The Obama administration released it’s FY 2012 budget proposal. Among the most drastic reductions in multifamily affordable housing programs is a proposed elimination of the section 538 multifamily guaranteed loan program. The Terminations, Reductions and Savings report cited the rising cost of the program resulting from an increased default rate:
However, the defaults in these programs have been much higher than initially projected, and the increase has happened quickly, making them more expensive than their direct loan counterparts. In addition, the direct loan programs have very low defaults, even though they tend to serve the much lower income residents/communities
The problems in the 538 program surfaced several months ago in the USDA’s budget submissions. A December CARH email newsletter called attention to the curious rise in the USDA Rural Development Section 538 Guaranteed Rural Rental Housing program loan guarantee score:
In the USDA’s budget submission, the score for FY2011 appropriations increased nearly ten-fold from FY2010… It appears that certain defaults in the Section 538 program, together with changes resulting from the lack of interest credit subsidy, have been cited as reasons for this scoring increase.
The ten-fold increase in defaults was, in-part, responsible for a $13,625,000 increase in requested loan subsidies for guaranteed multi-family housing, an increase explained in the 2011 Office of Budget and Program Analysis explanatory notes:
The proposed increase supports the estimated loan obligations associated with the requested loan level in FY 2011. The increase in subsidy rate is a result of annual technical assumptions, increase in default rates, and interest changes as forecasted in the President’s 2011 budget economic assumptions.
Looking at the 2011 budget assumptions, the subsidy Rate increased from 1.15 in 2010 to 9.69 in 2011 with the program level remaining essentially constant. Underlying this rate change was an increase in the default rate from 1.49 to 11.73 (taken from the 2010 and 2011 subsidy estimates).