The VA Streamline loan may be being used by banks and mortgage companies to take advantage of both veterans and taxpayers.
In a whistleblower suit filed in federal court in Atlanta, some mortgage brokers have alleged that the banks and other mortgage lenders are hiding fees that are not permitted by the VA, costing veterans hundreds to thousands of dollars, and the taxpayers as well through the VA mortgage guarantees. The whistleblowers claim that non-allowed costs, such as legal fees, are being passed on to the veteran by being added to allowable charges, such as a title history.
First let me explain how the VA mortgage guarantee works for those not familiar with it. A veteran can, under the GI Bill, obtain a 100% mortgage. No downpayment. The VA offsets this with a guarantee of up to a maximum of 50% of the mortgage. If the veteran fails to pay and loses the property, the VA cushions the lender against the loss. Basically, this means the VA is promising equity to the lender on a loan that would otherwise have none. Veterans, by the way, help support this guarantee by paying the VA a funding fee on the loan.
Looking at this, you can see why refinancing a veteran in the current bad economy would entice lenders. If the mortgage principal goes up in the process, so does the guarantee, maxing out at around $46,000. Meanwhile, the lender makes money off closing costs.
Which brings us to the VA Streamline Loan, otherwise known as Interest Rate Reduction Refinancing Loans, or IRRRL loans. This is intended to permit veterans to refinance with a no-hassle, no-qualifying loan that will lower their interest rates and thus their mortgage payments. In the interests of fairness, I must add that some allowed costs may be variable lender to lender, and the VA advises veterans to shop around. It is that allowed variability, however, that puts the veteran in a threatening position. It is also that variability that would allow lenders to allegedly conceal non-allowed costs by adding them to allowed costs.
The VA has strict terms under which these loans can be offered. A veteran cannot have been late on a payment for at least twelve months. The banks or mortgage companies are allowed only to charge certain fees. Other costs are not allowed to be charged at all. And this is where the trouble begins, if some lenders are indeed concealing those costs by adding them to allowed charges.
But let me illustrate what a veteran is up against in making a refinance decision.
My lender offered me a Streamline refinance about two years ago. They called me and tried to entice me by telling me my interest rate would drop by 1.5%, but that I had to hurry because those rates were climbing and might increase. I needed to move quickly to reduce my payment. What’s more, I could “skip” two monthly payments if I did this. How? Well, they’d be rolled into my principal.
But more than that would be rolled into my principal. I asked point blank what the closing costs would be. Numbers were thrown at me, mutters about this and that fee, until finally I elicited a total: It would add $13,000 in closing costs to my principal, but that needn’t concern me because it would all be rolled into the loan. It concerned me enough to hang up.
So I went to the VA site, because this didn’t seem like a very good deal to me and, progressive that I am, I believed the government hadn’t created a program to fleece veterans. As I read the allowed costs and the non-allowed costs, I began to do my own calculations. Any way I figured the numbers, the VA was telling me my closing costs shouldn’t exceed $4000 plus rolled-in mortgage and escrow payments. Even with two mortgage payments added to it, it didn’t come anwhere near the ballpark my lender was talking about.
How do I know I didn’t miscalculate? Because a few months ago a credit union called me offering me a VA Streamline, and when they finished calculating my closing costs, they came to $3800 plus two months’ payments. Less than half what my current lender told me.
So it appears some major banks and other mortgage lenders are taking advantage of veterans with “hidden” closing costs and by jacking up the price of allowed costs to cover their profiteering, and thus costing veterans thousands they should not be paying. What’s more, with those rolled-in costs, a veteran may find himself under water with the new loan, or may even find that he is paying more each month. There may be no payment reduction whatsoever.
And how does that cost the taxpayer? Because in these tough times, more homes are being foreclosed and it is harder than ever to get out by selling a home, especially one that is underwater, and those now larger loan guarantees are coming out of the public fisk.
Thus lenders are taking two bites out of the apple: adding excessive amounts to the principal of the loans they are making, some of which may be adding fees and costs that should not be legally charged to the veterans, costs which are then paid to the lender. And then if the homeowner goes into foreclosure they are hitting the VA for the guarantee.
More financial sleight of hand brought to you by the mortgage wizards of America.