#082 Jul/Aug 1995

One Million Families At Risk

The dangers of Mark to Market and the needs for preserving expiring subsidized housing.

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? Michael Bodaken (below) and Helen Dunlap provide differing opinions.

We Must Preserve the Nation’s Supply of Affordable Housing

For 60 years, Congress has recognized that meeting America’s housing needs requires federal partnership with the private housing industry and state and local governments. This has come through a combination of mortgage insurance, direct investment of capital, tax incentives, a write-down of mortgage interest, or other assistance. Today we are engaged in a debate over the future of that partnership, the people it serves, and the millions of units of housing it has produced.

The Department of Housing and Urban Development (HUD) is proposing a profound shift in policy on housing built and owned by the private sector, both for-profit and nonprofit. Built over two decades with federal mortgage insurance and receiving project-based Section 8 rental assistance, this housing has served millions of low-income people and has had broad bipartisan support during both Republican and Democratic Administrations. HUD’s new policy is spurred by the expiration of Section 8 contracts on a total of over one million assisted housing units over the next 10 years.

HUD’s Proposal for Federal Housing

Administration (FHA) insured and Section 8 assisted housing is to eliminate project-based assistance as contracts expire; eliminate regulatory requirements governing the housing; pay mortgage claims triggered by the elimination of subsidy; provide some rehabilitation to a portion of the stock; and provide residents with Section 8 certificates administered by local public housing authorities. (HUD would cap the value of the voucher at a rate below the present level, i.e., the buying power of the voucher would erode.) The idea is to mainstream this housing into the conventional real estate market, without subsidies or use restrictions. The plan reverses a long-standing policy on maintaining a supply of well-located and maintained housing for current and future low-income renters. The new policy, called “Mark to Market,” is the antithesis of preservation of existing affordable housing, an explicit goal adopted by the Congress over a decade ago.

All parties in this debate agree that reform of HUD programs is necessary, that maintaining the status quo is unacceptable from a fiscal and housing quality perspective. But is an approach that could eliminate the affordable housing supply the best solution? Is it the best solution from a cost perspective as well as from the perspective of renters, owners, neighborhoods, local governments and the national interest in having an affordable housing supply and delivery system? Also, are there policy distinctions to be made based on the characteristics of the federally-insured housing stock, including age, condition, type of financing, and other subsidies? We believe there are and that HUD’s goals of reducing costs and providing more flexible housing opportunities can be achieved without “throwing the baby out with the bath water.”

How Did We Get Here?

The federal housing story begins in 1937 with the National Housing Act. The Act committed the United States “to remedy the unsafe and unsanitary conditions and the acute shortage of decent, safe and sanitary dwellings for families of low income in rural or urban communities, that are injurious to the health, safety and morals of the citizens of the nation.”

In 1949, Congress established as a cornerstone of national policy “the realization as soon as feasible of the goal of a decent home and a suitable living environment for every American family.”

Congress reaffirmed this policy in 1968, declaring that “the highest priority and emphasis should be given to meeting the housing needs of those families for which the national goal has not become a reality.”

Between 1965 and 1974, private builders were offered below-market interest rate insured loans for affordable units reserved for low-income families and seniors. The program was highly successful, generating the development of over 600,000 homes during this decade. Later, utility price hikes and other operating expense increases due in part to the oil crisis led to the need for additional federal property-based subsidies to keep the units affordable. Section 8 contract rents for these units are generally below market and “budget-based,” i.e. rent is based on budgeted expenses and the owner’s limited dividend. These properties are typically referred to as “older assisted housing.”

Apartments created under the Section 8 New Construction/Substantial Rehabilitation (NC/SR) program, made part of the Housing and Community Development Act of 1974 during the Nixon/Ford Administrations, are typically referred to as “newer assisted housing.” Designed for private operation, this program provided federal insurance as an option. All these units received project-based subsidies. This program produced almost one million apartments between 1974 and 1983. Unlike the older assisted stock, the newer assisted stock has fewer financial and physical problems. Another contrast is that incomes of tenants in newer assisted stock are generally lower than incomes of tenants in older assisted stock. Unlike the older assisted stock, most contracts on newer stock do not begin to expire until 1998. Finally, for a variety of reasons, contract rents for newer assisted stock are often above market, whereas contract rents for older assisted stock are typically below market.

