Low-Income Housing Subsidies in a Bind

The Clinton administration is attempting to solve a looming $18-billion financial crisis involving federal rent subsidies on low-income apartments, but the proposed fix might end up costing taxpayers several billion dollars, federal officials said Wednesday.

Housing and Urban Development Secretary Henry Cisneros acknowledged for the first time Wednesday that owners of nearly 1 million low-income housing units could default on $18 billion worth of federally backed mortgages if the government goes forward with plans to reduce subsidies on those units, which house an estimated 2.5 million low-income Americans.

The subsidies, which currently cost the government about $5 billion a year, are under severe fiscal pressure at a time when Congress is attempting to balance the federal budget.

The remedy backed by Cisneros would have the federal government make direct payments to the mortgage holders for the low-income housing, thereby reducing the loans to levels that could be supported by smaller federal subsidies and avoiding defaults on the loans, which are insured by the Federal Housing Administration.

The plan could save the government billions of dollars in losses by avoiding a financial meltdown in low-income housing markets. But it could attract criticism on grounds that the government is bailing out urban slumlords.

“It’s a Catch-22 problem, but we’re doing something about it,” Cisneros said.

The plan depends on Tax Code changes that would allow property owners to get the bailouts without having to pay federal income taxes on the government assistance, further fueling controversy in dealing with the problem.

Cisneros, speaking at a breakfast with Times reporters, said the agency is nearing agreement with Congress on his approach.

“It is the most serious financial issue that we face, and that is why we are offering a solution, because it gets worse if it is unattended,” Cisneros said. “The subsidies become very large. It overwhelms most of HUD’s other programs if left unattended. But we are very close to having a joint approach to this with the Congress.”

But Rep. Jerry Lewis (R-Redlands), chairman of the House Appropriations subcommittee that controls the HUD budget, sharply disputed that the Clinton administration is near agreement with Congress, and said he isn’t convinced that HUD’s plan will even work.

“I don’t think any light has been focused on what some might say is a bailout for slumlords,” Lewis said. “The committees haven’t even begun to examine this.”

Lewis said he is “very skeptical” about HUD financial projections. “I don’t think anybody has calculated the total potential liabilities,” he said.

Over the long term, Cisneros believes that reduced subsidies would more than offset the cost of the bailout. The economics of the plan are supported by an audit completed for HUD last week by the accounting firm Ernst & Young. Cisneros said the Clinton administration is making the first attempt to solve a problem that has been ignored for years by its predecessors.

Indeed, the roots of the problem go back more than 15 years, when long-term subsidy agreements were signed with developers of low-income apartment buildings around the nation. As an inducement to developers to build the apartments, HUD set subsidies far in excess of the prevailing local apartment rents.

Now, with those agreements coming up for renewal, HUD is facing the prospect of an escalation of subsidy levels to keep the apartment owners afloat, according to Federal Housing Administration Commissioner Nicolas P. Retsinas.

If the subsidies are not increased, apartment building owners would be unable to meet their mortgage commitments and most likely would default on their loans, forcing the Federal Housing Administration to pay off the lenders and then face the problem of how to dispose of the property.

“What we are trying to do,” said Lewis, “is make sense out of a bag of worms that is social planners’ dreams gone awry.”

In many cases, the subsidized housing units are substandard, even though HUD’s subsidies mean landlords are getting rents that are far above what is warranted by the local market.

“We now are paying exorbitant subsidies on those properties, across the street from private apartments that are of the same quality and renting for less,” Cisneros said. “The taxpayers are paying out the nose in subsidies that are too high, and our strategy is to try to reduce the subsidies.”