We note the story in Politico about the newly issued subpoenas to lenders by the eastern district of New York. While the number of lenders is not certain, recent reports say perhaps a dozen have been impacted. As the Politico story states, this likely stems from the concern about VA churning and the use of IRRRL (Interest Rate Reduction Refinance Loan). At its worst, some have concerns that the simple act of refinancing the same loan and financing in closing costs can simply allow a stressed VA borrower from making a payment for a month or two while only increasing their leverage and simultaneously impairing prepayment speeds which is a significant concern of GNMA MBS investors. As Politico states, “One VA program in particular — the Interest Rate Reduction Refinance Loan — allows lenders to put existing VA borrowers into new loans without an appraisal or underwriting and was ripe for abuse.”
We took note of recent data from the Urban Institutes quarterly chart book showing VA cash out refinancing far ahead of all other products and well above more normalized levels in comparison to the GSEs, GNMA overall, or FHA.
Mortgage Media believes this to be a critical issue for several reasons. First, the thought of some lenders chasing sales commissions on the backs of Veterans who may be in stress by simply creating extension risk at greater leverage is something that deserves close scrutiny. Second, the investor community has been increasingly concerned about GNMA pools with uncertain prepayment speeds. This churning behavior is negative to convexity models and could worsen GNMA pricing if not curbed. Third, after the experience the mortgage industry has had since the Great Recession, a focus on responsible and ethical lending practices should be paramount in the minds of all industry leadership. And while trade associations like the MBA cannot be the police of their membership, statements that they make on this subject can help make clear that responsibility, sustainability, and ethical practices should be the mandate in this industry.
As the names of companies who have been subpoenaed become clear, we will be interested to see the nature of the concern from the Eastern District and what, if any legal action stems from this process.