Mortgage Churn: Why Vilifying the VA Streamline Loan Is Not the Answer

A home is in a cycle of refinance, representing mortgage churnRecently there has been a lot of discussion within the mortgage industry about “VA mortgage churn,” a current hot topic that is also called “VA serial refinancing.” In these discussions, I have seen a lot of bias, as well as the spreading of misinformation.

Two instances in particular stick out to me: an opinion piece by Joseph Murin that was published in October on National Mortgage News and the letter written in September by Senator Elizabeth Warren to the president of Ginnie Mae.

As the CEO of a mortgage lender who serves veterans, I was surprised and disappointed by what was said in both of these situations. I hope to be able to explain why their proposed solutions are both misleading and ineffective.

Opinion Based on Biased Business Interests

To understand my negative feelings about Joseph Murin’s article on National Mortgage News, one must first understand a bit about the lender that Mr. Murin represents. This lender primarily focuses on VA cash-out refinance mortgages, not the VA IRRRL (or “streamline refinance”) attacked in the article.

Mr. Murin is not transparent regarding this fact, which is why I found it interesting that in his article he advocated charging origination fees on loans that would directly profit his business, but not on loans that wouldn’t.

It is not clear in Mr. Murin’s article that the lender he works for has a vested interest in doing and promoting VA cash-out loans, nor is it clear how few streamline refinances they do annually. While I think it’s fine for a business to have specific products they focus on, it is misleading not to disclose them.

In this spirit of full disclosure, I want to make it clear that the company I represent, Low VA Rates, does focus heavily on VA IRRRL products. I have no problem being very transparent about this, and I believe it makes me more of an expert on them than Mr. Murin.

Most Veteran Complaints Are about Payments, Not Solicitations

Illustration of a wallet with worried expression holding up a houseIn Sen. Warren’s letter to the president of Ginnie Mae, she accuses unnamed lenders of potentially “mistreating veterans.” To back up this claim, she cites a November 2016 report from the CFPB that states there have been “complaints from veterans who believe that they are being targeted with aggressive solicitations by lenders to refinance using one of the VA programs.”

However, if one takes time to go over the data compiled in the CFPB report, one would see that the percent of complaints regarding solicitations has dropped since 2011. In fact, in 2016 less than 7% of all complaints from veterans to the CFPB had to do with receiving a credit offer to refinance their loan.

In contrast, over half of the 2016 complaints involved “making payments” or having “problems when . . . unable to pay.”

If Sen. Warren were truly worried about the veteran, she would have chosen to focus more on why veterans were not happy with making payments or how they were treated when struggling to make payments, instead of the smaller volume problem of offer solicitations.

The Truth about the VA Streamline Loan

Illustration of a hand representing refinancing pulls a house out of a pitThe VA IRRRL that has been so quickly villainized in the National Mortgage News article and other media publications was actually created to help struggling veterans lower their rates and payments. Not financially exploit them as Sen. Warren claims.

To use the definition found in Chapter 6 of the VA Lenders Handbook, a VA streamline refinance is a “VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate . . . and with lower principal and interest payments . . . ” (Emphasis added.)

In addition to helping veterans lower their mortgage payments, the VA streamline loan is also a great tool that can help keep all lenders honest.

For all of these reason, suggesting that the VA IRRRL should not be able to charge origination fees, as Mr. Murin does, or that it be submitted to overreaching legislation, like Sen. Warren wants, would not address the problem of VA mortgage churn. Instead, these “solutions” would actually create worse problems.

Bans & Excessive Legislation Harm Veterans

First, I want to make it clear that I don’t have anything against lenders who have built businesses around VA mortgage lending, since I am one of them. I even applaud all that the lender Mr. Murin works for has done to advertise and educate veterans on their 100% cash-out benefits.

However, recommending that origination fees should be banned for VA streamline loans simply because it benefits your business model is, to put it frankly, very disturbing because it makes it more difficult for veterans to lower the rates they’ve been given.

And how do I know that will be the result?

A man is chained to a house as he heads uphill towards higher rates

After Ginnie Mae issued new rules in February 2017 that made it harder and more expensive for veterans to streamline refinance their loans in the first 6 months, the VA loan industry immediately saw new VA home loans issued at much higher rates than before.

When veterans can’t refinance as soon or as easily as they’d like, they’re essentially “locked in” to whatever rate they’ve been given, at least until they’re finally able to refinance. And, as demonstrated by the rule change earlier this year, if lenders can lock veterans in to higher rates because of refinancing restrictions, then they will.

