Two lenders have been punished by a top U.S. mortgage agencyamid its concern that they enabled costly rapid refinances ofveterans' home loans.

NewDay USA and Nations Lending Corp. have been restrictedeffective this week from issuing Ginnie Mae bonds that areintermingled with loans from other lenders, according to a personfamiliar with the matter. The move follows an examination byGinnie Mae, a government-owned corporation thatguarantees about $2 trillion in mortgage-backed securities,including loans backed by the Department of Veterans Affairs.

Over the past couple years, some lenders have rapidly churnedveterans through unneeded refinances, according to Ginnie Mae andother regulators. That process can increase lenders' profits butresult in fees or higher loan balances for veterans who may notunderstand the repercussions while driving up rates for otherborrowers, Ginnie Mae says.

Under the restrictions, NewDay and Nations Lending can stillissue Ginnie Mae-backed securities but only in “custom pools” thataren't mixed with loans from other lenders. Those bespoke securities arelikely to get worse prices from bond investors.

Lenders' Denials
NewDay said in a statement that it would continue to issue Ginniesecurities in custom pools, that many of its borrowers can't getloans elsewhere and that it doesn't churn loans.

“Policy changes recommended by Ginnie Mae will do virtuallynothing to stop the unprincipled practice of veteran loan churning,but in all likelihood will force the elimination of much-neededbenefits and financial services for tens of thousands of veterans —especially those veterans struggling with poor credit,” NewDay saidin the statement.

The company said it made recommendations to Ginnie Mae to reducechurning but that those haven't been implemented.

Nations Lending Chief Administrative Officer Cheryl Lieber saidin a statement that the company recently underwent a routineexamination by the Department of Veterans Affairs without a problemand that the company doesn't have issues with its VA loan program.She said the discussion with Ginnie Mae pertain to the performanceof loans in a particular pool and denied that they pertain toNations' origination of VA-backed mortgages.

“We are confident that the matter will be successfully resolvedin the very near future,” Lieber said.

Taking Steps
Ginnie Mae Chief Operating Officer Michael Bright said in astatement that the agency was continuing to take steps to keep outof its main programs mortgage bonds backing loans with rapid ratesof refinance.

“This process is ongoing,” Bright said. “We are committed to it,and this type of monitoring is now part of the business of GinnieMae.”

In the past few months, Ginnie Mae has homed in on lenders whosemortgage bonds have higher refinance rates than the rest of themarket.

Some lenders have solicited veterans with misleading fliersclaiming they can skip mortgage payments by refinancing. Othershave used a refinance to lower a veterans' rate by a tiny amount,only to follow up a few months later with another refinanceoffer.

Regulators have said that some lenders with high refinance ratesdon't perform the refinance themselves, but instead make mortgageswith rates that are far above those of other lenders, setting theborrower up for a churn soon after the initial loan.

Ginnie Mae in February sent letters to NewDay, Nations and sevenother lenders warning them that they could face restrictions ifthey didn't provide satisfactory plans to reduce refinance rates.In December, Ginnie Mae limited how often a lender can put amortgage into bonds it backs.

The Senate in March passed legislation meant in part to stoppredatory veteran refinances. The provisions, attached to a broaderoverhaul of the Dodd-Frank Act that's still being considered by theHouse of Representatives, would require that a veteran recoup hisor her fees after a refinance within three years and that the newloan reduce the mortgage interest rate by at least half apercentage point in most cases, among other provisions.

Executives from NewDay in the past have said they support such amove.

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