Madam Chairwoman, Ranking Member Boozman, and Members of the Subcommittee, I appreciate the opportunity to appear before you today to discuss the Department of Veterans Affairs (VA) Home Loan Guaranty Program.  Accompanying me today is Mike Frueh, Assistant Director for Loan Management in VA’s Loan Guaranty Service.

The VA Home Loan Guaranty Program provides an important benefit to our Veterans and eligible Servicemembers.  Since the crisis in the subprime mortgage markets became evident in the summer of 2008, the VA Home Loan Guaranty Program has been a model of stability, helping Veterans to continue to realize the dream of homeownership, despite the decreasing number of opportunities in the current marketplace. 

VA offers the country’s largest mortgage program with a zero-downpayment option.  The no-downpayment feature is a cornerstone of the VA home loan guaranty program and is critical to ensuring that Veterans and Servicemembers can secure a mortgage.  Ninety percent of VA loans in fiscal year (FY) 2009 were no-downpayment mortgages.  While most no- or low-downpayment mortgage options have become scarce in the market, federally guaranteed VA loans have become more attractive to banks and mortgage investors. 

VA’s Home Loan Guaranty Program has maintained stability for several reasons.  VA’s adherence to sound credit and underwriting principles prohibited the program from engaging in risky or subprime lending practices.  Our strong lender oversight ensured that VA’s mortgage-industry partners complied with these policies.  Additionally, VA’s panel of fee appraisers, who are assigned on a rotational basis and monitored by VA, ensures that home values are reasonable in light of market conditions.  VA also attributes the strength of the program to the strong sense of commitment that Veterans and Servicemembers demonstrate with regard to their financial obligations.  Finally, VA has a robust default-servicing program to oversee loan-servicing efforts by private mortgage servicers and, when appropriate, directly assists Veterans and Servicemembers in avoiding foreclosure.  The servicing program ensures that every effort is made to keep Veterans and Servicemembers in their homes, while limiting adverse impacts when home retention is not possible.

Program Activity Since the Financial Market Crisis

The number of home loans issued with a VA guaranty has increased dramatically since the start of the subprime crisis for three main reasons:  Other forms of mortgage financing are more difficult to obtain; interest rates are at historic lows; and changes to the VA home loan program enacted in 2008 increased the maximum guaranty amount available to individuals purchasing homes in high-cost areas.

Overall, in FY 2009, VA guaranteed 325,671 loans nationwide, valued at over $68 billion.  That represents an 82 percent increase over FY 2008, in which VA guaranteed 179,649 mortgages valued at over $36 billion.  In fiscal year 2010, the program is on track to match the volume and value of loans guaranteed in FY 2009.  VA has nearly surpassed the FY 2008 loan volume already this fiscal year, guaranteeing 175,446 loans totaling approximately $36 billion through the end of April.

Increases in both purchase loans and refinance loans have driven this growth since 2008.  An increase in refinancing loans primarily caused the increase in VA’s overall loan volume.  In FY 2008, purchase loans made up 79 percent of VA-guaranteed loans.  As refinancing became more popular, purchase loans decreased to 55 percent of VA-guaranteed loans in FY 2009.  Refinancing loans increased from 21 percent of all VA loans in FY 2008 to 45 percent of all VA loans in FY 2009.  For the current fiscal year through May 4, 2010, 40 percent of the program’s loans are refinancing loans.  Historically, interest-rate-reduction refinance loans have constituted roughly 80 percent of the refinance loans, and historically low interest rates since the start of the financial crisis sparked increased activity for these loans.

Delinquency and Foreclosure Rates

Veterans and Servicemembers, like all other Americans, face serious economic difficulties.  Rising unemployment and under-employment have led to lost wages and rapid depreciation of home values, making it difficult for homeowners to relocate for work or sell a home they can no longer afford.  VA and its partners in the mortgage industry employ a number of servicing options to help struggling Veterans and Servicemembers.  These efforts have been very successful in keeping Veterans’ and Servicemembers’ home loans from going into foreclosure, as demonstrated by industry data. 

The Mortgage Bankers’ Association (MBA) conducts a quarterly survey of approximately 44 million home loans of all types, including VA-guaranteed, Federal Housing Administration (FHA) insured, conventional market prime rate, and conventional market subprime rate mortgages.  VA believes the MBA data show that the servicing efforts by VA and its private-sector partners have been extremely effective in preventing foreclosure for Veterans and Servicemembers, despite the state of the economy and a turbulent market.  Table 1 included with this statement summarizes this information. 

Table 1: Delinquency and Foreclosure Information (Source:  Mortgage Bankers Association)

 According to the MBA data, in the fourth quarter of FY 2009, the percentage of outstanding VA loans that were in the foreclosure process was 2.46 percent.  This was the lowest in the industry.  In comparison, for the entire population, the foreclosure inventory was 3.31 percent for prime mortgages and 15.58 percent for the sub-prime mortgages. 

