Volume 3 Number 6
June 2006

In this Issue
Factors in Achieving and Retaining Homeownership
Performance Measurement Enhances Community Development
Mark-to-Market Preserves Affordable Rental Housing
Optimized Tax Credit Allocation Can Serve Those in Need
In the next issue of ResearchWorks

Mark-to-Market Preserves Affordable Rental Housing

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In the 1980s, HUD faced a serious challenge in our efforts to preserve the supply of affordable rental housing. Policymakers were concerned that a growing disparity between HUD-approved rents and market-rate rents would lead property owners participating in HUD's Section 8 subsidy program for low-income renters to leave the program. Others were concerned that HUD’s rent subsidy costs were rising at a rate that, if it continued, would become far too costly. This situation can be traced to initial rent levels for Section 8 properties established back in the 1970s and early 1980s. Back then, rents were often set above local market levels to compensate for administrative costs, higher construction costs, and special features for the elderly.

In 1997, Congress authorized the Mark-to-Market (M2M) program in response to these concerns. Its first objective was to reduce rents to market level rates in Section 8 properties with FHA-insured mortgages. In some instances, rents were reduced without further negotiation or long-term commitment from the owner. In many cases, this would have thrown a project into default, unable to meet expenses with reduced income. In response, M2M authorized partial or full payment of mortgages from the FHA Insurance Fund as a means of reducing the size of the first mortgage debt. This type of debt restructuring replaces the old with a new mortgage and smaller mortgage payments that reduced rents can cover (plus expenses). The Section 8 subsidy is then decreased and HUD saves money. The owner agrees to retain the property as affordable rental housing for 30 years, thus meeting the second objective of M2M: that of preserving affordable rental housing. Additional provisions allow: (1) repair and replacement to upgrade or sustain a property’s condition, and (2) above-market rents where affordable housing is needed and a property cannot be made financially viable at the market rate.

HUD recently arranged for an independent evaluation of M2M performance over time that focused on administrative aspects of the program, statistical analyses, and in-depth case studies which demonstrated how the program was operating. By the end of July 2003, 2,416 properties had worked with the M2M program after their original Section 8 contracts expired. The properties represented 25 percent of the assisted housing stock. Owners of the remaining stock have the opportunity to go through the M2M process as their contracts expire. Projected cost savings from completed M2M restructurings were calculated in three ways, based on differing financial performance scenarios. For the properties processed through M2M by the end of July 2003, these scenarios produced a range of anticipated net savings to HUD that ranged from $111 million to $883 million over the next 20 years.

Based on an exhaustive review of actual outcomes, researchers concluded that M2M’s restructuring process appeared to be effective in preserving affordable housing. Few properties that entered the M2M process had left the Section 8 program. Initial owner resistance to negotiating the restructuring of their contracts with HUD had largely dissipated, and the financial arrangements negotiated appeared to be sound. Section 8 tenants were able to remain in their homes, while enjoying physical improvements to the property. Moreover, the government was saving money.

Lynn Acres, in Shelbyville, Kentucky, is considered one of the success stories that illustrate M2M's purpose - to improve the financial viability of the property while preserving affordable rental housing. Lynn Acres has 40 Section 8 subsidized units occupied by a mix of young families, single mothers, and elderly tenants. The current owners built the project 20 years ago under the HUD-financed 223(a)(7) program. At the point of entry into the M2M restructuring process, both assessors and tenants rated Lynn Acres' condition as good, although it was in need of some repair and rehabilitation. This was similar to what was found in other rentals in the community. Yet the property was at a competitive disadvantage, because it lacked washer and dryer hookups. Lowering the rents without debt restructuring would have created too much of a financial burden for the owner. Therefore, HUD arranged for the mortgage to be restructured with lower payments.

Features of the renegotiated plan for Lynn Acres included reduced rents. The rent for a two-bedroom unit, for example, was reduced from 140 percent of fair market rate ($552) to 124 percent ($489). The reductions will save Section 8 over $40,000 annually. The new 30-year commitment from the owners of Lynn Acres retains the units as affordable housing. Agreed-upon renovations and repairs will maintain the good condition of the buildings and bring parking and common areas into compliance with the Americans with Disabilities Act of 1990.

Evaluation of the Mark-to-Market Program details the evaluation conducted, reviews outcomes, and further describes the circumstances of the restructuring of fifteen properties located throughout the United States. The study is available as a free download at www.huduser.org/publications/PUBASST/evalm2m.html or in print for a nominal fee by calling 800.245.2691.