If any silver lining can be found in the cloudy state of the housing and mortgage banking markets today, it would have to be the rural residential lending sector. Existing in a relatively unscathed state while the urban and suburban sectors were damaged by the ongoing crisis, the rural markets have seen a combination of successful government lending and stable private-sector input to encourage steady growth.
However, that situation is beginning to show signs of change that reflect the overall state of the industry and the economy. While the situation is still far from being a crisis, cautious concern is already being expressed for the sector's progress in the coming year.
At the moment, however, things are still strong. It helps that the rural sector never experienced the tumult that the rest of the country felt, both in regards to housing and the overall economy.
‘Subprime problems were not a rural problem,’ says Ken Auer, president and CEO of the Farm Credit Council. ‘The agricultural economy has been very strong.’
Even the low-income corners of the sector have not been exacerbated by the ongoing situation.
‘Rural markets did not benefit from the bubble and are not affected by the collapse of the bubble,’ says Leslie Strauss, communications director with the Housing Assistance Council in Washington, D.C.
One of the key points for the stability of the sector came from the predominance of community banks as mortgage originators. These smaller banks, with their history of conservative lending, maintained their stability while their larger competition wobbled or fell.
‘These banks offer good, commonsense lending practices,’ observes Dave Petro, president and CEO of ICBA Mortgage in Washington, D.C. ‘Most rural areas have not experienced overheated markets and declining property values. There are reasonable lenders out there, and people want a good loan from someone who is solid, stable and rational.’
Even the federal lending programs aimed at rural America are enjoying a conspicuous lack of problems. The U.S. Department of Agriculture's (USDA) Rural Housing Service, which serves towns with populations under 20,000, produced numbers that seem a world away from the rest of the housing market. During the Mortgage Bankers Association's annual convention last October, Russell Davis, administrator for the program, highlighted the service's success in 2008.
‘Forty-five of our states have declining delinquency rates, so our difficulties are confined to five states,’ he said in a presentation at the convention in late October. ‘Our originations are way up. We doubled in the last year, and we are doubling this year. The last projection I saw stated we were doing about 120,000 loans this year.’
Davis acknowledged that USDA benefits from a few anomalies. The agency traditionally has weaker performances during real estate boom cycles, and the average USDA loan is on the small side, with an average loan size of $111,000 – and loans in the five-digit range are not uncommon.
Spreading cracks Â
However, this positive situation is showing signs of trouble. Affordable housing, a longtime concern of both urban and suburban markets, is becoming increasingly prevalent in rural areas.
‘One of our biggest problems is affordability,’says Strauss. ‘It is hard to find decent, quality places where there is a definite mismatch between housing costs and incomes. There are federal, state and some local programs, but never enough to match up with all of the people who need it.’
Running parallel to the lack of affordable housing is the problem of property values for existing homes. Bob Frazee, president and CEO of MidAtlantic Farm Credit in Westminster, Md., notes that this has created some problems with borrowers.
‘Our challenge is declining property values,’ he says. ‘As people come in to refinance, they may not qualify for the products that they qualified for a few years ago.’
Frazee believes the issue of declining property values will dominate the sector in 2009. ‘My concern is whether we reached the bottom yet with property values and market conditions,’ he adds. ‘In 2009, I'm hopeful we'll find that.’
Greg Burger, president of MinnWest Bank of Luverne, Minn., has experienced a low level of declining property values in his market – in the 2% to 4% range – but his main concerns revolve around ensuring the property appraisals are on target.
‘Our main problem involves how appraisal standards have tightened up in the secondary market in the last six to eight months,’ he explains. ‘We are now being required to come up with comparable sales no more than six months old and within 25 miles of subject property. If you have a home out in the country and cannot find comparable sales to meet those qualifications, it will be difficult to get loans into the secondary market. We're sort of getting redlined.’
Burger notes that this creates a lose-lose situation, because banks wind up putting their rural housing loans into their portfolios, while customers are not able to get the quality of loans that the secondary market offers.
‘If we can get back into the secondary market option for customers, it will go a long way to solving the problems out there,’ he says.
Other problems that are prevalent elsewhere in the country have also turned up in the rural sector.
‘We've had some areas where property is not moving and auctions are being held, but folks are not taking bids because they feel they're not high enough,’ reports Auer.
‘We are not seeing a turnover of housing,’ adds Joe Brasher, community bank president of First State Bank in Sharon, Tenn. ‘Inventories are rising. However, we're not having the increased foreclosure activities that seem to be persistent in more metropolitan areas.’
Strauss points out that statistics on rural foreclosures are lacking, so the genuine breadth of the problem remains uncertain. ‘We don't have a good handle on it,’ she says of the void in statistical data. ‘I know it's not as bad as the cities, and in some ways, that's good. But we're having the crisis happen in rural areas that did not have the big housing prices to begin with.’