Home Buyers Turn to USDA for Mortgages

Home Buyers Turn to USDA for Mortgages
Nick Timiraos by Tuesday December 16, 2008, 7:14 pm

Tightened lending standards are leaving builders and real-estate agents scrambling for new ways to move cash-strapped buyers into homes. One increasingly popular option: an obscure home-loan program offered by the U.S. Department of Agriculture.

Created in 1991 as a way to boost homeownership in rural areas, the program is being tapped by home buyers in overbuilt exurbs who are attracted to the no-money-down terms.

When Erick Moore first read about the USDA's Rural Development Guaranteed Loan program, he says he imagined it would be "restricted to some little farmhouse." Instead, the 33-year-old computer programmer moved last month into a four-bedroom, three-bath home in Fuquay-Varina, N.C., 17 miles outside Raleigh. The house sits on nearly one acre and features a brick facade, 10-foot ceilings and hardwood floors.

"I couldn't believe it until we closed," says Mr. Moore, who paid only $1,200 out of pocket to move into the $228,000 home. The seller contributed $5,000 in closing costs, and Mr. Moore rolled the 2% fee charged by the USDA into the loan. Mr. Moore, who owned a home in St. Louis before he relocated to the Raleigh area last year, says a 60% drop in his stock portfolio made it difficult to come up with a down payment. He directed his Realtor to show him only homes that were eligible for the USDA program.

Fueled by buyers like Mr. Moore, volume has nearly doubled for these USDA-backed loans. The department insured $7 billion in loans during the 2008 fiscal year, which ended Sept. 30, up from $3.6 billion the previous year. In October and November, the agency has already insured some $1.7 billion in loans.

That's relatively small when compared with the volume of business handled by the Federal Housing Administration -- which guaranteed $102 billion in new loans during fiscal 2008. But interest in the USDA's development lending program is growing rapidly in response to the nation's credit crunch and as most private lenders have stopped offering loans with no money down.

To be eligible for a USDA-backed loan, a borrower can't have income that exceeds 115% of the median county income, and the loans are restricted to areas with lower population density -- generally towns of no more than 25,000 residents. So while home buyers in big cities aren't eligible for the loans, residents of many of America's fastest-growing towns and exurbs do qualify. The loans that come through the program are made by private lenders, then insured by the government and sold to Ginnie Mae, a federal agency that sells mortgages to investors.

Home builders, many of which have overbuilt properties in these areas, are eagerly promoting the program to sell excess inventory. The USDA program accounted for 40%-50% of sales in October and November for Scottsdale, Ariz.-based home builder , says John Bargnesi, vice president for sales. "It's one of our main tools right now."

Meritage is advertising a "$500 move in" program to clear inventory in new exurban developments, including the Buckeye and Queen Creek subdivisions outside Phoenix that have been hard hit by foreclosures and falling prices. "If a builder is in one of these geographical areas, they certainly are using it," says Mr. Bargnesi. "We're all in tune with it now."

D.R. Horton Inc., the nation's largest home builder by number of houses built, is promoting the program in sales pitches for a number of new developments outside Austin, Texas. One is named Parkside Condos, a development of 144 new two- and three-bedroom condos priced at $130,000 in Pflugerville. Kastera Homes LLC, a home builder based in Boise, Idaho, is offering to pay closing costs for buyers who use a USDA loan. D.R. Horton and Kastera didn't return calls seeking comment.

The success of the USDA program comes at a time when easy home financing is getting much harder to find. Private lenders have stopped offering loans that require no money down, amid worries that borrowers without equity are more likely to let their homes fall into foreclosure. In October, Congress terminated a popular program that allowed sellers to fund down-payment "gifts" for new home loans backed by the FHA. Next year, the FHA will require a minimum 3.5% down payment on all new loans, up from 3%, and private lenders often require a minimum 5% down payment.

Such restrictions do not apply to loans backed by the USDA, which is best known as the guardian of the nation's food supply. In fact, some buyers can finance 102% of the home price, factoring in a 2% USDA insurance fee meant to cover loan losses. The loans also don't require borrowers to pay for monthly mortgage insurance. That means that USDA loans typically carry lower monthly payments than FHA loans, even in cases when the size of the loan is larger.

