Multifamily Housing: Better Direction and Oversight by HUD Needed for
Properties Sold With Rent Restrictions (Letter Report, 03/22/95,
GAO/RCED-95-72).

Between 1990 and 1993, the Department of Housing and Urban Development
(HUD) began foreclosure on a large number of insured mortgages on
multifamily properties with financial, physical, or operating problems.
However, HUD was unable to sell many of the properties promptly because
of the long-term rent subsidies the agency had attached to the
properties.  Purchasers of 62 properties agreed to restrict rents
charged to low-income households to the same rents that they would have
paid under the HUD rent subsidy program--usually 30 percent of the
household income.  GAO found that HUD has not (1) provided its field
offices nor purchasers of HUD multifamily properties with clear
instructions on the procedures owners must follow in managing properties
subject to rent restrictions or (2) established long-term requirements
specifying how field offices should oversee owners' compliance with
agreed-upon use restrictions.  As a result, HUD has placed inconsistent
requirements on property owners and, until recently, had not required
field offices to oversee owners' compliance.

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

 REPORTNUM:  RCED-95-72
     TITLE:  Multifamily Housing: Better Direction and Oversight by HUD 
             Needed for Properties Sold With Rent Restrictions
      DATE:  03/22/95
   SUBJECT:  Housing programs
             Surplus federal property
             Public housing
             Real estate sales
             Federal property management
             Low income housing
             Rental housing
             Disadvantaged persons
             Foreclosures
             Rent subsidies
IDENTIFIER:  HUD Section 8 Rental Assistance Program
             
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Cover
================================================================ COVER


Report to the Honorable
William S.  Cohen,
U.S.  Senate

March 1995

MULTIFAMILY HOUSING - BETTER
DIRECTION AND OVERSIGHT BY HUD
NEEDED FOR PROPERTIES SOLD WITH
RENT RESTRICTIONS

GAO/RCED-95-72

HUD Properties Sold With Rent Restrictions

(385444)


Abbreviations
=============================================================== ABBREV

  FHA -
  HUD -

Letter
=============================================================== LETTER


B-259672

March 22, 1995

The Honorable William S.  Cohen
United States Senate

Dear Senator Cohen: 

Between 1990 and 1993, the Department of Housing and Urban
Development (HUD) began foreclosure on a large number of insured
mortgages on multifamily properties that experienced financial,
physical, or operating problems.  To help carry out the legislative
goal of preserving certain units as housing affordable to low-income
households when these properties were sold to new owners, HUD had
attached long-term rent subsidies directly to the properties. 
However, HUD was unable to promptly sell many of these properties
because of a shortage of funds for the rent subsidies.  To compensate
for the funding shortages, HUD explored alternatives that would allow
property sales without using the subsidies.  Under one alternative,
used on 62 properties thus far, purchasers agreed to restrict rents
charged to low-income households to the same rents that these
households would have paid under the HUD rent subsidy
program--usually 30 percent of the household income. 

As requested, this report focuses on HUD's procedures for
implementing this rent-restriction alternative.  Specifically, the
report discusses (1) HUD's instructions to its field offices and to
property purchasers on how the rent-restriction alternative should be
implemented, (2) HUD's instructions to field offices on monitoring
purchasers' compliance with rent-restriction agreements, and (3) the
expected future use of this rent-restriction alternative. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

HUD has not provided clear and consistent instructions to its field
offices or to property purchasers on how the rent-restriction
alternative should be implemented.  A particularly important
inconsistency in HUD's instructions has been whether or not property
owners must fill vacant units on a first-come, first-served basis. 
HUD required purchasers of about half of the 32 properties we
reviewed to fill vacancies in this manner.  Essentially, this
practice ensured that the new property owners accepted low-income
households regardless of how much rental income the owners received. 
HUD gave purchasers of other properties greater latitude in filling
vacancies--essentially allowing them to exclude a household from
their rent-restricted units if the renter could not pay the full
rent, either directly or through a rent subsidy assigned to the
household. 

