Multifamily Housing: HUD's Restructuring Office's Actions to Implement
the Mark-to-Market Program (Letter Report, 01/20/2000, GAO/RCED-00-21).

Pursuant to a congressional request, GAO reviewed the development of the
Office of Multifamily Housing Assistance Restructuring's (OMHAR)
mark-to-market program and the relationship between OMHAR and other
Department of Housing and Urban Development's (HUD) offices, focusing
on: (1) OMHAR's progress in obtaining staffing resources to implement
the program; (2) the status of OMHAR's progress on seven actions that
are integral to the program's successful implementation; (3) whether
OMHAR has implemented nine statutory requirements in accordance with the
act; (4) the extent to which HUD management is involved in directing,
reviewing, and approving OMHAR's operations; (5) whether OMHAR's
Director has complied with the legislative requirements to report to
congressional committees if actions by HUD's Secretary interfere with
the Office's ability to carry out the mark-to-market program; and (6)
whether the other HUD offices from which OMHAR must obtain support have
provided the support requested.

GAO noted that: (1) although OMHAR's organizational and staffing plans
have been finalized, they have not been fully implemented; (2) as of
December 13, 1999, OMHAR had on board 64 of the 75 staff that it had the
authority to employ in fiscal year (FY) 1999; (3) OMHAR officials
attributed the delay in reaching the authorized staffing level in FY
1999 to the normal difficulties associated with staffing an entire
office and noted that HUD had taken steps to expedite the hiring
process, such as providing OMHAR with priority on all of its personnel
actions; (4) OMHAR planned to increase its staffing level to 101
employees in FY 2000; (5) however, language in the Senate Committee
report accompanying the FY 2000 HUD appropriations act directed HUD to
limit OMHAR to a staffing level of 50 employees until the Office
provided the Committee with adequate justification for its staffing
needs; (6) recognizing the implications of the report's language, OMHAR
plans to provide additional information on its organization and staffing
to Congress to justify the need for additional staff; (7) as of December
1999, OMHAR had completed action on 5 of the 7 key aspects of the
program's implementation that GAO reviewed and was taking action on the
remaining two; (8) while it has not completed the actions in accordance
with the original schedules the Office had developed for completing
them, OMHAR officials believe that the slippages did not have much of a
practical effect on the program's implementation because the Office did
not begin to receive a large volume of projects to assign for
restructuring until the spring of 1999; (9) the steps that OMHAR has
taken thus far on the nine key statutory requirements that GAO reviewed
are generally consistent with the act's requirement; (10) however, given
the early stage of the program's implementation, OMHAR's actions for
some of these requirements have been limited primarily to establishing
program procedures in the mark-to-market regulations and in the
operating procedures guide; (11) it is to soon for GAO to determine
whether the actual implementation of the procedures will be in
accordance with statutory requirements; (12) the actions and the
functions of the OMHAR Director are subject to the review and the
approval of the HUD Secretary; (13) concerning the legislative
requirement that the Director of OMHAR report any interference by the
HUD Secretary to Congress, the Director told GAO that there has been no
encounters of the HUD Secretary interfering with OMHAR's activities; and
(14) OMHAR officials believe that HUD's other offices have provided the
support necessary to meet OMHAR's operational needs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-00-21
     TITLE:  Multifamily Housing: HUD's Restructuring Office's Actions
	     to Implement the Mark-to-Market Program
      DATE:  01/20/2000
   SUBJECT:  Housing programs
	     Mortgage programs
	     Federal aid for housing
	     Low income housing
	     Interagency relations
	     Rental rates
	     Human resources utilization
	     Reporting requirements
	     Reengineering (management)
	     Program management
IDENTIFIER:  HUD Mark to Market Program
	     HUD Section 8 Housing Assistance Program
	     HUD Insured Section 8 Multifamily Rental Housing Portfolio

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Report to Congressional Committees

January 2000

MULTIFAMILY HOUSING

HUD's Restructuring Office's Actions to Implement the Mark-to-Market
Program
*****************

*****************

GAO/RCED-00-21

Letter                                                                     3

Appendixes

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

                                                                         26

Appendix II:Summary and Status of Seven Key Actions Needed to Implement
the Mark-to-Market Program

                                                                         29

Appendix III:OMHAR's Implementation of Eight Other Key Statutory
Requirements

                                                                         32

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

                                                                         39

Appendix V:Objectives, Scope, and Methodology

                                                                         43

Appendix VI:GAO Contacts and Staff Acknowledgments

                                                                         45

Figure 1:  Number of OMHAR Staff Planned and Number of Staff
On Board, December 13, 1999                     10

FDIC    Federal Deposit Insurance Corporation

FHA     Federal Housing Administration

GAO     General Accounting Office

HUD     Department of Housing and Urban Development

NCSHA   National Council of State Housing Agencies

OMHAR   Office of Multifamily Housing Assistance Restructuring

                                                 Resources, Community, and 
                                              Economic Development Division

B-282631

January 20, 2000

Congressional Committees

The Office of Multifamily Housing Assistance Restructuring (OMHAR) was
established within the Department of Housing and Urban Development (HUD)
by the Departments of Veterans Affairs and Housing and Urban Development
and Independent Agencies Appropriations Act of 1998./Footnote1/ The Office
was created to administer the "mark-to-market" program, which was also
authorized by the act. This program provides the framework to restructure
HUD's portfolio of insured Section 8 multifamily housing projects by
"marking" (resetting) rents to market levels and reducing mortgage debt,
if necessary, to permit a positive cash flow./Footnote2/ Without
restructuring, rents for many of the insured Section 8 multifamily housing
projects substantially exceed market levels, resulting in higher subsidies
under the Section 8 program. HUD received $3.8 billion in budget authority
for Section 8 project-based subsidies in fiscal year 1998 and an estimated
$4.1 billion in fiscal year 1999./Footnote3/

The act requires us to audit OMHAR's operations annually during the first
2 fiscal years following the date of enactment. Our initial report, issued
in October 1998, described the status of the Office's development,
including its preliminary organization and staffing plans, its progress in
meeting key operational requirements for implementing the mark-to-market
program, and its planned procedures and systems for overseeing the
program's implementation./Footnote4/ As agreed with the responsible
subcommittees of the Senate and House Appropriations and Banking
Committees, this second report focuses on the steps that OMHAR has taken
to implement the mark-to-market program. Specifically, it discusses (1)
OMHAR's progress in obtaining the staffing resources to implement the
program, (2) the status of OMHAR's progress on seven actions that are
integral to the program's successful implementation, and (3) whether OMHAR
has implemented nine statutory requirements in accordance with the act. We
are also reporting on the relationship between OMHAR and other HUD
offices, including (1) the extent to which HUD management is involved in
directing, reviewing, and approving OMHAR's activities and how this
involvement has affected OMHAR's operations; (2) whether OMHAR's Director
has complied with the legislative requirements to report to congressional
committees if actions by HUD's Secretary interfere with the Office's
ability to carry out the mark-to-market program; and (3) whether the other
HUD offices from which OMHAR must obtain support have provided the support
requested. 

The seven actions we reviewed to assess OMHAR's progress in implementing
the mark-to-market program were ones we had reviewed for our initial
report on OMHAR. These actions included issuing interim and final
regulations, developing an operating procedures guide (a manual that sets
forth a uniform process to complete work under the program), and selecting
organizations (referred to as participating administrative entities) to
restructure projects on behalf of OMHAR. The nine statutory requirements
that we reviewed to assess whether OMHAR implemented the program in
accordance with the act were selected because they were discussed not only
in the act but also in congressional debate and the act's accompanying
conference report (H.R. 105-297). These requirements included determining
market rents and obtaining the tenants' participation in the restructuring
process. The actions and the statutory requirements that we reviewed are
discussed in the body of the report and in appendixes II and III. We
conducted our review from April through December 1999 in accordance with
generally accepted government auditing standards. (See app. V for a
discussion of our scope and methodology.) 

Results in Brief

Although OMHAR's organizational and staffing plans have been finalized,
they have not yet been fully implemented. As of December 13, 1999, OMHAR
had on board 64 of the 75 staff that it had the authority to employ in
fiscal year 1999. OMHAR officials attributed the delay in reaching the
authorized staffing level in fiscal year 1999 to the normal difficulties
associated with staffing an entire office and noted that HUD had taken
steps to expedite the hiring process, such as providing OMHAR with
priority on all of its personnel actions. OMHAR planned to increase its
staffing level to 101 employees in fiscal year 2000. However, language in
the Senate Committee report accompanying the fiscal year 2000 HUD
appropriations act directed HUD to limit OMHAR to a staffing level of 50
employees until the Office provided the Committee with adequate
justification for its staffing needs. Recognizing the implications of the
report's language, OMHAR plans to provide additional information on its
organization and staffing to the Congress to justify the need for
additional staff.

As of December 1999, OMHAR had completed action on five of the seven key
aspects of the program's implementation that we reviewed and was taking
action on the remaining two. While it has not completed these actions in
accordance with the original schedules the Office had developed for
completing them, OMHAR officials believe that the slippages did not have
much practical effect on the program's implementation because the Office
did not begin to receive a large volume of projects to assign for
restructuring until the spring of 1999. 

The steps that OMHAR has taken thus far on the nine key statutory
requirements that we reviewed are generally consistent with the act's
requirements. However, given the early stage of the program's
implementation, OMHAR's actions for some of these requirements have been
limited primarily to establishing program procedures in the mark-to-market
regulations and in the operating procedures guide. Consequently, it is too
soon for us to determine whether the actual implementation of the
procedures will be in accordance with statutory requirements. 

Because OMHAR is part of HUD, the actions and the functions of its
Director are subject to the review and the approval of the HUD Secretary.
For example, various offices within HUD were involved in reviewing and
approving the regulations of the mark-to-market program. However, the
issues raised by HUD's offices in reviewing the regulations contributed to
a delay of more than 10 months in their issuance. Concerning the
legislative requirement that the Director of OMHAR report to the Congress
any interference by the HUD Secretary, the Director of OMHAR told us that
he has encountered no circumstances in which the HUD Secretary interfered
with OMHAR's activities. Furthermore, during the course of our work, we
did not become aware of any instances of interference that should have
been reported to the Congress. Finally, OMHAR officials believe that HUD's
other offices, such as the Office of Housing, have provided the support
necessary to meet OMHAR's operational needs.

Background

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 contracts for project-based Section 8 housing
assistance payments. The residents of housing units that receive project-
based assistance are required to pay a portion of their income for rent
(generally 30 percent), while HUD pays the balance. In 1996, a HUD
contractor estimated that, for approximately 63 percent of these
multifamily projects, the rents are higher than those of comparable
unassisted rental units in the same housing rental market. A main cause of
the higher rents is the fact that the government originally paid to
develop these properties by establishing rents above market levels and
then regularly raised them by applying 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 the residents'
contributions and the projects' rents, these higher rent levels increase
the cost of the Section 8 program to the federal government. HUD estimated
that, if no actions were 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 their operating
expenses and payments on 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./Footnote5/ 

To address the increasing costs to the federal government of insured
Section 8 housing, in fiscal years 1996 and 1997, the Congress established
mark-to-market demonstration programs to test various methods of
restructuring the financing of these properties. In October 1997, the
Congress extended the demonstration program through fiscal year 1998 and
created the permanent mark-to-market program for projects with above-
market rents and project-based Section 8 contracts expiring in October
1998 or later./Footnote6/ 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
October 1997 act also established OMHAR within HUD to administer the
program. As required by the act, the Office is under the management of a
Director, who was nominated by the President on September 29, 1998, and
confirmed by the Senate on October 21, 1998. The act authorizes the mark-
to-market program and the Office, including the Director's position,
through September 30, 2001. After that time, both the program and the
Office will terminate, and any outstanding mark-to-market responsibilities
will be transferred to HUD.

