Multifamily Housing: Progress Made in Establishing HUD's Office of
Multifamily Housing Assistance Restructuring (Letter Report, 10/27/98,
GAO/RCED-99-5).
Pursuant to a legislative requirement, GAO reviewed the status of the
Office of Multifamily Housing Assistance Restructuring's (OMHAR)
development, focusing on: (1) its organization and staffing and how it
relates to the Department of Housing and Urban Development's (HUD)
overall structure; (2) whether it is on schedule to meet its key
operational and reporting requirements; (3) the procedures and systems
it will use to oversee the mark-to-market program's implementation; (4)
the status of projects included in the three mark-to-market
demonstration programs and how HUD is using information gathered from
these programs; and (5) the actions it has taken to obtain information
and feedback from parties that will be affected by the mark-to-market
program.
GAO noted that: (1) because a Director for OMHAR was not appointed until
October 21, 1998, HUD had not made final decisions at the time of GAO's
review on the Office's staffing and organization or on how the Office
would relate to HUD's overall structure; (2) in addition to the 10 staff
currently assigned to work on the mark-to-market program, HUD's
preliminary plans call for hiring approximately 75 staff for OMHAR; (3)
the Departments of Veterans Affairs and Housing and Urban Development,
and Independent Agencies Appropriations Act of 1998, provides the
Director special compensation authority to pay employees of OMHAR at a
higher level than other employees in order to obtain the skills and
expertise needed to accomplish the program's purposes; (4) HUD has made
considerable progress toward meeting its key operational requirements
for implementing the mark-to-market program; (5) because of delays in
obtaining contract support and the sheer volume of tasks that HUD needs
to complete, some of these tasks either have been or will be completed
behind their original schedule; (6) the HUD officials responsible for
the mark-to-market program are in the process of establishing or
planning several procedures and systems designed to oversee the
implementation of the program; (7) these include: (a) a system for
measuring the performance of the entities responsible for carrying out
restructuring transactions on HUD's behalf; (b) an Internet-based system
to track the actions taken by these entities in carrying out
mark-to-market functions; and (c) an audit guide to test these entities'
compliance with the program's requirements and objectives; (8) as of
October 14, 1998, most of these procedures and systems were still being
developed; (9) in accordance with legislative requirements, HUD
mark-to-market staff have taken actions to obtain information and
feedback from affected parties; (10) specifically, they: (a) have
developed program guidance that includes steps to involve affected
parties including tenants and neighborhood associations, at various
points in the restructuring process; and (b) have held three public
forums to obtain recommendations from organizations representing
affected parties on implementing certain legislative provisions; and
(11) in addition to the legislatively required actions, HUD invited
organizations representing project owners and managers, tenant groups,
nonprofit organizations, lenders, coalitions of local and state
government agencies, and other advocacy groups to submit ideas and
comments on developing the program and to participate in meetings to
discuss these issues.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-5
TITLE: Multifamily Housing: Progress Made in Establishing HUD's
Office of Multifamily Housing Assistance
Restructuring
DATE: 10/27/98
SUBJECT: Performance measures
Housing programs
Federal aid for housing
Low income housing
Rental rates
Rent subsidies
Agency missions
Federal agency reorganization
Federal employees
Public housing
Mortgage programs
IDENTIFIER: HUD Mark-to-Market Program
HUD Insured Section 8 Multifamily Rental Housing Portfolio
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Cover
================================================================ COVER
Report to Congressional Committees
October 1998
MULTIFAMILY HOUSING - PROGRESS
MADE IN ESTABLISHING HUD'S OFFICE
OF MULTIFAMILY HOUSING ASSISTANCE
RESTRUCTURING
GAO/RCED-99-5
HUD's Office of Multifamily Housing Restructuring
(385712)
Abbreviations
=============================================================== ABBREV
AFR - applicable federal rate
FERA - front-end risk assessment
FHA - Federal Housing Administration
FMR - fair market rent
GAO - General Accounting Office
HFA - housing finance agency
HUD - Department of Housing and Urban Development
IRS - Internal Revenue Service
MAHRAA - Multifamily Assisted Housing Reform and Affordability Act
of 1997
MRRAS - mortgage restructuring and rental assistance sufficiency
(plan)
OMHAR - Office of Multifamily Housing Assistance Restructuring
OTAG - Outreach and Training Grant
PAE - participating administrative entity
RFQ - Request for Qualifications
Letter
=============================================================== LETTER
B-280458
October 27, 1998
Congressional Committees
The Department of Housing and Urban Development's (HUD) permanent
"mark-to-market" program was recently established to restructure
HUD's multifamily portfolio of insured Section 8 housing projects by
resetting rents to market levels and reducing mortgage debt if
necessary to permit a positive cash flow.\1
The Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act of 1998\2
authorized the program and established the Office of Multifamily
Housing Assistance Restructuring (OMHAR) within HUD to administer it.
Currently, the rents for many of the HUD-assisted and -insured
multifamily housing projects substantially exceed the market level,
which results in higher subsidies under the Section 8 program. HUD
received $3.8 billion for Section 8 project-based subsidies in fiscal
year 1998.
The act requires us to audit the operations of OMHAR annually during
the first 2 fiscal years following the date of enactment and as
appropriate after that. This initial report reviews the status of
OMHAR's development, focusing on (1) its organization and staffing
and how it relates to HUD's overall structure, (2) whether it is on
schedule to meet its key operational and reporting requirements, (3)
the procedures and systems it will use to oversee the mark-to-market
program's implementation, (4) the status of projects included in the
three mark-to-market demonstration programs and how HUD is using
information gathered from these programs, and (5) the actions it has
taken to obtain information and feedback from parties that will be
affected by the mark-to-market program.
--------------------
\1 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).
\2 Referred to in this report as "the act" (P.L. 105-65, Oct. 27,
1997).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Because a Director for the Office of Multifamily Housing Assistance
Restructuring was not appointed until October 21, 1998, HUD had not
made final decisions at the time of our review on the Office's
staffing and organization or on how the Office would relate to HUD's
overall structure. In addition to the 10 staff currently assigned to
work on the mark-to-market program, HUD's preliminary plans call for
hiring approximately 75 staff--most of whom would be hired from
outside the Department--for the Office of Multifamily Housing
Assistance Restructuring. The act provides the Director special
compensation authority to pay employees of the Office at a higher
level than other HUD employees in order to obtain the skills and
expertise needed to accomplish the program's purposes.
HUD has made considerable progress toward meeting its key operational
requirements for implementing the mark-to-market program. For
example, HUD issued interim regulations for the program on September
11, 1998, and expects to complete such important tasks as developing
an operating procedures manual in October 1998, when the program is
mandated to begin. However, because of delays in obtaining contract
support and the sheer volume of tasks that HUD needs to complete,
some of these tasks either have been or will be completed behind
their original schedule. For example, HUD initially planned to
publish the interim program regulations by August 1998 and final
regulations by October 1998. However, the interim regulations were
not published until September 11, 1998, and the final regulations are
not expected to be published until 3 months after the Director's
appointment.
The HUD officials responsible for the mark-to-market program are in
the process of establishing or planning several procedures and
systems designed to oversee the implementation of the program. These
include (1) a system for measuring the performance of the entities
responsible for carrying out restructuring transactions on HUD's
behalf, (2) an Internet-based system to track the actions taken by
these entities in carrying out mark-to-market functions, and (3) an
audit guide to test these entities' compliance with the program's
requirements and objectives. In addition, mark-to-market officials
were planning procedures to oversee specific components of the
program, such as the processes that administrative entities use to
decide new rents for restructured properties, determine projects'
rehabilitation needs, and restructure project mortgages. HUD
deserves credit for focusing on oversight procedures prior to the
program's implementation. However, as of October 14, 1998, most of
these procedures and systems were still being developed.
The amount of information that HUD can use to assess the outcomes
under the three restructuring approaches being tested under the
demonstration program is limited because a relatively small number of
transactions to restructure Section 8 projects have been completed.
Furthermore, all but four of the completed transactions were
processed under one of the three restructuring approaches being
tested. Nevertheless, according to HUD mark-to-market officials,
they have used information from the demonstrations to identify,
evaluate, and improve upon, as necessary, the processes used by HUD
field offices and third parties in carrying out restructuring
activities. For example, HUD has used information from the
demonstration program to help develop process flow charts and
operating procedures for the permanent program.
In accordance with legislative requirements, HUD mark-to-market staff
have taken actions to obtain information and feedback from affected
parties. Specifically, they (1) have developed program guidance that
includes steps to involve affected parties including tenants and
neighborhood associations, at various points in the restructuring
process, such as when a project's rehabilitation needs are being
determined, and (2) have held three public forums to obtain
recommendations from organizations representing affected parties
(such as state and local housing finance agencies, tenants, and
project owners) on implementing certain legislative provisions. In
addition to the legislatively required actions, HUD invited
organizations representing project owners and managers, tenant
groups, nonprofit organizations, lenders, coalitions of local and
state government agencies, and other advocacy groups to submit ideas
and comments on developing the program and to participate in meetings
to discuss these issues.
