WASHINGTON -- The Department of Housing and Urban Development is preparing rule changes to make it easier for private nonprofit organizations to buy low-income rental units under a new program designed to preserve the stock of affordable housing.
Housing industry officials who have seen a draft of the proposed changes say HUD has removed some but not all of the problems in the original set of rules proposed last April. Remaining roadblocks could make the mortgages needed for the purchases -- and, in turn, the bond financing -- too costly for the nonprofits to become involved in the program, the officials said.
The rules govern a program created by Congress in 1990 to keep low-income housing projects from being converted into expensive properties. Housing industry officials had predicted that once the final rules are in place, the program could spur 501(c)(3) organizations to buy the properties using mortgage loans financed with billions of dollars of the tax-exmpt bonds.
The proposed changes "are an improvement, but [the rules] are still not necessarily workable," said Martin C. Schwartzberg, president of the National Foundation for Affordable Housing Solutions, a nonprofit organization working on preserving low-income housing units.
At the same time, HUD's proposals "still bode very well for the bond market," because they show that the department "is getting much more aware of the business implications" of the regulations it issues and is more willing to change them when necessary, Mr. Schwartzberg added.
Congress created the program to solve the so-called prepayment problem, involving thousands of housing units built in the 1960s and 1970s by private developers who received HUD-subsidized 40-year mortgage loans. In return for the subsidies, the developers were required to keep low-income tenants in the units for at least 20 years.
Many of the mortgages on those projects have reached their 20th year, prompting developers to prepay their loans so they can be released from their low-income requirements and turn the units into more expensive rental or condominium properties.
The purchase program is designed to stave off an expected wave of prepayments by offering financial incentives to developers if they agree to sell the properties to entities -- mainly 501(c)(3) organizations -- that are interested in preserving the stock of affordable housing.
Purchases under the program will begin once the rules are made final, which is expected next year.
HUD did resolve one of the housing industry's biggest complaints about the April rules, which was the priority given to tenant groups or "resident councils" as purchasers of the units. Once the property goes up for sale, a seller could only accept a bid from those groups for the first 12 months. Bids from non-profits would have to be held until the end of that period, a situation which would discourage those groups from coming forward, industry officials have said.
HUD is now proposing to cut that period to six months, and would expand the definition of "resident council" to include some types of 501(c)(3) organizations, such as community-based nonprofits and 501(c)(3)s created by tenant groups.
Another problem with the April rules was HUD's stipulation that buyers offer a 1% "earnest money" deposit when they bid on a property. Housing industry officials complained that requirement could discourage 501(c)(3) organizations from amking bids, because those groups tend to have little up-front cash for such a venture.
HUD is proposing to ease the earnest-money requirement by making it the smallest of either 1%, $500 per unit, or $50,000.
But while HUD's proposed changes to those two problems-appear to satisfy the housing industry, a third does not.
HUD's April regulations required the term of the loans made under the program be no longer than 20 years or the remaining term of the original loan on the property, rather than a 40-year term, which is standard. Housing officials have complained that the shorter loan period would drive up costs and may discourage purchases.
HUD is now proposing a 40-year term, but only for refinancings. That still leaves nonprofits seeking a mortgage to buy a property forced into a 20-year term. "HUD has skewed the process" away from new loans, and thus away from bond financing, said Robin Salomon, a lobbyist with the law firm of Brownstein Zeidman & Schomer.
Aside from the ongoing problem with loan terms, HUD made a new proposal that created a problem in the rules where none had existed before, according to Sara Johnson, the executive director of the National Housing Trust. The trust is a nonprofit organization created to find ways of preserving the stock of affordable housing.
Under HUD's proposal, purchasers would not be permitted to use proceeds from their mortgage loans to pay transaction costs. The department is prepared to offer grants equal to 5% of the property's value, but Ms. Johnson said that amount is unlikely to be enough to cover those costs.
The provision "came out of nowhere" and "created a high degree of concern" among housing industry officials who have been anxious to see the program get off the ground, said Ms. Johnson.