#091 Jan/Feb 1997

From the National Rural Housing Coalition: Rural Housing Year by Year

Things got off to a good start when, at the beginning of President Clinton’s first term, the National Rural Housing Coalition (NRHC) and others were able to persuade the administration […]

Things got off to a good start when, at the beginning of President Clinton’s first term, the National Rural Housing Coalition (NRHC) and others were able to persuade the administration to expand low-income home ownership lending for rural housing under Section 502. The new Secretary of Agriculture, former Congressman Mike Espy (D-MS), was interested in homeownership, and his leadership was important in getting the administration, and ultimately Congress, to support increases in rural housing programs. (In the midst of this increased spending, Espy did propose a small decrease in section 515 rural rental housing.)

Section 502 had been a principal target of the Reagan and Bush administrations, which had proposed various forms of block grants and vouchers for rural housing but settled for close to a 50 percent reduction in section 502, from $2.3 billion to $1.26 billion. With over 100,000 applicants on the waiting list, the FY 1994 Clinton administration budget request included an additional $500 million for Section 502 direct loans and increased funding for homeownership guarantees and water and waste disposal.

This early shift toward increased funding for low income and moderate homeownership and a phase out of rural rental housing was as close as the Clinton administration ever got to a rural housing policy, or a rural development policy for that matter. In the end, the administration policy for rural housing was centered on saving money.

By late 1993, the administration and Congress had agreed to a five-year budget plan which, among other things, limited domestic discretionary spending. So, as the administration and Congress began considering the budget for FY95, spending caps were a major factor in policymaking for all departments. At USDA, spending caps appeared to be the only factor.

The President’s 1995 budget proposed a greater than 50 percent cut in section 515 and $1.8 billion for section 502 and additional increases in guaranteed loans and water and waste funding. However, the section 502 budget was accompanied by a request to increase, for current and future borrowers, mortgage payments from a base of 20 percent of adjusted income plus utilities and maintenance to 30 percent of adjusted income. This would have increased total housing costs for many section 502 borrowers to 50 percent of income.

The budget impact of this was to cut the cost of subsidy for section 502 in half. With this proposal, the long slide downward in rural housing spending began. Congress refused to adopt the administration proposal on section 502 borrower payments but did provide the budget authority for section 502 based on a reduction in subsidy. As a result, section 502 lending in FY95 fell from about $175 billion to $940 million.

At the same time, section 515 was cut to $220 million. A house Appropriations Committee investigation uncovered a number of problems with the program, from mismanagement, to questionable accounting practices, to overly generous profits for developers. Some argued that the direction of the report was pre-ordained; House Democrats, having made a decision to reduce agriculture spending, needed a cover to cut section 515. In any event, the rural housing budget, which was increased by some $500 million in FY94, was cut by more than that in FY95. By the beginning of FY95, the Democrats had direct rural housing lending to the lowest level since the Nixon administration.

In the face of a new, more conservative Congress, the administration managed to gather itself together well enough to propose a budget with only limited further reductions in rural housing direct lending. The new policy, never stated, was to promote and increase the guarantee program as the major vehicle for promoting decent housing in small communities. Call it rural housing on the cheap. In federal budget terms, the guaranteed loans cost only pennies.

However, while the budget proposal was not any worse, the drive to bring further reductions from section 502 continued. New proposed regulations scrapped the old system of interest credit in favor of payment assistance based on a sliding scale. The result was a reduction in subsidy for section 502. The savings in FY96 were projected to be as much as $70 million in budget authority, which could have resulted in some $400 to $500 million in lending activity.

Congress, after much back and forth, proposed $1 billion for Section 502 marked for FY96, but without taking into account the savings from the proposed new subsidy mechanism. As the conference committee on the House and Senate appropriations bills met, the administration offered the savings from section 502 subsidies, the money went elsewhere, and section 502 remained at $1 billion. Section 515, lacking an authorization and a reform agenda, was cut further and mostly restricted to repair of existing projects.

Rural housing appropriations fared worse in FY 1997. The administration, anxious to stretch a dollar, projected interest rates for 1997 at 5.56 percent, a very optimistic, unrealistic scenario; lower interest rate projects mean lower subsidy costs to the government. The interest rate projected turned out to be wrong by about half. Congress, on the hunt for savings, was more than happy to go along with the charade and use the administration budget to set rural housing spending. As a result, section 502 direct loans, projected by the administration and Congress to be $1 billion, turned out to be about $585 million.

Congress also reduced rental assistance by $30 million and lumped new construction for rural rental housing, home repair, farmworker grant, and community facilities funding into a Rural Housing Assistance Program and cut the total by 30 percent. Section 515 was finally reformed and re-authorized, but it seemed unlikely that new funds would be forthcoming.

So, during the four years of the first Clinton administration, program level for section 502 loan guarantees was increased from $579 million to $2.3 billion. Over the same period, the section 502 direct loan program was pared back from $1.8 billion to $585 million and the section 515 program was reduced by 75 percent. Direct funding for housing construction, repair and purchase programs, section 502 and 515, plus funding for very low-income housing repair, farm labor housing, housing preservation grants, site loans and credit sales was reduced by more than 50 percent in fiscal years ’95 to ’97. For the first time, the program level for rural housing loan guarantees exceeds program levels for all construction and repair direct loans and grants combined.

There were a few good moments. Congress and the administration teamed up to establish the Fund for Rural America, which provides funding for rural development – including rural housing – outside the appropriations process. Over three years, $300 million is available for rural development and research activities. Some of this money will probably be used to take some of the sting out of the section 502 cut for 1997 and perhaps add needed funds for farmworker housing and water and sewer development.



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