Sue Botelho of Northstar Mortgage Group in Destin, Fla., is promoting the USDA loans as part of a "move in with a penny down" program. "The down-payment assistance has gone away. Subprime has gone away," she says. "So now mortgage lenders are pretty aggressive in terms of making people aware of this USDA program."

One of Ms. Botelho's clients, 46-year-old insurance adjustor Alan Sammons, paid nothing to move into a new $270,000 home in the Florida Panhandle in June. He had spent more than a year trying to find a reasonable loan before beginning construction on a custom four-bedroom, 3½-bathroom home in his Crestview, Fla., subdivision, which includes a community swimming pool and lighted tennis courts.

"They're still building homes in here," Mr. Sammons says.

Julie Chapman, a Brunswick, Ga., real-estate agent, says she is listing more properties eligible for the USDA loans -- including homes in the Plantation at Golden Isles, a new subdivision adjacent to a golf course. Many of the properties are selling preconstruction. "That's something you don't see anymore in this market," she says.

New housing developments built on open land that were among the first to experience the downturn could now benefit from the USDA program. "They're showing some signs of recovering," says Michael Orr, a housing analyst based in Mesa, Ariz.

Some question the USDA's practice of allowing no-money-down purchases. "If you have to get a 102% loan, you probably shouldn't be buying a house," says U.S. Sen. Christopher Bond (R., Mo.), who adds that he supports the intent of the programs because it has traditionally been "very difficult" for rural borrowers to buy homes.

USDA officials, for their part, say that concerns about the program's 100% financing aren't warranted because the department has a strong track record and because rural areas are less prone to big increases in home prices. "We guarantee in a very controlled environment," says Philip Stetson, a USDA administrator for the lending program. Because its average loan amount is just $120,000, he says that the program is less susceptible to large-scale losses.

USDA- and FHA-backed loans aren't prone to some of the risks that faced subprime loans because the government-insurance programs offer only fixed loans and require income verification. "We have not seen any direct evidence at this point that 100% financing is leading to greater losses," Mr. Stetson says.

The default rate on USDA loans is slightly better than the rate for FHA-backed loans. Some 11.35% of USDA loans were delinquent in 2008, while 1.4% went into foreclosure, according to the department's statistics. Meanwhile, FHA loans had a 13.6% delinquency rate, while 2.3% went into foreclosure. That compares to a 4.3% delinquency rate and 1.6% foreclosure rate on prime loans, and a 20.0% delinquency rate and 12.9% foreclosure rate on subprime loans, according to the Mortgage Bankers Association.

Unlike the FHA, the USDA programs rely on a fixed appropriation from Congress, which totaled $4.1 billion in the 2008 fiscal year, and new loans can't be made once that allocation is exhausted. The program was able to make nearly $7 billion in loans this year because it received additional funding from other department sources.

But heavy demand for the loans has administrators asking for more money. Officials say that the program will run out of money next month, even though it has been funded through March. "Up until only two years ago, we weren't even using the full amount," says Mr. Stetson. "It has been rather incredible at how it has taken off."

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Car, home buyers could benefit from Fed rate cut

Car, home buyers could benefit from Fed rate cut
AP News Wire 12/16/2008


WASHINGTON – Consumers trying to buy a house or finance a car loan could be the big winners as a result of the Federal Reserve's decision to slash its target interest rate to nearly zero and take other steps to battle the financial crisis and worsening recession.

But analysts caution that any upturn in the economy is still months away.

The Fed on Tuesday announced that it was reducing its target for the federal funds rate to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest target rate in a half century.

And the central bank pledged to use "all available tools" to fight the current downturn. It said it was likely that rates would be kept at "exceptionally low levels" for some time to come.

"The Fed has taken some very historic steps and for the first time since this crisis began, they have gotten ahead of expectations instead of trailing behind them," said Mark Zandi, chief economist at Moody's Economy.com.

The Fed's announcement sparked a big rally Tuesday on Wall Street, with the Dow Jones industrial average jumping 360 points, or 4 percent, as investors were pleasantly surprised by the Fed's resolve to aggressively attack the country's economic woes.

