	Introduction

The Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), insures mortgages on both single-family homes and multifamily rental housing properties for low- and moderate-income households. 1.3.) HUD’s Proposals to Address Problems With the Insured Section 8 Portfolio

In May 1995, HUD proposed to address the key problems affecting the insured Section 8 portfolio through a process that it called “mark-to-market.” The principal steps in this process were to reset rents to market levels and reduce mortgage debt if necessary to permit a positive cash flow, terminate FHA’s mortgage insurance, and replace project-based Section 8 subsidies with portable tenant-based subsidies. Objectives, Scope, and Methodology

To assist the Congress in evaluating HUD’s proposal for reengineering the insured Section 8 multifamily housing portfolio, we examined the (1) problems affecting the properties in the portfolio and HUD’s proposals for addressing them; (2) results and reasonableness of a HUD-contracted study carried out by Ernst & Young LLP that assesses, on the basis of a national sample of 558 randomly selected properties, the effects of HUD’s proposal on the portfolio; and (3) key issues facing the Congress in assessing HUD’s proposal. 2.) The study further indicates that about 80 percent of the properties would need to have their debt reduced in order to continue operations after reengineering. Over the next 10 years, according to Ernst & Young’s data, this reduction would result in claims costs, calculated on a present value basis, of between $6 billion and $7 billion. However, some assumptions used in Ernst & Young’s financial model may not reflect the way in which insured Section 8 properties would actually be affected by portfolio reengineering. Ernst & Young’s assumptions about the transition period for reengineered properties may be overly optimistic. Ernst & Young’s data indicate that between 22 and 29 percent of the properties in the portfolio could not cover their immediate deferred maintenance and short-term capital needs even if their mortgage debt were fully written off. What Should Be Done to Address Properties That Have Difficulty Sustaining Operations? Any approach that is implemented should address not only the high costs of Section 8 subsidies but also the government’s high exposure to insurance loss, the poor physical condition of some of the properties, and the underlying causes of these long-standing problems with the portfolio.
Why GAO Did This Study

GAO reviewed the Department of Housing and Urban Development's (HUD) proposals to reengineer its portfolio of insured Section 8 multifamily rental housing properties, focusing on the: (1) problems affecting the properties in the HUD insured Section 8 portfolio and HUD plans for addressing them; (2) results and reasonableness of a study performed by Ernst & Young to assess the effects of the HUD proposal on the portfolio's properties; and (3) key issues facing Congress in assessing the HUD proposal.

What GAO Found

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.