CHISPA wall raising. The Community Housing Improvement Systems and Planning Association, Inc. is a nonprofit community-based organization located in Salinas, California that operates on the Central Coast.

Self-help housing organizations threatened by today’s economic crisis

By Stanley Keasling, RCAC chief executive officer

The U.S. Department of Agriculture (USDA) Rural Development (RD) Mutual Self-Help Housing program has assisted approximately 50,000 very-low to low-income families to build and purchase their homes. With technical assistance and loan funds from RD, nonprofit housing organizations work with families to achieve the American dream of home ownership.

Today, these rural nonprofit housing organizations are in a very difficult situation. Some will not survive. Other organizations may continue their community development work, but they may not be able to stay in the self-help housing arena.

Similar to the recession in 1980, the unemployment rate is on the rise, home prices are dropping, land values are decreasing at a rapid pace and new home construction has slowed to a crawl. This economic environment challenges almost every business and every nonprofit organization. The housing industry is especially challenged. There are a number of aspects to the crisis, but affordable housing developers are being most seriously impacted by the private credit market meltdown. Self-help housing developers in particular are struggling.

The Mutual Self-Help Housing program benefits low- and very-low income households. The beneficiaries of this program are the most at risk populations in rural America – people with disabilities, single parents and farm workers to name but a few. Most of these families cannot afford fair market housing costs, so they rent (in many cases substandard housing) or become homeless. The program offers these families the opportunity to become homeowners and earn equity, and it improves their health and well-being by providing safe, adequate and affordable housing.

Four significant signs of distress for organizations in the Mutual Self-Help Housing program include:

1. Inability to market and recruit new families to participate in the program

As the recession has grown more severe, low-income families, like most American households, have grown more cautious in their financial decisions. Many families are concerned they may lose their jobs; or they have been impacted by high food and fuel prices; or their credit has suffered as money has grown tighter. There are other factors, including a concern that a new home could lose value. As a result, self-help housing developers have difficulty recruiting enough families to participate in their programs, and many are now falling seriously behind in their production goals under their technical assistance grants.

A pure capitalist may argue the fall in demand for self-help housing should translate into the demise or transformation of organizations working in self-help. That is shortsighted. Consumer confidence will return. The demand for low-income affordable housing ownership will return. We must ensure that housing development organizations survive the recession so they can be instrumental in the economic recovery that will follow. It is better to retain the expertise of existing organizations than to attempt to create new organizations when housing demand returns.

2. Declining land values

The appraised value of existing lots has declined in most markets, and in some higher growth markets they have fallen steeply. As developers try to secure construction financing for new subdivisions, they find their appraisals no longer support the total development costs. Often the valuation used in construction appraisals, called bulk sale appraisals, yields a value that is less than the cost of the improved subdivision. This results in a need for subordinate debt to complete the construction financing. Now however, individual lot appraisals are less than the cost of the improvements. This has led a number of groups to suspend new land development activity and in some cases to either suspend development or quit selling lots in existing higher cost subdivisions. In some high priced markets, appraisals have now fallen to the point where the raw land has no value, and in other cases, the lot appraisals are not even equal to the cost of the entitlements and land improvements.

Organizations that hold land with significant value depreciation need financing that will allow them to hold the land until the economy improves. Servicing such debt may prove to be impossible for some organizations, and they may fail. Other organizations can weather the bad times with reasonable financing. However, many traditional financing sources are scared and unwilling (and in some cases unable) to provide such financing. Community Development Financial Institutions (CDFIs) need to provide this financing.

RCAC became a CDFI in 1996 when the U.S. Department of the Treasury first began certifying CDFIs. There are approximately 500 CDFIs in the United States with at least one for each state.

3. Credit crisis shuts down lending

The continued availability of Section 502 loans for self-help families is a critical success factor within the self-help program. The business plans of many Section 523 grantees (the affordable housing organizations) also include development of self-help housing in areas not eligible for 502 loans. This is referred to as “non-RD self-help” or “urban self-help”. Although this work is outside the basic 523 grant, the work is important to many organizations because it allows them to retain personnel, and it supplements their income. Housing development organizations that have ventured into urban self-help are experiencing financing problems from their traditional sources.

