Friday, May 21, 2010

USDA Rural Housing Update: Fundings Dry Up Across the Country

by John Rodgers Mortgage News Daily May 20, 2010

In March we learned that USDA Rural Housing funds were expected to run dry by the end of April.

Here is a quote from the story:

"Every year USDA runs out of money for their fundings and normally you are not affected by this however, this year is very different. The USDA Section 502 guaranteed Rural Housing Program will have exhausted there 2010 fiscal funds by the end of April. The USDA would need to receive about $150 million in funding to be able to continue funding loans for the rest of fiscal year 2010."

USDA Section 502 Single Family Housing Guaranteed Loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. There is no required down payment. The lender must determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

You’re probably asking yourself how it is possible for the USDA to fund all affordable housing demand with only $150 million dollars.

This is possible because the USDA is not the actual “lender,” instead the USDA “guarantees” loans by charging borrowers an upfront fee, similar to upfront mortgage insurance premium charged by the FHA. The upfront fee for a Section 502 loan is 3.5%. This loan guarantee fee was not paid by the borrower at closing though. Instead 2% of the 3.5% fee was financed into the deal so it can be paid over the course of the loan. The remaining 1.5% of the 3.5% was covered by USDA government subsidies.

This is where the "funds running dry" problem comes back into the picture.

By early May, high demand for the Rural Development loan product had rapidly exhausted Section 502 subsidy funding to the point where it was believed the program would shut down for the remainder of the government fiscal year (ends on Sept.30). As a result lenders were forced to stop accepting USDA Section 502 loan applications. This effectively cut off affordable housing financing to low income consumers who live in rural areas.

Then on May 11, 2010 we received good news from the USDA's Office of Rural Development. The Guaranteed Rural Housing Program would once again accept loan applications and issue approvals! Lenders reacted quickly to the announcement by re-opening their doors to new USDA guaranteed loan applications. Unfortunately there was a caveat ...all new conditional commitments must be modified to read:

Loan approvals are “subject to the availability of funds and Congressional authority to charge a 3.5% guarantee fee for purchase loans and a 2.25% guarantee fee for refinance loans”.

To put it simply, the USDA would continue to issue Section 502 Loan Guarantees when the Congressional vote was final. All indications were that the vote was just a formality

Rich Van Tassel President of Royal Oaks Building Group says; “We (home builders) were under the impression that the heavy lifting relative to getting additional USDA funding had been completed by both the US Senate and US House of Representatives. We understood it to be a formality for congress to pass a bill that made the USDA Guaranteed Rural Housing Program self sustaining and re-capitalized the program to not cause a hiccup in getting mortgages for our buyers at no extra expense to the US taxpayer.”

Well it wasn't a given. The legislation has not been passed yet.

On May 12, 2010 the USDA's Office fo Rural Development issued an announcement recalling and voiding the guidance offered the day before on May 11, 2010. Lenders who had just resumed taking new Section 502 loan applications were forced to once again shut their doors to Affordable Rural Development loan programs. I would like to share that press release with you but it has been removed from the Rural Development website, along with the May 11th announcement.


Here is the legislative update on H.R.5017: Rural Housing Preservation and Stabilization Act of 2010....

Latest Major Action: 4/28/2010 Referred to Senate committee.
Status: Received in the Senate and Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

The new legislation essentially removes the 1.5% government subsidy and puts the entire 3.5% guarantee fee on the shoulders of the borrower, but some politicians think the guarantee fee should be larger. As a result the bill is still stuck in committee, the USDA is not issuing new loan approvals, and lenders are not taking new loan applications.

There are several issues here...

  1. First time home buyers fueled the recent uptick in housing demand. With it now expired, do we really want to remove a program that is intended to attract the very same potential homebuyers who supported the real estate and mortgage business over the past 12 months?
  2. An increase in fees would wreak havoc on high cost calculations. READ MORE
  3. While the likelihood of this bill passing remains very high, there is good reason for the industry to be frantic about the timing of its passage: CONGRESS GOES ON MEMORIAL DAY VACATION FROM MAY 31 TO JUNE 4. If a the legislation does not pass before then, we would have to wait at least another week for the program to reopen. This would be critical time wasted for many prospective home buyers who need to utilize Section 502 funding and still take advantage of the tax credit. Did you know that USDA loans are unwritten twice? Once by the investor and once by USDA. The Section 502 qualification process is not short! Wasting a week would surely push some USDA loan closings past the June 30 tax credit cut off date.


If you want to see this program brought back we need to urge our lawmakers and our President to appropriate the funds to bring this program back now.

USDA Rural Housing Update: Fundings Dry Up Across the Country

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