BACKGROUND
------------------------------------------------------------ Letter :2
Approximately 8,500 projects that have been financed with Federal
Housing Administration (FHA)-insured mortgages are also supported by
project-based Section 8 housing assistance payments contracts.\3 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,
which increases the costs of the Section 8 program to the federal
government. However, if the Section 8 assistance is reduced, owners
of many of the FHA-insured housing projects are likely to default on
their mortgage payments, resulting in substantial claims to the FHA
General Insurance Fund. In addition to the cost of insurance claims,
defaults on mortgage payments could leave tenants without adequate
affordable housing.
The original project-based Section 8 contracts that were entered into
in the 1970s and 1980s were typically for 15, 20, or 40 years and
began expiring in the early 1990s. The Congress and HUD have worked
together to renew expiring contracts for 1 year. As its long-term
Section 8 contracts expire and its 1-year contracts are renewed
annually, HUD estimates that its annual renewal costs will increase
steadily. For example, HUD estimated that if no actions were taken,
the annual cost of renewing project-based Section 8 contracts would
rise to over $7 billion--or approximately one-third of HUD's current
total budget--by 2007. To address these escalating costs, the
Congress appropriated $30 million to conduct a mark-to-market
demonstration program in fiscal year 1996. This demonstration was
intended to test various methods of restructuring the financing of
insured Section 8 properties, generally by adjusting rents to market
levels and reducing the mortgage debt to reflect any decline in net
operating income resulting from the rent adjustment. Near the end of
fiscal year 1996, the Congress repealed the demonstration program but
authorized a new demonstration for fiscal 1997.
To deal with Section 8 contract expirations occurring in fiscal year
1999 and thereafter, the Congress legislated a permanent
mark-to-market program in October 1997.\4 This legislation also
extended the fiscal year 1997 demonstration program through fiscal
1998 with modifications as a transitional program while HUD developed
regulations to implement the permanent program. The intended goals
of the permanent mark-to-market program are to reduce the costs of
expiring Section 8 contracts, address financially and physically
troubled projects, correct management and ownership deficiencies, and
preserve the affordability and availability of low-income rental
housing. (See app. I for an overview of the mark-to-market
process.)
The act directed HUD to select capable entities to carry out
restructuring under the mark-to-market program on behalf of the
federal government. These entities are referred to as participating
administrative entities (PAE). Entities eligible to apply to become
PAEs include public agencies, such as state housing finance agencies,
local housing agencies, nonprofit organizations, and these entities
in partnership with each other or with private entities. The act
specifies selection criteria such as experience in working directly
with tenant organizations and other community-based organizations;
experience with multifamily housing financing and restructuring; a
history of stable, financially sound, and responsible administrative
performance; and financial strength.
--------------------
\3 FHA mortgage insurance protects lenders from financial losses
stemming from borrowers' defaults on the mortgage loans. 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. In
addition to mortgage insurance, many FHA-insured multifamily
properties receive some form of subsidy from HUD, such as Section 8
rental subsidies tied to some or all units (Section 8 project-based
assistance).
\4 The Multifamily Assisted Housing Reform and Affordability Act of
1997 was enacted in title V of P.L. 105-65. Subtitle A of the 1997
act contains the FHA-Insured Multifamily Housing Mortgage and Housing
Assistance Restructuring Program.
STAFFING AND ORGANIZATIONAL
DECISIONS NOT FINAL BECAUSE OF
DELAYS IN APPOINTING AN OMHAR
DIRECTOR
------------------------------------------------------------ Letter :3
The act established OMHAR as an entity within HUD and required the
Office to be under the management of a presidentially appointed and
Senate-confirmed Director. Section 572(a) of the act specifies that
not later than 60 days after its enactment (Oct. 27, 1997), the
President should submit a nomination for the Director for OMHAR to
the Senate. However, the Director was not nominated until September
29, 1998. The Senate confirmed the nomination on October 21, 1998.
The act authorizes the Director to hire personnel to carry out
OMHAR's functions. However, because the Director was not appointed
until October 21, 1998, HUD staff began formulating organization and
staffing plans for OMHAR in the Director's absence. HUD anticipates
very targeted hiring of staff for OMHAR with expertise to carry out
critical policy development, oversight, and decision-making
functions. Section 574(a),(b) of the act allows the Director to pay
OMHAR's employees (1) without regard to certain provisions of pay
schedules used to hire most federal employees\5 and (2) comparably to
the officers and employees of the Federal Deposit Insurance
Corporation. In effect, this authority allows the Director to
compensate OMHAR employees at a higher level than other HUD employees
to obtain the skills and expertise needed to accomplish the program's
purposes.
HUD plans to hire these staff in phases. OMHAR will have
approximately 75 to 85 staff at its peak; however, this number may
increase if additional hiring authority is obtained. Some HUD
personnel are expected to be detailed to OMHAR, but according to
mark-to-market officials, most will be hired from outside HUD. For
the first quarter of fiscal year 1999, the 10 existing HUD staff
working on the mark-to-market program will be detailed to OMHAR and
additional support will be provided by HUD staff with collateral
assignments. HUD envisions that these senior core staff will be
assisted by 10 staff hired for 1-year terms. HUD intends on hiring
additional staff with 4-year terms in three phases--at the end of
October and December 1998 and the end of February 1999. Of the 75
additional staff expected to be hired during fiscal year 1999,
approximately 15 will be distributed among five HUD field offices,\6
and the remainder will be located in headquarters.
Because mark-to-market is a relatively short-term effort--authority
for both the program and OMHAR terminates on September 30, 2001\7
--HUD plans to focus staff resources on inherently governmental
functions and will generally not hire internal staff to carry out
commercial functions that are readily obtainable through
private-sector vendors. Instead, HUD expects to obtain capacity for
such functions through contracts to support internal staff. While
HUD's plan to oversee the contractors is not yet final, HUD
anticipates having several staff dedicated to managing the
contractors. These staff would include the chief of a newly created
office of contracts, compliance, and controls; three contract
analysts/government technical representatives; a records management
analyst; two internal review specialists; and a clerical support
staff member. Figure 1 illustrates OMHAR's proposed organizational
structure.
Figure 1: OMHAR's Proposed
Organizational Structure
(See figure in printed
edition.)
Housing experts involved with mark-to-market issues, including
representatives of advocacy groups, whom we contacted were concerned
that a Director of OMHAR had not yet been appointed at the time of
our discussions. For example, one representative was concerned that
the delay in the Director's appointment limited the Director's
opportunity to participate directly in developing the program's
regulations. In addition, according to some representatives, the
delay in appointing the Director and implementing the program sent a
negative message to stakeholders about the administration's support
of the program. In response to this concern, HUD mark-to-market
officials said that the administration has been supportive of the
program and has provided access to any resources necessary to prepare
for its implementation.
--------------------
\5 These provisions relate to classification and General Schedule pay
rates and are set forth in title 5 of the U.S. Code.
\6 These five field offices will be referred to as OMHAR hubs. At
the time of our review, HUD had not yet decided which five field
offices would be designated as OMHAR hubs.
\7 The mark-to-market program established by the act is referred to
as the "permanent" program in the sense that it is not a
"demonstration" program. However, under section 579 of the act,
authority for the permanent program terminates in 2001.
HUD HAS MADE PROGRESS IN
PREPARING FOR MARK-TO-MARKET
PROGRAM, BUT SOME KEY TASKS ARE
BEHIND HUD'S ORIGINAL SCHEDULE
------------------------------------------------------------ Letter :4
As mandated in the act, HUD is required to implement the
mark-to-market program for Section 8 contracts expiring in fiscal
year 1999 (beginning Oct. 1, 1998) and thereafter. Despite delays
in hiring a management studies contractor and a voluminous number of
tasks to complete, HUD has made considerable progress toward this
end. For example, HUD has published interim regulations for the
mark-to-market program and is expecting to develop an operating
procedures manual and to select its partners (the PAEs) to perform
the restructurings in October 1998.
However, in spite of HUD's efforts, some of these tasks either have
been or will be completed behind their original schedule. For
example, in May 1998, HUD had planned to issue the program's interim
regulations by August and to have final regulations in place by
October 1998. Now, HUD expects to have only the interim regulations
in place by October 1998. Final regulations are to be developed 3
months after the OMHAR Director's appointment. Also, while HUD
originally planned to begin briefing PAEs on their responsibilities
in September 1998, because of delays in selecting the PAEs, briefings
are not scheduled to begin until October. Of eight key tasks, such
as preparing briefing manuals and conducting technical assistance
briefings for field office staff, HUD had completed one as of
September 8, 1998, the most recent date for which this information
was readily available. The remaining seven were in progress,
although three of these were behind HUD's original schedule.
Appendix II provides a more detailed description of HUD's progress in
carrying out eight key tasks needed to implement the mark-to-market
program.
In addition to the operational tasks that HUD must perform, the act
places some reporting and other requirements related to the
mark-to-market program on HUD. For example, the act requires the
OMHAR Director to report certain information to the Secretary of HUD
and for the Secretary to submit information on OMHAR's operations to
the Congress and the Office of Management and Budget. (See app. III
for information on the mark-to-market reporting requirements.) The
act also requires that prior to issuing final regulations, HUD seek
recommendations on the implementation of the mark-to-market program
from individuals and organizations affected by the program and
convene at least three public forums so that those individuals and
organizations can express their views concerning the proposed
disposition of the recommendations. This requirement is discussed in
greater detail later in this report.
