The Department of Veterans Affairs plans to introduce a low-interest rate refinancing plan starting May 31, 2024, for borrowers with VA-backed home loans in default. (Stars and Stripes)
WASHINGTON — The Department of Veterans Affairs plans to begin offering up to 40,000 veterans and troops who own a home and face foreclosure a VA-backed loan — a “last resort” refinancing tool to bring down their interest rates.
The Veterans Affairs Servicing Purchase program, which aims to help veterans, active-duty troops and military spouses avoid foreclosure and stay in their homes, will become available May 31, VA officials said Tuesday.
Under the terms of the program, the VA will agree to purchase VA-guaranteed home loans from commercial mortgage servicers, lower the interest rate to 2.5%, and then add the mortgage to VA’s own portfolio of direct loans.
The average rate on a 30-year fixed loan was running close to 7% on Wednesday, according to BankRate, a consumer financial services company that surveys major lenders weekly.
The VA said home loan counselors will be available to work directly with eligible borrowers to adjust the terms of their loans. The refinancing option is designed as a money-saving plan for borrowers who have fallen behind on a least two monthly payments.
Josh Jacobs, the VA’s undersecretary for benefits, said Tuesday that the Veterans Affairs Servicing Purchase program is for borrowers with VA-backed home loans in default who have exhausted other refinancing options with commercial lenders.
The VA adopted a forbearance program after the coronavirus pandemic idled many businesses and caused thousands of veterans to lose income, according to the VA. The program allowed them to skip payments for six to 12 months.
After the pause expired in 2022, many homeowners with VA-backed mortgages had to catch up on higher monthly payments.
The VA estimated last fall that about 6,000 homes were in foreclosure, and 34,000 others were considered delinquent.
The VA paused foreclosures until it could introduce a low-cost refinancing program.
Jacobs described the below-market financing as providing an “additional affordable payment [plan] that will work in a higher interest rate environment.”
“If you are not in default, this program is not for you,” Jacobs said.
But some Republican lawmakers have questioned whether the refinancing option will incentivize some borrowers to default intentionally on their loans to lower their monthly payments.
“I am concerned that this program will encourage veterans to become delinquent on their loans to let VA take over the servicing of their payments,” Rep. Merrick Van Orden, R-Wis., chairman of the House Committee on Veterans’ Affairs subpanel on economic opportunity, said in February.
There are roughly 3.7 million active home loans held by veterans, active-duty military personnel and spouses, according to the VA, which guaranteed 400,000 home loans in 2023.
The VA plans to send letters to veterans whose loans are in default and assign loan technicians to help borrowers through the process.
“We become the holder of the note, when we take the loan back,” said John Bell, executive director of the loan guaranty program at the VA.
Bell said not only is the “rising [interest] rate environment” straining homeowners, but higher costs for homeowners’ insurance and utilities also is having an impact.
The special refinancing package for homeowners in distress is being introduced as the VA ends its pause on foreclosures, which was announced in November.
The VA had requested commercial mortgage servicers pause foreclosures on VA-backed loans through May 31 as it sought to find a way to provide economic relief to borrowers in default.
Veterans will not apply directly for the special refinancing. Mortgage servicers instead will submit requests on their behalf after a review of all repayment options is explored, the VA said.