HUD did not require its field offices to monitor property owners'
compliance with rent-restriction agreements until July 1994, after we
had discussed the matter with HUD officials.  The officials said that
they had placed a low priority on establishing monitoring
requirements because relatively few properties had been sold with
rent restrictions.  In July 1994, HUD provided field offices with
interim monitoring instructions and directed them to review
compliance at properties containing more than 20 rent-restricted
units.  The field offices determined that 14 of the 16 properties
reviewed were in compliance as of November 1994. 

Even though HUD had planned to issue instructions clarifying program
requirements, it had not established a time frame for doing so. 
However, the agency's January 1995 comments on our draft report
indicated that revised use agreement riders detailing purchasers'
obligations for meeting rent-restriction requirements would be
available for use in sales contracts by April 1, 1995, and that
revised monitoring instructions would be issued to its field offices
by May 1, 1995. 

HUD officials believed that changes authorized by new property
disposition legislation enacted in April 1994 are likely to diminish
the agency's use of the current rent-restriction alternative.\1 A key
change authorized in the new legislation is that, in many cases,
occupants of rent-restricted units may be required to pay rents
computed as a percentage of the area median income rather than as 30
percent of their own adjusted household income.  In response to our
draft report, HUD said that its new use agreement riders and revised
monitoring procedures will reflect rent-restriction alternatives
authorized under the new law. 


--------------------
\1 Multifamily Housing Property Disposition Reform Act of 1994 (P.L. 
103-233, Apr.  11, 1994). 


   BACKGROUND
------------------------------------------------------------ Letter :2

HUD provides mortgage insurance on more than 13,000 privately owned
multifamily properties under various programs designed to help low-
and moderate-income households obtain affordable rental housing.  In
recent years, HUD had experienced a significant growth in the number
of defaulted multifamily mortgages because of financial, operating,
or other problems.  As of July 1993, HUD held more than 2,400
mortgages with unpaid principal balances totaling about $7.5 billion,
more than 2,000 of which were assigned to HUD as a result of default. 

HUD's Federal Housing Administration (FHA) insures mortgage lenders
against financial losses in the event owners default on their
mortgages.  When a default occurs, a lender may assign the mortgage
to HUD and receive an insurance claim payment from the agency.  HUD
then becomes the new lender for the mortgage.  HUD's policy is to
attempt to restore the financial soundness of the mortgage through a
workout plan.  If a workout plan is not feasible, HUD may, as a last
resort, initiate foreclosure in order to sell the property and
recover all or part of the debt.  If HUD is unsuccessful in selling a
property at a foreclosure sale, it may acquire ownership of the
property.  HUD retains these properties in its "HUD-owned inventory"
until it can sell or otherwise dispose of them. 

The Housing and Community Development Amendments of 1978 (12 U.S.C. 
1701z-11), as amended, required that in disposing of properties, HUD
preserve a certain number of units as affordable housing for
low-income households.\2 To accomplish this requirement and to ensure
that units remain affordable to eligible households,\3 HUD normally
uses a federal rental subsidy program called section 8 project-based
assistance.  Under this program, households do not have to pay more
than 30 percent of their adjusted income for rent.  Through contracts
with HUD, owners are then reimbursed the difference between a unit's
rent and the portion paid by the renter. 

HUD's ability to sell a large number of foreclosed properties while
preserving affordable units for low-income households was
significantly impeded by a shortage of federal funds needed to
support section 8 project-based contracts.\4

As a result, in some cases, HUD assumed ownership of the properties
rather than sell them to other purchasers at foreclosure sales.  HUD
then operated these properties until funding for section 8 was
available. 

To facilitate the sale of some properties, in 1991 HUD started using
alternatives to providing section 8 project-based assistance that
were allowed by the property disposition legislation.  These
alternatives included getting the purchaser to agree to keep the
required number of units available and affordable to lower-income
persons for 15 years and to charge occupant households no more than
30 percent of their income for rent.  Under this procedure, HUD
required new owners, as well as any subsequent owners, to set aside
the same number of units that they would have been required to
allocate for the section 8 program.  Purchasers agreed to fill these
rent-restricted units with tenants meeting the same household income
eligibility criteria as used in the section 8 program.  Use of the
rent-restriction approach was limited to properties that, at the time
HUD paid off the mortgage lender, were not receiving any HUD subsidy
(such as a below market interest rate loan) or were receiving rental
assistance payments for fewer than 50 percent of their units. 

