HUD’s Section 8 program provides rental subsidies for low-income families. 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. 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. To obtain data to better assess the likely outcomes and costs of the mark-to-market proposal, HUD contracted with Ernst & Young LLP in 1995 for a study on HUD-insured properties with Section 8 assistance to (1) determine the market rents and physical condition of the properties and (2) develop a financial model to show how the proposal would affect the properties and to estimate the costs of subsidies and claims associated with the mark-to-market proposal. As such, it is important to note that the study’s results do not reflect the changes that HUD made to its proposal in early 1996. Unfortunately, however, these benefits may come at a high cost.
Why GAO Did This Study

GAO discussed the Department of Housing and Urban Development's (HUD) proposal to restructure its section 8 multifamily rental housing portfolio.

What GAO Found

GAO noted that: (1) the section 8 portfolio suffers from high subsidy costs, exposure to insurance losses, and deteriorating property conditions; (2) HUD has proposed to implement a mark-to-market process that would allow property owners to set rents at market levels and allow HUD to reduce mortgage debt, terminate mortgage insurance, and restructure section 8 subsidies; (3) HUD contracted for a study to obtain information on market rents and the physical condition of the properties in its portfolio; (4) the study showed that the majority of insured section 8 properties would require debt reduction or forgiveness to continue operating; (5) the study also showed that, for most properties, assisted rents are higher than estimated market rents; (6) the contractor's study methodology was reasonable; and (7) any benefits that the HUD proposal realizes may come at a high cost.