Terminated with a claim. In  particular, our 2012 report found overlap in the products offered, borrower  income levels, and geographic areas served by the two programs. In keeping  with RHS’s income restrictions, RHS’s loans were smaller than FHA’s,  and RHS’s no-down-payment requirement resulted in higher LTV ratios  for RHS than for FHA. Both RHS and FHA Served Large Numbers of Borrowers in RHS-Eligible Areas

In 2010–2014, RHS and FHA both guaranteed large numbers of loans to  borrowers in RHS-eligible areas, with FHA serving more borrowers  overall and RHS serving a higher number and percentage of borrowers in  more rural areas (see fig. Credit score. 6). In RHS-eligible areas in 2010–2014, most of the borrowers served by  each agency had annual incomes of less than $60,000, but RHS  borrower incomes were generally lower than those of FHA borrowers. The median income of RHS borrowers was about $44,000, compared  with about $57,000 for FHA borrowers—a 28 percent difference. 7). These differences are  consistent with the RHS program’s statutory income limits (the program is  designed to serve low- and moderate-income borrowers). At origination, both RHS- and FHA-guaranteed loans in RHS-eligible  areas had high LTV ratios (above 90 percent)—a median ratio of 101  percent for RHS and 96.5 percent for FHA. At Least 36 Percent of RHS Borrowers Potentially Could Have Met FHA’s Down-Payment and Other Key Criteria

Based on our analysis of data on RHS-guaranteed loans, we estimated  that at least 36 percent of RHS borrowers could have met key criteria to  receive FHA-guaranteed loans and also potentially could have made a  3.5 percent down payment (see fig. Additionally, the borrower’s household income would have had to be  within RHS limits. As described previously, FHA requires borrowers to make a 3.5  percent down payment, but RHS has no down-payment  requirement. Assuming a 3.75 percent interest rate, the monthly  mortgage payments (including the annual guarantee fee) during the first  year would have been $50 less, or 7 percent lower, with an RHS- guaranteed loan than with an FHA-guaranteed loan. These  trade-offs highlight issues for RHS and FHA to consider in evaluating  opportunities to consolidate the programs, as we recommended in 2012  and reaffirm in this report. Our statistical  model also estimated that RHS loans would be expected to have higher  troubled loan rates than FHA loans, due partly to the higher LTV ratios of  RHS borrowers. Additionally, RHS’s higher  LTV ratios and lower guarantee fees relative to FHA also may  increase financial risk to the federal government from higher potential  loan defaults and less revenue to cover unanticipated costs of the  loan guarantees. For this reason, we maintain that RHS and FHA should  implement our 2012 recommendation to report on and evaluate  consolidation opportunities. Estimates of RHS and FHA Borrowers Who Could Have Met Key Criteria for the Other Loan Guarantee Program

To estimate the number and percentage of RHS and FHA borrowers in  RHS-eligible areas who could have met key criteria for the other agency’s  guarantee program in 2010–2014, we compared the characteristics of  RHS-guaranteed loans to the requirements and benchmarks for FHA’s  program and compared the characteristics of FHA-guaranteed loans to  the requirements and benchmarks for RHS’s program. To calculate the illustrative monthly, annual, and lifetime costs of RHS-  and FHA-guaranteed loans, we calculated:  1.  the monthly principal and interest payment based on the final loan  amount (including the financed up-front guarantee fee);  2.  the amount of the annual guarantee fee by multiplying the annual  average outstanding loan balance by the annual guarantee fee  percentage (in 2014, the annual guarantee fee was 0.5 percent for  RHS loans and 1.2 percent for FHA loans);  3.  the monthly cost of the annual guarantee fee by dividing the  amount of the annual guarantee fee by 12 (for 12 months); and  4.  the total monthly costs by adding the monthly principal and  interest payment to the monthly cost of the annual guarantee fee. To obtain the perspective of program participants, we interviewed a  nonprobability sample of eight mortgage lenders selected to capture  variation in the geographic areas served, volume of guaranteed loans  originated, and mix of RHS and FHA business. Appendix V: Performance of Home Purchase Loans RHS and FHA Guaranteed in RHS- Eligible Areas in Fiscal Years 2010–2012