What Would Happen Under Mark to Market?

HUD proposes to eliminate all use restrictions, except income eligibility, for any FHA insured property partially or fully assisted by project-based Section 8. This applies to both the newer and older assisted housing stock. The drive to market is nowhere better expressed than in HUD’s proposed legislation, which allows the HUD Secretary to “remove at the owner’s request, or at the Secretary’s determination, any [emphasis added] mortgage restriction, regulatory agreement restriction, project-based contract, or use agreement restriction from projects undergoing restructuring (Mark to Market) if such restriction would prevent the project from operating as a market rate rental project.”

If the housing defaults, HUD proposes to sell the mortgages. Whether the mortgage sales will be driven purely by economic or by a public interest/market mix remains unclear. Mark to Market assumes a market in which this real estate will find its “natural” level. Federal rent formulas will be abandoned, the owner will be entitled to an unlimited distribution, and affordability restrictions are eliminated. While owners may be required to rent to those earning below certain incomes, residents may have to pay rents in excess of 30 percent of their income to stay in place.

The Difference Between the “Old” and the “New” and Budget Realities

The Mark to Market proposal tends to blur three essential points:

1) HUD asserts that “Mark to Market” will reduce ongoing Section 8 subsidy costs by cutting rents down to market and writing down FHA mortgages to a property’s true economic value. This is only half true.

Despite their essential differences, HUD proposes to “mark to market” both older and newer assisted housing stock. Approximately one-half of the 900,000 units are in the older assisted category, projects built in the 1960s and 1970s with below market interest rates.

There is no budgetary or policy rationale for “marking up to market” older assisted housing. Raising rents would negate the benefits of the financing structure of these projects; eliminating property based Section 8 and substituting vouchers would be a waste of precious budget resources in an increasingly stingy budget climate.

HUD acknowledges that 70-80 percent of contract rents in the older assisted housing stock are below local fair-market rents. In its latest report on “Mark to Market,” HUD declares that nine out of 10 residents will choose to stay in the units they presently occupy. Assuming this to be true, the federal government will pay more than the current rent for a voucher to a family currently residing in older assisted housing. Additional costs of marking to market the older assisted stock have been noted by the General Accounting Office, which observes that “excluding the older assisted properties from [Mark to Market] would cost $4 billion less over 25 years (on a net present value basis) than including them.”

2) HUD assumes that tenant-based subsidies are “the future.” But HUD has already carved out property-based “exceptions” for the elderly and the disabled, block granting them to local governments. Ironically, as a rule, state and local governments use place-based assistance, i.e., through the allocation of low-income housing tax credits, HOME, CDBG and other resources that essentially provide up-front capital subsidies for housing with long-term rent restrictions.

Vouchers are a valuable tool in any affordable housing delivery system. But they are not a substitute for maintaining a supply of affordable housing, especially when choices must be made about how to invest limited resources. If we are not going to supplement incomes enough to permit the private housing market to meet the housing needs of low-income Americans, national housing policy must include well-designed and implemented programs to preserve the existing supply of affordable housing.

3) HUD’s Mark to Market displacement literature assumes that residents would “accept” a rent burden of 40 percent of income before they would relocate. There is no basis to assume that low-income residents have incomes sufficient to pay higher rents.

Higher rents are a certainty for tens of thousands of apartments. In a case example document released June 21, 1995, HUD estimates that rents for older assisted housing would increase between 8 and 34 percent, depending upon the location and condition of the property. To mitigate these impacts, HUD proposed that, as contracts expire, residents of Section 8 units and others who are or become rent burdened would receive two-year vouchers. Further, HUD posits that vouchers work best with adequate counseling and where discriminatory barriers are reduced. Thus, HUD requested from Congress tens of thousands of additional vouchers to make Mark to Market work with older assisted housing. In July, the House Appropriations Committee rejected HUD’s request and voted for no additional Section 8 certificates, thus denying certificates for households that become rent burdened due to Mark to Market rent hikes. Instead, the Committee gave the Secretary “discretion” to voucher out assisted housing at HUD’s proposed lower voucher levels. Due to budget politics, this type of Mark to Market “Lite” (less housing, reduced voucher assistance) may well be the legislative outcome.

