Amendments to a new bill which is currently making its way through the United States Senate may have unintended consequences for military families who currently own a home or are considering purchasing their first house. Called the Financial Services bill, the piece of legislation attempts to provide additional protection for home mortgage borrowers and close several mortgage lending loopholes that contributed to the subprime mortgage collapse.
However, an amendment introduced by Sen. Jeff Merkley (D-OR) would also ban so-called “liar loans” that proliferated during the recent housing market boom. These mortgage programs required no real financial documentation from the borrowers and often resulted in defaults or foreclosures due to the loans’ associated higher costs. The bill, as its proposed, would eliminate bonuses for mortgage brokers who participate in these loan programs and would close several loopholes that allowed the loans to proliferate in the process.
While the amendment seems like excellent progress for the safety of the mortgage lending market, it may actually harm proven, ethical lending programs in the progress. The bill will now require strict underwriting and verification procedures for many government sponsored loan programs, most notably the VA Loan Guaranty program, which provides guaranties to help veterans, active duty service members, and their families purchase homes. VA home loans have competitive interest rates, generous credit terms, and low down payment options, as well as streamlined refinancing.
The new layers of protection guaranteed by the amendment will unfortunately have consequences, however, for the veterans who attempt to use a VA loan to purchase a home. If the legislation passes, the new underwriting and credit requirements for the VA program will preclude many previously qualified potential borrowers for receiving funds on a VA loan and the underwriting requirements will cost more time and money, necessitating a price increase for the loan itself. As with most price increases, this one will surely be passed down to the customer, making the formerly inexpensive VA loans a little more costly for customers.
VA home loans have provided more than 18 million qualified service members and veterans with loans since the program’s inception in 1944. Moreover, in spite of the recent economic crisis, the program has boasted the lowest default and foreclosure rate of any other loan type on the market by a wide margin. While the recent amendment to the Financial Services bill was doubtless born out of an altruistic desire to repair the mortgage market, it unfortunately has unacceptable consequences for at least one of the most secure and beneficial loan programs currently on the market.