How can the Rural Housing Service Section 502 low-income mortgage program be improved to better serve its target audience?

Adding a credit counseling and repair component will offer a needed function within the program. Changing the formula for computing loan interest from reliance on Area Median Income to one based on participants paying 20 percent of their adjusted annual income to principal, interest, taxes and insurance (PITI) will provide more cost equity to low-income rural buyers.

Background

The Section 502 direct lending program provides low-cost housing acquisition loans to qualified rural low-income households. These loans can be used to build, repair, renovate or relocate homes, or to purchase and prepare sites, including providing water and sewage facilities. The program is especially valuable to Delta community-based housing development organizations because of its ability to extend homeownership to very low-income households – those earning 50 percent or less of Area Median Income (AMI). In the Mid-South Delta study area, this means that the Section 502 program can finance housing purchases for households earning $12,100 or less annually. The program also provides low-cost financing to households earning up to 80 percent of Area AMI – a Delta study area average of $19,300.

As important as these funds are to low-income homeownership, it has become more difficult for low-income persons to access this resource. The first challenge is building opportunities for borrowers to meet Section 502 debt-to-income limitations. This can be addressed by adding credit repair and counseling as a program component.

In addition to this barrier, the current loan pricing method uses Area Median Income to determine the repayment rate for borrowers. This often penalizes those living in more rural communities. For example, a low-income household in Phillips County, Arkansas, where the AMI was $18,898 in 1997, can earn no more than 50 percent of AMI ($9,449) to qualify for the most favorable Section 502 interest rate of 1 percent. A household living in rural Desha County, however, where the median income in 1997 was $23,361, can earn up to $11,680 and still obtain the 1 percent rate. Neither is in less need of the subsidy, yet the Phillips County family will pay more to service their debt under the current system. At this income level, even a 1 percent increase in the cost of a loan can prevent a family from obtaining a home.

In an effort to enhance the usefulness of the Section 502 direct loan program for its designated purpose – the financing of mortgages for low-income persons living in distressed rural areas – the following course of action is recommended.

• The Secretary of Agriculture and the Rural Housing Service (RHS) Administrator should request monies from Congress to add a credit counseling and repair component to the program.
  1. Mid-South Delta Rural Development directors, governors and congressional delegations can play an active role in educating the Secretary and RHS Administrator about the need for this funding. The Mid-South Delta region is home to House Agriculture Committee members Bennie Thompson, Ronnie Shows, Charles Pickering and Marion Berry. Senate Agriculture Committee members include Blanche Lincoln, Tim Hutchinson and Thad Cochran (who also serves as the ranking minority member of the Senate Agriculture Appropriations Committee).
  2. A General Accounting Office program audit of Section 502 direct loan program application rejections should be requested by the Mid-South Delta congressional delegations.
  3. An internal Office of the Inspector General audit of the Section 502 direct loan program should be conducted to document the rejection rate and the rate at which Section 502 loans are denied because applicants cannot afford a higher rate of interest as well as the accompanying principal, insurance and taxes.
  4. Findings from the above inquiries should be revealed at public hearings to be held in each of the Mid-South states for the purposes of providing the public an opportunity to recount their experiences with the Section 502 direct loan program.
• Should findings support a revision of the Section 502 program's rules and procedures, then the following should be considered:
  1. The Section 502 program rules should be changed from reliance on Area Median Income to a standard based on families paying 20 percent of adjusted income for PITI.
  2. In addition, typical allowances for utility payments and regular maintenance should be calculated and added to PITI to arrive at a total monthly housing cost. The interest credit subsidy offered by the program should result in a total shelter cost of 30 percent of an applicant's adjusted income. This approach for determining loan interest would ensure affordability throughout the term of ownership while preserving the value of the housing asset.
  3. Terms would remain at 33 and 38 years.
• Delta organizations should advocate for additional appropriations for Rural Housing Service to hire in-house staff in each local office who would be responsible for administering homebuyer education, credit training and debt remediation services to Section 502 program applicants.

How can Mid-South Delta states increase their support for low-income housing development and capacity building for community-based housing development organizations?

HOME and CDBG allocations can be further focused to provide more assistance to CHDOs, encourage sweat equity programs, and fund housing rehabilitation and low-income mortgage purchases.

Background

The primary purposes of HUD's HOME Investment Partnerships (HOME) program is to provide safe, decent, affordable housing for all Americans by alleviating excessive rent burdens, homelessness and deteriorating housing stock. HOME funds were designed to be the most flexible monies available to participating jurisdictions to achieve these purposes. They can be used for rental and homeownership development. The Delta has considerable need for both.

Community Housing Development Organizations (CHDOs) – locally responsive nonprofit organizations – are important delivery mechanisms for low-income communities, and HUD recognizes this by requiring states to set aside 15 percent of their HOME allocations for projects developed by these organizations. States may also use up to 5 percent of additional HOME funds for CHDO operating expenses. HAC strongly encourages this use of funds. At present, none of the Mid-South states offers the complete range of HOME assistance allowed by HUD to CHDO applicants or communities (see Appendix B), and some offer no direct CHDO assistance at all.⁷

The Community Development Block Grant (CDBG) Program, which predates HOME, also provides state and local governments with access to money for demolition, rehabilitation, property acquisition, homebuyer assistance, public facilities and improvements, and economic development/training activities that directly benefit low-income persons. Currently, less than 2.3 percent of the $101 million in CDBG allocated to Mid-South states is earmarked for housing. Two of the three Mid-South states allocate no CDBG monies to housing.

Recommendations

• allocate an additional 5 percent of state HOME allocations to invest in CHDO operations and capacity building necessary to improve and increase the production of low-income housing in Delta communities;^{8 9}
• set aside 10 percent of the 15 percent CHDO annual allocation to invest exclusively in delivering project technical assistance to improve the capacity of CHDOs and for project-specific seed money loans to CHDOs for land purchase, purchase option, utility placement, planning activities and engineering/architectural fees),;
• set aside a percentage of annual HOME allocation for grants to support CBO-based sweat equity construction programs. This money should be used to match the HUD Self-Help Homeownership Opportunity Program (SHOP) property acquisition and predevelopment loan/grant. Combining this option with SHOP's 75 percent grant conversion provides sweat equity programs with an additional project subsidy of up to $17,500 for each $20,000 SHOP loan/HOME grant combination;
• set aside no less than 10 percent of their CDBG annual allocation to participate in mortgage purchase programs that benefit low-income owner/residents. This might be accomplished through direct purchase or by investing in available regional programs. Programs such as the Enterprise Corporation of the Delta's Mid-South Home Ownership Program, which finance low- and moderate-income owners' non-FHA-compliant housing loans, should be considered as suitable investments for this purpose.

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