Big Changes Come to Rural Housing Program

WASHINGTON — An agency within the Department of Agriculture that promotes housing in rural areas is revamping its loan guarantee program to make it more attractive to lenders.

Originating loans through the Rural Housing Service has traditionally been a time-consuming process, and many lenders tend to focus on other products that make up a larger piece of their portfolios. In fiscal year 2014, RHS guaranteed 139,000 loans totaling $19 billion.

But the agency is trying to increase that number. The service is upgrading its technology to expedite loan processing to save lenders time and money. And under regulations that went into effect Dec. 1, lenders can charge a higher interest rate on RHS-guaranteed loans, and more banks can participate. Now, any federally-regulated depository institution can be an RHS-approved lender.

"One of the best ways to build communities is through homeownership," Tony Hernandez, the administrator of RHS, said in an interview. "We are trying to increase participation of rural banks and credit unions through automation and better rates and terms."

The agency has also introduced a program to promote "construction-to-permanent" loans — which provide financing for borrowers both to build and reside in a home — that is designed to spur new construction in rural areas where the current housing stock is old.

The new regulation allows lenders to charge an interest rate based on the Fannie Mae 90-day delivery rate plus 100 basis points rounded up to the highest quarter. The previous cap was 60 basis points. For example, the interest rate for a typical RHS loan on Dec. 5 — with the 100 basis points built in — was 4.75%.

So far, the industry is hailing the reforms.

"These changes are huge," Bill Scammell, senior vice president for correspondent lending at PMAC Lending Services, Inc., based in Boca Raton, Fla., said the of new rules. "It represents a complete modernization of the RHS loan guarantee program."

A spokesman for the Mortgage Bankers Association said "members … like the updates and are encouraged by the technology changes, which should help streamline the origination process."

Although the agency's loan guarantee program has been limited in scope, it is a profitable niche for lenders who specialize in RHS loans. The program provides no-down payment loans for low- and moderate-income borrowers in rural areas.

"It is a win-win for anyone who touches the loan, especially the borrower," said Scammell. He added that banks can also get Community Reinvestment Act credit for originating RHS loans. "It is very CRA rich," he said.

There is a 2% upfront guarantee fee — and 0.5% annual guarantee fee — on RHS loans. The upfront fee can be rolled in to the loan amount, increasing the loan-to-value ratio to 102%.

Responding to concerns from lenders and Realtors about processing times, the RHS is trying to speed up the loan approval process. Loan applications and closing documents can now be submitted through an automated system. On Dec. 1, the agency started issuing final loan note guarantees electronically. The final approval for the loan is posted on the RHS website, which the lender can access.

The RHS is also working on issuing conditional loan commitments electronically. When RHS-approved lenders submit a loan application, agency staff must review the application before issuing preliminary approval in the form of a conditional loan commitment. Currently, lenders receive conditional commitments mostly by e-mail and sometimes by fax. RHS officials expect the issuance of conditional loan commitments will be electronic starting March 31.

To get ready for the new system, RHS had to address a slowdown in approvals that was leading to canceled home sales. RHS actually stopped accepting new loan applications on Nov. 21 to clean up a backlog of conditional loan commitments in 13 states. That backlog was partially due to budget cuts and staff reductions, and was blocking RHS from converting to its new loan processing systems.

Hernandez said RHS mobilized staff to get rid of the backlog during Thanksgiving week. He said the new "paperless process will be quicker and easier for the lender."