The American Legion's Joe Sharpe testifies before the House Subcommittee on Economic Opportunity. Craig Roberts

Healthy in an unhealthy market

While America has been suffering through an unprecedented crisis in housing loan defaults, the VA Home Loan Guaranty Program has remained healthy.

"The American Legion has been very pleased to watch the performance of VA loans during the unprecedented downturn in the mortgage marketplace over the last two and a half years," said Joe Sharpe, the Legion's Economic Division director.

Sharpe testified on VA's home loan program May 20 before the House Subcommittee on Economic Opportunity, chaired by Rep. Stephanie Herseth Sandlin, D-S.D.

According to The Mortgage Bankers Association, the delinquency rate for subprime loans stands at 30 percent, while only 5 percent of veterans have defaulted on their VA home loans. The prime loan delinquency rate is 7 percent while FHA defaults stand at about 9 percent.

"This data clearly shows that VA loans are performing better than all other mortgage loan types in the marketplace," Sharpe told the subcommittee. He attributed such favorable performance to several factors:

• While other lenders compromised their standards to generate more business, VA has maintained its prudently crafted credit underwriting standards.• VA selects home appraisers from its own approved list; it does not allow lenders to choose appraisers, as is common in the mortgage industry.• VA has an aggressive and comprehensive program to help veterans who are unable to make loan payments.• Veterans and servicemembers are usually more responsible borrowers because of discipline and maturity developed through their military service.

One problem The American Legion wants to eliminate is VA's current practice of charging veterans a "funding fee" that was introduced in 1982.

"Unfortunately, this fee has become a fixture of the home loan program and - even more unfortunately - it has been raised numerous times by Congress," Sharpe said.

Currently, veterans using the program for the first time must pay 2.15 percent of the loan amount and 3.3 percent for the second time (i.e., $4,300 or $6,600 for a $200,000 loan).

Sharpe told the subcommittee that The American Legion wants Congress "to consider either eliminating this fee or significantly reducing it.

"Veterans should not have to make such a significant financial sacrifice in order to use a benefit that they have earned as a result of their service to America," he said.

The American Legion also wants VA's home loan program extended to the spouses of deceased veterans - regardless of what maladies they died from. "It is unfair for a veteran's spouse only to become eligible for the home loan if a veteran dies of a service-connected disability," Sharpe said.

The VA home loan program has had a resurgence since fiscal 2007, when it guaranteed only 137,297 loans. Sharpe noted that VA guaranteed 325,673 home loans in fiscal 2009. "It looks like VA is on track to match last year's high volume during fiscal year 2010," he said.

The substantial increase in VA home loans can be partially attributed to the fact that other lenders stopped offering riskier "no down payment" packages once the mortgage crisis hit, Sharpe explained.

Another reason VA's home loan program has gained more customers is because it now uses automated underwriting systems that are preferred by lenders, Sharpe told the subcommittee. These systems reduce significantly the time needed to process a loan application, and VA has maintained the integrity of its underwriting process by requiring its own standards to be written into the systems' software.