Housing advocates and the U.S. Department of Housing and Urban Development (HUD) scored a victory in the annual budget fight this year, as Congress approved funding for an additional 60,000 Section 8 vouchers in the fiscal 2000 VA/HUD appropriations bill. The bill also includes money to renew all expiring Section 8 contracts, providing a total of $11.4 billion for Section 8 and $26 billion for all HUD programs.

"This budget agreement puts HUD back in the business of housing Americans and creating opportunities for economic development in communities throughout the nation," says HUD secretary Andrew Cuomo. "As a result, HUD is equipped with new tools to revitalize economically distressed communities; and to help welfare recipients and others to become self-sufficient; increase and preserve the supply of affordable housing; expand the commitment to end discrimination; and care for elderly Americans."

In addition to Section 8, major funding elements of the bill include $4.8 billion for community development block grants; $1.6 billion for the HOME program; and $1.02 billion to fight homelessness.

The bill also provides credit limits for Federal Housing Administration (FHA) and Government National Mortgage Association (Ginnie Mae) financing programs. For FHA, the bill authorizes $18.1 billion in commitments for insured multifamily loans. It also authorizes a commitment level of $200 billion for Ginnie Mae-guaranteed mortgage-backed securities, which finance most FHA loans.

In addition to funding HUD programs, the bill includes substantive legislation aimed at preserving the nation's affordable housing inventory. One threat to that inventory is the prospect that owners of Section 8 projects with below-market rents will opt out of the program to escape its rent restrictions. To deal with that threat, the bill authorizes HUD to mark rents up to market when renewing contracts, when such rents exceed 110% of HUD's fair market rents (FMRs).

In such cases, the contract would be renewed at comparable market rents, subject to a ceiling of 150% of FMR. Projects won't be eligible for the mark-up-to-market program if they are owned by nonprofit organizations; subject to other low-income use restrictions that can't be removed by the owner; or if HUD has already provided vouchers for tenants notified the Section 8 contract is being terminated. The bill also encourages Section 236 owners to remain in the program by allowing HUD to raise project rents to comparable market rents.

Courts deal defeat to housing owners While Congress may have dealt favorably with assisted-housing owners, the courts handed them stinging defeats in two cases. In Greenbrier v. U.S., the U.S. Court of Appeals for the Federal Circuit rejected breach-of-contract claims by owners of Section 236 and Section 221(d)(3) below-market-interest-rate (BMIR) projects. When the projects were developed, the mortgage documents gave the owners the right to prepay their loans and convert to market-rate housing after 20 years.

However, those prepayment rights were curtailed by the enactment of the Emergency Low-income Housing Preservation Act of 1987 (ELIHPA) and the Low-income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA). The owners contended that the enactment of these laws breached their contractual prepayment rights. However, the court rejected their argument, upholding the ruling of the Court of Federal Claims that there was no contract between the government and the owners involving prepayment rights and therefore, the government couldn't be liable for a breach of contract.

The key to the ruling is the three-cornered regulatory structure in the 236 and 221(d)(3) programs. The prepayment right was included in the mortgage between the owner and the lender, while the low-income use restriction associated with the mortgage was spelled out in a regulatory agreement between the owner and HUD. The owners argued that the documents should be read together as parts of a single regulatory scheme, but the court held that they are separate agreements.

The second case, Melrose Associates v. U.S., is more dramatic, though not so far-reaching. It involves a Section 8 project which received an increase in subsidy when the HUD field office approved a change in the method of setting rents. HUD headquarters subsequently ruled that the field office had no authority to grant such approval and reversed the decision, and the U.S. Court of Federal Claims previously upheld that action. In this decision, the claims court also ruled for HUD in its claim for repayment of the excess assistance received by the owner while the unauthorized rents were in effect. As a result, the owners owe the government about $700,000.