Growth in VA-Guaranteed Lending Will Continue in Years Ahead

The Department of Veterans Affairs mortgage guarantee program is likely to continue its growth trajectory in years ahead as military personnel return stateside and/or leave the service and buy homes.

That will make VA lending one of the few bright spots in a mortgage industry struggling with rising compliance costs, shrinking origination volumes and tightening profit margins.

Over the past seven years, the VA guarantee program "has grown exponentially," even during the mortgage bust years of 2007 and 2008 as well as the boom years since then, noted Grant Moon, the founder and president of VA Loan Captain, a Union City, N.J.-based lead generation company specializing in VA loans.

"You have the U.S. winding down after years of fighting wars in Iraq and Afghanistan, so you have more veterans, younger veterans coming home, integrating back into society, getting jobs," Moon said. "That is creating the impetus to have some sort of shelter."

The VA home loan program allows these veterans to "get into their own home with minimal barriers" to getting approved, pointed out Moon, a military veteran himself.

Between 2008 and 2013 the program's annual volume has increased each federal fiscal year (which runs from Oct. 1 to Sept. 30) over the previous one, according to VA's data. And between 2005 and 2011, there were more purchase loans done through the program than refinancings.

In 2012 and 2013, which was the peak of the latest refi boom, the VA guaranteed more refi loans than purchase loans. In fact, 2013 was the busiest fiscal year ever for the program, with 629,293 loans guaranteed by VA. But only 38% or 241,194 were for home purchases.

But through Aug. 10, 62% of the 358,629 mortgages guaranteed by VA in fiscal year 2014 were used to buy a home. The main selling point for the VA product is that it is practically the only program in the market that provides 100% financing.

There is no mortgage insurance required for any loan with a loan-to-value ratio higher than 80%.

That is an advantage in higher priced markets like New York where it could take a long time for someone to save enough cash for a down payment, Moon said.

But even in other markets, not having to use savings for a down payment means the veteran can use those funds for other expenses, like buying furniture, that come with buying a new home, added John Bell, the VA's assistant director of loan policy and valuation.

There is no down payment made with 89% of the loans VA guarantees, he said.

Furthermore, 35% of veterans do not have to pay a funding fee with this loan because they receive compensation for a disability.

The VA product is more attractive to those eligible when there are few, if any, other 100% financing products in the market, added Louise Thaxton, director of the military mortgage specialist division and a branch manager at Fairway Independent Mortgage Corp.'s Leesville, La., office.

Borrowers with credit challenges, a condition many military families find themselves in, are also eligible for financing. Higher debt-to-income ratios are also permitted.

And even with the broad underwriting criteria, there are still some vets who don't qualify for a loan.

"I don't see many [lenders] go the extra mile," Thaxton said.

"We do not say no; we just say not now. There are many of our military clients we work with to help them get ready to purchase a home."

The VA's underwriting guidelines are responsible for the program's high percentage of performing loans, Bell said.

The agency requires lenders to look at the borrower's entire credit profile, focusing on their expenditures versus their income.

There are some challenges to growth in the VA program. The United States military has been reducing its numbers, with some being laid off from the armed services, she noted.

A lot of people had planned to be in the military for at least 20 years and be eligible to retire; now they have to find another job. That could keep them from participating in the home purchase market.

Also holding back the VA program, even with the record fiscal 2013 volume, is what Moon termed "urban myths," such as the idea that the borrower doesn't have to shop for lower rates and fees.

When Moon left military service in 2008 and decided to buy a home, he didn't know much about the program, so he looked it up on an online search engine.

He went with the first lender the search returned "because I was like, 'if it is a VA loan, it is a one size fits all.' Everyone is going to give me the same rate, everyone is going to give me the same fees and I didn't know that is actually not the case."

Like with any other mortgage product, shopping can indeed save the veteran money. Some lenders charge discretionary fees. (The lenders listed on VA Loan Captain do not charge an origination fee, Moon said.)

The VA controls what fees lenders can charge and it monitors them for adherence to the policy, Bell added.

There are also false preconceived notions about what the loan can be used for, how many times a veteran can use the program, the interest rates and closing costs.

To help counter those notions, education is important. Fairway conducted a "boot camp" in August and trained over 400 real estate sales people to earn the company's Certified Military Residential Specialist designation.

Fairway has a separate designation for its loan officers, the Military Mortgage Specialist. Thaxton holds this designation and teaches both courses.

"I tell them some of the challenges of working with military families and why there is such a need for watchdogs and people who care and go the extra mile."

Many military families have been victimized by payday loan and other financial scams and they need to work with someone who has knowledge about their unique circumstances.

Thaxton tells originators and real estate agents looking to work with military families not to look for clients who have 800 credit scores.

Another challenge is the divorce rate is higher among military families and that not only affects their credit, but also puts a strain on their income, she noted.

The VA has also made its own concerted effort to expand vets' knowledge of the product, through webinars and in-person training, along with working with trade groups such as the National Association of Realtors and the National Association of Home Builders, Bell said.

Ditech, which recently revived its iconic brand name, decided to put a bigger emphasis on originating VA loans this year. The company opened up the program to all of its origination channels and now has very few investor overlays.

It saw that the number of people with military service who need housing finance grow dramatically "and we obviously we wanted to be to support those folks," said Laura Reichel, the senior vice president of investor relations and product development at the Fort Washington, Pa.-based subsidiary of Walter Investment Management.

"It really supports the Ditech branch message, who we are and making sure we are taking care of our borrowers in general, but especially those in the military," she said.

Having VA guaranteed loans on the product menu is critical for Ditech's main production channels, retail (where the company gets much of its business through real estate agents) and correspondent, so it can fully serve the needs of those it purchases loans from.

"We can't grow unless we have a VA program. It's a must have in our mind," Reichel stated.

Even though the VA business is going strong now, changes in the United States' military profile will have an effect many years down the road.

As noted above, the armed services are reducing their workforces. The future of the military "is more towards machines and less towards people," said Mitchell Fillet, a professor at the Fordham University School of Business and the co-director of Fordham's Center for Entrepreneurship.

There will not be the massive call-ups that had been in the past when the country has a military action.

But in the near term, the military remains a viable option for many young people who are looking for a good job and acquire skills they can use in the future. And when they come out of the military they will still require the support services and benefits, Fillet said.

So military veterans will be an important force for the U.S. economy's growth in the future.

Their level of training and military experience will make them attractive candidates for many civilian employers. And once they get established in the job market, these people will start looking to buy a home, he said.

And all the experts agree, the VA guarantee program offers these people financial advantages over conforming or other government loan programs.

"In most cases, the veteran is best served by doing a VA loan than any other loan type," Moon declared.

"Is that always true? No. Nothing is ever always true. For most vets I know, it is definitely the best deal around for them."