Last week, Andrea Chandler opened her mailbox in rural Virginia to find an official-looking envelope warning her that an immediate response was requested, with a Washington, DC return address and ominous logos to suggest it was a communication from a government agency. She knew what she'd find inside: a solicitation from a firm offering to refinance her home and lower her monthly payments.
Chandler is a US Navy veteran with almost 10 years of service, from June 1998 to January 2008, and she's been getting these solicitations since she bought her home with the assistance of a Veterans Administration (VA) loan guarantee in 2008.
She's a target of pre-screened credit offers, a practice used throughout the financial industry that violates consumer privacy and sets people up for identity theft. These offers prey upon people who may lack the financial savvy to understand the truth behind the appealing terms. In pre-screening, financial institutions take advantage of vast amounts of data on consumers and their habits to tailor offers of credit cards, home loans and other financing. While it is possible, when companies follow the law, to opt out of pre-screening and stop getting such offers, the fine print about how to do that is on the back of the notices, and no mention as to why people might want to do that is provided.
“I get on average one to two solicitations a week from firms that want me to refinance my home through them,” Chandler says. The offers say that “my credit doesn't matter, the amount of equity in my home doesn't matter, no appraisal necessary, no income verification necessary—all that matters is that I have a VA home loan and no additional liens on the property, like a second mortgage.” These solicitations surround the VA's Interest Rate Reduction Refinancing Loan (IRRRL) program, often marketed as a “VA streamline” or “VA to VA” streamline loan, and this program is big, big money for lenders, even in a toppling economy.
The VA has been offering home-buying support through the GI Bill since 1944, when returning servicemembers who fought in World War II bought homes in scores, boosting the post-war economy. Millions of home loans have been secured by the VA through its program, which offers not loan financing, but backing for veterans who need assistance buying a home. Many veterans have limited savings that make it difficult to put down a deposit on a home. The VA insures the loan, providing an assurance to lenders that in the event of default, it will step in. At the same time, it lowers home-buying costs for veterans, sometimes cutting out the down payment and lowering monthly payments by eliminating the need for private mortgage insurance.
Discussing the purchase of her home, Chandler says “the real virtue of the VA Home Loan Guaranty program is that part where it lets you avoid a down payment and mortgage insurance.” Home affordability for veterans is the primary purpose of the program, but it's been immensely popular with lenders as well, “because if I default, the lender is going to get 25 percent of the loan, guaranteed by the US government, and they get to seize the house and sell it.”
Private companies across the United States are lining up for GI Bill handouts, and they exploit veterans in the process, whether it's for-profit colleges taking advantage of veterans (as documented by Frontline), abusive payday lenders, or mortgage lenders seeking customers for primary VA loans or refinances.
The VA has been criticized for failing to provide adequate orientations to exiting veterans preparing for integration with the civilian world, and the military as a whole provides limited financial education to personnel. Andrea Chandler says, “During my Transition Assistance Program (TAP) classes as I prepared to leave the military, a VA representative spoke to us and explained the home loan benefit again, and gave us a rough explanation of terms like 'points' and interest rates but nothing in-depth and no guidance on selecting a reputable lender.” Chandler was also warned about predatory lending at car dealerships (a documented issue for veterans and service members) in boot camp, but representatives failed to mention predatory mortgage lending and other exploitative financial practices.
When Chandler first started shopping for a home in 2005 while she was on shore duty, she found herself plunged into a world of shady practices she was fortunately able to avoid because she had a high level of financial literacy. Real estate agents pressured her to purchase a home well outside the range she could afford, although she had taken advantage of tools like mortgage calculators to estimate her comfort zone. One agent actually refused to work with her when she informed him how much she was willing to spend, while another showed her homes $100,000 or more above her affordability range.
