The U.S. is investigating lenders for allegedly pressuring veterans and members of the military into unneeded mortgage refinances — unsavory conduct that not only leads to higher consumer costs but has consequences for one of the world’s largest bond markets.
The probe is being conducted by Ginnie Mae, a government-owned corporation whose purpose is to make mortgages more affordable. It does so by guaranteeing repayment on $2 trillion of mortgage bonds even if borrowers default on the underlying loans. Ginnie-backed securities support several federal housing initiatives, including programs in which loans are made through the Department of Veterans Affairs.
The concern is that some lenders are improperly pushing veterans and servicemembers to refinance loans that have been wrapped into Ginnie securities. Lenders are hounding consumers to refinance loans over and over again in a short period of time, according to Ginnie Acting President Michael Bright. The practice, known as churning, generates high fees for lenders but can leave servicemembers with larger loan balances.
The issue is starting to resonate on Capitol Hill, where it has drawn the attention of Sen. Elizabeth Warren, one of the finance industry’s most relentless critics. Last week, the Massachusetts Democrat sent Bright a letter, asking whether some lenders were abusing Ginnie’s program by engaging in aggressive marketing tactics.
Task force
In a response to Warren dated Thursday, Bright said Ginnie and Veterans Affairs had created a task force to address churning and other abusive practices by lenders approved to issue Ginnie-backed bonds. The agencies could impose restrictions on refinances and ban lenders from their programs. Bright’s letter didn’t identify any specific companies engaging in churning.
“There are clearly some Ginnie Mae-approved issuer companies who appear to be taking advantage of the VA program to aggressively market and churn loans in our securities,” Bright wrote to Warren in his letter, which Ginnie provided to Bloomberg News.
When banks make loans through Veterans Affairs they offer terms that aren’t available to most borrowers. These include no requirement for a down payment and adding closing costs to loan balances so borrowers don’t have to pay them at the time of the sale.
But the loans are also prime targets for churning, Bright said in an interview. Unlike financing provided through other government programs, lenders issuing loans through Veterans Affairs don’t have a strong obligation to ensure that borrowers experience a real benefit when they refinance. Some lenders are persuading servicemembers to refinance loans at rates that barely reduce their mortgage payment, while misleading them about potential consequences, Bright said.
“I am glad that Ginnie Mae and the VA have created the Lender Abuse Task Force and have committed to working with me to crack down on lenders who are exploiting veterans in order to line their own pockets,” Warren said in a statement Thursday. “These abusive practices are wrong, and lenders who engage in them shouldn’t benefit from any taxpayer backing.”
'Predatory lending'
“It’s starting to smell like predatory lending,” said Tozer, comparing the recent practices to those used by subprime lenders before the last housing bust.
In a report released last November, the Consumer Financial Protection Bureau said it had received 1,800 complaints from servicemembers, veterans or their families about mortgage refinances. In one such complaint, a veteran continued to get calls from their mortgage company, even though they had told the lender multiple times that they had recently refinanced their mortgage.
Bonds slump
Serial refinances have become enough of a problem that they are driving down prices of Ginnie bonds, JPMorgan Chase & Co. analysts said in a research report issued last week.
When investors buy Ginnie securities, they make assumptions about how quickly borrowers will refinance. If refinances happen more quickly than expected, investors risk losing their expected bond yield and income stream. Such factors make Ginnie bonds less attractive, and when demand wanes, prices fall.
That’s what seems to be happening, and it doesn’t just affect Veterans Affairs mortgages, the JPMorgan analysts wrote. Veterans Affairs mortgages are wrapped into the same Ginnie securities as mortgages backed by the Federal Housing Administration, which are popular among first-time home buyers. Falling securities prices lead to higher interest rates for mortgage borrowers.
Ginnie has tried to slow down the refinancing rush in the past year, putting a six-month moratorium between between new mortgages and a refinance.
However, there were enough exceptions to the moratorium that serial refinances didn’t stop, and once the six-month mark passed, Bright said Ginnie saw a new blitz of lenders preying on servicemembers. In the letter to Warren, Bright said that some lenders apparently targeted veterans for a refinance at “six months and one day.”
