While Ginnie Mae has attempted to “to combat the churning of VA mortgages (which results in unusually fast prepayment speeds),” Urban Institute claimed in a recent report that alleged abuses by some VA lenders may have led to more expensive federal loans, particularly for VA borrowers.
Ginnie Mae’s programs convert government mortgages backed by three federal agencies—the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA) Rural Housing Program—into mortgage-backed securities for investors to purchase. Urban’s report states that VA borrowers prepay their mortgages faster and are more responsive to interest rate declines, and claims that some of those accelerated prepayments are due to churning, where the mortgage is originated with the expectation that the loan will quickly refinance.
“Churning can cause a VA borrower to pay an above-market rate for a period of time and additional origination fees on the new mortgage,” Urban’s report states. “In many cases, the new mortgage is a cash-out refinance, so the increased balance includes both the fees and some equity taken out for the borrower.”
According to Urban, these faster prepayment speeds would require all Ginnie Mae borrowers to pay around an additional 7 basis points per year in interest rates, which Urban’s experts note is not high, but is still significant.
“For example,” Urban says, “it would increase the monthly payment on a $250,000, 30-year mortgage with a 4.25 percent interest rate by $175 per year, with no benefit to the borrower.”
Faster prepayments may undermine investor confidence, as the loans are removed and refinanced. Ginnie Mae has taken steps to resolve this problem, including a six-month seasoning period for streamlined refinance loans and cash-out refinance loans. However, the solution won’t be easy to find. Ginnie Mae is still seeking advice on further action through a request for information.