HUD generally assumes that because occupants will pay no more than 30
percent of their adjusted household income toward the rent, the
owner's rental income would be reduced on the rent-restricted units. 
Accordingly, HUD adjusts the minimum bid prices it is willing to
accept on the properties downward to the point that the properties
should have a positive cash flow even if the owner received no rental
income on the rent-restricted units.\5 Because rent-restricted units
can reduce a property's cash flow, HUD has found that the
rent-restriction procedure is usually financially feasible only when
a relatively small proportion of a property's total units (usually no
more than 10 percent) have rent restrictions. 

Through December 1994, HUD had used the rent-restriction alternative
in the sale of 62 properties, or about 17 percent of the properties
sold.  The 62 properties contained 10,595 units, of which 1,344 were
rent-restricted units. 


--------------------
\2 The act established preservation goals based on conditions that
exist at the time HUD pays off the mortgage.  All units should be
preserved in properties receiving a HUD subsidy--such as below market
interest rate loans--or receiving housing assistance payments for
more than 50 percent of their units.  For properties not meeting
these criteria, but occupied by some unassisted households who had
incomes qualifying them for rental assistance, the number of units
preserved can be limited to the number of households qualifying for
rental assistance.  The Multifamily Housing Property Disposition
Reform Act of 1994 authorized new preservation alternatives in order
to make it easier for HUD to dispose of properties.  As of December
1994, HUD was in the process of issuing implementing regulations. 

\3 To be eligible, a household's annual income, adjusted for family
size, must be at or below 80 percent of the median income for the
area. 

\4 In our May 1993 testimony before the Subcommittee on Housing and
Community Development, House Committee on Banking, Finance and Urban
Affairs, we reported that HUD would need as much as $3 billion in
section 8 funding to dispose of the 440 properties in its inventory
or foreclosure pipeline at the end of fiscal year 1992 but that it
was appropriated only $93 million for this purpose in fiscal year
1993.  Multifamily Housing:  Impediments to Disposition of Properties
Owned by the Department of Housing and Urban Development
(GAO/T-RCED-93-37, May 12, 1993). 

\5 The properties are sold to the highest bidder, generally for
prices that exceed the minimum acceptable bid.  According to HUD
property disposition officials, the minimum acceptable prices are
used internally and usually are not disclosed to the public. 


   LACK OF UNIFORM INSTRUCTIONS
   LED TO DIFFERENT
   RENT-RESTRICTION REQUIREMENTS
------------------------------------------------------------ Letter :3

HUD's instructions for disposing of multifamily properties did not
provide HUD field offices or purchasers of HUD properties with clear
directions for implementing the rent-restriction alterative.  Field
offices therefore made different judgments as to what requirements
should apply--particularly whether or not properties should be
subject to certain rules and practices that had been used in
connection with the section 8 project-based rental assistance
program.  Consequently, field offices incorporated different,
sometimes conflicting, requirements into sale documents and
accompanying deed restrictions. 


      RENT-RESTRICTION
      INSTRUCTIONS WERE NOT
      UNIFORM
---------------------------------------------------------- Letter :3.1

HUD first issued instructions for implementing the rent-restriction
approach as part of a July 1991 notice prescribing procedures that
field offices were to use in selling defaulted mortgages at
foreclosure sales.  (These instructions did not apply to sales of
HUD-owned properties.) The notice described the conditions under
which rent restrictions could be used, the length of time the
restrictions were to remain in effect at each property, and the
limitations on tenants' rents.  The notice also included two,
slightly different standard-use agreements that HUD used in writing
sales contracts for properties sold at foreclosure.  One agreement
was to be included in sales contracts when HUD was also requiring
that the purchaser perform repairs to a property after the sale; the
other was to be used when HUD was not requiring the purchaser to
perform post-sale repairs. 

Both agreements required purchasers to maintain a specified number of
units as affordable housing for 15 years and to limit what households
pay toward rent to no more than what they would be charged under the
section 8 project-based rent subsidy program.  Both agreements also
required purchasers to follow certain procedures that were required
under the section 8 project-based program. 

