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Troubled Properties, Including Foreclosures and Contract Terminations

HUD multifamily properties may be at risk of conversion to market rate or demolition when the property is in poor condition, or where the owner has other properties in extremely poor condition or has committed serious program violations. For properties with a Section 8 contract, this risk may occur at or about the time of contract expiration, or during the contract term. The Section 8 rents of these properties may be at any level, but usually exceed true market "street rents." These properties risk (1) owner default on the mortgage and termination of restrictions or subsidy through HUD’s foreclosure and "property disposition" process and (2) disqualification or termination from the Section 8 program, usually a refusal by HUD to renew the Section 8 contract or a mid-term contract termination.

Foreclosure and Property Disposition
This HUD foreclosure chart outlines the process after an owner of a HUD-insured property defaults on its mortgage. After default, HUD takes an assignment of the mortgage from the original lender in exchange for an insurance payment and becomes the lender for the project. HUD has broad discretion to act to make repairs, take possession and operate the property, terminate or extend the Section 8 contract, and force a change in ownership, where major defaults persist. If HUD is the high bidder at the foreclosure sale, HUD takes title to the property and then tries to sell it through the property disposition program. Laws and regulations cited below provide a framework to preserve the low-income character of the housing through the foreclosure and disposition process. However, since 1995, Congress has also given HUD "flexible" authority, which HUD has typically used to quickly sell the property with few if any use restrictions or subsidies to preserve it, in order to reduce its obligation to subsidize and regulate these properties. HUD may take a number of actions which could be harmful to tenants, including: terminate the Section 8 contract upon foreclosure; sell the project for a nominal amount to a local government interested in redevelopment or demolition; fail to place conditions on a foreclosure sale for competent ownership and management, repairs or continued affordable low-income use; bid low at the foreclosure sale, thus allowing speculative developers to acquire the project.

Starting in 2005, with perennial enactment of the Schumer Amendment, Congress now requires HUD to maintain any project-based Section 8 contract at foreclosure or disposition sale, unless “infeasible.”

Disqualification or Contract Termination
There are a few ways a property or owner may be disqualified from Section 8, during the contract term or upon expiration: (1) general "suspension or debarment" from all HUD programs (24 C.F.R. Part 24); (2) violation of the terms of the Section 8 Housing Assistance Payments (HAP) contract, resulting in an agency-initiated contract termination; or (3) at the expiration of the term of the contract, HUD or the Participating Administrative Entity (PAE) may "disqualify" the owner or property by refusing to offer a renewal contract to an otherwise eligible and willing owner. This third option can also occur simply because HUD or the PAE finds the cost of rehabilitation to be "too expensive." Renewal of the Section 8 contract and mortgage restructuring under "Mark to Market" may be an important part of a preservation solution for these properties, although the PAE may require transfer to new ownership. The law requires HUD to develop procedures to facilitate the transfer of such properties preferably to tenant-endorsed nonprofit or public owners (MAHRAA §516(e)), with a renewal of the Section 8 contract, but HUD’s rule requires little more than a notice from an owner who is facing imminent disqualification and intends to sell the property (24 C.F.R. § 401.480). In the event of disqualification, tenants will usually receive a short-term notice from HUD or a PHA that the building is being disqualified and they must move, and that they should come in for a Voucher certification appointment. The problems of the building and its impact on the community will rarely be solved by a disqualification alone. Disqualification or termination from the Section 8 program will often precipitate a default and foreclosure on any HUD-insured mortgage, as mentioned above.


Eighth Circuit Affirms Residents’ Victory in Missouri Demolition Case

This NHLP Housing Law Bulletin article is from Sept. 2005. On August 18, 2005, the United States Court of Appeals for the Eighth Circuit handed down a victory for civil rights and affordable housing in Charleston Housing Authority v. USDA, 419 F.3d 729 (8th Cir. 2005). The case involved a challenge by residents and Housing Comes First, a Missouri fair housing organization, to the Charleston (Missouri) Housing Authority’s plan to vacate and demolish Charleston Apartments, a 50-unit housing complex financed under the Department of Agriculture (USDA) Section 515 affordable rural rental housing program.

Federal Court Rules That HUD Violated Federal Disposition Act

This NHLP Housing Law Bulletin article is from Nov.-Dec. 2004. Residents of a large HUD-owned multifamily property have successfully challenged sale of the property to the City of Baltimore for demolition and redevelopment as middle- income housing. Although their complaint raised many other significant claims and related issues, this is the first judicial decision in more than a decade that has found that HUD violated the federal property disposition statute. The court also kept alive the tenants’ Fair Housing Act claims against HUD and the city, leaving them for later resolution.

