Government repo homes have been rising in number at the U.S. Department of Agriculture largely because of the department’s provision of home loans with zero down payment and 100-percent financing, according to housing analysts.
In Port St. Lucie, one of coastal towns in Florida littered with abandoned subdivisions and foreclosed houses, about one in five home loans was provided by the USDA, according to local real estate professionals.
In Menifee, California, where many mortgages were taken out through the USDA housing program, record foreclosures have been posted because distressed borrowers could not sell their homes to avoid foreclosure.
The program that has driven the sharp increase in USDA home loans is the USDA guaranteed housing loan program launched in 1949 and rejuvenated by the Obama administration with $10.5 billion this year, a substantial increase from the $6 billion provided by the Bush administration last year.
Because of the sharp increase in funding, builders and lenders took advantage of the easy requirements of the program, resulting into almost 120,000 home loans in the first 9 months of 2009, a staggering increase from only around 35,000 in 2007.
According to interviews with borrowers, they are attracted to the program because they do not need to shell out down payment. This easy requirement however has resulted into more government repo homes at USDA.
Analysts such as Daniel Oppenheimer of Credit Suisse said the relaxed lending standards are the same standards that led to the current housing meltdown and added that the USDA no-down loans should be called USDA subprime loans.
Among the builders helped by the program is D.R. Horton. About 64 percent of its total home sales were sold through federal loan programs, including loans guaranteed by USDA. Jim Belfiore, head of Phoenix-based Belfiore Real Estate Consulting, said every builder is trying everything to survive the downturn, so the USDA home loan program is a great opportunity for them to make sales.
The builders and lenders, just like during the boom, have been filling their advertisements with enticing words such as absolutely zero-down and 100-percent financing.
In response to critics, builders and the USDA explained that they apply strict underwriting requirements and evaluate borrowers’ income, cash flow and credit thoroughly.
Joaquin Tremlos, acting head of the USDA home loan program, said the department’s loan portfolio has a low delinquency rate. He reiterated that the department has not relaxed its guidelines leading to more government repo homes as reported in the media.