MBA Offers Recommendations to Improve Veterans’ Loan Programs

The Mortgage Bankers Association, in testimony submitted to the Senate Veterans Affairs Committee, offered recommendations to improve veterans’ ability to obtain loans under the VA Home Loans program, as well as improving the market for VA-guaranteed refinancings in Ginnie Mae mortgage-backed securities pools.

H.R. 299, the Blue Water Navy Vietnam Veterans Act of 2017 (https://www.congress.gov/bill/115th-congress/house-bill/299), introduced by Rep. David Valadao, R-Calif., primarily proposes medical benefits for veterans who were exposed to dangerous chemicals in the course of their service. However, the bill also includes several provision that address Department of Veterans Affairs Home Loans program.

MBA offered comments and recommendations on the following provisions:

Section 6(a) of H.R. 299 adjusts the size of the VA loan guaranty for a subset of loans. Under existing law, the VA guaranty on loans greater than $144,000 cannot exceed the lesser of: 1) 25 percent of the government-sponsored enterprise conforming loan limit, reduced by the amount of entitlement previously used and not restored; or 2) 25 percent of the loan. The proposed changes in the legislation would adjust the VA guaranty on loans greater than $144,000 to 25 percent of the loan, reduced by the amount of entitlement previously used and not restored.

MBA said it supports this provision because it would increase the VA guaranty on loans above the GSE conforming loan limit. “We believe this adjustment is warranted, as it will promote access to credit for veterans living in higher-cost areas of the country,” MBA said.

However, MBA noted the proposed adjustment would have the effect of lowering the VA guaranty on second properties purchased by the veteran, in cases in which the second loan is at or below the GSE conforming loan limit. As such, MBA said, this adjustment would make it more difficult for veterans to obtain zero-down payment financing for many second properties.

“Given the frequency with which veterans may be required to relocate due to a permanent change of station, it is common for veterans to purchase a second home in their new station, while continuing to own and rent their first home,” MBA said. “In such a scenario, we believe it is appropriate to allow for zero-down payment financing for the second home, particularly if the loan is at or below the GSE conforming loan limit.”

MBA recommended the language in Section 6(a) be further amended so as to use the existing calculation for loans at or below the GSE conforming loan limit and the new calculation contained in Section 6(a) only for loans above the GSE conforming loan limit. MBA also recommend such amendments clarify the application of existing VA policies regarding restoration of entitlement, including any changes to this process.

Section 6(b) of H.R. 299 changes the VA loan fee schedule. MBA noted changes to the schedule would increase the overall fees collected from veterans in association with VA-guaranteed loans and would equalize fees paid by active duty veterans and reservists, as reservists often pay higher fees in the current system. “We firmly believe that mortgage borrowing costs should not be increased to pay for non-housing-related expenditures,” MBA said. “We oppose any changes to VA loan fees that do not correspond to the credit risk associated with the VA guaranty.”

Section 6(c) of H.R. 299 requires VA loan fees to be collected from veterans with service-connected disabilities rated as less than total, surviving spouses of such veterans, or veterans that receive a loan in excess of the GSE conforming loan limit. MBA said it is unclear that this provision, which would have the effect of increasing the overall fees collected through the VA Home Loans program, is being proposed due to a commensurate change in the credit risk profile or the financial health of the program. Veterans with service-connected disabilities have sacrificed for their country, and the existing waiver from paying VA loan fees is an appropriate benefit. “We would strongly oppose removing this benefit for the purpose of raising funds to offset non-housing-related expenditures,” MBA said.

Similarly, the purchase of a home with a loan that exceeds the GSE conforming loan limit is unrelated to the veteran’s service-connected disability. The proposed legislation would prevent veterans with service-connected disabilities from using their fee waiver if they purchase a more expensive home, but the purpose of the waiver is not influenced by the size of the loan. MBA expressed its opposition to this provision

Section 7 of H.R. 299 allows VA-approved appraisers to conduct appraisals solely on the basis on information gathered and provided by a third party, a system that MBA said ensures that the VA guaranty is properly protected from inflated or otherwise inaccurate valuations. MBA noted while this provision could allow appraisers to make better use of the improved technology that is facilitating large-scale data collection by industry vendors, the legislation as currently drafted provides that VA “may” issue guidance prior to prescribing regulations to implement this change.

“We would recommend that VA instead be required to issue guidance ahead of any regulations that are prescribed,” MBA said. Similarly, to allow for additional flexibility in VA’s implementation of this provision, MBA recommended the language be amended to clarify that VA may also enter into such agreements with third parties.

MBA also urged the Committee to support technical amendments to the recently passed S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. In particular, Section 309 of the legislation, which provides enhanced requirements on VA refinances that we believe will effectively address the problem of loan churning, has caused inadvertent disruptions in this market and is in need of revision.

MBA supported Section 309 of S. 2155, which includes new requirements on refinanced loans to achieve eligibility for a VA guaranty and Ginnie Mae pooling. One such requirement is a minimum seasoning period for the prior loan. For both VA and Ginnie Mae eligibility, at least 210 days must have passed between the date of the first payment made by the borrower on the prior loan and the note date of the refinance. This seasoning period is intended to slow the pace of refinances, thereby deterring extreme cases of serial refinancing.

“While we support the use of a minimum seasoning requirement, the implementation of Section 309 has led to unexpected disruptions in the market,” MBA said, noting he seasoning calculation differs from–and is longer than–that of the seasoning requirement instituted by Ginnie Mae through a prior All Participant Memorandum. Ginnie Mae’s existing standard requires 210 days to pass between the first payment due date of the prior loan and the first payment due date of the refinance. The seasoning calculation in Section 309 differs in both the start point and end point for this timeline. As a result, some VA refinances that were in process or recently closed at the time the legislation was signed into law in late May lost their eligibility to serve as collateral for Ginnie Mae MBS.

“These ‘orphaned’ loans cannot be delivered to Ginnie Mae despite carrying a valid VA guaranty and being fully compliant with the requirements in place at the time the applications were taken and (in some cases) the loans were closed,” MBA said. “This situation has caused liquidity strains for some lenders, particularly if they have originated a significant volume of affected loans.”

MBA urged Congress to undertake technical corrections needed to restore Ginnie Mae eligibility for the orphaned loans and align the VA seasoning requirements with those of the other government mortgage programs. “These technical corrections would address a pressing need in the current market and would allow for more sensible implementation of these important anti-churning provisions on an ongoing basis,” MBA said.