Refinancing a mortgage is something most people do not consider until several years after originating a home loan with a lender, barring a sudden, significant drop in interest rates or some other circumstance that would justify doing so sooner.
Noting that the Department of Veterans Affairs (VA) likely never intended its Interest Rate Reduction Refinance Loan (IRRRL) program to be used within 30-90 days of a loan origination, NewDay USA Chairman Emeritus and Advisory Board Member Joe Murin, former president of Ginnie Mae, and Capital Markets Cooperative President and CEO Tom Millon told Dodd Frank Update that such instances have cropped up more and more over the past year. They offered their perspectives on why it is happening, how it should be addressed and why it is proving to be a counterintuitive use of the program, which was created to help veterans with low FICO credit scores and high debt-to-value ratios save money on a long-term basis.
Murin described how, in his view, some veterans incorrectly are being led to believe they could benefit from the IRRRL program shortly after consolidating their debt with a VA loan.
The program allows veterans to lower their interest rate by refinancing their existing VA loans, and, if they choose to, refinance their adjustable rate mortgage (ARM) into a fixed rate mortgage.
The root of the problem
While the program can be beneficial to many veterans, Murin said an unfortunate trend has grown in the past year involving lenders who solicit veteran borrowers about IRRRLs shortly after they have been issued a VA loan to consolidate their debt.
Prior to the rise in rates near the end of 2016, Murin said there were far fewer issues stemming from the IRRRL program than there are now. Once rates began to rise, and the market prominence of refinancing waned, lenders started soliciting veteran borrowers for IRRRLs more frequently.
Such lenders, looking for new sources for leads, buy information collected from courthouse records regarding newly originated loans, Murin explained. After purchasing the loan information, those lenders contact veteran borrowers about refinancing through the IRRRL program with the promise of offering them a lower interest rate.
The program is appealing to both borrowers and lenders because the application process is simple, with no required appraisal or credit underwriting, though some lenders require them anyway, and borrowers can enter into an IRRRL with “‘no money out of pocket’ by including all costs in the new loan or by making the new loan at an interest rate high enough to enable the lender to pay the costs,” according to the VA website. However, many lenders charge fees for servicing the IRRRLs, which often override the cost savings borrowers expect.
“Basically, it’s an inexpensive way for a mortgage lender to find a veteran borrower and, in my mind, take advantage of them,” Murin said.
Examining IRRRL solicitation
Murin is close to the matter as many veteran borrowers for which his company originated VA loans get solicited for IRRRLs within one to three months of origination.
“I’ve seen some of the letters that these borrowers get and I’m hoping that some of these letters get turned over to the regulators because I think the regulators should see how these veterans are being solicited,” Murin said. “But, ultimately, it’s a combination of someone reaching out and trying to figure out how they can get a loan on the books, in my mind, at the expense of the veteran.”
Millon explained how many lenders are promoting IRRRLs to veterans and why they are resulting in high default rates.
“It’s just hyper-fast refinance with very little benefit to the borrower while bringing a lot of fees to the lender, all done at premium financing,” Millon said. “They’re being pitched to the borrowers as a quick cash-out. When a VA loan is refinanced into an IRRRL, the borrower can get cash back equal to the escrow balance. The problem is that the borrower has to put new money in to the new loan’s escrow account from the premium pricing of the IRRRL. It’s an expensive way to take cash out with little-to-no benefit for the borrower. [The lenders] tell the borrower they’ll drop their payment maybe $50 a month, for example, and they’ll let them take maybe $3,000 out of escrow. So, it’s sort of like a get-your-money-back deal, but the monthly benefit to the borrower is often minimal and there are thousands of dollars in lender fees baked into that transaction. It’s 100 LTV lending, basically, and when you do that at a premium, suddenly you’re at 103 LTV, give or take, and may have high default rates.”
Proposed solutions
In response to a letter from Sen. Elizabeth Warren (D-Mass.) suggesting that Ginnie Mae take action to help veterans are being solicited into IRRRLs, the company assembled a taskforce to do just that. Murin said he has spoken with Ginnie Mae about the matter and believes the company ultimately will decide to close a “loophole” in the six-month moratorium it placed on VA loan refinances, which allows an exception for VA loans placed into a custom pool.
“That will slow down, to some degree, the solicitations to the veterans,” Murin said. “However, I would like to see Ginnie Mae take it one step further and take that moratorium to 12 months, rather than six months, with no loopholes.”
As for the VA, Murin said he would like to see the organization disallow the practice of charging veterans additional fees on a loan that has already been recorded to do an IRRRL.
These are stipulations that NewDay abides by, according to Murin, with the idea that doing so is in the best interest of its borrowers.
“What I think that will do is make it so there is no financial incentive for any lender to try to do an IRRRL on a veteran,” Murin said. “I think that would greatly reduce the initiative that we’ve been seeing in the marketplace since January of 2017 where there has been an onslaught of this kind of financial activity.”
He also said that NewDay is starting an education program designed to teach veterans about the implications of various financial programs available to them.
“They have to understand what they’re getting into with these programs,” Murin said. “They have to be able to ask the right questions. They have to be able to do the math and say, ‘I’m saving $100 and I’m adding $3,000 to my unpaid balance. It’s going to take me 30 months just to get back to square one.’ They don’t really pay attention to that because they trust the people they’re talking to.”
Closing thoughts
Although he sees value in implementing the type of lockout period that Murin described, Millon said doesn’t believe that any of the proposed solutions stemming from the perceived misuse of the IRRRL program are gaining a lot of traction at the VA, noting that the VA would have to make changes to rules governing IRRRLs, not Congress.
He said that IRRRLs have contributed to the shrinking of the pricing spread between Ginnie Mae and Fannie Mae over the last year, which has decreased by 50-100 basis points, with Ginnie Mae securities not commanding the premiums they once did.
“It’s not good for the people buying servicing, and is part of the reason for the lack of liquidity in the Ginnie Mae servicing market,” Millon said.
Defenders of the practice of refinancing VA loans shortly after origination cite the fact that many borrowers contacted about using the IRRRL program have high interest rates associated with their VA loans.
Murin addressed that point, noting that those high rates are intended to offset the significant risk that comes with such loans, given borrowers’ low credit scores and high loan-to-value ratios, and that VA loans are inherently riskier for lenders because, should the borrower default, the lender is responsible for a larger portion of the shortfall than with a traditional or FHA loan.