Assisted Housing: Section 8 Mark-to-Market Restructuring

Assisted Housing: Section 8 Mark-to-Market Restructuring

Order Code RL31182
Report for Congress
Received through the CRS Web
Assisted Housing: Section 8
Mark-to-Market Restructuring
Updated June 13, 2002
Susan Vanhorenbeck
Analyst in Housing
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Assisted Housing: Section 8 Mark-to-Market
Restructuring
Summary
When the Section 8 assisted housing program began in 1974, it provided
project-based rental subsidies to encourage developers to build affordable housing
for low-income residents. Under the program, tenants paid a fixed percentage of
their income for rent, and the balance was paid by the federal government directly to
the project owner. Many project rents were set higher than market rates, to
encourage owners to participate. Moreover, throughout the 20 years of these original
contracts, many of the rents were adjusted, to compensate for increased property
costs. To reduce the cost to the federal government of renewing these contracts, a
mortgage and rent restructuring program for certain Section 8 projects – commonly
referred to as “mark-to-market” – was enacted in 1997. This program was scheduled
to expire at the end of FY2001, but it was amended and reauthorized through
FY2006 in Title VI of the Labor, Health and Human Services, Education, and
Related Agencies Appropriation Act for FY2002 (P.L. 107-116) and signed into law
by the President on January 10, 2002.
The original mark-to-market legislation established a program for restructuring
FHA-insured mortgages for Section 8 project-based contracts, which expire on or
after October 1998 and have above-market rents. By restructuring mortgages and
lowering rents, the program reduces the federal costs of over-subsidized Section 8
properties. The 1997 law also created the Office of Multifamily Housing Assistance
Restructuring (OMHAR) in HUD.
Even though the Act was signed into law in 1997, a director for OMHAR was
not appointed until a year later, and operating procedures for implementing the
program were not established until April 1999. For these and several other reasons,
the Section 8 mark-to-market program did not begin assigning properties for
restructuring until July 1999. In addition, owners of properties with mortgages that
qualified for the debt restructuring were very skeptical of participating in the program
as it was initially operated by HUD. Since then, OMHAR has streamlined the
procedures and guidelines of the program, and has created an incentive package
encouraging owners to participate. In the past year, momentum of the program has
increased. As of June 6, 2002, according to OMHAR, 2,159 projects have entered
the restructuring process, and 1,383 have reached completion.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Multifamily Restructuring Reauthorization Bills . . . . . . . . . . . . . . . . . . . . . 2
Description of the Restructuring Program
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Office of Multifamily Housing Assistance Restructuring (OMHAR) . . 2
Participating Administrative Entities (PAEs) . . . . . . . . . . . . . . . . . . . . . . . . 3
Screening Owners and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Mortgage Restructuring Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Rent Restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Implementation of the Restructuring Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Assisted Housing: Section 8
Mark-to-Market Restructuring
Background
When the Section 8 assisted housing program began in 1974, it was a project-
based rental subsidy program designed to encourage developers to build apartments
which would provide affordable housing for low-income residents. Under this
program, the tenants paid 25% (later raised to 30%) of their monthly income as rent,
with the balance of the rent paid by the federal government directly to the owner of
the development. The subsidy was attached to the unit, not given to the tenant, so
that when one tenant moved out of the unit, another eligible tenant could move in and
the subsidy would continue. Many of the projects’ rents were set higher than market
rents of comparable unassisted units in the area. Permitting these higher rents was
the federal government’s way of encouraging the building of affordable housing.
Throughout the 20 years of the original contracts, many of these properties received
adjustments to the set rents. When property costs increased, due to heating and
cooling bills or the need for rehabilitation, the rent also increased, resulting in an
increase of the Section 8 subsidy.
In 1997, Congress became concerned about the large number of insured
multifamily properties in the Federal Housing Administration (FHA) portfolio that
were also receiving Section 8 assistance. An examination of the portfolio found that
approximately 10,000 of these properties were receiving Section 8 project-based
rental assistance, and that a substantial number of these had rents higher than the
rents of comparable, unassisted rental units in the same rental housing market.
Congress believed that if changes to the Section 8 project-based program were not
made, the renewals of expiring contracts for Section 8 assistance would consume an
increasingly large portion of the discretionary budget of HUD in future years. The
problem facing Congress was how to restructure the program in a way that would be
beneficial to the families living in these projects, cost-saving for the federal
government, and attractive to project owners.
In its investigation of the assisted multifamily properties, Congress also
discovered that many of them were financially or physically distressed, including a
number that were being mismanaged. Congress decided that the economic, physical,
and management problems of these federally insured and assisted projects could best
be solved by reforms that reduced the cost of federal assistance, while retaining the
low-income affordability and availability of the housing stock. As a result of these
findings, Congress designed a “mark-to-market” restructuring program which
reduces the federal subsidies to owners of properties insured by FHA, lowers the
above-market rents payable to these owners, and restructures the mortgages of
properties so that owners can operate effectively on less income.

