Recently 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
In 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
The 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?
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.
One 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?