Federal officials plan to crackdown on what they view as predatory lending schemes — reminiscent of the toxic practices seen during the housing boom — targeted at thousands of veterans nationwide who have VA home loans.
The abuses involve serial refinancings that generate hefty fees for lenders and loan brokers but leave borrowers in worse financial shape than they were before the transaction. Lenders are dangling teaser interest rates, "cash out" windfalls, and lower monthly payments, sometimes using shady marketing materials that resemble official information from the Department of Defense. Not infrequently, officials say, borrowers end up in negative equity positions, owing more on their loan balance than their house is worth.
Officials at the Government National Mortgage Association, better known as Ginnie Mae, say some veterans are being flooded with misleading refi offers and are signing up without assessing the costs and benefits. Some properties are being refinanced multiple times a year, thanks to "poaching" by lenders who aggressively solicit competitors' recent borrowers to refi them again and roll the fees into a new loan balance.
Image courtesy of USAF.
The costs to the veterans can far outweigh the relatively modest reductions in monthly payments. In an analysis of questionable refinancings, Ginnie Mae found "many" examples where the borrowers were persuaded to switch from a long-term fixed interest rate to a lower-rate, short-term adjustable, but saw the principal amount owed to the lender jump by thousands of dollars. In an average fixed-rate to adjustable-rate refi, according to data provided to me for this column, borrowers added $12,000 to their debt in order to reduce their monthly payment by $165. Just to break even on that deal would take more than six years, according to Ginnie Mae, and could push unsuspecting borrowers into negative equity.
A typical pitch for one of these loans was received recently by a veteran and his wife who live in Silver Spring, Md. Along with a fake "check" made out to the veteran in the amount of $30,000 -- all he had to do to get the cash was sign up for a refi -- were come-ons like this: a new 2.25 percent interest rate, no out-of-pocket expenses, a refund of his escrow money, and up to two months with zero mortgage payments.
USAF photo by Staff Sgt. Kenny Holston
"Call now and lock in your rate before rates go any higher," urged the lender. In small print on the back of the check were a couple of key disclosures: Homeowners would have to switch from their current 3.75 percent fixed rate to a "3/1" adjustable rate that could increase 36 months after closing and rise to as high as 7.25 percent during the life of the loan. There was nothing about fees or the fact that opting for the refi could add to the family's debt load.
VA home loans are backed by the Department of Veterans Affairs and often have no down payment. Lenders who originate them receive guarantees of a portion of the loan amount against loss in the event of a default. Ginnie Mae bundles VA and Federal Housing Administration (FHA) loans into mortgage bonds, which are then purchased by investors who receive guarantees of timely payments.
In an interview, Michael R. Bright, acting Ginnie Mae president, said some of the abuses he is seeing hark back to 2005 and 2006 -- heyday years of the boom before the bust. "We're seeing borrowers refinance three times in less than six months and (their) loan balances going up." Homeowners also are dumping fixed-rate loans for riskier adjustables.
Image from Wisconsin State Legislature.
"That was the play back then" during the boom, he said. Now it's back.
Bright declined to name mortgage lenders who are most aggressively involved in abusive refis, but he said violators of agency rules face financial penalties and loss of eligibility to participate in bond offerings -- essentially closing down their funding source.
Bottom line for VA borrowers: Look skeptically at all refi promotions. Run the numbers to see whether refinancing will leave you better off -- or deeper in debt.