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USDA fee cut likely won't re-energize agency's home-loan program, originators say

U.S. Department of Agriculture (USDA) loans will soon get  cheaper for borrowers — but originators say the agency’s surprise move to cut the insurance premiums will not stop declining interest in the program.

USDA announced last month that it was lowering its upfront fee to 1 percent of the total mortgaged amount, from 2.75 percent. The annual insurance fee was also slashed 10 basis points, to 0.35 percent.

The moves, which will become effective Oct. 1, brought the fees and insurance premiums down to prerecession levels.

The agency said that the cuts were possible because of delinquency and foreclosure rates have fallen to historic lows.

 “When our borrowers succeed, the program succeeds,” USDA Rural Housing Service Administrator Tony Hernandez said. “Excellent overall performance in our single-family housing guaranteed-loan program means we can charge less for the life-changing opportunity to own a home.”

USDA guarantees loans in eligible areas that provide 100 percent financing and require no downpayment. It is by far the smallest major government loan program, but has traditionally been popular among first-time homebuyers in rural areas. Unlike other government loan programs that saw volumes and loan counts rise substantially in 2015, USDA’s numbers have declined since 2013 after the agency tightened its underwriting standards in several ways, and altered the eligibility maps that define the geographic areas where USDA loans can be made.  

USDA’s endorsement volume for the guaranteed program dropped 2.6 percent in fiscal 2015, to $18.6 billion — a year in which the Veterans Affairs and Federal Housing Administration (FHA) loan programs saw double-digit increases in endorsements in their programs.

Loan officers say the fee cuts likely won’t spur much more interest in the program. USDA specialists say the agency has the toughest and least flexible standards for debt-to-income and credit history, and the agency has also implemented a new requirement that borrowers with lower credit scores must have three loan payments in cash in the bank at the time of the closing.

“They have done a lot of things to shoot themselves in the foot to basically lower the number of people who can get USDA loans,” said Florida-based originator Richard Peacock. “I have two school teachers right now who make $42,000 dollars a year base who can’t even get a USDA loan. They are the people who actually need it.”

Ohio-based originator Coley Rau said he was happy that USDA cut the fees, but also said it likely won’t make the program more competitive with the FHA program.  

“The [USDA] product is just a better product for our clientele, but when you have people that come in and you hit them with a reserve requirement, and now that buyer has got to have three months reserves after closing, that is a big knock on them,” Rau said. “You might have the credit score, the job, the debt-to-income ratio, but now they have got to have three payments cash. It is a big, big impact. It has changed the ballgame a lot for a lot of buyers.”


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