A federal loan program that has helped hundreds of thousands of Americans buy homes in rural areas is about to run out of money, potentially crippling the real estate market in many small communities.
Since last fall, the loans from the Department of Agriculture have fueled much of the real estate business in some parts of the country. Real estate agents are pleading with Congress to find a way to keep the money flowing until more funding becomes available later in the year.
The program has doubled in size thanks to stimulus money, but now it appears to be a victim of its own success, largely because of the generous terms offered to borrowers.
"It definitely helped me out," said Lisa Kartak, who closed late last month on a new three-bedroom house in Annandale, a small town 50 miles west of Minneapolis. "If I didn't get approved through them, I would have had to bring thousands of dollars to the table."
The USDA's Rural Development program provides 30-year fixed-rate mortgages at market rates. Buyers do not have to put any money down, unlike loans from the better known Federal Housing Administration, which requires a down payment of 3.5 percent. And unlike FHA loans, there are no monthly mortgage insurance premiums in the USDA program.
The program aims to help often-struggling rural communities by assisting homebuyers who might otherwise move to bigger cities.
The loans are offered through local lenders, and the approval process is usually fast. To be eligible, people must be in communities with fewer than 20,000 residents and live outside metropolitan areas.
Federal stimulus money has helped the program offer many more mortgages than in the past. In the current fiscal year, the amount of loans available climbed from $6 billion to $12 billion. Nearly 116,000 loans were financed in the 2009 fiscal year. That's more than double the number in the previous year.
But even with its funding doubled, the program is expected to run out of money later this month, said Jay Fletcher, an agency spokesman.
Few options for rural families
That's alarmed the National Association of Realtors, which is pressuring Congress to continue the program until the end of the fiscal year Sept. 30, after which the Obama administration has proposed making another $12 billion in loans available.
"As private mortgage markets have dried up, many rural families will be left out in the cold without these guaranteed loans," association President Vicki Cox Golder wrote to leaders of the House and Senate appropriations committees.
Pat Hill, a real estate agent in Annandale, said loss of the loans would be a serious blow for his business. He estimated that 70 percent of the homes he's sold in the last couple years have involved Rural Development mortgages. That's 15 to 20 families.
Some were first-time buyers, while others were families who wanted to trade up to bigger homes but did not have enough equity in their old homes to make the big down payments required with a conventional mortgage.
"It would crush us not to have it," Hill said. "It really would. Our whole office uses it. ... I hope they figure something out quickly."
Program officials note that although the loans are aimed at low-to moderate-income buyers, the program's default and foreclosure rates are lower than FHA loans.
For fiscal 2009, the USDA program's delinquency and foreclosure rates were 12.16 percent and 1.72 percent, respectively, compared with 14.57 percent and 3.32 percent for FHA mortgages.
"This is not a subprime program," said Joaquin Tremlos, acting director of the program, referring to risky loans that were blamed in part for the nation's economic meltdown in 2008.
Backed by the government
The loans are guaranteed by the federal government, so there's less risk to the participating lenders, which include big national banks such as Chase and Wells Fargo as well as smaller mortgage companies.
Tremlos said his agency's loan program is necessary because the housing needs of rural America are different from those of urban areas traditionally served by FHA, which insures roughly 30 percent of all new mortgages and is the government's largest backer of mortgages to first-time buyers.
The Rural Development loans also have a faster approval process with sophisticated automation. Applications are reviewed using artificial intelligence that builds on the program's experience with hundreds of thousands of other loans. The process makes it easier to predict accurately whether buyers can afford their payments.
And unlike FHA, Rural Development has a network of field offices nationwide that review the applications before closing.
"This is a very well-performing program, a very safe lending program," Tremlos said. "Even though it's a no-down-payment program, there are lots of safeguards to take that higher risk into account."
Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee, and four other members of his panel wrote letters to Agriculture Secretary Tom Vilsack last month supporting the program and proposing immediate funding options.
Waiting until the next fiscal year to replenish the program would mean shutting it down for five months. And proponents say that would hurt people who could not get a conventional mortgage.
"Keep in mind, to pull out of this recession, home buying and purchasing financing are extremely important, not to mention the human element of being able to purchase your own home," said Rep. Shelley Moore Capito, a Republican from West Virginia and the ranking minority member of a housing subcommittee.
In Minnesota, Kartak said she feels lucky she closed on her home before the program ran out of money.
Although the 28-year-old single woman has a steady job, she didn't have much money for a down payment and probably would still be renting if not for the program.
"I think it's a great program," Kartak said. "I think it worked well for me, and I think it's great they're using it as a way to build up rural areas."