The U.S. Department of Housing and Urban Development's recently disclosed interpretation that a Section 8 housing-assistance contract provision allows owners to opt out of existing contracts could hurt the creditworthiness of state housing finance agencies' bond programs, two housing credit analysts say.
Florence Zeman, a senior vice president at Moody's Investors Service, said in an interview yesterday that the interpretation "could deteriorate the credit quality" of some the existing housing bond programs should it be implemented. "I have grave concerns," Zeman said.
Wendy Dolber, a managing director at Standard & Poor's, said the interpretation could lead to upheaval in the marketplace and legal uncertainty. When it assigned ratings to Section 8 bonds, Standard & Poor's "never anticipated" that owners would in the future be given the opportunity to pull out of -- or change the terms -- of Section 8 contracts that support existing debt, Dolber said.
Affordable housing advocates say the interpretation could trigger a flood of property owners pulling units geared to low-income residents out of the Section 8 program.
HUD acknowledges that the newly articulated legal interpretation of a provision in standard Section 8 Housing Assistance Payments contracts between the department and the affordable housing development owners that the agency used between 1975 and 1980 could affect some existing HAP contracts. There are currently 19,407 such contracts in effect, covering 1,289,227 affordable housing units, and as many as 180,665 could be affected by the interpretation, according to HUD.
The National Council of State Housing Agencies and various sources argue the interpretation is new and constitutes a reversal of long-standing policy, but HUD has taken the position that that precise legal question had never been raised previously. NCSHA Executive Director Barbara J. Thompson said from a conference in New Mexico yesterday that her group is lobbying federal lawmakers to overturn the interpretation. "We've talked with the chairs and ranking members of the housing subcommittees in Congress and they're already looking into the matter," she said.
In a letter recently obtained by The Bond Buyer, the federal department specifically denied that its interpretive approach to the contractual provision governing whether HAP contracts terminate upon mortgage prepayment is new. The memorandum, dated June 23, that was written by Richard A. Hauser, HUD's general counsel, to John C. Weicher, assistant HUD secretary, states that "there has not been any reinterpretation."
HUD's office of general counsel "remains of the opinion that the maximum total term of an old regulation State Agency HAP contract (on the old form) terminates on the 'date of the last payment of principal due on the permanent financing' (Section 1.4a) -- in accordance with the literal and precise language of the HAP contract," Hauser said in the memo. "We are not aware that HUD Field or Headquarters counsel has ever considered or adopted a different interpretation of the specific contract language," Hauser noted later in the memo.
Anthony Freedman, a housing lawyer with bond law firm Hawkins Delafield & Wood here, said the memo contains "bald-faced lies." Earlier this week Freedman said: "They not only interpreted the language, they drafted it. They're reading the words wrong." The former deputy assistant secretary for housing policy and budget at HUD under President Jimmy Carter said, "It's a shoddy attempt to justify an unjustifiable action." Another housing lawyer, who did not wish to be identified, agreed the interpretation was new but was not ready to pass judgment on what effect it might have. "It does seem to me that this isn't the way that HUD has operated the programs in the past, but I'm not certain if this is a bad thing," he said. "It depends on the circumstances in each individual case."
A HUD spokesman yesterday reiterated the department's position that it does not view the interpretation as being something new, but did not elaborate. In July a senior HUD official said "there has not been a change in interpretation -- the state agencies have not been complying with their responsibilities as administrators of these contracts."
The controversy over the legal intricacies of HAP contracts arose earlier this year when the department's counsel were approached by an outside attorney representing a Section 8 property owner who refinanced his mortgage and whose development had been financed with bonds issued by the New Jersey Housing & Mortgage Finance Agency. After the owner requested a clarification of the legal meaning of a provision in the contract dealing with refinancing, HUD counsel determined that any refinancing of a mortgage in a property covered by that standard contract had the legal effect of terminating the contract, he said. Neither HUD officials nor municipal market participants have been able to estimate the value of bond deals involving Section 8 contracts that might be affected by the interpretation.