In Asia, markets climbed higher Wednesday. Japan's Nikkei 225 stock average rose 44.50 points, or 0.5 percent, to 8,612.52 after initially rising 1.1 percent, and Hong Kong's Hang Seng Index rose 2.2 percent to 15,460.52.

Meanwhile, the Commerce Department on Wednesday reported that the deficit in the broadest measure of American trade fell more than expected in the third quarter as an export boom helped offset an increase in oil imports.

The current account trade deficit, which represents the amount of money the U.S. is borrowing from foreigners, fell by 3.7 percent to $174.1 billion in the July-September quarter. That was a better showing than economists expected, and the deficit is likely to continue falling as the U.S. recession lowers demand for foreign goods.

Economists cautioned that even with the Fed's bold moves it will take months for the economy to stabilize given that it is confronting the worst financial crisis since the Great Depression and a yearlong recession that is already the longest in a quarter-century.

The news on the economy is expected to get worse before it gets better. Businesses, which have already cut nearly 2 million jobs since January, keep laying off workers in the face of slumping demand.

The government reported Tuesday before the Fed rate announcement that home builders slashed production in November by 18.9 percent, the biggest drop in nearly a quarter century, pushing activity down to a record low annual rate of 625,000 units as the woes in housing, where the current economic troubles began, showed no signs of abating.

Economists were optimistic that the central bank's moves Tuesday to cut interest rates and pledge other efforts to unfreeze frozen credit markets will translate into significantly lower interest rates for consumers.

Commercial banks responded immediately to the Fed announcement by cutting their prime lending rate, the benchmark rate for millions of consumer and business loans, by three-fourths of a percentage point to 3.25 percent, pushing it to the lowest point in more than a half century.

Home mortgages, rates on consumer credit cards, auto loans and student loans were also expected to decline in the weeks ahead based on the Fed's commitment to use "all available tools" to make credit more available.

The Fed in the weeks since the credit crisis struck with force in September has rolled out a number of new programs to greatly expand its own lending programs, promising to provide up to $600 billion to purchase debt issued or guaranteed by Fannie Mae, Freddie Mac and other government-backed mortgage companies.

The Fed has also pledged to lend up to $200 billion to support securities backed by credit card loans, car loans and student loans, all in an effort to get those markets functioning more normally.

In its statement, the Fed pledged to keep working to get credit into the economy through these programs and additional programs if needed. It specifically mentioned the purchase of longer-term Treasury securities. The Fed's massive expansions of its loan programs have already pushed its balance sheet of loans from $900 billion in September to $2.2 trillion currently.

The new pledges had an immediate impact on bond markets where the possibility of heavy purchases by the central bank sent yields on Treasury securities falling sharply.

"The Fed has decided to flood the economy with money in the hopes that it will be lent and spent," said Sung Won Sohn, an economist at the Martin Smith School of Business at California State University, Channel Islands.

Sohn predicted that 30-year mortgage rates, which have already fallen a full percentage point since late October to now stand at 5.47 percent, could drop by another percentage point in coming weeks to around 4.5 percent. He predicted that rates on auto loans and credit card debt would also come down.

"The bottom line is that confidence has deteriorated to such an extent that the Fed is willing to take these extraordinary steps," Sohn said.

But Sohn and other analysts still look for the recession to last until next summer. The overall economy as measured by the gross domestic product shrank at an annual rate of 0.5 percent in the third quarter and many analysts believe it will be a much more severe downturn of around 6 percent in the current quarter with continued GDP declines in the first and second quarters of next year.

If the recession ends next June, as some economists are forecasting, it will have lasted 18 months, making it the longest downturn since the Great Depression.

Businesses cut more than a half-million jobs in November alone, pushing the unemployment rate to a 15-year high of 6.7 percent. Many analysts believe that unemployment will surpass 8 percent by late next year before an economic recovery has picked up enough steam to stabilize employment.

The weak economy is helping to keep a lid on prices. The government reported Tuesday that consumer prices fell by a record 1.7 percent in November as gasoline and other energy prices continued to plunge. The Fed noted that "inflation pressures have diminished appreciably," a development that gives the central bank maneuvering room to focus on boosting growth.

