Among the many federal agencies with an “affordable housing” mission is the Agriculture Department’s Rural Housing Service (RHS). It was established in 1949 to provide housing assistance to poor farmers and farm workers. But what is a federal agency without mission creep?
By 1961, RHS expanded its portfolio to include direct mortgage loans to individuals residing on farms or other rural property — whether they worked the land or not. Later, in the early 1990s, it shifted its focus from direct lending to guaranteeing mortgages issued by private lenders — a move that dramatically expanded its operations to a broader population of borrowers.
Its geographic reach has expanded as well. RHS lending is no longer restricted to housing on farm property. Instead the agency now serves any area that it subjectively defines as being “rural in character.”
Apparently, “rural” is in the eye of the beholder. A U.S. Government Accountability Office audit found that more than half of the properties in the agency’s loan portfolio are in metropolitan counties (urban and suburban zip codes).
As a result, the RHS today is almost entirely focused on providing means-tested housing assistance to nonfarm households in markets it designates as rural. It maintains a significant presence as a lender, issuing about $1 billion in direct home loans. The direct loans are targeted to low- and very-low-income borrowers, households making less than 80 percent of the median income of their area.
But the vast majority of RHS assistance is concentrated in its single-family housing guaranteed mortgage program. This is a means-tested program that insures single-family home loans to individual borrowers of moderate incomes. Households making as much as 115 percent of area median income are eligible to participate — although the agency seems none too strict about abiding by those criteria. Almost 20 percent of the borrowers in the guaranteed mortgage program exceed the program’s income ceiling.
The RHS receives $24 billion annually in total loan authorization for this single-family housing guaranteed mortgage program, a nearly 300 percent increase since fiscal 2009.
Advocates of the RHS and similar federal housing-assistance programs argue that, without them, many borrowers would be unable to attain the credit needed to buy a home. However, research indicates that many borrowers receiving RHS subsidies would have no trouble getting private financing if the program did not exist.
But there’s a more insidious problem with these programs. Means-tested loan guarantee programs tend to tempt financially vulnerable individuals into taking on debt that they simply can’t sustain. In the event of loan failure, this leaves them in financial ruin, and leaves taxpayers stuck with making good on the loans or loan guarantees.
According to official sources, default rates for the RHS mortgage guarantee programs are at least double those of a comparable program managed by the Federal Housing Administration (FHA) — a separate government agency with a long record of insuring high-risk loans. The default rate for the RHS direct mortgage program is five times that of a comparable FHA program.
At best, RHS housing assistance programs provide so-called affordable housing for those that can qualify and properly maintain payments on the debt. For those outside the program, however, they crowd out opportunities by increasing demand for houses and forcing up prices.
In worst case scenarios, as evidenced by experiences during the recent housing crisis, such government programs encourage individuals take out mortgages they ultimately cannot afford — with dire financial consequences for borrowers and taxpayers alike.
Given the small benefits and huge liabilities associated with these programs, Congress should shut down the Rural Housing Service. It has grown far beyond its original mandate and purpose and now exposes taxpayers to billions of dollars in potential liabilities. Restoration of market discipline for the rural and suburban dwellers currently served by the program will, over time, create proper incentives for prudent lending, additional housing construction, and sustainable homeownership opportunities.
- John L. Ligon is a senior policy analyst and the research manager for the Heritage Foundation’s Center for Data Analysis.
- This piece originally appeared in The Washington Times.
Originally appeared in the Washington Times