Ban origination fees on VA refis to curb veteran mortgage churn
Recently, Ginnie Mae and the Department of Veterans Affairs formed a task force to curb the practice of churning VA Interest Rate Reduction Refinance Loan products. I applaud this long overdue effort to protect our veterans from one of our industry's more insidious lending practices. But as the former president of the Ginnie Mae, chairman of a national VA lender and a retired veteran, I feel it's time we go further and ban origination fees for IRRRL products altogether.
Our country's military veterans are highly skilled in many different areas, from planning and organization, collaboration with people from diverse backgrounds and working under pressure. They also possess a unique understanding of how the world works.
What they are not experts at is how mortgages work. As our veterans transition to civilian life and become first-time home owners, many find themselves frequent targets for churning, or the reselling of IRRRL products every time there is a small drop in rates.
Churning is a particular problem in our industry because of the way the VA refinance program is structured. Because lenders are allowed to charge fees for IRRRL products, lenders have an incentive to repeatedly push them onto unsuspecting veterans. In fact, there are companies that go into county courthouses and hunt down recently recorded VA loans, specifically targeting lenders that serve military borrowers. Lenders then buy this information and aggressively target veterans by mail and phone, telling them they could save thousands by refinancing their mortgages. Every veteran I know who owns a home is constantly harassed with mailers and phone calls.
What veterans don't always realize is that the lender will charge thousands of dollars in fees to reduce their monthly mortgage payment by $100. It will take years for the refinance to pay off. However, if the veteran goes ahead and refinances, the lender will be back with them a few months later with the exact same offer. If the veteran refinances again, they pay another hefty origination fee. This pattern can and frequently does go on for years.
Lenders specifically target VA borrowers because they know veterans are more trusting than the average borrower. In fact, trust is extremely valued in the military community. Allowing others in our industry to take advantage of that trust is wrong. If a veteran has taken out a mortgage, he or she has already paid a significant origination fee. There's no reason to charge veterans again when they refinance.
Eliminating IRRRL origination fees alone would eliminate churning as we know it. But as a second step, the VA and Ginnie Mae could ensure that nobody can put a new VA loan into a Ginnie Mae pool if they are less than 12 months old. It's always in the best interest of the lender that originated a VA loan to put it in its own portfolio. Lastly, our industry needs to do a better job educating military veterans so they understand how IRRRL products work and what their rights are under the program.
If a borrower has a VA loan for several years and is interested in a cash-out refinance, I see nothing wrong with charging a new origination fee. But the VA loan should be viewed for what it is — an earned benefit, not a profit opportunity. That benefit should be preserved and protected so our veterans can build long term financial security, not eroded through predatory lending practices.
I call on all my colleagues in the mortgage industry to treat our nation's military veterans with the honor and respect they deserve, and put an end to the harassment and bombardment of IRRRL products by eliminating origination fees for them altogether. Our veterans have already paid their price to society, and then some. It's our turn to pay them back.