Background

On May 7, the U.S. House of Representatives passed The Mortgage Reform and Anti-Predatory Lending Act of 2009 (H.R. 1728). Although the measure focuses largely on single-family lending practices, two amendments were added during floor debate that would cause serious problems in the apartment sector—a forced foreclosure mechanism and an overly broad renter notification requirement.   A comparable forced foreclosure amendment was also proposed but withdrawn from S. 896.

Forced Foreclosure Amendment

Rep. Nydia Velazquez (D-NY) attached an amendment to H.R. 1728 that would allow the federal government to prematurely force apartment properties into bankruptcy and then sell them at a lower price to an entity that agrees to convert them to affordable housing.  (Sen. Charles Schumer (D-NY) sponsored a comparable amendment to a Senate bill (S. 896), but he withdrew it on procedural grounds.)

Velazquez's amendment directs HUD and the Treasury Department to work together to create a loan modification program for "at risk" multifamily properties.  The bill does not target any specific level of mortgage distress, property condition or occupancy level that would justify government intervention.  Instead, it says federal action would be allowed when an apartment is at risk of disinvestment or default or is in foreclosure already.

Properties could be subject to government intervention, including but not limited to: restructuring the existing mortgage through interest rate or principal reductions or other mortgage modifications; transferring of the property through foreclosure short-sale or deed-in-lieu of foreclosure; or a combination of actions to restructure the debt and ownership transfer. 

Alarmist Resident Notification Amendment

In addition to Rep. Velazquez's ill-advised forced foreclosure amendment, Rep. Bob Filner (D-CA) attached a separate amendment to H.R. 1728 that would require apartment owners to notify current or prospective renters whenever a property is in default or foreclosure.  Importantly, the amendment does not limit this requirement to monetary defaults, and thus would include non-monetary defaults--which are often quickly remedied. 

NMHC Position

Forced Foreclosure Amendment

This back-door effort to convert market-rate apartments into affordable housing would place financing of all multifamily properties at much greater risk by enabling the federal government to swoop in and foreclose on a property in the absence of any clearly defined guidelines.  Such a draconian measure goes far beyond the controversial mortgage cramdown legislation and could create such uncertainty among multifamily lenders that no loans would be made. 

Moreover, this kind of federal intervention circumvents the normal processes owners and lenders undertake to resolve financing issues and address property concerns.  To the extent that government action is needed to help manage, restructure or liquidate troubled assets, those actions should be undertaken via new commercial real estate financing programs offered under the Term Asset-Backed Loan Facility (TALF) or efforts to manage illiquid assets by the Public-Private Partnership Investment Program (PPIP).

Alarmist Resident Notification Amendment

By failing to distinguish between single-family foreclosures, which are almost always a result of insufficient financial resources, and multifamily foreclosures, which are often temporary and for non-monetary issues, such as the failure to properly record a new insurance policy, this amendment will unduly alarm apartment residents. 

This alarm is not only unfortunate, but also unnecessary because unlike renters of single-family houses and condos, apartment renters are already protected by state laws in the event of a foreclosure and state laws ensure an orderly transfer of ownership in the case of an apartment property foreclosure. 

When a 5+ unit property goes into foreclosure, the renters are not evicted.  State law requires the new owner to honor the existing leases on a property. State and local health and safety codes also mandate enforcement of standards and lenders and investors also step in if a property is not being physically maintained.  Therefore, the Filner amendment would unnecessarily frighten residents, often for no legitimate reason if the cause of the notification is a non-monetary technical default. 

Beyond its negative impact on the residents, however, the Filner amendment could actually trigger a foreclosure or create financial stress on a property.  The foreclosure notifications required by the Filner amendment could reasonably discourage existing residents from renewing their leases and prospective residents from signing a lease. 

Some form of renter protection may indeed be needed for the glut of single-family houses and condos currently being rented out.  But extending those protections to the nation's more than 600,000 apartment properties (defined as properties with 5+ units) will not help renters.  Instead, they will needlessly alarm them and could lead to a self-fulfilling prophecy of pushing an otherwise healthy property into bankruptcy. 

Current Status

NMHC has made significant progress in turning back earlier efforts to facilitate the government takeover of distressed multifamily properties by receiving assurances from House Financial Services Committee Chairman Barney Frank (D-MA) that he has no intention to allow the government to seize any apartment property. 

In May, Rep. Nydia Velazquez (D-NY) included an amendment to a mortgage reform bill (H.R. 1728) that would have allowed the government to prematurely force apartment properties into bankruptcy and then sell them at a lower price to an entity that agrees to convert them to affordable housing.

After extensive dialogue between NMHC and the offices of Representatives Velazquez and Frank, lawmakers revealed a revised plan last week as part of their "TARP for Main Street" bill (H.R. 3068).  Among other things, H.R. 3068 would transfer $2 billion in dividends from banks that received TARP funds to the U.S. Department of Housing and Urban Development (HUD) to stabilize apartments that are in default or foreclosure or that have recently been foreclosed.  

The program would provide loans, advances and insurance to reduce and restructure the current financing, fund operating reserves and underwrite rehabilitation activities. 

Importantly, while the program would also facilitate the transfer of the asset to a new owner, thanks to NMHC's strong opposition to H.R. 1728, the new H.R. 3068 requires the consent of the owner before such a transfer is made.

On July 9, Frank Apeseche, CEO of Berkshire Property Advisors, testified before Congress on behalf of NMHC regarding H.R. 3068.

In our written testimony and oral statement, we offered several recommendations to improve the proposed program.  We emphasized the importance of carefully targeting the legislation to avoid further distressing the capital markets and wasting taxpayer dollars. 

We made it clear that any government assistance program should not compete with private sector equity investors, but should attract investment capital to areas currently not served by private investors. 

We also said that the apartment industry does not under any circumstances support the transfer or taking of a property without the consent of both the property owner and lender.  And we asked Congress to define exactly what constitutes a mortgage default that would trigger government assistance and what precisely is an “at-risk” property.     

Following the hearing, Chairman Frank assured NMHC that he wanted the committee staff to work with us on the points raised in our testimony. 

Notably, Rep. Frank opened the hearing saying that the root of the current housing crisis is the imbalance in federal housing policy that caused support for rental housing to decline and over-emphasized homeownership. Providing funding to stabilize troubled multifamily properties would help address that imbalance.

The measure remains controversial, however, as Republicans have argued that any dividends from the TARP program should be used to pay down the deficit and that recycling them to pay for new programs violates the appropriations process established in the Constitution.  NMHC will continue to work with Congress to influence the legislation and educate them on how this legislation will impact the multifamily sector.

A copy of NMHC’s written testimony is available at www.nmhc.org/goto/5288. 

Relevant Committees

House Financial Services Committee
Senate Banking Committee

Key Legislative, Regulatory and Court Action

H.R. 1728

• Introduced March 26, 2009
• Sponsor: Brad Miller (D-NC)
• Passed the House of Representatives on May 7, 2009.

Contact Information

Lisa Blackwell
NMHC/NAA Vice President of Housing Policy
202/974-2365
LBlackwell@nmhc.org

Last Updated:   May 15, 2009