The United States spends less on direct housing aid for the poor than any other western industrial democracy. Now, the few existing affordable housing units that have been built with federal assistance are at risk.
From 1970 to 1993, the total number of low-cost rental units shrank from 7.4 million to 6.5 million, while the number of low-income renters rose from 6.5 million to 11.2 million in 1993. This shortage of 4.7 million fewer low-cost rental units than low-income renters is the largest shortfall on record. (Lazere 1995)
Renters, especially low-income renters, spend such large percentages of income on housing costs in part because of the substantial shortage of affordable housing. The following is a description of the problem.
Privately-Owned, Publicly-Subsidized and Regulated Rental Stock
Much of the privately-owned, publicly-subsidized and regulated rental stock is threatened by the failure of federal programs to ensure that this low-income housing remains permanently affordable. What follows is a more detailed discussion of these programs and their impact on the future affordability of the housing stock.
Expiring Use Restrictions
Under large federal programs created in the late 1960s, low-income housing was produced with subsidized mortgages that could be prepaid after 20 years. With prepayment, restrictions requiring low- and moderate-income occupancy would be terminated. Private owners of subsidized projects can usually convert to market use after 10-20 years. Approximately 3,800 properties with nearly 400,000 units, subsidized under these programs-called Section 236 or 221(d)3-are facing the expiration of their affordability use restriction by 1997. (National Housing Trust 1995) By the end of fiscal year 1994, the HUD preservation programs had extended these restrictions for only 278 properties with only 36,452 units. (FHA 1994)
Preservation of most of this stock is made possible under a new federal housing program entitled the Low Income Housing Preservation and Resident Home Ownership Act. For owners who elect not to continue with government assistance, preservation of the projects as affordable will depend on the organized efforts of tenant groups, nonprofit sponsors, and local government.
In response to this legislation, tenant organizations are trying to secure greater participation in owning or managing these endangered projects. For example, the Mission Plaza Tenant Association’s efforts to secure greater tenant participation in management of a Section 236 complex in Los Angeles have resulted in the tenants purchasing their homes. The tenant organization’s leader observed, “For 16 years we organized rent strikes, demonstrations, petitions, hearings, lawsuits-everything you can imagine. And now it’s added up to the ultimate victory: we are going to own and control our homes…”
Numerous risks remain, including the need for sufficient federal money to operate the program. The government assistance needed to save and recapitalize these projects may very likely be the largest federal housing program of the 1990s. (Koebel and Bailey 1992) One expert estimated the price tag at $27.4 billion. (Achtenberg 1992)
Federal Section 8 Project-Based Subsidies
Most owners of property assisted by HUD’s Section 8 project-based subsidies are for-profit owners, although some are nonprofit. Many owners hire management companies to manage the day-to-day operations of their projects.
Section 8 project-based housing includes 1.5 million units in over 20,000 projects. Over 10,000 Section 8 assisted properties are also HUD-insured. (England-Joseph 1996) Of the $45 billion of HUD multifamily housing insurance in force, $11.9 billion, or 26 percent, is estimated to be at risk because of physical or financial problems.
The National Housing Law Project (NHLP) estimates that rents in about half, or 700,000, of the project-based Section 8 units are above market. (These are limited to the “newer-assisted”-Section 8 New Construction/Substantial Rehab-rentals.) This means that some owners of Section 8 projects may be receiving rent subsidies that are higher than necessary to reasonably operate their apartments.
The House Employment, Housing and Aviation Subcommittee held hearings on July 26, 1994, to focus on three issues: why some Section 8 projects become troubled, how HUD intends to improve its management of troubled projects, and how to address HUD’s provision of excessive rental subsidies to some owners. Several subcommittee members were concerned, in a broader sense, with the future of the Section 8 project-based program and whether it should continue to exist in its current form.
The subcommittee found:
- Many Section 8 apartments do not meet HUD’s housing quality standards for decent, safe, and sanitary housing, and are therefore classified as “troubled” units.
- HUD is not adequately inspecting projects for compliance with its housing quality standards, and is not following up on inspections to ensure that necessary repairs are being made.
