Rural Housing Service: The Silent Surge

The 2014 HMDA data provide interesting market insights. The FHA continues to shrink giving way to an expanding conventional market. The most dramatic change from a decade ago is the role of the Veterans Administration, Rural Housing Service (RHS), and the Farm Service Agency (FSA). These latter two programs are not well known, but have expanded lending in rural areas.

The RHS and FSA are part of the United States Department of Agriculture (USDA) and are intended to support financing for home purchases and farm purchases, respectively, in areas designated as rural. RHS supports home financing in two ways; either through direct loans or by guaranteeing loans. When the RHS guarantees a loan it is acting as an insurer, guaranteeing the steady payments from the mortgagee to whomever buys the mortgage. In 2014, the RHS and FSA financed nearly 134,000 mortgages, nearly six times the level at the peak of the housing bubble. This shift to stable financing is important as rural markets had a higher share of both subprime loans[1] and loans with risky prepayment penalties[2] during the build up to the last financial crisis.

The majority of RHS work is done with guarantees like the FHA. As of July, the program had guaranteed well over a million loans and had 962,953 outstanding. Of these 75.3 percent were to first time buyers and 90.1 percent were to borrowers of moderate or lower income. The vast majority of guarantees are for single-family homes with loans averaging $127,407 and buyers contributing 2.1 percent in equity on average. Racially, the majority of RHS guarantees have gone to White borrowers at 85.1 percent and only 5.0 percent going to African Americans. This pattern is in stark contrast to the 265,543 RHS direct loans where African Americans make up 18.1 percent of originations and Hispanics 14.4, while Whites receive 64.4 percent of financing. 87.0 percent of this program’s direct lending goes to low or very low income borrowers.

While the FHA is more widely know for its role in supporting urban homeownership and equality in finance, the RHS has provided the same access in rural markets. Like its larger urban relative, the RHS charges a fee for its guarantee. However, the RHS fees upfront and annual fees, 2 percent and 0. 5 percent respectively, are far lower than the FHA’s 1.75 percent upfront fee and 0.85 percent annual fee. What’s more the RHS’ fees are scheduled to decline to 1 percent and 0.35 percent, respectively, on October 1^st.

While the RHS will only guarantee 90 percent of the balance, the borrower can use grants, gifts and down payment assitance from non-interested parties to fill the gap. The catch is that there are income limits, the house must be in an area designated as rural, and the maximum front-end and back-end debt-to-income ratios are 29 percent and 41 percent as compared to the FHA’s 31 percent and 43 percent.

The RHS program expanded dramatically in the wake of the financial crisis. It is now a dominant player supporting first-time, low income, and minority borrowers with safer financing in rural areas.