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The Veterans Administration continues to resist modernizing its approach to loss mitigation, failing to update policies to reflect current market realities. This has been a persistent issue for decades. Ironically, the group most deserving of our nation’s support—veterans—consistently receives the least. This cannot be allowed to continue. Last week, the VA abruptly announced the wind-down of the Veterans Assistance Servicing Purchase (VASP) program, giving mortgage servicers and veteran borrowers just six days’ notice. VASP was the only program that guaranteed a reduction in monthly principal and interest payments for struggling veterans. Now, it’s being withdrawn without any viable alternative. This paper provides a brief overview of the long-standing neglect that veterans have faced in mortgage servicing. Over the decades, the federal government has developed several mortgage programs backed by guarantees or insurance to promote homeownership. The Federal Housing Administration (FHA) offers an insurance program where borrowers pay a monthly premium that protects lenders against losses in the event of default and foreclosure. FHA loans are designed to expand access to homeownership by allowing for lower down payments and more flexible credit qualifications, particularly benefiting first-time buyers and low or moderate-income households. The U.S. Department of Agriculture’s Rural Housing Service (USDA RHS) provides a partial guaranty to lenders, incentivizing mortgage lending in rural areas where property values tend to be less stable than in suburban markets. The Veterans Administration (VA) also guarantees home loans, enabling veterans—many of whom may have limited credit histories or lack the ability to save for a traditional down payment after years of service—to access home financing. The primary source of funding for government-backed loans is the Government National Mortgage Association (GNMA), which creates investment vehicles allowing investors to buy into a pool of loans. These loan pools generally share similar interest rates and repayment terms. CASE STUDY 1 In 2017, the southeastern United States and Puerto Rico were hit by three major hurricanes – Harvey, Irma and Maria. The hurricanes caused widespread devastation to homes, apartments and businesses. In response, the VA, along with FHA and USDA implemented forbearance plans, allowing borrowers to temporarily suspend their mortgage payments while they navigated the challenges of repairing their properties and returning to work. However, unlike their counterparts, VA only offered a modification to reinstate the default. By January 2019, many of these loans were exiting forbearance. At that time, the modification interest rate was hovering around 5%. In contrast, the average mortgage rate over the five years prior to the hurricanes was 4.04%, with some borrowers paying even lower rates by purchasing discount points at closing or choosing 15-year repayment terms. As a result, many VA borrowers faced significant increases in their monthly mortgage payments, despite having done nothing to cause their financial hardship. This shift to higher rates put an undue burden on veterans, many of whom were already struggling to recover from the devastation of the hurricanes. DLS Servicing encouraged VA to adopt a Partial Claim program modeled after FHA’s which has been proven successful since its introduction in 1996. FHA’sPartial Claim program was a result of necessity. In the early 1990s – the maximum monthly payment that would be approved was for a total of principal, interest and escrow that did not exceed 28% of a borrower’s gross monthly income (front end debt ratio). This left plenty of monthly income to establish repayment plans to recover from a potential default due to a natural disaster, excessive obligations or a temporary loss of income. But as time went on, the standards for qualifying for a mortgage became less restrictive and front-end debt ratios climbed more than 50%. So, while a borrower could resume making their monthly payments, they had insufficient surplus income to perform well under the traditional repayment plan. FHA recognized the need to expand the loss mitigation offering of allowing a claim against their insurance to bring a loan current, as opposed to forcing the loan to foreclosure, where their insurance payout would be much more significant. The strategic shift proved effective. While some borrowers still ended up in foreclosure, many recovered from their delinquency and successfully repaid their mortgages. The partial claim creates a secondary subordinate lien on the property in the form of a new mortgage payable to FHA; the funds are due when the first mortgage is paid in full and at a zero percent interest rate. The terms of the underlying mortgage remained the same. This allowed borrowers who enjoyed historically low rates to maintain them. Over the years, FHA has tweaked and modified how the partial claim is calculated and applied, including an option to offer a modification with principal deferment to lower the payment for a struggling borrower. USDA followed suit, creating the Mortgage Recovery Advance during the 2008–2012 housing crisis. Like FHA’s program, it was later enhanced to include modifications and principal reductions in response to changing economic conditions. In contrast, the VA offered programs that were optional to mortgage servicers but were structured in ways that would lead to significant losses or increased risks to the servicer. A servicer would hesitate to approve a loan for such programs because a shift in the market could increase their affected volume and lead to financial instability for the servicer, so most avoided the optional “creative” programs. This left veteran borrowers with no comparable loss mitigation program. CASE STUDY 2 During the COVID-19 pandemic, the federal government directed FHA, VA, and USDA RHS to implement streamlined loss mitigation options to help homeowners recover from forbearances granted under the CARES Act. A core element of these options was the use of a partial claim to cover missed payments and bring loans current. VA did issue a partial claim program that was extremely successful, though it had a few administrative bumps. In addition, the VA Refund Modification used a partial claim that reinstated the loan and provided additional payment relief by including principal in the claim and then re-amortizing the remaining unpaid balance over a new thirty-year term, with a …

Attention Servicers: The VASP Readiness Testing window is officially open! If your organization has already downloaded the VASP Servicing Transfer Readiness Package, it is time to take the next step in ensuring your systems are ready for the VASP process. Testing Window Details: Open Testing Period: November 18, 2024 – December 6, 2024 You can submit a Master Boarding File test during the testing window to confirm your readiness. To get started, download the VASP Servicing Transfer Readiness Instruction Package from the link below: www.vrmco.com/vasp-testing/ Additional Resources: For further details about the VASP program, including answers to common questions, check out the VASP Program FAQs: VA VASP FAQs