lis 217 stemming the tide - LISC

The reaction to HUD's proposal was almost uniformlynegative. Advocates feared the potentialloss of affordable units. Owners, investors, andbondholders worried that withdrawal of longstandingfederal supports and uncontrolledmortgage sales or debt reduction would spurmassive foreclosures and create huge owner taxliabilities due to relief from mortgage indebtedness.Above-Market Properties: Mark-to-MarketIn 1997, Congress adopted the MultifamilyAssisted Housing Reform and Affordability Act(MAHRA) to address the problem of expiringSection 8 contracts in HUD-insured propertieswith above-market rents. MAHRA established aMark-to-Market program with a decidedly morepreservation-oriented flavor.In general, HUD was mandated to reduceabove-market rents when the contracts expired,to restructure the underlying debt, and to renewproject-based subsidies in most cases. TheHUD-insured mortgage would be bifurcated intosupportable and unsupportable debt, with HUDretaining a deferred second mortgage in theamount of the restructured, unsupportabledebt.In exchange for debt restructuring, owners wererequired to renew their Section 8 contracts,subject to appropriations, for 30 years. The programalso created adjunct long-term use restrictionsin case subsidies became unavailable.HUD was directed to designate ParticipatingAdministrative Entities (PAEs) to execute thedebt restructuring, with state and local publicagencies receiving preference over privateagencies. The PAEs were accountable to theOffice of Multifamily Housing AssistanceRestructuring (OMHAR), a quasi-independentoffice within HUD. PAEs were charged with creatinga process that minimized costs to themortgage insurance fund while ensuring longtermpreservation of affordable housing properties.The most innovative feature of the Mark-to-Market program—the bifurcated mortgagestructure—addressed a number of stakeholderconcerns. Since the unsupportable debt wasneither relieved nor forgiven, the IRS was ableto issue a favorable ruling to owners, whichminimized the risk of adverse tax consequencesfrom restructuring. HUD's continuing role assecond mortgage holder facilitated the accountabilityand long-term public control desired bypreservation advocates. The overall structureprovided a mechanism to secure a direct federalcapital subsidy for the housing, which wouldreduce annual Section 8 obligations and becost-effective over time—similar, ironically, tothe discarded preservation capital grant program.Implementation of the Mark-to-Market programhas been slow. PAEs received their first assignmentsas late as July 1999. Due to rising rentsand the generally robust housing marketnationwide, the number of properties eligiblefor debt restructuring is much smaller than originallyanticipated. Many properties can absorbthe relatively small rent decreases necessary tobring rents down to market without reducingtheir existing debt. Owners typically prefer this"OMHAR Lite" option, which involves less oversightand no use restrictions.OMHAR’s relationship with the public sectorPAEs has been a challenge. More private PAEshave been selected to administer Mark-to-Market than was originally anticipated, andmany public PAEs have left the program overtime. Of the 42 state housing finance agenciesthat were originally approved as PAEs, only 22remain in the program today.Over 2,102 properties were in the Mark-to-Market pipeline, with 1,461 transactions completedas of April 9, 2002. 6 Of these, only 627are full debt restructurings, while 571 are"lites." Non-renewal of Section 8 has been recommendedin only 16 properties to date. Thepipeline is heavily concentrated in the heartland—Ohio,Pennsylvania, and Kentucky—although nearly every state has eligible properties.Although some owners have been willing tocooperate in the restructuring process, recentOMHAR initiatives have provided incentives tochapter one: Subsidized Housing Preservation: An Historical Perspective5