Christopher Meder/
Christopher Meder/

While there are many uncertainties with the future of affordable housing, there’s one that we should be seriously concerned about. There’s a shortage of affordable housing units across the nation, especially in rural communities. And while discovering ways to increase our supply, we should also be worried about our current units and their expiring affordability.

The United States Department of Agriculture's (USDA) Rural Housing Service (RHS) multifamily rural rental housing mortgage loans started to mature two years ago, and that process will speed up over the next 10 years. Problematically, this may exacerbate the unavailability of affordable housing further. Ten years ahead may seem like we have plenty of time to mitigate the situation, but just like that, we’ll blink and the clock will have run out for affordable properties.

When asked to describe the current state of preservation efforts to keep affordable housing in rural communities, Richard Price of global law firm Nixon Peabody says such efforts are “insufficient—we’re losing affordable housing in rural communities [every year]. There’s a growing need for workforce and elderly housing in particular, but they have fewer housing units every year.”

Relief for Rural Communities
RHS rural rental housing programs provide relief for rural communities and help its people thrive. USDA programs like Sec. 515 loans, 514/516 loan and grants, and Sec. 521 Rental Assistance (RA) are crucial for these areas.

Sec. 515 is the largest affordable rental housing funding source for rural communities. These loans provide affordable housing to very low-, low-, and moderate-income families, the elderly, and the disabled. These funds have been used for new construction in rural areas and currently are used for rehabilitation of existing Sec. 515 buildings.

Almost two-thirds of all tenants in RHS rural rental housing are headed by someone who is elderly, handicapped, or disabled who live on less than $1,000 a month. Eligible tenants who receive RA pay no more than 30% of their income toward the rent, and RHS pays the balance to the property owner. Unlike HUD project-based Sec. 8, RA agreements with the owners expire when the original USDA loan is paid in full with the final loan payment. So, once the mortgages mature, RA is no longer provided and tenants must pay full-market rents, regardless of their ability.

“The most important point to remember is when the mortgage matures, so does the rent subsidy, and you lose both," says Price.

The time has now come for most rural affordable housing to mature out of the program.

"USDA occupancy reports show that the USDA portfolio is shrinking and that [the number of] RA units being used peaked in FY13," says Laurence Anderson, former preservation director of the USDA Office of Rural Development (RD). "The portfolio is losing about 1,290 RA units a year from projects that prepay their mortgage or from mortgages maturing.”

About 60% of properties with maturing mortgages exited the program between 2014 through 2017, according to the Government Accountability Office (GAO). The USDA expects that between 50 and 100 Sec. 515 loans will mature each year through 2023. Most loans of other programs will continue maturing each year after 2028.

At a recent Council of Affordable and Rural Housing (CARH) conference, the GAO expressed its concern for the high percentage of properties with maturing mortgages that left the program rather than being preserved, according to Anderson, who adds that some owners have been surprised by the number of matured loans that were ahead of their 50-year loan schedule.

“Some owners made loan payments ahead of schedule, which inadvertently paid their loans ahead of time, as early as 15 to 20 years before they were due to mature,” Anderson notes.

Prepayment Prevention May Help
The prepayment prevention program Congress created almost 30 years ago was to prevent this very thing from happening. The problem is, according to Anderson, for the past six years or so, RD stopped providing incentives to avoid prepayment. But now, RD has about $40 million or 8,000 RA units available the agency could use for this purpose.

Anderson suggests a good place to start to use these funds would be to fund the 1,000 RA units now on a prepayment-prevention waiting list. He says RA could save 10 projects or 225 units with every $1 million worth of incentives it funds. RD has the money to make a positive change this fiscal year, but no moves have been made toward that effort thus far.

Maturing mortgages are currently a crisis because of what they portend for affordability for low-income tenants. Many property owners will likely forgo the affordable rents once they're no longer obligated to offer them under the program. They' ll have less incentive to keep the rates low without the promise of USDA rental assistance for their properties.

Red Tape
According to Price, the issue with attempting to convince property owners to maintain the affordability of the housing is that the extension process for programs like Sec. 15 is too time- and resource-consuming.

Anderson clarifies part of the reason RD has made minimal effort to entice owners to maintain affordable rents: “RD doesn’t [fully acknowledge] owner motivation—profit—so [the owners] can’t afford to stick around. Owners depend on RD assistance for reasonable and tightly controlled profit, but when they're refused, they're motivated to convert to market-rate units.”

Even nonprofit owners still depend on adequate project revenues to maintain operations.

To combat the problem, RD on April 28, 2018, released an Unnumbered Letter providing a stopgap measure that allows property owners to reamortize loans, but the actual process is complicated and RD staff have difficulty completing it because they must wait for the Office of Management and Budget to authorize each transaction.

In the meantime, RD is seeking a more permanent solution. According to Anderson, the temporary fix fails to address ongoing property needs and only works as a solution if a project doesn’t need rehabilitation or repair. However, most of these properties haven't been recapitalized or rehabilitated in more than 30 years.

A Collaborative Response
Many organizations, policy leaders, and preservation working groups consisting of advocates and rural nonprofits are coming together to form viable solutions to the RA problem. Some nonprofits have begun acquiring these properties with expiring affordability. In doing so, they're able to keep the rents affordable, giving tenants a sense of stability and peace. This act also, in turn, satisfies the owners' mission as affordable housing proponents.

In 2016, the RHS implemented the Multi-Family Housing Property Preservation Tool to identify these properties more consistently and accurately. The initiative was intended to help address properties in the order of their priorities and eliminate the potential for human error to ensure accuracy. From there, nonprofit organizations and private investors could approach property owners to sell and, in turn, the organizations could maintain the affordability of the homes.

The problem with the new tool, however, according to a May 17 GAO report, was that “RHS lacked sufficient controls to ensure the accuracy, completeness, and timeliness of those estimates.” The GAO recommended that RHS be given authority to continue rental assistance after mortgage maturity, thereby allowing continuing affordability in a cost-effective manner.

But even this solution presented a problem, says Anderson, in that, post–mortgage maturity, a new program initiative would be required for RD. Even if RD were granted such authority, the agency might be unable to implement a new program to protect tenants. Such a program could end up, instead, going to HUD and still lack the necessary attention to provide long-term protection of affordable occupancy.

Some argue that RD and local organizations should turn to private investments to save affordable housing units. But RD has been relying on private investment and debt financing from other government agencies for many years, and that alone hasn't solved the preservation problem.

“Private investments wouldn’t be inexpensive enough to maintain RD assistance," says Anderson. "This is partly why banks in rural towns can’t provide enough loans and investments—they lack sufficient capacity to provide affordable rates that meet the amount required to preserve affordability for low-income tenants.”

What it comes down to is, in part, whether property owners are mission- or purely profit-oriented. Ascertaining the owner's motive would better enable RD to determine how to approach the owner for the good of the tenant.

Otherwise, Anderson says, “there’s no way to protect tenants who aren't eligible for vouchers, under current rules, at mortgage maturity.”

We’ve seen many properties exit the program already, as many property owners choose to prepay. It appears to be up to mission-oriented owners, whether for-profit or nonprofit, as well as advocacy groups to go beyond mere stopgap measures and devise solutions that will provide permanent results.

Now is the time to avoid losing more affordable housing units—before it’s too late.