USDA Reviving Subprime

Stare at wall….

Look at computer screen….

Stare back at the wall…

Shake head slowly…

I don’t even have the words.

Via BusinessWeek (not the

Builders and lenders are dusting off a familiar pitch: mortgages with $0 down and 100% financing. The deals, which take advantage of a little-known loan program at the U.S. Agriculture Dept., are bolstering sales in some areas. These new mortgages share some characteristics with the old ones now wreaking havoc on the housing market—and critics fear lending standards could slip.

Says Daniel Oppenheimer, an analyst with Credit Suisse: “Unlike beef, these loans should be described as USDA subprime.”

In the grand scheme of the $1.89 trillion residential real estate market, the USDA program—founded in 1949 to spur home sales and development in rural areas—is still a blip. But since the financial crisis, the program has exploded in size.

The result: The number of home loans guaranteed by the USDA swelled to nearly 120,000 in the first nine months of 2009, up from roughly 35,000 in all of 2007.

Given the rampant development during the boom, many communities where the USDA loans are available aren’t technically “rural” anymore—and include exurbs near big cities.

The government-backed loan program is buoying builders and lenders. (and why not – money is free) Analysts say federal loans, including those guaranteed by the USDA, accounted for 64% of sales at builder D.R. Horton (DHI) in the latest quarter. In Port St. Lucie, Fla.—a coastal town littered with foreclosures and empty subdivisions—roughly one in five mortgages is coming through the Agriculture Dept., according to local industry players. “Everyone is fighting for every little sale they can get, and the USDA financing is a huge opportunity,” says Jim Belfiore, president of Belfiore Real Estate Consulting in Phoenix.

Housing experts question the wisdom of 100% financing for any borrower. (emphasis added)

You think? I mean having “no skin in the game” worked out well the last time. (Jul 6, 2009: WSJ – No Money Down or Negative Equity Top Source of Foreclosures)

Similar questionable lending decisions during the housing boom lie at the root of many distressed properties today. In the current environment the mortgages are particularly problematic since prices continue to fall in the areas where the Agriculture Dept. loans have proliferated. In one such place, Menifee, Calif., record foreclosures continue to depress home values. For owners, falling prices and no equity in their homes have proven a toxic combination, especially when they try to sell.

A similar program run by the Federal Housing Administration has experienced a significant uptick in fraud since the agency’s share of the market ballooned this year. “Some people have cleverly figured out this [USDA program] is the way to target a good chunk of people,” says Michael R. Widner, an analyst at Stifel Nicolaus Equity Research. “The question is, do they have the capacity to handle it? If you are getting massive growth, you are probably getting a good number of the wrong people.” (emphasis added)

Anecdotal example:

Ashley-Gayle Boothe and her husband Scott have applied for a USDA-backed loan to buy their first home, a three-bedroom house 30 minutes north of Tampa, for $127,500. “We didn’t want to put anything down,” says Ashley-Gayle Boothe. “We figured we’d have to buy appliances.” (emphasis added)

Translation: What a trip! I thought I missed the great times of 2003-2006 where money was free and mortgages were crazy. But the answer to any problem in the country is to repeat the root causes, but only bigger. This is even better than renting where I’d at least have to come up with a security deposit – how unfair! Buying a home in America is even cheaper than renting! Thank you government! When this mortgage goes bad on the back end circa 2012 we’ll just have the taxpayers pay for it. We can probably get away with at least 18 months of no payments in 2011-2012 before they kick us out of our underwater foreclosure – that’s another cost savings versus renting! Now let’s get some appliances charged on our VISA card since we have no money to actually put into a down payment. Yeaaah!!!!

Oh yeah 1 more thing – if we lose our job, it sure looks like the government will pay for that too! (Sep 20, 2009: Mortgage Assistance for Unemployed Gains Steam) Awesome!!!

I don’t know where it ends. No…. I do know where it ends – at some point the government will be buying the whole house for us. Give it 10-15 years. (Jun 3, 2009: A Country that Cannot Function Without Easy Money) Until then, I just continue to blink rapidly as I stare at this wall and chastise myself for ever disconnecting from the Matrix.

About Mark Hanna 542 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

Follow Mark on Twitter @fundmyfund.

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