HUD Mark-to-Market
The Mark-to-Market (M2M) program was established by the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRAA) for the restructuring of multifamily properties insured by the Federal Housing Administration (FHA). The M2M program is overseen by the Office of Multifamily Housing Assistance Restructuring (OMHAR), a division of the Department of Housing and Urban Development (HUD).
HUD has established the Office of Affordable Housing Preservation (OAHP) effective October 1, 2004. The MAHRAA lowers the HUD tenant subsidies through Section 8 housing assistance payment contracts (HAP contracts) for many low-income multifamily housing projects whose contract rents exceed market rents, and it allows eligible projects to reduce the amount of their debt by restructuring their existing HUD-insured or held mortgages.
Projects eligible for M2M restructuring must meet all of the following three conditions:
- The project must have one or more FHA/HUD direct or insured mortgages
- One hundred percent of the gross potential rent of the apartments under HAP contracts must exceed the total market rents for those units
- Projects must have a Section 8 HAP contract under the following programs:
1) New construction or substantial rehabilitation
2) Rent supplement
3) Moderate rehabilitation
4) Loan management set aside
5) Section 23 of the 1937 U.S. Housing Act
6) Section 8 property disposition
Congress delegated responsibility for restructuring eligible mortgages to state or local agencies called participating administrative agencies (PAE). PAE’s are supervised by the OMHAR, an independent office within HUD.
The terms of the first mortgage coming out of a restructuring will be based upon the expected cash flows from rents HUD is prepared to pay (comparable market rents, or if no unsubsidized comparable rents can be found, 90% of FMR). Therefore, the new first mortgage will probably be less than the original unpaid mortgage. Any shortfall will require a second and possibly a third mortgage.
The HUD held second mortgage is limited to an amount that the PAE reasonably expects can be repaid by the owner based on the amount of expected cash flow after debt service for the first mortgage, payments to the replacement reserve accounts, and the expected residual value of the project at the end of the mortgage term. This mortgage will typically bear a simple interest rate of at least 1% but no more than the applicable Federal rate determined by the Treasury Department, with debt service of 75% of the remaining cash flow. Any residual cash flow is payable to the owner if he or she is in good standing with HUD.
If the first and second mortgages are not sufficient to equal the unpaid balance of the old mortgage, HUD may require a third mortgage. The third mortgage will bear interest at the same rate as the second mortgage and will not require debt service payments until the second mortgage is paid.
