Loan Source Threatened

Funding for USDA's guaranteed loan program likely to be exhausted by May; access to more funds remains uncertain.

The end of April may signal the end of the $8,000 federal home buyer tax credit program, but it's also increasingly looking like the end of the U.S. Department of Agriculture's Single Family Housing Guaranteed Loan program, which has become a critical source of mortgage financing through the housing downturn. In early March, the government agency issued letters to its participating lenders stating that it was on track to exhaust its $12 billion in loan authority by May 1.

Many builders in key housing markets stand to be negatively affected by this latest development. Not only are builders' potential buyer pools once again reduced as buyers find themselves with fewer financing options, but portions of their backlogs dependent on the financing remain in jeopardy to varying degrees.

The USDA guaranteed loan program, known as Sec. 502, was set up to aid single-family development in rural areas. The program encouraged banks to lend to low- to moderate-income buyers in designated rural areas by guaranteeing up to 90 percent of the loan value.

Although the program went into effect in the early 1990s, like FHA financing, it was little used by home builders until the housing and mortgage markets headed into the tank. The USDA program, which offered buyers an affordable, no-down payment loan option, helped to fill the financing void.

Through the downturn, the program's volume has exploded. Whereas the USDA guaranteed 31,131 loans in 2006, by 2008, that number had grown to 54,660. In 2009, volume more than doubled to 115,981 loans guaranteed.

The agency has labored to find funding to keep up with program demand. For example, last year, its funding was exhausted twice. However, funding historically has come in, thanks to new funding resolutions, stop-gap measures, and most recently a flow of stimulus money.

However, this time around a few things are different. First, the program's funding is running out earlier in the fiscal year, which ends Sept. 30, suggesting yet another significant uptick in loan volume so far in 2010.

The other difference is that the agency will not issue condition loan commitments contingent on additional funding because it's uncertain whether any additional funding will be available.

The USDA is asking for $10 billion of budget authority to guarantee additional loans through the end of the fiscal year, which would require an actual appropriation of roughly $215 million based on USDA operating costs.

In the meantime, builders are in block-and-tackle mode. Holiday Builders' COO Bruce Assam said he counted the company lucky because its potential USDA exposure today was capped at roughly 12 percent of company sales, compared with 40 percent just a couple of years ago.

However, Assam said the company has had to identify all of its USDA-financed buyers who will be unable to close by April 1 and start moving them over to FHA financing. With the USDA no-down payment loan option no longer on the table, these buyers have to come up with a down payment on short order. Many are going to family, friends, and employers to gift them the money.

“Where there's a will, there's a way. Somehow they are going to come up with the money,” he said. —Sarah Yaussi