Subcommittee on Housing and Transportation

Oversight Hearing on "The Multifamily Assisted Housing Reform and Affordability Act of 1997"

Mr. Chairman, Ranking Member Allard, and distinguished Members of the Subcommittee, thank you for the opportunity for me to be here today in order to give you a status report on the Mark-to-Market program. I would like to give you a brief but comprehensive look at what has been accomplished by OMHAR through the Mark-to-Market program, what remains to be done, and what will be needed in order to allow the Mark-to-Market program to continue achieving the goals that Congress envisioned in the MAHRA legislation.

At this time I would like to thank Secretary Martinez’ Office and John Weicher, Assistant Secretary for Housing-FHA Commissioner, for their leadership and for asking the honest questions about the Mark-to-Market program’s continuation. If continued, I believe their thoughtful analysis will only serve to strengthen the program.

I would also like to recognize the leadership of a man serving on this Committee, Evan Bayh, under whom I had the honor of serving for 8 years.

Congress created the Office of Multifamily Housing Assistance Restructuring (OMHAR) as a semi-independent entity within HUD to address a financial crisis in the Section 8 program for affordable housing assistance. Former Senator Connie Mack noted at the time that an effort to "reform the Nation’s assisted and insured multifamily housing portfolio" was needed in order to handle what was termed the most difficult problem in housing at the time. OMHAR has accomplished much and worked hard to meet the challenge of its mission. Unless changes are made to the sunset provision in the MAHRA legislation, OMHAR and its restructuring authority will go out of existence on September 30, 2001. However, the statutory requirement and the need to reduce the rents on expiring above-market, Section 8 contracts will continue.

The many goals of the Mark-to-market program can be grouped into three categories:

• Preserving affordable housing by maintaining the long-term physical and financial integrity of the privately owned, publicly subsidized rental housing insured or held by FHA

• Reducing long-term project-based Section 8 rental assistance costs
• Reducing the risks of large FHA insurance costs

• Promoting operating and cost efficiencies in Section 8 assisted properties
• Addressing problem properties by terminating relationships with owners who have not met their obligations and responsibilities to HUD and/or to their tenants
• Establishing a nationwide network of local public and private entities to administer the Mark-to-Market program
• Engaging and organizing tenant and local community participation in the restructuring process to preserve affordable housing
• Providing a consistent, prudent, and documented process for all participating properties

The Mark-to-Market program offers a "win-win" opportunity for the government, taxpayers, tenants, and communities , as more deals are closed, we are saving more money by reducing excess payments on Section 8 subsidy contracts, while ensuring that the properties involved are on a sound financial footing, and preserving needed units of affordable housing in good condition , thereby meeting the goals of the Mark-to-market program.

Almost 900 properties-comprising of over 63,000 units-have gone through the Mark-to-Market process, resulting in net savings of $895 million. A big job remains-- about half of the properties assigned to OMHAR still remain to be completed.

The Mark-to-Market program is currently facilitating the preservation of over 140,000 units of affordable housing in 1,739 properties. The underwriting requirements of the Mark-to-Market program ensure that these affordable housing properties will be operated in a manner to ensure their ongoing economic viability and good physical condition. At a time when affordable housing is in short supply in many parts of the nation, the Mark-to-Market program provides critically needed continuity to many communities and residents.

A PAE partner highlighted in his letter of support to the subcommittee that "discussions regarding OMHAR and the mortgage restructuring process frequently forget the manner in which it impacts the resident---the quality of housing provided to the residents [under M2M] has dramatically improved."

In addition, one of the nation’s largest apartment owners, Denver based Apartment Investment and Management Company ("AIMCO"), who has 110 projects in the program, considers the Mark-to-Market program "important to AIMCO and residents in [its] affordable housing portfolio. The program will enable [them] to continue to provide safe and decent affordable housing to qualifying tenants for many years to come while protecting HUD from claims under its mortgage insurance programs. The program is an important element in addressing the affordable housing requirements in the country." Their statement has been submitted to the subcommittee.

Completed transactions so far have resulted in net savings of $895 million. Once all deals in the current pipeline are completed, we estimate that the savings represent $2.4 billion, while at the same time ensuring that these 140,000 units of affordable housing remain part of the affordable housing stock. This is not the final tally of Mark-to-Market savings, since additional properties expected to enter the Mark-to-Market program between now and the sunset date will generate additional savings. In addition, there are future savings to be captured from the Section 8 contracts expiring over the next three to five years.

In furtherance of our goals, we have adopted processes that:

• Require the application of national standards for consistency, while enabling solutions tailored to local conditions and community requirements;
• utilize a small staff of government employees to leverage public and private contractors;
• rely on market-oriented principles to set rents;
• encourage meaningful participation by tenants in the affected housing units; and
• maintain communications and share information and concerns with all stakeholders, including owners, lenders, HUD offices, tenants, and government agents, on an ongoing basis.

As I mentioned earlier, the result of the process is savings to the government, and to the taxpayer, that are generated even as the affordable housing remains available, and as the physical condition of the housing is improved, when needed.

