Housing Buoyed by 20-Year High for Vet’s Loans: MortgagesPrashant Gopal and Jody Shenn
During his third deployment in Afghanistan, Air Force Staff Sgt. Claude Hunter was so eager to return to the U.S. and buy a house that he signed a contract for a property that his agent showed him over Skype.
Hunter got back in time to close the deal, paying $219,000 in May for the four-bedroom Waldorf, Maryland, house that he financed with a U.S. Department of Veterans Affairs mortgage. It didn’t require a down payment.
“On Facebook, my friends have started posting: ‘I got my VA loan, I got my house,’” said Hunter, 31. “Everybody is just ready. A lot of them have done their jobs overseas and are coming home.”
America’s fragile housing recovery is getting a boost from military buyers using VA mortgages as the U.S. draws down troops after more than a decade of combat in Iraq and Afghanistan. About 4.7 million full-time troops and reservists served during the wars and many are now able to take advantage of one of the easiest and cheapest paths to homeownership. The program’s share of new mortgages, at a 20-year high, is also increasing as other types of government-backed loans have grown more costly.
“The reduction in uncertainty for the returning vets allows them the freedom to spend more, including buying housing,” said Sam Khater, deputy chief economist at CoreLogic Inc., an Irvine, California-based property-data firm. “VA buyers are coming into the market in higher and higher proportions and tend to be first-time buyers, one of the missing drivers in the recovery in housing demand.”
VA loans accounted for 8.1 percent, or $19.5 billion, of mortgages made in the first quarter, up from 6.9 percent in 2013 and less than 2 percent a decade ago, according to newsletter Inside Mortgage Finance. There are more than 2 million VA loans, with balances in excess of $370 billion, after six years of increasing volumes.
The road to homeownership for Michael Malarsie, 26, began on a bridge in Afghanistan’s Kandahar province, less than a month into his deployment. An improvised explosive device threw Malarsie 20 feet (6 meters) into an irrigation canal during an ambush of his patrol team.
When he woke up a week later in Walter Reed Army Medical Hospital in Washington, he learned four friends were killed in the Jan. 3, 2010, attack and that the injuries to his face were so severe that he would never see again.
Two years later, he got a different kind of surprise. A nonprofit veterans group called Operation Finally Home presented Malarsie, and his family with a newly-built house near his Air Force base in San Antonio, Texas. They sold the property because he needed to live closer to public transit and, on July 8, Malarsie purchased a 4,300-square-foot house in South Jordan, Utah, using a VA mortgage.
Now Malarsie, who has a wife and three young children, plans to go to college to study communications, possibly with a minor in computer science, he said. Homeownership is “our step to normal life,” said the retired Air Force staff sergeant.
VA loans came into existence in 1944, when President Franklin D. Roosevelt signed into law the G.I. Bill of Rights, which included college tuition assistance as well as help with mortgages, business loans and unemployment benefits.
As veterans returned from fighting against Germany and Japan, the loans jumped to 28 percent of all mortgages recorded in 1947. That drove up homeownership and helped create a suburban building boom, said Daniel Fetter, assistant professor of economics at Wellesley College in Massachusetts.
“The most important thing in the increase in homeownership after World War II is mortgage finance,” Fetter said.
While about half of today’s 21 million veterans served in World War II, the Korean War and the Vietnam era, many of the 2.8 million veterans who joined since the Sept. 11, 2001, attacks are now prime candidates for homebuying as they shift into civilian life.
For some, the combat deployments helped them build a nest egg. Service members don’t pay taxes during deployments in war zones and receive $225 a month in danger pay for service in Iraq and Afghanistan. Basic salaries range from $18,378 to $64,933 for enlisted personnel and $34,078 to $153,925 for officers with less than 20 years’ experience. In addition, service members receive significant tax-free housing and food allowances.
Reynaldo Diaz, 35, retired from the Marines a year ago after five deployments to Iraq and one to Afghanistan and dreams of purchasing a three-family brownstone in New York City where he plans to remake his life. He’s working to raise his credit score, damaged during his divorce, complete his degree in business administration, and get a job.
Diaz, who struggles with nightmares caused by post-traumatic stress disorder, said he lost three close friends to combat in Iraq, and one who committed suicide after coming home. Buying a house “is part of the healing process,” he said.
“It’s part of the reason we were fighting and the reason we lost so many people out there,” he said. “We were fighting for the American Dream.”
VA mortgage benefits are available to veterans, their surviving spouses, active members of the armed forces and reservists who’ve served six years or have been called up for 90 days. The government reduces risks for lenders by covering a portion of losses, typically up to 25 percent of the loan amount.
While the VA program hasn’t always been the best deal, its popularity surged as the Federal Housing Administration boosted the cost of its mortgages over the past few years to bolster its finances, said Jason Pepsnik, a veteran who oversees retail mortgage lending in the U.S. South for JPMorgan Chase & Co.
Unlike the FHA, which allows down payments as little as 3.5 percent, the VA doesn’t charge monthly insurance premiums, and the relatively moderate upfront cost can be rolled into loan balances. About 90 percent of VA mortgages don’t have down payments.
Underwriters are required to test how much income VA borrowers have left over to cover other living expenses, an approach that has kept default rates low compared with other loans, Urban Institute researchers Laurie Goodman, Ellen Seidman, and Jun Zhu said in a report this month.
The VA backed a record 629,293 mortgages in its last fiscal year, which ended Sept. 30. That partly reflected booming refinancing as rates reached record lows.
At the same time, home purchases financed with the loans jumped 19 percent to 241,190 during the 2013 fiscal year, reaching the highest level since at least 2000, according to VA data. During the same period, all U.S. home purchases with mortgages grew about 9 percent, according to Black Knight Financial Services data. VA borrowers purchased more than 196,000 properties since then, adding demand to the relatively weak entry-level segment of the housing market.
