How does a government loan program outperform conventional prime mortgages, even when it offers no-downpayment loans to 90% of its borrowers?
First, it helps that you cater to veterans and the men and women of the U.S. armed forces.
Second, the VA loan guarantee program has experienced a surge in originations since subprime lending dried up.
And third, the Department of Veterans Affairs developed an automated servicing system that allows its staff to monitor the performance of individual loans, ensuring that private servicers are taking the proper steps to help vets who fall behind on their payments.
The VA also employs a “single point of contact” model, which some large servicers are now only starting to implement under the duress of enforcement orders by their regulators.
“Right now we have 89,000 defaulted loans and every loan is assigned to a single person,” said Mike Frueh, acting director of the VA home loan guarantee service.
VA estimates that upwards of 20,000 of those borrowers need more attention and are placed on a special watch list where agency staffers initiate contact with the borrower if they are not responding to the servicer.
In an interview with National Mortgage News, Frueh referred to this oversight as “supplemental servicing.” In rare cases, VA will actually buy the loan from the servicer if agency officials believe there is a chance to modify the loan and keep the veteran in their home.
He noted that VA has the same percentage of 30-day delinquencies as prime loans, using the Mortgage Bankers Association’s delinquency survey as a benchmark. “Our borrowers experience defaults just like anyone else,” the VA acting director said, adding that veterans are “pretty responsible” and supplemental servicing helps them recover from defaults much faster.
Over the past nine quarters, VA loans have actually outperformed prime mortgages in terms of serious delinquencies (90 days or more past due). Roughly 4.52% of VA loans were deemed seriously delinquent as of March 31, compared to a 5.85% rate on prime notes. (The serious delinquency rate on Federal Housing Administration-insured loans is 8%.)
Under former home loan director Keith Pedigo, VA rolled out an automated servicing system called VALERI (VA Loan Electronic Reporting Interface system) in February 2008 just as Wall Street was reeling from the subprime mortgage meltdown.
With VALERI, the agency’s supplemental servicing shop receives real-time data on every loan and its staff can make sure servicers are offering delinquent VA borrowers every opportunity to retain their home or avoid foreclosure.
“If a servicer is not responsive, we can intervene and suggest a loan modification,” Frueh said. VALERI also allows VA to implement a single point of contact where one person is assigned to every single defaulted borrower.
In other words, VALERI allows VA to completely change its approach to the way it works with servicers. “We were 100% more effective than we were before,” the acting director said.
Meanwhile, VA has experienced a surge in demand for its loan products. Since the housing bust, VA loan production has tripled as subprime lending dried up. It also comes at a time of extremely tight underwriting standards.
In calendar year 2006, VA guaranteed 138,000 loans. By 2008, demand rose to just under 200,000 and hit 328,000 in 2010 and there are no signs of a slowdown this year.
Lenders originated 111,000 VA loans during the first four months of this year, which translates into an annual run-rate of 333,000 units for 2011.
In fiscal year 2010, VA guaranteed 314,000 loans totaling $36 billion. The average loan size is $116,000. More veterans are using their benefits because conventional lenders are demanding high downpayments.
The average VA borrower has only $6,900 in assets and 90% get a VA loan without a downpayment. “If you’re a veteran or service member and you want to buy a house, it is very hard to get a conventional loan,” Frueh said.
The VA guarantee program currently has 1.45 million loans outstanding totaling $230 billion.
