OFFICE OF MULTIFAMILY HOUSING ASSISTANCE RESTRUCTURING

MULTIFAMILY HOUSING ASSISTANCE RESTRUCTURING

NA = Not Applicable

a/ Rehabilitation assumed as incorporated in debt restructuring.

Funding in support of the activities of the Office of Multifamily Housing Assistance Restructuring (OMHAR) is included under several HUD program accounts. OMHAR related funding in fiscal year 2000 includes the following items:

1. Sec 8 Contract Renewal BA (Discretionary). The Housing Certificate Fund request for Project-Based contract renewals in fiscal year 2000 includes $708.5 million to support approximately 118,420 Above Market Section 8 units which will experience a reduction in Section 8 rents to market and which may require restructuring of the FHA debt.
2. FHA Funded Restructuring Costs (Mandatory). The FHA's GI/SRI Liquidating Account includes an estimate of $667 million of mortgage restructuring costs during fiscal year 2000 associated with the approximately 120,000 FHA insured units expected to be subject to mark-to-market by the year 2000.
3. FHA Rehabilitation Costs (Mandatory). The GI/SRI Liquidating Account will incur rehabilitation expenses as part of the restructuring costs. Projects processed during fiscal year 1999 and subsequent years will have rehabilitation expenses met from the resources specified under Sec 517(b)(7) of the 1998 Appropriations Act. 1998 Transition Program participants are eligible for rehabilitation funded from the FHA GI/SRI Liquidating Account pursuant to the transition provisions of Sec 522(b) of the 1998 Appropriations Act.
4. Third Party Fees and Incentives (Mandatory). Third party fees and incentives may include payments to State HFA's, or their designees, acting as Participating Administrative Entities (PAEs), private Joint Ventures acting as PAEs, costs associated with due diligence, technical expertise, consulting, legal or other actions authorized by Title V of the 1998 Appropriations Act. These costs are paid from the GI/SRI Liquidating Account. An estimated $26 million is included for these purposes in fiscal year 2000 under that heading.

2. CHANGES FROM 1998 ESTIMATES INCLUDED IN 1999 BUDGET

The 1999 Budget included modest restructuring activity in fiscal year 1998 as a result of the fact that the enabling legislation was not enacted until nearly 1 month into the fiscal year and the fact that the scope of the program was limited to projects with rents greater than 120 percent of FMR. The 1999 Budget estimated restructuring of approximately 105 projects and 11,079 units in 1998. As of November 1998, 320 projects had elected to participate in the Transition Program, with 72 projects at or near resolution. Of those, only 5 projects and 525 units completed restructuring as of November 1998. The remainder are under review for restructuring, have been renewed at 120 percent of FMR as permitted under the Transition Program rules, renewed at current rents, experienced a reduction to market rents without restructuring or were vouchered-out of the project-based program.

The revised 1999 Budget estimates reflect the workload which OMHAR now expects to manage given interaction and discussion with project owners, potential PAE's, and other interested parties over the course of fiscal year 1998 as the OMHAR organization came into being. The Director of OMHAR was appointed in October 1998 and the process of assembling the OMHAR professional staff continues in fiscal year 1999.

The revised Budget estimates for 1999 and subsequent years reflect a longer restructuring process than originally anticipated in the 1999 Budget. A detailed, step by step, processing schedule has been identified reflecting technical procedures which must be accomplished by PAE's in executing the restructuring process. Also, the workload estimates reflect a re-evaluation, based on OMHAR's best informed judgment from the experience obtained over the course of the 1998 Transition period. This re-evaluation, for budget purposes, reflects a reduction to the estimated number of Above Market units as estimated in the April 1996 Ernst & Young Market Study. That Market Study, based on data gathered in August 1995, served as the basis of the 1999 Budget estimates. The Market Study results, with respect to the percentage of eligible insured Older and Newer Assisted units which remain Above Market are adjusted downward in the fiscal year 2000 Budget to reflect improving market rent conditions over the interim leading to a conclusion by OMHAR that fewer HUD assisted units are presently Above Market than earlier estimated. Consequently, the revised Budget estimates for 1999 and subsequent years reflect lower restructuring costs in the FHA GI/SRI Liquidating account and, concurrently, more projects renewed at current rents as part of the contract renewal estimates.

All restructuring-eligible projects, which have Above Market rents will continue to be subject to marking down-to-market and associated FHA insured mortgage restructuring. The policy has not changed. OMHAR is working in conjunction with PD&R to update the analysis of rents to further refine workload estimates under the program. That analysis is expected to be ready for review in early summer 1999.

The Multifamily Assisted Housing Reform and Affordability Act of 1997 was enacted in the 1998 Appropriations Act, with transition provisions for project-based Section 8 contracts expiring during fiscal year 1998.

During fiscal year 1998, owners of FHA-insured multifamily projects with expiring contracts at current rents in excess of 120 percent of FMRs, had a choice of renewing their Section 8 contracts at 120 percent of FMRs, opting-out of the Section 8 program, or of participating in mortgage restructuring intended to make their projects supportable at comparable market rents, and affordable for 20 years. Owners of projects with current rents less than or equal to 120 percent of FMRs were renewed at the same rent in effect at contract expiration. Beginning in fiscal year 1999, renewal of Section 8 contracts for these projects will be at rents that do not exceed comparable market rents, both for projects that are above 120 percent of FMRs, and those that are below 120 percent.

The majority of those FHA-insured projects that currently have above-market rents would not be able to meet their debt service and operating expenses if rents were reduced to comparable market levels. In conjunction with such rent reductions, FHA is faced with the costs associated with restructuring mortgages, or with default claims and foreclosures.

The principal tool for restructuring is the availability of a new second mortgage program, under which the proceeds may be used to pay down a first mortgage to the extent necessary so that the remaining mortgage will be sustainable at comparable market rents. Other tools under the permanent legislation include partial payments of claim for amounts of existing debt not capable of repayment under the terms of the second mortgage program, refinancing of debt, FHA mortgage insurance, and other credit enhancements. The second mortgage must be sized so that it can be reasonably expected to be repaid. FHA outlay estimates divide the insured multifamily portfolio into 4 classes: (1) projects that can be maintained at market rents without debt restructuring; (2) projects in need of a second mortgage used to pay down a part of the first mortgage; (3) projects supportable at market rents only if the full first mortgage is removed and (4) projects not sustainable at market rents even without any debt service. The fourth category includes projects located in geographic areas with very low market rents, such as some rural areas.

Under the 1998 Act, the needs of projects for rehabilitation to be restored to a non-luxury standard adequate for their rental markets may be met through debt restructuring, appropriations, the new grant program from the reuse of Section 236 interest reduction payment recaptures, replacement reserves, residual receipts, owner equity, and other project resources. Owners or purchasers of restructured projects must contribute from non-project resources at least 25 percent of the amount of rehabilitation assistance received.

The use of up to $10 million annually from appropriated funds was authorized under Section 514 of the Act for technical assistance, tenant services, and capacity building for tenant groups, non-profit and public agencies in connection with implementation of the mark-to-market legislation.