Multifamily Housing:

Physical and Financial Condition of Mark-to-Market At-Risk Properties

GAO-02-953: Published: Sep 6, 2002. Publicly Released: Sep 6, 2002.

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Stanley J. Czerwinski
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In 1997, Congress established the mark-to-market program to help preserve the availability and affordability of low-income rental housing while also reducing the cost to the federal government of rental assistance provided to low-income households. The mark-to-market program was developed for multifamily properties that are both insured by the Federal Housing Administration (FHA) in the Department of Housing and Urban Development (HUD) and aided through the project-based Section 8 program. Under the mark-to-market program, at the time of the assisted properties' section 8 contract renewal, HUD resets rents to prevailing market levels and restructures a property's mortgage debt, if necessary, to permit a positive cash flow. This process is designed to ensure that properties whose rents are reduced to market level still have sufficient income to meet the mortgage payments and operating expenses on the property. The Office of Multifamily Housing Assistance Restructuring (OMHAR) was established within HUD to administer the mark-to-market program. OMHAR places federally assisted, FHA-insured properties on the watch list when their rents have been reduced to market level under the mark-to-market program but their mortgages have not been restructured. Two-hundred and eleven properties have been placed on the watch list, for one of three reasons: (1) the property owners elected not to enter into or complete the mortgage restructuring process; (2) OMHAR determined that the property was not financially viable for restructuring; or (3) the property owners were disqualified from the mortgage restructuring process because of certain actions by the owner, such as financial or managerial improprieties. Eighty-seven percent of OMHAR's watch list properties received HUD inspections that indicated they were in satisfactory physical condition, but some of these inspections occurred before the properties were placed in the watch list. The timing of HUD's inspection cycle depends on the results of each property's most recent inspection. As a result, a watch list property that received a high score on its previous physical inspection may not be reinspected for up to 3 years from the last inspection. While OMHAR believes that all properties on the watch list are potentially at financial risk, HUD's Financial Assessment Subsystem--which contains information on property owners' audited annual financial statements--indicates that 62 percent of the watch list properties show signs of potential financial risk. HUD established guidance for monitoring the watch list properties 10 months ago, but it is too early to assess how effective the monitoring will be.

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