Does USDA have enough funds?

[ShanetheMortgageMan]

That question seems to be popping up quite often lately.  In recent weeks memo's from USDA offices have informed us that they estimate funds will run out very soon.  There are even banks who have decided to cut off funding for USDA too, sometimes in the midst of the transaction.  For the most part banks are still funding USDA loans, and they say everything is status quo, but the question is for how much longer.

It is pretty normal for USDA to run out of funding, happens quite often.  USDA gets their funds in blocks that are approved by congress, and the current block of money was supposed to run until the end of March, however since USDA is one of the remaining sources of 100% financing this last block was used up at a quicker pace than was expected.

USDA has never run out of funds this quickly before and some officials have said they are unsure when more funding will be approved by Congress.  In the past when funds have run out lenders have been able to use surplus funds to fulfill those loans it committed to doing and kept it in their servicing portfolio until the USDA was granted more money by Congress and then those loans became saleable, and when sold then lenders freed up that money to fund new loans.  However since banks are not as liquid as they used to be they have less money to fund new loans, they will appropriate less of dollar amount of money towards funding new USDA loans due to not being able to sell them without USDA's guarantee.

The way that a lender secures/reserves funds with USDA to guarantee their loan is by sending off a Request for Reservation of Funds form after they have received a loan file in underwriting.  Typically this is not done until most of the documents are in the file although one can be sent in earlier in the process if really needed.  When the USDA office grants the request, not when the request is sent, is when the funds in the block of money they are using are set aside for the loan.  What you are used to hearing that the lender is waiting to get something back from USDA is the conditional commitments, which is saying if USDA has money then they will guarantee the loan.  If the request for funds was not approved the lender may still fund the loan if they are OK with the conditional commitment and not the guarantee funds are there.

So what will eventually happen, short of a rush funding package by Congress, is that more and more lenders will stop funding USDA loans.  It probably won't be all of them, and it might not be most of them but you will hear some of lenders temporarily suspending their USDA programs.  The next block of money was scheduled to guarantee loans in April, May & June, however if another source of funds isn't come up with until then, those funds in the next block will be used to fulfill any commitments that have been issued prior to then.  In short, we could see some rocky times with USDA loans in the next few months, so keep your ears & eyes open, and don't be afraid to contact your local USDA office, so you know what to expect.

[ShanetheMortgageMan]

Below is what was posted back on 1/16/09 in response to other posters concerns on other websites that this entry was posted at, sorry for the delay on posting this information here.

USDA's Florida office commented on my post, while it's not as candid of a response as I'd like, and doesn't address liquidity issues banks would have, it has a more optimistic tone than of my original post:

Shane,

Please do not panic or paint a doomsday forecast regarding the USDA, Rural Development's guaranteed residential loan product.

Lenders cannot submit a Form 1980-86, Reservation of Funds, prior to submitting a full package. This is national policy.

Below is the actual message that was sent from our headquarters in Washington, D.C. Like they say, it is business as usual. Your Taylor, Bean & Whitaker quote is accurate and reflective of the majority of the wholesale lenders.

Funding for the USDA, Rural Development, guaranteed residential loan product is included in the economic stimulus package being considered by Congress. Once that package is passed by the House and Senate and signed by the President, it takes only a few days to filter the funds through OMB into RD's budget. Our team says the amount included for RD is $18 billion, over 4X last year. If you want to know the status of the bill, contact your congressperson or senator. While you are at it, educate them about the RD guaranteed loan product and the good that it is doing in rural America.

We have had many years when funds were depleted early in the year. This product was started in 1990. We have always came through with the funds to make good on the Commitments issued.

Presently the Agency is operating on a Congressional continuing resolution that expires March 6. That gave RD partial funding based on last year's allocation that obviously was insufficient for FY-2009. Congress will either fully fund federal agencies or extend the continuing resolution. Either way, more funds will be made available.

