USDA Loans Possibly Headed for Wave of Defaults

There are bubbling concerns that USDA loans, of all places, could be the next mortgage product to collapse.

An audit released recently revealed that thousands of these low-cost rural home loans might be headed for default, compromised by poor oversight and the same type of lending practices that triggered the subprime mortgage meltdown.

The audit looked at a relatively small sample of the more than 133,000 loans the USDA guaranteed in 2009. But the findings were disconcerting enough to raise major red flags. Auditors estimate that more than 10 percent of loans might have been provided to consumers who failed to meet minimum financial requirements.

Compounding the problem, government officials didn’t catch the discrepancies. Borrowers who might not have the financial wherewithal to repay their mortgages could soon find themselves in default.

As The New York Times pointed out in a recent article, the audit report didn’t address whether any approved USDA lenders flouted lending requirements and regulations on purpose.

For their part, USDA officials admitted the program needed improvements but took exception with the claim that borrowers who didn’t meet requirements ultimately secured loans.

The agency specializes in providing loan guarantees to low- to middle-income borrowers in rural areas. The value of USDA-backed loans has soared in recent years, from $3.7 billion in 2007 to about $16.8 billion last year.

“I don’t believe there is any intent by anyone to defraud the government and give a loan to someone who is ineligible,” Tammye H. Treviño, administrator of the Rural Housing Service, told the Times. “A lender by nature is going to be conservative when he’s doing income calculations.”