While most representatives of the groups involved with mark-to-market
issues whom we contacted were generally complimentary of
mark-to-market officials' efforts to implement the program, many
expressed concerns about the delays HUD has experienced in issuing
the program's regulations and soliciting and selecting its
administrative partners. For example, there were concerns that the
delay in publishing the interim regulations could limit the time that
affected parties have to review and comment on them before they
become effective and that entities that are eligible to serve as PAEs
might not be able to develop a sufficient understanding of the
regulations before having to decide if they want to participate in
the program. According to HUD mark-to-market officials, the public
will have 45 days to comment on the interim regulations, which they
believe is a sufficient amount of time. Although the regulations
become effective 30 days after publication, which will be before the
end of the comment period, these officials said that the comments
received will be considered in developing the program's final
regulations. Furthermore, these officials said that the published
notice soliciting PAEs contains an adequate description of the scope
of work for entities to decide whether they want to participate.
HUD'S PROCEDURES TO OVERSEE
MARK-TO-MARKET PROGRAM'S
IMPLEMENTATION ARE UNDER
DEVELOPMENT
------------------------------------------------------------ Letter :5
Because HUD is responsible for establishing effective management
controls over the program's implementation, the HUD officials
developing the mark-to-market program were establishing or planning
several procedures and systems to oversee its implementation.\8
However, as of October 14, 1998, most of these procedures and systems
were not yet in place, and many of the related details remained to be
developed.
--------------------
\8 The legislation gives the Secretary of HUD the responsibility for
carrying out mark-to-market operations until a Director for OMHAR is
appointed.
HUD IS DEVELOPING CONTROLS
OVER PROGRAM OPERATIONS AND
COMPLIANCE
---------------------------------------------------------- Letter :5.1
Among other things, management controls can include (1) controls over
program operations, which are policies and procedures that management
implements to reasonably ensure that a program meets its objectives,
and (2) controls over compliance with laws and regulations, which are
policies and procedures to reasonably ensure that resources are used
consistent with laws and regulations.\9 Because many of the functions
necessary under the mark-to-market program will be carried out by the
PAEs rather than by HUD, it will be particularly important for HUD to
establish procedures ensuring that all the parties involved are
carrying out their responsibilities in ways that meet the program's
objectives and are in compliance with the program's requirements. To
its credit, HUD has focused on developing oversight procedures prior
to the program's implementation.
In general, to oversee the operations of the HUD field offices and
PAEs in the mark-to-market program, HUD is developing a plan for
centralized review and oversight. Within its general oversight
system, HUD has either developed or is planning three key components
to help ensure that field offices and PAEs carry out the program in a
way that meets its objectives and is in compliance with requirements:
(1) performance measures to judge the effectiveness of PAEs'
activities and a system of compensating PAEs, (2) an Internet-based
tracking system to monitor and analyze actions taken by HUD field
offices and PAEs in carrying out mark-to-market functions, and (3) an
oversight and audit guide to test compliance with the program's
requirements and objectives. As of October 14, 1998, HUD was still
in the process of developing all three of these components. The
components and their status are presented in table 1.
Table 1
Key Components of HUD's Oversight of
Field Offices' and PAEs' Activities in
the Mark-to-Market Program
Task Purpose Performed by Status
-------------------- ----------------------- -------------------- --------------------
Performance measures To allow HUD to assess Developed by HUD According to mark-
to judge the PAEs' performance and officials to-market officials,
effectiveness of compensate them responsible for procedures to judge
PAEs' activities and accordingly. mark-to-market, with the effectiveness of
a system for assistance from third parties'
compensating PAEs --HUD may provide HUD's management activities will be
incentives to reward studies contractor, included in an
superior performance who is to make oversight and audit
(�513(a)(2)(I)) or may recommendations for guide, which was not
terminate its agreement improvements to the yet final as of
with a PAE for failure fee structure used October 14, 1998.
to comply with under the The compensation
requirements demonstration structure was also
(�513(a)(2)(F)). program. not final as of that
date.
--HUD is to compensate
PAEs for all reasonable
expenses incurred as
necessary to perform
their duties under the
act (�513(a)(2)(H)).
Internet-based To allow HUD to track The tracking system As of October 14,
tracking system to transactions completed was developed by a 1998, HUD was in the
monitor actions by its field offices HUD contractor. process of
taken by HUD field and PAEs, including Another contractor, implementing a
offices and PAEs in project-and loan- the management system for use under
carrying out mark- related information, studies contractor, the fiscal year 1998
to-market functions and analyze the social, then evaluated the demonstration
economic, and system and program. At that
administrative recommended changes. time, HUD was also
implications of working with the
restructuring. management studies
contractor to
--HUD is to report identify changes
annually to the necessary for the
Congress on the actions permanent program
taken under the mark- and expected the
to-market program and system to be ready
on the status of for assigning
eligible projects projects to PAEs,
(�520(a)). tracking PAEs' fees,
and tracking
projects under the
permanent program in
November 1998.
Oversight and audit To identify internal Developed by HUD's This guide was still
guide to test control objectives and management studies under development as
compliance with tests that can be used contractor. of October 14, 1998.
program's to determine if the
requirements and program's goals,
objectives objectives, and
requirements are being
met. According to mark-
to-market officials,
the guide will allow
all parties involved in
the restructuring
process to know that
their work will be
reviewed and to be
aware of exactly what
they will be held
accountable for doing.
-----------------------------------------------------------------------------------------
Note: All section citations refer to P.L. 105-65.
--------------------
\9 Government Auditing Standards, 1994 Revision (GAO/OCG-94-4, June
1994).
HUD IS DEVELOPING PROCEDURES
TO MONITOR PROGRAM'S KEY
COMPONENTS
---------------------------------------------------------- Letter :5.2
In addition to the processes described in table 1 for HUD's general
oversight of field offices' and PAEs' performance under the
mark-to-market program, HUD is responsible for monitoring several
specific components of the program as they are implemented. These
components include (1) screening owners and projects to determine
their eligibility for restructuring, (2) setting projects' rents, (3)
determining projects' rehabilitation needs, (4) restructuring
projects' mortgages, (5) recapturing Section 8 funds, (6) reviewing
restructured properties, and (7) using technical assistance funds.
As of October 14, 1998, HUD had developed procedures to oversee two
of these components but was still in the process of developing
oversight procedures for the other five. The program's components
and the description and status of HUD's procedures to oversee their
implementation are presented in appendix IV.
DATA ON COMPLETED
RESTRUCTURINGS ARE LIMITED, BUT
DEMONSTRATIONS HAVE PROVIDED
INFORMATION ON PROCESS
------------------------------------------------------------ Letter :6
HUD's ability to evaluate the results of the various restructuring
approaches allowed under the mark-to-market demonstration programs is
limited because a relatively small number of demonstration
transactions have been fully completed. The Congress authorized
these demonstrations for fiscal years 1996-98 to explore approaches
for restructuring the financing of and reducing the Section 8
assistance provided for properties eligible for the mark-to-market
program. Despite the fact that relatively few transactions have been
fully completed, HUD mark-to-market officials believe that the
experience and process of carrying out the demonstrations have
yielded information useful for implementing the permanent program.
DEMONSTRATIONS WERE
ESTABLISHED FOR FISCAL YEARS
1996-98 TO TEST
MARK-TO-MARKET APPROACHES
---------------------------------------------------------- Letter :6.1
In April 1996, the Congress passed legislation authorizing the fiscal
year 1996 mark-to-market demonstration--a voluntary program. The
repeal of this demonstration near the end of fiscal year 1996 did not
nullify any agreements or proposals that had already been considered
under the program, and HUD continued to process proposals that had
been received prior to its termination.\10
For project-based Section 8 contracts expiring in fiscal years 1997
and 1998, the Congress again authorized optional demonstration
programs to explore approaches to restructuring the debt secured by
these properties while minimizing adverse impacts on tenants, owners,
and communities.\11 As authorized by the legislation, restructuring
transactions were performed by HUD field offices, by HUD in
partnership with state and local housing finance agencies (HFA), and
by HUD in joint ventures with nonprofit entities. As of October 2,
1998, the latest date for which information was readily available,
HUD had executed contracts with 25 HFAs and entered into 4 joint
venture agreements with nonprofit entities to restructure projects
under the demonstrations.
--------------------
\10 The fiscal year 1996 demonstration program was repealed by
section 212 of the Departments of Veterans Affairs and Housing and
Urban Development, and Independent Agencies Appropriations Act of
1997 (P.L. 104-204, approved Sept. 26, 1996).
\11 Sections 211 and 212 of the Departments of Veterans Affairs and
Housing and Urban Development, and Independent Agencies
Appropriations Act of 1997 (P.L. 104-204, approved Sept. 26, 1996)
and section 522(b) of the Departments of Veterans Affairs and Housing
and Urban Development, and Independent Agencies Appropriations Act of
1998 (P.L. 105-65, enacted Oct. 27, 1997).