VA’s rate of serious delinquency (those loans 90 or more days delinquent, or in the process of foreclosure) was also lower than any other type of loan according to the MBA data.  VA’s serious delinquency rate was 5.42 percent in the fourth quarter of 2009, while serious delinquency rates were 7.01 percent for prime mortgages and 30.56 percent for sub-prime mortgages. 

Although our total default rate (those loans 30 or more days delinquent, excluding those in the process of foreclosure) has actually been slightly higher than the prime rate, VA leads the field with the lowest numbers of seriously delinquent loans and foreclosures. This illustrates that despite greater payment difficulties, VA borrowers are more likely to reach a positive outcome due to VA’s robust servicing policy.  VA is proud that our policies with respect to mortgage servicing, loss mitigation options, and alternatives to foreclosures have been very successful in helping Veterans and Servicemembers emerge from default, even though they face the same financial difficulties as all Americans.

Effects of the Slower Economy 

Although VA’s Home Loan Guaranty Program continues to provide an important benefit to Veterans and Servicemembers, the slower economy has had its effects on the program.  As previously described, the VA-guaranteed loan volume has risen over the past two years because of more stringent credit standards and the constrained state of credit in the mortgage market, which make other types of financing more difficult to obtain.  Since the financial crisis began, the VA home loan program has enabled lenders to finance loans for Veteran borrowers who may not otherwise have been able to purchase a home due to these market conditions.

Veterans and Servicemembers have had fewer opportunities for homeownership due to overall market conditions.  Potential home-buyers have faced stricter requirements for obtaining loans as more mortgage investors hedge against losses by establishing minimum credit scores for borrowers and requiring larger downpayments.  

VA has received anecdotal evidence and reports from industry partners that stricter requirements are being imposed on their VA loans as well.  For example, although VA does not require that borrowers have a minimum credit score to qualify for a VA-guaranteed home loan, many lenders have instituted such a requirement as part of their own underwriting policies.  Some lenders have also considered requiring a downpayment on VA loans to help protect them from loan losses beyond the VA guaranty.  VA does not have the authority to prohibit lenders from imposing this extra layer of requirements, but additional lender requirements may make it more difficult for Veterans to obtain homes. 

Like many other Americans, Veterans and Servicemembers who already own homes have been affected by financial problems.  Although VA loans continue to out-perform all other types of mortgages in avoiding serious delinquency and foreclosure, trouble in the broader economy has led to a slight rise in these numbers.  Serious delinquencies have risen steadily from 4.12 percent in the fourth quarter of FY 2008 to 5.42 percent in the fourth quarter of FY 2009. The inventory of loans in foreclosure has risen as well, from 1.66 percent in the fourth quarter of FY 2008 to 2.46 percent in the fourth quarter of FY 2009.

Private-sector VA home loan partners, including banks and mortgage servicing companies, are the first source of assistance for a borrower in trouble, and under VA loan program guidelines, these partners are required to pursue all realistic alternatives to foreclosure.  These alternatives include extended payment plans, forbearance, loan modifications, short sales, and deeds in lieu of foreclosure.  VA instituted an incentives program to ensure that servicers explore these options before considering foreclosure.  VA also reviews each loan that is referred for foreclosure and attempts to contact the borrower directly to provide financial counseling and assistance in developing repayment plans with the private servicers if needed.  These efforts protect the American taxpayer by avoiding claim payments on loans that can avoid foreclosure.  In FY 2009, VA helped nearly 72 percent of those who defaulted on their VA mortgages, or over 38,000 families, avoid foreclosure.

VA adopted measures to provide greater assistance to struggling homeowners in the midst of the financial crisis.  VA’s Home Affordable Modification Program (VA HAMP) went into effect in February 2010.  VA HAMP is part of the President’s Home Affordable Modification Program (HAMP) to make home ownership affordable, or when that is not possible, to mitigate losses.  Under HAMP, the servicer may offer the borrower a modification of the mortgage terms to make the payments manageable.  If the servicer is not willing to offer the borrower a HAMP modification that could make the loan affordable, VA will consider whether it is in the Government’s best interest to purchase the loan from the bank or mortgage servicer and offer terms that are more favorable to the homeowner.  VA HAMP has seen very little activity in the past few months as servicers continue to ramp up their special review processes to address loans that cannot be helped through traditional loss-mitigation options.  

Although foreclosures of VA loans increased as a result of the poor economy, VA and its private-industry partners have worked hard to ensure foreclosure is truly the last resort.

Conclusion

We look forward to working with Congress to improve our service.  The VA Home Loan Guaranty Program provides a valuable benefit to Veterans and Servicemembers who want to obtain, retain, or adapt a home.  VA plans to continue to provide world-class service by focusing on prevention of foreclosures.  We aim to bolster our relationships with our private-sector partners that help fulfill our mission through training and outreach to lenders. 

 Madam Chairwoman, this concludes my testimony.  I appreciate the opportunity to be here today, and I look forward to answering the Subcommittee’s questions.