance contract, the tenants would not be affected by the mortgage
maturity. As long as the rental assistance is in force, these tenants
would continue to benefit from subsidized rents.

5.	Under existing laws and regulations, are there Federal government
incentives that HUD could offer the owners of the multifamily housing
developments to keep properties affordable upon maturity of the FHA
mortgage and pay off the principal? Under existing law and regulations,
what types of incentives are available for each state and the District of
Columbia that could be made available to the owners of the multifamily
housing developments? Have they been successful?

HUD does not offer property owners any specific incentive to keep
properties affordable to low-income tenants after maturity of their HUD
mortgage. During the 1990s, HUD established incentive programs to deal
with the loss of affordable units because owners were prepaying their
mortgages and opting out of their Section 8 contracts. These incentives
include the Mark-up-to-Market program, Section 236 Decoupling, and Section
202 Prepayments. These incentives do not directly address the termination
of the affordability requirements resulting from mortgage maturity.
Rather, they can extend, under certain circumstances, the affordability
period beyond the original term of the mortgage, as in the Section 236
Decoupling incentive, or allow property owners to be better positioned
financially to continue providing affordable housing, as in the case of
Section 202 Prepayments and Mark-up-to-Market.

State and local agencies identified tools and incentives to preserve
affordable housing, but not specifically for addressing maturing HUD
mortgages. The 226 state and local agencies that responded to our survey
commented on the effectiveness of 18 tools and incentives as a mean to
preserve HUD's affordable rental housing. Of the 18, 6 were funded
directly by the federal government, while 12 were administered by state
and local governments and were not directly federally funded. However,
there was no evidence that they have been used to protect properties when
HUD mortgages mature. This may be because relatively few mortgages have
matured to date.

6.	What are the possible effects if the Section 8 contract maturity date
is shorter than the FHA mortgage maturity date?

Appendix II
Questions from December 10, 2002, Letter
from the House Committee on Financial
Services

The effects depend largely on the owner's decision about the future use of
the property. As noted in our response to question 2, an owner's decision
to renew a Section 8 contract can be influenced by a number of factors,
such as neighborhood incomes, the condition of the property, and owner's
mission. Consideration of these factors would likely also apply to
properties where the Section 8 contract expiration date is earlier than
the scheduled maturity date on the HUD mortgage.

When mortgage maturity is imminent, an owner may also consider what the
impact of losing the interest rate subsidy as well as paying off the HUD
mortgage will be on the property's cash flow. When interest rate subsidies
were first paid to properties built in the 1960s and 1970s, they
represented substantial assistance to property owners. Over time,
inflation has substantially reduced the value of this subsidy relative to
the rental assistance subsidy, which is adjusted annually to account for
increases in operating costs. Project-based rental assistance now provides
the bulk of the assistance to these subsidized properties. Therefore, it
is possible that, under certain circumstances, such as where a surrounding
neighborhood has gentrified and the property can be upgraded at a
reasonable cost, a forprofit owner may decide to forgo the remaining
interest rate subsidy payments and prepay the mortgage at the time the
project-based contract expires. However, because most owners have had the
right to prepay mortgages and opt out of their Section 8 contracts for a
number of years, the economic factors that drive the decision to convert
to market rate when mortgages mature are no different than in the past.

From the tenant's perspective, if the owner elects to enter into a new
Section 8 contract, the tenants in assisted units will be protected for
the duration of the contract. If the owner elects not to enter into a new
Section 8 contract with or without prepaying the mortgage, the tenants in
the units that previously received rental assistance would receive
enhanced vouchers. Enhanced vouchers give the tenants the right to stay in
their units and generally protect them from rent increases in the
properties after the Section 8 contract expires, regardless of the
maturity date of the HUD mortgage.

7.	For those mortgages that have reached mortgage maturity or are soon to
do so, what actions, if any, have been taken by state, local, or other
bodies to ensure that affordability has been maintained after the FHA
mortgages are extinguished or are about to be paid off in their entirety?
Have the efforts been successful?

