Ginnie Mae calls for more lender scrutiny as VA share rises

Ginnie Mae has recommended a move that could increase scrutiny of originators making loans the Department of Veterans Affairs has guaranteed.

The recommendation, which is included in a report to Congress, calls for an information sharing arrangement with the Consumer Financial Protection Bureau and the VA. The CFPB, which is in the midst of a legal challenge to its authority, has separately noted concerns about compliance related to rules giving certain servicemembers’ right to lower pre-existing consumer-loan rates to 6% while on active duty, something that’s been less relevant to housing finance lenders until recent hikes raised rates above that level for the first time in quite a while.

“Recognizing the limitations on authority of the VA and Ginnie Mae to act on any identifiable unfair or deceptive activity of a mortgage loan originator, Ginnie Mae recommends the creation of a Protecting Veterans Task Force comprised of the VA, Ginnie Mae, and CFPB that meets at least biannually to discuss and share monitoring information related to any potential originator abusive, unfair or deceptive practices,” Ginnie Mae said in the report.

Scrutiny of VA lenders that contribute loans to the securitizations Ginnie insures has become more pressing to the government bond insurer because the VA share of Ginnie issuance has nearly doubled in the past 10 years. Back in 2011, it was 23%. Pre-pandemic, Ginnie had a 42% VA share. Now it’s nearly 45%.

Historically, Ginnie Mae’s key VA concern has been excessive refinancing that did not necessarily benefit borrowers and diminished the attraction of securities to investors.

Since far fewer loans are now eligible for refinancing to a lower rate, Ginnie Mae could be concerned about excessive cash-out refinancing in the current market. 

Cash-outs have fewer restrictions on them than the streamlined Interest Rate Reduction Refinance Loans that VA borrowers typically use to move to a lower rate.

IRRRLs have a streamlined process and some restrictions on how frequently they can be refinanced. They must show a net tangible benefit to the borrower. 

“There should be some benefit to the veteran refinancing, it shouldn’t be a negative event,” said Audley Lewis, a branch manager for Embrace Home Loans in Newport News, Virginia.

VA cash-outs don’t necessarily have to show a net tangible benefit, but are subject to standard ability to repay rules applicable to all mortgages.

In reviewing the pre-pandemic restrictions it set on refinancing to mitigate the aforementioned prepayment concern, Ginnie found it did leave in the market with a “solid investor appetite for…MBS, including those containing VA-guaranteed loans,” but also noted the low volume of cash-out loans made that market more difficult to size up the impact of rulemaking on.

Some investor reports have raised concerns that with the VA share higher at Ginnie Mae and a potential recession pending, the impact of delinquencies on mortgage servicers could be higher. The VA guarantee provides less protection to mortgage companies than the Federal Housing Administration’s insurance, but that’s generally considered to be offset by the fact that the former’s delinquencies are more often lower.

The report found,”VA lending continues to display lower borrower delinquency levels and higher levels of refinancing compared to FHA lending, each of which must continue to be monitored for impact on liquidity.”

Ginnie Mae and VA have worked toward better coordination of their policies since some unintended consequences created pooling challenges.

Ginnie also mentioned in the report that the growing concentration of nonbanks within the broader ranks of the mortgage companies it works with is also present in the subgroup of top 10 VA lenders. Eight of these are non-depositories subject to new financial eligibility requirements that Ginnie will be rolling out through the end of 2024.

In other news, Ginnie Mae did recently add one new flexibility to its counterparty rules that could prove helpful to some mortgage companies that may be finding it harder to meet financial requirements due to profitability strains in the industry.

The government bond insurer said it “may consider a written agreement, including but not limited to a corporate guarantee, that allows the financial strength of the corporate parent to be considered.”

The flexibility, available immediately, will be at Ginnie’s discretion and subject to due diligence.