“There are clearly some Ginnie Mae-approved issuer companies who appear to be taking advantage of the VA program to aggressively market and churn loans in our securities,” Bright wrote to Warren in his letter, which Ginnie provided to Bloomberg News.

When banks and credit unions make loans through Veterans Affairs they offer terms that aren’t available to most borrowers. These include no requirement for a down payment and adding closing costs to loan balances so borrowers don’t have to pay them at the time of the sale.

But the loans are also prime targets for churning, Bright said in an interview. Unlike financing provided through other government programs, lenders issuing loans through Veterans Affairs don’t have a strong obligation to ensure that borrowers experience a real benefit when they refinance. Some lenders are persuading servicemembers to refinance loans at rates that barely reduce their mortgage payment, while misleading them about potential consequences, Bright said.

‘Predatory Lending’

Ted Tozer, who helmed Ginnie under President Barack Obama’s administration, said that his agency found some lenders who called veterans and offered a refinance that would allow them to draw cash out of their homes and pay off other debts such as credit-card balances. However the rate given could be a half percentage point above the current market price. Then several months later, the lender or a competitor would call the veteran back and offer another refinance at the market rate, earning another round of fees for the refinance.

“It’s starting to smell like predatory lending,” said Tozer, comparing the recent practices to those used by subprime lenders before the last housing bust.

In a report released last November, the CFPB said it had received 1,800 complaints from servicemembers, veterans or their families about mortgage refinances. In one such complaint, a veteran continued to get calls from their mortgage company, even though they had told the lender multiple times that they had recently refinanced their mortgage.

Bonds Slump

Serial refinances have become enough of a problem that they are driving down prices of Ginnie bonds, JPMorgan Chase & Co. analysts said in a research report issued last week.

When investors buy Ginnie securities, they make assumptions about how quickly borrowers will refinance. If refinances happen more quickly than expected, investors risk losing their expected bond yield and income stream. Such factors make Ginnie bonds less attractive, and when demand wanes, prices fall.

That’s what seems to be happening, and it doesn’t just affect Veterans Affairs mortgages, the JPMorgan analysts wrote. Veterans Affairs mortgages are wrapped into the same Ginnie-securities as mortgages backed by the Federal Housing Administration, which are popular among first-time home buyers. Falling securities prices lead to higher interest rates for mortgage borrowers.

Ginnie has tried to slow down the refinancing rush in the past year, putting a six-month moratorium between between new mortgages and a refinance.

However, there were enough exceptions to the moratorium that serial refinances didn’t stop, and once the six-month mark passed, Bright said Ginnie saw a new blitz of lenders preying on servicemembers. In the letter to Warren, Bright said that some lenders apparently targeted veterans for a refinance at “six months and one day.”

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