VA Lending Rising, Borrowers Leaving FHA; Small Lenders & Mortgage Insurers Benefiting
Currently, veterans are the fastest growing part of the housing market, and US officials are urging private insurers to guarantee mortgages for them. VA loans have risen to $26.5 billion or 9 percent of mortgages made in the second quarter. Due to the FHA raising insurance premiums, borrowers are being forced to shift to government controlled entities.
The Department of Housing and Urban Development is urging mortgage insurers that rely on Fannie Mae and Freddie Mac for business to offer supplemental protection for lenders to veterans and current military personnel. Currently, 25 percent of VA loan accounts are backed by the Department of Veterans Affairs, this keeps some institutions from participating in the program.
Since 2001, approximately 2.6 million Americans have returned from serving oversees, the VA share of home lending now accounts for almost 9 percent in the second quarter, at least a 20-year high. Insurers such as American International Group (AIG) and MGIC Investment Group are considering these loans as their role in the expanding mortgage market.
Unfortunately, the 25 percent cap on VA insurance “leaves a lot of small lenders awfully exposed and reluctant to offer veterans credit under this initiative” HUD Secretary Julian Castro states. An added layer of protection would make lenders feel more confident in offering Veterans home loans.
The director of the VA’s loan guaranty service, Mike Frueh, states that the 70-year-old program has about 1,500 firms making loans that it guarantees, the agency supports using extra insurance to draw in more.
Recently, with more troops returning from Iraq and Afghanistan, VA lending has expanded, especially since it doesn’t require a down payment. As the FHA (which guarantees loans with down payments as low as 3.5 percent) has increased insurance premiums, borrowers are being taking their business to the government controlled Fannie Mae and Freddie Mac. (Fannie and Freddie require loans with less than 20 percent down payments to carry mortgage insurance). FHA borrowers must now pay as much as 1.35 percentage point in annual mortgage-insurance premiums, along with an upfront fee of 1.75 percent of the loan balance. Before October 2010, borrowers were required an annual amount of only 0.55 percent.
VA loans have risen to $26.5 billion or 9 percent of mortgages made in the second quarter, with more business shifting to the private market, and away from the FHA, mortgage insurers are benefiting. The industry backed 14 to 15 percent of new loans last quarter (In 2009 and 2010, this was only 5 percent according to data from Inside Mortgage Finance and Mortgage Bankers Association).
How Does This Effect Smaller Lenders?
When smaller lenders offer VA loans, they often sell the servicing contracts to larger lenders to avoid the default risk, ultimately leaving smaller lenders with a minor role in the VA market, reducing competition that can cut borrowing costs and limiting underwriting flexibilities.