Here's a troubling anecdote for you, via the Wall Street Journal:
When Erick Moore first read about the USDA's Rural Development Guaranteed Loan program, he says he imagined it would be "restricted to some little farmhouse." Instead, the 33-year-old computer programmer moved last month into a four-bedroom, three-bath home in Fuquay-Varina, N.C., 17 miles outside Raleigh. The house sits on nearly one acre and features a brick facade, 10-foot ceilings and hardwood floors. "I couldn't believe it until we closed," says Mr. Moore, who paid only $1,200 out of pocket to move into the $228,000 home. The seller contributed $5,000 in closing costs, and Mr. Moore rolled the 2% fee charged by the USDA into the loan. Mr. Moore, who owned a home in St. Louis before he relocated to the Raleigh area last year, says a 60% drop in his stock portfolio made it difficult to come up with a down payment. He directed his Realtor to show him only homes that were eligible for the USDA program.
The seller funded essentially all closing costs, and Mr. Moore is only into his house for a measly $1,200 -- sound like a guy that will stick it out for the long haul if prices continue to fall? And guess who now is on the hook should the loan go bad? Not the realtor that earned the commission. It's a good thing, I guess, that the USDA program isn't really taking off as builders look to cram any buyers they can find into the program, wherever the government has failed to update its program guidelines to account for explosive growth in exurbs. Oh, wait:
Fueled by buyers like Mr. Moore, volume has nearly doubled for these USDA-backed loans. The department insured $7 billion in loans during the 2008 fiscal year, which ended Sept. 30, up from $3.6 billion the previous year. In October and November, the agency has already insured some $1.7 billion in loans. ... Home builders, many of which have overbuilt properties in these areas, are eagerly promoting the program to sell excess inventory. The USDA program accounted for 40%-50% of sales in October and November for Scottsdale, Ariz.-based home builder Meritage Homes, says John Bargnesi, vice president for sales. "It's one of our main tools right now."
Let's just say that Meritage isn't piledriving half of buyers in an eligible subdivision into USDA-approved mortgages because the program offers an attractive spread.