The act directs the Office to select capable organizations, referred to as
participating administrative entities, to carry out restructuring under
the mark-to-market program on behalf of the federal government. This
restructuring generally involves resetting rents to market levels and
reducing mortgage debt, if necessary, to permit a positive cash flow.
Among the participating administrative entities' responsibilities is
developing a mortgage restructuring and rental assistance sufficiency plan
for each mark-to-market project. Among other things, this plan is to
restructure the project-based rents or provide for tenant-based
assistance, require the project's owner to provide or contract for
competent management of the project, and require the owner to maintain
affordability and use restrictions on the project for at least 30 years.
Appendix I describes the mark-to-market process in more detail.

HUD published a Request for Qualifications on August 17, 1998, in the
Federal Register to solicit proposals from organizations interested in
becoming participating administrative entities. Organizations that are
eligible to become participating administrative entities include public
agencies (such as state housing finance agencies or local housing
agencies), nonprofit organizations, other entities (including law firms
and accounting firms), or a combination of such organizations that meet
the act's criteria. However, if a for-profit organization is selected as a
participating administrative entity, it is required to enter into a
partnership with a public-purpose entity (including HUD). The criteria to
select organizations include such requirements as experience in working
directly with residents of low-income housing projects and community-based
organizations; experience with and capacity for multifamily housing
restructuring and financing; a history of stable, financially sound, and
responsible administrative performance; financial strength in terms of
asset quality, capital adequacy, and liquidity; and a demonstrated ability
to carry out mark-to-market responsibilities in a timely, efficient, and
cost-effective manner; as well as other criteria established by OMHAR.

OMHAR Has Developed, but Not Fully Implemented, Its Organization and
Staffing Plans

OMHAR has developed its organization and staffing plans, which include a
headquarters office, four field offices, and a total staffing level of 101
employees, on the basis of the projected workload for the mark-to-market
program and other factors. Although the organizational and staffing plans
have been finalized, they have not yet been fully implemented; as of
December 13, 1999, OMHAR had 64 staff on board. The Office and HUD have
taken some steps to overcome specific barriers to hiring staff for OMHAR.
To implement its staffing plans, OMHAR was authorized to employ 75 staff
in fiscal year 1999 and had requested the full staffing level of 101
employees in HUD's fiscal year 2000 budget proposal to the Congress.
However, language in the Senate Committee report that accompanied the
fiscal year 2000 HUD appropriations legislation directed HUD to limit
OMHAR to a staffing level of 50 employees until the proposed staffing
level was adequately justified. Recognizing the implications of the
report's language, OMHAR plans to provide additional information on its
organization and staffing to the Congress to justify the need for
additional staff.

OMHAR Has Developed Its Organization and Staffing Plans Based on Various
Analyses, but Not All Planned Staff Have Been Hired
---------------------------------------------------------------------------

OMHAR has planned an organizational structure that calls for a full
staffing level of 101 employees. Of these, the Office had the authority to
employ 75 staff in fiscal year 1999 and had requested the full level of
employees in HUD's fiscal year 2000 budget proposal to the Congress. OMHAR
developed its organization and staffing plans for headquarters through
discussions within the Office and with various program and personnel
experts to identify the positions needed to carry out its program and
administrative responsibilities. 

Under the planned structure, slightly less than half of OMHAR's total
number of 101 employees will be located at its headquarters office in
Washington, D.C. The remaining staff will be distributed among three OMHAR
field offices in Chicago, New York, and San Francisco, and a fourth field
office, responsible for the southeast region of the United States, which
is co-located with the Washington headquarters office./Footnote7/ OMHAR
based its organization and staffing plans for the field offices on
analyses of several factors. Specifically, OMHAR determined where the
field offices would be located by considering such analyses as the timing
and the volume of the estimated mark-to-market program workload in each
state, the presence or absence of a HUD hub office in the same
city,/Footnote8/ the accessibility by air, and the ease of ground
transportation in the area. Once the locations were determined, OMHAR
estimated the staffing needs for each field office according to analyses
of field office responsibilities, the number of mark-to-market projects
expected for each area, and the number of hours required to complete each
project. OMHAR finalized its plans for locating the four field offices in
January 1999. According to OMHAR officials, the New York, Chicago, and
Washington, D.C., offices were operational in June 1999, and the San
Francisco office became operational in August 1999. Although none of the
field offices had been fully staffed by the end of fiscal year 1999, all
of the 29 field office positions authorized for that year had been staffed
by December 13, 1999. 

As of December 13, 1999, OMHAR had 64 staff on board, an increase of 18
employees over the number on board at the end of September 1999. According
to OMHAR officials, about 20 percent of the staff on board were previously
employed by HUD, and the remaining staff were hired from outside of HUD.
Figure 1 shows the number of staff planned for each location and the
number hired as of December 13, 1999. 

Figure****Helvetica:x11****1:    Number of OMHAR Staff Planned and Number
                                 of Staff On Board, December 13, 1999

*****************

*****************

Note: Two of the staff positions counted among the field office positions
are not allocated to any specific field office and therefore are not
reflected in this figure. These positions are the field manager and the
mark-to-market ombudsman. According to OMHAR officials, the planned
distribution of staff among the field offices is subject to change as
workload projections are revised.

Source: GAO's analysis of OMHAR's data.

Of the positions remaining to be filled as of December 1999, 15 were in
headquarters and 22 were in the field offices. Most of the open positions
in the field offices were for debt-restructuring specialists, who work
with participating administrative entities as they carry out project
restructurings. According to OMHAR officials, the Office's hiring process
focused first on positions that were necessary to build an infrastructure
for the Office and the mark-to-market program and then on positions that
would be needed as the program began to be implemented. Considering that
project restructurings were just beginning to get under way and none were
completed by the end of fiscal year 1999, OMHAR officials thought they had
had adequate staff to carry out the Office's functions up to that point.
They expected to have the remaining 11 positions that were authorized for
fiscal year 1999 but not staffed as of December 13, 1999, either
advertised or filled by the end of December 1999.

Congressional Action Could Limit OMHAR's Staffing Level 
--------------------------------------------------------

OMHAR has requested a full staffing level of 101 employees in HUD's fiscal
year 2000 budget proposal to the Congress. However, language in the Senate
report (S. 106-161) that accompanied the fiscal year 2000 HUD
appropriations legislation directed HUD to limit OMHAR to a staffing level
of 50 employees until the Office provides "adequate justification for its
staffing" needs to the Senate Committee on Appropriations. In its report,
the Committee stated that OMHAR's salaries and expenses had not been
adequately justified and that the justification did not reflect its roles
and responsibilities as envisioned by the mark-to-market legislation.
Although no staffing limit for OMHAR was specified in the fiscal year 2000
HUD appropriations act itself, language in the conference report (H.R. 106-
379) that accompanied the act indicates that OMHAR must comply with the
Senate report's language because it was not addressed to the contrary in
the conference report. In response to this limitation, OMHAR officials
planned to provide more detailed information on the Office's organization
and staffing to the Congress by the end of December 1999. OMHAR officials
stated that they expected this additional information to justify the need
for additional staff.

OMHAR Has Taken Steps to Overcome Perceived Barriers to Its Ability to
Hire Staff
---------------------------------------------------------------------------

OMHAR officials said that the Office has been successful in attracting
exceptionally qualified individuals from within HUD, other agencies, and
private industry. Although several positions remain open, these officials
maintain that staffing an entire office takes time, particularly when the
process has to be done in accordance with many regulations and
requirements. However, they also thought that some specific barriers have
hindered the Office's ability to hire qualified staff.

First, OMHAR officials stated that the act's language regarding post-
employment provisions for OMHAR employees could be interpreted too
stringently./Footnote9/ They said that the provisions' wording could be
interpreted by potential applicants to mean that an OMHAR employee could
not take a job with a financial institution or local government for 2
years after leaving OMHAR. The officials said that such a strict
interpretation by potentially interested parties might hinder OMHAR's
ability to attract highly qualified staff for its senior positions but
that it is difficult to determine the extent to which this factor had
actually hindered their hiring ability. According to them, for fiscal year
1999, only five of OMHAR's positions, by virtue of their pay levels, were
subject to these provisions, and all but one of these had been filled as
of December 13, 1999. Another barrier that OMHAR officials said had
impeded the Office's ability to hire staff was its lack of Schedule A
hiring authority. Such authority enables agencies to hire staff without
administering an examination. However, on January 29, 1999, HUD received
authority to hire employees on OMHAR's behalf under the Department's own
Schedule A hiring authority. According to HUD, subsequent to this
agreement, the OMHAR Director decided to primarily use competitive hiring
procedures for personnel actions so the process could withstand public
scrutiny and avoid any charge of politicization. Finally, at the time some
OMHAR positions were advertised, HUD had not yet made a decision on
reemployment rights for OMHAR employees, which would give them the right
to employment within the Department upon completion of their work at
OMHAR. According to OMHAR officials, this fact limited the interest of
experienced HUD staff in working for OMHAR. However, in February 1999, the
HUD Deputy Secretary approved reemployment rights for OMHAR career
employees, thus removing this issue as a potential barrier. 

OMHAR and HUD have also taken other actions to expedite the hiring
process. For example, OMHAR officials told us in May 1999 that HUD's
Office of Human Resources had made a commitment to provide OMHAR with
priority on all of its personnel actions and to assign two employees to
work on those actions. OMHAR officials stated that this commitment has
decreased the time needed to fill an OMHAR position. According to HUD's
Office of Administration, the number of workdays to fill an OMHAR position
has averaged 39 workdays, compared with an average of 50 workdays for
other HUD positions. In addition, for fiscal year 1999, HUD gave OMHAR
blanket authority to fill all 75 of the positions authorized for that
year, rather than seeking authority for each position individually, as is
normally required.

OMHAR Has Accomplished Several Key Actions, but Many Were Completed Behind
Schedule

Since our October 1998 report on the establishment of OMHAR, the Office
has taken steps to complete each of the seven actions we reviewed and had
completed five of them as of December 1999. For example, both the
program's operating procedures guide and the selection process for OMHAR's
administrative partners-the participating administrative entities-have
been completed. Furthermore, by the end of May 1999, OMHAR began assigning
multifamily housing projects to the participating administrative entities
for restructuring. As of December 13, 1999, OMHAR had assigned to the
participating administrative entities 52 percent of the 997 projects that
had entered the program, but, as of that date, none of the restructurings
had been completed. 

Although OMHAR has completed five of the seven actions we reviewed, all of
them were completed behind the Office's original schedule. Furthermore,
the two remaining actions are taking longer to complete than OMHAR
originally anticipated. For example, the act required OMHAR to publish the
program's final regulations no later than 3 months after the appointment
of a Director, which occurred in October 1998./Footnote10/ While OMHAR
planned to issue these regulations by January 1999, they had not been
published as of December 13, 1999./Footnote11/ Furthermore, OMHAR
completed the process to select the participating administrative entities
behind schedule. OMHAR expected to complete this process by October 29,
1998, but the selected public entities (i.e., state and local housing
finance agencies) were not announced until January 21, 1999. Nonpublic
entities were selected in May 1999. Before the participating
administrative entities could receive Section 8 projects to restructure,
they had to sign contracts, called portfolio-restructuring agreements,
with OMHAR. The Office had planned to enter into these contracts with the
entities as soon as possible after the selection process was complete.
However, OMHAR's contract negotiations with potential public participating
administrative entities proved to be a lengthy process, taking several
months to sign contracts with the selected state and local housing finance
agencies./Footnote12/ Because projects could not begin to be restructured
until this process was complete, OMHAR's delay in selecting the entities
and entering into contracts with them delayed the program's implementation. 

