Clarifying the Facts on Small Area FMRs

In November of 2016, HUD published a rule titled “Establishing a More Effective Fair Market Rent System; Using Small Area Fair Market Rents in the Housing Choice Voucher Program Instead of the Current 50th Percentile FMRs,” which mandated that PHAs in certain metropolitan areas use Small Area Fair Market Rents instead of regular Fair Market Rents (FMRs).[1] After learning of the content of an interim evaluation report of the Small Area FMR Demonstration, which showed that the use of Small Area FMRs had both benefits and drawbacks, HUD suspended the mandatory implementation of Small Area FMRs for two years, though PHAs are still allowed to voluntarily implement Small Area FMRs. NAHRO has previously covered the publishing of the rule, the suspension of the mandatory implementation of the rule and the report. While NAHRO believes that the concept of localizing rents – i.e., Small Area FMRs — is good, flaws in the rule’s execution made its mandatory implementation problematic.

The Atlantic addressed the topic of HUD making Small Area FMRs voluntary in a piece titled “Trump Administration Puts on Hold an Obama-Era Desegregation Effort.” The article makes many points extremely well, including its discussion about the benefits of living in areas of opportunity. It also makes a strong case against cuts to HUD’s budget, with which NAHRO wholeheartedly agrees. The piece makes a few points about Small Area FMRs that NAHRO believes require additional clarification. What follows are quotes from the article along with additional information and context that we hope can provide a more accurate picture of the Small Area FMR rule.

“[T]he Trump administration recently suspended a key Obama policy that would have, on October 1, begun helping low-income people move. The program, called Small Area Fair Market Rents, would have increased the amount of money the government would pay for voucher-holders to rent homes in high-opportunity areas, and lowered the amount they would receive in low-opportunity areas.”

The Small Area FMR rule still remains in place. Any PHA that previously planned on implementing Small Area FMRs can still implement them. Provisions such as the ability to hold harmless program participants or other provisions to limits subsidy reductions, remain in place. Only the mandatory imposition of Small Area FMRs in 23 metropolitan areas was suspended.

As the interim evaluation found Small Area FMRs had varying impacts on different housing markets, this voluntary approach allows communities to use local knowledge and need in order to maximize the benefit and to minimize the potential harm of using Small Area FMRs.

“[The rule] also sought to make sure that the Section 8 program was not artificially inflating rents in low-opportunity areas where landlords, knowing that voucher holders could pay a certain amount of money, would charge rents that the market otherwise wouldn’t support.”

It is has been the experience of many of NAHRO’s members that FMRs do not accurately represent on-the-ground rental prices. The FMRs are based on the American Community Survey (ACS), and while NAHRO appreciates that this is the best national data source available to HUD, the ACS still produces FMRs that lag behind actual rental prices in many markets—especially metropolitan markets. If FMRs lag behind actual rental prices in metropolitan areas, then many of the “inflated low-opportunity areas” actually receive FMRs that are too low for their surrounding neighborhoods. The shift to Small Area FMRs lowers the subsidy amount for program participants in these areas even further, making it hard to find units. In the high-rent areas, if the FMRs are lagging behind the on-the-ground rental prices, then the additional subsidy may still not be enough for program participants to find units.

“And yet, this wasn’t a program that was rushed to implementation or that materialized out of bureaucrats’ brains with no testing or little process. HUD had tried out the program in five housing authorities beginning in 2012.”

This passage refers to the Small Area FMR Demonstration, which is a study currently being conducted by HUD on seven PHAs testing the effects of Small Area FMRs. While the Small Area FMR Demonstration began in 2012, the first results from the Demonstration were published in August of 2017. This interim evaluation report is one of the reasons behind HUD’s suspension of the mandatory implementation of Small Area FMRs in 23 metropolitan areas. The final results of the Demonstration will be published in mid-2018. The rule for Small Area FMRs was published in November 2016–before the Demonstration had even published preliminary findings.

While it is true that there were other studies that had investigated Small Area FMRs before the Demonstration, these studies only looked at the Dallas metropolitan region. As NAHRO has stated before, the country has many different housing markets with a wide range of characteristics. The evidence from only the Dallas housing market was not enough to institute a nation-wide rule change that had the potential to cost-burden many families.

