Rural Housing: Options for Optimizing the Federal Role in Rural Housing
Development (Letter Report, 09/15/2000, GAO/RCED-00-241).

Pursuant to a congressional request, GAO provided information on rural
housing programs, focusing on: (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 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 federal,
state, and private organizations; and (4) options for maximizing the
efficiency and effectiveness of the federal role in rural housing.

GAO noted that: (1) 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; (2)
particularly in some remote rural areas, the quality of housing is
poorer for some groups, especially minorities; (3) 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; (4) RHS is the largest component of a comparatively new
USDA mission area, Rural Development, created when the Department was
reorganized in 1994; (5) 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 service through an
extensive field network; (6) RHS' single family and multifamily programs
are available to households that live in rural areas and have incomes
ranging from very low to moderate; (7) RHS' multifamily programs
provide: (a) direct and guaranteed loans to commercial developers or
nonprofit organizations to produce new rental housing; (b) grants and
loans to public or nonprofit agencies or individual farmers to build
affordable rental housing for farm workers; (c) housing preservation
grants to local governments, nonprofit organizations, and Native
American tribes; (d) and rental assistance subsidies; (8) as 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 reliance on state, local, and
private partners to leverage funds for rural communities; (9) rural
households have greater access to RHS than to other federal or state
agencies; (10) 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; (11) 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 and private
partnerships, the federal role in rural housing is at a crossroads; and
(12) 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.

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

 REPORTNUM:  RCED-00-241
     TITLE:  Rural Housing: Options for Optimizing the Federal Role in
	     Rural Housing Development
      DATE:  09/15/2000
   SUBJECT:  Rural housing programs
	     Rural economic development
	     Government guaranteed loans
	     Housing construction
	     Housing repairs
	     Low income housing
	     Federal aid for housing
	     Redundancy
	     Direct loans
IDENTIFIER:  HUD Self-Help Homeownership Opportunities Program
	     BIA Housing Improvement Program
	     BIA Native American Loan Guarantee Program
	     RHS Multifamily Housing Loan Program
	     HUD Low Income Housing Tax Credit Program
	     RHS Single Family Direct Loan Program
	     RHS Single Family Loan Guarantee Program

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GAO/RCED-00-241

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

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

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

Resources, Community, and Economic Development Division

Lett er

B- 284435 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

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.

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.

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

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.

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).

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

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

homes had electricity or indoor plumbing, but by the 1970s, virtually all
Households' Access to

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

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

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.

available in rural as in urban areas, but rural borrowers often pay slightly
higher rates.

Housing Quality Lags in While distinctions between rural and urban areas are
no longer as

Some Rural Areas 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

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

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.

Figure 2: New Home Financed With RHS Single- Family Loan and Additional
Funding Sources

USDA Has Determined That In its 1997 analysis of the demand for and
availability of credit in rural

Credit Is Available in Most areas, USDA found no evidence of widespread or
economically important

Rural Areas 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

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

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

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

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

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 USDA's Farmers Home Administration managed rural
housing programs

Housing and Community along with farm credit programs until the Department's
1994 reorganization

Development Services 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

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

Number of Total dollars

Total dollars Total dollars

households RHS housing

spent, fiscal spent, fiscal

spent, fiscal helped, fiscal

Type of program

year 1979 year 1994

year 1999 year 1999 assistance

Single- Family $2, 870.0 $1,656. 8 $966. 9 15, 600 Loans subsidized as

Housing Direct low as 1 percent interest

Loans (sec. 502) Single- Family

$725. 9 a $2, 980. 0 a 38, 600 No money down, Housing

no monthly mortgage Guaranteed Loans

insurance loans (sec. 502)

Single- Family Home $33.7 $52. 7 $46. 8 9, 021 Grants for elderly and

Repair Grants and loans subsidized as low

Loans (sec. 504) as 1 percent interest

Single Family $5.6 $12. 8 $25. 4 1, 350 Grants to nonprofit and

Housing Mutual public entities to provide

Self- Help Grants technical assistance

(sec. 523) Multifamily Direct

$869.5 $512. 4 $114. 3 2, 181 Loans to developers Rural Rental

subsidized as low as Housing (sec. 515)

