The past few weeks have been a time of celebration for the Department of Veterans Affairs. The festivities are all about VA loans – since 1944 the government has insured 20 million mortgages for vets and their families.
Today there are some 1.7 million VA loans outstanding and they have a market value of about $284 billion. Just in 2012 the VA has guaranteed an additional 540,000 mortgages.
These are big numbers but actually they are the less important part of the story. What really separates the VA program from other loan options is not just that qualified borrowers can get home mortgages with nothing down, it's that VA mortgages are not toxic. VA loans do not include prepayment penalties, annual mortgage insurance fees or hidden clauses that make principal and interest more expensive after several years.
VA loans, says the department, are "attractive within the mortgage industry because they protect lenders from loss if the borrower fails to repay the loan. Mortgages guaranteed by VA have had the lowest foreclosure rate for the last 17 quarters and the lowest delinquency rate for the last 14 quarters compared to all other types of home loans in the nation, including prime loans, according to a report by the Mortgage Bankers Association."
In other words, if you offer safe and reasonable mortgages borrowers can get the financing they need, lenders can make money originating loans and insurance claims from foreclosures can be held to a minimum. Everybody wins. In fact, the VA says that since 2009, its efforts "have resulted in over $8 billion in savings to taxpayers in foreclosure avoidance."
Translation: The financing system works if you have sensible underwriting standards in place, borrowers with a history of responsibility and lenders who follow the rules.
There is now a debate in Washington regarding what forms of mortgage lending will be allowed in the future. Under Wall Street Reform lenders have been encouraged to make what are called "qualified residential mortgages" or QRMs. The definition of a QRM now includes VA, FHA and conventional mortgages sold to Fannie Mae and Freddie Mac. Some lenders would like to expand the QRM definition to include other loans, including perhaps mortgages which are more risky and more costly.
The question is why should the federal government guarantee loans which are more risky than VA financing? Who benefits from such risk, who gets the profits and who has to pay off when risky loans go bad? Maybe it would be best if we followed the standards and guidelines laid out for VA mortgages almost 70 years ago if only because we know they work.
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