Variety of factors hamper HUD's program administration Preservation of the existing low-income housing inventory has been a major issue in federal housing policy for the last decade. Currently, the focus is on the high cost of renewing expiring Section 8 project-based rental assistance contracts, but there are still unresolved issues about potential mortgage prepayments and conversions of old Section 221(d)(3) below-market interest rate (BMIR) and Section 236 projects.
Under their original terms, Section 221(d)(3) BMIR and Section 236 mortgages generally could be prepaid without approval of the U.S. Department of Housing and Urban Development (HUD) after 20 years. However, in the Emergency Low-Income Housing Preservation Act of 1987 (ELIHPA) and the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA), Congress combined restrictions on prepayments with incentives for continued low-income use under the same ownership or through project sales.
In a report on the ELIHPA-LIHPRHA preservation efforts, the U.S. General Accounting Office (GAO) concluded that HUD's program administration has been hampered by a variety of factors, including complexity, frequent changes in requirements, tight time frames for funding decisions and inadequate program guidance.
Program funding can be provided to cover repairs needed to bring projects up to acceptable condition, to makeadditional improvements to enhance the economic life of a project and its livability for tenants, and to enable owners to take out their equity.
In an analysis of 40 projects awaiting funding, the GAO found that HUD approved assistance ranging from about $8,000 to $120,000 per unit. For 22 of the properties, the approved funding exceeded the value of the property by an average of 62%. While high program cost is clearly a matter of concern, the GAO cautioned that, since the projects weren't randomly selected, its findings could not be extrapolated to all properties in HUD's funding queue.
A specific problem in assistance for project sales, according to the report, is excessive funding for deposits to reserves for replacement. The GAO criticized HUD's policy of letting sellers retain the amounts in the replacement reserve and then providing funding to the purchasers to replenish the reserve. It disputed HUD's assertion that this policy was simply a reflection of congressional intent, noting that a proposed amendment to include the replacement reserve in the owner's equity was never enacted.
There have also been problems in targeting funds to where they are most needed, the report says. In some cases, funding has been provided to projects which are already subject to low-income use restrictions, while in others, funds may go to projects whose owners wouldn't prepay their mortgages anyway.
Court supports owners in housing preservation case In another low-income housing preservation development, the U.S. Court of Federal Claims has again backed project owners' claims that the government breached their contractual right to prepay their mortgages by enacting ELIHPA and LIHPRHA.
In Anaheim Gardens vs. United States, the court rejected most of the government's arguments in support of continued low-income use restrictions, though it delayed a final ruling pending appellate court action on a related case, Cienega Gardens vs. United States.
However, the court did rule for the government on five projects. In three of the projects, the mortgage notes specifically prohibited prepayment without HUD approval, even after 20 years. In another, the original owner was a nonprofit, which never had a right to prepay, so the plaintiff-owner which purchased the project also had no such right. The plaintiff on the fifth project purchased the project after enactment of LIHPRHA, so it was on notice that prepayments had been restricted.
FDIC proposes streamlined rules on bank real estate investments The Federal Deposit Insurance Corp. (FDIC) has proposed streamlined regulations for real estate investments by subsidiaries of state-chartered financial institutions.
Institutions which meet certain standards for safety and soundness and which have a Community Reinvestment Act (CRA) rating of satisfactory or better could undertake real estate investments through a subsidiary by filing a notice with the FDIC. The notice would be considered approved unless the agency objects within 30 days. Other institutions would have to obtain prior FDIC approval for such investments.
A subsidiary in which a financial institution has invested more than 2% of its Tier 1 capital would have to have an independent board of directors and chief executive officer.
An institution could lend no more than 10% of Tier 1 capital to any subsidiary engaged in real estate activities and no more than 20% of Tier 1 capital to all subsidiaries engaged in the same activity.
Barry G. Jacobs is NREI's Washington Correspondent and editor of Housing and Development Reporter.
- HUD approved assistance ranging from $8,000 to $120,000 per unit. - Of projects studied, 22 had approved funding exceeding the value of the property by an average of 62%.
*=General Acccounting Office analysis of 40 projects