The 2012 FHA annual report is out and it says there are a lot of VA loans. Actually, it doesn’t “say” any such thing, but if you read between the lines, that’s the plain message.
In the fiscal year that ended Sept. 30, the FHA insured 2,575,653 loans; that’s 27.2 percent of the market. The report also says that the VA guaranteed 7.4 of all new loans during the same period, or roughly 700,000 mortgages.
What’s unusual about these numbers is that, relatively speaking, there are not a lot of military households. We have 1,452,939 individuals on active duty with the Army, Navy, Air Force, Marines and Coast Guard. We also have a roughly equal number of people in the Reserves and National Guard.
Nearly 3 million people have direct ties with the military, less than 1 percent of the 314.7 million people who make up our national population.
So why is it that military households have roughly 1 percent of the population but 7 percent of the new loans?
I think three reasons stand out:
First, military personnel have jobs and excellent insurance. Such economic stability is a very important consideration for lenders.
Second, lenders want to make VA loans because there are few foreclosures. The latest figures from the Mortgage Bankers Association show that VA mortgages have a 2.21 percent foreclosure rate that’s lower than prime fixed-rate financing (2.34 percent) and vastly lower than adjustable prime-rate loans (7.82 percent).
Third, VA loans are consistent and reliable. There are no prepayment penalties with a VA mortgage and no annual mortgage insurance premiums. There are also no “gotcha” clauses, the surprise costs associated with toxic loans.
Truth is, VA loans are also important because they create an important benchmark. There would have been no mortgage meltdown and no financial crisis if all loans met VA standards.
The VA has never backed off from traditional lending standards. When you get new VA financing there must be a full-blown mortgage application. In exchange for a little paperwork you get a mortgage that’s safe and secure, the lender has more certainty that the loan will succeed and the VA has fewer claims than might otherwise be the case.
There’s now a big debate in Washington regarding what loans lenders should be allowed to make. Here’s an idea, forget the arguments, complexities and exceptions and just agree that all mortgages must meet baseline VA standards. We know such benchmarks work: just look at the disproportionate number of loans which go to VA borrowers, and look at how few turn sour.
Photo courtesy Alaskan Dude