VA churn makes all government mortgages pricier – report

by Ryan Smith11 Jul 2019

Fast prepayment speeds on VA mortgages are making all government-backed mortgages more expensive, according to a new report by the Urban Institute.

Since 2016, GInnie Mae – which converts government mortgages into securities for investors to purchase – has been trying to combat the churning of VA mortgages. Churn occurs when lenders convince borrowers to unnecessarily refinance their mortgage, and results in unusually fast prepayment speeds. That churn has made all government mortgages – particularly those made to veterans – more expensive, the Urban Institute found in a study.

“We quantified the additional cost that fast prepayments might impose upon all government mortgage borrowers and find that the cost in the form of higher mortgage rates is 7 basis points, or 0.07 percent,” study authors Laurie Goodman, Ed Golding and Michael Neal wrote. “Because many of these prepayments do not benefit borrowers and represent an abuse of the program by lenders, this extra cost is concerning. Critically, the cost to all borrowers could be larger if investors lose confidence in Ginnie Mae securities because of churning.”

The study found that VA borrowers tended to prepay their mortgages faster than FHA borrowers, and were more responsive to interest rate declines. Some of that speed is accounted for by the nature of the VA program, the study authors said – the cost of refinancing a VA mortgage is lower than the cost to refinance an FHA mortgage, and VA borrowers generally have better credit scores.

“But some of the faster prepayments are because of churning, where the original mortgage is made with the expectation that the loan will quickly refinance,” the authors wrote. “Churning can cause a VA borrower to pay an above-market rate for a period of time and additional origination fees on the new mortgage.”

The Urban Institute determined that the cost of those faster prepayment speeds, if passed on to all borrowers, would require all Ginnie Mae borrowers to pay an additional seven basis points per year in interest rates.

“Although not a huge number, it is significant,” the study authors wrote. “For example, it would increase the monthly payment on a $250,000, 30-year mortgage with a 4.25 percent interest rate by $175 per year, with no benefit to the borrower.”

Ginnie Mae has been attempting to combat churn, implementing a six-month “seasoning period” for streamlined refinance loans and later extending that rule to cash-out refinances. In the past several months, Ginnie Mae has also penalized several lenders with unusually fast VA prepayment speeds by prohibiting them from delivering VA loans into multi-issuer Ginnie Mae II securities.