VA, Congress move to help veterans in mortgage mess

By Tom Philpott

With thousands of service members and veterans having lost homes or facing foreclosure as the mortgage crisis continues, lawmakers are pushing legislation to raise VA loan ceilings, lower VA funding fees and expand the VA’s ability to help veterans to refinance loans they can’t afford.

The Department of Veterans Affairs, meanwhile, is encouraging military members, veterans and surviving widows with at-risk loans to seek advice from VA loan counselors even if their loans are not VA-guaranteed.

VA loan experts lack authority to restructure or renegotiate loans not backed by VA.  But they can advise veterans on their options and on how they might negotiate with mortgage holders to avoid default.

VA’s effort to reach mortgage holders in distress now includes a toll free number (1-877-827-3702) that automatically directs callers the nearest of nine VA regional loan centers.  VA loan counselors have helped 74,000 homeowners since 2000, including half of all VA loans in serious default last year, thus saving the government nearly $1.5 billion, officials contend.

The VA Loan Guaranty program avoided the subprime loan debacle.  While delinquency rates have climbed over the past five years for subprime, FHA and prime mortgages, delinquencies have fallen for VA-backed loans.

During the easy mortgage money frenzy that led to the housing market crash, VA-backed loans with no down payment lost favor with home-buying veterans who needed bigger loans for more costly houses than the VA would approve, or were tempted by teaser loans and unchecked credit.

“We never did the same things [as mortgage companies] as far as changing rules for what it takes to get a loan,” said Judith Caden, director of the VA Loan Guaranty Service, in a phone interview.  “We’ve required underwriting and always had underwriting standards.  We’ve always required that [applicant] income and credit be documented.  We made sure that someone getting a VA loan could afford that loan.”

That doesn’t mean VA loans operated well during the housing market bubble or mortgage crisis that has followed, according to Rep. Bob Filner (D-Calif.), chairman of the House Veterans Affairs Committee.  VA loans have “basically become irrelevant,” Filner told Military Update.   “Especially in California [where] they gave out less than 100 loans last year.”

A more accurate figure for VA loans in California last year is 2000, according to VA data.  But officials get Filner’s point.  The ceiling on VA loans is $417,000, which more so before the housing bubble popped, didn’t cover many new mortgages in Filner’s state.  VA loan rates and fees often were seen as less competitive than other offerings.

As a result, VA-guaranteed loans nationwide fell from a recent peak of nearly 500,000 in 2003 to 133,000 last year.  The trend seems to have bottomed and VA loans across the country are rising.  In California, 3500 VA loans have been approved through the first eight months of fiscal 2008.

Filner said the two major successes of the World War II-era GI Bill were in education and housing.  Congress is moving to approve an initiative from Sen. Jim Webb (D-Va.) for a new wartime education benefit.  Filner said he’d like to lead a similar effort to enhance the VA home loan program.

“I’m in Congress because of the GI Bill of ’44.  My dad came back from World War II, got some education but more important he bought us a house for $3000 and all of a sudden we were in the middle class,” Filner said.

Too many military people today in and around his district in San Diego have been “devastated” by the mortgage crisis, Filner said.  “The problem is they can’t work out something with the bank and they can’t turn to the VA.”

Filner’s Helping Our Veterans to Keep Their Homes Act (HR 4884), would raise the maximum VA home loan to $730,000; eliminate a requirement that veterans have 10 percent equity in a home to be able to refinance through a VA loan; and lower VA home loan funding fees by moving to a flat fee of one percent regardless of type of home loan.

Sen. Daniel Akaka (D-Hawaii), chairman of the Senate veterans’ affairs committee, also has a bill to raise the loan ceiling to $730,000.   He noted that veterans in February were left out ofthe Economic Stimulus Act of 2008 which raised ceilings identically for other federal home loan programs. Akaka proposes only lowering the equity requirement for a veteran to refinance a mortgage with a VA loan, from 10 percent down to five.  Filner’s call to eliminate any equity requirement for VA refinancing, and to lower most funding fees, are opposed by VA officials as too risky.

“That’s our job,” Filner said, “to take the risk for the young people who served our nation.  It is part of the cost of war….If we can’t take more risk than the bank does, then it’s not worth having [VA loans]…We should be willing to take some risk on the people who took risks for us.”

In 2004, when the VA loan maximum was $240,000, Congress indexed that amount to rise automatically with the single family home loan limits used by Freddie Mac and Fannie Mae to fuel the broader mortgage market.  Congress, however, failed to index VA loan guarantees for refinancing of non-VA-backed loans.  This has left many veterans unable to use VA refinancing to retire subprime non-VA-backed mortgages larger than $144,000.

Rep. Steve Buyer (Ind.), ranking Republican on the veterans affairs committee, has a bill (HR 4539) that would, among other things, raise that ceiling for VA-backed loans for refinancing to at least $417,000.

Until that becomes law, a lot of veterans with subprime loans aren’t able to use VA refinancing.   A $144,000 loan ceiling, a 10 percent equity requirement and falling home values, Caden said, means “we really can’t help very many veterans in that position.”

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