RealEstateEconomyWatch.com

While slashing funds for disability, elderly, homelessness and Native American housing programs, Congress has doubled the funding for a USDA housing program that may cost the government $4 billion in defaulting loans because over a third of the government-guaranteed rural home loans in its portfolio may be ineligible for the program.

On April 15, President signed into law the continuing resolution to fund the government that, despite concern over the deficit, included increased funding for the USDA’s Rural Development Service’s Section 502 single family guaranteed loan program from $12 to $24 billion annually for the current year as well as the next Federal fiscal year.   

In January, an inspector general’s report discovered that the government may have given out more than $4 billion in stimulus housing loans to ineligible borrowers.  An IG’s audit found that among 100 randomly selected government-guaranteed rural home loans across the country, 28 loans lenders had not fully complied with federal regulations in determining borrower eligibility.

The audit report found borrowers with annual income over the program’s limits, borrowers with questionable ability to repay the loan, borrowers who didn’t need the government loan guarantee and borrowers who purchased homes with swimming pools, which is strictly prohibited by the program’s rules. Some borrowers had debt-to-income ratios that were too high because lenders accepted unstable or inconsistent earnings or used only recent earnings. Several borrowers were, or had been, delinquent on their loans. One was over 180 days delinquent. Another had defaulted and the lender had filed a loss claim.  USDA officials agreed that 10 of the 28 borrowers were ineligible.

Although the auditors looked at only a tiny sample of the 133,053 loan guarantees made in 2009, they estimated that tens of thousands might have been done improperly and warned that a wave of defaults might be looming.

Analysts said the problems echoed those exposed earlier in the mortgage crisis, with banks seemingly eager to collect fees for loans in which they retained little or no risk.  The findings of the audit have raised concerns that the program, which features 90 percent government guarantees, could lead to widespread defaults.

“In a couple years, when these loans are going bad, everybody’s going to say, ‘Oh me, oh my, how did this happen?’ ” Christopher Whalen, managing director of Institutional Risk Analytics, a bank rating and consulting firm, told the New York Times. “There’s no surprises here.”

 Founded in 1949 to spur home sales and development in rural areas, the US Department of Agriculture’s popular direct and guaranteed rural housing loans today are one of the few places in America you can get a mortgage with no money down at competitive rates.   

Borrowers don’t have to be lower income; in fact they can make slightly more than the median.  Nor do they have to buy in rural area.  They can live relatively close to a major urban area like Loudon County, VA, Half Moon Bay, CA or parts of Westchester County, NY.  Or, in a popular resort community like Naples, FL, Aspen or Vail, CO, or Cape Cod, MA.  To qualify for the government guaranteed loans, borrowers can earn up to 115 percent of the median income for the area.

In recent years, Congress has rushed through legislation to increase funding for the program when it has run out of money part way through the year.

The value of USDA-backed loans has soared, from $3.7 billion in 2007 to about $16.8 billion last year. 

With strong support among both housing and farm state interests, the 100 percent increase in the troubled USDA program sailed through untouched even as other housing programs, including support for low income disabled and elderly renters and grants for Native American housing, homeless assistance and public housing were cut in the final congressional negotiations.  A companion direct loan program, which is limited to lower income home buyers, was not increased.