Evaluation of Alternatives for Financing Low and Moderate Income Rental Housing

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Joseph F. Delfico Team: General Accounting Office: Program Analysis Division Phone: (202) 512-7215