First of all, the fundamental complexity of the Mark-to-Market program is due to the nature of the work that must be accomplished in order to restructure a property. These real estate workouts occur in the context of a complex legislative and regulatory environment, and involve negotiations between property owners, PAEs, tenants, lenders, and other community stakeholders.

Some properties, despite having these above market rents, are physically, financially, or managerially stressed even before the rents are reduced. The legislative requirements of the Mark-to-Market program are explicit regarding transaction costs and cash flow to owners after restructuring and these terms have created difficult hurdles to a successful restructuring for some owners.

In some cases, property conditions or ownership problems have been such that we have not been able to close restructuring transactions or continue project-based assistance; tenant protections and providing vouchers has been a key goal in such cases.

In a letter of support submitted to this subcommittee, a public PAE partner of ours captured perfectly the challenge we balance every day: "while these [social, financial, and administrative] are admirable goals, they continuously compete with one another and speak volumes about the complexity of the process."

We have listened to our stakeholders, we have implemented changes where prudent, and we have striven to create as flexible a program as possible within the context of the legislation. As a result, beginning in the fall of last year, we implemented revisions and initiatives to address the concerns of our stakeholders.

First, we introduced additional performance-based incentives for participating owners. Each year after Mark-to-Market, if a property meets program standards for financial, physical and managerial soundness, the property owners will receive a market level of return on the capital they were required to invest in order to pursue Mark-to-Market, plus a greater share of property cash flow for that year. We believe this reform is vital for the long-term health of the properties and aligns the interests of HUD and the owner community. We also believe it appropriately rewards owners for achieving HUD’s public policy objectives. Purchasers are also eligible for these same performance-based incentives.

Second, we introduced incentives for purchasers, recognizing the additional costs they will incur, over and above costs typically incurred by stay-in owners. This feature was necessary in order to insure that, whenever an owner chooses to sell a Mark-to-Market property, there will be a capable and desirable purchaser willing to take over the property and take it through Mark-to-Market.

We have made use of our statutory authority under MAHRA §517a5, to forgive 2^nd mortgage debt, when appropriate. PAEs may consider 2^nd mortgage debt forgiveness for independent, tenant endorsed, community based nonprofit and public agency purchasers who accept a longer use agreement, agree not to sell the property for a ten-year period, and agree to reinvest a portion of cash flow in the property. This reform is consistent with our statutory responsibility to facilitate transfers when owners desire to sell.

Finally, we introduced reforms to improve the level of communication between OMHAR, PAEs, owners and purchasers. Specifically, we gave owners and purchasers the right to receive various important information throughout the restructuring process, and we formalized the notification and appeal processes to give owners and purchasers additional assurances that their point of view would be solicited, heard, and considered.

We have reached an agreement with Ginnie Mae to facilitate the securitization of small mortgage loans created for Mark-to-Market properties, thereby increasing the availability and decreasing the cost of these small mortgage loans.

We have created a ‘large owner initiative’ under which owners of large portfolios were given the opportunity to centralize processing of all of their properties with one or two PAEs. This initiative is now directly responsible for a significant share of new transactions coming in to OMHAR.

We have responded to concerns and comments received from our PAE partners and greatly streamlined standard program guidance, giving PAEs additional flexibility, and placing a premium on their professional judgment of what is best for each property.

All of these initiatives demonstrate our commitment to a workable program that circumvents hurdles and responds to valid stakeholder issues--all the while continuing to achieve the mission and ensuring public accountability.

• 47 more closings are being scheduled at this time.
• 116 transactions are approved and are now in owner negotiations.
• 169 deals are currently in approval stages

As you can see, there is more work to do, which will bring more savings and will preserve more affordable housing. We have the infrastructure in place, with a momentum that can be sustained in order to complete the task that Congress envisioned.

OMHAR and its partners are positioned to complete that work . .

The program is in place. Yes, it took time for the Mark-to-Market program to build its infrastructure, to work with its partners to ramp up production to our satisfaction, and to the satisfaction of others. But we are now there. The processes work, and we are meeting the goals of the program. Let me detail the resources in place to complete our mission.

• We currently have 87 staff on board, of which 38 are permanent and 49 are temporary. Chart # 6 - Two-thirds of our staff is comprised of production staff -- meaning overseeing PAEs, reviewing and underwriting deals, and conducting closing and post closing activities - Specifically, three quarters of our field staff that are completing restructurings are term employees + which means that their jobs with OMHAR expire in 102 days.

The staff has exceptional and diverse backgrounds. As envisioned under the legislation’s creation, many have RTC, FDIC workout, and DUS underwriting experience. These staff are trained and experienced and have established effective oversight and direction for the Mark-to-Market program. I, personally, continue to be impressed by the professionalism of the OMHAR staff and their commitment to boosting production numbers and meeting the goals of the program in the face of the looming September 30 sunset date.

