“The combination of tightening rents and diminished safety net programs has precipitated a slow but accelerating deterioration of this ‘naturally occurring’ affordable housing.”
A rent-stabilized building in the Bronx. (Photo by Adi Talwar)
There are slightly less than 1 million rent stabilized apartments in New York City, of which 780,000 were built before 1974. Most of this older housing is concentrated in the city’s low and moderate-income communities. As reported in the latest (2023) Housing Vacancy Survey (HVS), the city-wide household median income of these pre-1974 apartments is about $60,000 a year. In the Bronx, it’s about $42,500 a year for about 200,000 apartments, predominantly privately owned.
This older housing is arguably the largest source of affordable housing in the city. Two self-inflicted wounds have affected these properties.
First, in efforts to curb vacancy decontrol in higher income areas, the 2019 Housing Stability and Tenant Protection Act (HSTPA) put a tourniquet on the cash flows of lower-income buildings—eliminating rent increases on vacancies and sharply narrowing permitted increases to pay for both individual and building-wide capital improvements.
This has made it difficult not only to operate the building amidst rising expenses, e.g., insurance, taxes and utilities, but also to pay for ongoing repairs in these aging buildings. Recent testimony by the Furman Center to the Rent Guidelines Board documented this problem. Furthermore, the rise in interest rates means that as mortgage loans come due, refinancing rates, assuming there are banks offering refinancing, would increase from 3-4 percent to over 6 percent.
Second, safety net programs designed to help off-set increasing operating and repair costs have frayed. The program known as J-51, which would reduce real estate taxes to help pay for critical repairs, has had its benefits whittled down over the years to the point where they’re insufficient to incentivize meaningful renovations. A second program of low-cost secondary loans (1 percent), often coupled with J-51 for the most distressed buildings, is both underfunded, with processing too complicated and time consuming to be used at a scale that’s needed.
The combination of tightening rents and diminished safety net programs has precipitated a slow, but accelerating deterioration of this “naturally occurring” affordable housing.
The collapse of Signature Bank was in part caused by defaults on its loans to rent stabilized buildings. The Community Preservation Corporation, partnering with Related Fund Management, has been selected by the FDIC to fix approximately 35,000 units in buildings that had about $5.6 billion of Signature mortgages. Their task is to restructure the properties so they remain affordable by restoring their physical and financial health. In addition to likely obtaining real estate tax abatement from the city, the FDIC will put up the lion’s share of $550 million to help pay for repair and other costs in these buildings.
Signature Bank loan problems are the tip of the iceberg. A survey done by Maverick Real Estate Partners estimates there’s about $50 billion of bank loans secured by properties that have 75 percent or more of rent stabilized apartments. Many of these are located in low and moderate-income neighborhoods.
Many of these loans are no doubt classified as troubled by the banks and their regulators. Herein lies an opportunity to restore potentially a large number of affordable buildings to physical and financial health.
First, reinvigorate safety net programs in designated low and moderate-income areas: Reinstate as-of-right J-51 real estate tax abatements with updated eligible costs, enhanced to support more extensive building-wide improvements. (Past benefits could be expanded by 150 percent for defined moderate renovation.) This can be coupled with low interest city and state loans, and possibly funds from the Federal Home Loan Bank’s affordable housing program.
Further investment can be made by existing or new owners. Needed work would include repairs and/or replacement of major building systems, e.g., plumbing, wiring, heating, etc., so that their useful life is extended by at least 30 percent longer than the term of the loan as certified by an approved engineer/architect. Further cash flow would be generated by permitted major capital rent increases, waived in all or in part for eligible seniors as per the Senior Citizen Rent Increase Exemption program.
In turn, the bank would restructure its debt to a fixed payment, say for 10 or 15 years, adjusted through discounts to produce a positive cash flow both to provide a return to owners, and a cushion to make ongoing repairs, e.g., a ratio of net income to debt payments of 115-120 percent. This combination has a long track record of success in preserving distressed affordable housing.
Second, to incentivize the banks to undertake such steps, the State Mortgage insurance Fund (MIF), could provide “first loss” insurance to enhance the security of these restructured mortgages. The mortgage insurance would last only as long as the mortgage term. It would not cover the risk of refinancing. All other requirements for mortgage insurance would have to be met, including the above work scope; the loan size consistent with MIF’s loan to value standards; approved repair work equal at minimum to 20 percent of the loan.
How big might this program be? The MIF’s capital reserves, which set aside one dollar for every five dollars insured, is funded by a .25 percent surcharge on the state’s mortgage recording tax, insurance premiums (.5 percent annual fee on the outstanding balances of multifamily loans), and interest on its capital reserves.
Over the years, MIF has had substantial untapped capacity as it has returned unused surcharge funds to the state. Going forward the MIF might expand its program to provide the “top loss” insurance, for say 25 percent, for the restructured loans. The City’s Residential Mortgage Insurance program could supplement this effort, potentially creating billions of dollars of additional insurance capacity. This fully aligns with both mortgage insurer’s mission to “encourage investment in underserved areas.”
Will the banks view the cost and time of such restructuring worth moving troubled loans to performing status? It is uncertain. A more likely response for some banks may be to sell these loans at the best price they can get, or go through a lengthy foreclosure—both routes leaving the health of the building to an uncertain fate. Others might see an opportunity to buy discounted debt and work with owners experienced with the public programs to restore the properties to financial and physical health.
Will the government expand the use of public insurance, and safety net programs to preserve this housing? This must be measured against the cost of inaction, or ineffective action. If public action is taken, it must be credible, best demonstrated by the creation of a simplified processing regimen to encourage broad private participation.
Why is the use of mortgage insurance important? The precipitous changes in HSTPA, undermined widely held assumptions regarding the long-term stability of rental projects. As a result, some banks have stated their intention to cut back on new loan originations for rent regulated housing.
Fixing these properties at any scale must engage the banks who hold these mortgages. A credible program to fix these properties, bolstered by mortgage insurance, may create renewed confidence in the soundness of this housing. Such assurance may be necessary to re-engage skeptical lenders to fund current and future rental projects.
If properly targeted, this program could have significant results in arresting decay, improving tenant living conditions while preserving housing affordability. It would be beneficial not only to residents, but to owners, banks and investors. It highlights the need to fix the problems of the HSTPA, and to reinvigorate safety net programs—two important corrective actions to keep this housing sound and affordable.
Michael Lappin is the former CEO of the Community Preservation Corporation (1980-2011). During his tenure, CPC financed and/or developed the preservation and building of over 92,000 affordable apartments in New York City. Currently he heads Lappin Associates, providing development and advisory services for affordable housing.
The post Opinion: The Urgency Of Preserving Low- And Moderate-Income Rent Stabilized Housing appeared first on City Limits.
Leave a Reply