Former GMHF director of lending and programs Robyn Bipes published this article in the March 2017 issue of Community Development Investments.
By Robyn Bipes, Vice President of Loan Fund and Mortgage Lending, Twin Cities Habitat for Humanity
Some housing crises grab national headlines: sub-prime lending, the collapse of the housing market, or the urgent need to create more stable housing for our military veterans. Unfortunately for thousands of seniors and modest-income families, there is another housing crisis that has gone largely unnoticed: the looming loss of hundreds of thousands of the most affordable rental housing units in small towns and rural areas across the country.
What’s at Stake
Many parts of rural America face disinvestment. For years, affordable housing in rural areas has lacked private reinvestment, and the condition of rental housing has continued to decline due to aging properties and unaddressed rehabilitation needs. Rural areas do not see as much new construction; rents often are lower so developers are attracted elsewhere for greater profits; and state and federal resources allocated to building or revitalizing rural areas are vastly insufficient. Yet, these affordable rental properties are home to some of America’s lowest-income seniors and families.
Without investment in rural housing, the situation may get much worse. Over the next eight years, rural America could collectively lose an estimated 11,500 affordable, federally assisted U.S. Department of Agriculture (USDA) Rural Development rental properties, currently home to more than 300,000 seniors and lowest-income Americans. This threat hinges on the loss of affordable mortgage financing for rural multifamily rental buildings. When the USDA mortgage secured by a rural multifamily rental building is paid off, the tenants in the property no longer receive USDA rental assistance. The rental assistance payments keep rents affordable for tenants and provide stable rent payments for the property owners.
The story could have a happy ending, however. In rural places across the nation, banks are partnering with nonprofit and community lending organizations to find new ways to stabilize and preserve this much-needed and irreplaceable affordable housing before it is permanently lost.
Decades of Affordable Housing Finance
The U.S. Department of Housing and Urban Development (HUD) creates much of the country’s affordable housing in urban centers and larger towns. The USDA, through its Rural Development division, has for decades provided financing for the creation and preservation of affordable housing in smaller towns, regional city centers, and rural areas with populations less than 20,000. The USDA’s Rural Development Section 5151housing program provided low-interest mortgages, with effective rates as low as
1 percent for 30 to 50 years, to small building owners, nonprofit groups, and mom-and-pop operators who developed and operated apartment buildings as small as eight units to house rural farm labor and other low- and moderate-wage households. The majority of this housing stock was built as modest walk-up apartments between 30 and 50 years ago.
These affordable properties have weathered decades of use, with insufficient funds for upkeep and rehabilitation. Many original owners who built this housing stock are aging too, often with no clear plan for who can take over the properties or care for their tenants.
The situation is reaching a crisis point as thousands of these affordable developments across the country are now nearing the end of their USDA-financed mortgages. While an end to a mortgage payment sounds good to most people, the striking reality is that when a USDA Section 515 mortgage is paid off, the owner is no longer under contract to provide affordable rents. When rent restrictions end, many owners elect to sell their properties or convert them into units that demand market-rate rents. According to USDA Rural Development, 11,500 properties will reach this maturity payoff point by 2024, creating a severe impact on hundreds of thousands of residents.
The USDA’s Section 515 program also provides important rental assistance to many tenants of these properties. With this assistance, tenants can afford the rent by paying no more than 30 percent of their income on housing, helping ensure they have enough money for food, clothing, transportation, and health care. When a USDA mortgage matures or is prepaid, this rental assistance disappears. Consider this example: A renter with a household income of $1,000 a month has a rent payment of $500. Of this, the renter pays $300 and USDA rental assistance covers the rest. When a mortgage matures, the affordability restriction expires and the owner raises the rent to $600 a month at the same time that the tenant’s rental assistance disappears. The renter must now pay $600, twice the previous amount. On average, households in a USDA-financed Section 515 property earn less than $15,000 a year, and many are on fixed incomes and unable to afford any significant rent increases.
Making the rural disadvantage worse is the fact that the USDA does not provide portable rental vouchers to tenants living in properties when USDA mortgages mature. Portable vouchers can protect tenants against rent increases when a property matures out of the program, by allowing them to use a voucher where they live or to find a similar property that will accept a voucher. Without vouchers, existing renters are often unable to pay the full rent to stay in their current housing. Finding other affordable housing can be difficult in rural communities where affordable housing has not been developed in years, or where the nearest affordable apartment is towns away.
How big is this problem? According to USDA Rural Development, rental assistance helps more than 215,000 of the 333,845 households that are renters in USDA-financed apartment buildings. The loss of USDA-financed housing will cause a doubling or, in some cases, tripling of rents, displaced seniors and low-wage earners, fewer suitable replacement apartments to house them, and further disinvestment in rural towns.
Banks Consider Public-Private Partnership
While national attention on this crisis lags, states like Minnesota, Oregon, and Ohio with large and aging portfolios of USDA-financed properties are proactively developing public-private partnerships among banks, public entities, and nonprofit organizations to effectively preserve these affordable units before too many are lost.
In Minnesota, a collaboration of Minnesota Housing (the state housing finance agency), the USDA Rural Development Minnesota office, and the Greater Minnesota Housing Fund (GMHF), a nonprofit lender, has resulted in a creative set of financing tools and incentives that have attracted private capital from banks and other investors. These resources are preserving Minnesota’s most at-risk USDA-financed affordable rental properties before they convert to market-rate housing.