Saving Rural Rental Homes

In September 2022, NHLP submitted testimony for the record to the Banking, Housing and Community Affairs Subcommittee on Housing, Transportation, and Community Development for the Congressional hearing titled, “Examining the U.S. Department of Agriculture’s Rural Housing Service: Stakeholder Perspectives.” The testimony focused on actions that USDA’s Rural Housing Service must take to protect the rights and interests of low-income borrowers and tenants and to preserve its multifamily housing programs. You can read NHLP’s written testimony here: NHLP Congressional Testimony on Stakeholder Perspectives.

RD Section 515 loans have been made for a variety of terms. In the 1960, when loans were restricted to elderly housing, loans were typically made for a term of 50 years. When the program was extended to family households, loans for family housing were typically made for 40 years while loans for elderly housing continued to be made for 50 years. Section 515 loan terms were reduced by RD to 30 years with a 20-year RD renewal option after Congress, in 1989, extended use restrictions to the full term of the loan.

More than 40 years have passed since the first family housing loans were made in the 1960s and 50 years have passed since some of the first elderly housing loans were made. As a result, Section 515 developments have been maturing since about 2003. The number of developments with maturing mortgages has been accelerating since although they remain in a relatively modest range. RD predicts that loan maturities will accelerate over the next 10 years and will increase dramatically as of 2028.

RD has made little effort to deal with maturing loans and Congress has criticized the agency for failing to propose ways to limit mortgage maturities and protect residents from displacement. The only formal action that it has taken was the publication of an Unnumbered Letter (UL) in April of 2015, which was renewed and extended in December 2016.

The UL sets out various options for handling maturing loan properties. First, it makes clear that all loans that are nearing pay off prior to the original loan maturity dates are considered prepayments and must be processed in accordance with the RD prepayment regulations. Loans may be ahead of schedule for a variety of reasons including, failure to use all the original loan proceeds, supplemental principal payments, erroneous amortization schedules, and sale of a portion of the secured property the proceeds of which were paid to RD. Loans that are ahead of schedule cannot be allowed to prepay without the owner having filed a prepayment application and any payment that is received by RD that would pay off the loan must be returned.

RD’s servicing agents are urged to notify borrowers with loans that are 36 or fewer months before loan maturation when the loan will mature, that RD subsidies will terminate as of the maturity date, and the options that the borrower has to reamortize the loan balance, thereby continuing the subsidies. RD staff is urged to encourage borrowers with loans scheduled to mature before the end of 2019 to request loan deferral under the Multifamily Preservation and Revitalization (MPR) Demonstration program. Those who decline to do so are encouraged to apply to prepay their loan, thereby making the residents eligible for RD Vouchers if the loan is prepaid before the maturity date. In the alternative, they can apply for incentives to avert prepayment.

RD has implemented a “Re-am-Lite” processing system under the UL to ensure that RD can reamortize loans quickly when owners have requested reamortization of loan balances.

RD also encourages owners to notify residents of the impending loan maturity be sending a letter to the residents that is set out in the UL.

RD has not articulated any other policy to deal with maturing loans. In 2016, it requested that Congress make RD vouchers available to residents of maturing loans, but the agency has not pursued that option vigorously. It has also not articulated any way in which the loss of the Section 515 rental housing can be ameliorated through a permanent voucher system or the decoupling of RD subsidies from its Section 515 mortgage program. As a consequence, RD loans will continue to mature, residents will be displaced and the Section 515 program will effectively end before 2050 leaving rural communities and residents without affordable housing.

Mortgage foreclosures are another way in which the RD rental housing stock is being diminished. RD will frequently foreclose on borrowers who have defaulted on their loans by either failing to make payments, not maintaining the RD-financed housing, and not responding to RD efforts to operate the housing in accordance with program policies. RD foreclosures are most frequently carried out in a manner that ensures that the property leaves the Section 515 program and relieves RD from continuing to have any responsibility for a development’s operations. RD accomplishes this by bidding less than the property’s fair market value at the foreclosure sale and thereby encouraging purchaser who do not intend to keep the housing in the RD programs to bid at the foreclosure sale. RD has the authority to compel current owners to abide by their loan obligations by bringing a specific performance law suit against the owner or forcing the development into receivership. These options are, however, rarely used.

