Lesser-known financial outfits such as Low VA Rates LLC are dominating the business of selling cash-out VA mortgage refinancing, which totaled $41 billion worth of new loans over the past year, Bloomberg News reported. This boom is alarming federal regulators. Lenders, who can charge thousands of dollars in fees, are encouraging veterans to extract as much as 100 percent of their home equity. Many of the borrowers have poor credit and low incomes, and they could soon find themselves deep underwater. Multiple refinancings helped spark the 2008 financial collapse. In a recent Federal Register notice, the VA itself says financial companies are reviving “subprime lending under a new name.” Lenders say that they’re providing a valuable service to cash-strapped veterans. Many borrowers use the money to pay off high-rate credit cards, medical bills, or home repairs. Founded in 1944, the VA loan program began as a way to offer a hand up to returning World War II service members. In the event of a default, the government guarantees 25 percent of the loan; the lender is responsible for the rest. Government-owned Ginnie Mae backs bonds based on these loans, which are packaged and sold to investors, such as pension and mutual funds. The loans have helped generations of veterans buy homes. But refinancings can be a costly way to free up money. In a cash-out transaction, borrowers get a new loan for more than they owe on their current mortgage. A VA borrower must pay as much as 3.3 percent of the loan amount to the federal government as a fee that offsets defaults.
