GAO/RCED-00-214R Data on High-Interest Direct Rural Housing Loans

United States General Accounting Office

Washington, DC 20548

Resources, Community, and

Economic Development Division

B–285596

June 7, 2000

The Honorable Robert E. Andrews

House of Representatives

Subject: Rural Housing Service: Update of Data on High-Interest Direct Loans

Dear Mr. Andrews:

You asked us to update the data we presented in December 1994 on the number of borrowers

who pay above-market interest rates on direct single-family housing loans made by the U.S.

Department of Agriculture’s (USDA) Rural Housing Service (RHS).1 Specifically, you asked

us to determine whether a significant number of borrowers continue to pay above-market

interest rates on such loans.

RHS makes both direct and guaranteed housing loans to rural Americans who generally

cannot obtain credit elsewhere. The agency’s direct loan program is designed to promote

homeownership for rural households with low and very low incomes by providing direct

mortgage loans for single-family housing, and depending on the borrowers’ incomes, interest

subsidies to lower the monthly mortgage payments. The direct loans are meant to provide

temporary credit—borrowers are required to graduate from the direct loan program when

their incomes are sufficient for them to afford private credit. The guaranteed loan program is

designed primarily to assist rural households with moderate incomes. In guaranteeing a

single-family housing loan, RHS agrees, in the event that a borrower defaults, to reimburse a

commercial lender for an amount up to 90 percent of the principal advanced to the borrower.

Because qualifying for private credit without a government guarantee is more difficult than

qualifying with a guarantee, movement from a direct loan to a guaranteed loan is a logical

progression for borrowers whose financial condition has improved but is still not sufficient

to qualify for nonguaranteed private credit. However, RHS is statutorily prohibited from

refinancing direct single-family housing loans using the guaranteed program.

In our 1994 report, we found that as of September 30, 1994, 92,000 nonsubsidized direct

single-family loans were held by borrowers who were paying interest rates of 9.5 percent or

higher on an outstanding principal balance of $2.2 billion. The prevailing rate for the

guaranteed loan program at the time of our 1994 report was 9.5 percent. About 13,000 of

these direct loans were carrying interest rates of 13 percent or higher. As of

1

See Shift to Guaranteed Program Can Benefit Borrowers and Reduce Government’s Exposure (GAO/RCED/AIMD-95-63, Dec.

21, 1994).
B-285596

2 GAO/RCED-00-214R Data on High Interest Direct Rural Housing Loans

May 31, 2000, over 65,000 nonsubsidized direct single-family loans were still being held

by borrowers who were paying interest rates of 9.5 percent or higher on an outstanding

principal balance of almost $1.5 billion. About 9,100 of these direct loans carry rates of

13 percent or higher. An additional 11,500 borrowers receive $50 or less in interest

subsidies each month but still pay an effective interest rate of 9.5 percent or higher.

These borrowers could also benefit from refinancing using the guaranteed program.

Table 1 compares data on direct loans for the two periods.

Table 1: Data on RHS’ Direct Single-Family Housing Loan Program, September 30, 1994, and May

31, 2000

Date Total

outstanding

principal

balance

Total

number

of direct

loans

Portion

of loans

with

interest

subsidy

Number of

nonsubsidized

loans at 9.5%

or higher

Outstanding

principal

balance of

loans at 9.5%

or higher

Number of

nonsubsidized

loans at 13%

or higher

Sept. 30,

1994

$18.6 billion 765,000 About

twothirds

92,000 $2.2 billion 13,000

May 31,

2000

$16.5 billion 552,000 Under

half

65,000 $1.5 billion 9,100

Source: Data for 1994 are from GAO’s Dec.21, 1994, report (GAO/RCED/AIMD-95-63) and data for 2000 are from

RHS.

A significant number of borrowers continue to hold RHS single-family direct loans with

interest rates at or above the 9.5-percent guaranteed rate that was prevailing at the time

of our 1994 report. Under today’s prevailing guaranteed rate of 8.75 percent, the number

of borrowers that would be eligible to refinance their loans using the guaranteed loan

program would be even greater.

Agency Comments

We provided a copy of this report to RHS for its review and comment. The RHS Deputy

Administrator for Single-Family Housing said that the report accurately reflects data on

the single-family housing direct loan portfolio. He observed that the ability to refinance

direct loans with high interest rates through the guaranteed loan program would be of

significant benefit to RHS customers holding such loans. He also noted that moving

customers from the direct loan program to private-sector financing would be consistent

with RHS’ statutory mandate and would help to ensure the customers’ continued

success with homeownership.

Scope and Methodology

To obtain information for this report, we met with officials from RHS’ Single-Family

Housing Direct Loan and Guaranteed Loan Divisions. We also obtained current loan

data from RHS’ Centralized Servicing Center in St. Louis, Missouri.

We performed our work in June 2000 in accordance with generally accepted

government auditing standards.
GAO/RCED-00-214R Data on High-Interest Direct Rural Housing Loans

-----

We are sending copies of this report to interested congressional committees and the

Honorable Dan Glickman, Secretary of Agriculture. We will also make copies available

to others upon request.

Please call me on (202) 512-7631 if you or your staff have any questions.

Sincerely yours,

Stanley J. Czerwinski

Associate Director, Housing and Community

Development Issues

(385867)
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