What The Proposed Changes To HUD Mean For CRE

In April, U.S. Secretary of Housing and Urban Development Ben Carson proposed several overhauls to HUD’s federally assisted housing program. Among those changes would be raising the minimum rent requirement from 30% of a renter’s adjusted income to 35%. Hunt Mortgage Group Director of Affordable Housing Kevin Deegan says these changes would potentially harm both apartment owners and renters.

Deegan in March joined Hunt’s Affordable Housing team, where he focuses on originating and closing affordable and Federal Housing Authority multifamily loans nationwide, while also serving clients using Hunt Mortgage Group’s balance sheet products and agency executions. Changing HUD guidelines impact how his clients evaluate loans and refinancing options.  

For the owners of FHA-subsidized multifamily properties, while a potential rent increase might mean higher rents in the short term, increased defaults on payments by renters and the prospect of higher vacancies could threaten the stability of these assets.  

“Owners of FHA-subsidized properties will suffer,” Deegan said. “There is a guaranteed percentage of residents who will not be able to meet their monthly obligations and will miss rent payments, and there will be residents who end up being evicted due to this increase. The ensuing turnover in apartments will be costly to owners and developers.” 

Deegan has seen mixed reactions from Section 8 property owners. For those with mission-driven goals of providing affordable housing, disagreement over the efficacy of the proposed HUD overhaul can’t be negotiated on the site level. Owners are beholden to federal rules and regulations set forth by HUD, and there isn’t a lot of wiggle room for the owner to counter what they perceive to be a negative change for their residents, Deegan said. 

For many owners, the continued high demand for Section 8 housing vouchers masks the impact of the higher rent minimum. Historically, low-income housing sees less than 1% vacancy. A change in rent that forces some residents out will not have a major impact on a building’s net operating income in the short term, since more tenants will soon follow.

But tenant turnover, which often includes expenses to renovate and repair units before putting them back on the market, can be costly. A revolving door of residents can add up over time.  

To the detriment of renters, Carson’s proposed changes don’t offer scaling based on income level, hitting low-income renters the hardest, Deegan said. Under current conditions, a Section 8 resident who earns $18K/year pays $450/month in rent. Based on the new 35% limit, this number will increase to $525. This $75 increase will require an additional 10 hours of work per month to produce enough after-tax income to cover the increase. For retired seniors or those on a fixed income who depend on Section 8 Housing, additional work hours are not possible, exacerbating the impact of the rent raise.  

“This is simply a transfer of cost from the subsidy provider, HUD, to the resident,” Deegan said. “Many claim, as do I, that this is a completely misguided transfer of costs to the lowest-income-earning Americans. It is essentially asking for more money from those who can least afford it.” 

“It’s true that affordable properties will continue to sustain high occupancy levels,” Deegan said. “But the tenants who are already living in a building and paying rent will feel a direct impact on their monthly finances. It is imprudent to not analyze how that will impact the tenant’s day-to-day lives and how that impact will extend to the owner and the community.” 

Borrowers need to factor in the anticipated impact of the proposed HUD changes when looking to either acquire a Section 8 portfolio or refinance existing assets. Hunt takes into account these operational changes in its pro forma so that it can use the information to better underwrite loans. For people who currently own these portfolios and are preparing their annual budgets or negotiating a new contract with HUD, all of these expense items need to be accounted for. According to Deegan’s analysis, the impact will be felt. 

This feature was produced in collaboration between Bisnow Branded Content and Hunt Mortgage Group. Bisnow news staff was not involved in the production of this content.