GAO

United States General Accounting Office

Report to the Chairman, Subcommittee

on Housing and Community Opportunity,

Committee on Banking and Financial

Services, House of Representatives

September 2000 RURAL HOUSING

Options for Optimizing

the Federal Role in

Rural Housing

Development

GAO/RCED-00-241

Page 1 GAO/RCED-00-241 Rural Housing Options

Contents

Letter 3

Appendixes Appendix I: Opportunities to Improve the Effectiveness

of Current Rural Housing Programs 44

Appendix II: Estimated 1999 Census by Metro and Nonmetro

Categories 55

Appendix III: Comments From the Department of Agriculture 56

Appendix IV: Comments From the Department of Housing

and Urban Development 72

Tables Table 1: Data on RHS’ Housing Programs 15

Table 2: Key Features of the Principal Single-Family

Programs Offered in Rural Areas 21

Table 3: Key Features of the Principal Multifamily Programs

Offered in Rural Areas 26

Table 4: Key Features of Specialized Programs Offered in

Rural Areas 31

Figures Figure 1: Distressed Home With Outhouse in Northwest

Mississippi 12

Figure 2: New Home Financed With RHS Single-Family Loan

and Additional Funding Sources 13

Figure 3: Counties Where RHS Guaranteed More Loans Than

FHA Insured in 1999 25

Figure 4: Locations of Units Subsidized by HUD and RHS in

Nonmetro Areas 28

Figure 5: Counties Where RHS Subsidizes More Units

Than HUD 29

Figure 6: RHS Elderly Repair Grant Home 51

Figure 7: RHS Repair Loan Home 52
Contents

Page 2 GAO/RCED-00-241 Rural Housing Options

Abbreviations

CDBG Community Development Block Grant

CRA Community Reinvestment Act

FHA Federal Housing Administration

FHLBank Federal Home Loan Bank

HFA housing finance agency

HOME Home Investment Partnerships Program

HUD Department of Housing and Urban Development

MSA metropolitan statistical area

OMB Office of Management and Budget

RHS Rural Housing Service

VA Department of Veterans Affairs

USDA U.S. Department of Agriculture
Page 3 GAO/RCED-00-241 Rural Housing Options

United States General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-284435 Letr

September 15, 2000

The Honorable Rick Lazio

Chairman, Subcommittee on Housing

and Community Opportunity

Committee on Banking and Financial Services

House of Representatives

Dear Mr. Chairman:

In the 1930s, the distinctions between rural and urban life were far sharper

than they are today. At that time, there were few suburbs—little in the way

of urban sprawl extending the city into the country—and most rural

residents were farmers. Without electricity, telephone service, or good

roads connecting rural residents to population centers, most rural

residents were comparatively isolated and their access to credit was

generally poor. Today, conditions are very different. More people live in

suburbs than in central cities, and the proportion of the nation’s population

that lives on farms has dropped dramatically, from 25 percent in 1930 to

less than 2 percent today. Advances in transportation, computer

technology, and telecommunications have—or have the potential to—put

rural residents in touch with the rest of the nation, and credit has become

more readily available in rural areas. With these demographic and

economic changes, the federal role in rural housing has also evolved. Most

notably, the federal government has scaled back its involvement in rural

housing assistance programs, often reducing its financial commitment to

direct lending and shifting responsibilities to state and local governments

and the private sector.

As the distinctions between rural and urban life have blurred and federal

budgets have tightened, some policymakers have questioned the need for

the separate rural housing programs that were first created in the mid1930s to stimulate the rural economy and assist needy rural families.

Accordingly, you asked us to describe (1) the physical condition of today’s

rural housing and rural households’ access to affordable housing credit; (2)

the rural housing programs offered by the U.S. Department of Agriculture’s

(USDA) Rural Housing Service (RHS) and the ways in which RHS’

programs have adapted to changes in the level of federal housing

assistance; (3) any overlap between RHS’ programs and the programs of

the Department of Housing and Urban Development (HUD) and other
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federal, state, and private organizations; and (4) options for maximizing the

efficiency and effectiveness of the federal role in rural housing.

Our work is based on reviews of agency and published data; analyses of

market data provided by RHS, HUD, and the National Council of State

Housing Agencies; and discussions with RHS, HUD, and industry experts.

We also conducted case studies in six states where we observed the

condition of rural housing and RHS operations and met with local agency,

housing, banking, and community development officials. We judgmentally

selected these states to obtain a cross section of rural housing conditions,

delivery structures, and states with different concentrations of rural

counties. We relied on published studies, primarily by USDA’s Economic

Research Service, to evaluate the condition of rural housing, the cost and

availability of rural credit, and changes in rural housing markets. Our

analysis of the overlap between RHS’ and other agencies’ programs is

based on a comparison of program features, including eligibility

requirements, subsidy levels, product terms and conditions, and the

location and income levels of the households served.

Results in Brief Nationwide, the physical condition of rural housing has greatly improved

since the inception of rural housing programs in the 1930s, but it still lags

somewhat behind that of urban housing. Particularly in some remote rural

areas, the quality of housing is poorer for some groups, especially

minorities. Affordable housing is also difficult to find in some rural areas,

and rural homeowners sometimes pay slightly higher mortgage interest

rates than their urban counterparts.
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RHS is the largest component of a comparatively new USDA mission area,

Rural Development, created when the Department was reorganized in 1994.

RHS targets a wide array of housing services to rural residents, often offers

more favorable terms and conditions than other federal housing programs,

and delivers services through an extensive field network. RHS’ singlefamily and multifamily programs are available to households that live in

rural areas and have incomes ranging from very low to moderate.

Specifically, RHS’ single-family programs provide highly subsidized direct

loans to households with very low and low incomes, guaranteed loans to

households with low and moderate incomes, and grants and direct loans

for housing repairs to households with very low incomes.1 RHS’ multifamily

programs provide direct and guaranteed loans to commercial developers or

nonprofit organizations to produce new rental housing; grants and loans to

public or nonprofit agencies or individual farmers to build affordable rental

housing for farm workers; housing preservation grants to local

governments, nonprofit organizations, and Native American tribes; and

rental assistance subsidies. As the federal government has scaled back its

involvement in rural housing assistance, it has greatly reduced its funding

for RHS’ direct loan programs, expanded RHS’ guaranteed loan programs,

and increased its reliance on state, local, and private partners to leverage

funds for rural communities. RHS has also streamlined and centralized its

operations in many states, reducing its field office staffing. Nevertheless,

rural households still have greater access to RHS than to other federal or

state agencies because RHS continues to operate offices in and assign staff

to cover rural areas.

Overlap in the products offered and in the households served by RHS and

the other organizations offering housing assistance varies by rural housing

program and program mission. Some RHS products are similar to products

offered by others. For example, although RHS’ guaranteed loan program

offers borrowers better terms than HUD’s Federal Housing

Administration’s (FHA) insurance program, both programs allow

borrowers to obtain mortgages with little or no cash and protect lenders

against losses when loans go into default. In addition, RHS’ rural housing

programs often serve many of the same markets as programs offered by

others. In particular, HUD and the Department of Veterans Affairs (VA)

1

Very-low-income households have incomes at or below 50 percent of their area’s median

income; low-income households have incomes above 50 percent and at or below 80 percent

of their area’s median income; and moderate-income households have incomes above 80

percent and at or below 115 percent of their area’s median income.
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provide housing assistance nationwide, including assistance to eligible

households in rural areas. For example, RHS’ single-family loan guarantee

program serves a moderate-income market segment, as does FHA’s much

larger single-family mortgage insurance program. But RHS guarantees

more loans than FHA insures in the more remote rural areas, in part

because lenders in some rural areas do not always offer FHA loans and

because RHS loans are less expensive to the consumer. Some RHS

products and terms have no counterparts elsewhere. For example, RHS

offers the only farm worker housing construction program. In addition,

RHS’ single-family direct loan program offers a greater interest subsidy

than other programs and is available only to households that are unable to

qualify for credit elsewhere. Although most state housing finance agencies

also offer single-family direct loan programs, these programs typically

complement rather than duplicate RHS’ program because they provide

smaller subsidies and their products are therefore available to households

with higher incomes. The state agencies further complement RHS’ efforts

by participating in RHS’ single-family loan guarantee program. In the

multifamily area, despite overlap in the eligibility requirements for

households benefiting from RHS’ and HUD’s multifamily guaranteed loan

and/or rental assistance programs, RHS typically delivers program services

through district or local offices, whereas HUD relies on regional offices. On

the one hand, RHS’ program management structure can make it easier for

rural households to gain access to housing credit; on the other hand, the

differences in RHS’ and HUD’s program management structure have led to

inconsistencies in program rules, sometimes causing frustration and extra

paperwork for property owners and managers. In addition, the two

agencies have established separate, uncoordinated systems for monitoring

the physical and financial condition of their properties.

Given the diminished distinctions between rural and urban areas today,

improvements in rural housing quality and access to credit, and RHS’

increasing reliance on guaranteed lending and public/private partnerships,

the federal role in rural housing is at a crossroads. Options for optimizing

the federal role include fundamentally changing the programs’ targeting,

subsidy levels, and delivery systems, as well as merging RHS’ programs

with HUD’s or other agencies’ comparable programs. Without some

prodding, the agencies are not likely to examine the benefits and costs of

merging as an option. Nonetheless, as a first step toward achieving greater

efficiency, the Congress may wish to require RHS and HUD to explore the

potential benefits of merging similar programs. Depending on the results,

the Congress may then choose to merge similar programs, such as the

single-family insured lending programs and the multifamily portfolio
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management programs, taking advantage of the best practices of each and

ensuring that targeted populations are not adversely affected. In addition,

RHS and others have identified a number of actions that could be taken to

increase the efficiency of existing rural housing programs, whether or not

they are merged (see app. I).

Background Federal housing assistance in rural areas dates back to the 1930s. At that

time, most rural residents worked on farms, and rural areas were generally

poorer than urban areas. Accordingly, the Congress authorized separate

housing assistance for rural areas and made USDA responsible for

administering it. Specifically, the Bankhead-Jones Farm Tenant Act of 1937

authorized USDA to provide long-term, low-interest loans to farm tenants

and sharecroppers so that they could purchase and repair farms, including

homes on farms. The Housing Act of 1949 authorized new rural lending

programs, which were administered by RHS’ predecessor, the Farmers

Home Administration, within USDA. Persons were eligible for this

assistance if they lived in dwellings on land capable of producing at least

$400 worth of agricultural commodities annually. Legislation authorizing

the Farmers Home Administration to make loans to rural residents other

than farmers was enacted in 1961.
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Nationwide housing assistance programs also originated during the 1930s.

FHA began providing mortgage insurance in 1934, and the first public

housing program was authorized in 1937. The Veterans Administration

(now the Department of Veterans Affairs) started offering housing

assistance to all eligible veterans in 1944. Later, other federal housing

programs were placed under HUD, created in 1965. Currently, federal tax

policies, especially the Low-Income Housing Tax Credit program, help

make housing affordable nationwide. In addition, various programs, some

of which are administered by federal departments other than HUD or

USDA and by state housing finance agencies (HFA), offer low-interest

financing for affordable rural housing. Community development

corporations, regional commissions, and other nonprofit organizations also

promote affordable homeownership and rental assistance at local levels.

Finally, the federal government helps make homeownership affordable by

requiring certain lenders to meet special housing finance needs.2

Historically, the term “rural” has described an area that is sparsely settled

with wide open spaces, a population engaged in resource-based

occupations, and a lifestyle and culture distinct from those of urban places.

