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Redefining Sustainable Homeownership: Lessons Learned from the VA
A
long, hard look at the continuing stability of the VA Loan Guaranty program
should be requisite for those helping to reshape and redefine sustainable
homeownership in America.
These
flexible loans continue to outperform the field in terms of delinquencies and
defaults, despite the fact that nine in 10 are no-down payment mortgages. At
the same time, VA loan volume has soared the last two years, helping thousands
of American service members purchase or refinance amid an increasingly tighter
lending environment.
VA
loans have more than weathered the subprime crisis and ensuing fiscal tumult. They've
emerged as "a model of stability," as Thomas J. Pamperin, a VA deputy under
secretary, told a House subcommittee meeting this spring.
To
be sure, VA loans remain a small minority when it comes to overall loan volume
and market share. But their continued success and stability offers some
potential lessons to industry stakeholders working to remake the nation's
lending landscape.
Growth and Stability Despite Downturn
Banks,
investors and borrower alike are flocking to these government-backed loans
given the current economic and lending climate. VA loan volume surged 82
percent in fiscal 2009, as the agency guaranteed more than 325,000 loans valued
at about $68 billion.
The
agency expects similar totals for FY 2010.
As
credit and underwriting requirements have tightened, prospective and existing
borrowers have sought refuge in the VA loan program. The agency has long employed
flexible-yet-prudent credit and underwriting standards. Its institutional
aversion to risk - coupled with its bureaucratic layers of lender oversight -
helped insure that primary VA lenders avoided the calamity of subprime and
no-paper lending.
Yet,
time and again, what draws service members and other qualified borrowers to the
program is its signature benefit - the no-down payment mortgage. The concept
sounds almost anachronistic, if not downright anarchic, on the cusp of 2011.
Service
members in most of the country can secure up to the conforming loan limit
($417,000) without spending a dime out of pocket. The limit exceeds $700,000 in
some of the country's costliest corners. There's also no PMI or any type of
mortgage insurance premium.
A
staggering 90 percent of the VA loans issued in FY 2009 came without a down
payment.
Yet,
this nearly 70-year-old loan program has proved resilient in the face of
default.
At
the close of Q2, the delinquency rate for VA loans stood at 7.79 percent,
compared to 13.3 percent for FHA loans and 17 percent for subprime loans. Only
prime loans - at 7.1 percent - had a lower rate.
VA
loans fared even better in terms of foreclosures. Here's a quick look at
foreclosure inventory rates during Q2:
-
Subprime:
14.4 percent
-
FHA:
3.62 percent
-
Prime:
3.49 percent
-
VA:
2.50 percent
That
isn't to say that some service members aren't struggling. Fannie Mae and a host
of mortgage companies recently banded together to establish new forbearance
options for service members and their families.
But
the VA has done a tremendous job keeping veterans in their homes. In fact, the
agency helped nearly 72 percent of the families who defaulted on the VA loans
in FY 2009 avoid foreclosure.
The
continued strength and success of the program is attributable in part to each
of its three stakeholders: the government, agency-approved lenders and
borrowers themselves. Some aspects of the VA loan program - no down payment
mortgages, no PMI, etc. - don't represent a scalable fit when it comes to redefining
sustainable homeownership in America. But
a handful of policies, procedures and points of view are worth considering....
Four Lessons from VA Loans
The
first is the VA's stance regarding debt-to-income
ratio and residual income.
Unlike
the conventional sphere, the VA is concerned only with the back-end DTI ratio
(the VA guideline is 41 percent). But the agency also puts significant stock in
residual income, the amount of money remaining at the end of each month after
subtracting all major expenses. The agency has well-established residual income
guidelines that vary by region and dependent status.
For
example, a prospective New Jersey borrower with a family of four would need to
have at least $1,025 in residual income each month in order to satisfy the VA.
And that's assuming the borrower's DTI ratio is at or below that 41 percent
guideline. Prospective borrowers with a DTI ratio above the guideline must
clear an additional hurdle - their residual income must be at least 120 percent
of the guideline.
An
unacceptable residual income level will kill a loan application out of the
gate. Enacting standards that incorporate residual income can help boost the
likelihood that borrowers have the financial ability to meet their obligations
each month.
The
second policy is the VA's appraisal
process. There's already been movement in this direction, but it's worth
reiterating. The VA has served as a standard bearer for neutral, above-board appraisals.
VA appraisers are assigned randomly on a rotating basis and monitored
frequently by agency officials. This degree of oversight and objectivity has
helped ensure home values are in line
with market realities.
VA
appraisals also put a premium on the health and safety of veterans and their
families.
The
third concept worth considering is the VA's foreclosure avoidance mechanisms. The agency is committed to helping
service members stave off default. VA-approved lenders are required to explore
options to foreclosure, from forbearance and modifications to payment plans and
short sales. VA officials even created an incentive program to further entice mortgage
servicers to exhaust alternatives to foreclosure.
The
VA will also intervene directly with borrowers to find a solution.
The
fourth and final idea is more difficult to mimic. Order, structure and obligation are deeply ingrained tenets for
most service members. That conditioning tends to follow them throughout their
lives, including when the time comes to follow through on structured loan
payments. Part of remaking the concept of sustainable homeownership is helping
borrowers comprehend what's truly sustainable when it comes to their expenses,
their income and their ability to meet financial obligation.
Prospective
borrowers don't need to go through boot camp or basic training in order to gain
that perspective. But the average service member's "strong sense of
commitment," as Mr. Pamperin described it this spring, represents the kind of
borrower ethos that the industry - and the market as a whole - needs in order to
move forward.