For more information on the Guaranteed Loan, go to my web site at www.rurdev.usda.gov/fl/guarrhs.htm

You can find the RD office serving your area by following the links at www.rurdev.usda.gov

SFH Origination News

From the National Office in Washington DC



Single Family Housing Guaranteed Loan Program




January 5, 2009

The Federal Government is operating under a Continuing Resolution (CR) covering the period from October 1, 2008 through March 6, 2009. For the SFHGLP, a guarantee level of $2.6 billion was allocated under the CR. Demand for the SFHGLP is at a historic high, and we anticipate this funding will be exhausted by January 9, 2009, if not sooner.

USDA Rural Development will continue to accept and process applications, and will issue Conditional Commitments "subject to receipt of Congressionally appropriated funds." Lenders will continue closing loans under the SFHGLP; business as usual. There will be no interruption of service by USDA Rural Development during any period in which funding is not available.

Once funding is appropriated by Congress and has become available to the SFHGLP, USDA Rural Development will be able to issue Loan Note Guarantees for Conditional Commitments that were issued "subject to receipt of Congressionally appropriated funds."

Funding for disaster areas declared in 2008 or in areas declared for Hurricane Katrina may become available sooner. More information on eligible disaster counties will be relayed in the near future when disaster funding becomes available.

The SFHGLP portfolio continues performing well, with delinquency and foreclosure rates significantly lower than our performance benchmarks. USDA Rural Development has strong credit quality standards, and each guarantee stands behind a fully documented 30-year fixed rate loan with affordable payments for qualified low- and moderate-income households in rural America.

A week ago or so Taylor Bean & Whitaker (a pretty strong lender who offers USDA) came out with the following announcement to it's customers to alleviate any concerns one might have about their ability to continue funding USDA loans, I believe this memo was previously posted here by Brian Barnes:

Recently the USDA announced about the availability of funds for the Single Family Housing Guaranteed Loan Program. Due to the significant increase in Rural Housing mortgages, the USDA expects to exhaust their current available funds within a short period of time. TB&W wishes to provide clarification on our procedures and continuation of the USDA Single Family Housing Guaranteed Loan Program.
• TB&W will continue to underwrite, close, fund and accept delivery of all Rural Housing mortgages without interruption of service
• USDA will continue to accept and process applications and will issue Conditional Commitments subject to receipt of Congressionally appropriated funds, without interruption of service
• Once the funds have been made available by Congress, the USDA will provide TB&W with the Loan Note Guarantee. This has no effect on the ability to continue to underwrite, close, fund or accept delivery of these loans without interruption of service

However keep in mind many lenders have released similar memo's in the past on programs which rumored to have problems and eventually did get suspended or eliminated... for the most part lenders, USDA, real estate agents, mortgage professionals, any anyone associated with the profit of real estate transactions will generally be upbeat about things & sugarcoat when it comes to "official" statements, even if the bottom line is bad news. No one is going to come out with an official memo or statement saying be cautious, do your due dilligence, and make sure you have a backup plan... but that is what forums like CreditBoards are for, to find out the candid information one needs in order to make an educated decision about credit as well as life.

The bottom line is USDA isn't over, and lenders are still continuing to fund USDA loans right now. If there would be an interruption of funding USDA loans by lenders, chances are not all lenders would stop at the same time, each lender would have different periods of time they might not be funding USDA loans for, and it might not be solely based on new funding being appropriated by Congress (such as if they had other loans they could sell to free up funds for USDA fundings, etc.). If you keep in touch with your mortgage professional and your mortgage professional keeps tabs on what your lenders USDA policy is (those both go hand in hand, not one or the other), then you should be able to avoid any issues when it comes to your USDA loan funding.

I apologize and am sorry if the original post created any panic amongst readers; it was intended solely as a heads up to make sure all of your i's are dotted and t's are crossed if you are getting a USDA loan in the immediate future, not as a scare tactic into shying people away from using USDA. I do stand corrected on the official time when the 1980-86/reservation of funds form can be sent in as well.