The Department of Veterans Affairs headquarters building as seen in Washington, D.C., on July 6, 2022. (Carlos Bongioanni/Stars and Stripes)
WASHINGTON — More than 40,000 veterans who fell behind on their mortgages will get seven more months to catch up with payments or make other arrangements with lenders under an extended moratorium on foreclosures that the Department of Veterans Affairs announced.
The moratorium on foreclosures for delinquent VA-backed home loans, which was set to expire May 31, will be extended through Dec. 31, VA officials said Wednesday.
The extra time also will enable the VA to implement a new “last resort” program that grants the VA authority to assume mortgage obligations with the goal of keeping borrowers in their homes, the agency said.
Lenders also will have until Oct. 1 to familiarize themselves with technical and policy requirements for making submissions under the new program, the VA said.
The new Veterans Affairs Servicing Purchase program, known as VASP, authorizes the VA to buy a VA-guaranteed home loan in default from a financial institution and place it in the VA-owned portfolio as a direct loan.
The VA then will take over the loan servicing and charge the homeowner a fixed, below-market rate of 2.5% under the terms of a 40-year modified home loan.
“For veterans who still encounter challenges after working through a number of steps to refinance their loans, we see this tool as meaningful,” VA Secretary Denis McDonough said at a news conference announcing the extension.
McDonough said he did not have projections on the number of foreclosures on veterans’ homes that the agency hopes to avoid through the new program.
Veterans must be experiencing severe financial hardship to be considered for the program, the VA said.
To be eligible, borrowers must be in default for at least three months, have acceptable credit and show proof of income. They also will need to certify their intent to live in the home as full-time residents.
The lender must submit a request for the VA to purchase the loan after the homeowner has exhausted conventional refinancing options through the financial institution, the VA said.
That means borrowers in default need to show a history of working with their bank to adjust the terms of their loan or establish alternative payment plans to keep their homes, the VA said.
“You may hear your servicer refer to VASP as the last option in the home retention waterfall,” according to a VA web page about the new program.
Homeowners facing immediate financial hardship should enter into forbearance agreements that allow them to temporarily stop or reduce their mortgage payments before talking to their lender about the VA’s below-market rate home loan program, the VA said.
The Veterans Affairs Servicing Purchase program has been set up as “the final step on a multi-step process as the veteran wrestles through the challenges of an interest-rate market with significant challenges,” McDonough said.
The average 30-year fixed mortgage interest rate is now hovering at about 7%, according to Bankrate, which tracks commercial interest rates for consumers.
Thousands of veterans with VA-backed home loans fell behind in their payments during the coronavirus pandemic, when many businesses closed, and workers lost earnings.
Some of the VA-backed home loans went into default after the VA ended a pandemic-era program in 2022 that let borrowers push their overdue payments to the end of their loan term.
Many borrowers who left the program refinanced their loans at a higher interest rate with commercial lenders. They are not eligible for the below-market rate under the Veterans Affairs Servicing Program, VA officials said.
The program is only for borrowers who are in default on their home loans and demonstrate an inability to meet their financial obligations, the VA said.
“To be eligible, folks have to be in a delinquency situation,” said Terrence Hayes, the VA press secretary. “Those individuals who modified loans with higher interest rates unfortunately don’t fall into that category.”
