The USDA Rural Refinance Pilot program, launched in February of 2012, has drawn criticism from mortgage originators who say there is no profit to be made from the loan.
The USDA Rural Refinance Pilot program, launched in February of 2012, has drawn criticism from mortgage originators who say there is no profit to be made from the loan. However, the USDA stands firm, saying the loan is for the benefit of the borrower, so the 1% cap under fire from originators is here to stay for the foreseeable future.
The pilot program was designed to help USDA borrowers who owe more than the current value of their homes to have the opportunity to pay lower monthly mortgage payments and interest rates, said Tammye Trevino, administrator for USDA Housing and Community Facilities Services.
But while the borrower is important, the program isn’t viable if brokers originating the loan can’t break even, said Marc Savitt, president of the National Association of Independent Housing Professionals (NAIHP).
The USDA has many worthwhile programs, he said, but the problem with the pilot program is the 1% cap to reduce consumer costs, something Savitt sees as prohibitive only to brokers.
Creditors are allowed to charge the borrower additional fees for smaller loan amounts or lower credit scores, he explained, and settlement agents still receive their regular fees. In addition to the 1% origination fee, correspondent lenders and creditors are permitted to receive additional compensation by service release premiums, but brokers are prohibited from receiving the same.
“Why doesn’t everyone take a little less instead?” Savitt asks.
The 1% has to cover the loan originator, the processor and every cost in between, said Alyce Burgess, who has been originating USDA loans since 1998. The owner of Essential Mortgage Loan Services in Astoria, Ore., Burgess says there simply isn’t enough to go around even in her small company.
Trevino said one reason for the cap is that initially the pilot program didn’t include closing costs, but this was a stumbling block to those consumers who were already struggling with payments.
Four months into the program, the USDA came back with an update saying they were going to tie in the cost of closing, but the 1% cap remained, Burgess said.
The USDA’s Regular and Streamline Refinance Programs are not capped, but they see the cap on the pilot as reasonable because it’s less work for an originator than a regular refinance.
“We aren’t asking for an appraisal or credit report or inspection, we don’t have to calculate debt to income ratio,” Trevino said. “From an origination point of view, it’s a lot less work.”
Savitt argued that originators must still ensure borrowers aren’t over the income limit and qualify for the program.
“In order to satisfy the requirement, you still have to look at paystubs, W-2s and bank statements,” Savitt said. “You aren’t using it for qualifying, but you still have to do the work for income limits.”
“I certainly cannot refuse a borrower to improve their life,” Burgess said. “We take the applications, but what we have found is that the loan documentation process to originate these loans is as great if not more than the upfront program when we originally did the purchases.”
The pilot will expire in February 2014. Until then, Trevino said performance for the loans is being watched very carefully and formally evaluated every six months.
“At the end of the two-year period we will look at the program and a decision will be made at that point,” Trevino said. “The most important is cost and benefits to the borrower.”
Savitt hopes the USDA will consider his suggestion of removing the 1% cap prior to that.