But the definition has evolved over time, responding to population

increases and changes in land use. Today, vast areas are still clearly rural,

but suburban sprawl in other areas has created a mosaic of regions that are

alternately rural and urban in character. For example, rural pockets persist

between new suburbs that have grown up near urban centers. And within

rural areas are urban pockets—small towns that have grown into cities as

urban “expatriates” have moved beyond established suburbs. Conversely,

some areas have lost population and are more rural today than they were

20 or 30 years ago.3

2

Specifically, the Community Reinvestment Act (CRA) encourages depository institutions

and other lenders to meet the housing credit needs of the communities they serve, and the

Federal Housing Enterprises Financial Safety and Soundness Act of 1992 places upon

Fannie Mae and Freddie Mac numerical goals for the loans they purchase that are made to

low- and moderate-income persons and are made in underserved areas. In addition, the

Federal Home Loan Bank (FHLBank) system operates the Community Support Program

that, among other things, requires FHLBank members to meet standards of community

investment or service in order to maintain continued access to long-term FHLBank system

advances. For example, a member is required to provide federal oversight agencies with the

public disclosure portion of its most recent CRA evaluation and a description of how the

member assists first-time homebuyers.

3

Joseph N. Belden and Robert J. Wiener, Housing in Rural America (SAGE Publications,

1999).
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To keep up with such demographic changes, USDA identifies areas on

maps in local and state offices that are eligible for its rural housing

programs. The following criteria determine eligibility:

A rural area is open country that is not part of or associated with an urban area. A rural area

may include any town, village, city, or place, including a place that is not part of or

associated with an urban area but is immediately adjacent to a densely settled area, has a

population of no more than 10,000, and is rural in character. Such a place may be in either a

metropolitan statistical area (MSA) or a nonmetropolitan area. In addition, a

nonmetropolitan area with a population of 10,001 to 20,000 may be considered a rural area if

USDA or HUD determines that it has a serious lack of mortgage credit. 4

For this report, where the data allowed us to do so, we broke down rural or

nonmetropolitan (nonmetro) areas into three subcategories—urbanized

nonmetro, rural nonmetro, and completely rural nonmetro areas. We

defined (1) urbanized nonmetro areas as counties that are not in MSAs and

have at least one town with a population of 20,000 or more; (2) rural

nonmetro areas as counties that are not in MSAs and have one or more

towns with a population of 2,500 to 19,999; and (3) completely rural

nonmetro areas as counties that are not in MSAs and do not have a town

with a population of over 2,499. This breakdown corresponds with the

requirement for most of RHS’ programs that eligible households be located

in rural communities with fewer than 20,000 residents and shows the

extent to which RHS’ and other agencies’ programs serve the most rural

areas.

Today’s Rural Housing

Quality and Rural

Households’ Access to

Affordable Housing

Credit

Since the inception of rural housing programs in the 1930s, the quality of

rural housing has improved. For example, in the 1930s, very few rural

homes had electricity or indoor plumbing, but by the 1970s, virtually all

rural homes had both. Today, despite improvements, the quality of rural

housing still lags somewhat behind that of urban housing. According to

HUD’s American Housing Survey, 22 percent of the nation’s population

lived in rural areas in 1991. Yet 29 percent of the nation’s occupied housing

units with severe or moderate physical problems related to plumbing,

heating, electricity, kitchen facilities, or maintenance were in rural areas. In

some rural locations, housing quality continues to lag because there is little

incentive to invest in housing. Overall, housing credit is almost as readily

4

Specifically, MSAs consist of counties with central cities of at least 50,000 residents and

surrounding contiguous counties that are metropolitan in character and economically tied

to the core counties.
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available in rural as in urban areas, but rural borrowers often pay slightly

higher rates.

Housing Quality Lags in

Some Rural Areas

While distinctions between rural and urban areas are no longer as

pronounced as in the past, a higher proportion of rural units are

substandard, and minorities and persons living in remote areas are affected

the most. According to HUD’s 1997 American Housing Survey, rural

households lived in moderately or severely inadequate housing more often

than urban households. The 1990 Census found that 6 percent of rural

African-American homes and 12 percent of rural Native American homes

lacked complete plumbing. In comparison, 2.4 percent or less of all the

remaining homes—regardless of location—lacked complete plumbing. In

addition, the Housing Assistance Council reported that 9 percent of owneroccupied rural units in 1991 were substandard, compared with 6 percent in

central cities. For renters, the incidence of substandard units was similar in

rural areas and central cities—about 13 percent. This difference in housing

quality for owners and renters is particularly noteworthy, given that a

significantly higher proportion of rural residents own their homes. HUD’s

1999 American Housing Survey found that 75 percent of rural households

owned their own homes, compared with 67 percent of households

nationwide and 50 percent of households in central cities. Rural ownership

rates are higher even among very-low-income households, reflecting the

basic tenet that owning a home on a parcel of land has become part of the

culture of rural America. But a higher incidence of housing quality

problems in rural areas nullifies many of the advantages of

homeownership, including the ability to use homes as investments or as

collateral for credit. A 1999 HUD report concludes that the most severe

rural housing problems are found farthest from the nation’s major cities,

especially in such places as the Mississippi Delta, Appalachia, the Colonias

on the Mexican border, and Indian trust land. Furthermore, for some rural

residents, such as migrant farm workers, a shortage of affordable rural

housing persists.

Although the overall quality of housing in rural areas has improved, some

rural counties continue to lose population and suffer from stagnant

property values. In such economically depressed locations, there is little

incentive to invest in housing. Some state Rural Development officials we

spoke with noted that low population levels and low household incomes

affect both the availability and attractiveness of affordable housing as an

investment for builders. Because housing development costs are not

significantly lower in rural areas, it is difficult to build even highly
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subsidized housing in rural areas that is affordable to low- and very-lowincome families.

We found such difficulties in the following areas:

• The Mississippi Delta, which contains some of the poorest counties in

the nation, is having problems attracting new housing investment.

Casino gambling and catfish-processing operations have brought some

new jobs to the area, but the jobs are not always near the older rural

Delta towns. As a result, there is a need for affordable housing closer to

the new jobs. Meanwhile, a number of older distressed towns, with little

economic development and no significant housing construction in the

past 40 years, continue to decline.

• In northern Missouri, employment has declined with farm production.

Moreover, according to Missouri RHS and local community

development officials, vacancies in multifamily housing have increased

with the poor agricultural economy. Some new jobs have recently

appeared in the farm-processing sector. However, these jobs are not

located in the areas with the multifamily housing vacancies, creating an

imbalance in the supply and demand for houses.

• The Colonias consist of hundreds of quasi-rural communities located

along the Mexican border in Texas, Arizona, New Mexico, and

California. These communities are characterized by severely

substandard living conditions, lacking water and sewage systems and

decent housing. The Colonias of the Rio Grande Valley in Texas serve as

the principal “home base” for many migrant farm laborers. Housing is

often constructed of “found materials,” such as cardboard, wood

palettes, and corrugated metal sheets. The Colonias often fall outside

the jurisdiction of cities; counties may not have the legal power to incur

debt for financing infrastructure improvements; and the Colonias’ lowincome, minority residents have little political power to compete for

scarce resources.

In contrast, there is a greater willingness to invest in neighborhoods closer

to growing urban areas. For example, we visited a home that was 1 of 10

recently built with funds from RHS, the Federal Home Loan Bank

(FHLBank), the state of Mississippi, and the local government. According

to the Mississippi state director, the willingness of the other partners to

contribute to maintaining an historically significant African-American

neighborhood in an economically growing area was the key to the
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development’s moving forward. Figure 1 shows the house and privy where

the homeowner lived for 46 years until his new home, shown in figure 2,

was finished in February 2000.

Figure 1: Distressed Home With Outhouse in Northwest Mississippi

Outhouse is located 

in the rear of the yard.
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Figure 2: New Home Financed With RHS Single-Family Loan and Additional Funding

Sources

USDA Has Determined That

Credit Is Available in Most

Rural Areas

In its 1997 analysis of the demand for and availability of credit in rural

areas, USDA found no evidence of widespread or economically important

market failures or imperfections. USDA concluded that financial markets

are serving the credit needs of rural America reasonably well. The report

cited increased competition in rural housing markets and the increased

secondary market activity of Fannie Mae, Freddie Mac, and other

secondary market institutions in rural areas as key factors in reducing the

rural financial market inefficiencies that plagued the sector in the past.

Nonetheless, the study noted that interest rates were slightly higher in rural

areas for most types of home mortgages. The report found that, with the

exception of some smaller and remote rural areas, the banking system and

other lenders active in rural America generally have sufficient deposits and

access to money markets and other sources of funds to respond quickly to

changes in the demand for credit. The report also found that the interest

rates on home mortgages eligible for purchase by Fannie Mae, Freddie
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Mac, or other secondary market institutions are comparable in rural and

urban areas. However, rural borrowers often pay slightly higher rates

because the cost of doing business is greater in sparsely populated areas

and loans to rural borrowers often have unconventional terms that make

them ineligible for purchase by secondary market institutions. For

example, housing factors, such as unacceptable water and sewer facilities

and dated utility systems, and employment factors, such as a higher

incidence of seasonal or self-employment, make rural loans less likely to

meet the underwriting standards of Fannie Mae, Freddie Mac, and other

secondary market institutions.

Major RHS Rural

Housing Programs and

How They Have

Changed Over Time

RHS offers a wide array of services to rural residents. An increased

emphasis in recent years on leveraging limited funds with public- and

private-sector partners and a general move away from direct lending

programs has led RHS to streamline and centralize its operations in some

states. This increased centralization reflects RHS’ overall shift in emphasis

from being primarily an on-site lender of last resort to being primarily a

facilitator delivering a variety of low-income housing and other community

development services as a part of USDA’s restructured Rural Development

mission area.

RHS Offers a Wide Array of

Housing and Community

Development Services

USDA’s Farmers Home Administration managed rural housing programs

along with farm credit programs until the Department’s 1994 reorganization

legislation split these functions. Farm credit programs were then shifted to

the new Farm Service Agency, and housing programs were moved to the

newly created RHS in the new Rural Development mission area that was

tasked with helping improve the economies of rural communities.

RHS’ homeownership programs provide highly subsidized direct loans to

households with very low and low incomes, guaranteed loans to

households with low and moderate incomes, and grants and direct loans to

rural residents for housing repairs. Multifamily programs provide direct

and guaranteed loans to developers or nonprofit organizations for new

rental housing; grants and loans to public or nonprofit agencies or to

individual farmers to build affordable rental housing for farm workers;

housing preservation grants to local governments, nonprofit organizations,

and Native American tribes; and rental assistance subsidies that are

attached to about half of RHS’ rental units. In addition, RHS administers

community facilities programs that provide direct and guaranteed loans
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and grants to help finance rural community centers, health care centers,

child care facilities, and other public structures and services.

For fiscal year 2000, RHS received an appropriation of $1.3 billion and loan

authorizations of about $4.6 billion, primarily for its guaranteed loan

programs. RHS employs about 6,500 staff and oversees an outstanding

single-family and multifamily direct loan portfolio of about $28 billion.

RHS’ major housing programs were funded at higher levels both 20 years

ago and in 1994, when the Congress set up the current organizational

structure. Table 1 lists RHS’ programs, briefly describes them, and

compares the spending for them in fiscal year 1999 with the spending for

them in fiscal years 1979 and 1994.