First, purchasers had to maintain waiting lists of eligible
applicants and fill vacant restricted units on a first-come,
first-served basis but give preference to applicants who were
involuntarily displaced, living in substandard housing, or paying
more than 50 percent of their household income for rent.  Also, both
agreements required purchasers to annually verify the income of
households occupying restricted units using procedures similar to
those used in the section 8 project-based program.\6 While neither of
these procedures was specifically required by the property
disposition legislation, HUD field office officials believed that
they were appropriate because they help ensure that proper controls
are used in the management of rent-restricted properties.  Moreover,
several officials believed that the procedure for filling vacancies
is beneficial because it can place more of the cost of providing
affordable housing on property owners since it essentially requires
the owners to accept low-income households on a first-come,
first-served basis even if they would not pay the full rental cost. 

The primary difference between the two agreements was that the
agreement for properties without post-sale repair requirements stated
that rent-restricted units could not be occupied by households that
continued to possess a section 8 voucher or certificate after
occupancy.\7 Several of the field office officials we talked with
said that this requirement was appropriate because they believed that
rent-restricted units were intended to serve unassisted households. 

In September 1992, HUD issued instructions for the sale of HUD-owned
properties.  These instructions, however, differed from the 1991
instructions in that the use agreements only required that purchasers
restrict rents on the specified number of units for 15 years and
limit rents paid by the occupants to what would be charged under the
section 8 project-based program.  The use agreements did not require
waiting lists or annual income verification procedures and did not
prohibit occupancy by section 8 voucher or certificate holders.  Thus
the agreements gave purchasers greater latitude in filling
vacancies--essentially allowing them to exclude a household from
their rent-restricted units if the renter could not pay the full
rent, either directly or through a rent subsidy assigned to the
household. 

In June 1993, HUD replaced the 1991 and 1992 instructions with
instructions that applied both to properties sold at foreclosure and
to HUD-owned properties.  The use agreements included in the 1993
instructions were essentially the same as the 1992 use agreements
with respect to requirements for rent-restricted units.  The 1993
instructions thus eliminated any specific requirements for (1)
filling vacancies from waiting lists on a first-come, first-served
basis; (2) verifying household incomes; and (3) prohibiting section 8
voucher and certificate holders from occupying rent-restricted units. 
Property disposition officials told us that these changes were made
to reduce government regulation and to delegate more authority to
field offices. 

In September 1993, HUD's Office of General Counsel (OGC) specifically
directed field offices to discontinue use of the 1991 use agreement
that prohibited section 8 voucher or certificate holders from
occupying rent-restricted units.  Although field offices had approved
sales contracts containing the 1991 use agreement, the OGC
subsequently concluded that excluding voucher and certificate holders
violated section 204 of the Housing and Community Development
Amendments of 1978.  (Section 204 prohibits property owners from
unreasonably refusing to lease units to anyone simply because he or
she held a section 8 voucher or certificate.)

HUD headquarters officials told us in November 1994 that the
difference in use agreements for rent-restricted units since 1991
occurred unintentionally.  The officials said that because of the
relatively few properties sold with rent restrictions, they
considered the instructions to be a low priority and thus had given
them little attention.  The officials said that there is no reason
why requirements for rent-restricted units should differ because of
the type of sale or because post-sale repairs are required. 

The officials also told us that after discussing the lack of guidance
with us in June 1994, HUD issued interim instructions to field
offices in July 1994, advising them to direct owners to use waiting
lists, annually certify household incomes, and not exclude section 8
voucher and certificate holders.  Also, according to the officials,
HUD will incorporate these specific requirements into new use
agreements that the agency will develop to reflect the
rent-restriction provisions of the Multifamily Housing Property
Disposition Reform Act of 1994.  The officials said that the revised
use agreements should be completed after the regulations implementing
the 1994 act are finalized.  In its comments on our draft report, HUD
said that new use agreement riders would be ready for field offices'
use in sales contracts by April 1, 1995. 