RELATIVELY FEW DEMONSTRATION
TRANSACTIONS HAVE BEEN
COMPLETED
---------------------------------------------------------- Letter :6.2
As of October 2, 1998, nearly 300 properties were participating in
the demonstration programs. Restructuring had been completed for 42
of these properties, and all but 4 (which were processed under a
joint venture arrangement) of these had been processed by HUD staff.
None of the restructurings had been completed under HFA arrangements
as of that date. Consequently, information that HUD could use to
assess outcomes under the various restructuring approaches has been
limited. Table 2 shows the number of projects participating in each
component of the demonstrations and their status.
Table 2
Number and Status of Projects
Participating in Mark-to-Market
Demonstration Programs
Number of Party responsible for
Demonstration participatin processing restructuring Status of participating
program g projects transactions projects
--------------- ------------ ---------------------------- ----------------------------
Fiscal year 36\a HUD, with assistance from a As of September 30, 1997,
1996 contract financial adviser. five project-restructuring
transactions had been
completed under the 1996
demonstration.\b
Fiscal year 120 As of October 2, 1998, As of October 2, 1998, 33
1997 project transactions had
--22 projects were assigned been completed under the HUD
to a joint venture field office component of
arrangement; the 1997 demonstration, and
4 had been completed under
--17 projects were assigned the joint venture component.
to HFAs; and
--approximately 81 projects
were assigned to HUD field
offices.
Fiscal year 126 As of October 2, 1998, As of October 2, 1998, no
1998 project transactions had
--23 projects were assigned been completed under the
to a joint venture fiscal year 1998
arrangement; demonstration.
--52 projects were assigned
to HFAs; and
--approximately 51 projects
were assigned to HUD field
offices.
Total 282 projects 42 restructuring
participatin transactions completed
g
-----------------------------------------------------------------------------------------
\a HUD received 110 voluntary proposals from owners to participate in
the fiscal year 1996 demonstration. Of these, HUD rejected 21 as
either ineligible or incomplete. HUD rejected 53 of the remaining 89
proposals because the project's financing arrangements precluded
mortgage restructuring, the proposal did not meet the program's
objectives, or the proposal did not demonstrate a resolution approach
that was different from proposals already in process. HUD accepted
the remaining 36 proposals with specific modifications and
conditions.
\b Five other projects originally submitted under the 1996 program
were completed under the 1997 program. Owners of 14 projects elected
not to participate further in the demonstration. As of September 8,
1998, the remaining 12 projects were held in abeyance because they
were financed with certain bonds, and the bond issuers had to agree
to the restructuring. These 12 would no longer be eligible to be
restructured under the 1996 demonstration program. According to HUD
mark-to-market officials, if the owners of these projects choose to
pursue restructuring, they could currently be considered for
participation in the 1998 demonstration.
Source: HUD.
ACTIVITIES UNDER
DEMONSTRATIONS HAVE PROVIDED
INFORMATION ON
MARK-TO-MARKET PROCESS
---------------------------------------------------------- Letter :6.3
Despite the relatively few demonstration transactions that have been
fully completed, according to HUD mark-to-market officials, they have
used information from the demonstrations to identify, evaluate, and
improve, as necessary, the processes used by HUD field offices and
third parties in carrying out restructuring activities.
Specifically, information from the demonstrations was used to help
develop process flow charts and an operating procedures manual for
the permanent mark-to-market program. These charts and the manual
were compiled by mark-to-market officials, with assistance from HUD's
management studies contractor, by reviewing and documenting HUD's
policy and program requirements under the demonstrations, identifying
weak policies and procedures in the process, and recommending
improvements in the program's design and delivery.
In addition, a front-end risk assessment of the fiscal year 1997
demonstration program identified some concerns, which HUD
mark-to-market officials told us that they had considered in
establishing the permanent program. For instance, the front-end risk
assessment noted that concerns over potential tax liabilities kept
many owners from participating in the program, owing either to an
inability or an unwillingness to handle the tax consequences or a
resistance to participating until anticipated changes to the tax
legislation became known.\12
(See app. II for more information on resolution of the tax issue.)
The 1997 front-end risk assessment also identified communication and
the coordination of HUD's functions as an area of concern. For
instance, the risk assessment stated that HUD's information
technology staff ideally should have been involved in developing
information systems for the fiscal year 1997 demonstration program
earlier in the process to ensure that all departmental documentation
and other information technology requirements were met. The risk
assessment concluded that, in general, the program's staff should be
representative of all applicable areas of HUD or should involve
appropriate personnel from the earliest stages of the process to
avoid the need to substantially modify processes late in the program.
According to HUD mark-to-market officials, they have applied this
"lesson learned" by involving other areas within HUD's Office of
Multifamily Housing, such as Section 8 and Multifamily Claims staff,
and other HUD offices, such as the Office of Policy Development and
Research and the Office of General Counsel, throughout the
development of the permanent program.
According to mark-to-market officials, the demonstration programs
also provided other information useful for working out the details of
the permanent program. For instance, mark-to-market officials
believe that their efforts in developing agreements with state and
local HFAs laid the foundation for HFAs' participation in the
permanent program as PAEs. Similarly, issues raised by the nonprofit
partners under the joint venture arrangements have been instructive
as mark-to-market officials consider details and policies under the
permanent program, such as issues related to adjusting rents to
market levels without mortgage restructuring and the compensation
structure for nonprofit partners.
With respect to the lessons learned from the component of the
demonstration program carried out by HUD field offices,
mark-to-market officials said that they have compiled an ongoing
question-and-answer document to respond to the issues raised by the
field offices involved. These mark-to-market officials said that
they have communicated with the field offices to discuss the
advantages and disadvantages of certain approaches and to develop
responses to the questions. According to these officials, this
effort has assisted in developing the permanent program by giving
them a better understanding of the potential effects of policy
decisions on the participating field offices.
--------------------
\12 The demonstration program did not include legislative provisions
offering property owners any relief from the tax liabilities that
could be incurred in the restructuring process.
HUD HAS OBTAINED INPUT FROM
AFFECTED PARTIES AND DEVELOPED
PLANS FOR THEIR CONTINUED
INVOLVEMENT
------------------------------------------------------------ Letter :7
Under the mark-to-market legislation, HUD must establish procedures
to provide an opportunity for parties affected by restructuring to
participate in the process. The act also requires HUD to hold at
least three public forums to obtain recommendations on the
implementation of certain legislative provisions. In accordance with
these requirements, HUD's program guidance includes steps for
involving affected parties in the restructuring process, and, on
October 1, 1998, mark-to-market staff held the three required public
forums. In addition, in preparing to implement the program, HUD has
sought input from a variety of groups representing those affected by
the program.
PROGRAM'S GUIDANCE INCLUDES
OPPORTUNITIES FOR
PARTICIPATION BY AFFECTED
PARTIES
---------------------------------------------------------- Letter :7.1
Section 514(f) of the act requires HUD to establish procedures to
provide an opportunity for tenants, neighborhood residents, local
government, and other affected parties to participate in the
restructuring process. These procedures must require consultation
with affected parties in connection with, at a minimum, a project's
mortgage restructuring and rental assistance sufficiency plan,\13 any
proposed sale or transfer of the project to another entity, and the
rental assistance assessment plan developed to determine whether to
renew the project's Section 8 assistance with project-based or
tenant-based assistance. The act further directs that, to the extent
practicable and consistent with the need to accomplish the
restructuring of Section 8 projects in an efficient manner, the
procedures should give all such parties an opportunity to provide the
PAE with comments in writing, in meetings, or in another appropriate
manner.
HUD has addressed this legislative requirement by outlining
procedures in the program's draft operating procedures manual for
affected parties' participation. The manual identifies several
points when affected parties must be given the opportunity to
participate. For instance, the manual requires a PAE to conduct at
least one consultation meeting before a project's physical needs
assessment is completed. The consultation meeting is to provide the
PAE with an opportunity to receive oral presentations and comments
and respond to tenants' and communities' concerns regarding the
mortgage restructuring and rental assistance sufficiency plan, the
rental assistance assessment plan, and any proposed sale or transfer
of the project. In addition, within 10 days of the PAE's completion
of the proposed rental assistance assessment plan, the owner must
send a notice and provide an opportunity to comment to the project's
residents, a local government representative, a representative of the
public housing authority, and representatives of neighborhood
residents or other affected parties, as determined by the PAE.
Section 514 of the act also authorized up to $10 million annually in
funding for tenant groups, nonprofit organizations, and public
entities for building the capacity of tenant organizations, technical
assistance, and tenant services. HUD has designated a portion of
these funds to enhance opportunities for affected parties to
participate in the mark-to-market process through the Outreach and
Training Grants (OTAG) program. Under the program, $6 million is
available to provide technical assistance for tenants of eligible
mark-to-market projects so that the tenants can (1) participate
meaningfully in the mark-to-market program and (2) affect decisions
about the future of their housing. Grant funds can be used for,
among several other activities, organizing residents of eligible
low-income housing so that tenants can effectively participate in the
mark-to-market process.\14
--------------------
\13 Each project undergoing restructuring is required to have a
mortgage restructuring and rental assistance sufficiency plan, which
provides the details of a project's restructuring.
