Tough Collector

Charles Ward fell behind on his mortgage in September, just as his late wife began a losing battle with lung cancer and her medical costs soared.

His lender seized his $2,958 federal tax refund and has taken a $131 bite from each of his last four monthly Social Security checks.

“What little money I had saved up has just disappeared,” says Mr. Ward, a 71-year-old former truck driver who bought his $128,000 home in Nelsonville, Ohio, in 2008. He receives about $200 a month in food stamps and takes on odd jobs to make ends meet.

Mr. Ward’s lender isn’t a bank. It is the U.S. Department of Agriculture’s Rural Housing Service, which provides mortgage loans to rural homeowners and guarantees loans made by banks. It accounted for at least a third of all mortgages issued in 2010 in sparsely populated areas such as Morton County, Kan., and Sioux County, Neb., according to data reported under the Home Mortgage Disclosure Act.

Unlike private firms, the USDA doesn’t need permission from a court to start collecting on unpaid debts. It can in some cases seize government benefits and tax refunds before a foreclosure is completed. After foreclosure, the USDA can go after unpaid balances, even in states that limit such actions by private lenders.

A USDA spokesman says the agency follows all federal and state laws.

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.

The USDA is wielding its special powers even as the Obama administration is forcing private banks to give strapped homeowners a break. Under a $25 billion settlement over questionable foreclosure practices announced in February, five large banks agreed to slash loan balances and forgive the debt of borrowers who lost homes to foreclosure.

USDA Rural Housing Administrator Tammye Treviño says the agency strives to work with borrowers “to offer a path back to sustainability.”

“Where these efforts aren’t successful and the homeowner goes into foreclosure,” she says, “we actually have a process that we are required by statute to follow to collect on the debts owed.”

USDA officials say their actions are required by the federal Debt Collection Improvement Act of 1996, enacted well before the housing bust produced a wave of delinquencies. They say the agency came under pressure from its own Inspector General in 1999 and from the Government Accountability Office a few years later for being too soft on delinquent borrowers.

The USDA started making loans to farmers in 1949, then expanded its programs to other rural residents. A 1990 law allows it to guarantee bank loans issued by banks.

The agency is a small player in the overall mortgage market, holding or backing about 944,000 loans totaling $84.4 billion. That is less than 1% of the $9.4 trillion in U.S. mortgage debt outstanding.

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.

Critics say the USDA’s collection practices are troubling because the federal agency lends to low- and moderate-income homeowners, many of whom have been hurt by job losses and falling home prices. The USDA lets borrowers finance up to 102% of a home’s value. About 12% of its guaranteed loans and 17% of direct loans are delinquent or in foreclosure.

The agency is “pulling blood out of a stone,” says Gideon Anders, an attorney with the National Housing Law Project who has sued the USDA on behalf of borrowers seeking loan workouts.

The USDA says guaranteed loans are generally not referred to collection until the foreclosed home has been sold and the lender has been paid. A spokesman said borrowers with loans issued directly by the USDA have “multiple opportunities” to avoid collection by working with the agency. He said USDA often negotiates settlements that reduce the debt amount or cancel it entirely—if the borrower shows no ability to pay.

While several federal agencies help consumers get mortgages, their collection standards vary greatly.

Since 2003, the USDA has required borrowers who take out a guaranteed loan to sign a form acknowledging the agency “will use all remedies available” to collect unpaid debt.

The Federal Housing Administration and Veterans Administration, which also guarantee mortgage loans issued by private lenders, say they generally don’t pursue borrowers for debt left after foreclosure. “We’d gain nothing by placing an even greater debt burden on the borrower,” an FHA spokeswoman says.

The VA says Congress in late 1989 enacted legislation preventing it from collecting deficiencies, except in cases of “fraud, misrepresentation or bad faith on the part of the veteran.”

Some borrowers now say they didn’t know what they agreed to when they signed the USDA form. “It was a shock when I got the note that they were going to garnish my Social Security check,” says Jeanne Marie Andersen, a 74-year-old widow who lives in Lake Crystal, Minn., and took out a USDA loan in 2007.

Ms. Andersen lost her home to foreclosure in 2010, after she lost her job as a cook at a local restaurant. She now receives food stamps and lives in low-income housing.

She filed for bankruptcy protection in February to block the USDA from taking $113 a month from her $863 Social Security check to repay some of the roughly $50,000 she owes the government.

USDA officials declined to comment on specific examples for reasons of borrower privacy, but said that agency staff inform borrowers seeking direct loans of their repayment obligations before the loan is completed. They say lenders making guaranteed loans are responsible for making sure borrowers understand their responsibilities.

The Treasury Department handles USDA collections of delinquent debt. Its arsenal includes taking tax refunds, seizing up to 15% of Social Security payments and garnishing up to 15% of a borrower’s take-home pay. It can also tack on up to 28% to cover collection costs.

On guaranteed loans, the USDA’s ability to pursue collections often turns on whether the borrower has signed a single piece of paper tucked in a pile of mortgage closing documents.

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