Mortgage Churning or Wolves in Sheep’s Clothing?
Should veterans be concerned with predatory lending practices like mortgage churning? This is a topic that is getting some attention lately. Eric Kandell owner of Low VA Rates seems to have exposed some wolves in sheep’s clothing. Unfortunately, when dealing with money and our government they always seem to try to paint a prettier picture than what really exists. Read on or watch the video above for a better understanding of what I’m talking about.
Recently the VA streamline loan, also known as the VA IRRRL, has come under some scrutiny recently and has become vilified. The reason this is a problem is that the issues that have been addressed about the IRRRL do not paint the picture correctly. Now it’s harder for veterans to use their VA benefits.
In this post, we’re going to talk, specifically, about veterans trying to get mortgages or refinances. Read Eric Kandell’s originall article titled “Mortgage Churn: Why Vilifying the VA Streamline Loan Is Not the Answer”
How This Topic About Mortgage Churning All Started
Recently, Senator Elizabeth Warren wrote a letter to the president of Ginnie Mae to raise some concerns that she had about mortgage refinances. Ginnie Mae isn’t a mortgage company, but they’re an institution that helps create liquidity in the mortgage market for FHA, VA, and USDA loans.
Senator Warren helped create the Consumer Financial Protection Bureau (CFPB) and her platform is to take care of the consumer. In her letter to Ginnie Mae, she brings up a couple of good points on how veterans could be taken advantage of.
- Solicitations. First off, Low VA Rates is a for-profit company so we do solicit. However, there is a line that shouldn’t be crossed. Crossing that line involves misleading the consumer or being aggressive in solicitations. We commend Senator Warren for bringing this to the surface and we do not cross that line at Low VA Rates.
- Veterans are refinancing too often. Senator Warren points out in her letter that, not only are veterans refinancing too often but that it’s costing them money. She wants to make sure they’re not being abused. Again, this is very commendable of her to bring this issue to our attention.
However, since her letter was written, both responses from Ginnie Mae and the media have missed the bigger issue, and the viewpoints have become distorted. Now the VA streamline IRRRL has become vilified.
This has created an issue because it has now been suggested that VA lenders (no lenders were named in the letter) who focus on refinancing are the ones to blame for the problem.
Focusing on the Bond Holder: Are They the Victim?
The letter does want to make sure we know who’s being hurt in this process: the bond holder. Here’s an example of how this could be misconstrued.Let’s say the consumer has a refinance of 4.75% and they go to Low VA Rates, or one of our competitors, for a refinance of 3.25%.
The consumer ends up saving money but now the bond holder isn’t getting as much as they initially thought. But in most cases, these bond holders are the same ones that held the initial bond. So they’re not losing.
This is how the letter has created the idea that the bond holder is getting the short end of the stick. But that isn’t the case. As shown in the example, 3.25% is still more interest than 0%. It just isn’t the 4.75% expected beforehand.
A Tainted Reputation
Now here’s what happens when the VA streamline is vilified. The VA streamline becomes more difficult to obtain and the veteran has a harder time streamlining their loan.
In February 2017, Ginnie Mae came out with a new rule stating that VA loans could not be streamline refinanced unless the consumer made six payments.
Ginnie Mae made one condition. If somebody wanted to refinance within their first six payments of their VA mortgage, then they’re going to have a worse interest rate. This wasn’t said directly but Ginnie Mae wouldn’t deny it.
Now, if somebody wanted to refinance with less than six payments, they’re going to pay more money in fees. This seems to be contradictory since Senator Warren addressed her concerns about the fees of the refinance. So if the consumer wants to avoid the fees, they’ll have to wait until the six payments are made.
What happened is Ginnie Mae thought this was going to curb the number of people doing streamline refinances, and it did. The Veterans Affairs Office in Washington D.C. has verified this in their statistics. The drop in refinances could be tied to this Ginnie Mae rule, but it didn’t curb them as much as the agencies thought they would. And now there’s talk of doing more.
Here’s what happened around February 2017. All of our competitors that do VA purchases and VA cash-outs started charging veterans a higher interest rate because the companies knew how much harder it was for veterans to refinance their loans. And the higher the interest rate, the more money the company makes. It’s as simple as that.
Real-Life Example & the Benefit of the Streamline Process
Here’s a real-life Low VA Rates example. We had a veteran who got a loan last month for a 4.75% interest rate. This is high! No veteran should be paying that much on their mortgage.
Low VA Rates will refinance that veteran within six months of their last month for 3.75%-3.25%. And the final rate depends on the consumer’s game plan. But we can do a free loan for a difference of 4.25% with no closing costs.
Misdirection & Higher Interest Rates
Why is this the case? Senator Warren should be concerned about the veteran being taken advantage of by predatory lenders (and we’ll refrain from names). Veterans are being subject to higher interest rates than they should be.
If the veterans benefit is taken away (a benefit has been around for years) then the chances are that veterans will continue paying higher interest rates.
So, in the future, a 4.75% may not look like a bad number because a company could feel free to charge something as high as 5.25%.
Final Thoughts on VA Refinance Mortgage Churning
As stated before, the issues from this topic have become distorted. And the issue being brought up in this post aren’t even being covered. The reputation of the VA streamline loan is now tainted and it’s been for the wrong reasons.
The main concern is veterans not being able to use their VA benefits. Because it’s harder for veterans to refinance, this has allowed some companies to lock them into high-interest loans, and it’s done on purpose.
It’s important for the main issue to be addressed so we can get back on track giving veterans the benefits they deserve.
For more information about your VA Home loan benefits call 1-855-956-4040