As CEO of NewDay, I’m seeing a disturbing trend within our mortgage industry that hurts veterans through their Department of Veterans Affairs home loans — the very loans intended to reward these patriotic citizens for their service to our nation.
Veterans with VA loans are being hurt by a few lenders offering to save them money on their monthly mortgage payments. On the surface, these offers sound appealing. In reality, veterans and active military will lose money. Here is how this predatory lending practice works.
The VA loan offers tremendous benefits in helping veterans and their families realize the American dream of home ownership. This loan is helpful because it is guaranteed, backed by the Department of Veterans Affairs. It allows veterans to purchase a home without a down payment. Since the Department of Veterans Affairs Established the VA Home Loan program in 1944, more than 20 million VA home loans have been guaranteed under the program.
But a harmful lending practice called “loan churning” occurs when lenders make repeated offers to lower a veteran’s home loan interest rate by a negligible amount, often times by a quarter percentage point or so. The veteran is also told they can even skip a month or two of mortgage payments while his loan paperwork is processed. The veteran believes he is saving money, but the offer is too good to be true.
It sounds too good to be true because, in fact, it is not true.
What the veteran is not told is how the lenders may charge an “origination fee,” and other expensive closing costs, increasing the unpaid loan balance. The end result is a refinanced loan that appears to have a short-term gain for the veteran, but in the long run could end up being costlier.
Loan churners predominantly use a popular VA loan called the VA Interest Rate Reduction Refinance Loan or. This disturbing trend requires immediate action by mortgage lenders, federal agencies, and possibly even Congress to ensure our active service members and veterans are protected.
Recently, Veterans Affairs and the Government National Mortgage Association (known as Ginnie Mae) have formed a joint task force to make recommendations to end loan churning.
Our company has long established practices that, if adopted by the rest of the lending industry, can greatly reduce — if not end — VA loan churning.
First, the practice of charging costly origination fees on IRRRLs must be stopped. Eliminating origination fees on IRRRLs removes the primary incentive for churning. Next, limit the frequency of IRRRL refinances to once every 12 months, to ensure the discipline of making a mortgage payment remains continuously reinforced.
In Washington, D.C., the VA and Ginnie Mae are working together to effectively end loan churning. The time has come for more substantive policy changes to extinguish a shameful practice that takes unfair advantage of our nation’s active military and veterans.
Rob Posner is CEO of NewDay USA.
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