A Closer Look at Ginnie Mae's 2017 APM on VA Refinance Churn
It was with great anticipation that I waited, along with many of my industry partners, competitors, and experts, for Ginnie Mae’s next update on the pooling of VA refinance loans. If you aren't familiar with this topic and how it relates to the controversial topic of mortgage churn, I strongly urge you to read my prior article on the topic.
As I read the press release, I wondered if I was still half asleep because it didn't seem like anything new was being announced. It was all in line with APM 16-05, Ginnie Mae's previous APM on loan pooling that was released more than a year ago on October 19, 2016.
Contradicting Information Leads to Confusion
I decided I would dig into this press release and wait to read the official APM when I actually arrived at my office. Once I was at work and started going through my inbox, I realized that many people were emailing me about their confusion regarding the press release and the APM.
Once I read through APM 17-06 (which, going forward, I will refer to as the VA Churn APM), I realized that a critical piece of information, because of differences in formatting and phrasing, contradicted part of the press release.
Analyzing the Press Release
In the press release, Ginnie Mae says, " . . . streamline and cash out refinance loans can only be pooled . . . if six monthly payments have been made on the underlying loan and the refinance occurs no earlier than 210 days after the first monthly payment is made on the initial loan."
If we examine the second condition of the above statement, the press release is saying that a refinance cannot close until 210 days after the buyer makes their first payment on the original loan. Generally speaking, the first payment isn't due until one full month after the last day of the month in which the loan closes.
Analyzing the VA Churn APM
In the APM, the requirements for refinancing a VA loan are presented and worded differently, both of which change the meaning.
Firstly, the two conditions are separated into different list items.
Secondly, the condition itself actually says loans are eligible for refinance and inclusion in the standard Ginnie pools if "the first payment due date of the refinance loan occurs no earlier than 210 days after the first payment due date of the Initial Loan."
Again, if examined in detail, the difference in meaning becomes more clear. Instead of saying the refinance can't close until 210 days after the first payment on the original loan, it actually says the borrower just can't pay on their new loan until 210 days have passed.
Because payment on a loan doesn't occur until a full month after the end of the month the loan closed, a refinance could still close before 210 days and not have the first payment due for almost two full months, allowing the refinance to still meet this condition.
What Does It All Mean?
To put it in even simpler terms, the press release implies that a refinance can't close until 210 days have passed while the APM implies that it could close around the 180 day mark, as long as the first payment on the refinance doesn't occur for 210 days.
I wonder if Ginnie Mae realized this contradiction. The industry was already thoroughly confused about how to interpret what Ginnie wanted after APM 16-05 was released in 2016, and the subsequent media articles and statements only made things more confusing.
However, I am sure clarity will come in time. Even though Low VA Rates is not a direct Ginnie issuer, we work with some of the largest in the nation, and we have requested that these issuers work to secure more information and clarity on this APM.
Changes to VA Refinance Rules
Though the press release initially made it seem like nothing new would be announced in the VA Churn APM, once I dove in, I realized there were some important things being shared and clarified, so I wanted to discuss what these changes are and what their impact might be.
Bondholders, Not Veterans, Are Ginnie Mae's Top Priority
This one isn't totally new, but I do think it deserves mentioning. As has been blatantly obvious, Ginnie Mae is mostly concerned with their mortgage-backed security (MBS) holders and the stability of the Ginnie program.
However, in the VA Churn APM, they make this even more clear when they state in the opening paragraph: "To ensure the strength and liquidity of our MBS Program, Ginnie Mae is continuing to address activities that result in unduly rapid prepayments to investors in Ginnie Mae mortgage-backed securities."
While I commend Ginnie Mae for taking measures to protect the program, I have said before, and I'll say it again, that veterans should also be protected. They deserve to be treated differently than other borrowers who have not served this country.
I think it's fine to protect the interests of bondholders, as long as doing so doesn't adversely affect a veteran. I hope that Ginnie Mae, the VA, and other stakeholders will eventually be able to find a way to protect both veteran borrowers and MBS investors, but only time will tell.
VA Cash-Out Loans Must Now Also Be Seasoned Just Like the VA IRRRL
The most clearly stated change to the prior pooling restrictions is the inclusion of VA cash-out refinance loans into the already enacted, and now more clearly stated, seasoning requirements. Last year's APM really only addressed the seasoning requirements for the VA IRRRL.
In prior circulars and articles many people, including those at Ginnie Mae, felt that some lenders might have been sidestepping the seasoning requirement for VA IRRRLs by putting loans into a VA cash-out loan, even when the borrower didn't need cash or equity from their home.
Though I have never personally seen this happen, it would be a blatant abuse of the system and the veteran if it did. VA cash-out refinances requires the added expense of an appraisal, in addition to much higher closing costs and a significantly larger VA funding fee.
VA cash-out refinance loans also require the veteran and the lender to put in a lot more effort. That's why I highly doubt most lenders would use a cash-out refinance to sidestep the seasoning requirements for a VA IRRRL, especially since they could put the loan into a custom Ginnie Mae II pool with a lot less effort.
