For those properties identified by HUD as having above-market rents, Congress created the mark-to-market program in 1997 to reduce rents to market levels and restructure existing mortgage debt to levels supportable by these rents. The goals of the mark-to-market program include preserving the affordability and the availability of low-income rental housing, while reducing the long-term costs of Section 8 project-based assistance. Under the mark-to-market program, properties whose rents are above market levels undergo one of two types of restructuring. Approximately 211 properties have not completed the mortgage restructuring process, even though, as a result of having their rents reduced to market level, OMHAR determined that such a restructuring is necessary for the properties to have acceptable, positive cash flows.OMHAR places properties that it believes should have had a mortgage restructuring on the watch list because it believes such properties are at risk of developing physical and financial problems stemming from insufficient cash flow. Properties Are on the Watch List for One of Three Reasons

OMHAR places properties on the watch list when a property’s rents are reduced to market level but its mortgage is not restructured. OMHAR assigned the majority of these properties to the watch list because the property owners elected not to enter into or complete the mortgage restructuring process, even though OMHAR had determined that the mortgage needed to be restructured. Secondly, OMHAR also places properties on the watch list if it determines that because of economic conditions in the market and/or a property’s financial and/or physical condition, restructuring the property is not financially viable. Financial Assessment Scores Suggest Many Watch-List Properties Are Experiencing Financial Problems

Based on information from FASS, which contains information from property owners’ audited annual financial statements, 131 of the 211 watch-list properties, or 62 percent, show signs of potential financial risk. According to OMHAR, the total cost of the needed improvements to the property is too high for OMHAR to finance under the mark-to-market program. HUD’s project manager stated that the owner will most likely opt out of the Section 8 program at the end of the 24 months and compete in the private rental market. Physical and Financial Condition

The property received a score of 99 on its most recent physical inspection, which took place in August 1999 (2 years before the property was placed on the watch list). HUD considers this score to indicate that the property was in satisfactory physical condition. (4) What are HUD’s procedures for monitoring watch-list properties?
What GAO Found

In 1997, Congress established the mark-to-market program to help preserve the availability and affordability of low-income rental housing while also reducing the cost to the federal government of rental assistance provided to low-income households. The mark-to-market program was developed for multifamily properties that are both insured by the Federal Housing Administration (FHA) in the Department of Housing and Urban Development (HUD) and aided through the project-based Section 8 program. Under the mark-to-market program, at the time of the assisted properties' section 8 contract renewal, HUD resets rents to prevailing market levels and restructures a property's mortgage debt, if necessary, to permit a positive cash flow. This process is designed to ensure that properties whose rents are reduced to market level still have sufficient income to meet the mortgage payments and operating expenses on the property. The Office of Multifamily Housing Assistance Restructuring (OMHAR) was established within HUD to administer the mark-to-market program. OMHAR places federally assisted, FHA-insured properties on the watch list when their rents have been reduced to market level under the mark-to-market program but their mortgages have not been restructured. Two-hundred and eleven properties have been placed on the watch list, for one of three reasons: (1) the property owners elected not to enter into or complete the mortgage restructuring process; (2) OMHAR determined that the property was not financially viable for restructuring; or (3) the property owners were disqualified from the mortgage restructuring process because of certain actions by the owner, such as financial or managerial improprieties. Eighty-seven percent of OMHAR's watch list properties received HUD inspections that indicated they were in satisfactory physical condition, but some of these inspections occurred before the properties were placed in the watch list. The timing of HUD's inspection cycle depends on the results of each property's most recent inspection. As a result, a watch list property that received a high score on its previous physical inspection may not be reinspected for up to 3 years from the last inspection. While OMHAR believes that all properties on the watch list are potentially at financial risk, HUD's Financial Assessment Subsystem--which contains information on property owners' audited annual financial statements--indicates that 62 percent of the watch list properties show signs of potential financial risk. HUD established guidance for monitoring the watch list properties 10 months ago, but it is too early to assess how effective the monitoring will be.