Rural Housing Service: Better Data Controls, Planning, and Additional Options Could Help Preserve Affordable Rental Units

Under its rural housing program, RHS provides mortgages and rental assistance to support affordable rental units for low-income tenants (see figure). When these mortgages reach the end of their terms (mature), property owners may exit the program; current law does not allow RHS to continue providing rental assistance when such exiting occurs. As a result, tenants in properties with mortgages that are maturing may face rent increases or lose their housing altogether.

GAO was asked to examine how RHS is addressing the risks posed by maturing mortgages. This report examines RHS's efforts to (1) estimate rural housing property exit dates and (2) preserve the affordability of rural rental properties with maturing mortgages. GAO reviewed RHS mortgage loan data and preservation documents, and interviewed RHS officials and industry stakeholders.

The U.S. Department of Agriculture's Rural Housing Service (RHS) implemented an automated tool to estimate when properties could exit the rural rental housing program, but RHS lacked sufficient controls to ensure the accuracy, completeness, and timeliness of those estimates. In 2016, RHS developed its Multi-Family Housing Property Preservation Tool to replace a manual process of estimating exit dates. RHS data suggest that a smaller number of properties could exit RHS's program in the near term, but between 2028 and 2050, over 90 percent of RHS's properties and units could exit the program (about 13,000 properties with 407,000 units). However, RHS lacked controls that would better ensure the accuracy and completeness of these estimated exit dates, such as the verification of key data input at mortgage origination. In addition, RHS had not established a regular process to update the preservation tool's underlying data due to staff turnover and data system challenges. Without these controls, RHS may lack assurance that is has reliable data for calculating exit dates and initiating preservation efforts.

While RHS has taken actions to address properties with maturing mortgages, such as offering property owners options designed to prevent property exits, about 60 percent of properties with maturing mortgages exited the program between 2014 through 2017. The agency's planning efforts lacked key steps such as (1) establishing preservation goals, (2) developing metrics for evaluating preservation efforts, and (3) analyzing and responding to risks facing its portfolio such as resource limits and growing capital rehabilitation needs. Without taking these actions, RHS is not well positioned to preserve affordable housing in the near term or when much larger numbers of properties and units could exit the program starting in 2028. Although taking the steps above would help RHS's preservation efforts, some tenants may still be at risk of losing rental assistance when mortgages mature. Accordingly, allowing RHS to renew rental assistance after mortgage maturity could protect assisted low-income tenants from increased rents or displacement from their units. When the Department of Housing and Urban Development (HUD) faced a similar loss of affordable housing subsidies, Congress authorized the department in 2011 to continue providing rental assistance at properties after contracts expired.

Congress should consider granting RHS authority to continue providing rental assistance to tenants in properties with maturing mortgages. GAO is also making five recommendations, including that RHS improve data quality and take steps to comprehensively plan for preserving properties with maturing mortgages. We provided a draft of this report for review and comment to RHS and HUD. RHS agreed with all five of GAO's recommendations.

The U.S. Department of Agriculture’s (USDA) rural rental housing  program was created in the 1960s and 1970s to help provide funding for  the development of affordable multifamily rental properties. Through the  department’s Rural Housing Service (RHS), USDA has provided  mortgage loans (mortgages), interest subsidies, and rental assistance for  more than 14,000 properties with 400,000 units of affordable rental  housing for low- and very-low income rural tenants, including vulnerable  residents such as the elderly and people with disabilities.

Some of RHS’s oldest rural rental mortgages have begun to mature—that  is, reach the end of their repayment schedules, at which point they could  exit the affordable housing program. Property owners whose RHS  mortgages have matured are no longer required to provide housing to  low-income tenants and no longer receive RHS rental assistance, which  covers the difference between the tenant’s contribution and the unit’s  rent. As a result, tenants in properties whose mortgages have matured  may no longer be able to afford their rents. RHS has therefore identified  ways to preserve affordable housing for tenants in properties with  maturing mortgages.

You asked us to examine what information RHS has on rural rental  housing maturing mortgages and the extent to which RHS has tools and  strategies to preserve those properties. This report examines RHS’s  efforts to (1) estimate the dates that properties may exit the rural rental  housing program due to mortgage maturity and (2) preserve the  affordability of rural rental properties with maturing mortgages.

To examine RHS’s efforts to estimate property exit dates, we analyzed  RHS documentation and interviewed RHS officials about the data the  agency uses to identify and preserve properties with maturing mortgages.  To assess the accuracy and completeness of data used to determine  property exit dates, we reviewed and analyzed two different types of data.  First, we analyzed a stratified random sample of RHS mortgage loan  documents in five selected states—California, Illinois, Minnesota,  Pennsylvania, and Virginia. We selected these states based on their  geographic diversity and number of rural rental properties, and because  they had a high number of mortgages nearing maturity. Second, we  reviewed and assessed the underlying data the agency uses to estimate  property exit dates. To assess the reliability of these data, we reviewed  RHS documentation, tested the data for missing or erroneous values, and  interviewed RHS officials. As discussed later in this report, we identified a  selected number of errors in the data for the sample of RHS mortgage  documents and underlying data that we reviewed. However, we  determined the data we used were sufficiently reliable for purposes of  estimating the number of properties, units, and units with rental  assistance that could exit the rural rental housing program between 2017  and 2050, and for properties that are eligible to prepay their mortgages.

