Many people ask why appraisal are required for the VA IRRRL program. The official answer is that the VA doesn’t require an appraisal, but many lenders require an appraisal.
Yesterday, Rob Chrisman had a commentary about the current state of the VA IRRRL program, here are just a few excerpts:
Yesterday the commentary had two items (financial education and VA IRRRL’s) which brought a good-sized number of replies of varying perspectives. I will have the financial education letters tomorrow, and look at the VA IRRRL program’s today.
On the VA IRRL program, I am not going to replace the Scotsman Guide for programs, but it appears that Plaza, Guild wholesale, WestStar, and a few others offer a program with no appraisals, and Icon will do it if the loan is serviced by Wells Fargo. (Icon runs an AVM on VA IRRLS that are not serviced by Wells through an AVM system. However, if they are serviced by Wells, Icon does not run an AVM.) I received this note: “Explain to this person that if VA really does want originators to produce more VA IRRL’s – then it would get rid of the no-bid option and Ginnie would exempt IRRLs from their servicer Tier rankings. If they did that – every originator/conduit in the nation would immediately open the program up full throttle. Until then – an issuer/servicer would be insane to write/buy IRRL’s without appraisals because the losses they will bear will be huge.”
“You need to explain Delinquency Compare Ratios. If a lender has a compare ratio of 150%, it means their VA delinquencies are 150% of national VA delinquency average. This is what VA monitors and is one of the ways VA can pull your entire VA ticket. There is no way to know what is driving it, but not requiring appraisals when most lenders do leads to adverse selection, which in turn leads to higher delinquency ratios. When selling loans into GNMA pools, the result is you have to buy the loans back out of the pools or GNMA gets mad because the delinquency in your pools is too high, and/or they can stop supporting the issuance of the pools. Furthermore, if too high, you can lose your entire VA ticket. This is why lenders have overlays, otherwise everyone would be doing VA streamlines with no appraisals and FHA loans with no minimum credit scores.”
Another wrote, “The overlay issues with the VA IRRL guidelines that require no appraisal aren’t new. The VA guaranty is only 25% of the loan value. Many of our real estate markets have fallen more than that over the last three years, so who would fault a new investor for their concerns about taking on a new borrower who has been current (one of the conditions of a VA IRRL), but whose actual LTV could be 150% or more? That’s a risk that the investor didn’t have last year (or month). If that borrower goes delinquent, walks away, whatever, the lender can now stand to lose the amount of the loss above and beyond the 25% VA guaranty. So if they bought a VA IRRL from a correspondent lender, for $150,000, and the value of the property is actually $100,000, and the borrower walks, the investor gets probably $75,000 from the sale of the home after going through foreclosure and dealing with the discounted price of a foreclosure sale, plus the 25% VA Guaranty amount of $37,500, for a total of $112,500. Their loss is $37,500 on a loan that they just bought, and didn’t formerly have the risk. Most correspondent investors who have been around a long time first learned the brutal truth of these numbers the hard way with the real estate value downturn in Southern California in the early 1990’s. With loss mitigation numbers like that, if your writer was investing their own funds in VA IRRLs, I dare say that he would probably want to know that the house they are lending on is actually worth $150,000, before he lends $150,000, and then loses $37,500. This is also the reason that you will usually find the VA IRRL programs with no appraisals captive to the existing investor’s borrowers. The investor already has the risk, so at that point it becomes smart for them to better the borrower with a lower rate.”
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