Cash Dwindling For No-Money Down Home Loan Program
By Dawn Wotapka
The Wall Street Journal
March 25, 2010
At the Canyon Crossing community in southwest San Antonio, buyers can still get into a $135,000 four-bedroom home for no money down.
It’s possible thanks to a program from the Department of Agriculture’s rural development division, which offers no-money-down loans in certain parts of the country for low- and middle-income borrowers. The Single-Family Housing Guaranteed Loan Program is likely to run out of funding next month, just as a surge of buyers are expected to ink deals before the federal tax-credit expires April 30.
Originally crafted to encourage home buying in rural areas, it’s become quite popular in some exurbs that have seen rapid development in recent years. Some developers have even created entire communities catering to USDA-backed borrowers.
Builders are worried what happens when the program exhausts its fiscal-year funding. Last month, all of Canyon Crossing’s 13 closings came from buyers tapping the USDA program, said Eric Lipar, chief executive of Texas-based LGI Homes. “It’s going to have a substantial impact on sales,” he said.
The company has an entire section of its Web site dedicated to “No Money Down,” but said that it won’t tout the deals after April 1.
The housing downturn has fueled the program’s popularity in recent years. Pre-crash, the USDA typically issued $3 billion in loans for each fiscal year ending Sept. 30, said Jay Fletcher, an agency spokesman. That number has more than quadrupled.
Once lenders, fearing more foreclosures, stopped offering zero-down deals, buyers have flocked to the USDA guaranteed-loan program created in 1991. Lenders consider the loans a safe bet because the USDA guarantees a percentage of the principal amount, up to 90%, meaning they’ll pay should the borrower default. Last fiscal year’s foreclosure rate on USDA loans was 1.72%, far below the Federal Housing Administration’s 3.32%, Fletcher said. Borrowers also can’t make more than 115% of a county’s median income, curbing supersized loans: The average USDA loan is $112,000.
In 2009, the USDA spent a record $16.2 billion to guarantee 115,981 loans. This year, Congress set aside $12 billion and there was $1.1 billion carried over from last year’s economic stimulus. (The 2011 allotment, which would be released Oct. 1, hasn’t been determined.)
With buyers moving beyond their post-crash paralysis, the money is nearly depleted. Some have been rushing to take advantage of low interest rates and falling prices, while others are tapping the federal tax credit for first-time buyers - main users of the USDA program.
There’s an industrywide push - both Chase Home Lending and the National Association of Home Builders are active - for Congress to authorize more funds or find a way to keep the program going until new money becomes available in October. (See the National Association of Home Builders’ letter to Senators Herb Kohl and Sam Brownback). But with leaders focused on health care and the money quickly dwindling, public and private builders nationwide are worried, given they’ve increasingly counted on sales from the obscure offer as the residential downturn drags on.
“These are loans for low- and moderate- income families,” said Tom Kelly, a spokesman for Chase, the nation’s largest originator of such loans. “It’s important to extend it.”
The funds are first-come, first-served - and 1,900 lenders nationwide participate - so anyone with USDA “loans in the pipeline is going to be working fast and furious getting those closed” before the money runs out, said Lisa Marquis Jackson with John Burns Real Estate Consulting. Losing a deal, “that’s a catastrophe, almost, for a builder who has a sale sitting there waiting.”
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