The section 538 Guaranteed Rural Rental Housing Program, which had been targeted for termination by the administration, has been saved from the chopping block in  H.R. 2112. Here is a graphic depicting the funding made available to all USDA Development programs through the Act:


Todays federal register contains two notices of funding availability for USDA Rural Development affordable housing programs. The first of these notices announces the timeframe to submit pre-applications for section 514 Farm Labor Housing (FLH) loans and section 516 FLH grants for the construction of new off-farm FLH units.

Funding available for these programs is as follows: For FY 2011, up to $25,672,886.92 will be available for Section 514 loans, and up to $9,853,254.00 for Section 516 grants, and $2,994,000 for FLH Rental Assistance.

Other key information:

  • Individual requests may not exceed $3 million (total loan and grant).
  • No State may receive more than 30 percent of available FLH funding distributed in FY 2011.
  • If there are insufficient applications from around the country to exhaust Sections 514 and 516 funds available, the Agency may then exceed the 30 percent cap per State. Section 516 off-farm FLH grants may not exceed 90 percent of the total development cost (TDC) of the housing as defined in 7 CFR part 3560.11.
  • Applications that will use leveraged funding must provide written commitments from the funding source at pre-application.
  • If leveraged funds are in the form of tax credits, the applicant must document that it has received tax credits or has applied and been approved to receive tax credits.

Applications are due by  5 p.m. local time to the appropriate Rural Development State Office on August 22, 2011.

For further information contact: Mirna Reyes-Bible, Finance and Loan Analyst, Multi-Family Housing Preservation and Direct Loan Division, STOP 0781 (Room 1263-S), USDA Rural Development, 1400 Independence Ave., SW., Washington, DC 20250-0781, telephone: (202) 720-1753 (this is not a toll free number.), or via e-mail:

[click to continue…]


Yesterday, The USDA announced the availability of funding for the Rural Development Voucher Program. Specifically, the notice announces  $13,972,000 in funds made available through the Department of Defense and full-year continuing Appropriations Act 2011 Public Law 112-10 (April 15, 2011). The voucher program is designed to provide assistance to eligible impacted families when an owner prepays a Section 515 Rural Rental Housing Program loan or  USDA action results in a foreclosure.


Stephanie B.M. White, Director, Multi-Family Housing Portfolio Management Division, Rural Development, U.S. Department of Agriculture, 1400 Independence Avenue, SW., STOP 0782, Washington, DC 20250-0782, telephone (202) 720-1615. Persons with hearing or speech impairments may access this number via TDD by calling the toll-free Federal Information Relay Service at 800-877-8339.


Last Thursday, The house passed H.R. 2112, the appropriations bill for Agriculture, Rural Development, Food and Drug Administration, and Related Agencies programs for the fiscal year 2012.  Here is a breakdown of what the bill means for rural development programs:

  • $846 million for the Section 502 single-family subsidized direct loan program, $276 million less than FY 2011
  • $24 billion for the Section 502 unsubsidized guaranteed loan program, the same as FY 2011
  • $59 million for the Section 515 rural rental housing program, $11 million less than in FY 2011
  • No funding for the section 538 multifamily loan guarantee program



Questions arise surrounding the default rate as the affordable housing industry fights to keep the program alive

On February 14th we posted a story on the Obama administration’s proposed elimination of the USDA Rural Development’s 538 multifamily guaranteed loan program.  In the Terminations, Reductions and Savings report that accompanied the proposed budget the administration cited the rising cost of the program caused by a dramatic increase in the program’s default rate:

…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

We also noted that the program’s default troubles were not news to the affordable housing industry. A CARH email newsletter had noted the troubling rise in default rate several months earlier:

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.

Looking at the 2011 budget assumptions, we found that the subsidy rate increased from 1.15 in 2010 to 9.69 in 2011, driven by an increase in the default rate from 1.49 to 11.73.

Affordable housing advocates have since rallied around the program in an effort not only to save the program for FY2012, but also to maintain it’s funding levels in FY2011. These efforts culminated in a recent joint letter to both the house and senate:

We would urge you as you complete consideration of the Fiscal Year 2011 budget to provide the necessary appropriations to allow for a program level of $129 million and then in Fiscal Year 2012, consider allowing fees to be charged, thus making the program revenue neutral.

While the efforts to maintain a funding level of $129 million in 2011 have proven unsuccessful (the recently released FY2011 CR, H.R. 1473 only provides $30 million), the fight to keep the program alive in FY2012 goes on. The letter, signed by numerous advocacy groups, strongly contests the default rate at the center of the program’s proposed elimination:

We refute both statements, particularly the default rate… The default rate and therefore the subsidy rate for the program are incorrect as relayed by the Administration in its FY 2011 and FY 2012 budgets. The Council for Affordable and Rural Housing (CARH) has numbers that can demonstrate the default rates to be less than the agency transmitted in their budget.

