Rural Development
RRHA of Illinois
“Happy 5-15 Day”
Hot Topics in 2013
Barry Ramsey
Housing Program Director
Rural Development
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Sequestration and 2013 Budget Impacts
RD Portfolio Overview (Then & Now)
Collaboration with Treasury & HUD
IRS Reporting on Predetermined
Amortization Schedule System (PASS) Loans
• 2014 Outlook –
• “The future ain’t what it used to be.”
- Yogi Berra
Sequestration…and the 2013 Budget
• Sequestration triggered a
5% cut of all domestic
discretionary funding (RD
loans, grants & RA)
• The 2013 budget reduced
RA by an additional 2.77%
• Renewal shortfalls are
anticipated for 25-30
properties in IL this year
• April memo from Dallas
Tonsager sent to MFH
Property Owners
$1,300
$1,250
$1,200
$1,150
$1,100
$1,050
$1,000
$950
$900
$850
Renewals
($m)
2013
Budget
($837m)
2014
Proposed
($1,015m)
$800
2013 2014 2015 2016 2017 2018 2019 2020
Rental Assistance
 USDA has developed some actions for reducing RA costs – The
renewal cost of RA in 2013 is expected to be $933 million; plans to
offset that figure with about $31 million in savings from initiatives are
underway:
 Use of Overage (overage collected will be converted to RA renewal dollars);
 No incentive offers have been made to prepaying projects since August
2012. A notice will soon be published outlining plans to make offers which
can be funded. Additional RA won’t be part of the offer if it is not available;
 No RA is anticipated for MPR rehabs or new construction projects;
 RA funds from prepaid and foreclosed properties is being converted into RA
renewals;
 RA not used for 6 consecutive months will no longer be transferred to other
properties by State Directors, but will be converted to RA renewals;
 Increased enforcement of occupancy standards targeting “over-housed” RA
units like 1 person in a 2 bedroom unit when a 1 bedroom unit is available;
 Continued emphasis through nationwide audits of tenant certification
renewals with RA for correct income and asset documentation including
death records maintained by the Social Security Administration.
 Savings efforts may still result in a shortfall for some properties.
MFH Budget Summary
MFH Programs ($m)
#MFH Loans for REO Sales
*Guaranteed 538
Direct 515 RRH Loans
Rental Assistance
MPR Rehab Demo (Outlay)
MFH Vouchers
Housing Preservation Grants
Farm Labor Housing Loans
Farm Labor Housing Grants
FY 2010
Enacted
FY 2011
Enacted
FY 2012
Enacted
FY 2013
Enacted
FY 2014
Proposed
130
70
980
26
16
11
26
9
31
69
954
13
16
10
19
9
130
64
904
2
11
3
21
7
150
29
837
16
9
3
21
8
150
28
1,015
20
13
24
8
#No funds are designated for Agency financing on REO properties (other than
the $29m in 515 loan funds for general use)
*Guaranteed loans are paid from Lender fees – no cost to the Government
RD PORTFOLIO (THEN & NOW)
CASELOAD
1995
2013
Change
RRH Properties (IL)
785
567
-27.8%
RRH Total Units (IL)
11,808
10,456
-11.4%
Rental Assistance Units
6,576
7,370
+12.1%
% Units with RA
55.7%
70.4%
+14.7%
Project Size (IL)
15.0 units
18.4 units
+22.7%
 11.4% of units have prepaid or been foreclosed,
 16.4% of units have been consolidated into another project,
 12.1% in additional RA has been provided (794 more units) from
new projects or incentive offers to prevent prepayments,
 Today, over 70% of units in Illinois include RA funded by USDA.
RD PORTFOLIO (THEN & NOW)
56
ILLINOIS
57
Category 1
Category 2
581 properties (8/2011)
Category 3
567 properties (5/2013)
468
40
53
Category 1
Category 2
Category 3
474
 Category 1 = needed, but
able to prepay;
 Category 2 = needed, core
properties to preserve;
 Category 3 = not needed,
not viable to preserve
Collaboration with Treasury & HUD
 Financial Reporting – consistency for annual
audits and AUP requirements
 Physical Inspections – acceptance of another
Agency’s reports
 Subsidy Layering – common underwriting for
RD/HUD acquisition/rehab tax credit deals
 Income Reporting / Definitions – common
recertification form for all
 Capital Needs Assessments – HUD template
 Fair Housing Compliance Enforcement – coop
agreements between USDA & HUD
IRS Reporting & PASS
 IRS reporting is based on an IRS News
Release, IR-85-55, dated 6/3/85 and states
“If loan is governed by PASS, the borrower
may deduct interest computed at the full note
rate of interest, but must include in income the
loan credit provided by the FmHA”.
 IRS form 1098 reports as an expense:
 Interest paid by the borrower cash, RA,
overage collected & PASS Subsidy
 IRS form 1099-MISC reports as income:
 Rental Assistance Payments, and
 PASS Interest Credit Subsidy Payments
Example
 $1,000,000 PASS loan closed in 1986 for 50 years at
10.625% note rate and plan II interest credit at 1%
 10.625% = $8,899.07 note payment
 1.0% =
$2,118.59 reduced payment
 Difference = $6,780.48 monthly subsidy
 With no extra payments, interest due at installment 438
equals the subsidy amount and the approx. loan balance
= $764,000 (in year 37);
 With a $10,000 extra payment, interest due at
installment 314 equals the subsidy amount and the
approx. loan balance = $764,000 (in year 27)
Example
 At the point when the subsidy equals the monthly
interest, part of the subsidy also pays monthly principal
 In our $1,000,000 loan example, this occurs in 2022.
For the next 13.5 years:
 Subsidy = $1,105,218 which is taxable income
 Interest = $684,405 which is an expense
 Difference= $420,813 which is “phantom income”
 With a $10,000 extra payment, this event occurs in
2012 (10 years sooner). For the next 13.5 years, it’s the
same story: subsidy exceeds interest by $420,813
 The loan pays off in 2025, almost 11 years early!
What Can I Do
Says the Borrower?
 Do Nothing…pay taxes on
$420,813 and pay in full
just over 10 years early
 Reamortize / same rate and
term (spread the $10,000
payment over the original
loan term cutting the
phantom income by 55%)
 Reamortize / new rate and
term (smaller payment &
subsidy drops phantom
income 90% in 30 years)
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
Subsidy
Interest
Phantom
Income
$0
 A 30 year new rate/term amortization postpones phantom income from
subsidy for another 20 years;
 A 50 year new rate/term amortization has no phantom income from
subsidy during the entire 30 year loan term.
Questions?
Rural Development is an Equal Opportunity
Lender, Provider, and Employer. Complaints of
discrimination should be sent to USDA, Director,
Office of Civil Rights, Washington, D. C.
20250-9410.