WASHINGTON - The U.S. Department of Housing and Urban Development's upcoming guidance that may allow owners of multifamily rental properties to opt out of long-term Section 8 assistance contracts could shrink the nationwide supply of affordable housing -- but sources disagree whether the impact will be catastrophic or almost negligible.
On one side, the National Council of State Housing Agencies and other housing market participants say the guidance, expected in coming weeks, could lead to severe shrinkage of the affordable housing inventory by opening the door for multifamily property owners participating in the Section 8 program to pull units geared to low-income residents out of the program. To withdraw the units, owners would have to jump a few bureaucratic hurdles at HUD, but withdrawal could allow owners to charge higher rents.
The guidance is likely to undermine confidence in HUD in general, and hurt state housing finance agencies, which could suddenly face unanticipated prepayment risks and bond calls, those fighting the new policy say.
"HUD is about to embark on a course of action that could cost the low-income housing inventory as many as 100,000 units," said Barbara J. Thompson, executive director of the NCSHA, in an interview earlier this week. "HUD basically is saying 'we think we screwed up and now we're going to compound the error and make it even worse.' "
"The notion of a government agency changing an interpretation of a contract 27 years in, it means no one can rely on the word of the government," said Anthony Freedman, a housing lawyer with the bond law firm Hawkins Delafield & Wood here.
"Here is HUD causing massive uncertainty in the market for no reason whatsoever. It appears to be that there was no thought given to the process," said Freedman, who was deputy assistant secretary for housing policy and budget at HUD under President Jimmy Carter.
Kurt van Kuller, a director and housing bond analyst at Merrill Lynch & Co., said it is unclear what impact the guidance will have. "One of the foremost impacts I would be concerned about would be potential par calls on outstanding Section 8 bonds because of a potential new right of owners to opt out," he said. "If it gives the property owners the right to opt out of their contracts, then it may lead to a substantial increase in call risk in certain situations, such as in bond refinancings done without an adjustment of the original mortgage."
But HUD officials and other sources said any potential impact the guidance may have would be minor. The guidance, which when it is published will reflect an official July 2 decision already made by HUD, will affect only subsidized municipal bond-financed housing developments that have refinanced their underlying mortgages, a senior HUD official said in an interview yesterday.
The official, who asked not to be identified, acknowledged the department does not know exactly what the "full impact" will be, adding that "there are contracts that obviously will terminate and there is a potential loss of affordable housing."
There are currently 19,407 Section 8 Housing Assistance Payments contracts in effect, covering 1,289,227 units of affordable housing, according to HUD. Although Thompson claims as many as 100,000 affordable housing units could be affected, HUD said the figure is actually higher: As many as 180,665 units could be affected.
But any loss of inventory, however, is likely to be small, the HUD official said. Whenever an owner of a Section 8 subsidized property wants to opt out he has to give a notice one year in advance to the department, followed by another notice 120 days before the termination date of the Housing Assistance Payments contract, he said.
In most cases, when such notice is given the owner is only attempting to preserve his legal right to opt out of the Section 8 HAP contract with HUD, and usually the owner fails to follow through and does not "actually opt out," he said. If the owner does complete the opt-out, HUD provides financial protection for the tenants in the property by issuing them so-called enhanced vouchers that cover the increase in rent, he added.
"If the landlord raises rent above HAP rents then the effect of these enhanced vouchers is they will meet the rent in that property no matter what the level the landlord sets it at, so the family stays and it may cost the government more," the official said.
Monica Hilton Sussman, a former lawyer in HUD's general counsel office who now works for the bond law firm Nixon Peabody here, agreed with the HUD official. "Maybe a small handful of owners will opt out," she said, adding that for years people have been refinancing section 8 loans and various HUD field offices have said "it was OK and didn't terminate the contracts."
According to the HUD official interviewed, the controversy arose when the department's counsel were approached three or four months ago 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 and Mortgage Finance Agency, the official said.
HUD counsel determined last week that the refinancing of the mortgage had the legal effect of terminating the HAP contract because of the legal language in the contract, he said.
Since that precise legal question had never been raised previously, HUD lawyers decided to offer the New Jersey property owner the option of amending the contract to keep the units within the Section 8 program, he said. The owner accepted the proposal and the bond deal went through, he said. A NJHMFA spokesman contacted for this article declined to comment.
Bob Odman, assistant commissioner for multifamily housing at the Minnesota Housing Finance Agency, said the senior HUD official is wrong.
"The HAP contract has been interpreted many times over and over again and HUD previously didn't go with this new interpretation," he said. "There were about six developments that were refinanced in Minnesota in the 1980s where HUD did take the interpretation that they're taking today and then subsequently reversed itself."
The HUD official said that however many owners are affected, few will probably want out of Section 8. The choice given to the New Jersey landlord can be also offered to other owners should they be affected by the upcoming guidance, and this option will mitigate any potential harm, he said.
HUD is committed to preserving affordable housing and not jeopardizing the bonds in these transactions, he said. Neither HUD officials nor municipal market participants were able to estimate the value of bond deals involving Section 8 contracts that might be affected by the upcoming guidance.
