The churning of loans backed by the Department of Veterans Affairs has long been a thorn in Ginnie Mae’s side, as the agency has worked for three years to curb abuses by VA lenders, even going so far as booting some lenders from its securities platform and restricting others for questionable conduct.
And, it seems even the authorities are getting involved, with the U.S. attorney’s office in the Eastern District of New York subpoenaing at least eight lenders earlier this year as part of its investigation into loan churning that amounts to higher mortgage fees for military veterans.
Now, the Urban Institute has tacked a number to the problem.
The institute recently released a study asserting that fast prepayments as a result of churning is driving up rates on all government mortgages by seven basis points, or 0.07%.
That means that on an annual basis, the payment for a $250,000, 30-year mortgage with a 4.25% interest rate is $175 more because of the costs of churning on VA loans.
While the institute acknowledges that this is “not a huge number,” it says it is nonetheless significant, especially because it stands to increase if larger investors lose faith in Ginnie Mae because of rampant churning.
“Churning can cause a VA borrower to pay an above-market rate for a period of time and additional origination fees on the new mortgage,” the study states. “In many cases, the new mortgage is a cash-out refinance, so the increased balance includes both the fees and some equity taken out for the borrower.”
All Ginnie Mae borrowers pay the price for high VA prepayment speeds in the form of higher interest rates, the study states.
While Ginnie Mae has expressed its concern over VA loan churning and has taken steps to curb abuses, the Urban Institute says more must be done.
One potential route would be strengthening the net benefit test for refinancing to require lenders to better explain to borrowers the impact of a refi. Or, the agency could consider further restricting refis on recent originations. Among the most drastic changes would be the creation of a separate Ginnie Mae security for the VA program.
But of course, with all actions there are reactions, and Ginnie Mae must weigh the total impact of such moves before it acts.
“Any of these options could impose significant costs on the mortgage system and create winners and losers,” the study states. “Nonetheless, doing nothing is not a good option.”