Agencies Prepare Crackdown on Serial VA Loan Refis

WASHINGTON — Ginnie Mae and the Department of Veterans Affairs are taking steps to reduce serial refinancings of VA home loans and slow the prepayment speeds on Ginnie Mae mortgage-backed securities.

But the real crackdown will not go into effect until Feb. 1. That's when Ginnie Mae-eligible loans that are refinanced within a six-month period will be segregated and bunched together in special pools, which means lenders will be penalized in terms of pricing.

Wall Street MBS experts have been complaining for some time that VA prepayment speeds are getting out of hand. They point to reducing valuations of mortgage servicing rights, which are a key financial asset held by Ginnie Mae issuers.

"We are seeing bad practices," said Satish Mansukhani, an MBS strategist at Bank of America/Merrill Lynch at a recent Urban Institute housing symposium in Washington. "We are seeing borrower churning" in the refinancing of VA loans, he said at the Nov. 2 symposium.

Some VA lenders encourage veterans to refinance on a regular basis. And it is not uncommon for veterans to refinance after two or three months.

"It has created somewhat of a fragile situation," Mansukhani said. "We are seeing growing concerns about pricing of Ginnie Mae servicing rights that has taken hit because of the performance of VA loans."

Mortgage Bankers Association senior vice president Pete Mills acknowledged that some of these refinancings are not in the interest of the veteran. The MBA is backing Ginnie Mae's efforts to reduce serial refinancings.

On Oct. 19, Ginnie Mae issued an All Participant Memorandum to "reduce outlier refinance trends" on Ginnie Mae I single-issuer pools and Ginnie Mae II multiple issuer pools. Loans where the borrower has not made six consecutive monthly payments on their FHA, VA or Rural Housing Service loan will be pooled in separate Ginnie Mae Custom II pools.

"By taking the economic incentive out of serial refinances, it should go a long way toward resolving the problem," Mills said. "This is a good move. We support it. I think it will have a beneficial impact on the Ginnie Mae market and protect veterans from some questionable refinancing activity."

But these changes don't go into effect until Feb. 1, according to the Ginnie Mae memorandum.

While Ginnie Mae was able to act first, VA is expected to start a rulemaking process to reduce serial refinancings.

"VA may drop the hammer and place some prohibitions and restrictions on refinancings," Mills said. "That is one of the things they are looking at."

One reason serial refinancing has become such a critical issue is that VA loans comprise nearly 40% of

Ginnie Mae MBS this year, as compared to 17% back in 2009.

And unlike FHA, which insures 100% of the loan balance, the VA only insures 25% of the loan balance. The remaining 75% is covered by the lender.

Urban Institute researcher Karan Kaul warns that the rising volume of VA loans originated by nonbank lenders is creating greater counterparty risk for Ginnie Mae.

To address this risk, the Urban Institute says that VA needs to enhance its capital requirements and regulation of nonbank institutions.

But VA officials are conducting an "examination into the performance of serially-refinanced loans," according to a VA spokesman, as well as disparities in the performance of bank and nonbank VA lenders.

"Any notable, negative outcomes of these analyses will be examined and managed through the VA Home Loan program's risk management framework," the spokesman added.

Meanwhile, the "fragile state" of the Ginnie Mae MSR prices, according to Mansukhani, might cause Department of Housing and Urban Development officials to postpone a reduction in FHA mortgage insurance premiums this year.

HUD is slated to release the FHA annual actuarial report this month and many expect it will a show a healthier FHA insurance fund that could support another mortgage insurance premium reduction.

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