by Rebekah King, National Housing Conference
On May 19, 2015, the Housing and Insurance Subcommittee of the House Financial Services Committee held a hearing on the future of housing in America and oversight of the Rural Housing Service (RHS), the division within the U.S. Department of Agriculture (USDA) which administers rural housing programs. Among the programs under review were the Section 502 direct and guaranteed loan programs for homeownership and Section 515 and 521 programs for rental housing. Two witnesses presented testimony: Mr. Tony Hernandez, administrator for the Rural Housing Service at USDA and Mr. Matthew Scire, director of financial markets and community investment for the U.S. Government Accountability Office (GAO).
In summary, the discussion focused on similarities and possible overlap between USDA and Federal Housing Administration (FHA) homeownership programs as well as USDA’s recent efforts to improve and strengthen its rural housing programs. The USDA rural housing budget is much smaller than the Department of Housing and Urban Development (HUD) budget but USDA programs provide important affordable housing in rural communities. Conversations around how to improve its programs, better align with and leverage HUD and Veterans Administration programs and how to involve more nonprofit and private sector partners will be constructive and beneficial for rural households in need of USDA programs. Those conversations should be fully explored and solutions implemented before continuing to discuss program consolidation.
In Mr. Hernandez’s testimony, he discussed the important role of rural housing programs and the various business improvements USDA has made, like shifting to more electronic systems and maintaining low delinquency rates in its lending programs. Mr. Scire discussed recent GAO studies, inefficiencies within RHS programs and the overlap GAO perceives between HUD and USDA programs. He acknowledged that RHS has made improvements based on GAO recommendations but observed that they could still do more, especially in targeting resources to the areas of greatest need.
In the committee discussion, Chairman Luetkemeyer (R-Mo.) raised a point which was repeated during the hearing: the overlap between FHA and USDA homeownership programs in terms of the clients served. A GAO study referenced in the hearing discussed how a large number of FHA clients were also eligible for USDA housing programs. Mr. Hernandez responded that USDA’s products were designed for rural homebuyers without the ability to make a downpayment, in comparison to the 3.5 percent downpayment minimum in FHA loans. The average income of a Section 502 direct loan borrower is $29,000, and for a Section 502 guaranteed loans it is $50,000, income levels that could struggle to afford an FHA loan. Mr. Hernandez also noted that many FHA lenders do not work in rural areas, which limits access to FHA products for rural homebuyers. At the hearing, USDA was unable to share data on how many of its borrowers were also eligible for FHA loans, but this data could be helpful in addressing this overlap question in the future. Questions from several committee members focused on issues of overlap and program consolidation between FHA and USDA homeownership programs.
Representative Williams (R-Texas) asked if the private sector could offer a viable option for rural affordable housing instead of USDA programs. Mr. Hernandez observed that often lenders and developers find rural areas too risky to do business. While not discussed at the hearing, it is also more difficult to make project budgets work for multifamily and homeownership development serving rural low-income households, even with subsidy dollars. USDA programs are designed to serve areas with low real estate values and limited growth potential where private finance and development will not commit resources.
Representative Barr (R-Ky.) raised an interesting point about how the definition of rural is ever-evolving. Congress defines “rural” and thus decides what communities will be eligible for USDA programs. Mr. Barr discussed two communities in his district that needed grandfathering language from Congress to avoid losing access to USDA programs. Some rural areas are easy to distinguish, but rural areas in close proximity to urban areas present a challenge. Rep. Barr argued that this confusion is one reason for consolidating housing programs and eliminating this rural eligibility criterion.
The definition issue is perennial. Any geographic distinction will necessarily be arbitrary in some places (as any resident of a metro area like Washington, DC, or Kansas City that spans state lines would witness). Rural communities face different challenges than urban and suburban communities and do need programs designed to fit their needs. There is an ongoing tension between targeting limited resources on those communities with deepest need and preventing painful dislocation in communities where growth and development change their eligibility relative to a static definition.