Time for the VA to Fix the Interest Rate Reduction Refinance Loan Program

wash mon flagsVeterans Day was this past Saturday. At MBA, we’ve been trying to find a solution to a problem harming veterans who have used their VA benefit to purchase a home. Today, I’m writing to say it’s time for the VA to act.

As you know, it’s a point of pride for many of us in the industry that we get the opportunity to partner with the VA to provide low cost mortgages for home purchase and for refinance. This is something the American people have decided to provide as a benefit to those who have risked it all to secure our freedoms. Lenders play an important role in that process.

One part of the benefit is the Interest Rate Reduction Refinance Loan (IRRRL). The program helps veterans refinance their existing VA loan into a new one, with the goal of obtaining a lower interest rate or moving from an ARM to a fixed-rate loan.

Unfortunately, a small number of companies have taken advantage of a loophole in the program that allows aggressive serial refinancing; sometimes putting a borrower from a 30-year fixed to a 3/1 ARM, or promising “cash out” from refunding escrow balances on the old loan. VA borrowers are often solicited for their first refinancing within weeks of the initial closing.

That sort of lending is never in the veteran’s best interest. Such activity strips equity and puts veterans into a product that is almost certain to result in higher payments over the long run, especially in the new normal of rising rates.

Ginnie Mae has taken steps on its own to curb the flow of capital to serial refinancing. It has helped, but it’s not enough.

It’s long past time for VA to address the problem directly through a rule change that protects veterans while preserving legitimate refinancing opportunities.

Bottom line: This has to stop. Now. MBA’s full resources are available to do whatever it takes to make sure VA closes this loophole and protects veteran borrowers.