To examine steps RHS has taken to preserve properties with maturing  mortgages, we reviewed RHS guidance and documentation on the  agency’s options for preventing properties from exiting the program. In  addition, we interviewed RHS national and state officials about what tools,  resources, and plans were in place for addressing maturing mortgages  and rehabilitating properties. We also interviewed officials from a  judgmental sample of rural housing industry organizations that we  selected by identifying stakeholders that represented a diverse range of  roles in the rural housing industry including: developers, borrower and  tenant advocacy organizations, and organizations advocating for the  retention or expansion of affordable housing. To determine how other  agencies approached expiring rental assistance contracts and low- income housing preservation, we reviewed past GAO reports and  interviewed officials from the Department of Housing and Urban  Development. Appendix I describes our objectives, scope, and  methodology in greater detail.

We conducted this performance audit from May 2016 to May 2018 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Mortgages under RHS’s program can be used to build, acquire, and  rehabilitate rental housing in rural areas and are generally 30-year loans  with 50-year amortization periods and include subsidized interest rates as  low as 1 percent. To help finance housing projects and keep rents  affordable to low-income tenants, RHS offers rental assistance subsidies  to some property owners, which cover the difference between the tenant’s  contribution and a unit’s rent.

The rental assistance program, authorized in 1974, provides the rental  subsidies through agreements with property owners for an amount  estimated to last for 1 year as required under the program’s  appropriations acts. Eligible tenants pay no more than 30 percent of their  income toward the rent, and RHS pays the balance to the property owner.  Tenants must be low-income (incomes above 50 percent of area median  income but not more than 80 percent of area median income) or very-low- income (with incomes not more than 50 percent of area median income)  to be eligible for rental assistance. The agreements with the owners  expire when the original dollar amount obligated is fully expended.  Agreements specify that owners will receive payments on behalf of  tenants in a designated number of units at the property. In addition,  property owners must certify tenants’ incomes annually or when a tenant  experiences a substantial change in income. Statutorily, rental assistance  is tied to RHS loans for rural rental housing and is no longer provided to  property owners once mortgages mature.

The program supports five general types of rural rental housing projects— family; elderly (units may be occupied by an income-eligible household  that includes a tenant or co-tenant who has a disability or is age 62 or  older, or both); mixed (project has both family and elderly units);  congregate housing (project may be occupied by income-eligible elderly  households that need meals or other services); and group homes (may  be occupied by income-eligible elderly persons or individuals with  disabilities who share living space within a rental unit).

Properties with RHS rental housing mortgages can exit the program in  three ways—foreclosure, prepayment, and natural maturity of the  mortgage. When an owner defaults on loan payments and the property is  foreclosed, it may exit RHS’s program. Properties can also exit the  program when loans mature naturally, meaning the loan is paid off as  scheduled by the original loan term. Loans can also be prepaid, meaning  payments are made ahead of schedule, which ends the loan term early.  Only those loans made on or after December 15, 1989, are ineligible to  prepay. As previously noted, once a property exits RHS’s program,  owners are generally no longer required to provide housing for low- income tenants and properties are no longer eligible to receive rental  assistance that is used to keep rents affordable for tenants.

Some owners that are reaching the end of their RHS mortgage terms may  wish to exit the program. Other owners may wish to remain in the  program and continue renting to low-income tenants. RHS has offered  tools and incentives to help owners stay in the program and preserve the  affordability of rural rental housing. Some of these tools involve extending  mortgage terms, which extends the availability of rental assistance to  properties.

RHS’s June 2017 data showed that the program had approximately  14,000 properties containing 427,000 rental units. Of these,  approximately 12,000 properties (85 percent) and 282,000 units (66  percent) received rental assistance. According to RHS, the agency has  not financed any new rental housing properties since 2011. Instead, RHS  has generally used program funding to repair and rehabilitate existing  program properties.

RHS properties are geographically dispersed, but one-quarter of the RHS  program, or about 3,500 properties, was concentrated in six states as of  June 2017: Texas (670 properties); Missouri (609); North Carolina (595);  Michigan (564); Illinois (534); and Minnesota (509) (see fig. 1). Appendix  II provides data in table form for RHS properties, units, and units with  rental assistance.

RHS’s Multi-Family Housing Portfolio Management Division and the Multi- Family Preservation-Direct Loan Division administer USDA’s rural rental  housing loan program. RHS’s national office also maintains the  Automated Multi-Family Housing Accounting System (AMAS) and Multi- Family Information System (MFIS) databases, develops program policy,  and oversees management of the program. RHS state offices administer  the day-to-day operations of the rural rental housing program, including  entering key mortgage and project information contained in hard copy  mortgage closing documents into the AMAS and MFIS databases.

RHS Developed a Tool That Estimates That Large Numbers of Mortgages Will Mature Starting in 2028, and Better Controls Could Improve Data Accuracy

RHS Developed a Tool to Estimate Property Exit Dates

In March 2016, RHS developed the Multi-Family Housing Property  Preservation Tool (preservation tool), an electronic system designed to  use data from AMAS and MFIS to estimate mortgage maturity and  property exit dates and to calculate new dates that may result from RHS’s  preservation efforts. Before introducing the preservation tool in 2016,  RHS officials manually calculated exit dates for rural rental properties, a process that was subject to errors and inconsistencies due to properties  with multiple mortgages and mortgages that could be prepaid. AMAS and  MFIS track loan closing dates; loan amounts; interest rates; and property  location, among other information, but were not designed to estimate  property exit dates.