According to OMHAR officials, the delay in accomplishing mark-to-market
actions was due, in part, to the normal challenges associated with
starting a new organization. They also cited specific reasons certain
actions were delayed. For example, they said the delay in selecting the
participating administrative entities was due to the Office's compliance
with the legislative requirement to give preference to public agencies.
While OMHAR officials told us that many of these agencies were notified in
October 1998 that they were qualified to participate in the program
(conditioned on their acceptance of OMHAR's fee structure), the official
announcement of the 52 selected public agencies was not made until January
1999, after those agencies that had been initially rejected could resubmit
their proposals to become qualified. According to HUD, OMHAR worked
closely with rejected agencies to try to qualify them. OMHAR officials
also acknowledged that signing portfolio-restructuring agreements with the
participating administrative entities took much longer than originally
expected. They said the process of working cooperatively with the public
agencies to develop standardized contract provisions was time-consuming.
OMHAR officials also cited two reasons for the delay in issuing the final
regulations-the issues raised by various HUD offices and the Office of
Management and Budget during a lengthy review and clearance process and
the fact that the regulations included Section 8 contract renewal
provisions, which were not under the Office's direct control. While OMHAR
officials agreed that certain mark-to-market actions were completed behind
the Office's original schedule, they did not believe that the slippages
had much practical effect on the program's implementation. They believed
that the Office was being prudent in implementing the program by first
establishing an infrastructure before assigning projects for
restructuring. Furthermore, the Director of OMHAR stated that the Office
did not begin to receive a large volume of projects to assign for
restructuring until the spring of 1999. 

Nevertheless, because of delays in implementing the program, OMHAR will
have to extend some expiring Section 8 contracts at the projects' current
rent levels beyond the time frame allowed in the mark-to-market
regulations. The regulations allow OMHAR to extend a contract for 1 year
at a project's current rents to provide the participating administrative
entity time to restructure it. However, OMHAR is currently preparing a
waiver that would allow it to continue the higher rents. In October 1999,
OMHAR officials estimated that the additional Section 8 costs for 34
projects expected to receive contract extensions for longer than 1 year
would be about $4.1 million. It should be noted, however, that these
increased costs will be offset, at least somewhat, to the extent that
payments to cover HUD's costs for restructuring projects, such as claims
to FHA and fees to the participating administrative entities, are also
delayed. 

In its comments on our draft report, HUD reiterated that, while our report
implies that its delay in signing contracts with the participating
administrative entities caused a delay in the program's implementation, in
HUD's view, the real question was whether the process of contracting with
those entities was carried out in the right manner. HUD stated that OMHAR
had negotiated standardized contract provisions with participating
administrative entities and their trade groups and had honored
congressional priorities.

OMHAR's Planned Procedures Have Been Generally Consistent With Statutory
Requirements

We found OMHAR's actions for implementing the nine statutory mark-to-
market requirements that we reviewed, such as determining market rents and
obtaining tenant participation, have been generally consistent with the
act's requirements. However, given the early stage of the program's
implementation, OMHAR's actions for some of these requirements have
largely been limited to establishing program procedures in the mark-to-
market regulations and in the operating procedures guide. The National
Council of State Housing Agencies (NCSHA) and some state and local housing
finance agencies we contacted have questioned whether OMHAR implemented
one of the nine statutory requirements we reviewed, the process for
selecting participating administrative entities and allocating projects to
them, in accordance with the statute./Footnote13/ (For information on
OMHAR's actions relating to the other eight mark-to-market statutory
requirements that we examined, see app. III.)

The act requires OMHAR to select participating administrative entities
according to certain criteria, such as demonstrated experience with
multifamily financing, the financial strength to carry out the mark-to-
market restructurings, and cost-effectiveness, as well as other criteria
established by OMHAR./Footnote14/ In conjunction with this requirement,
the act specifically requires that OMHAR provide a reasonable period
during which it will consider proposals only from state or local housing
finance agencies and that OMHAR select such an agency without considering
other applicants if it determines that the agency is qualified. The act
states that this period must be of sufficient duration for OMHAR to
determine whether any state or local housing finance agencies are
interested and qualified. Furthermore, the act states that if a state or
local housing finance agency is selected as the participating
administrative entity, that agency will be responsible for restructuring
such projects in that jurisdiction as may be agreed upon by that agency
and OMHAR. 

The Request for Qualifications required entities, both public and
nonpublic, that were interested in participating in the mark-to-market
program to submit applications to OMHAR by September 16, 1998. According
to OMHAR, the applications were reviewed in two phases, with exclusive
priority given to public agencies during the initial phase. After
reviewing the applications from public agencies, the Secretary of HUD
announced on January 21, 1999, that 52 state and local agencies had been
selected to implement the mark-to-market program. However, in making this
announcement, the Director of OMHAR told us that the Office only
determined that these public agencies were "technically qualified" to
participate in the program, not actually chosen to perform restructuring
activities. Prior to actually participating in the program, these agencies
must sign a contract, referred to as a portfolio-restructuring agreement,
with the Office. This agreement sets forth the terms the entities must
follow in carrying out the restructuring actions and also the compensation
OMHAR would pay them. According to the standard portfolio-restructuring
agreement for public participating administrative entities, OMHAR will
compensate them with a uniform base fee, reimburse certain expenses, and
provide incentive fees if they achieve established goals. According to
OMHAR officials, the compensation amounts were based on analyses of
information, including a survey of 20 firms' estimated costs to complete a
restructuring transaction.

As of December 13, 1999, OMHAR had signed portfolio-restructuring
agreements with 37 public agencies. As of that date, OMHAR had not been
able to reach agreement with the other selected state and local agencies
because of such factors as disagreements concerning the compensation they
would receive to perform the restructurings, concerns about the operating
procedures guide, and state-specific legal issues. While OMHAR's Director
told us that the Office was still trying to reach agreements with the
other public agencies, six public agencies had elected not to participate
in the program because of their inability to reach agreements with OMHAR.
Approximately 30 percent of the projects that had entered the program as
of December 13, 1999, were located in jurisdictions where the public
agencies had been unable to reach agreement with OMHAR by that date or
where the agencies subsequently elected not to participate in the program.

We contacted selected state and local housing finance agencies to obtain
their views on negotiating contract terms with OMHAR./Footnote15/ Of the
10 state or local agencies we spoke with, 8 did not believe that OMHAR's
proposed compensation was fair. In addition to concerns with compensation,
the three agencies that we contacted that had decided not to participate
in the program cited the prescriptive nature of OMHAR's operating
procedures guide as a reason not to participate. We also obtained
information from six other public agencies that, as of October 1999, had
not reached agreement with OMHAR. While one agency could not reach
agreement with OMHAR because of compensation issues, the other five
agencies cited various legal issues as reasons for not signing the
portfolio-restructuring agreement./Footnote16/

For the 16 nonpublic entities that applied to participate in the mark-to-
market program, OMHAR began reviewing their proposals on January 22, 1999,
the day after the announcement that the 52 public entities had been
selected. On May 4, 1999, OMHAR sent 11 of the nonpublic entities a letter
saying they were qualified to participate in the program and a bid package
soliciting additional information. OMHAR received proposals from 8 of the
11 qualified entities, and subsequently it requested, on two occasions,
that they provide their best and final offers. After reviewing the
proposals, OMHAR selected three of these entities to serve as
participating administrative entities. OMHAR and these three entities
signed contracts that became effective on June 30, 1999. As of December
13, 1999, OMHAR was in the process of conducting a second nonpublic bid
and expected to sign contracts with the successful bidders by the end of
December 1999. HUD stated that while some states believe that OMHAR's fee
structure is not reasonable, the fact that nonpublic participating
administrative entities have accepted lower fees than those OMHAR has
offered to public entities demonstrates that OMHAR's fee determinations
have been accurate. 

As of December 13, 1999, OMHAR had assigned 374 projects to 28 public
agencies for restructuring, and an additional 145 projects were pending
acceptance by the participating administrative entity to which they had
been assigned. Additionally, OMHAR had assigned 83 projects to nonpublic
entities in eight states where no public agency had elected to participate
in the program and 13 projects in two states where the public agency
initially elected to participate but later decided not to. In one state,
OMHAR assigned 29 projects to a nonpublic entity while it was still
negotiating with the state agency, but the agency had not yet signed a
portfolio-restructuring agreement./Footnote17/

NCSHA representatives and some state and local housing finance agencies
that we contacted have questioned whether OMHAR's selection of
participating administrative entities has been conducted in accordance
with statutory requirements. In particular, the Council's Executive
Director has expressed the view that by establishing a uniform
compensation fee structure to which all public entities must agree, OMHAR
has not complied with the act's requirement to reimburse participating
administrative entities for all reasonable expenses they incur. While he
maintained that HUD is required to challenge specific state costs if it
believes they cannot be substantiated, HUD cannot reject a state's costs
just because they are higher than another state's costs or an estimate
from a private sector bidder. The NCSHA representative also said the
Congress did not condition the state and local agency priority on those
agencies accepting costs equal to or lower than private sector costs. He
said the Congress did not intend the mark-to-market program to go to the
lowest bidder. Representatives from NCSHA also believed that OMHAR
violated the act when it assigned properties to a nonpublic entity for
restructuring in a jurisdiction where it was still negotiating contract
terms with the state agency. In their view, the act requires OMHAR to
assign qualified and willing state agencies the projects within their
jurisdictions to restructure and the act does not allow OMHAR to assign
projects to nonpublic entities without the consent of the state.

While we recognize that OMHAR's actions in selecting participating
administrative entities have generated considerable concern, nonetheless,
we believe that OMHAR's actions have been consistent with the statutory
requirement that it give priority to state and local agencies. Not only
did OMHAR establish a period during which it only considered applications
from state and local housing finance agencies, it has also continued to
try to reach agreements with these agencies before assigning any projects
in their jurisdictions to nonpublic entities for restructuring. While the
process that OMHAR followed has proven to be lengthy and has led to
disagreements between OMHAR and state and local housing agencies, in our
view, it is permissible under the law. 

We agree with the NCSHA representatives that the act does not require the
mark-to-market program to go to the lowest bidder, but we do not agree
that the act precludes OMHAR from establishing a uniform fee structure.
The act requires that a prospective participating administrative entity be
evaluated for, among other things, "cost-effectiveness" and that a
participating administrative entity be compensated for its "reasonable
expenses." However, the act neither mandates the method OMHAR is to use to
determine "cost-effectiveness" nor mandates the method to determine the
types or the amount of expenses that are considered "reasonable." OMHAR
has the discretion to determine what constitutes "cost-effectiveness" as
well as "reasonable costs" as part of its overall statutory duty "to
determine whether any state housing finance agencies or local housing
agencies are interested and qualified" to participate in the mark-to-
market program. 

