Multifamily Housing

About 8,600 privately owned multifamily properties with federally insured mortgages totaling nearly $18 billion received federal rental subsidies for all or some of their apartments under the Department of Housing and Urban Development's (HUD) Section 8 program. For subsidized apartments, HUD pays the difference between the rent and 30 percent of the household's income. The rents at many properties exceed market levels, resulting in high subsidies. To reduce costs and address other problems, HUD has proposed adjusting the rents to market levels and writing down mortgages as needed to allow the properties to operate at market rents. In essence, HUD's proposal recognizes a reality that has persisted for some time--namely, that many of the properties in the insured Section 8 portfolio are worth far less than their mortgages suggest. This report examines the (1) problems affecting the properties in HUD's insured Section 8 portfolio and HUD's plans for addressing them, (2) results and reasonableness of a study done by Ernst & Young assessing the effects of HUD's proposal on the properties in the portfolio, and (3) key issues facing Congress as it assesses HUD's proposal.

GAO found that: (1) the HUD insured Section 8 portfolio suffers from high subsidy costs, high exposure to insurance loss, and the poor physical condition of some properties; (2) under the HUD mark-to-market proposal, property owners would set rents at market levels, and HUD would reduce mortgages as necessary to achieve positive cash flows, terminate Federal Housing Administration (FHA) mortgage insurance, and replace Section 8 project-based rental subsidies with portable tenant-based subsidies; (3) the Ernst & Young study concluded that under the reengineering proposal, about 80 percent of the properties would need to have their mortgages reduced to some degree and that between 22 and 29 percent of the properties would have difficulty sustaining operations even if their mortgages were totally written off; (4) the study data indicated that the cost to the government of writing down mortgages and addressing deferred maintenance needs at reengineered properties would be high; (5) based on Ernst & Young's assumptions, FHA insurance fund claims would be between $6 billion and $7 billion in present value over the next 10 years and subsidy costs would be comparable to the existing program's subsidy costs if all of the properties were reengineered when their Section 8 contracts expire; and (6) Ernst & Young's financial model was generally reasonable, but some assumptions about the properties' deferred maintenance needs were questionable and some financing assumptions may not reflect the way in which insured Section 8 properties would actually be affected by portfolio reengineering.