More from MND:
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YOUR MESSAGE HERE
Redefining Sustainable Homeownership: Lessons Learned from the VA
A
long, hard look at the continuing stability of the VA Loan Guaranty program
should be requisite for those helping to reshape and redefine sustainable
homeownership in America.
These
flexible loans continue to outperform the field in terms of delinquencies and
defaults, despite the fact that nine in 10 are no-down payment mortgages. At
the same time, VA loan volume has soared the last two years, helping thousands
of American service members purchase or refinance amid an increasingly tighter
lending environment.
VA
loans have more than weathered the subprime crisis and ensuing fiscal tumult. They've
emerged as "a model of stability," as Thomas J. Pamperin, a VA deputy under
secretary, told a House subcommittee meeting this spring.
To
be sure, VA loans remain a small minority when it comes to overall loan volume
and market share. But their continued success and stability offers some
potential lessons to industry stakeholders working to remake the nation's
lending landscape.
Growth and Stability Despite Downturn
Banks,
investors and borrower alike are flocking to these government-backed loans
given the current economic and lending climate. VA loan volume surged 82
percent in fiscal 2009, as the agency guaranteed more than 325,000 loans valued
at about $68 billion.
The
agency expects similar totals for FY 2010.
As
credit and underwriting requirements have tightened, prospective and existing
borrowers have sought refuge in the VA loan program. The agency has long employed
flexible-yet-prudent credit and underwriting standards. Its institutional
aversion to risk - coupled with its bureaucratic layers of lender oversight -
helped insure that primary VA lenders avoided the calamity of subprime and
no-paper lending.
Yet,
time and again, what draws service members and other qualified borrowers to the
program is its signature benefit - the no-down payment mortgage. The concept
sounds almost anachronistic, if not downright anarchic, on the cusp of 2011.
Service
members in most of the country can secure up to the conforming loan limit
($417,000) without spending a dime out of pocket. The limit exceeds $700,000 in
some of the country's costliest corners. There's also no PMI or any type of
mortgage insurance premium.
A
staggering 90 percent of the VA loans issued in FY 2009 came without a down
payment.
Yet,
this nearly 70-year-old loan program has proved resilient in the face of
default.
At
the close of Q2, the delinquency rate for VA loans stood at 7.79 percent,
compared to 13.3 percent for FHA loans and 17 percent for subprime loans. Only
prime loans - at 7.1 percent - had a lower rate.
VA
loans fared even better in terms of foreclosures. Here's a quick look at
foreclosure inventory rates during Q2:
-
Subprime:
14.4 percent
-
FHA:
3.62 percent
-
Prime:
3.49 percent
-
VA:
2.50 percent
That
isn't to say that some service members aren't struggling. Fannie Mae and a host
of mortgage companies recently banded together to establish new forbearance
options for service members and their families.
But
the VA has done a tremendous job keeping veterans in their homes. In fact, the
agency helped nearly 72 percent of the families who defaulted on the VA loans
in FY 2009 avoid foreclosure.
The
continued strength and success of the program is attributable in part to each
of its three stakeholders: the government, agency-approved lenders and
borrowers themselves. Some aspects of the VA loan program - no down payment
mortgages, no PMI, etc. - don't represent a scalable fit when it comes to redefining
sustainable homeownership in America. But
a handful of policies, procedures and points of view are worth considering....
Four Lessons from VA Loans
The
first is the VA's stance regarding debt-to-income
ratio and residual income.
Unlike
the conventional sphere, the VA is concerned only with the back-end DTI ratio
(the VA guideline is 41 percent). But the agency also puts significant stock in
residual income, the amount of money remaining at the end of each month after
subtracting all major expenses. The agency has well-established residual income
guidelines that vary by region and dependent status.
For
example, a prospective New Jersey borrower with a family of four would need to
have at least $1,025 in residual income each month in order to satisfy the VA.
And that's assuming the borrower's DTI ratio is at or below that 41 percent
guideline. Prospective borrowers with a DTI ratio above the guideline must
clear an additional hurdle - their residual income must be at least 120 percent
of the guideline.
An
unacceptable residual income level will kill a loan application out of the
gate. Enacting standards that incorporate residual income can help boost the
likelihood that borrowers have the financial ability to meet their obligations
each month.
The
second policy is the VA's appraisal
process. There's already been movement in this direction, but it's worth
reiterating. The VA has served as a standard bearer for neutral, above-board appraisals.
VA appraisers are assigned randomly on a rotating basis and monitored
frequently by agency officials. This degree of oversight and objectivity has
helped ensure home values are in line
with market realities.
VA
appraisals also put a premium on the health and safety of veterans and their
families.
The
third concept worth considering is the VA's foreclosure avoidance mechanisms. The agency is committed to helping
service members stave off default. VA-approved lenders are required to explore
options to foreclosure, from forbearance and modifications to payment plans and
short sales. VA officials even created an incentive program to further entice mortgage
servicers to exhaust alternatives to foreclosure.
The
VA will also intervene directly with borrowers to find a solution.
The
fourth and final idea is more difficult to mimic. Order, structure and obligation are deeply ingrained tenets for
most service members. That conditioning tends to follow them throughout their
lives, including when the time comes to follow through on structured loan
payments. Part of remaking the concept of sustainable homeownership is helping
borrowers comprehend what's truly sustainable when it comes to their expenses,
their income and their ability to meet financial obligation.
Prospective
borrowers don't need to go through boot camp or basic training in order to gain
that perspective. But the average service member's "strong sense of
commitment," as Mr. Pamperin described it this spring, represents the kind of
borrower ethos that the industry - and the market as a whole - needs in order to
move forward.
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