Seeking to buoy a strained rural economy in the midst of the recession, Congress ordered up a huge increase in federal mortgage guarantees for small-town homebuyers as part of the 2009 economic-stimulus package.
The response from lenders was immediate. The value of federally backed rural-home loans soared to $16.2 billion in fiscal 2009, up from just $3.7 billion two years earlier. Last year, the guarantees reached nearly $16.8 billion.
Now, a newly released audit has found that the rural-loan program, administered by the Department of Agriculture, was plagued by lax government oversight and many of the same sloppy banking practices that fueled the broader mortgage debacle.
Although the auditors looked at only a tiny sample of the 133,053 loan guarantees made in 2009, they estimated that tens of thousands might have been done improperly and warned that a wave of defaults might be looming. Analysts said the problems echoed those exposed earlier in the mortgage crisis, with banks seemingly eager to collect fees for loans in which they retained little or no risk.
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“In a couple years, when these loans are going bad, everybody’s going to say, ‘Oh me, oh my, how did this happen?’ ” said Christopher Whalen, managing director of Institutional Risk Analytics, a bank rating and consulting firm. “There’s no surprises here.”
While USDA officials acknowledged that there had been some problems, they said the program had achieved the goals of the stimulus.
“We’re very confident that the overall objective of the recovery act was met,” said Tammye Trevino, the administrator of the Rural Housing Service, which runs the program. “At a time when new-home construction and home sales in rural America were struggling, we continued to make loans.”
The audit estimated that more than 10 percent of the loans made possible through the program might have been to borrowers not eligible because they did not meet the minimum financial requirements and might not have had the means to pay them back. In many instances, lenders improperly calculated income figures for borrowers. The audit, released last week by the office of the USDA inspector general, Phyllis Fong, also found that Agriculture Department officials failed to detect the errors.
The report did not say whether any lenders appeared to have intentionally skirted the rules.
In a written response to the audit, the USDA acknowledged the need for improvements, although in the majority of cases, it said, the auditors were incorrect in concluding that borrowers should not have qualified for loans. The agency said it had previously made changes to address similar problems.
In an interview, Trevino said that lenders in the program, which included both large national banks and small institutions in rural communities, had not meant to break the rules. “I don’t believe there is any intent by anyone to defraud the government and give a loan to someone who is ineligible,” she said. “A lender by nature is going to be conservative when he’s doing income calculations.”
The huge increase in loan guarantees occurred almost overnight, as the agency rushed to approve loans on the hurry-up timetable of the stimulus program, whose broader goal was to give a rapid boost to the economy. The rural program focused on communities with populations under 20,000 that were outside metropolitan areas. The loans required no down payment.
But the growth strained the capacity of the Rural Housing Service to monitor the loans. “I think it’s fair to say that staff has been stretched in the last year or so with the increase in production,” Trevino said.
The foreclosure rate for the USDA’s portfolio of guaranteed mortgages rose to 2.25 percent in the fiscal year that ended Sept. 30. The year before, the rate was 1.72 percent, and in 2007, it was 1.38 percent.
The agency was quick to point out that its foreclosure rate was lower than the rate for loans insured by the Federal Housing Administration, a similar but much larger program that covers all areas of the country, not just small towns or rural communities. The FHA’s foreclosure rate in 2009 was 3.32 percent, up from 2.32 percent a year earlier. The FHA has not yet released final data for last year; in the third quarter the rate was 3.22 percent.
Until recently, the rural-housing guarantee program was financed through fees charged to lenders and with tax money. Last year, Congress passed a law intended to make the agency self-supporting. It allowed the agency to increase the fees it charged so that it could operate without using taxpayer money. An increase in defaults could force it to increase fees further, however.