A recent NAHB study tracks trends in loans for new construction obligated under the USDA Single-family programs, the Section 502 Direct Loan Program and the Section 502 Guaranteed Loan Program. The report finds that, similar to the Federal Housing Administration’s single-family loan program, the USDA programs supported homeownership at a time when obtaining a conventional loan became increasingly difficult.
However, the increase in activity coincided with higher loan-to-value ratios in both programs (calculated at origination), but the increase was greater for loans obligated under the Direct Program. Meanwhile, a greater portion of loans under the Guaranteed program exceeded 100 percent LTV ratio and the percent of these loans rose in the years following the recession’s onset.
Section 502 refers to a section of the Housing Act of 1949, landmark legislation that established the federal government’s role in providing a decent home and a suitable living standard. The 502 Direct program assists low- and very-low income households to buy housing in rural areas by providing a subsidy to increase the applicant’s repayment ability. The 502 Guaranteed program targets home buyers in rural areas with slightly higher incomes and provides them with less of a subsidy. Borrowers are also charged a fee, similar to the Federal Housing Administration’s mortgage insurance fee, which borrowers can also finance as part of the loan.
The data used in this analysis were provided to NAHB by USDA. The data contain loan-level information on 502 Direct and Guaranteed loans obligated for new built homes. The series provided goes back to fiscal year 2006 (October 2005).
Overall, for both newly built and previously occupied homes, use of these programs peaked in two different periods. Activity under the 502 Direct Program peaked in 1976 while the 502 Guaranteed Program reached a zenith in 2013. Current budget scoring rules indicate that the 502 Direct Program is a net cost to the federal government while the 502 Guaranteed Program generates a net surplus.
As illustrated by the figure above, growth of loans obligated for new construction occurred as the recession deepened. However, the increase in loan volume between 2006 and 2010 under the Guaranteed program exceeded growth under the Direct program—by 483 percent compared to 88 percent. Meanwhile, loan volume under the Direct program began to taper off in 2011 while volume under the Guaranteed program didn’t begin a sustained drop until 2014. The decline in loan volume for newly built homes under Section 502 Direct and Guaranteed programs combined coincided with the period when the share of conventional mortgages used for new construction has risen.
Both the median loan amount obligated and the appraised value, adjusted for inflation, of newly built home under the Guaranteed program exceeded those in the Direct Loan Program. As shown in the figure above, the appraised value of newly built homes under both programs generally rose between 2006 and 2009. However, the trend diverged over the 2009 to 2012 period. The appraised value of homes under the Direct program fell while the median appraised value of newly built homes under the Guaranteed loan program remained about constant. This may also reflect geographic differences as well. Since 2012, the appraised value of homes under both programs began to climb, the median value of newly built homes under the Guaranteed program reached $180,000 and the median value in the Direct program was $160,000.
In 2006, the median inflation adjusted loan amount of newly built homes under the Direct program was approximately $120,000, 80 percent of the inflation adjusted appraised value. Over time, the gap between the two began to close, but the loan amount never exceeded the appraised value. By 2016, median loan amount of $160,000 was 97 percent of the appraised value. Under the Guaranteed program, the change in the gap between the median loan amount and median appraised value did not close as dramatically, but the relative levels flipped. In 2006, the median inflation adjusted loan amount on newly built homes under the Guaranteed program was less than the median inflation adjusted appraisal value. However, by 2011, the loan amount exceeded the appraisal value. The two values tracked each closely in the years since 2011, but in 2016, the loan amount was again visible above the appraisal value.
Since 2006, the LTV ratio for new homes purchased with 502 Direct loans rose dramatically. Over the 2006 to 2010 period, when loan volume climbed 40 percent, the median LTV ratio rose to 97 percent, from 84 percent in 2006. In e-mailed comments on the larger report, the USDA noted that “the lower LTV ratio on direct loans may have reflected the presence of leveraged loans with a conventional first mortgage and secured by a junior lien, with a combined LTV ratio of 100%.” E-mailed comments by the Housing Assistance Council agree. They noted in e-mailed comments that “Prior to 2006, there were more loans supplemented by other financing (leveraged loans), the total LTV was probably much higher when the leveraged financing is included”. Taken together, this information suggests that conventional financing used to supplement loans made under the Direct program shrank during the recession and the new loans obligated after the recession accounted for a larger portion of the appraised value. Since 2014, the median LTV ratio on Direct loans for new homes rose to 100 percent.
The median LTV ratio on loans for new homes under the 502 Guaranteed program consistently exceeds the ratio on Direct loans. In 2006, the LTV ratio on newly built homes under the Guaranteed program was 100%, reaching 102% by 2011, its level as of 2016. Both 502 programs tend to have higher LTVs than conforming loans purchased by Freddie Mac.
Although the median LTV ratio on new home loans under the 502 Direct program rose significantly between 2006 and 2016, the share with an LTV ratio exceeding 100 percent has remained low and constant over the same time period. In contrast, the share of new home loans with 100 percent-plus LTV ratios under the 502 Guaranteed program has risen dramatically to a much higher level. The increase in LTV ratios over 100 percent under the 502 Guaranteed program likely reflects the financing of guarantee fees. Over the 2008 to 2010 period when loan volume grew by 182 percent, the share of 502 Guaranteed loans with LTV ratios above 100 percent nearly doubled, from 38 percent to 74 percent.