Appendix II
Questions from December 10, 2002, Letter
from the House Committee on Financial
Services

According to officials from the four national housing and community
development organizations we contacted, because relatively few HUD
mortgages have matured to date, their member state and local agencies have
not experienced the need to deal with mortgage maturity. They noted that
their member agencies can offer tools and incentives, such as loans and
grants, to owners to keep properties affordable after mortgage maturity.
However, about three-quarters of the state and local agencies that
responded to our survey reported that they do not track the maturity dates
on HUD mortgages, and none provided examples of tools or incentives used
specifically to keep units affordable after mortgage maturity.

8.	Please provide data on how many units/developments have already reached
mortgage maturity, the current status of those units/developments, and
whether those units/developments are still serving low-income families.

Our review of HUD's data showed that HUD-insured mortgages at 32
properties matured between January 1, 1993, and December 31, 2002. Sixteen
of the 32 properties are still serving low-income tenants through
project-based Section 8 rental assistance contracts. For 13 of these 16
properties, the rental assistance covers 100 percent of the units (799
assisted units), and for the remaining 3 properties, it covers 54 percent
of the units (174 assisted units).

Using HUD's archived data for inactive properties, we attempted to contact
the property managers of the remaining 16 properties (consisting of 1,997
units) to determine if the properties currently serve low-income tenants.
We were able to obtain rent information for 10 properties.1 We found that
all 10 (none of which have project-based rental assistance contracts) are
still primarily serving low-income tenants and that the current rents are
affordable to tenants with incomes below 50 percent of area median income.
According to HUD's database, only 2 of these properties ever had Section 8
project-based contracts, and both expired in early 2000. We could not
obtain actual tenant incomes since property managers told us that they are
not required to maintain such information for properties without federal
use restrictions.

1Of the remaining 6 properties, we did not include 2 because they are
skilled nursing facilities and do not charge traditional rents. We could
not obtain information on the others because there was insufficient
contact information in HUD's archived database with which to locate
current owners or managers, or the owners or managers who were not
required to provide us with information did not respond.

Appendix II
Questions from December 10, 2002, Letter
from the House Committee on Financial
Services

9.	The provision of enhanced vouchers does not currently apply to Section
236 or Section 221 (d) (3) mortgages that mature. What is the impact on
the current tenant population upon mortgage maturity?

There is no statutory requirement for HUD to offer tenants special
protections, such as enhanced vouchers, when a HUD mortgage matures.
However, tenants who receive rental assistance in properties with maturing
Section 236 or Section 221(d)(3) mortgages would be eligible for enhanced
vouchers under rental assistance programs, such as project-based Section

8. Depending on property owners' decisions, tenants in these properties
who do not receive rental assistance could face higher, possibly
unaffordable, rents.

10. What recommendations does GAO propose to address or alleviate the
potential loss of affordable housing arising from FHA mortgage
maturations?

Awareness of the potential for a HUD mortgage to mature, while not a
guarantee of action, could help state or local agencies' ability to use
available tools or incentives for preserving properties' affordability to
lowincome tenants. Therefore, to help state and local housing agencies
track HUD-subsidized properties that may leave HUD's programs upon
mortgage maturity or for other reasons, we are recommending that the
Secretary of HUD solicit the views of state and local agencies to
determine (1) the specific information concerning HUD-subsidized
properties that would be most useful to their affordability preservation
efforts and (2) the most effective format for making this information
available, and then use the results to modify the current means of
conveying the data on these properties to make the data more readily
available.

Appendix III

Comments from the Department of Housing and Urban Development

Appendix III
Comments from the Department of Housing
and Urban Development

Appendix III
Comments from the Department of Housing
and Urban Development

Appendix IV

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Andy Finkel (202) 512-6765 Rich LaMore (617) 788-0571

Staff 	In addition to those named above, Mark Egger, Daniel Garcia-Diaz,
Nadine Garrick, Curtis Groves, Austin Kelly, John McDonough, John McGrail,

Acknowledgments	Luann Moy, Barbara Roesmann, William Sparling, Thomas
Taydus, and James Vitarello made key contributions to this report.

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