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U. S. Auditors See Rising Defaults In Rural Loans

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Seeking to buoy a strained rural economy in the midst of the recession, Congress ordered up a huge increase in federal mortgage guarantees for small-town home buyers as part of the 2009 economic stimulus package.

The response from lenders was immediate. The value of federally backed rural home loans soared to $16.2 billion in fiscal 2009, up from just $3.7 billion two years earlier. Last year, the guarantees reached nearly $16.8 billion.

Now, a newly released audit has found that the rural loan program, administered by the United States Department of Agriculture, was plagued by lax government oversight and many of the same sloppy banking practices that fed the broader mortgage debacle.

Although the auditors looked at only a tiny sample of the 133,053 loan guarantees made in 2009, they estimated that tens of thousands might have been done improperly and warned that a wave of defaults might be looming.

Analysts said the problems echoed those exposed earlier in the mortgage crisis, with banks seemingly eager to collect fees for loans in which they retained little or no risk.

“In a couple years, when these loans are going bad, everybody’s going to say, ‘Oh me, oh my, how did this happen?’ ” said Christopher Whalen, managing director of Institutional Risk Analytics, a bank rating and consulting firm. “There’s no surprises here.”

While U.S.D.A. officials acknowledged that there had been some problems, they said the program had achieved the goals of the stimulus.

“We’re very confident that the overall objective of the recovery act was met,” said Tammye H. Treviño, the administrator of the Rural Housing Service, which runs the program. “At a time when new-home construction and home sales in rural America were struggling, we continued to make loans.”

The audit estimated that more than 10 percent of the loans made possible through the program might have been to borrowers who were not eligible because they did not meet the minimum financial requirements and might not have had the means to pay them back. In many instances, lenders improperly calculated income figures for borrowers. The audit, released last week by the office of the U.S.D.A. inspector general, Phyllis K. Fong, also found that U.S.D.A. officials failed to detect the errors.

The report did not say whether any lenders appeared to have intentionally skirted the rules.

The audit looked at 100 randomly selected loans. That is a very small statistical sample, but the auditors deemed their findings, which they said were preliminary, significant enough to require immediate attention.

It just gets better at least the taxpayers pockets are deep enough to deal with this.

The mother of all malinvestments looming?

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