With regard to NCSHA's concern that OMHAR had assigned projects to a
nonpublic entity while still negotiating contract terms with a public
agency, OMHAR officials said the Office did this because there was an
urgent need to restructure properties in the state and OMHAR could not
reach agreement with the state housing finance agency on compensation
issues. In our view, because OMHAR had yet to reach an agreement with the
state agency in this case, OMHAR was under no obligation to (and, indeed,
could not) assign any projects to it. Even if that agency were to become a
participating administrative entity in the future, the number of projects
assigned to it would be that number "as may be agreed upon by the
participating administrative entity and [OMHAR]." Should OMHAR find that
an agreement could not be reached, it then would have the option of
assigning projects to a nonpublic participating administrative entity. The
act does not require that OMHAR receive permission from the relevant state
or local housing finance agency before assigning projects to a nonpublic
entity.

HUD Offices Were Involved in OMHAR's Key Tasks and Provided Support for
Its Operations 

While other HUD offices were involved in three of OMHAR's key tasks that
we reviewed, their involvement consisted primarily of reviewing OMHAR's
proposals and providing comments on them. According to HUD officials,
these reviews were aimed at ensuring that OMHAR's actions met the act's
requirements and were consistent with HUD's policies. However, these
reviews contributed to OMHAR's delay in issuing its regulations for the
mark-to-market program. With regard to the obligation of the Director of
OMHAR to report to the Congress any interference by the HUD Secretary in
OMHAR's activities, the Director indicated that there had been none.
Likewise, we did not encounter any instances of interference during our
review. With respect to support from other HUD offices, officials from
both HUD and OMHAR stated that these offices had provided sufficient and
timely support when OMHAR requested it. 

HUD's Involvement in OMHAR's Key Tasks Was Primarily in the Form of
Reviews and Clearances 
---------------------------------------------------------------------------

Section 573(b) of the act specifies that the OMHAR Director's
determinations, actions, issuance of regulations, and functions are
subject to the HUD Secretary's review and approval. We reviewed HUD's
involvement in three of OMHAR's key tasks: developing the program's
regulations, the Request for Qualifications for participating
administrative entities, and the program's operating procedures guide. For
these three tasks, the involvement of other HUD offices consisted
primarily of reviewing OMHAR's proposals and commenting on them.

Numerous HUD offices were involved in OMHAR's development of the program's
regulations, with primary involvement coming from the offices of Housing
and General Counsel. For example, these offices drafted the interim
regulations, issued in September 1998, because OMHAR was not yet
operational. The Office of Housing submitted the interim regulations to
other HUD offices for review and clearance. The Office of General Counsel
then directed the interim regulations through an abbreviated review and
clearance process. 

HUD offices also provided review and clearance of the final mark-to-market
regulations, which were combined with final regulations on project-based
Section 8 contract renewals./Footnote18/ However, concerns raised during
their review of the regulations added to the delay in issuing them. Under
the act, the regulations were required to be issued no later than January
21, 1999. OMHAR distributed the final regulations to HUD offices on March
9, 1999. As of December 13, 1999, final regulations had not been issued,
but OMHAR officials expected them to be published by the end of the year. 

According to an official in HUD's Office of General Counsel, the
complexity of the concerns raised by other HUD offices and the need to
obtain public comments on the regulations were the main reasons for the
delay. In particular, five HUD offices raised concerns with the final
regulations that needed to be resolved before they could be approved. For
example, HUD's Office of Public and Indian Housing would not approve the
regulations until OMHAR clarified which residents would be eligible for
tenant-based assistance in projects with expiring Section 8 contracts.
Furthermore, the Office of Chief Financial Officer would not approve the
regulations until a risk assessment of the mark-to-market program had been
completed.

According to HUD and OMHAR officials, HUD offices were also involved in
reviewing and approving draft versions of the Request for Qualifications
for soliciting participating administrative entities. For example, HUD's
Office of General Counsel reviewed the Request for Qualifications to
verify that it conformed to the statutory language that state and local
public agencies were given priority consideration over nonpublic entities.
HUD's Office of Inspector General disagreed with the draft Request for
Qualifications because it did not solicit sufficient historical
information on the financial and administrative capacity of the
organizations applying for selection to become participating
administrative entities. In response to the Inspector General's concern,
OMHAR changed the Request for Qualifications. HUD and OMHAR officials
stated that no other HUD offices or officials were involved in actually
selecting participating administrative entities, except for a request made
by the Secretary's Office that OMHAR demonstrate proper management and
oversight for both public and nonpublic entities. 

Developing OMHAR's operating procedures guide involved several HUD
offices, with primary input coming from the offices of Housing and General
Counsel. For example, OMHAR held a departmental retreat with these offices
to resolve key implementation issues in the guide. OMHAR also distributed
the guide to these offices and the Office of Inspector General for review
and comment. However, to expedite issuing the guide since informal reviews
by relevant HUD offices had already been obtained, OMHAR obtained approval
from HUD's Deputy Secretary to forgo the normal review and clearance
process. 

OMHAR Director Reports No Interference by the HUD Secretary
-----------------------------------------------------------

Section 573(d)(2) of the act states that the Director of OMHAR is to
report to the Congress any actions by the HUD Secretary that interfere
with the Office's activities. Specifically, the act requires the reporting
of any action that interferes with the Director's ability to perform his
duties or that affects the administration of the mark-to-market program,
including proposed actions by the Director that are overruled by the
Secretary. The Director stated that he is mindful of his responsibilities
under the statutory requirements and would report any actions that would
interfere with his ability to perform any duties in administering the mark-
to-market program. However, according to the Director of OMHAR, HUD's
Secretary had not interfered in any activities as of December 13, 1999.
Moreover, in the course of our work, we did not identify any incidences of
HUD's interference that should have been reported to the Congress.

HUD Provided the Necessary Support for OMHAR to Meet Its Needs 
---------------------------------------------------------------

Officials from both OMHAR and other HUD offices said that HUD has provided
sufficient support for OMHAR to meet its operational needs. For example,
the Office of Housing provided staff, space, equipment, and technical
expertise in the initial months of OMHAR's operations. In addition, HUD's
Office of Procurement and Contracting has supported OMHAR by fulfilling
its contracting needs, including hiring, at its request, an employee to
work primarily on its contracting activities. While HUD's Office of
Procurement and Contracting can assign this person other work, OMHAR's
needs are expected to take priority. Furthermore, HUD's multifamily hubs
have screened owners for initial eligibility before allowing them to
participate in the mark-to-market program.

Agency Comments

We provided HUD with a draft of this report for its review and comment.
HUD's written comments are in appendix IV. HUD generally agreed that the
draft report accurately describes OMHAR's efforts to date to implement the
mark-to-market program. However, HUD expressed the concern that the scope
of our evaluation precluded a fully balanced picture from being achieved
and requested that any additional review of its implementation of this
program be expanded to more accurately portray the complex issues and
conflicting goals that OMHAR has had to balance. In this regard, HUD cited
a number of actions that OMHAR has taken since October 1998 to implement
the mark-to-market program and noted that it is confident that the extra
time spent in setting up the proper infrastructure and protocols will
allow OMHAR to more efficiently respond to issues that arise during the
program's implementation. We do not agree that the scope of our evaluation
precluded us from presenting a balanced view of OMHAR's implementation of
the program. While we did not discuss every action that OMHAR has taken
since October 1998, when we previously reported on the program's status,
we believe our report does discuss most, if not all, of the key actions
that OMHAR has taken to implement the mark-to-market program, including
the vast majority of those cited by HUD. 

HUD also stated that OMHAR was thorough in its analysis of the
compensation participating administrative entities should receive. As
discussed in our report, while some states believed that OMHAR's fee
structure was not reasonable, HUD maintained that the fees accepted by the
nonpublic participating administrative entities demonstrate the accuracy
of OMHAR's fee determinations. Lastly, HUD stated that, while our report
implies that its delay in signing contracts with the participating
administrative entities delayed the program's implementation, the real
question was whether the process of contracting with those entities was
carried out in the right manner. HUD pointed out that OMHAR had negotiated
standardized contract provisions with participating administrative
entities and their trade groups and had honored congressional priorities.
We have incorporated these comments, as well as technical changes that HUD
provided, into our report, as appropriate. 

We are sending copies of this report to the Honorable Andrew M. Cuomo,
Secretary of Housing and Urban Development, and to the Honorable Ira G.
Peppercorn, 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 about this report, please call me at
(202) 512-7631. Major contributors to this report are listed in appendix VI.

*****************

*****************

Stanley J. Czerwinski
Associate Director, Housing and
  Community Development Issues

List of Committees

The Honorable Wayne Allard
Chairman
The Honorable John F. Kerry
Ranking Minority Member
Subcommittee on Housing and Transportation
Committee on Banking, Housing,
  and Urban Affairs 
United States Senate

The Honorable Christopher S. Bond
Chairman
The Honorable Barbara A. Mikulski
Ranking Minority Member
Subcommittee on VA, HUD, and
  Independent Agencies
Committee on Appropriations
United States Senate

The Honorable Rick A. Lazio
Chairman
The Honorable Barney Frank
Ranking Minority Member
Subcommittee on Housing and
  Community Opportunity
Committee on Banking and
   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

--------------------------------------
/Footnote1/-^Referred to in this report as the act (P.L. 105-65, Oct. 27,
  1997).
/Footnote2/-^Insured multifamily housing projects are those with mortgages
  insured by the Federal Housing Administration (FHA), an agency 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 low-income 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. 
/Footnote3/-^Budget authority is the authority provided by law to enter
  into financial obligations that will result in immediate or future
  outlays involving federal funds. 
/Footnote4/-^Multifamily Housing: Progress Made in Establishing HUD's
  Office of Multifamily Housing Assistance Restructuring (GAO/RCED-99-5,
  Oct. 27, 1998).
/Footnote5/-^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. 
/Footnote6/-^The Multifamily Assisted Housing Reform and Affordability Act
  of 1997 was enacted in title V of P.L. 105-65. Subtitle A of title V of
  the 1997 act contains the FHA-Insured Multifamily Housing Mortgage and
  Housing Assistance Restructuring Program.
/Footnote7/-^Under the fiscal year 1999 staffing plan, 46 positions (61
  percent of the authorized level of 75) were located at OMHAR's
  headquarters office, and the remaining 29 positions (39 percent of the
  75) were located in the field offices. 
/Footnote8/-^"Hub" refers to a HUD field office with multifamily housing
  program responsibilities.
/Footnote9/-^Section 576 of the act states that, for 2 years after leaving
  the Office, any OMHAR employee who was paid more than the lowest rate
  for a position above the GS-15 level cannot accept compensation from any
  party (other than a federal agency) having any financial interest in any
  mortgage restructuring and rental assistance sufficiency plan or
  comparable matter in which the employee had direct participation or
  supervision. In effect, according to OMHAR officials, this provision
  applies to any OMHAR employee whose base salary exceeds that of the
  highest GS-15 level.
/Footnote10/-^Prior to issuing final regulations, the mark-to-market
  program operated under interim regulations, which were published
  September 11, 1998, and became effective October 13, 1998.
/Footnote11/-^OMHAR had originally planned to issue the final regulations
  in October 1998 but revised the schedule because the OMHAR Director was
  not appointed until October 21, 1998. 
/Footnote12/-^OMHAR began negotiating contracts with individual public
  participating administrative entities in March 1999. As of December 13,
  1999, OMHAR had reached agreement with 37 public agencies and was still
  negotiating with 9 public agencies. Also, as of that date, six public
  agencies had elected not to participate in the program because they
  could not reach agreement with OMHAR on such contract issues as
  compensation or state-specific legal concerns.
/Footnote13/-^NCSHA is a national organization representing 43 state and
  local housing finance agencies.
/Footnote14/-^In addition to stating that the Secretary of HUD has these
  responsibilities, the act requires the Secretary to carry out the mark-
  to-market responsibilities through the OMHAR Director. Accordingly, we
  refer to OMHAR rather than the Secretary here, because OMHAR is actually
  responsible for carrying out these functions.
/Footnote15/-^We contacted 10 of the 52 state and local housing finance
  agencies that qualified to participate in the program. Four had signed
  portfolio-restructuring agreements with OMHAR, three had not yet reached
  agreement, and three had elected not to participate in the program. We
  note that the information obtained from these agencies does not
  necessarily reflect the views of all the public agencies or all the
  nonpublic entities selected to participate in the program.
/Footnote16/-^For example, one state agency cited language in the
  portfolio-restructuring agreement that required the agency to indemnify
  OMHAR for willful misconduct, negligence, or actions not permitted by
  the terms of the agreement. According to that agency, this requirement
  was prohibited by its state constitution. Another state agency
  maintained that the portfolio-restructuring agreement limited its
  ability to choose counsel for representation on mark-to-market issues.
/Footnote17/-^Also, OMHAR assigned 10 projects in two states to nonpublic
  entities, pending formal approval of the public agencies in those
  locations, and assigned 13 projects to a nonpublic entity in two other
  states because of issues concerning capacity and conflict of interest
  with the public agencies in those locations.
/Footnote18/-^OMHAR later decided to separate the mark-to-market
  regulations from the Section 8 contract renewal regulations. The
  Director of OMHAR stated that this was done because the Office of
  Housing reconsidered portions of the Section 8 regulations when the mark-
  to-market regulations were nearing final approval. 