Another pressured her to work with a mortgage broker he was associated with. He encouraged Chandler to consider what he referred to as a “starter loan,” telling her it came with low interest and low monthly payments for several years, followed by an adjustment in the interest rate, by which time she could refinance the home through the IRRRV program to access a lower rate. Chandler recognized an adjustable rate mortgage when she saw one, but other veterans weren't so savvy, and have been facing foreclosures across the United States as the interest rates on their homes spike upward and their homes are now mortgaged for far more than they are worth.
Predatory lenders encouraging veterans to refinance in excess of home value haven't helped; the VA loan program allows for financing of up to 120 percent of home value to pay for improvements. Many returning veterans are buying homes in need of improvements because they cannot afford homes that are immediately habitable and may need to make some basic repairs before they can even move in. Many more need modifications to their homes to make them accessible. Wheelchair ramps, rails, doorway widening, and other accessibility modifications for disabled veterans can be expensive, and the 120 percent financing is designed to help pay for that.
When home values are falling, a home financed at 120 percent of its value is a serious liability for a veteran, especially if it's an adjustable rate mortgage and the interest rate is about to jump, causing monthly payments to skyrocket. Meanwhile, in Congress, proposals to cut benefits to veterans are brought up left and right, including living allowances. Veterans who were banking on a certain amount each month are learning that Congress wants to make these funds unavailable, leaving them facing homelessness after they did their time and put in their service to the United States.
This problem is not limited to veterans. Active duty service members using government assistance to buy homes face foreclosure for these and other reasons, like repeat deployments overseas that cause them to fall behind on their payments. These foreclosures, incidentally, often violate the law, a reflection of growing sloppy practices in the financial industry when it comes to handling foreclosures. The financial industry has a huge backlog of inappropriately handled foreclosures and now it’s trying to negotiate immunity to evade responsibility for its actions. Active duty enlisted personnel do not make much money, and that was threatened earlier this year with the specter of a government shutdown that would have ended paychecks to military service members, and could have forced thousands into foreclosure thanks to the complete lack of a savings safety cushion.
Homelessness rates among veterans are extremely high, and predatory lending is pushing those numbers up at a rapidly increasing rate. What's most despicable is that lenders clearly haven't learned their lessons from the financial crisis; they continue offering exploitative financing “opportunities” to veterans despite knowing that many of them are going to default. Lenders are happy collecting their 25 percent of the financed value and leaving veterans out in the cold, after which they can turn around and resell the homes they seize from their defaulted customers.
Donald L. Bartlett and James B. Steele report on the foreclosure mill phenomenon faced by many veterans, noting that 66,000 people defaulted on VA loans in 2010, and that this does not “...include the tens of thousands of other veterans who faced foreclosure on FHA or conventional mortgages that many took out to survive.” Many veterans report lending practices that are highly misleading, and express regret for taking out loans at rates that turned out to be usurious. At the time their loans originated, they didn't understand what adjustable rate mortgages were, but now they do.
While the service academies, like West Point and Annapolis, provide financial literacy training to their students, such training is not as readily extended to other members of the armed services, although optional classes are available. Some, like Andrea Chandler, were fortunate enough to receive some financial education before entering the service, and took that with them when they left. Others were not; in the enlisted ranks, many service members come from impoverished backgrounds where such training is not common and isn't considered necessary. Why would you need to know about interest rates when you're living below the poverty line?
People leaving the service with minimal financial education and guidance are viewed as cash registers by exploitative lenders who see their GI benefits as a windfall of cash. Veterans who cannot make their housing payments, who drop out of for-profit colleges due to lack of support, who enter bankruptcy after using alternative financial services to finance their lives, are casualties of the profiteering mill.
Congress, and the VA, have been slow to act when it comes to checking predatory lending practices aimed at veterans and active duty service members. Despite being aware of the issue, the government has chosen a hands-off approach, at a grave cost for members of the service and their families. Highly decorated veterans die in the streets of the United States because the nation collectively tolerates a financial system that preys on vets and discards them after bleeding them dry. This should be a national shame, but instead, people call it business as usual.