USDA Home Loans: Subprime Redux?

Builders and lenders are dusting off a familiar pitch: mortgages with $0 down and 100% financing. The deals, which take advantage of a little-known loan program at the U.S. Agriculture Dept., are bolstering sales in some areas. These new mortgages share some characteristics with the old ones now wreaking havoc on the housing market—and critics fear lending standards could slip. Says Daniel Oppenheimer, an analyst with Credit Suisse: "Unlike beef, these loans should be described as USDA subprime."

In the grand scheme of the $1.89 trillion residential real estate market, the USDA program—founded in 1949 to spur home sales and development in rural areas—is still a blip. But since the financial crisis, the program has exploded in size. As part of the Obama Administration's effort to prop up housing, the U.S. allocated $10.5 billion to the Agriculture Dept.'s guaranteed loan program this year, up from $6 billion in 2008 and $3 billion in the past.