Housing Preservation

Congress created the preservation program 10 years ago to keep multifamily housing affordable for low-income households because the owners of several thousand federally insured multifamily properties were reaching a point at which they were eligible to pay off their mortgages. Prepayment would enable these owners to terminate the existing affordability restrictions, such as limits on the income levels of residents and the rents that can be charged. The program offers incentives to owners and purchasers of federally insured multifamily properties who agree to maintain their properties for low-income occupancy. This report reviews the (1) funding provided for preservation properties as compared with the properties' values, (2) levels of rehabilitation grants provided to properties compared with their physical needs, and (3) administrative and other problems that have arisen under the program. GAO also identifies lessons from the preservation program that can be applied to portfolio reengineering, a program designed to address long-standing problems plaguing the Federal Housing Administration's insured portfolio of multifamily properties.

GAO noted that: (1) for the 40 properties that GAO reviewed, HUD approved $239 million for preservation grants or loans, which average about $6 million per property; (2) the approved funding ranged from one-fourth of a property's value to more than 3 times its value; (3) for 22 of the 40 properties, the approved funding exceeded the property's value by an average of 62 percent; (4) as part of the preservation funding for the 27 sales transactions GAO reviewed, HUD approved a total of $111.9 million for rehabilitation funding that owners or purchasers had requested; (5) this amount was 568 percent higher than the $16.7 million that HUD contractors had identified as needed to cover repairs that would return the properties to good condition; (6) the approval of a higher funding level is largely attributable to HUD's broad criteria for funding rehabilitation costs presented in a 1994 preservation policy notice; (7) the policy on eligible rehabilitation costs is aimed at facilitating sales to nonprofit purchasers and maximizing the remaining life and quality of preservation properties; (8) while HUD is likely to reduce rehabilitation funding for some of these properties in order to comply with fiscal year 1997 funding caps that Congress established, the overall rehabilitation funding for the 27 properties will still be substantial; (9) HUD's administration of the preservation program is hampered by a number of factors that collectively limit the Department's ability to ensure that the program is being managed effectively and efficiently, that federal funds are being spent wisely, and that preservation operations are consistent with program requirements; (10) these factors include the program's complexity, frequent changes in program requirements, the tight time frames under which approval and funding decisions are often made, program guidance that is fragmented and sometimes ambiguous or incomplete, and HUD's limited oversight of its field office operations; (11) for example, GAO found these factors contributed to two cases in which HUD erroneously funded and in a third case planned to provide preservation funding that exceeded legislatively mandated funding caps by a total of $1.5 million; (12) after GAO notified HUD of these situations, it took action to recover the excess funds; and (13) GAO also found two cases in which HUD used its waiver authority to provide preservation funds to properties whose operations were already governed by use agreements requiring the owners to maintain them as affordable housing for extended periods even if they prepaid their mortgages.

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.

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