HUD Announces Complex Plan to Save Section 8
By Albert B. Crenshaw and Judith Havemann
The Clinton administration yesterday proposed a far-reaching but complicated plan to prevent the nation's largest low-income housing program from running out of money and throwing billions of dollars worth of apartment buildings and their government-insured mortgages into foreclosure.
If it works, Housing and Urban Development Secretary Andrew M. Cuomo said, the plan will reduce federal costs by $1.4 billion over the next five years while preserving 500,000 units of affordable housing.
The proposal represents the first comprehensive plan for addressing an issue that has plagued federal officials for more than a decade. Now, with housing contracts between HUD and thousands of landlords about to expire, the situation is becoming desperate.
These subsidized units are home to 850,000 poor, elderly and disabled people, HUD officials said, and if no deal is worked out, many of them could end up homeless while others will see their buildings deteriorate.
The troubled program, known as Section 8, is a legacy of a 1970s attempt to bring private-sector incentives to bear on some of the problems that government was finding too expensive or too difficult to address.
Section 8 guaranteed developers high rents over long periods if they would build housing and rent it to low-income tenants.
The program was successful in that it generated tens of thousands of housing units, but with most of the subsidy contracts due to expire in the next two to three years, the administration and Congress are faced with a dilemma: Renewing the deals on current terms would be extremely expensive, but failing to act would cause many perhaps most of the projects to go broke.
HUD officials dating back to the Reagan administration have been aware of the looming problem, and a number of potential solutions have been considered, ranging from continuing the full subsidies to halting them entirely and letting the market take its course.
Those solutions have generally been rejected as too expensive, too harsh, or both.
The current plan focuses on some 500,000 units where inflation clauses in the subsidy contracts have escalated rents well beyond market levels.
In those projects, Cuomo said, HUD is proposing to cut the rent subsidies to a level at or near market rates. In exchange, it will negotiate a reduction in the project's mortgage, thus lowering the building's debt service costs.
Cuomo acknowledged that most projects would not be viable with their current mortgages if rents were cut, but he said he believes that deals can be worked out so that rent cuts will be balanced by the mortgage reductions.
In some markets, subsidized rents are more than double the market rates for similar units, according to HUD. In Washington, for example, the government level is $739 for a unit while the market rate is $499.
"To be subsidizing rents which are higher than market rates is inexcusable," Cuomo said.
Mortgage debt reductions, though, result in taxable income under current law, so the administration plan also includes a provision that would allow owners to spread that tax hit over 10 years with no penalties or interest.
Treasury Secretary Robert E. Rubin, who appeared with Cuomo at HUD headquarters, said their two departments had worked hard to create a plan owners could support.
"This is a program that reduces the cost to government . . . reduces the risks to taxpayers . . . and finally it extends the availability of affordable housing," Rubin said.
Congressional Republicans welcomed the plan as an important contribution toward solving the problem even as it drew immediate fire from owner groups.
The National Association of Home Builders called the tax provisions "extremely unfavorable for current owners," and said rents are above market because the projects were built under federal wage and design guidelines that boosted construction costs.
The home builders also objected to a provision that would shift much of the subsidy from the project to the tenants. Thus, if a tenant left, his or her portion of the subsidy would go, too, and be paid to the owner of the building they moved into.
Rep. Rick Lazio (R-N.Y.), chairman of a subcommittee on housing, said that some owners are just trying to hang onto the deal they have now "to continue to renew contracts at an average of 130 percent of fair market rent. "If we don't change, by the year 2000 funding for Section 8 will cannibalize all the housing budget."
© Copyright 1997 The Washington Post Company