For the mortgage industry, boosting consumer protection is more important than ever, especially in the wake of the subprime collapse. But new, stricter underwriting guidelines that are now part of the sweeping Financial Services bill in the Senate could wind up hurting some borrowers more than they help, especially veterans.
The bill got an unexpected jolt this week from an amendment introduced by Sen. Jeff Merkley (D-Oregon). His amendment, which later passed, has great intentions but all the signs of a classic Washington overreach. In part, it takes some solid steps — the measure bars mortgage brokers from making money by pushing borrowers into high-cost loans they probably can’t afford and eliminates “liar loans” that required little to no documentation.
But it also adds new layers of underwriting and verification to loan programs with a proven track record of safety and solvency, including the VA Loan Guaranty program. Veterans and their families may find it more difficult and more expensive to purchase a home with a VA loan, which runs counter to the spirit of a program created to reward those who proudly served our country.
What’s worse is that some veterans who would normally obtain a VA loan may now find themselves shut out because of the new standards. And it’s not as if VA loans represent a subprime meltdown in the making. On the contrary, they have the lowest default rate of any major loan program on the market. Here’s a quick look at default rates for four major lending veins, according to recent data from the Mortgage Bankers Association:
- Subprime: 15.58%
- FHA: 3.57%
- Prime: 3.31%
- VA: 2.46%
For decades the VA has employed strict underwriting and appraisals standards meant to safeguard those who served. Adding these new layers will only add delays to the processing and underwriting phases, which will likely drive up loan costs and potentially push sellers away from VA borrowers.
Creating a new era of honesty and transparency in mortgage lending is a good thing. So is making sure the unintended consequences of these new measures don’t try to fix programs that aren’t broken.
Veterans and their families might wind up on the losing end of a bill meant to protect consumers.
Image: Eric Beato
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