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HUD-Assisted Housing 101
National policies and programs for housing low and moderate income households have fundamentally changed several times over the last eight decades.  (This history remains relevant because housing still remains from all these eras.)  Beginning in the 1930s, Congress established public housing, which still remains prevalent throughout the country and which tends to house the poorest and most disadvantaged households.  Under the public housing program, public housing agencies (PHAs) own and operate rental housing developments and scattered-site units, with HUD funding PHAs to make up the difference between the rent tenants pay (based upon 30% of their income) and what it costs to operate the unit.  With public housing, there is generally not a concern with conversion to market rate housing; rather, the preservation challenge is usually that underfunded (and occasionally badly-managed) public housing programs may be forced to seek HUD's permission to sell off or demolish units because they can no longer afford to operate them.

During the 1960s, Congress, operating through HUD, shifted its focus to engaging the private sector in building the next generation of affordable housing.  Through programs popularly referred to as the Section 236 and Section 221(d)(3) programs, Congress insured and subsidized mortgages for private developers in return for those developers building and operating apartment buildings at below market rents for low and moderate income households.  These programs, generally referred to as HUD Multifamily Subsidized Housing, produced thousands of units in communities across the country, most of which still exist today.

There was a cost, however, to involving the private sector in low income housing.  Congress and HUD concluded that in order to provide sufficient incentive for private sector participation, owners must be provided the opportunity to leave the program early, often after the first 20 years of the 40-year mortgage.  Not surprisingly, owners eventually began exercising this option, leading to alarm in Congress at the prospect of the country losing a large share of this precious subsidized housing resource.  As a result, over the next couple of decades, Congress enacted a patchwork of statutes restricting these mortgage prepayment rights.  This is an area in which the Housing Justice Center (HJC) has been particularly active, by ferreting out legal rights under these various federal statutes and, in some cases, housing contracts to force badly needed properties to stay in the HUD programs.  Still, thousands of units have been lost from the HUD inventory.

In the 1970s, Congress shifted its approach again with the Section 8 program.  Rather than ensuring and subsidizing mortgages, HUD began directly subsidizing rents.  Many people are familiar with the Section 8 voucher program (originally known as the Section 8 certificate program) in which Section 8 programs run by PHAs issue families a rent voucher so they may find a private market landlord willing to rent to them.  The voucher program was intended to expand geographic choices about where low income families may live.  Although the voucher program has been more successful in expanding choice than its predecessor programs, the program has not always lived up to its potential in providing families opportunities in a wide range of neighborhoods.

The other large Section 8 program was Project-based Section 8, in which owners of apartment buildings entered into contracts with HUD to rent to lower income households while receiving rent subsidies from HUD.  In some cases, these Section 8 contracts were added on to pre-existing multifamily subsidized properties, while in other cases new buildings were constructed under the Project-based Section 8 program.  The terms of these Section 8 contracts varied, from short terms to some as long as 40 years.  This became significant because although HUD has generally renewed Section 8 contracts when the original terms were up, a number of owners have sought to not renew, or to “opt out” of the Section 8 program, when the opportunity arose.  Again Congress found itself facing the prospect of losing much of its Section 8 housing.  Congress first responded with legislation combining restrictions on opting out with incentives to stay in, but a combination of legal, political, and financial problems led Congress to eventually abandon that approach.  Congress then enacted legislation essentially ratifying the rights of many owners to opt out of Section 8 contracts, but providing some protections in the form of advance notice requirements and “enhanced vouchers” to protect tenants in buildings where the owner opted out.

As a result, many Section 8 owners have opted out.  This problem has been compounded by the fact that, over time, many long term Section 8 contracts have converted to annual contracts, thus creating a new opt-out risk every year.  Although far from a perfect approach, enhanced vouchers do protect many tenants.  When an owner opts out of a Section 8 contract, the owner is free to charge a market rate rent, which usually means a huge rent increase over previous limits.  Existing tenants receive enhanced vouchers, however, which will either enable the tenant to remain in the unit with the voucher covering the cost of the newly increased rent, or will enable the tenant to move and use the voucher elsewhere just as the tenant would with a normal Section 8 voucher.

Problems remain with the enhanced voucher approach, however; some tenants are denied enhanced vouchers, and in some cases tenants are forced to move if the owner no longer wants to operate the building as rental housing (in condo conversions, for example).  But the biggest problem with enhanced vouchers as a preservation solution is that it temporarily protects tenants, but does nothing to preserve the affordability of the housing.  As units in opt-out buildings turn over (when enhanced voucher holders move out), the units convert to market rate rents with no remaining obligation to rent to voucher holders.  Tenants still have their vouchers, of course, but as buildings leave the Section 8 program, over time tenants discover there are fewer and fewer projects where they can use those vouchers.  Despite this seemingly bleak environment for preserving Section 8 housing, advocates and government agencies have still managed considerable success in heading off Section 8 opt-outs.  For more information, see article on “Preserving HUD-Assisted Housing.”

Finally, in the mid-1980s, Congress adopted yet another approach to creating new units to house needy households.  Rather than providing direct government subsidies to supplement rents, Congress chose to provide income tax credits to investors willing to provide cash for the construction of apartment buildings which would then operate with below-market rents for income qualified tenants.  This program, the Low Income Housing Tax Credit program (LIHTC), was not a HUD program at all, but was established by the Internal Revenue Code.  Rents in these LIHTC buildings are not as low as Section 8 or public housing, but they are at least generally at levels where they can be used by Section 8 voucher holders.  The tax credit program remains the only federal housing program today which provides for construction of new rental units.

Even with this program, residents and affordable housing advocates have to be concerned with potential loss of affordable units.  Although most LIHTC properties are committed to remaining affordable for 30 years, many are in situations where starting in the fifteenth year, they can exercise rights to exit the program.  Unless the administering agency (often the state housing finance agency) identifies a party to buy out the owners at a designated price within one year, the owners are free to exit the program and shed all restrictions.  As of this writing in mid-2008, it is unclear how big a threat exists for loss of LIHTC rents.

Preservation is vastly cheaper (and usually easier) than constructing a new unit.  For that compelling reason, it is worth the substantial effort to identify and pursue all legal and other strategies to retain as many of these units as possible within these programs.  Meanwhile, advocates and residents can hope that as Congress settles on its next approach to housing the nation’s needy households, long term or permanent retention of new housing in government programs will be part of the equation.

- Tim Thompson, Summer 2008.