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December 10th 2008 ~ Weekly Commentary on Loans & Real Estate

December 10th 2008 ~ Weekly Commentary

Thumbnail Sketch: The non-manufacturing sector ISM (Institute of Supply Management) survey fell from 44.4 to 37.3 last month. This is very much in keeping with declines in retail sales and employment and, indeed, the employment figures for October were very grim, with 533,000 lost payroll jobs (largest one-month drop since December 1974), and a spike in the unemployment rate to 6.7% (highest rate since 1993).

Looking at the plunging non-manufacturing ISM data (which indicates the rapidly declining vibrancy in the service sector), Aaron Smith of Moody’s Economy.com opined: “The survey's plunge reinforces the case that this recession will be the worst since 1981-1982.”

And that, for the most part, is the nature of the news today. Sales, employment and orders are all down dramatically, even after a relatively good post-Thanksgiving shopping day. Factory orders in October were down 5.1%. Consumer credit was down by a precipitous 3.5%. And chain store sales were down 2.7% in November, though Wal-Mart had a very good month.

So one wonders why the number of mortgage loan applications climbed so incredibly high over Thanksgiving week while the rest of the economy was busy exploring the bottom of the proverbial barrel.

The simplest answer is that available mortgage interest rates fell to extremely attractive levels. But that answer doesn’t fully satisfy—for you can reduce the cost of a mortgage to zero and people won’t act on the lower rates unless they want to buy real estate.

Look at the reality of the situation. “The contract rate for 30-year fixed rate mortgages finished at 5.47%, down 51 basis points from a week ago, down 100 basis points from four weeks ago, and down 34 basis points from a year ago” [Economy.com]. If anything, this should bring refinancers out of the woodwork. And indeed it did. Applications were up by 203.3%--which was 37.7% higher than the level of applications a year ago.

But what about applications for purchase money loans? This is where the real estate market’s pedal hits the metal. A strong spike in applications would almost certainly indicate the powerful demand for real estate currently waiting to be fulfilled. Applications were up 38% (but down 22% from their year-ago level). Surely we can conclude, at least tentatively, that the market is ready to revive itself. Just give it half a chance!

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December 3rd 2008 - Weekly Real Estate Market & Economy Commentary

December 3rd 2008 - Weekly Commentary

Thumbnail Sketch: John Templeton once suggested that the time to buy investments was at the highest point of pessimism. Have we reached that yet? It’s hard to say, but we continue to see signs that we’re starting to crawl out of the economic black hole - in spite of the massive number of analysts who assert the opposite in our daily newspapers, radio and television reports.

The economic indicators, most of them backward-looking, continue to undergird the widespread gloom. Construction spending declined 1.2% from September to October, 4.6% year-over-year. And sales of new homes dropped heavily—by 5.3%--from September to October, providing little hope for a sustainable improvement.

If we look beneath the numbers, though, we see that there are changes afoot. For example, “the Fed's new programs designed to improve the flow and terms of credit to homebuyers and consumers has had the immediate effect of dropping mortgage rates by an amount that will translate into significant improvement in affordability. Barring further intensification of economic and financial problems, declines in house prices and mortgage rates could buoy demand and lead to stabilization in sales by early next year.” [Aaron Smith, Moody’s Economy.com]

In other words, while highly visible leaders run around decrying the end of the economic world, some programs are being put into place—by the Fed, by Fannie and Freddie, by other major lenders—that should reduce the number of foreclosures and increase the sales of properties, as affordability jumps. Further, though the Treasury interest rate drops haven’t fully penetrated mortgage rates, they are bound to keep mortgage rates attractive. (Treasury rates drop when investors over the world use the securities as a safe harbor for their wealth in particularly uncertain times—as is the case presently.)

And have you filled your gas tank lately? This is a double-edged sword, of course. The hard edge is the fact that gasoline costs so much less because weaker economies mean far less demand for gasoline (though it is difficult to lament the burning of less oil). The softer edge is that consumers in most areas are paying less than half of what they paid when gas prices soared. And that has to bode well for people’s budgets.

Lastly, the jury is still out, but early reports suggest that the heavily-discounted retail sales over the Thanksgiving weekend pulled in a lot of money. And all of the above should provide us some cheer as we roll into the holiday season.

Buying real estate right now is a good idea. If we're not at bottom, we sure are close.