According to RHS officials, the preservation tool and the underlying data it  uses are publicly accessible via the Internet and are intended to improve  program transparency and help support the agency’s preservation  efforts. Users can search for the date a property began operating; total  number of units; units receiving RHS rental assistance; mortgage amount  and interest rate; mortgage prepayment eligibility; and property exit date  estimates, among other information. The preservation tool enables RHS  to look at trends in property exits across years and help determine when  RHS will need to take preservation actions. As of April 2018, RHS had  estimated property exit data available from 2017 to 2050, but not  information on properties whose mortgages may mature in 2051 or  beyond. RHS officials said that data will be released publically on its  website when available.

RHS Data Show a Significant Increase in Maturing Mortgages after 2027

Our analysis of data used by the preservation tool showed that  approximately 900 properties (6 percent of the program’s portfolio),  including 20,000 units (5 percent), will have maturing mortgages and  could exit the program between 2017 and 2027. Industry stakeholders  said that low-income tenants living in these properties could face  escalating rents or lose their housing altogether. In addition, over 13,000  properties (94 percent) and about 407,000 units (95 percent) are  estimated to have mortgages that will mature between 2028 and 2050  (see fig. 2).

Our analysis of RHS’s June 2017 data, the most recent data available,  also showed that 35 percent of RHS’s rural rental properties (4,944 out of  14,075 properties) have mortgages that are eligible for prepayment and  could exit the RHS program ahead of their original mortgage maturity  date. This earlier exit could cause tenants to face rent increases or  search for alternative affordable housing earlier than expected (see fig.  3). According to RHS, if an owner prepays and a property exits the RHS  program, rental assistance is no longer available to assist that property’s  tenants. Concerns about the loss of affordable units led Congress to  enact legislation that precluded prepayment for loans made on or after  December 15, 1989. For those properties that are eligible for  prepayment, RHS officials said they cannot predict which owners might  make this choice and the agency has not been collecting data on  borrower’s prepayment choices. As a result, outreach to these owners is  particularly important for possible preservation of affordable housing.

Better Controls Could Improve the Accuracy and Utility of Maturing Mortgage Data

Our review identified three internal control shortcomings that could impact  the accuracy, completeness, and timeliness of RHS’s data on properties  with maturing mortgages.

First, RHS lacks sufficient controls to help ensure the accuracy of all loan  information for each mortgage at the time of initial data entry because it  only retroactively reviews a sample of loan document information entered  into AMAS and MFIS. Although RHS staff reviews some loan information  through the agency’s State Internal Review process, officials noted that  the review of mortgage data entered into AMAS and MFIS only occurs for  each field office at least once every 5 years and includes a step for staff  to review and reconcile AMAS information with loan documents to help  ensure the accuracy of RHS debt instruments. RHS officials added that  they improved the guidance in October 2017 by adding specific data  checks intended to help ensure that loan amount, interest rate, and  amortization period information were correct. In addition, during our  review of RHS’s rural rental housing loan documents, we identified  mismatches between loan document information and the data in AMAS  and MFIS used by the preservation tool. We found errors in the data on  mortgage amounts, closing dates, and repayment periods in an estimated  3 percent to 5 percent of the properties in five states we examined.  While the data we reviewed had limited errors, without appropriate  internal controls, RHS cannot be assured that the data that is used by the  preservation tool will be reliable in the future, and the mismatches  suggest that RHS could improve how data are entered into AMAS and  MFIS.

According to RHS officials, these systems were not designed to estimate  the expected maturity of rural rental housing mortgages. At the time of the  systems’ development, officials said that it was not a priority to build in  controls to ensure the accuracy of such estimates. RHS officials said that  rural rental housing mortgages would not mature for many years after  they were originated. As a result, RHS did not create controls intended to  ensure the accuracy of data related to mortgage maturity and did not  prioritize establishing a process to check that data.

Federal internal control standards state that management is responsible  for designing control activities for information systems and information  processing objectives to support the completeness, accuracy, and validity  of information processing. Without these controls, mortgage information  used by the preservation tool to estimate property exit dates may be  inaccurate and could affect the reliability of exit date estimates needed to  identify properties for possible preservation.

Second, RHS lacked controls to check the accuracy and completeness of  underlying data used by the preservation tool. When we examined the  underlying data the preservation tool uses to estimate property exit dates,  we observed missing (blank) values for some property address; property  state; borrower address; and management company name information.  For example, borrower address and property address were missing for  588 and 141, respectively, of the roughly 14,000 properties. In addition,  some properties in RHS’s data included estimated property exit dates but  contained incomplete information (“N/A” designations) for key variables  such as property name; property address; property state; number of units;  and type of housing.

Although RHS has been developing and implementing the preservation  tool since 2016 and has made the preservation tool’s exit date estimates  available on its website, the agency has not yet developed a control  process to identify potential issues with its underlying data. As noted  above, federal internal control standards require activities to help ensure  the completeness, accuracy, and validity of program information. Without  information that has been checked for accuracy, RHS might not be  assembling the most complete and accurate information with which to  estimate exit dates and begin possible preservation of rural rental housing  for low-income tenants. In addition, RHS is missing an opportunity to  improve data on properties with maturing mortgages and be better  positioned to address those properties to protect low-income tenants.