Additionally, the article did not discuss all of the preliminary results of interim evaluation of Small Area FMRs. While Small Area FMRs do create a modest increase (three percent) in families living in high-opportunity areas, they also cause a 3.4 percent loss in the stock of affordable housing units (which the article mentions). Further, the tenant contributions of families in areas using Small Area FMRs increase by 16 percent, while areas that are not using Small Area FMRs only had a nine percent increase. These results indicate that Small Area FMRs, like many other policy options in the public sphere, impose a set of trade-offs, and cannot be said to be “good” or “bad.”

“From June to July of 2015, and then again from June to August of 2016, the Obama administration conducted two comment periods, during which the concerns of the housing authorities could be heard.”

To HUD’s credit, they not only had these two comment periods, but also published an Advanced Notice of Proposed Rulemaking in 2015 and took suggestions on how to best implement Small Area FMRs. But despite these opportunities to comment, there were flaws in how HUD collected information. First, as previously mentioned, HUD finished the entire rulemaking process implementing Small Area FMRs before the Small Area FMR Demonstration had published even preliminary results. Second, although HUD went through the motions of the rulemaking process, they did not incorporate the suggestion that Small Area FMRs should be made voluntary because of the lack of empirical evidence and the large potential harmful effects to program participants, a point that NAHRO made during the comment periods.

“And, crucially, HUD instituted a change whereby housing authorities would have been allowed to exempt voucher-holders from a drop in their subsidy if they remained in the unit they currently rent with a voucher.

While HUD did implement this change, it should be noted that the provision allowing this was mandated by Congress in the Housing Opportunity Through Modernization Act of 2016 (HOTMA). It is not clear that HUD would have implemented this provision without being required by law to implement it. In the implementation, there was some ambiguity as to whether the provision would apply to only metropolitan-wide FMRs or Small Area FMRs, which HUD resolved by stating that it would apply to all FMRs, irrespective of the level at which they were calculated.

Additionally, it is important to remember that the addition of this provision does not mean there are no trade-offs with the use of Small Area FMRs. PHAs that decide to hold harmless families may see their costs increase, as they are paying higher subsidies in high-rent areas that are not offset with lower subsidies in low-rent areas. PHAs operate with extremely limited funds which means that this increase in costs will result in fewer families served. Some PHAs will be forced to make a choice between serving fewer families or increasing the cost burden of families in low-rent areas to pay for the higher subsidies in high-rent areas.

“The idea that all the housing authorities need is more time to implement these changes is far-fetched.

While it is true that the initial Advanced Notice of Proposed Rulemaking was published in 2015, it was not clear which PHAs would be required to implement Small Area FMRs. The list of areas where the mandatory imposition of Small Area FMRs was required was not published until November 16, 2016, leaving less than one year for a PHA to implement the final Small Area FMR rule.

This, he says, is “not respecting the basic rule of law.” To write a new rule that reverses this one, for instance, HUD would have to go through the same years-long notice and comment period. Instead, he says, HUD suspended the rule so that it would not have to enforce it, and would not have to go through the process of reversing it.

The Obama administration wrote a provision in the Small Area FMR rule noting that the mandatory imposition could be suspended based on a documented determination by the HUD Secretary. The provision provides a way to delay or stop the implementation of Small Area FMRs if the empirical evidence, which had not been available at the time when the Small Area FMR rule was finalized, found that the rule had potential harmful consequences to program participants.

In crafting policies, it is important that we get them right, so that they maximize the benefits to the families being served, and so we fully understand any potential harm they may cause. More research needs to be done in many different markets before the industry can understand all the costs and benefits of Small Area FMRs. Making the imposition of Small Area FMRs voluntary would allow community-specific solutions to be crafted.

[1] Fair Market Rents are calculated by HUD on the county or metropolitan area level. HUD states that the FMR is the amount of money that would be needed to pay the gross rent (shelter rent plus utilities) of privately owned, decent, and safe rental housing of a modest nature. Fair Market Rents help determine the amount of rent covered by the voucher (i.e., the higher the FMR, the higher the potential value of the voucher). Small Area FMRs are FMRs calculated by zip code. The intended effect of Small Area FMRs is to decrease subsidies in low-opportunity (low-rent) neighborhoods and increase subsidies in high-opportunity (high-rent) neighborhoods to incentivize families to move from low-opportunity neighborhoods to high-opportunity neighborhoods.

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