In making the Rural Housing Service self-funding, Congress estimated the agency could guarantee $24 billion of single-family loans under the new premium structure — a huge jump in exposure from two years ago, when it backed just $6.9 billion.

RHS administrator Tammye Trevino is still waiting for Congress to set its authority for fiscal 2011, which started Oct. 1.

But Congress no longer has to appropriate actual funds to subsidize the RHS guarantee program. And lenders can still originate RHS loans when the congressional budget process is tied up in knots.

"It helps to have a budget-neutral program now," Trevino said in an interview with National Mortgage News. But she seemed concerned the RHS was growing too big, too fast.

Trevino said in the interview that the RHS has insufficient resources to monitor its loan portfolio.

In addition, the agency has been under pressure to loosen its underwriting standards, but Trevino said she does not want to move in that direction.

"We believe we have a product that works," she said.

RHS officials still check every appraisal before the government guarantee kicks in.

"We review every loan, and it limits the capacity of the program given its resources and personnel," Trevino said.

The RHS single-family program's foreclosure rate had crept up to 2.55% at Sept. 30, from 1.72% at the end of fiscal 2009.

"We might get a little bit tighter" when it comes to indemnification, the RHS administrator said. "It will put the burden on making good loans on the originator."

The RHS issued a proposed rule in May, and it plans to publish a final indemnification rule in February. Under the rule, agency officials will review all single-family guaranteed loans that go into loss mitigation.

"We will go back and do another review on whoever originated that loan," Trevino said.

The RHS has always reviewed claims submitted by servicers, according to one RHS lender/servicer.

"If you make a mistake, you pay for it. They will reduce your loss claim," the lender said.

Meanwhile, the RHS program's originations have doubled since fiscal 2008 because of the American Recovery and Reinvestment Act of 2009 and the RHS self-funding bill that President Obama signed in July.

The Rural Housing Service guaranteed $16.8 billion in single-family loans in fiscal 2010, topping the previous year's record by $700 million. The stimulus bill boosted RHS guarantee authority by $10 billion in fiscal 2009.

The agency entered fiscal 2010 with $12 billion in guarantee authority thanks to Congress, plus $1.1 billion carried over from the stimulus bill.

But lenders quickly ran through the $13.1 billion. By April Congress was considering a bill (HR 4899) to make the RHS loan guarantee program self-funding.

Unfortunately, the RHS provision got tangled in an emergency supplemental appropriations bill that Senate Republicans filibustered for several months. The emergency bill wasn't passed until late July.

This forced lenders to rely on conditional loan commitments (instead of a full guarantee) until mid-September, when the RHS was able to update its information systems to accommodate the new premium structure.

Under HR 4899, the Department of Agriculture can increase the RHS up-front premium to 3.5% for homebuyers and 2.25% for refinancings to make the program self-funding.

The RHS is now charging homebuyers a 3.5% up-front premium and a 1% up-front premium on refinancings. The legislation also authorizes the agency to charge an annual premium of up to 0.5%. The agency plans to implement the annual fee in 2012.

"At that time, the up-front fees are likely to be revised," Trevino said. Despite the availability of conditional commitments, RHS lending slowed during second half of fiscal 2010, which ended Sept. 30.

From May through September, lenders originated $3.75 billion in RHS loans, compared with $13 billion in the first seven months of fiscal 2010.

Officials at the agency are hoping to guarantee another $16.7 billion in single-family loans in fiscal 2011.

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