NCPA - National Center for Policy Analysis

USDA Is a Tough Collector When Mortgages Go Bad

June 7, 2012

The U.S. Department of Agriculture's (USDA) Rural Housing Service provides mortgage loans to rural homeowners and guarantees loans made by banks, especially in sparsely populated rural counties.  The housing service's volumes have grown substantially since the beginning of the housing crisis, and as a result, its brutal debt collection mechanisms are causing a greater stir than ever before, says the Wall Street Journal.

  • The agency is a relatively small player in the overall mortgage market, holding or backing about 944,000 loans totaling $84.4 billion (roughly 1 percent of national mortgage debt).
  • But since the mortgage crisis began in 2007, the USDA's loan volumes have tripled: the agency guaranteed $16.9 billion in loans in fiscal 2011, and issued $1.1 billion in direct loans.
  • These new mortgage issuances have resulted in unprecedented debts held by the USDA.
  • The Treasury Department collected $45 million in delinquent USDA mortgage debt from borrowers in the last fiscal year, up from $23 million in fiscal 2007.
  • At the end of fiscal 2011, $779.2 million in delinquent USDA mortgage debt was awaiting collection, up from $420.7 million in 2007.

To make collections on these towering USDA mortgages from delinquent homeowners, Treasury Department officials are forced to comply with austere policies written long before the housing crisis.

  • Uniquely, the Treasury Department is able to seek tax refunds in order to force delinquent payers to make payment on their mortgages.
  • Its arsenal also includes seizing up to 15 percent of Social Security payments and garnishing up to 15 percent of a borrower's take-home pay.
  • It is also allowed to impose a 28 percent surcharge to cover collection costs.

This leaves Treasury targeting homeowners long past foreclosure, in effect forcing them to continue to make payments on a property long lost.

Furthermore, it bears mention that the Treasury is allowed these extraordinary tools for debt collection at a time when the Obama administration is strongly urging private lenders to give borrowers more breathing room.  Though five large banks agreed to slash loan balances and forgive the debt of borrowers who lost homes to foreclosure in a $25 billion settlement, Treasury debt brutality persists.

Source: Ruth Simon, "USDA Is a Tough Collector When Mortgages Go Bad," Wall Street Journal, May 24, 2012.

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