--------------------
\6 This program requires property owners to use HUD's standardized
rent-calculation forms in determining the level of adjusted household
incomes and rent payments.  In addition, owners are required to
recertify household incomes annually to determine if rent payments
need to be adjusted. 

\7 The section 8 certificate and voucher programs are similar to the
project-based program but attach rental assistance to a specific
household rather than to a specific property.  A household possessing
a section 8 certificate pays 30 percent of its adjusted income for
rent while HUD makes up the difference between that amount and the
actual rent, which is approved by the local housing agency and which
usually cannot exceed a "fair market rent" determined by HUD for a
unit with the same number of bedrooms in the market area.  The
voucher program is slightly different in that an assisted household
may elect to pay more or less than 30 percent of its adjusted income
toward rent.  HUD's subsidy, however, is generally equal to the
difference between 30 percent of the household's adjusted income and
a subsidy benchmark set by local or state housing agencies. 


      DIFFERENT REQUIREMENTS FOR
      PURCHASERS OF PROPERTIES
---------------------------------------------------------- Letter :3.2

HUD's inconsistent guidance has led to different requirements being
used for owners of properties with rent-restricted units.  In a
review of 32 properties sold with rent restrictions from February
1993 through June 30, 1994, we found an equal split between
properties with the more specific use agreements issued in 1991 and
properties with the more general use agreements issued in 1992 and
1993.  In six instances, however, the responsible field office had
used the more specific 1991 use agreements during 1994, well after
they had been replaced by the more general agreements in June 1993. 
We also found that several field offices were continuing to actively
discourage purchasers from counting certificate and voucher holders
toward satisfying rent-restriction requirements even after the OGC,
in September 1993, advised them of section 204 and its applicability. 
HUD property disposition officials told us that they intended to give
field offices flexibility to modify the 1993 use agreements on the
basis of local preferences, but that field offices should not be
discouraging voucher and certificate holders from occupying
rent-restricted units. 

The three properties we visited illustrate how HUD's waiting list
requirements can influence the extent to which a property owner
actually experiences reduced rental income because of rent-restricted
units.  Two of these properties were formerly HUD-owned and,
therefore, were sold under the more general use agreements, without
requirements for filling vacancies from waiting lists on a
first-come, first-served basis.  The third property was sold with a
1991 use agreement that specifically required use of a waiting list. 

On-site managers at the two properties sold with the 1992 use
agreement told us that they did not accept tenants in rent-restricted
units unless the households also had a section 8 voucher or
certificate or unless 30 percent of their adjusted income (i.e., what
the tenant would have to pay) equalled the full rent.  Households
that did not have certificates or vouchers or that did not have the
necessary income to pay the full rent were turned away. 

In contrast, the third property was using a waiting list to fill
unoccupied units.  This particular 280-unit property had 55
rent-restricted units.  Because the waiting list provided a
systematic selection process, applicants were selected on a
first-come, first-served basis.  None of the 55 households residing
in the rent-restricted units had vouchers or certificates or
sufficiently high incomes; therefore, the owner was receiving less
than the full rent on each of the units.  According to data provided
by the on-site management company, the property was receiving an
average of $357 less than the full monthly rental income for each of
the rent-restricted units. 


   HUD'S INITIATIVES TO IMPROVE
   OVERSIGHT
------------------------------------------------------------ Letter :4

Until recently, HUD headquarters' and field offices' actions to
oversee compliance with the rent-restriction agreements were limited. 
However, in July 1994, HUD directed its field offices to review
compliance at a number of selected properties.  The field offices
found that 2 of the 16 properties they reviewed had not fully
complied with their rent-restriction agreements.  The property owners
disagreed, and HUD was reviewing the cases as of November 1994. 

HUD did not issue instructions to its field offices for monitoring
compliance with rent-restriction agreements until we discussed the
matter with its property disposition officials in June 1994.  The
officials told us that they had not required field offices to monitor
purchasers' compliance with rent-restriction agreements because they
considered this to be a low priority, given the relatively small
number of properties that had been sold with rent restrictions. 
However, the officials agreed that some form of oversight was needed. 

