When the USDA ran out of money for its Section 502 guaranteed Rural Housing product in April, the program effectively shut down.  At that time it was up to the Congress to appropriate the $150 million needed to continue the program through the September 30 end of the fiscal year.   A month later, even though the legislation intended to provide the funding had not passed, USDA began issuing commitments for new loans, but there was a caveat: Loan approvals would be "subject to the availability of funds and Congressional authority to charge a 3.5 percent guarantee fee for purchase loans and a 2.25 percent guarantee fee for refinance loans." 

While this put the program back in business on paper, lenders were understandably reluctant to write Section 502 loans without a USDA guarantee firmly in place. Without this guarantee,  buyback responsibility for early payment defaults on those loans would fall solely on the shoulders of the lender. In the current climate,  that is a huge risk that few lenders are willing to take.  All of these machinations came at the very time many home buyers, especially first time buyers, were scrambling to take advantage of the homebuyers' tax credit before it expired on April 30.

Finally, on July 29 Congress passed HR 4899 to reestablish the program as one that would no longer be subject to the annual whims of Federal funding but self-sustaining through a 3.5 percent guarantee fee paid by the borrower.  The fee, while substantial, could be financed into the loan.  That legislation also included $679 million in funds to enable USDA to waive those fees for low-income borrowers.

All good right?

No. Three weeks have passed, the Congress did their job and appropriated unlimited funding for the USDA Rural Housing Program, yet all loans under Section 502 must still carry the "subject to availability" caveat.  WHERE'S THE MONEY?  WHAT'S THE HOLD UP?

Consequently, many lenders continue to  hold back from writing Section 502 loans, and potential homebuyers are watching the clock tick toward the September 30 deadline for finalizing their home purchases before the tax credit disappears for good.  In addition, the $659 million has not been released into the system for low income borrowers, and John Rodgers, President of Prime Mortgage Lending in Apex, North Carolina thinks he knows why the whole system has ground to a halt.

First a little background on the way the program is structured...

There are actually two Rural Housing Programs. The first is a direct program administered by USDA and intended for low income homebuyers.  The second program is a loan guarantee program that operates like FHA or VA, with loans originated by private lenders like Prime Mortgage Lending. These loans are primarily used to help individuals purchase homes in rural areas and can be used to build, repair, renovate, or relocate a home.  The loans require no down payment and while they are primarily intended to help low-income individuals. There are geographical income limits. 

The guarantee program is very popular, particularly now with so many other avenues of funding closed to homebuyers, and is usually oversubscribed.  The direct program is not nearly as sought after; borrowers, given their druthers, appear to prefer to deal with private lenders rather than work through the inevitable bureaucracy of the direct lending program.  Unfortunately, USDA has a quota for its direct lending program; a quote which has not yet been met.

Rodgers said that lenders expected the conditional status of guarantees would be removed shortly after the legislation was passed and that the newly appropriated funds would also quickly be available.  In the past, he said, it has taken only about ten days to update the software and get the system operating when major changes have been made.  However, with the USDA quota as yet unmet, he feels the Department is under pressure to put more borrowers through that program.  If the $689 million is released, Rodgers said, the Secretary will probably have to allocate it to both the direct and the guarantee programs which will give the guarantee program, with its greater efficiencies, a competitive edge that USDA may not be able to match.    

With most federal programs, funds unspent at the end of the year are returned to the Treasury, something program administrators hate to do.  Unspent funds in one fiscal year also mean that it is harder to justify the same or greater levels of funding for the following year.  There are also always politics involved; Congress who voted for a program want to see results rather than a program that falls short of its goals. 

Whether Rodger's theory is right, USDA needs to get the Rural Housing Program back up and running immediately.  Home financing is in tight enough supply already and with the end the fiscal year only 43 days away, a lot of homebuyers may see their hopes of owning a home expire along with the tax credits.