\14 In addition, $1 million in fiscal year 1998 and, subject to
appropriations, $8 million in fiscal 1999 is available under HUD's
Intermediary Technical Assistance Grant program. Under this program,
intermediaries provide technical assistance funds to subrecipients,
including grantees under the Outreach and Training Grants program,
to, among other things, help tenants participate meaningfully in the
mark-to-market process and have input into and set priorities for
project repairs.
HUD HAS HELD REQUIRED PUBLIC
FORUMS
---------------------------------------------------------- Letter :7.2
The act also specifically requires that, in addition to obtaining
public comments before publishing the program's final regulations,
HUD seek recommendations from various parties on how it should
implement the legislative provisions governing the selection of PAEs
and requiring that certain Section 8 contracts be renewed as
project-based assistance. To seek views concerning HUD's proposed
disposition of these recommendations, the legislation requires HUD to
convene at least three public forums involving organizations
representing state and local HFAs, other potential PAEs, tenants,
project owners and managers, state and local governments, and
mortgagees. HUD held these forums on October 1, 1998, in New York,
Chicago, and San Francisco; these locations were selected because, in
part, of the levels of contract expirations in these areas. However,
when the forums were held, the process of selecting PAEs--one of the
forum topics on which HUD was soliciting recommendations--was already
under way. According to HUD mark-to-market officials, interested
parties had extensive opportunities to provide input prior to the
start of the PAE selection process.
HUD HAS OBTAINED INPUT FROM
AFFECTED PARTIES IN
PREPARING TO IMPLEMENT THE
PROGRAM
---------------------------------------------------------- Letter :7.3
Going beyond these legislative requirements, on December 18, 1997,
HUD's Office of Multifamily Housing began a consultation process with
representatives from a wide variety of national advocacy groups
interested in HUD's implementation of the permanent mark-to-market
program. Organizations representing owners and managers of
FHA-insured assisted housing, tenant groups, nonprofit organizations,
lenders, coalitions of local and state government agencies, and other
advocacy groups were invited to submit ideas and comments on
developing the new program. HUD received concept papers from housing
groups representing several interested parties and from February 2
through 27, 1998, held 13 full-day meetings to discuss various issues
related to mark-to-market's implementation. According to HUD
mark-to-market officials, the information presented during these
consultations was used in developing the mark-to-market program and
considered by the Department in drafting the program's interim
regulations.
In addition to the concept papers and meetings, mark-to-market
officials have also coordinated separately with the National Council
of State Housing Agencies and individual housing finance agencies to
obtain feedback from them regarding HFAs' involvement in the
mark-to-market program. For instance, in May 1998, the
mark-to-market official responsible for the HFA component of the 1997
and 1998 demonstration programs met with the Council to obtain HFAs'
views on the compensation structure for their participation in the
program. According to mark-to-market officials, they have been
meeting with HFAs on a continuing basis to discuss the program and
hear their concerns because their involvement as PAEs is key to the
program's success.
The representatives of groups involved with mark-to-market issues
whom we contacted generally believed that HUD's efforts to obtain
input on the program's implementation were productive. However,
three of these representatives were concerned that, since the
meetings in February, HUD had not given any indication of its
tentative decisions on the issues discussed. Some of these
representatives said that, without knowing HUD's intentions prior to
the Department's publication of the interim regulations for public
comment, their groups may be less able to provide meaningful input on
the program's implementation, particularly if the interim regulations
govern the program for a period of time. According to HUD
mark-to-market officials, it would have been inappropriate to solicit
information from the public during the process of writing the
regulations. Accordingly, at the meetings in February,
mark-to-market officials notified participants that there would be no
further discussions until the regulations were completed and that any
further comments would have to be submitted during the comment
period.
AGENCY COMMENTS
------------------------------------------------------------ Letter :8
We provided HUD with a draft of this report for its review and
comment. HUD agreed that our report accurately described the
Department's efforts in developing and implementing the
mark-to-market program. HUD stated that our review was helpful to
the Department in confirming that it was focusing its attention and
efforts on issues that needed to be addressed. HUD also noted that
it had developed an extremely aggressive work plan to accomplish the
development and implementation of the mark-to-market program and that
while some key tasks were accomplished later than provided for in its
original schedule, a small but efficient core group of mark-to-market
staff members have accomplished several significant work items, even
in the absence of a Director. HUD suggested some minor technical
changes, which we have incorporated. The complete text of HUD's
comments appears in appendix V.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9
Section 577 of the act requires us to audit the operations of OMHAR
annually for the first 2 fiscal years following the date of enactment
(Oct. 27, 1997). For this assignment, our work focused on the
status of OMHAR's development and HUD's plans for implementing the
permanent mark-to-market program. To carry out the assignment's
objectives, we interviewed the HUD officials responsible for
mark-to-market operations and reviewed documentation related to their
plans for developing OMHAR and implementing the program, including
their work plans, time frames, and draft program guidance. We also
discussed HUD's efforts to develop OMHAR and prepare for the
program's implementation with representatives of groups involved with
issues related to mark-to-market, including two independent housing
consultants, the National Council of State Housing Agencies, the
National Leased Housing Association, the National Housing Law
Project, the National Alliance of HUD Tenants, and the National
Housing Conference. Because OMHAR was not yet established and HUD's
plans for implementing the permanent mark-to-market program were
still being developed, we did not attempt to evaluate the
effectiveness of OMHAR's operations or HUD's implementation plans.
We performed our work at HUD in Washington, D.C., from March through
September 1998 in accordance with generally accepted government
auditing standards.
---------------------------------------------------------- Letter :9.1
We are sending copies of this report to the Secretary of Housing and
Urban Development. We will make copies available to others on
request. Please call me at (202) 512-7631 if you or your staff have
any questions. Major contributors to this report are listed in
appendix VI.
Judy A. England-Joseph
Director, Housing and Community
Development Issues
List of Committees
The Honorable Connie Mack
Chairman
The Honorable John F. Kerry
Ranking Minority Member
Subcommittee on Housing Opportunity
and Community Development
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 Joseph P. Kennedy II
Ranking Minority Member
Subcommittee on Housing and
Community Opportunity
Committee on Banking and
Financial Services
House of Representatives
The Honorable Jerry Lewis
Chairman
The Honorable Louis Stokes
Ranking Minority Member
Subcommittee on VA, HUD,
and Independent Agencies
Committee on Appropriations
House of Representatives
OVERVIEW OF THE MARK-TO-MARKET
PROCESS
=========================================================== Appendix I
As the Department of Housing and Urban Development (HUD) plans to
implement it, the process to be used under the permanent
mark-to-market program has nine phases: (1) screening owners and
projects for eligibility, (2) assigning projects for restructuring,
(3) preserving affordable housing, (4) collecting data, (5)
underwriting, (6) approving the loan, (7) closing, (8) distributing
postclosing documents, and (9) servicing and monitoring. This
appendix describes the key activities that are to occur during each
of the nine phases, as outlined in HUD's draft operating procedures
manual.
1. Screening Owners and Projects for Eligibility: The first phase
of the restructuring process is determining a project's eligibility.
To be eligible to participate in the mark-to-market program, a
project must be financed by a Federal Housing Administration
(FHA)-insured or Secretary-held mortgage, receive project-based
assistance, and have rents that exceed comparable market rents.\1 HUD
has established additional criteria for determining if a project is
eligible to (1) renew its Section 8 contract at market rents and
restructure the project's debt, (2) renew its Section 8 contract at
market rents without restructuring the project's debt, or (3) renew
its Section 8 contract at the lesser of the project's current rents
with an operating cost adjustment factor, budget-based rents with an
operating cost adjustment factor, or base rents with an operating
cost adjustment factor.\2 HUD will extend the Section 8 contracts for
projects with contracts that are due to expire while they are in the
mark-to-market "pipeline," such as projects undergoing eligibility
determinations, or while they are participating in the development of
a mortgage debt restructuring plan. Under these circumstances, a
project's Section 8 contract may be extended at the project's current
contract rent for up to 9 months, with the option of a further
extension of 3 months.
A project may not be restructured, and its contract may not be
renewed if its owner has engaged in material adverse financial or
managerial actions or omissions with regard to the project or other
federally assisted, financed, or insured projects. Furthermore, a
project may not be restructured if its condition is too poor to be
rehabilitated at a reasonable cost or if the owner fails to comply
with the requirements for restructuring. Such projects are to be
directed into HUD's enforcement program.
2. Assigning Projects for Restructuring: During the second phase of
the mark-to-market process, HUD assigns multifamily projects to its
administrative partners, who will actually perform the restructuring,
which are referred to as participating administrative entities (PAE).
Assets are first assigned to state and local housing finance agencies
(HFA) that HUD has selected as PAEs. After this first round of
assignments, non-HFA entities that HUD has selected to be PAEs can
bid for the rights to restructure projects that remain.
3. Preserving Affordable Housing: One of the goals of the act is to
preserve the affordability and availability of low-income rental
housing through mortgage restructuring. As part of the restructuring
process, a mortgage restructuring and rental assistance sufficiency
plan is to be developed for each project. The development of this
plan is expected to take, on average, 9 months. One element of the
mortgage restructuring and rental assistance sufficiency plan is a
rental assistance assessment plan, which the PAE develops to
determine whether Section 8 assistance should be renewed as
project-based or tenant-based assistance. The plan must also include
a use restriction whereby the project's owner agrees to maintain
affordability for at least 30 years.\3 Other elements required in the
mortgage restructuring and rental assistance sufficiency plan, which
will be developed in later phases, include a new rent subsidy level,
a plan to restructure the debt, and a plan to finance the
rehabilitation needs of the project.