HUD issued a memorandum in July 1994 that required field offices to
perform a one-time on-site compliance review at each property having
more than 20 rent-restricted units.  The agency also provided general
guidelines for monitoring compliance and a checklist to use during
the review.  The memorandum also stated that HUD was considering
various alternatives and would later provide instructions for the
long-term monitoring of projects to ensure that they remain in
compliance with the terms and conditions of the use agreements under
which they were sold.  According to HUD officials, these instructions
were to be prepared after the field offices completed the initial
compliance reviews. 

Field offices were directed to complete their compliance reviews by
August 15, 1994.  However, because the July 1994 memorandum did not
require the field offices to formally report the results of the
reviews to HUD headquarters, a second memorandum was issued in
September 1994 that extended the time for completing and reporting on
the reviews until October 1994. 

The results of the compliance reviews were reported to HUD
headquarters in October 1994.  In all, 25 properties containing a
total of 949 rent-restricted units met the criteria to be reviewed
(i.e., they contained 20 or more rent-restricted units).  However,
reviews at 9 of the 25 properties were postponed for several months
because the properties had only been recently sold and had not yet
had time to fully implement their rent-restriction procedures.  The
field offices determined that 14 of the remaining 16 properties
complied with the provisions of their use agreements and that 2
properties were not in compliance.  As of November 1994, HUD was
reviewing these two cases to determine what actions, if any, should
be taken.  HUD property disposition officials said that they were
satisfied with the overall compliance found to date. 

HUD property disposition officials told us that the agency had
planned to develop instructions to field offices for the long-term
monitoring of owners' compliance with rent-restriction agreements,
but as of December 1994, they did not have a specific target date for
issuing them.  In commenting on our draft report, HUD said that it
would issue revised monitoring procedures to its field offices by May
1, 1995. 


   FUTURE USE OF EXISTING
   RENT-RESTRICTION REQUIREMENTS
------------------------------------------------------------ Letter :5

In April 1994, the Congress enacted the Multifamily Housing Property
Disposition Reform Act (P.L.  103-233), which revised the procedures
HUD may use to dispose of multifamily properties.  Although
rent-restriction agreements are likely to continue as an important
aspect of HUD's multifamily property disposition activities, future
use of the current rent-restriction alternative is likely to
decrease. 

The act authorizes HUD to use rent restrictions as a means of
complying with a number of its requirements (such as ensuring that
units in certain properties that do not receive project-based section
8 assistance remain available and affordable to low-income families). 
The act gives HUD broad discretionary authority to use rent
restrictions and to discount sales prices in order to meet the act's
property disposition goals.  The act also established an additional
way to determine the maximum amount that occupants of rent-restricted
units have to pay toward rent.  Occupants can be required to pay a
percentage of the median income in the local area, instead of a
percentage of their household income.  This could increase the amount
that some households with low incomes pay toward rent. 

HUD officials told us that while the previously used rent-restriction
agreements may still be used under the 1994 act, they believe that
the need to use them in future sales may be limited.  Instead, HUD is
likely to use rent-restriction agreements that base tenants' rent
payments on a percentage of the area's median income.  The officials
also noted that the need for the previous agreements will be
diminished at least through fiscal year 1995 because larger amounts
of section 8 funding have been appropriated (approximately $550
million in fiscal year 1995 compared with $93 million in fiscal year
1993). 

As proposed in our draft report, HUD recently established a firm
schedule for prompt issuance of instructions implementing the new
rent-restriction options that it plans to use in carrying out the
1994 legislation.  In its comments on our draft report, HUD said that
new use agreement riders reflecting the 1994 legislation would be
available for use in sales contracts by April 1, 1995, and that its
revised monitoring instructions, scheduled for issuance by May 1,
1995, would include revisions to reflect the 1994 legislation. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

HUD has not (1) provided its field offices nor purchasers of HUD
multifamily properties with clear instructions on the procedures
owners must follow in managing properties subject to rent
restrictions or (2) established long-term requirements specifying how
field offices should oversee owners' compliance with agreed-upon use
restrictions.  As a result, HUD has placed inconsistent requirements
on property owners and, until recently, had not required field
offices to oversee owners' compliance. 

