A proposal in Congress could severely limit the Department of Veterans Affairs’ assistance for last-resort borrowers under the VA servicing purchase program. At the same time, it could reinstate a short-term option that the industry has sought.
“My final bill would provide an option for the waterfall for veterans going through the loss mitigation by establishing a partial claim program. This program would bring the VA home loan program on par with other programs such as FHA,” said Rep. Derrick Van Orden, R-Wis., at a subcommittee hearing Tuesday.
The proposal could temporarily promote some standardization that resolves tension between broader utilization of the pandemic-era partial claim at the Federal Housing Administration and the VA’s difficulties funding its own version, but it also raises some short- and long-term concerns for the industry. A partial claim allows the VA to temporarily cover a portion of a veteran’s mortgage arrears. This helps prevent foreclosure and gives veterans time to repay.
The bill, HR 1814, would limit a last-resort option now extended to tens of thousands of veterans to just 250. Also, it would only reinstate the partial claim until Sept. 30, 2027.
“The VA MBA supports the partial claim program in the VA Home Loan Program Reform Act, however, several changes are needed to ensure the program is workable and provides maximum benefit to veterans,” said Elizabeth Balce, an executive vice president at Carrington Mortgage Services.
Key servicer concerns include the lack of clarity around whether or not the partial claim option involved would be deducted from the 25% loan guarantee the VA provides if the loan defaults, she told attendees at a VA subcommittee hearing.
“If a partial claim is deducted from the 25% loan guarantee, lenders will be left with little to no remaining coverage, increasing risk and making VA loans less competitive in the market,” she said. “This could reduce veterans’ coverage.”
Balce, who was speaking on behalf of the Mortgage Bankers Association and not her employer, also showed concern about a requirement in the bill for veterans to repay their partial claim within three years to maintain a 0% interest rate, increasing to 0.5% in cases where payments are delayed.
“Veterans should not be subjected to unnecessary repayment burdens that could jeopardize the ability to remain in their homes. This is inconsistent with other government partial claims and would prove difficult to operationalize,” she said.
In response to the concerns raised by Balce, Rep. Delia Ramirez, D-Ill., warned that limiting the partial claim could lead to more VA foreclosures. VA foreclosures recently rose 30% after a voluntary ban originally put in place to address a lag between an emergency program and VASP was lifted.
“Without VASP, the risk of veteran foreclosures is only going to grow,” Ramirez said.
Democrats currently have limited power in the Republican-dominated Congress, particularly in the House where the GOP leads by a broader margin.
Van Orden, who chairs the VA economic opportunity subcommittee and will play a key role in shaping the bill, said he takes a “nonpartisan” stance on veterans issues.
The subcommittee chair said he can understand the industry’s view given his experience as a borrower, but that his first priority is to protect taxpayers and VA’s budget by encouraging borrowers to live up to their obligations.
Features of the bill such as the interest rate charge aimed at deterring borrowers from making late payments are important because they prevent the VA borrower relief from introducing a moral hazard, Van Orden said. (VA performance tends to be particularly strong, in part due to residual income analysis.)
John Bell III, executive director of the loan guaranty service at the Department of Veterans Affairs, submitted a written statement to the hearing record indicating he wanted more time to study the bill before weighing in on the VASP’s fate.
“I do not want to get ahead of the administration and the administration goals as to the future of VASP or the future of the program,” he said during testimony at the hearing. “What I can say is it never was intended as the stop gap for all mortgages or a long-term program.”
The VA discontinued the pandemic-era partial claim program back in 2022, citing unsustainable costs and the fact that it was an emergency measure. The Biden administration later pushed the department to create VASP to help borrowers who might have otherwise wouldn’t get relief without the partial claim.
While Van Orden said not all bills discussed at the hearing will pass, he signaled that keeping costs from the VASP program in check is a priority.
Tobias Peter, senior fellow and co-director of the American Enterprise Institute’s AEI Housing Center, said during the hearing that he supported that aim.
The VASP program is an example of “costly, taxpayer-funded federal intervention,” he said.
