Ginnie Mae is turning up the heat in its fight against a segment of mortgage lenders that are aggressively targeting servicemembers and military veterans for quick and potentially risky refinances of their mortgages.
It started with an investigation into “loan churning,” the practice of convincing an existing borrower to refinance their mortgage. Then, Ginnie Mae and the Department of Veterans Affairs launched a task force to determine what steps to take to address the issue, and finally, Ginnie Mae increased its oversight over VA refinances.
Now, Ginnie Mae is threatening a small number of lenders with expulsion from its primary mortgage bond program if the lenders do not address their abnormally high prepayment speeds.
“We have an obligation to take necessary measures to prevent the lending practices of a few from impairing the performance of our multi-issuer securities, and thus raising the cost of homeownership for millions of Americans,” Michael Bright, Ginnie Mae’s executive vice president and chief operating officer, said.
“By addressing the anomalous performance of a few lenders, Ginnie Mae is acting to protect veterans, the broader Ginnie Mae program, the American taxpayer and the consumers we serve,” Bright added. “We expect issuers receiving these notices to respond quickly, produce a corrective action plan and come into compliance with our program.”
According to Ginnie Mae, it notified a “small number of issuers” that have prepayment speeds that are “outliers” when compared to other participants in Ginnie Mae multi-issuer mortgage-backed securities. “Such deviations from market norms are not acceptable and put a veteran earned benefit at risk,” Ginnie Mae said.
To that end, Ginnie Mae said that it expects the “small number” of lenders to provide a corrective action plan that lays out “immediate strategies” to bring the lenders’ prepayment speeds in line with market peers.
If the lenders don’t address their high prepayment speeds, Ginnie Mae said that the lenders “risk being restricted from access to Ginnie Mae multi-issuer pools.” At that point, the lenders may only have access to Ginnie Mae custom pools.
“We are focusing on outliers that are harming Ginnie Mae’s program, not at issuers that genuinely help support responsible lending,” Bright said. “The vast majority of our issuers fall squarely in the latter category, and we look forward to continuing to work with them to provide refinance opportunities to veterans, rural communities, and low to moderate-income homeowners.”
According to Ginnie Mae, the abnormally high prepayment speeds have an impact down the line on investors and consequently on future borrowers.
As Ginnie Mae, the “vast majority” of the loans originated under VA, Federal Housing Administration, and Department of Agriculture housing programs are securitized through the Ginnie MBS platform.
“The churning practices witnessed in recent years are damaging to Ginnie Mae MBS because they cause rapid refinancing of loans in Ginnie Mae securities,” Ginnie Mae said. “This causes investors of all stripes across the globe to withdraw capital from the Ginnie Mae market, which results in higher than necessary borrowing rates for all federal housing program borrowers.”
Ginnie Mae’s move comes on the heels of a legislative effort to address the refinance issue that was launched in the Senate recently.
Earlier this year, a group of 12 senators from both parties, led by Sens. Thom Tillis, R-North Carolina, and Elizabeth Warren, D-Mass., introduced the “Protecting Veterans from Predatory Lending Act of 2018.”
The bill would require lenders to demonstrate a “material benefit” to consumers when refinancing their mortgage.
Denise Rohan, the national commander of the American Legion, said that the group appreciates the efforts of Ginnie Mae, the VA, and the senators pushing for the predatory lending protection bill.
“On behalf of two million members of the American Legion, I applaud the efforts of Ginnie Mae to curb misleading mortgage refinancing marketing targeting veterans and the unscrupulous practice known as ‘churning’ – the refinancing of a loan multiple times to generate profits for lenders at the expense of veterans,” Rohan said.
“Aggressive home mortgage churning creates uncertainty for investors and higher interest rates for borrowers,” Rohan added. “Our veterans didn’t serve their country around the globe in order to be taken advantage of by unscrupulous lenders at home. The American Legion stands with Ginnie Mae and Senators Warren and Tillis as they work to protect veterans from predatory home lending and ensure veterans have an affordable pathway to home ownership.”