Congress approves Section 8 mark-to-market plan Congress has approved permanent legislation to deal with the costly problem of expiring Section 8 rental assistance contracts on Federal Housing Administration-insured multifamily projects that carry rents well above market.

Under the so-called mark-to-market plan, adopted as part of the fiscal 1998 appropriations bill for the U.S. Department of Housing and Urban Development (HUD), rents will be reduced to market levels, and the mortgages will be written down to the amount supportable by market rents.

In some cases, the Section 8 contracts will be renewed as project-based assistance, while in other cases, tenants will receive Section 8 certificates or vouchers which they can use in their current units or in other housing.

Third-party participating administrative entities (PAEs) will handle the debt restructuring for HUD. State and local housing finance agencies (HFAs) which want to participate in the program will be given priority for selection as PAEs, but other public agencies, nonprofit organizations and for-profit entities, including law and accounting firms, can also be PAEs. An autonomous Office of Multifamily Housing Assistance Restructuring will be created within HUD to administer the program.

The permanent legislation will go into effect in fiscal 1999, which begins next Oct. 1. The demonstration mark-to-market program, which HUD has been operating since fiscal 1996, will continue through the current fiscal year.

The key element of the permanent program is the restructuring of the existing FHA-insured mortgage into a new first mortgage which can be supported by market rents and a second mortgage covering the difference between the first mortgage and the outstanding balance on the original debt. Payments on the second mortgage will be deferred while the first mortgage is outstanding, unless the project generates excess income.

The two-mortgage mechanism is an attempt to deal with one of the toughest problems in Section 8 project restructuring: the potential income tax liability faced by project owners when their existing mortgages are written down.

Normally, such a writedown would result in the recognition of income from the forgiveness of debt, and the legislation provides no direct tax relief. Instead, it seeks to avoid the tax problem through a second mortgage that leaves the total amount of debt unchanged. The key to the success of the program may be whether the Internal Revenue Service will recognize the second mortgage as genuine debt that can ultimately be supported by the value of the project.

The appropriations bill also provides fiscal 1998 funding for HUD programs, with a big chunk of the housing money earmarked for the continuation of current subsidies.

Specifically, the bill provides $8.18 billion for the renewal of expiring Section 8 subsidy contracts and for vouchers for tenants in Section 221(d)(3) and Section 236 projects whose owners prepay their mortgages and terminate the low-income use restrictions. There is no money for incentives to continue such restrictions under the Low-Income Housing Preservation and Resident Homeownership Act (LIHPRHA).

On the finance side, the bill sets commitment limits of $17.4 billion for FHA-insured multifamily mortgages, $110 billion for FHA single-family loans and $130 billion for Government National Mortgage Association-guaranteed mortgage-backed securities.

Section 515 Rural Housing Program funded for 1998 The fiscal 1998 agriculture appropriations bill approved by Congress provides $128.6 million for the Rural Housing Service (RHS) Section 515 rural rental housing direct loan program and $19.7 million for Section 538 guaranteed multifamily loans. It also provides $541.4 million for rural rental assistance to subsidize tenant rents.

The bill also extends the authority for the Section 515 and 538 programs through fiscal 1998, including the 9% Section 515 set aside for loans to nonprofits.

In addition, the bill also reduces the maximum Section 515 loan term from 50 years to 30 years, though it still provides for 50-year amortization. In addition, the RHS can make an additional loan for up to 20 years at the end of the 30-year term if there is a continuing need for low-income rental housing. *

* Restructured first and second mortgages * Markets rents * Project-based or tenant-based rental assistance * Third-party program administration