MBA Weighs in on HUD Section 8 Proposal
The Mortgage Bankers Association this week weighed in with HUD on its proposal to transition to a single Section 8 regulation and a single Housing Assistance Payment contract for its Section 8 project-based rental assistance programs.
“While the concept is appealing and well-intended, MBA unfortunately believes the impact of the proposed changes will have a significant negative impact on the supply of these affordable units,” MBA said in the letter replying to HUD Docket No. FR-6320-A-01. “MBA urges HUD to reconsider this proposal, and to use all tools to preserve existing properties.”
MBA also joined a coalition of multifamily groups to provide feedback on the proposed rule.
MBA’s reasoning for asking HUD to reconsider the proposal included:
Reserve for Replacement
1) HUD said to ensure project capital needs are met, it intends to require an owner to establish a HUD-controlled reserve for replacement account, with initial and annual deposits determined by means of a periodic capital needs assessment. MBA believes the reserve for replacement account proposal is duplicative and is mitigated fully by current procedures and regulations, and requests it be withdrawn.
“This language does not recognize the crucial role lenders play in maintaining Section 8 properties,” MBA said. “Requiring an additional reserve would be duplicative for several reasons, increase costs, and likely further hamper the development of affordable rental housing”
2) In addition, HUD asked if it should provide an incentive to owners to use their own capital to establish and/or make continued deposits to a reserve for replacement account. MBA responded that a common occurrence in an acquisition or refinance is to request a Mark Up to Market (MUTM) of the contract rents and request a new 20-year contract. To justify a MUTM, there is often some level of repairs, interior and exterior, that need to be done. In an acquisition, borrower funds along with the loan funds are often needed to purchase the property and make the repairs. For properties that are refinancing, loan funds are generally used to make repairs. A Chapter 15 MUTM to post rehab rents is sufficient incentive for the owner to make the repairs. Additional incentives or escrows would be duplicative in nature.
Rehabilitation
3) HUD asked if the standard program regulation should address requirements when a project assisted under section 524 is undergoing rehabilitation. MBA responded that additional oversight or requirements for rehabilitations are not needed. Section 8 projects often go through tax credit acquisition/rehabilitation. To receive tax credits, state housing finance agencies often have a minimum level of rehabilitation that must be performed.
4) HUD said if the standard regulation should address rehabilitation, what elements of rehabilitation should it cover (i.e., rehabilitation planning, tenant relocation, use of the pass-through). MBA responded that, again, additional rehabilitation requirements are not needed. “In addition, HUD Asset Management account executives are already overburdened,” the letter said. “MUTM and requests for new 20-year contracts in conjunction with new loans can take up to three months or longer, which can often lead to a delay in closing. Adding another layer or review (of the scope of work for the rehabilitation), will only make the process slower.
Project Finances
5) To ensure compliance with the reserve for replacement requirement, HUD said it intends to require all owners to submit annual financial reports. MBA responded that additional monitoring of deposits to the reserves for replacement is not required. “Lenders already automatically collect reserve deposits for each loan,” the letter said. “Owners of projects with FHA-insured loans are already required to submit an annual audit. If audits are to otherwise be required, they should be limited to projects that are 50% or more covered by a contract.”
6) HUD asked if the standard program regulation should contain any limits on distributions. MBA responded that distributions should not be limited. “Lenders and tax credit investors already ensure that the property is maintained properly,” MBA said. “In addition, REAC inspections, coupled with annual audits calculating surplus cash, perform this same function.”
HUD Enforcement
7) In the interest of providing clarity and transparency, HUD said it believes it would be beneficial to include in the regulation a subpart on enforcement, where the tools available to HUD and the circumstances under which such tools could be employed would be addressed. MBA responded that it does not oppose including enforcement provisions, but said it is unclear on how these would be added to a contract. “Would existing contracts need to be revised? That would be a daunting process, taking years if not decades to complete,” MBA said. “A better approach may be an incentive provided with a Use Agreement (such as was used for 202’s when first allowed to prepay) – e.g., incentives like distributions or access to HUD controlled proceeds from a refinance or sale.”
Vacancy Payments
8) HUD asked what incentives it could use to encourage owners to re-lease vacant units quickly. MBA responded that it believes vacancy payments should be discontinued if there are long-term vacancies.
Scope
9) HUD asked what topics should be addressed in a standard program regulation. MBA requested that the scope of the regulation be limited. “Adding too much to the regulation will make the program more rigid and less nimble,” MBA’s response said. “A process to request waivers in justifiable circumstances should be a part of any process, as no policy is perfect to cover every potential outcome.”
10) HUD said it expects to incorporate into the regulation tenant rights equivalent to those that apply currently to tenants residing in projects assisted under RAD PBRA HAP contracts (as currently described in Notice H 2019–09/PIH2019–23). MBA responded that Notice H 2019–09/PIH2019–23 is lengthy and includes many provisions. This should be a separate rulemaking process to ensure all parties impacted by updated requirements have the ability to voice their concerns and recommendations, MBA said.
Renewal Options
11) HUD noted that upon expiration, most contracts in MFH’s portfolio are eligible for renewal under section 524 of MAHRA. HUD intends to require renewal of such contracts by means of the standard program contract, so that as owners renew, they will be subject to the requirements laid out in the standard program regulation. MBA responded that HUD’s intention to reduce complexity by creating a consolidated HAP contract is well intentioned, “however, the proposal will add an additional and duplicative form of HAP,” the letter said. “True consolidation would not occur until every HAP contract is renewed, which would be decades as the various forms of HAPs and the underlying regulations would still exist negating any streamlining efficiencies. Further, it is unclear when the new contract would be required – would it be at the end of the existing contract or at the end of the preservation term?
MBA’s letter strongly urged HUD to reconsider this proposal. “The impact of the significant proposed change, while well intentioned, will greatly decrease the supply of affordable housing units,” MBA said.
