Rural Housing Service: Opportunities to Improve Management
Published: 2003-06-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: Our testimony is based on two reports--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.

section_title: Letter
paragraphs: 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. 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  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.
subsections: section_title: Background
paragraphs: 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  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. 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. RHS oversees an  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.
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).
section_title: Changes in the Rural Housing Environment Raise Questions About the Need to Maintain Separately Operated Rural Housing Programs
paragraphs: 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.
subsections: section_title: Arguments For and Against Separately Operated Programs
paragraphs: 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;    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.
section_title: Actions Taken to Share Resources and Expertise
paragraphs: Since we issued our report in September 2000, it appears that RHS and  FHA have shared some mutually beneficial practices. First, RHS’s single- family 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 first- time homeownership statistics. Third, we understand that there have been  discussions between RHS and HUD staff on developing a model to  restructure RHS section 515 mortgages using techniques that HUD has  learned through restructuring similar HUD section 236 mortgages.
section_title: Opportunities Exist to Improve RHS Program Efficiencies
paragraphs: 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 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, 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  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.
section_title: RHS Does Not Have a Mechanism to Prioritize the Long- Term Rehabilitation Needs of Its Multifamily Portfolio
paragraphs: 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  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.
section_title: GAO Is Examining Rental Assistance Program Issues
paragraphs: 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.
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.
section_title: Contact and Acknowledgements
paragraphs: 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.
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