[imgcontainer][img: houseloan-grants.png][source][/source]The chart shows the number of housing units financed through programs by USDA Rural Development from 1950 to 2013. (Click to enlarge.)[/imgcontainer]
Federal spending on affordable rural housing programs has been on a downward trend for a number of years that threatens to continue until the programs eventually fade away. The Obama administration seems to be seeking just such a fade out, thinking that housing groups will not notice. This has been underway quietly as the federal budget gets tighter and many worthy programs are cut. Sequestration and across-the-board cuts resulted in steep reductions in FY 2013.
Promising “a decent home and suitable living environment for every American family,” the Housing Act of 1949 addressed rural housing issues through the US Department of Agriculture (USDA). The first USDA loan programs served low-income family farmers. With counseling for borrowers delivered by local USDA office staff, these programs helped families who could not qualify for credit from other sources and aimed to help such families eventually “graduate” to conventional, private-sector credit. The programs were expanded over the years to include rental and other housing needs, and to be available to all rural residents as well as to farmers.
With the aim of financing decent, safe and sanitary housing through its single-family homeownership programs and multi-family rental housing programs, USDA has helped more than 2 million low- and very low-income families become homeowners through the Section 502 direct loan program. In addition, approximately 180,000 very low-income homeowners received loans to improve their substandard housing and nearly 189,000 elderly very low-income homeowners received grants to remove health and safety hazards from their homes. Over 533,000 rental units for lower-income families were constructed through the Section 515 Rural Rental Housing program. Monthly rents for very low-income families were made more affordable by a tenant rent subsidy called Rental Assistance (RA) or Section 521. Farmworker housing also was supported.
So we had for several decades a set of programs that served the housing needs of low-and very low-income rural people. But in recent years, this emphasis on lower-income families has dissipated in favor of less costly loan guarantees serving moderate incomes.
Trends for USDA Housing Programs
During the 1970s and early 1980s, USDA’s housing programs served hundreds of thousands of lower-income rural households. Programs like the Direct Section 502 Single Family Housing loan program and the Section 504 Rural Repair and Rehabilitation loan and grant programs helped improve the quality and affordability of homes in rural areas.
Then, in the early 1990s, the agency introduced a loan guarantee program for single-family mortgages, primarily aimed at moderate income households (115 percent of Area Median Income) and similar to mortgage guarantees offered by the HUD Federal Housing Administration and the Department of Veterans Affairs. Commercial lenders make the loan, and the federal government guarantees those lenders against loss. Since the 1990s, funding has shifted toward loan guarantees instead of direct loans. (Compare the blue [direct loans] and red [loan guarantees] lines in the chart at the top of this article.)
The agency can make many more guaranteed loans at a lower cost because these loans do not have deep subsidy and because private sector lenders fund the loan. The cost to the government comes only if there is a loss on the loan. However, these programs do not serve the same populations. In 2013, for example, there was a very stark gap: Homebuyers receiving Section 502 direct loans had an average income of $28,268, compared to $54,224 for homebuyers with Section 502 guaranteed loans.
[imgcontainer][img: income-borrowersHAC.png][source][/source]The shift from direct loans to guaranteed loans means USDA housing loans are more likely to serve recipients with higher incomes, not the poorest rural residents, the authors say. [/imgcontainer]
The direct program has generally been shrinking and the loan guarantee program growing since 1994. The guaranteed program exploded in fiscal year 2009 as part of the Congressional recovery law. For FY 2013 and FY 2014 Congress approved $24 billion a year in these guarantees, versus less than $1 billion a year for the direct loans.
Rural Rental Programs
The Section 515 rental production program peaked in about 1979 and has been steadily declining. In 1996 the agency introduced a guaranteed multi-family housing program (Section 538). The last unit of new construction rental housing through Section 515 was funded in 2011. Recent Section 515 loans have been mainly for repair and rehab of existing units.
Even though USDA has financed very few new subsidized rental housing units in recent years, the annual Rental Assistance costs are increasing. In FY 2013, Rental Assistance funding was not sufficient to cover expiring contracts. Over 190,000 units were funded, about 15,500 fewer units than FY 2012. The shortfall was partially due to the sequestration and rescission of funds, and as a result, Rental Assistance contracts needing renewal at the end of the sical year in September could not be funded.
However, sequestration was not the only culprit. In the early years of the program, Rental Assistance contracts were funded for multiple years. When a new loan was made the agency provided sufficient funding to cover Rental Assistance needs for 20 years. Eventually, this was shortened to five years, then four year, two years and finally only annual Rental Assistance contracts. A significant portion of the Rental Assistance units had funding left from these multi-year contracts. These funds are nearing depletion resulting in more units joining in to partake of the annual funding. The Housing Assistance Council estimates that approximately $160 million over the FY 2013 funding level will be needed to cover these units.
Over time, as the funding for USDA’s rural development programs has been steady or declining, Rental Assistance costs have been steady or increasing.
[imgcontainer][img: rentalportionusda.png][source][/source]Because of changes in how Rental Assistance is funded, the program has been taking up more and more of overall Rural Development funding. [/imgcontainer]
The president’s proposed budget for Fiscal Year 2015 continues the trend away from the programs serving the lowest-income populations. The Section 502 direct program is proposed at $360 million, down from $900 million in 2014 and compared to $24 billion proposed for 502 loan guarantees. Other proposed levels for 2015 are similar to prior years except for Section 523 self-help grants (down from $25 million to $10 million). Even though the change looks rather small, the Section 521 Rental Assistance program is also down from 2014. The president includes proposed cost saving changes to the Rental Assistance program such as minimum rents (which will affect only those tenants with the lowest incomes) and a provision giving USDA discretion on whether to renew existing Rental Assistance contracts.
USDA funding has shifted to the guaranteed programs that are less costly and do not have deep subsidy. They also serve people with higher incomes. If a president’s budget proposed to eliminate most HUD programs except for FHA mortgage guarantees, the justified outrage from urban low-income housing advocates would be immediate and deafening. So what’s ahead for rural housing? The proposed changes and cuts will provide fewer opportunities and less support for lower-income rural residents. Community-based nonprofits will experience reduced ability to serve these residents. USDA programs will rely more upon private sector lenders.
Is this the future we want?
The authors work for the Housing Assistance Council, a Washington, D.C., nonprofit that focuses on low-income housing issues for rural America. Mike Feinberg is senior policy analyst, and Joe is deputy executive director.