Nine lenders have been warned by the U.S. that they will be kicked out of a top mortgage program within months unless they find ways to stop costly rapid refinances of veterans' loans.
The warnings stem from an investigation by Ginnie Mae, a government-owned corporation that makes mortgages cheaper by protecting bond investors against homeowner defaults. Ginnie Mae, the Government National Mortgage Association, guarantees about $2 trillion in bonds containing loans backed by agencies, including the Department of Veterans Affairs.
Some lenders have increased their revenue through repeated, unneeded refinancing of veterans' home loans, according to regulators. That process, called "churning," lowers prices investors are willing to pay for bonds, effectively raising rates for veterans, first-time homebuyers and others whose loans are included in Ginnie Mae-backed securities.
Letters sent to the nine lenders this week warn that they are at risk of being forced to issue "custom pools" of Ginnie Mae mortgage-backed securities instead of the traditional Ginnie Mae bonds that most lenders offer. Those bespoke securities probably would be shunned by investors because they would be harder to trade and carry much higher refinance rates.
In a research note on Thursday, analysts with Wells Fargo Securities wrote that Ginnie Mae's moves would be positive for its securities. "Overall, momentum continues to build on all fronts to curb borrower churning," they wrote.
The letters are the latest step in the government's effort to stamp out churning. In December, Ginnie Mae restricted how often a lender is allowed to put a mortgage to a particular borrower into a bond it backs.
The targeted lenders include NewDay Financial and Nations Lending Corp., which were given 30 days to respond to the letter, according to a person familiar with the matter. Others, including Freedom Mortgage Corp., LoanDepot.com LLC and Flagstar Bank, were given 60 days, the source said.
Representatives for NewDay and Flagstar said that they do not comment on agency communications but do not churn mortgages. A spokesman for Freedom said the company's chief executive officer wasn't available to comment. Representatives for the other lenders didn't respond to requests for comment.
"We are targeting our actions at outliers, not at lenders who are genuinely helping to support responsible lending," Ginnie Mae Chief Operating Officer Michael Bright wrote in a statement. Removing bad actors from the program would cut mortgage rates for veterans and others by as much as half a percentage point, Bright said.
Over the past three months, some loans within Ginnie Mae mortgage bonds serviced by Freedom Mortgage refinanced at speeds that were more than five times as fast as that of similar loans serviced by lenders as a whole, according to data compiled by Bloomberg.
NEW REQUIREMENTS
Some veterans have been sent misleading fliers that claim rapid refinances will allow them to skip mortgage payments, while others have gotten new loans that cut their interest rate by a tiny amount and then been targeted for another refinance a few months later. Former Ginnie Mae president Ted Tozer has said that some of the lending practices he observed seemed to be similar to those of the boom era of predatory lending.
Sens. Elizabeth Warren, D-Mass., and Thom Tillis, R-N.C., introduced legislation last month to create new requirements. The bill would, for example, allow a new VA loan for a particular borrower only if the fixed rate would drop by at least half a percentage point.
"Companies that are churning loans at the expense of veterans and taxpayers should be held fully accountable," said Warren in a statement through a spokesman, adding she supported Ginnie Mae's actions.
The letters require the lenders to submit a detailed plan to reduce the refinance rate of their bonds to be more comparable with those of other lenders. If they don't, or if Ginnie Mae doesn't think the response is satisfactory, they'll be exiled from the main bond program.
Not all of the lenders are necessarily churning loans themselves. Ginnie Mae says some are making mortgages with rates far above those of other lenders, in effect setting up the borrower for a refinance shortly after the initial loan is made.
Susan Bergesen, a Flagstar spokesman, said in a written statement that "we can say very firmly that Flagstar does not churn" and that it guards against such activity by third-party loan originators.
"The record is abundantly clear that NewDay does not churn veteran loans," NewDay said in a statement. The company said it supports the legislation sponsored by Tillis and Warren and that "policymakers should also ensure that well-meaning efforts to end loan churning will not have the unintended consequences of denying veterans' access to their hard-earned VA benefits."
Business on 02/09/2018