OVERVIEW OF THE MARK-TO-MARKET PROCESS
======================================

In general, the process to be followed under the mark-to-market program,
as outlined in the Office of Multifamily Housing Assistance
Restructuring's (OMHAR) 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) tenants'
comments, (5) consultation meeting, (6) physical condition assessment,
(7) second tenants' 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./Footnote1/

   1.    Project Assignment to Participating Administrative Entity: The
         mark-to-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./Footnote2/
         The hub or program center screens the owner and the 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 the ground rules, the 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
         following the owner's receipt of that information. 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 the 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 the recipients can give
         comments to the participating administrative entity regarding the
         property's physical condition and other matters; and the date,
         the time, and the place of a public meeting to be held no sooner
         than 20 days, but within 40 days, following the date of the notice.

   4.    Tenants' Comments: After receiving the notice, the tenants and
         other interested parties can provide written comments to the
         participating administrative entity on such matters as the
         property's physical condition, the project's 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 submitting 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 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 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 phase is the draft restructuring
         plan mentioned in the preceding phase.

   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: The closing dockets and the
          other supporting documents are distributed to HUD officials,
          loan servicers, asset managers, and others. 

--------------------------------------
/Footnote1/-^This 13-phase process applies only to "full" restructurings,
  under which both a project's rents and its mortgage are restructured. 
/Footnote2/-^HUD's field office structure for delivering multifamily
  housing services consists of 18 jurisdictional hubs with staff stationed
  in 33 program centers. 

SUMMARY AND STATUS OF SEVEN KEY ACTIONS NEEDED TO IMPLEMENT THE MARK-TO-
MARKET PROGRAM
===========================================================================

                                       Continued from Previous Page
------------------------------------------------------------------------
| Action           : Purpose        : Current status                   |
|----------------------------------------------------------------------|
| Issue the        : To implement   : Not completed; behind            |
| interim and the  : the mark-to-   : schedule. The interim            |
| final            : market         : regulations were published       |
| regulations.     : program. The   : September 11, 1998, and became   |
|                  : law required   : effective October 13, 1998.      |
|                  : the final      : HUD had originally expected to   |
|                  : regulations    : issue the interim regulations    |
|                  : to be issued   : by August 1998 and the final     |
|                  : before the     : regulations in October 1998.     |
|                  : later of       : However, because OMHAR's         |
|                  : October 27,    : Director was not appointed       |
|                  : 1998, or 3     : until October 21, 1998, the      |
|                  : months after   : target date for issuing final    |
|                  : the Director   : regulations was moved back to    |
|                  : of OMHAR had   : January 21, 1999, (3 months      |
|                  : been           : after the appointment of the     |
|                  : appointed      : Director).                       |
|                  : (****Helvetica :                                  |
|                  : :xa4****522(a) :                                  |
|                  : (2)).          :                                  |
|                  :                : As of December 13, 1999, final   |
|                  :                : regulations had not been         |
|                  :                : published, in part, because of   |
|                  :                : issues raised by other HUD       |
|                  :                : offices during their review      |
|                  :                : and clearance of the             |
|                  :                : regulations. According to        |
|                  :                : OMHAR officials, the original    |
|                  :                : time allowed by the act for      |
|                  :                : issuing final regulations was    |
|                  :                : optimistic and did not reflect   |
|                  :                : normal clearance time frames,    |
|                  :                : given the innovative nature      |
|                  :                : and the complexity of the mark-  |
|                  :                : to-market program. OMHAR         |
|                  :                : officials also said that the     |
|                  :                : delay in issuing the             |
|                  :                : regulations had not delayed      |
|                  :                : the program's implementation     |
|                  :                : since the program has been       |
|                  :                : operating under the full         |
|                  :                : authority of the interim         |
|                  :                : regulations. These officials     |
|                  :                : expect the regulations to be     |
|                  :                : published by the end of          |
|                  :                : December 1999.                   |
|----------------------------------------------------------------------|
| Solicit and      : To allow HUD   : Completed behind schedule. HUD   |
| select third     : to work with   : published the Request for        |
| parties,         : the            : Qualifications to solicit        |
| referred to as   : participating  : participating administrative     |
| participating    : administrative : entities on August 17, 1998.     |
| administrative   :  entities,     : In September 1998, OMHAR         |
| entities.        : which will     : expected to complete the         |
|                  : actually       : selection process by October     |
|                  : restructure    : 29, 1998. According to OMHAR     |
|                  : the mortgages  : officials, many of the public    |
|                  : and rental     : entities were notified in        |
|                  : assistance     : October 1998 that they were      |
|                  : payments of    : qualified to participate in      |
|                  : eligible       : the program. However, HUD did    |
|                  : multifamily    : not officially announce the      |
|                  : projects       : selected public participating    |
|                  :                : administrative entities until    |
|                  : (****Helvetica : January 21, 1999.                |
|                  : :xa4****513(a) :                                  |
|                  : (1)).          :                                  |
|                  :                :                                  |
|                  :                : Proposals from the nonpublic     |
|                  :                : entities were opened after the   |
|                  :                : public entities had been         |
|                  :                : selected. On May 4, 1999,        |
|                  :                : OMHAR sent a letter to 11        |
|                  :                : nonpublic entities to notify     |
|                  :                : them that they were qualified    |
|                  :                : to participate in the program.   |
|                  :                : OMHAR requested additional       |
|                  :                : information from these 11        |
|                  :                : entities and received            |
|                  :                : responses from 8 of them.        |
|----------------------------------------------------------------------|
| Enter into       : To establish   : Not completed. According to      |
| portfolio-       : the            : OMHAR officials in September     |
| restructuring    : obligations    : 1998, OMHAR hoped to enter       |
| agreements with  : and            : into portfolio-restructuring     |
| the              : requirements   : agreements as soon as possible   |
| participating    : of the         : after the participating          |
| administrative   : participating  : administrative entities had      |
| entities.        : administrative : been selected. OMHAR consulted   |
|                  :  entities      : with representatives from        |
|                  : (****Helvetica : state and local housing          |
|                  : :xa4****513(a) : finance agencies to develop      |
|                  : (2)) and to    : the basic portfolio-             |
|                  : clarify the    : restructuring agreement, which   |
|                  : duties that    : was sent to each of the 52       |
|                  : they will      : qualified public participating   |
|                  : typically      : administrative entities on       |
|                  : perform.       : April 21, 1999. According to     |
|                  :                : OMHAR officials, negotiations    |
|                  :                : with individual public           |
|                  :                : participating administrative     |
|                  :                : entities over the precise        |
|                  :                : contract terms were time         |
|                  :                : consuming. For example,          |
|                  :                : capacity and compensation        |
|                  :                : issues were difficult to         |
|                  :                : resolve. In addition, OMHAR      |
|                  :                : officials said complex legal     |
|                  :                : issues were encountered under    |
|                  :                : state and federal laws that      |
|                  :                : required extensive legal         |
|                  :                : research and consultation. As    |
|                  :                : of December 13, 1999, OMHAR      |
|                  :                : had signed agreements with 37    |
|                  :                : public and 3 nonpublic entities. |
|----------------------------------------------------------------------|
| Conduct          : To             : Completed behind schedule.       |
| technical        : familiarize    : According to OMHAR officials     |
| assistance       : the            : in September 1998, the           |
| briefings for    : participating  : briefing sessions for the        |
| the              : administrative : participating administrative     |
| participating    :  entities      : entities were planned to begin   |
| administrative   : with the       : in October 1998. However,        |
| entities on the  : restructuring  : OMHAR officials said this        |
| mark-to-market   : process and    : timetable was revised (after     |
| process.         : their          : the OMHAR Director was           |
|                  : responsibiliti : appointed in October 1998) to    |
|                  : es, which      : allow OMHAR time to establish    |
|                  : include        : a proper infrastructure to       |
|                  : determining    : successfully implement the       |
|                  : the project    : mark-to-market program.          |
|                  : owner's        : Consequently, it was not until   |
|                  : eligibility,   : mid-January 1999 that a          |
|                  : determining    : technical briefing session for   |
|                  : the rent       : potential public participating   |
|                  : levels,        : administrative entities was      |
|                  : restructuring  : held. The briefing's purpose     |
|                  : the loans,     : was to provide a general         |
|                  : underwriting   : overview of the mark-to-market   |
|                  : new or         : program and to solicit           |
|                  : modified       : comments on an early draft of    |
|                  : loans,         : the portfolio-restructuring      |
|                  : managing the   : agreement. OMHAR's financial     |
|                  : closing        : advisor developed a plan to      |
|                  : process,       : conduct technical briefing       |
|                  : distributing   : sessions for the participating   |
|                  : documents      : administrative entities, OMHAR   |
|                  : after          : field office staff, and HUD      |
|                  : closing, and   : staff. The first 1-day           |
|                  : servicing the  : briefing session (to be          |
|                  : loans.         : conducted with each              |
|                  :                : participating administrative     |
|                  :                : entity as agreements are         |
|                  :                : executed) was held in May        |
|                  :                : 1999, and as of December 1999,   |
|                  :                : 30 additional sessions had       |
|                  :                : been held. The purpose of        |
|                  :                : these sessions is to provide     |
|                  :                : the participating                |
|                  :                : administrative entities with a   |
|                  :                : general overview of the mark-    |
|                  :                : to-market program and their      |
|                  :                : roles and responsibilities.      |
|----------------------------------------------------------------------|
| Develop an       : To set forth   : Completed behind schedule. In    |
| operating        : a uniform      : September 1998, OMHAR            |
| procedures guide.: process for    : officials expected the draft     |
|                  : restructuring  : guide to be ready for            |
|                  : FHA-insured    : departmental clearance by mid-   |
|                  : Section 8      : September 1998. The guide was    |
|                  : housing        : not issued, however, until       |
|                  : projects.      : April 19, 1999. According to     |
|                  :                : OMHAR officials, the Office      |
|                  :                : needed to coordinate several     |
|                  :                : key issues and work              |
|                  :                : cooperatively with HUD's         |
|                  :                : offices of Housing and General   |
|                  :                : Counsel since the mark-to-       |
|                  :                : market program significantly     |
|                  :                : impacts HUD's multifamily        |
|                  :                : housing programs. OMHAR also     |
|                  :                : consulted with representatives   |
|                  :                : from state and local housing     |
|                  :                : finance agencies on the          |
|                  :                : development of the operating     |
|                  :                : procedures guide.                |
|----------------------------------------------------------------------|
| Prepare a front- : To identify    : Completed behind schedule. In    |
| end risk         : the risks      : September 1998, OMHAR            |
| assessment       : related to     : officials expected the           |
| report for the   : fraud, waste,  : contract to complete the front-  |
| permanent mark-  : and abuse of   : end risk assessment to be        |
| to-market        : federal        : awarded that month. The report   |
| program.         : resources and  : was expected to be completed     |
|                  : to document    : 60 days later, or about mid-     |
|                  : both the       : November, 1998. However, the     |
|                  : existing       : front-end risk assessment        |
|                  : program        : report was not completed until   |
|                  : controls and   : July 1999. According to OMHAR    |
|                  : management's   : officials, competing work        |
|                  : plans for      : priorities resulted in OMHAR's   |
|                  : implementing   : completing the planned action    |
|                  : additional     : portion of the report later      |
|                  : controls to    : than anticipated. However,       |
|                  : mitigate the   : they said the report's           |
|                  : identified     : findings were considered in      |
|                  : risks.         : OMHAR's development of the       |
|                  :                : organization, performance        |
|                  :                : standards for the                |
|                  :                : participating administrative     |
|                  :                : entities, and procurement of     |
|                  :                : contract resources.              |
|----------------------------------------------------------------------|
| Develop an       : To enable      : Completed behind schedule. In    |
| Internet-based   : OMHAR to       : October 1998, OMHAR expected     |
| tracking system. : monitor        : the system to be ready for       |
|                  : actions taken  : assigning projects to the        |
|                  : by the         : participating administrative     |
|                  : participating  : entities, tracking their fees,   |
|                  : administrative : and tracking projects under      |
|                  :  entities and  : the permanent program by         |
|                  : HUD's field    : November 1998. However,          |
|                  : offices in     : testing on the system was not    |
|                  : carrying out   : completed until April 1999. In   |
|                  : mark-to-       : May 1999, OMHAR implemented      |
|                  : market         : the first release of the         |
|                  : functions.     : system. According to OMHAR       |
|                  :                : officials, the delay in          |
|                  :                : implementing the tracking        |
|                  :                : system did not present a risk    |
|                  :                : to implementing the mark-to-     |
|                  :                : market program because a stand-  |
|                  :                : alone application to identify    |
|                  :                : the projects submitted to        |
|                  :                : OMHAR had been developed prior   |
|                  :                : to implementing the tracking     |
|                  :                : system. Furthermore, OMHAR       |
|                  :                : officials said the               |
|                  :                : implementation of the tracking   |
|                  :                : system coincided with OMHAR's    |
|                  :                : first assignment of projects     |
|                  :                : to the participating             |
|                  :                : administrative entities.         |
------------------------------------------------------------------------