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This restructuring plan was known as the Multifamily Assisted Housing Reform
and Affordability Act. It was passed by Congress as Title V of the VA-HUD
Appropriations Act for FY1998 (P.L. 105-65). The Act was signed into law by the
President on October 27, 1997, and it expired on September 30, 2001. The program
had been reauthorized since that time through a series of continuing resolutions until
January 10, 2002 when it was finally amended and reauthorized through FY2006,
under Title VI of the Labor, Health and Human Services, Education, and Related
Agencies Appropriations Act for FY2002 (P.L. 107-116).
Multifamily Restructuring Reauthorization Bills
Legislation to reauthorize the mark-to-market program (H.R. 2589) was passed
by the House on September 24, 2001. The version of this legislation that passed the
House was revised from the version reported earlier by the House Financial Services
Committee (H.Rept. 107-196). As passed by the House, the bill reflects a
compromise between the House committee bill and similar legislation reported by
the Senate Banking Committee (S. 1254, no written report). This compromise was
included as Title VI of both the House and Senate versions of the FY2002 Labor,
Health and Human Services, Education, and Related Agencies Appropriations bills
(H.R. 3061, S. 1536). The House passed H.R. 3061 on October 11, 2001; the Senate
passed its version on November 6, 2001. The final version of the bill was agreed to
in conference on December 12, 2001, and was signed into law as P.L. 107-116 by the
President on January10, 2002.
Description of the Restructuring Program
The Office of Multifamily Housing Assistance Restructuring
(OMHAR)
Originally, an office was established within the Department of Housing and
Urban Development (HUD) to oversee the restructuring of the mortgages of Section
8 expiring contracts. The director of the office was appointed by the President with
the consent of the Senate, and in consultation with experts in housing finance and
management. The director must be an expert in the financing and mortgage
restructuring of multifamily housing. Other employees of OMHAR must be experts
in real estate development, market analysis, management, finance, taxation, or
auditing. These employees are hired by HUD, and may be contracted from other
agencies as needed.
As amended by P.L. 107-116, the Director of OMHAR can now be appointed
by the President without the consent of the Senate, and he is to report all of his
activities and determinations to the Federal Housing Commissioner, who now has
oversight of OMHAR.
OHMAR is not funded as a separate line item in the HUD budget. It is funded
through various offices at HUD, but primarily through the Office of the Federal
Housing Administration (FHA).