Third, the agency has not developed a regular, timely process for  updating the preservation tool’s underlying data and exit date information.  Since RHS developed the tool in March 2016, RHS updated the  underlying data for September and December 2016 and June 2017 but  not for 2018. RHS staff said the data were intended to be updated  quarterly because information that affects exit date calculations changes  as RHS preserves rural rental housing or properties exit the RHS  program. However, RHS officials said that they have been unable to  update the preservation tool quarterly due to staff attrition and competing  program demands across RHS.

Federal internal control standards require activities to help ensure the  accuracy and validity of program information. For RHS’s information to be  accurate and valid, it needs to be as current as possible for program  management purposes. Since the mortgage maturity dates of properties  are affected by RHS’s preservation options and the exit dates of  properties can change over time as mortgages mature, it is critical for  RHS to have accurate, complete, and timely rural rental housing  information.

Without controls to help ensure that RHS, industry stakeholders, and the  public have the most recent data available, they might not have the most  current information that could be used for estimating property exit dates  and starting preservation.

RHS Has Taken Steps to Address Properties with Maturing Mortgages, but Lacked Comprehensive Planning and Faces Statutory Constraints That Limit Preservation

While RHS has taken steps to address properties with maturing  mortgages, such as identifying various options and incentives intended to  preserve the affordability of properties for low-income tenants, a majority  of properties with maturing mortgages from 2014 to 2017 have exited  RHS’s rural rental housing program. Moreover, RHS has not taken  important steps to comprehensively plan and prepare for the much larger  number of potential property exits in future years, such as developing  goals and metrics to assess the effectiveness of its preservation efforts  and analyzing risks to its ability to preserve properties. While taking these  steps would help RHS’s preservation efforts, some tenants may still be at  risk of losing rental assistance when mortgages mature because RHS  cannot continue to provide rental assistance. RHS also cannot provide  vouchers to tenants residing in properties whose mortgages have  matured.

RHS has Taken Steps to Preserve Properties with Maturing Mortgages with Limited Success to Date

In addition to developing the preservation tool as a first step in preserving  properties with maturing mortgages, RHS officials said they  commissioned two studies on the impacts of maturing mortgages to  advance the agency’s understanding of key issues. Officials said they  hoped the two studies would help the agency prepare for maturing  mortgages. In September 2016, the Housing Assistance Council  completed its first study for RHS, which identified the characteristics of  RHS’s rural housing program and the impact that maturing mortgages  may have on tenants and geographic regions. The report noted that  understanding these characteristics and effects is important for planning  and implementing strategies to preserve the properties. According to  officials, the second study, which was under review by the agency as of  December 2017, was intended to outline issues facing RHS’s multifamily  housing program, such as the estimated $5.6 billion needed to  rehabilitate properties program-wide, and possible policy solutions for  addressing potential property exits.

RHS has offered property owners several options to prevent property  exits and preserve the access to and affordability of housing for low- income tenants (see fig. 4).

Reamortization: Loan reamortization and a shortened reamortization  process (known as “Re-Am Lite”) allow borrowers to repay  outstanding loan balances over new, longer repayment periods. By  extending the term of the loan, officials said that the agency can  continue providing rental assistance to that property. Re-Am Lite does  not require borrowers to have their properties appraised, which  officials said can shorten the reamortization application process by 60  to 90 days.

Deferral: Borrowers can defer repayment of direct loans for up to 20  years. This prevents property exits and preserves affordability for low- income tenants by continuing the payment of rental assistance to  property owners. Loan deferrals can be offered under the Multi- Family Housing Preservation and Revitalization program. This 12- year-old demonstration program offers a combination of property  rehabilitation funding and the opportunity for owners to reamortize or  defer loan payments to help keep rents affordable. Officials said the  program can also be used to attract new owners who wish to stay in  the affordable housing program by offering a funding source for  property rehabilitation.

Prepayment Offer: If borrowers decline RHS’s options that extend  loan terms (reamortization, Re-Am Lite, and deferral), but wish to  remain in the RHS portfolio, the agency encourages property owners  to submit a request to prepay their mortgage, if eligible to do so and if  their mortgages are 12 or more months from maturity. After an owner  submits a prepayment request, RHS is authorized to offer owners  incentives to avert prepayment. These incentives include increased  returns on investment to for-profit owners, additional rental assistance  units, and equity loans.

Prepayment: If borrowers decline RHS’s options, the agency  encourages property owners to prepay their loans. While owners who  prepay would no longer have rural rental housing loans with RHS or  be eligible to receive rental assistance from the agency, prepayment  of a loan allows RHS to provide vouchers to tenants affected by the  loss of affordable housing. According to RHS data, only about 5,000  of the 14,000 properties within RHS’s multifamily housing program are  eligible to prepay loans.