Note: All section citations refer to P.L. 105-65.

OMHAR'S IMPLEMENTATION OF EIGHT OTHER KEY STATUTORY REQUIREMENTS
================================================================

                                        Continued from Previous Page
-------------------------------------------------------------------------
| Task      : Statutory requirements : OMHAR's planned implementation   |
|-----------------------------------------------------------------------|
| Determine : According to the act   : We found OMHAR's planned         |
|  market   : (****Helvetica:xa4**** : implementation of this task to   |
| rents.    : 514(g)(1)), rent       : be in accordance with            |
|           : levels must either be  : statutory requirements, as       |
|           : (1) equivalent to the  : follows. According to the        |
|           : rents derived from     : regulations (24 C.F.R.           |
|           : not less than two      : 401.410), the restructured       |
|           : comparable properties  : rents for project-based          |
|           : or (2) equal to 90     : assistance must be established   |
|           : percent of the fair    : at comparable market rents       |
|           : market rent if         : unless the participating         |
|           : comparables are not    : administrative entity finds      |
|           : available. The act     : that exception rents are         |
|           : (****Helvetica:xa4**** : necessary. Comparable market     |
|           : 512(1)) defines        : rents are the rents charged      |
|           : comparable properties  : for properties that the          |
|           : as properties in the   : participating administrative     |
|           : same market areas      : entity determines to be          |
|           : that are similar to    : comparable. For purposes of      |
|           : the housing project    : ****Helvetica:xa4****512(1) of   |
|           : as to neighborhood,    : the act, other relevant          |
|           : type of location,      : characteristics include any      |
|           : access, street         : applicable rent control and      |
|           : appeal, age, property  : other characteristics            |
|           : size, apartment mix,   : determined by the                |
|           : utilities, and other   : participating administrative     |
|           : relevant               : entity. If the participating     |
|           : characteristics and    : administrative entity is         |
|           : are not receiving      : unable to identify at least      |
|           : project-based          : three comparable properties      |
|           : assistance. The act    : within the local market, the     |
|           : (****Helvetica:xa4**** : participating administrative     |
|           : 514(g)(2)) also        : entity may use noncomparable     |
|           : provides exceptions,   : housing stock within that        |
|           : whereby rents may      : market or, if necessary, go      |
|           : exceed market rents,   : outside the market from which    |
|           : but not exceed 120     : adjustments can be made. As a    |
|           : percent of the fair    : last resort, if the              |
|           : market rent. The       : participating administrative     |
|           : participating          : entity is unable to identify     |
|           : administrative         : enough comparable properties,    |
|           : entities may approve   : comparable market rents must     |
|           : exception rents on 20  : be set at 90 percent of the      |
|           : percent of the units   : fair market rents for the        |
|           : covered by the         : relevant market area.            |
|           : portfolio-             : Furthermore, the regulations     |
|           : restructuring          : (24 C.F.R. 401.411) state that   |
|           : agreement. The act's   : exception rents may be           |
|           : accompanying           : provided if the participating    |
|           : conference report      : administrative entity            |
|           : stresses that the      : determines that the project's    |
|           : participating          : income under the rent levels     |
|           : administrative         : established under 24 C.F.R.      |
|           : entities set rents at  : 401.410 would be inadequate to   |
|           : a reasonable level     : meet the costs of operating      |
|           : near or at market      : the project and that the         |
|           : rates according to     : housing needs of the tenants     |
|           : the rents of other     : and the community could not be   |
|           : comparable properties  : adequately addressed. The        |
|           : in the market, not     : exception rents are limited to   |
|           : the fair market rent.  : 20 percent of the units          |
|           : The conference report  : covered by the participating     |
|           : also says that the     : administrative entity's          |
|           : participating          : portfolio-restructuring          |
|           : administrative         : agreement. According to the      |
|           : entities may approve   : operating procedures guide,      |
|           : exception rents to     : the participating                |
|           : ensure the projects'   : administrative entity will       |
|           : financial viability.   : discuss the appropriateness of   |
|           : According to the       : the comparable market rents      |
|           : congressional          : with the owner, the proposed     |
|           : colloquies regarding   : lender, the physical             |
|           : the mark-to-market     : inspector, and the appraiser     |
|           : program, the           : after visiting the project and   |
|           : legislation was        : its comparables.                 |
|           : crafted to allow the   : Notwithstanding these            |
|           : consideration of rent- : discussions, the appraiser       |
|           : stabilized apartments  : will make an independent         |
|           : within the definition  : judgment regarding the           |
|           : of comparable          : determination of market          |
|           : properties for the     : comparables.                     |
|           : purposes of            :                                  |
|           : determining market     :                                  |
|           : rent levels.           :                                  |
|-----------------------------------------------------------------------|
| Renew     : According to the act   : We found OMHAR's planned         |
| Section   : (****Helvetica:xa4**** : implementation of this task to   |
| 8         : 515(c)(1)), project-   : be in accordance with            |
| assistanc : based assistance must  : statutory requirements, as       |
| e as      : be renewed if (1) the  : follows. According to the        |
| project-  : project is located in  : regulations (24 C.F.R.           |
| based     : an area where          : 401.420), the Section 8          |
| versus    : available and          : contract must be renewed as      |
| tenant-   : affordable housing is  : project-based assistance,        |
| based.    : inadequate, (2) a      : subject to the availability of   |
|           : predominant number of  : funds for this purpose: if the   |
|           : the units in the       : participating administrative     |
|           : project are occupied   : entity determines there is a     |
|           : by elderly and/or      : market-wide vacancy rate of 6    |
|           : disabled families, or  : percent or less; if at least     |
|           : (3) the project is     : 50 percent of the units in the   |
|           : held by a nonprofit    : project are occupied by          |
|           : cooperative ownership  : elderly and/or disabled          |
|           : housing corporation.   : families; or if the project is   |
|           : The conference report  : held by a nonprofit              |
|           : mandates the           : cooperative ownership housing    |
|           : continuance of         : corporation or nonprofit         |
|           : project-based          : cooperative housing trust. The   |
|           : assistance in tight    : regulations (24 C.F.R.           |
|           : rental markets. In     : 401.421) also state, for any     |
|           : defining a tight       : project not subject to           |
|           : rental market, the     : mandatory project-based          |
|           : conferees believe      : assistance under 24 C.F.R.       |
|           : that a 6-percent       : 401.420, the participating       |
|           : vacancy rate is        : administrative entity must       |
|           : reasonable. For the    : develop a rental assistance      |
|           : remaining inventory,   : assessment plan in accordance    |
|           : the participating      : with section 515(c)(2) of the    |
|           : administrative         : act to determine whether         |
|           : entities determine     : assistance should be renewed     |
|           : which assistance to    : as project-based assistance or   |
|           : provide.               : whether some or all of the       |
|           : Congressional          : assisted units should be         |
|           : colloquies regarding   : converted to tenant-based        |
|           : the mark-to-market     : assistance. According to the     |
|           : program say it is      : operating procedures guide,      |
|           : imperative that        : mandatory project-based          |
|           : residents be kept      : assistance is required for       |
|           : informed of the        : projects (1) in tight rental     |
|           : mortgage-              : markets (defined as those with   |
|           : restructuring process  : market-wide vacancy rates at 6   |
|           : and the possibility    : percent or below), (2)           |
|           : of receiving tenant-   : predominately occupied by        |
|           : based assistance and   : elderly or disabled families,    |
|           : be offered ample       : or (3) owned by a nonprofit      |
|           : opportunity to voice   : cooperative ownership housing    |
|           : their preferences as   : corporation or nonprofit         |
|           : to the type of         : housing trust. The guide also    |
|           : assistance provided.   : says the participating           |
|           : The colloquies also    : administrative entity            |
|           : state it is not the    : determines whether to renew      |
|           : intent of the          : project-based assistance,        |
|           : drafters of the        : provide residents with tenant-   |
|           : legislation that HUD   : based assistance, or renew a     |
|           : attempt to             : portion of the units with        |
|           : micromanage or second- : project-based assistance and     |
|           : guess the              : convert the remaining units to   |
|           : determination of the   : tenant-based vouchers.           |
|           : participating          : According to the guide, the      |
|           : administrative         : participating administrative     |
|           : entity. Neither is it  : entity makes this decision       |
|           : their intent that      : only after consulting with the   |
|           : HUD's regulations      : affected residents, the          |
|           : include one-sided      : project's owner, and local       |
|           : interpretations of     : government officials.            |
|           : the statutory          :                                  |
|           : language, which would  :                                  |
|           : force a preference     :                                  |
|           : for tenant-based       :                                  |
|           : assistance upon the    :                                  |
|           : local decisionmakers.  :                                  |
|           : The criteria are       :                                  |
|           : intentionally          :                                  |
|           : objective and          :                                  |
|           : neutral, and the       :                                  |
|           : final decision for     :                                  |
|           : applying them rests    :                                  |
|           : at the local level.    :                                  |
|-----------------------------------------------------------------------|
| Rehabilit : According to the act   : We found OMHAR's planned         |
| ate       : (****Helvetica:xa4**** : implementation of this task to   |
| propertie : 517(b)(7)) and the     : be in accordance with            |
| s.        : conference report,     : statutory requirements, as       |
|           : rehabilitation may be  : follows. According to the        |
|           : paid from the          : regulations (24 C.F.R.           |
|           : residual receipts,     : 401.452), rehabilitation must    |
|           : replacement reserves,  : be performed to restore the      |
|           : or any other project   : property to the nonluxury        |
|           : accounts not required  : standard adequate for the        |
|           : for the project's      : rental market for which the      |
|           : operations.            : project was originally           |
|           : Rehabilitation will    : approved. The regulations (24    |
|           : only be for the        : C.F.R. 401.472) also state       |
|           : purpose of restoring   : that funding for the             |
|           : the project to a       : rehabilitation must include      |
|           : nonluxury standard     : funds from the project's         |
|           : adequate for the       : residual receipts account,       |
|           : rental market          : surplus cash account,            |
|           : intended at the        : replacement reserve account,     |
|           : original approval of   : and other project accounts, to   |
|           : the project-based      : the extent the participating     |
|           : assistance. Each       : administrative entity            |
|           : owner shall            : determines that those accounts   |
|           : contribute, from       : will not be needed for the       |
|           : nonproject resources,  : initial deposit to the           |
|           : not less than 25       : reserves. The owner's            |
|           : percent of the amount  : contribution requirement will    |
|           : of the rehabilitation  : be calculated as 20 percent of   |
|           : assistance received.   : the total cost of                |
|           :                        : rehabilitation,a unless HUD or   |
|           :                        : the participating                |
|           :                        : administrative entity            |
|           :                        : determines that a higher         |
|           :                        : percentage is required. The      |
|           :                        : owner's contribution             |
|           :                        : requirement must include a       |
|           :                        : reasonable proportion (as        |
|           :                        : determined by HUD) of the        |
|           :                        : total cost of rehabilitation     |
|           :                        : from nongovernmental sources.    |
|           :                        : The participating                |
|           :                        : administrative entity may        |
|           :                        : exempt housing cooperatives      |
|           :                        : from the owner's contribution    |
|           :                        : requirement. According to the    |
|           :                        : operating procedures guide,      |
|           :                        : the participating                |
|           :                        : administrative entity's          |
|           :                        : underwriter must confirm that    |
|           :                        : the rehabilitation escrow and    |
|           :                        : reserves for replacement will    |
|           :                        : address the project's 12-month   |
|           :                        : and long-term physical needs.    |
|           :                        : For less than substantial        |
|           :                        : rehabilitation, the              |
|           :                        : rehabilitation escrow should     |
|           :                        : consist of 100 percent of the    |
|           :                        : cost in cash plus 10 percent     |
|           :                        : in either cash or a letter of    |
|           :                        : credit. The underwriter must     |
|           :                        : confirm the amount and the       |
|           :                        : source of the owner's            |
|           :                        : contribution of nonproject       |
|           :                        : funds to the rehabilitation      |
|           :                        : escrow. All owners, except for   |
|           :                        : nonprofit cooperatives, are      |
|           :                        : required to contribute at        |
|           :                        : least 20 percent of the escrow   |
|           :                        : amount. In addition, 3 percent   |
|           :                        : of the rehabilitation cost       |
|           :                        : must come from nongovernmental   |
|           :                        : sources.                         |
|-----------------------------------------------------------------------|
| Obtain    : According to the act   : We found OMHAR's staffing        |
| expertise : (****Helvetica:xa4**** : plans to be in accordance with   |
|  at OMHAR.: 574), the Director     : statutory requirements, as       |
|           : may appoint and fix    : follows. For fiscal year 1999,   |
|           : the compensation of    : OMHAR's compensation structure   |
|           : such officers and      : reflected an approximately 19-   |
|           : employees of the       : percent increase over the        |
|           : Office as the          : salary levels for other HUD      |
|           : Director considers     : employees, with a salary cap     |
|           : necessary to carry     : of $136,700. See previous        |
|           : out the functions of   : section on OMHAR's               |
|           : the Director and the   : organization and staffing        |
|           : Office. According to   : plans for additional details     |
|           : the conference         : on OMHAR's hiring.               |
|           : report, the conferees  :                                  |
|           : intend that OMHAR be   :                                  |
|           : staffed with expert    :                                  |
|           : employees and have     :                                  |
|           : access to private      :                                  |
|           : expertise to           :                                  |
|           : accomplish the         :                                  |
|           : purposes of the act.   :                                  |
|-----------------------------------------------------------------------|
| Disqualif : According to the act   : We found OMHAR's planned         |
| y         : (****Helvetica:xa4**** : implementation of this task to   |

