Comment Detail

Comment

Robert A. Rapoza
Executive Secretary
National Rural Housing Coalition

Regulatory Comment on FHFA Enterprise Duty to Serve Underserved Markets Notice of Proposed Rulemaking; 12 CFR Part 1282 (FR Vol. 80, No. 243, Friday, December 18, 2015)
March 16, 2016

On behalf of the National Rural Housing Coalition (NRHC), I would like to thank you for the opportunity to submit regulatory comment on the Federal Housing Finance Agency (FHFA) Proposed Rulemaking for the Enterprises Duty to Serve Underserved Markets (Proposed Rule), as published in Federal Register Volume 80, Number 243, on December 18, 2015.
NRHC is a national membership organization consisting of housing developers, non-profit housing organizations, state and local officials, and housing advocates. Since 1969, NRHC has promoted and defended the principle that rural people have the right—regardless of income—to a decent, affordable place to live, clean water, and basic community services.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 was amended by the Housing and Economic Recovery Act of 2008 to create a duty to serve three specific underserved markets for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The underserved markets identified for Fannie Mae and Freddie Mac (collectively the Enterprises) to serve are manufactured housing, affordable housing preservation, and rural markets.
The goal of the duty to serve, as stated in the Proposed Rule, is “to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for very low-, low-, and moderate-income families in those markets.” 80 FR 79182. To achieve this goal, the Proposed Rule identifies several activities to facilitate a secondary mortgage market for moderate-, low- and very low- income families in what it identifies as “rural areas.” The Proposed Rule also identifies several High-Needs Rural Regions and High-Needs Rural Populations. Finally, the Proposed Rule addresses affordable housing preservation.
NRHC encourages FHFA to adopt the U.S. Department of Agriculture (USDA) definition of “Rural Areas,” as it is defined in Section 520 of the Housing Act of 1949, as amended, because it is both widely understood and includes a number of small, rural communities that the proposed definition would exclude because they are located within Metropolitan Statistical Areas (MSAs). NRHC also believes that “persistent poverty” counties should be identified as High-Needs Rural Regions in the Final Rule. Finally, NRHC would encourage that the Final Rule specify that in addition to Section 515 properties, the Enterprises should prioritize the purchase of Section 538 Guaranteed loans that are used to refinance and rehabilitate maturing Section 515 rural rental properties.
Rural Areas Definition
FHFA proposes a new definition for “rural areas,” which it developed after analyzing the current definitions for “rural areas” used by the U.S. Department of Agriculture (USDA), the Consumer Finance Protection Bureau, and the U.S. Census Bureau. In the end, FHFA defines “‘rural area’ as (1) a census tract outside of an MSA, as designated by OMB, or (2) a census tract that is in an MSA but outside of the MSA’s UAs or UCs, as designated by USDA’s RUCA codes.” An “MSA” is a metropolitan statistical area. The RUCA codes are USDA’s Rural-Urban Commuting Area Codes. According to USDA, the RUCA codes are “a detailed and flexible scheme for delineating sub-county components of rural and urban areas. . . . RCUA codes are based on the same theoretical concepts used by the Office of Management and Budget (OBM) to define county-level metropolitan and metropolitan areas. . . . [T]he use of census tracts instead of counties as building blocks for RUCA codes provides a different and more detailed geographic pattern of urban and rural areas.” Urbanized Areas (UAs) are metropolitan cores with populations of greater than 49,999. Urban Clusters (UCs) can be either large (with populations between 10,000 to 49,999) or small (with populations between 2,500 to 9,999).
NRHC’s interpretation of the proposed definition for “rural areas” is that it includes (1) census tracts outside of an MSA and (2) areas that are within an MSA but outside of a UA or UC, which means areas within MSA’s that have populations of up to 2,500. In other words, the proposed definition for rural areas includes only areas outside of MSAs and areas in MSAs that have a population of less than 2,500. FHFA estimates that this definition will cover 24.7 percent of the population.
According to data from the Census Bureau, in 2010, 32 million of the nation’s 60 million rural residents lived in metropolitan areas – thus more than 50 percent of “rural” Americans live within an MSA. In addition, there are many communities, particularly in the West, that have populations greater than 2,500 that are rural in character, and so covered by the USDA definition of rural areas. The restrictive nature of the proposed definition will leave small communities, which are “rural” under the USDA definition, outside of the Enterprises duty to serve. Census geography, which is based on county boundaries, is problematic in the Mountain West and Far West, where counties can be larger than entire eastern states. To illustrate, in twelve of the California MSAs alone, this definition would exclude 195 small communities that have populations of less than 10,000, but more than 2,500, because they are included within a geographically large MSA. The Housing Assistance Council produced several maps showing the geographical areas that would be covered by the various definitions mentioned in the Proposed Rule. These maps indicate that it is particularly communities in the West that would be excluded as a result of the FHFA definition of “rural areas.”
In Question 70, FHFA asks commenters to respond to whether one of the four other definitions discussed in the Proposed Rule would better serve the Duty to Serve Objectives. NRHC believes that USDA’s definition for “rural areas,” which is discussed in the Proposed Rule, contains the flexibility necessary to capture the small rural communities that happen to be located within large MSAs. According to the Housing Assistance Council, the USDA definition of rural covers an estimated 34 percent of the population, which is nearly ten percent more than what is covered by the Proposed Rule definition. This coverage increase is mainly in the Western United States. Because the USDA definition of “rural areas” does not limit itself to areas inside or outside of MSAs, it is better suited to accommodate the small communities located within geographically large MSAs in the Mountain West and Far West.
