WASHINGTON -- The Department of Housing and Urban Development plans to sell billions of dollars in multifamily loans it has acquired through defaults over the years, and state and local governments hope to be among the buyers, housing officials say.
HUD expects to sell the troubled loans in pools to Wall Street investors, but state and local officials are hoping to persuade the agency to sell to them as well, so they can refurbish the deteriorated apartments built with the loans.
Much of the rehabilitation would be financed with tax-exempt multifamily housing bonds or 501 (c)(3) bonds, the housing officials said. The officials said that loans with a face value of upwards of $11 billion could eventually be sold, though a HUD official could not confirm that figure.
"This would create a real opportunity for local governments to address the deteriorated HUD-held portfolio of properties adversely affecting their neighborhoods," said Robin Salomon, a housing lobbyist with the law firm of Pepper Hamilton & Scheetz.
"I think it's just an ideal way of attempting to bring these units back into a city's affordable housing stock," said Steve Leeper, the director of housing for the Pittsburgh Urban Redevelopment Authority.
Even if HUD does not sell to them, state and local governments could still try to work with buyers of the loans to preserve the units for low-income people. But housing officials said that by purchasing the loans themselves, state and local governments can more easily control the process and move more quickly to rehabilitate the units.
"This fits right into our preservation strategy," said one potential buyer, Walter Webdale. the director of the Fairfax County, Va., Department of Housing and Community Development.
The transactions would be beneficial for state and local governments because "anytime you can intervene in a property at an earlier stage rather than a later stage, you have an opportunity to prevent physical deterioration of the property," said Charles Brass, the president of the Association of Local Housing Finance Agencies.
Brass is also vice president of development for the New York City Housing Development Corp.
Tax-exempt bonds would play a role here because the properties are, for the most part, "in deplorable condition," and in urgent need of rehabilitation, an official said.
After acquiring the loans, agencies could buy the properties, turn them over to private, nonprofit organizations or private developers, and then issue 501 (c)(3) bonds or multifamily housing bonds to provide loans to finance rehabilitation of the properties, housing officials said.
Alternatively, a housing agency could acquire a loan without buying the property, and work out an agreement with the existing owner that would include lending the owner money to rehabilitate the property.
Either way, "what I would envision would be a financing package including both bonds and other subsidy sources, whether it be Community Development Block Grants, HOME money, or state funds," Leeper said.
The loans in question were insured by HUD and were assigned to the agency by lenders when borrowers defaulted. Until now, HUD has been unable to sell the loans because of a 1987 law that requires the department to offer subsidies to buyers of the loans under Section 8 of the housing code to ensure that the properties are preserved for low-income tenants.
Though it legislated the requirement, Congress, always short of cash, has never appropriated the needed Section 8 funds. "Consequently, we can't sell the properties and we're backlogged," said Jeanne Engel, general deputy assistant secretary in HUD's office of housing.
But legislation pending in Congress would ease the subsidy requirement by permitting HUD to use other methods to make sure the projects remain low-income. Congress is expected to pass the legislation later this year, according to housing lobbyists.
Reversing the 1987 law and allowing the loan sales to go forward would correct "a do-gooder policy gone awry," Salomon said.
So far, HUD's only plans are to pool the loans and sell them to investors, Engel said, who added that she did not have an exact figure on the number of loans that could be sold. HUD officials have met with representatives from credit rating agencies and investment firms to get advice about how best to package the loans to investors, Engel said.