If Ginnie Mae places further restrictions on the frequency veterans are able to refinance their loans using the VA IRRRL as Sen. Warren seems to be calling for, it will actually lead to greater exploitation from lenders, as we’ve already seen with these types of restrictions.

And, even though Mr. Murin doesn’t seem to be advocating for legislation that directly limits the frequency a veteran is able to refinance, the result will be the same.

Businesses need financial stability, and for those that sell VA IRRRL products, the origination fee helps provide that. Removing it removes the incentive to offer the IRRRL product, and without that incentive, lenders are simply less likely to offer it, potentially locking veterans into higher rates for a longer time.

Why Ginnie Mae Added the New Rules

Despite the added expense and difficulty, many veterans—more than Ginnie Mae was expecting—still kept refinancing within the 6-month period. They wanted to refinance as a way to get out of the higher rates their lenders were trying to hold them hostage to.

So, if Ginnie Mae was really concerned about the financial welfare of veterans, why would they make a change that only ended up costing veterans more money and time?

The truth is that they weren’t actually worried about veterans.

Instead, they were more worried that the holders of the Ginnie Mae bonds, which these VA loans helped create, were not getting a good enough return on their investments.

Let me say that again: the main benefactors of making it more difficult for veterans to streamline their loans are holders of Ginnie Mae bonds.

In addition, lenders who have a business model of trying to lock veterans into higher rates also benefit.

Questions to Be Answered

I would like to pose some questions to Mr. Murin and Senator Warren, but something tells me that may not happen any further than the circulation of this article. However, if I could have a seat at a table with either of them, I would pose the following questions:

  • Why are some lenders putting veterans in mortgages with rates exceeding 4.75% when they could easily qualify for much lower rates?
  • What is Ginnie Mae or Senator Elizabeth Warren going to tell all the veterans that have been, and will continue to be, put into loans upward of 4.75% when that rate is paying the lender anywhere from 4-7% in premiums?
  • Because new VA loans decrease when they become harder to issue, what will Ginnie Mae tell their bondholders when the decrease in bond issuance leads to lower returns and a new-found appetite for more bonds?

A Better Solution to Protect Veterans

To truly address the underlying problem of mortgage churn—that lenders are taking financial advantage of veterans—we have to first identify the guilty lenders and hold them accountable. That way the IRRRL loan can continue to function as intended and not be hobbled by overreaching regulations.

Illustration of people being inspected as a representation of lender interest rates being scrutinizedOne way to do this is to have either Ginnie Mae or the VA’s newly created task force report the names of all lenders (including Low VA Rates) and the range of interest rates they give to veterans at closing.

I believe that this information would reveal that those who vilify the VA IRRRL are the ones who are charging higher interest rates. It would make sense because making an IRRRL more difficult would allow them to keep veterans locked in at higher rates, as already discussed.

Then, once the lenders offering high interest rates are identified, the solution could be to force them to give larger credits to the veteran. This solution works two-fold. First, veterans with higher rates still have financial protection because the rate is offset by the larger credit. Second, because the larger credit reduces the premium lenders earn from the higher interest rate, it removes the incentive to offer high interest rates in the first place.

However, since many of these decisions are driven by bondholders, I doubt this solution will be implemented, simply because bondholders only really care about getting higher rates of return.

So, as an alternate solution, Ginnie Mae could place a cap on the interest rate a lender can give a veteran. This cap could be tied to an easily followed index.

Let the VA Loan Program Continue to Succeed

Fannie Mae, Freddie Mac, and even the FHA mortgage program have all struggled financially. More than one of them has needed the American taxpayer to bail them out.

The VA loan program, in comparison, has never needed a cash infusion from anyone, and it has stood on its own two feet since its incorporation. Why mess with something that is not broken and is functioning, by all standard measures, better than any other program?

25 thoughts on “Mortgage Churn: Why Vilifying the VA Streamline Loan Is Not the Answer

  1. Great points—and it’s so true. Veteran’s are paying POINTS right now for a 4.75% and 5% interest rate AND being asked to sign forms saying they will not refinance for SIX months. They are being taken advantage of due to these regulations and it will only get worse with these new proposed regulations.

  2. So…the solution is…make veterans pay more for longer…? BRILLIANT! /s

    And this is because the bond holders are losing out? Oh boo, hoo to the bond holders. I say the “CONSUMER” financial protection board should actually stick up for the individual CONSUMER. If you want to spend time and resources on fixing the problem, find the guilty offenders.

