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Unless otherwise noted, all years in this text refer to fiscal years. |
The Congress is considering this year proposals to restructure rural housing assistance. This paper, requested by the Senate Budget Committee, describes current programs and explains how the budgetary treatment obscures their costs. It provides estimates of the long-term cost of the current programs and discusses options both for reducing costs and for modifying the budgetary treatment to make costs more apparent.
Roberta Drews of CBO's Human Resources and Community Development Division prepared this paper and Ben Steffen provided the computer modeling of long-term program costs. They worked under the supervision of Nancy M. Gordon and Martin D. Levine. Robin Seiler and Ann Hadley reviewed earlier drafts of the report and provided helpful comments. Many members of the CBO staff, including Brent Shipp, Lloyd Atkinson, Patricia Ruggles, Joel Slackman, and Peter Taylor, also contributed necessary information and useful comments. Numerous persons at the Farmers Home Administration of the Department of Agriculture provided program and budget data used in the study. Francis Pierce edited the paper. Mary Braxton typed the several drafts and prepared the manuscript for publication.
In accordance with CBO's mandate to provide objective and impartial
analysis, this paper contains no recommendations.
Alice M. Rivlin
Director
June 1982
SUMMARY
CHAPTER I. INTRODUCTION
CHAPTER II. FmHA RURAL HOUSING PROGRAMS
CHAPTER III. THE LONG-TERM COSTS OF RURAL HOUSING PROGRAMS AND OPTIONS FOR REDUCING COSTS
CHAPTER IV. THE BUDGETARY TREATMENT OF RURAL HOUSING PROGRAMS AND OPTIONS FOR MAKING COSTS MORE APPARENT
APPENDIX. ASSUMPTIONS USED TO DEVELOP LONG-TERM COST ESTIMATES
| TABLES | |
| 1. | LONG-TERM COSTS OF AUTHORIZING $100 MILLION IN SECTION 502 INTEREST-CREDIT ASSISTANCE IN 1983 UNDER A RANGE OF ASSUMPTIONS |
| 2. | LONG-TERM COSTS OF AUTHORIZING $100 MILLION IN SECTION 515 INTEREST-CREDIT ASSISTANCE IN 1983 UNDER A RANGE OF ASSUMPTIONS |
| 3. | LONG-TERM COSTS OF ALTERNATIVE 1983 FUNDING LEVELS FOR RURAL HOUSING INTEREST-CREDIT LOANS |
| 4. | LONG-TERM COSTS OF AUTHORIZING $100 MILLION IN INTEREST-CREDIT RURAL HOUSING ASSISTANCE IN 1983 UNDER A RANGE OF OPTIONS TO LOWER COSTS |
| 5. | COMPONENTS OF BUDGET AUTHORITY AND OUTLAYS IN THE RURAL HOUSING INSURANCE FUND |
| A-1. | ASSUMPTIONS USED TO DEVELOP LONG-TERM COST ESTIMATES FOR SECTION 502 INTEREST-CREDIT MORTGAGES |
| A-2. | ASSUMPTIONS ON THE PERCENT OF SECTION 502 MORTGAGES MADE IN 1983 THAT WILL BE CLOSED ANNUALLY, EITHER BY FmHA ACQUISITION OR BY BORROWER PREPAYMENT |
| A-3. | PERCENTAGE OF PROPERTY APPRECIATION THAT SECTION 502 INTEREST-CREDIT BORROWERS MAY BE REQUIRED TO PAY WHEN THE MORTGAGE IS TERMINATED |
| A-4. | ASSUMPTIONS USED TO DEVELOP LONG-TERM COST ESTIMATES FOR SECTION 515 INTEREST-CREDIT-MORTGAGES |
Although the federal government is a major mortgage
lender in rural areas, current budget practices obscure the costs of this
activity and make it difficult for the Congress to assess the consequences
of annual funding decisions. The Farmers Home Administration (FmHA), an
agency of the U.S. Department of Agriculture, subsidizes the housing costs
of some low- and moderate-income households in rural areas by providing
reduced-interest homeowner-ship and rental housing loans. The cost to the
federal government of outstanding mortgages totaled $1 billion in 1981
and is expected to reach $1.7 billion by 1983. Despite the growing cost
of rural housing assistance, the Congress does not now have available estimates
of the additional costs that result from each year's new lending activity.
MAJOR FmHA LENDING PROGRAMS
The two major FmHA lending programs are the Section 502 homeownership program, which finances the purchase of newly built or existing single-family homes, and the Section 515 rental housing program, which finances the construction or rehabilitation of multifamily rental projects.1
The Section 502 program provides 33-year mortgages at effective interest rates as low as 1 percent. For low-income borrowers2--the vast majority of Section 502 participants--the FmHA sets interest rates at levels that enable them to spend 20 percent of their incomes on mortgage payments, property taxes, and insurance. The FmHA then pays the difference between the interest rates charged on funds to finance the program and the rates paid by its borrowers; this difference is referred to as an interest credit. Over time, as borrowers' incomes change, the effective interest rates are recalculated to maintain the housing-cost-to-income ratio of 20 percent. Households receiving interest-credit loans must repay the government at least part of the interest subsidy received, if their homes have appreciated in value at the time they are sold. Moderate-income borrowers do not receive interest-credit agreements and pay interest rates that are tied to federal borrowing costs but that are generally below private mortgage rates.