Table 1: Data on RHS’ Housing Programs

Dollars in millions

RHS housing

program

Total dollars

spent, fiscal

year 1979

Total dollars

spent, fiscal

year 1994

Total dollars

spent, fiscal

year 1999

Number of

households

helped, fiscal

year 1999

Type of

assistance

Single-Family

Housing Direct

Loans (sec. 502)

$2,870.0 $1,656.8 $966.9 15,600 Loans subsidized as

low as 1 percent interest

Single-Family

Housing

Guaranteed Loans

(sec. 502)

$725.9a $2,980.0a 38,600 No money down,

no monthly mortgage

insurance loans

Single-Family Home

Repair Grants and

Loans (sec. 504)

$33.7 $52.7 $46.8 9,021 Grants for elderly and

loans subsidized as low

as 1 percent interest

Single Family

Housing Mutual

Self-Help Grants

(sec. 523)

$5.6 $12.8 $25.4 1,350 Grants to nonprofit and

public entities to provide

technical assistance

Multifamily Direct

Rural Rental

Housing (sec. 515)

$869.5 $512.4 $114.3 2,181 Loans to developers

subsidized as low as

1 percent interest

Multifamily Housing

Guaranteed Loans

(sec. 538)

$74.8a 2,540 Guaranteed loans for

developing moderate-income

apartments
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a

Dollar amount represents private-sector loan levels guaranteed by RHS. Actual federal

outlays are much lower because they are based on subsidy costs and projected losses that

are less than loan levels.

Declining Budgets Have

Increased the Use of

Guaranteed Loans, Led to

Streamlined Delivery

Systems, and Increased

Reliance on Partners

In recent years, RHS has changed how it delivers its major programs in

response to declining budgets. RHS has increased its use of guaranteed

lending, streamlined its delivery systems, and relied more on public and

private partners to deliver its programs.

Increased Use of Loan Guarantees

Competing demands for limited budgetary resources have increased RHS’

reliance on loan guarantees, which, because of their lower subsidy rates,

require less budget authority than does the highly subsidized direct loan

program. For example, RHS’ single-family direct loan program, with a

subsidy rate of 8.53 percent for fiscal year 2000, is very costly compared

with the single-family guaranteed program, with a subsidy rate of 0.61

percent. That is, for every $100 that RHS lends directly, it costs the U.S.

Treasury $8.53, whereas, for every $100 in single-family loans that RHS

guarantees, it costs the Treasury only $0.61. RHS’ multifamily direct loan

program is also more expensive than its multifamily guaranteed loan

program (39.68 percent versus 0.48 percent). While the guaranteed

programs cost the government less than the direct programs, they generally

Multifamily Housing

Farm Labor Grants

and Loans (secs.

516/514)

$68.8 $56.3 $33.2 622 Grants and

loans subsidized

at 1 percent interest

Multifamily Housing

Preservation Grants

(sec. 533)

$23.0 $7.2 1,800 Grants to nonprofit

organizations, local

governments, and Native

American tribes,

usually leveraged

with outside funding

Multifamily Housing

Rental Assistance

(sec. 521)

$423.0 $446.7 $583.4 42,000 Rental assistance

to about one-half the

residents in RHSrental

and farm labor units

Dollars in millions

RHS housing

program

Total dollars

spent, fiscal

year 1979

Total dollars

spent, fiscal

year 1994

Total dollars

spent, fiscal

year 1999

Number of

households

helped, fiscal

year 1999

Type of

assistance
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help fewer households with very low incomes. As table 1 indicated, RHS

guaranteed more multifamily loans than it made directly (2,540 versus

2,181), and it guaranteed two and one-half times more single-family loans

than it made directly (38,600 versus 15,600) in fiscal year 1999.

The increased emphasis on guaranteed loans has also affected RHS’

traditional mission of serving as a temporary lender of last resort. For

example, although single-family direct loans are available only to

borrowers who cannot obtain private credit, lenders that offer guaranteed

single-family loans must only certify that a borrower could not obtain

financing without the benefit of an insured or guaranteed loan, be it from

RHS, FHA, VA or a private insurer.

More Streamlined Delivery Systems

The 1990s also saw significant streamlining of USDA’s locally based

program delivery structure, including the creation of a new in-house center

to centrally service its single-family direct loans.

From the 1930s through the early 1990s, USDA had field staff in almost

every rural county, usually with separate offices for credit, conservation,

and farm programs. Consistent with the 1994 reorganization, over 1,500

county offices were closed or consolidated into “USDA service centers”

that include staff representing the Department’s Farm Services,

Conservation, and Rural Development mission areas.5

Since the 1994 reorganization, about 600 Rural Development field positions

were transferred to the St. Louis Centralized Servicing Center, further

cutting the need for Rural Development field staff. Previously, RHS staff in

hundreds of local field offices manually serviced RHS’ portfolio of 765,000

5

State Rural Development offices were given the authority to develop their own program

delivery systems for three sister agencies. RHS is the largest of the three, with 89 percent of

Rural Development’s fixed funding and 86 percent of its estimated staff years. In addition to

rural housing, RHS addresses the need for health facilities, fire stations, and other

community facilities in rural areas. The Rural Utilities Service addresses rural needs for

basic services such as clean running water, sewers and waste disposal, electricity, and

telecommunications. The Rural-Business Cooperative Service helps rural areas develop new

job opportunities. The Rural Community Advancement Program gives USDA the flexibility

to reallocate up to 25 percent of each state’s Rural Development funding among the three

Rural Development agencies. As of August 2000, about 6,500 USDA employees delivered

Rural Development programs through the Department’s headquarters in Washington, D.C.;

47 state headquarters, 144 area, and 671 local Rural Development offices; and the St. Louis

Centralized Servicing Center.
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direct loans. However, cuts in the single-family direct program since 1994

have reduced the number of loans that are serviced out of St. Louis by 28

percent, raising questions as to the Centralized Servicing Center’s longterm viability. According to the Centralized Servicing Center’s director,

without new direct loans or additional servicing work, the center could be

underutilized within a few years. The center’s director is seeking new work

from other federal agencies and the private sector, proposing to service

RHS’ guaranteed loans, FHA’s and VA’s assigned loans, and private

residential loans, as well as collect nonhousing debt, such as food stamp

overpayments and amounts owed to IRS. As of July 2000, USDA was

awaiting approval from the Department of the Treasury to begin a pilot

project that would involve the Centralized Servicing Center in servicing all

severely delinquent debts in Rural Development programs. According to

the center’s director, this project could add up to 40,000 new accounts to

the center’s portfolio.

Increased Emphasis on Partnering

Growing budgetary pressures during the 1990s also increased RHS’

emphasis on partnering with state and local governments, nonprofit

organizations, banks, and other federal agencies. RHS multifamily funds

have been used in combination with low-income housing tax credit

developments. In addition, RHS has leveraged its single-family direct loan

programs with funding from private banks and its single-family guaranteed

program with assistance from state HFAs.

Authorized in the Tax Reform Act of 1986, the Low-Income Housing Tax

Credit program is currently the largest federal program to fund the

development and rehabilitation of multifamily housing for low-income

households. Under this program, the states are authorized to allocate

federal tax credits to the private sector as an incentive to develop rental

housing for low-income households. Our 1997 report on this program

reported that 53 percent of the tax credit properties and 28 percent of the

tax credit units placed in service from 1992 through 1994 were in rural

areas.6 RHS’ multifamily direct loans were a financing source for many of

those rural tax credit properties. With its funding for multifamily direct

loans drastically reduced, RHS has made very few new direct loans and is

focusing more on managing the portfolio of loans it has already made.

6

Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing Program

(GAO/GGD/RCED-97-55, Mar. 28, 1997).
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Rural developers have more recently been focusing on using tax-exempt

bonds with tax credits and funding from HUD programs to finance new

rural low-income housing developments.

Multiple funding sources are also becoming the norm in financing rural

single-family homes. For example, RHS has developed a leveraged

mortgage program to help make its single-family direct loan program funds

go further. Private lenders provide a market-rate first mortgage loan, and

RHS provides a second mortgage, typically covering 80 percent of the loan

amount, to ensure affordability. Some bank officials we spoke with

consider the program to be a loss leader because of the relatively high costs

of servicing such small loans. Others said they believe the program is costeffective and virtually risk free because the banks assume the first position

on the mortgage. Bankers we spoke with who participate in the program

said they generally support the program for its goodwill and credit reform

benefits and because they understand that the more leveraging involved,

the more loans RHS can underwrite. A number of RHS state officials added

that they were originally hesitant about leveraging direct loans but now

believe that the additional bank oversight and homeowner education

requirements most banks impose make better borrowers and improve the

overall quality of RHS’ portfolio.

Five of the six states we visited were using RHS’ single-family guaranteed

program to leverage state HFA funds. The exception was Mississippi,

where, according to the state Rural Development director, the state HFA

tentatively agreed in May 2000 to use some of its bond proceeds to help

reduce the interest rate on RHS single-family guaranteed loans. Mississippi

has lagged behind most states in making single-family guaranteed loans.

Mississippi state Rural Development officials told us they believed that a

reduction of as little as 1 percent in the guaranteed program’s interest rate

would encourage realtors to get more involved in the program, which in

turn would pressure lenders to get involved.

Overlap Between RHS’

and Others’ Programs

In addition to RHS, FHA, state HFAs, and others operate housing programs,

though these programs are not targeted to rural areas. The extent of

overlap between the products offered and the markets served by RHS and

others varies, depending on the program. For example, although RHS’

single-family loan guarantee is similar to the mortgage insurance offered by

FHA, RHS’ deeply subsidized single-family direct loans have no

counterparts in other agencies. Furthermore, although FHA insures far

more single-family loans than RHS guarantees, RHS guarantees more loans
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in many remote rural areas than FHA insures. As for multifamily programs,

there is more overlap in both the products offered and the markets served

by RHS and HUD. Nonetheless, RHS still is a major source of financing for

multifamily housing in more remote rural areas. The extent of overlap

between RHS’ and other entities’ specialized programs varies by program

and program mission.

National and State Housing

Programs

FHA’s and the VA’s single-family mortgage insurance programs are the

largest national programs of their kind, operating in urban and rural areas.

HUD also operates multifamily programs that provide mortgage insurance,

rental assistance, and public housing nationwide. Furthermore, HUD

operates two major grant programs—the Community Development Block

Grant (CDBG) program and the Home Investment Partnerships Program

(HOME)—that promote affordable rental housing and homeownership

nationwide, although, by statute, 30 percent of CDBG funding and 40

percent of HOME funding is allocated to the states for distribution to

smaller communities.

State HFAs provide subsidized financing for affordable housing in urban

and rural areas. Specifically, states sell tax-exempt mortgage revenue and

multifamily bonds and use the proceeds to finance discount mortgages for

lower-income first-time homebuyers and to construct apartments

affordable to lower-income renters.