1 percent interest Multifamily Housing

$74. 8 a 2, 540 Guaranteed loans for Guaranteed Loans

developing moderate- income (sec. 538)

apartments

Dollars in millions Number of Total dollars

Total dollars Total dollars

households RHS housing

spent, fiscal spent, fiscal

spent, fiscal helped, fiscal

Type of program

year 1979 year 1994

year 1999 year 1999 assistance

Multifamily Housing $68.8 $56. 3 $33. 2 622 Grants and

Farm Labor Grants loans subsidized

and Loans (secs. at 1 percent interest

516/ 514) Multifamily Housing

$23. 0 $7. 2 1, 800 Grants to nonprofit Preservation Grants

organizations, local (sec. 533)

governments, and Native American tribes, usually leveraged with outside
funding

Multifamily Housing $423.0 $446. 7 $583. 4 42, 000 Rental assistance

Rental Assistance to about one- half the

(sec. 521) residents in RHSrental

and farm labor units

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

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

Guaranteed Loans, Led to lending, streamlined its delivery systems, and
relied more on public and

Streamlined Delivery private partners to deliver its programs.

Systems, and Increased

Increased Use of Loan Guarantees

Reliance on Partners 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

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.

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).

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

and Others' 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

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

Programs 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 State HFAs' mortgage revenue bond programs and
FHA's principal singlefamily

Products and mortgage insurance program are the major programs that are

Markets Served in Rural offered in the same markets as RHS' single- family
programs. The state

Areas 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.

Table 2: Key Features of the Principal Single- Family Programs Offered in
Rural Areas

Loan guarantee/

Interest Income

Location Agency Direct loans

insurance subsidy targeting targeting

RHS X X X a X X State HFAs X b X X X c HUD/ FHA d X VA X

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

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.

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.

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.

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

Metro counties (10) Urbanized nonmetro counties (13) Rural nonmetro counties
(228) Completely rural nonmetro counties (132)

One possible reason for the low number of FHA- insured loans in some
counties is low bank participation. Some bank officials indicated that they

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

Multifamily Products and relative to HUD's. But there is more overlap in the
products offered and the

Markets Served in Rural groups served by the two agencies' multifamily
programs, even though RHS

Areas 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 Loan guarantee/

Interest Rental

Income Location Agency Direct loans insurance subsidy assistance targeting
targeting

RHS X X X X X X HUD X X X X

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

10 HUD also provides funding to 1. 3 million public housing units and 1. 4
million privately owned units rented by tenants with certificates and
vouchers. 11 Because 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. 12 About 45, 000 of the units that HUD
subsidizes are located in developments financed by RHS.

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

Subsidized units in thousands 250

200 150 100

50 0

Urbanized Rural nonmetro Completely nonmetro rural nonmetro

HUD RHS

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.

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)

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

Overlap With RHS' offers a number of programs that target special
employment, age, or ethnic

Specialized Programs 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.

Table 4: Key Features of Specialized Programs Offered in Rural Areas Elderly
Farm worker

Self- help Indian

housing Community Agency/ entity housing housing housing

repairs Weatherization development

RHS X X X X X Bureau of Indian

X Affairs HUD X X X X

Department of X Energy State HFAs X X X X

Nonprofit X X X X X organizations 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

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.

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 rural housing environment has changed
dramatically since rural

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

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

become more prevalent, the distinctions between rural and urban areas
Development

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?

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

Arguments against continuing to housing programs to rural areas

target housing programs to rural areas Some rural areas continue to

The single- family program's have substandard housing

emphasis has shifted from direct Some rural areas have few

to guaranteed loans, which have resources and lack the capacity

more in common with FHA's to obtain funding on their own

insured loans Overall, national programs,

With little new funding for particularly those offered by

construction, RHS' multifamily HUD and VA, do not target rural

program is targeting few new areas and some do not target

units in rural areas 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

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

Arguments for providing better Arguments against providing better

terms in rural areas terms in rural areas

Rural borrowers often pay higher There is no urban counterpart to

mortgage interest rates because RHS' direct loan program that

the costs of doing business are would allow very- low- income

greater in sparsely populated urban residents to become

areas homeowners

Such terms support the basic FHA cannot compete with RHS

tenet that homeownership is a guaranteed loans requiring no

part of the culture of rural money down and no monthly

America mortgage insurance payments

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

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

RHS' field role has changed from residents do not have access to

primarily originating and modern telecommunications or

servicing direct loans to other means to obtain

leveraging deals with partner information on affordable

organizations housing opportunities

In some states, local banks, RHS believes borrowers often

nonprofit organizations, social need local servicing in the first

workers, and other local year of the loan

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

Merging Rural Housing Programs With Other Housing Programs Arguments for
merging housing

Arguments against merging housing programs

programs Current RHS staff with local

Rural areas could lose their contacts could provide a field

federal voice presence for HUD, and for other

Rural areas could lose the public partners, applying their

benefits of lower rates and terms leveraging/ partnering skills to all

offered by current RHS direct communities

and guaranteed loan programs RHS' centralized servicing center

HUD, other federal partners, and could seek to increase its

some state HFAs have not servicing workload by competing

focused on rural areas to service loans for other federal

State HFAs could have less agencies or private companies

funding for other programs 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

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.