Transfer: RHS has taken steps to facilitate the sale (transfer) of  properties to new owners to prevent property exits. Officials described  this as a key preservation tool because new RHS mortgage terms  typically accompany the sale and allow for rental assistance to  continue at properties where applicable. First, the agency  established a more centralized and standardized transfer process  based on input from developers, owners, and other stakeholders,  which officials say reduced the average property transfer time from  156 to 112 days. Second, RHS maintains a spreadsheet available on  the agency’s website, called the Preliminary Assessment Tool, which  officials said streamlines and provides greater transparency to the  property transfer process for potential buyers and sellers. The agency  also hosted three conferences in 2016 designed to help find new  buyers for RHS properties whose owners were seeking to sell their  properties. Finally, in September 2016, RHS announced a 2-year  pilot program to encourage nonprofit organizations to purchase rural  rental properties with maturing mortgages, which could create new  loan terms that would extend the repayment period and continue the  properties’ affordability. Prior to the pilot, nonprofit owners were not  required to make an initial equity contribution to projects and therefore  could not earn any return on investment. Under the pilot, loan  transfers to nonprofits would allow nonprofits to earn returns on their  own resources initially invested in the property.

Despite the preservation options and incentives identified by RHS, 61  percent (148 of 244) of the properties with mortgages that matured  between January 2014 and December 2017 exited the agency’s rural  rental housing program (see table 1). Some industry stakeholders said  that options and incentives did not adequately or broadly appeal to  property owners. They added that existing options and incentives would  be used primarily by owners who have no other choice but to stay in the  program. Stakeholders explained that owner choice might be limited  because of the condition of their property or because their property is  located in a market that would not accommodate the sale of a property or  rent increases to market levels. Some stakeholders also said options that  extend loan terms only offer a short-term solution to preservation  challenges because mortgages cannot be extended indefinitely.

RHS Has Not Comprehensively Planned to Preserve Properties with Maturing Mortgages

RHS’s efforts lacked a number of important steps that would better  position the agency to preserve properties. First, RHS lacked  documented goals for preserving its program and has not created  measures for tracking progress toward those goals. In the absence of  documented goals, RHS national officials stated that the agency’s goal is  to preserve all properties within its program that are needed to ensure  sufficient affordable housing, though they acknowledged that current  resource levels would preclude that possibility and that some owners may  leave the program regardless of the options the agency offers.

Second, RHS is not monitoring and assessing options and incentives it is  providing in a way that would inform or improve the use of these options.  While the agency can track preservation status—meaning whether a  property is still within the program or not—through its preservation tool  discussed above, it is not actively tracking preservation outcomes. RHS is  also not systematically collecting data for monitoring purposes. RHS  officials said agency databases contain variables that would show which  options owners choose to use, but added that this information is not  available in a single source. RHS is also not collecting information that  would help them assess options. For example, the agency is not  collecting information from property owners on what options and  incentives appeal to them. This information would help the agency assess  preservation options on how well they are being received by borrowers.  Similarly, RHS is not monitoring the results of efforts to preserve  properties, including information on how many properties were transferred  as a result of its three buyers-sellers conferences.

Finally, RHS has not fully analyzed or responded to the risks facing its  rural rental housing program, such as the following:

Owner behavior—RHS officials told us a key risk to preserving its  rural rental housing program is that the agency cannot predict whether  owners will choose to leave the program or stay. To help respond to  this risk, the agency directed staff to notify owners 3 years in advance  that their loan is maturing and that options are available for preserving  the property within the program. While this window could provide RHS  with the time to plan for property exits, RHS is not collecting  information from owners on why they may choose to exit rather than  stay in the affordable housing portfolio. The agency’s effort to predict  owner behavior would be aided by collecting and analyzing data on  how many owners choose to leave the program and why.

Resource constraints—During a May 2017 conference, a senior RHS  official highlighted the issue of agency resource constraints for  addressing maturing mortgages, saying that the agency does not  have the ability or the financial resources to preserve all of the  properties that could leave the program once the loans mature. RHS  has also acknowledged that, even at lower levels of about 80  maturing mortgages each year, the agency does not have the  resources to provide all preservation options to every owner who  wishes to use them. RHS has also not analyzed or planned for how it  would prioritize the use of limited resources. RHS national office  officials said there is some guidance that could be used by state  offices to prioritize the use of resources, but this guidance was not  specific to addressing maturing mortgages and was in the process of  being updated to include information that could be used to help  prioritize limited resources for preserving properties. That update is  expected by January 2019.

Management of maturing mortgages—RHS has not analyzed or  responded to risks involving staff management of maturing  mortgages. For example, the agency’s national office said that staff  attrition and turnover in the national, state, and field offices that  manage mortgages have resulted in fewer staff managing its program  in general and that they were not sure what the effect of maturing  mortgages would have on staff workloads. RHS staff in some of the  states we visited expressed concern that workloads are already heavy  and that any increase caused by maturing mortgages, including  smaller numbers occurring now, might affect their ability to be  responsive to program needs. Similarly, some state office staff  expressed concerns that they were not trained for managing and  responding to properties with maturing mortgages and needed  additional guidance from the national office. RHS national office  officials said that while the agency does not provide training specific to  maturing mortgages, it does provide training on loan servicing, which  includes the use of preservation options, and the national office  conducts monthly conference calls that all state offices participate in,  which have included maturing mortgages as a topic and which can be  used to answer staff questions about maturing mortgages.

Rehabilitation Costs—RHS has commissioned two studies on the  risks that program-wide rehabilitation costs pose to its ability to  preserve its program, but has not analyzed or planned for how it  would address the estimated $5.6 billion needed to rehabilitate its  aging portfolio of properties. Officials said that they have met with  industry stakeholders and Congress about capital needs estimates,  but no additional steps such as requesting additional funding were  taken. Officials added that federal budget uncertainties caused by  years of continuing resolutions and a sequestration have made  planning for maturing mortgages and program-wide rehabilitation  more difficult. However, RHS has been aware of growing rehabilitation  needs since at least 2004, when the agency released a commissioned  study that said capital needs program-wide would continue to  increase and cost more if not addressed.

