Rural Rental Assistance And Low Interest Incentives

We’re taking a look at what I call the “section” housing programs as part of the former Representative in-depth examination of federal anti-poverty programs created or associated with the War On Poverty. As in the last post, I’ll offer some background and history, give Ryan’s assessment and make my own, along with some ideas of how the program might be improved or repurposed.

Section 521 Rural Rental Assistance Program

I’ve pointed out before that rural America’s housing problems are worse than those in urban settings. Workers earn less, must travel further to find housing, and once they do they discover that vacancies are few and far between, and the buildings are older and more decrepit. Construction costs for new housing costs in rural areas rival those in the cities but rural rents are much lower than in urban or suburban areas. Translation: developers quickly figure out that most projects in rural areas simply aren’t feasible, and this includes projects financed with non-profit tax credits. So rural areas face the double whammy of low wages and low housing supply; even though housing quality is lower, prices remain high and vacancies low. Meanwhile, subsidies end up in cities rather than rural areas.

The Section 521 program is administered by – surprisingly – the United States Department of Agriculture (USDA) as part of the Housing Act of 1949. The USDA actually runs a variety of programs, including the Section 515 Rural Rental Housing Program, and the Section 514 and 516 Farm Labor Housing programs, each of which use loans and subsidies to encourage rural housing development. Assistance from the Section 521 program, moreover, can be used to pay rent in those units. Tenants pay rents equal to 30% of their adjusted monthly income based on their AMI; the Section 521 program pays the remaining portion of the rent. Like the other housing programs already discussed, these combine capital and rent relief dollars.

Ryan decided, based on studies he cited, that the Section 521 program failed in its mission to help people find affordable housing. The National Low Income Housing Coalition last year said that “Forty-seven percent of rural renters are cost burdened, paying more than 30% of their income for their housing and nearly half of them pay more than 50% of their income for housing. More than half of the rural households living with multiple problems, such as affordability, physical inadequacies, or overcrowding, are renters.”

I’ve already noted that the housing problems of rural America are serious and challenging to solve. I concur that, while well intended, Section 521 and the associated programs aren’t making much of a dent in the issues. Like the other programs discussed here, if we were to deregulate housing policy to allow more housing to be built, those subsidies would actually more of a difference in hard-hit rural areas without resorting to all the complicated and inefficient financing schemes.

In fiscal year 2012, Section 521 outlays were $905 million. The Section 521 RA program was funded at $1.375 billion in FY20 and $1.410 billion in FY21. The FY22 spending bill provided $1.450 billion for Section 521.

Section 236 Rental Housing Assistance Program

The Section 236 program offered incentives to developers in the form of Below Market Interest Rates (BMIR) to incentivize the building of low-cost rental housing. The main tool of the program, created in 1968, is Below Market Interest Rates (BMIR) for developers willing to build housing for families with lower incomes. The BMIR concept originated in the Housing Act of 1961, with the incentive being a low statutory 3 percent interest rate. BMIR did not actively insure new loans after it was replaced by Section 236. While the program was active thousands of units were built utilizing federally backed mortgage insurance on loans over a 40-year term. There were also payments made to private developers reducing interest. The projects also included Section 8 Tenant-Based assistance. According to Ryan’s analysis, at that time, more than 11,000 such units were still receiving payments to reduce interest.

The program was created in 1968 and was gradually phased out in favor of vouchers, and by fiscal year 2012, the Section 236 program was spending $401 million on interest reduction payments on remaining mortgages. As the commitment period drew to a close, in 2016, HUD offered advice on how to wind down, convert, or keep housing affordable. It’s unclear exactly where these payments stand because HUD doesn’t have a transparent reporting process, but most of the Section 236 housing has been converted to private uses or continuing operating as affordable units underwritten with different subsidies. Ryan didn’t offer much in terms of an analysis of the effectiveness of the program other than to say there weren’t any studies on the program’s effectiveness.

My view on this program is that it would be worth a look with rising interest rates whether incentivizing new construction of market rate rental housing might be incentivized with payments to reduce interest down to zero with conditions. As I’ve pointed out, with economic uncertainty, rising interest rates, and falling demand, production of rental housing is likely to fall. That means when demand returns, maybe even explodes, low-income households in search of rental housing will face sky-high rents. That will spark more concerns that will lead to unhelpful regulation. Offering loans with a reduced or even zero interest rate now, along with other incentives to private developers, would reduce their risk and stoke creation of supply for the future.