The Guru Is In
A Foolish Inconsistency
By David A. Smith
5 min read
A simple principle can have far-reaching consequences when its consistent application exposes policy or outcome inconsistencies taken for granted for decades. With the publication of a proposed rulemaking, Standard Program Regulation and Renewal Contract, the Department of Housing and Urban Development has called the question: what is Section 8 actually for?
In the lengthy comment (5,750 words including extensive citations) I submitted, consolidation and standardization of Section 8 Project-Based Rental Assistance (PBRA) has few if any long-term drawbacks and many portfolio-wide practical benefits, including:
- Separation of resident affordability from property feasibility. Now that financing and new resources are coming from others (e.g., Low Income Housing Tax Credit allocators), HUD should no longer be property-nanny.
- Equitable treatment of all Section 8 recipients regardless of original subsidy, property regulatory requirements or financing.
- Simplified Section 8 reporting that reduces adminis-trivia, guidance conflicts and program costs.
- Portability and interoperability: shifting from property-based to portable vouchers should change neither rents nor operational feasibility.
The change will bring Section 8 back to the first principles. Its progenitor, the 1969 Section 23 Leased Housing Program, was enacted so that local housing authorities could take “full advantage of vacancies or potential vacancies in the private housing market…for the purpose of providing a supplementary form of low-rent housing, which will aid in assuring a decent place to live for every citizen [emphasis added].” In doing so, “the new law grants local housing authorities the power…to abandon the concept of the ‘housing project’ and to scatter subsidized tenants about the city.”
That simple and sound idea was abandoned in 1976, when (for neither the first nor the last time) Congress and HUD used resident income subsidies to slap a patch on capital-stack problems. Though successful in the short term, the accumulated consequences of ad hoc revenue patching were a series of programmatic lurches now too embarrassing to recall. These reached the point of absurdity and ended only when Congress grasped the nettle. In 1997, via the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), Congress decreed that however much it cost the Federal Housing Administration insurance fund, over subsidized loans had to be restructured one by one.
MAHRA was the watershed, which articulated the logically inescapable convergence of Section 8 PBRA renewals back toward market basing, and letting the underwriting chips fall where they may. Over the ensuing quarter century (1998 to 2023), because rents have been reset to track markets, its effects have been consistently positive. That is not a coincidence, it’s a consequence. Here’s why.
Section 8’s goal is resident support, not property operating support. Households whose income is too low to afford market rentals do not have a housing problem, they have a locational poverty problem. The housing policy solution to the poverty problem begins by supplementing resident incomes. That is Section 8’s goal. By itself, it’s important enough, and by itself hard enough to achieve, that it cannot survive being saddled with a secondary goal—property viability—that’s inherently in tension with it.
The only fix to a busted underwriting is financial recapitalization. If a transaction’s financial feasibility breaks, whether from bad underwriting (mistakes foreseeable at the time) or unlucky underwriting (weaknesses made critical only by disruptive events), the property needs to be re-underwritten – that is, recapitalized.
More than just resetting debt or equity expectations, recapitalization breathes new life into old properties. It provides an essential opportunity to bring in new non-Federal resources, new non-Federal concessionary capital and new non-Federal grants; to update the property’s physical condition and add new technology or new amenities; to swap out owners or managers; to add new players and strengthen resident services using non-HUD funding sources; and to enable financially obsolete investors to exit and be replaced with new capital providers.
When the deal is busted, fix it fast, fix it right and fix it only once. Though temporarily painful, deferring it is permanently more painful.
Once Section 8 rents are no longer expected to sustain underwriting viability, HUD property operational oversight is unnecessary. Changing to LIHTC, a pure capital subsidy, and letting states decide how to fill feasibility gaps with soft capital and affordability gaps with Section 8, fundamentally changed the business. Over three and a half decades, we self-evolved an ecosystem of mature incumbent entities, government or private nonprofit, that is robust, capable, nationally diversified and evolutionarily innovative.
Virtually every recapitalized or newly developed property now has at least one non-Federal government body with explicit regulatory oversight. These new regulators have three powerful self-interested motivations: they have their own money at stake; they’re close to the property and its local market conditions; and the policy and political consequences of failure hit harder in the state house or mayor’s office than they do in Washington. HUD should defer to them.
Market-based Section 8 can expect that the property to which it is attached will be affordable indefinitely. Just as property viability has become a state/local activity, so too has preserving long-term affordability. For three decades, relying on state/local forces has worked. Opt-out risk has been wildly overblown: although exceptional properties occasionally make news, that is only because they are so rare. This too is not luck – it’s the result of an adaptive ecosystemic response by a constellation of entities acting responsibly and appropriately.
With viability and affordability now state/local issues, changing a property’s affordability schema should seldom result in a change of Section 8 rent levels. Although transitional rules may be required, in practicality if, for no other reason, they should start from a desired end state of consolidation, standardization, uniformity of rulemaking and streamlined approval. Exceptions should be exceptional, and time limited.
Unifying Section 8 across platforms is a great initiative, long overdue. Doubtless, there will be many details to untangle, so the establishment of core principles is mandatory.
