Trying to avoid disaster

August 18, 1996|By James R. Barth and Robert E. Litan

Last year, Congress saw little immediacy in addressing the Section 8 problem.

Because the high-cost Section 8 contracts expiring in 1996 covered fewer than 1,000 units, it was easy to ignore the problem for another year. Actually, Congress didn't totally pass the buck: It renewed the high-cost subsidies only for one year, while it gave HUD authority to "demonstrate" the benefits of restructuring the program on 15,000 units. But this demonstration expires at the end of September 1997, and thus leaves more than 700,000 units awaiting action - 236,000 expiring in 1997.

This year, rather than butt a congressional wall, HUD and the Clinton administration have tried to persuade Congress to adopt a scaled-back approach. The new approach was crafted to avoid some of the objections made by tenants and property owners. It differs from the original proposal in the following respects:

* The new proposal would reduce excessively generous rents to market levels and, in many instances, make future subsidies portable - thereby giving tenants more choice. Meanwhile, HUD would gain negotiating authority with respect to the mortgages on the oversubsidized properties (where rents exceed market levels). This would save the government money on subsidy payments. But it also leaves in place the disincentives for investment in older properties, which will make up the bulk of the Section 8 contract expirations over the next three years.

* The new proposal would give state and local governments a say in the decision whether, and at what pace, assistance now tied to individual properties should be converted to portable vouchers. Involving lower levels of government and other

stakeholders in the system in the decision about the form of future assistance is designed to meet objections to vouchers from both tenant groups and owners. In some cases, for example, a community might decide that continuing project-based subsidies are necessary to ensure a neighborhood's stability.

* The new proposal recognizes the tax difficulties that renegotiation of the mortgages creates for property owners, but does not explicitly outline how to deal with them. Instead, the administration has thus far expressed only a "willingness" to discuss with Congress ways to take account of this problem. The most likely solution would defer recognition of any capital gains from mortgage write-downs until the properties are sold to another party, provided that the FHA insurance is extinguished and the rental subsidies are restructured. One unresolved issue, however, is whether any tax benefits would be conditioned on owners making new investments in their properties, or whether benefits would be granted only with the FHA insurance and subsidy conditions. If HUD is given authority to renegotiate the mortgages on the older units, many of which are desperately in need of repair, then some element of "new investment" conditionality becomes more relevant and, in our view, makes sense.

* Whereas under the original proposal, FHA would no longer have guaranteed the restructured mortgages, the new proposal would permit property owners to apply for FHA insurance on their newly restructured loans, which could be properly underwritten based on the new conditions and scored as a subsidy under current "credit subsidy" budget accounting rules.

* HUD would transfer its guarantee liabilities on a designated portion of the FHA-insured mortgages to competitively selected third parties (at competitive prices). A wide variety of entities, alone or acting together as teams, would be eligible to participate: local and state governments (including state housing finance agencies), nonprofit organizations, private asset managers and any number of potential capital partners. These entities would then negotiate with lenders and owners to restructure the mortgages, or sell them, depending on the circumstances. All Section 8 contract obligations and rights would be honored, including the protection of tenants.

Using a trust structure, HUD and the third parties would share in the proceeds to the extent that the third parties can do better than the government's liabilities. In this way, HUD would ensure that the third parties would not be given windfalls; meanwhile, HUD's share of the proceeds would be used to help rehabilitate dilapidated properties. Third parties would be required to pledge capital to participate.

Pub Date: 8/18/96

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