The U.S. Department of Housing and Urban Development (HUD) has released details of its mark-to-market proposal to reduce subsidy costs for Federal Housing Administration-insured projects with project-based Section 8 assistance.

Over the past several years, as five-year Section 8 contracts for certificates and vouchers and 15-year loan management contracts for troubled FHA-insured projects have begun expiring, Congress and Republican and Democratic administrations have established a policy of renewing all of them.

Now, however, as the first of the 20-year contracts on projects developed with Section 8 assistance approach the end of their term, HUD and Congress are considering a systematic approach to wean the projects from their rental subsidies. In many cases, the subsidized rents are well above the rents for unsubsidized projects in the same area.

Under the mark-to-market plan, HUD would restructure the loans on FHA-insured projects, reducing the debt to a level where market rents will support the projects. Low-income tenants would receive certificates or vouchers, to use to support their rents in the same project or to move to another unit.

The mark-to-market plan would apply only to FHA-insured projects with Section 8 assistance provided through the old new construction and substantial rehabilitation programs which were terminated in 1983, or the loan management program, and to HUD-acquired projects sold with Section 8 property disposition assistance -- an estimated 9,300 projects with a total of about 900,000 units.

Mark-to-market would not apply to FHA-insured Section 221(d)(3) below market interest rate (BMIR) or Section 236 projects without project-based Section 8, to FHA-insured projects with Section 8 moderate rehab assistance, or to Section 8 projects which don't have FHA financing.

HUD has developed two approaches to mark-to-market, each with two options.

Under the first approach, mortgages would be restructured after default, but before they have actually been assigned to HUD. In the first option under this approach, a loan would be sold to another mortgagee at a discount reflecting current market conditions and HUD would pay the seller the difference between the bid amount and the amount the seller would have received by assigning the mortgage to HUD. Mortgages receiving no acceptable bids would be offered for sale to the state or local government. If the state or local government isn't interested, the mortgage would be canceled.

Under the second option, defaulted mortgages would be transferred to partnerships with mortgage servicing and asset disposition capacity and the partnerships would determine what to do with them. Alternatives could include individual or bulk sales, property rehabilitation and sale, or transfer of mortgages to state or local agencies.

The second approach would deal with mortgages before they go into default. Under the first option for this approach, HUD would transfer to a joint venture entity part of the economic liability for the insurance on a mortgage portfolio, and the joint venture would be responsible for resolving the mortgages. HUD would estimate the base value that it would recover by retaining and resolving the mortgages. The joint venture would have to guarantee HUD the base values on the portfolio and the joint venture and HUD would share any recovery in excess of the base value.

Under the second option, mortgage insurance claims would be accelerated by allowing lenders to "put" or assign mortgages to HUD up to one year before expiration of the Section 8 contract if the loans are likely to go into default when the contract expires. The loans would then be turned over to joint ventures for resolution.