How does a government loan program outperform conventional prime mortgages, even when it offers no-down-payment loans to 90% of its borrowers?
First, it helps to cater to veterans and the men and women of the U.S. armed forces.
Second, originations for the Department of Veterans Affairs' loan guarantee program have surged since subprime lending dried up.
And third, the VA has developed an automated servicing system that allows its staff to monitor the performance of individual loans, ensuring that private servicers are taking the proper steps to help veterans who fall behind on their payments.
What's more, the VA employs a "single point of contact" model, which some large servicers are only now starting to implement under the duress of enforcement orders by their regulators.
"Right now we have 89,000 defaulted loans and every loan is assigned to a single person," said Mike Frueh, acting director of the agency's home loan guarantee service.
The VA estimates that upward of 20,000 of those borrowers need more attention and are placed on a special watch list where agency staffers initiate contact with the borrower if they are not responding to the servicer.
Frueh referred to this oversight as "supplemental servicing." In rare cases the VA will actually buy the loan from the servicer if agency officials believe there is a chance to modify the loan and keep the veteran in his or her home.
Frueh said the supplemental servicing helps borrowers recover from defaults much faster.
Over the past nine quarters, VA loans have outperformed prime mortgages in the category of serious delinquency, or 90 days or more past due.
Roughly 4.52% of VA loans were deemed seriously delinquent as of March 31, compared with 5.85% of prime mortgages, according to the Mortgage Bankers Association's delinquency survey. (The serious-delinquency rate on Federal Housing Administration-insured loans is 8%.)
One reason for the agency's success is an automated servicing system called Valeri (VA Loan Electronic Reporting Interface system), which was rolled out in February 2008 during the early days of the mortgage meltdown under former home loan director Keith Pedigo.
With Valeri, the agency's supplemental servicing shop receives real-time data on every loan and its staff can make sure servicers are offering delinquent VA borrowers every opportunity to retain their home or avoid foreclosure.
"If a servicer is not responsive, we can intervene and suggest a loan modification," Frueh said.
Meanwhile, demand for the agency's loan products is way up.
Since the housing bust, VA loan production has nearly tripled as subprime lending has dried up. In 2006, the VA guaranteed 138,000 loans. In 2008, that number rose to just under 200,000 and hit 328,000 in 2010.
There are no signs of a slowdown this year. Lenders originated 111,000 VA loans during the first four months of the year, a run rate of 333,000 units for 2011.
The agency's guarantee program currently has 1.45 million loans outstanding, totaling $230 billion.
