VA Program Sparks ‘Loan Churning’ Concerns

January 16, 2018

Ginnie Mae officials recently testified to lawmakers that “loan churning” within the VA program is putting veteran borrowers at risk with serial refinancings.

Michael R. Bright, Ginnie Mae’s executive vice president, was one of four mortgage industry experts who testified to the House Committee on Veterans Affairs last week about the constant pressuring to get vets to refinance their loans. Bright testified that loan churning within the VA program could cause borrowers to face higher interest rates and also has the potential to spark problems with investors that could spill over into FHA and USDA loan programs.

In early 2016, the VA program started to face increasing loan prepayment rates and serial refinancings in the VA mortgages, reports Ginnie Mae, which guarantees and securitizes the loans.

An analysis by Ginnie Mae found that some lenders were using aggressive marketing tactics to push a higher rate than the borrower deserves. Veterans were facing high solicitations to refinance from both the original lender and others, with promises of benefits like skipping a few payments, a cash out refi, or lowering the rate with an adjustable mortgage. Some borrowers were being convinced to refinance multiple times in a year. But Ginnie Mae officials warn that this often results in higher loan balances for borrowers, and refinancing fees often get hidden in the new loan.

“There are an increasing number of veterans, and many of them are susceptible to advertising schemes that appear to come from reputable sources,” Mortgage News Daily reports.

The average cost to refinance a VA fixed-rate refinance is $6,000. On average, a veteran will need 5.5 years to recoup the loan costs, Mortgage News Daily reports. Further, refinancing from a fixed rate product into an adjustable one can result in refinance fees up to $12,000 and could require seven years to break even (assuming the interest rate doesn’t also adjust upward).

“It does not matter how much a refinance purports to save a veteran homeowner if it will take them a decade to recoup loan costs and fees that swell their loan balance,” Brock Cooper, general counsel for Veterans United Home Loans, testified to the Congressional committee. “That does not put veteran homeowners in a stronger financial position because they have less equity or may even be upside down on their home when they go to sell. The same could be said for convincing someone to refinance into an adjustable-rate mortgage without discussing the possibility for future rate increases or the potential for additional costs and decreased equity when later refinancing back into a fixed-rate mortgage.”

Bright warns that a lot of the advertising directed at vets is inaccurate or misleading and some has the appearance of being official correspondence from government agencies.

Mortgage News Daily reports that churning within the VA program also has implications for the broader mortgage market: “The premium investors pay for Ginnie Mae bonds directly translates into lower rates for VA borrowers and those from other government loan programs. As loans are refinanced, they are removed from MBS pools, taking away the return investors expect as well as their incentive to price these bonds above par. This ultimately increases interest rates.  Because VA loans are co-mingled in Ginnie Mae securities with other government programs, FHA, USDA and other borrowers are paying the increased costs as well.” 

Bright urges Ginnie Mae to tighten its requirements, the VA to establish a framework to better protect veterans from predatory lending practices, and improved monitoring and enforcement within the VA program.

Source: “Growing Concerns Over VA Loan Churning,” Mortgage News Daily (Jan. 11, 2018)