The Department of Housing and Urban Development proposes to rewrite the rules affecting the affordability of housing for over 1 million low-income families. Will HUD’s controversial proposal preserve affordable housing or cause significant displacement? Helen Dunlap (below) and Michael Bodaken provide differing opinions.
Mark to Market: A Strategy to Recapitalize HUD’s Assisted Housing Inventory
On May 26, 1995, the Department of Housing and Urban Development (HUD) put forward a historic initiative to reform Section 8 project-based assistance. The initiative—known as “Mark to Market”—could directly affect 8,000-9,000 properties. These properties both receive Section 8 project-based assistance and have mortgages insured by the Federal Housing Administration (FHA). The vast majority of the residents of these properties are low income, and a substantial percentage are elderly. How we manage the transition of this portfolio has critical long-term implications for the federal government-and for millions of residents in hundreds of communities.
The goal of Mark to Market is often expressed in financial terms: saving budget dollars. But the scope is really far broader. The growing recognition that we can no longer avoid reforming Section 8 provides a unique opportunity to recapitalize and rehabilitate Section 8 properties. Mark to Market is an approach to improve surrounding neighborhoods, and, most importantly, to give low-income households far more choice over where they live. The idea is to replace a wasteful, rigid and bureaucratic system of housing assistance—where the federal government has become the primary “customer”—with a modern, market-driven system that is motivated primarily to serve the people who live there.
Under our initiative:
- Section 8 assistance contracts between HUD and the project owner will not be renewed as they expire.
- Owners will be free to rent their units for whatever the marketplace will bear. In the case of newer Section 8 projects, this would generally mean a reduction in the rents. For older projects, this would generally mean the same rents or an increase to market levels.
- Residents will receive housing certificates that they could use to remain in their current units or move to other housing. Special protections would ensure that most elderly and disabled residents could remain in their present units if they so chose.
- For properties that would not be financially viable without federal project-based subsidies, HUD will assist in writing down the property’s debt to a level that can be supported by market rents. The presence of mortgage insurance on these properties provides us with the vehicle to help in this restructuring.
- Ailing properties will undergo rehabilitation, where economically feasible.
- In some cases, it may be appropriate to sell or transfer the property to a nonprofit or local government organization. These entities, with a stake in the needs of the community, may be able to use HOME or other funds for rehabilitation, as necessary.
- HUD’s preferred approach is to restructure properties’ financing and provide for rehabilitation before contracts expire and defaults occur. This would make it easier for good owners to remain in place and would protect against property disinvestment as the Section 8 program unwinds.
The initiative has been developed in response to two overriding realities:
- Neither the Administration nor Congress supports continued funding for Section 8 project-based contracts at the current subsidy levels. One clear indicator of this mood is the recent legislation passed by Congress and signed by the president, rescinding $2 billion in funds already authorized for Section 8. A large wave of Section 8 contracts expires over the next five years, beginning with contracts on 140,000 units in FY 1996. The Department estimates that the cost just to renew the contracts expiring in FY 1996 would be about $5 billion, and the pricetag rises sharply to $14 billion by FY 1998. If we continue with the status quo, we will spend about $222 billion in present value dollars over the next 25 years on Section 8 renewals alone. Indeed, soon nobody will be talking about closing down HUD. Section 8 renewals will have swallowed the entire Department.
- Longstanding operational and structural flaws in the Section 8 project based assistance program have reached critical proportions. Our analysis reveals that HUD is providing subsidies above market levels to as many as 3,000 Section 8 properties. Some apartments rent for twice as much as non-subsidized units down the street. This not only drains scarce federal housing resources, it also seriously undermines public support for assisted housing programs across the board. But over-subsidization is not the only problem. Another large group of Section 8 properties is undersubsidized and in distressed condition. No matter how badly these buildings deteriorate, however, most tenants can’t move because they would lose their rental assistance. Structurally, we have build an elaborate housing delivery system that is not sufficiently responsive to tenants.