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Participating Administrative Entities (PAEs)
The Multifamily Housing Reform Act authorized HUD to enter into portfolio
restructuring agreements with housing finance agencies, public entities, and nonprofit
or for-profit organizations. HUD was required to evaluate each of these agencies’
qualifications to administer the restructuring of mortgages, and to notify the
applicants as soon as possible of their acceptance or rejection to act as a PAE. PAEs
must be involved in all critical functions of the restructuring process such as
developing the rental assistance plan, screening owners and properties for mark-to-
market, and monitoring the portfolio after restructuring. HUD is to utilize qualified
housing finance agencies as much as possible for PAEs because they had shown
expertise in providing affordable housing in the past.
The Act also encouraged interested public and nonprofit organizations to form
partnerships with other entities, including public housing authorities (PHAs), private
financial institutions, and housing organizations such as Fannie Mae, Freddie Mac,
and the Federal Home Loan Banks, if they wished to act as PAEs.
Screening Owners and Properties
The mortgage restructuring program is voluntary and owners with expiring
Section 8 project-based contracts have the option of not renewing them. If owners
have expressed an interest in participating in the program, PAEs are to screen owners
to see if their properties are economically viable and in good physical condition.
Owners of properties that are approved by the PAE then work with the PAE in
developing a rental assistance plan for the development.
If properties have not been properly maintained, and the PAE believes that
federal funds for the project have not been used efficiently, a contract with that owner
is not renewed. HUD can provide owners with the opportunity to remedy the
situation and improve their properties, or HUD may transfer the property to a
qualified purchaser (usually a tenant organization or tenant-endorsed community-
based nonprofit agency). The new owner is then eligible to participate in the
restructuring program.
If a contract for a Section 8 property is not renewed, residents of the project will
be informed early in the process, and they will be given enhanced vouchers so that
they may remain in their units. Owners who choose not to renew their Section 8
contracts must notify HUD and the tenants (in writing) not less than 1 year prior to
terminating the contract, and HUD will provide tenant-based assistance for tenants
residing in that property. In addition, the owner must send a second notice to tenants
of non-renewal of the Section 8 contract at least 120 days prior to contract
termination. If this second notice is not sent, the owner may not evict the tenants nor
raise their rents until a 120 day notice of intent to terminate the contract has been
given and the time has lapsed.
A concern of many tenants has been having enough time to find affordable
housing if an owner does not want to renew his contract. In answer to this concern,
the reauthorizing legislation requires not only the owner, but OMHAR or a PAE

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designated by OMHAR to notify tenants as soon as it is known that a contract will
not be renewed, and also to inform the tenants of any assistance that will be available
to them.
The Mortgage Restructuring Plan
Originally, the mortgage restructuring plan applied to Section 8 project-based
properties with FHA-insured mortgages and rents exceeding market levels. As stated
in the conference report on the 1997 Act, the program “is an effort to reduce rent
levels to those of market rate properties, or at least to lower them to the minimum
level necessary to support property operations and maintenance.”1 Properties
undergoing mortgage restructuring and resetting rents to market levels are called
“full” participants in the program.
The debt restructuring is designed to reduce the outstanding mortgages of
Section 8 property owners so that they can charge lower rents with reduced Section
8 assistance. This is done by restructuring the mortgage debt into two mortgages.
The first mortgage is intended to be for an amount that the PAE determines
would be sustainable at lower rent levels. The second mortgage is for the difference
between the first mortgage and the original amount of indebtedness immediately
before the restructuring. However, if this amount is excessive, the second mortgage
can be limited to the amount that the PAE determines the owner can be reasonably
expected to repay. The interest rate for the second mortgage is determined by the
PAE or HUD, but it can be no higher than the applicable federal rate. To make it
easier on the owners of Section 8 properties, payment on the second mortgage is
deferred until the first mortgage matures, unless there is evidence of excessive project
income. If the second mortgage is held by HUD and the project is purchased by a
tenant organization, a tenant-endorsed community-based organization, or public
entity, HUD may modify terms of the mortgage, or forgive all or part of the
indebtedness.
Owners who participate in the mortgage restructuring program must agree to
maintain affordability and use restrictions, in accordance with regulations
promulgated by HUD, which are intended to keep the property as affordable housing
for low-income tenants for at least 30 years. The Section 8 contract is also renewed
for 20 years.
As amended in P.L. 107-116, properties other than Section 8 project-based
projects can now apply to participate in the mark-to-market restructuring program.
Properties receiving assistance under the Emergency Low Income Housing
Preservation Act of 1987 or the Low-Income Housing Preservation and Resident
Homeownership Act of 1990 may participate in the restructuring program, if
1U.S. Congress. House Committee on Appropriations. Department of Veteran Affairs and
Housing and Urban Development, and Independent Agencies Appropriations Bill, 1998.
Conference Report 105-297. 105th Congress, 1st session. Washington, U.S. Govt. Print.
Off., 1997. p. 137.

