Project-Based Rental Assistance:

HUD Should Update Its Policies and Procedures to Keep Pace with the Changing Housing Market

GAO-07-290: Published: Apr 11, 2007. Publicly Released: Apr 11, 2007.

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In light of the pressing need for rental housing affordable to low-income households and concerns that the Department of Housing and Urban Development (HUD) may not be committed to maintaining its Section 8 project-based housing stock--a key source of such housing--Congress directed GAO to assess HUD's efforts to preserve its project-based housing and recommend ways to improve these efforts. This report discusses (1) patterns in the volume and characteristics of HUD's Section 8 project-based properties; (2) tools and incentives that are available to encourage property owners to stay in the program; and (3) the views of property owners, managers, and industry representatives on HUD's preservation efforts. To address these issues, GAO analyzed HUD data, reviewed pertinent legislation and regulations, and interviewed HUD officials and industry representatives.

GAO identified a number of patterns in the volume, characteristics, and location of HUD's project-based Section 8 housing between 2001 and 2005. During this period owners renewed 92 percent of Section 8 rental assistance contracts and 95 percent of the units covered by these contracts. While relatively few owners left the program voluntarily, most of those we interviewed did so to seek higher rents in the private market or to convert their units into condominiums. The properties most likely to leave the program were those with few Section 8 units, family-occupied units, those in poor physical condition, and those located in markets with rapidly escalating housing values. HUD offers several incentives to keep Section 8 property owners in the program. Owners that used these incentives between 2001 and 2005 most often chose the Mark-to-Market and Mark-up-to-Market programs, both of which adjust rents to conform to prevailing market conditions. Some owners used HUD programs that offered additional financing for property rehabilitation to participants in the Section 236 mortgage reduction program and the Section 202 mortgage program for housing for the low-income elderly and persons with disabilities. HUD officials, owners, and industry representatives told us that many Section 8 owners also opted to use the Low-Income Housing Tax Credit and tax-exempt bonds, both of which the IRS administers through state housing finance agencies. Some property owners, managers, and industry representatives cited concerns with certain HUD policies and practices, especially the one-for-one replacement policy for Section 8 units and the Operating Cost Adjustment Factors (OCAF) payment process. GAO found that the one-for-one replacement policy, which prohibits reductions in the total number of Section 8 units in a property when a contract is renewed, had led some owners to leave the program. Property owners noted that they could not reconfigure their properties to supply larger units that were in higher demand, especially by elderly tenants. Although not required by statute to adopt this policy, HUD did so in order to preserve as many units as possible but is reviewing it in light of the growing concerns. Owners also expressed frustration with the long delay in OCAF adjustments, the use of statewide averages, and the inability of the process to deal with emergency situations. Finally, owners offered several suggestions that may warrant HUD's attention, including improving the Section 8 contract renewal guidance and revisiting physical inspection guidelines.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The one-for-one replacement issue was looked at from a number of different angles during HUD's Affordable Housing Preservation Symposium on May 24,2007, attended by over 200 industry leaders. HUD will use the feedback from the Symposium to carefully evaluate any modifications to this requirement and will include specific criteria that must be met in order for a modification to be approved. Over the next 90 days, HUD will review and evaluate this requirement and develop the criteria for approval of such . (90-day letter- 6/08/07) On February 1, 2011, HUD issued a notice permitting owners to convert underutilized Section 8 efficiency units into one-bedroom units where doing so would better meet market demand. The policy does not require one-for-one replacement.

    Recommendation: To help ensure that project-based Section 8 preservation efforts meet the needs of a changing housing market, the HUD Secretary should direct the Deputy Assistant Secretary for Multi-family Housing to modify the one-for-one replacement requirement to allow for a case-by-case assessment of the merits of permitting owners to reduce the number of project-based Section 8 units or reconfigure the units to better meet market demand and to expand its reconsideration of this policy beyond elderly properties.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: Based on the industry's concerns and the need to review the methodology since it has not been revised since its origination, HUD is reviewing and evaluating the OCAF adjustment process and anticipates announcing the findings by the end of FY 2007. (90-day letter dated 6/08/07) HUD's Office of Evaluation did an extensive review of the OCAF methodology in 2007 and revised the methodology to include the average per unit change in operating costs (excluding debt service and bad debt expense) by state for all projects submitting valid financial statement reports between 7/31/2005 and 7/31/2007. Data from outlier properties, with unusually high or low operating expenses were deleted from the analysis. In 2011, HUD updated the cost ratios again using the 3 latest years of Annual Financial Statements and changed the producer Price Indicator to the Consumer Price Index to more accurately reflect annual change factors.

    Recommendation: To help ensure that project-based Section 8 preservation efforts meet the needs of a changing housing market, the HUD Secretary should direct the Deputy Assistant Secretary for Multi-family Housing to expeditiously reevaluate its OCAF adjustment process to make sure that the adjustments reflect local variations, are implemented in a more timely manner, and are responsive to emergency situations.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: HUD notes that it is committed to improving the Section 8 payment process. HUD will continue to streamline its policies and procedures to make them clear, understandable, and cost effective within its fiduciary requirements and prudent business practices. HUD will continue these efforts as well as provide more consistent guidance on various policies. HUD has published clarifications with respect to the LEP requirements. HUD will continue to solicit feedback from owners and mangers on REAC inspection inconsistencies. (90-day letter dated 6/08/07). In Aug, 2011, HUD informed us that they are finalizing a revised Section 8 renewal guide that incorporates a number of programmatic improvements and changes and consolidates all Section 89 guidance into one comprehensive source. HUD expects the guide to be issued in early FY 2012. HUD believes that the new guidance, which has included the input of owners and management companies throughout the development process, will help further clarify HUD policies.

    Recommendation: To help ensure that project-based Section 8 preservation efforts meet the needs of a changing housing market, the HUD Secretary should direct the Deputy Assistant Secretary for Multi-family Housing to determine if any of the additional issues raised by owners such as policies and procedures that are unclear, inconsistently applied, or administratively burdensome could contribute to owners' opting out of the Section 8 program and take steps to address these issues.

    Agency Affected: Department of Housing and Urban Development


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