The PAEs: Our partners, the PAEs, are the 3^rd parties through which the nitty gritty work of restructuring gets done. At our peak, we had contractual relationships with 51 PAEs (42 publics and 9 privates); and we are now working with 34 PAEs (25 publics and 9 privates). Why did this consolidation happen? There are many reasons we can identify:

• A lack of deal inflow meant that volumes were insufficient for either the PAEs or OMHAR to justify continued participation;

• The restructuring process was much more rigorous and time-consuming than anticipated;

• The Mark-to-Market restructuring is a ‘real estate workout’ and the ability to negotiate in controversial situations wasn’t an expertise that some PAEs had or wanted to develop; and

• The various roles of being the Section 8 contract administrator, lending to the local affordable community, developing more housing with some of the owners, and doing Mark-to-Market restructuring, presented conflicts of interest in some cases.

With approximately 900 deals under our belt, we have developed a stable capacity amongst our PAEs. And let me assure you, we have stellar performers - both public and private.

Given the magnitude of the training, management and oversight efforts required by OMHAR, I think it is important to share with you that the capacity between the public and private PAEs is quite different. The average private PAE manages 66 deals, while the average public PAE manages 7 deals. While OMHAR continues to be committed to the statutory preference for public PAEs, and we are very pleased with the quality of many of the public PAE’s performance, when a PAE with very few deals does not perform in a timely manner or does not deliver quality work products, it is very labor intensive with little product to show for the effort. When numerous PAEs with few deals do not perform in a timely manner or do not deliver quality work products, it ties up limited staff resources and impedes production. All non-renewals to date have occurred in public PAEs, who had capacity, competing priority, and/or performance issues.

It is important to emphasize that public entities continue to play a vital role in the Mark to Market process, even though in certain cases it has not proved appropriate or efficient for them to serve as PAEs. Finance agencies, in their traditional roles as affordable housing lender, tax credit allocator, or allocator of state affordable housing grants and low-interest loan funds, are well positioned to provide new funds to restructured properties. Congress intended this in designating HFAs as part of the restructuring process - - to date, however, the public PAEs have brought additional funding to less than a dozen deals. Finance agencies can make the difference between preserving housing for the long term or losing it from the affordable housing stock, by facilitating the use of additional sources of funds that can be instrumental to a successful restructuring. Because states have not typically brought outside sources to OMHAR deals, OMHAR issued clarifications that it does not seek to recoup external funds brought into Mark-to-Market properties and wants them invested entirely into properties in their states.

In addition, due to their historical working relationships, public entities often have a wealth of information about the properties and owners in their jurisdictions, and about the appropriate level of rents and operating expenses. With this background, with their sensitivity to the challenges facing these properties, and with their established working relationships with community stakeholders (such as tenant associations), public entities are a valuable resource and can play a role in the Mark to Market process. OMHAR staff is currently working with HFAs on strategies for utilizing public entities in roles beyond the PAE role, in recognition of the value that we think they can add.

We have arrived at a balance in partners, in quality, in oversight, and in timeliness that is working. And we are performing efficiently. To date OMHAR has cost $66.2 million in PAE staff costs and FHA claims to achieve those savings of $895 million over 20 years. Looking at the present value of those savings - $517 million - still shows a 7.8:1 savings to cost ratio. In other words, for every dollar of cost, we save almost $8.

OMHAR has not yet reached its peak for completions of full debt restructurings. We’ve seen improved results with a significant increase in full restructurings since February. We have assets moving through every stage of the pipeline; we and the PAEs have learned much; we’ve become more creative in addressing the challenges, and we’ve improve our timeliness with each passing month. We have developed an expertise not easily or readily able to be replicated. We want to finish the job we signed on to do.

This is echoed by another public PAE partner in a letter of support recently submitted to the subcommittee; . . . "it would be a travesty for the program to not continue. OMHAR has learned lessons, adapted the program and built working relationships with PAEs that will allow them to successfully accomplish the goals of MAHRA."

September 30, 2001, the sunset date called for in the MAHRA legislation, is fast approaching. Planning must occur now to determine the Government’s approach to reducing rents on expiring Section 8 contracts after the sunset date. Without the legislative authority to reduce a property’s mortgage payments when its rents are reduced, HUD will have to watch Section 8 properties struggle with excessive debt burdens. Owners may cut back on maintenance to make ends meet, or default on their FHA insured loans. The residents of these properties are negatively impacted by failing properties. The resulting costs to HUD exceed the costs of restructuring the mortgage debt under Mark-to-Market.

Furthermore, with over half of OMHAR’s staff on term appointments that expire with sunset, the legislative authority to continue their terms beyond sunset and keep this dedicated group of staff together is key to the continued success of the program.

The Mark-to-Market program and its stakeholders need an assurance of continuity in order to maintain momentum, and to continue to bring its benefits to the affordable housing units with Section 8 contracts that are only now approaching expiration. The ability to reduce a property’s mortgage payments is crucial for the Mark-to-Market mission of preserving affordable housing at market rents. And we believe it benefits the financial savings goals to address these workouts proactively and with the consistent methodology and process that we have developed.

Mr. Chairman, I believe we have a compelling story to tell. Affordable housing is being preserved for those in need, at a cost savings to the taxpayer. There is nevertheless much work still to be done. I believe with more time we will have a resounding success story to tell.

Thank you, Mr. Chairman - I would be pleased to answer any questions.

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