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November 09 2017 by David Stinner in Edge Platform

An Analysis of VA Mortgage Refinance and Performance Data

In light of recent news stories1 concerning efforts to stem aggressive solicitations that steer VA mortgage refinances that are not necessarily in their best interest, we thought it fitting to take a look at some of the data underlying this trend. At issue are claims that VA borrowers are being persuaded to refinance their mortgages ostensibly to reduce their monthly payment. In many cases, however, the lower monthly payment was being made possible primarily by upfront fees and by extending the term of the mortgage. Consequently, even though the monthly mortgage payment was going down, the mortgage balance was often going up along with the number of payments required to pay off the mortgage. Let’s see what the data indicates.

 

Issuance Trends

Almost all VA mortgages ultimately find their way into Ginnie Mae mortgage-backed securities. Issuance of Ginnie Mae securities has remained relatively stable over the past year, totaling $469 billion, which represents 34% of the total government and GSE issuance.

Ginnie Mae securities are comprised primarily of loans insured by the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA). The charts below contrast the distinct differences in the purpose, purchase vs. refinance, for the new loans between the two guarantors. From the fourth quarter of 2016 through early 2017, VA refi loans exceeded purchase loans. In contrast, FHA purchase loans have consistently surpassed refi loans. This may be an indication that Ginnie Mae’s efforts to curb serial refinancings—by imposing a six-month moratorium on refinancing purchase loans—have had the desired effect.

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Performance Trends

Serial refinancings (churning) also impact the investors in Ginnie Mae mortgage-backed securities. Faster and more volatile prepayment rates make a security more difficult to value and can negatively affect its price. During most of 2016, prepay speeds on VA loans significantly outpaced those of FHA loans. Prior to early 2016, however, FHA loans actually prepaid faster than VA loans, and speeds for the two products have been nearly the same since February 2017.

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Comparing the prepay rates for only VA loans based on purpose (purchase vs. refinance) shows a similar trend—refi loan prepay materially faster than purchase loans, with the gap narrowing in the more recent periods.

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A comparison of serious delinquency rates (90 days or more weighted by outstanding balance) reveals VA refi loans are measurably more prone to delinquency than are purchase loans. This indicates increased risk for the refi loans with potentially adverse consequences for the borrowers.

In the aggregate, the actions taken by Ginnie Mae to target serial VA mortgage refinances, principally a moratorium on refis within six months of a new purchase loan, appear to be having their intended effect—reducing refis and delinquencies to the benefit of veterans and MBS investors alike.

 

Performance Trends

Serial refinancings (churning) also impact the investors in Ginnie Mae mortgage-backed securities. Faster and more volatile prepayment rates make a security more difficult to value and can negatively affect its price. During most of 2016, prepay speeds on VA loans significantly outpaced those of FHA loans. Prior to early 2016, however, FHA loans actually prepaid faster than VA loans, and speeds for the two products have been nearly the same since February 2017.