  3. It seems as though they are attempting to remove some of the benefits the VA offers. Not necessarily all at the same time but slowly and over the space of time. If the overall goal was to improve a loan experience for the veterans then this would make sense but it looks like these proposed changes would make things more difficult and expensive. So why are we attempting to fix something that is not even close to being broke?

  4. So nice to have these questions and confusion cleared up.

    I will definitely use some of these points to help friends and family who could really be blessed by a VA home loan/refinance.


  5. So force people to stay in a high rate a lender put them in when they purchased or refinanced the home? Makes no sense. If the market allows lower rates, we shouldn’t be restricting the consumer/veteran’s access to them. I’ve seen people that received a loan with a rate above 5% during a time when that rate should never have even been available, but no ones talking about that.

  6. Petitioning Ginnie Mae and their bond holders? Talk about low hanging fruit! Why not actually build the dialogue around Veterans who have taken part in a streamline refinance and the benefits they’ve enjoyed? The Veterans aren’t the ones with the deep pockets here, yet they’re the ones who will lose the most at Sen. Warrens’s expense.

  7. This is so frustrating to me. I don’t understand why people of high influence such as senator Warren constantly push for “change” just for the sake of change, without providing real solutions to real problems. If the problem is that veterans are being taken advantage of, why limit their options and put restrictions on their ability to get a lower rate? I’d like to see veterans taken care of not taken advantage of. They have given us so much. I would hate to see legislation limit their ability to get a lower interest rate.

  8. As a VA Underwriter, I witness on a daily basis the benefit these loans provide our Veterans. The product is an efficient way for a Veteran to get immediate relief from an interest rate that is too high for their current budget. Situations change- life happens. Often, the Veteran needs the extra money provided through the lowered rate to survive. An IRRRL provides solutions. Hands the Veteran extra cash for medical expenses, food, soccer for their kids, Christmas for their parent. I sincerely hope that the Veteran is not lost in the effort of appearance of “helping” through more regulation of this product. They served. They protected. I hope they dont lose this avenue for help.

  9. Who benefits from forcing a vet to keep a high interest rate? Lenders. Who should regulators be looking out for? Veterans.

  10. Focus should be on the veteran and not the bond holder. When six-month seasoning was put in place we immediately saw lenders putting our veterans in high rate loans knowing they could hold them hostage. Let those who protect our freedom have the freedom to choose the loan they want when they want it!

  11. Since when did we start allowing bond holders to demand higher profits from Veterans? The next time there is a deployment to a combat zone ask them if they want to deploy and face the dangers of combat. They need to feel the spiritual experience of events that almost cost them their lives. Then, they will change their mind regarding the profits that they seek from Veterans when they must participate in the actions that earn the Veteran’s their benefits.

    Another magical example of a civilian that has never raised their right hand in an oath to defend the Constitution of the U.S. making a bureaucratic decision under the guise of this will help the Veteran.
    This exposes why most Veterans do not take advantage of their VA benefits. They do not want to slog through massive amounts of red tape only to find out that they did not fill out the paper work correctly and must start over. Most never start over and just disengage from the process

    The VA should revisit their Motto from Abraham Lincoln “To care for him who shall have borne the battle, and for his widow, and his orphan”. There is no mention of bond holders in the VA Motto!

  12. The VA IRRRL program is hugely beneficial for veterans and changing it would do harm to those it was designed to help.

  13. The main objective of the IRRRL is to get the Veteran’s the best rates possible! Veteran’s have been getting put in rates WAY above 4% because the banks know that they cannot refinance for 6 months. There is no reason the lenders should be taking advantage of the veteran

  14. The long term interests of veterans are best served by getting them the best products for their needs. Normally, locking them into a high interest rate for a long period is not going to be a benefit to the veterans the VA program is meant to serve. There are ways to safeguard against abusive transactions without imposing rules that represent a huge financial cost, in the aggregate, to the veterans themselves.