Some Overlap in SingleFamily Products and

Markets Served in Rural

Areas

State HFAs’ mortgage revenue bond programs and FHA’s principal singlefamily mortgage insurance program are the major programs that are

offered in the same markets as RHS’ single-family programs. The state

HFAs’ mortgage revenue bond programs offer below-market-interest-rate

loans in markets served by RHS’ single-family direct loan program; FHA’s

and VA’ s programs offer mortgage insurance and guaranteed loans in

markets served by RHS’ single-family guaranteed loan program. The extent

to which these programs serve rural areas and the similarities and

differences in their products are described below. Table 2 shows the key

features of the single-family programs offered by RHS and the other

nationwide programs that operate in rural areas. A discussion of the

overlap between the programs of RHS and the other principal organizations

that operate in rural areas follows.
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Table 2: Key Features of the Principal Single-Family Programs Offered in Rural

Areas

a

Direct loans only.

b

State HFAs self-insure some of the loans that they make as well as purchase some

guaranteed/insured loans made by RHS, FHA, and VA.

c

Varies by state.

d

FHA makes direct single-family loans as part of property disposition.

RHS Direct Loans and State HFA Direct Loans

RHS and state HFAs both subsidize direct loan interest rates for lowincome borrowers in rural areas. However, their products differ in the

amount of subsidy offered, and although the two programs serve similar

income groups, state HFAs have less activity in rural areas than does RHS.

Each program has helped about 2 million families become homeowners,

but because RHS’ direct loan program targets poorer, more rural areas, it

has assisted more rural families to date. In addition, RHS offers larger

subsidies, so its program complements, rather than duplicates, the direct

loan programs offered by state HFAs. In fact, most state HFAs work

directly with RHS. For example, according to RHS, as of October 1999, 39

state HFAs were participating in RHS’ guaranteed programs, which

typically allow borrowers to obtain below-market-interest-rate loans and/or

obtain down payment and closing cost assistance. However, the funding for

RHS’ direct loan program—about $1 billion per year—is down significantly

from its peak of $2.9 billion in 1976. On the other hand, more state HFAs

have developed housing assistance programs in recent years, and bond

activity is expected to increase starting in 2003, when a phased-in increase

in the bond cap from $50 to $75 per capita will begin to take effect. Starting

in 2003, each state’s cap will increase in equal annual increments until it

reaches the greater of $75 per capita or $225 million in 2007. Thus, while

RHS offers deeper subsidies and targets rural households, state HFA

Agency Direct loans

Loan

guarantee/

insurance

Interest

subsidy

Income

targeting

Location

targeting

RHS X X Xa X X

State HFAs X b X XXc

HUD/FHA d X

VA X
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programs offer greater growth potential for low-income households

nationwide. However, state funding for housing must compete with other

state priorities and not all states give priority to housing.

According to RHS Centralized Servicing Center officials, new RHS singlefamily direct loans made to low- and very-low income households are

usually subsidized so that the effective interest rate to the borrower is

between 1 and 3 percent. In fact, RHS’ mortgage loans are subsidized to the

point that the portion of a family’s income going toward the RHS mortgage

is comparable to what the family would pay under federal rental assistance

programs, such as RHS’ rental housing or HUD’s public and assisted

housing program. State HFA funds, which are raised through a state’s

issuance of tax-exempt housing bonds, generally do not offer such deep

subsidies. Nebraska, for example, is offering a 3-percent interest rate for

low-income borrowers and is targeting rural counties. But most states do

not subsidize as deeply; typically, they offer only a point or two below the

market rate. According to the National Council of State Housing Agencies,

a typical bond-financed mortgage saves a first-time homebuyer up to $100 a

month compared with a conventional mortgage. The executive director of

Vermont’s HFA told us that her agency does not try to compete with RHS’

deeply subsidized direct loans. Vermont’s bond-financed mortgage loan

program offers a rate that is about 1 percent below the market rate.

Although state HFAs finance properties in rural areas, they do not focus

their lending on those areas as RHS does. Of the single-family properties

whose location was reported by the 30 state HFAs that financed these

properties in 1998, 77 percent were inside and 23 percent were outside

metro counties. Available data do not allow for an analysis of how many of

the properties outside metro counties are in urbanized, rural, or completely

rural nonmetro counties. Of the states we visited, Maine, Vermont, and New

Hampshire had active statewide programs, whereas Mississippi, Missouri,

and Ohio focused on urban areas. In comparison, RHS made about 15,600

single-family direct loans in 1999, of which about 8,500, or 55 percent, were

outside metro areas. Of those nonmetro loans, about 1,900, or 22 percent,

were in urbanized nonmetro areas; about 5,600, or 66 percent, were in rural

nonmetro areas; and just over 1,000, or 12 percent, were in completely rural

nonmetro areas.
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RHS Loan Guarantees and FHA Mortgage Insurance

RHS and FHA both operate in rural areas and offer similar insured singlefamily products. Along with VA, which offers a mortgage insurance

program, both RHS and FHA encourage lenders to make loans by insuring

them against losses they might incur when borrowers default on their

mortgages.7 However, only veterans are eligible for VA’s program. Although

RHS’ guaranteed loan program and FHA’s mortgage insurance program

require that borrowers meet the same debt-to-income ratios, RHS’ program

offers more generous terms than FHA’s program.8 Specifically, RHS

borrowers are not required to make a down payment, may finance closing

costs, pay a lower up-front fee, and do not pay monthly mortgage

insurance. FHA borrowers may finance the up-front fee and closing costs,

but they are required to make a 3-percent down payment, pay an up-front

fee of up to 2.25 percent, and pay monthly mortgage insurance. As a result,

a borrower eligible for both programs would be prudent to choose an RHS

mortgage.

Despite the differences in the terms of their programs, RHS, FHA, and VA

all serve a significant share of low-income households. According to Home

Mortgage Disclosure Act data, about 45 percent of all FHA, VA, and RHS

loans made in 1998 went to households that had very low or low incomes.

RHS reported that about 30 percent of its single-family guaranteed loans in

1999 went to households with very low and low incomes.

RHS differs from FHA and VA in that it is precluded from lending to

households with incomes above the moderate level—that is, above 115

percent of the local area’s median income.9 Hence, the remaining 70

percent of RHS loans went to moderate-income families. In comparison,

over 20 percent of all FHA and VA loans in 1998—the majority of which

were FHA loans—were made to borrowers with incomes above 120

percent of the local area’s median income, according to Home Mortgage

Disclosure Act data.

7

FHA covers essentially 100 percent of the losses on any foreclosed loan. RHS covers up to

90 percent.

8

Both RHS and FHA require that borrowers not have housing debt payments exceeding 29

percent of their monthly incomes or total debt exceeding 41 percent of their total incomes.

9

A recent legislative proposal would expand eligibility for the program, particularly in

poorer states, by using the greater of statewide or national median income in place of the

local area’s median income.
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RHS also differs from FHA in that its programs are substantially smaller

and a higher proportion of its activities are concentrated in rural areas,

including remote rural areas. Whereas RHS guaranteed $3 billion in singlefamily loans in fiscal year 1999, FHA insured about $112 billion in singlefamily loans. Yet even though 20 percent of the U.S. population resides

outside metro areas, only 7 percent of FHA’s single-family insured loan

activity in fiscal year 1999 was outside metro areas. In contrast, 55 percent

of the loans RHS guaranteed in fiscal year 1999 were made to households

outside metro areas. Nonetheless, because FHA insures 33 housing loans

for every loan RHS guarantees, FHA does much more business than RHS in

most areas, including rural areas. Yet in 18 percent of the rural and

completely rural counties, RHS guaranteed more loans than FHA insured.

Specifically, RHS guaranteed more loans than FHA insured in 360 of the

2,053 rural and completely rural nonmetro counties. RHS also guaranteed

more loans in 23 additional metro counties and urbanized nonmetro

counties. (See fig. 3.) In fact, RHS is a significant source of mortgage

insurance in some of the least populated counties. The 383 counties in

which RHS guaranteed more single-family loans than FHA insured contain

only 3 percent of the nation’s population and are primarily located in the

Midwest.
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Figure 3: Counties Where RHS Guaranteed More Loans Than FHA Insured in 1999

One possible reason for the low number of FHA-insured loans in some

counties is low bank participation. Some bank officials indicated that they

Metro counties (10) 

Urbanized nonmetro counties (13) 

Rural nonmetro counties (228)

Completely rural nonmetro counties (132)
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do not want to deal with the extra paperwork required for governmentinsured loans or get involved with 30-year loans. An FHA official said that

she believes some small rural banks do not participate in FHA’s programs

because they do not want to hold FHA loans in their portfolios and are not

large enough to benefit from pooling loans to back securities sold to

investors. In contrast, rural bank officials cited certain advantages of

participating in RHS’ programs, including the opportunity to advertise

guaranteed loans that require no money down and the assistance provided

by local RHS staff.

More Overlap Within

Multifamily Products and

Markets Served in Rural

Areas

Like its single-family programs, RHS’ multifamily programs are small

relative to HUD’s. But there is more overlap in the products offered and the

groups served by the two agencies’ multifamily programs, even though RHS

has a greater presence across nonmetro counties. Similarities and

differences in the agencies’ products and the extent to which their

programs serve rural areas are discussed following table 3, which shows

the key features of the multifamily programs offered by RHS and HUD. The

two principal ways in which RHS and HUD make multifamily housing

affordable—mortgage credit and rental assistance—along with the location

of units receiving assistance by RHS and HUD are also described.

Table 3: Key Features of the Principal Multifamily Programs Offered in Rural Areas

Agency Direct loans

Loan guarantee/

insurance

Interest

subsidy

Rental

assistance

Income

targeting

Location

targeting

RHS X X X X X X

HUD X X X X
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RHS and HUD subsidize multifamily housing through multifamily

subsidized loan and rental assistance programs. HUD’s portfolio of about

1.4 million subsidized units in about 38,000 properties overshadows RHS’

multifamily portfolio of about 466,000 subsidized units in 17,702

properties.10 But unlike HUD’s single-family mortgage insurance programs,

which insured only 7 percent of the loans in fiscal year 1999 to families

living outside metro counties, HUD provided assistance to over 210,000, or

16 percent of its subsidized multifamily housing units, outside metro

counties.11 In comparison, about 65 percent, or about 303,000 of RHS’

466,000 subsidized multifamily units, were outside metro counties. Figure

4, which compares the locations of HUD and RHS multifamily units outside

metro counties, shows that RHS has a large number of multifamily units in

all but urbanized nonmetro counties.12

10HUD also provides funding to 1.3 million public housing units and 1.4 million privately

owned units rented by tenants with certificates and vouchers.

11Because we could not identify county classification code data for about 108,000 HUD

units, our analysis is based on about 1.3 million HUD multifamily subsidized units.

12About 45,000 of the units that HUD subsidizes are located in developments financed by

RHS.
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Figure 4: Locations of Units Subsidized by HUD and RHS in Nonmetro Areas

Note: Not included in the figure are approximately 1.1 million HUD-subsidized and 163,000 RHSsubsidized units in metro counties.

As shown in figure 5, RHS has more subsidized units in its portfolio than

HUD for 1,870 counties. These counties have a total population of 54

million, or 20 percent of the U.S. population. About 322,000 units, or about

69 percent of RHS’ multifamily portfolio, and about 122,000 units, or about

9 percent of HUD’s multifamily portfolio, are located in these 1,870

counties. Thus, although RHS’ overall multifamily market share is small

relative to HUD’s, in 60 percent of the primarily rural nonmetro counties

spread throughout the nation, RHS subsidizes more multifamily units than

does HUD.

Subsidized units in thousands

0

50

100

150

200

250

Urbanized

nonmetro

Rural nonmetro Completely

rural nonmetro

HUD

RHS
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Figure 5: Counties Where RHS Subsidizes More Units Than HUD

Metro counties (239) 

Urbanized nonmetro counties (75)

Rural nonmetro counties (962) 

Completely rural nonmetro counties (594)
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RHS’ and HUD’s multifamily programs differ in the way they are managed.

