Shelterforce The journal of affordable housing and community building

Fall/Winter 2009 » February 12, 2010

Slipping Away

As a wave of HUD mortgages expires in the next four years, an already dwindling supply of affordable units may nosedive with owners making windfall profits -- unless the right mix of federal legislation and local organizing can save the day. By Miriam Axel Lute with Michael Kane

“Expiring use,” a term used to reference housing units whose affordability restrictions can end if owners prepay their subsidized mortgages or decide against renewing their rent assistance contracts upon expiration, is not an unfamiliar nomenclature in the affordable housing world. The first wave hit in the late 1980s, when units subsidized with below-market interest rate mortgages in the 1960s and 1970s under the Section 236 and Section 221(d)(3) programs began to reach the 20-year mark at which owners were eligible to prepay their mortgages and opt out of keeping the units affordable.

Many owners did so, especially those in hot markets. But two federal provisions passed in 1987, known as the Title II and VI Preservation Program, saved about 90,000 units by providing various incentives for owners to remain in the programs (such as Section 8 subsidy increases and lucrative equity take-out loans) and by requiring owners to either refinance as affordable housing or sell to a nonprofit or tenant group that would preserve affordability. Tenants groups or nonprofits purchased about 30,000 units using this provision. But these laws were terminated in 1996, and the National Alliance of HUD Tenants (NAHT) estimates that 360,000 units have since been lost as owners decide to prepay mortgages and/or not renew expiring Section 8 contracts.

The New Wrinkle

The next several years may see an even greater loss of affordable housing as the 40-year mortgages are themselves expiring. A 2004 GAO report found that 21 percent of HUD-subsidized mortgages are scheduled to reach maturity by 2013. This amounts to 2,328 properties and 237,000 units. (In addition, about 30,000 units saved under the Title II Preservation Program will also have their use restrictions expire with the end of the mortgage, despite the additional incentives owners received not to opt out in the early 1990s. These units were missed by the GAO report, according to NAHT.)

There are currently no requirements for owners to extend HUD contracts beyond the 40-year mortgages. Since current rents are tied to the original subsidized mortgages and are typically hundreds of dollars per month below market, the temptation to convert to market rents is very real. Only a few cities with local rent controls, such as Los Angeles, have been able to limit huge rent hikes.

In expiring mortgage buildings where owners decide to not renew, or “opt out,” of project-based Section 8 contracts, current tenants are at least eligible for “enhanced vouchers,” which allow them to stay in their homes by paying the full market rent to the owner. But the issue here is replacement, not displacement. Each time a low-income resident leaves, that unit converts to market rate and is lost to the affordable housing stock for good.

And for the 101,000 families in expiring mortgage buildings who do not now receive Section 8, there are no federal protections in place whatsoever. They are not currently eligible for enhanced vouchers and face immediate displacement when mortgages end and rents increase. Nor are they entitled to the one-year notice provisions that Section 8 tenants get or the 150-day prepayment notices for non-Section 8 tenants.

For tenants like Evelyn Cobb, a hard-working single mother and naturalized citizen from Jamaica who lives in the 967-unit Georgetowne Homes complex in Boston’s Hyde Park, these threats are real. Cobb, who is employed as a commercial analyst, says “There’s no way I can afford a $700 per month rent increase, which is what the owner could charge when the mortgage runs out next March. Im having a hard time making ends meet now.”

Cobb, a leader of Georgetowne Tenants United, questions the fairness of Georgetowne owner Howard Cohen making $170 million in windfall profits, paid for by tenants and federal, state, and city subsidies, if his company carries through on threats to convert to market. “People objected when AIG got $160 million from taxpayers for bonuses paid to 3,000 employees last year,” she notes. “Yet just one person stands to make a bigger windfall at Georgetowne.”

Tenants Organize

Anticipating the flood of expiring mortgages, NAHT’s local affiliate in Massachusetts, the Mass Alliance of HUD Tenants (MAHT), is the first group to organize tenants in buildings whose mortgages are about to expire. They’ve had some notable wins, but the losses underscore the need for mandatory federal regulation to preserve affordable housing.

In the state’s first expiring mortgage building, MAHT helped the Bowdoin Residents Organization (BRO) in Malden in its negotiations with Winn Development, which purchased the development from its prior owners. In 2004, with MAHT assistance, the BRO negotiated a written agreement with Winn that preserves all 226 units as affordable housing for 99 years for the same income profile as previously served by the development (50 percent project-based Section 8, most of the remaining units below 80 percent of the area median income). BRO and MAHT also retained staff and an architect to help residents have input into the rehab design plans and relocation procedures.

The thing we’re most proud of is the 99 years of affordability, so that the people behind us who are struggling will have a place to raise their families,” comments Yvonne Putney, BRO president and grandmother of four.

In a different twist, the owner at Bradford Apartments (now Sycamore Village) in Lawrence, Mass. failed to apply for enhanced vouchers despite being eligible for them. MAHT helped the tenant group apply for vouchers directly from HUD (a national first) that protected many tenants from displacement after the mortgage ran out. Since then, a new owner has purchased the building and is accepting Section 8 vouchers—perhaps the first case of a building that left HUD programs being restored as low-income housing.