The Numbers

Further investigation revealed that the increase in default resulted from just five properties going into foreclosure. The table below shows the series of loans that went into default, grouped by repurchase date to indicate which loans belonged to each of the five properties:

Also included in the table is a calculation of the default rate. This calculation, taken by summing the default amounts, and dividing the sum by the total outstanding principle in the program, results in a default rate of 8% not 11.73%. “Somewhere there is a disconnect, said Rob Hall of Bonneville Multifamily Capital.  While concerned with this disconnect, he was more troubled by the way in which the numbers do not paint an accurate picture of the program’s cost, “Historically [this default rate] is not indicative of the deals getting done in the past 7 years.”

A different program

Underlying this belief is the fact that four of the five loans were originated in the early years of the program, before updated underwriting practices went into effect: “Four of the five deals were not tax credit properties. All the deals closed in the last 5,6,7 years have been LIHTC properties. They are completely different than deals from the early days of the program, which had virtually no equity.”

The changes Mr. Hall is referring to stem from a 2004 Notice of Funding Availability that awarded points to 538 loan applicants based on Loan to Value ratios and a 2005 NOFA that awarded points for Loan to Cost ratios.  Additionally, since 2005, Rural Development has pushed to have every 538 loan securitized by the Government National Mortgage Association (GNMA). Because GNMA requires a Loan to Cost Ratio of 50% or less, this move has been accompanied by subsequently tighter NOFA requirements. The combined effect of these policies is that the agency has been funding loans that have more equity, generally in the form of tax credits. Pictured left is a clip from the 2005 Notice of Funding Availability that details the debt to cost preference scheme.

Given the historically low rate of defaults in the LIHTC program, the correlation between 538 and tax credit deals has significant implications for the 538 program’s projected cost. A recent Ernst and Young report showed the default rate for the 23-year history of the program at .83%, and an annual rate of about .03%.

“Recent 538 deals should be nearly identical to that TC rate because they are all the same deals. The default rate is well below 1% for 538 loans originated in the last 5-7 years.”  Said Mr. Hall. He also noted while the loans that went into default should never have been underwritten, “the lenders behind these loans are no longer involved with the program and the officers who originated the loans are no longer with the program.” He continued, “Members of the industry just want the default rate to reflect this, something reasonable like 2-3%. The higher default rate is leading the budget people and congress to believe the program is very expensive when it is not. “

Symptom of broader ills

A recently released GAO audit on the USDA’s 514/515 Farm Labor housing program suggests that the questions surrounding the 538 program could be indicative of broader problems for the agency. In particular, the GAO found that, “Rural Development (RD) overestimated its credit subsidy costs for the fiscal year 2010 FLH loan cohort”, attributing this overestimate to errors in calculating the default rate, “we found that the primary driver of the change from the fiscal year 2010 credit subsidy estimate to the re-estimate was the default cost component and, more specifically, how this cost component was calculated.”

The report also provides insight into the mysterious credit subsidy rate formula: “Four cost components comprise the credit subsidy estimate for the FLH program: defaults, net of recoveries; interest; fees; and a component labeled “all other,” which includes prepayments.” Going on to explain exactly how the agency erred in their default rate calculation:

Specifically, when the fiscal year 2010 budget formulation credit subsidy estimate was calculated, the estimated default cost component was inflated by a prepayment estimate. That is, RD overstated the estimated default cost component to reflect the effect of prepayment. RD, includes the impact of prepayment estimates in the all other cost component

It remains unclear whether RD uses the same credit subsidy formula for the 538 program and whether mistakes in the same prepayment calculations could have contributed to an inflated 538 default rate.  However, some industry experts find it hard not to see similarities between the two issues, “My take is that if there is a problem with determining the subsidy rate for one program, there may be issues in determining rates for other programs.” , said Colleen Fisher, Executive Director of the Council for Affordable and Rural Housing (CARH),   “I think that it shows that there are some issues that need to be worked out between OMB people and the budget people and the program people that actually know what the story is.”

She went on to reiterate that the program today is a vastly different one than produced four of the five problem-properties, “The program is too important now and we have really seen it improve since its early days. From an infancy period where it had some issues, we can now use this program to do some good”,  she continued,   “I think if we can get through FY2011, I think we might be seeing the agency reviewing the subsidy rate, that’s all premised on the crazy FY2011.”


A January 13th article in the New York Times, entitled Auditors See Rising Defaults in Rural Loans, focused on the USDA’s mishandling of $133 million in budget authority for Rural Development’s Section 502 Single Family Housing Guaranteed Loan Program, granted through the American Recovery and Reinvestment Act of 2009.  The mishandling came to light through a December audit by the Office of the Inspector General.