PHA Decision to Demolish RHS Development Violates Fair Housing Act

This NHLP Housing Law Bulletin article from Apr. 2004 reviews a case involving a challenge to a public housing authority’s decision to vacate and demolish a housing development that is the subject of a Section 515 Rural Housing Service insured mortgage and a project-based Section 8 subsidy contract. The decision is an important partial victory and may be of use to other advocates seeking to use civil rights to preserve federally assisted housing.

Using HUD’s Updated Physical Inspection Scores to Preserve Threatened Multifamily Properties

This NHLP Housing Law Bulletin article is from Nov.-Dec. 08. One vital aspect of affordable housing preservation is ensuring the proper physical and financial maintenance of projects to avoid loss of the property. The Department of Housing and Urban Development (HUD) created its current inspection standards for multifamily properties a decade ago, as part of its 2020 Management Plan. HUD also created the Real Estate Assessment Center (REAC) and the Enforcement Center, both located in HUD Headquarters, to address problems presented by noncomplying properties. The REAC evaluates the financial and physical condition of all HUD-funded public and assisted housing developments. The Enforcement Center takes action against troubled developments that fail the financial and physical inspection standards.


Dean v. Martinez

No. CCB 03-1381 (D.Md. filed 2003) Challenge to HUD's proposal to foreclose on a 980-unit largely vacant HUD-subsidized property (Upland Apts., Baltimore, MD) (approx. 50% project-based Section 8) on a large site and acquire title for re-transfer to the City as part of a mixed-income redevelopment plan that includes no project-based Section 8. Defendants were both HUD and the City. Claims included alleged procedural and substantive violations of property disposition statute, URA and relocation regulations, fair housing laws, Section 504 of the Rehabilitation Act, and state law.

Massie v. HUD

No. 09-1087 (3d Cir. Sept. 8, 2010), rev'g No. 06-1004, slip. op. (W.D. Pa. decision Sept. 26, 2008). The cooperative Third East Hills Park, Inc. owned a Federally-assisted residential housing development in Pittsburgh. Shareholders in the cooperative sought to enjoin HUD from foreclosing the property without project-based Section 8, and without URA relocation benefits. After the District Court granted summary judgment to HUD, the Third Circuit reversed, ruling that HUD’s 2006 foreclosure and disposition of the property without a Section 8 contract violated the Schumer Amendment.

Chicago Acorn v. HUD

No. 05C-3049 (N.D. Ill. filed May 23, 2005) Current residents of a Chicago project-based Section 8 property sought to prevent HUD from terminating a Section 8 contract for a 1,240-unit property after foreclosure. During pendency of appeal to 7th Circuit, Congress enacted the Schumer Amendment, and the parties settled the case on terms preserving about one-half of the units with project-based Section 8 under new ownership.

Cheatham v. Donovan, No. 07-13168 (E.D. Mich. Sept. 8, 2009).

A federal district court preliminarily enjoined HUD from relocating residents and failing to maintain full occupancy of a Section 236 property (Parkview Apartments, Ypsilanti, MI) where HUD became the mortgagee-in-possession in 2006.

Roundtree v. U.S. Dep't of Hous. & Urban Devel.

No. 5:09-cv-234-Oc-10GRJ (M.D.Fla. Aug. 28, 2009).
Federal District Court issues a preliminary injunction prohibiting HUD from terminating a project-based Section 8 contract at Marion Manor, a 100-unit property in Ocala, based primarily on HUD's violation of the tenants' Fifth Amendment procedural due process rights requiring notice and an opportunity to be heard prior to property deprivations.


Statutes and Regulations

Multifamily Housing Property Disposition Reform Act of 1994

Pub. L. No. 103-233, 108 Stat. 342 (1994), primarily codified at 12 U.S.C. § 1701z-11.

"Schumer Amendment"

Pub. L. No. 111-117, div. A, title II, §217, 123 Stat. 3100 (Dec. 16, 2009) (for FYs 2010 and 2011, carried over by Pub. L. No. 112-10, §1104, 125 Stat. 103 (2011) (requiring HUD to maintain project-based assistance at foreclosure or disposition sale, absent specified exceptions); prior statutes at Pub. L. No. 111-8, div. I, Title II, § 218, 123 Stat. 524 (March 10, 2009) (same, FY ‘09); Pub. L. No. 110-161, div. K, 121 Stat. 2410 (Dec. 26, 2007), § 220, 121 Stat. 2436 (same, FY ‘08); Pub. L. No. 109-115, 119 Stat. 2936, § 311 (Nov. 30, 2005) (same, FY ‘06).