Most rural HUD multifamily developments are managed from a distance,

from 18 hubs and 33 program centers, typically located in urban areas. RHS

multifamily developments are typically managed from district or local

offices, although program administration varies greatly by state. RHS

officials believe their developments are better monitored with closer local

supervision. HUD believes its newly consolidated, regional structure allows

it to quickly identify weaknesses in its portfolio. Developers and property

managers told us that differences in the management of low-income

housing tax credits, RHS’ and HUD’s multifamily programs, and various

RHS state programs create inconsistent rules that lead to frustration and

extra paperwork.

Despite differences in the way they manage their multifamily programs,

RHS and HUD are facing similar challenges. Both agencies are dealing with

aging properties that have increasing rehabilitation needs. In addition, both

agencies may lose affordable housing units if owners decide to leave the

programs, and both are offering incentives for owners to stay. For example,

RHS offered equity loan incentives to 43 developments in fiscal year 1999.

In addition, the Congress and HUD have taken steps to encourage property

owners to renew their rental assistance contracts or mitigate the impact on

households when owners decide to not renew their rental assistance

contracts. Finally, in recent years, HUD and RHS have set up separate

systems to monitor the physical and financial condition of their properties.

Variation in the Degree of

Overlap With RHS’

Specialized Programs

In addition to its primary single-family and multifamily programs, RHS

offers a number of programs that target special employment, age, or ethnic

groups or offer services to communities in general. The degree of overlap

between these and other programs varies in terms of the products they

offer and the people they serve. In some instances, RHS is the only source

of funding. In other instances, a number of agencies offer similar programs.

Table 4 shows the key features of the specialized programs offered by RHS

and other organizations in rural areas. A discussion of the programs

follows the table.
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Table 4: Key Features of Specialized Programs Offered in Rural Areas

• RHS is the only national source of funds for the construction of farm

worker housing. Farm workers are frequently the most poorly housed

people in the country, often found living in tents, shacks without running

water, or crowded, poorly built dormitories. Since the early 1960s, RHS

has provided low-interest loans and grants to public or nonprofit

agencies or to individual farmers to build affordable rental housing. The

program is limited to housing employees that are involved in production

agriculture, including aquaculture and on-farm processing. In some

states, such as California, farm laborers have been able to build their

own homes through RHS’ self-help housing program.

• RHS has administered the self-help housing program since 1971. This

program, which allows families to obtain small direct mortgage loans in

amounts based on how much “sweat equity” they put into the

construction of their homes, is one of the few RHS programs whose

funding levels have increased. RHS contracts with four regional

organizations to provide (1) training and technical assistance to selfhelp sponsors and (2) assistance to applicants to become self-help

sponsors. Habitat for Humanity International, a religious-based

nonprofit organization, which receives grants for land and infrastructure

costs from HUD’s Self-Help Homeownership Opportunities Program,

and Fannie Mae also offer “sweat equity” programs in urban and rural

areas.

• HUD and the Department of the Interior’s Bureau of Indian Affairs offer

direct housing assistance programs for Native Americans. HUD started

two new rural housing assistance programs for Native Americans in the

Agency/entity

Farm worker

housing

Self-help

housing

Indian

housing

Elderly

housing

repairs Weatherization

Community

development

RHS X X X X X

Bureau of Indian

Affairs

X

HUD X X X X

Department of

Energy

X

State HFAs X X X X

Nonprofit

organizations

XX X X X
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1990s. The Native American Loan Guarantee Program, first offered in

1994, provides homeownership opportunities to Native Americans

interested in owning a home on tribal, individual trust, or Indian area

lands. The Native American Housing Assistance and Self-Determination

Act of 1996 established a block grant approach to housing for Native

Americans. Tribes or tribally designated entities are now empowered to

determine how housing and community development funds should be

used to address community-specific needs. In addition, the Department

of the Interior’s Bureau of Indian Affairs administers the Housing

Improvement Program, which provides grants to repair, renovate,

replace, or provide housing for the neediest Indian families living in

substandard housing or lacking recourse for assistance. Although RHS

does not offer housing programs specifically for Native Americans, it

uses its existing housing programs to fund single-family and multifamily

loans to Native Americans. For example, in fiscal year 1999, RHS made

250 single-family direct loans and over 250 single-family direct repair

loans and grants to Native Americans, and it provided direct and

guaranteed financing for 263 multifamily units of rental housing on

Native American reservations or in communities where the majority of

tenants are Native Americans. Furthermore, according to RHS Indian

housing staff, coordination with HUD has improved as RHS’ programs

are being included in many of the tribal housing plans required under

the Native American Housing Assistance and Self-Determination Act of

1996. RHS anticipates that coordination with Indian tribes and HUD will

increase as Native American communities become more familiar with

RHS’ programs.

• RHS serves rural elderly homeowners by offering repair grants and lowinterest loans. FHA, Fannie Mae, and some state HFAs have developed

reverse mortgage programs that are available throughout the country.

These programs allow elderly homeowners to take equity out of their

homes to pay for needed repairs. Because income has nothing to do with

getting a loan or the amount of the loan, reverse mortgages are a viable

way for low-income rural elderly families who own their homes outright

to make needed repairs. RHS does not have its own reverse mortgage

program. An RHS outreach staffer in Vermont told us that he educates

consumers whenever possible about reverse mortgage programs

available in his area. In two other states, RHS officials told us that they

were not sufficiently informed about reverse mortgage programs to

offer advice.
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• RHS’ predecessor agency made weatherization loans from 1977 through

1983. Today, weatherization grants of up to $2,032 per household are

available nationwide through a program administered by the

Department of Energy. In fiscal year 1999, the $133 million formula grant

program weatherized about 70,000 low-income dwellings nationwide.

RHS and community development officials told us that they often use

Department of Energy weatherization grants to supplement repair

grants for the elderly that can go up to $7,500 per household. In addition,

RHS’ repair loan program, which is available to all very-low-income

families and allows them to borrow up to $20,000 at 1 percent interest,

can be used to weatherize homes.

• As part of USDA’s state Rural Development offices, RHS serves rural

communities in general by packaging its housing and community

development programs to fit the development needs of small towns. For

example, a state Rural Development office could offer financing for a

new fire station, a health care facility, and a new sewer plant along with

a self-help housing program grant for a particular town. As such, RHS

has a great deal in common with HUD’s community builders program,

which began in 1998 and is run out of HUD’s 81 field offices. Similar to

RHS staff in more proactive states, HUD community builders focus on

improving relationships between HUD and banks, local governments,

and businesses. However, few HUD community builders have been

active in rural areas, and the noncareer fellows portion of the program

has been terminated. In addition, both RHS and HUD officials noted that

coordination between RHS staff and HUD community builders varied by

state.

Options for Optimizing

the Federal Role in

Rural Housing

Development

The rural housing environment has changed dramatically since rural

housing programs were first created. As the quality of housing in rural

areas has improved, technology has advanced, and access to credit has

become more prevalent, the distinctions between rural and urban areas

have blurred. These changes—along with RHS’ growing reliance on

guaranteed lending, leveraged funds, and partners—raise questions about

how best to ensure the availability of decent affordable housing in rural

areas. For example, is the housing market in rural areas different enough

from other housing markets for federal housing programs to (1) be targeted

to rural areas, (2) carry better rates and terms in rural areas, and (3) have a

separate rural delivery system?
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Rural housing experts we spoke with discussed proposals for optimizing

the federal role in rural housing development. These proposals typically

involved changes in RHS’ product features, targeting, or delivery systems.

Specifically, to optimize the federal role, a range of options is available,

including options to continue or discontinue targeting housing programs to

rural areas, providing households in rural areas with greater subsidies than

their urban counterparts, and operating separate systems for delivering

rural programs. In addition, the best working features of rural housing

programs could be merged with other comparable federal housing

programs. Arguments for and against these options follow.

• Targeting Housing Programs to Rural Areas

Arguments for continuing to target

housing programs to rural areas

Arguments against continuing to

target housing programs to rural

areas

• Some rural areas continue to

have substandard housing

• Some rural areas have few

resources and lack the capacity

to obtain funding on their own

• Overall, national programs,

particularly those offered by

HUD and VA, do not target rural

areas and some do not target

low-income households

• Rural housing assistance is a part

of the community development

packages offered by state Rural

Development offices

• RHS is the major agency offering

single-family direct loans and

grants and farm worker housing

to very-low-income rural

residents

• The single-family program’s

emphasis has shifted from direct

to guaranteed loans, which have

more in common with FHA’s

insured loans

• With little new funding for

construction, RHS’ multifamily

program is targeting few new

units in rural areas
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Page 35 GAO/RCED-00-241 Rural Housing Options

• Providing Better Rates and Terms on Mortgages for Households in Rural

Areas

Arguments for providing better

terms in rural areas

Arguments against providing better

terms in rural areas

• Rural borrowers often pay higher

mortgage interest rates because

the costs of doing business are

greater in sparsely populated

areas

• Such terms support the basic

tenet that homeownership is a

part of the culture of rural

America

• Median incomes are generally

lower in rural areas, but housing

development costs are about the

same as or higher than in urban

areas

• Some rural areas do not have the

capacity to take advantage of

HUD’s CDBG, HOME, and other

assistance programs that often

focus on urban areas

• There is no urban counterpart to

RHS’ direct loan program that

would allow very-low-income

urban residents to become

homeowners

• FHA cannot compete with RHS

guaranteed loans requiring no

money down and no monthly

mortgage insurance payments
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• Maintaining a Separate System for Delivering Housing Programs in

Rural Areas

Arguments for a separate system Arguments against a separate

system

• RHS believes some rural

residents do not have access to

modern telecommunications or

other means to obtain

information on affordable

housing opportunities

• RHS believes borrowers often

need local servicing in the first

year of the loan

• RHS’ field role has changed from

primarily originating and

servicing direct loans to

leveraging deals with partner

organizations

• In some states, local banks,

nonprofit organizations, social

workers, and other local

organizations are doing much of

the front-line interaction with

rural households that was

previously done by RHS staff

• RHS’ new community

development mission serves

much the same function as

HUD’s community builders

program

• Most of RHS’ direct loan

servicing is done by the

Centralized Servicing Center
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Page 37 GAO/RCED-00-241 Rural Housing Options

• Merging Rural Housing Programs With Other Housing Programs

Arguments for merging housing

programs

Arguments against merging housing

programs

• Current RHS staff with local

contacts could provide a field

presence for HUD, and for other

public partners, applying their

leveraging/partnering skills to all

communities

• RHS’ centralized servicing center

could seek to increase its

servicing workload by competing

to service loans for other federal

agencies or private companies

• RHS and HUD could combine

multifamily portfolio

management functions that are

now provided under separate

systems

• RHS’ mortgage guarantee and

FHA’s mortgage insurance

programs could be combined

because both operate throughout

rural areas

• State HFAs could use the

increased funding from the

increase in the bond cap to

operate a more highly subsidized

single-family direct loan program

• Rural areas could lose their

federal voice

• Rural areas could lose the

benefits of lower rates and terms

offered by current RHS direct

and guaranteed loan programs

• HUD, other federal partners, and

some state HFAs have not

focused on rural areas

• State HFAs could have less

funding for other programs
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Conclusions In some rural areas, particularly those that are far from urban centers,

housing quality is still below par and credit costs are slightly higher than

elsewhere. But many former problems with infrastructure, housing quality,

and credit are no longer prevalent in rural areas today, and in much of the

country, the divisions between rural and urban areas are not clearly

defined. Budget cutbacks; technology improvements; and greater reliance

on guaranteed lending, leveraged funds, and public and private partners

have also led to fundamental changes in the ways rural housing programs

operate. Some of these changes have occurred since the Congress last

restructured USDA’s rural housing delivery system in 1994, and their effect

has generally been to reduce the distinctions between RHS’ rural housing

programs and other agencies’ programs that are available in rural areas.

