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
                      (ï¿½513(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
                      (ï¿½513(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 (ï¿½513(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,
                      (ï¿½520(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
                       (ï¿½522(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
                       (ï¿½513(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 (ï¿½513(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 (ï¿½513(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 (ï¿½516(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 (ï¿½573(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          (ï¿½520(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 (ï¿½520(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 (ï¿½575(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 (ï¿½575(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, ï¿½210(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, ï¿½212(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, ï¿½210(g); P.L. 104-   programs. As of September 8,
                               204, ï¿½212(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.
                      (ï¿½512(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
                      (ï¿½515(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
                      (ï¿½514(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.
                      (ï¿½517(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. (ï¿½523(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.
                      (ï¿½519(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
                      (ï¿½514(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. ***