These subsidies are linked either to multifamily apartment units (project-based) or to individuals (tenant-based). Problems Affecting the Portfolio

The insured Section 8 portfolio suffers from three basic problems—high subsidy costs, high exposure to insurance loss, and in the case of some properties, poor physical condition. These include (1) program design flaws that have contributed to high subsidies and put virtually all the insurance risk on HUD; (2) HUD’s dual role as mortgage insurer and rental subsidy provider, which has resulted in the federal government averting claims against the FHA insurance fund by supporting a subsidy and regulatory structure that has masked the true market value of the properties; and (3) weaknesses in HUD’s oversight and management of the insured portfolio, which have allowed physical and financial problems at a number of HUD-insured multifamily properties to go undetected or uncorrected. If existing rents exceeded market rents, the process would lower the mortgage debt, thereby allowing a property to operate and compete effectively at lower market rents. After reviewing HUD’s proposal, various stakeholders raised questions and concerns about the proposal, including the effect that it would have on different types of properties and residents, and the long-term financial impact of the proposal on the government. Study Confirms Excess Subsidy Costs and Significant Physical Needs at Properties

Ernst & Young estimates that the majority of the properties have assisted rents exceeding market rents and that the properties have significant amounts of immediate deferred maintenance and short-term and long-term capital needs. On the other hand, HUD has indicated that also including those properties with rents currently below market levels could help improve these properties’ physical and financial condition and reduce the likelihood of default. To What Extent Should the Government Provide Tax Relief to Owners Affected by Portfolio Reengineering

HUD’s portfolio reengineering proposal is likely to have adverse tax consequences for some project owners.
Why GAO Did This Study

GAO discussed the Department of Housing and Urban Development's (HUD) efforts to reengineer its multifamily rental housing portfolio.

What GAO Found

GAO noted that: (1) the portfolio's excessive subsidy costs, high exposure to insurance loss, and poor physical condition stem from program design flaws, HUD dual role as loan insurer and rental subsidy provider, and weaknesses in HUD oversight and management; (3) in 1995, HUD proposed allowing property owners to set rents at market levels, terminating Federal Housing Administration (FHA) mortgage insurance, and replacing project-based rent subsidies with portable tenant-based subsidies; (4) although the proposal could lower mortgage debt, it would result in substantial FHA insurance claims; (5) HUD has made several proposal changes in 1996 due to concerns about the lack of data, effects on properties and existing residents, and the long-term financial impact on the government; (6) a 1996 contractor's report confirmed that most properties have assisted rents that are higher than estimated market rents and significant maintenance and capital improvement needs; (7) the study also indicates that most portfolio properties need to have their debt reduced to continue operating; and (8) reengineering issues requiring congressional consideration include HUD portfolio management problems, FHA insurance for restructured loans, project- versus tenant-based rent subsidies, protection for displaced households, inclusion of properties with below-market rents, mortgage restructuring, government financing of rehabilitation costs, and property owners' tax relief.