HUD pitches refinancing of debt to project owners to reduce Section 8 costs.

WASHINGTON -- The Department of Housing and Urban Development is trying to encourage owners of multifamily projects that receive Section 8 rental subsidies to refinance their high-coupon, tax-exempt debt so HUD can lower its payments.

But housing industry officials claim the financial incentives HUD now provides, or is proposing to offer, are too meager to make the project owners willing to forgo a portion of the subsidies.

"There's no incentive for anyone to bother," said Robin Salomon, a principal at DFC group, a real estate consulting firm. Project owners are likely to "shrug their shoulders and not bother," Salomon said. "It's meaningless."

A HUD spokesman said the department has no estimate of how many bond issues with high coupon rates are still outstanding. But industry officials said they believe dozens, and possibly hundreds, of such issues exist.

The owners being targeted by HUD built their bond-financed projects a number of years ago, when interest rates were far higher. The owners receive enough subsidies to make the debt service payments on their bonds in return for keeping low-income tenants in the units. If an owner refinances, his debt service payments become smaller and HUD is able to reduce its subsidies.

Under HUD regulations, the department will give a project owner 10% of the savings gained from the refinancing of high-interest rate debt.

But earlier this year, the department acknowledged that 10% was not enough to motivate owners to go to the trouble and expense of undertaking refinancings. In April, HUD proposed legislation that would permit the department to pay up-front costs of the transactions.

The department predicted that the incentive would be sufficient to bring owners to market and would save the federal government $27 million a year in reduced Section 8 payments.

HUD's proposal for paying up-front costs has a good chance of being enacted this year because it is conrained in both the House and Senate versions of the housing reauthorization legislation. But Salomon and several other housing market participants said that still isn't enough to motivate owners.

"What my members tell me is that that won't do it," said Denise Muha, the executive director of the National Leased Housing Association. "Owners aren't going to do it unless they see some benefit in it."

Sheldon Shreiberg, a housing lawyer with the firm of Pepper, Hamilton & Sheetz, said many project owners "feel that the 10% savings or even [coverage of] closing costs is inadequate, but they have been discussing with HUD and Hill staff some alternatives, which might not give current savings to the government but would provide long-term savings to the government, and which would benefit the owner."

For example, HUD could keep the same level of payments to the owner, who would in turn agree to use the excess to pay down principal, and pay off the loan more quickly. But Shreiberg said incentives that delay the benefit to the federal government might be difficult to enact in an atmosphere where Congress is hungry for every dime of revenue it can muster.

The HUD spokesman declined comment on whether the department would be open to providing deeper incentives. But a number of housing industry officials have suggested that the most appropriate and attractive incentive would be for HUD to split the savings evenly with project owners.

They pointed out that a precedent already exists: HUD splits savings with state and local housing agencies under another federal program that provides housing for the homeless.

"That's fair. If I'm a project owner and I'm going to give you savings that you, the government, wouldn't have otherwise, then we ought to be willing to split them," said Neil Churchill, a mortgage banker in Arlington, Va. "It's fair to split it fifty-fifty, especially when you're [already] willing to do that with another entity."

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