Underwriting Changes Could Squeeze Out Military Borrowers

Military families might have to pay a steep price for the mortgage lending sins of the recent past.

The Senate this week tacked on a new amendment to the massive Financial Services bill it’s considering. Introduced by Sen. Jeff Merkley (D-Oregon), the amendment bans the flimsy “liar loans” that required no real documentation and eliminates bonuses for mortgage brokers who needlessly steer borrowers into higher-cost loans.

That one-two punch helped create the subprime mortgage collapse. But the Merkley amendment appears tailor-made for a classic overreach — the bill would now introduce new, needless layers of underwriting and verification to already proven lending programs, particularly the VA Loan Guaranty program.

These new layers would likely end up breaking a program that doesn’t need fixing. They would also make it more difficult and more expensive for veterans and their families to take advantage of the benefits earned by their service.

VA loans have helped more than 18 million service members become homeowners since 1944. Today, after a tumultuous decade, they continue to have one of the lowest default rates on the market. Here’s a look at the most percent of loans in foreclosure, according to the Mortgage Bankers Association:
•   Subprime: 15.58%
•   FHA: 3.57%
•   Prime: 3.31%
•   VA: 2.46%

These loans continue to withstand the ailments and ills of the era. The VA employs strict underwriting standards, including appraisal guidelines that weren’t tainted by some of the other high-profile problems that many other loan products experienced.

Weighing down the VA loan program with superfluous guidelines will wind up doing two things:
• Stricter underwriting guidelines will require more time in processing and underwriting, which will directly lead to increased lending costs. That means borrowers will have more fees associated with their loan.
• Some borrowers who would normally qualify for a VA loan would no longer be able to obtain one, even though they qualify under the VA guidelines.

There’s no doubt the bill’s aims are legitimate and well timed amid a continued push for greater transparency, openness and consumer protection. But it makes little sense to shove wide-ranging requirements and new layers of underwriting into a loan program that, by all indications, is working fine and helping thousands.

Especially one that was built to protect and serve those who have served us.

Image: Tony the Misfit

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.