Rural Housing Service: Update of Data on High-Interest Direct Loans
(Correspondence, 06/07/2000, GAO/RCED-00-214R).

Pursuant to a congressional request, GAO followed up on its report on
the high-interest direct loans made by the Rural Housing Service (RHS),
focusing on whether a significant number of borrowers continue to pay
above-market interest rates on direct single-family housing loans.

GAO noted that: (1) RHS makes both direct and guaranteed housing loans
to rural Americans who generally cannot obtain credit elsewhere; (2) the
direct loan program is designed to promote homeownership for rural
households with low incomes by providing direct mortgage loans for
single-family housing, and depending on the borrowers' incomes, interest
subsidies to lower the monthly mortgage payments; (3) the direct loans
are meant to provide temporary credit--borrowers are required to
graduate from the direct loan program when their incomes are sufficient
for them to afford private credit; (4) the guaranteed loan program is
designed primarily to assist rural households with moderate incomes; (5)
in guaranteeing a single-family housing loan, RHS agrees, in the event
that a borrower defaults, to reimburse a commercial lender for an amount
up to 90 percent of the principal advanced to the borrower; (6) because
qualifying for private credit without a government guarantee is more
difficult than qualifying with a guarantee, movement from a direct loan
to a guaranteed loan is a logical progression for borrowers whose
financial condition has improved but is still not sufficient to qualify
for nonguaranteed private credit; (7) however, RHS is statutorily
prohibited from refinancing direct single-family housing loans using the
guaranteed program; (8) GAO found that as of September 30, 1994, 92,000
nonsubsidized direct single-family loans were held by borrowers who were
paying interest rates of 9.5 percent or higher on an outstanding
principal balance of $2.2 billion; (9) the prevailing rate for the
guaranteed loan program at the time of GAO's 1994 report was 9.5
percent; (10) about 13,000 of these direct loans were carrying interest
rates of 13 percent or higher; (11) as of May 31, 2000, over 65,000
nonsubsidized direct single-family loans were still being held by
borrowers who were paying interest rates of 9.5 percent or higher on an
outstanding principal balance of almost $1.5 billion; (12) about 9,100
of these direct loans carry rates of 13 percent or higher; (13) an
additional 11,500 borrowers receive $50 or less in interest subsidies
each month but still pay an effective interest rate of 9.5 percent or
higher; (14) a significant number or borrowers continue to hold RHS
single-family direct loans with interest rates at or above the 9.5
percent guaranteed rate that was prevailing at the time of the 1994
report; and (15) under today's prevailing guaranteed rate of 8.75
percent, the number of borrowers that would be eligible to refinance
their loans using the guaranteed loan program would be even greater.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-00-214R
     TITLE:  Rural Housing Service: Update of Data on High-Interest
	     Direct Loans
      DATE:  06/07/2000
   SUBJECT:  Rural housing programs
	     Government guaranteed loans
	     Mortgage loans
	     Subsidies
	     Loan interest rates
	     Direct loans
	     Disadvantaged persons
IDENTIFIER:  USDA Rural Housing Service Single Family Housing Program

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GAO/RCED-00-214R

B-285596

June 7, 2000

The Honorable Robert E. Andrews

House of Representatives

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

Dear Mr. Andrews:

You asked us to update the data we presented in December 1994 on the number
of borrowers who pay above-market interest rates on direct single-family
housing loans made by the U.S. Department of Agriculture's (USDA) Rural
Housing Service (RHS). Specifically, you asked us to determine whether a
significant number of borrowers continue to pay above-market interest rates
on such loans.

RHS makes both direct and guaranteed housing loans to rural Americans who
generally cannot obtain credit elsewhere. The agency's direct loan program
is designed to promote homeownership for rural households with low and very
low incomes by providing direct mortgage loans for single-family housing,
and depending on the borrowers' incomes, interest subsidies to lower the
monthly mortgage payments. The direct loans are meant to provide temporary
creditâborrowers are required to graduate from the direct loan program
when their incomes are sufficient for them to afford private credit. The
guaranteed loan program is designed primarily to assist rural households
with moderate incomes. In guaranteeing a single-family housing loan, RHS
agrees, in the event that a borrower defaults, to reimburse a commercial
lender for an amount up to 90 percent of the principal advanced to the
borrower. Because qualifying for private credit without a government
guarantee is more difficult than qualifying with a guarantee, movement from
a direct loan to a guaranteed loan is a logical progression for borrowers
whose financial condition has improved but is still not sufficient to
qualify for nonguaranteed private credit. However, RHS is statutorily
prohibited from refinancing direct single-family housing loans using the
guaranteed program.

In our 1994 report, we found that as of September 30, 1994, 92,000
nonsubsidized direct single-family loans were held by borrowers who were
paying interest rates of 9.5 percent or higher on an outstanding principal
balance of $2.2 billion. The prevailing rate for the guaranteed loan program
at the time of our 1994 report was 9.5 percent. About 13,000 of these direct
loans were carrying interest rates of 13 percent or higher. As of

May 31, 2000, over 65,000 nonsubsidized direct single-family loans were
still being held by borrowers who were paying interest rates of 9.5 percent
or higher on an outstanding principal balance of almost $1.5 billion. About
9,100 of these direct loans carry rates of 13 percent or higher. An
additional 11,500 borrowers receive $50 or less in interest subsidies each
month but still pay an effective interest rate of 9.5 percent or higher.
These borrowers could also benefit from refinancing using the guaranteed
program. Table 1 compares data on direct loans for the two periods.

Table 1: Data on RHS' Direct Single-Family Housing Loan Program, September
30, 1994, and May 31, 2000

                                                     Outstanding
      Total        Total   Portion of  Number of     principal   Number of
                   number
 Date outstanding  of      loans with  nonsubsidized balance of  nonsubsidized
      principal            interest    loans at 9.5% loans at    loans at 13%
      balance      direct  subsidy     or higher     9.5% or     or higher
                   loans
                                                     higher
 Sept.
 30,  $18.6        765,000 About       92,000        $2.2        13,000
 1994 billion              two-thirds                billion
 May
 31,  $16.5        552,000 Under half  65,000        $1.5        9,100
 2000 billion                                        billion

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

A significant number of borrowers continue to hold RHS single-family direct
loans with interest rates at or above the 9.5-percent guaranteed rate that
was prevailing at the time of our 1994 report. Under today's prevailing
guaranteed rate of 8.75 percent, the number of borrowers that would be
eligible to refinance their loans using the guaranteed loan program would be
even greater.

Agency Comments

We provided a copy of this report to RHS for its review and comment. The RHS
Deputy Administrator for Single-Family Housing said that the report
accurately reflects data on the single-family housing direct loan portfolio.
He observed that the ability to refinance direct loans with high interest
rates through the guaranteed loan program would be of significant benefit to
RHS customers holding such loans. He also noted that moving customers from
the direct loan program to private-sector financing would be consistent with
RHS' statutory mandate and would help to ensure the customers' continued
success with homeownership.

Scope and Methodology

To obtain information for this report, we met with officials from RHS'
Single-Family Housing Direct Loan and Guaranteed Loan Divisions. We also
obtained current loan data from RHS' Centralized Servicing Center in St.
Louis, Missouri.

We performed our work in June 2000 in accordance with generally accepted
government auditing standards.

- - - - -

We are sending copies of this report to interested congressional committees
and the Honorable Dan Glickman, Secretary of Agriculture. We will also make
copies available to others upon request.

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

Sincerely yours,

Stanley J. Czerwinski

Associate Director, Housing and Community

Development Issues

(385867)
  
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