The Section 515 rental housing program provides 50-year mortgages to
developers with interest credits reducing effective interest rates to 1
percent, thereby permitting tenants to pay reduced rents. Tenants of Section
515 projects are required to contribute toward their housing expenses the
greater of 25 percent of their incomes or the minimum project rent, which
includes the costs of amortizing the 1 percent mortgage and project expenses.
The developer keeps the minimum rent, and the FmHA collects any payments
above the minimum. Payments above the minimum rent are referred to as "overage"
payments and are treated as additional interest payments, thereby reducing
total program costs.
THE LONG-TERM COST OF RURAL HOUSING PROGRAMS
If the Congress authorized $3.2 billion in Section 502 and Section 515 interest-credit assistance in 1983--the level funded in 1982--the resulting long-run cost would range from $1.0 billion to $1.6 billion in 1983 dollars. Although the Congress has modified the programs in recent years in order to lower program costs, other options exist to lower costs still further.
Long-Term Program Costs
The net long-term cost of providing $100 million in additional Section 502 interest-credit loans in 1983 would range from $23 million to $29 million in 1983 dollars (see Summary Table). The interest subsidies associated with these loans would range from $33 million to $41 million. The subsidy recapture provision would reduce the interest subsidy costs by about one-third, or from $10 million to $13 million.
Providing $100 million in additional interest-credit Section 515 loans in 1983 would cost from $54 million to $100 million in 1983 dollars over the term of the commitments. Interest subsidies for Section 515 lending would range from $89 million to $130 million, which is higher than for Section 502 loans because borrower interest rates remain fixed at 1 percent and because the term extends for 50, instead of 33, years. These costs would be partially offset by the overage collections, which could range from $19 million to $58 million. The FmHA has little information, however, on overage collections to date, making estimates of future overage collections especially uncertain.
Options That Would Reduce Costs
The long-term costs of Section 502 and Section 515 interest-credit loans in 1983 could be lowered either by reducing the loan volume in any one year or by requiring tenants to pay a larger share of program costs. The savings realized by providing less assistance would be straightforward; any reduction in funding levels would yield a proportionate reduction in long-term costs. The savings realized from requiring tenants to pay an increased share of their housing costs would depend on how the increase was structured.
Increasing Homeowners' Interest Payments. One way to reduce Section 502 interest-credit program costs would be to require borrowers to pay 25 percent of their income for their mortgage payments, property taxes, and insurance--instead of the currently stipulated 20 percent. This would raise the effective interest rates paid and would reduce the long-run real costs of new assistance provided in 1983 by 30 to 50 percent. Some of the savings could be offset by increases in defaults, however.
Recapturing a Larger Share of Interest Subsidies. Another option would be for the FmHA to recapture a larger share of its subsidy when a property financed with a Section 502 interest-credit mortgage is sold. Currently, the FmHA receives from 9 to 78 percent of the net property appreciation, though not more than the total subsidy provided, depending on the number of months a property was held and the average interest rate paid. The FmHA could, instead, collect a fixed percentage of property appreciation, as is the case in homeownership programs operated by the Department of Housing and Urban Development (HUD). The reduction in long-term costs would depend on the percentage of property appreciation collected. If the FmHA collected 50 percent of net appreciation, long-term real program costs would fall by up to one-third and participants in FmHA and HUD homeowership programs would receive similar treatment. Recapturing a higher share of property appreciation would reduce program costs further but could decrease incentives for homeowners to maintain their properties, thereby lessening the amount of appreciation available for recapture.
Raising the Share of Income Renters Contribute Toward Their Housing
Expenses. A third way to increase the share that assisted households
pay of their housing costs would be to require that tenants in Section
515 projects pay the higher of 30 percent of their incomes--rather than
the current 25 percent--or the minimum rent level. Such a change could
reduce long-term costs by anywhere from 30 to 90 percent, depending on
the assumptions about tenant incomes. This option would ensure similar
treatment of assisted households across federal programs, since renters
in HUD-sponsored programs will be required to pay 30 percent of their incomes
by 1986. On the other hand, it would decrease the income that such households
would have to spend on other necessities.
THE BUDGETARY TREATMENT OF RURAL HOUSING PROGRAMS
The major FmHA housing loan programs are financed through the Rural Housing Insurance Fund (RHIF), a revolving fund from which program expenditures are made and into which program collections are deposited. Because the RHIF is a revolving fund, budget authority and outlay estimates are not adequate measures of program cost as they are in most federal programs.
