Statement to the House Committee on Banking and Financial Services

Subcommittee on Housing & Community Opportunity

Washington, D.C.
May 4, 1999
By Michael Bodaken, National Housing Trust

Mr. Chairman, members of the Committee, thank you for inviting the National Housing Trust to participate in this hearing today. My name is Michael Bodaken and I am the President of the National Housing Trust, a national nonprofit organization formed in 1986, dedicated exclusively to the improvement of multifamily, affordable housing. Our board of directors includes housing advocates, owners, representatives of state housing agencies, national nonprofit intermediaries, housing scholars and professionals who care deeply about protecting our nation's affordable housing.

The organization serves as an informational clearinghouse on program developments for the public and private sector. In addition to its public policy and program monitoring role, the Trust provides real estate advisory services to nonprofit purchasers of HUD-assisted and -insured housing.

H.R. 1336 appropriately recognizes the twin problems posed to affordable housing by owner decisions to "opt out" of HUD Section 8 contracts or to "prepay" HUD mortgages. On the one hand, tenants are threatened with the loss of their homes. Simultaneously, when an owner opts out or prepays, the nation loses an irreplaceable housing resource. Neither outcome is acceptable. If properly amended, H.R. 1336 can adequately address these problems which Chairman Leach has quite appropriately characterized as "bedeviling."

At the same time, we believe that H.R. 1336 should be amended to more comprehensively address this critical housing issue. We recognize that a more complete solution requires bi-partisan cooperation among the committee members. The time for such cooperation is now and the means are at hand.

The Loss of Affordable Housing Is Alarming and Continuing

The National Housing Trust is currently tracking both prepayment and opt out data. As you know, prepayments of HUD insured mortgages or an owner opt out of a Section 8 contract essentially terminates affordability use for a HUD assisted and/or insured apartment complex. The owner has decided to "take the building private." Our data shows an alarming number of prepayments and Section 8 opt outs over the past 2 ½ years. Prepayments and opt outs have resulted in the loss of affordability of over 2,500 apartments per month during that 30-month time span. This housing is not just located in, as some would have you believe, San Francisco and Boston, but in every nook and cranny of this nation. Our data demonstrates that through the end of 1998:

• Prepayments and opt outs have occurred on over 925 properties involving nearly 98,000 previously affordable apartments.
• Prepayments and opt outs are truly national in scope, having occurred in 48 states and the District of Columbia.
• The average rent hike when an owner prepays a HUD mortgage is over 50%.
• Prepayments and opt outs have occurred in many prime housing markets, which unfortunately led to the loss of affordable housing from neighborhoods with better schools and services.

The Threat of Future Loss is Substantial

What lies ahead? Will our nation continue to lose its investment in affordable housing as owners prepay their HUD mortgages or decide not to renew their Section 8 contracts?

In order to help you analyze what housing is potentially "at-risk," the National Housing Trust created the accompanying table demonstrating the threat of future loss of HUD assisted or insured housing. We have tabulated, by state, every "below market" Section 8 assisted property listed by HUD that expires between now and the fiscal year 2004. The figures are troubling. According to the Trust data, more than 500,000 Section 8 apartments in all 50 states and the District of Columbia are potentially 'at-risk' of loss of affordability; that is, their current Section 8 contract rents are below 110% of Fair Market Rent.

More than 280,000 of these affordable Section 8 apartments are located in home states of members of this subcommittee. Eighteen states have more than 10,000 apartments at-risk. Moreover, in some smaller or rural states, such as Iowa, Rhode Island or Nebraska, while the number of at-risk apartments may be small, the apartments themselves may well constitute the only affordable housing available in certain towns. From the West Coast to the east, the Midwest to the South, hundreds of thousands of affordable, Section 8 apartments are at-risk of loss of affordability during the next five years.

No legislation can protect the affordability of all of these 500,000 "at-risk" apartments. Nor is it likely that all of the owners of these units will in fact prepay or opt out. But legislation can be crafted and adopted, without undue expenditure, to encourage owners of affordable properties to renew their Section 8 contracts. H.R. 1336, if amended, can be that legislation.

Ironically, the Loss of Housing Is Accompanied by Greater and Greater Federal Expenditures

Prepayment does not pay. Much has been made about the potential cost of saving affordable housing. But the truth is somewhat more elusive. For example, providing enhanced vouchers does not achieve any real cost savings for the American taxpayer.

Those who argue that it costs too much to save the housing fail to recognize that the government spends almost the same or more to protect the residents when an owner prepays or opts out. It works something like this. An owner prepays a HUD-insured mortgage. Under current law, a resident of the property is protected from eviction through what is known as an "enhanced voucher." An "enhanced voucher" pays the difference between market rent, and 30% of the tenant's income. The cost of these enhanced vouchers is significant.

