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Ginnie Mae faces risks from VA-loan churning

Over the past year, there have been reports that lenders have aggressively solicited veterans and military personnel to repeatedly refinance Veterans Affairs (VA) loans, a practice known as churning. Ginnie Mae, which insures the bonds underpinned by government-backed loans, has been investigating this practice. Scotsman Guide News recently discussed the issue with Joseph Murin, a former president of Ginnie Mae at the end of the George W. Bush Administration, and he offered his thoughts on how Ginnie Mae might stamp out the practice. Murin also is  chairman emeritus at NewDay USA.

Do you perceive VA loan churning as a serious problem?

joemurinI do. It is taking advantage of the veterans at this stage in the game, continually refinancing their same loan. Unfortunately, what is happening is that [the loan] is not just getting refinanced once, it is getting originated sometimes two and three times. Each time, somebody is charging fees, and those fees are most likely being rolled into the unpaid balance.

So, I have a problem with two things. No. 1, the way it is being done, and the mode of solicitation — [offers to the borrower to] skip two payments, move into an ARM [adjustable-rate mortgage]. Look, most of these veterans have a higher interest rate because they had a lot of debt that was consolidated, so a lot of them were turned down by a major bank or a credit union, like Navy Federal or Pentagon Federal, because [those lenders] only do 80 percent [loan-to-value] type loans. They [the veterans] finally go to a lender who puts them in a loan who charges them a little  bit more for the risk, and then this churning begins, where they are cherry picked out of these [Ginnie Mae insured loan] pools and they are solicited and solicited, and solicited. And, I think, that is just not good for the veteran, nor is it good for the mortgage business.  

Does this present any risk to Ginnie Mae?

The risk to Ginnie Mae is that the investors who buy the bonds get upset when prepayment speeds accelerate like that. This began to happen, to this level, only since the end of last year when interest rates spiked, after basically eight or nine years of unconditional refinance. When interest rates spiked, people [originators] started to panic, and they looked for a means to continue to refinance. So, they started to solicit bonds, where these VA loans were located. They began a campaign to solicit on a very rigorous basis. Now, the prepayment speeds upset the investors. Ginnie has to pay attention to their investors because that is the liquidity being used to finance the bonds to roll back into the market to produce more loans. So, it does present a problem to Ginnie Mae.

Wouldn’t the practice of churning disappear naturally as interest rates rise?

Absolutely. There are a couple of ways it could go away. Obviously a rising interest rate environment will stop it in its tracks. After being in this interest rate environment for the past decade, it is hard to say when that will occur. Unfortunately, our 10-year bond isn’t necessarily tied to the Fed anymore. It is basically tied to the global markets. As long as there seems to be threats in the global market, people will run to safety, which is  the 10-year bonds. So, it is kind of hard to determine when that interest rate rise will occur.

The other thing that could slow it down is for the VA to change their program, and not allow fees on a refinance of a VA loan. The other thing that could happen is that Ginnie Mae decides not to allow a refinanced loan in their pools within the first 12 months of its origination. I don’t know if we want to wait around for an interest rate rise to occur, but certainly that would put the brakes on it if we started to see a 50 to 100 [basis] point rise in the interest rates.

Do you believe that Ginnie Mae or the agencies will make changes to stop this practice?

I do believe, to some degree. Now, Ginnie Mae last year decided that they were going to put a six-month moratorium on loans being re-pooled. However, what they did was add the exception that you could do it if you put it into a specified pool or a custom pool. Well, that didn’t really do anything because many VA loans were pulled out within the first six months and re-entered into specified pools. It really didn’t stop the folks that were very eager to continue this practice.

I believe the first thing that Ginnie Mae can do, and may do, is eliminate the specified pool option on the six-month moratorium [the mandatory six-month waiting period before Ginnie will allow a loan into a pool]. I think they will consider, and probably take into consideration, not only what they want to do, but also what [Federal Housing Administration] as well as VA wants to do, and make a determination whether a 12-month moratorium makes more sense. It certainly makes a lot of sense to me. I think there is more chance of Ginnie changing the moratorium process than there is for  the VA to change their program.

Given that this issue affects veterans and a lot of people care about that, do you believe Ginnie will tighten its rules to restrict lenders from doing quick turnover refinance, or does that overstate your position?  

No, and I support that. The first thing that Ginnie could do is eliminate the custom pool on the six-month moratorium that they already have in place. That would certainly slow it down. The second thing I would consider is a 12-month moratorium on those loans. Look, if you are cleaning up the debt of a veteran, and you put him into a little higher interest rate and, because you have given [the veteran] more residual income every month because you have cleaned up the credit card debt, I would want to see if they perform over the next 12 months.

If they perform over the next 12 months, then the risk of them going bad is minimized. Then, you can go in and refinance the loan at a lower rate if there is a lower rate available. But the fact of the matter is the veteran already has been put in a better position today [through the original refinanced loan] by cleaning up all their debt. So, they are already in a good position. If the rates remain lower, you can even improve their position. But you have got to give them time to perform, and that is why I think the 12-month moratorium makes a lot of sense. 


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