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participation would facilitate the sale or transfer of the properties to other owners
who agree to participate in the Section 8 program.
Rent Restructurings
Some Section 8 properties are physically and financially sound so that owners
do not have to restructure their mortgages in order to operate successfully at
restructured market-level rents. Owners of these properties are referred to as “lite”
participants in the program. Unlike properties undergoing a “full” restructuring of
mortgages, properties undergoing only rent restructuring have no affordability or use
restrictions on their properties.
In restructuring rent levels for expiring Section 8 contracts, PAEs are given
great flexibility, but any determination of rent levels is to be made in consultation
with project owners and tenants. In determining rent levels for restructured
properties, PAEs are to compare assisted units to similar units of unsubsidized
properties, and set rents at market levels. If no comparable units can be found in a
market area, the restructured rents are to be set at 90% of the fair market rent levels.2
If a property with an expiring Section 8 contract has rent levels that are below
comparable market rent levels, they are restructured at the market level, and the
contract is renewed for at least 5 years. HUD has the discretion to conduct a
comparison of rents once during the 5-year contract period to see if any adjustments
to the rent are necessary.
If a property has rents equal to or greater than the market rents for the area, the
rent restructuring for these properties will permit rents sufficient to cover budget-
based cost increases. These budget-based rents are intended to provide owners of the
property a reasonable rate of return after an adjustment is made for operating costs.
The Act states that 20% of the projects being restructured may have budget-based
rents of up to 120% of the fair market rent for the area.
Certain projects are exempt from these restructuring rent levels. They include
projects insured by state and local governments, projects funded under Section 202,
Section 515, or the McKinney Homeless Assistance Act, and properties with expiring
contracts that house tenants who are particularly vulnerable (such as the elderly,
disabled, or large families) and are located in areas where tenant-based assistance is
difficult to use because of low vacancy rates, high return of unused vouchers, or lack
of affordable housing. These projects, if restructured, are allowed to operate on
budget-based rents at a higher level if necessary to keep the property as affordable
housing.
HUD is required to renew all budget-based contracts for 5 years. At the end of
the 5-year period, HUD will once again compare the property rent levels with
comparable market rents to see if adjustments are needed.
2Fair market rents are rent levels established by HUD, based on the rents of comparable
unsubsidized units in a Standard Metropolitan Statistical Area.

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Some owners who would like to participate in the restructuring program may
be told by the PAE that their properties need to be rehabilitated in order to meet
physical standards before their mortgage can be restructured. Contracts for such
projects are to be renewed at budget-based rents with an operating cost adjustment
factor. There are provisions in the restructuring program to aid owners with
rehabilitation costs. These provisions include the retention of residual receipts,
project reserves, debt restructuring, and the rehabilitation grant program.
A concern of many owners when considering participating in the restructuring
program has been the amount they have to contribute to the rehabilitation of their
property under the program. The reauthorizing legislation maintains current law in
requiring the owner to pay 25% of rehabilitation costs. This provision was included
in the law as a safeguard against excessive rehabilitation costs and to prevent abuse.
The new law also states that if a PAE determines that significant new features beyond
the rehabilitation are needed (elevators, roof replacement, air-conditioning, etc.), the
owner may be required to pay up to 25% of the cost, as determined by the PAE.
Implementation of the Restructuring Program
Although the restructuring program was authorized in 1997, OMHAR was very
slow in getting organized, and the office did not begin to assign a large volume of
properties for restructuring until 1999. The law authorized HUD to spend $10
million a year for tenant-outreach on the mechanisms of the mark-to-market program.
Because the program was slow in getting started, only about $1.5 million was spent
in the first year. OMHAR continued to approve grants, assuming that they would be
paid for with unused funds carried over into the next fiscal year. Some legislators
interpreted the original law as limiting funding for the restructuring program to $10
million in any fiscal year with no carry-over of funds, and OMHAR was accused of
violating the Anti-Deficiency Act which prohibits obligating government funds that
have not been appropriated. As a result, OMHAR underwent OPM audits and an
investigation by the Inspector General of HUD. These audits and investigations
concluded that there was no wrong doing on the part of OMHAR.
Because of this conflict in allocating funds, the reauthorizing legislation clearly
authorizes the Secretary of HUD to make available no more than $10 million
annually for the program, in addition to any amounts carried over from previous
years.
There are other factors which have contributed to a slow start of the program.
For example, some owners and PAEs have criticized the extensive requirements
contained in OMHAR’s operating procedures guide, as well as a level of review and
oversight which many PAEs believed slowed the process down, but did not result in
improvements to the restructuring plans.
Another major factor in delaying implementation of the program was the lack
of interest or unwillingness of Section 8 property owners to participate in the
restructuring program. Many owners felt that they had no incentive to commit their
properties to the long-term use agreement that accompanies a “full” mortgage

