Testimony 

Before the Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, 

House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Thursday, June 19, 2003 RURAL HOUSING 

SERVICE 

Opportunities to Improve 

Management 

Statement of William B. Shear, Acting Director 

Financial Markets and Community Investment 

GAO-03-911T 
Our testimony is based on two reports addressed to this subcommittee—the 

September 2000 report on rural housing options and May 2002 report on 

multifamily project prepayment and rehabilitation issues. GAO found that 

while RHS has helped many rural Americans achieve homeownership and 

has improved the rural rental housing stock, it has been slow to adapt to 

changes in the rural housing environment. Also, RHS has failed to adopt the 

tools that could help it manage its housing portfolio more efficiently. 

Specifically: 

• Dramatic changes in the rural housing environment since rural housing 

programs were first created raise questions as to whether separately 

operated rural housing programs are still the best way to ensure the 

availability of decent, affordable rural housing. Overlap in products and 

services offered by RHS, HUD, and other agencies has created 

opportunities for merging the best features of each. Even without 

merging RHS’s programs with HUD’s or those of other agencies, RHS 

could increase its productivity and lower its overall costs by centralizing 

its rural delivery structure. 

• RHS does not have a mechanism to prioritize the long-term rehabilitation 

needs of its multifamily housing portfolio. As a result, RHS cannot be 

sure it is spending limited rehabilitation funds as effectively as possible 

and cannot tell Congress how much funding it will need in the future. 

Federal housing assistance in rural 

America dates back to the 1930s, 

when most rural residents worked 

on farms. Without electricity, 

telephone service, or good roads 

connecting residents to population 

centers, residents were 

comparatively isolated and their 

access to credit was generally poor. 

These conditions led Congress to 

authorize separate housing 

assistance for rural residents, to be 

administered by USDA. 

Over time, the quality of the 

housing stock has improved and 

credit has become more readily 

available in rural areas. Also, 

advances in transportation, 

computer technology, and 

telecommunications have 

diminished many of the distinctions 

between rural and urban areas. 

These changes call into question 

whether rural housing programs 

still need to be maintained 

separately from urban housing 

programs, and whether RHS is 

adapting to change and managing 

its resources as efficiently as 

possible. 

www.gao.gov/cgi-bin/getrpt?GAO-03-911T.

To view the full product, click on the link 

above. For more information, contact William 

B. Shear at (202) 512-4325 or 

shearw@gao.gov. 

Highlights of GAO-03-911T, a testimony 

before the Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, U.S. House of 

Representatives 

June 19, 2003 

RURAL HOUSING SERVICE

Opportunities to Improve Management 
Page 1 GAO-03-911T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the management of Rural Housing 

Service (RHS) programs. RHS makes a significant investment in affordable 

housing for low-income rural Americans through a variety of direct and 

guaranteed loan and grant programs. RHS manages a single-family and 

multifamily direct loan portfolio of about $28 billion, oversees a program 

that guarantees about $3 billion in single-family mortgages annually, and 

administers over $700 million in rental assistance payments each year. 

This statement is based on two reports addressed to this Subcommittee: 

our September 2000 report on rural housing options and our May 2002 

report on multifamily project prepayment and rehabilitation issues.1

 I will 

also briefly discuss the objectives of our ongoing work on RHS’s rental 

assistance program. My principle objective today is to present an overview 

of the concerns identified in our previous reports that you may want to 

consider as you deliberate on how best to improve housing services for 

rural Americans. 

In summary, while RHS has significantly improved the quality of the 

housing stock in rural America and has helped many rural Americans 

become homeowners, it has been slow to adapt to changes in the rural 

housing environment. In addition, it has not adopted the managerial tools 

that are now available that would help it make better use of its housing 

portfolio and limited budgetary resources. Specifically: 

• First, dramatic changes in the rural housing environment since rural 

housing programs were first created raise the question of whether 

separately operated rural housing programs are still needed to best 

ensure the availability of decent affordable rural housing. Overlap in 

the products and services offered by RHS, the Department of Housing 

and Urban Development (HUD), and other agencies opened up 

opportunities for merging the best features of each program. But even 

without merging the best features of RHS’s programs with the best 

features of those of HUD or other agencies, RHS could increase its 

 1

Rural Housing: Options for Optimizing the Federal Role in Rural Housing Development 

(GAO/RCED-00-241, September 15, 2000) and Multifamily Rural Housing: Prepayment 

Potential and Long-Term Rehabilitation Needs for Section 515 Properties (GAO-02-397, 

May 10, 2002). 
Page 2 GAO-03-911T 

productivity and lower its overall costs by centralizing its rural delivery 

structure. 

