VA Faces More Criticism Of 'Vendee' Loan Program

The Department of Veterans Affairs' practice of making mortgage loans directly to buyers of its foreclosed properties continues to rankle the Bush administration, which has been trying to shut down the "vendee" loan program for the past two years.

Recently, the VA tried to solicit public comments on the benefits of the vendee program, but the Office of Management and Budget blocked its publication in the Federal Register. The VA wanted to "know whether or not eliminating the vendee loans would be a cost-effective measure," said Keith Pedigo, director of the VA's loan guaranty service. "More specifically, we wanted to know what the impact would be on the public."

But OMB contends a public comment period is not needed to shut down the vendee loan program.

"Regulatory action is not needed to discontinue offering vendee loans," OMB spokeswoman Amy Call said. "Both VA and OMB have agreed that this program should end. The recommendation is included in the president's fiscal year 2003 budget as well as VA's congressional justification."

Nevertheless, the director of the VA's loan guaranty service maintains it is a business decision and he is standing his ground. "Our analysis shows that it is cost effective to make vendee loans. So we will continue to do so," Mr. Pedigo said in an interview.

Two years ago, Booz-Allen & Hamilton conducted a study that shows the vendee loan program saves the VA $1,000 on each foreclosure by financing the sale and securitizing the guaranteed loans on Wall Street.

In the fiscal year 2002 (which just ended Sept. 30), the VA made 8,856 vendee loans to veterans and non-veterans and sold 11,384 vendee loans totaling $1 billion in four securitizations.

OMB claims that the vendee loan program competes with private sector lenders and it makes loans to non-veterans, which is outside its mission. The administration has also raised concern about high default rates in the vendee loan program.

Closing down the vendee loan program would be cost effective, Ms. Call said, because vendee loans extend the VA's liability for another 30 years, instead of selling the property for cash.

In the midst of this standoff between the VA and OMB, the vendee program has supporters in Congress.

The VA-HUD spending bill recently approved by the House Appropriations Committee directs the VA to continue the vendee program. "Until the administration can provide a study to show the vendee program is not of financial benefit to the department, the committee directs the VA to continue the vendee loan program."

In related news, the VA is very close to making a decision on whether it will privatize the management and sales of its real estate- owned or to keep the REO operation in-house.

The VA solicited bids from private sector REO management firms last year, but it received only one private sector bid. The VA's contracting office is expected to announce its decision in November.

Meanwhile, the VA experienced a surprising 21% drop in foreclosures in FY 2002. The number of veterans losing their homes dropped from 26,187 in FY 2001 to 20,628 in FY 2002.

Mr. Pedigo attributed the results to better training of the VA's loss mitigation specialists and to the advances private servicers have made in helping delinquent borrowers.

The VA also experienced a slight improvement in the rate of seriously delinquent loans. Loans 90 days or more past due went from 3.1% as of Sept. 30, 2001 to 2.9% as of Sept. 30 of this year.

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