Rural Housing:

Shift to Guaranteed Program Can Benefit Borrowers and Reduce Government's Exposure

RCED/AIMD-95-63: Published: Dec 21, 1994. Publicly Released: Jan 9, 1995.

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Stanley J. Czerwinski
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Pursuant to a congressional request, GAO reviewed the: (1) Farmers Home Administration's (FmHA) single-family housing loan program, focusing on the merits of allowing borrowers to refinance their direct and guaranteed loans at lower interest rates.

GAO found that: (1) as of September 30, 1994, the FmHA loan portfolio contained about 765,000 direct loans for single-family housing with an outstanding principal balance of $18.6 billion; (2) from 1991 through 1994, FmHA guaranteed an additional 25,000 housing loans totalling about $1.5 billion; (3) although the majority of FmHA direct loan borrowers would not benefit from loan refinancing because they receive substantial subsidies, low interest rates, or both, many nonsubsidized direct loan borrowers would benefit from refinancing; (4) refinancing in the FmHA loan program will require legislative changes; (5) lowering borrowers' interest rates through the direct or guaranteed loan program would help FmHA promote successful homeownership and meet its requirement to graduate direct loan borrowers to private credit; (6) allowing FmHA borrowers to refinance their loans would help many moderate-income borrowers who are both ineligible for subsidies and unable to graduate to nonguaranteed private credit; (7) although the Department of the Treasury would receive immediate revenues from FmHA loan refinancing, it would forgo future revenues from mortgage payments; and (8) refinancing would reduce FmHA loan servicing costs because banks would be charged with administering and servicing loans previously administered by FmHA local county offices.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: In a June 7, 2000, report to Congressman Andrews (RCED-00-214R), GAO updated the data in its December 1994 report. Mr. Andrews used the report as a basis for trying to include language in the fiscal year 2001 Agriculture Appropriations legislation to include a mechanism for section 502 borrowers to graduate to private credit using the 502 guaranteed program along with a similar proposal allowing borrowers currently in the 502 guaranteed program to refinance within the program. The appropriations attempt did not go through, but Mr. Andrew succeeded in getting the language in H.R. 3834 -- The Homeowners Financing Protection Act. The legislation was signed into law on December 27, 2000, as part of the American Homeownership and Economic Opportunity Act of 2000 (P.L. 106-569).

    Matter: Congress should consider amending the Housing Act of 1949 to allow FmHA direct loan borrowers to refinance their loans using the guaranteed program. Additional budget authority may be required to issue these loan guarantees.


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