The past few years have seen an enormous number of foreclosures. The common wisdom has been that a leading cause of default was payment shock, a swift and sizable increase in adjustable monthly payments.
Now, however, Paul S. Willen, a senior economist with the Federal Reserve Bank of Boston, says payment shock is little more than an urban myth.
See More
The leading real estate story of the past few years has concerned foreclosures and delinquencies, but an untold story concerns the VA mortgage program and the fact that it has the lowest level of troubled loans.
VA loans have had the lowest rate of foreclosure for the past 14 months and the lowest rate of serious delinquency for the past 11 months, according to the Mortgage Banker Association. Serious delinquency refers to the percentage of loans 90 days or more past due. The rates exceed even those of prime loans.
These VA foreclosure results allow us to make several observations.
First, down payments are not the key to mortgage success. VA mortgages are almost always made with zero down versus 3.5 percent for FHA financing and 5 percent for conventional loans with private mortgage insurance.
Second, high interest rates for subprime loans are justified by steep foreclosure rates. Alternatively, some would argue that as a business decision lenders should not be making subprime loans given the woeful results such financing produces. The catch is that if lenders do not make subprime loans there will be fewer buyers in the marketplace, less demand, and less pressure to force up home prices — not a good strategy in today’s world.
Third, another argument in the finance field goes like this: The VA gets good results, the best results, because it uses leverage to hold lenders accountable for the loans they make.
How is that done?
Here’s an example: Imagine that a lender makes an FHA loan. The principal amount is 100 percent insured. If the loan goes bad the FHA insurance fund takes the hit.
Now imagine that a lender makes a VA mortgage. Nope, no 100 percent lender guarantee here. Instead, the VA promises to pay back only a portion of the debt. As the VA explains, lenders get “a 25% guaranty from VA, assuming the veteran has full entitlement.”
A 25 percent guarantee is substantial — before the foreclosure crisis it was hard to imagine a situation where a lender could make a VA loan and lose a quarter of the loan amount. In effect, VA mortgages represented almost no risk to lenders.
Today, however, a 25-percent loss is entirely possible. As an example, the Federal Housing Finance Agency reports that home values at the end of the second quarter were down 18.8 percent when compared with the peak in April 2007. You can bet that in the major foreclosure centers the typical price drop has been far greater.
To get the benefits of a VA mortgage you can expect lenders to check and verify every aspect of a loan application with a particular vigor. That’s fair, because with the VA program lenders really have skin in the game — their own.
The benefit to VA borrowers is that with fewer foreclosures there’s less justification to raise the up-front funding fee, and that’s fair, too.
Photo courtesy of respres
The past few years FHA loans have been enormously popular. This is largely a byproduct of the fact that FHA financing is a known quantity; these loans have been used by more than 37 million borrowers since the 1930s.
No less important, FHA financing is safe. Like VA loans, an FHA mortgage doesn’t have any “gotcha” clauses that create unfair costs or surprise foreclosures.
The popularity and safety of FHA financing raises a question: Instead of getting a VA mortgage would it make more sense to get an FHA loan now and save your VA entitlement for later?
The government has new mortgage information and guess what? It turns out that the use of VA mortgages has more than doubled since the financial crisis began — and that those who use VA loans have fewer foreclosures than any other group of borrowers.
This is a very big deal because the foreclosure crisis would be far worse had it not been for the use of FHA and VA mortgages. Now, for the first time, we can begin to see how government-insured home loans have prevented the fall of the housing market from being much worse.
Recent Comments