Situs Residential: New study reveals the cost of VA churning


Faster than expected prepayments of Department of Veterans Affairs (VA)-backed mortgages are driving up interest rates for all Ginnie Mae loans, according to new research from the Urban Institute.

“The VA churning issue has been the subject of active industry discussion for the last couple of years,” said Stephanie Schader, Vice President of The Collingwood Group, a SitusAMC company. “Both the VA and Ginnie Mae are exploring regulatory solutions to curb the turnover of VA refinances, including the recent decision to make 90% loan-to-value (LTV) cash-out refinances ineligible for Ginnie Mae issuer pools.”

In a Request for Information (RFI) earlier this year, Ginnie Mae said its chief concern “is that investor trepidation about how this activity will negatively impact investor confidence in the performance of the securities and the relative price that they receive in the market.”

Schader said, “The findings now show that this trend is adversely impacting homeowners, not only those with VA loans, but also those with Federal Housing Administration (FHA) or United States Department of Agriculture (USDA) loans, as well as Ginnie Mae.”

The Urban Institute calculated that the additional cost resulting from fast repayment to homeowners with Ginnie Mae-backed loans equates to seven basis points higher in mortgage rates. The monthly payment on a $250,000, 30-year fixed-rate mortgage with a 4.25% interest rate, for example, would increase approximately $15 a month. While this is not a significant burden, the Urban Institute notes that the added cost is of “no benefit to the borrower.”

The data reveals VA loans see the highest rates of refinances among Ginnie Mae-backed loans. In March of 2019, for example, about a quarter of all VA originations were cash-out refinances, compared to about 20% of Fannie Mae originations and 17% of FHA originations.

When a high volume of loans secured in a pool are pulled out faster than expected, investors stand to lose; “The more loans are removed and refinanced, the more investor confidence in this security is undermined,” the Urban Institute explains.

Ginnie Mae announced its new high LTV cash-out refinance restrictions in an All Participants Memorandum last week. “The new policy moves Ginnie Mae’s mortgage-backed securities (MBS) pooling eligibility requirements closer to that of Fannie Mae, Freddie Mac and the FHA,” Ginnie Mae said in a statement. “It provides global investors with increased certainty in the performance of the Ginnie Mae security, which ultimately lowers mortgage rates for all borrowers served by the program.”

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