On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155 / P.L. 115-174, or the “Act”). The Act, among other things, changed requirements regarding refinance loan transactions guaranteed by the Department of Veterans Affairs as well as eligibility requirements for Ginnie Mae with respect to these loans. As a result, some loan applications in the pipeline prior to May 25, 2018 may be eligible for the VA guaranty, but may not be eligible for securities issuance and pooling under Ginnie Mae programs. For any such loans that fund, VA lenders will have to find alternative secondary market outlets for such loans.
Under Title III of the Act, Protections for Veterans, Consumers, and Homeowners, section 309 amends 38 U.S.C. Chapter 37, Subchapter I to require that a refinanced home loan may not be guaranteed by the Department of Veterans Affairs (VA), unless: (1) a specified minimum time period has passed between the original loan and the refinancing, and (2) the lender complies with provisions related to fee recoupment, mortgage interest rates, and net tangible benefit tests. Section 309 also amends section the National Housing Act to prohibit Ginnie Mae from guaranteeing securities backed by VA-guaranteed loans that do not meet these new criteria. On May 30, Ginnie Mae issued All Participants Memo (APM) 18-04 implementing additional pooling eligibility requirements of such VA-guaranteed loans.
On May 25, 2018, the VA issued Circular 26-18-13 providing that loan applications taken on or after May 25, 2018 that do not meet the certain requirements will not be eligible for guaranty by the VA.
A lender, which also includes any broker or agent of the lender, and any servicer or issuer of an Interest Rate Reduction Refinance Loan (IRRRL), must:
(1) Provide recoupment statements to VA (in accordance with VA Circular 26-18-1 and 26-18-1 for IRRRLs), and;
(2) Certify that all fees and incurred costs, referenced in VA Circular 26-18-1, shall be recouped on or before the date that is 36 months after the date of the loan, as determined by the date of the loan note. The recoupment calculation is described in the Circular, and is the result of lower monthly payments of the refinanced loan.
Net Tangible Benefit
The lender, which also includes any broker or agent of the lender, and any servicer or issuer of an IRRRL, must provide the Veteran or borrower a net tangible benefit test (NTB) as follows:
(1) A case in which the previous VA loan had a fixed interest rate and the new refinanced loan will have a fixed interest rate; the new refinanced loan must have an interest rate that is not less than 50 basis points (.50 less in interest rate) less than the previous loan,
(2) A case in which the previous VA loan had a fixed interest rate and the new refinanced loan will have an adjustable interest rate, the new refinanced loan must have an interest rate that is not less than 200 basis points (2.00 less in interest rate) less than the previous loan, and
(3) The lower interest rate is not produced solely from discount points unless:
(a) Such points are paid at closing;
(b) For discount point amounts that are less than or equal to one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan-to-value ratio of 100 percent or less; and
(c) For discount point amounts that are greater than one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan-to-value ratio of 90 percent or less.
VA Circular 26-18-13 contains an attachment providing lenders with instructions on determining the value of properties securing IRRRLs.
All VA-guaranteed loans must be seasoned for a period of time, before refinancing to an IRRRL, also known as a VA streamline refinance. The seasoning period also applies to cash-out refinances when the principal amount of the new loan is less than the loan being refinanced. (Seasoning shall not apply to a VA cash-out or “regular” refinance if the principal amount of the new cash-out loan will exceed the amount of the loan being refinanced.)
The required seasoning is the later of:
(a) The date that is 210 days after the date on which the first payment is made on the loan, and
(b) The date on which the sixth monthly payment is made on the loan.
The VA provided Circular 26-18-13 will sunset on January 1, 2020.
On May 31, 2018, the VA issued Circular. 26-18-14 reiterating that the lender’s certification applies to all VA-guaranteed loans, and is not contingent upon the type of VA loan.
The Lender Certification is required on IRRRLs whether or not underwriting is required. The VA states that this is supported in 38 C.F.R. §36.4340(k). This section states that:
“Lenders originating loans are responsible for determining and certifying to VA on the appropriate application or closing form that the loan meets all statutory and regulatory requirements. Lenders will affirmatively certify that loans were made in full compliance with the law and loan guaranty regulations as prescribed in this section.”
Ginne Mae Guidance
New Pooling Eligibility Criteria
APM 18-04 provides that, effective with mortgage-backed securities guaranteed on or after June 1, 2018, a refinance loan insured or guaranteed by the VA is eligible for Ginnie Mae securities only if it meets the following condition.
The note date of the refinance loan must be on or after the later of:
a) the date that is 210 days after the date on which the first monthly payment was made on the mortgage being refinanced, and
b) the date on which 6 full monthly payments have been made on the mortgage being refinanced.
Security Issuances Dated June 1, 2018 or Later
APM 18-04 further provides that refinances, including refinances that bear a note dated prior to the date of APM 18-04, that do not meet the condition implemented by the Act and the requirements of APM 18-04 are not eligible for inclusion in any new pool or loan package in the Ginnie Mae I or the Ginnie Mae II MBS Program.
Notwithstanding the foregoing, in APM 18-04, Ginnie Mae reminds that Issuers are required to review and evaluate the eligibility of any VA Refinances submitted with any pools or loan packages scheduled for June delivery or later.
Impact on Security Issuances Dated May 1, 2018 or Earlier
Refinances that do not meet the seasoning condition implemented by the Act and announced in APM 18-04 remain eligible collateral for securities that were previously issued with a date of May 1, 2018, or earlier, assuming they meet all other pooling and program requirements.
Importantly, the Ginnie Mae guaranty attached to a security issued with a date of May 2018 or earlier is not affected by the Act or APM 18-04, even if such security is backed by one or more pools or loan packages containing refinances that do not meet the condition implemented by the Act.
In APM 18-04, Ginnie Mae states that it understands that some Issuers have already certified pools and loan packages for June 2018 issuances, which may contain loans that do not meet the seasoning requirements implemented by the Act and reflected in this memorandum.
Ginnie Mae stated that its Office of Issuer and Portfolio Management will be contacting any impacted Issuers ahead of the June 1st issuance date to provide additional guidance on curing any pools or loan packages that have become defective as a result of the recently enacted statutory prohibition.
However, APM 18-04 states that the implementation of the Act in the Ginnie Mae multi-class securities program will be addressed in a separate announcement.