A Balanced Approach: Protecting Both Affordable Housing and Low Income Residents

Let me proceed directly to the heart of the issue presented by H.R. 1336. As you know, below market, Section 8 assisted and HUD insured housing constitutes what we have termed "the Forgotten Stock." According to HUD, half of the 1.3 million units assisted and insured by HUD, are in fact below market. We believe that approximately 500,000 of those apartments are potentially at-risk between now and 2004. The strong economy has driven up real estate prices in many markets, making the market rate conversion of these apartments very attractive. Not surprisingly, owners of this below market housing are now exercising their right to "opt out" of their Section 8 contracts and/or "prepay" their HUD insured mortgages, resulting in dramatically higher rents.

H.R. 1336 has established the framework for a balanced policy response, one that is fair to both owners and tenants, and one that, we believe, will ultimately improve and maintain the housing itself.

1. Vouchers are Necessary, But Not Sufficient. Merely Providing Enhanced Vouchers Will Actually Facilitate Section 8 Opt Outs, Dramatically Increasing Rents and Reducing the Number of Affordable Apartments.

Today's testimony is heard at a particularly auspicious moment in the history of the Section 8 program. Just 25 years old, this program has produced hundreds of thousands of affordable, livable apartments to the working poor and elderly. The program was created to spur private investment in affordable housing, available not only to the current residents but also to future generations.

As drafted, H.R. 1336 requires HUD, subject to appropriations, to provide "enhanced vouchers" for elderly and disabled Section 8 tenants where project-based Section 8 contracts are not renewed by owners ("opt outs"). These vouchers would provide assistance up to the new market rent levels (if determined reasonable by the PHA) for tenants who remain, and regular voucher assistance at ordinary PHA payment standards for those who move.

Also, H.R. 1336 would permit HUD to make "enhanced vouchers" available to other Section 8 tenants in residence at contract expiration, where the project is located in a HUD-determined "low-vacancy area" with an inadequate supply of habitable affordable units for families with tenant-based assistance.

There are some who argue that enhanced vouchers are enough. The Trust believes enhanced vouchers, while necessary, are not sufficient. They are necessary because they protect tenants when an owner is determined to exit the Section 8 program altogether. But enhanced vouchers do nothing for our nation's loss of affordable housing. They protect the resident, not the housing.

Indeed, we believe that any proposal to simply provide enhanced vouchers, without an accompanying proposal requiring the Secretary to attempt to save affordable Section 8 housing, will inevitably lead to higher owner opt outs of the Section 8 program. The relatively short history of the so-called "prepayment properties" is illustrative in this regard. When owners secured the prepayment right in the fall of 1997, everyone agreed that tenants needed to be protected with enhanced vouchers It took a few months, but prepayment lenders ultimately came to understand that the provision of an enhanced voucher made a prepayment investment almost risk free. Fueled by low interest rates and rising real estate prices, and the notion that the loans were not as risky as they once feared, lenders began to feel comfortable with prepayment. Prepayments soared.

Similarly, the most valuable Section 8 stock will be lost if the only policy response is enhanced vouchers. Providing enhanced vouchers, without providing the owner a realistic opportunity to renew the Section 8 contract, will inevitably lead to increased Section 8 opt outs and loss of the most valuable housing stock in the portfolio.

2. HUD Should Be Required to Target Rent Hikes To Those Properties Most At-Risk of Loss, i.e. Where the Housing is Located in Rural or Low Vacancy Areas or Where Vulnerable Populations Occupy the Housing.

Owners need to have options other than going private. Otherwise, as we have seen, hundreds of thousands of apartments will lose their affordability use and our nation's investment in them will have been squandered. How can we correctly manage the incentives to encourage owners to "stay with Section 8?"

As currently written, H.R. 1336 would revise HUD's discretion to increase the rents paid under the project-based Section 8 contract. The bill establishes renewal rent levels set at 90% of comparable market rents for projects with current rents less than that amount and existing rents for projects with current rents between 90% and 100% of market rent.

As presently worded, H.R. 1336 arguably removes the means needed to preserve properties most at-risk of loss. If Congress does not provide sufficient funds to "mark up to market" all below-market properties, then HUD will have to make choices about which properties should receive market offers. H.R. 1336 should be revised to specify the circumstances where HUD (or some delegate) must act to save housing, such as in tight submarkets, for tenant populations where vouchers do not work well (e.g., elderly, people with disabilities, and large families), or in other situations, such as rural areas where no comparable rental housing exists.

