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. Recently, 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.
"The last thing we need is another hit to our industry," said Holiday Builders' COO Bruce Assam, of the announcement. "But what it does is continue to weed out the industry."
The USDA guaranteed loan program, known as Section 502, was set up to aid single-family development in rural areas with loans for both home purchases and renovations. The program encouraged banks to lend to low- to moderate-income buyers in designated rural areas by guaranteeing up to 90% of the loan value, meaning if a buyer defaulted on the loan, the lender could recover nearly all of the loss on the loan.
Although the program went into effect in the early 1990s, like FHA financing, it was little used by home builders because there was a plethora of mainstream mortgage financing options available in the market. However, as the housing market headed into the tank in 2006, followed by the mortgage market in 2007 with the subprime crisis, builders increasingly struggled to help their buyers find mortgage financing, particularly those with little down payment money. The USDA program, which offered buyers an affordable, no-down payment loan option, helped to fill the financing void.
With the USDA program the only no-down payment game in town, the program's volume exploded. Whereas the USDA guaranteed 31,131 loans in 2006, by 2008, that number had grown to 54,660, according to the agency. That volume more than doubled in 2009 to 115,981 loans guaranteed, exceeding the government agency's target volume by more than 70%. Consequently, its loan authority has more than tripled since 2006.
The agency has labored to find funding to keep up with program demand. For example, last year, the program's funding was exhausted twice, prompting the agency to send letters to participating lenders notifying them that funding was running dry. However, the agency historically would continue to issue loan commitments in the near term, albeit contingent on the influx of new funds. And the funding would usually 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, than in years past. This means that, assuming the USDA's current projections hold, by the end of April, the agency will have exhausted its $12 billion in loan authority for all of fiscal 2010 in roughly seven months, nearly twice the pace of 2009.
The other difference is that, unlike in years past, the agency will not issue condition loan commitments contingent on additional funding because it's uncertain whether any additional funding is available. Sources at the USDA stated that some money could be moved around internally to fund the program and that existing funds could last a little longer than projected if lenders pull back on taking applications for the USDA program, which some are rumored to have done following the agency's announcement. JPMorgan Chase, Bank of America, and Wells Fargo are some of the program's largest participating lenders.
Even if internal funding could be stretched, the program would still need Congress to appropriate more funds to the program to be able to meet projected demand through the end of fiscal 2010. The USDA is asking for $10 billion of budget authority to guarantee additional loans through the end of the fiscal year.
In terms of costs to the taxpayers, the USDA estimates that because the agency runs rather efficiently, the increase in $10 billion in budget authority would require an actual appropriation of roughly $215 million. According to information from the USDA, default rates in fiscal 2009 were 3.27%. Factoring the fees it charges borrowers and other collections it takes in, the rate drops to 1.27%.
Given the potential drag on the housing and mortgage industries, as well as local governments, many of which are battling their own budget crunches, stakeholders such as the NAHB and the Mortgage Bankers Association are mobilizing to pressure key congressional leaders in both the House and Senate appropriations and finance committees to release funds to the program.
"The housing market and economy are just turning," said Tamara King, director of loan production at the MBA. "At this juncture, we don't want to play with it. We want to keep the momentum as long as we can."
In the meantime, builders in key housing markets such as California, Texas, and the Midwest, where much of the land developed for residential neighborhoods is former agricultural land and, therefore, eligible for USDA financing, are in block-and-tackle mode.
Holiday Builders' Assam said he counted the company lucky because the company's potential USDA exposure was capped at roughly 12% of company sales thanks to some timely closeout of communities, compared with 40% just a couple of years ago.
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 between 4% and 4.5% of the homes purchase price, factoring in down payment requirements and up-front fees, 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," Assam said.
That's what Eric Lipar, CEO of Texas-based LGI Homes, hopes happens, considering he's got communities where 50% or more sales are financed through the USDA program. But quantifying how much of the company's backlog could fall out is easier said than done. "It's a little bit unknown how many people won't be able to come up with down payment money," he said. "So, I'd just assume keep the program."