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You might have heard in nearly every locale in the nation home prices have soared. Many houses get multiple offers and sell for way more than the posted price. The Veterans Benefits Administration has been tinkering with the 75-year old home loan program to ensure it gives veterans a shot at the house they want. For an update, VA’s Executive Director of Loan Guaranty John Bell III spoke to the Federal Drive with Tom Temin.
Tom Temin: Mr. Bell, good to have you on.
John Bell III: Thank you, Tom.
Tom Temin: And just give us a sense of the scope of the program. How much money do you have under guarantee and what’s your entitlement from Congress to be able to offer? How big is this program?
John Bell III: If you put things in perspective of 27 million loans since 1944, that’s totaling over $3.4 trillion. Last year, we set an all-time record for purchases: 444,000 loans. We are about 12-13% market share of any mortgage product out there. So we’ve grown that over the past 10 years from 1% of the mortgage market to, again over 12% of the mortgage market as we stand today. So VA’s had a lot of growth, over 380% over that time period. And we credit a lot of that to changing the processes and procedures that we’ve had, the technology modernization advancements that we’ve had for the program, trying to get the word out about just how strong our veteran borrowers are. And one key characteristic that we change is the mindset. The mindset of this is not just a program that is available as a soft landing for veterans, this should be their product of choice. And by choosing VA over all the other home loan products out there, we’ve been able to really capture you know, a lot of that market share back.
Tom Temin: And just to be accurate, the Veterans Benefits Administration doesn’t loan money, you back loans, correct? That are made by regular commercial lenders?
John Bell III: That’s 100% correct. We have a 25% guarantee. And what that does is it entices lenders, because we carry 25% of the risk for them. So lenders will make mortgage loans. Then they will sell those mortgage loans called mortgage-backed securities. They will sell those in the open market. But this gives an assurity to the entire industry that the government backing of that 25% is going to stave off the faults, which is again, our default ratio is in line with conventional and much less than other agency programs out there.
Tom Temin: So a given borrower with VA backing, then if they had a risk rating to a lender of X, after they are backed by VA, then their rating would drop 2.75 risk or something?
John Bell III: That’s a great way to think about it. That’s pretty much what we do to try to limit cost to the veteran and to the lender that’s lending that money. And then on the back end of it, it’s from the default space. If that loan is going bad, VA is there to help mitigate between the borrower and the servicer so that we can figure out the best option available at that time. So servicers aren’t they’re doing it on their own. They also have the backing of VA to help our veterans make sure that they can stave off some of that financial impact.
Tom Temin: And then rolling up the mortgage portfolios into those securities, do you have any connection to the markets that are controlled by Freddie Mac and Fannie Mae?
John Bell III: I think from a total market share that is correct. From a collaborative space, which is, if you take COVID for instance, we all had to work together to make sure that we stood up the mortgage industry while we went through COVID. So we had to ensure that we could still lend money, even if appraisers couldn’t make it into homes, right, we had to make sure that lenders still felt comfortable, and that they still had the government backing and originating those files. And then also keeping costs down, we were still able to break origination records through 2020-21 and now on to ’22.
Tom Temin: We’re speaking with John Bell, he’s executive director of Loan Guaranty at the Veterans Benefits Administration. And you mentioned that you made some process changes and some back-end information technology updates to make the program, I guess, easier to use for veterans. Tell us about some of those.
John Bell III: Yeah, some exciting things. If you think about VA 10 years ago, and how we would review files, a lender would mail in this file that was probably 300-400 pages thick. And we couldn’t glean any data from those files. We couldn’t share that nationally. So if Wells Fargo was doing a loan in the state of Oregon, and also doing a loan in the state of Washington, we couldn’t compare and contrast what that experience was like. Now we’re able to glean 237 pieces of information, data, from each one of those files we review and then we’re able to scorecard performance of our lenders so that they understand how they’re competing and benchmarking against other lenders. It has improved the overall health of the program, because they’re not only able to see how they’re performing against others, but they’re also able to see why they aren’t performing as well against the rest of the country.
Tom Temin: And what is performance for a lender? I would think, I guess, I presumed you were more worried about the performance of the borrower. But what are some of the parameters of lender performance that you need to track?
John Bell III: So what we require are lenders to at least follow our guidelines. And then lenders because they own 75% of the risk, they can establish or put on additional guidelines on top of ours. And so what we’re trying to understand is, is that additional requirement worth the value of preventing a veteran into the home? And so as we’re able to benchmark what those differences are, and the additional requirements that they have, were able to teach the lender, that value isn’t necessarily getting you the right result. And so that’s the piece that we were missing in the puzzle is being able to go back to the lenders and say, Okay, fine, you want to put a six-month reserve requirement on a loan that’s over $600,000. But the value of performance in that loan versus a loan that doesn’t have that requirement is the same, equal or better. And so while they’re missing out on all of those originations, they’re doing it for the wrong reason.
Tom Temin: And you were able to glean this information from these paper packets, in what manner? Scanning them or digitizing them, or –
John Bell III: No, it’s a wonderful question. So we started with electronic uploads. So they would be able to upload their packages directly from their what’s called the their loan origination system. And then we just switched earlier this year to a true electronic system-to-system transfer of that data. So they no longer have to download a package and upload it. It’s all done electronically. And then at the end of the year, we’re actually moving into our API tech, API’s application programming interface. And it gives us a lot of opportunities from an analytics shareability that we just didn’t have before.
Tom Temin: And what about the aspect of the program that faces the veteran borrowers?
John Bell III: So one of the big key changes are actually two of them, real quick. One is we improve the eligibility timelines. Ten years ago, we averaged about 20 business days in determining what the eligibility of the borrower was just to participate in the program, just to be benefit-eligible. Now, because we do those electronically and instantaneously. Now, 95% of applicants that apply for eligibility are approved in less than three business days. So it has really been a game changer for us in reducing the time that it takes in that process to get a borrower from an applicant to an eligible applicant for lenders. We also have improved our appraisal process. And in November, I actually testified in a hearing in December, but through November, we had 1,500 unassigned appraisals at that time. We just had a huge need for recruiting more appraisers, in particular areas. We had an impending volume of loans coming in. And so we’re at about 1,500 in unassigned appraisals, we’re now down to zero. But we’ve also reduced the time it takes to deliver an appraisal from 11.8 business days down to eight business days, which is honestly in line or better than most other markets out there and loan products. So by fixing those few things, we’ve decreased the timeline that takes to get into a loan, which then allows veterans to compete better when they go to bid.
Tom Temin: Yeah, my question then, has all of this helped veterans in this crazy market where sometimes you have to act fast, or go above the asking price, and not have any baggage associated with your bid for a house in the eyes of the seller?
John Bell III: So last year, we did 444,000 purchases. Wwe’re about 4% off that mark right now. And what we’re seeing is while rates are increasing, and prices in certain areas are stagnating, we’re seeing fewer bids, which are enabling more veterans to be able to take advantage of this time. What veterans were competing against six months ago, eight months ago were cash offers. Most of those offers were from investors that were flooding the market. Now that investor activity has constricted and it’s allowed veterans to compete better. Are we at a spot where we’re saying that we’re done? Of course not. We’ve got to get the message out. The message is mostly being lost to those sellers and the listing agents that really aren’t even accepting agency contracts to begin with. So when they go to list the property, they’re not marking list property available to submit from an agency. And so they’re not even seeing our veteran loan. So we’re hoping to reduce that by working with the National Association of Realtors. We’ve done a couple of videos with them. And then also, we talked to them again this week about getting the message out. And then for us getting lenders and we’re building out a training team to help with establish more materials so that we can combat those issues.
Tom Temin: John Bell is executive director of Loan Guaranty at the Veterans Benefits Administration. Thanks so much for joining me.
John Bell III: Tom, thank you so much for having me. And look, I want to leave you with one thing: If you know a veteran, they haven’t used their benefit, or they haven’t been able to use it because someone tells them they can’t, you’re costing them money. Tell them they’re leaving money on the table.
