Thousands of Washington area tenants may have to pay higher rents for their apartments after June 1, the day the Reagan administration plans to deregulate rents for apartment buildings with federally insured mortgages.
A policy change scheduled to take effect on that date will eliminate all controls on rents for roughly 4,000 apartment buildings with mortgages insured by the Federal Housing Administration. The controls would be relaxed but not eliminated for another 3,500 FHA-insured projects.
In the Washington metropolitan area, the change could affect as many as 230 apartment projects containing roughly 36,000 housing units, according to the local office of the Department of Housing and Urban Development, which administers FHA programs.
The size of the rent increases that will result from deregulation will vary from market to market, according to Philip Abrams, HUD's assistant secretary for housing. Although the increases might force some tenants to move, they will encourage more investment in rental housing by giving project owners a higher return on their investment, Abrams said.
"The effect of rent control is that properties deteriorate because owners cannot get a market-rate rental for them," Abrams said. "The property suffers and, therefore, the tenants have poorer living conditions. The risk of foreclosure and losses for the FHA insurance fund also increases."
Deregulation will increase the value of existing projects and encourage more interest in construction of new projects, according to Abrams. "The most important overall effect is to encourage construction of new rental housing," he said. Deregulation also will remove some of the motivation for condominium conversions, Abrams added.
"I think it's long overdue," said Irving M. Kriegsfeld, president of Management Partnership Inc., which manages several thousand rental housing units in the area. "This way, response time to market conditions will be quicker. It will help encourage investment." Kriegsfeld said FHA rent controls have been more of a nuisance than an actual constraint on rent levels. Deregulation will cut the time and red tape it takes to increase rents but probably will not result in large rent increases, according to Kreiesfeld.
"It's a question of what people will pay for rent, and that's pretty much controlled by the market," he said. Rents for FHA projects are already fairly high, making it hard for their owners to increase rents without losing tenants to the home ownership market, he said.
"They are experiencing increasing difficulty renting their units," Kreigsfeld said. "The people who want them can't afford them, and the people who can afford them would rather buy."
Landlords in the District also face local rent controls, which will continue to apply to FHA-insured projects. The FHA still will be able to override the local controls, but it has done so only a few times in the recent past, according to District officials.
Rent deregulation will apply only to projects intended for moderate- to middle-income families that do not involve federal rental subsidies. Abrams stressed that deregulation of rents is consistent with the unsubsidized nature of the projects.
Abrams said deregulation will allow project owners to make the same return as owners of projects with no federal connection. "One thing we can be certain of: The increases will not be higher than the market-rate rentals in the community," Abrams said. "To the extent FHA rent controls have held rents below the market, they will rise to the market level."
Landlords probably will avoid increasing rents by amounts that would force tenants to move out, Abrams said. But he conceded that there will be tenants who may move because they do not want to pay any increase in their rents.
Other FHA officials said rents are most likely to increase for older projects in strong market areas. They said owners of projects in weak rental markets, especially the Midwest, probably could not increase rents much without suffering higher vacancy rates.
The deregulation process is complex because it involves deregulation of rents and the allowable return on an owner's investment for two different sets of projects. It is hard to estimate the impact of the move because owners of projects already subject to the controls will have to agree to revisions in their mortgage insurance agreements with the FHA before deregulation can take effect. The new policy will apply to all projects which obtain mortgage insurance after June 1.
The first set of projects are those insured under Sections 220 and 221(d)(4) of the National Housing Act. The law does not require regulation of rents or rates of return for those projects, so the FHA no longer will insist on approving them. This affects about 4,000 projects throughout the country. The second set of projects includes about 3,500 with mortgage insurance under Section 207 of the National Housing Act, which does require regulation of rents and rates of return.
The FHA must continue to approve rents for those projects, but it will use a more liberal policy to do so. It will allow owners to increase rents to provide a rate of return based on the project's current appraised market value, rather than its original replacement cost. It also will allow increases to cover current expenses and anticipated increases in expenses.