USDA Rural Housing Program: Where’s the Funding?

When the USDA ranrnout of money for its Section 502 guaranteed Rural Housing product in April, the program effectively shut down.  At that time it was up to the Congress to appropriate the $150rnmillion needed to continue the program through the September 30 end of the fiscalrnyear.   A month later, even though thernlegislation intended to provide the funding had not passed, USDA began issuingrncommitments for new loans, but there was a caveat: Loan approvals would be “subjectrnto the availability of funds and Congressional authority to charge a 3.5rnpercent guarantee fee for purchase loans and a 2.25 percent guarantee fee forrnrefinance loans.”  </p

While this putrnthe program back in business on paper, lenders were understandably reluctant tornwrite Section 502 loans without a USDA guarantee firmly in place. Without this guarantee,  buyback responsibility for early paymentrndefaults on those loans would fall solely on the shoulders of the lender. Inrnthe current climate,  that is a huge risk that few lenders are willing to take.  All of these machinations came at the veryrntime many home buyers, especially first time buyers, were scrambling to takernadvantage of the homebuyers' tax credit before it expired on April 30. </p

Finally, on July 29rnCongress passed HR 4899 to reestablish the program as one that would no longerrnbe subject to the annual whims of Federal funding but self-sustaining through arn3.5 percent guarantee fee paid by the borrower. rnThe fee, while substantial, could be financed into the loan.  That legislation also included $679 millionrnin funds to enable USDA to waive those fees for low-income borrowers.</p

All good right? </p

No. Three weeks havernpassed, the Congress did their job and appropriated unlimited funding for the USDA Rural Housing Program, yet all loans under Section 502 must still carry the “subject tornavailability” caveat.  WHERE'S THE MONEY?  WHAT'S THE HOLD UP?</p

Consequently, manyrnlenders continue to  hold back from writing Section 502 loans, and potential homebuyersrnare watching the clock tick toward the September 30 deadline for finalizingrntheir home purchases before the tax credit disappears for good.  In addition, the $659 million has not beenrnreleased into the system for low income borrowers, and John Rodgers, Presidentrnof Prime Mortgage Lending in Apex, North Carolina thinks he knows why the wholernsystem has ground to a halt.</p

First a littlernbackground on the way the program is structured… </p

There are actually two RuralrnHousing Programs. The first is a direct program administered by USDA and intendedrnfor low income homebuyers.  The secondrnprogram is a loan guarantee program that operates like FHA or VA, with loans originatedrnby private lenders like Prime Mortgage Lending. These loans are primarily used tornhelp individuals purchase homes in rural areas and can be used to build,rnrepair, renovate, or relocate a home. rnThe loans require no down payment and while they are primarily intended tornhelp low-income individuals. There are geographical income limits.  </p

The guarantee program is veryrnpopular, particularly now with so many other avenues of funding closed tornhomebuyers, and is usually oversubscribed. rnThe direct program is not nearly as sought after; borrowers, given theirrndruthers, appear to prefer to deal with private lenders rather than workrnthrough the inevitable bureaucracy of the direct lending program.  Unfortunately, USDA has a quota for itsrndirect lending program; a quote which has not yet been met.</p

Rodgers said thatrnlenders expected the conditional status of guarantees would be removed shortlyrnafter the legislation was passed and that the newly appropriated funds wouldrnalso quickly be available.  In the past,rnhe said, it has taken only about ten days to update the software and get thernsystem operating when major changes have been made.  However, with the USDA quota as yet unmet, hernfeels the Department is under pressure to put more borrowers through thatrnprogram.  If the $689 million is released,rnRodgers said, the Secretary will probably have to allocate it to both the directrnand the guarantee programs which will give the guarantee program, with itsrngreater efficiencies, a competitive edge that USDA may not be able to match.    </p

With most federalrnprograms, funds unspent at the end of the year are returned to the Treasury,rnsomething program administrators hate to do. rnUnspent funds in one fiscal year also mean that it is harder to justifyrnthe same or greater levels of funding for the following year.  There are also always politics involved;rnCongress who voted for a program want to see results rather than arnprogram that falls short of its goals.  </p

Whether Rodger'srntheory is right, USDA needs to get the Rural Housing Program back up andrnrunning immediately.  Home financing isrnin tight enough supply already and with the end the fiscal year only 43 days away,rna lot of homebuyers may see their hopes of owning a home expire along withrnthe tax credits.

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