“Churning” is a four-letter word in the mortgage business.
The term refers to aggressive lending practices. The most common churning scenario: Soon after a buyer closes on a home, rival lenders offer to refinance the mortgage. The poachers offer the unsuspecting borrower a lower interest rate, but they have to pay closing costs all over again, and perhaps some additional fees -- so there is little or no real savings. In some cases, the new loan could even be more costly than the old one, even with the lower rate.
Churning seems to be on the rise lately. With a continued decline in people applying for home loans, some lenders are tripping over themselves to snatch away other lenders’ clients.
Just last fall, the government took steps to stop lenders from going after veterans and servicemen and women who have used their housing entitlements to purchase homes with loans backed by the Veterans Administration (VA).
According to the San Antonio Express-News, one Air Force veteran hadn’t even finished unpacking in his new Texas home when he received his first call from a lender about refinancing.
The refi schemes have brought howls of foul play from the original lenders, who were counting on the loans being on their books at least long enough to recoup their cost to make the loan and perhaps earn a profit. And it caught the attention of muckraking Sen. Elizabeth Warren, D-Mass., among others. In a September letter to Ginnie Mae, the principal financing arm for government loans, Warren demanded the agency put a stop to lenders “aggressively marketing VA refinance mortgages that benefit them but harm veterans and the American taxpayers.”
In response to the letter, Ginnie Mae -- which packages government loans into securities for sale to investors in much the same way Fannie Mae and Freddie Mac do with conventional loans -- said it had restricted how often a lender is permitted to place a mortgage to the same borrower whose initial mortgage is in a Ginnie Mae loan bond.
The agency also said it would closely track how quickly certain lenders refinance VA borrowers and the rates they charge. If lenders refinance borrowers too quickly, or if they charge rates that are more than 1.5 percentage points above the market, they may face penalties.
But Joseph Murin, who was Ginnie Mae’s president under both Presidents Bush and Obama during the first years of the housing crisis (2008-09), says he doesn’t think the agency has gone far enough to stop the practice. Murin, who is now chairman emeritus of Maryland-based NewDay USA, says the moratorium placed on refinancing should be 12 months, not the current six. Murin claims NewDay is losing some loans as soon as 30 days after they close -- something he says is previously unheard of.
As he sees it, too many lenders are “pilfering” refi loans as a “back-door means to survival” when they could shift their focus to making new loans to new borrowers.
But pressuring VA borrowers into refinancing isn’t the only kind of churning. In some cases, wholesale lenders are stealing customers from mortgage brokers.
Wholesale lenders don’t make loans directly. Rather, they originate loans through a huge network of mortgage brokers, who help borrowers choose a loan they like, fill out all the paperwork and then send the package off to one wholesaler or another. Sometimes, brokers actually close the loan and then deliver it to the wholesaler.
The system works well: Brokers do all the legwork, and borrowers get a lender of their choice. But in some cases, wholesalers jump to refinance the broker’s customers shortly after they close on the original mortgage.
The practice has been going on for years, according to Anthony Casa of Garden State Home Loans in New Jersey. But now, a group calling itself BRAWL -- Brokers Rallying Against Whole-tail Lending -- is calling out the bad guys. (The group coined the term “whole-tail” to refer to shady companies straddling the line between wholesale and retail.)
“Mortgage brokers have known about whole-tailers’ shady tactics for years, but we just didn’t have a voice before,” says Casa, a founding member of BRAWL. “We’re speaking up now.” The Jersey broker says his colleagues are “the ones handing buyers the keys,” but then underhanded wholesalers are “stealing our customers.”
BRAWL seeks to out “lenders who appear to offer both wholesale and retail services, when the truth is that their wholesale divisions exist for one reason only: to feed their retail machines.” In an open letter to the broker community, the group asks members to “pledge to partner only with true wholesale lenders until the whole-tailers put an end to their selfish and greedy ways.”
The third form of churning is called “trigger leads,” which are leads sold by the national credit repositories to lenders on a daily basis.
Every time a would-be borrower’s credit record is pulled by a lender, the credit agencies package the request with others as potential leads and peddle them to other loan originators based on the specific types of consumers that fit their lending parameters.
Then, the would-be borrower is inundated with other loan offers, ostensibly so they can compare the poachers’ products against the original quote. According to the National Credit Reporting Association (NCRA), some lenders who use trigger leads lie about how they know the borrower has applied for a mortgage, and some flaunt the rules by using deceptive practices to persuade the consumer to take a loan with their companies.
Uncle Sam’s official position on the practice is that it’s good for consumers because it promotes competition. But original lenders don’t like it, and sometimes, neither do the borrowers.
Terry Clemans, NCRA’s executive director, says trigger leads are basically pre-screened offers of credit, similar to the “pre-approved” credit card offers that fill your mailbox. “Opting out is the only current way for consumers to avoid being part of the trigger lead program and exercise their rights to cease any type of pre-approved offers,” he says.