Predatory-lending practices affecting VA, FHA borrowers

WASHINGTON — Could predatory-lending practices affecting veterans also be inflating interest rates paid on FHA loans?

The answer appears to be yes.

According to officials, some lenders active in the Department of Veterans Affairs homemortgage program have been inducing borrowers to refinance their loans frequently to generate fat fees for the lenders themselves rather than benefiting veterans.

Such abuses have spilled over onto borrowers in the Federal Housing Administration market, which primarily serves firsttime home purchasers and others who lack significant cash for a down payment.

The linkage is via the Government National Mortgage Association, or Ginnie Mae. Ginnie connects individual homebuyers and refinancers using federal mortgage programs with deep-pocket investors around the world. Ginnie pools VA, FHA and U.S. Department of Agriculture rural housing loans into mortgage bonds, and provides a federal guarantee of timely payments to investors.

The inevitable result of the VA lenders' predatory activities is an unusually high number of refinancings within the pools, which disrupts the expected long-term payment flows to investors. That, in turn, prompts investors to lower what they'll pay for the bonds, and has the side effect of raising lenders' interest-rate quotes to VA, FHA and rural homebuyers and refinancers.

What's being done to end this scandal? Ginnie Mae recently announced that it has notified lenders who allegedly have been abusing veterans on refinancings that they face exclusion from Ginnie's principal bond program if they don't stop such practices.

Meanwhile a bipartisan group of senators has introduced legislation that would block lenders from foisting rotten refi deals on VA borrowers.