HUD has acknowledged that it did not provide field offices and
property owners adequate instructions when the rent-restriction
approach was implemented.  Although HUD had planned to clarify
property management requirements and issue instructions to field
offices for the long-term monitoring of properties with
rent-restriction agreements, it did not have a definite time frame
for completing these actions.  However, in response to our draft
report, HUD said that it would have revised use agreement riders,
which detail purchasers' obligations for meeting rent-restriction
requirements, ready for field offices to use in sales contracts by
April 1, 1995.  HUD also said that it would issue revised monitoring
procedures to its field offices by May 1, 1995. 

According to HUD officials, the agency will require owners to
maintain waiting lists and to fill vacancies from the lists on a
first-come, first-served basis.  This requirement should increase the
availability of future rent-restricted units to households that are
not already receiving federal rent assistance by preventing owners
from purposely filling vacancies exclusively with holders of section
8 vouchers and certificates. 

While it is unclear to what extent the previously used
rent-restriction agreements will be used in the future, rent
restrictions will be a key tool for HUD to use in meeting the
requirements of new property disposition legislation enacted in April
1994.  HUD plans to soon have available new use agreement riders and
monitoring instructions that reflect the additional rent-restriction
options it will use in implementing the 1994 act.  As was the case
with previous rent restrictions, the effectiveness of future
restrictions will depend, in part, on how effectively the new riders
communicate the procedures owners must follow in managing
rent-restricted properties and on the adequacy of the new monitoring
instructions. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In its comments, HUD said that we correctly pointed out the problems
it had experienced in developing procedures to implement the
rent-restriction approach but noted that there have been relatively
few properties and units sold with rent restrictions.  Through its
comments, HUD implemented the recommendations that we proposed by
establishing a firm schedule for (1) clarifying procedures that
owners must follow in managing rent-restricted units, (2) clarifying
procedures field offices are to use in monitoring owners' compliance,
and (3) establishing similar procedures for new rent-restriction
options that the agency will use to carry out requirements of the
Multifamily Housing Property Disposition Reform Act of 1994. 
Accordingly, this report makes no recommendations, and it has been
revised to reflect HUD's additional actions.  We plan to monitor
HUD's issuance of the revised procedures and ensure that the
revisions adequately address the problems that we found.  (See app. 
I for the complete text of HUD's comments.)


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To evaluate HUD's instructions and compliance monitoring, we reviewed
applicable laws, regulations, and procedures concerning the
rent-restriction approach and analyzed information and data provided
by HUD on properties sold with rent restrictions through December 31,
1994.  We discussed the implementation of the rent-restriction
approach with officials from the Office of Preservation and
Disposition and the Office of General Counsel at HUD headquarters in
Washington, D.C., and with corresponding officials at field offices
in Denver, Colorado; Jacksonville, Florida; Atlanta, Georgia; Kansas
City, Kansas; St.  Louis, Missouri; Greensboro, North Carolina; and
Fort Worth and Houston, Texas.  Through June 30, 1994, these eight
field offices were responsible for selling about 60 percent of the
rent-restricted properties.  We also visited three properties that
were sold with rent restrictions, obtained and analyzed information
on their rent-restriction procedures, and interviewed property owners
and on-site staff. 

To determine the expected future use of rent restrictions, we (1)
reviewed the provisions of the Multifamily Housing Property
Disposition Reform Act of 1994, (2) determined what changes the act
makes in HUD's authority for establishing rent restrictions, and (3)
discussed with property disposition officials HUD's plans for
implementing the act. 

We conducted our review from May through December 1994 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

As arranged with your office, unless you publicly announce it
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter.  At that time, we will
send copies to the Secretary of Housing and Urban Development.  We
will also make copies available to others on request. 

Please contact me at (202) 512-7631 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
II. 

Sincerely yours,

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

HOUSING AND COMMUNITY DEVELOPMENT
ISSUE AREA

Richard A.  Hale
Joseph M.  Raple
Jeanne B.  Davis
Woodliff L.  Jenkins, Jr.
Sally S.  Moino

OFFICE OF GENERAL COUNSEL

John T.  McGrail


*** End of document. ***