  15. Veterans are smart people and saying advertisements are tricking them is silly. They throw them in the trash just like the rest of us when were not interested in something else the world sells us. The current road block making it more difficult to refinance before 6 months is also, in my opinion, questioning their intelligence. Veterans are smart enough to know when it’s a good idea to refinance or not. As far a advertising to them, many don’t know what a streamline refinance is and when they find out they can drop their payment and not pay unnecessary interest their overjoyed. Holding them prisoner to a higher interest rate hurts the Veteran and the thought to extend that or saying a Veteran can’t refinance when there is a benefit like a lower monthly payment can NOT happen. Many should have been able to secure life long lower rates already but can’t, they have to wait for the bond holders to get just a little richer before they get out of their high rate. Looking out for the Veteran who is struggling to make ends meat with rising costs of living and medical bills is the answer. An extra 80, 90, 100 dollars savings a month goes a very long way for Veterans feeding and caring for a family. I say we let them continue to do that. Love to get involved somehow and will be following this

  16. Any time government gets more and more involved everyone loses. They try and over relegate everything. It may help a very small view but harm the majority. Leave things along

  17. What happened to free market economy? There are so many processes in place that make homeowners aware of what they are doing. I’m refinaning my home now and I’ve received 5 sets of papers which spell out exactly what my benefits are. I’m a big boy and can make these decisions for myself. I don’t need someone to tell me how often I can refinance. The benefit in the loan might not be important to the lawmakers, but it’s important to the home owners.

  18. I will say that I am no expert on this subject but I love the way that this is explained. There is no situation that it is ok to take advantage of people let alone our veterans. I love that this video describes no just how to take a stand but to educate us how to make changes in the system. I pray that Senator Warren and others will lobby for change but the kind that will not be biased towards products that work and can change the lives of our veterans the way these loans can.

  19. Why take away an option which could be so beneficial to the Veterans? The streamline refinance offers a timely solution to our Veterans. Taking away this option could have devastating effects for those who would otherwise not be able to afford all of their required monthly bills and payments including their mortgage. It could also leave them with no choice but to be stuck on a high interest rate mortgage and lose out on hundreds of dollars in monthly savings.

  20. The VA Loan program was initially instituted to help our service members get into a home that they can afford with little to no money out of pocket. The way that a “no out of pocket” option is possible for these men and women, is to give them a little bit higher interest rate, initially. When I say a little bit higher interest-rate I’m talking about something along the lines of 4.25 – 4.5%, which should allow them a huge lender credit to cover some of the closing costs, VA Funding fee etc. Taking away/over regulating the IRRRL program essentially negates their benefit of being able to quickly turn around and lower their payment by paying less interest, and still having the benefit of not needing to come out of pocket with a ton of cash to do it.

    There are fees. Their loan balances will go up. They’re going to save thousands compared to the initial rate they were given and they still have the home they wanted without cutting a $10k check at the closing table.

    This discussion is about Serial Refinancing. But making changes across the board to curb those that are constantly refinancing, will ultimately hurt all of those others who have not yet taken advantage of their benefit to use the IRRRL program. Veterans are the ones who afford most of us the ability to live the life we want to live, while they are putting theirs on the line. Should we maybe give them this one?

  21. Veterans have a program in place to lower their interest rates if lower rates are available. Trapping a veteran in a higher rate with this proposed restriction reminds me of when there were prepayment penalties on mortgages to protect creditor’s profits. Ask any homeowner if they feel like a 6 month prepayment penalty would be in their best interest.

  22. It looks like I am the only person posting a rebuttal to this article, so I am prepared to be challenged, or worse. I work for a lender that provides VA loans (primarily purchases, but also refi’s including IRRRLs). I also obtained my first VA loan earlier this year (my husband is a Veteran). Lenders base their rates and pricing on several factors. One of the biggest is the value of servicing the loan. When specific sets of loans, like VA, have abnormally high prepayment speeds, it detrimentally affects the value of servicing those loans. Placing the proposed restrictions on VA IRRRLs would help smooth out these abnormalities, resulting in LOWER rates for the Veteran. Trust me, as a lender, we want to offer the best rates to our borrowers. Most of us truly want to help Veterans. Our rates are naturally going to be higher than an IRRRL-focused shop. Securing a purchase transaction is much more cost- and labor-intensive than simply monitoring public records for refi opportunities. The lenders that go after a just-closed VA purchase loan are only exacerbating the problem of higher rates for VA loans.

  23. @stacy,
    Thanks for the comment and your unique insight for sure. The hard part is that we see lenders (it is so clear who they are I wish this was a good place to name them, but we won’t) that are putting both VA cash out and VA purchase loans at 5.25% today. Look, a purchase may be more time intense (we do them too and not all are) however at 5.25% before any payup for service value we would be making over 6 points today in profit and the closing disclosure from these lenders is with origination fee and locked at PAR for the veteran. If IRRRLs are restricted that 5.25 will soon be 5.75%. Thanks

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