Hello, LOs!
It's tough out there for Veteran homebuyers.
Even though Veterans Affairs-insured offers consistently fall to the bottom of the stack when up against other offers, they're the darling of lenders and bond investors.
The big reason VA loans (and securities they back) are so prized is their ironclad government guarantee. It doesn't get much safer.
Ginnie Mae — which has the full backing of the federal government — insures bonds which are, in large part, made up of VA mortgage backed securities. And at the loan level, the VA repays the lender even in the (relatively unlikely) case a VA borrower does default.
But I also found that VA loans aren't just a safe investment: they are a cash-cow for lenders. A 2020 study conducted by Own Up found that lenders typically require a 67% larger profit for VA loans than they do on conventional loans.
One obstacle for higher profits on VA loans is the 1% cap on origination fees. To get around that, some lenders change the label of the fee. Lenders doing so may want to tread lightly, however, especially with the new CFPB expected to ramp up compliance enforcement.
John Levonick, a regulatory compliance attorney and CEO of Canopy, told me he closely reviews other types of loans for investors to make sure the fee labels are appropriate.
"We look at the purpose of the fee to make sure the lender is not just calling the fee something that it's not to avoid fee restrictions," said Levonick. In other words, "calling a cat a dog to make it a dog," he said.
"If it's truly a dog, then, sure. But you have to make sure it's not a cat — and only then you can presume it's a dog."
Even without changing fee labels, lenders typically max out the 1% cap on origination fees. The Mortgage Bankers Association found that the average origination fee for VA loans is about double the average origination fee — a $1,105 surcharge on VA-insured loans.
So, are there other kinds of loans that have a bad reputation, but are favored by lenders and investors? And if you specialize in VA financing, have you seen a recent drop-off in the amount of those loans? What else should I be looking into? You can drop me a confidential line here: gkromrei@housingwire.com.
Be sure to check out my deep dive into VA lending, and the headwinds they face in the current market, out this morning on HW+.
Georgia Kromrei
Senior Mortgage Reporter, HousingWire
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