Evaluation of Alternatives for Financing Low and Moderate Income Rental Housing

PAD-80-13: Published: Sep 30, 1980. Publicly Released: Sep 30, 1980.

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Over the past 10 years, financing of Government-subsidized housing has changed from the more traditional and well-understood financing methods to more unusual combinations of the basic building blocks of the older programs. The new mechanisms, created to overcome the problems of older programs, have resulted in higher costs and some new problems. New and old alternatives for financing subsidized multifamily housing were compared in terms of: total costs over the lives of projects; operating lives of subsidized units; risk of financial failure; adequacy of incentives to lenders, builders, and investors; and tenant groups served. The alternatives studied included: the conventional public housing program; private lending insured by the Federal Housing Administration (FHA); State housing agency financing using tax-exempt bonds and private ownership; financing by public bodies who issue tax-exempt bonds under section 11 of the National Housing Act; and certain subalternatives and combinations of these methods. Except for public housing, each financing alternative uses rental assistance payments from the Department of Housing and Urban Development (HUD) under section 8 of the National Housing Act. A more detailed comparison was made of the two important section 8 alternatives, lending insured by FHA and State agency tax-exempt financing.

The long-term costs of providing housing through public housing and FHA insurance alternatives are much lower than the State housing and section 11 options. The section 8 program is expected to have fewer failures than past FHA subsidized programs because it uses fewer nonprofit sponsors, subsidizes less rehabilitation, and produces fewer projects for families. Construction and early operation are the most risky periods in a project's life; good monitoring by the lender should reduce risk. Generally, State agencies serving as lenders are better managers of risk than private lenders. While the financing alternatives studied provided the necessary enticements to encourage housing production, shortcomings still exist. Section 8 was designed to serve a wide range of eligibles, but the housing produced under it has primarily been serving elderly and small nonelderly families; little section 8 housing being built will accommodate families with children or large households. Only a small share of housing assistance is going to eligible nonelderly households above the poverty line who have difficulty finding good housing at affordable rents. FHA insured financing is much less costly than State agency financing, even when the cost of more expected failures is considered.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: HUD believes that to prohibit tax exempt financing would gravely disrupt current production mechanisms without a compelling need or providing an obvious or clearly superior alternative.

    Matter: Congress should require HUD to use taxable bonds rather than tax-exempts for State agency section 8 financing.

  2. Status: Closed - Not Implemented

    Comments: No administration or Congress has been willing to provide full funding for the section 802 program; no State agencies have expressed any serious interest in it. HUD plans no action on this recommendation.

    Matter: Congress should reappropriate funds for subsidizing State housing taxable bonds under another existing program, section 802, which provides an interest reduction payment to State agencies using taxable bonds. This would result in a lower total subsidy.

  3. Status: Closed - Not Implemented

    Comments: HUS believes that it has adequately responded by detailing the incentives for family housing for GAO. a shallower subsidy than section 8 is needed to provide assistance to the working poor, but HUD has been unable to obtain congressional or agency support for the appropriate mechanism. HUD anticipates no further action.

    Matter: Congress, should improve oversight and ensure greater equity for families and the working poor by requiring HUD to report periodically to the housing oversight committees during the next 2 years on how well the needs of families and nonpoverty lower income households are being met by the various housing programs.

  4. Status: Closed - Not Implemented

    Comments: HUD agrees to continue to monitor production levels of family housing and believes that incentives for family housing production has improved.

    Matter: Congress should improve oversight and insure greater equity for families and the working poor by enacting legislation requiring that some percentage of housing assistance funds go to nonelderly households and particularly larger eligible households above the poverty threshold. This would be based on the HUD national needs assessment.

  5. Status: Closed - Not Implemented

    Comments: HUD will be making greater use of mortgage-backed securities with the 11(b) program and has issued regulations to this effect.

    Matter: Congress should reevaluate the use of the section 11(b) finance mechanism as presently structured.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: HUD felt that the section 8 program is too deep and costly a subsidy to be relied upon as a primary vehicle for housing moderate income households. HUD felt that a more shallow subsidy would be more appropriate.

    Recommendation: The Secretary of HUD should take steps to target some housing at the working poor.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Not Implemented

    Comments: HUD believes that its past experiences and the extensive improvements it has made in management procedures and supervision of loans have proven that coinsurance is a favorable development. HUD believes that the relevance of coinsurance as a risk management tool is not important.

    Recommendation: The Secretary of HUD should decrease the insurance coverage of FHA-insured multifamily loans.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Not Implemented

    Comments: HUD believes that steps to improve incentives for production of family housing have been taken and that GAO acknowledged those steps as significant. HUD plans no further action.

    Recommendation: The Secretary of HUD should develop a strategy to overcome some of the problems of producing family housing.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Not Implemented

    Comments: HUD believes that the reports it currently provides to Congress in the Special Analyses to the Budget already present the type of long-term discounted cost estimates GAO is seeking. HUD believes that the detailed information GAO suggests that HUD provide to Congress would be overly burdensome and speculative.

    Recommendation: The Secretary of HUD should provide budget estimates to Congress which show all major costs over an expected subsidy life discounted to reflect current year dollars.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Not Implemented

    Comments: HUD disagrees with the GAO finding that the costs of public housing are less than the costs of section 8 housing. HUD believes that its current allocation system provides the appropriate proportion of aid for families and the elderly.

    Recommendation: The Secretary of HUD should place more emphasis on public housing by producing a larger proportion of assisted housing units with this mechanism.

    Agency Affected: Department of Housing and Urban Development

  6. Status: Closed - Not Implemented

    Comments: HUD believes that section 11(b) is so closely tied to FHA insurance that to deny insurance may affect the viability of the program. The production of projects perceived as riskier would be jeopardized.

    Recommendation: The Secretary of HUD should emphasize mortgages rather than bonds and should ask Congress for authority to deny FHA insurance for these alternatives.

    Agency Affected: Department of Housing and Urban Development

  7. Status: Closed - Not Implemented

    Comments: HUD believes that without State agency tax exempt financing, production levels under the section 8 new construction and substantial rehabilitation programs would be crippled.

    Recommendation: The Secretary of HUD should experiment with the use of mortgage-backed securities to finance section 8 multifamily housing.

    Agency Affected: Department of Housing and Urban Development

  8. Status: Closed - Not Implemented

    Comments: HUD believes that FHA insurance encourages agencies to undertake family and inner city projects that it would not otherwise finance. Therefore, it believes that there is a need to retain the option of providing FHA insurance.

    Recommendation: The Secretary of HUD should avoid granting mortgage insurance to projects financed by State agencies since State agency risk avoidance is probably encouraged by their role as lenders without insurance.

    Agency Affected: Department of Housing and Urban Development

  9. Status: Closed - Not Implemented

    Comments: HUD agrees that State agency rents should comply with comparability rules. Revised State agency regulations (part 883) now require State agency to do rent comparability tests. HUD will review the tests as part of normal monitoring.

    Recommendation: The Secretary of HUD should require State agencies to produce full rent comparability tests to decrease the cost of subsidizing tenants who live in projects financed by State housing finance agencies. These tests should be subject to HUD review and approval.

    Agency Affected: Department of Housing and Urban Development

 

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