3. Where a Targeted Property Is Identified, HUD Should Be Required to Offer the Owner a Comparable Market Rent.

In general, owners should not be provided more than is necessary to operate their properties. But, in those situations where the property is in a tight market or houses vulnerable populations, HUD should be required to provide a market rent to the owner. While HUD recently announced that it intended, within its discretion, to administratively provide market offers to certain owners, it is fair to say that this is a short-term fix to a longstanding and persistent problem. We desperately need policy direction for this and future Administrations, especially as these 500,000 affordable apartments come up for renewal during the next five years.

One means of amending the bill to accomplish this would be as follows: restate the general Section 8 contract renewal rule-renew Section 8 contracts at the lesser of comparable market rents or existing rents adjusted by OCAF. At the same time, H.R. 1336 should permit an exception that requires the Secretary to adjust to comparable rents in the situations outlined above, i.e., where the property is occupied by the elderly or disabled or where it is located in a low vacancy or rural area.

4. A Public Quid Pro Quo is Essential: Renewal Should be Assured. Once Renewal is Accepted, the Owner Should Agree to Maintain Affordability of the Housing

No one wants a giveaway program to owners. In its present form, H.R. 1336 requires nothing from owners beyond the commitment for the one-year contract term. Both the public and the tenants deserve more security. In exchange for receiving these new benefits, subject to appropriation, owners should be required to commit to renew the contract (with annual formula cost adjustments over the term) for a specified period of time -- at least five to ten years.

5. H.R. 1336 Should Be Amended to Make Enhanced Vouchers Truly Useful for Residents and Owners

No matter what we do, some owners will choose to opt out. Residents must be protected with enhanced vouchers in that situation. A few minor modifications to the enhanced voucher will make it much more useful:

a. The Trust believes that H.R. 1336 needs to be amended to make it clear that the enhanced voucher level may be moved to market on an annual basis. Under current law, the assistance level remains set at the initial "enhanced" level (under FY 1999 appropriations language), and does not increase to cover subsequent rent increases. The protection for the resident is only temporary and economic displacement is merely deferred.

b. Further, the owner's obligation to accept the voucher remains unclear, both initially and subsequently (since there is no longer any good cause eviction requirement at the end of a lease term). This lack of tenure security presents a huge risk for tenants, especially for elderly and large families.

c. Under its current format, H.R. 1336 does not guarantee protection to low- income residents. HUD has to determine "low-vacancy" areas with an inadequate supply for voucher holders. The bill should be more explicit on what constitutes an inadequate supply of housing.

d. Finally, tenants residing in properties that opted out in FY 1999 are not covered. If they are still in residence, they should receive the new benefits to offset any increased rent burdens they experienced.

6. Revision to Permit Cash Flow on Budget Based Properties

A "rent freeze" policy for expiring Section 8 contracts jeopardizes affordable housing by preventing owners' access to any unrealized equity gains. A more flexible and responsive federal policy is needed to protect the housing. H.R. 1336 should be amended to assure that appropriate cash flow is allowed under any "mark up to market" program so that owners will in fact be encouraged to renew their Section 8 contracts.

7. Need for a Comprehensive Solution -- Using H.R. 425 to Fill the Gap

H.R. 1336 sets the framework for a comprehensive solution. But the federal government probably can't do this alone. Some state and local authorities already are investing their resources to preserve affordable housing. Federal matching grants would enable them to do more and encourage other state and local governments to join their efforts. A bi-partisan measure has been introduced to encourage state and local governments to become involved in saving this unique national resource.

H.R. 425 (The Housing Preservation Matching Grant of 1999), co-sponsored by Reps. Vento (D-MN) and Ramstad (R-MN), would authorize federal matching grants for state funds contributed to improve federally-assisted low-income housing. The bill would supplement state funds used for assisted housing. States have great flexibility in designing their own programs under the Act. Funds may be used for loans, grants, acquisitions, operating costs or capital expenditures. Most important, the local government is making the initial decision that a particular property is worth preserving.

Conclusion

The choice before you is clear -- during the next five years, over ½ million affordable Section 8-assisted apartments will come up for renewal, at roughly 100,000 units per annum. The subcommittee can choose the "voucher only" route and provide only enhanced vouchers to the tenants. We believe such a policy is imprudent and expensive.

Or, for approximately the same cost, the subcommittee can craft a targeted voucher and housing solution, protecting both the tenants and the housing, directing HUD to offer both alternatives to owners when they seek to renew. A balanced policy will yield the right outcomes -- keeping tenants secure and housing affordable.