A. Financing Subsidies: Mortgage Insurance and Mortgage Interest Rate Subsidies

1. Section 221(d)(3) BMIR. This program insured and subsidized mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative housing for low- and moderate-income families. The reduced mortgage interest rate, usually from 1% to 3%, resulted in lower operating costs for these projects and therefore reduced rents. This program no longer provides subsidies for new mortgage loans, but existing Section 221(d)(3) BMIR properties continue to operate under the program. Families living in Section 221(d)(3) BMIR projects are considered subsidized because the reduced rents for these properties are made possible by subsidized mortgage interest rates.

HUD Occupancy Handbook Chapter 1: Introduction

8/13

1-3

4350.3 REV-1

Some BMIR projects have experienced escalating operating costs that have caused the BMIR rents to increase beyond levels that are readily affordable to lower and moderate-income tenants. In these cases, HUD may have allocated project-based rental assistance through Section 8 Loan Management Set-Aside (LMSA) to these properties to decrease vacancies and improve the project’s financial position (see subparagraph C below).

2. Section 236. The Section 236 program, established by the Housing and Urban Development Act of 1968, combined federal mortgage insurance with interest reduction payments to the mortgagee for the production of low-cost rental housing. Under this program, HUD provided interest subsidies to lower a project’s mortgage interest rate to as low as 1 percent. This program no longer provides insurance or subsidies for new mortgage loans, but existing Section 236 properties continue to operate under the program. The interest reduction payment results in lower operating costs and subsequently a reduced rent structure.

The Section 236 basic rent is the rent that the owner must collect to cover the property’s operating costs given the mortgage interest reduction payments made to the property. The Section 236 market rent represents the rents needed to cover operating costs if the mortgage interest were not subsidized. All tenants pay at least the Section 236 basic rent for their property and, depending on their income level, may pay a rent up to the Section 236 market rent. Tenants paying less than the Section 236 market rent are considered assisted tenants.

Some Section 236 properties have experienced escalating operating costs, causing the basic rents to increase beyond levels readily affordable to many low-income tenants. To help maintain the financial health of the property, HUD may have allocated project-based rental assistance through Section 8 LMSA to a Section 236 property (see subparagraph C below). Some Section 236 properties have other forms of project-based rental assistance, such as Rent Supplement or RAP (see subparagraph C below).

3. Section 231. The Section 231 program insures mortgage loans to facilitate the construction and substantial rehabilitation of multifamily rental housing for elderly persons and/or persons with physical disabilities. In Section 231 properties, elderly persons or elderly families must occupy no less than 50 percent of the units. In units designated as elderly units, owners must restrict occupancy to an elderly person or an elderly family. Owners may admit nonelderly physically disabled families to the nonelderly units up to the percentage allowed in the Regulatory Agreement. The property may serve a greater percentage of nonelderly persons with physical disabilities than the percentage allowed in the regulatory agreement only after the owner has received written approval from HUD. This program no longer provides subsidies for new mortgage loans, but existing Section 231 properties with subsidy continue to operate under the program.

HUD Occupancy Handbook Chapter 1: Introduction

5/03

1-4

4350.3 REV-1

Some Section 231 properties have experienced escalating operating costs, causing the rents to increase beyond levels readily affordable to many low-income tenants. To help maintain the financial health of the property, HUD may have allocated project-based rental assistance through Section 8 LMSA to a Section 231 property (see subparagraph C below). Some Section 231 properties have other forms of project-based rental assistance, such as Rent Supplement (see subparagraph C below).