Ginnie Mae is looking into a number of mortgage lenders that are aggressively targeting servicemembers and military veterans for quick and potentially risky refinances of their mortgages, the government agency revealed Thursday.
Ginnie Mae’s investigation comes at the urging of Sen. Elizabeth Warren, D-Massachusetts, who sent the agency a letter earlier this month, raising concerns about lenders that may be “aggressively and misleadingly marketing the refinancing of mortgages backed by the Department of Veterans Affairs, generating fees for themselves at the expense of veterans and American taxpayers.”
Warren’s letter to Ginnie Mae cites a November 2016 report from the Consumer Financial Protection Bureau, which covered complaints received from veterans about VA mortgage refinancing.
The report, which can be read in full here, stated that the CFPB received “many” complaints from veterans who “believe they are being targeted with aggressive solicitations by lenders to refinance using one of the VA programs.”
In many cases, the report notes, the veteran in question does not want to refinance or has just refinanced, but are targeted by aggressive lenders nonetheless.
Warren’s letter to Ginnie Mae also noted that market analysis by JPMorgan Chase showed that “certain VA mortgage servicers are significantly more likely to ‘churn’ loans,” which is the practice of convincing an existing borrower to refinance their mortgage.
Warren’s letter also stated that the “share of ‘churning’ servicers” among newer Ginnie Mae mortgage pools remains “fairly high.”
Ginnie Mae, like Fannie Mae and Freddie Mac, is a mortgage bond issuer, but focuses specifically on securitizing pools of government-backed mortgages insured by the VA, the Federal Housing Administration, and other agencies, so issues related to refinancing VA loans would affect Ginnie Mae mortgage-backed securities.
And according to Michael Bright, the acting president and chief operations officer of Ginnie Mae, the agency has indeed found some issue with VA refinances.
Bright responded to Warren’s letter with a letter of his, which was published by Ginnie Mae.
In Bright’s response letter to Warren, Bright notes that some lender marketing practices “may be negatively impacting “Ginnie Mae securities without “necessarily benefiting veteran borrowers.”
Bright says that Warren is “correct to be concerned” about the VA refinancing issue.
Bright says that Ginnie Mae has been aware of VA refinancing issues for some time, even before the CFPB published its report nearly one year ago.
“As the proportion of VA guaranteed loans in our pools has grown in recent years, our attention to VA loan performance has also increased,” Bright writes. “Last year, Ginnie Mae noted unusually fast prepayment speeds in our securities.”
In response, Bright says that Ginnie Mae began working with the VA, Ginnie Mae issuers, and the investment community to gather more information about the cause of the increased prepayment speeds.
According to Bright, those conversations led Ginnie Mae to discover that the market for VA loans that is “somewhat saturated with lenders and brokers making dozens of calls and sending dozens of letters to veterans” trying to get them to refinance their mortgages.
“When a refinance occurs, the lender collects refinance fees, but the borrower may be left no better off and, in some cases, worse off in the long-term,” Bright writes.
In response to these issues, Bright says that the agency put in new standards that limited the delivery of “streamline refinance” loans into standard Ginnie MBS until six consecutive monthly payments were made on the initial loan.
“Effectively, this means that an originator cannot do a quick refinance of a loan and deliver it into a standard Ginnie Mae security until the borrower has made six months of payments,” Bright writes.
Bright says these restrictions went into place in February of this year, and that Ginnie Mae saw positive results during the first six months, but cautions that issues still persist.
“Unfortunately, however, that initial period has elapsed, and in recent weeks, we have begun to see more streamline refinancing loans appear in our pools,” Bright says.
Bright also says that some lenders are employing “evasive mechanisms” to pursue aggressive VA loan churning in order to avoid the consequences of Ginnie Mae’s new rules.
Specifically, Bright identifies a number of tactics used by certain lenders to skirt the rules, including:
- Waiting until six months and one day after origination and then originating a refinance
- Performing a fully underwritten (e.g. non-streamlined) refinance within just a couple of months of the origination of the prior loan
- Marketing a cash out refinance, since cash outs are excluded from the definition of a “streamlined refinance” and are therefore excluded from the original moratorium on early refinancing
- Refinancing from fixed rate loans to adjustable rate mortgages
- Soliciting borrowers for a refinance with the promise that they can skip a month of mortgage payments
- Offering to return the borrowers’ escrows; as well as other tactics
Bright also said that Ginnie Mae’s investigation found “suspicious loan characteristics” on some of these fast refinances, including loans where the home values or credit scores increased substantially in just a few months.
“These practices by a few issuers appear designed to market products that evade Ginnie Mae and VA program rules, and, in our view, may not be designed to help veteran homeowners,” Bright writes.
Bright acknowledges that the “churning” is negatively impacting Ginnie Mae securities, adding that there are “clearly” some Ginnie Mae issuers that are taking advantage of the agency’s rules.
“We believe that we have identified some patterns of suspicious behavior that we will endeavor to curtail,” Bright states.
Bright also says that Ginnie Mae recently formed a joint Ginnie Mae-VA “Lender Abuse Task Force” to continue to review the situation and determine a course of action.
“We are analyzing every option, from large scale program changes, to working lender-by-lender to understand how individual marketing practices may be impacting the overall health of Ginnie Mae’s program,” Bright writes.
Warren issued a release on Friday, welcoming the creation of the task force and urging Ginnie Mae to continue to pursue the issue.
“I am glad that Ginnie Mae and the VA have created the Lender Abuse Task Force and have committed to working with me to crack down on lenders who are exploiting veterans in order to line their own pockets,” Warren said. “These abusive practices are wrong, and lenders who engage in them shouldn't benefit from any taxpayer backing.”