4. Collecting Data: During the fourth phase of the process, the PAE
collects and assesses project-specific data from project owners,
lenders, servicers, or other third parties to be used during the
underwriting and loan approval phases. The PAE is also to collect
and analyze market studies, appraisals, and physical needs
assessments to determine market rents, expenses, and the projects'
rehabilitation needs.
5. Underwriting: Once the data collection is complete, the fifth
phase in the mark-to-market process is underwriting. During the
underwriting phase, the size of the restructured first and the new
second mortgage will be determined. The existing project mortgage
will be restructured to provide a first mortgage that is sustainable
at restructured market rents. The second mortgage may not exceed the
difference between the restructured or new first mortgage and the
current unpaid principal balance and must be an amount that can
reasonably be expected to be repaid. The term of the second mortgage
shall equal the term of the first mortgage. However, the only
payments that need to be made on the second mortgage before repayment
of the first are an amount equal to 75 percent of excess project
income.
6. Approving the Loan: The sixth phase of the process is the loan's
approval. It is in this phase that the PAE reviews the mortgage
restructuring and rental assistance sufficiency plan to ensure that
all required HUD forms have been filled out completely and accurately
and then delivers the plan to the OMHAR hub for approval.\4
7. Closing: After the OMHAR hub grants approval of the plan, the
seventh phase of the process is loan closing. Closing is the phase
during which HUD, the PAE, the owner, and affected lenders or
servicers fulfill the legal requirements for (1) executing the
mortgage restructuring and rental assistance sufficiency plan, (2)
restructuring the project's debt, and (3) renewing the project's
Section 8 contract.
8. Distributing Postclosing Documents: During the eighth phase of
the process, the postclosing documents are distributed to the parties
(such as servicers, asset managers, and Section 8 contract
administrators) who are responsible for loan servicing and asset
management functions after restructuring.
9. Servicing and Monitoring: The ninth phase is loan servicing and
monitoring. During this phase, servicers, asset managers, escrow
agents, Section 8 contract administrators, and monitors have
responsibilities to oversee the loans. The servicers of the first
and second mortgages are responsible for the cash management
function, which includes billing and collecting payments, and
accurately accounting for and reporting payments. The asset managers
of the first and second mortgages are responsible for ensuring that
the underlying collateral is maintained in decent condition. The
asset managers of the second mortgage are also responsible for
ensuring that only eligible expenses have been deducted from project
revenue to maximize excess project income, which can be used to pay
off the second mortgage. The escrow agents are responsible for
managing the accounts that will be used to finance the immediate
rehabilitation needs of the projects, identified through the
restructuring process. The Section 8 contract administrators are
responsible for ensuring that the projects are maintained in decent,
safe, and sanitary conditions by the projects' owners. Monitors,
referred to as restructuring use agreement monitors, are responsible
for ensuring that the owners or future purchasers of the projects
maintain the affordability and use restrictions agreed to during the
restructuring process.
--------------------
\1 Under the legislation, some projects are exempt from
restructuring; these include projects for the elderly and homeless
and projects financed with state or local government financing (P.L.
105-65, sec. 514(h)). A bill, H.R. 4194, would amend this
provision to specify that state- or local-financed projects would be
exempt only if restructuring is incompatible with the terms of the
financing or illegal under applicable law.
\2 An operating cost adjustment factor allows for rent adjustments to
ensure adequate coverage for inflationary conditions. The operating
cost adjustment factor is determined annually by the Secretary of
HUD.
\3 In exchange for an agreement to restructure the mortgage, the
owner must agree to two affordability requirements: (1) the project
must remain affordable for at least 30 years, and (2) the owner may
not refuse to lease a reasonable number of units to rent certificate
and voucher holders (P.L. 105-65, sec. 514(e)(6)and (9)). In
addition, section 515 (b) of the act specifies that owners must
accept a project-based contract if offered this assistance. To
maintain affordability, HUD is requiring that project rents remain at
either of the following levels: (1) rents are such that 20 percent
of all units in the project are affordable to residents with incomes
at 50 percent of median income, or (2) rents are such that 40 percent
of all units in the project are affordable to residents with incomes
at 60 percent of median income.
\4 HUD anticipates that five field offices will have mark-to-market
responsibilities. These field offices will be referred to as OMHAR
hubs.
SUMMARY AND STATUS OF OPERATIONAL
TASKS NEEDED TO IMPLEMENT THE
MARK-TO-MARKET PROGRAM
========================================================== Appendix II
Task Purpose Performed by Status
--------------------- -------------------- -------------------- ----------------------
Issue interim and To implement the OMHAR's Director to Behind original
final regulations mark-to-market issue both; however, schedule. The interim
program. The final the Secretary of HUD regulations were
regulations are is required to issue published September
required to be the interim 11, 1998, and became
issued by the later regulations if a effective 30 days
of October 27, 1998, Director is not later. HUD had
or 3 months after appointed originally expected to
the Director of issue the interim
OMHAR has been regulations by August
appointed 1998 so that the final
(�522(a)(1)(2)). regulations could be
issued in October
1998. According to
mark-to-market
officials, now the
final regulations are
not expected to be
published until 3
months after the
appointment of the
OMHAR Director.
Solicit and select To allow HUD to work HUD Behind original
third parties, with PAEs, which schedule. HUD
referred to as PAEs\ will actually published the Request
restructure the for Qualifications
mortgages and rental (RFQ) to solicit PAEs
assistance payments on August 17, 1998.
of eligible HUD had originally
multifamily projects planned to publish the
(�513(a)(1)). RFQ in June 1998 in
order to have the PAEs
selected by August
1998. HUD will select
the PAEs in two
phases\a and, as of
September 8, 1998,
expected to complete
the selection process
by October 29, 1998.
Conduct technical To familiarize the HUD, with assistance Behind original
assistance briefings PAEs with the from management schedule. The briefing
for the PAEs on the restructuring studies sessions for PAEs will
mark-to-market process and their contractor begin in October 1998.
process responsibilities, HUD had originally
which include planned to begin
determining owners' briefing the PAEs in
eligibility, September 1998.
determining rent
levels,
restructuring loans,
underwriting new or
modified loans,
managing the closing
process,
distributing
documents after
closing, and
servicing the loans.
Develop an operating To set forth a HUD, with assistance As of September 8,
procedures manual uniform process for from management 1998, the operating
restructuring FHA- studies contractor procedures manual was
insured Section 8 in draft form, but
projects. sections of the draft
were expected to be
ready for departmental
clearance by September
11, 1998.
Enter into portfolio To establish the HUD HUD will enter into
restructuring obligations and portfolio
agreements with PAEs requirements of the restructuring
PAEs in developing agreements with the
mortgage PAEs as soon as
restructuring and possible after they
rental assistance are selected. However,
sufficiency plans in the time period for
accordance with the completing this
act (�513(a)(1)). process will depend on
Also, to identify the length of time
the eligible involved in
multifamily housing negotiating the
projects for which a agreements.
PAE is responsible
and to clarify the
duties that a PAE
will typically
perform.
Prepare briefing To instruct the HUD's management As of September 8,
manuals and conduct field offices on studies contractor 1998, HUD expected the
technical assistance their briefing manuals to be
briefings for HUD responsibilities, completed by the end
field office\b staff which include of September, so that
on the permanent coordinating the the briefing sessions
program flow of cases to could commence in
PAEs and Section 8 October 1998, after
contract the PAEs are selected.
administrators,
determining projects
with Section 516\
violations\c that
require enforcement
action, and
monitoring the
performance of the
PAEs.
Request a revenue To obtain a HUD In late 1997, HUD
ruling from the favorable tax ruling initiated discussions
Internal Revenue regarding potential with the Treasury
Service (IRS) on the tax consequences for Department to obtain a
tax liabilities for project owners whose ruling on the proper
owners participating mortgages are income tax treatment
in the mark-to- restructured.\d of the components of
market program the mortgage
refinancing
contemplated in
section 517(a) of the
act, which provides
for a restructured or
new first mortgage
that is sustainable at
market rents and a
second mortgage that
is an amount equal to
the difference between
the restructured first
mortgage and the
indebtedness under the
existing insured
mortgage. The act
specifies that
interest charged on
the second mortgage
cannot exceed the
applicable federal
rate (AFR).
Since (1) section 7872
of the Internal
Revenue Code, in
general, defines a
below-market loan as
any loan on which the
interest rate charged
is less than the AFR
and
(2) section 7872(b)
provides that the
borrower of a below-
market term loan is to
be treated as having
received cash from the
lender in an amount
equal to the excess of
the amount loaned over
the present value of
all payments required
under the loan, the
ruling was required to
determine if a
project's owner, whose
second mortgage bears
interest below the
AFR, would be
responsible for paying
taxes on this amount.
In August 1998, IRS
ruled on this request,
holding that the
second mortgage loans
made in accordance
with the Multifamily
Assisted Housing
Reform and
Affordability Act of
1997 are exempt from
section 7872 of the
Internal Revenue Code.
