For veterans, VA-backed home loans offer security

By Megan McCloskey (contact)

Monday, Oct. 27, 2008 | 2 a.m.

Across Las Vegas, the most prominent sign of the times is the home for-sale sign with the added placard: “Bank owned.”

It’s a buyer’s market, and Air Force Tech Sgt. Simone Browne recently took advantage, purchasing her first home: a two-bedroom, two-bath town house with a garage in Aliante.

She got it for $154,500 — without putting any money down.

That would have elicited no more than a shoulder shrug a few years ago. But the housing market that was once like an audacious minx, trading credit for a smile, has become a miserly curmudgeon, bestowing now-elusive credit on only first-rate buyers. Easy financing with zero down has disappeared.

Veterans and active-duty service members such as Browne, though, are mostly immune from that credit pinch. Loans through Veterans Affairs Department give them the opportunity to buy homes of up to $417,000 — and more in some areas — with no money down, making them a rare group that can cash in on the housing collapse without fronting capital or having pristine credit.

“I knew a VA loan would help me get a house,” Browne said.

Others are coming around to that realization. This year VA-backed loans are up 31 percent nationwide over last year, and in Clark County there has been an even larger jump. The VA guaranteed 710 loans in 2007. As of the end of September, it had closed almost 1,800 loans this year. The vast majority of the purchases were 100 percent financed.

Veterans and active-duty personnel “are coming back to what they never should have left in the first place,” said Bruce Reichstein, president of Houston-based VAloans.com, an accredited broker of the government loan program.

The subprime mortgage mania lured many veterans away from VA-backed loans. No need to go through the government when any bank on the block was offering zero-down financing — with no cap on the price of the house.

Reichstein, whose entire business is brokering VA-backed loans, said he had to increase advertising to drum up business, in part because overzealous real estate agents and brokers were talking buyers out of using VA-back loans, because of the more restrictive underwriting and appraisal standards. The VA verifies income and requires that a buyer’s mortgage payment and other debt not exceed 41 percent of total income. The subprime market allowed that number to inflate to 60 percent, sometimes 70 percent.

Despite the changing market parameters, the VA never lowered its underwriting standards.

“It was tempting because loan volume was going down,” said Mike Frueh, an assistant director of the VA home loan program.

The concept came up over the years, Frueh said, but government bureaucracy is slow to change and the VA didn’t face the same kind of public pressure to relax standards from lawmakers as Freddie Mac and Fannie Mae did. The VA loan program is designed to be conservative to protect veterans.

“At the core of our business we’re a benefit program, not a profit-seeking organization,” he said.

As a result, those with VA-backed loans are somewhat insulated from the recent spate of foreclosures. While subprime delinquency rates in the conventional market are hovering around 19 percent, the VA has a modest 2.8 percent delinquency rate.

Unlike other borrowers drowning in mortgage payments, even veterans who shunned the VA loan program to follow the subprime yellow brick road have a place to turn. More than 300 people at VA regional centers across the country are dedicated to helping veterans in default regardless of the loan type. In many instances, the VA can step in and refinance a traditional loan as a VA-backed loan, “where we wish they had started,” Frueh said.

The VA deals directly with the banks to negotiate on the veteran’s behalf. That’s a stark contrast to the impotent desolation many borrowers are facing as the housing market crashes. In 2007, the VA saved more loans — by renegotiating terms — than were lost to foreclosure. Almost 8,500 owners were able to hold onto their homes compared with about 8,100 who went into foreclosure. And this year the VA has added a toll free number (1-877-827-3702) that vets can call to ask for help. Nevada isn’t in the VA’s top 10 for either amount of loans or foreclosures.

The VA doesn’t actually finance loans but rather guarantees loans banks make to veterans. In this tight market, with banks refusing to lend to one another and home loans hard to secure, VA-guaranteed loans are a desirable commodity.

“The lender knows without a shadow of a doubt they can sell the loan” to finance companies, Frueh said.

Some local lenders have been advertising on the radio about the VA loan program, trying to attract vets and airmen. Frueh dismissed any concern that lenders are targeting veterans for shoddy loans, saying the stringent underwriting standards required by the VA don’t leave much room for unscrupulous lending.

VA-backed loans are not expected to have a large effect on Las Vegas’ recovery, said Mary Riddel, an associate economics professor at UNLV.

Not only is the military/veteran demographic a small percentage of the population here, but financing is also only one component of making the decision to buy a house. “There’s still an enormous amount of uncertainty. I don’t think the Vegas market has hit bottom yet,” she said.

So even if veterans can get favorable loans, that doesn’t mean they’ll choose to buy right now.