"Flexible Authority" Statute

12 U.S.C. §1715z-11a; Pub. L. No. 104-204, § 204, 110 Stat. 2873, 2894 (Sept. 26, 1996) Adding 12 U.S.C. §1715z-11a effective FY ‘97 to allow HUD to dispose of units or sell the mortgages without minimal protections in 1994 law for planning, management or subsidy requirements.

Transfer of Section 8 Contracts

Pub. L. No. 111-117, div. A, title II, §212, 123 Stat. 3098 (Dec. 16, 2009),(expressly applicable for FYs ‘10 and ’11) (allows transfer of project-based contracts, debt and use restrictions to other properties on specified terms and conditions); prior statutes at Pub. L. No. 110-161, div. K, 121 Stat.2410 (Dec. 26, 2007), § 215, 121 Stat. 2433 (authorizing HUD to transfer project-based rental assistance to other properties in area, including Section 8, under certain conditions, FYs 08 and 09); Pub. L. No. 109-115, 119 Stat. 2936, § 318 (Nov. 30, 2005) (FYs ’06 and ’07).

Up-Front Grant Authority

Pub. L. No. 106-377, § 204, 114 Stat. 1441A–24 (Oct. 27, 2000) (made permanent HUD’s authority to use insurance funds for rehab; note expiration of subsequent limitations imposed by Pub. L. No. 109-171, §§ 2001-2003, 120 Stat. 9 (Feb. 8, 2006) (for FYs 2006-2010); prior statutes at Pub. L. No. 105-65, § 213, 111 Stat. 1366 (Oct. 27, 1997) (amending 12 U.S.C. §1715z-11a to authorize HUD’s use of insurance funds for rehab grants and loans in FY ‘97 and ‘98); Pub. L. No. 105-276, §206 112 Stat. 2484 (Oct. 21, 1998) (extended for FY ‘99).

Mark to Market Disqualifications

MAHRAA § 516; Pub. L. No. 105-65, §516(e), 111 Stat. 1343, 1400 (1997) (MAHRAA statute for "Mark to Market"- eligible properties disqualified due to owner violations, directs HUD to develop to encourage the transfer of disqualified properties to tenant-endorsed community-based non-profits); Pub. L. No. 106-74, §531, 113 Stat. 1110 (1999) (amending MAHRAA §524(a)(2), for other properties); and Pub. L. No. 105-65, § 516(d), 111 Stat. 1400 (1997) (tenant-based assistance for tenants in disqualified properties).

Pub. L. No. 106-554, Appendix G, § 141, 114 Stat. 2763, 2763A–614-617 (Dec. 21, 2000)

Amending 1715z-11a to require transfer of HUD-owned properties to state or local government where the project is unoccupied there are or more than 25% severely defective units.

24 C.F.R. Part 24

Disqualification from HUD’s programs generally.

24 C.F.R. Part 290

Disposition of Multifamily Projects and Sale of HUD-Held Multifamily Mortgages. Note HUD’s "flexible" regulatory provision concerning "methods of disposition" contained in Section 290.1, adopted by 64 Fed. Reg. 72412 (Dec. 27, 1999).

24 C.F.R. § 401.480

Transfer or sale of properties in Mark to Market restructuring; See also 24 C.F.R. §§ 401.2, 401.403, 401.602, and 401.645.

Memorandum from Charles H. Williams

HUD DAS for Multifamily Housing, to HUD Field Staff, re FY 2006 Property Disposition Program (May 31, 2006).

Guidance to HUD field staff on implementation of Schumer Amendment and Reconciliation provisions, some of which arguably violates these laws.

HUD‘s Operating Procedures Guide

For PAE administration of Mark to Market Restructuring or "Mark to Market Lites". See Chapter 3, Section 8, regarding sale or transfer of properties, and Appendix C for Qualified Non-Profit Purchasers.

Guide, Disposition of Multifamily Projects and Sale of HUD-Held Multifamily Mortgages, 61 Fed. Reg. 11,691 (Mar. 21, 1996)

Included with the promulgation of 24 C.F.R. Part 290, only appears in the Federal Register and not codified with the regulations.

Section 219, Pub. L. No. 108-199 (2004)

Section 219, Pub. L. No. 108-199, 118 Stat. 397, § 219 (2004) (requires HUD to issue proposed rules within 90 days governing purchaser qualifications for multifamily properties sold at foreclosure or from HUD’s inventory; proposed rules were issued August 2005, but no final rule as of October 1, 2009).


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