RD’s obligations to residents throughout the foreclosure process are set out in Chapters 6 and 15 of RD Handbook 3-3560. RD frequently does not follow those obligations strictly. See, Turner v. Vilsack, 2013 WL 6074114 (D. Or. Oct. 24, 2013).

Residents of developments that are foreclosed upon are eligible for RD vouchers. When foreclosures are for reasons other than monetary default, residents with RD vouchers may have to move to other housing if the existing development does not meet health and safety standards.

RD has statutory authority under Section 542 of the Housing Act of 1949 to operate a voucher program in rural areas that is comparable to the HUD Housing Choice Voucher program. That voucher program has, however, never been funded. Instead, Congress has authorized RD to operate a more stringent voucher program through annual appropriations bills since 2006. That program limits vouchers to residents in developments that are prepaid or foreclosed upon and restricts the subsidy that residents are eligible to receive to the difference between the market value of their unit as of the date of prepayment or foreclosure and the rent that the resident was paying. The appropriations acts have never authorized RD to increase the voucher subsidy when rents increase, when household income decreases, or when a voucher holder moves to another community where rental prices are higher.

RD has operated the voucher program for 11 years without publishing formal regulations that were subject to public notice and comment. Instead, the agency publishes an annual notice in the Federal Register that sets out the manner in which RD operates the program.

There are several issues that arise from the manner in which RD operates its voucher program. First, it does not allow residents to apply for vouchers prior to loan prepayment or foreclosure and requires borrowers to live in the prepaid or foreclosed property as of the date of prepayment. The latter requirement is mandated by statute, the former is not. The RD regulations restrict retroactive voucher payments to 60 days prior to RD having entered into a Housing Assistance Payment (HAP) Contract with the owner of the development in which the resident wants to use the voucher. The fact that the resident cannot apply for a voucher until after the prepayment has occurred together with the 60-day retroactive limitation causes many households eligible for vouchers to have to pay full market rent when RD is unable to promptly inspect the unit and distribute voucher payments within the 60-day limitation.

Second, RD requires that all adult residents of households applying for vouchers be citizens of the United States or persons admitted for permanent residence. While a citizenship requirement is mandated by Section 214 of the Housing and Community Development Act of 2008, that Act does not require all household residents to meet that requirement. In the case of mixed households, it authorizes proration of the voucher subsidy. Indeed, HUD has allowed minor household members to qualify the entire household to live in HUD subsidized housing or to receive HUD vouchers, provided the subsidy is prorated. RD has not implemented the proration provisions of the act and requires that all household members be citizens or permanent residents. RD has also not allowed voucher applicants to appeal the determination that they do not qualify for a voucher by reason of their status as required by the act.

Third, RD issues vouchers to all residents of prepaid developments regardless of whether the prepayment is subject to use restrictions. In fact, there is no reason for RD to extend vouchers to households that remain in prepaid developments. The use restrictions require prepaying owners to continue to rent apartments to residents as of the date of prepayment as if they continued to live in a Section 515 development. The subsidy that is provided to these residents by RD vouchers does not provide the remaining residents any protection that is not already provided by the use restriction. All that the voucher does is to relieve owners from the financial burdens that the use restrictions were intended to impose on them and, thereby, discourage prepayment of their loans. The fact that RD has been issuing vouchers to households that do not need them has caused RD to run short of voucher funding over the last several years and has, as a result, deprived other households in need of vouchers from receiving them.

Lastly, the use restriction form that RD uses for developments that are prepaid subject to use restrictions authorizes the agency to lift the use restrictions when the voucher subsidy is terminated for reasons beyond the owner’s control. However, the use restrictions are a condition of the prepayment and RD vouchers were intended to provide assistance to residents and not owners. Accordingly, removing the use restrictions when voucher funding terminates violates ELIHPA.

NHLP’s Managing Attorney Natalie Maxwell testified in front of the United States Senate Committee on Banking, Housing and Urban Development to discuss “Rural Housing Legislation.” Natalie addressed the importance of rental housing provided by USDA’s Rural Housing Service. Congress plays a crucial role in preserving rural rental housing and can ensure preservation issues are addressed by passing The Rural Housing Service Reform Act of 2023. You can read Natalie Maxwell’s full testimony here and watch the hearing here. (May 2, 2023)