In early 2018, federally owned Government National Mortgage Association (GNMA or Ginnie Mae) threatened a small group of lenders with expulsion from its primary mortgage bond program if the lenders did not address problematic policies Ginnie Mae alleged targeted servicemembers and military veterans. It appears two of those lenders, reportedly NewDay USA and Nations Lending, did not succeed in meeting Ginnie Mae’s requirements, as they were expelled from the program this week. Ginnie Mae did not officially confirm the two lenders’ identities, although the corporation did respond that it is working to “insure the integrity of our bonds and strengthen the support they provide to veterans and other home buyers.”
The lenders in question were accused of “loan churning,” the practice of soliciting an existing borrower into a refinancing opportunity. While this practice is not necessarily illegal, borrower and homeowner advocacy groups often argue that the promotional materials for such refinance opportunities are misleading and downplay or omit information about fees associated with the refinancing process. While this may not necessarily be at the forefront of a real estate investor’s mind, if you offer short-term or seller financing that is reliant on a homeowner refinancing into a traditional loan within a relatively short period of time (one to five years, for example), then you should be aware that refinancing options are presently under close review and, further, consult a legal adviser before making any sort of recommendation to your buyers or borrowers about how to refinance their loan.
Ginnie Mae spokespeople have repeatedly emphasized that they are working hard to identify entities that might be a threat to borrowers while making policy and program changes to protect and help them. Specifically, the corporation recently made changes to the acceptable risk parameters and prepayment parameters. One red flag for loan churning appears when loans are prepaid too many times in a short period of time, which may indicate repeated refinancing on the part of the borrower. Ginnie Mae based its initial identification of the pool of potentially problematic lenders on “an in-depth evaluation of prepayment speeds on the MBS pools of individual issuers” and targeted lenders with “prepayment speeds that substantially deviate[d] from the mean for an extended period of time.”
NewDay USA responded to the news with an unequivocal statement: “NewDay does not churn veteran loans.”
Nations Lending also denied the expulsion from the program “pertained to Nation’s origination of VA-backed mortgages.”
Federal practices set industry standards. If you work with veterans, be sure to document your processes and make sure your practices are 100-percent ethical by today’s changing industry standards. What used to be acceptable may no longer be considered so.