The audit examined a sample of 100 loans, finding 28 loans where, “lenders had not fully complied with Federal regulations or Recovery Act directives in determining borrower eligibility.” The Audit found the USDA granted loans to applicants with annual income that exceeded program limits, to borrowers that did not meet repayment ability guidelines, those who had abiility to secure credit without a government loan guarantee, borrowers who already owned adequate homes, and borrowers who used government loan guarantees to purchase homes with swimming pools.

While the report does not contain a complete explanation of the causes behind the program failures, it points to “instances where agency policies and guidance were unclear, inadequate, or insufficient.” and alludes to future insights and recommendations to be contained in a future, final audit. The audit concluded the following:


In our judgment, the borrowers that did not meet repayment ability guidelines also have a higher risk of becoming delinquent and defaulting on their loans. Based on the sample results, we estimate that 27,206 loans (over 33 percent of the portfolio) may be ineligible with a projected total value of $4.0 billion.

So several months after our FOIA request, we have finally received a list of the 22 lenders behind the 28 loans mentioned in the audit:

document2011-03-11-095015 (dragged)

Article Image courtesy of Flickr user James Cridland


Agriculture Secretary Vilsack had the following to say about the elimination of the 538 guaranteed loan program:

On the rural development side, we are proposing and suggesting some tailoring of our housing programs, reducing some of the programs and eliminating others, but still try to meet the overall housing needs through a very aggressive Guaranteed Loan Program.

Link to audio recording

Media Briefing: Remarks by Agriculture Secretary Vilsack on President’s Proposed FY 2012 Budget

Monday, February 14, 2011

MODERATOR: Good afternoon, everyone, and thank you for joining us today. Agriculture Secretary Tom Vilsack is here in this studio to talk about the proposed 2012 budget as it relates to agriculture. If you would like to ask a question of him, let us know by pressing Star/1 on your touchtone pad, and with that, we go straight to the Secretary.

SECRETARY VILSACK: Susan, thank you very much, and thank you all for joining. I am going to take a few minutes of your time this afternoon to talk about a very challenging and difficult budget that we presented today. In fact, there are several different challenges or realities that the USDA budget has to face in this year.

I think it’s no surprise that folks at USDA and across the country have become very concerned about the deficits, and the President has instructed us to take a look, a very close look, at our budget to find ways in which we can provide opportunities for reducing the deficit. USDA stepped up to the plate last year and steps up to the plate this year as well. Whenever you are talking about deficit reduction or eliminating or reducing programs, you are obviously talking about difficult and tough choices, both to reduce budgets and to reallocate resources. That’s one reality we had to face in this budget.

[click to continue…]


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).


New USDA 538 form

by Ryan Sloan on Jan 6, 2011

A final rule, effective February 2, 2011, adds an additional form of Guarantee for construction advances and the permanent financing phase of 538 projects. The form is intended to, “to enhance efficiency, flexibility, and effectiveness in managing the program.”

FOR FURTHER INFORMATION CONTACT: Tammy S. Daniels, Financial and Loan Analyst, USDA Rural Development Guaranteed Rural Rental Housing Program, Multi-Family Housing Guaranteed Loan Division, U.S. Department of Agriculture, South Agriculture Building, Room 1271, STOP 0781, 1400 Independence Avenue, SW., Washington, DC 20250–0781. E-mail: Telephone: (202) 720–0021. This number is not toll-free. Hearing or speech-impaired persons may access that number by calling the Federal Information Relay Service toll-free at (800) 877–8339.


The USDA announced that it will be holding a series of teleconference and/or web meetings on multi-family housing programs. The meetings will happen on a quarterly basis, but may be held monthly at the Agency’s discretion and are scheduled to occur in the months of January, April, July, and October of 2011. The USDA offered the following as potential objectives and topics:

Enhance the effectiveness of the Multi-Family Housing

Enhance RHS’ awareness of issues that impact the Multi-
Family Housing Program;

Increase transparency and accountability in the Multi-
Family Housing Program;

Updates on USDA Multi-Family Housing Program activities;

Feedback from participants on the Multi-Family Notice of
Funds Availability processes;

Comments on Section 514/516 and Section 515 transaction

Comments on particular servicing-related activities of
interest at that time;

FOR FURTHER INFORMATION CONTACT: Any member of the public wishing to
register for the meetings and obtain the call-in number, access code,
Web link and other information for any of the public teleconference
and/or Web conference meetings may contact Sandra Mercier, Financial
and Loan Analyst, Multifamily Housing Operations and Asset Management
Division, telephone: (202) 720-1617, fax: (202) 720-0302, or e-mail: Those who request registration less than
15 calendar days prior to the date of a teleconference may not receive
notice of that teleconference, but will receive notices of future
teleconferences. The Agency expects to accommodate each participant's
preferred form of participation by telephone or via web link. However,
if it appears that existing capabilities may prevent the Agency from
accommodating all requests for one form of participation, each
participant will be notified and encouraged to consider an alternative
form of participation.