“It’s really the only avenue out there for people who are completely cash-strapped to be able to get into a home,” said Michael Litzner, a real estate broker at Century 21 American Homes in Levittown, New York, the town that symbolized the post-World War II suburbanization of America the loans helped fuel.
Sales of previously owned U.S. homes rose in June to an eight-month high, a sign the housing market is rebounding after a slow start to the year, according to data today from the National Association of Realtors. Sales increased 2.6 percent to a 5.04 million annual rate last month.
The housing market has turned around from the worst crisis since the 1930s after extraordinary Federal Reserve measures to revive the financial system, employment gains and purchases of thousands of houses across the country by institutional landlords. Even so, housing starts unexpectedly declined in June to a nine-month low, underlining the recovery’s fragility.
Young service members and veterans are buying now because rents are getting more expensive and the risks of homeownership now seem less formidable, said Tim Lewis, consumer advocate for iFreedom Direct, a Salt Lake City, Utah lender.
As the two wars raged, active duty service members faced the uncertainty of multiple deployments, as the military rotated troops in and out. Adding to the risks of homeownership, property prices were plunging during the worst real estate crash since the Great Depression.
After returning from Afghanistan in November, Army Cavalry Scout Jordan Hensler, 25, paid $106,000 for the two-bedroom house that he shares with his wife, Brittany, and five-year-old son, near the Fort Carson base in Colorado. He requested the move to Colorado, which he fell in love with during a bike ride through the state a few years ago.
“Now that the wars are closing off, you have less worry about being deployed out,” said Hensler, who got a VA loan through iFreedom Direct. “You get more family time and now you get to change your mode of thinking from ‘What are we going to be doing out in the field?’ to ‘What are we going to be having for dinner tonight?’”
The Pentagon is making cuts identified by Congress as the wars come to an end. The Army alone plans to reduce its current force of 520,000 active duty soldiers to about 450,000. It had about 566,000 at the peak in 2010.
With the U.S. pulling back from Afghanistan, the 30,800 troops there will be reduced over the next two years to fewer than 4,900, from a peak of 100,000 as recently as 2011, President Barack Obama said in May. In 2011, the U.S. brought troops back from Iraq, where there were as many as 166,300 in October 2007.
“As the military’s downsizing, we are seeing more people coming out and needing a home,” said Winston Wilkinson, USAA’s senior vice president of real estate lending. VA loans have climbed to about 70 percent of originations at the San Antonio-based financial-service firms for the military community and their families, from about 40 percent in 2009, and its volumes of the loans and purchase mortgages are at records.
Changes in the maximum size of the VA’s guarantees have helped expand its worth since the mid-2000s, especially in high-cost states such as California, according to Mike Frueh, director of the Department of Veteran Affairs’ Loan Guaranty Service. VA consumers can get loans of more than $1 million in the most expensive areas of the U.S., higher than other taxpayer-backed loans offer.
While VA underwriting can be cheaper and more flexible than other types of mortgages, most VA lenders require at least a 620 FICO credit score, said Chris Birk, director of VA loan education at Veterans United Home Loans, a national lender based in Missouri. Credit scores go up to 850.
One lender that doesn’t have a minimum credit score for VA loans is Vienna, Virginia-based Navy Federal Credit Union, which has more than 5 million members, and matches its guidelines to what the agency will accept, while making judgments based on an individual borrower’s circumstances, according to Katie Miller, its vice president of mortgage lending.
“There’s no reason we should be saying no if the VA is saying yes,” she said.
The loans now make up about 55 percent of the lender’s originations, up from less than 30 percent five years ago, she said. While the loans require the use of VA appraisers with more rigorous rules, home sellers should want to deal with the buyers because lenders can get the agency to approve exceptions to its stated underwriting guidelines and “my experience with the VA is they want the best for a veteran and they want to work with us.”
A relatively high portion of new veterans can’t purchase because they’re not working. The unemployment rate for veterans between ages 18 and 24 was 21.4 percent last year compared with a 14.3 percent rate for non-veterans. One in five service members who returned from Iraq or Afghanistan had symptoms of post-traumatic stress or depression, according to a 2008 Rand Corp. study.
VA loans also are helping former service members and move-up buyers like Brooks Johnson, 34, who was a captain in the Air Force in Ohio working in acquisitions, such as purchases of reconnaissance aircraft. He left the service in 2006 and moved to the Dallas-Forth Worth area, where he bought a house for about $170,000 just as the market was peaking.
Later, after marrying and having a daughter, he used a VA mortgage from USAA to buy a $394,000 home in April in the more affluent Colleyville suburb without a down payment. Saving 20 percent would have taken another 18 months or so, he said, and waiting seemed like a risk.
“Part of the decision was, if we were going to make a move, we wanted to do it before the Fed really lets interest rate rise,” said Johnson, a technology manager for a mutual-fund company.
Now that values are increasing, Hunter, the Air Force man who returned from Afghanistan, said he wanted to purchase before they get any higher. His agent, Leslie Albertson, used a cell phone to give him a real-time tour of a few dozen properties before he settled on a four-bedroom brick house with gleaming hardwood floors, a country kitchen and a large backyard where his six-year-old son, Claude, can play.
Hunter, who is less than six years away from retirement, spent six years in Portugal, Korea and England and 18 months in Afghanistan during the three deployments. Andrews Air Force Base, 10 miles from his new home, will likely be his final stop, he said.
“I went overseas for the love of my country -- I didn’t do it to gain the VA benefit,” Hunter said. “But because the benefit is there, I took advantage of it. I now have a stable place where I can raise my son and know that, at some point, I can leave him this property.”
(An earlier version of this story corrected the year of the 9/11 attacks.)
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