Audit Warns Of More Foreclosures On Rural Housing Home Loans

Lousy oversight and poor lending practices may lead to skyrocketing foreclosure rates on rural housing loans, warns a government audit.

An inspector general audit estimates that over a third of government-guaranteed rural home loans valued at over $4 billion in all may be ineligible for the program. The inspector general, examining 100 randomly selected government-guaranteed rural home loans across the country, found that in 28 loans lenders had not “fully complied with” federal regulations in determining borrower eligibility.

The audit report found borrowers with annual income over the program’s limits, borrowers with questionable ability to repay the loan, borrowers who didn’t need the government loan guarantee and borrowers who purchased homes with swimming pools, which is strictly prohibited by the program’s rules.

Officials at the U.S. Department of Agriculture, which administers the mortgage, agreed that 10 of the 28 borrowers were ineligible.
Those cases involved borrowers who earned more than the allowable annual income for the applicable area, borrowers who had questionable ability to repay their loans, borrowers who had the ability to secure credit without a government loan guarantee, and borrowers who had purchased homes with swimming pools.

In eight loans, borrowers had a questionable ability to repay the loan. Agency officials disagreed with the audit, saying seven of those loans really meet the program’s criteria.

Riskier loans could lead a big jump in rural housing mortgages and the government covering 90 percent of the lender’s loses.

Some lenders did not know about, or misunderstood, the program’s regulations. For instance, lenders didn’t know the mortgages are not supposed to finance homes with swimming pools. The audit says the agency is partly to blame for lenders being uninformed.

Some borrowers had debt-to-income ratios that were too high because lenders accepted unstable or inconsistent earnings or used only recent earnings. Several borrowers were, or had been, delinquent on their loans. One was over 180 days delinquent. Another had defaulted and the lender had filed a loss claim.

The USDA must work to educate its staff and lenders and improve its policies, the audit warns.

The USDA defends the program and said it will work to improve lending oversight and has already taken some steps.  “I am confident that the overall objective of the Recovery Act was met by stimulating new home construction and home sales in rural America during a time when the housing market was struggling,” wrote Dallas Tonsager, a USDA under secretary, in response to the audit. “Not only did the agency’s loan guarantees provide home ownership opportunities to thousands of low, very-low and moderate income households, but also many other rural Americans benefited.”

The foreclosure rate of rural housing mortgages has increased recently, but the USDA notes that the rate is still smaller than the foreclosure rate for FHA home  loans, a similar but larger program.

It its Recovery Act of 2009, Congress authorized $10 billion to guarantee single-family home loans in rural areas. Including past years, the rural home loans have a total value of over $16 billion.