Loan guarantees provided through the US Department of Agriculture’s Housing and Community Facilities Programs are the latest victims of the financial crisis. The program is virtually on hold, but don’t fret. Help is on the way.
As down payment assistance programs vanished last year, demand for guarantees provided by the little known program took off. It virtually eliminates the need for a down payment because it allows an individual or family to borrow up to 100% of the appraised value of the home. Eligibility is easy for most families. Applicants for loans may have an income of up to 115% of the median income for the area. Families must be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories.
The default rate on USDA loans is slightly better than the rate for FHA-backed loans. Some 11.35% of USDA loans were delinquent in 2008, while 1.4% went into foreclosure, according to the department’s statistics. Meanwhile, FHA loans had a 13.6% delinquency rate, while 2.3% went into foreclosure. That compares to a 4.3% delinquency rate and 1.6% foreclosure rate on prime loans, and a 20.0% delinquency rate and 12.9% foreclosure rate on subprime loans, according to the Mortgage Bankers Association.
USDA insured $7 billion in loans during the 2008 Federal fiscal year, which ended September 30, up from $3.6 billion the previous year. In October and November, the agency insured some $1.7 billion more in loans. Overnight, guarantees once intended for Iowa towns were ending up in Westchester County townhouses.
Now the program is virtually out of money. It ran through its appropriation of $4.1 billion for the 2008 fiscal year and was able to make nearly $7 billion in loans only because it received additional funding from other department sources. Agency officials say that any day they will run out of funding meant to last through March.
New loans can’t be made once that allocation is exhausted and the program will come to a screeching halt. USDA is writing conditional commitments, which are like an IOU, to be honored if and when funds arrive. If a bank has underwritten a loan and then sent it off to USDA for underwriting and funds were reserved for that particular loan, then the loan are closing. If funds were not reserved, the loan can only close if the bank will agree to the USDA IOU. Buyers and sellers ready to close on USDA guaranteed loans across the nation will soon receive some bad news.
Hope, however, is on the way. The stimulus package introduced by the House Democrats and the Obama Administration last week contains enough funding to guarantee $18 billion worth of mortgages-a tripling of past funding levels. The House Appropriations Committee is expected to consider the bill this week and Congress hopes to send a final bill to President Obama by mid-February. Funds could he flowing again by the first of March.