| propertie : 516), the Secretary    : be in accordance with            |
| s.        : may elect not to       : statutory requirements, as       |
|           : consider any           : follows. According to the        |
|           : project's              : regulations (24 C.F.R.           |
|           : restructuring plan if  : 401.101), the request of an      |
|           : HUD or the             : owner of an eligible project     |
|           : participating          : for a restructuring plan will    |
|           : administrative entity  : not be considered if the owner   |
|           : determines that an     : or an affiliate is debarred or   |
|           : owner has engaged in   : suspended under part 24 of       |
|           : material adverse       : this title, unless the sale or   |
|           : financial or           : the transfer of the property     |
|           : managerial actions or  : is proposed. HUD may also        |
|           : omissions with regard  : decide not to accept a request   |
|           : to such project or     : for a restructuring plan if      |
|           : the poor condition of  : HUD notifies the owner that      |
|           : the project cannot be  : HUD is engaged in a pending      |
|           : remedied in a cost-    : enforcement action against       |
|           : effective manner.      : that owner or affiliate.         |
|           : According to the       : According to the operating       |
|           : conference report,     : procedures guide, the            |
|           : the participating      : participating administrative     |
|           : administrative entity  : entity is responsible for        |
|           : is required to         : making a complete and ongoing    |
|           : carefully evaluate     : assessment of the eligibility    |
|           : the project owner's    : of the owner and the project     |
|           : record in operating    : while developing the             |
|           : the property and the   : restructuring plan. If, at any   |
|           : property's physical    : time, the participating          |
|           : condition. This is     : administrative entity            |
|           : the federal            : discovers any grounds for        |
|           : government's           : rejection, it must advise        |
|           : opportunity to rid     : OMHAR's field office             |
|           : the inventory of bad   : immediately, provide             |
|           : project owners and     : supporting documentation, and    |
|           : properties. HUD is     : make a recommendation to         |
|           : authorized to deal     : reject the owner or the          |
|           : with a disqualified    : project for restructuring.       |
|           : property in several    :                                  |
|           : ways, including        :                                  |
|           : selling or             :                                  |
|           : transferring the       :                                  |
|           : property to a          :                                  |
|           : qualified purchaser.   :                                  |
|           : According to the       :                                  |
|           : congressional          :                                  |
|           : colloquies, it is      :                                  |
|           : important for the      :                                  |
|           : federal government to  :                                  |
|           : terminate its          :                                  |
|           : relationship with      :                                  |
|           : those owners who have  :                                  |
|           : abused the Section 8   :                                  |
|           : program and those      :                                  |
|           : properties that are    :                                  |
|           : simply unfeasible to   :                                  |
|           : continue to            :                                  |
|           : subsidize. The         :                                  |
|           : colloquies also state  :                                  |
|           : that the Secretary of  :                                  |
|           : HUD should not only    :                                  |
|           : explore the use of     :                                  |
|           : sales or transfers to  :                                  |
|           : nonprofit              :                                  |
|           : organizations but      :                                  |
|           : also allow these       :                                  |
|           : properties to retain   :                                  |
|           : project-based          :                                  |
|           : assistance if the      :                                  |
|           : ownership or physical  :                                  |
|           : condition problems     :                                  |
|           : are adequately         :                                  |
|           : addressed.             :                                  |
|-----------------------------------------------------------------------|
| Avoid     : According to the act   : We found OMHAR's planned         |
| conflicts : (****Helvetica:xa4**** : implementation of this task to   |
|  of       : 513(b)(7)(B)), no      : be in accordance with            |
| interest  : private entity shall   : statutory requirements, as       |
| and       : share, participate     : follows. According to the        |
| prohibit  : in, or otherwise       : regulations (24 C.F.R.           |
| equity    : benefit from any       : 401.310), the participating      |
| sharing.  : equity created,        : administrative entity may not    |
|           : received, or           : permit conflicts of interest     |
|           : restructured as a      : to exist without obtaining a     |
|           : result of a portfolio- : waiver. The participating        |
|           : restructuring          : administrative entity must       |
|           : agreement. The act     : establish procedures to          |
|           : (****Helvetica:xa4**** : identify conflicts of interest   |
|           : 517(d),(e)) also       : and to help ensure that          |
|           : prohibits HUD from     : conflicts of interest do not     |
|           : participating in any   : arise or continue. HUD will      |
|           : equity agreement or    : not enter into a portfolio-      |
|           : profit-sharing         : restructuring agreement with a   |
|           : agreement in           : potential entity that has        |
|           : conjunction with any   : conflicts of interest or         |
|           : housing project under  : permit one with a conflict to    |
|           : the program and        : continue performance under an    |
|           : allows HUD to          : existing portfolio-              |
|           : establish guidelines   : restructuring agreement. The     |
|           : to prevent conflicts   : participating administrative     |
|           : of interest under the  : entity has a continuing          |
|           : program. According to  : obligation to take all           |
|           : the conference         : necessary actions to identify    |
|           : report, the            : whether it has a conflict of     |
|           : prohibitions on        : interest. The regulations (24    |
|           : equity sharing were    : C.F.R. 401.311) also state       |
|           : mandated because of    : that, in connection with the     |
|           : concerns that equity-  : performance of any portfolio-    |
|           : sharing arrangements   : restructuring agreement and      |
|           : might skew the         : during the term of such          |
|           : motivations of the     : agreement, a participating       |
|           : participating          : administrative entity or other   |
|           : administrative         : restricted person may not (1)    |
|           : entities or HUD in     : solicit for itself or others     |
|           : ways counter to the    : favors, gifts, or other items    |
|           : public interest.       : of monetary value from any       |
|           : According to the       : person who is seeking official   |
|           : congressional          : action from HUD or the           |
|           : colloquies, the        : participating administrative     |
|           : Senators expected the  : entity in connection with the    |
|           : Secretary to           : agreement or has interests       |
|           : establish strict and   : that may be substantially        |
|           : coherent guidelines    : affected by the restricted       |
|           : to ensure that the     : person's performance or          |
|           : participating          : nonperformance of duties to      |
|           : administrative         : HUD; or (2) improperly use       |
|           : entities do not go     : HUD's property or property       |
|           : beyond their           : over which the restricted        |
|           : restructuring duties   : person has supervision or        |
|           : as intended under the  : charge by reason of the          |
|           : bill.                  : agreement; or (3) use its        |
|           :                        : status as the participating      |
|           :                        : administrative entity for its    |
|           :                        : own benefit, or the financial    |
|           :                        : or business benefit of a third   |
|           :                        : party, except as contemplated    |
|           :                        : by the agreement; or (4) make    |
|           :                        : any unauthorized promise or      |
|           :                        : commitment on behalf of HUD.     |
|           :                        : According to the operating       |
|           :                        : procedures guide, both the       |
|           :                        : owner and the participating      |
|           :                        : administrative entity are        |
|           :                        : responsible for notifying        |
|           :                        : OMHAR headquarters of any        |
|           :                        : potential conflicts of           |
|           :                        : interest that may exist for      |
|           :                        : either party during the          |
|           :                        : restructuring process.           |
|-----------------------------------------------------------------------|
| Obtain    : According to the act   : We found OMHAR's planned         |
| tenant    : (****Helvetica:xa4**** : implementation of this task to   |
| participa : 514(f)), the HUD       : be in accordance with            |
| tion.     : Secretary must         : statutory requirements, as       |
|           : establish procedures   : follows. According to the        |
|           : to provide an          : regulations (24 C.F.R.           |
|           : opportunity for the    : 401.500), the participating      |
|           : project's tenants and  : administrative entity must       |
|           : other affected         : solicit and document the         |
|           : parties to             : consideration of the tenants'    |
|           : participate            : comments. At a minimum, three    |
|           : effectively and on a   : notices must be provided. The    |
|           : timely basis in the    : first is a notice of intent to   |
|           : restructuring          : restructure, which must          |
|           : process. These         : include the project, the         |
|           : procedures must take   : responsible participating        |
|           : into account the need  : administrative entity and the    |
|           : to provide the         : contact person, the owner's      |
|           : project's tenants and  : notice of intent to              |
|           : other affected         : restructure through the mark-    |
|           : parties timely notice  : to-market program, and the       |
|           : of proposed            : expiration date of the project-  |
|           : restructuring actions  : based assistance. The second     |
|           : and appropriate        : is a notice that includes the    |
|           : access to relevant     : location of the restructuring    |
|           : information about      : plan for inspection and          |
|           : restructuring          : copying and the date, the        |
|           : activities. The        : time, and the place of the       |
|           : procedures must give   : public meeting. The third is a   |
|           : all such parties an    : notice of the completion of      |
|           : opportunity to         : the restructuring plan. This     |
|           : provide comments to    : notice must describe the         |
|           : the participating      : completed restructuring plan     |
|           : administrative entity  : and restructuring commitment     |
|           : in writing, in         : or the reasons not to            |
|           : meetings, or in        : restructure. In addition to      |
|           : another appropriate    : the regulations, the operating   |
|           : manner. According to   : procedures guide includes        |
|           : the congressional      : detailed requirements relating   |
|           : colloquies regarding   : to the tenants' participation.   |
|           : the mark-to-market     : Among other things, the          |
|           : program, the Congress  : procedures include               |
|           : fully expects that     : requirements for the             |
|           : the participating      : participating administrative     |
|           : administrative         : entities to (1) notify the       |
|           : entities will          : tenants of mark-to-market        |
|           : establish procedures   : activities; (2) obtain and       |
|           : that ensure            : document their comments          |
|           : meaningful and         : submitted in response to the     |
|           : effective              : notices; (3) conduct a meeting   |
|           : participation for      : to hear presentations and        |
|           : residents of the       : comments on the desired          |
|           : restructured projects  : contents of the restructuring    |
|           : and other affected     : plan, on the owner's             |
|           : parties. The           : evaluation of the project's      |
|           : colloquies also state  : physical condition, and on any   |
|           : that the Senators      : proposed transfer of the         |
|           : expect the             : project; (4) conduct a follow-   |
|           : participating          : up meeting with the tenants      |
|           : administrative         : and other affected parties to    |
|           : entities to take this  : provide them with the            |
|           : concern seriously,     : opportunity to offer             |
|           : while balancing it     : additional input on the          |
|           : with the need to       : restructuring plan; (5) make     |
|           : complete the           : the completed restructuring      |
|           : restructuring process  : plan available for inspection    |
|           : in a timely fashion.   : by the tenants; and (6)          |
|           :                        : provide the tenants and the      |
|           :                        : community with access to         |
|           :                        : various documents relating to    |
|           :                        : the restructuring process.       |
|-----------------------------------------------------------------------|
| Collect   : According to the act   : We found OMHAR's                 |
| public    : (****Helvetica:xa4**** : implementation of this task to   |
| comments. : 522), the Secretary    : be in accordance with            |
|           : must seek              : statutory requirements, as       |
|           : recommendations        : follows. On October 1, 1998,     |
|           : regarding the          : HUD conducted public forums in   |
|           : selection of the       : New York, Chicago, and San       |
|           : participating          : Francisco. Forum participants    |
|           : administrative         : representing a variety of        |
|           : entities and the       : interests made presentations     |
|           : mandatory renewal of   : that expanded and clarified      |
|           : project-based          : written comments on the          |
|           : assistance for         : Department's implementation of   |
|           : certain Section 8      : the mark-to-market program. In   |
|           : contracts from         : addition to these public         |
|           : affected parties.b     : forums, OMHAR convened a focus   |
|           : The Secretary must     : group on November 18, 1998, in   |
|           : convene three public   : Washington, D.C.                 |
|           : forums at which the    :                                  |
|           : organizations making   :                                  |
|           : recommendations may    :                                  |
|           : express their views    :                                  |
|           : concerning the         :                                  |
|           : proposed disposition   :                                  |
|           : of the                 :                                  |
|           : recommendations.       :                                  |
|           : According to the       :                                  |
|           : act's accompanying     :                                  |
|           : conference report,     :                                  |
|           : the conferees          :                                  |
|           : included special       :                                  |
|           : requirements for the   :                                  |
|           : Department to seek     :                                  |
|           : comment through the    :                                  |
|           : public forums in       :                                  |
|           : order to focus         :                                  |
|           : attention on those     :                                  |
|           : issues. The conferees  :                                  |
|           : urged HUD to use the   :                                  |
|           : forums to elicit a     :                                  |
|           : wide range of          :                                  |
|           : concerns and           :                                  |
|           : recommendations from   :                                  |
|           : affected parties.      :                                  |
|           :                        :                                  |
|           :                        :                                  |
-------------------------------------------------------------------------

