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USDA's declining loan numbers have come with policy changes

United States Department of Agriculture (USDA) loan numbers have declined this year, but not for the reasons stated recently by the agency, loan officers told Scotsman Guide News.

USDA credit-guarantee programs have produced lower loan counts and flat volumes at a time when the numbers have risen sharply in other programs. USDA officials recently noted a lack of affordable-housing options nationwide as a reason.

Loan officers who specialize in USDA loans, however, said recent policy changes have caused the decline.

USDA backs loans through a guarantee program and directly originates a small number of loans. It is by far the smallest of the major government loan programs, but historically has served low-to-moderate income borrowers, particularly first-time homebuyers in rural areas.

In the past, USDA has been the best option for buyers who live in eligible areas, loan officers say, because borrowers can get 100 percent financing on homes and less-costly mortgage insurance than what's offered in other government programs.

The agency, however, tightened its underwriting guidelines in December. It has also recently changed its maps, which reduced USDA-eligible land outside of some metropolitan areas.

The changes have made USDA loans much harder to obtain, and driven many people into other government programs, particularly Federal Housing Administration (FHA) loans, the loan officers say.

“Because they have tightened the guidelines, it has really knocked a lot of people out that would want USDA,” said Christy Solar, a Louisiana-based loan officer with Fairway Independent Mortgage, who specializes in USDA loans.

“I don’t think it is necessarily [that] the lenders or the Realtors are pushing the clients away,” Solar said. “I just think there are a lot of  programs that are making up for that difference with less-strict guidelines.”  

While other government loan programs have boomed for the first three quarters of fiscal 2015 (October through June), compared to a weak 2014, USDA’s numbers have remained flat or declined, according to numbers recently provided by the agency.  

Declining numbers 

USDA’s combined loan counts for its guarantee and direct loan programs have dropped 0.7 percent through the third quarter, compared to the same period in 2014. Although USDA’s cumulative volumes were up 1.6 percent through the nine months ending in June compared to 2014, USDA’s counts and volumes remain down by 17 percent and 16 percent, respectively, compared to the same period in fiscal 2013.

The numbers have been flat or declining during a time when the overall mortgage market has improved substantially. The FHA, Veterans Affairs (VA) and government-sponsored enterprises Fannie Mae and Freddie Mac have had massive gains in 2015 compared to 2014. Much have this has been driven by a mini-boom in refinances from low interest rates, but the agencies have also made moves to encourage growth in their programs. The loan officers say that the USDA's policy changes appear directed to shrink or contain USDA lending at the current levels.

In October, USDA loans become more expensive when the guarantee fees, an upfront charge for the government backing, are raised 75 basis points to 2.75 percent. The USDA has estimated that this will only add a few dollars to the monthly payments, but some loan officers say it will make the program less competitive with FHA. 

Also, loan officers report a notable rise in the use of downpayment assistance programs, where a borrower obtains a grant or deferred loan through a state agency or nonprofit to cover the downpayment costs for a conventional or FHA loan. This has been pushing borrowers away from USDA’s guarantee program, the loan officers say, because one of the central benefits of a USDA loan has been its zero downpayment option.

Downpayment assistance programs have similar income requirements as the USDA program, but it typically takes longer to get a USDA loan than other loan types, Solar said.  

“We are finding that a lot of the real estate agents are pushing those type programs,” she said.  

The USDA has loosened some requirements on properties, but tightened the requirements on borrowers. Solar said one of the biggest hindrances has been that the USDA now strictly requires three past credit lines with a payment history of at least 12 months. She said this knocks out a lot of younger borrowers with thinner credit profiles.

Gary Powell, a Texas-based senior loan officer at NLC Loans, said USDA now has the tightest government loan program. He noted that USDA's standards on borrower debt have tightened considerably, and are stricter than those of the FHA. Borrowers will typically get rejected, he said, if the mortgage payment exceeds 32.5 percent of their gross monthly income.  

Powell said that USDA also now requires borrowers to show that they have money in reserve when they take out a loan.

 "The trend has been toward tighter guidelines, higher-expense loans," Powell said. "I think all of those [reasons], to some degree or another, are going to have a negative impact on the overall USDA market share. I am doing more FHA, and fewer USDA loans, in some of these rural markets than I have done in the past." 

USDA denied in an email last week that the map changes impacted the numbers significantly, but Powell said that they have affected some areas near Texas cities.

“Regardless of the changes in the underwriting guidelines, the eligibility map right there is going to shrink the pie,” Powell said. “The only surprise is that the USDA is claiming that isn’t having an impact.”  

The USDA didn’t respond to requests for comment this week. 


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