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restructuring. Also, many owners knew that rehabilitation would be necessary to
bring their properties up to standard for renewals of contracts, and they were reluctant
to contribute the required 25% of rehabilitation costs as prescribed in the law.
According to OMHAR, some PAEs were also responsible for the slow
implementation of the program. OMHAR claims that some of the PAEs were slow
in submitting restructuring plans and that many of these plans were unacceptable.
OMHAR also noted that some PAEs did not have enough staff working only on the
mark-to-market plans without a number of competing priorities.3
Finally, OMHAR reports that at the time they were processing contract
negotiations with some PAEs, a significant number of properties entered into the
mark-to-market program, causing processing delays and the need to temporarily
extend some Section 8 contracts at above market rents.
OMHAR has taken action to address these factors attributed to the slow
implementation of the restructuring program. It has streamlined its operating
procedures and revised its guidelines for appraisals and physical inspections of
property. In reviewing the restructuring plans, OMHAR staff have been instructed
to ensure the reasonableness of the PAEs’ underwriting and compliance with the
regulations, rather than to spend time rewriting the restructuring plan.4
In an effort to encourage Section 8 owners to participate in the program,
OMHAR has put together an incentives package including monthly capital recovery
payments and performance fees for demonstrated sound management practices.
Since these incentives have been offered, there has been an increase in the number
of Section 8 owners requesting full mortgage restructuring.
Finally, OMHAR has sought to aid PAEs in the completion of restructuring
transactions by dispatching experienced underwriters to assist them, and by providing
specialized training for staff of PAEs at their request, or if OMHAR sees a need for
such training.
As of June 6, 2002, 2,159 properties had entered OMHAR’s mark-to-market
program. Of these, about 52% are undergoing full mortgage restructuring and rent
resetting levels; 48% are undergoing a “lite” restructuring only of their rents.
According to OMHAR, there are approximately 3,800 Section 8 project-based
contracts which have above market rents and are potentially eligible for the
restructuring program.
P.L.107-116 reauthorizes OMHAR through September 30, 2004, and the
restructuring program through September 30, 2006.
3U.S. General Accounting Office. Multifamily Housing: Issues Related to Mark-To-Market
Program Reauthorization,, GAO-01-800, July 2001. p.17.
4Ibid., p.19

Conclusion
Without reauthorization of the restructuring program, HUD would still be
required to renew Section 8 contract rents and many of them would have to be
renewed at rents exceeding market levels, or a number of FHA-insured properties
could face foreclosures. The result would be higher federal subsidies under the
Section 8 program. While the beginnings of the restructuring program were slow,
once OMHAR overcame obstacles in setting up the office, selecting PAEs, and
offering incentives to owners to participate in the program, the volume of owners
requesting restructuring has increased.