A Dec. 23 ruling by a U.S. District Court means the determination of fair market rent (FMR) in two dozen of the nation’s largest metropolitan areas has come full circle. Much like how it is important to know what the U.S. Supreme Court actually held in the ICP v. Texas DHCA decision (as opposed to some of the reporting), interested parties should understand what the court’s opinion says and does.

Background

In November 2016 the Department of Housing and Urban Development (HUD) issued a rule setting FMRs at the ZIP code level, known as “Small Areas,” as opposed to being the same amount across an entire metropolitan region. Allowing local variation means Section 8 payment standards are more in some areas and less in others. Because markets with higher income households often have higher rents, FMRs can go up or down with poverty rates; vouchers cover more of the cost in richer neighborhoods. This change opens up properties in higher income areas because tenants usually can only access units where the rent is within the FMR limit.

In other words, HUD’s intended effect was to increase voucher households’ access to apartments in areas of greater opportunity. The rule made Small Area FMRs mandatory for 23 vicinities (plus it already was in effect for one other) and optional elsewhere. These public housing authorities and Section 8 administrators (PHAs) represented 18 percent of the program’s total number of vouchers nationwide.

For additional information see Thomas Stagg’s explanation of how the methodology works and description of concept’s history and consequence.

The rule lists an effective date of Jan. 1, 2018. However, in August 2017 HUD notified the more than 200 affected PHAs it was postponing mandatory implementation of the rule by two years (use remained an option). A Connecticut advocacy organization and two individuals, as supported by other firms and organizations, responded by initiating litigation similar to a case brought against the Environmental Protection Agency. On Nov. 8 they filed for an injunction to prevent the delay and retain the original effective date.

Interim Report and Court Ruling

The opinion makes clear at the outset that it does not address “what is good housing policy.” Rather, the case “is about the rule of law.” Specifically, did HUD observe the procedures and identify relevant factual criteria required to suspend the regulation. The court’s bottom line answer was no to both.

The main reason HUD gave for the delay was to have more time to consider new information before preparing guidance and technical assistance. A report released in August 2017 covers lessons learned in a demonstration project involving seven PHAs implementing Small Area FMRs. Although many of the findings were positive, the report did raise concerns, particularly regarding consequences of decreasing FMRs.

The court was not convinced by HUD’s rationale. Citing a provision of the rule itself, the opinion explains HUD may only suspend Small Area FMR upon documenting a specific instance of “changes to local rental housing market conditions that drive rents up, to voucher holders’ detriment.” Results from the seven pilot PHAs in the demonstration were an insufficient basis for an across the board delay, in part because they “did not represent the Rule-affected areas in terms of demographics or scope.”

Also important to the court’s decision were the rule’s “provisions to protect voucher holders” against concerns raised in the interim report. Namely, the annual decrease in FMRs may be no more than 10 percent of the prior year and PHAs are allowed to:

• hold households harmless from payment standard reductions;
• set new payment standards between hold harmless and new FMRs;
• establish different policies for decreases; and
• request exceptions for rapidly changing market conditions or to ensure enough apartments are available.

In addition to making legal arguments, securing an injunction means proving a “certain and great” harm which is “beyond remediation.” The court found the two individual plaintiffs would fit this description if the rule did not go forward. Without Small Area FMRs the Section 8 payment standards are too low to afford rent in higher income areas. As a result, the households would not have access to better schools, “safer living environment” and shorter commutes.

The above is merely a partial summary of the opinion. Not mentioned is the court formally or effectively endorsing the policy objective behind the rule, because there is no such statement. Rather, the judge applied generally applicable procedural requirements to a federal agency’s action and found it did not comply.

Outcome

The consequence of this decision is the Small Area FMR rule will take effect on Jan. 1, 2018, two years earlier than most housing professionals anticipated. Although the PHAs involved were aware of the litigation, the extent to which they prepared for this outcome is unknown. HUD also has not yet announced its plan.

The various parties’ readiness is a question, particularly considering HUD’s expressed need for more time to prepare guidance and technical assistance. Regardless, absent another postponement done in accordance with the ruling, Small Area FMRs are legally required for vouchers in the 23 metropolitan regions. What this means in practice remains to be seen.