Other developments have been more difficult. In several Massachusetts buildings owned by First Realty Management (FRM), tenants have been harassed as they try to organize. Despite a vigorous “Save Our Homes” campaign and a fair housing lawsuit, tenants at High Point Village in Boston were unable to persuade FRM owner Bill Kargman to renew a 320-unit Section 8 contract under HUDs Mark Up to Market Program, which pays full market rent to the owner while preserving housing for low-income families. Kargman chose to replace the low-income families with market-rate tenants instead. More than half the 540 High Point families have been replaced in three years, and High Point is now a “gated community” called “Stonybrook Commons.”

Because HUD multifamily housing is often the only racially diverse housing in suburban areas, conversion of developments like these often reinforces patterns of racial exclusion and re-segregation.

“High Point is no longer a family oriented development,” laments tenant leader Elaine Marin, who raised two biracial children at High Point. “The people moving in are young professionals with roommates, and units turn over fast. I dont know my neighbors anymore.” Salea Perry, High Point leader and married mother of three, added: “It sickens my heart to know there are families out there in shelters that cant move in because one man wants to make more money.”

Although MAHT considers High Point a loss, Marin, Perry and other High Point leaders have taken the “Save Our Homes” message to other FRM buildings. Their persistence paid off when Kargman announced plans to renew the expiring Section 8 contract for 266 units at Brandywyne Village in East Boston for another five years. FRM has since done the same at other buildings in Boston and Worcester. Veteran MAHT tenant leaders now are organizing tenants at Georgetowne and other expiring mortgage buildings.

Tenant organizing is essential and powerful, but it is not sufficient when owners, especially those in hot market areas, have few incentives to remain in subsidy programs and no requirements to sell to a preservation purchaser, even one making a fair market value offer.

MAHT has proposed state legislation, killed recently by the Massachusetts legislature, to allow cities to regulate rents after federal contracts end, as in Los Angeles, and to require renewal of expiring Section 8 contracts, which would save at-risk buildings at no cost to city and state governments.

NAHT and others are also advocating for federal legislation to stanch the loss of expiring use units.

Federal Legislation

Rep. Barney Frank’s (D-Mass.) multifamily housing preservation bill, which has been in the works for five years and may be introduced this session, contains a long list of provisions that should help address the situation. The bill would provide enhanced vouchers for the 101,000 families not currently eligible for them in expiring mortgage buildings, and allow conversion of enhanced vouchers back to project-based Section 8 to keep buildings in the affordable housing system. It proposes new tools to address troubled subsidized housing, a range of incentives to encourage owners to keep units affordable, and even funding for tenant organizing. Most of these provisions have widespread support. NAHT estimates that 90 to 95 percent of the bill is “noncontroversial.”

However, owners’ trade associations are opposing three items in the bill that NAHT considers crucial.

Two of these are tenant empowerment measures: First, giving tenants access to information about the operations of their building, such as annual operating budgets, HUD contracts, and HUD management reviews. Ricky Leung, NAHT vice president/East, told Congress in 2008, “Only owners and managers who fail to provide quality service and/or have something to hide should raise any objection to empowering tenants with this information.” But they are, citing privacy concerns.

NAHT also wants tenants to be designated as third-party beneficiaries of HUD contracts, with standing to sue owners if they are violating them.

But NAHTs top priority is “right of first purchase,” a provision that Frank may take out of the bill due to pressure from owners groups, who have threatened to oppose the whole bill if it remains. Similar to the former Title II/VI provisions, the right of first purchase would provide a six-month window during which a tenants’ group or nonprofit purchaser that intended to keep the development affordable would have the right to purchase the building before it went on the open market.

Such a right is in place for federally subsidized rural housing, and for HUD-subsidized housing in Illinois. When New York City tried to pass a similar measure, though, it was struck down by state courts who said it should be implemented nationally.
In early November, 35 organizations, including the Housing Preservation Project, National Alliance of Community Economic Development Associations, National Housing Law Project, and the National Low Income Housing Coalition (NLIHC), sent a sign-on letter organized by NAHT and NLIHC to Frank to encourage him to retain the right of first purchase. “While we continue to support the expansion of voluntary incentives to preserve at-risk housing,” they wrote, “more is needed to ensure an opportunity to preserve certain properties through transfers to preservation purchasers where owners reject generous incentives for properties that are often the best of the inventory.”

While it seems likely that the preservation bill will pass, it remains to be seen whether it will contain these provisions. Meanwhile, new development, which costs significantly more than preservation per unit, is stalled, rental assistance contracts are also expiring, and a flood of predatory equity investments is putting other affordable buildings at risk. It’s clear that the expiring mortgage problem is part of a larger crisis in affordable housing, but at least it has some promising solutions—if Congress follows through.

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Published by the National Housing Institute