For example, RHS’ single-family guaranteed loan program and FHA’s singlefamily insured loan program both primarily target low- and moderateincome households, use the same qualifying ratios, and operate in the same

markets. Even though RHS’ program offers slightly more attractive terms

for the borrower and is available only in rural areas, whereas FHA’s

program is available nationwide, both programs could be offered through

the same network of lenders. Similarly, efficiencies could be achieved by

merging RHS’ and FHA’s multifamily programs, adapting each one’s best

practices for use by the other, and eliminating inconsistencies in the rules

applicable to private owners under the current programs. However,

without prodding by the Congress, it is unlikely that RHS and FHA would

consider examining the benefits and costs of merging these programs.

Although state HFAs have expanded their programs offering below-market

interest rates to low-income homebuyers, RHS’ single-family direct loan

program remains unique in offering highly subsidized home mortgages to

low-income homebuyers unable to qualify for credit elsewhere. Similarly,

RHS is the only major provider of farm worker housing and self-help

housing programs for very-low-income rural residents. However, questions

exist as to whether a separate field structure is needed to deliver these

programs or whether local public and private organizations could provide

the same services more efficiently. Finally, competing to service other

agencies’ direct loans could increase the efficiencies of RHS’ Centralized

Servicing Center. Appendix I expands on these and other ideas that could

be considered in merging some of RHS’ programs with those of HUD and

others, as well as in improving the effectiveness of the current programs.
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Matter for

Congressional

Consideration

To optimize the federal role in rural housing, the Congress may wish to

consider requiring USDA and HUD to examine the benefits and costs of

merging those programs that serve similar markets and provide similar

products. As a first step, the Congress could consider requiring RHS and

HUD to explore merging their single-family insured lending programs and

multifamily portfolio management programs, taking advantage of the best

practices of each and ensuring that targeted populations are not adversely

affected.

Agency Comments We provided USDA and HUD with a draft of this report for their review and

comment. USDA said it believes that the report does an excellent job of

describing the general picture of rural housing programs and the general

condition of rural homes. USDA said it believes that some of the

suggestions made in the report to improve the effectiveness of current

programs may better serve rural areas and that the agency will further

explore some of these issues over the next 6 months. However, USDA also

said it believes that the gap in housing affordability between rural and

urban areas, as well as the importance of rural housing programs to the

Department’s broader Rural Development mission area, would make

merging RHS’ programs with HUD’s programs unfeasible and detrimental

to rural America. USDA also believes that merging programs would result

in rural areas’ losing a federal voice. The report recognizes that some rural

areas, particularly remote ones, have severe housing affordability gaps.

However, others, including USDA’s Economic Research Service, have

reported that, overall, the affordability gap in rural areas is no worse than

in urban areas. Furthermore, the report recognizes that rural housing is

part of USDA’s broader Rural Development mission area. Now that HUD is

also adopting a holistic management approach with its community builders

program, we believe both agencies could benefit from evaluating best

practices and exploring opportunities to merge common programs. We also

recognize that an argument against merging programs is that rural areas

could lose a federal voice. For this and other reasons, we maintain that the

Congress needs to consider whether the housing market in rural areas is

sufficiently distinct to justify targeted programs, better terms, and a

separate program delivery system. USDA’s complete letter and our

response to specific areas of disagreement with USDA appear in appendix

III.

HUD also commended the report in general, stating that it presents an

informed description and analysis of the quality of rural housing, access of
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Page 40 GAO/RCED-00-241 Rural Housing Options

rural households to mortgage credit, and relationship of RHS’ programs to

other public and private affordable housing programs today. HUD also

stated that it believes any opportunity to improve the delivery of rural

housing services should be explored. However, HUD believes the

differences between RHS’ and FHA’s single-family programs are sizable and

that without legislative changes to product terms, efforts to merge the

programs would likely result in a more cumbersome rather than a more

efficient delivery system. HUD added that it has been working and will

continue to work with USDA in a mutual exchange of information on best

practices and will explore possible avenues of coordination. While HUD

and RHS are working on best practices and exploring opportunities for

improving coordination, we believe that they should also explore the

potential benefits of merging similar programs because merged programs

need not be more cumbersome or inefficient than separate programs are

today. The complete text of HUD’s comments and our evaluation of them

appear in appendix IV.

Scope and

Methodology

Overall, our work was based on our review of published data and visits to

Maine, Mississippi, Missouri, New Hampshire, Ohio, and Vermont, where

we were able to observe a variety of rural housing conditions, RHS’

methods of delivering its products, and RHS’ interactions with partner

organizations. We judgmentally selected these six states to obtain a cross

section of rural housing conditions, delivery structures, and states with

differing concentrations of rural counties. We also used data from RHS,

FHA, and state HFAs to measure the markets they serve.

To describe the physical condition of today’s rural housing, we reviewed

published information from HUD’s American Housing Survey and the

decennial Census. To describe rural households’ access to affordable

housing credit, we relied on information supplied by USDA’s Economic

Research Service, RHS, and others.

To document the rural housing programs offered by RHS and the ways in

which its programs have adapted to changes in federal housing assistance

levels, we interviewed appropriate officials at USDA’s RHS headquarters,

Centralized Servicing Center, and Office of Budget Program Analysis;

HUD’s offices of Housing, Community Planning and Development, Public

and Indian Housing, and Policy Development and Research; and other

public and private organizations involved in delivering rural housing

programs. To measure the effectiveness of different RHS state offices’

program delivery systems, we analyzed data on lending activity and staffing
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Page 41 GAO/RCED-00-241 Rural Housing Options

by state. During our visits to the six states, we also met with RHS officials

and officials of nonprofit organizations, banks, state HFAs, and other

public and private partners to get firsthand knowledge of how rural

housing programs are implemented and received.

To assess any overlap between RHS’ and other agencies’ programs, we

analyzed RHS, FHA, and HFA databases to evaluate single-family and

multifamily programs at the county level. Where possible, we used the

Economic Research Service’s codes, used to describe counties’ “ruralness,”

to place nonmetro county data into three subcategories that best

correspond to RHS’ program eligibility criteria. Appendix II associates

these county data with corresponding population statistics.

We developed options for maximizing the efficiency and effectiveness of

the federal role in rural housing after synthesizing the information

developed under the first three objectives and proposals set forth by rural

housing experts. We discussed these options, as well as individual

proposals affecting RHS only, with these rural housing experts.

We performed our work from January through August 2000 in accordance

with generally accepted government auditing standards.

Unless you publicly announce its contents earlier, we plan no further

distribution of this report until 30 days after the date of this letter. At that

time, we will send copies of the report to interested congressional

committees and Members of Congress; the Honorable Dan Glickman,

Secretary of Agriculture; the Honorable Andrew M. Cuomo, Secretary of

Housing and Urban Development; the Honorable Jacob J. Lew, Director,

Office of Management and Budget; and other interested parties. We will

also make copies available to others on request.
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Page 42 GAO/RCED-00-241 Rural Housing Options

If you or your staff have any questions about this report, please contact me

at (202) 512-7631. Key contributors to this report are Andy Finkel, Jerry

Hall, Rich LaMore, and Matt Scire.

Stanley J. Czerwinski

Associate Director, Housing and

Community Development Issues
Page 43 GAO/RCED-00-241 Rural Housing Options
Page 44 GAO/RCED-00-241 Rural Housing Options

Appendix I

Opportunities to Improve the Effectiveness of Apendxies

Current Rural Housing Programs ApendxiI

Through discussions with Rural Housing Service (RHS) officials and

others, we identified a number of proposals that could be used for

improving the efficiency of existing rural housing programs, whether they

are merged or not. For example, some RHS state officials believe that the

requirement to operate housing programs out of the U.S. Department of

Agriculture’s (USDA) service centers does not match RHS’ new mission of

serving communities. In addition, some state and industry officials believe

that the eligibility criteria for certain programs could be modified to reach

more rural residents and the procedures for administering other programs

could be changed to increase their efficiency or accessibility. We are

presenting the options below with arguments for and against each one.

Centralize RHS State

Delivery Systems

When state Rural Development offices were given the authority to develop

their own program delivery systems as part of the 1994 reorganization,

some states did not change, believing that they needed to maintain a

county-based structure with a fixed local presence to deliver services oneon-one to potential homeowners. Other states tried innovative, less costly

approaches to delivering services, such as consolidating local offices to

form district offices and using traveling loan originators for single-family

programs. However, RHS has undergone a major shift in mission during the

past few years. RHS is still a lending agency like its predecessor, the

Farmers Home Administration, but it now emphasizes community

development, using leveraging for rural communities to develop housing,

community centers, schools, fire stations, health care centers, child care

facilities, and other community service buildings. Some state Rural

Development officials we spoke with questioned the efficiency and costeffectiveness of maintaining a county-based field structure in a streamlined

environment where leveraging, rather than one-on-one lending, has become

the focus of the work.

For example, Mississippi, which maintains a county-based Rural

Development field structure, has the most staff and field offices of any

state; its productivity is also next to the lowest, as measured by dollar

program activity per staff member. Ohio, on the other hand, ranks fifth in

overall productivity, operating at less than one-fifth of Mississippi’s cost per

staff member. We recognize that it is more difficult to underwrite loans in

the Mississippi Delta and other economically depressed areas than in rural

areas generally, and Mississippi does have a substantial multifamily

portfolio. Nevertheless, the number of field staff in Mississippi far exceeds

that in most other states. Ohio, whose loan originators are based in four

offices and travel across the state with laptop computers, ranks seventh in
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 45 GAO/RCED-00-241 Rural Housing Options

the dollar value of single-family guaranteed loans made, and fifth in the

dollar amount of direct loans made, per staff member. Ohio has also done a

good job of serving all of its counties, while Mississippi has experienced a

drop in business in the counties where it has closed local offices. Ohio’s

travel and equipment costs have increased with the use of traveling loan

originators.

The Maine Rural Development office also fundamentally changed its

operational structure, moving from 28 offices before the reorganization to

15 afterwards, and it now operates out of 3 district offices. The current

state director, who also headed the Farmers Home Administration state

office in the 1970s, said he has headed the agency under both models and

believes the centralized system is much more effective. He said he believes

centralized offices are more productive because his staff work better as a

team than spread across the state in county offices with small staffs. He

added that by centralizing, the state was able to reduce its leasing costs and

better manage its resources overall. This idea was reflected in the state’s

1996 office-restructuring plan that said centralization would allow for

flexibility in accommodating the changes that occur between programs and

resources. He added that under the current structure, staff can no longer sit

in the office waiting for clients to come to them. He also maintained that a

centralized structure is better suited to building the partnerships with real

estate agents, banks, and other financial institutions that have become the

core element of RHS’ work.

