The U.S. Department of Veteran Affairs (V.A.) announced on Wednesday morning a program to purchase defaulted V.A. loans from mortgage services and place them in its portfolio at a fixed 2.5% interest rate.
The Veteran Affairs Servicing Purchase (VASP) program attempts to prevent foreclosure actions against military members still experiencing financial hardship due to the consequences of the COVID-19 pandemic.
However, the initiative has received criticism from politicians, who cite a “moral hazard” issue in encouraging veteran borrowers to become delinquent to take advantage of a much lower monthly payment. They also mention impacts on the federal budget.
According to the V.A., the new program starts on May 31 and will result in a government subsidy reduction of approximately $1.5 billion from 2024 to 2033. The estimate is based on the savings from avoiding foreclosures compared to the cost of purchasing these loans.
V.A. Secretary Denis McDonough said in a statement that the program “will help more than 40,000 veterans and their families stay in their homes.”
Mortgage servicers will identify qualified borrowers and submit requests to the program on behalf of veterans, so veterans will not apply directly for VASP.
During the COVID-19 pandemic, the Veterans Assistance Partial Claim Payment program allowed borrowers to skip six or 12 mortgage payments, resuming when they were back on their feet. Meanwhile, missed payments were moved to the end of the loan term.
The program ended in October 2022, when mortgage rates were higher. In November 2023, amid complaints of veterans’ struggles and no substitute to the partial claim, the V.A. paused foreclosures and extended its COVID-19 Refund Modification program through May 31.
During a conference in February, John Bell, executive director of loan guaranty service at the V.A., explained that VASP “acts in the same manner that a partial claim does.” Still, for the Department to be able “to set an interest rate below market,” it has to “take the asset back.” The program, according to him, “certainly has fiscal responsibility.”
In response to the V.A. Wednesday’s announcement, the National Consumer Law Center (NCLC) and the Center for Responsible Lending (CRL) asked the V.A. to extend the foreclosure pause, which is set to expire on May 31, until the VASP program is widely available.
“We also urge V.A. to eliminate any rules that unnecessarily limit access to VASP for borrowers who previously received unaffordable loan modifications,” Steve Sharpe, senior attorney at the NCLC, said in a prepared statement.
In a letter to the V.A. in January 2023, the consumer advocate groups noticed that the average interest rate for VA-guaranteed loans originated after 2019 is 3%, less than half the current market rate. At HousingWire’s Mortgage Rates Center, the 30-year conforming mortgage rate was 7.16% on Wednesday morning.
Kanav Bhagat, a consultant to the CRL, added that the VASP program “will be broadly available and provide relief that many V.A. borrowers need, especially in the current high-interest rate environment. “
However, NCLC and CRL added that the V.A. could adopt additional changes to improve further VASP, including a system for modifying interest rates that gives all borrowers substantial payment reductions and a plan for limiting servicing transfers.
Mortgage Bankers Association (MBA) president and CEO Bob Broeksmit said in a statement that despite the program starting in May, servicers will be provided additional time to implement it, which Veterans should consider.
“MBA will work with the VA to ensure VASP delivers what is promised without placing undue operational and cost burdens on servicers and Veterans,” Broeksmit added.
While welcoming the release of the VASP program, the MBA also believes additional resources should be available to borrowers, including a permanent partial claim option as it exists for every other government loan program.
“Having both a partial claim option and VASP would provide servicers a durable loss mitigation framework to help struggling homeowners avoid foreclosure in any market environment,” Broeksmit said.
