According to a 2016 U.S. Census report, America’s rural communities make up 97% of the United States’ land mass and only 19% of the country’s total population. Last year, rural counties still had 750,000 fewer jobs than they did in 2008, and the average median income for nonmetropolitan counties was only $46,000 compared to $62,000 in metropolitan areas.1 Rural America’s consistent decline in infrastructure investment since the Great Recession comes as no surprise.
As rural housing stock falls into disrepair, communities are less attractive to home buyers and outside investors. And without access to capital for new construction, the decline continues. And yet, these more rural communities can benefit from the same type of renewal downtown cities have received over the past decade. The key for communities transitioning from employment-poor to amenity-rich, says Director Tremols, is outside investment. Research at South Dakota State University points to the same. Rural communities investing in infrastructure, education, entrepreneurship, and access to financial services have seen a 19% increase in population, including residents under 34. Keeping these new residents investing back into the community requires available, affordable, and reliable housing options.
Rural communities investing in infrastructure, education, entrepreneurship, and access to financial services have seen a 19% increase in population, including residents under 34.
To encourage increased investment in development across the US’s rural communities, the USDA developed a pilot single-close construction loan. The program is designed to fill affordable housing gaps in low-income, rural communities modeled after a similar successful program designed in response to disaster recovery.
The original USDA construction lending loan was a typical two-time close. The initial construction loan remained temporary and only converted to a traditional housing loan after completion of a build. This meant that lenders could not securitize a loan until after the second closing, leading to increased risks for the lender and tied up capital. Combined with the overhead and effort involved in a two-closing loan, this program was less attractive to borrowers and lenders.
In 2005, after Hurricanes Katrina and Rita devastated much of Louisiana, Alabama, and Mississippi, the USDA tested a single-close construction-to-permanent loan (CTP) to encourage and increase the speed of redevelopment in these communities. These single-close loans reduced closing costs by only requiring the borrower to qualify once.
The USDA’s single-close construction pilot program included an interest-only construction phase. Upon construction completion, unused funds were applied to the principal and the whole loan was reamortized. The result of the pilot program after Hurricane Katrina, says Director Tremols, included 150 loans.
The success of the pilot resulted in a new ruling by the USDA in March 2016 making single-close construction loans permanent. Under this rule, loans became fully backed by the federal government. An interest reserve account is established to cover payments during the construction period and a separate contingency fund pays to complete a home build and cover unexpected expenses or costs. If unused, both the reserve and contingency are applied toward the principal at construction completion and the loan is reamortized.
As the permanent single-close construction loan program caught the interest of lenders, it also drew concerns over liquidity and saleability on the secondary market. According to Tremols, investors wanted these loans to include principal and interest payments at the start, without being reamortized upon construction completion.
In response to the additional concerns, the USDA rolled out an updated pilot program on June 20, 2017 in the same 27 states. In it, the USDA introduced a principal reserve alongside the interest reserve. Payments include interest and principal at the start of the loan and no longer require reamortization after construction - making the program an attractive investment option.
“I applaud the USDA and Director Tremols, specifically, for being responsive to feedback from lenders and investors following the March 2016 ruling,” says Christina Jenkins, Attorney, Director of Customer Support, Asurity Technologies.
The USDA has proposed further regulation to make the latest pilot a permanent feature in a final rule that will be published in January 2019.
Since the early 1990s, the mortgage compliance team of Asurity Technologies has provided 100% compliant residential mortgage loan document packages. They are among a few providers in the industry that can produce disclosure documents and packages for construction loans. In 2016, the USDA partnered with Asurity’s compliance experts to pioneer disclosures for its newest loan product: the one-time close CTP loan. To ease lender adoption, Asurity built an entire document set customized to the loan structure.
“The disclosure process for a single-close construction loan is a bit more involved than other loan types,” explained Jenkins. “There are many moving parts involved in construction. You start with a plot of land and you end with a home on it. You hope the home is well constructed and there are no issues with the title or the lien.” With the new changes to the single-close construction loan program and the release of TRID 2.0, the Asurity team, together with the USDA and regulators nationwide, monitors for necessary changes to keep the document package up-to-date.
For more than 25 years, the USDA has guaranteed more than one million loans totaling nearly $122 billion. With a low delinquency rate of 0.8%, these loans deliver on the USDA’s promise of providing decent, safe, and affordable housing in rural America.
Construction of new homes in rural areas, according to the USDA, stimulates the local economy. With every $1 million invested in rural single-family construction, 12.4 jobs are created in the local economy. The USDA’s guaranteed loan program totals to an investment of $122 billion in rural housing, leading to the creation of more than 1.5 million jobs.
“This single-close construction lending program is a hidden gem for lenders, investors, and borrowers alike, especially with these new rules,” said Jenkins. “It provides affordable housing where it’s needed most and guarantees for lenders in areas where they’re typically less inclined to go.”
With lender and investors, the guaranteed construction loan program is a success. The single close options combined with the USDA’s new regulations allow construction loans to be sold to investors at a faster rate than the traditional construction alternative. With a low delinquency rate and backing of the US government, the resulting securities are an easy sell, and lender liquidity is high.
As lenders expand to rural areas, utilizing the USDA’s guaranteed loan program may lead to a greater positive economic impact, and returns for investors and the community at large. Not only does it make good business sense, but it also creates improved and safer neighborhoods.
“Building new [homes] leads to less stress for new homeowners, since they don’t have to worry about pipes leaking or the air conditioner breaking,” said Tremols. “That peace-of-mind for rural homeowners is an important part of this program.”
Learn how to overcome construction loan compliance challenges>>
Learn more about the Goals Module and its key monitoring and reporting features.
Learn about the changes of state consumer protection and the responsibility of financial services institutions to pursue operational excellence and a culture of compliance.
Regulatory and technology experts discuss innovation, CRA reforms, and how single-close construction loans are reenergizing rural America.