Federal internal control standards call for agencies to define objectives in  specific and measurable terms to enable management to identify,  analyze, and respond to risks related to achieving those objectives.  Specifically, these standards call for agencies to establish goals and performance measures for tracking progress toward achieving goals;  establish activities that monitor performance and assess results so that  appropriate action is taken; and identify, analyze, and respond to risks  related to achieving their goals.

RHS officials said that, as of December 2017, they had not taken steps to  develop goals and measures, perform key monitoring and assessments,  and analyze and respond to risks because the larger number of potential  property exits is not expected to begin for another 10 years (2028). RHS  officials said that they were using this time to see how their existing  options and resources perform, and that the agency would make resource  and other adjustments over time as they gained experience with  preservation. However, as discussed above, mortgages have already  begun to mature and the majority of properties with maturing mortgages  between 2014 and 2017 exited the agency’s rural rental housing program.  Some property owners may have chosen to exit the program regardless  of additional actions or incentives. For example RHS officials noted that  many of the property owners whose mortgages are currently maturing are  nearing retirement or prefer market returns to RHS’s options and  incentives. However, the percentage of exits (61 percent) suggests that  RHS’s current planning efforts have not proven sufficient to prevent the  majority of properties with mortgages that have matured from exiting its  rural housing program.

By not having taken the planning steps identified above, RHS is not well  positioned to respond to properties that currently have maturing  mortgages and require action, nor is the agency prepared for the future  larger number of potential property exits that starts in 2028. In particular,  without developing goals and measures, conducting sound monitoring  and assessments of rural rental housing program developments, and  analyzing and responding to risks, RHS may not have the key  information, staff, tools, and resources in place to effectively preserve  properties and prevent the financial hardship that increasing housing  costs could cause rural low-income tenants or the loss of their housing  altogether.

Law Limits RHS’s Ability to Offer Rental Assistance and Vouchers to Low- income Tenants

RHS has options to extend loan terms in order to continue rental  assistance at properties but cannot continue providing rental assistance  to tenants once the loan is paid off and the property exits RHS’s  affordable housing program. Some owners of properties with maturing  mortgages may be open to continue offering rental assistance and agree  to restrict the units to eligible low-income tenants after mortgage maturity.  Further, some industry stakeholders cited that having the ability to extend  existing rental assistance contracts after mortgage maturity would be  useful in protecting tenants from rent increases or displacement.

However, in some cases, property owners may not want to extend rental  assistance contracts after mortgage maturity. Tenants living in these  properties could be subject to rent increases or the risk of displacement.  RHS lacks the authority to provide vouchers to tenants in these situations.  Voucher assistance would allow RHS to provide assistance to the tenants  to help pay for rent in their existing unit or at other rental housing in the  private market without requiring the owner to serve low-income tenants  exclusively.

In 2016, legislation was introduced that would have allowed RHS to  continue providing rental assistance to properties through new contracts  with owners after their loans matured or to provide vouchers to tenants  under different circumstances, including mortgage maturity. In exchange  for accepting rental assistance payments on behalf of eligible tenants, the  legislation would have required the property owners to enter into an  agreement with RHS to ensure that the property remained subject to low- income use restrictions for an additional period of time. In cases where a  new rental assistance contract is not possible, RHS would offer vouchers  to tenants after mortgage maturity. The proposed legislation was  introduced on April 12, 2016, but no further action on the bill was taken.

In the past, Congress has taken legislative action to continue rental  assistance to low-income tenants and protect them from the impact of  terminated assistance. For example, beginning in fiscal year 2006,  Congress has authorized RHS to provide vouchers to tenants affected by  loan prepayments, which leads to the property owners’ exit of the RHS’s housing program. Tenants receiving vouchers after the prepayment of a  loan could use them to remain in the property after it exits RHS’s program  or to find other suitable housing in the private market. Congress has  limited the amount that RHS paid in subsidies. The amount of a voucher  is limited to the difference between the comparable fair market rent for the  housing unit occupied by a tenant and the rent paid by the tenant on the  date of prepayment or foreclosure.

In addition, when the Department of Housing and Urban Development  (HUD) faced a similar loss of affordable housing, Congress gave the  department authority in 2011 to further protect tenants through the  creation of the Rental Assistance Demonstration (RAD). Before the  RAD program, HUD had limited authority to extend rental assistance at  these properties when contracts expired or owners terminated  contracts. However, this demonstration, among other things, allowed  HUD to continue providing rental assistance to property owners after the  original contracts expired. In 2014, we reported that the conversion of  rental assistance should not have an effect on voucher program costs  because HUD uses the same calculation for providing budget authority for  the project-based vouchers converted under RAD as it does for  calculating budget authority for tenant-protection vouchers.

