Could predatory lending practices affecting veterans also be inflating interest rates paid by thousands of unsuspecting home buyers using FHA loans?
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The answer appears to be yes — and the underlying abuses in home loans to veterans are prompting action by federal authorities and legislation on Capitol Hill.
Here’s what’s happening: According to officials, some lenders active in the Department of Veterans Affairs (VA) home-mortgage program have been inducing borrowers to refinance their loans frequently in order to generate fat fees for the lenders themselves, rather than benefiting veterans with lower costs or better loan terms.
The lenders use baiting tactics reminiscent of the housing-boom era — “teaser rates,” promises of zero payments for one or two months, refunds of escrows, switches from long-term fixed rates to short-term floating rates, and a grab-bag of bogus claims about saving money. In fact, many veterans have ended up paying more for their loans after the predatory refinancings, and some have found themselves left with little or no equity in their homes. Officials estimate that anywhere from 12,000 to 20,000 veterans have been affected by these marketing tactics during recent years.
All this may sound horrible, but it gets worse: Abuses in the VA mortgage-lending arena have spilled over onto borrowers in the much larger Federal Housing Administration (FHA) market, which primarily serves first-time home purchasers and others who lack significant cash for a down payment.
The linkage is via a little-publicized but exceptionally important agency, the Government National Mortgage Association or Ginnie Mae. Ginnie connects individual home buyers and refinancers using federal mortgage programs with deep-pocket investors around the world — giant pension funds and banks, among others. Ginnie pools VA, FHA and U.S. Department of Agriculture rural housing loans into mortgage bonds, and provides a federal guarantee of timely payments to investors.
The inevitable result of the VA lenders’ predatory activities is an unusually high number of refinancings within the pools, which disrupts the expected long-term payment flows to investors. That, in turn, prompts investors to lower what they’ll pay for the bonds, and has the side effect of raising lenders’ interest-rate quotes to VA, FHA and rural home buyers and refinancers.
Michael Fratantoni, chief economist for the Mortgage Bankers Association, told me “it absolutely impacts interest rates” adversely when investors cut the prices they’ll pay for Ginnie Mae bonds. It sounds complicated, but the simple fact is this: If pension funds or banks are less enthusiastic about Ginnie’s bonds, individual borrowers sitting across from loan officers or making applications online end up paying higher interest rates on their government-backed loans.
Michael R. Bright, executive vice president and chief operating officer of Ginnie Mae, estimated in an interview last week that the abuses in VA refinancings have caused interest rates on FHA, VA and rural housing recently to be one-quarter of a percent to one-half of a percent higher than they otherwise would have been.
What does that mean in dollar terms to applicants? Steve Stamets, senior loan officer for The Mortgage Link in Rockville, Maryland, told me that on a $300,000 FHA loan, a half a percentage point rate increase could add more than $1,000 a year to a home buyer’s payments.
“It’s heinous,” said Ted Tozer, immediate past president of Ginnie Mae. “People don’t realize this affects all borrowers who are getting a [government-backed] home loan.” Given the fact that FHA alone insured 882,000 new single-family-home purchase loans in fiscal 2017, you can begin to grasp how many borrowers may have been overcharged on their mortgage interest.
What’s being done to end this scandal? Last week, Ginnie Mae announced that it has notified a small group of lenders who allegedly have been abusing veterans on refinancings that they face potential exclusion from Ginnie’s principal bond program if they don’t stop what they’ve been doing. That would effectively cut them off from their main source of institutional funding for loans — a severe penalty. The agency did not identify specific lenders, but Bright told me the first penalties could be imposed as early as next month.
Meanwhile a bipartisan group of senators has introduced legislation that would block lenders from foisting rotten refi deals on VA borrowers. The “Protecting Veterans from Predatory Lending Act,” co-sponsored by Sens. Thom Tillis, R-N.C., and Elizabeth Warren, D-Mass. The legislation would require lenders to produce a “net tangible benefits” analysis — demonstrating real savings to borrowers before initiating a refinancing and guaranteeing decreases in interest rates.
Kenneth Harney is executive director of the National Real Estate Development Center.