“We really need to defend the VA program,” said Michael Bright, executive vice president and chief operating officer of Ginnie Mae, a government corporation that oversees the process for ensuring the success of the government’s mortgage-backed securities guarantee. Ginnie Mae officials issued the notifications, building on work of a “loan churn task force” that started in September.
“We need to make sure that capital is there to support the program. If lenders are abusing it with aggressive, misleading marketing and aggressive and misleading refinances, it not only harms veteran borrowers and homeowners, but it harms the capital that is the source for making these loans in the first place.”
He stressed that these are just a few lenders among many in the VA loan business. Bright declined to identify the lenders who received notifications, citing long-standing Ginnie Mae policy.
A source familiar with the issue said NewDay Financial, Nations Lending, LoanDepot.com and Freedom Mortgage were among the companies that received the letters.
NewDay USA and Freedom Mortgage officials declined to comment on whether they had received a notification or what the allegations entail.
“As company policy, NewDay USA does not publicly discuss its interactions with regulators, including Ginnie Mae,” according to a NewDay response provided to Military Times. “However, the record is abundantly clear that NewDay does not churn veteran loans.
“NewDay is an outspoken supporter of measures to end this shameful practice.”
In a statement from Freedom Mortgage, officials said the company is “honored to be one of the nation’s largest VA mortgage providers and we do so responsibly serving the needs of our veterans. We service and close every loan with the top priority of helping our customers.”
Responses weren’t immediately received from Nations Lending or LoanDepot.
WHAT IS CHURNING?
The behaviors associated with “home loan churning” involve targeting VA loan users with an onslaught of mortgage-refinance solicitations, often shortly after they’ve closed on a home loan. Some borrowers have been convinced to refinance their loan multiple times in a year, without any financial benefit; fees attached to the deals can increase the overall loan amount.
About 99 percent of VA loans are secured into a Ginnie Mae mortgage backed security and then sold in the secondary mortgage market with a full faith and credit guaranty from Ginnie Mae, which is also responsible for policing their program to protect against loss.
The lenders’ letters notify them that if they don’t change their behavior and give Ginnie Mae officials a credible business plan for making that change, they’ll be kicked out of the main Ginnie Mae program, Bright said. Without the ability to put the mortgages into the Ginnie Mae program, the lenders essentially wouldn’t be able to make VA loans, he said.
In some cases, lenders are charging veteran borrowers interest rates that are substantially higher than prevailing market interest rates, sometimes called a “premium loan.” These loans are profitable for the company because they can immediately sell the loan into a Ginnie Mae securities pool at a high dollar price because of the high interest rate, and pocket the cash gain on the sale.
With the rapid refinance, the loan is removed from the Ginnie Mae pool, along with the return expected from monthly principal and interest payments. This makes investors less willing to pay a premium price for Ginnie Mae bonds. As bond prices fall, interest rates offered to borrowers increase.
It’s causing investors across the globe to withdraw capital from the Ginnie Mae market, officials said.
“I applaud the efforts of Ginnie Mae to curb misleading mortgage refinancing marketing targeting veterans and the unscrupulous practice known as ‘churning’ ― the refinancing of a loan multiple times to generate profits for lenders at the expense of veterans,” said Denise Rohan, national commander of the American Legion, in a statement. “Our veterans didn’t serve their country around the globe in order to be taken advantage of by unscrupulous lenders at home.”