This appendix describes the results of our analysis comparing the  performance of single-family home purchase loans guaranteed by the  Rural Housing Service (RHS) and the Federal Housing Administration  (FHA) in fiscal years 2010–2012 in RHS-eligible areas after 2 and 3 years  of performance. Performance of these loans is defined in terms of the share of loans that  are troubled. At the same time, there are some differences. 23). 24). This permitted us to analyze loan  performance in the more rural portions of the RHS-eligible areas.
Why GAO Did This Study

RHS and FHA help borrowers finance homes by guaranteeing single-family mortgage loans made by private lenders, and both operate in rural areas. However, eligibility for RHS guarantees is restricted to RHS-eligible areas and to low- and moderate-income households. A prior GAO report (GAO-12-554) found overlap in the products offered, borrower income levels, and geographic areas served by the two guarantee programs and recommended that RHS and FHA evaluate and report on opportunities for consolidating similar housing programs.
GAO was asked to expand on the analysis in its 2012 report. This report compares the characteristics, performance, and borrower costs of RHS- and FHA-guaranteed loans in RHS-eligible areas.
GAO analyzed RHS and FHA data for home purchase loans guaranteed in fiscal years 2010–2014 (which allowed for analysis of loan performance over multiple years). GAO also interviewed RHS and FHA officials, eight lenders (selected to capture variation in rural areas served, origination volume, and mix of RHS and FHA business), and industry associations.

What GAO Found

GAO's comparison of single-family home purchase loans guaranteed by the Rural Housing Service (RHS) and the Federal Housing Administration (FHA) in fiscal years 2010–2014 identified significant overlap and some differences in the borrowers served. Within statutorily defined rural areas (RHS-eligible areas):
Both agencies served large numbers of rural borrowers, but FHA served over 35 percent more than RHS, while RHS reached a greater number of borrowers in the more rural parts of RHS-eligible areas.
Most of the borrowers served by each agency had annual incomes below $60,000. But consistent with RHS's statutory income limits, the median borrower income for RHS ($44,000) was well below that for FHA ($57,000).
RHS and FHA borrowers had similar credit scores (around 685 at the median) and ratios of housing expenses to monthly gross income (23–24 percent at the median).
Borrowers in both programs had high loan-to-value (LTV) ratios (loan amount divided by home value). But RHS's no-down-payment requirement and FHA's statutorily required 3.5 percent down payment resulted in higher LTV ratios for RHS than for FHA (medians of 101 and 96.5 percent, respectively).
Significant portions of RHS and FHA borrowers could have met the criteria of the other program. For example, at least 36 percent of RHS borrowers could have met FHA's criteria, including the 3.5 percent minimum down payment.
In RHS-eligible areas, RHS loans guaranteed in fiscal years 2010–2011 performed worse than corresponding FHA loans after 3 years. Specifically, for borrowers whose incomes fell within RHS limits, RHS's 3-year troubled loan rate (the share of loans 90 or more days late, in foreclosure, or terminated with a claim) was 7 percent, compared with 6 percent for FHA. GAO estimated that RHS's loans would be expected to perform worse than FHA's due partly to RHS borrowers' higher LTV ratios.
Borrower costs—at loan closing and paid monthly—were lower for RHS loans than for FHA loans. Due to differences in down-payment requirements, a borrower purchasing a $125,000 home in 2014 would have paid $4,375 more in up-front costs with an FHA loan than with an RHS loan. Also, FHA (which must maintain a capital reserve) charged borrowers a higher annual guarantee fee than RHS, which has no capital requirement. Due largely to the difference in this fee (charged monthly), a borrower's initial monthly payments would have been about 7 percent lower with an RHS loan (assuming a 3.75 percent interest rate).
GAO's analysis provides additional evidence of how the programs overlap in terms of income, location, and borrower qualifications. It also highlights issues for RHS and FHA to consider in evaluating opportunities to consolidate these programs, as GAO recommended in 2012. Specifically, differences in the performance and borrower costs of RHS and FHA loans underscore important tradeoffs. Higher LTV ratios and lower guarantee fees help make mortgages more affordable. However, these features also may elevate financial risks to the federal government from increased loan defaults and less revenue to cover unanticipated costs. Agency consideration of these issues would aid congressional decision-making about potential program consolidation.

What GAO Recommends

GAO makes no new recommendations in this report but maintains that RHS and FHA should evaluate and report on opportunities to consolidate their similar housing programs.