Loan program that spurred East Iowa growth could be cut

A combination of natural and man-made disasters helped push Iowans' participation in a government home-loan program to record levels the past two years. Now, the U.S. Department of Agriculture's rural home loan program could face elimination.

“The program over the past three or four years has been growing in importance and was pretty important the last couple years, with the problems we've had in the industry,” said Rick House, owner of Residential Mortgage Network, Inc., in Coralville.

After two years nearly double the usual level, USDA's loan business is returning to something like normal. The mortgage programs, which include both direct loans and loan guarantees to buyers in communities under 20,000 population who meet income guidelines, received extra infusions from Congress for recovery from the 2008 floods, and again under the federal stimulus program.

The added money helped fuel growth in and around North Liberty in Johnson County, said USDA Iowa spokesman Darin Leach.

The city between Cedar Rapids and Iowa City may grow itself out of the rural loan program - if it grows as it did during the past decade it will exceed the 20,000 population limit by 2020.

With the extra money from Congress spent, the agency is bracing for the potential elimination of direct loans while moving to protect the loan guarantee program.

“We're really uncertain as to the future of the direct program,” said Bill Menner, USDA's director of rural development for Iowa. “We know that those direct loans do make a difference to folks in rural communities, but we don't know what the future of that is.”

With President Barack Obama's budget proposal calling for elimination of the direct-loan program, its fate is “just part of the ongoing budget negotiations that are under way,” Menner said.

After Sept. 30, borrowers getting USDA loan guarantees will pay new fees to make that program self-sufficient.

“Up until now we have always relied on congressional appropriations to fund that program, and sometimes it would stop and start,” said Menner.

USDA now charges a service fee of 3.5 percent of a loan's value. Under the new plan, the basic fee drops to 2 percent, but an annual fee of up to 0.5 percent will be assessed on the loan's anniversary date.

The plan will raise about $24 billion nationwide over its first year, with the revenue used to guarantee new loans.

“It really changes the way we do business because there's that predictability,” said Menner. “Some bankers in the past have been reluctant to use our program” because of the funding uncertainty.

On a $100,000 loan, the new fee is about $42 a month, an amount that decreases with the loan's principle, Leach said.

“In the big scheme of things, not a huge amount,” said Menner. “(Borrowers) can basically roll that into their loan. I don't think that increased fee is going to raise the price of a rural home that much.”

USDA's programs also have income guidelines: Direct loans are limited to borrowers making 80 percent or less of their county's median household income, guarantees to those making 115 percent. For a four-member household Linn County, that's $54,700 and $78,650 respectively.

With conventional credit still tight, the direct-loan allocation for many counties won't last the fiscal year.

“For a long time our agency was seen as the lender of last resort and folks came to us only when they had to and they had no other recourse,” said Menner.