Department of Housing and Urban Development

Recommendations and Actions

HUD02: Improve Multi-Family Asset Management and Disposition


The Department of Housing and Urban Development (HUD) has an unmanageable and still growing workload of problem multifamily loans and foreclosed properties. Management and disposition of these loans and real estate are hampered by outdated practices and restrictive and unrealistic statutory rules. Additional staff is not a practical alternative. The problems are different for subsidized projects and for market-rate rental apartment buildings and loans secured by such apartment buildings.

Market-rate rental properties and mortgage loans owned by HUD are those HUD-held assets that do not have statutory mandates concerning their use, other than the mandate to protect taxpayer resources and the financial viability of the appropriate insurance fund. These assets should receive separate treatment from subsidized housing projects and loans on subsidized housing projects. The market-rate properties and loans should be considered as primarily financial assets, and their value should be maximized by efficient asset management and disposition.

As with all of its asset disposition, HUD is traditionally geared to manage and sell these assets in-house, with primarily government staff and governmental decisionmaking. Negotiating compromises and restructures, selling or securitizing (a complex form of selling) loans returned to performing status, and managing and selling foreclosed collateral are functions performed best by skilled business persons with their own money at risk and a direct financial stake in the outcome. A comparable environment cannot be created within a governmental context. Loans owned by HUD because of the now defunct co-insurance program (and other such loans that may be coming) are particularly appropriate for use of new public-private techniques.

HUD should consider a variety of alternatives including bulk sales, securitization, and contract management. HUD should identify the alternative that best turns over management of business decisionmaking for market-rate assets to the private sector with the least discount in the financial return to HUD. The most likely candidate is probably a public-private limited partnership arrangement. Several large-scale transactions, appropriate as models for HUD, have recently been closed by the Resolution Trust Corporation (RTC).

HUD multi-family loan and real estate assets involving subsidized units have extra complications hindering use of pure, private sector, asset-value-maximizing mechanisms. In recent years, Congress has tightened requirements for HUD to sell foreclosed multi-family housing properties that are classified as formerly subsidized. Sales may only be for long-term use as subsidized housing. Current requirements are that 15-year project-based rent subsidies must be attached to 100 percent of the units to maintain the buildings as subsidized housing projects for 15 more years.

HUD estimates $6.5 billion more in rental assistance funds would be needed over a five-year period to permit selling the current inventory of HUD-held and foreclosure properties classified as formerly subsidized. Properties are being held in HUD inventory with a continuing decrease in their value. The result is a large federal public housing stock. The restrictions on sales also make it difficult for HUD to maintain timely payment compliance because borrowers are aware that HUD cannot afford to foreclose. It is important that HUD gain some relief from these statutory restrictions on sale and demolition of HUD-held, formerly subsidized properties.

HUD has proposed modifications of the statutory requirements for disposition of multi-family properties. Those proposals, if adopted, would help ease HUD's management and fiscal problem. While reducing the present statutory obligation, the HUD proposals still keep the goal of maintaining many of these units as affordable housing with 15-year HUD subsidies. The HUD proposals shift some subsidy funding from 15-year commitment of appropriated rental subsidy to 15-year rent restrictions and occupancy requirements to achieve essentially the same effect. Any reduction in rent resulting from rent and occupancy restrictions would, presumably, be funded by HUD through reduced sales price of the real estate. That will shift costs from appropriated rental subsidies to reduced return to the insurance fund. Altogether, the HUD proposals, if enacted, will greatly help in reducing costs, moving the HUD inventory and encouraging more income mix in the buildings after sale.

The HUD proposals will still result in a large percentage of the apartments sold being assisted with subsidies tied to the units, i.e., not portable subsidies. Non-portable subsidies tend to protect the building owner at the expense of the tenant who loses the benefit of the portable subsidy. Subsidies tied to the unit also tend to be a more expensive way of delivering value to the tenant and thus are expensive to the taxpayer. If HUD could freely use portable subsidies to assist those tenants presently receiving assistance (without obligation to the building or the unit per se) HUD could, in many cases, provide more desirable assistance to tenants, encourage income mix, and have a more beneficial impact on surrounding neighborhoods at lower cost than under the HUD-proposed legislation. In addition, that flexibility to replace project-based subsidies with portable subsidies after foreclosure would greatly increase HUD's leverage in dealing with poor managers of assisted private housing and borrowers on HUD-insured loans.


1. HUD should identify those market-rate rental apartment buildings and HUD-held loans secured by such apartment buildings as primarily financial assets and should maximize the present value financial return in disposition.

These assets, which do not involve formerly subsidized housing, specifically include the large volume of apartment building loans and real estate flowing to HUD as a result of a co-insurance program that has now been phased out.

2. For the identified financial assets, HUD should use the best practice models of public-private partnerships for management and disposition of problem loans and real estate, as opposed to working those assets with in-house staff.

Several models for wholesale transferring of problem loan and real estate assets have been developed by the private sector and by the federal agencies dealing with financial institutions. The RTC has made extensive use of bulk sales, but the best practice models are the public-private partnerships also developed by RTC. Partnership models can be expected to achieve up to 25 percent better yields than the bulk sales. The partnership structures used include limited partnerships and security arrangements.

3. Statutory restrictions on HUD disposition of multi-family properties held as a result of FHA insurance programs should be relaxed; HUD should be authorized to assist affected tenants with portable subsidies (as opposed to assistance tied to the project or unit) when appropriate.

Lower-income tenants should be protected through portable subsidies when appropriate. Portable subsidies are appropriate when the objectives of assisting and empowering tenants, encouraging income mix, and causing a favorable impact on surrounding communities can most efficiently be achieved by that means. When portable subsidies are used for tenants, properties may then be managed and disposed of through public-private partnerships for maximum financial yield to the insurance fund.


Using state-of-the-art public-private partnerships would release HUD staff from the detailed work of asset management and disposition. Partnerships with private entrepreneurs will bring highly skilled business persons with positive financial incentives to the business of working out problem assets. For those assets which HUD may treat as primarily financial assets, financial return would be maximized.

Releasing restrictions on HUD property disposition would assist HUD in dealing with the major buildup of HUD's portfolio of formerly subsidized real estate, which is diminishing in value under government management. HUD would also have increased leverage to negotiate with and/or discipline borrowers not meeting their obligations.

Fiscal Impact

The above recommendations will not result in immediate reduction of government appropriations or budgeted outlays, but, because these are the major areas of HUD financial investment and operations, improved efficiency would have significant long-term impact on the cost to taxpayers of operating HUD.

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