In the ruling, IRS
concluded that the
legislative history of
section 7872 indicates
that most government-
subsidized loans, such
as government-insured
residential mortgage
loans, were intended
to be exempted from
section 7872 and that
the factors justifying
an exemption of second
mortgages under the
1997 act were similar
to the factors
justifying the
exemption of
government-subsidized
loans.
Furthermore, IRS
concluded that the
interest arrangements
of the second mortgage
loans were not
structured with a
principal purpose of
avoiding federal tax.
Prepare a front-end To identify risks A HUD contractor HUD received proposals
risk assessment related to fraud, in response to the
(FERA) report for the waste, and abuse of Request for Contract
permanent mark-to- federal resources Services for the FERA
market program and to document both on August 17, 1998. As
the existing program of September 8, 1998,
controls and review of these
management's plans proposals was
for implementing complete, and the
additional controls contract was expected
that mitigate the to be awarded by
identified risks. September 11, 1998.
The FERA was expected
to be finished 60 days
after the selection of
a contractor.
-----------------------------------------------------------------------------------------
Note: All section citations refer to P.L. 105-65.
\a The act provides selection criteria for PAEs based on their
experience and capacity and requires that HUD give priority to public
agencies during the selection process (�513(b)(1)). Accordingly,
during the first phase of the selection process, HUD will review and
consider only responses from state or local HFAs. HFAs that are not
selected in the first phase may resubmit their proposals by
responding to the specific deficiencies identified. During the
second phase, HUD will review proposals from rejected HFAs from the
first phase and all non-HFA entities. The non-HFAs will usually only
be considered for jurisdictions in which no HFA exists or is
qualified.
\b Briefing sessions will be held for staff in the five OMHAR hubs.
In addition, HUD scheduled a session for October 6, 1998, to discuss
the Section 8 renewal policy with field office staff in its
multifamily program centers and multifamily hubs.
\c Section 516 violations refer to projects that are ineligible for
either Section 8 contract renewal or debt restructuring because the
owner has engaged in material adverse financial or managerial actions
or omissions or because the project's poor condition cannot be
remedied in a cost-effective manner (�516(a)).
\d With a favorable tax ruling, owners would not incur tax
liabilities as a result of the restructuring process.
SUMMARY OF HUD'S REPORTING
REQUIREMENTS FOR THE
MARK-TO-MARKET PROGRAM
========================================================= Appendix III
The Multifamily Assisted Housing Reform and Affordability Act of 1997
(MAHRAA) requires the OMHAR Director to report certain information to
the Secretary of HUD and requires the Secretary of HUD to submit
information on OMHAR's operations to the Congress and the Office of
Management and Budget. Table III.1 provides a summary of the reports
required by the legislation and the status of actions taken by HUD.
For these mandated reports, it is HUD's interpretation of the act
that the reporting requirements become effective once the permanent
mark-to-market program is operational. The table also includes
information on three other required reports: one on equity-sharing
partnerships and the two others on demonstration program activity.
As the table shows, HUD is in the process of issuing a report on the
possible ways that equity-sharing partnerships may be used as options
in implementing the mark-to-market program and has submitted reports
on the 1996 and 1997 demonstration programs.
Table III.1
Summary of HUD's Reporting Requirements
for the Mark-to-Market Program
Date and/or frequency
Report's description required\ Status
----------------------------- ---------------------------- ----------------------------
OMHAR's Director must submit Semiannually (�573(b)) According to HUD's
a report to the Secretary of interpretation of the act,
HUD regarding the activities, this report will be
determinations, and actions initiated once the OMHAR
of the Director. Director is in place.\a
The Secretary of HUD must Semiannually, starting April According to HUD's
report figures to the 27, 1998, for 2 years and interpretation of the act,
Congress identifying (1) each annually thereafter this reporting requirement
project for which the (�520(b)) becomes effective once the
participating administrative permanent mark-to-market
entity has developed a rental program is operational, by
assistance plan that the later of October 1998 or
determines that the tenants appointment of the OMHAR
generally supported tenant- Director.\a
based assistance but under
which the assistance was
renewed with project-based
assistance and (2) each
project for which the
participating administrative
entity has developed a plan
under which the assistance is
renewed as tenant-based
assistance.
To ensure compliance with the Annually (�520(a)) According to HUD's
legislation, the Secretary of interpretation of the act,
HUD must conduct reviews and this reporting requirement
report to the Congress on becomes effective once the
actions taken under the permanent mark-to-market
legislation and on the status program is operational, by
of eligible multifamily the later of October 1998 or
housing projects. appointment of the OMHAR
Director.\a
The Secretary of HUD must Annually, before the HUD is planning to prepare
submit a copy of the beginning of each fiscal this report for the
financial operating plans and year (�575(a)) beginning of fiscal year
forecasts for OMHAR to the 1999 to be included in the
Office of Management and federal budget for fiscal
Budget. These annual plans year 2000 and HUD's
and forecasts are supposed to congressional
be included in the federal justifications.
budget and in HUD's
congressional justifications
for each fiscal year.
The Secretary of HUD must Quarterly and at the end of HUD is planning to prepare
submit a report on the each fiscal year (�575(b)) this report for the
results of OMHAR's operations beginning of fiscal year
to the Office of Management 1999 to be included in the
and Budget. federal budget for fiscal
year 2000 and HUD's
congressional
justifications.
The Secretary of HUD must February 15, 1998 (directed As of September 8, 1998,
submit a report to the by the conference report of this report was circulating
Congress on possible ways P.L. 105-65) through the Department for
that equity-sharing concurrence and signature.
partnerships may be used as In their formal comments on
options in implementing the our report draft on October
mark-to-market program if the 2, 1998, HUD officials said
prohibition is lifted. that the internal clearance
of the equity-sharing report
had been completed and
letters transmitting the
report to the Congress were
being prepared.
The Secretary of HUD must Semiannually for the 1996 HUD issued reports for the
submit reports to the demonstration (P.L. 104- 1996 and 1997 demonstrations
Congress describing and 134, �210(g)); quarterly for through the fourth quarter
assessing the status of the the 1997 and 1998 of 1997. HUD submitted the
projects in the demonstration demonstrations (P.L. 104- last report, covering
programs. 204, �212(m)(1)(A)) demonstration program
activities through the
fourth quarter of fiscal
year 1997, on March 28,
1998.
The Secretary of HUD must Not later than 6 months HUD is planning to prepare
submit a final report on the after the end of the these reports for the 1996
demonstration programs upon demonstration program (P.L. and 1997 demonstration
their completion. 104-134, �210(g); P.L. 104- programs. As of September 8,
204, �212(m)(1)(B)) 1998, HUD was in the process
of updating its data to
obtain the information
needed for these reports.
-----------------------------------------------------------------------------------------
Note: Except where noted, all section citations refer to P.L.
105-65.
\a Subsequent to our review, the nominee for OMHAR Director (who had
been nominated by the President on Sept. 29, 1998) was confirmed by
the Senate on October 21, 1998.
HUD'S PROCEDURES FOR MONITORING
KEY COMPONENTS OF THE
MARK-TO-MARKET PROGRAM
========================================================== Appendix IV
Explanation or
related legislative
Program component provision(s) Performed by Monitoring procedures
-------------------- -------------------- -------------------- ----------------------
Screening of owners To be eligible for HUD field offices --Directors in HUD's
and projects to restructuring, a initially screen multifamily hubs and
determine project must meet projects to program centers\b are
eligibility for certain determine their required to authorize,
restructuring legislatively eligibility on the by signature, the
mandated criteria, basis of information initial eligibility
including the provided by the determination for each
following: owners, field office project.
staff, third-party
--It must consist of appraisers working --For projects
more than four for the field identified as having
dwelling units. offices, and HUD's below-market rents,
Assessment and field office
--It must have rents Enforcement Offices. supervisory review is
that, on an average Field offices are to required to confirm
per-unit or per- make their screening that contract rents
room basis, exceed determinations on are actually below
the rents of the basis of market.
comparable legislative
properties in the criteria, which are --For projects
same market area. identified in HUD's identified as
mark-to-market draft potentially ineligible
--It must receive operating procedures because of poor
project-based manual. Field condition or adverse
Section 8 offices assign owner determination,
assistance. eligible projects to the field offices and/
OMHAR, which will or PAEs must recommend
--It must have a then assign the potential remedies to
HUD-insured or HUD- projects to PAEs for OMHAR; OMHAR makes
held\a mortgage. further processing. determinations
For projects with regarding whether to
In addition, under contract rents below assign such projects
the legislation, a the owners' estimate to PAEs for
project is of market rents, restructuring or to
ineligible for field offices are to deny the owners the
restructuring if review the owners' right to restructure.
estimate, based on
--the owner has their knowledge of --Owners have 30 days
engaged in material the market area. to dispute decisions
adverse financial or Assistance from HUD of the field offices
managerial actions appraisal staff or a regarding project
or omissions or third-party review eligibility with
should be obtained respect to poor
--the property is in if there is any condition or adverse
poor condition that doubt as to the owner determination.
cannot be remedied actual market rents. At the end of this
in a cost-effective period, OMHAR may
manner. affirm, modify, or
reverse decisions.
