Military Financial Advice - Army Times

VA loans solid during crisis

While the collapse of the subprime mortgage market has rocked the U.S. economy and frightened homeowners, the veterans’ home loan program has remained steady as a rock.

In fact, home loans backed by the Department of Veterans Affairs for current and former service members are bucking national trends because the percentage of loans in default — behind on payments by three months or more — has dropped to its lowest level in a decade.

On one hand, the subprime mess makes clear that the VA never dabbled in the loose lending practices that helped cause the housing collapse when some homeowners couldn’t keep up with rising mortgage payments.

Yet critics say one reason the VA program is unscathed is that it has become irrelevant in many areas because of its $417,000 loan limit and because it is perceived as slow and inflexible. In 1999, the VA backed 257,665 purchase loans and 227,945 refinanced loans. In 2007, the numbers had fallen to 117,940 new loans and 15,372 refinanced loans.

Rep. Bob Filner, D-Calif., the House Veterans’ Affairs Committee chairman, believes the VA loan program needs changes.

He wants the maximum VA loan increased to $630,000 and applied to new and refinanced loans. And he wants loan fees, which now range from 1.25 percent to 3.3 percent of the loan value, to be capped at 1 percent.

“The current VA home loan program is irrelevant because fees for the loans are too high and equity requirements are overly restrictive,” Filner said.

He also wants to expand the Servicemembers’ Civil Relief Act so that National Guard and reserve members called to active duty are protected from foreclosure for up to a year after their mobilization ends — on all mortgages, not just those from the VA.

His proposals are included in bills HR 4883 and HR 4884, introduced Dec. 19.

Filner is not the only lawmaker seeking changes. Reps. Steve Buyer, R-Ind., and Mike Michaud, D-Maine, unveiled a bill Dec. 13, HR 4539, that would increase the VA loan limit to $521,250, about halfway between the current limit and Filner’s proposal.

Like Filner, Buyer believes the $417,000 cap is so low it precludes service members and veterans from using the program in some areas of the country.

Buyer said his bill also would make it easier for people with non-VA loans to refinance under the government guaranty program by capping refinancing fees, which currently are larger for refinancing than for new loans, and could relax rules on who must pay closing costs in order to make the VA loan program more attractive.

VA officials are willing to work with Congress on changes, said Judith Caden, director of the VA home loan guaranty service. But she warned that raising the loan limit may not help some troops or veterans at risk of losing their homes to foreclosure because the VA would still insist on strict underwriting to ensure borrowers can make future payments.

Caden said some troops and veterans suffering from the combination of rising mortgage payments and falling housing prices can’t expect much help from the VA if they are far behind on payments — which makes them credit risks — or if their home is worth less than what they owe on it.

The VA does not make loans, but serves as middleman between lenders and home buyers. VA-backed loans are available to active and reserve members and honorably discharged veterans.

The VA’s chief role is promising a lender a payment usually equal to about one-quarter of the value of the loan if a home buyer is unable to pay. This encourages lenders to offer lower interest rates and other favorable terms, and allows the purchase of homes without down payments — a significant advantage for service members.

Caden said the VA offers another foreclosure-prevention service that helps both homeowner and lender — negotiating between the lender and borrower when a borrower falls behind on a loan. In 2007, the VA kept 8,453 loans from foreclosure, officials said.

Michigan, Indiana, Ohio, Colorado, Kentucky, Texas, Kansas, Oklahoma and Missouri are the states with the most VA-backed loans in trouble, said Michael Freuh, the VA’s assistant director for loan management.

High-cost California, which has the nation’s biggest foreclosure problem, is not a factor for the VA, largely because the $417,000 loan limit makes the program unsuitable there if people can’t make a large down payment — and those who can have many other options besides the VA, Freuh said.