Allow RHS Personnel

to Locate Separately

From USDA Service

Centers

Consistent with its 1994 reorganization legislation, USDA closed or

consolidated hundreds of county offices and established “USDA service

centers” that include staff representing farm services, conservation, and

rural development programs. However, the primary goal of the original

USDA/Office of Management and Budget (OMB) task team that designed

the service centers was to place all the county-based agencies together,

particularly those that dealt directly with farmers and ranchers, to reduce

Option 1: Centralize RHS State Delivery Systems

For Against

• Could increase productivity

• Could lower overall costs

• Could result in a more

manageable structure

• Would lose fixed local presence

• Could increase travel and

equipment costs
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 46 GAO/RCED-00-241 Rural Housing Options

personnel and overhead expenses by sharing resources. But while the farm

finance functions from the old Farmers Home Administration fit well into

the new county-based Farm Service Agency, the housing finance functions

that moved to the new state Rural Development offices were never a

natural fit in the centers. According to a USDA Rural Development program

budget office specialist, the decision to collocate Rural Development and

Farm Service offices was based on the fact that Rural Development had a

similar county-based field structure and the Department needed to fill

space in the new service centers. He added, however, that collocating Rural

Development and Farm Service offices makes less sense today, especially

in states where Rural Development operations have been centralized.

All the states we visited had centralized some operations. Staff in several

offices emphasized their belief that cost savings result from sharing

building space and telecommunications systems. Some also said it makes

sense for staff to be close to their customers. But for Rural Development

staff, the move to the new USDA service centers often meant moving from

town centers to more remote areas that were closer to farm clients. In

particular, some staff questioned the benefits of placing Rural Development

outreach personnel in small, county-based service centers that were

designed to serve farmers or ranchers. These personnel spend their days in

rural communities working with bankers, in nonprofit homeownership

centers providing homeownership education and outreach, and with real

estate brokers marketing their programs. For example, the majority of

Vermont’s Rural Development staff work out of one USDA service center in

the state capital. But five outreach staff maintain offices in county-based

USDA service centers. The outreach staff we met with emphasized that

they have nothing in common with the farm and resource agencies that

operate out of the centers, and they said they typically visit the service

centers only once or twice a week to pick up their mail. In Ohio, personnel

use four USDA service centers as their home bases. Like the Vermont

outreach workers, they spend the majority of their time meeting with

nonfarm clients wherever they can find acceptable space. Staff in Maine

cited what they believe to be cultural differences between Rural

Development and Farm Service agencies. They said they prefer to meet at

their customers’ locations because USDA service centers are “jeans and

workboot” places that are fine for meeting with farmers, but Rural

Development’s customers expect business dress.
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 47 GAO/RCED-00-241 Rural Housing Options

In 1993 testimony before the Senate Committee on Governmental Affairs,

we reported that USDA should be restructured in the context of the newer

management concepts that guide private-sector corporations and that the

new management concepts should emphasize flexibility, flattened

hierarchies, and a customer focus. We also stated that USDA’s missions and

corresponding restructuring should be continually reassessed and updated

to address changing conditions.1 USDA’s November 1999 report

Modernization Plan of the USDA County-Based Agencies examines a

number of important issues, such as how to deal with outmoded business

practices and technology and reduce program delivery costs. But it does

not consider the more fundamental question of how to deal with an

increasingly centralized Rural Development mission area in a county-based

USDA service center environment. Consequently, some suggest that Rural

Development offices be located apart from USDA service centers. For

example, outreach personnel could be collocated with community

development partners. This option could, however, create the appearance

of a conflict of interest.

1

Revitalizing USDA: A Challenge for the 21st Century (GAO/T-93-62, July 21, 1993)

Option 2: Allow RHS Personnel to Locate Separately From USDA

Service Centers

For Against

• Would place Rural Development

staff where customers are

located

• Staff in some states already

spend much of their time running

community education/outreach

programs with community

development partners

• Would increase vacant space in

USDA service centers

• Could create an appearance of

conflict of interest by other

lending partners if staff are

collocated with community

development agencies
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 48 GAO/RCED-00-241 Rural Housing Options

Combine All Rural

Capacity-Building

Initiatives Into One

Notice of Funding

Availability Under One

Organization

While the disparities between average weekly earnings for rural and other

areas of the United States decreased over the past decade, some rural areas

still have fewer resources and lack the capacity needed to obtain funds for

housing and community development. A local organization that can

successfully compete for limited funds can be the difference between the

success or failure of a local housing initiative. We witnessed this during our

state visits, where a strong local nonprofit group was often the lead in

community outreach and in leveraging funding from a variety of federal,

state, and local organizations. For example, in northwest Mississippi, the

combination of an active nonprofit group and a proactive RHS office put

together a new single-family development with funding from RHS, the

Department of Housing and Urban Development’s (HUD) Community

Development Block Grant (CDBG), the Federal Home Loan Bank

(FHLBank), and the local government. According to a local official, the

new development also had the benefit of revitalizing the area, as other

homeowners adjacent to the new development began fixing up their homes

after they saw the new homes going in.

Recognizing the need for more local involvement in rural areas, the

Congress recently enacted programs in HUD and RHS aimed at building

capacity at the state and local levels for rural housing and community

development. HUD’s program made $25 million available for fiscal years

1999 and 2000 for building the capacity of local rural nonprofit

organizations, community development corporations, and other local

organizations. Over 700 organizations responded to a notice of funding

availability in fiscal year 1999, and over 600 responded in fiscal year 2000.

In a separate notice, RHS announced the availability of a $6 million grant

program in fiscal year 2000 to develop the capacity and ability of private

nonprofit organizations and low-income communities to improve housing,

essential community facilities, or community and economic development

through a program of technical assistance in rural areas. Qualified private

and public (including tribal) intermediary organizations proposing to carry

out technical assistance programs are eligible to receive funding. The

intermediary must provide matching funds from nonfederal sources in an

amount at least equal to the grant. More recently, the administration

proposed a third program, a $22 million CDBG set-aside for developing

capacity in the Lower Mississippi Delta. While each grant program has its

unique goals and application requirements, all three are designed to meet a

common goal of rural capacity building. Merging the programs into one

notice of funding availability and under one organization could make the

process more efficient and cost-effective. However, special funding for the
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 49 GAO/RCED-00-241 Rural Housing Options

Mississippi Delta would have to be legislatively targeted. Requiring

matching funds would ensure local commitment, allow more applicants to

be funded, and—assuming fewer applicants applied—further reduce

processing costs. A matching requirement could, however, eliminate some

areas that need capacity building most but do not have access to matching

funds.

Make Funds Available

for Off-Farm Worker

Housing

RHS’ farm worker housing loans and grants can be used only to house

employees that are involved in production agriculture, including

aquaculture and on-farm processing. However, in some rural areas of the

country, new agribusiness jobs are available in off-farm processing plants,

particularly in aquaculture, poultry, and pork-processing operations.

Officials in Mississippi and Missouri told us that poor, primarily minority

workers, many of whom would have worked in the fields before the use of

mechanization, are now accepting these agricultural processing jobs.

Often, there are housing shortages in towns where the new plants are built.

According to the director of Missouri’s RHS single-family housing program,

three or four families end up sharing small, often substandard, single-family

homes. However, these processing workers are not eligible for farm worker

housing. Expanding the farm worker housing program’s eligibility criteria

to include these off-farm workers or developing a separate program for

them could help alleviate this problem; at the same time, though, it would

reduce the funding available for farm worker housing.

Another possibility would be to target HUD/CDBG state and small cities

funds for off-farm worker housing. A recent legislative proposal includes $5

Option 3: Combine All Rural Capacity-Building Initiatives Into

One Notice of Funding Availability Under One Organization

For Against

One lead agency and one notice of

funding availability would be more

efficient than two or three

Mississippi Delta funds would have

to be legislatively targeted
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 50 GAO/RCED-00-241 Rural Housing Options

million for a housing demonstration program for agriculture, aquaculture,

and seafood-processing workers

Encourage Families

With Sufficient Equity

to Obtain Reverse

Mortgages Instead of

Repair Grants and

Loans

RHS offers direct grant and loan programs for home repair, basing

eligibility on income level and need. Equity in the home is not considered.

RHS state officials said that the grant funds typically run out early in the

year but that loan funds are usually available because often families cannot

afford to repay loans, even at interest rates as low as 1 percent. Reverse

mortgages, however, are based solely on equity; income is not a factor. As a

result, rural homeowners who have sufficient equity are eligible to take

cash out of their homes for repairs or other purposes. In addition, reverse

mortgages for the elderly require no monthly payments and involve

minimum out-of-pocket costs, such as transaction fees, for the borrower.

Some state Rural Development staff we met with suggested that RHS’

elderly repair grants and loans go only to families that do not have

sufficient equity in their homes to qualify for a privately placed reverse

mortgage. Encouraging borrowers with sufficient equity to obtain a reverse

mortgage is in line with the repair grant and loan program’s eligibility

criteria, which limit funds to very-low-income borrowers who are unable to

obtain affordable credit elsewhere and whose homes present health and

safety issues. RHS could also partner with banks, state housing finance

agencies (HFA), and other lending institutions that offer programs to

further subsidize the loans.

Figure 6 shows a home that received an RHS repair grant to pay for the

residents’ first indoor bathroom. RHS state officials said they did not

consider a reverse mortgage as a possibility, but they are confident that the

owner did not have sufficient equity in the home to qualify. In contrast,

figure 7 shows a home purchased in 1959 by a couple using a $4,000 RHS

direct loan. In 1999, the couple, who are now retired and living on a fixed

income, received a $10,745 RHS repair loan, at 1 percent interest, for

Option 4: Make Funds Available for Off-Farm Worker Housing

For Against

• Would recognize changes in rural

labor markets

• Would update programs to fill a

current need

• Without new funding, off-farm

worker housing would compete

with on-farm worker housing

• Could concentrate worker

housing in one location
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 51 GAO/RCED-00-241 Rural Housing Options

rehabilitation work. The major repairs included a new roof, siding, and

insulation, and the kitchen and bathroom were remodeled. RHS state

officials told us they had not considered a reverse mortgage as a possibility

when the loan was made, but they believed the couple had sufficient equity

in the home to qualify for a reverse mortgage and cover the needed repairs.

Figure 6: RHS Elderly Repair Grant Home
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 52 GAO/RCED-00-241 Rural Housing Options

Figure 7: RHS Repair Loan Home

Rural housing officials told us that, in their view, the instances in which

prior RHS borrowers would have sufficient equity in their homes to justify

a reverse mortgage would generally be limited to areas adjacent to growing

metropolitan areas. They also expressed concern that most of their repair

grants and loans are for only a few thousand dollars and that their clientele

would be hurt by high transaction costs and possibly by predatory lenders.

However, Fannie Mae, HUD, and the American Association of Retired

Persons are strong advocates of reverse mortgages. All three organizations

see reverse mortgages as a way for house-rich but cash-poor seniors to tap

into their home equity to make repairs, pay bills, or supplement Social

Security. As such, the reverse mortgage option would be particularly

Side view

Front view
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 53 GAO/RCED-00-241 Rural Housing Options

helpful for RHS clients interested in taking out more equity than needed to

cover the average home repair. In addition, all three organizations do

outreach to inform seniors about reverse mortgages, and HUD offers free

counseling and referrals to HUD-approved lenders.

On the basis of our visits to rural areas in six states, we agree that the

typical RHS client would likely not have sufficient equity to qualify for a

reverse mortgage. However, there are exceptions, such as in the case

illustrated in figure 7, which was not near a growing metropolitan area.