For example, the California Housing Finance Agency (CalHFA) recently could not sell mortgage revenue bonds, and although some liquidity has returned to the market, finance agencies across the country are still paying a premium to sell bonds. Related interest rates have risen dramatically. The crisis has placed strains on CalHFA’s cash flow, and as a result, Moody’s has issued a watch on the agency’s bonds. This makes it even more difficult for CalHFA to secure credit. For nearly 10 years, California self-help organizations have enjoyed a very favorable loan rate from CalHFA, receiving 3 percent first mortgages for their families. Recently, the program was canceled because the agency did not have the financial capacity to continue subsidizing the mortgages. Currently, California self-help groups have some 60 homes in construction that will not have secured financing upon completion. Even more disconcerting—these organizations have a pipeline of some 300 lots that were to be financed through the CalHFA program.

CDFIs do not need a bailout. They need to find financing to replace the 3 percent loan programs of government entities like CalHFA. Affordable housing developers relied on the availability of government programs to start construction. The families are still available, but the financing is not. Affordable housing developers need an exit strategy that will get the families into the homes without excessive financial burden to the developer.

4. Home appraisals fall below construction costs

In Arizona, some self-help organizations have seen the appraisals on their homes fall below the construction costs. In other words, families are earning no sweat equity for their labor, and as a result, recruitment is even more difficult. This has another more serious problem in that RD self-help grantees are evaluated by USDA based on the equity that families earn. Grantee technical assistance costs are supposed to be less than the average sweat equity earned by the family. This is a much more rigorous test of grantee performance than it was in the past, and it could have a significant effect on new grant applications.

USDA RD needs to evaluate the validity of their valuation methodology in the face of these economic challenges. And, self-help organizations need to think of ways to bring new grants to the housing development process so that the resulting house appraisal is more than the secured debt.

Adversity and challenges bring opportunity

In many markets, self-help organizations now have opportunities to acquire lots that are much less costly than their existing inventory. One self-help organization has been offered lots for as little as $12,000, less than one third of the cost of developing the lots. Other rural organizations are seeing these opportunities arise as national builders are exiting from more challenging markets. These lots could provide the opportunity to continue delivering a product that provides families with sweat equity and grantees the ability to meet their production goals by providing excellent values on new homes. However, given slow sales in existing subdivisions, conventional lenders are extremely reluctant to lend additional money for land. RCAC is working diligently to expand its lending capital so it can assist in financing some of these opportunities.

Another opportunity for rural self-help organizations may be the U.S. Department of Housing and Urban Development’s new Neighborhood Stabilization Program. Program funds are working their way through state and local bureaucracies. Eventually, the funds will be available for nonprofit organizations and others to acquire and rehabilitate foreclosed properties, and then provide subsidies to first-time homebuyers so they can purchase a home. RCAC is available to provide support in the design of local programs, and to consult with organizations interested in trying to secure a portion of this funding.

In summary

It is apparent that the credit crisis of recent months has affected rural housing groups and the need for flexible and customized financing solutions is growing. As was true of the 1980 recession, the nation’s economy will rebound, and there are opportunities for those willing and able to invest. If self-help organizations could find patient capital to repay their conventional lenders on their existing subdivisions, allowing the land to be banked for future use at lower interest costs, or a source to obtain financing for new development, then they could take advantage of the deals in the marketplace.

One thing is certain; this will be an increasingly difficult time for the self-help program and affordable housing agencies. It is important that these organizations survive because they are the affordable housing infrastructure of rural America.

RCAC is committed to doing everything it can to ensure that affordable housing organizations succeed and continue to exist during these trying times.

If you would like to discuss your particular challenges, please contact the RCAC regional manager for your state:

Joe Waters, Regional Manager Housing (AZ/NM)

Connie Baker Wolfe, Regional Manager Housing (CO/UT/MT/WY)

Bruce Newman, Regional Manager Housing (AK/CA/HI/ID/NV/OR/WA)

Share your problems and your strategies. RCAC has formed a team that will ensure the appropriate staff resources are applied to the problems identified.

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