Like I said in my last article on VA mortgage churn, I believe the seasoning requirements are inherently flawed. I still maintain that this is true, regardless of whether they're being applied to the VA IRRRL or cash-out loans.
Ginnie Mae Clarifies What Constitutes a Truly Seasoned Loan
In APM 16-05, Ginnie Mae stated, “Streamline refinances of loans on which fewer than six consecutive monthly payments have been made may only be delivered into Ginnie Mae II custom MBS pools.”
This was not clear to many lenders, and our research and experience at Low VA Rates has shown that more than a few Ginnie issuers were warned, fined, or otherwise penalized for innocently placing loans that had made six payments into standard Ginnie pools.
Because of the lack of clarity, some issuers believed that if a veteran made a double payment in the same month––or even if they had paid ahead or financed the sixth payment into the refinance––those would both count as fully seasoned loans. Apparently, Ginnie Mae didn't agree.
Not only did this confusing requirement impact the lenders, it also had an impact on the veterans. There are plenty of instances where a veteran truly did make enough payments to meet the requirements, and instead of being placed in the seasoned pool to be refinanced at a better rate, they were placed in the Ginnie Mae II custom pool (which has higher costs and rates than the standard pool).
In the VA Churn APM, Ginnie clarifies the six payment rule by adding, “the first payment due date of the refinance loan occurs no earlier than 210 days after the first payment due date of the Initial Loan.”
With this clarification, Ginnie ensures that their bondholders will get no less than six interest payments. As already discussed, this was not always the case under APM 16-05.
The Possibility of a New Type of VA Refinance Loan
Perhaps the most interesting update in the VA Churn APM is regarding rate/term refinance loans. This type of loan does not currently exist in the VA loan program.
In the VA Churn APM, however, Ginnie Mae suggests that if a VA rate/term refinance loan option were to be created, and the loan itself was fully underwritten, then the restrictions regarding seasoning would not apply and the loan could be placed in a standard Ginnie I or II pool.
To put it simply, a borrower could refinance with a fully underwritten VA rate/term refinance loan before making six consecutive payments and without having to wait 210 days to make the first payment on their new refinanced mortgage.
To me, this feels like Ginnie Mae is foreshadowing that the VA has plans to roll out a fully underwritten rate/term refinance loan option, similar to the existing FHA and USDA rate/term refinance loans.
I have also personally spoken to officials at the DC office of the VA home loan program. Based on these conversations, together with the mention of rate/term refinance loans in the VA Churn APM, I am confident that the VA will make an announcement very soon about some proposed changes related to a VA rate/term refinance loan.
Because nothing official has been announced yet, we'll just have to wait and see if the VA has forewarned the special task force of an upcoming fully underwritten VA rate/term refinance loan option.
It's also important to note that, since this product does not exist yet, this portion of the APM currently has no actual impact on VA loans.
Enhanced Monitoring and Premium Loan Enforcement
At the end of the VA Churn APM, Ginnie Mae gives a stern warning to lenders that are, in my opinion, the most abusive to our veterans. I want to commend them for taking the initiative to issue this warning.
As I stated in my prior article, there are lenders who are placing our nation’s veterans into rates that exceed 5%. Not only is this overly harmful and aggressive, it is downright un-American! There is no reason at all to give a veteran a mortgage with a rate in the 5% range.
So why would a lender do this? In my opinion, there are only two reasons:
To churn their own loans. If a lender puts a veteran in a loan at 5.25%, they'll be able to refinance that veteran 2-3 more times, pocketing a share of the money each time. Even if this is done at no direct cost to the veteran, it still hurts them because they've had to pay more each month on their mortgage because of the higher-than-necessary rates.
In addition, lenders who churn their own loans also abuse the bondholder and harm Ginnie Mae.
- Greed. Putting a veteran at a rate 1%-2% higher than he needs helps the lender make more money off of the veteran's loan. That's greed, pure and simple, and it's one of the reasons why veterans should shop around for their VA home loans.
As part of their enhanced monitoring and enforcement efforts in 2018, Ginnie Mae suggests that they will further revise their standards on pooling higher, premium rate loans.
I hope they follow through with this claim. As it stands now, higher rates allow lenders to make more money and bondholders to receive higher returns, but they do so at the cost of harming our veterans.
How to Solve the Problem
Though I don't know exactly what these changes and restrictions will look like, if Ginnie Mae keeps their promise, they have the opportunity to solve two problems in one go. I hope they consider releasing guidelines that limit lenders from giving too high of a rate up front. In this scenario, the veteran would already be at a lower rate, which would prevent churning altogether. This would obviously:
- Protect the veteran from unnecessarily high rates, and
- Protect bondholders from having their returns negatively affected by churning
I also think that Ginnie Mae and/or the VA should add a restriction that prevents lenders from giving veterans a rate more than a percent higher than the average going rate.
However, despite Ginnie Mae's promise to take a closer look at restricting premium loan rates, I am still afraid it won't actually happen, and that would be a tragedy. But if veterans, lenders, and government representatives can stay in the ear of Michael Bright and Ginnie Mae, then we might see these changes happen.