Photographer: Chris Rank/Bloomberg

U.S. Is Restricting Lenders in Veterans' Mortgage Crackdown

Updated on
  • NewDay USA, Nations Lending are punished by Ginnie Mae
  • Move aims to slow rapid refinances of loans to servicemembers

Two lenders have been punished by a top U.S. mortgage agency amid its concern that they enabled costly rapid refinances of veterans’ home loans.

NewDay USA and Nations Lending Corp. have been restricted effective this week from issuing Ginnie Mae bonds that are intermingled with loans from other lenders, according to a person familiar with the matter. The move follows an examination by Ginnie Mae, a government-owned corporation that guarantees about $2 trillion in mortgage-backed securities, including loans backed by the Department of Veterans Affairs.

Over the past couple years, some lenders have rapidly churned veterans through unneeded refinances, according to Ginnie Mae and other regulators. That process can increase lenders’ profits but result in fees or higher loan balances for veterans who may not understand the repercussions while driving up rates for other borrowers, Ginnie Mae says.

Under the restrictions, NewDay and Nations Lending can still issue Ginnie Mae-backed securities but only in “custom pools” that aren’t mixed with loans from other lenders. Those bespoke securities are likely to get worse prices from bond investors.

NewDay USA collects payments on loans bundled into about $1.1 billion of multi-issuer bonds backed by Ginnie Mae. The bonds were issued between 2014 and 2017 with 4.5 percent coupons. They also collect payments on about $265 million of loans packaged into Ginnie Mae bonds with 4 percent coupons and issued in 2016, according to Wells Fargo data. 

On Wednesday, Ginnie Mae multi-issuer mortgage-backed securities with 4.5 percent coupons gained a little more than 4/32 versus 1/32 for similar Fannie Mae bonds, according to data compiled by Bloomberg. Most of the gains occurred after Bloomberg reported the restrictions.

Lenders’ Denials

NewDay said in a statement that it would continue to issue Ginnie securities in custom pools, that many of its borrowers can’t get loans elsewhere and that it doesn’t churn loans.

“Policy changes recommended by Ginnie Mae will do virtually nothing to stop the unprincipled practice of veteran loan churning, but in all likelihood will force the elimination of much-needed benefits and financial services for tens of thousands of veterans -- especially those veterans struggling with poor credit,” NewDay said in the statement.

The company said it made recommendations to Ginnie Mae to reduce churning but that those haven’t been implemented.

Nations Lending Chief Administrative Officer Cheryl Lieber said in a statement that the company recently underwent a routine examination by the Department of Veterans Affairs without a problem and that the company doesn’t have issues with its VA loan program. She said the discussion with Ginnie Mae pertain to the performance of loans in a particular pool and denied that they pertain to Nations’ origination of VA-backed mortgages.

“We are confident that the matter will be successfully resolved in the very near future,” Lieber said.

Taking Steps

Ginnie Mae Chief Operating Officer Michael Bright said in a statement that the agency was continuing to take steps to keep out of its main programs mortgage bonds backing loans with rapid rates of refinance.

“This process is ongoing,” Bright said. “We are committed to it, and this type of monitoring is now part of the business of Ginnie Mae.”

In the past few months, Ginnie Mae has homed in on lenders whose mortgage bonds have higher refinance rates than the rest of the market.

Some lenders have solicited veterans with misleading fliers claiming they can skip mortgage payments by refinancing. Others have used a refinance to lower a veterans’ rate by a tiny amount, only to follow up a few months later with another refinance offer.

Regulators have said that some lenders with high refinance rates don’t perform the refinance themselves, but instead make mortgages with rates that are far above those of other lenders, setting the borrower up for a churn soon after the initial loan.

Ginnie Mae in February sent letters to NewDay, Nations and seven other lenders warning them that they could face restrictions if they didn’t provide satisfactory plans to reduce refinance rates. In December, Ginnie Mae limited how often a lender can put a mortgage into bonds it backs.

The Senate in March passed legislation meant in part to stop predatory veteran refinances. The provisions, attached to a broader overhaul of the Dodd-Frank Act that’s still being considered by the House of Representatives, would require that a veteran recoup his or her fees after a refinance within three years and that the new loan reduce the mortgage interest rate by at least half a percentage point in most cases, among other provisions.

Executives from NewDay in the past have said they support such a move.

— With assistance by Christopher Maloney

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