 Note: The section citations for the regulations refer to the draft final
regulations, dated April 9, 1999.

aThe statutory requirements and the regulations for an owner's
contribution requirement are mathematically equivalent. In other words, 25
percent of the amount of rehabilitation assistance an owner receives
equates to 20 percent of the total rehabilitation costs.

bAffected parties may include organizations representing state and local
housing finance agencies, other potential participating administrative
entities, tenants, owners, and managers of eligible multifamily housing
projects, states, units of general local government, and qualified
mortgagees.

COMMENTS FROM THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
=============================================================

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OBJECTIVES, SCOPE, AND METHODOLOGY
==================================

Section 577 of the departments of Veterans Affairs and Housing and Urban
Development and the Independent Agencies Appropriations Act of 1998 (P.L.
105-65) requires us to audit the operations of OMHAR annually for the
first 2 fiscal years following the date of enactment (October 27, 1997).
For this report, our work focused on the status of OMHAR's development by
providing information on the Office's (1) progress in obtaining staffing
resources, (2) actions to implement the mark-to-market program, (3)
implementation of the act's statutory requirements, and (4) relationship
with other offices within HUD. 

To assess OMHAR's progress in obtaining staffing resources to implement
the mark-to-market program, we reviewed the analyses OMHAR completed to
develop and finalize its organizational structure and staffing plans. We
obtained documentation indicating current and projected staffing levels at
OMHAR headquarters and at its four field offices, as well as salary levels
for the positions at each of these locations. We interviewed OMHAR and HUD
officials to discuss their efforts to hire the staff necessary to carry
out the Office's operations and to obtain their views on any barriers to
hiring qualified staff. We also reviewed the evaluation by an OMHAR
contractor of the Office's staffing issues in a May 14, 1999, front-end
risk assessment report on the mark-to-market program.

To provide information on the status of OMHAR's progress on seven key
actions that are integral to the program's successful implementation (such
as conducting technical assistance briefings on the mark-to-market process
and developing an internet-based tracking system), we interviewed OMHAR
officials and reviewed relevant documentation to assess the steps OMHAR
has taken to implement them. We examined documentation indicating the
process that OMHAR followed to qualify public and nonpublic entities for
selection to become participating administrative entities and reviewed
agreements between OMHAR and these entities. We discussed OMHAR's contract
negotiations with four public participating administrative entities that
had signed portfolio-restructuring agreements and three entities that were
still negotiating with OMHAR as of September 1, 1999, as well as with
three entities that had been qualified but later elected to not
participate in the program. In addition, we discussed OMHAR's
implementation efforts to sign public entities with the National Council
of State Housing Agencies (NCSHA) and the Association of Local Housing
Finance Agencies.

To determine whether OMHAR has implemented the mark-to-market program in
accordance with the act's requirements, we reviewed OMHAR's planned
procedures for nine statutory requirements. We selected these requirements
because they were discussed not only in the act but also highlighted in
congressional debate and the act's accompanying conference report. We
reviewed the act, the conference report, and the debate to determine how
OMHAR was to implement the nine requirements. We examined OMHAR's
implementation of the requirements by reviewing the mark-to-market
regulations, OMHAR's operating procedures guide, and the actions OMHAR has
taken to implement the requirements. 

To provide information on OMHAR's relationship with other offices within
HUD, we interviewed OMHAR and HUD officials to determine the extent of
involvement by HUD management in three OMHAR tasks-developing program
regulations, a Request for Qualifications for participating administrative
entities, and an operating procedures guide for the program. We selected
these tasks because they were critical to implementing the mark-to-market
program. We reviewed documentation to determine the level and the type of
involvement by other HUD offices in each of these tasks. This
documentation identified the dates that proposals were submitted to those
offices for review, the dates the reviews were completed, the issues
raised by those offices during their reviews, and the resolution of those
issues. In reviewing this documentation, we also were alert for situations
that might indicate that the HUD Secretary had interfered with the OMHAR
Director's ability to administer the mark-to-market program. We also
interviewed the OMHAR Director to determine if there had been any instance
of such interference by the HUD Secretary. In addition, we discussed with
OMHAR and HUD officials the types and the amount of support provided by
HUD to determine if OMHAR had received adequate support. 

GAO CONTACTS AND STAFF ACKNOWLEDGMENTS
======================================

GAO Contacts

Stanley J. Czerwinski (202) 512-7631

Richard A. Hale (202) 512-3090

Acknowledgments

In addition to those named above, John T. McGrail, Andy C. Clinton, Sally
S. Moino, and Leigh K. Ward made key contributions to this report.

(385795)

Figure 1:  Number of OMHAR Staff Planned and Number of Staff
On Board, December 13, 1999                     10

*** End of document. ***