Without the authority to continue providing rental assistance or to provide  vouchers to tenants at existing properties whose mortgages have  matured, RHS is not well positioned to protect tenants from potential  increased rents or displacement from their units. The agency could lose  important sources of low-income housing, which for some communities  may be the only source of affordable housing. Further, without the  authority to offer vouchers to tenants living in units that received rental  assistance at mortgage maturity, tenants may also face rent increases  and not be able to afford their rents in properties where the owners  choose not to extend their rental assistance contracts. Continued  provision of rental assistance could be limited to units or tenants that  were receiving rental assistance at mortgage maturity and would not  represent an expansion of the number of units or tenants assisted.  Furthermore, Congress could structure this to have no or limited  budgetary impact, similar to what was done under HUD’s RAD program.  For example, subsidies could be kept at a level that is similar to what was  provided at mortgage maturity.

RHS’s preservation tool is a positive first step to help the agency estimate  property exit dates, alert stakeholders to properties with maturing  mortgages, and begin to preserve their affordability. However, the lack of  data controls for information on RHS rural rental properties raises  concerns about data used by the preservation tool, especially as RHS  applies preservation options that extend mortgages and result in new exit  dates. The lack of controls for underlying data used by the preservation  tool, and missing information on some properties, demonstrate that RHS  has opportunities to improve rural housing program data as properties  continue to have maturing mortgages. RHS has not been able to update  the preservation tool’s data on a regular basis. Developing controls with  clear guidance on the frequency and process for routinely updating data  on RHS’s website could help ensure that preservation efforts are based  on the most current information available. Regular updated information  would also help ensure that industry and other stakeholders have the  most recent information available on RHS’s rural rental housing program.

While RHS has taken steps to better understand maturing mortgage  challenges and preserve properties, RHS’s strategy to use the next  several years to plan for the larger number of expected future maturations  and test available preservation options does not address the significant  number of mortgages that will mature before then. The agency has also  not taken important planning steps required by federal internal control  standards to establish goals and performance measures for tracking  progress toward achieving goals; establish activities that monitor  performance and assess results so that appropriate action is taken; and  identify, analyze, and respond to risks related to achieving their goals.  Actions to enhance the agency’s data and controls, and strengthen its  comprehensive planning and program evaluation processes, would better  position RHS to respond to maturing mortgages, preserve its rural rental  housing program, and maintain affordable housing for low-income  tenants.

Further, the agency lacks the authority to continue rental assistance to  properties with matured mortgages and is limited in its ability to issue  vouchers to tenants affected by property exits. Even if the agency takes  additional steps to plan for maturing mortgages or increases options and  incentives for preserving housing, these limits to rental assistance and  vouchers restrict RHS’s ability to protect tenants. These limits also effect  RHS’s ability to meet the agency’s objective of providing decent, safe,  and sanitary housing to low-income rural residents. Expanding RHS’s  ability to protect existing tenants would give the agency tools that are  available to other affordable rental housing programs, and could be  implemented in a way to maintain, rather than increase, program size and  costs.

We are making the following matter for congressional consideration:

For RHS properties whose mortgages have matured, Congress  should consider granting RHS the authority to renew annual rental  assistance payments to owners who wish to continue to receive them  and provide vouchers to tenants living in rental assistance units in  properties whose owners choose to no longer receive rental  assistance.

We are making the following five recommendations to RHS:

The RHS Administrator should establish additional controls to check  the accuracy of all loan information entered into RHS information  technology systems, to help ensure complete, accurate, and reliable  data for estimating rural rental housing property exit dates.  (Recommendation 1)

The RHS Administrator should establish a process to help ensure  regular and frequent updates for the preservation tool and its  underlying data. (Recommendation 2)

The RHS Administrator should establish performance goals and  measures for its rural rental housing preservation and rehabilitation  efforts and report out these outcomes. (Recommendation 3)

The RHS Administrator should monitor the results of rural rental  housing preservation efforts and assess the degree to which those  efforts yielded intended outcomes. (Recommendation 4)

The RHS Administrator should identify, analyze, and respond to risks  to achieving its preservation goals, including resource and staffing  limitations. (Recommendation 5)

We provided a draft of this report for review and comment to RHS and  HUD. RHS provided technical comments, which we incorporated into the  report, and stated that it agreed with all five of our recommendations but  did not provide a formal agency comment letter. HUD stated that it had no  comments on the draft.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Agriculture, the Secretary of Housing and  Urban Development, and other interested parties. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on   the last page of this report. Key contributors to this report are listed in  appendix III.

Our objectives were to examine the Rural Housing Service’s (RHS)  efforts to (1) estimate the dates that properties may exit the rural rental  housing program due to mortgage maturity, and (2) preserve the  affordability of rural rental properties with maturing mortgages.

To examine RHS’s efforts to estimate property exit dates, we analyzed  RHS documentation and interviewed RHS officials about the data the  agency uses to identify and preserve properties with maturing mortgages.  To determine what steps RHS has taken to help ensure the accuracy and  reliability of RHS’s Multi-Family Housing Property Preservation Tool  (preservation tool), we reviewed documentation that included the  preservation tool’s user guide, and the capabilities it offered the agency  and the public. We also conducted interviews with RHS national and state  office officials about the preservation tool and about how the agency’s  Automated Multi-Family Housing Accounting System (AMAS) and the  Multi-Family Housing Information System (MFIS) operate. AMAS contains  data on loans and rental assistance contracts and MFIS tracks monthly  loan and rental assistance payments and contains data on the location of  RHS’s rural rental properties. Both systems provide data used by the  preservation tool to calculate mortgage maturity and exit dates for rural  rental housing properties. To determine how the preservation tool was  built and the main information it uses to determine mortgage maturity and  property exit dates, and the information it calculates for users, we  interviewed the contractor hired by the agency to create and populate the  preservation tool.