NRHC supports FHFA’s goal of serving rural communities throughout the country. However, NRHC believes that the definition for “rural areas” proposed in the rule unduly restricts the number of communities covered by the Duty to Serve Rural Markets and excludes many small rural communities, particularly in the Mountain West and Far West, that were intended to be covered by the duty. NRHC believes that the USDA definition of “rural areas” is broadly understood by industry players and best reflects the increasing trend for MSAs to contain both rural and urban communities. Thus, NRHC encourages FHFA to adopt USDA’s definition of rural areas.
High-Needs Rural Regions
The Proposed Rule also provides a duty to serve credit for the Enterprises for supporting financing of income-eligible housing needs for rural regions and populations identified as “high-needs.” The Proposed Rule identifies Middle Appalachia, the Lower Mississippi Delta, and the Colonias as “high-needs rural regions.” NRHC appreciates FHFA’s recognition of the economic needs of these areas. In Question 77, FHFA asks if there are high-needs rural regions in addition to those specified that should be included. NRHC believes that rural areas of the country that are defined as “persistently poor” should be identified as “high needs regions” in the Final Rule.
According to the Economic Research Service, a county is a “persistently poor” if 20 percent or more of its population was living in poverty over the last 30 years, as measured by the past three censuses. The ERS reports that there are 353 persistently poor counties across the country, or 11.2 percent of all counties. A 2014 report by RUPRI found that persistent poverty counties are overwhelmingly rural: 86 percent were nonmetropolitan (22 percent were micropolitan, 64 percent were noncore). Additionally, 20 percent of all counties in the South region are persistent poverty. These counties are located in the south, Appalachia, southern Mountain West, Texas along the U.S.-Mexican Border, parts of the Midwest, and much of mainland Alaska.
While the cost of housing is typically lower in rural areas, due to lower incomes and decreased access to financing opportunities, many people living in these areas are unable to afford adequate housing. Additionally, people living in these areas are frequently cost-burdened, meaning they pay more than 30 percent of their income on housing and utilities. This is particularly true for racial and ethnic minorities, which make up the largest share of the population in persistent poverty counties.
Although most of the counties within the three regions identified as “high needs” in the Proposed Rule also include “persistently poor counties,” there are many rural persistently poor counties that are not within the specified regions, particularly across the Southeast, Northeast Texas, Northwest Texas and northern New Mexico, and Central California. Expanding the definition of “high-needs regions” to include “persistent poverty counties” in rural areas, as defined by the Economic Research Service, would help ensure that rural America’s most needy residents have increased access to affordable financing options.
NRHC urges FHFA to identify “persistent poverty counties” located in rural areas as “high-needs rural regions” in the Final Rule.
Rural Housing Preservation
During the Duty to Serve Webinar hosted by FHFA on December 22, 2015, NRHC submitted several questions. NRHC asked whether refinancing maturing Section 515 mortgages to allow them to maintain their affordability would fall within the scope of preservation activities for affordable rental housing. In light of the response to that question, NRHC understands that refinancing Section 515 properties would be considered a preservation activity in the Final Rule. NRHC believes that this is an important step to protect rural renters. NRHC would further urge FHFA to prioritize the purchase of Section 538 guaranteed loans that are used to refinance or rehabilitate existing Section 515 properties to further support preserving rural rental housing.
There is a maturing mortgage crisis for Section 515 financed properties. By 2024, 11,500 properties financed through Section 515 are expected to mature. By 2023, some 330,000 out of 440,000 RD multifamily units will be paid off, and will require refinancing to maintain their affordability.
Frequently, Section 515 rental properties are the only affordable rental option for the community, so if the tenants are priced out, as the Section 515 mortgage matures, they will have great difficulty finding a housing alternative. In addition to the affordability issues related to maturing Section 515 mortgages, many Section 515 rural rental properties are older developments, and in need of significant rehabilitation to remain habitable. Many of these projects have not been renovated since their initial construction, and so experience higher costs for energy and utilities. These necessary repairs will require additional financing.
A tool for preserving these projects is the use of the Section 538 Guarantee Rural Rental Housing Program. With the Section 538 Guaranteed Rural Rental Housing Program, USDA provides guarantees for loans made to developers by commercial lenders for the construction of housing units serving low- and moderate- income tenants in rural areas. This program, which can be combined with other financing sources, is used to guarantee permanent financing or a combination of construction and a permanent loan.
Over the past years, funding for Section 515 has decreased as funding for Section 538 has remained relatively consistent. Thus, if the Enterprises were to prioritize Section 538 guaranteed loans that are used to provide new financing or rehabilitation for properties with maturing Section 515 mortgages, the effect of their preservation efforts would be expanded.
NRHC thus encourages FHFA to prioritize Section 538 guaranteed loans to further support preserving rural rental housing.