• Second, RHS does not have a mechanism for prioritizing the long-term 

rehabilitation needs of its multifamily portfolio. As a result, RHS cannot 

be that sure that it is spending its limited rehabilitation funds as 

effectively as possible and cannot tell Congress how much funding it 

will need in the future. 

The government has been providing housing assistance in rural areas since 

the 1930s. At that time, most rural residents worked on farms, and rural 

areas were generally poorer than urban areas. For example, in the 1930s 

very few rural homes had electricity or indoor plumbing. Accordingly, the 

Congress authorized housing assistance specifically for rural areas and 

made USDA responsible for administering it. However, rural demographic 

and economic characteristics have greatly changed over time. By the 1970s 

virtually all rural homes had electricity and indoor plumbing. Today, less 

than 2 percent of the nation’s population lives on farms, and advances in 

transportation, technology, and communications have – or have the 

potential to – put rural residents in touch with the rest of the nation. The 

federal role has also evolved, with HUD, the Department of Veterans 

Affairs (VA), and state housing finance agencies becoming significant 

players in administering housing programs. 

Homeownership in the United States is at an all-time high with 68 percent 

of the nation’s households owning their own home. In rural areas, the 

homeownership rate is even higher — 76 percent. However, according to 

the Housing Assistance Council, affordability is the biggest problem facing 

low-income rural households. Rural housing costs have increased and 

income has not kept pace, especially for rural renters who generally have 

lower incomes than owners. As a result, rural renters are more likely to 

have affordability problems and are twice as likely as rural owners to live 

in substandard housing. 

Although the physical condition of rural housing has greatly improved 

over time, it still lags somewhat behind that of urban housing. The most 

severe rural housing quality problems are found farthest from the nation’s 

major cities, and are concentrated in four areas in particular: the 

Mississippi Delta, Appalachia, the Colonias on the Mexican border, and on 

Indian trust land. Minorities in these areas are among the poorest and 

worst housed groups in the nation, with disproportionately high levels of 

inadequate housing conditions. Migrant farm workers in particular have 

difficulty finding affordable, livable housing. The higher incidence of 

Background 
Page 3 GAO-03-911T 

housing quality problems, particularly in these four areas, offsets many of 

the advantages of homeownership, including the ability to use homes as 

investments or as collateral for credit. 

USDA’s Farmers Home Administration managed rural housing programs 

and farm credit programs until reorganization legislation split these 

functions in 1994.2

 Farm credit programs were then shifted to the new 

Farm Service Agency. Housing programs were moved to the newly created 

RHS in the new Rural Development mission area which was tasked with 

helping improve the economies of rural communities. RHS currently 

employs about 5,500 staff to administer its single family, multifamily, and 

community facilities programs. 

RHS’s homeownership programs provide heavily 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 low-income rural residents for housing repairs. Multifamily programs 

provide direct and guaranteed loans to developers and nonprofit 

organizations for new rental housing that is affordable to low and 

moderate income tenants; grants and loans to public and nonprofit 

agencies and 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 the rental units that RHS has financed. In 

addition, RHS administers community facilities programs that provide 

direct and guaranteed loans and grants to help finance rural community 

centers, health care centers, child care facilities, and other public 

structures and services. 

For fiscal year 2003, RHS received an appropriation of $1.6 billion. Of this 

amount, the largest share, $721 million, is for its rental assistance program. 

Congress also authorized about $4.2 billion for making or guaranteeing 

loans, primarily for guaranteeing single-family loans.3

 RHS oversees an 

 2

Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 

1994, Pub. L. 103-354 (1994). 

