Multifamily Housing:

HUD Missed Opportunities to Reduce Costs on Its Uninsured Section 8 Portfolio

RCED-99-217: Published: Jul 30, 1999. Publicly Released: Jul 30, 1999.

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Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development's (HUD) portfolio of section 8 properties that are not insured by the Federal Housing Administration, focusing on: (1) section 8 rental assistance provided to properties in HUD's uninsured portfolio; (2) the financial benefits that may be available to state and local housing agencies that participate in the section 8 program; and (3) the ways HUD and the state agencies oversee the physical and financial condition of the properties in their respective uninsured section 8 portfolios and the information they have on the physical and financial condition of these properties.

GAO noted that: (1) according to HUD's data, rental assistance payments for the uninsured section 8 portfolio totalled over $3.3 billion in fiscal year 1998; (2) a majority of these payments--about $2.3 billion--were associated with the two largest programs in the uninsured portfolio, one of which is the state agency program; (3) complete data were not available for assessing the relationship of the rents for section 8 units, or section 8 contract rents, to actual market rents; (4) nevertheless, available information indicates that some contract rents exceed market rents; (5) when section 8 contract rents exceed market rents, the section 8 subsidies support higher rents than the properties generally command without federal assistance; (6) the federal government will continue to incur these high costs each year until its existing section 8 contracts expires; (7) these contracts will expire at various times, generally from within the next 5 years to about 20 years; (8) contracts in the state agency program will generally be among the last to expire; (9) under the section 8 program, state and local agencies may derive financial benefits, or savings, from refunding their tax-exempt bonds; (10) the agencies may receive one of two available fees for administering their section 8 contracts; (11) the agencies are required to use the savings from refunding their bonds, and in some cases may use a portion of their fee, to provide affordable housing for low-income residents within their jurisdictions; (12) GAO found that HUD has not resolved three long-standing issues associated with these financial benefits; (13) as a result, HUD has missed opportunities to reduce its section 8 costs by tens of millions of dollars, particularly in the state agency program; (14) to monitor the physical and financial condition of properties in the uninsured portfolio, HUD requires annual physical inspections and generally requires annual audited financial statements; (15) as of December 1998, HUD had limited information on the physical condition of properties in the uninsured portfolio and no information on their financial condition; (16) according to HUD's central database, which included the results of inspections for about 63 percent of the properties, most of the properties were in satisfactory or better physical condition, however, these ratings were not based on objective criteria and their reliability is therefore unknown; and (17) in mid-1998, HUD began to establish centralized procedures to improve the monitoring of multifamily properties in its uninsured and other portfolios.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The FHA Commissioner's response to this recommendation indicates that the Department is of the view that state agencies should not be required to share savings generated from refunding bonds associated with all contracts entered into between 1979 and 1984, and that HUD regulations should not be amended to impose such a requirement. The response states that the McKinney Act amendment, read in combination with its legislative history, is ambiguous on this point. Furthermore, it states that HUD's Office of General Counsel advised the Office of Housing that, while it could seek to recover such savings--that is, it had authority to do so under the statute--it was not required to do so. The Department chooses not to recover savings from state agencies relevant to the refunding transactions in question.

    Recommendation: The Secretary of Housing and Urban Development should determine whether the state agencies are required, under the McKinney Act, to share savings from refunding bonds associated with all contracts entered into between 1979 and 1984. If so, HUD should revise its applicable rules and regulations to clarify the requirements for sharing bond refunding savings with the federal government. For contracts associated with bonds that have already been refunded, HUD should determine whether it can require the state agencies to begin sharing the section 8 savings they retain.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: HUD issued Notice H 03-28 on December 1, 2003, which, among other things, provides instructions on how to deduct bond refunding savings before calculating rent increases. Part B of the notice titled "Servicing of McKinney Act Shared Savings Bond Refundings" indicates that the instructions result from audit findings of HUD's Inspector General and the GAO. Per GAO's recommendation, the notice includes an appendix with a sample case on how to calculate rent increases when bond refunding savings are involved.

    Recommendation: To ensure that state and local housing finance agencies comply with HUD's guidance on deducting bond refunding savings before calculating rent increases, the Secretary of Housing and Urban Development should require HUD to provide the state and local agencies with the appropriate methodology and examples of calculations and ensure that the rule is kept current and integrated into HUD's guidance on annual section 8 rent increases.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: In GAO's June 2005 follow-up with HUD, it had completed the waiver request process for the 17 states identified as dual fee states. HUD granted waivers to all 17 states--the final waiver was granted on May 24, 2005.

    Recommendation: To eliminate excess costs from paying dual fees to state agencies administering section 8 rental assistance contracts, the Secretary of Housing and Urban Development should require HUD to enforce its regulation prohibiting dual fees unless there is a documented, sound, and equitable basis for waiving the regulation. To enforce the regulation, HUD should identify all section 8 contracts for which state agencies receive both an administrative fee under the section 8 contract and an override fee, including those contracts that are not subject to a refunding agreement with HUD.

    Agency Affected: Department of Housing and Urban Development


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