- HUD cannot identify which projects in its inventory are troubled. This is due to inadequate HUD data systems.
- HUD is not taking aggressive enforcement action when necessary against owners of troubled projects.
- The inability of HUD to address the problems of troubled projects is due to a variety of factors, including ineffective management, inadequate data systems, staffing shortages, and a lack of program accountability. HUD is attempting to address weaknesses in its financial systems by automating financial statements for HUD-insured projects.
- HUD is providing additional funds to some projects without first making cost-effective decisions about the projects’ future long-term viability.
- HUD has not done a complete assessment of its inventory of troubled projects. This would include a financial and cost-benefit analysis of each troubled property to determine remedial action. It would also include a social impact analysis, which would examine the impact that the remedial action would have on tenants, owners, and communities.
- Many Section 8 apartments have rents that are excessive compared to comparable unassisted apartments in the same area. Some of the unassisted apartments are in better condition than the Section 8 apartments.
- Moreover, anecdotal information indicates that some Section 8 subsidies are lost because the participating owner never makes them available to poor families or utilizes them improperly.
The bigger problem, however, lies with the way the program is structured. Unlike public housing, Section 8 projects have subsidy contracts that are for very short periods of time, some as short as five years. This federal program originally subsidized projects with rent subsidy contracts that ran 15 years with two five-year renewals at the election of the owners. Because these contracts have only been renewed in five-year increments, over 600,000 units will come up for renewal between 1996 and 1999, the NHLP reported. As a result of language included in the 1996 HUD Appropriations legislation, beginning with contracts that expire in 1996, estimated to affect over 143,000 units, these project-based Section 8 contracts are only being renewed for one to two years depending on the program, with the vast majority receiving only a two-year renewal, and expecting only a one-year renewal the next time around.
Between 1996 and 2004, according to the NHLP figures, approximately 914,452 units receiving project-based assistance will have their contracts expire. Congress is now deciding whether to preserve the affordability of these units, and how to make and implement decisions affecting this stock. The additional budget authority needed to handle all of the contracts due to expire by the turn of the century is significant.
Section 8 contract renewals were funded at over $4 billion in 1996, and this figure is expected to grow as the number of contracts expiring increases each year, especially given the current policy requiring that contracts be renewed every year. HUD estimates that Budget Authority demands of these renewals will balloon from $2 billion in 1995 to $20 billion in 2002. (England-Joseph 1996)
While HUD’s latest “portfolio re-engineering” demonstration is taking steps towards housing preservation using project-based Section 8, the legislation does not supply details on how tenants and communities will have a voice in determining how this housing survives over the next 20 years. (Bodaken 1996)
HUD has a growing portfolio of foreclosed projects. HUD insures mortgages on more than 14,000 privately-built multifamily housing developments nationwide, most of which carry rental subsidies for low-income tenants. (England-Joseph 1996)
Because of years of mismanagement, poor market conditions, and poor oversight, many landlords began defaulting on their mortgage payments in the late 1980s and early 1990s. Banks, in turn, “assigned” the mortgages to and collected insurance from HUD.
HUD ownership certainly provides new opportunities for competent residents to become owners and managers, and to keep rents affordable to very low-income tenants by providing adequate subsidies to pay for sufficient repairs and operating expenses. The statutes governing HUD’s foreclosure activities emphasize preserving the buildings for low-income tenants. However, while preservation of subsidized units is guaranteed, formerly unsubsidized units serving lower income families are no longer guaranteed.
Tenants in subsidized and unsubsidized buildings are often victims of property neglect by HUD or its managing agent. Moreover, HUD’s disposition plans governing the resale of projects and their long-term future are often completely inadequate. Due to the high cost of rehabilitation, this housing needs sufficient subsidies to survive.
Some HUD statistics peg the total multifamily foreclosure problem at 27,000 units, with another 40,500 in the foreclosure pipeline. (Hans 1993) These numbers are much lower than those in a confidential HUD transition report, which cited 48,000 units owned and managed by HUD, and expressed concern at the rising costs of maintenance due to poor management.