3

Authorized dollar amounts represent the expected private-sector loan levels guaranteed by 

RHS as well as loans made directly by RHS during the year. Actual appropriations are much 

lower because they cover the subsidy cost, not the face value of the loans or guaranteed 

loans. The subsidy cost is the estimated long-term cost to the government of a direct or 

guaranteed loan calculated on a net present value basis, excluding administrative costs. In 

fiscal year 2003, the $4.2 billion in loan authorizations are estimated to require about $37 

million in credit subsidy costs. 
Page 4 GAO-03-911T 

outstanding single-family and multifamily direct loan portfolio of about 

$28 billion. Table 1 lists RHS’s 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. The table also shows that, although 

RHS’s single and multifamily guaranteed programs are relatively new, by 

1999 RHS had guaranteed more single- and multifamily loans than it made 

directly. 

Table 1: Data on RHS’s 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) 

$2,870.0a $1,656.8a$966.9a 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 Loans 

(sec. 515) 

$869.5a $512.4a$114.3a 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 moderateincome apartments 

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 RHS rental and farm labor units 

Source: Rural Housing: Options for Optimizing the Federal Role in Rural Housing Development (GAO/RCED-00-241, September 15, 2000). pp. 15-16. 

a

Dollar amounts represents private-sector loan levels guaranteed by RHS or loans made directly by 

RHS during the year. Actual federal outlays are much lower because they cover the subsidy cost, not 

the face value of the loans or guaranteed loans. The subsidy cost is the estimated long-term cost to 

the government of a direct or guaranteed loan calculated on a net present value basis, excluding 

administrative costs. 
Page 5 GAO-03-911T 

While RHS administers its programs in rural areas, HUD, VA, and state 

housing finance agencies provide similar programs nationwide, including 

assistance to households that may be eligible for RHS programs in rural 

areas. For example, RHS’s single-family loan guarantee program serves 

moderate-income homebuyers as does the Federal Housing 

Administration’s (FHA) much larger single-family insurance program. VA 

and most state housing finance agencies also offer single-family loan 

programs. In the multifamily area, HUD’s multifamily portfolio is similar to 

RHS’s multifamily portfolio and HUD’s project-based section 8 program 

operations parallel RHS’s rental assistance program. Further, in contrast 

to RHS, HUD has more established systems for assessing the quality of its 

multifamily portfolio through its Real Estate Assessment Center (REAC) 

and for restructuring financing and rental assistance for individual 

properties through its Office of Multifamily Housing Assistance 

Restructuring (OMHAR). 

Given the diminished distinctions between rural and urban areas today, 

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

increasing reliance on guaranteed lending and public/private partnerships, 

our September 2000 report found the federal role in rural housing is at a 

crossroads. We listed arguments for and against fundamentally changing 

the programs’ targeting, subsidy levels, and delivery systems, as well as 

merging RHS’s programs with HUD’s or other agencies’ comparable 

programs. 

A number of arguments have been presented to support continuing RHS’s 

housing programs separately from HUD and other agencies or for 

maintaining a separate system for delivering these programs, including the 

following: 

• Some rural residents need the close supervision offered by RHS local 

offices because they do not have access to modern 

telecommunications or other means of obtaining information on 

affordable housing opportunities; 

• Rural borrowers often need a local service office familiar with their 

situation in the first year of a loan; 

Changes in the Rural 

Housing Environment 

Raise Questions 

About the Need to 

Maintain Separately 

Operated Rural 

Housing Programs 

Arguments For and 

Against Separately 

Operated Programs 
Page 6 GAO-03-911T 

• Rural areas could lose their federal voice in housing matters; 

• Rural areas could lose the benefits of the lower rates and terms RHS’s 

direct and guaranteed loan programs currently offer; and 

• HUD and other potential partners have not focused on rural areas. 

Proponents of arguments for merging RHS’s housing programs with other 

housing programs or not maintaining a separate system for delivering 

housing programs in rural areas present a different set of arguments: 

• RHS’s 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 work 

with rural households that was previously done by RHS staff; 

• The thousands of RHS staff with local contacts could provide a field 

presence for HUD, and other public partners, applying their leveraging 

and partnering skills to all communities; and 

• RHS and HUD could combine management functions for their 

multifamily portfolios that are now provided under separate systems. 

We also noted that without some prodding, the agencies are not likely to 

examine the benefits and costs of merging as an option. As a first step 

toward achieving greater efficiency, we suggested that the Congress 

consider requiring RHS and HUD to explore the potential benefits of 

merging similar programs, such as the single-family insured lending 

programs and the multifamily portfolio management programs, taking 

advantage of the best practices of each and ensuring that targeted 

populations are not adversely affected. 

