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 Now, it’s being withdrawn without any viable alternative.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 target of lowering the principal and interest portion of the payment by 25%. Similar to FHA and USDA RHS, VA allowed borrowers affected by the COVID-19 pandemic to request a streamlined loss mitigation option, where they were not required to submit documentation for financial review.
Finally, VA was no longer hindering their borrowers from getting the same sort of assistance afforded to other government insured/guaranteed programs. For some inexplicable reason, VA ended the stand-alone partial claim program in August of 2022. At the same time, mortgage market rates began to rise in response to inflationary pressures.
Adding to the challenges was the involvement of the Consumer Financial Protection Bureau (CFPB).
CFPB was established after the housing crisis of 2009–2012 when the avalanche of newly defaulted loans crippled many of the largest mortgage servicers who could not keep up with the demand for assistance. Their failures led to painfully slow responses, with many borrowers working through both a foreclosure action and a hope for a loss mitigation reinstatement simultaneously. To avoid putting borrowers in these unnecessary stressful situations, the CFPB created many mortgage servicing rules targeted at increasing communication and transparency between servicers and borrowers; and providing clear expectations on how the process of receiving loss mitigation assistance should proceed. While they had good intentions, there were also unintended consequences, since not all loans are alike. Servicing a conventional loan inside a Fannie Mae portfolio is quite different than servicing a VA loan inside a Ginnie Mae (GNMA) pool. However, the CFPB did not make a clear distinction, and once again the veteran borrower paid a heavy price.
One of the rules that CFPB required was that to offer a borrower a loss mitigation option, the servicer had to collect all documentation necessary to make a decision regarding all available options. This had always been challenging for mortgage servicers because documentation for home retention and property liquidation options varied greatly, but that drama is reserved for a different paper. The federal agencies permitted low and/or no documentation (streamlined) loss mitigation options during the COVID-19 pandemic response as a nod to the overwhelming volume associated.
After prodding from the mortgage industry, CFPB released a statement clarifying their position that streamlined options (they called “incomplete loss mitigation applications”) could be offered as long as the resulting or modified principal and interest (P&I) payment did not increase. If the P&I did increase, the servicer must request a full loss mitigation application and review the borrower under standard loss mitigation options. A clear misunderstanding of the VA loss mitigation waterfall and detrimental to VA borrowers.
The COVID-19 streamlined Refund Modification offered by VA allowed for a partial claim and modification combination that included the arrears and a principal reduction in the partial claim. It would afford the veteran the lowest payment option post-default resolution, despite the higher current market interest rate environment. The sharp rise in the market interest rate in 2022 and 2023 meant that many VA borrowers saw their interest rate double. Even if their P&I increased, the Refund Modification was still the best option for COVID-19 affected borrowers. The standard loss mitigation option offered only a stand-alone modification, with no principal deferment partial claim.
Despite repeated requests for CFPB to further clarify their rule, they refused. They simply did not understand the impact.
The result was that 98% of the veteran borrowers who would have qualified for the Refund Modification (absent the CFPB rule) were denied the option and required to submit a full loss mitigation application which resulted in a modification that increased the borrower’s payment by nearly 6% more than the Refund Modification option. Many of these borrowers did not reapply with a full loss mitigation application and some were foreclosed on.
CASE STUDY 3
After suspending the VA COVID-19 Partial Claim in August 2022, the VA requested that mortgage servicers consider a voluntary moratorium on initiating a foreclosure action while they worked to create a new program that offered payment assistance. It would be a program like the Refund Modification, that was also withdrawn on May 31, 2024.
The new program, called VASP, would be available on May 31, 2024, and be mandatory by October 1, 2024. The program was an overhaul and expansion of an existing VA program that purchased whole mortgages from mortgage servicers. VA would modify the loans to a payment the veteran could afford, but the previous program had been used sparingly. Now it was going to be used in most cases where a borrower struggled to make their current payment. The cost was astounding.
After a review by a House Congressional committee, they found that VA had helped more than 17,000 veteran borrowers, but at a cost of more than $5.74 billion. To be fair, the program created a receivable, where the loans would be modified and the borrowers would be paying back the principal with interest (typically 2.5%) over time, but the initial outlay was large. If VA had instead mimicked the current FHA waterfall which included a stand-alone partial claim or a partial claim/modification combination, results would have been similar at a cost that was 80% less or approximately $1 billion in cash outlay. The receivable would not earn any interest.
Understanding that this program was poorly designed, it was scrapped effective May 1, 2025. While Congressional leaders issued their directive to close the program on April 4, 2025, VA remained silent until the evening of April 23, 2025. This late communication left servicers and their technology providers only six days to implement the change.
Once again, the veteran borrowers are being underserved. The VA believes it needs congressional authority to issue a stand-alone Partial Claim program. There had been several attempts to pass a bill through Congress over the last two years, but each failed to make it through the procedural hurdles, in part because there was a lack of urgency. Now it is urgent.
From a servicing technology perspective, if Congress passes a law next month that exactly mimics the current FHA program, we could be ready to deliver relief to VA borrowers within 30 to 60 days. A substantial change would require more time to program the nuances and therefore require 90 to 180 days, depending on the complexity. But that is only from the servicer side of the equation—how much time will VA need to stand up their end of the process?
Why is this so urgent? Our data shows that removing VASP as an option to provide payment relief to struggling veteran borrowers will lead to options that will increase their interest rate 85% of the time. For 68% of the borrowers, this will translate to a monthly mortgage payment that will be higher than the payment they had when they first defaulted. The payment increase will on average be 21% higher. So, if their existing mortgage payment was $2,000, their payment will increase to $2,420. Some borrowers saw their monthly payment go up as much as 74%.
This is not an endorsement of the VASP program, as it was deeply flawed. However, it was the only option available to a desperate veteran fighting to stay in their home.
This is a condemnation of federal government agencies who have failed to adequately support our veterans. It is time to speak up on their behalf.
VA should have offered a Partial Claim program or lobbied Congress for one more than a decade ago. The CFPB should have done a deeper dive into the individual regulations that affected each loan type and created regulations that worked fairly across all demographics. Finally, Congress should have done a better evaluation of the collateral damage that ending a wasteful program would have on vulnerable constituents. Everyone is failing our veterans.
Where do we go from here? There must be an emergency extension for the VASP program until a viable alternative can be implemented. Congress must act swiftly to pass a new Partial Claim program that would mirror the FHA program. Once passed, the VA must implement the program within 60 days. They already had a similar program during COVID; they would just need to build on that framework.
Is the FHA waterfall perfect? No, it is not. There are vulnerabilities within any streamlined program that does not evaluate actual need. For at least an estimated 80% of veteran borrowers requesting assistance, they will get the right program for their specific needs. This is better than 68% getting a higher payment than the one they recently defaulted on. I believe once we close this vulnerability gap, that all the streamlined programs be re-evaluated for a better, more cost-effective approach that will stand the test of time.
I encourage everyone to submit this information to their Congressional delegation. Action must be taken—the time is now!
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