HUD has recently emphasized this problem and has been disposing of properties with vigor. Problems with financially “at risk” loans remain serious. In 1994 HUD-held mortgages (those “assigned” to HUD when insured properties held by other mortgage companies became delinquent) numbered 2,244. At the end of 1993, HUD had 178 properties in its inventory. In 1994 there were 121, and in 1995, only 74. This change is due primarily to the increased appropriations committed to property disposition in the form of Section 8 necessary to sell the projects. In addition, the Property Disposition law passed in 1994 has allowed HUD to sell “HUD-held” mortgages at auction. By September 1995, HUD had sold 616 mortgages using this new law, greatly reducing the number of properties for which HUD held the bulk of liability. (HUD 1995) This process will continue. HUD is finalizing the sales of HUD-held mortgages to three State Housing Finance Agencies (HFAs) in Maryland, Missouri and Pennsylvania, as part of a demonstration program that would turn the loans over without insurance to be serviced by the state HFAs. This will affect tens of thousands of units.
Threatened GSE and HUD Foreclosure Inventories
In recent years, governmental agencies acting on behalf of the public have foreclosed on multifamily buildings and single-family homes in record numbers. According to the Star Ledger of Newark, New Jersey, in 1993 foreclosure rates hit their highest since the Great Depression. To make matters worse, the foreclosed stock is often mismanaged and deteriorates during foreclosure, prior to eventual disposition. This public investment in foreclosed inventories of residential units represents an opportunity to expand the affordable housing stock.
Fannie Mae and Freddie Mac Foreclosures
The Federal National Mortgage Association (Fannie Mae) reported a 30 percent increase in single-family foreclosures between 1990 and 1992 and a 20 percent increase in the number of seriously delinquent single-family loans in 1992. In addition, the Federal Home Loan Mortgage Corporation (Freddie Mac) experienced a 60 percent increase in multi-unit foreclosures, raising their holdings to over one quarter million residential units.
In late 1995 Freddie Mac owned a total of 6,600 single-family properties, compared to 6,200 in 1994 and 5,300 in 1993. Freddie Mac also experienced a 20 percent increase in delinquencies from 1994 to 1995. This was in stark contrast to Fannie Mae, which has seen a significant decrease in both its seriously delinquent multifamily mortgages and its multifamily foreclosed inventory.
The failure of large commercial banks in the 1980s and early 1990s resulted in a growing inventory of foreclosed properties held by the Federal Deposit Insurance Corporation (FDIC), particularly in the Northeast. While the FDIC is mandated by federal affordability regulations, only a small number of single-family properties had been sold as affordable housing at the time of this research, mostly because the federal government had failed to appropriate the funds necessary for implementation. Much of the inventory lay dormant in the depressed real estate market.
Federal HOME Program
Congress has created a similar risk of losing affordable housing in its design of the HOME program created by the 1990 National Affordable Housing Act. Federal funds can be used, under this program, for terms as short as between five and 20 years. If these restrictions are not extended by Congress, a conversion problem like that experienced by FHA-subsidized multifamily projects will repeat itself for HOME-funded projects.
State Finance Agency Mortgage Bond Restrictions
Thousands of units have been financed with below market mortgages through state housing finance agencies. Some projects carried affordability restrictions expiring during the 1990s. The National Council of State Housing Agencies has recognized the magnitude of this growing problem but has not yet quantified it.
State and Local Expiring Affordability Restrictions
A wide variety of state and local programs have been used to finance affordable housing. Many of these subsidies carried affordability restrictions, with terms of 10 to 20 years being most common. We are now approaching the end of those terms. These local subsidy programs include density bonuses, inclusionary zoning, Community Development Block Grants, Rental Rehab Programs, Housing Trust Funds, and others.
Privately-Owned, Unsubsidized Rentals, Unregulated by the Federal Government
These properties remain at risk of becoming unaffordable due to market forces (Harvard Joint Center for Housing Studies 1992). Clearly this study is presented on the crest of a serious and potentially disastrous trend.