As regulators move forward with policy changes designed to curb so-called refinance churning of Department of Veterans Affairs-insured mortgages, concerns have surfaced about the fate of loans originated during the transition period.
The Department of Housing and Urban Development's interpretive rule on the recently enacted Economic Growth, Regulatory Relief and Consumer Protection Act includes a number of useful clarifications about how the law will be implemented. But a "technical snag" stands to "orphan" a subset of VA loans by excluding them from Ginnie Mae securities, according to Dan Fichtler, director of housing finance policy at the Mortgage Bankers Association.
In short, Fichtler said, VA loans originated before the law was enacted that don't meet the new requirements can't be included in new Ginnie Mae securities. However, similarly situated VA loans that have already been securitized can be included in Ginnie Mae multiclass securities.
"Our concern is that this is really having an unintended consequence that upon our reading of the statute, HUD's determination just doesn't sync up with what seems to be the congressional intent here. If we can get a fix to this problem, we think this will really go a long way towards helping the situation," Fichtler said in an interview.
The new law prohibits Ginnie Mae from guaranteeing timely principal and interest payments on a security backed by a mortgage that fails to meet specific seasoning guidelines. Among the specific requirements, VA loans can't be refinanced until the borrower makes six payments on the original mortgage and the new loan must reduce the borrower's interest rate. The measures are designed to reduce loan churning by lenders and ensure that refinancing benefits the borrower.
"Not only does the outcome of HUD's determination fail to advance the legislative aim of the statute, it also directly frustrates the purpose of the statute. By prohibiting a subset of VA-guaranteed refinances from serving as collateral for Ginnie Mae MBS, HUD's determination effectively 'orphans' these loans, reducing their liquidity and lowering their market value," Pete Mills, MBA senior vice president of residential policy and member engagement, wrote in a letter to HUD.
"As such, the lenders that originated these loans in accordance with the VA and Ginnie Mae requirements in place at the time will likely take losses, which in some cases may be substantial," he added.
HUD concluded the same standard does not apply to multiclass securities as it does to MBS, the MBA said, because the underlying MBS in multiclass securities can be resecuritized without interfering with anti-churning efforts.
"We took some of the rationale that [HUD] used for the multiclass securities, and we think that there are places where they could have applied that same rationale to the orphaned loans and come to a different conclusion," said Fichtler.
"When you think about the orphaned loans, many of these loans have already closed prior to the law going into effect, so you think about applying that rationale in the same way: the loan already closed, the lender can't do anything about it, so prohibiting that loan from going into a Ginnie MBS doesn't help the borrower," he explained.
Further supporting the MBA's argument, the loan seasoning periods for the VA and Ginnie Mae were defined identically in the new law, suggesting that the act "didn't intend for the requirements to apply to Ginnie Mae in a different way than how they applied to VA," explained Fichtler.
Still, the new law marks a step in the right direction for the industry, which could have a "measurable impact on reducing churning," according to Fichtler.