USDA home loans showing signs of collapsing


The USDA home loan program was targeted toward rural communities. Image: Flickr / lcd1863 / CC-BY-SA

As a part of the stimulus package of 2009, the USDA got in the home loan guarantee business. The value of USDA-guaranteed home loans was $16.2 billion in 2010. A recently released audit, however, shows that the program could be headed for collapse.

The USDA loan program

As a part of the stimulus package, the United State Department of Agriculture got into the home-loan guarantee business. The USDA-backed home loans were intended for rural homes that may have trouble otherwise getting financed. For areas such as Irving, Texas, and Pocatello, Idaho — towns that do not have high property values — these guarantees helped many individuals get home loans. In 2009, the USDA guaranteed 133,053 home loans. Various banks provided the money for these loans but had to take on very little risk thanks to the guarantees.

Problems with the USDA program

Though the USDA home loan guarantee program has helped grease the wheels of many home loans, it is not without problems. The USDA recently released an audit of its own loan program, and the results are worrisome. Banking practices that led to the original mortgage crisis have also plagued the USDA home loan program. Though they are only intended as emergency loans, these loans may end up dragging down the federal ledgers. Estimates of the audit are that 10 percent or more of the loans were made to people who simply should not have qualified.

How emergency loan guarantees are working

Though more than 10 percent of the mortgage loan guarantees made by the USDA are at risk, that does not mean the program is entirely at risk. The majority of the loans were made by small and medium banks, which tend to have lower tolerance for risk than larger banks. The majority of the USDA-backed home loans were intended for low- and middle- income borrowers, and many required no down payment. The foreclosure rate of these loans is currently about 2.25 percent.


NY Times

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