Since we issued our report in September 2000, it appears that RHS and 

FHA have shared some mutually beneficial practices. First, RHS’s singlefamily guaranteed program plans to introduce its automated underwriting 

capabilities through technology that FHA has already developed and has 

agreed to share with RHS. Second, RHS, FHA, and VA have collaborated in 

developing common reporting standards for tracking minority and firsttime homeownership statistics. Third, we understand that there have been 

discussions between RHS and HUD staff on developing a model to 

Actions Taken to Share 

Resources and Expertise 
Page 7 GAO-03-911T 

restructure RHS section 515 mortgages using techniques that HUD has 

learned through restructuring similar HUD section 236 mortgages. 

Our September 2000 report also identified a number of actions that RHS 

officials and others have identified that could increase the efficiency of 

existing rural housing programs, whether or not they are merged. I will 

limit my discussion today to two issues that deal with RHS’s field 

structure. 

The first issue involves 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 one-on-one services 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, and uses its federal funding for rural communities to 

leverage more resources 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 cost-effectiveness of maintaining a countybased field structure in a streamlined environment where leveraging, 

rather than one-on-one lending, has become the focus of the work. 

For example, the shift in emphasis from direct to guaranteed single-family 

lending moved RHS from relying on a labor intensive loan generation 

process to one that relies on private lenders to underwrite loans. When we 

performed our audit work in 2000 we found that Mississippi, which 

maintains a county-based Rural Development field structure, had more 

staff and field offices than any other state but the next to lowest 

productivity as measured by dollar program activity per staff member. 

Ohio, however, which ranked fifth in overall productivity, operated at less 

than one-fifth of Mississippi’s cost per staff member. We recognize that it 

is more difficult to underwrite single-family 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 exceeded that in most other states. 

Ohio, whose loan originators were based in four offices and traveled 

across the state with laptop computers, ranked seventh in the dollar value 

Opportunities Exist to 

Improve RHS Program 

Efficiencies 
Page 8 GAO-03-911T 

of single-family guaranteed loans made and fifth in the dollar amount per 

staff member of direct loans made. Ohio had also done a good job of 

serving all of its counties, while Mississippi had experienced a drop in 

business in the counties where it had closed local offices. Ohio’s travel and 

equipment costs had increased with the use of traveling loan originators. 

The Maine Rural Development office had also fundamentally changed its 

operational structure, moving from 28 offices before the reorganization to 

15 afterwards, and in 2000 it operated out of 3 district offices. The state 

director at the time, who had also headed the Farmers Home 

Administration state office in the 1970s, said that he had headed the 

agency under both models and believed the centralized system to be much 

more effective. He added that under the new structure, staff could no 

longer sit in the office waiting for clients to come to them but had to go to 

the clients. He also maintained that a centralized structure was better 

suited to building the partnerships with real estate agents, banks, and 

other financial institutions that had become the core element of RHS’s 

work. 

The second issue involves the location of field offices. Consistent with its 

1994 reorganization legislation, USDA closed or consolidated hundreds of 

county offices and established “USDA service centers” with staff 

representing farm services, conservation, and rural development 

programs. However, the primary goal of the 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 

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. 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. Collocating 

Rural Development and Farm Service offices designed to serve farmers 

and ranchers makes less sense today, especially in states where Rural 

Development operations have been centralized. 
Page 9 GAO-03-911T 

How to deal with the long-term needs of an aging portfolio is the 

overriding issue for section 515 properties. In the program’s early years, it 

was expected that the original loans would be refinanced before major 

rehabilitation was needed. However, with prepayment and funding 

restricted, this original expectation has not been realized, and RHS does 

not know the full cost of the long-term rehabilitation needs of the 

properties it has financed. RHS field staffs perform annual and triennial 

property inspections that identify only current deficiencies rather than the 

long-term rehabilitation needs of the individual properties. As a result, 

RHS does not know whether reserve accounts will cover long-term 

rehabilitation needs. Without a mechanism to prioritize the portfolio’s 

rehabilitation needs, including a process for ensuring the adequacy of 

individual property reserve accounts, RHS cannot be sure it is spending its 

limited rehabilitation funds as effectively as possible and cannot tell 

Congress how much funding it will need to cover the portfolio’s long-term 

rehabilitation costs. 

