USDA Rural Housing Bill Passes; Low-Income Rental Legislation Advances

One government housing program that had run out of funds months ago was revived by Congress yesterday, and another bill targeted at low-income rental housing moved a step closer to approval.

The Senate yesterday passed HR 4899 to reestablish the popular U.S. Department of Agriculture Single-Family Housing Guaranteed Loan Program (Section 502 Housing) as a self-sustaining program. Also, the House Financial Services Committee approved H.R.4868, the Housing Preservation and Tenant Protection Act of 2010 which aims to stem the loss of affordable rental housing units and prevent the displacement of low-income tenants.

The Rural Housing program had run through its $13.1 billion funding by early this year and many buyers hoping to finance home purchases using Homebuyer Tax Credits were unable to close their loans.  Depleted funding has been a nearly annual occurrence for the program that guarantees loans for single family homes in designated exurban and rural areas.  The new legislation will end the annual uncertainty by putting the program on a self-funding basis through enacting a 3.5 percent guarantee fee paid by the borrower.  The fee, while substantial, can be included in the total amount financed.

Senator Michael Bennet released the following statement, "The Rural Housing Preservation and Stabilization Act increases the maximum loan guarantee fee that USDA's Rural Housing Service has authority to charge for new housing purchases from 2.0 to 3.5 percent and allows an annual fee of not more than 0.5 percent per year on the balance of the loan. The bill would also enable the Rural Housing Service to waive these fees for low-income borrowers for up to $679 million in loans. Together, these changes will enable the USDA-Rural Development's Rural Housing Service to continue offering loan guarantees through the duration of the year and to become self-funding."

Despite the low down payment required to participate in the program, it is generally considered to be a good risk by lenders because of the 90 percent government guarantee and because the loan size is limited to 115 percent of the area's median income.  This keeps the loans small; the average loan size is $112,000. Last year the foreclosure rate for these USDA loans was a reported 1.72 percent compared to 3.32 percent for Federal Housing Administration loans.

MORE BACKGROUND ON SECTION 502 LOANS

The bill now goes to President Obama for signature. As we went to press, USDA had not commented on the action and we are still waiting for guidance from lenders.

H.R. 4868 was approved by the House Financial Services Committee Thursday, and passed on to the full House for consideration.  It is designed to prevent the loss of rental housing units from the pool subsidized by HUD for low income tenants.  According to the bill's sponsor, Committee Chairman Barney Frank (D-MA), approximately 1.7 million rental units in over 23,000 privately owned properties are subsidized by HUD through various programs, some of which have existed since the 1950s.  The Government Accountability Office (GAO) six years ago projected that over 193,000 units could convert to market-rate housing in the following 10 years as their HUD mortgages matured.  These mortgages carry rental cost restrictions which would also disappear, enabling the owners to convert units to market rates or even to condominiums.  While some of the tenants in those units would be sheltered from big rental increases by existing protections such as enhanced vouchers, GAO estimated that approximately 200,000 tenants in 101,000 units might face rent increases or eviction. The bill establishes several mechanisms to keep these units affordable. 

Grants and loans will be available to both for- and non-profit housing sponsors to recapitalize the property and keep it affordable and the bill will establish a voluntary Preservation Exchange Program to encourage owners to sell to purchasers who will keep the property affordable.  State housing agencies will have a right of first refusal to purchase a property that the owner wishes to sell as it comes out of the HUD program.  A right of first refusal does not prevent the seller from accepting a better offer. 

The legislation would permit property owners to request project-based assistance in lieu of enhanced vouchers if that would help keep the project affordable or assist with capital for rehabilitation and ensure that tenants are not displaced.  Owners will also be able to receive budget-based rent increases as an incentive to renew Section 8 contracts and keep the property maintained.

In the event that housing does convert to market-rate rentals, the legislation will close gaps in existing laws to make sure existing tenants are eligible for enhanced vouchers to prevent displacement and includes notification requirements to ensure that tenants have time to plan for alternative housing.

The law has specific provisions for both elderly and rural housing.  It will give HUD and affordable housing providers assistance in recapitalizing the aging Section 202 elderly housing portfolio and enables tenants to be partners with HUD and the Rural Housing Service (RHS) to ensure that housing is properly maintained.  A rural housing revitalization demonstration program initiated in 2006 to preserve and recapitalize Section 515 properties will be made permanent and the bill extends the above provisions for HUD-assisted housing to tenants in RHS-assisted multifamily properties.

Finally, the law directs HUD to establish a nationwide database of HUD and RHS assisted properties so that the public and policymakers can more effectively monitor and preserve the existing portfolio of affordable housing. A vote on H.R. 4868 on the House floor has not yet been scheduled. READ MORE