HUD is to establish
an administrative
review process to
appeal any final
decision regarding
rejection of an
owner or project for
restructuring.
(�512(2), 516(a),
516(b)(2)(C))
Rent-setting process Section 8 contracts The PAE, in --After the PAE, in
may be renewed as consultation with consultation with the
either project- the owner, owner and lender,
based or tenant- determines whether develops the draft
based. to renew Section 8 mortgage restructuring
assistance as and rental assistance
--Project-based project-based or sufficiency (MRRAS)
renewals are tenant-based. On the plan for a project,
mandatory for basis of its including the
projects located in assessment of determination of
tight rental comparable rents and project-based or
markets, that have a input from an tenant-based Section 8
predominant number appraiser and the assistance and the
of units occupied by project owner, the restructured rent
the elderly or PAE also determines levels, the OMHAR hub
disabled, or that restructured rent must review the draft
are held by a levels. If the PAE plan and will either
nonprofit determines that a approve or reject
cooperative project would have it.\g
ownership housing negative net
corporation or operating income at --According to mark-
trust.\c market-level rents, to-market officials,
the PAE may issue a oversight of the
Restructured rents "Finding of Special exception rent
are to be based on Need" and calculate authority is being
equivalent market exception rents for worked on and will be
rents charged for at the property. addressed in the
least two comparable oversight and audit
properties in the guide, which was still
same market area. If being developed as of
rents based on two October 14, 1998.
comparable
properties cannot be
determined, rents
can be set equal to
90 percent of the
fair market rent
(FMR).\d
--PAEs can approve
exception rents\e up
to 120 percent of
FMR for no more than
20 percent of all
units covered by the
portfolio
restructuring
agreement between
the PAE and HUD with
contracts that
expire in a fiscal
year.\f
(�515(c)(1),
515(c)(2)(A),
514(g)(1),
514(g)(2))
Determination of The physical needs The owner or --The PAE must submit
rehabilitation needs of each project must purchaser of a a draft mortgage
be evaluated. project must restructuring and
Rehabilitation may evaluate its rental assistance
be paid from project rehabilitation needs sufficiency plan,
accounts not and take actions as which includes the
required for project necessary to determination of a
operations, rehabilitate and project's
increases in budget maintain the project rehabilitation needs,
authority for in decent, safe to the OMHAR hub. The
Section 8 assistance condition. The PAE, OMHAR hub must review
contracts, capital with support from a the draft plan and
grants, or through qualified inspector, will either approve or
the debt- must review the reject it.
restructuring owner's evaluation
transaction. and conduct an --According to mark-
independent to-market officials,
--HUD may make assessment of the details on capital
grants for the project's grants will be
capital costs of rehabilitation generally discussed in
rehabilitation to needs. The PAE is the operating
owners of projects ultimately procedures manual.
if the owners responsible for Instructions for the
demonstrate that determining the oversight of the grant
capital grant rehabilitation funds will be
assistance is needed actions necessary to addressed in the
for rehabilitation maintain the project oversight and audit
of the projects and in decent and safe guide, which was still
that project income condition, for being developed as of
is not sufficient to determining their October 14, 1998.
support such cost, and for
rehabilitation. identifying the
source(s) of
Rehabilitation will funding. HUD can
be only for the delegate to state
purpose of restoring and local
the project to a governments the
nonluxury standard responsibility for
adequate for the administering
rental market capital grants.
intended at the
original approval of
the project-based
assistance. Each
owner or purchaser
of a project to be
rehabilitated under
mark-to-market must
contribute, from
nonproject
resources, at least
25 percent of the
amount of
rehabilitation
assistance
received.\h
(�514(e)(3),
517(b)(7), 531)
Restructuring of Each project's The PAE, in The PAE submits the
mortgages restructuring plan consultation with project's mortgage
must include the owner and restructuring and
lender, determines rental assistance
--a restructured or the size of the sufficiency plan,
new first mortgage, restructured first which includes the
sustainable at the mortgage and second PAE's conclusions
restructured rent mortgage. regarding the new
levels; and first mortgage and
second mortgage, to
--a second mortgage the OMHAR hub.
no greater than the Depending upon the
difference between details of the MRRAS
the restructured or plan, the OMHAR hub
new first mortgage will perform either an
and the indebtedness administrative review
under the existing or a technical review,
mortgage, in an after which it can
amount that can accept or reject the
reasonably be plan.\i
expected to be
repaid.
The size of a
project's
restructured first
mortgage and second
mortgage must be
determined.
(�517(a))
Recaptured Section 8 HUD will recapture Within HUD's Office According to mark-to-
funds budget authority not of Multifamily market officials, the
required for Housing, the Office procedures for
contracts amended or of Program monitoring this
terminated as part Management and function will be
of restructuring and Oversight will be defined in the
use it to provide responsible for oversight and audit
housing assistance administering guide, which was still
for the same number recaptured Section 8 being developed as of
of families that budget authority. October 14, 1998.
were covered by that
contract for its
remaining term; any
budget authority
saved by shifting to
project-based or
tenant-based
assistance will be
rescinded. (�523(c))
Annual reviews of At least annually, PAEs that are According to mark-to-
all restructured PAEs qualified as qualified to be market officials,
properties Section 8 contract Section 8 contract these procedures will
administrators must administrators are be addressed in the
review the status of responsible for oversight and audit
all restructured annual project guide, which was still
projects, including reviews. If a PAE is being developed as of
on-site inspections not qualified to be October 14, 1998. In
to determine a Section 8 contract general, HUD currently
compliance with administrator, intends to require the
housing codes and either HUD or a PAEs to submit monthly
other requirements qualified state or reports and to have
of the legislation local housing agency HUD field staff
and restructuring will be responsible conduct semiannual
agreements. for this required monitoring reviews.
(�519(b)) review.
Technical assistance HUD can provide up HUD will select Grantees and
funds to $10 million grantees on a intermediaries must
annually in funding competitive basis submit quarterly
to tenant groups, either to provide performance reports to
nonprofit direct technical OMHAR. HUD will ensure
organizations, and assistance or to act that this reporting
public entities for as intermediaries by requirement is met by
capacity-building administering a including provisions
and technical program of technical in the grant agreement
assistance in assistance grants to and addressing this
furthering the subrecipients. issue in the oversight
purposes of the and audit guide, which
mark-to-market was still being
program. developed as of
(�514(f)(3)) October 14, 1998.
----------------------------------------------------------------------------------------
Note: All section citations refer to P.L. 105-65.
\a A "HUD-held" mortgage is one for which HUD has paid an insurance
claim and is now, in effect, the lender.
\b HUD's multifamily housing services are delivered through 18 hubs
located in 18 cities, with staff stationed in 33 program centers.
\c Currently, the act appears to require that all three conditions
(i.e., located in a tight rental market, predominant number of units
occupied by the elderly or disabled, and held by a nonprofit
cooperative ownership housing corporation or trust) be met for
project-based renewal to be mandatory. However, a bill, H.R. 4194,
would amend this provision so that only one of three need be met for
mandatory project-based renewal.
\d In general, the fair market rent for an area is the amount that
would be needed to pay the gross rent (shelter rent plus utilities)
of privately owned, decent, safe, and sanitary rental housing of a
nonluxury nature with suitable amenities.
\e Under section 514(g)(3) of the act, a project eligible for an
exception rent will receive a rent calculated on the actual and
projected costs of operating the project, at a level that provides
income sufficient to support a budget-based rent that consists of the
debt service of the project; operating expenses, including
contributions to reserves and the costs of maintenance and necessary
rehabilitation; allowance for potential operating losses due to
vacancies and failure to collect rents; allowance for a reasonable
rate of return to the project owner; and other expenses determined by
the PAE to be necessary for the project's operation.
\f Upon a finding of special need, HUD can waive the 120-percent rent
limit for up to 5 percent of all units subject to restructuring in
any fiscal year and can waive the 20-percent limit on number of
units.
\g In addition, section 515(c)(2)(C) of the act requires each PAE to
report regularly to the OMHAR Director, identifying (1) each project
for which the tenants of the project generally supported tenant-based
assistance but for which the assistance was renewed as project-based
and (2) each project for which assistance is planned to be renewed
using tenant-based assistance.
\h PAEs may provide an exception from the 25-percent contribution
requirement for housing cooperatives.
\i OMHAR hubs are to perform administrative reviews of plans
considered "conforming," which are plans with the following
characteristics: (1) the new first mortgage is at least 60 percent
of the existing mortgage's unpaid principal balance, (2)
rehabilitation costs are no more than $5,000 per unit, (3) the PAE is
not involved as a lender or as a provider of any credit enhancement
for the project's mortgage, and (4) no conflicts of interest exist
among the parties involved in the restructuring. Plans that do not
have all four of these characteristics are considered
"nonconforming." OMHAR hubs are to perform technical reviews of
nonconforming plans.
(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI
HOUSING AND COMMUNITY DEVELOPMENT
ISSUE AREA
Richard A. Hale
Sally S. Moino
Leigh K. Ward
OFFICE OF THE GENERAL COUNSEL
John T. McGrail
*** End of document. ***