HUD's FY99 Budget
Congressional Justifications
Office of Housing

Rental Housing Assistance Program

(Section 236)

PROGRAM HIGHLIGHTS

NA = Not Applicable

SUMMARY OF BUDGET ESTIMATES

1. SUMMARY OF BUDGET REQUEST

No appropriation is requested for the Rental Housing Assistance program in 1999. No new commitment activity has occurred since the program was terminated in 1973. However, the program does have activity from amendments or recaptures in connection with State-aided projects.

The inventory of Section 236 units will be affected by three separate activities in the foreseeable future: Preservation Prepayment; Multifamily Enforcement; and the Interest Reduction Payment (IRP) Grant program.

Preservation Prepayment. As an incentive to attract developers into the original Section 236 program, participants were given the right to prepay their subsidized mortgage after 20-years.

In the 1990�s, when mortgages began to hit the 20-year mark, the Department implemented the Preservation program to entice project owners to continue in the low income housing program. However, since not enough preservation funding has been made available in the form of incentives, and no new funding is proposed, it is anticipated that owners will begin to prepay mortgages in large numbers in 1998 and 1999.

When owners prepay, some of the units are already occupied by tenants receiving Section 8 assistance. Other tenants may be income eligible but not presently receiving assistance. These tenants may face rent increases and will be assisted with Tenant Protection vouchers.

Because the Section 236 mortgage is prepaid and liquidated, the IRP interest subsidy contract terminates. Previously obligated contract authority and imputed budget authority is subject to recapture.

A total of 62,000 units in Section 236 projects are expected to be prepaid in 1998 and 1999. An estimated 34,000 Tenant Protection vouchers are provided in the Budget in 1998-1999 to protect income eligible tenants not currently receiving Section 8 assistance.

The 1997 Appropriation Act included $150 million of recaptures and rescission from 1997 prepayments. The 1998 Budget did not include a rescission of anticipated Section 236 Preservation Prepayment recaptures. This reflected the uncertainty about the future of the Preservation program. Recaptures may be utilized in the new IRP Grant program. Consequently, the 1999 Budget estimates continue to reflect no Preservation Prepayment rescission.

Congress provided $10 million in the 1998 Appropriation Act to compensate owners for costs incurred in connection with submission of plans of action in the Preservation program. No additional funding is proposed for 1999.

Multifamily Enforcement. Housing is undertaking an expanded program of addressing insured multifamily projects experiencing operating problems including: poor housing quality standards, financial problems and poor owner administration. It is anticipated that some projects will experience a termination or non-renewal of Section 8 assistance. Tenants living in affected projects may have existing project-based Section 8 converted to tenant-based vouchers. Additional Tenant Protection vouchers may be used to aid income eligible families not presently receiving assistance but who would be adversely affected by HUD enforcement actions.

It is anticipated that some Enforcement projects will be foreclosed and acquired by HUD. Section 236 IRP is expected to be recaptured subject to rescission in 1998. The 1998 Budget includes $125 million of rescission representing about 6,000 Special Workout Assistance Team (SWAT) unit recaptures. The 1999 Budget reflects recaptures of $70 million on 3,500 units. However, since these IRP recaptures may be used in the IRP Grant Program no rescission is proposed.

IRP Grant Program. As part of Portfolio Re-Engineering, some Section 236 mortgages are expected to be partially paid down or completely written-off. Consequently, there will be Section 236 IRP recaptures from these restructurings. Title V of the 1998 Appropriations Act makes the IRP recaptures available for grants to project owners. The grants will be in an amount and pattern over the years that tracks the original IRP outlay pattern. It is anticipated that the new IRP Grant program will create savings in the FHA Fund. A total of $529 million of net present value savings in the FHA GI/SRI liquidating account was scored by CBO as a result of the legislation. CBO and Administration estimates concerning when the recaptures will occur and in what amounts differs modestly. The 1999 Budget reflects the Administration's assumptions of the re-use of the IRP recaptures in association with restructuring write-downs.

The Budget reflects recapture and re-use of IRP budget authority amounting to $727 million mortgage restructurings in 1999 (assuming a relatively slow implementation in 1998). These recaptures are associated with Section 236 IRP projects with expiring Section 8 contracts in 1999. For projects undergoing restructuring, a portion or all of the mortgage may be written-off with a consequent reduction in the IRP subsidy. Under the IRP Grant Program, the budget authority associated with that reduced IRP will be obligated for rehabilitation grants and will be structured to outlay at the same rate as the original IRP contract outlays. Utilizing IRP resources in this way reduces the amount of costs which must be absorbed by the FHA Fund for rehabilitation purposes as part of the restructuring write-down.

2. CHANGES FROM 1997 ESTIMATES INCLUDED IN 1998 BUDGET

The 1998 Budget estimated that $68 million would be used in 1997 for assistance to State-aided projects. Actual activity amounted to $29.6 million in 1997.

3. CHANGES FROM 1998 BUDGET ESTIMATES

The 1998 Budget estimates are consistent with the 1998 Budget with the exception of the inclusion of estimates for the IRP Grant program and revisions for units eligible for payment.

EXPLANATION OF INCREASES AND DECREASES

The 1999 Budget includes the effect of the proposed IRP Grant program discussed under Summary of Budget Request.

PROGRAM DESCRIPTION

1. Original Program. The Section 236 program, as enacted in 1968, provides a subsidy to reduce mortgage interest payments. The maximum subsidy available to a project was set at the difference between the monthly payment for principal, interest, and mortgage insurance premium on the outstanding mortgage at the market rate of interest and the monthly payment that would be required under a mortgage bearing an interest rate of 1 percent.

A basic rental charge that was deemed sufficient to meet operating expenses plus debt service expenses at the 1 percent rate of interest was determined for each unit. Every tenant is required to pay the basic rental charge or up to 30 percent of income, whichever is higher. Contract approvals for new projects were discontinued in January 1973, except for "bona fide" commitments outstanding at that time and for amendments to prior contracts.

2. Deep Subsidy Program. The Rental Assistance Payments (RAP/"deep subsidy") program, authorized by the Housing and Community Development Act of 1974, was designed to aid very low-income families in Section 236 projects by permitting HUD to provide additional subsidies equal to the difference between the basic rent and 30 percent of income for a certain percentage of units in a project. Most insured projects receiving RAP funding have converted to Section 8 assistance. The remaining inventory of RAP assisted projects is largely limited to State-aided, bond-financed, projects which continue to receive amendment funding from a special set-aside.

3. State Agency Financed Projects (RAP funding). Amendments to State agency sponsored RAP projects will continue to be funded utilizing the set-asides of contract authority provided for in the 1983 Supplemental Appropriations Act. The following table provides the status of the set-aside of contract authority established for non-insured RAP assisted projects and the estimated use of the set-aside during fiscal years 1997-1999:

The Housing and Urban Development Act of 1968 authorized the Secretary to establish a fund for the deposit of rental collections in excess of the established basic rent for units in subsidized Section 236 projects. Pursuant to Section 201 of the Housing and Community Development Amendments of 1978, excess rental collections that continue to be deposited into the fund are to be paid to the Flexible Subsidy Fund. However, Section 214 of the 1997 Appropriations Act contains provisions likely to result in reductions of the collections of these excess receipts. The table below reflects the status of funds: