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Government cracks down on refi scheme targeting veterans

Kenneth R. Harney on

WASHINGTON -- Federal officials plan to crack down on what they view as predatory lending schemes -- reminiscent of the toxic practices seen during the housing boom -- targeted at thousands of veterans nationwide who have VA home loans.

The abuses involve serial refinancings that generate hefty fees for lenders and loan brokers but leave borrowers in worse financial shape than they were before the transaction. Lenders are dangling teaser interest rates, "cash out" windfalls and lower monthly payments, sometimes using shady marketing materials that resemble official information from the Department of Defense. Not infrequently, say officials, borrowers end up in negative equity positions, owing more on their loan balance than their house is worth.

Officials at the Government National Mortgage Association, better known as Ginnie Mae, say some veterans are being flooded with misleading refi offers and are signing up without assessing the costs and benefits. Some properties are being refinanced multiple times a year, thanks to "poaching" by lenders who aggressively solicit competitors' recent borrowers to refi them again and roll the fees into a new loan balance.

The costs to the veterans can far outweigh the relatively modest reductions in monthly payments. In an analysis of questionable refinancings, Ginnie Mae found "many" examples where the borrowers were persuaded to switch from a long-term fixed interest rate to a lower-rate short-term adjustable but saw the principal amount owed to the lender jump by thousands of dollars. In an average fixed-rate to adjustable-rate refi, according to data provided to me for this column, borrowers added $12,000 to their debt in order to reduce their monthly payment by $165. Just to break even on that deal would take more than six years, according to Ginnie Mae, and could push unsuspecting borrowers into negative equity.

A typical pitch for one of these loans was received recently by a veteran and his wife who live in Silver Spring, Maryland. Along with a fake "check" made out to the veteran in the amount of $30,000 -- all he had to do to get the cash was sign up for a refi -- were come-ons like this:

-- A new 2.25 percent interest rate

-- No out-of-pocket expenses

-- A refund of his escrow money

-- Up to two months with zero mortgage payments.

"Call now and lock in your rate before rates go any higher," urged the lender. In small print on the back of the check were a couple of key disclosures: The homeowners would have to switch from their current 3.75 percent fixed rate to a "3/1" adjustable rate that could increase 36 months after closing and rise to as high as 7.25 percent during the life of the loan. There was nothing about fees or the fact that opting for the refi could add to the family's debt load.

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