The National Housing Trust estimates displacement to be well over 175,000 households, based on more realistic ratios of rents to income, the fact that there will be no additional Section 8 certificates provided by Congress, and factoring in stock lost due to deterioration. Without any testing of the Mark to Market concept, there is no telling how much displacement will occur.

Timing and Alternatives

Different subsidy contracts expire at different times. HUD estimates that 75 percent of newer assisted projects have rents in excess of FMR. Most of those contracts do not expire until later in the decade. According to the Congressional Budget Office, only 957 newer assisted apartments in the country have contracts that expire in FY 1996, and the peak years are FY 1998-2000 for contract renewals for newer assisted housing. Nevertheless, HUD asserts that decisions must be made this summer to avoid negative capital market consequences. The Trust believes that a hastily-set policy will lead to numerous mid-course corrections, which would be more harmful than taking time to develop a well-conceived policy.

Unfortunately, older assisted housing, for which rents will be increased, would be the first candidates tested by Mark to Market. According to the CBO, fully 220,000 units of older assisted housing expire during the next two years. The possibility that HUD will abandon the preservation of this mixed-income, federally-assisted, multifamily housing that serves primarily the working poor-and incur a greater expense to the taxpayer in doing so-leaves affordable housing preservationists shaking their heads.

Now is the time to bring other approaches to the table.

  • The National Housing Trust has advanced a capital grant proposal that would provide for rehabilitation of the older assisted housing stock, demand permanent affordability in return, maintain the current below market rents in place, and cost approximately 15 percent less than Mark to Market.
  • A variant of this approach would be to segment the older assisted stock into three tiers. The top tier, excellent properties in strong markets, are candidates for a capital grant. The second tier could have debt written off, prior to default, in return for substantial repairs, keeping below-market rents in place. The third are those properties that might not be able to sustain operating expenses, even if debt is written down to zero, but that serve as anchors in weak markets. These properties may need continued property based assistance, albeit at lower levels.
  • A third proposal would permit owners of the older assisted stock to mark rents up a little, not all the way to market, with continued property based assistance to attract private financing for rehabilitation.
  • Another proposal would permit property owners to provide “turnover certificates” to poorer residents to avoid low-income concentration. When very low-income people moved out with their certificates, the property owner could move in a slightly higher income resident who could afford the budget-based rent without federal subsidy.
  • A draft concept, currently in circulation on Capital Hill, permits owners of high-value properties to opt out, but provides rehabilitation and operating funds for “good owners” of lower-value developments, which are the best properties in distressed neighborhoods.
  • Finally, the National Housing Trust, local governments, and nonprofits have asked that restrictions be lifted to permit the mix and match of HOME funds and tax credits to preserve federally assisted housing.

The Trust compliments the Administration’s efforts in beginning to wrestle with the policy and financial challenges of HUD assisted housing. But HUD’s Mark to Market proposal should be unbundled and each element should be evaluated for cost-effectiveness, administrative feasibility, and its impact on the future of this housing stock. As presently framed, Mark to Market is not the most cost-effective approach, and it would not necessarily serve the interests of current residents, the neighborhoods in which the housing is located, or the local governments that may realize increased burdens without adequate resources.

For more information about Mark to Market, call the National Housing Trust at 202-333-8931 or see www.nhtinc.org


  • In Their Own Hands: Colonias Organize

    July 1, 1995

    “Complex but doable,” as one organizer put it, is an apt description of the job facing activists in the colonias, poverty-ridden communities along the Texas-Mexico border. The next questions are […]

  • Part II: The Great Production Debate

    July 1, 1995

    In response to an earlier piece that examines the potential of design enhancement for neighborhood revitalization, housing development consultant Bob Santucci argues for high-quality, low-cost affordable housing production.

  • Shelterforce Interview: Bill Apgar

    July 1, 1995

    William C. Apgar, Jr. is Executive Director of Harvard’s Joint Center for Housing Studies and a Lecturer in Public Policy at Harvard’s JFK School of Government. He was a founding […]