Importantly, the Administration’s proposal is based on going forward only if housing certificates are available to assist affected residents. The certificates will pay the difference between 30 percent of residents’ incomes and the payment standard established by the public housing authority (PHA) for the area. Our proposal would allow affected residents not currently receiving Section 8 assistance-but who benefit from below-market rents in their buildings-to receive certificates if the increased rents exceed 30 percent of their adjusted income.
There is widespread belief that HUD would mandate an end to all project based assistance for Section 8 properties. This is not true. Our initiative gives localities flexibility to provide project-based assistance at their option, for however long they choose, where they find it appropriate within the context of the local housing strategy.
HUD is considering several options for ensuring a smooth transition to market for Section 8 properties. Our preferred approach is to help properties transition to a market basis voluntarily before Section 8 contracts expire. We would do so primarily by entering into public-private joint ventures with entities that are experienced in restructuring real estate and also sensitive to public policy goals. The joint ventures would operate under carefully established HUD guidelines and would help properties make the transition to market on a property-by-property basis. HUD currently lacks the capacity to respond to the needs of each property individually. The joint ventures might also include national or regional nonprofit intermediaries and other established housing providers.
Because of the specialized nature of their housing and circumstances, elderly residents and those with disabilities could have particular difficulty locating suitable alternatives if forced to move from their current apartments. This could become a problem if the new market rents in their units are higher than the levels that would normally be supported by housing certificates. Our proposal would protect these residents by ensuring that their certificates cover the new rent, whatever its level, so long as it passes a “rent reasonableness” test for comparable unassisted units in the area.
Some have charged that the transition to market of the Section 8 portfolio would lead to massive displacement. We have seen other people circulating figures on displacement as high as 171,000 households. The Department has looked carefully at the potential for displacement – and we have found that these claims are greatly exaggerated. They don’t account for the extra support available to elderly and disabled households. They erroneously assume that any rent increase, even 1 dollar, above the Fair Market Rent will cause displacement.
- The vast majority of housing that converts to a market basis under the Mark to Market initiative would remain part of the affordable housing stock and would continue to be available to residents currently residing in these same project-based units.
- There will be some displacement when obsolete housing leaves the stock. We estimate that approximately 65,000 units will leave the stock—but that the majority of this attrition will occur with or without Mark to Market. In fact, this is happening now as the Department pursues aggressive enforcement against owners who are not meeting their contractual obligations.
- About 30,000 households could be displaced because rents in their properties rise above the levels supported by their tenant-based certificates. In arriving at this estimate, we assume that tenants could absorb a rent burden of up to 40 percent of income, but that rent burdens greater than 40 percent may cause displacement.
Because Mark to Market represents change, there is an understandable tendency to focus on its potential for disruption. But the initiative also offers significant benefits. For the first time residents will have the option of moving and taking their subsidy assistance with them. Older properties in need of repair will finally be able to be upgraded. Residents will have opportunities to purchase their projects as cooperatives where feasible or to apply their new tenant-based housing certificates toward homeownership.
Some are pressuring us to take more time to sort out all the answers before transitioning this complex portfolio to a market-based system. We have been advised to study the Section 8 portfolio for another year or begin with pilot demonstrations. Such advice may seem superficially rational—and even prudent. Unfortunately, in the real world, we do not have the luxury to delay implementing a transition plan—not even for one year. The private markets have already begun to react, as owners, investors, and lenders realize that project-based subsidies will not continue indefinitely. The risk of inaction is that owners will disinvest and that physical deterioration of older projects will accelerate. Against this backdrop, timely implementation of Mark to Market is essential.
The Department is actively soliciting wide input on how best to implement the transition to market of the Section 8 portfolio. We welcome all comments. Further information can be obtained by contacting the Office of Multifamily Housing at 202-708-4542 and requesting information about Mark to Market.