The abusive practices of some lenders are hurting some veterans financially, experts told House lawmakers Wednesday, and their behavior could end up weakening the VA loan benefit and the overall mortgage market.
The behavior is known as “home loan churning,” and it involves targeting VA loan users with an onslaught of mortgage-refinance solicitations, often shortly after they’ve closed on a home loan. Some borrowers have been convinced to refinance their loan multiple times in a year, without any financial benefit; fees attached to the deals can increase the overall loan amount.
It’s an alarming trend that’s “borderline predatory in nature,” Michael R. Bright, executive vice president and chief operating officer of the Government National Mortgage Association, better known as Ginnie Mae, told the House Veterans Affairs Committee’s economic opportunity panel. The practices are similar to loan-industry techniques used in the run-up to the 2008 financial crisis, Bright said.
Officials from the Veterans Affairs Department and Ginnie Mae said they are taking steps to curb the practice to protect veterans and the VA home loan guarantee benefit itself, as well as taxpayers and financial institutions.
SMALL GROUP, BIG PROBLEM
Ginnie Mae and VA officials said data indicate a small number of lenders are churning loans. There were “about a dozen” such lenders in 2016, said Jeffrey London, director of the VA Home Loan Guaranty Service. That number was reduced to “a handful” in 2017, he said.
Veterans who engage with these lenders can sign deals that drain their equity in their house, leaving them “upside down” on the mortgage, or owing more than what the home is worth. The average cost to refinance a VA loan is $6,000 in fees, Ginnie Mae found, with the borrower receiving an average payment savings of $90 a month. It will take a veteran 5½ years to break even.
Rep. Jodey Arrington, R-Texas, said he is concerned that this practice could “depreciate the value of VA-guaranteed loans and the integrity of the program, and potentially expose taxpayers to greater risk,” as well as affect financial institutions.
While there are certainly circumstances where refinancing is appropriate, he said, officials need to ensure there are appropriate standards in place to prevent unfair and deceptive practices.
VA plans to provide veterans with more information about the financial consequences of their loan earlier in the loan process. VA already requires the lender to disclose the terms of the loan, including how long it will take to break even on the fees that were charged, but that information is provided at the closing table, along with a lot of other information that must be digested all at once, said Jeffrey London, director of the VA Home Loan Guaranty Service.
New policy will require the lender to give that information up front, and also provide a copy to the VA, London said, adding that the change is expected this year.
VA is looking at other policy changes, such as “net tangible benefit tests” which provide clear information about the cost and benefit to the borrower, London said. It’s also been working with Ginnie Mae on a joint refinance task force, which among other things has resulted in a Ginnie Mae rule that requires a six-month waiting period for streamlined and cash-out refinancing loans to be eligible for certain Ginnie Mae securities.
THE BIG PICTURE
VA doesn’t loan money; it guarantees loans made by private lenders. The benefit helps provide service members and veterans access to all low-cost mortgage option, requiring a low or no down payment, no private mortgage insurance, and often with lower interest rates than other loans.
More than 98 percent of the loans that are guaranteed by VA, the Federal Housing Administration and the Agriculture Department are financed through Ginnie Mae mortgage-backed securities. The loans are sold in the secondary mortgage market with a full faith and credit guaranty from Ginnie Mae, which is also responsible for policing their program to protect against loss.
In early 2016, Ginnie Mae officials began to notice prepayments of VA loans at speeds that couldn’t be justified by economic factors. Investors began to notice this, too, Bright said. The increased prepayment risk, which would remove the returns expected from the monthly principal and interest payments, drives down the value of these securities for investors.
That means every veteran who relies on the program could pay a higher rate than they should, Bright said. And borrowers in other government loan programs could pay higher rates, too.
Rep. Beto O’Rourke, D-Texas, said he hopes the problem can be fixed “in a way that’s not burdensome or onerous, but protects veterans from fraud or duplicity, or decisions they may not be making in an informed way.”