As former mortgage bankers, our founders, Patrick Boyaggi and Mike Tassone, are uniquely aware of the inherent misalignment of incentives in the mortgage industry.
Specifically, lenders make more money when borrowers close loans with higher interest rates and pay more in fees. Mortgage lenders have lined their pockets for decades by taking advantage of borrowers. This has been made possible in large part due to the asymmetry of information that exists in the industry. That is, lenders have access to information that borrowers do not, which means they have the ability to overcharge borrowers without them even knowing it. The internet has reduced the information barrier slightly, but the industry remains very opaque, which is why most borrowers overpay on their mortgage.
One group of borrowers that is negatively impacted by the nefarious behavior of certain mortgage lenders are US Veterans, who account for more than 20% of homebuyers according to the National Association of Realtors (NAR). Here are three reasons why Veterans overpay on their mortgage:
1. Lenders set higher profit margins on VA loans
Mortgage lenders claim that VA loan transactions are more challenging to process, take longer, and close at significantly lower rates than conventional loans. Lenders use this argument to justify charging higher interest rates, which results in a higher profit margin. Moreover, historically, VA loans only take two days longer than average to close and close at a rate only 3% less than conventional loans. Moreover, historically, VA loans have lower delinquency rates than conventional and FHA loans (see chart). For this “inconvenience,” lenders typically require a 67%* larger profit than they do on conventional loans which leads to an average mortgage interest rate that is 0.25% higher than veterans should receive. This increase will cost a veteran with an average mortgage of $301,044 over $14,000 in excess interest.
*Gross revenue on the sale of a conventional loan is approximately 150 - 200 bps, gross revenue on the sale of a VA loan is approximately 250 - 300 bps, and gross revenue on an FHA loan is approximately 300 to 350 bps
2. VA Lenders can charge some of the highest origination fees in the industry
VA lenders are authorized by law to charge origination fees of up to 1% of the loan amount, and many of them do. This is in addition to the allowable itemized closing fees including those for the appraisal, loan recording, credit report, title exam, title insurance, VA funding fees settlement, and prepaid/escrow items. This origination fee is almost double the average origination fee charged by lenders according to the Mortgage Bankers Association**. On a $301,044 loan this is an additional $1,575 in fees that must be paid upfront.
**Mortgage Bankers Association Quarterly Report Q2, 2020
3. VA borrowers are frequent targets of loan “churning” schemes
The VA program recently cited multiple lenders with predatory lending practices which involved charging premium rates and fees on mortgages and then targeting them with offers to refinance their mortgage multiple times in a year, often without any meaningful financial benefit. Because the VA program allows borrowers to roll loan closing costs into the loan balance on refinances, these transactions often increase the borrower’s overall loan balance, draining the equity in their house and leaving them “upside down” on the mortgage, or owing more than what the home is worth.
Our study of HMDA data and its findings
To validate these findings, we conducted an analysis of data made public by the Home Mortgage Disclosure Act (HMDA). HMDA is a federal act approved in 1975 that requires mortgage lenders to keep records of certain key pieces of information regarding their lending practices, which they must submit to regulatory authorities. It was implemented by the Federal Reserve through Regulation C. HMDA data can be analyzed from a variety of angles, including the interest rates charged by lenders.
Our study of HMDA data verifies that many mortgage lenders overcharge borrowers, especially US Veterans. This table shows that of the top 20 VA lenders in 2019, ten had a rate spread that was above the Average Prime Offer Rate (APOR)
|Lender***||Average Rate Spread****||Amount Originated in 2019|
|Navy Federal Credit Union||-0.359||10,525,605,000|
|United Shore Financial Services||-0.230||11,488,655,000|
Home Point Financial
|Caliber Home Loans||-0.056||6,806,660,000|
|USAA Federal Savings Bank||-0.002||12,256,935,000|
|Lakeview Loan Servicing||0.003||1,878,080,000|
|Mortgage Research Center||0.147||15,970,615,000|
|The Federal Savings Bank||0.169||3,358,600,000|
|New Day Financial||0.889||2,418,320,000|
***This list comprises the Top 20 VA lenders in 2019, by volume. It was created using objective, publicly available criteria and highlights the wide variability among financial outcomes across VA lenders. None of the top 20 VA lenders are members of Own Up’s lender network.
****Average rate spread compares all VA loans originated by a lender in 2019 to the APOR at the time of origination. In the course of completing this study we also examined the Top 20 lenders’ rate spreads within a specific VA loan purpose (Purchase, Refinance & Cash-out Refinance) and we found similar variability within the specific categories.
The bottom line
- Lowest spread = -0.359
- Average spread = 0.04%
- Highest spread = 0.889%
- Highest - Lowest = 1.25%
Based on these calculations if a borrower were to secure a loan with a lender with the lowest Annual Percentage Rate (APR) to APOR spread, which was Navy Federal Credit Union, instead of the lender with the highest APR to APOR spread, which was New Day Financial, they would secure an APR that is 1.25% better. This table shows the impact to the borrower:
Balance of Mortgage
|Rate of Best Mortgage of Top 20||2.50%|
|Rate of Worst Mortgage of Top 20||3.75%|
|Term in Years||30|
|Total Payments of Best Mortgage||$428,213|
|Total Payments of Worst Mortgage||$501,901|
We conducted the same analysis to the VA loans originated by lenders in the Own Up Lender marketplace. The average rate spread between APR and APOR was -0.542%, which is 0.183% better than the VA lender with the lowest interest rates in the top 20 lenders in 2019.
Because we require our lender partners to stay below set pricing standards as a condition of being in our marketplace, we're able to ensure that our customers, including those seeking VA loans, secure fair interest rates.
What’s apparent from our study is that all borrowers are not treated equally. But more disturbingly, our veterans and those actively serving in the military, citizens who should be revered for their service to our country, are being taken advantage of by certain lenders. It is our hope that this study causes lenders to evaluate their pricing policies, especially on VA loans, as it appears disingenuous to celebrate our veterans while simultaneously overcharging them. Moreover, our hope with this study is to educate consumers on the importance of shopping among multiple mortgage lenders before selecting one. Data from HMDA shows unequivocally that interest rates and closing costs can vary widely among lenders, so it's imperative that you find a lender that offers fair terms.
The purpose of the study was to examine potential differences in financial outcomes that occurred among borrowers of VA loans in 2019.
Data for this study was taken from publicly available sources, including the Home Mortgage Disclosure Act Platform (HMDA), Ellie Mae’s Insight Reports, and the Department of Veterans Affairs. The primary source for this data was HMDA, which was used to compare the rate spread between the Annualized Percentage Rates (APR) on loans made by the Top 20 VA lenders in 2019, and the Average Prime Offer Rate (APOR), an index which is published weekly. This rate spread is generated by subtracting the APOR (index) from the APR (lender reported) for loans made in the same time period by a given lender.
A sample rate spread calculation can be conducted by entering the amortization type (fixed vs. variable), the date a loan was originated, the APR on the loan being compared, and the term of the loan. The calculated rate spread allows us to assess whether an originated loan is priced better or worse than the APOR. However, just looking at absolute rate spreads is insufficient. Effective analysis must account for the rate spreads across lenders within the same loan type (VA loans in the case of our study) to assess competitiveness. Lenders with relatively low or negative rate spreads represent better terms to borrowers, while positive, high rate spreads represent worse terms.