Picture a mortgage program that seems to defy many of the
lessons of the housing bust:
— 91 percent of its borrowers make zero down payments.
— Loan amounts go well into the jumbo range — to $1 million
and sometimes above, even with little or nothing down.
— Credit standards are flexible and generous. Underwriting
rules encourage loan officers to look for ways to approve
applications rather than to reject them.
— Mortgage originations are up — almost triple what they were
just three years ago and are on track this year to exceed 2010’s
volume. The rest of the loan industry, by contrast, is down by
anywhere from 25 percent to 30 percent.
You might assume that any home loan program with come-ons like
these must be swimming in bad mortgages, loaded down with
serious delinquencies and foreclosures. Yet this one, which gets
relatively little attention in the media, has better mortgage
performance than the Federal Housing Administration, and is
comparable with some “prime” loan operations that have far more
stringent credit rules.
Can you name this financing phenom? It’s the Department of
Veterans Affairs’ home loan guaranty program. At a time when
federal regulators are considering imposing a 20 percent minimum
down payment requirement for most conventional mortgages, the
VA program, which is restricted to veterans, offers important
insights on how to get families into homes with little cash
upfront, and to keep them out of foreclosure, even in tough
What’s in the special recipe at the VA? Tops on the list: a
combination of loan features that are by far the most attractive
available in the current market. While the FHA program also
offers minimal down payments — 3.5 percent — the VA goes to
zero even if you need a jumbo-sized loan.
Unlike low-down-payment loans you can get from Fannie Mae and
Freddie Mac and FHA, there are no monthly mortgage insurance
premiums. VA loans do have an upfront “funding fee” that varies
according to the down payment and other criteria. Currently this
fee ranges from 2.15 percent for zero-down borrowers to 1.25
percent for applicants putting down 10 percent. Most applicants
opt to roll the fee into the loan amount and finance it over
The VA imposes no credit score minimums. Its average FICO score
is 708, compared with the 750 to 770 scores typical for Fannie
Mae- and Freddie Mac-backed conventional mortgages at the best
interest rates. It does, however, require underwriters to look
closely at credit bureau reports and documented income to ensure
that borrowers have the ability to repay their loans.
The agency is exceptionally flexible on seller contributions
to help buyers pay closing costs, escrows and loan origination
charges — more lenient, in fact, than any other national
program. That, in turn, can significantly lower the net cash
outlays needed from borrowers at closing.
The VA also stretches debt-ratio norms when needed to help
creditworthy, income-strapped borrowers get into a home. Though
the official “back end” ratio of total household monthly debt
to household income is 41 percent, lenders say VA will let them
push this higher, even to 55 percent, on a case-by-case basis.
With all these accommodations to borrowers, how is it that VA’s
90-day delinquency rate in the latest study by the Mortgage
Bankers Association is 2.2 percent while FHA’s is 4.8 percent?
Or its total seriously delinquent plus in-foreclosure rate for
borrowers is 4.5 percent against FHA’s 8.04 percent and the
conventional prime market (Fannie and Freddie) at 4.3 percent?
Michael Fratantoni, the Mortgage Bankers Association’s vice
president for research, said that the VA’s record “is remarkably
good, given that they’re allowing first-time buyers to get in
with no down payments,” which is traditionally linked to high
defaults and foreclosures.
Michael Frueh, the VA program’s acting director, said the key to
the agency’s quiet success is its nearly paternalistic emphasis
on servicing its 1.5 million borrowers — moving early and
quickly to intervene at the slightest hint of payment problems.
“At the end of the day we are veterans’ advocates,” he said in
an interview. “We exist solely to help them,” not only to afford
to finance their homes but to remain in them. In the past three
years, the VA has instituted industry-leading techniques such
as requiring lenders to establish “single point of contact”
servicing systems, where customers deal with one person about
their mortgage issues, rather than anonymous multitudes.
Could this mindset — intensive “advocacy” servicing as a
borrower benefit built into the loan itself — be duplicated in
other segments of the mortgage market?
Ken Harney is a syndicated real estate columnist.