Bills Introduced to Extend USDA ‘Zero Down’ Home Loans

Two members of the U.S. House of representatives have introduced bills to save the U.S. Department of Agriculture’s Single-Family Housing Guaranteed Loan Program–one of the last ways to get into a house for no money down–which is expected to exhaust its fiscal-year funding in coming weeks.

Rep. Shelley Moore Capito (R, WV) the ranking Republican member of the House Financial Services Subcommittee on Housing and Community Opportunity, late Tuesday introduced legislation that would increase the current 2% guarantee fee to between 3% and 4%.

Separate legislation was recently introduced by Rep. Paul E. Kanjorski (D, Pa.), chairman of the House Financial Services Subcommittee on Capital Markets. That version has the lender paying a 3.5% upfront fee when the loan is issued, while authorizing an annual assessment of .5% of the outstanding balance.

Neither program places additional cost on the taxpayers.

The next step is discussion at committee level before a final bill is moved to the House floor. That’s expected to happen quickly, given the money is quickly dwindling during the key Spring selling season.

The USDA wasn’t immediately available for comment Wednesday.

The program, offering no-money-down loans in certain parts of the country for low- and middle-income borrowers, has become quite popular in recent years, particularly with buyers in exurbs that have seen rapid development. Demand has also been fed by the government offering a tax credit to first-time buyers–big tappers of the USDA program.

In 2009, the USDA spent a record $16.2 billion to guarantee 115,981 loans. This year, Congress set aside $12 billion and there was $1.1 billion carried over from last year’s economic stimulus. The 2011 allotment amount, which would be released Oct. 1, is unclear.

While some industry watchers criticize zero-down deals, lenders consider it a safe bet because the USDA guarantees a percentage of the principal amount, up to 90%, meaning the agency will pay should the borrower default. Last fiscal year’s foreclosure rate on USDA loans was 1.72%, below the Federal Housing Administration’s 3.32%, according to the USDA. Borrowers also can’t make more than 115% of a county’s median income, curbing giant loans. The average USDA loan is $112,000.

As the program’s cash has dwindled, everyone from the National Association of Home Builders to JPMorgan Chase & Co.’s (JPM) Chase Home Lending has pushed to keep the program going beyond this month.

“I have received hundreds of letters, emails and calls from my constituents, including home buyers and sellers, who are concerned,” Moore Capito said in a statement.

-Article by Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com