Why Doesn’t the VA Loan Money Directly?
Many borrowers are confused to discover that the “VA loan program” consists of private lenders offering money to private borrowers, with little perceivable involvement by the VA. While it’s true that the VA doesn’t do the actual money-lending, the VA is still heavily involved in the VA loan program, and it is, in fact, the VA’s involvement that makes the VA loan program possible and so advantageous to veterans. In this article, we’re going to cover the main reasons why the VA doesn’t loan money directly, plus a couple of reasons that we should all be glad they don’t.
The VA Loan Program is Taxpayer-Funded
Depending on your political views, this may not seem like much of a problem, but the VA gets its funds for the VA loan program from the taxpayers, and it would be insanely expensive for the VA to personally offer all of the loans for all VA borrowers. To put this in perspective, consider that in 2014 alone, the total loans made (new purchase and refinance) came to a total of over $99 billion, which is what the VA would be on the hook for if they were the ones who were making the loans. Under the current model, which is where the VA offers a guaranty to the lender, they are on the hook for just over $25 billion, and that’s only if every single VA borrower defaulted on their loan. Considering that only a very small number of borrowers default on their loans, and that cost is offset by each borrower paying a reasonable Funding Fee, the annual cost of the VA loan program drops significantly below $25 billion.
It Would be a Logistical Nightmare
As if the sheer cost of making the loans wouldn’t be enough, the VA would also have to have loan offices and a system of handling foreclosures, short sales, and other issues with homes.They would have to employ a significant number of loan officers, underwriters, and processors to cover all of the VA loan volume across the country, and they would incur all the overhead that private lenders incur combined. Not to mention, there rises an immense conflict-of-interest as the VA fights to serve two opposing priorities: make the VA loan program as beneficial as possible at the same time as making the loan package attractive enough to buyers. How many VA borrowers do you think the VA could foreclose on before the lawsuits started happening and the VA loan program got a bad name.
We Don’t Want the VA to Offer the Loans
The VA guarantee is what makes the VA loan program so beneficial anyway. It’s the VA’s willingness to cover some of the lenders loss if the borrower defaults on the home that makes lenders willing to offer such great terms. Being able to choose which lender to go with helps weed out the bad lenders and strengthen the good ones over time, and VA borrowers aren’t stuck with only one option. The recent scandals involving VA medical centers should be a strong indicator that it is not always best for the government to be the exclusive provider of a service. The way the VA loan program is currently set up, it is always, without fail, beneficial to the borrower to use instead of the conventional loan program. If the VA were to start making loans and doing the entire VA loan program on their own, there would be many cases where the benefit stops being beneficial and starts being harmful. This is exactly the thing we all want the VA to avoid.
Not only is it OK that the VA doesn’t offer VA loans directly, it’s preferable this way. Veterans still get all the benefits that the VA can reasonably offer through the program, and the VA’s costs are kept much lower and simpler at the same time. It’s a win-win situation. Whenever possible, it’s best for the government to let the market take control and naturally run its course, and the VA loan program is no different. By stepping back, offering a set of benefits and letting private lenders and borrowers do their thing, the VA creates a very powerful benefit at relatively low taxpayer expense.