USDA Borrower Beware!!!   USDA Rural Housing Personally Guarantees you will not be protected by Arizona’s Anti-Deficiency statute.

    Have you heard of the USDA?  The United States Department of Agriculture is often associated with rural development and farming initiatives, but did you know they also deal in residential home loans?  The USDA has a home loan program that incentivizes lenders to make loans to low-income individuals living in rural areas who are in need of housing but do not have funds for a down payment.  At first glance, this sounds like a great plan to improve housing options for those in underserved areas of the country.  This is especially true when you realize that national lenders routinely do not offer competitive financing options for rural housing.  But there is a substantial tradeoff most homeowners were completely unaware of when they used the USDA program in the most recent housing boom. 

     Unlike a typical purchase money loan, a loan sponsored by the USDA came with the requirement of a personal guarantee signed by the homeowner.  What this essentially meant was if you live in an anti-deficiency state, like Arizona, you may have inadvertently waived your right to be protected from judgment creditors on the purchase of your primary residence.  But before I get into great detail on this, a little background on the reason why rural housing loan programs were developed.

     Financing for rural homes is generally harder to find because properly valuing the property is difficult.  Comparable sales are often far away from the subject property and also might not be very recent (sales within 6 months) making the valuation of the property from a lender’s perspective difficult. In addition, because rural homes are often on large acreage they might include a working or hobby farm which makes the valuation even more challenging. Further, the valuation model is different for commercial versus residential and so are the lending terms/rates on these properties.  Therefore when a property doubles as an income generating property and residential it is considered undesirable to a conforming (FNMA, FreddieMac) lender. 

     All that being said, the USDA responded to this problem by sponsoring a rural housing loan program which insured the national lenders from losses in the riskier rural markets thereby promoting them to lend in these communities. The program enables national banks to make loans on the types of properties common in rural living, but with the assurance of performance backed by the federal government.  The program also allowed for low income borrowers to get a 100% loan to value on the home they purchase.

     Wow you say, that is pretty interesting.  But what is really interesting and a relatively unknown aspect of this program is that the USDA sponsors these loans for new construction homes located in what may have once been “rural” but now, after the housing boom, are nothing more than suburban Planned Unit Developments (PUDs).  Simply put, they are sponsoring loans to low-income individuals for 103.5% financing on homes in the suburbs.  Many of these suburban homes are located in Arizona cities like Maricopa, Red Rock, Queen Creek, and Marana. These new construction homes were built by the thousands during the boom, and the builders aligned with national banks, and the USDA, to find low cost financing for buyers.  After 2010, the property values for most of these homes had decreased by nearly half or even more. 

     

     Home owners who financed 100% or more with a rural housing loan saw their equity turn upside down and their home was underwater.  However, unlike most homeowners in Arizona, these folks signed a form called the 1980-21 which was a personal guarantee, separate and aside from the mortgage loan.  This form allowed the bank to foreclose on the home, the bank then collects the difference from the USDA, and then the USDA pursues the borrower for the difference.  The banks were guaranteed the difference by the USDA, so in turn, they also had no incentive to work with these borrowers to find modifications or workout solutions.  Although this form changed in Feb. 2013 (Rev. 2-13), all the USDA sponsored loans made before that date are subject to the personal guarantee. Many borrowers in this program were first time home buyers and were not counseled on the implications of this form. As of October 31, 2008, Rural Development’s portfolio consisted of more than 246,000 single-family housing guaranteed loans totaling nearly $22 billion. At that time, over 31,000 of those loans, totaling more than $2.6 billion, were in a delinquent status. In fiscal year 2008, the agency paid over $103 million in claims to financial institutions for losses attributed to borrowers who had defaulted on guaranteed loans. [1]

     

     The big picture for these homeowners if they decided to “walk” from their home in the midst of the crisis, whether it was a short sale, deed-in-lieu or foreclosure, is they are not protected by Arizona’s Anti-Deficiency statute.  In Arizona, the Anti-Deficiency statute, grants protection to the consumer avoiding judgments to be entered against them for purchase money mortgages provided the property meets the definition as detailed in the statute. 

     So the folks with loans originated to them by a sub-prime, conventional, or a hybrid entity were able to walk from their homes without recourse against them for the deficiency (the amount owed, versus the amount collected in the sale).  But the folks with the most need, the low-income individuals, with the highest loan to value are on the hook for this same deficiency. 

     A campaign by the USDA to collect on these Guarantees has been underway since late 2013.  The USDA’s position is that the Guarantee is based on applicable Federal Laws and that state anti-deficiency statutes are not applicable.  Borrowers with a USDA sponsored loan are seeing their wages garnished and their tax refunds levied.  To further exacerbate the collection efforts, unlike a normal bank loan, the USDA also has the power of the government on its side when it comes to collection.  That means they do not have to go through the typical channels for collection, instead think about it like a fast track to your assets.  The USDA authority to collect on this debt comes from the Debt Collection Improvement Act of 1996.  This act gives the federal government certain powers to collect non-tax federal debt. Because an unpaid USDA guaranteed loan constitutes a federal debt, the Department of the Treasury can collect amounts owed using such methods as garnishing your wages and seizing income tax refunds.

     

    The moral of this tale is the road to rural housing loans is paved with good intentions but misaligned incentives, changing geographic demands and no-risk lending for the banks created a significant lapse of protection for the consumer.  If you, or someone you know, are in this predicament with a federally sponsored loan program it is worth your time and energy to respond to the demand and contact a lawyer.