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

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

merging those programs that serve similar markets and provide similar
Consideration

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

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

Methodology 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

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.

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

Appendi xes Opportunities to Improve the Effectiveness of

Appendi xI

Current Rural Housing Programs 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 When state Rural Development offices were given the
authority to develop

Delivery Systems 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

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.

Option 1: Centralize RHS State Delivery Systems

For Against Could increase productivity

Would lose fixed local presence Could lower overall costs

Could increase travel and Could result in a more

equipment costs manageable structure

Allow RHS Personnel Consistent with its 1994 reorganization legislation,
USDA closed or

to Locate Separately consolidated hundreds of county offices and established
“USDA service

centers” that include staff representing farm services, conservation,
and From USDA Service

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

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

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.

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.

Option 2: Allow RHS Personnel to Locate Separately From USDA Service Centers

For Against Would place Rural Development

Would increase vacant space in staff where customers are

USDA service centers located

Could create an appearance of Staff in some states already

conflict of interest by other spend much of their time running

lending partners if staff are community education/ outreach

collocated with community programs with community

development agencies development partners

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

Combine All Rural While the disparities between average weekly earnings for
rural and other

Capacity- Building 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
Initiatives Into One

housing and community development. A local organization that can Notice of
Funding

successfully compete for limited funds can be the difference between the
Availability Under One

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

Organization 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

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.

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

Mississippi Delta funds would have funding availability would be more

to be legislatively targeted efficient than two or three

Make Funds Available RHS' farm worker housing loans and grants can be used
only to house

for Off- Farm Worker employees that are involved in production agriculture,
including

aquaculture and on- farm processing. However, in some rural areas of the
Housing

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

million for a housing demonstration program for agriculture, aquaculture,
and seafood- processing workers

Option 4: Make Funds Available for Off- Farm Worker Housing

For Against Would recognize changes in rural

Without new funding, off- farm labor markets

worker housing would compete Would update programs to fill a

with on- farm worker housing current need

Could concentrate worker housing in one location

Encourage Families RHS offers direct grant and loan programs for home
repair, basing

With Sufficient Equity 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
to Obtain Reverse

year but that loan funds are usually available because often families cannot
Mortgages Instead of

afford to repay loans, even at interest rates as low as 1 percent. Reverse
Repair Grants and

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

Loans 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

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

Figure 7: RHS Repair Loan Home

Front view Side view

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

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.

Option 5: Encourage Families With Sufficient Equity to Obtain Reverse
Mortgages Instead of Repair Grants and Loans

For Against Would allow homeowners to use

Clients would incur transaction equity in homes for repairs or

costs to obtain reverse other purposes

mortgages Programs are already available in

Would deplete limited wealth for private sector

some homeowners 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

Estimated 1999 Census by Metro and

Appendi xII

Nonmetro Categories Number of Percent of

Percent of Average County type counties a counties Population population 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

783 24. 9 6, 510, 875 2.4 8, 315 nonmetro Total 3, 141 100 272,690, 813 100
86, 817

a Numbers also include some cities or census areas.

Comments From the Department of

Appendi xI II

Agriculture See comment 1. See comment 2.

See comment 3. See comment 4. See comment 5.

See comment 6.

See comment 7.

See comment 2.

See comment 8. See comment 9.

See comment 10

See comment 11. See comment 12.

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.

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

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.

Comments From the Department of Housing

Appendi xI V

and Urban Development See comment 1.

See comment 2. See comment 3.

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) Lett er

GAO United States General Accounting Office

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Contents

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

Page 3 GAO/ RCED- 00- 241 Rural Housing Options United States General
Accounting Office

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Appendix I

Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix I Opportunities to Improve the Effectiveness of Current Rural
Housing Programs

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Appendix II

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Appendix III

Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix III Comments From the Department of Agriculture

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Appendix IV

Appendix IV Comments From the Department of Housing and Urban Development

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Appendix IV Comments From the Department of Housing and Urban Development

Page 74 GAO/ RCED- 00- 241 Rural Housing Options

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