RHS’s state personnel annually inspect the exterior condition of each 

property financed under the section 515 program and conduct more 

detailed inspections every 3 years. However, according to RHS guidelines, 

the inspections are intended to identify current deficiencies, such as 

cracks in exterior walls or plumbing problems. Our review of selected 

inspection documents in state offices we visited confirmed that the 

inspections are limited to current deficiencies. RHS headquarters and state 

officials confirmed that the inspection process is not designed to 

determine and quantify the long-term rehabilitation needs of the individual 

properties. 

RHS has not determined to what extent properties’ reserve accounts will 

be adequate to meet long-term needs. According to RHS representatives, 

privately owned multifamily rental properties often turn over after just 7 to 

12 years, and such a change in ownership usually results in rehabilitation 

by the new owner. However, given the limited turnover and funding 

constraints, RHS properties primarily rely on reserve accounts for their 

capital and rehabilitation needs. RHS officials are concerned that the 

section 515 reserve accounts often are not adequate to fund needed 

rehabilitation. 

RHS and industry representatives agree that the overriding issue for 

section 515 properties is how to deal with the long-term needs of an aging 

portfolio. About 70 percent of the portfolio is more than 15 years old and 

in need of repair. Since 1999, RHS has allocated about $55 million in 

rehabilitation funds annually, but owners’ requests for funds to meet 

RHS Does Not Have a 

Mechanism to 

Prioritize the LongTerm Rehabilitation 

Needs of Its 

Multifamily Portfolio 
Page 10 GAO-03-911T 

safety and sanitary standards alone have totaled $130 million or more for 

each of the past few years. RHS headquarters has encouraged its state 

offices to support individual property owners interested in undertaking 

capital needs assessments and has amended loan agreements to increase 

their rental assistance payments as necessary to cover the future capital 

and rehabilitation needs identified in the assessments. However, with 

varying emphasis by RHS state offices and limited rental assistance 

funding targeted for rehabilitation, the assessments have proceeded on an 

ad hoc basis. As a result, RHS cannot be sure that it is spending these 

funds as cost-effectively as possible. 

To better ensure that limited funds are being spent as cost-effectively as 

possible, we recommended that USDA undertake a comprehensive 

assessment of the section 515 portfolio’s long-term capital and 

rehabilitation needs, use the results of the assessment to set priorities for 

the portfolio’s immediate rehabilitation needs, and develop an estimate for 

Congress on the amount and types of funding required to deal with the 

portfolio’s long-term rehabilitation needs. USDA agreed with the 

recommendation and requested $2 million in the President’s 2003 budget 

to conduct a comprehensive study. RHS staff drafted a request for 

proposal that would have contracted out the study, but the Undersecretary 

for Rural Development chose to lead the study himself. Plans are to 

develop an inspection and rehabilitation protocol by February 2004 on the 

basis of an evaluation of a sample of properties. 

Finally, I would like to mention some work we have begun on the Section 

521 rental assistance program. With an annual budget of over $700 million, 

the rental assistance program is the largest line item appropriation to the 

Rural Housing Service. This is a property-based subsidy that provides 

additional support to units created through the Section 515 multifamily 

and farm labor housing programs. RHS provides this subsidy to property 

owners through 5-year contracts. The objectives for our current work are 

to review (1) how RHS estimates the current and future funding needs of 

its Section 521 rental assistance program; (2) how RHS allocates the rental 

assistance; and (3) what internal controls RHS has established to monitor 

the administration of the rental assistance program. We anticipate 

releasing a report on our findings in February of 2004. 

GAO Is Examining 

Rental Assistance 

Program Issues 
Page 11 GAO-03-911T 

Mr. Chairman, this concludes my prepared remarks. I would be pleased to 

answer any questions you or any other members of the Committee may 

have. 

For questions regarding this testimony, please contact William B. Shear on 

(202) 512-4325 or at shearw@gao.gov, or Andy Finkel on (202) 512-6765 or 

at finkela@gao.gov. Individuals making key contributions to this testimony 

included Emily Chalmers, Rafe Ellison, and Katherine Trimble. 

Contact and 

Acknowledgements 

(250148) 
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