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180 <br /> <br />affordable housing. The National Housing Act of 1968 created <br />federal mortgage insurance, below market interest rate loans, and <br />operating subsidies under the Sections 221 (d) (3), 221 (d) (4), and <br />236 programs which were very effective at encouraging the <br />development of new affordable housing. Since 1961, nearly two <br />million privately owned federally subsidized units of housing for <br />low-income households have been constructed nationally. <br /> <br />More recently a myriad of state and local financing tools have been <br />established to finance affordable housing. As was the case with <br />federal subsidies, owners participating in these programs agreed to <br />use restrictions which limited the amount by which rents could be <br />raised for a specific period of time. The duration of the use <br />restriction varied depending on the type of subsidy received, type <br />of project owner, and the underlying mortgage financing. Many of <br />the federal incentives provided established 40 year mortgages that <br />prohibited prepayment without HUD's consent for 20 years and <br />regulatory agreements that were coterminous with the mortgage. <br />Many state or local programs had affordability requirements of as <br />little as fifteen years. <br /> <br />Impact Of The Termination Of Housing Subsidies <br /> <br />Many of the privately owned affordable housing units constructed <br />with public subsidies in the 1960's and 1970's will be eligible for <br />conversion to market rate rentals or sale as condominiums in the <br />1990's. Four primary factors threaten the continued operation of <br />this low-income housing stock: <br /> <br />Increased numbers of owners will become eligible to <br />prepay their federal mortgages as their loans reach their <br />twentieth anniversary with the largest effect being felt <br />between 1990 and 1994. <br /> <br />Rental assistance contracts provided through the Loan <br />Management Set Asides (LMSAs) are expiring with the <br />largest effect being felt between 1997 and 1999. As a <br />consequence, owners will experience a drop in rental <br />income and tenants will no longer be assured that they <br />can afford the rents. <br /> <br />Second notes on many older properties in the inventory <br />will mature. Ownership will revert to the second note <br />holders if the current owners are unable to pay off the <br />second note at maturity. <br /> <br />The housing supply is aging. Given the change in tax <br />benefits and the possible expiration of rental subsidies, <br />owners face diminished after-tax returns and reduced cash <br />flows with which to meet repair and maintenance needs. <br />In addition, the Tax Reform Act of 1986 now disallows the <br />use of passive losses to offset income from such sources <br />as salary, interest, dividends, and reduces other tax <br />advantages for investors of low-income housing. <br /> <br />2 <br /> <br /> <br />