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Wells Fargo: Ginnie Mae warning on VA loan churning is just the beginning

Analysts expect oversight of VA refinances to intensify

On Thursday, Ginnie Mae laid down the law, so to speak, 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.

Ginnie Mae announced that it warning a “small number” of lenders to get their Department of Veterans Affairs refinance programs under control, or they will no longer be allowed to participate in Ginnie Mae multi-issuer mortgage-backed securities.

But according to analysts from Wells Fargo, Ginnie Mae’s threat will not be last move in the agency’s effort to clean up VA “loan churning,” the practice of convincing an existing borrower to refinance their mortgage.

This all started last year as an investigation into loan churning, which was spurred by a letter from Sen. Elizabeth Warren, D-Mass., who cited a report from the Consumer Financial Protection Bureau about complaints received from veterans about VA mortgage refinancing.

Warren’s letter claimed that there may be lenders “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.”

Then, Ginnie Mae and the VA launched a task force to determine what steps to take to address the issue. Then, Ginnie Mae increased its oversight over VA refinances.

But it didn’t stop there, leading to Thursday’s threats against a number of lenders.

In a report sent to clients after Ginnie Mae's announcement, Wells Fargo analysts Vipul Jain, Anish Lohokare, and Randy Ahlgren wrote that Ginnie Mae appears nowhere close to being done with the VA loan churning issue.

“Overall, momentum continues to build on all fronts to curb borrower churning. We expect more headlines to come from (Ginnie Mae) as it works its way through the process of policing prepayment speeds,” Wells Fargo’s analysts write.

“Now that the conversation has started in earnest with select issuers, we will be monitoring prepayment speeds closely to see if this has the ability to effect change, especially at the steepest parts of the seasoning ramps,” the analysts continue. “We believe this news should be a net benefit for (mortgage-backed securities), especially higher coupons where outlier speeds are most prevalent.”

Ginnie Mae did not identify the lenders that got the notices about loan churning, but Bloomberg’s Joe Light reported that nine lenders were targeted by Ginnie Mae.

And Light’s report named names.

From Bloomberg:

The targeted lenders include NewDay Financial and Nations Lending Corp., which were given 30 days to respond to the letter, according to a person familiar with the matter. Others, including Freedom Mortgage Corp., LoanDepot.com LLC and Flagstar Bank, were given 60 days, according to the person.

Representatives for NewDay and Flagstar said that they do not comment on agency communications but do not churn mortgages. A spokeswoman for Freedom said the company’s chief executive officer wasn’t available to comment. Representatives for the other lenders didn’t respond to requests for comment.

As for why Ginnie Mae seems to care so much about this issue, Brent Nyitray, director of capital markets for iServe Residential Lending, said in a note that loan churning affects both the investors and the borrowers.

The issue for investors is the prepayment speeds, with the loans being paid off sooner than the investors can make their desired returns. That tamps down demand for certain coupon levels, which in turn, affects loan pricing for borrowers.

“The Elizabeth Warrens of the world will focus on the veteran who is paying a big fee for a refi that will take several years to break even, but Ginnie will be focused on some of the unintended consequences of this, and it really becomes evident when you look at how it affects the more marginal borrower,” Nyitray wrote.

“Ginnie Mae was created to finance the tougher credits – the first time homebuyer, the cash-strapped buyer, manufactured homes, lower income / credit buyers. These homebuyers usually have risk factors that will translate into bigger loan level pricing adjustments, and will often require a higher note rate to make the math work,” Nyitray continued.

“If those higher note rates are not available, then it becomes tough to finance those people, and Ginnie Mae's mission is to help get these people loans,” he concluded. “Which is why Ginnie is very sensitive to the actual investors of Ginnie Mae MBS as well as the veteran. The behavior of a few rogue lenders really does impact the whole market and pretty much everyone who takes out a government loans.”

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