Each client with sufficient equity that chose to use a reverse mortgage loan

instead of an RHS grant or loan would free RHS funds for a client without

equity whose home is in need of health and safety repairs.

Reverse mortgages can have the additional benefit of allowing borrowers

who have paid off their RHS direct loans but deferred the repayment of

interest subsidies to repay these subsidies. RHS policy allows borrowers

who pay off their direct RHS loans but continue to occupy their properties

to defer this repayment, commonly known as interest credit recapture. As

of July 31, 1999, RHS’ records showed that about $140 million of interest

credit recapture was owed by borrowers who had paid off or refinanced

their mortgages but were continuing to occupy their properties. RHS does

not charge interest on the amounts owed by these borrowers. To receive a

reverse mortgage, a borrower must either pay off any debt against his or

her home before applying for the mortgage or, as most borrowers do, use

an immediate cash advance from the reverse mortgage to pay off the debt.

It is likely that, in some cases, the size of the interest credit recapture

would be too great, leaving little equity to make the reverse mortgage

worthwhile for the elderly homeowner. But when the borrower has

sufficient equity to cover the money needed for home repairs and pay off

the interest credit recapture, the reverse mortgage can be used for both

purposes.
Appendix I

Opportunities to Improve the Effectiveness

of Current Rural Housing Programs

Page 54 GAO/RCED-00-241 Rural Housing Options

Option 5: Encourage Families With Sufficient Equity to Obtain

Reverse Mortgages Instead of Repair Grants and Loans

For Against

• Would allow homeowners to use

equity in homes for repairs or

other purposes

• Programs are already available in

private sector

• Would save limited repair grant

and loan funds for homes

without equity

• Would create opportunities to

partner with banks and others to

make funding go farther

• Could enable RHS to collect

outstanding interest recapture

• Clients would incur transaction

costs to obtain reverse

mortgages

• Would deplete limited wealth for

some homeowners
Page 55 GAO/RCED-00-241 Rural Housing Options

Appendix II

Estimated 1999 Census by Metro and

Nonmetro Categories ApendxiI

a

Numbers also include some cities or census areas.

County type

Number of

countiesa

Percent of

counties Population

Percent of

population

Average

by county

Metro 836 26.6 217,911,140 79.9 260,659

Urbanized nonmetro 252 8.0 17,209,599 6.3 68,292

Rural nonmetro 1,270 40.5 31,059,199 11.4 24,456

Completely rural

nonmetro

783 24.9 6,510,875 2.4 8,315

Total 3,141 100 272,690,813 100 86,817
Page 56 GAO/RCED-00-241 Rural Housing Options

Appendix III

Comments From the Department of

Agriculture ApendxiI

See comment 1.

See comment 2.
Appendix III

Comments From the Department of

Agriculture

Page 57 GAO/RCED-00-241 Rural Housing Options

See comment 3.

See comment 4.

See comment 5.

See comment 6.
Appendix III

Comments From the Department of

Agriculture

Page 58 GAO/RCED-00-241 Rural Housing Options
Appendix III

Comments From the Department of

Agriculture

Page 59 GAO/RCED-00-241 Rural Housing Options

See comment 7.
Appendix III

Comments From the Department of

Agriculture

Page 60 GAO/RCED-00-241 Rural Housing Options
Appendix III

Comments From the Department of

Agriculture

Page 61 GAO/RCED-00-241 Rural Housing Options

See comment 2.
Appendix III

Comments From the Department of

Agriculture

Page 62 GAO/RCED-00-241 Rural Housing Options

See comment 8.

See comment 9.
Appendix III

Comments From the Department of

Agriculture

Page 63 GAO/RCED-00-241 Rural Housing Options
Appendix III

Comments From the Department of

Agriculture

Page 64 GAO/RCED-00-241 Rural Housing Options

See comment 10
Appendix III

Comments From the Department of

Agriculture

Page 65 GAO/RCED-00-241 Rural Housing Options
Appendix III

Comments From the Department of

Agriculture

Page 66 GAO/RCED-00-241 Rural Housing Options
Appendix III

Comments From the Department of

Agriculture

Page 67 GAO/RCED-00-241 Rural Housing Options

See comment 11.

See comment 12.
Appendix III

Comments From the Department of

Agriculture

Page 68 GAO/RCED-00-241 Rural Housing Options
Appendix III

Comments From the Department of

Agriculture

Page 69 GAO/RCED-00-241 Rural Housing Options

The following are GAO’s comments on the Department of Agriculture’s

letter dated August 24, 2000.

GAO’s Comments 1. We recognize that RHS’ housing programs are a component of the Rural

Development mission area. However, with 89 percent of Rural

Development’s fixed funding and 86 percent of its staff years, RHS is

the largest component of the Rural Development mission area. We also

recognize that HUD, like Rural Development, is moving toward a

holistic approach through its community builders program.

2. We agree that there is a housing affordability crisis in parts of rural

America, just as there is a housing affordability crisis in parts of urban

America. In particular, we recognize that in some remote areas, such as

the Mississippi Delta, the Colonias on the Mexican border, Appalachia,

and Indian trust lands, residents have unique problems obtaining

financing. However, as we state in our report, USDA’s Economic

Research Service found, in its 1997 study entitled Credit in Rural

America, that the increased competition in rural housing markets and

the increased secondary market activity of Fannie Mae, Freddie Mac,

and other secondary market institutions in rural areas have reduced the

rural financial market inefficiencies that plagued the sector in the past.

In addition, in the 1999 study by Belden and Wiener that RHS cites in its

comments, a leading housing expert maintains that, overall, the

affordability issue is less severe in rural areas than in urban ones.

Specifically, she states, “Although incomes in rural areas tend to be

somewhat lower than those in urban areas, housing costs are also

lower. Therefore, rural households are less likely to face affordability

problems than are households in central cities or urbanized areas.”1

3. Although the Congress placed most new rural housing and other rural

development functions in USDA, the Congress did locate a recent rural

program, a rural capacity-building grant program, in HUD. We

examined today’s rural housing programs from an historical

perspective to see whether continuing the overall policy is still the most

efficient and effective way for the Congress to maximize the federal

role in rural housing. Our conclusion—that budget cutbacks,

technology improvements, and other factors have led to changes in the

1

Joseph N. Belden and Robert J. Wiener, Housing in Rural America (SAGE Publications,

1999), p. 17.
Appendix III

Comments From the Department of

Agriculture

Page 70 GAO/RCED-00-241 Rural Housing Options

ways rural housing programs operate—led us to suggest that the

Congress consider requiring USDA and HUD to take steps towards

merging those programs that provide similar products and serve similar

markets.

4. We do not understand USDA’s basis for commenting that merging these

programs would be devastating to rural areas. In fact, as part of our

matter for congressional consideration, we noted that it was important

to ensure that targeted populations are not adversely affected.

5. We did not perform detailed cost-benefit analyses of merging rural and

urban housing programs in this review. However, we believe the

changes in the rural environment and the overlap in the markets served

by RHS and HUD indicate a need to identify best practices, including

the efficiencies resulting from those practices.

6. There is also a gap in access to affordable housing credit in urban areas

for those who cannot qualify for single-family housing loans from HUD

or the private sector. Urban areas have no counterpart to RHS’ direct

loan program, and HUD’s Federal Housing Administration (FHA)

cannot compete with the terms of RHS’ guaranteed loans—no money

down and no monthly mortgage insurance payments.

7. We agree, as stated in our report, that many smaller communities have

few resources and lack the capacity to compete with more urban areas.

Recognizing this situation, the Congress recently enacted programs in

HUD and RHS aimed at building capacity at the state and local levels

for rural housing and community development. We see this as another

area where RHS and HUD could examine their best practices and

explore the benefits of merging similar programs.

8. We believe that this statement is equally true for urban and rural

households. Households with low incomes, low skills, and little

collateral fail to qualify for loans in both urban and rural areas. But the

disparity between a rural borrower, who can obtain a guaranteed loan

with no money down, and an urban borrower, who must pay 3 percent

down under FHA’s terms, raises the question of whether the economic

differences between rural and urban areas are still great enough to

support the provision of better terms in rural areas.

9. The paragraph referenced in USDA’s comments on access to credit is

from the introduction to the proceedings of a 1996 Fannie Mae policy
Appendix III

Comments From the Department of

Agriculture

Page 71 GAO/RCED-00-241 Rural Housing Options

roundtable conference on rural housing issues, the highlights of which

were published in Belden and Wiener’s 1999 study entitled Housing in

Rural America. It should be noted that the next paragraph in the

introduction states that “credit access problems may be reduced by

using computer technology, increasing the role of nonprofit

intermediaries to establish public-private partnerships, and providing

technical assistance to remote rural lenders.” We believe that progress

has been made in all three areas since 1996.

10. We focused on single-family insured loan programs because these

programs have the greatest similarities and operate in markets where

distinctions between rural and urban areas have blurred. In merging

similar programs, USDA and HUD should consider the savings that may

be achieved and the impact that merging may have on targeted

populations. Such an analysis should be part of any review of “best

practices,” as we mention in the report. With regard to RHS’ guaranteed

loan program in particular, the report already recognizes that RHS

offers better terms than FHA, which explains, in part, its greater cost.

In contrast, FHA’s single-family insurance program is self-sufficient.

11. We agree that originating direct loans is still an important part of Rural

Development’s mission. We changed the wording in this section of our

report to match the wording in the body of the report. However, we

maintain that several factors—budget cuts in direct loan funding, the

new centralized servicing operation, and the emphasis in Rural

Development’s new community development mission on leveraging

deals with partner organizations—reflect a fundamental change in

program operations.

12. We recognize the tie between the delivery system and the potential to

merge programs. For example, we recognize that the single-family

direct loan program, the farm worker housing program, and the selfhelp housing program are unique in both the products they offer and

the way they are delivered. In contrast, RHS’ delivery system for

guaranteed loans program is not unique. Both RHS and FHA rely on

private lenders to deliver their products. Given the diminishing

distinctions between rural and urban areas, we believe aspects of

delivery systems should be examined in the course of reviewing best

practices, not only between HUD and RHS but also within RHS itself,

where delivery systems vary greatly from state to state.
Page 72 GAO/RCED-00-241 Rural Housing Options

Appendix IV

Comments From the Department of Housing

and Urban Development ApendxiIV

See comment 1.
Appendix IV

Comments From the Department of Housing

and Urban Development

Page 73 GAO/RCED-00-241 Rural Housing Options

See comment 2.

See comment 3.
Appendix IV

Comments From the Department of Housing

and Urban Development

Page 74 GAO/RCED-00-241 Rural Housing Options

The following are GAO's comments on the Department of Housing and

Urban Development's letter dated August 23, 2000.

GAO's Comments 1. We agree that merging programs would require statutory changes and

that in some cases the costs may exceed the benefits. That is why we

are focusing on having RHS and HUD explore the potential benefits of

merging similar programs, focusing on the best practices of each and

insuring that the targeted populations are not adversely affected.

2. In our July report on HUD's housing portfolios, we noted that HUD had

established quality assurance procedures; however, we also found that

gaps or weaknesses in some of those procedures substantially limited

their effectiveness.1

3. We revised the report to make it clear that only the noncareer fellows

portion of the community builders program has been terminated.

1

HUD Housing Portfolios: HUD Has Strengthened Physical Inspections but Needs to Resolve

Concerns About Their Reliability (GAO/RCED-00-168; July 25, 2000).

(385819) Letr
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