To analyze the accuracy of AMAS and MFIS data used by the  preservation tool to calculate mortgage maturity and property exit dates,  we reviewed mortgage documents that RHS uses to populate those  systems. We reviewed loan documents for a generalizable stratified  random sample of 100 properties in five states—California; Illinois;  Minnesota; Pennsylvania; and Virginia—to determine if loan information  found within mortgage documents matched data contained in AMAS and  MFIS for selected variables relevant to mortgage maturity and property  exit date calculations. We stratified the population of 2,152 loan  documents in the five states by state, number of loans per property, and  age groups. We computed an initial sample size of 60 properties for a  simple random sample to achieve an upper bound of no more than 5  percentage points, an expected error (inaccurate data field) rate of 0  percent, and a 95 percent confidence level. We then proportionally  allocated the sample across the strata and increased sample sizes in  stratum within each state so that we selected at least 10 properties with  more than 1 loan and 10 properties older than 20 years old. States we  visited were selected based on their geographic diversity, diversity (age  and size of program) of rural rental housing properties, and their proximity  to GAO offices.

To select properties’ loan files for this review, we created a  nongeneralizable sample of 20 properties in each of the five states. We  also interviewed agency officials knowledgeable about the data— including officials from RHS, Rural Development’s Office of Operations  and Management, and the U.S. Department of Agriculture’s (USDA)  National Financial and Accounting Operations Center—about the  processes used to populate these systems and any quality checks in  place for ensuring that data were inputted completely and accurately,  including any available documentation on these steps. We also  interviewed RHS state office officials, who service loans, about the  process for identifying errors in these systems and making corrections.

To determine which rural rental housing properties were estimated to exit  the RHS program and where these properties were located, we analyzed  RHS’s raw data from June 2017 (the latest available RHS data). We  analyzed the data to determine the number of properties, units, and rental  assistance units with property exit dates by state and by year from 2017  to 2050. We also generated summary statistics on the number of  properties that were eligible to prepay their mortgages. In assessing  RHS’s data we also conducted checks on the data for outliers and  missing information. Although we found a selected number of data  anomalies that point to the need for better data controls, we determined  the data we used were sufficiently reliable for purposes of describing the  estimated number of properties that could exit the RHS program between  2017 and 2050.

To better understand the calculations used by the preservation tool, we  reviewed the logic or code it uses to calculate mortgage maturation dates.  For this analysis, we used documentation on the program used to  generate estimates and compared this documentation to the code to see  if there were any operational differences. Additionally, we reviewed each  of the functions within the logic and looked for inconsistencies in logic or  deviations from financial convention that might cause incorrect  predictions.

To examine steps RHS has taken to preserve properties with maturing  mortgages, we reviewed documents that listed options available for  retaining properties with maturing mortgages. We gathered and analyzed  documentation on any comprehensive planning efforts by RHS to address  rural rental housing maturing mortgages, including documentation  showing preservation goals and measures, and any assessments of  RHS’s plans, efforts, or resources needed to address maturing  mortgages. We also analyzed documentation and interviewed national  and state RHS officials about any training and guidance that was being  provided to staff on maturing mortgages. In addition, we interviewed RHS  national and state officials about what tools, resources, and plans were in  place for addressing maturing mortgages and their limits. Further, we  asked about ongoing efforts to address maturing mortgages, including  any plans to obtain additional resources for managing maturing  mortgages now and in the future when a larger number of properties are  expected to have loans mature. We reviewed and interviewed officials  about studies commissioned by RHS on the effects of maturing  mortgages on the rural affordable rental housing program and affected  communities and on program-wide rehabilitation needs and cost  estimates. We also assessed how the studies and reports were  conducted for any flaws in their approaches and methodologies.

To determine stakeholder perspectives on how RHS was managing  maturing mortgages, we interviewed officials from a judgmental sample of  rural housing industry organizations. We took multiple steps to identify  these industry organizations. First, we met with an affordable housing  organization with a national membership that represents owners;  developers; housing advocates; and tenants. We asked this national  organization to identify industry organizations that work with RHS. From  that list, we focused on organizations that also had a multi-state or  national focus. Second, during interviews with these organizations, we  requested additional contacts. We interviewed organizations that were  named during multiple interviews. This selection process allowed us to  identify stakeholders that represented a diverse range of roles in the rural  housing industry including: developers, borrower and tenant advocacy  organizations, and organizations advocating for the retention or  expansion of affordable housing.

To determine how other agencies approached expiring rental assistance  contracts and low-income housing preservation, we also interviewed  Department of Housing and Urban Development officials. More  specifically, we determined what key steps and best practices the  department used to preserve its multifamily housing program properties,  including properties with maturing mortgages, and what tools and  resources were required for managing its housing program.

Appendix II: Number of Properties and Units That Could Exit the Rural Housing Service’s Program between 2017 and 2050

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Harry Medina (Assistant  Director); Steve Ruszczyk (Analyst in Charge); Holly Hobbs; Enyinnaya  David Aja; Jim Ashley; Stephen Brown; William Chatlos; DuEwa Kamara;  John McGrail; Marc Molino; and Tovah Rom made key contributions to  this report.