The Operation of the RHIF
Each year the Congress authorizes an activity level for rural housing programs, which is financed through four funding sources available to the RHIF. The primary source is the sale of mortgage-backed securities called certificates of beneficial ownership (CBOs) to the Federal Financing Bank (FFB), an off-budget branch of the U.S. Treasury that coordinates federal agency financing. Another funding source is the appropriations made by the Congress to the fund to cover annual interest subsidies and losses on foreclosures for the last year in which they are known--generally two years prior. A third source of financing is borrower payments. Finally, to the extent that its other funding sources are insufficient to meet its needs, the RHIF has permanent, indefinite authority to borrow from the U.S. Treasury, authority that does not expire and that allows unlimited, unsecured borrowing to finance Congressionally authorized lending. Budget authority and outlay levels are the net result of the transactions of the RHIF; as a .result they are difficult to estimate and do not represent either the full federal expenditures associated with rural housing aid or the long-run costs associated with any year's funding level.
Options for Changing the Current Budgetary Treatment to Make Costs More Apparent
Modifying the budgetary treatment of the RHIF would not change the actual cost of programs but would make the costs more apparent.
Treating CBO Asset Sales as Borrowing. Transactions between the RHIF and the FFB are treated by law as asset sales,3 but they may be more appropriately viewed as RHIF borrowing from the FFB. The FmHA continues to maintain possession of and service the mortgages securing the CBO, and it guarantees the timely payment of principal and interest on the securities. Thus, the FFB is not purchasing a pool of mortgages but, rather, is lending to the FmHA based on the agency's guarantee.4
Treating the RHIF's transactions with the FFB as sales, rather than as borrowing, moves the financing of rural housing programs out of the unified budget.5 When the RHIF sells a CBO to the FFB, it offsets its budget authority requirements and reduces its outlay levels by the amount of the sale, while the FFB's budget levels increase by the amount of the sale. Because the FFB spending totals are not included in the unified budget, a large share of the federal expenses of rural housing programs are, therefore, also not included in the budget. Changing the treatment of CBO transactions from asset sales to borrowing would not change actual spending by the federal government, but it would increase unified budget spending totals. Had this change been enacted in 1981 when CBO sales totaled $6 billion, RHIF budget authority requirements and outlays would have risen by that amount, as would the unified budget deficit.
Modifying the Interest Rate Paid on Treasury Borrowing. The Treasury is mandated to charge the RHIF an interest rate on its short-term borrowing based on the average rate on outstanding long-term securities,6 which leads at times to underestimated costs for rural housing programs. The Treasury currently charges the RHIF 9.4 percent on its borrowing, but the current rate on its short-term borrowing is over 12 percent. If the rate charged the RHIF were set at the short-term Treasury borrowing rate, the cost attributed to rural housing programs would increase under current interest rate patterns. Had the RHIF been charged in 1981 the average rate on three-month Treasury securities, instead of the rate on outstanding long-term securities, its borrowing costs would have increased from $140 million to $240 million, or by 70 percent.
Fully Funding the Cost of Rural Housing Programs in Advance. The FmHA currently reports the annual costs of the programs only after they are incurred, which is the basis for the appropriation for past-year losses. Thus, the Congress is not able to consider the long-term cost of rural housing loans at the time they are authorized.
The Congress could consider funding the full expected cost of rural housing loans at the time they are made by appropriating an amount equal to the interest subsidies and foreclosure losses expected to result from the new lending. This would allow the Congress to compare the costs of rural housing programs to other programs, particularly the housing programs operated by HUD, which are funded in a similar manner. It would also, however, require large increases in budget authority.
Requiring the FmHA to Provide Estimates of Long-Term Program Costs. As an alternative to providing full funding for rural housing programs, the Congress could require the FmHA to include estimates of the expected long-term costs of additional lending in its budget submissions. This would provide the Congress with cost estimates that it could compare with estimates of the cost of other federal programs. The FmHA might, however, require more resources to prepare such estimates.
This document is available in its entirety in PDF.
1. The program names refer to section numbers of the Housing Act of 1949 (Public Law 81-171), as amended.
2. Low-income borrowers are those with incomes below a range of $11,500 to $18,000 in the continental United States, depending on area housing costs, with adjustments allowed for certain household expenses. Moderate-income levels are set $5,500 higher than low-income limits.
3. Both P.L. 81-171 and P.L. 87-128, as amended, authorize CBO transactions to be treated as asset sales.
4. For a more complete discussion of these transactions see: Congressional Budget Office, The Federal Financing Bank and the Budgetary Treatment of Federal Credit Activities (January 1982).
5. Treating RHIF transactions with the FFB as asset sales rather than as borrowing does not, however, affect program cost estimates. Because the RHIF pays an interest rate based on the government cost of borrowing on the funds, the full cost of the transaction is included in the budget.
6. See Section 517(h) of Public Law 81-171, as amended.